10KSB 1 imok.txt INTERMOST CORP. ANNUAL REPORT 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ________________ Commission File Number 0-30430 INTERMOST CORPORATION --- ---------------------- (Name of Small Business Issuer in its charter) Utah 87-0418721 --------------------------------- ----------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 10th Floor, B10-07 Guomao Building, Renmin Rd.(South), Shenzhen, China 518014 ---------------------------------------------------- (Address of principal executive offices)(Zip code) Issuer's telephone number, including area code: 86 755 822 10238 Securities to be registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which each is registered ------------------- ------------------------------------------------- None None Securities to be registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value (Title of class) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---------- Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The Issuer's revenues for the fiscal year ended June 30, 2002 were $592,059. The number of shares of the registrant's common stock, $.001 par value per share, outstanding as of June 30, 2002 was 33,120,481. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on September 11, 2002, based on the last sales price on the OTC Bulletin Board as of such date, was approximately $993,614. DOCUMENTS INCORPORATED BY REFERENCE None Transition Small Business Disclosure Format: Yes No X --------- ---------- TABLE OF CONTENTS Page PART I ITEM 1. BUSINESS.............................................5 ITEM 2. DESCRIPTION OF PROPERTY..............................7 ITEM 3. LEGAL PROCEEDINGS....................................7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................7 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................7 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.................9 ITEM 7. FINANCIAL STATEMENTS.................................16 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...............16 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT....................17 ITEM 10. EXECUTIVE COMPENSATION...............................19 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................20 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......21 ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K.....................21 SIGNATURES NOTE REGARDING FORWARD LOOKING STATEMENTS This Annual Report on Form 10-KSB contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our business and our industry. Words such as "believe," "anticipate," "expect," "intend," "plan," "will," "may," and other similar expressions identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, the following: o a continuation of the general decline in the market for business-to-business Internet products, o our lack of capital and whether or not we will be able to raise capital when we need it, o government regulation of the Internet and Internet services in China, o our ability to successfully compete in our market and industry, and other factors, some of which will be outside our control. You are cautioned not to place undue reliance on these forward-looking statements, which relate only to events as of the date on which the statements are made. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. You should refer to and carefully review the information in future documents we file with the Securities and Exchange Commission. INFORMATION ON CURRENCY TRANSLATION Unless otherwise indicated as Hong Kong dollars ("HK$") or Renminbi ("Rmb"), all financial information contained in this Annual Report is presented in United States dollars ("$" or "US$"). Our sales are principally in Hong Kong dollars and Renminbi. The translation of Hong Kong dollars into United States dollars is for reference purposes only and has been made at the exchange rate of HK$7.80 for US$1. The Hong Kong dollar has been "pegged" to the US dollar since October 1983. The so-called "peg" is the Linked Exchange Rate System. Pursuant to the Linked Exchange Rate System, banks that issue the currency of Hong Kong are required to hold certificates of indebtedness issued by the Hong Kong Exchange Fund as backing for the issue of Hong Kong dollar notes. The Hong Kong dollar notes are redeemed against US dollars at a fixed exchange rate of HK$7.80 to US$1. In practice, therefore, any increase in note circulation is matched by a US dollar payment to the Exchange Fund, and any decrease in note circulation is matched by a US dollar payment from the Exchange Fund. In the foreign exchange market, the exchange rate of the Hong Kong dollar continues to be determined by forces of supply and demand. Against the fixed exchange rate for the issue and redemption of certificates of indebtedness, the market exchange rate has generally stayed close to the rate of HK$7.80 to US$1. There can be no assurance, however, that the Hong Kong government will maintain the "peg" at HK$7.80 to US$1 or at all, and the translation is not a representation that Hong Kong dollar amounts could actually be converted into United States dollar amounts at that rate or at any other rate. The translation of Renminbi amounts into US dollars are for reference purpose only and have been made at the exchange rate of Rmb8.28 for US$1. The People's Bank of China sets and publishes daily a base exchange rate with reference primarily to the supply and demand of Renminbi against the United States dollar in the market during the prior day. The People's Bank of China also takes into account other factors such as the general conditions existing in the international foreign exchange markets. Although Chinese governmental policies were introduced in 1996 to reduce restrictions on the convertibility of Renminbi into foreign currency for current amount items, conversion of Renminbi into any other currency for capital items, such as foreign direct investment, loans or security, requires the approval of the State Administration for Foreign Exchange. The translation of Renminbi amounts in this annual report on Form 10-KSB is not a representation that the Renminbi amounts could actually be converted into United States dollars at that rate or at any other rate on that date or on any other date. PART I ITEM 1. BUSINESS HISTORY AND DEVELOPMENT OF THE COMPANY Intermost Corporation (as used in this annual report on Form 10-KSB, unless the context otherwise requires, the terms "we," "us," "the Company," and "Intermost" refer to Intermost Corporation and its subsidiaries) was incorporated as La Med Tech, Inc. under the laws of the State of Utah on March 6, 1985. The Company changed its name to Entertainment Concepts International in 1987, to Lord & Lazarus, Inc. in 1988, and to Utility Communication International, Inc. in 1996. From the date of incorporation through October 1998, the Company's operations were limited to efforts to identify and acquire, or merge with, one or more operating businesses. In October 1998, the Company acquired all of the issued share capital of Intermost Limited, a British Virgin Islands Company ("IML"), by issuing to the then shareholders of IML a total of 4,970,000 shares of the Company's common stock, par value $0.001 per share (the "Merger"). Following the Merger, (i) IML became a wholly-owned subsidiary of the Company, (ii) the shareholders of IML held 58.7% of all issued and outstanding shares of the Company, (iii) the Company changed its name to Intermost Corporation, (iv) the Company terminated all its prior business activities and adopted IML's business plan, and (v) all officers and directors of the Company resigned and were replaced by officers and directors of IML. Our operations are conducted through our largest subsidiary, China e.com Information Technology Ltd., which is the owner of 90% of Intermost Focus Advertising Company Ltd. and 55.3% of Shenzhen Bank Union & Jiayin e-Commerce Company Ltd. While we have two other subsidiaries, neither of them is currently engaged in significant operations. IML was incorporated in January 1998 to develop a Chinese-language Internet business portal, and to render services in connection therewith in the People's Republic of China ("China"). During the period following the Merger, the Company entered into agreements with, and completed acquisitions of, various businesses that provided or supported Internet services in an effort to implement this business plan. The Company also endeavored to develop its own Internet services businesses, including e-commerce business solutions. However, the global decline in the demand for Internet services since mid-2000, resulting in a significant economic slowdown experienced by many of the companies with whom we do business, among other factors, has materially undermined the effectiveness of our efforts. Currently, through China e.com Information Technology Ltd., we offer web design and hosting services and system integration services to customers in China. Management is also continuing efforts to identify and explore acquisition, merger and development opportunities. PRODUCTS AND SERVICES Currently, we offer web design and hosting services and system integration services exclusively in China. We operate within what is commonly referred to as the "business-to-business" segment of the Internet market, in which products and services are offered principally to businesses, as compared to the "business-to-consumer" segment of the Internet services market, in which products and services are offered principally to consumers. During the year 2001, we developed imSCM, an e-commerce supply chain management software, and imPARTNER, an e-commerce customer relations management software. As of June 30, 2002, we installed this software in connection with the web design, web hosting or system integration services we rendered. However, as of June 30, 2002, we had not yet sold these programs as stand-alone products, although we are making efforts to do so. We are also exploring the acquisition or development of other products and services in viable markets. 5 We locate our customers and secure web design and hosting or system integration projects primarily through the efforts of members of our sales team. We currently employ 10 sales persons who are based in Shenzhen, but who travel throughout China, as necessary. Our sales persons are paid a base salary, and earn commissions on revenues we receive from the customers they procure. For the 2002 fiscal year, no single customer accounted for 10% or more of our sales. COMPETITION The software market is intensely competitive and we expect it to become increasingly competitive in the future. Increased competition could result in pricing pressures, low operating margins and the realization of little or no market share. Currently, our competitors are primarily other Chinese owned and operated software development companies. Many of our current and potential competitors may have longer operating histories, larger customer bases, greater brand recognition and greater financial, marketing and other resources than we do and may enter into strategic or commercial relationships on more favorable terms than we can. In addition, new technologies and the expansion of existing technologies may increase competitive pressures on us. We compete through quality service, competitive pricing and excellent working relationships with our customers. However, we have no patented technology to preclude our competitors from entering our markets. At this time, we do not represent a significant competitive presence in the marketplace. REGULATION Since we operate principally through our subsidiary in China, we are subject to and affected by Chinese laws, regulations, administrative determinations, court decisions and similar constraints regarding operation in China, Internet usage and e-commerce. China has enacted regulations governing Internet connection and the distribution of information via the Internet. Pursuant to Article 6 of the Revised Provisional Regulations Governing the Management of Chinese Computer Information Networks Connected to International Networks, individuals or entities operating computer networks within China which are connected to the Internet and conduct international information exchange must use the international access channels provided by the Ministry of Information Industry ("MII") and obtain various licenses and approvals. Our relevant subsidiaries have secured the necessary licenses and approvals, and access the Internet through ChinaNet, an approved channel of MII. We intend to work diligently to assure compliance with all applicable regulations which impact our business, including cooperating with the MII and the Ministry of Public Security. There can be no assurance, however, that we will be successful in our efforts to assure full compliance with Chinese regulations affecting our operations or that additional regulations will not be enacted which might adversely impact our operations. EMPLOYEES As of June 30, 2002, we employed 33 full-time employees, 2 of whom were management executives, 16 of whom were engineering/technical staff, 5 of whom were administrative and clerical, and 10 of whom were sales personnel. None of our employees are members of any labor union, and we have never experienced any business interruption as a result of any labor disputes. We do not provide any special benefit or incentive programs for our employees. We believe that we enjoy good relations with all of our employees. 6 ITEM 2. DESCRIPTION OF PROPERTY Our principal office consists of approximately 4,000 square feet of office space that is located at 10th Floor, B10-07 Guomao Building, Renmin Rd.(South), Shenzhen, China 518014. The premises are leased from an unrelated third party with rental payments and management fees of approximately $29,000 per year. The lease will expire in September 2004. As part of our efforts to reduce our operating costs, we moved to the above address in August 2002. Our office facilities are in good condition and we believe they are adequate to support our operations for the foreseeable future. We also own office space consisting of approximately 5,000 square feet in Guomao Building, which we lease to an unrelated third party for approximately $24,000 per year. The lease term is 3 years. The lease will expire in September 2003. ITEM 3. LEGAL PROCEEDINGS In June 2001, we filed a lawsuit in the Court of First Instance of High Court of Hong Kong (the "Court") against J.R. Hi-Tech Investment Corporation ("J.R. Hi-Tech") and its controlling shareholders, Mr. Xin Lei Wang and Mr. Yong Jiang, (collectively, the "Defendants"). On October 24, 2000, we entered into a Subscription Agreement with the Defendants, which provided among other things for our subscription of 70,000 ordinary shares, par value $1 per share, representing 58.3% of the post-closing issued and outstanding shares of J.R. Hi-Tech in consideration of our payment of $176,470 in cash and our issuance of 510,300 shares of our common stock. J.R. Hi-Tech's principal asset is an indirect 90% interest in Shenzhen China Websecurity.com, a Chinese-foreign equity joint venture, which engages in the provision of Internet security services, systems integration and software development services. Despite the Defendants' failure to deliver J.R. Hi-Tech ordinary shares to us as provided in the Subscription Agreement, we delivered in January 2001 Rmb 1,500,000 in cash to J.R. Hi-Tech (but not our shares). In this lawsuit, we seek rescission of the Subscription Agreement, recovery of the Rmb 1,500,000, and additional damages and injunctive relief. On June 22, 2001, the Court issued an order to freeze certain bank accounts in the names of the Defendants. On July 3, 2001, following a hearing, the Court extended this order until further order from the Court. We intend to vigorously pursue our rights against the Defendants. However, due to uncertainty of any recovery from J.R. Hi-Tech or the other two Defendants, in fiscal 2001, we have written off the entire Rmb 1,500,000 we delivered to J.R. Hi-Tech. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is quoted on the National Association of Securities Dealers, Inc. Electronic Bulletin Board (the "OTC Bulletin Board"), and is traded under the symbol "IMOT". Historically, however, the market for our securities has been extremely limited and sporadic. The following table represents the high and low bid prices for our common stock on the OTC Bulletin Board for each quarter during the last two fiscal years. 7 HIGH LOW FISCAL 2001 Quarter ended September 30, 2000 3.03 0.97 Quarter ended December 31, 2000 1.38 0.31 Quarter ended March 31, 2001 0.53 0.31 Quarter ended June 30, 2001 0.34 0.03 FISCAL 2002 Quarter ended September 30, 2001 0.09 0.04 Quarter ended December 31, 2001 0.08 0.03 Quarter ended March 31, 2002 0.07 0.03 Quarter ended June 30, 2002 0.05 0.03 The above bid information is obtained from the "Finance" section of yahoo.com, and reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. As of September 11, 2002, there were approximately 560 holders of record of the Company's common stock. This number does not include an indeterminate number of shareholders whose shares are held by brokers in street name. We have never declared or paid any cash dividend on our common stock and do not expect to declare or pay any cash dividend in the foreseeable future. We do not currently have an equity compensation plan. RECENT SALES OF UNREGISTERED SECURITIES In September 1999, the Company reserved to issue 800,000 shares of common stock, par value US$0.001 each, for cash at US$1.25 per share, amounting to approximately Rmb8,280,000 (equivalent of US$1,000,000), of which approximately Rmb621,000 was yet to be received as of June 30, 2000. These shares were issued in January 2001. In 2001, Rmb331,200 of issuance costs initially recorded as subscription receivable were appropriately reclassified to additional paid-in capital. On January 26, 2000, the Company issued 75,712 shares of common stock, par value US$0.001 each, valued at approximately Rmb3,126,000, as part of the consideration for the acquisition of a phone payment system of the Group. On January 26, 2000, the Company issued 41,110 shares of common stock, par value US$0.001 each, valued at approximately Rmb1,702,000, to certain employees as rewards for their contribution to the Group. The cost for these shares has been recorded as part of employee compensation. In January and February 2000, the Company issued an aggregate of 953,334 shares of common stock, par value US$0.001 each, for cash at US$3.00 to US$3.23 per share. The net proceeds amounted to approximately Rmb23,615,000 (equivalent of US$2,852,000). 8 On March 22, 2000, the Company issued 77,200 shares of common stock, par value US$0.001 each valued at approximately Rmb2,637,000, as part of the consideration for the acquisition of a building in the PRC. In August 2000, the Company issued 15,000 shares of common stock to the vice president in charge of business development, par value US$0.001 each in lieu of employee salary, at US$4.37 per share. In October 2000, the Company issued 150,000 shares of common stock, par value US$0.001 each for marketing services performed by an unrelated third party, at US$3.02 per share. In February 2001, the Company issued 1,152,000 shares of common stock, par value US$0.001 each, for cash at US$0.3125 per share. The net proceeds amounted to approximately Rmb2,742,000 (equivalent of US$331,200). In connection with the issuance, the Company paid a commission of Rmb 238,464 to Sanway Consulting Limited, a company owned by Mr. Yang Shim, a director of the Company. In the fiscal year ended June 30, 2002, the Company issued to various investors, employees and other parties, pursuant to Section 4(2) and Rule 506 of the Securities Act of 1933, a total of 20,000,000 shares of its common stock, which constitutes 60.4% of the Company's total issued and outstanding shares after such issuance, at $0.02 per share. In relation to this offering, the Company has entered into an agreement with a placement agent, Yorkshire Capital Ltd, for the issuance of 2,000,000 shares of common stock in payment for its fee in placing the securities. As at June 30, 2002, these shares have not been issued and delivered to the placement agent. In the fiscal year ended June 30, 2002, the Company issued to various investors, employees and other parties, pursuant to Section 4(2) and Rule 506 of the Securities Act of 1933, a total of 20,000,000 shares of its common stock, which constitutes 60.4% of the Company's total issued and outstanding shares after such issuance, at $0.02 per share. In relation to this offering, the Company has entered into an agreement with a placement agent, Yorkshire Capital Ltd, for the issuance of 2,000,000 shares of common stock in payment for its fee in placing the securities. As at June 30, 2002, these shares have not been issued and delivered to the placement agent. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's discussion and analysis of results of operations and financial condition are based upon the Company's consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following critical accounting policies rely upon assumptions, judgments and estimates and were used in the preparation of the Company's consolidated financial statements: REVENUE RECOGNITION Revenues are recognized (i) with respect to services, at the time a project (or a milestone thereof) is completed and accepted by the customer, and (ii) with respect to products, at the time products are delivered to customers and collectibility for such sales is reasonably assured. We have adopted Staff Accounting Bulletin No.101, Revenue Recognition ("SAB101") in our financial statements. SAB 101 provides in part further interpretive guidance for public companies on the recognition, presentation, and disclosure of revenues in financial statements. The adoption of SAB 101 did not have a material impact on our revenue recognition practices. ACCOUNTS RECEIVABLE 9 We typically extend credit to our customers. From time to time, e-commerce solution services are provided under fixed-price contracts where the revenues and the payment of related receivable balances are due upon the achievement of certain milestones. Management estimates the probability of collection of the receivable balances and provides an allowance for doubtful accounts based upon its judgment in assessing the realization of these receivable balances based on aging, historical experience, the customer's financial condition and general economic conditions. LONG-LIVED ASSETS The Company periodically evaluates the carrying value of long-lived assets held or used whenever events and circumstances indicate that the carrying value of the asset may no longer be recoverable. An impairment loss, measured on the fair value of the asset, is recognized if expected future undiscounted cash flows are less than the carrying value of the assets. OVERVIEW From the fourth quarter of fiscal 2000 through the present day, the global market for Internet services and products experienced a sharp decline in growth that was accompanied by a general reduction in technology spending. This reduction in spending has adversely impacted both our liquidity and our revenues. Because of a decline in our revenues and in the market price of our common stock, we decided not to consummate certain acquisitions, as described more fully herein. These decisions resulted in the provision of doubtful debt, in the 2001 fiscal year, of a loan in the amount of $284,300, which is subsequently written off in fiscal 2002; and the write-off, in the 2002 fiscal year, of a non-refundable deposit in the amount of $60,000. In response to the decline in our revenues, management has taken measures to both raise and conserve cash. We placed 20,000,000 shares of common stock at a price of $0.02 per share, we relocated our principal office to smaller and less expensive premises, we reduced our staff from 62 full time employees to 33 full time employees. In fiscal 2001, we elected not to proceed with a proposed acquisition of a 70% interest in Dunwell Computer (H.K.) Limited and with a proposed acquisition of equity interest in projects owned by Internet.com Ltd in fiscal 2002. We do not currently have any material commitments for capital expenditures. We intend to continue operating our core business and to continue to look for potential alliances, such as joint ventures or acquisitions, which will enhance our business. While we believe that cash flow provided by our current operations will be adequate to fund our working capital requirements in the ordinary course of business for the 2003 fiscal year, we cannot assure you that future events will not cause us to seek additional capital sooner. Furthermore, we expect that we will need financing in order to sustain our operations after the 2003 fiscal year. To the extent that we need more money either during or after the 2003 fiscal year, we cannot assure you that funds will be available to us on favorable terms, or at all. The unavailability of funds could have a material adverse effect on our ability to continue our operations. RESULTS OF OPERATIONS Following is summary financial information reflecting our operations for the periods indicated. YEAR ENDED JUNE 30, 2001 2002 ---- ---- 10 Net revenues ................................. $ 984,179 $ 592,059 Cost of revenues ............................. 844,215 401,089 Gross profit ................................. 139,964 190,970 Selling, general and administrative .......... 3,493,575 1,026,258 Loss from operations ......................... (3,353,611) (835,288) Loss on abandonment of fixed assets .......... (39,184) (98,731) Loss on disposal of fixed assets ............. -- (37,952) Loss on abandonment of phone payment system ............................ (813,370) -- Share of loss in an associated company ....... (275,035) -- Impairment of investment in an associated company ......................... (143,622) -- Gain on liquidation of an associated company .................................... -- 67,735 Other income, net ............................ 17,088 64,766 Loss before minority interest ................ (4,607,734) (839,470) Minority interests ........................... 403,510 (357) Net loss ..................................... $(4,204,224) $ (839,827) YEAR ENDED JUNE 30, 2002 COMPARED TO YEAR ENDED JUNE 30, 2001 NET REVENUES. Net revenues for the year ended June 30, 2002 decreased by $392K1, or 40%, to $592K from $984K for the year ended June 30, 2001. Net revenues during fiscal 2002 and 2001 were derived principally from e-commerce solutions and advertisement sales. The term "e-commerce solutions" includes web site design and development, web hosting, and system sales and integration. -------------------------------------------------------------------------------- 1 As used in this 10-KSB, the letter "K" appearing immediately after a dollar amount denotes rounding to the nearest $1,000; as an example, $380,499 may be rounded to "$380K" 11 The following table reflects the total net sales and percentage of net sales represented by the sale of e-commerce solutions and advertisements for the periods indicated:
TOTAL NET SALES PERCENT OF TOTAL NET SALES ---------------------- -------------------------- YEAR ENDED JUNE 30, YEAR ENDED JUNE 30, ------------------- ------------------- 2001 2002 2001 2002 ---- ---- ---- ---- US$ US$ E-commerce solutions - Web site design and development 469,096 246,450 47.66% 41.63% - Conference services 0 132,633 N/A% 22.40 % ------- ------- ------ ------- 469,096 379,083 47.66% 64.03% System sales and integration 345,669 112,003 35.13% 18.92% Phone payment system 76,077 0 7.73% 0 % Advertisement 93,337 100,973 9.48% 17.05% ------- ------- ------ ------- Total 984,179 592,059 100.0% 100.0% ======= ======= ====== ======
12 Total revenues derived from e-commerce solutions decreased by $90K, or 19 %, to $379K in fiscal 2002 as compared to $469K in fiscal 2001. System sales and integration revenues decreased by $234K, or 68%, to $112K in fiscal 2002 as compared to $346K in fiscal 2001. Web advertisement revenues increased by 8K, or 8%, to $101K in fiscal 2002 as compared to $93K in fiscal 2001. Web advertisement revenues and conference service revenues are not considered to be core revenues under the Company's business plan. The increases in revenues from those sources during the year are considered to be non-recurring. The decline in total net revenues and the character of those sales was primarily attributable to management's decision to revise the Company's plan of operation to develop our business beyond the market for Internet products and services. This market was adversely impacted during the 2001 fiscal year by a sharp decline in worldwide investment in Internet initiatives and by weak economic conditions and slowing economic growth globally, particularly following the terrorist attacks of September 11, 2001 in the United States. We continue to believe that the Chinese Internet market will continue to develop, outpacing the growth of other more mature Internet markets, and that our presence in the market, including development of our software products, will allow us to capitalize on opportunities to sell our software products and services in China. However, it is our intention to become less dependent on this market. COSTS OF REVENUES. Costs of revenues consist principally of salaries for computer network technicians, sub-contract fees, costs of systems sales and integration, depreciation, and other costs including travel, employee benefits, office expenses and related expenses allocated to the engineering and technician staff. Additionally, other costs of revenues during the 2001 fiscal year included certain costs associated with the offering of special promotional packages, which included participation in a seminar, lodging and advertisement. These costs were not incurred during the 2002 fiscal year. The following table reflects the principal components of costs of revenues and the percentage of net sales represented by each component for the periods indicated:
TOTAL COST OF REVENUES PERCENT OF TOTAL NET SALES -------------------------- ------------------------------- YEAR ENDED JUNE 30, YEAR ENDED JUNE 30, --------------------- -------------------- 2001 2002 2001 2002 --------- -------- -------- -------- US$ US$ Engineers/technician salaries 132,355 49,518 13.45% 8.36% Subcontract fees 143,550 177,015 14.59% 29.90% Cost of system sales and integration 325,309 97,485 33.05% 16.47% Depreciation 17,965 15,394 1.83% 2.60% Other 225,036 61,677 22.87% 10.41% ------- ------- ------- ------ Total 844,215 401,089 85.79% 67.74% ======= ======= ======= ======
Compared to the 2001 fiscal year, the total costs of revenues for the 2002 fiscal year decreased by$443K, or 52%, to $401K. The decline in costs of revenues was due to cost containment efforts implemented by management and a decline in sales. The principal components of costs of revenues during the 2002 fiscal year were costs of hardware and subcontracting fees, other costs associated with support of the engineering and technician staff, engineer and technician salaries, and depreciation of equipment utilized in connection with services. In order to decrease operating costs, we substantially reduced the number of employees in the 2002 fiscal year and subcontracted most of the technical work to unrelated third parties. As a result, the salaries of engineers and technicians decreased by 63%, fees for subcontracting increased 13 by 23%, and other service-related costs, such as support of the engineering and technician staff, decreased by 73%. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense ("SG&A") consists principally of (1) sales commissions, advertising, trade show and seminar expenses, and direct-field sales expense, (2) salaries for administrative and sales staff, (3) corporate overhead, and (4) allowances for bad and doubtful debt. The following table reflects the principal components of SG&A and the percentage of net sales represented by each component for the periods indicated:
TOTAL SG&A PERCENT OF TOTAL NET SALES ---------------- ----------------------------- YEAR ENDED JUNE 30, YEAR ENDED JUNE 30, --------------------- -------------------- 2001 2002 2001 2002 -------- -------- -------- -------- US$ US$ Sales and marketing salaries and commissions 175,374 114,172 17.82% 19.28% Other sales and marketing 224,699 105,000 22.83% 17.73% Rentals 134,875 55,130 13.70% 9.31% Administrative salaries 554,695 168,858 56.36% 28.52% Other corporate 1,630,963 529,806 165.72% 89.49% Amortization of intangibles 144,927 - 14.72% -% Bad and doubtful debt for accounts receivables 17,608 5,006 1.79% 0.84% Bad and doubtful debt for other receivables 465,459 48,286 47.30% 8.16% Research and development 144,975 - 14.73% -% --------- --------- ------- ------- Total 3,493,575 1,026,258 354.97% 173.33% ========= ========= ======= =======
The principal components of SG&A during the 2002 year were sales and marketing salaries and commissions, other marketing expenditures, administrative salaries and benefits, other corporate expenses, which includes legal and professional fees, general office expenses, traveling expenses, general employee benefit expense, depreciation and consultancy fees. For the 2002 fiscal year, SG&A decreased by $2,468K, or 71%, to $1,026K as compared to $3,494K for the 2001 fiscal year. Sales and marketing salaries and commissions decreased 35% during the 2002 fiscal year, to $114K, as compared to $175K for the 2001 fiscal year. During the 2002 fiscal year, rentals decreased by 80K or 59% to $55K, as compared to $135K in the 2001 fiscal year. Administrative salaries decreased by $386K or 70% to $169K during the 2002 fiscal year, as compared to $555K in the 2001 fiscal year. The decrease in SG&A has been principally attributable to cost containment efforts undertaken during the 2002 fiscal year, including relocation of the Company's office to a less expensive office and a reduction in employees. Additionally, certain intangibles were fully amortized during the 2001 fiscal year, resulting in no amortization expense for the current year. Other corporate decreased substantially during the 2002 fiscal year, by $1,101K or 68% to $530K, as compared to $1,631K in the 2001 fiscal year. The decrease in other corporate was mainly attributable to cost control efforts, the non-recurring expenses of the bad debt relating to the acquisition of JR Hi Tech and the amortization of option compensation expenses recorded in fiscal 2001. Also included in SG&A during the 2002 fiscal year was the non-recurring non-cash expense of bad and doubtful debt expenses of 14 $53K, representing the write down of unrecoverable receivable, and the write-off of a non-refundable deposit in the amount of $60K to Internet.com Ltd Research and development expense, totaling $145K for the 2001 fiscal year, was principally attributable to salaries for the technology team that worked on the development of the SCM and CRM products. No research and development cost was recorded in the 2002 fiscal year. GAIN ON LIQUIDATION OF AN ASSOCIATED COMPANY. During the 2000 fiscal year, the Company acquired a 40% interest in Shenzhen Sino-E E-commerce Company Ltd. ("Sino-E"), a venture engaged in the development of an exchange platform system serving Chinese manufacturers. Under the equity method of accounting, the Company reports its allocable share of the loss of Sino-E, which share totaled $275K during the 2001 fiscal year. During the 2001 fiscal year, operations of Sino-E were suspended as a result of the downturn in Internet related markets. Sino-E is now being liquidated. As a result, during the 2002 fiscal year, the Company received $121K cash and computer equipment with a total value of $23K. The Company expects to recover the balance, $63K, by December 2002. MINORITY INTEREST. We reported a minority interest with a value of $0.4K for the 2002 fiscal year, reflecting our proportionate interest in the profits of Intermost Focus Advertising, as compared to a minority interest with a value $404K for the 2001 fiscal year, reflecting our proportionate interest in the profits of Jiayin Joint Venture. LIQUIDITY AND CAPITAL RESOURCES To date, we have used in our operations with cash from our operating activities, sales of our securities and by using our common stock to make acquisitions and purchases. Between October 1998 and June 30, 2001, the Company issued a total of 4,664,775 shares of its common stock. In the fiscal year ended June 30, 2002, the Company issued to various investors, employees and other parties, a total of 20,000,000 shares of its common stock, which constitutes 60.4% of the Company's total issued and outstanding shares after such issuance, at $0.02 per share. In relation to this offering, the Company has entered into an agreement with a placement agent, Yorkshire Capital Ltd, for the issuance of 2,000,000 shares of common stock in payment for its fee in placing the securities. As at June 30, 2002, these shares have not been issued and delivered to the placement agent. At June 30, 2002 we had cash and cash equivalents of $54K and working capital of $98K as compared to $498K of cash and cash equivalents and $128K of working capital at June 30, 2001. Operations used $579K of cash during the 2002 fiscal year as compared to $1,487K of cash used during the 2001 fiscal year. Funds used in operations primarily relate to losses of $840K incurred during the year, decreases in deposits, prepayments of $14K and increases in various liabilities which were partially offset by non-cash charges, including depreciation expense of $105K and loss on the disposal of fixed assets of $137K. Net cash provided by investing activities was $114K for the 2002 fiscal year while net cash used in investing activities was $272K for the 2001 fiscal year. Funds provided by investing activities consisted of net sales of equipment and repayment from directors for the year. 15 Net cash provided by financing activities was $21K for the 2002 fiscal year while net cash provided by financing activities was $621K for the 2001 fiscal year. Funds provided by financing activities consisted of proceeds received during the current year from the subscription for 4,760,000 shares of common stock from a private placement of 20,000,000 shares at $0.02 per share. The proceeds for the balance of the shares of common stock sold in this private offering were in an escrow account at June 30, 2002. We had no long term debt at June 30, 2002 or June 30, 2001. We have implemented various cost management measures to reduce our overhead in response to our declining revenues. We are also evaluating various opportunities to accelerate the path to, and attain, profitability. However, there can be no assurance that the cash provided by our current operations will be sufficient to meet our cash needs in the 2003 fiscal year, and in such instance the Company will likely need debt or additional equity financing in order to sustain operations during or after fiscal 2003. There are no commitments to provide any such funding, if needed, or any assurance that such funding be available. ITEM 7. FINANCIAL STATEMENTS The financial statements, together with the independent auditors' report thereon of Blackman Kallick Bartelstein LLP and Moores Rowland, appear beginning on page F-1 of this report. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In July 1999, the Company's Board of Directors dismissed Andersen, Andersen & Strong, L.C. as the independent auditors for the Company and selected Arthur Andersen & Co. to serve as its new independent auditors. In October 2000, Arthur Andersen & Co. resigned as the independent auditors for the Company and, in February 2001, the Company's Board of Directors selected PricewaterhouseCoopers to serve as its new independent auditors. In September 2001, the Company's Board of Directors dismissed PricewaterhouseCoopers as the independent auditors for the Company and selected Blackman Kallick Bartelstein LLP to serve as its new independent auditors. In January 2002, the Company's Board of Directors dismissed Blackman Kallick Bartelstein LLP as the independent auditors for the Company and selected Moores Rowland to serve as its new independent auditors. 16 Andersen, Andersen & Strong's reports on the financial statements of the Company for the fiscal years ended December 31, 1995, 1996 and 1997 contain no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty (other than uncertainty as to the Company's continuing as a going concern), audit scope, or accounting principles. In connection with its audits for fiscal years 1995, 1996 and 1997, and through the date of their dismissal, there were no disagreements with Andersen, Andersen & Strong, L.C. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Andersen, Andersen & Strong, L.C. would have caused them to make reference thereto in its reports on the financial statements for such years. Arthur Andersen & Co.'s audit report on the financial statements of the Company as of June 30, 2000 and for the three years ended June 30, 1998, 1999 and 2000 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. During the Company's two most recent fiscal years and any subsequent interim period preceding the resignation of Arthur Andersen & Co., there were no disagreements with Arthur Andersen & Co. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Arthur Andersen & Co., would have caused Arthur Andersen & Co. to make reference to the subject matter of the disagreements in connection with its report. PricewaterhouseCoopers did not render any audit reports on the financial statements of the Company. During the Company's two quarterly interim period preceding the dismissal of PricewaterhouseCoopers, there were no disagreements with PricewaterhouseCoopers on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PricewaterhouseCoopers, would have caused PricewaterhouseCoopers to make reference to the subject matter of the disagreements in connection with its report. During the Company's two quarterly interim period preceding the dismissal of PricewaterhouseCoopers, there have been no reportable events of the type required to be disclosed by Item 304(a)(1)(v) of Regulation S-K. Blackman Kallick Bartelstein LLP's audit report on the financial statements of the Company as of June 30, 2001 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. During the subsequent interim period preceding the resignation of Blackman Kallick Bartelstein LLP, there were no disagreements with Blackman Kallick Bartelstein LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Blackman Kallick Bartelstein LLP, would have caused Blackman Kallick Bartelstein LLP to make reference to the subject matter of the disagreements in connection with its report. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT IDENTIFICATION OF DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN SIGNIFICANT EMPLOYEES The following table sets forth certain information regarding the directors and executive officers of the Company. NAME AGE POSITION Andy Lin 56 President, Chief Executive Officer, Chief Financial Controller and Director Francis Tsui 41 Director Sai Keung Chan 46 Secretary and Director Jun Liang 41 Director Shim Yang 44 Director Sonny Hung 40 Director Catalina Chan 51 Director There are no family relationships among any of the directors or officers of the Company. 17 BUSINESS EXPERIENCE ANDY LIN has served as President, Chief Executive Officer and Chief Financial Controller of the Company since June 2001 and as a director of the Company since October 1998. Mr. Lin co-founded the Company's predecessor, IML, in January 1998 and previously served as Vice President of the Company from the Merger, in October 1998. Prior to forming IML, he was the vice president of China Business Resources from 1994 to 1998. Mr. Lin graduated from Tsinghua University in 1970 with a Bachelor degree and from the Chinese Academy of Sciences in 1981 with a Master of Science degree in computer science. FRANCIS TSUI has served as a Director of the Company since June 2001. Mr. Tsui has served as Managing Director of Ebiz Incubation, an information technology investment holding firm, since 2000. Previously, Mr. Tsui served as Assistant Director of John Hancock Financial Services, a private equities company, from 1995 to 1998. From 1998 to 1999, Mr Tsui was the Director of Business Development in Eastgate (HK) Limited. Mr. Tsui received a Ph.D. in Chinese Culture and History and an MBA from the University of Hawaii. JUN LIANG co-founded the Company's predecessor, IML, in January 1998 and served as its President and a director from inception until the Merger in October 1998 and as President of the Company from the date of the Merger until June 2001 and as a director of the Company since the Merger. Prior to forming IML, from 1994 to 1998, Mr. Liang was the president of China Business Resources, a privately-owned Hong Kong company specializing in providing company directories, business directory services and other business information in print, CD-ROM and electronic format. Mr. Liang graduated from Beijing Shijou University in 1982 with a Bachelor of Science degree in Chemical Engineering and from Stanford University in 1986 with a Master of Science degree in Chemical Engineering. SAI KEUNG CHAN joined the Company's predecessor, IML, as Secretary and a director in January 1998 and assumed the same positions with the Company following the Merger in October 1998. Mr. Chan received a law degree from the University of Southampton, U.K. and since 1986 has been a partner in the law firm of Liau, Ho & Chan in Hong Kong. SHIM YANG joined the Company's predecessor, IML, as a director in January 1998 and was appointed a director of the Company following the Merger in October 1998. Since December 1997, Mr. Yang has been a Managing Director of Corporate Finance International Ltd., a privately-held investment consulting and business brokerage company in Hong Kong specializing in corporate finance and business restructuring consulting, where he is responsible for corporate development and strategic management. From January 1997 to December 1997, Mr. Yang served as Managing Director of CEC (HK) Ltd., a privately-held company in Hong Kong specializing in securing financing for start-up Internet companies in Hong Kong and China. From 1993 to 1996, Mr. Yang served as Managing Director of Eagle Gain Ltd., a privately-held company in Hong Kong specializing in securing financing for real estate development in China. Mr. Yang received a Bachelors degree in Economics from the University of Foreign Trade in China in 1982. SONNY HUNG has served as a director of the Company since August 2001. Mr. Hung has served as Vice President of Yorkshire Capital, a Hong Kong-based investment banking firm, since June 2000. Previously, Mr. Hung served as Director of Corporate Development of Man Sang International from November 1996 to March 2000. From 1991 to 1997 he was in various senior positions with Dah Sing Bank, Hong Kong Bank. Mr. Hung received Bachelors degrees in Finance and Banking from San Francisco State Universety and an MBA from Baptist University in Hong Kong. 18 CATALINA CHAN has served as a director of the Company since April 2002. Ms. Chan. first established Multi M Company Limited in 1984 and it was one of the first companies to introduce Casio Products into China and is responsible for the trading and logistic management of these products in China. She has over 18 years of experience in China trade for digital products including cameras, watches, personal computers and printers, software and accessories. TERM OF OFFICE The directors named above will serve until the next annual meeting of the Company's shareholders. Officers will hold their positions at the pleasure of the Board of Directors, absent any employment agreement. COMPLIANCE WITH SECTION 16(A) OF EXCHANGE ACT Section 16(a) of the Securities Exchange Act requires our directors, executive officers and persons who own more than 10% of our Common Stock to file reports of ownership and changes in ownership of our common stock with the Securities and Exchange Commission. Directors, executive officers and persons who own more than 10% of our common stock are required by Securities and Exchange Commission regulations to furnish to us copies of all Section 16(a) forms they file. To our knowledge, based solely upon review of the copies of such reports received or written representations from the reporting persons, we believe that during our 2002 fiscal year our directors, executive officers and persons who own more than 10% of our common stock complied with all Section 16(a) filing requirements with the exception of the following: A Form 4 for transactions that took place in March 28, 2002 by Grand Grade International Limited, an entity owned by Catalina Chan, a director, was not filed as required. The Form 4 will be filed by November 8, 2002. ITEM 10. EXECUTIVE COMPENSATION For the 2002 fiscal year, all executive officers received their salaries from the Company and no bonus was paid to any executive officer. During the 2002 fiscal year, the Company did not have any executive officer receiving compensation of at least $100,000 per year. The following table sets forth information as to the compensation paid or accrued to the Chief Executive Officer for the three years ended June 30, 2002:
ANNUAL COMPENSATION OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION Andy Lin................................... 2002 $ 76,923 $ - $ - $ 0 Chief Executive Officer................. 2001 76,923 - 5,640 0 and President (1)....................... 2000 76,923 - 7,692 0 Jun Liang.................................. 2002 $ 5,769 $ - - $ 0 Chief Executive Officer,................. 2001 92,307 - 5,640 0 Chairman and President (2)............... 2000 92,307 - 7,692 0
(1) Mr. Lin was appointed as Chief Executive Officer and President of the 19 Company in June 2001. Previously, Mr. Lin served as Vice President of the Company. (2) Mr. Liang served as Chief Executive Officer of the Company from October 1998 until June 2001. During fiscal 2002, the Company did not make option grants to any of its directors or executive officers. DIRECTOR'S COMPENSATION Neither employee nor non-employee directors received any compensation for his or her service as a director in the 2002 fiscal year. The Company reimburses its directors for out-of-pocket expenses incurred on behalf of the Company. OTHER COMPENSATION AND EMPLOYMENT ARRANGEMENTS No executive officer, at June 30, 2002, had an employment agreement. The Company does not have any pension, profit-sharing, stock bonus, or other benefit plans. The Company expects to enter into employment agreements with key employees, to implement comprehensive compensation arrangements with its officers and to adopt benefit plans in the future to attract and retain officers and key employees. In January 2001, the Board of Directors adopted, subject to shareholder approval within 12 months, a stock option plan under which 3,000,000 shares of common stock were to be reserved for issuance pursuant to options to be granted to key employees. However, no shareholder approval was obtained, and in a Board of Director meeting in September 2001, the stock option plan was revoked. No options have been granted under the plan. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT COMMON STOCK The following table is furnished as of September 11, 2002, to indicate beneficial ownership of shares of the Company's common stock by (1) each shareholder of the Company who is known by the Company to be a beneficial owner of more than 5% of the Company's common stock, (2) each director and named officer of the Company, individually, and (3) all officers and directors of the Company as a group.
Name and Address of Number of Shares BENEFICIAL OWNER (1) BENEFICIALLY OWNED PERCENT Allied Point Limited (3)........................... 3,218,653 (2) 9.71% Jun Liang (3)...................................... 3,218,653 (2) 9.71% Andy Lin (3)....................................... 3,218,653 (2) 9.71% eBiz Incubation Co. Ltd. (4)....................... 1,152,000 (5) 3.47% Francis Tsui (4)................................... 1,152,000 (5) 3.47% Shim Yang.......................................... 350,000 1.05% Catalina Chan (6).................................. 1,000,000 3.01% Grand Grade International Ltd (6).................. 1,000,000 3.01% Sai Keung Chan..................................... 700,000 2.11% Sonny Hung......................................... 0 0% 20 E-World Investment Holding Ltd..................... 5,340,000 16.12% Mass United Investment Ltd......................... 2,500,000 7.55% All officers and directors as a group (7 persons).. 6,420,653 19.4%
(1) Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to the shares shown opposite the name of each person or group. (2) Allied Point Limited is a corporation organized under the laws of the British Virgin Islands and is owned 50% by Jun Liang and 50% by Andy Lin. Therefore, Mr. Liang and Mr. Lin are deemed to be the beneficial owners of those shares. (3) Address is 10th Floor, B10-07 Guomao Building, Renmin Rd.(South), Shenzhen, China 518014. (4) Address is Rm 3106, China Merchants Tower, Shun Tak Centre, 200 Connaught Road, Central, Hong Kong. (5) Francis Tsui is Managing Director of eBiz Incubation Co. Ltd. and may be deemed to be the beneficial owner of the shares held by eBiz Incubation Co. Ltd. (6) Catalina Chan is director and shareholder of Grand Grade International Ltd. and may be deemed to be the beneficial owner of the share held by Grand Grade International Ltd. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the years ended June 30, 2001 and 2002, Jun Liang and Andy Lin, officers, directors and principal shareholders of the Company, advanced funds to, and were advanced funds by, the Company on an unsecured, non-interest bearing basis without pre-determined repayment terms. At June 30, 2001, the net balances owed to Mr. Liang and Mr. Lin were $124,340 and $111,853, respectively. At June 30, 2002, the net balances owed to Mr. Liang and Mr. Lin were $80,891 and $143,496, respectively. During the 2002 fiscal year, the Company issued to various investors, employees and other parties, a total of 20,000,000 shares of its common stock, which constitutes 60.4% of the Company's total issued and outstanding shares after such issuance, at $0.02 per share. In relation to this offering, the Company entered into an agreement with a placement agent, Yorkshire Capital Ltd., for the issuance of 2,000,000 shares of common stock in payment for its fee in placing the securities. Mr. Sonny Hung, a director of the Company, is the Vice-President of Yorkshire Capital Ltd. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit NUMBER DESCRIPTION OF EXHIBIT 2.1 Exchange Agreement with Shareholders of Intermost Limited (1) 3.1 Articles of Incorporation (1) 3.2 Bylaws (1) 10.1 Employment Agreement, dated March 25, 2002, with Zacky Sun (5) 10.3 Cooperative Agreement re:formation of Jiayin E-Commerce joint venture (1) 10.4 Agreement re: acquisition of customer accounts from Labtam Corporation (1) 10.5 Subscription Agreement re: sale of common stock (1) 10.8 Agreement Regarding Transfer of Properties on 38th Floor, Guomao Building (2) 10.9 Joint Venture Agreement, dated June 1, 2000, re: Shenzhen SinoE E-commerce Co. Ltd.(3) 10.10 Subscription Agreement dated October 24, 2000, by and among Intermost Corporation, J.R. Hi-Tech Investment Corporation, Xinlei Wang and Yong Jiang (4) 21.0 Significant Subsidiaries(6) 23.0 Consent of Independent Accountants (6) 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (6) 21 (1) Incorporated by reference to the respective exhibits filed with Registrant's Registration Statement on Form 10-SB (Commission File No. 0-30430). (2) Incorporated by reference to the respective exhibits filed with Registrant's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2000. (3) Incorporated by reference to the respective exhibits filed with Registrant's Annual Report on Form 10-KSB for the year ended June 30, 2000. (4) Incorporated by reference to the respective exhibits filed with Registrant's Current Report on Form 8-K dated January 20, 2001. (5) Incorporated by reference to the respective exhibits filed with Registrant's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2002. (6) Filed herewith. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended June 30, 2002. 22 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERMOST CORPORATION BY: /s/ Andy Lin ANDY LIN PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER Dated: October 31, 2002 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Andy Lin President, Chief Executive Officer, October 31, 2002 ---------------------------------- Chief Financial Officer and Director Andy Lin /s/ Francis Tsui Director October 31, 2002 ---------------------------------- Francis Tsui /s/ Sai Keung Chan Director October 31, 2002 ---------------------------------- Sai Keung Chan /s/Shim Yang Director October 31, 2002 ---------------------------------- Shim Yang /s/ Sonny Hung Director October 31, 2002 ---------------------------------- Sonny Hung /s/ Catalina Chan Director October 31, 2002 ---------------------------------- Catalina Chan
23 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULES 13A-14 AND 15D-14 OF THE SECURITIES EXCHANGE ACT OF 1934 I, Andy Lin, Chief Executive Officer and Chief Financial Officer of Intermost Corporation, certify that: (1) I have reviewed this Annual Report on Form 10-KSB of Intermost Corporation. (2) Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report. (3) Based on my knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in the report. Dated: October 31, 2002 /s/ Andy Lin -------------------------------------- Andy Lin, Chief Executive Officer and Chief Financial Officer EXHIBIT 21 LIST OF SIGNIFICANT SUBSIDIARIES NAME OF SUBSIDIARY JURISDICTION OF ORGANIZATION China e.com Information Technology Ltd. People's Republic of China Intermost Limited British Virgin Islands Intermost Focus Advertising Company Ltd. People's Republic of China EXHIBIT 99 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Intermost Corporation (the "Company") on Form 10-KSB for the period ending June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Andy Lin, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 3(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Andy Lin --------------------------------- Andy Lin Chief Executive Officer and Chief Financial Officer October 31, 2002 INTERMOST CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants F-1 Report of Independent Auditors F-2 Consolidated Balance Sheets as of June 30, 2002 F-3 Consolidated Statements of Operations for the year ended June 30, 2001 and 2002 F-4 Consolidated Statements of changes in Stockholders' Equity for the years ended June 30, 2001 and 2002 F-5 Consolidated Statements of Cash Flows for the year ended June 30, 2001 and 2002 F-6 Notes to and forming part of the Consolidated Financial Statements F-7 - F25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Stockholders and the Board of Directors of Intermost Corporation: We have audited the accompanying consolidated balance sheet of Intermost Corporation and Subsidiaries ("the Group") as of June 30, 2001 and the related consolidated statements of operations, cash flows and changes in stockholders' equity for the year then ended. These 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 audit. The financial statements for the Company as of and for the year ended June 30, 2000 were audited by other auditors whose report dated October 9, 2000 expressed an unqualified opinion on those financial statements. We conducted our audit 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 the 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 audit provides a reasonable basis for our opinion. In our opinion, based on our audit, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Intermost Corporation and Subsidiaries as of June 30, 2001 and the results of their operations and their cash flows for the year ended June 30, 2001, in conformity with accounting principles generally accepted in the United States of America. / s / Blacjman Kallick Bartelstein, LLP Chicago, Illinois October 22, 2001 F-1 REPORT OF INDEPENDENT AUDITORS ------------------------------ To the Stockholders and the Board of Directors of INTERMOST CORPORATION We have audited the accompanying consolidated balance sheet of Intermost Corporation (the "Company") and its subsidiaries (the "Group") as of June 30, 2002, and the related consolidated statements of operations, cash flows and change in stockholders' equity for the year then ended. 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 audit. The consolidated financial statements of the Group as of and for the year ended June 30, 2001 were audited by other auditors whose report dated October 22, 2001, expressed an unqualified opinion on those financial statements. We conducted our audit 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 consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, based on our audit, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Group as of June 30, 2002 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Group will continue as a going concern. As discussed in Note 2(b) to the financial statements, the Group has suffered recurring losses from operations and continues to experience negative cash flow from operations that raise substantial doubt its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2(b). The financial statements do not include any adjustments that might result from the outcome of this uncertianty. MOORES ROWLAND CHARTERED ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS, HONG KONG, OCTOBER 31, 2002 F-2 INTERMOST CORPORATION CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, ----------------------- 2002 2002 ASSETS RMB US$ CURRENT ASSETS Cash and cash equivalents ................................................ 443,607 53,576 Accounts receivable, net of allowance for doubtful accounts of Rmb41,450 . 658,641 79,546 Costs and estimated earnings in excess of billings ....................... 150,170 18,136 Deposits, prepayments and other receivables, net of allowance for doubtful accounts of Rmb399,810 (Note 3) ...................................... 1,530,962 184,899 Amount due from custodian ................................................ 2,523,743 304,800 Due from related companies ............................................... 72,345 8,737 ----------- ----------- TOTAL CURRENT ASSETS ..................................................... 5,379,468 649,694 Plant and equipment, net (Note 4) ........................................ 3,248,326 392,310 ----------- ----------- TOTAL ASSETS ............................................................. 8,627,794 1,042,004 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accruals and other payables (Note 5) ..................................... 2,257,604 272,657 Deferred revenue ......................................................... 432,534 52,238 Business tax and government surcharges payable ........................... 21,963 2,653 Due to directors (Note 11) ............................................... 1,857,930 224,388 ----------- ----------- TOTAL CURRENT LIABILITIES ................................................ 4,570,031 551,936 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note 9) MINORITY INTERESTS ....................................................... 90,584 10,940 ----------- ----------- STOCKHOLDERS' EQUITY Preferred stock, par value of US$0.001 (Note 7): - Authorized - 5,000,000 shares - None outstanding ....................................................... -- -- Common stock, par value US$0.001: - Authorized - 100,000,000 shares - Outstanding and fully paid - 33,120,481 shares ......................... 274,279 33,125 - Reserved and to be issued - 2,000,000 shares ........................... 16,560 2,000 Additional paid-in capital ............................................... 62,085,259 7,498,220 ----------- ----------- 62,376,098 7,533,345 Accumulated deficit ...................................................... (58,378,023) (7,050,486) Accumulated other comprehensive loss ..................................... (30,896) (3,731) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY ............................................... 3,967,179 479,128 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................... 8,627,794 1,042,004 =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-3 INTERMOST CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS --------------------------------------------------------------------------------
YEARS ENDED JUNE 30, ---------------------------------------------- 2001 2002 2002 RMB RMB US$ Net revenues (Note 2(g)) ........................ 8,149,002 4,902,248 592,059 Cost of revenues (Note 2(i)) .................... (6,990,102) (3,321,014) (401,089) ----------- ----------- ----------- Gross profit .................................... 1,158,900 1,581,234 190,970 Selling, general and administrative expenses .... (28,926,800) (8,497,414) (1,026,258) ----------- ----------- ----------- LOSS FROM OPERATIONS ............................ (27,767,900) (6,916,180) (835,288) Other income (expense): Loss on disposal of fixed assets ................ (324,441) (314,242) (37,952) Loss on abandonment of phone payment system ..... (6,734,706) -- -- Loss on abandonment of fixed assets ............. -- (817,496) (98,731) Share of loss in an associated company .......... (2,277,286) -- -- Impairment of investment in an associated company (1,189,192) -- -- Gain on liquidation of an associated company .... -- 560,847 67,735 Interest income (Note 2(j)) ..................... 101,259 14,169 1,711 Other net income ................................ 40,226 522,092 63,055 ----------- ----------- ----------- TOTAL OTHER EXPENSE, NET ........................ (10,384,140) (34,630) (4,182) ----------- ----------- ----------- LOSS BEFORE MINORITY INTERESTS .................. (38,152,040) (6,950,810) (839,470) Minority interests .............................. 3,341,063 (2,954) (357) ----------- ----------- ----------- NET LOSS ........................................ (34,810,977) (6,953,764) (839,827) Other comprehensive loss: Currency translation adjustments ............ (10) -- -- ----------- ----------- ----------- COMPREHENSIVE LOSS .............................. (34,810,987) (6,953,764) (839,827) =========== =========== =========== Net loss per share (Note 2(o)) Weighted average number of shares outstanding - basic 11,899,202 14,189,163 14,189,163 ========== ========== ========== Loss per common share Basic (2.93) (0.49) (0.06) ========== ========== ========== (2.93) (0.49) (0.06) Diluted ========== ========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-4 INTERMOST CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY --------------------------------------------------------------------------------
COMMON STOCK RESERVED AND TO BE ISSUED ISSUED --------------------- -------------------------- ADDITIONAL Number of Number of PAID-IN shares AMOUNT shares AMOUNT CAPITAL RMB RMB RMB Balance as of June 30, 2000 ....................... 10,971,468 90,840 800,000 6,624 51,902,537 Common stock issued ............................... 1,984,013 16,473 (800,000) (6,624) 2,761,151 Issuance of common stock for marketing services ... received ....................................... 150,000 1,242 -- -- 3,749,598 Issuance of common stock to employee in Lieu of ... salary ......................................... 15,000 124 -- -- 542,133 Currency translation adjustments .................. -- -- -- -- -- Net loss .......................................... -- -- -- -- -- Balance as of June 30, 2001 ....................... 13,120,481 108,679 -- -- 58,955,419 Proceeds on issuance of common stock, net of issuance cost of Rmb331,200, of which the shares for issuance cost have not been issued ......... 20,000,000 165,600 2,000,000 16,560 3,129,840 Net loss .......................................... -- -- -- -- -- Balance as of June 30, 2002 ....................... 33,120,481 274,279 2,000,000 16,560 62,085,259
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-5 (Continued from table above, first column repeated)
ACCUMULATED OTHER SUBSCRIPTION ACCUMULATED COMPREHENSIVE RECEIVABLE DEFICIT LOSS TOTAL TOTAL RMB RMB RMB RMB US$ Balance as of June 30, 2000 ....................... (621,000) (16,613,282) (30,886) 34,734,833 4,195,028 Common stock issued ............................... 621,000 -- -- 3,392,000 409,662 Issuance of common stock for marketing services ... received ....................................... -- -- -- 3,750,840 453,800 Issuance of common stock to employee in Lieu of ... salary ......................................... -- -- -- 542,257 65,490 Currency translation adjustments .................. -- -- (10) (10) (1) Net loss .......................................... -- (34,810,977) -- (34,810,977) (4,204,224) Balance as of June 30, 2001 ....................... -- (51,424,259) (30,896) 7,608,943 918,955 Proceeds on issuance of common stock, net of issuance cost of Rmb331,200, of which the shares for issuance cost have not been issued ......... -- -- -- 3,312,000 400,000 Net loss .......................................... -- (6,953,764) -- (6,953,764) (839,827) Balance as of June 30, 2002 ....................... -- (58,378,023) (30,896) 3,967,179 479,128
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. INTERMOST CORPORATION ================================================================================ CONSOLIDATED STATEMENTS OF CASH FLOWS --------------------------------------------------------------------------------
YEARS ENDED JUNE 30, -------------------------------------------- 2001 2002 2002 RMB RMB US$ CASH FLOWS FROM OPERATING ACTIVITIES Net loss ................................................................. (34,810,977) (6,953,764) (839,827) Adjustments to reconcile net loss to net cash used in operating activities Bad debt written off: - Accounts receivable .......................... 145,793 -- -- - Deposit on investment in JRHIC ............... 1,500,000 -- -- Provision for doubtful debt:- Accounts receivable .................... -- 41,450 5,006 - Other receivables ...................... -- 399,810 48,286 - Due from a related party ............... 2,354,000 -- -- Deposits for acquisition of projects owned by Internet.com written off -- 496,800 60,000 Marketing expenses and employee compensation paid through issuance of common stock ...................................................... 4,293,097 -- -- Loss on disposal of fixed assets ..................................... 324,441 314,242 37,952 Loss on abandonment of phone payment system .......................... 6,734,706 -- -- Loss on abandonment of fixed assets .................................. -- 817,496 98,731 Depreciation and amortization of plant and equipment and phone payment system ............................................................ 2,759,488 865,337 104,509 Amortization of intangible assets .................................... 1,199,996 -- -- Share of loss of an associated company ............................... 2,277,286 -- -- Impairment of investment in an associated company .................... 1,189,192 -- -- Minority interests ................................................... (3,341,063) 2,954 357 Stock-based compensation costs ....................................... 1,744,878 -- -- Gain on liquidation of an associated company ......................... -- (560,847) (67,735) Changes in operating assets and liabilities: Accounts receivable, net ............................................. 328,486 (240,812) (29,084) Costs and estimated earnings in excess billings ...................... 290,990 203,040 24,522 Deposits, prepayments and other receivables .......................... 208,467 (117,094) (14,142) Inventories .......................................................... 41,240 15,818 1,910 Accruals and other payables .......................................... (573,275) 388,643 46,938 Deposit on liquidation of investment in an associated company ........ 1,000,000 -- -- Deferred revenue ..................................................... (181,546) 20,431 2,468 Deferred rent ........................................................ 362,638 (362,638) (43,797) Deposits from customers .............................................. (201,500) (61,400) (7,415) Business tax and government surcharge payable ........................ 37,236 (66,781) (8,065) NET CASH USED IN OPERATING ACTIVITIES .................................... (12,316,427) (4,797,315) (579,386) CASH FLOWS FROM INVESTING ACTIVITIES Additions of plant and equipment and phone payment system ................ (2,007,435) (17,612) (2,127) Proceeds on disposal of plant and equipment .............................. -- 441,889 53,368 Repayments from (loans to) directors ..................................... 284,265 520,133 62,818 Due from related companies ............................................... (530,720) -- -- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ...................... (2,253,890) 944,410 114,059 CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of common stock .............................. 3,392,000 788,257 95,200 Proceeds from (repayments to) directors .................................. 1,747,483 (617,883) (74,623) NET CASH PROVIDED BY FINANCING ACTIVITIES ................................ 5,139,483 170,374 20,577 Effect of exchange rate changes on cash and bank deposits ................ (10) -- -- Net decrease in cash and bank deposits ................................... (9,430,844) (3,682,531) (444,750) Cash and bank deposits, beginning of year ................................ 13,556,982 4,126,138 498,326 CASH AND BANK DEPOSITS, END OF YEAR ...................................... 4,126,138 443,607 53,576 NON-CASH TRANSACTION: Receivable from issuance of common stock ................................. -- 2,523,743 304,800
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS. F-6 INTERMOST CORPORATION ================================================================================ NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. ORGANIZATION AND PRINCIPAL ACTIVITIES Intermost Corporation (the "Company") was incorporated in the State of Utah, United States of America on March 6, 1985. The Company changed its name from Utility Communications International, Inc. to Intermost Corporation on October 23, 1998. During the period from January 2, 1998 to October 22, 1998, the Company was inactive. On October 23, 1998, the Company acquired 100% interest in Intermost Limited ("IL"; a company incorporated in the British Virgin Islands) by issuing 4,970,000 shares of common stock of par value of US$0.001 each (after the redenomination of par value and a stock split) to the shareholders of IL. The acquisition of IL by the Company on October 23, 1998 has been treated as a reverse acquisition since IL is the continuing entity as a result of the exchange reorganization. IL and its subsidiaries (the "IL Group") are principally engaged in the provision of business portal and e-commerce solutions, the development of software and the provision of consultation services in the People's Republic of China ("the PRC") and Hong Kong. Details of the Company's subsidiaries (which together with the Company are collectively referred to as the "Group") and their principal activities as of June 30, 2002 were as follows:
PLACE OF PERCENTAGE OF INCORPORATION/ EQUITY INTEREST ----------------- ATTRIBUTABLE TO NAME REGISTRATION THE GROUP PRINCIPAL ACTIVITIES Intermost Limited ("IL") The British 100% Investment holding and Virgin Islands development of software. Ceased operations of development of software in 2001 China E.com Information Technology Ltd. The PRC 100% Provision of business portal ("CECITL")* and e-commerce solutions IMOT Information Technology (Shenzhen) The PRC 100% Inactive Ltd. ("IITSL")* Intermost (Hong Kong) Limited ("IHKL") Hong Kong 100% Inactive Shenzhen Bank Union & Jiayin E-commerce The PRC 55.3% Provision of phone payment Company Ltd. ("SBUJE")** system services. Ceased operations in 2001 Intermost Focus Advertising Company Ltd. The PRC 90% Provision of advertising ("IFACL")** consultancy, and agency services and production of advertising materials
* CECITL and IITSL are wholly owned foreign enterprises established in the PRC to be operated for a period of 10 years until 2008. ** SBUJE and IFACL are equity joint ventures established in the PRC to be operated for a period of 10 years until 2009 and 2010, respectively. F-7 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of accounting The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. The consolidated financial statements are presented in Renminbi which is the Group's functional currency as the Group's operations are primarily located in the PRC. (b) Going concern considerations As shown in the accompanying consolidated financial statements, the Company incurred a net loss of Rmb6,953,764 for the year ended June 30, 2002 and continues to experience negative cash flows from operations. Management will be required to raise additional capital through an offering of securities to fund the Company's operations, and will attempt to continue raising capital resources until such time as the Company generates revenues sufficient to maintain itself as a viable entity. Additionally, the Company and its principle shareholders are exploring the possibility of obtaining loans from other third party sources. Management believes that these actions will assist the Company in reaching the point of profitability from operations and enable the Company to raise further capital from private placements or public offerings. If successful, these actions will serve to mitigate the factors which have raised substantial doubt about the Company's ability to continue as a going concern and increase the availability of resources for funding of the Company's current operations and future market development. (c) Principles of consolidation The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All material intra-group balances and transactions have been eliminated on consolidation. (d) Cash and cash equivalents The Company considers all cash and highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. (e) Associated company An associated company is an enterprise in which the Group has significant influence, but not control or joint control, and thereby have the ability to participate in their financial and operating policy decisions. In the consolidated financial statements, investment in an associated company is accounted for under the equity method of accounting, whereby the investment is initially recorded at cost and the carrying amount is adjusted thereafter for the post acquisition change in the Group's share of the associate's net assets. F-8 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f) Plant and equipment and depreciation Plant and equipment is stated at cost less accumulated depreciation and accumulated impairment loss. The cost of an asset consists of its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use, which include the estimated cost for dismantling, removing the asset and restoring the site. Expenditure incurred to replace a separate component of an item of plant and equipment, including major inspection and overhaul expenditure, is capitalized and accounted for as a component of the asset. Other subsequent expenditure is capitalized as an additional cost of the asset only when it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset. The gain or loss arising from the retirement or disposal of plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the assets and is recognized as an income or expense in the statement of operations. When assets are transferred between plant and equipment and other classes of assets, the cost of such an asset on transfer is deemed to be the carrying amount of the asset as stated under its original classification. Any previous revaluation reserve on the asset is frozen upon the transfer until the retirement or disposal of the asset. On retirement or disposal of the asset, the frozen revaluation reserve is transferred directly to retained earnings. Depreciation is calculated to write off the cost of plant and equipment over their estimated useful lives from the date on which they become fully operational and after taking into account of their estimated residual values, using the straight line method, at the following annual rates: Buildings 20 years Computer equipment 3 years Motor vehicles 5 years Furniture and office equipment 5 years Leasehold improvement shorter of 1 to 3 years or the unexpired term of leases The Group recognizes an impairment loss on plant and equipment when evidence, such as the sum of expected future cash flows (undiscounted and without interest charges) indicates that future operations will not produce sufficient revenue to cover the related future costs, including depreciation. Measurement of the impairment loss is based on the fair value of the assets. F-9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (g) Net revenues The Company recognizes revenue on the elements when there is persuasive evidence of an agreement with customers, with a fixed fee that is collectible and when delivery has occurred or service has been rendered. Revenue from website development contract is recognized under the percentage of completion method using milestones as a measure of progress towards completion. Revenues are allocated to the elements of the contract based on the fair values of the elements. Provisions for estimated contract losses are recognized in the year the loss becomes probable and can be reasonably estimated. The asset, costs and estimated earnings in excess of billings represents revenue recognized in excess of amounts billed. Revenue from maintenance contracts is recognized on a straight-line basis over the term of the maintenance contract, generally twelve months. The unearned portion of maintenance revenue is classified as deferred revenue and amortized over the life of the contract. (h) Research and development expenditures Research and development expenses are charged to expense as incurred and consist primarily of salaries, supplies and depreciation of equipment used in research and development activities. The Group incurred costs totaling Rmb1,200,397 in the year ended June 30, 2001. (i) Cost of revenues Cost of revenues includes the cost of the direct labour force, sub contract fee, costs of systems sales and integration, depreciation and amortization, and other costs associated with the same, including travel, welfare, office and related expenses allocable to the engineering and technician staff. (j) Other income Other income consists mainly of rental income and written back of lease incentive for the year ended June 30, 2002. (k) Income taxes Income taxes are provided under the provisions of Statement of Financial Accounting Standard ("SFAS") No. 109, which requires recognition of the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss carry forwards under the liability method. Deferred tax assets and liabilities are measured using expected tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The Group has recorded a full valuation allowance for its deferred tax assets as of June 30, 2002 due to the uncertainty of the realizability of those assets. F-10 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (l) Operating leases Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Rentals payable and receivable under operating leases are recorded in the statement of operations on a straight-line basis over the lease terms. Lease incentives received are recognized in the statement of operations as an integral part of the net consideration agreed for the use of the leased asset. (m) Comprehensive income (loss) The Group has adopted SFAS No. 130 "Reporting Comprehensive Income", which requires the disclosure of comprehensive income, which includes net income (loss), unrealized gains and losses on marketable securities classified as available-for-sale and foreign currency translation adjustments. (n) Foreign currency translation The Group considers Renminbi as its functional currency as a substantial portion of the Group's business activities are based in Renminbi. The translation of the financial statements of subsidiaries whose functional currencies are other than Renminbi, into Renminbi is performed for balance sheet accounts using closing exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during each reporting period. The gains or losses resulting from translation are included in stockholders' equity separately as accumulated other comprehensive loss. Transactions in currencies other than functional currencies during the year are translated into the respective functional currencies at the applicable rates of exchange prevailing at the time of the transactions. Monetary assets and liabilities denominated in currencies other than functional currencies are translated into respective functional currencies at the applicable rates of exchange in effect at the balance sheet date. Exchange gains and losses are dealt with in the statement of operations. Translation of amounts from Renminbi ("Rmb") into United States dollars ("US$") is for the convenience of readers and has been made at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York on December 31, 2000 of US$1.00 = Rmb8.28. No representation is made that the Renminbi amounts could have been, or could be, converted into United States dollars at that rate or at any other rate. F-11 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (o) Loss per common share Loss per common share is computed in accordance with SFAS No. 128, by dividing net loss for each period by the weighted average number of shares of common stock outstanding during the period, as if the common stock issued for the acquisition of IL (see Note 1) had been consummated prior to the years presented. The computation of diluted loss per common share is similar to basic loss per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all dilutive securities outstanding during the period were exercised. No diluted loss per common share was presented in the consolidated statements of operations as the options exercisable contained an exercise price greater than the average market price of the common shares as of June 30, 2001, and there were no dilutive securities available for exercise as of June 30, 2002. (p) Stock-based compensation The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 ("APB25"), "Accounting for Stock Issued to Employees" and Financial Accounting Standards Board issued Interpretation No. 44 ("FIN44"), "Accounting for Certain Transactions Involving Stock Compensation (an interpretation of APB Opinion No. 25"). The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". (q) Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. Such estimates include provisions for doubtful accounts, sales returns and allowances, long-lived assets and deferred income taxes. Actual results could differ from those estimates. (r) Fair value of financial instruments The estimated fair values for financial instruments under SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair values of the Company's financial instruments, which includes cash, accounts receivable and accounts payable, approximates their carrying value in the financial statements. F-12 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (s) Accounting pronouncements In June 2001, Financial Accounting Standards board ("FASB") issued SFAS No. 141, "Business Combination". SFAS 141 addresses financial accounting and reporting for business combinations and supercedes APB No. 16, "Business Combination" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises". All business combination initiated after June 30, 2001 are to be accounted for under the purchase method, the pooling of interest method of accounting is prohibited. The adopted of SFAS No. 141 did not have an impact on the Company's financial position, results of operations or cash flows. In June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". The SFAS No. 142 provides that goodwill and intangible assets which have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. The Company adopted SFAS No. 142 effective on July 1, 2002, the first day of its financial year 2003. The Company has no goodwill and intangible assets as of June 30, 2002. The Company does not believe that the adoption of the statement will have a material impact on its financial position or result of operations. In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations". The SFAS No. 143 addresses accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for financial years beginning after June 15, 2002. The impact of the adoption of SFAS No. 143 on the Group's financial statements is not expected to be material. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS No. 121 "Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 144 requires long-lived assets be measured at the lower of selling amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of SFAS No. 144 are effective for consolidated financial statements issued for financial years beginning after December 15, 2001. The Group does not expect that the adoption of SFAS No. 144 will have a material impact on the Group's financial statements. In April 2002, the FASB issued SFAS No. 145 Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement made revisions to the accounting for gains and losses from the extinguishment of debt, rescinded SFAS No. 44, and required certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The Group is required to and will adopt SFAS No. 145 on July 1, 2002. The adoption of SFAS No. 145 is not expected to have a material impact on the Group's financial statements. In June 2002, the FASB issued SFAS No. 146 "Accounting for costs associated with Exit or Disposal Activities". This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. An entity's commitment to plan, by itself, does not create a present obligation to others that meets the definition of a liability. This Statement is effective for exit or disposal activities that are initiated after December 31, 2002. The Group does not believe that the adoption of the Statement will have material impact on its financial position or result of operations. F-13 3. DEPOSITS, PREPAYMENTS AND OTHER RECEIVABLES Deposits, prepayments and other receivables consisted of:
AS OF JUNE 30, ------------------------------------ 2002 2002 RMB US$ Rental and utilities deposits 122,987 14,854 Advance to employees 11,416 1,379 Advance to Jiayin Investment Company Limited ("JICL") (Note 3(a)) 56,803 6,860 Prepaid expenses 54,102 6,534 Advances to China Chance Technology & Electronics Co. Ltd. (Note 3(b)) 197,950 23,907 Receivable on liquidation of an associate company 524,428 63,337 Fortification for legal proceeding (Note 3(c)) 535,000 64,613 Others 28,276 3,415 -------------- -------------- 1,530,962 184,899 ============== ==============
Notes:- (a) JICL was a minority shareholder of one of the Group's subsidiaries until February 2000 when it disposed of all its interest in that subsidiary. Thereafter, JICL was not classified as a related party. (b) This advance was for future fund raising activities or support to be provided by that company and is collateralized with an asset held in the PRC. (c) During September of 2000, the Group entered into an agreement to acquire 58.3% of the outstanding shares of JRHIC from its two stockholders. JRHIC's main investment via a holding company, is an ownership of 90% of Shenzhen China Websecurity.com, a Chinese-foreign equity joint venture established in the PRC, which engages in the provision of Internet security services, systems integration and software development services. Based on the terms of the agreement, the consideration was to be Rmb1,500,000 in cash and 510,300 shares of common stock of the Company valued at Rmb10,974,001 or US$2.60 per share. As of June 30, 2001, the Group had paid Rmb1,500,000 in cash, but had not issued the 510,300 shares of common stock, nor had they received the transfer of shares from the stockholders of JRHIC. The Group is in the process of commencing legal action to terminate the agreement and attempt the recovery of Rmb1,500,000. Due to the uncertainty of any recovery from the stockholders of JRHIC, the Group has provided a valuation allowance on the full amount of this receivable, and has accounted for it as a bad debt expense in the fiscal year ended June 30, 2001. During the fiscal year 2002, the Group paid Rmb535,000 to the Court and an Injunction Order was granted against the Defendants to freeze bank accounts held in the name of the Defendants until conclusion or further order from the Court. The management expects that the trial shall be in early 2003. F-14 4. PLANT AND EQUIPMENT, NET Plant and equipment consisted of:
AS OF JUNE 30, ---------------------------------------- 2002 2002 RMB US$ Building 2,790,204 336,982 Computer equipment 971,460 117,326 Furniture and office equipment 420,180 50,270 Leasehold improvements 148,416 17,924 Motor vehicles 532,470 64,308 ----------------- ----------------- Cost 4,862,730 586,810 Less: Accumulated depreciation (1,614,404) (194,500) ----------------- ----------------- Plant and equipment, net 3,248,326 392,310 ================= =================
The title of the building with a net book value of approximately Rmb2,441,000 as of June 30, 2002 has not been transferred to the Group. The Group is in the process of applying for the respective building ownership certificate. The director of the Group is confident that there is no legal impediment to the Group in obtaining the building ownership certificate. Depreciation expense amounted to Rmb1,517,998 and Rmb865,337 for the year ended June 30, 2001 and 2002 respectively. 5. ACCRUALS AND OTHER PAYABLES Accruals and other payables consisted of: AS OF JUNE 30, -------------------------------------- 2002 2002 RMB US$ Accrued operating expenses Wages and bonus 845,610 102,126 Rental deposit received 55,789 6,738 Legal and professional fees 1,126,518 136,053 Others 229,687 27,740 ---------------- ---------------- 2,257,604 272,657 ================ ================ F-15 6. INCOME TAXES The Company and its subsidiaries are subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate. The Company is subject to the United States federal tax at a rate of 35%. IL was incorporated under the International Business Companies Act of the British Virgin Islands and, accordingly, is exempted from payment of the British Virgin Islands income taxes. The subsidiaries (IITSL, CECITL, SBUJE and IFACL) and associated company (SECL) established in the PRC are subject to PRC enterprise income taxes at a rate of 15%. IHKL is subject to Hong Kong profits tax at a rate of 16%. As of June 30, 2001 and 2002, all group companies were in a tax loss position. The reconciliation of the United States federal income tax rate to the effective income tax rate based on loss before income taxes stated in the consolidated statements of operations is as follows:
YEARS ENDED JUNE 30, --------------------------------------- 2001 2002 % % United States federal income tax rate 35 35 Effect of different tax rates in foreign jurisdictions (8) (10) Valuation allowance for deferred tax assets (27) (25) ---------------- ---------------- - - ================ ================ Deferred taxation consisted of: AS OF JUNE 30, --------------------------------------- 2002 2002 RMB US$ Deferred tax assets, gross Net operating loss carry forwards 3,084,156 372,483 Valuation allowance (3,084,156) (372,483) ---------------- ---------------- Deferred taxes, net - - ================ ================
The change in valuation allowance from June 30, 2001 to June 30, 2002 is primarily related to the tax effects of the increase in the net operating loss in the current year. The Company has net operating loss carry forwards totaling approximately Rmb20,452,000, as of June 30, 2002, respectively, which begin to expire in the year 2004, primarily relating to their operations in the PRC. A valuation allowance has been established for the full amount of the deferred tax benefit related to those loss carry forwards and other deferred tax assets as management believes that it is more likely than not that the benefit will not be realized. F-16 7. SHARE CAPITAL During the period from January 2, 1998 (the earliest date covered by these financial statements) to October 22, 1998, the Company had authorized share capital of 100,000,000 shares of common stock, par value US$0.001 each, and 5,000,000 shares of preferred stock, par value US$0.001 each; and outstanding share capital of 1,742,853 shares of common stock, par value US$0.001 each. On October 23, 1998, the Company effected a redenomination of par value, resulting in 50,000,000 shares of common stock, par value US$0.002 each, authorized, and 1,742,853 shares of common stock, par value US$0.002 each, outstanding. On the same day, the Company effected a two-for-one stock split, resulting in 100,000,000 shares of common stock, par value US$0.001 each, authorized, and 3,485,706 shares of common stock, par value US$0.001 each, outstanding. Also, on October 23, 1998, the Company issued 4,970,000 shares of common stock (after the redenomination of par value and stock split described above), par value US$0.001 each, in connection with its acquisition of IL as described in Note 2. The effects of the redenomination of par value and the stock split have been reflected retroactively in the financial statements and all loss per share computations. On December 16, 1998, the Company sold 1,298,706 shares of common stock, par value US$0.001 each, for cash at US$0.77 per share through a private placement. The net proceeds amounted to approximately Rmb6,918,000 (equivalent of US$836,000), of which approximately Rmb6,272,000 (US$758,000) was received during the year ended June 30, 1999 and approximately Rmb646,000 (equivalent of US$78,000) was received during the year ended June 30, 2000. On June 8, 1999, the Company reserved to issue 69,700 shares of common stock, par value US$0.001 each, valued at Rmb2,400,000, in connection with its acquisition of system integration contracts and a customer list. Such shares were issued in December 1999. In September 1999, the Company reserved to issue 800,000 shares of common stock, par value US$0.001 each, for cash at US$1.25 per share, amounting to approximately Rmb8,280,000 (equivalent of US$1,000,000), of which approximately Rmb621,000 was yet to be received as of June 30, 2000. These shares were issued in January 2001. In 2001, Rmb331,200 of issuance costs initially recorded as subscription receivable were appropriately reclassified to additional paid-in capital. On January 26, 2000, the Company issued 75,712 shares of common stock, par value US$0.001 each, valued at approximately Rmb3,126,000, as part of the consideration for the acquisition of a phone payment system of the Group. On January 26, 2000, the Company issued 41,110 shares of common stock, par value US$0.001 each, valued at approximately Rmb1,702,000, to certain employees as rewards for their contribution to the Group. The cost for these shares has been recorded as part of employee compensation. In January and February 2000, the Company issued an aggregate of 953,334 shares of common stock, par value US$0.001 each, for cash at US$3.00 to US$3.23 per share. The net proceeds amounted to approximately Rmb23,615,000 (equivalent of US$2,852,000). F-17 7. SHARE CAPITAL (CONTINUED) On March 22, 2000, the Company issued 77,200 shares of common stock, par value US$0.001 each valued at approximately Rmb2,637,000, as part of the consideration for the acquisition of a building in the PRC. In August 2000, the Company issued 15,000 shares of common stock to the vice president in charge of business development, par value US$0.001 each in lieu of employee salary, at US$4.37 per share. In October 2000, the Company issued 150,000 shares of common stock, par value US$0.001 each for marketing services performed by an unrelated third party, at US$3.02 per share. In February 2001, the Company issued 1,152,000 shares of common stock, par value US$0.001 each, for cash at US$0.3125 per share. The net proceeds amounted to approximately Rmb2,742,000 (equivalent of US$331,200). In connection with the issuance, the Company paid a commission of Rmb 238,464 to Sanway Consulting Limited, a company owned by Mr. Yang Shim, a director of the Company. In May, 2002, the Company issued 20,000,000 shares of common stock, par value US$0.001 each, for cash at US$0.02 per share. The gross proceeds amounted to Rmb3,312,000 (equivalent to US$400,000). In connection with this issuance, the Company will pay an issuing cost by issuing 2,000,000 shares of common stock of Rmb331,200 (equivalent to US$40,000) to a placement agent. The subscription proceeds amounting to Rmb788,257 has been received and the balance of Rmb2,523,743 was held by the placement agent. The money will be released on demand as and when the board of directors decides to use the money. 8. STOCK-BASED COMPENSATION In November 1999, the Company entered into a two-year employment contract with the vice president in charge of business development. Pursuant to the contract, the Company granted to the employee stock options to purchase (i) 250,000 shares of common stock of the Company at US$3.50 per share, exercisable from November 2000 to November 2006, (ii) 250,000 shares of common stock of the Company at US$4.00 per share, exercisable from November 2001 to November 2006. In addition, the employee is also entitled to receive 15,000 shares of common stock of the Company after each six months of employment. In May 2000, the Company entered into a new one-and-a-half-year employment contract with this employee to replace the previous one. Pursuant to the new contract, the Company granted to the employee options to purchase (i) 125,000 shares of common stock of the Company at US$3.00 per share exercisable from November 2000 to May 2010 and (ii) 250,000 shares of common stock of the Company at US$4.00 per share exercisable from November 2001 to May 2010. Under the new contract, the employee is not entitled to receive any additional shares of common stock of the Company during the remaining term of the employment contract. The board of directors resolved to cancel the Share Option Plan 2000 and adopted the new Share Option Plan 2001 effective on January 19, 2001. In September 2001, the board of directors resolved to revoke the Share Option Plan 2001. None of option under the Share Option Plan 2001 issued for the year ended June 30, 2002. F-18 8. STOCK-BASED COMPENSATION (CONTINUED) Changes in outstanding options under the employee stock options for the years ended June 30, 2001 and 2002 are presented below:
2001 2002 ---------------------------------- ----------------------------------- OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE EXERCISE PRICE EXERCISE PRICE RMB RMB Outstanding, beginning of year 375,000 30.39 375,000 30.39 Granted - - (375,000) (30.39) --------------- --------------- --------------- --------------- Outstanding, end of year 375,000 30.39 - - =============== =============== =============== =============== Exercisable, end of year 125,000 24.84 - - =============== =============== =============== =============== Weight average remaining contractual life 8.3 years - =============== ===============
The Company accounts for stock-based compensation using the intrinsic value method prescribed by APB No. 25. Had compensation expense for the options been accounted for based on fair value on the grant date in accordance with SFAS No. 123, the Company proforma net loss and loss per common share would have been as follows:
YEARS ENDED JUNE 30, ---------------------------------------------------------- 2001 2002 2002 RMB RMB US$ Proforma net loss (41,043,347) - - ================= ================= ================ Proforma net loss per common share - basic (3.45) - - ================= ================= ================
The proforma effects of applying SFAS No. 123 may not be representative of actual results had the Company accounted for stock option awards using the fair-value-based method. The weighted-average fair value of the options granted in the fiscal year 2000 was estimated, using the Black-Scholes option-pricing model, to be US$4.63 to US$4.69. The fair value is estimated on the date of grant using the follow assumptions: Risk-free interest rate 5.87% Expected dividend yield - Expected option life (years) 8 - 9 Expected stock price volatility 1.3756 F-19 9. OPERATING LEASE COMMITMENTS The Group has operating lease agreements for office premises and staff quarters, which extend through 2003. Rental expenses for the years ended June 30, 2001 and 2002 were approximately, Rmb853,000 and Rmb385,888, respectively. Future minimum rental payments as of June 30, 2002, under agreements classified as operating leases with non-cancelable terms, are as follows: AS OF JUNE 30, --------------------------------------- 2002 2002 RMB US$ Fiscal year: 2003 28,060 3,389 ================ ================ The Group leases out its building under operating leases with lease term of 3 years. The future aggregate minimum rental receivable under non-cancelable operating leases are as follows: AS OF JUNE 30, -------------------------------------- 2002 2002 RMB US$ Fiscal year: 2003 199,950 24,149 2004 33,325 4,025 ---------------- ---------------- Total 233,275 28,174 =============== ================ 10. RETIREMENT PLAN AND POST-EMPLOYMENT BENEFITS The Group has no retirement plan or post-employment benefits for its employees. F-20 11. OTHER RELATED PARTY TRANSACTIONS Name and relationship of additional related parties: NAME OF RELATED PARTIES EXISTING RELATIONSHIP WITH THE GROUP Chuangshengxin Corporate Subsidiary of a company with common Conventions (Shenzhen) Company director Limited Corporate Conventions Subsidiary of a company with common International Limited director Dunwell Computer (H.K.) Limited During September of 1999, the Group ("DCL") entered into an agreement to acquire 70% of DCL, whose principal business activity is web hosting, for Rmb2,996,000. Based on the agreement, the consideration was to be the issuance of 51,282 shares of common stock of the Company, valued at Rmb 1,498,000 or US$3.53 per share, and the remainder in cash of Rmb1,498,000. DCL is a company substantially owned by Mr. Chan Sai Tak, brother of Mr. Chan Sai Keung, a director of the Company and 7% stockholder of DCL. During 2000, the Group paid the Rmb1,498,000 and advanced an additional Rmb321,000 to DCL. In 2001, the Group advanced an additional Rmb535,000 to DCL, bringing the total amount paid and advanced to Rmb2,354,000. As of October 22, 2001, the Company had not issued the 51,282 shares of common stock, nor had they received the transfer of shares from the stockholders of DCL. Due to DCL's current inability to repay, the Group has provided a full valuation allowance amounting to Rmb2,354,000 on this receivable, and accounted for it as a provision for doubtful debt in the fiscal year 2001. AS OF JUNE 30, ---------------------- 2002 2002 RMB US$ Due from related company Corporate Conventions International Limited 72,345 8,737 ========= ========= Due to directors Mr. Jun Liang ............................. 669,780 80,891 Mr. Andy Lin .............................. 1,188,150 143,497 --------- --------- 1,857,930 224,388 ========= ========= The outstanding balances with related company and directors were unsecured, non-interest bearing and without pre-determined repayment terms. F-21 11. OTHER RELATED PARTY TRANSACTIONS (CONTINUED) Summary of related party transactions is as follows: YEARS ENDED JUNE 30, -------------------- 2002 2002 RMB US$ Office rentals and utilities fees charged to Chuangshengxin Corporate Conventions (Shenzhen) Company Limited 3,843 464 ===== ===== 12. SEGMENT INFORMATION The Group adopted SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information", in respect of its operating segments. The Group reportable segments are E-Commerce Solution section, System Sales Integration section, Phone Payment System section and Web Advertisement section. They are managed separately because each business requires different technology and marketing strategies. The Group evaluates performance based on operating earnings of the respective business units. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The corporate assets primarily include cash and cash equivalents, amount due from custodian, and deposit and other receivables. There were no significant inter-segment transactions during any of the reported periods. In determining operating income/loss by reportable segment, general corporate expenses, other income and expense items of non-operating nature are not considered, as such items are not allocated to the Company's segments. Segment information for the years ended June 30, 2001 and 2002 are as follows: (a) Net revenues YEARS ENDED JUNE 30, ----------------------------------- 2001 2002 2002 RMB RMB US$ E-commerce solutions ....... 3,884,118 3,138,809 379,083 System sales and integration 2,862,136 927,384 112,003 Phone payment system ....... 629,915 -- -- Web advertisement .......... 772,833 836,055 100,973 --------- --------- --------- 8,149,002 4,902,248 592,059 ========= ========= ========= The PRC .................... 8,062,895 4,773,249 576,479 Hong Kong .................. 86,107 128,999 15,580 --------- --------- --------- 8,149,002 4,902,248 592,059 ========= ========= ========= F-22 12. SEGMENT INFORMATION (CONTINUED) (b) Net loss: YEARS ENDED JUNE 30, ------------------------------------------- 2001 2002 2002 RMB RMB US$ E-commerce solutions ........... (16,823,741) (2,558,483) (308,996) System sales and integration ... (1,759,592) (273,252) (33,001) Phone payment system ........... (5,959,517) (557,870) (67,376) Web advertisement .............. (68,327) 36,897 4,456 ----------- ----------- ----------- (24,611,177) (3,352,708) (404,917) Reconciliation: Net loss for reportable segments (24,611,177) (3,352,708) (404,917) Unallocated corporate expenses . (10,199,800) (3,601,056) (434,910) ----------- ----------- ----------- (34,810,977) (6,953,764) (839,827) =========== =========== =========== (c) Assets: AS OF JUNE 30, ------------------------- 2002 2002 RMB US$ E-commerce solutions ............... 36,958,434 4,463,579 System sales and integration ....... 681,784 82,341 Phone payment system ............... 2,056,255 248,340 Web advertisement .................. 907,738 109,630 ----------- ----------- 40,604,211 4,903,890 =========== =========== Reconciliation: Total assets for reportable segments 40,604,211 4,903,890 Other corporate assets ............. 3,547,313 428,419 Elimination of intra group balances (35,523,730) (4,290,305) ----------- ----------- 8,627,794 1,042,004 =========== =========== Substantially all of the Group's identifiable assets are located in the PRC. F-23 12. SEGMENT INFORMATION (CONTINUED) (d) Other items: YEARS ENDED JUNE 30, ---------------------------------- 2001 2002 2002 RMB RMB US$ Depreciation: E-commerce solutions ....... 1,283,326 723,318 87,356 System sales and integration 62,057 15,812 1,910 Phone payment system ....... 95,316 37,326 4,508 Web advertisement .......... 5,092 12,930 1,562 Unallocated corporate assets 72,207 75,951 9,173 --------- --------- --------- 1,517,998 865,337 104,509 ========= ========= ========= Expenditures for fixed assets: E-commerce solutions ....... 1,776,976 16,500 1,993 System sales and integration 900 -- -- Phone payment system ....... 148,209 -- -- Unallocated corporate assets 26,857 195,402 23,599 --------- --------- --------- 1,952,942 211,902 25,592 ========= ========= ========= (e) Major customers In the year ended June 30, 2001 and 2002, no single customer accounted for more than 10% of total revenue. 13. OPERATING RISK (a) Country risk The Group's operations are conducted in the PRC and Hong Kong. Accordingly, the Group's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC and Hong Kong, and by the general state of the PRC and Hong Kong economies. The Group's operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Group's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things. F-24 13. OPERATING RISK (CONTINUED) (b) Industry risk The Company operates in business segments which are characterized by rapid technological advances, changes in customer requirements and evolving regulatory requirements and industry standards. Any failure by the Company to anticipate or to respond adequately to technological changes in its industry segments, changes in customer requirements or changes in regulatory requirements or industry standards, could have a material adverse effect on the Company's business and operating results. (c) Concentration of credit As of June 30, 2002, five largest accounts receivable accounted for 95% of the total accounts receivable. The Group performs ongoing credit evaluation of each customer's financial condition. It maintains reserves for potential credit losses and such losses in the aggregate have not exceeded management's projections. F-25