PART
I
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Item 1.
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BUSINESS
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Overview
For the
first three quarters of 2008, our core business was the operation of outlets and
discount shopping centers catering principally to tourists visiting Hong Kong
from other parts of mainland China. This business involved offering
tourists discount prices on selected international brands in a wide range of
merchandise categories such as consumer electronics, cosmetics, watches, dietary
supplements, health care products and optical instruments.
We own
and operate five subsidiaries, of which two are trading subsidiaries. The two
trading subsidiaries, Raffle Limited and Sure Profits Trading Limited, engage in
the import and local distribution of consumer electronic products. We
source our products from suppliers worldwide in order to provide our customers
with an extensive variety of products at competitive prices.
Over the
past few years, our goal has been the development of our retail business with a
focus on international tourists in Hong Kong. Under the weight of a global
recession, management has re-evaluated the Company’s business model and
operation. In the near future, the Company foresees a significant slowdown in
retail sales and fierce competition from other retailers, anticipates a
reduction in tourist visits from mainland China to Hong Kong, and a reduction in
spending per tourist, partly as a result of adverse changes in travel policy and
the domestic economic environment in China.
During
the third quarter of 2008, the revenue of the Company significantly decreased
due to the above-mentioned trends. In addition, in the period leading up to and
during the Beijing 2008 Olympic Games, the Chinese government restricted
outbound travel visas, and this policy has not been reversed following the
Olympics. Further, management believes that the ongoing global economic
recession is discouraging tourist visits to Hong Kong. In the present economic
climate, management believes that the Company is unlikely to sustain
profitability with operation of its retail outlets, and believes that changing
its business model is in its best interest. Management believes the Company
faces heavy competition from other local retailers seeking to make sales to a
dwindling group of tourists, which is causing a trend toward lower profits.
Retailers that wish to stay afloat have to compete fiercely by drastically
marking down their prices, lowering their margins, and offering higher
commissions to travel operators. Some of our competitors are in a better
position to weather difficult economic conditions because they have
better locations with heavier foot traffic and attract a higher density of
tourists. Management believes that our sales will not improve in the near future
due to the difficult economic climate, the location of our outlets, and the
intense competition surrounding our area. Therefore, starting the third quarter
of 2008, the Company has shifted its business model from being an outlet and
discount shopping center operator to a retail service provider and has closed
the operation of its two outlets at the end of 2008.
On
October 28, 2008, three of the subsidiaries of the Company entered into a series
of Management Service Agreements (the “Agreements”) with Best Paramount
Industrial Limited (“Best Paramount”) whereby they agreed to act as a service
provider to Best Paramount at the Emax premises, a coveted location within Hong
Kong International Trade and Exhibition Center with heavy foot traffic from
visiting tourists. The Company agreed to provide technical, commercial and
operational management for Best Paramount. Under the terms of the Agreements,
the scope of services provided by the Company includes, but is not limited to,
accounting, human resources, administrative, marketing and sales consultancy,
retail operation and inventory management. The Company is responsible for
running Best Paramount’s Emax premises and provides its employees to staff Best
Paramount’s operation at the Emax location. Best Paramount is responsible for
paying its own rent, cost of sales, commissions to travel agents and taxes. The
Company is responsible for paying all other expenses of the operation,
including, but not limited to, advertising, utilities, insurance, salaries,
transportation, cleaning and administrative (“Actual Costs”) on the behalf of
Best Paramount. Best Paramount reimburses the Company for the Actual Costs, and
in addition pays the Company a 5% mark-up of such Actual Costs as consideration
for the Company’s services.
Under the
terms of the Agreements, the Company also has the discretion to charge Best
Paramount a discretionary fee, to be negotiated in detail in three to six months
pursuant to actual performance of the operation. The Agreements may be
terminated by mutual agreement, by either party giving the other written notice
in the event of material breach, or by giving a 60-day prior written notice
without cause. Best Paramount is reputed to be an experienced retail operator
that sells a wide variety of appealing items that attract tourists, including,
but not limited to, cosmetics, electronics, jewelry and branded watches, and it
also has the advantage of securing an excellent location in the coveted
Emax.
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Corporate
History
General
On
June 22, 2006, we (then named WT Holdings Corporation) acquired the
business that now constitutes our Hong-Kong based retail and trading operations,
by executing an Agreement and Plan of Share Exchange (“Exchange Agreement”) by
and among the company on the one hand, and Horizon Corporation Limited, a Hong
Kong corporation (“Horizon”), Profits Dreams Development Ltd. (“PDD”) and its
shareholders, and Forever Rise Holdings Limited (“FRHL”) and its shareholders on
the other hand. Prior to the Exchange Agreement, FRHL was the parent company of
Horizon, which in turn was the parent company of PDD, which in turn owns five
operating subsidiaries: (i) Allied Fine Development Limited, (ii) Max
Surplus International Development Limited, (iii) Manigood International
Industrial Limited, (iv) Raffle Limited, and (v) Sure Profits Trading
Limited, each a corporation organized under the laws of Hong Kong (the
“Operating Subsidiaries”). Pursuant to the Exchange Agreement and on the Closing
Date, we acquired the Horizon Group by issuing shares of the our common stock
(the “WT Holdings Shares”) to FRHL, and in exchange, the PDD Shareholders
assigned 100% of the outstanding common stock of PDD to us. As a result of the
transactions under the Exchange Agreement, we acquired the business and
operations of the Horizon Group, and our principal business activities are
conducted through the Operating Subsidiaries. As a result of the transactions
under the Exchange Agreement, (i) there were a total of 98,142,476 shares
of our common stock issued and outstanding, (ii) the prior stockholders of
the company (who prior to the transaction owned 100% of the shares), held 30% of
the issued and outstanding shares of the company, and (iii) the remaining
70% of the issued and outstanding common stock of the company were then held by
the FRHL Shareholders. The closing of the reverse acquisition transaction
occurred on June 28, 2006. The above description of the reverse take-over
transaction is qualified in its entirety with reference to our current report on
Form 8-K, together with the exhibits included with such report, as filed with
the SEC on June 28, 2006.
Senior
Convertible Debenture Financing - October 2006
On
October 6, 2006, we completed the issuance and sale of $3,069,895 principal
amount of our senior convertible debentures in a private placement to accredited
investors. The financing was conducted pursuant to a Securities Purchase
Agreement dated October 6, 2006 entered into between us and the accredited
investors named on the schedule of buyers thereto (“Securities Purchase
Agreement”). Maxim Group LLC acted as the lead placement agent with Chardan
Capital Markets LLC as the co-placement agent in the financing. Under the terms
of the financing, the senior convertible debentures are unsecured, bear 8%
interest per year payable in cash, and mature in three years. The debentures are
convertible into a quantity of common stock ranging from approximately 11.6 to
16.0 million shares, depending upon a one-time adjustment to the conversion
price, which shall occur on October 6, 2007. The initial conversion price
of the debentures is $0.24 per share, which conversion price may be adjusted to
equal the volume-weighted average trading price of our common stock for all
trading days during the one year following the closing of the financing, subject
to a maximum conversion price of $0.264 per share and a minimum conversion price
of $0.192 per share (“Conversion Price Collar”). The conversion price of the
debentures is also subject to anti-dilution adjustments within the Conversion
Price Collar in the event we sell and issue shares of our common stock for below
$0.24 per share. We may, at our election, force conversion of the debentures
after the first anniversary of the closing, if the volume weighted average
trading price of our common stock exceeds $0.48 per share for 30 consecutive
trading days, and the average daily trading dollar volume exceeds $350,000. We
may also redeem the debentures at 125% of the principal amount of the debentures
plus accrued unpaid dividends at any time after the first anniversary of the
closing.
In
connection with our October 2006 financing, we also issued warrants to investors
that are exercisable for up to approximately 8 million shares of our common
stock with an exercise price ranging from $0.2112 to $0.2904 per share. The
exercise price is adjustable based upon the conversion price of the debentures.
The warrants are exercisable for a five-year period commencing on
October 6, 2006. We also agreed to issue, in connection with the October
2006 financing, warrants to the placement agents for the purchase of up to
1,279,123 shares of our common stock with an exercise price ranging from $0.2112
to $0.2904 per share.
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On
October 6, 2006, in connection with the financing, we also entered into a
registration rights agreement dated October 6, 2006 under which we agreed
to use commercially reasonable efforts to cause the common stock issuable upon
conversion of the debentures and exercise of the warrants issued to the
investors and placement agent to be registered for resale on an appropriate form
for registration to be filed with the SEC within 30 days following the closing,
and to keep such registration statement effective until the shares underlying
the investor warrants and senior convertible debentures can be sold without
restriction under Rule 144(k). On November 3, 2006, we filed a registration
statement pursuant to the registration rights agreement, in order to register
these shares for resale by the investors in the October 2006 debenture
financing, which became effective on January 16, 2007. Under our registration
rights agreement with the investors, if we do not maintain the effectiveness of
our registration statement, we may be subject to penalties.
The above
description of the terms of the October 2006 financing is qualified in its
entirety with reference to the forms of agreements included as Exhibits 10.1,
10.2, 10.3 and 10.4 to our current report on Form 8-K filed with the SEC on
October 10, 2006.
Agreements
with Best Paramount
On
October 28, 2008, three of our subsidiaries entered into a series of agreements
with Best Paramount whereby they agreed to act as a service provider to Best
Paramount. The Company agreed to provide technical, commercial and operational
management for Best Paramount. Under the terms of the Agreements, the scope of
services provided by the Company includes, but is not limited to, accounting,
human resources, administrative, marketing and sales consultancy, retail
operation and inventory management. The Company is in charge of running Best
Paramount’s premises and agreed to provide its employees to staff Best
Paramount’s operation. Best Paramount is responsible for paying its own rent,
cost of sales, commissions to travel agents and taxes. The Company is
responsible for paying all other expenses of the operation, including, but not
limited to, certain Actual Costs on the behalf of Best
Paramount. Best Paramount agreed to reimburse the Company for the
Actual Costs, and in addition pay Company a 5% mark-up of such Actual Costs as
consideration for the Company’s services. Under the terms of the agreements, the
Company also has the discretion to charge Best Paramount a discretionary fee, to
be negotiated in detail in three to six months pursuant to actual performance of
the operation. The agreements may be terminated by mutual agreement, by either
party giving the other written notice in the event of material breach, or by
giving a 60-day prior written notice without cause.
Our Shopping
Centers
During
the first three quarters of 2008, we operated the following two shopping
centers:
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Super
Star Department Store. This shopping center has
approximately 20,000 square feet of floor space and is located in the area
in Hong Kong known as To Kwa
Wan.
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Hong
Kong (Duty Free) Centre. This shopping center has
approximately 20,000 square feet of floor space and is located in Whampoa
Garden, in Hung Hom, close to convenient transportation
centers.
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During
the first half of 2008, we employed approximately 130 highly trained
salespersons in our shopping centers. During the latter half of 2008, due to the
global recession and certain travel restrictions, we faced a significant
slowdown in our shopping centers and had to make certain cost-saving business
changes accordingly. We had to reduce the hours of operation of our
shopping centers, alternate the shutdown of each of the shopping centers, reduce
the hours and commissions of salespersons and cut the overall headcount of staff
members to save costs. At the end of 2008, we reduced our
salespersons to 45. During the second half of 2008, our stores were
only in operation part-time due to the considerable slowdown in our
business. We closed our two shopping centers at the end of 2008 in
order to shift its focus to provide management services to other retail
operators. Since the end of 2008, we have moved our staff from our
shopping centers to staff the retail operation of Best Paramount.
Products
All the
products sold at our shopping centers were internationally branded products of
high quality, including high-end consumer electronics and prestigious cosmetics
imported from Europe and Japan. In addition to cosmetics, our product line also
included consumer electronics, health products, and herbal ornaments, which are
the categories of products most sought after by mainland Chinese
tourists.
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All
products sold at our stores were guaranteed to be authentic products from the
original manufacturers. We provided our customers with a 180-day full refund
policy, and an optional three-year repair service to cover certain
appliances.
During
the operation of our shopping centers, our merchandising strategy was to provide
our customers with a broad range of well known, branded products that are the
most popular in their respective categories, at prices consistently lower than
could be obtained by our shoppers in mainland China. We sought to streamline and
limit specific items in each product line to fast selling models, sizes and
colors, focusing on selling popular products at high volume.
Sources
of Products
Purchasing from Suppliers and
Manufacturers. Over the past few years and prior to the closure of our
shopping centers at the end of 2008, we sourced products from over 100 suppliers
and manufacturers. We have developed strong and long-term relationships with our
top five suppliers, and many of these suppliers have been working with us or our
executives for nearly 20 years. Since most of the products we sold were
generally available from more than one manufacturer, we secured secondary
sources for most of our top-selling products. As a result, we did not experience
any difficulty in obtaining sufficient quantities of merchandise and believed
that if one or more of our current sources of supply became unavailable, we
would be able to obtain alternative sources without experiencing a substantial
disruption of our business.
Volume
purchases from our suppliers allowed us to benefit from volume discounts and
favorable trade credit terms. We had either written contracts or verbal
agreements based on historical dealings with the vendors under which certain
quantities must be purchased before we were qualified to have rebates or
discounts. We were not, however, obligated to purchase any particular quantities
from any of our suppliers. We carefully monitored sales trends and modified
purchasing strategy to benefit from supplier discounts as a result of volume
purchasing. These relationships allowed us to benefit from favorable trade terms
resulting in payables of 90 to 150 days with our top suppliers.
Alliance and Affiliation
Arrangements. In addition to purchasing from suppliers, we entered into
alliance and affiliate arrangements with retailers, manufacturers and
distributors of our products.
We have a
business alliance with Jebsen & Co Ltd., one of the largest distributors of
electronics worldwide. Jebsen & Co Ltd.is an authorized dealer of
international brands such as Panasonic and JVC. Our alliance with Jebsen &
Co Ltd. permits us access to deep volume discounts, as well as exclusive models
sold.
Product
Pricing
During
the operation of our shopping centers in 2008, we aimed to price our products
competitively and at a discount to most price points in the consumer retail
industry. Our pricing system was relatively flexible in that our store managers
had control over product pricing in the stores they managed. We held monthly and
weekly meetings with our store managers to evaluate our pricing strategies,
gross profit levels, and the performance of our sales force. Our purchasing team
provided us with up-to-date information on market situation, products, and
pricing in order to stay competitive.
Our
Relationship with Travel Companies and Tour Operators
During
the past few years and prior to the closure of our shopping centers, we built a
strong relationship with over 100 Chinese travel companies and tour operators,
including the following major tour operators, which, in 2008, held over 60% of
the market share for outbound mainland Chinese travelers to Hong
Kong:
Good
Friendship (Hong Kong) Limited;
Golden
Win International Travel Services Limited;
Harvest
International Travel Services Limited;
Million
Tour Limited;
7
Golden
Fortress Tour Limited;
Federal
Hong Kong Holdings Limited;
Amsito
Travel Services Limited;
Superlink
Travel Company Limited; and
Wah Wing
Travel Services Limited.
We had
arrangements with these and other tour operators, under which we paid a
commission based on the sales volume generated from each tour. A commission was
ordinarily paid to the tour operators within one week after sales are
made. We will continue to maintain and utilize our relationships with
tour companies and operators to increase traffic to the retail stores managed by
us.
Seasonality
We were
subject to more seasonality than typical retailers. We generally experienced
increases in sales during the summer months, as travel and tourist activity
increases. On the other hand, we generally experienced a decrease in sales
during the winter months when there are fewer travelers. We typically
experienced three peak periods when tourist activity usually increases, which
are Chinese New Year (celebrated in January or February of each year), Golden
Week (the first week of May), and National Day for the People’s Republic of
China (October 1).
Trading
Operations for Excess Inventory
Because
of our strong sales volume, rapid inventory turnover and strong relationships
with our suppliers during the operation of our outlets, we were able to
frequently negotiate to purchase an amount of products in excess of what we
could sell in our shopping centers at substantial discounts. We had taken
advantage of our ability to purchase products at such volume discounts by
selling a portion of such products to other retail businesses for a quick profit
through two of our wholly owned subsidiaries, Raffle Limited and Sure Profits
Trading Limited. During the operation of our shopping centers in
2008, Raffle Limited sold $24 million, approximately 25% of its products
purchased, to other retailers, supplying our shopping centers with the balance
of the products. In 2008, Sure Profits Trading Limited sold $16 million,
approximately 33% of its products purchased, to other retailers, supplying our
shopping centers with the balance of the products.
Despite
the closure of our shopping centers, we still own and operate our two trading
subsidiaries, which engage in the import and local distribution of consumer
electronic products. We source our products from suppliers worldwide in order to
provide our customers with an extensive variety of products at competitive
prices. We plan to source and distribute through our trading subsidiaries
certain products to the retail operators under our management, such as Best
Paramount.
Our
Customers
Most of
our customers were tourists from mainland China who were visiting Hong Kong
through organized tour packages. Our shoppers were from all parts of mainland
China, including Beijing, Shanghai, Tianjin, Shanxi, Shandong, Neimenggu,
Sichuan, Gansu, Jilin, Anhui, Jiangxi, Jiangsu, and Yunnan. A visit to our
shopping centers was part of the itinerary for all tourists who booked tours to
Hong Kong through the travel companies and tour operators with whom we had a
relationship, and such travel companies and tour operators transported those
tourists directly to our shopping centers. Since one of the major draws for
visiting Hong Kong is shopping and the typical Hong Kong tourist has limited
shopping time, most of our shoppers viewed a visit to our shopping centers as an
opportunity to gain access to goods that were difficult to find in mainland
China or to find goods at an attractive price. The average time each tourist
spent in our shopping centers was approximately two hours.
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In 2006,
we had an average of 1,800 tourists per day visiting our shopping centers. In
2007, we received an average of 1,300 visitors per day to our stores,
representing a decrease of 28% from the previous year. In 2008, prior to the
closure of our outlets, we received an average of 1,015 visitors per day to our
stores, representing a decrease of 17% from the previous year.
Competition
Our
industry is highly competitive and fragmented among a large number of retailers,
wholesalers, direct marketers and other sellers. Prior to the second half of
2008, we believed we held a dominant position in the rapidly growing travel
retail market in Hong Kong, which is regarded as a specialized segment of the
overall consumer retail market. We have developed this position over several
years by forming strong relationships with travel agencies and tour operators,
and accruing experience in the market in which we specialize.
However,
the global recession has changed our industry dramatically starting the second
half 2008, including a reduction in tourist visits from mainland China to Hong
Kong, and a reduction in spending per tourist, partly as a result of adverse
changes in travel policy and the domestic economic environment in
China. During the latter half of 2008, management believes the
Company faced heavy competition from other local retailers seeking to make sales
to a dwindling group of tourists, which caused a trend toward lower profits.
Retailers that wish to stay afloat have to compete fiercely by drastically
marking down their prices, lowering their margins, and offering higher
commissions to travel operators. Some of our competitors are in a better
position to weather difficult economic conditions because they have
better locations with heavier foot traffic and attract a higher density of
tourists. Management believes that our sales will not improve in the near future
due to the difficult economic climate, the location of our outlets, and the
intense competition surrounding our area. Therefore, the Company has closed our
two shopping centers at the end of 2008and shifted its focus to provide
management services to other retail operators, such as Best
Paramount.
Intellectual
Property
As of December 31, 2008, we did not
have any registered or pending intellectual property.
Employees
As of
December 31, 2008, we had approximately 110 employees.
Management
Information System
We have
invested considerably in our management information system, which we consider to
be important in enabling us to effectively operate and manage our business. We
have developed an in-house supply chain system that fully manages wholesale
sales, inventory management, logistics and procurement. Our system, which has
been in development for over five years, is capable of processing millions of
transactions without significant infrastructure alterations and capital
investment. Our information management system is capable of handling a large
product line, and provides us real time control over our inventory, logistics,
procurement processes and sales activity. We continue to develop our information
systems to efficiently update our database of products, streamline our inventory
management and provide financial reporting capabilities to aid in decision
making. Our current software platform is significantly scalable and will allow
us to achieve substantial growth with limited additional capital
expenditures.
Our
software operates on several hardware platforms, including four servers and 61
PCs. Our primary operating and application software is Microsoft-based. Our
business management software is programmed in Microsoft Visual Foxpro and SQL.
Our systems are updated and maintained by two in-house professionals. These
professionals are trained in various programming languages including Microsoft
SQL, Visual Foxpro, and Visual Basic.
We
currently employ a point-of-sale system, which allows our management to monitor
our sales and inventory levels in real time. Our systems allow us to adjust our
strategy and pricing in response to changing market conditions. For example, our
system allows us to make real time inventory inquiries and prepare comprehensive
reports of sales activity for analysis by management. Our system includes over
30 modules for back office management, such as stock transfer (transfer of
inventory), purchase order management, sales invoicing, and day-end and
month-end processes.
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Our
inventory management system was developed in, and has been in operation since,
2000. We updated our system in 2006 at a cost of over $120,000 to enhance its
capacity to provide prompt management information on sales, purchases, and
inventory data. Our system allows management to react quicker to customer
preferences based on such data. In addition, the system provides for extensive
flexibility to locate inventory on-hand, estimate product delivery time, and
order out-of-stock items.
We have
used our inventory management system for the operation of our shopping centers
and will continue to use such system for the management of other retailers, such
as Best Paramount.
RISK
FACTORS
You
should carefully consider the risks described below together with all of the
other information included in this report before making an investment decision
with regard to our securities. The statements contained in or incorporated into
this report that are not historic facts are forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by forward-looking statements. If
any of the following risks actually occurs, our business, financial condition or
results of operations could be harmed. In that case, the trading price of our
common stock could decline, and you may lose all or part of your
investment.
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Risks
Relating to Our Business
Our
sales are influenced by general economic cycles. A prolonged period of depressed
consumer spending would have a material adverse effect on our profitability or
the profitability of our affiliate retailers.
Retail is
a cyclical industry that is dependent upon the overall level of consumer
spending. The global economy is currently experiencing a downturn. Retail tends
to decline in periods of uncertainty regarding future economic prospects, when
consumer spending, particularly on discretionary items, and disposable income
decline. Many factors affect the level of consumer spending in the retail
industry, including, among others: prevailing economic conditions, levels of
employment, salaries and wage rates, energy costs, interest rates, the
availability of consumer credit, taxation and consumer confidence in future
economic conditions. During periods of economic uncertainty, we may not be able
to maintain or increase our sales or maintain or improve our margins from
operations as a percentage of net sales. A prolonged period of depressed
consumer spending would have a material adverse effect on our
profitability.
We
or our affiliate retailers face intense competition and operate in an industry
with limited barriers to entry, and some of our competitors may be better
positioned to capitalize on the rapidly growing retail sector in our geographic
area.
The
retail sector, in our geographic area, is rapidly evolving and intensely
competitive. Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing, technical, management and other resources than we
do. In addition, some of our competitors have used, and may continue to use,
aggressive pricing or carry a larger inventory than we do. We expect that
competition will further intensify in the future. Because barriers to entry are
limited, current and new competitors may open retail locations that will compete
with ours.
We
believe that the primary competitive factors in the retail sector include brand
recognition, price, shipping offers, product selection, product availability and
customer service. We currently compete against other retailers within the
specialized niche of travel retail in Asia.
We may
also experience significant competitive pressure if any of our suppliers were to
initiate their own retail operations in the locations we serve. Since our
suppliers have access to merchandise at very low costs, they could sell products
at lower prices and maintain a higher gross margin on their product sales than
we can. In this event, our current and potential customers may decide to
purchase directly from these suppliers. Increased competition from any supplier
capable of maintaining high sales volumes and acquiring products at lower prices
than us could significantly reduce our market share and adversely impact our
financial results.
We
compete not only for customers, but also for favorable product allocations from
product manufacturers. Some of our competitors could enter into exclusive
distribution arrangements with our suppliers, deny us access to their products
and devote greater resources to marketing and promotional
campaigns.
The
seasonality of our business places increased strain on our operations or the
operations of our affiliate retailers.
We
generally experience increases in sales during the summer months, as travel and
tourist activity increases. On the other hand, we generally experience a
decrease in sales during the winter months when there are fewer travelers. In
addition, if we are unable to meet customer demand for our products during these
peak periods, our revenues and future growth could be adversely affected.
Furthermore, we may be unable to adequately staff our retail outlets and
warehousing operations during these periods.
Our
future operating results may fluctuate and cause the price of our common stock
to decline.
We expect
that our revenues and operating results will continue to fluctuate significantly
from quarter to quarter due to various factors, many of which are beyond our
control. The factors that could cause our operating results to fluctuate
include, but are not limited to:
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seasonality of the
business;
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price competition from other
retailers;
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general price increases by
suppliers and manufacturers;
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our ability to maintain and
expand our distribution
relationships;
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increases in the cost of
advertising;
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unexpected increases in shipping
costs or delivery times;
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our
ability to build and maintain customer
loyalty;
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the
introduction of new services, products and strategic alliances by us and
our competitors;
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the
success of our brand-building and marketing
campaigns;
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government
regulations, changes in tariffs, duties, and
taxes;
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our
ability to maintain, upgrade and develop the retail stores managed by
us;
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the
amount and timing of operating costs and capital expenditures relating to
expansion of our business, operations and infrastructure;
and
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general
economic conditions as well as economic conditions specific to the retail
sector.
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If our
quarterly revenues or operating results fall below the expectations of investors
or securities analysts, the price of our common stock could significantly
decline.
We
or our affiliate retailers depend on our relationships with tour companies to
bring customers to retail locations, and losing these sources would adversely
affect our revenues and financial results.
We
attract retail traffic by entering into arrangements with tour companies who
schedule shopping tours with their customers. In order to maintain a flow of
tourist traffic, we must continually monitor and maintain our relationships with
the tour companies with which we do business. If the tour companies modify or
terminate their relationship with us, we could lose customers, and traffic in
our retail stores could decrease.
If
we or our affiliate retailers fail to offer a broad selection of products and
brands that customers find attractive, our revenues could decrease.
In order
to meet our strategic goals, we must successfully offer, on a continuous basis,
a broad selection of appealing products that reflect our customers’ preferences.
Consumer tastes are subject to frequent, significant and sometimes unpredictable
changes. To be successful in our line of business, our product offerings must be
broad, deep in scope and affordable to a wide range of consumers whose
preferences may change regularly. We cannot predict with certainty that we will
be successful in offering products that meet these requirements. If our product
offerings fail to satisfy customers’ tastes or respond to changes in customer
preferences, our revenues could decline. In addition, any failure to offer
products that satisfy customers’ preferences could allow our competitors to gain
market share.
If
we or our affiliate retailers do not successfully optimize and operate retail
locations under our management, our business could decline.
If we do
not successfully operate the retail locations under our management, this could
significantly limit our ability to meet customer demand and cause a decline in
sales at retail locations under our management. This in turn cuts
into our profits since our management fees are a percentage of actual costs paid
by us on the behalf of the retail locations we manage. Because it is
difficult to predict demand, we may not manage our facilities optimally, which
may result in excess or insufficient inventory, and distribution capacity.
Failure to optimize inventory will increase our net shipping cost by requiring
us to make long-distance shipments or partial shipments from different
locations. As we continue to sign on new retailers under our management with
different inventory management requirements, operating our inventory management
system becomes more challenging and there can be no assurance that we will be
able to operate our system effectively.
We
have limited control over the actions of our or our affiliate retailers,
distributors, retailers or their vendors.
We rely
on distributors for the sale of our branded products, and those distributors
maintain inventory and prepare merchandise for shipment to retailers and
individual customers. We have limited control over the products that our
distributors purchase or keep in stock, and our arrangements with our
distributors do not require them to set aside any amount of inventory to satisfy
demand. Our distributors may not accurately forecast the products that will be
in high demand. In addition, we have limited control over their sales process,
shipping and order processing procedures. Although we have not experienced
disruptions in the past, and we do not presently foresee possible disruptions in
the near future, a widespread inability of our distributors to successfully
supply our branded products, if it occurred, would substantially harm our
business.
12
We
or our affiliate retailers are dependent upon third parties for significant
functions, and if these functions or operations are interrupted for any
significant period of time or if we experience other problems with our
third-party service providers, our business and results of operations would be
substantially harmed.
In
addition, we rely upon third party tour operators for a large portion of our
customer flow. As a result, we are subject to cancellations and disruptions due
to factors that are beyond our control, including employee strikes and inclement
weather. Further, increased fuel costs may adversely affect tourist traffic. If
cooperating tour companies were to experience cancellations and disruptions,
this could negatively affect our sales revenue.
We
rely on foreign sources for the supply of many of the products we or our
affiliate retailers sell.
We rely
on long term supply relationships with several manufacturers in the PRC, and in
the future may rely upon supply relationships with other foreign sources.
Regional disruptions relating to political or environmental conditions could
cause shipping delays, which could interfere with our ability to supply our
customers and harm our financial results. A significant breakdown in the
manufacturing process or among suppliers could result in product shortages, and
our revenues could decline due to the loss of these suppliers and
manufacturers.
Our
operating results could be impaired if we are unable to meet our future capital
needs.
We may
need to raise additional capital in the future to maintain our current operation
as a retail service provider. If we raise additional funds by issuing
equity or convertible debt securities, the percentage ownership of our
stockholders will be diluted. Furthermore, any new securities could have rights,
preferences and privileges senior to those of our common stock. We currently do
not have any commitments for additional financing. We cannot be certain that
additional financing will be available when and to the extent required or that,
if available, it will be on acceptable terms. If adequate funds are not
available on acceptable terms, we may not be able to fund our expansion, develop
or enhance our products or services or respond to competitive
pressures.
The
loss of key members of our executive management could negatively affect our
business.
We depend
on the continued services and performance of our executive management and other
key personnel, in particular, Alex Chun Shan Yue, our Chief Executive Officer,
and Danny Sau Kwong Leung, our Chief Operating Officer. The loss of any of these
executive officers or other key persons could harm our business.
We
or our affiliate retailers may be adversely affected by the financial health of
the retail industry in Asia.
We are
subject to broad economic factors that drive consumer spending and maintain the
health of the retail industry in Asia. These factors include, but are not
limited to, unemployment rates, consumer credit levels, consumer confidence, and
household discretionary income. If any of these or other economic factors should
erode, consumer spending may fall and the Asian retail industry may suffer a
downturn. Consequently, our earnings would be adversely impacted by lower
sales.
We
or our affiliate retailers may be adversely affected by the trend towards retail
trade consolidation.
As we
pursue our retail distribution strategy, our sales will be contingent upon
favorable wholesale prices that we can obtain from retailers. If retailers merge
or the retail industry consolidates, the larger, combined retailers will have
significant pricing power because of the sheer size of their retail networks. As
a result, we may not be able to obtain reasonable prices for our products.
Consequently, our margins may decline and our results of operations may be
reduced. There can be no assurance that we will be able to obtain reasonable
wholesale prices for our products under a scenario where retailers merge and
consolidate into larger entities.
13
Risks
Related to Doing Business in China
Adverse
changes in economic and political policies of the PRC government could have a
material adverse effect on the overall economic growth of China, which could
adversely affect our business.
All of
our business operations are currently conducted in Hong Kong, under the
jurisdiction of the PRC government. Accordingly, our results of operations,
financial condition and prospects are subject to a significant degree to
economic, political and legal developments in China. China’s economy differs
from the economies of most developed countries in many respects, including
with respect to the amount of government involvement, level of development,
growth rate, control of foreign exchange and allocation of resources. While the
PRC economy has experienced significant growth in the past 20 years, growth has
been uneven across different regions and among various economic sectors of
China. The PRC government has implemented various measures to encourage economic
development and guide the allocation of resources. Some of these measures
benefit the overall PRC economy, but may also have a negative effect on us. For
example, our financial condition and results of operations may be adversely
affected by government control over capital investments or changes in tax
regulations that are applicable to us. Since early 2004, the PRC government has
implemented certain measures to control the pace of economic growth. Such
measures may cause a decrease in the level of economic activity in China, which
in turn could adversely affect our results of operations and financial
condition.
Abrupt
and forceful regulation by governmental authorities may impose costly
requirements on our business, which could have a material adverse effect on our
business and overall financial results.
Our
industry, particularly the market segment dealing with inbound visitors from
China, is relatively new, and until recent times it has been left unregulated.
Governmental authorities in the PRC and in Hong Kong may impose regulations
designed to protect consumers, or even to curtail what the PRC government might
view as a loss of domestic retail sales, import duties and tax revenue. Changes
in policies affecting the tourist retail industry may be enacted abruptly
without transitional periods that may force us to make rapid and costly
adjustments in our operations in an effort to comply. It is not always possible
for management to anticipate changes in government policies, or the impact of
those changes to our business.
On June
15, 2007, the Hong Kong government implemented its “Refund Protection Scheme for
Mainland China’s Inbound Tour Group Shoppers,” enacted by the Travel Industry
Council of Hong Kong. The Refund Protection Scheme is aimed at protecting the
consumer rights of mainland China’s tourist visitors to Hong Kong, and improving
the service standards in the industry as a whole.
Under the
Refund Protection Scheme, retailers who intend to arrange for mainland China's
Inbound group visitors must register with the Travel Industry Council and one of
the conditions of registration is that registered retailers shall offer
six-month, full refund protection to mainland China's inbound group visitors. As
a part of the conditions of the Refund Protection Scheme, registered retailers
must assist tour operators and inbound visitors seeking refunds. Registered
retailers who fail to comply may be subjected to penalties imposed by the Travel
Industry Council. We have registered with the Travel Industry Council under the
new rules and offer a 180-day refund policy to our customers.
Our
operations may be negatively impacted by these heightened standards and
implementation of the new rules.
Fluctuation
in the value of RMB and the Hong Kong Dollar relative to other currencies may
have a material adverse effect on our business and/or an investment in our
shares.
The value
of RMB and the Hong Kong Dollar against the U.S. dollar and other currencies may
fluctuate and is affected by, among other things, changes in political and
economic conditions. Although the exchange rate between RMB and the U.S. dollar
has been effectively pegged by the People’s Bank of China since 1994, and the
rate between the Hong Kong Dollar has been pegged to the U.S. dollar since 1983,
there can be no assurance that these currencies will remain pegged to the U.S.
dollar, especially in light of the significant international pressure on the
Chinese government to permit the free floatation of the RMB, which would result
in fluctuations in the exchange rate between the RMB and the U.S. dollar, and
other geopolitical factors If the RMB were to increase in value against the
dollar, for example, mainland Chinese consumers would experience a reduction in
the relative prices of goods and services, which may translate into a positive
increase in sales. On the other hand, a decrease in the value of the RMB against
the dollar would have the opposite effect. In addition, a strengthening of the
U.S. dollar against the Hong Kong Dollar, if it occurred, would adversely affect
the value of your investment.
14
We
face risks related to health epidemics and other outbreaks.
Our
business could be adversely affected by the effects of SARS and other epidemics
or outbreaks. China reported a number of cases of SARS in the spring of 2003,
which severely impacted the tourism industry for many months. Any prolonged
recurrence of SARS or other adverse public health developments in China could
negatively impact tourism in Hong Kong, which would have a material adverse
effect on our business operations. For instance, health or other government
regulations adopted in response may require temporary travel restrictions, or
even closure of our facilities or offices. Such closures would severely disrupt
our customer flow and business operations, and adversely affect our results of
operations. We have not adopted any written preventive measures or contingency
plans to combat any future outbreak of SARS or any other epidemic.
Risks
Related to an Investment in Our Securities
We
will need additional capital, which may not be accessible on attractive terms or
at all.
We
anticipate that we will need to raise additional funds in the future through
public or private financing. Our ability to obtain additional financing will be
subject to a number of factors, including market conditions, our operating
performance and the terms of our existing indebtedness. The terms of our senior
convertible debentures limit our ability to incur additional debt because any
such additional debt we incur, other than a limited senior credit facility, must
be contractually subordinated, as to payment and liquidation, to the payment in
full of the debentures. We cannot assure you that we will be able to raise
additional funds on terms favorable to us or at all. If we raise additional
funds through the sale of equity or convertible debt securities, your ownership
percentage of our common stock will be reduced. In addition, any such
transactions may dilute the value of our common stock. We may have to issue
securities that have rights, preferences and privileges senior to our common
stock. The terms of any additional indebtedness may include restrictive
financial and operating covenants that would limit our ability to compete and
expand. Our failure to obtain any required future financing could materially and
adversely affect our financial condition.
Conversion
of the debentures into shares of our common stock will dilute the ownership
interests of existing stockholders, including holders who will have already
converted their debentures.
The
conversion of some or all of the debentures into our shares of our common stock
will dilute the ownership interests of existing stockholders. Any sales in the
public market of the shares of common stock issuable upon such conversion could
adversely affect prevailing market prices of our shares of common stock. In
addition, the existence of the debentures may encourage short selling by market
participants because the conversion of the debentures could depress the price of
our shares of common stock.
To
date, we have not paid any cash dividends and no cash dividends will be paid in
the foreseeable future.
We do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay dividends. Even if
the funds are legally available for distribution, we may nevertheless decide not
to pay any dividends. We intend to retain all earnings for our
operations.
The
application of the “penny stock” rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those
shares.
If our
stock becomes quoted on an exchange, as long as the trading price of our common
shares is below $5 per share, the open-market trading of our common shares will
be subject to the “penny stock” rules. The “penny stock” rules impose additional
sales practice requirements on broker-dealers who sell securities to persons
other than established customers and accredited investors (generally those with
assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000
together with their spouse). For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase of
securities and have received the purchaser’s written consent to the transaction
before the purchase. Additionally, for any transaction involving a penny stock,
unless exempt, the broker-dealer must deliver, before the transaction, a
disclosure schedule prescribed by the Securities and Exchange Commission
relating to the penny stock market. The broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements must be
sent disclosing recent price information on the limited market in penny stocks.
These additional burdens imposed on broker-dealers may restrict the ability or
decrease the willingness of broker-dealers to sell our common shares, and may
result in decreased liquidity for our common shares and increased transaction
costs for sales and purchases of our common shares as compared to other
securities.
15
Our
common shares are not currently traded at high volume, and you may be unable to
sell at or near ask prices or at all if you need to sell or liquidate a
substantial number of shares at one time.
We cannot
predict the extent to which an active public market for its common stock will
develop or be sustained. However, the Company does not rule out the possibility
of applying for listing on the Nasdaq Capital Market or other
markets.
Our
common shares are currently traded, but currently with low volume, based on
quotations on the “Over-the-Counter Bulletin Board”, meaning that the number of
persons interested in purchasing our common shares at or near bid prices at
any given time may be relatively small or non-existent. This situation is
attributable to a number of factors, including the fact that we are a small
company which is still relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price. We cannot give you any assurance
that a broader or more active public trading market for our common stock will
develop or be sustained, or that trading levels will be sustained.
Stockholders
should be aware that, according to SEC Release No. 34-29093, the market for
“penny stocks” has suffered in recent years from patterns of fraud and abuse.
Such patterns include (1) control of the market for the security by one or
a few broker-dealers that are often related to the promoter or issuer;
(2) manipulation of prices through prearranged matching of purchases and
sales and false and misleading press releases; (3) boiler room practices
involving high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (4) excessive and undisclosed bid-ask
differential and markups by selling broker-dealers; and (5) the wholesale
dumping of the same securities by promoters and broker-dealers after prices have
been manipulated to a desired level, along with the resulting inevitable
collapse of those prices and with consequent investor losses. Our management is
aware of the abuses that have occurred historically in the penny stock market.
Although we do not expect to be in a position to dictate the behavior of the
market or of broker-dealers who participate in the market, management will
strive within the confines of practical limitations to prevent the described
patterns from being established with respect to our securities. The occurrence
of these patterns or practices could increase the future volatility of our share
price.
Our
corporate actions are substantially controlled by our principal stockholders and
affiliated entities.
Our
principal stockholders and their affiliated entities own approximately 80% of
our outstanding ordinary shares, representing approximately 80% of our voting
power. These stockholders, acting individually or as a group, could exert
substantial influence over matters such as electing directors and approving
mergers or other business combination transactions. In addition, because of the
percentage of ownership and voting concentration in these principal stockholders
and their affiliated entities, elections of our board of directors will
generally be within the control of these stockholders and their affiliated
entities. While all of our stockholders are entitled to vote on matters
submitted to our stockholders for approval, the concentration of shares and
voting control presently lies with these principal stockholders and their
affiliated entities. As such, it would be difficult for stockholders to propose
and have approved proposals not supported by management. There can be no
assurances that matters voted upon by our officers and directors in their
capacity as stockholders will be viewed favorably by all of our
stockholders.
The
elimination of monetary liability against our directors, officers and employees
under Delaware law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures by our company and
may discourage lawsuits against our directors, officers and
employees.
Our
certificate of incorporation does not contain any specific provisions that
eliminate the liability of our directors for monetary damages to our company and
stockholders, but we are prepared to give such indemnification to our directors
and officers to the extent provided by Delaware law. We may also have
contractual indemnification obligations under our employment agreements with our
officers. The foregoing indemnification obligations could result in our company
incurring substantial expenditures to cover the cost of settlement or damage
awards against directors and officers, which we may be unable to recoup. These
provisions and resultant costs may also discourage our company from bringing a
lawsuit against directors and officers for breaches of their fiduciary duties,
and may similarly discourage the filing of derivative litigation by our
stockholders against our directors and officers even though such actions, if
successful, might otherwise benefit our company and stockholders.
16
Legislative
actions, higher insurance costs and potential new accounting pronouncements may
impact our future financial position and results of operations.
There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results of
operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as
proposed legislative initiatives following the Enron bankruptcy are likely
to increase general and administrative costs and expenses. In addition, insurers
are likely to increase premiums as a result of high claims rates over the past
several years, which we expect will increase our premiums for insurance
policies. Further, there could be changes in certain accounting rules. These and
other potential changes could materially increase the expenses we report under
generally accepted accounting principles, and adversely affect our operating
results.
Past
activities of the company and our affiliates may lead to future liability for
us.
Prior to
our entry into the Agreement and Plan of Share Exchange (“Share Exchange
Agreement”) on June 22, 2006, the Horizon Group was engaged in the
Company’s operations. Although for a period of two years after the Closing Date
the major shareholders of the Horizon Group will indemnify the Company against
any loss, liability, claim, damage, or expense arising out of or based on any
breach of or inaccuracy in any of their representations and warranties made in
the Share Exchange Agreement, any liabilities relating to such prior business
against which the Company is not completely indemnified may have a material
adverse effect on the Company.
We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our shareholders.
We
believe that our current cash and cash equivalents, anticipated cash flow from
operations and the net proceeds from this offering will be sufficient to meet
our anticipated cash needs for the near future. We may, however, require
additional cash resources due to changed business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
If our resources are insufficient to satisfy our cash requirements, we may seek
to sell additional equity or debt securities or obtain a credit facility. The
sale of additional equity securities could result in additional dilution to our
shareholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that
would restrict our operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.
You
may face difficulties in protecting your interests, and your ability to protect
your rights through the U.S. federal courts may be limited because our
subsidiaries are incorporated in non-U.S. jurisdictions, we conduct
substantially all of our operations in Hong Kong, and all of our officers reside
outside the United States.
Although
we are incorporated in Delaware, we conduct substantially all of our operations
in China through our wholly owned subsidiaries in Hong Kon. All of our officers
reside outside the United States and some or all of the assets of those persons
are located outside of the United States. As a result, it may be difficult or
impossible for you to bring an action against us or against these individuals in
Hong Kong in the event that you believe that your rights have been violated
under U.S. securities laws or otherwise. Even if you are successful in bringing
an action of this kind, the laws of Hong Kong may render you unable to enforce a
judgment against our assets or the assets of our directors and
officers.
As a
result of all of the above, our public shareholders may have more difficulty in
protecting their interests through actions against our management, directors or
major stockholders than would shareholders of a corporation doing business
entirely within the United States.
17
If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or prevent fraud.
We will
be subject to reporting obligations under the U.S. securities laws. The
Securities and Exchange Commission (“SEC”), as required by Section 404 of
the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), adopted rules requiring
every public company to include a management report on such company’s internal
controls over financial reporting in its annual report, which contains
management’s assessment of the effectiveness of the company’s internal controls
over financial reporting. In addition, an independent registered public
accounting firm must attest to and report on management’s assessment of the
effectiveness of the company’s internal controls over financial reporting. These
requirements will first apply to our annual report on Form 10-K for the fiscal
year ending December 31, 2007. Our management may conclude that our
internal controls over our financial reporting are not effective. Moreover, even
if our management concludes that our internal controls over financial reporting
are effective, our independent registered public accounting firm may still
decline to attest to our management’s assessment or may issue a report that is
qualified if it is not satisfied with our controls or the level at which our
controls are documented, designed, operated, or reviewed, or if it interprets
the relevant requirements differently from us. Our reporting obligations as a
public company will place a significant strain on our management, operational,
and financial resources and systems for the foreseeable future. Effective
internal controls, particularly those related to revenue recognition, are
necessary for us to produce reliable financial reports and are important to help
prevent fraud. As a result, our failure to achieve and maintain effective
internal controls over financial reporting could result in the loss of investor
confidence in the reliability of our financial statements, which in turn could
harm our business and negatively impact the trading price of our stock.
Furthermore, we anticipate that we will incur considerable costs and use
significant management time and other resources in an effort to comply with
Section 404 and other requirements of the Sarbanes-Oxley
Act.
We
will incur increased costs as a result of being a public company.
As a
public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company. In addition, the Sarbanes-Oxley Act,
as well as new rules subsequently implemented by the SEC, have required changes
in corporate governance practices of public companies. We expect these new rules
and regulations to increase our legal, accounting and financial compliance costs
and to make certain corporate activities more time-consuming and costly. In
addition, we will incur additional costs associated with our public company
reporting requirements. We are currently evaluating and monitoring developments
with respect to these new rules, and we cannot predict or estimate the amount of
additional costs we may incur, or the timing of such costs.
|
Item
1B.
|
UNRESOLVED
STAFF COMMENTS
|
There are
no unresolved staff comments as of the date of this report with respect to
periodic or current reports under the Securities Exchange Act of 1934 made by
the Company.
|
Item 2.
|
PROPERTIES
|
Our
corporate headquarters are located in Hong Kong, where we lease an office of
approximately 2,700 square feet. We also lease additional facilities
in connection with our shopping centers. Please see the subsection entitled “Our
Shopping Centers” under the “Business” section above. The leases of
our shopping centers will expire in September 2009 and will not be
renewed. We have already closed the operations of our shopping
centers at the end of 2008 to shift our focus to being a retail service
provider. Since the end of 2008, we have used and will continue to
use the shopping centers as warehouses for our inventory until the expiration of
the leases in September 2009.
We
believe that our existing space is adequate for our current anticipated
operations. We currently do not own any real property.
|
Item 3.
|
LEGAL
PROCEEDINGS
|
Other
than the proceeding described below, we are not currently involved in any
material legal proceedings, nor have we been involved in any such proceeding
that has had, or may have, a significant effect on us. We are not aware of any
material legal proceedings pending against us.
18
We are
involved in a legal proceeding called Everest Special Situations Fund, LP v.
Asiamart, Inc. (Index No. 603666/07). On or about November 5, 2007, Everest
Special Situations Fund, LP filed a Complaint in the Supreme Court for the State
of New York, County of New York (the “Court”), alleging claims for fraud and
breach of contract related to a Securities Purchase Agreement entered into with
the Company on October 6, 2006. The Company filed a Motion to Dismiss the
Complaint, which was submitted on March 26, 2008. The Court granted the Motion
and dismissed the action pursuant to an Order entered on April 8, 2008. Everest
Special Situations Fund, LP filed a Motion for Reargument of the Motion to
Dismiss the Complaint in May 2008. On June 24, 2008, the Court entered an
order partially granting and partially denying the Motion for Reargument. The
Court ruled that Everest Special Situations Fund, LP could amend the complaint
to assert a claim for rescission, but the order dismissing claims for damages
was affirmed. On or about January 29, 2009, Everest Special Situations
Fund, LP filed a motion for leave to amend and supplement the complaint.
The motion remains pending and no ruling has been issued from the
Court.
|
Item 4.
|
SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
|
During
the fourth quarter of our fiscal year ended December 31, 2008, no matters were
submitted to a vote of security holders through the solicitation of proxies or
otherwise.
PART
II
|
Item 5.
|
MARKET FOR REGISTRANT’S COMMON
EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Market
for Common Stock
Our
common stock is not listed on any stock exchange. The common stock is quoted on
the Over-the-Counter Electronic Bulletin Board under the symbol
“AAMA.” The following table sets forth the high and low bid
information for the common stock for each quarter within the last two fiscal
years, as reported by the OTC Bulletin Board. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
|
Bid
Price
|
||||||||
|
PERIOD
|
HIGH
|
LOW
|
||||||
|
FISCAL
YEAR 2008:
|
||||||||
|
Quarter
ended December 31, 2008
|
$ | 0.06 | $ | 0.03 | ||||
|
Quarter
ended September 30, 2008
|
$ | 0.06 | $ | 0.05 | ||||
|
Quarter
ended June 30, 2008
|
$ | 0.18 | $ | 0.04 | ||||
|
Quarter
ended March 31, 2008
|
$ | 0.25 | $ | 0.04 | ||||
|
FISCAL
YEAR 2007:
|
||||||||
|
Quarter
ended December 31, 2007
|
$ | 0.40 | $ | 0.20 | ||||
|
Quarter
ended September 30, 2007
|
$ | 0.37 | $ | 0.21 | ||||
|
Quarter
ended June 30, 2007
|
$ | 1.01 | $ | 0.37 | ||||
|
Quarter
ended March 31, 2007
|
$ | 1.50 | $ | 0.75 | ||||
As of
April 23, 2009, there were approximately 264 stockholders or record of our
common stock, and 16 preferred stockholders. The number of registered
stockholders excludes any estimate by us of the number of beneficial owners of
common shares held in street name. On April 23, 2009, the closing
sale price of our common stock on the OTC Bulletin Board was $0.015 per
share.
Dividend
Policy
We do not
currently intend to pay any cash dividends in the foreseeable future on our
common stock and, instead, intend to retain earnings, if any, for future
operation and expansion. Any decision to declare and pay dividends in the future
will be made at the discretion of our board of directors and will depend on,
among other things, our results of operations, cash requirements, financial
condition, contractual restrictions and other factors that our board of
directors may deem relevant.
19
|
Item
6.
|
SELECTED
FINANCIAL DATA
|
Not
applicable.
|
Item 7.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion and analysis of the results of operations and financial
condition of the Company for the fiscal years ended December 31, 2008 and
2007 should be read in conjunction with Selected Consolidated Financial Data and
the Company’s financial statements and the notes to those financial statements
that are included as exhibits to this report. Our discussion includes
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under the Risk Factors, Note Regarding
Forward-Looking Statements and Business sections in this report. We use words
such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,”
“expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar
expressions to identify forward-looking statements.
Overview
For the
first three quarters of 2008, our core business was the operation of outlet and
discount shopping centers catering principally to tourists visiting Hong Kong
from other parts of mainland China who were brought directly to our shopping
centers through a large network of travel companies and tour operators. This
business involved offering this captive group of tourists discount prices on
selected international brands in a wide range of merchandise categories such as
consumer electronics, cosmetics, watches, dietary supplements, health care
products and optical instruments, producing high sales volume and rapid
inventory turnover. The high sales volume and rapid inventory turnover provided
us with volume purchasing power, and combined with the relatively low overhead
of our shopping centers strategically located in low to moderate rent districts,
we had been able to quickly achieve profitability since our inception, and
continued to grow our profits over the past several years.
Most of
our customers were brought to our shopping centers by various mainland Chinese
travel companies and travel tour operators. Over the years, we had
aggressively and strategically pursued development of our retail business with a
focus on international tourists in Hong Kong. This had been proven as successful
as we were the largest retail enterprise in this market until we decided to
shift our business focus in the latter half of 2008.
During
the third quarter of 2008, the revenue of the Company significantly decreased
due to the above-mentioned trends. In addition, in the period leading up to and
during the Beijing 2008 Olympic Games, the Chinese government restricted
outbound travel visas, and this policy has not been reversed following the
Olympics. Further, management believes that the current ongoing global economic
crisis is discouraging tourist visits to Hong Kong. In the present economic
climate, management believes that the Company is unlikely to sustain
profitability with operation of its retail outlets, and believes that changing
its business model is in its best interest. Management believes the Company
faces heavy competition from other local retailers seeking to make sales to a
dwindling group of tourists, which is causing a trend toward lower profits.
Retailers that wish to stay afloat have to compete fiercely by drastically
marking down their prices, lowering their margins, and offering higher
commissions to travel operators. Some of our competitors are in a better
position to weather the economic storm because they have better locations with
heavier foot traffic and attract a higher density of tourists. Management
believes that our sales will not improve in the near future due to the difficult
economic climate, the location of our outlets, and the intense competition
surrounding our area. Starting the third quarter of 2008, the Company has
shifted its business model from being an outlet and discount shopping center
operator to a retail service provider and has closed the operation of its two
outlets at the end of 2008.
During
October 2008, three of our subsidiaries entered into a series of agreements with
Best Paramount whereby they agreed to act as a service provider to Best
Paramount. Best Paramount is reputed to be an experienced retail operator that
sells a wide variety of appealing items that attract tourists, including, but
not limited to, cosmetics, electronics, jewelry and branded watches, and it also
has the advantage of securing an excellent location in the coveted Emax within
Hong Kong International Trade and Exhibition Center, an attractive location with
heavy foot traffic from visiting tourists.
20
The
Company agreed to provide technical, commercial and operational management for
Best Paramount. Under the terms of the agreements with Best Paramount, the scope
of services provided by the Company includes, but is not limited to, accounting,
human resources, administrative, marketing and sales consultancy, retail
operation and inventory management. The Company is in charge of running Best
Paramount’s premises and agreed to provide its employees to staff Best
Paramount’s operation. Best Paramount is responsible for paying its own rent,
cost of sales, commissions to travel agents and taxes. The Company is
responsible for paying all other expenses of the operation, including, but not
limited to, certain Actual Costs on the behalf of Best Paramount. Best Paramount
shall reimburse the Company for the Actual Costs, and in addition pay Company a
5% mark-up of such Actual Costs as consideration for the Company’s services.
Under the terms of the agreements, the Company also has the discretion to charge
Best Paramount a discretionary fee, to be negotiated in detail in three to six
months pursuant to actual performance of the operation. The agreements may be
terminated by mutual agreement, by either party giving the other written notice
in the event of material breach, or by giving a 60-day prior written notice
without cause.
Apart
from the above, we own and operate two trading subsidiaries - Raffle Limited and
Sure Profits Trading Limited, which engage in the import and local distribution
of consumer electronic products. We source our product from suppliers worldwide
in order to provide our customers with an extensive variety of products at
competitive prices.
Quarterly
Results May Fluctuate
Our
business is subject to some seasonality, with decreases in sales during the
winter months due to decreases in travel and tourist activity, and increases in
sales during the summer months due to increases in such activity. Due to the
seasonality of our sales, our quarterly results will fluctuate, perhaps
significantly. Our operating results can also be impacted by the supply of
products from suppliers caused by manufacturing delays or delivery issues.
Additionally, the offering of new products or utilization of new sales channels
can cause our quarterly operating results to fluctuate. For a discussion of
these and other risks related to seasonality of our business, see “Risk Factors.”
Critical
Accounting Policies and Estimates
Our
management’s discussion and analysis of our financial condition or plan of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us 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 as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our estimates and
assumptions. We base our estimates on historical experience and on various other
factors that we believe are reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.
While our
significant accounting policies are described in Note 3 to our consolidated
financial statements, we believe that the following accounting policies are the
most critical to aid you in fully understanding and evaluating our reported
financial results.
Revenue recognition. The Company derives the
major revenues from the sale of products and referral income. Referral income is
derived from referring our customers to other non-directly competitive shops.
Sales and referral income are recognized when the following four revenue
criteria are met: persuasive evidence of an arrangement exists, delivery has
occurred, the selling price is fixed or determinable, and collectability is
reasonably assured. Sales revenue is recognized net of sales discount and
actual returns at the time when the merchandise is sold to the customer. Based
on historical experience, management estimates that sales returns are immaterial
and has not made allowance for estimated sales returns. Referral income is
the income derived from referring customers to other non-directly competitive
duty-free shops. The Company recognized referral income according to the number
of visitors referred during the financial period. Service income is
primarily derived from the provision of management service to other retail
operators. These services are generally billed on a monthly basis. Revenue is
recognized when service is rendered and accepted by the customers.
21
Accounts
receivable. Accounts receivable consist primarily of trade
receivables and amounts due from banks for customer credit card transactions.
Accounts receivable are recognized and carried at original invoiced amount less
an allowance for any uncollectible accounts. Management reviews the adequacy of
the allowance for doubtful accounts on an ongoing basis, using historical
collection trends and aging of receivables. Management also periodically
evaluates individual customer’s financial condition, credit history, and the
current economic conditions to make adjustments in the allowance when it is
considered necessary. Account balances are charged off against the allowance
after all means of collection have been exhausted and the potential for recovery
is considered remote.
Inventories. We value inventory at the
lower of cost or market, using the first-in, first-out or weighted average basis
method, and regularly reviews the book value of discontinued product lines and
stock keeping units to determine if these items are properly valued. If the
market value of the product is less than cost, management will write down the
related inventory to the estimated net realizable value. The management
regularly evaluates the composition of its inventory to identify slow-moving and
obsolete inventories to determine if additional write-downs are required. This
valuation requires significant judgment from management as to the salability of
its inventory based on forecasted sales. It is particularly difficult to judge
the potential sales of new products. Should the forecasted sales not
materialize, it would have a significant impact on the company’s results of
operations and the valuation of its inventory, resulting in a charge to income
in the period such determination is made.
Property and equipment.
Property and equipment are recorded at cost less accumulated depreciation and
amortization and impairment losses. Gains or losses on disposals are reflected
as gain or loss in the year of disposal. The cost of improvements that extend
the life of plant, property and equipment are capitalized. These capitalized
costs may include structural improvements, equipment and fixtures. All ordinary
repair and maintenance costs are expensed as incurred. Property and equipment
held-for-sale are measured at the lower of their carrying amount or fair value
less cost to sell. Depreciation or amortization for financial reporting purposes
is provided using the straight-line method over the estimated useful lives of
the assets.
Impairment of long-lived
assets. We account for impairment of property, plant and equipment and
amortizable intangible assets in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which requires us to evaluate a long-lived
asset for recoverability when there is an event or circumstance that indicates
the carrying value of the asset may not be recoverable. An impairment loss is
recognized when the carrying amount of a long-lived asset or asset group is not
recoverable (when carrying amount exceeds the gross, undiscounted cash flows
from use and disposition) and is measured as the excess of the carrying amount
over the asset’s (or asset group’s) fair value.
2008 Highlights
In
October 2008, three of our subsidiaries executed the Agreements with Best
Paramount whereby we provided technical, commercial and operational management
for Best Paramount. In 2008, the following three major trends
affected our core business:
|
1.
|
A
reduction in tourist visits from mainland China to Hong Kong partly as a
result of adverse changes in travel policy and the domestic economic
environment in China;
|
|
2.
|
A
reduction in spending per tourist due to a downturn in global economic
conditions; and
|
|
3.
|
Severe
competition from other local retailers seeking to make sales to a
dwindling group of tourists, in the midst of a downturn in
tourism.
|
As a
result, management decided to close its shopping centers and change its
business model from being an outlet and discount shopping center operator to a
retail service provider. Thus, we entered into the Agreements with
Best Paramount and derived service fee. We believe this change can
enhance the Company’s profitability.
2009
Outlook
We
will focus on our new business model to provide management services to other
retail operators, such as Best Paramount. We are optimistic that our
new business direction will enable the Company to produce a more stable stream
of income and achieve profitability for the Company and its
shareholders.
22
RESULTS
OF OPERATIONS
Comparison
of Three Months Ended December 31, 2007 and December 31,
2008.
Sales. For the three months
ended December 31, 2008, sales decreased 68% from $16.5 million to $5.3 million
relative to the three months ended December 31, 2007. The average spending per
capita increased from $78 for the three months ended December 31, 2007 to $82
for the same period of 2008, an increase of 5% mainly because of more tourists
coming from cities with a higher average household income. Our retail sales for
the three months ended December 31, 2008 were $2.7 million, a decrease of 73%
from $10 million for the same quarter last year. The significant decrease in
sales is attributable to the closure of our retail stores in November 2008, a
reduction in tourist visits from mainland China to Hong Kong partly as a result
of adverse changes in travel policy and the domestic economic environment in
China, and severe competition from other local retailers seeking to make sales
to a dwindling group of tourists, in the midst of a downturn in
tourism.
Cost of Sales. Cost
of sales decreased from $10.2 million for the three months ended December 31,
2007 to $6.2 million for the three months ended December 31, 2008, a decrease of
39%, as compared to a 68% decrease in sales over the same comparable quarters in
2008 and 2007. The decrease in our cost of sales was due to the decline of watch
sales to our product offerings, which have a higher cost relative to the average
retail sales price per unit. Our gross profit margin was reduced from 39% for
the three months ended 2007 to gross loss of 18% for the same period in 2008.
The drop in margin was mainly due to our tactic of keeping our prices
competitive
Selling, General and Administrative
Expenses. Selling, general and administrative expenses decreased from
$7.3 million for the three months ended December 31, 2007 to $5.4 million for
the same period in 2008. Our selling expenses decreased from $5.6 million for
the three months ended December 31, 2007 to $2.6 million for the three months
ended December 31, 2008. As a percentage of retail sales, our selling expenses
decreased to 33% for the three months ended December 31, 2008 from 56% for the
same period in the last year. Our selling expenses decreased as a result of a
decrease in the sales volume-based incentives payable to the tour
operators.
Other Income. Other income
mainly represented management service income derived from the provision of
retail service and the gain on exchange from converting RMB received from
customers to Hong Kong Dollars. The other income on exchange remains relatively
the same at $0.3 million for the three months ended December 31, 2007 and for
the same period in 2008. We only started to derive service income
from the three months ended December 31, 2008 due to the change in business
model to become a retail service provider.
Comparison
of Year Ended December 31, 2007 and December 31, 2008.
Sales. For the year ended
December 31, 2008, our overall sales decreased 40% from $58.4 million to $35.0
million relative to the year ended December 31, 2007. Reasons attributable to
this considerable decrease include a reduction in tourist visits from mainland
China to Hong Kong partly as a result of adverse changes in travel policy and
the domestic economic environment in China, and severe competition from other
local retailers seeking to make sales to a dwindling group of tourists, which is
causing a trend toward lower profits starting the second half of 2008. For 2008,
approximately $27 million were sales generated by our retail segment and $8
million was generated from our trading segment. The number of customer visits to
our stores dropped from 461,620 for 2007 to 380,875 for 2008, a decrease of 17%.
Although the number of customer visits declined, the average spending per capita
increased from $74 for 2007 to $79 for 2008 as a result of our continued focus
on quality customers and a shift toward more first-time visitors from higher
income cities.
Cost of Sales. Cost of
sales decreased from $36 million for the year ended December 31, 2007 to $23
million for the year ended December 31, 2008, representing a decrease of 36%.
The decrease in cost of sales was mainly due to the closure of our retail stores
in November 2008. Our overall gross profit margin declined by 4% from 38% for
the year ended December 31, 2007 to 34% for the same period in
2008.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses decreased
from $23.4 million for the year ended December 31, 2007 to $21.3 million for the
same period in 2008. Our selling expenses decreased from $15.5 million for the
year ended December 31, 2007 to $11.7 million for the year ended December 31,
2008. As a percentage of retail sales, our selling expenses decreased to 43% for
the year ended December 31, 2008 from 40% for the same period in 2007. On the
other hand, our administrative expenses increased by about $1.6 million
from $8 million in 2007 to $9.6 million in 2008 due to inflation
and uncollectable debt in 2008.
23
Other Income. Other income
mainly represented management service income derived from the provision of
retail service and the gain on exchange from converting RMB received from
customers to Hong Kong Dollars. Another significant source of other income was
from concessionaire sales. Financing costs included $1 million of amortization
of the discount on the debentures payable and $0.26 million interest expenses on
our convertible debentures and other borrowings. Due to the change in business
model from the third quarter in 2008 from being an outlet and discount shopping
center operator to a retail service provider, we started to derive management
service income from the provision management service to other retail operators
in 2008. The management service income for the year ended December
31, 2008 was derived from the provision of management service to Best Paramount
in accordance with the agreements executed in October 2008.
Comparison
of Year Ended December 31, 2006 and December 31, 2007.
Sales. For the year ended December
31, 2007, our overall sales increased 10% from $53.1 million to $58.4 million
relative to the year ended December 31, 2006. For 2007, $14.3 million in sales
resulted from watches, a new addition to our product line. Of the remaining
$44.1 million in sales, approximately $34.3 million were sales generated by our
retail segment (excluding watches), $9.4 million was generated from our trading
segment, and $0.4 million was referral income. Since January 2007, we began
cooperating with a watch retailer in Hong Kong in an arrangement in which we
merchandized high-value watches and sold them through our cooperating watch
retailer’s store on a consignment basis. The profit margin from our watch sales
was about 6%. The number of customer visits to our stores dropped from 651,778
for 2006 to 461,620 for 2007, a decrease of 29%. Although the number of customer
visits declined, the average spending per capita increased from $68 for 2006 to
$74 for 2007 as a result of our continued focus on quality customers and a shift
toward more first-time visitors from higher income cities. Management believes
the decrease in overall customer visits in 2007 is partly due to the trend away
from organized group tours in favor of individual or independent travel, as
discussed above.
Cost of
Sales. Cost of sales increased from $24 million for the year ended
December 31, 2006 to $36 million for the year ended December 31, 2007,
representing an increase of 50%. The increase of cost of sales was mainly due to
the addition of watches to our product line. The cost of watch sales was $13.6
million and the profit margin on our watch sales was about 6%. Excluding the
cost of sales from watches, and for purposes of comparing our cost of sales
during the same period in the prior year, our other cost of sales was $22.4
million. Our overall gross profit margin declined by 31% from 55% for the year
ended December 31, 2006 to 38% for the same period in 2007. However, if the
effect of watch sales is excluded, our gross profit margin with respect to all
other parts of our business declined only from 55% to 49% over the year of 2006
and 2007.
Selling, General
and Administrative Expenses. Selling, general and
administrative expenses decreased from $25.7 million for the year ended December
31, 2006 to $23.4 million for the same period in 2007. Our selling expenses
increased from $15.3 million for the year ended December 31, 2006 to $15.5
million for the year ended December 31, 2007. As a percentage of retail sales,
our selling expenses increased to 45% for the year ended December 31, 2007 from
33% for the same period in 2006. In order for travel agents and operators to
support our refund guarantee scheme, we paid increased commissions to travel
agents and operators. We also increased our advertising efforts by spending
approximately $800,000 in 2007 on advertising as compared to $0 spent on
advertising in 2006. On the other hand, our administrative expenses decreased by
about $2 million from $10 million in 2006 to $8 million in 2007
due to the closure of one of our three stores in early 2007.
Other
Income. Other
income mainly represented the gain on exchange from converting RMB received from
customers to Hong Kong Dollars. Another significant source of other income was
from concessionaire sales, which was expanded to two shops in the third quarter
2007 compared to only one shop in the same period of 2006. On the other hand,
higher finance costs were incurred due to issuing convertible debentures in
October 2006. Financing costs included $1 million of amortization of the
discount on the debentures payable and $0.24 million interest expenses on our
convertible debentures issued in October of 2006. As a result, total other
income decreased from $1.5 million for the year ended December 31, 2006 to $0.1
million for the same period in 2007.
Related
Party Transactions
For a
description of our related party transactions see the section of this report
entitled “Certain
Relationships and Related Transactions.”
24
Liquidity
and Capital Resources
Cash
Flows. For the year 2008, net cash flows used in operations was
$1,049,959. The increase in net cash flows used in operations in 2008 was due to
a decrease in sales and gross profit margin.
Net cash
flows used in investing activities in 2008 was $71,154, which was primarily due
to purchase of plant and equipment.
Net cash
flows drawn by financing activities was $592,475 in 2008, which was mainly
attributable to the repayment of loan and capital lease.
We
believe that our existing cash balances and anticipated cash flows from
operations will be sufficient to meet our operating, acquisition and capital
requirements for at least the next 12 months. However, there is no assurance
that we will not need to raise additional equity or debt financing within this
period. We also may require additional capital for other purposes not presently
contemplated. If we are unable to obtain sufficient capital, we could be
required to curtail our expenditures, including capital expenditures for
property and equipment, which could harm our business.
Contractual
Obligations
We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.
The
following tables summarize our contractual obligations as of December 31,
2008, and the effect these obligations are expected to have on our liquidity and
cash flows in future periods.
|
Payments
Due by Period
|
||||||||||||||
|
Total
|
Less than 1
year
|
1-3 Years
|
4-5 Years
|
5 Years +
|
||||||||||
|
(in
thousands of dollars)
|
||||||||||||||
|
Contractual
Obligations:
|
||||||||||||||
|
Total
Indebtedness
|
318
|
66
|
—
|
—
|
—
|
|||||||||
|
Capital
Lease Obligations
|
205
|
45
|
—
|
—
|
—
|
|||||||||
|
Operating
Leases
|
470
|
90
|
—
|
—
|
—
|
|||||||||
|
Total
Contractual Obligations:
|
993
|
201
|
—
|
—
|
—
|
|||||||||
Total
indebtedness consists of an installment loan from a financial institution in
Hong Kong.
Capital
lease amounts primarily consist of equipment to support our wholesale
operations. See “Note 7—Property and Equipment” in
the notes to the consolidated financial statements, included elsewhere in this
report.
25
Operating
lease amounts include minimum lease payments under our non-cancelable operating
leases for office facilities, as well as limited computer and office equipment
that we utilize under lease arrangements. The amounts presented are consistent
with contractual terms and are not expected to differ significantly, unless a
substantial change in our headcount needs requires us to exit an office facility
early or expand our occupied space.
Other
purchase obligation amounts include minimum purchase commitments for advertising
and other goods and services that were entered into through our ordinary course
of business.
Off-Balance
Sheet Arrangements
We do not
have any off balance-sheet arrangements, investments in special purpose entities
or undisclosed borrowings or debt. Additionally, we are not a party to any
derivative contracts or synthetic leases.
|
Item 7A.
|
Quantitative and Qualitative
Disclosures about Market
Risk
|
We do not
use derivative financial instruments in our investment portfolio and have no
foreign exchange contracts. Our financial instruments consist of cash and cash
equivalents, trade accounts receivable, accounts payable and long-term
obligations. We consider investments in highly-liquid instruments purchased with
a remaining maturity of 90 days or less at the date of purchase to be cash
equivalents.
Interest Rates. Our exposure
to market risk for changes in interest rates relates primarily to our short-term
investments and short-term obligations; thus, fluctuations in interest rates
would not have a material impact on the fair value of these securities. At
December 31, 2008, we had approximately $0.1 million in cash and cash
equivalents. A hypothetical 5% increase or decrease in either short term or long
term interest rates would not have a material impact on our earnings or loss, or
the fair market value or cash flows of these instruments.
Foreign Exchange Rates. We
generally transact business in Hong Kong Dollars, and do not have significant
exposure to exchange rates between and among the U.S. Dollar or Chinese
Renminbi (RMB). Since 1983, the Hong Kong Dollar has been pegged to the
U.S. Dollar, and, as of March 31, 2009, has an exchange rate of 7.7504 Hong
Kong Dollars for each U.S. Dollar. Our stores typically hold insignificant
amounts of U.S. Dollars and RMB, i.e., 200,000 to 250,000 RMB,
and $5,000 to $10,000 in U.S. Dollars. However, see the section titled “Risk
Factors—Fluctuation in the value of RMB and Hong Kong Dollar relative to other
currencies may have a material adverse effect on our business and/or investment
in our shares.”
|
Item 8.
|
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
|
The
Consolidated Financial Statements and Financial Statement Schedule begin on the
next page, and are included in Part IV, Item 15(a)(1) and (2) of
this annual report on Form 10-K.
26
ASIAMART,
INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
||
|
Report
of Independent Registered Public Accounting Firm, ZYCPA Company Limited
(Formerly Zhong Yi (Hong Kong) C.P.A. Company Limited)
|
F-2
|
|
|
Report
of Independent Registered Public Accounting Firm, Cordovano and Honeck
LLP
|
F-3
|
|
|
Consolidated
Balance Sheets
|
F-4
|
|
|
Consolidated
Statements of Operations And Comprehensive Loss
|
F-5
|
|
|
Consolidated
Statements of Cash Flows
|
F-6
|
|
|
Consolidated
Statements of Stockholders’ (Deficit) Equity
|
F-7
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
- F-29
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board
of Directors and Stockholders of
Asiamart,
Inc.
We have
audited the accompanying consolidated balance sheets of Asiamart, Inc. and its
subsidiaries (“the Company”) as of December 31, 2008 and the related
consolidated statements of operations and comprehensive loss, cash flows and
stockholders’ deficit for the year ended December 31, 2008. The financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2008, and the results of operations and cash flows for the year ended
December 31, 2008 and in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred substantial losses
during this year, all of which raise substantial doubt about its ability to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note 2. These consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.
|
/s/
ZYCPA Company Limited
|
ZYCPA
Company Limited
(Formerly
Zhong Yi (Hong Kong) C.P.A. Company Limited)
Certified
Public Accountants
Hong
Kong, China
May 4,
2009
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Stockholders
Asiamart,
Inc. and subsidiaries
We have
audited the accompanying consolidated balance sheet of Asiamart, Inc. and
subsidiaries (“the Company”) as of December 31, 2007 and the related
consolidated statements of operations, cash flows and stockholders’ equity for
the year ended December 31, 2007. The financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits include consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 2007 and the results of operations and cash flows for the year ended
December 31, 2007 and in conformity with accounting principles generally
accepted in the United States of America.
Cordovano
and Honeck LLP
Certified
Public Accountants
Englewood,
Colorado USA
April 15,
2008
F-3
ASIAMART,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
As
of December 31,
|
||||||||
|
|
2008
|
2007
|
||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 99,186 | $ | 1,817,148 | ||||
|
Accounts
receivable, net
|
1,798,142 | 1,883,609 | ||||||
|
Inventories,
net
|
159,569 | 3,817,215 | ||||||
|
Deposits
and prepaid expenses, net
|
418,212 | 1,500,599 | ||||||
|
Income
tax recoverable
|
144,885 | - | ||||||
|
Other
receivables, net
|
54,152 | 475,513 | ||||||
|
Total
current assets
|
2,674,146 | 9,494,084 | ||||||
|
Non-current
assets:
|
||||||||
|
Plant
and equipment, net
|
592,141 | 848,978 | ||||||
|
Long-term
loans receivable, net
|
- | 1,211,580 | ||||||
|
Long-term
rental and utilities deposits
|
- | 157,922 | ||||||
|
Debt
issuance costs
|
79,067 | 184,492 | ||||||
|
Income
tax recoverable
|
- | 54,829 | ||||||
|
Total
non-current assets
|
671,208 | 2,457,801 | ||||||
|
TOTAL
ASSETS
|
$ | 3,345,354 | $ | 11,951,885 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ (DEFICIT) EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 1,104,528 | $ | 2,482,382 | ||||
|
Accrued
liabilities and other payables
|
2,426,101 | 1,136,981 | ||||||
|
Customer
deposits
|
108,515 | 95,292 | ||||||
|
Amounts
due to stockholders
|
288,456 | 286,585 | ||||||
|
Current
portion of bank borrowings
|
23,216 | 318,322 | ||||||
|
Current
portion of obligation under capital leases
|
82,287 | 205,113 | ||||||
|
Convertible
debenture, net of discount of $782,189
|
2,287,706 | - | ||||||
|
Total
current liabilities
|
6,320,809 | 4,524,675 | ||||||
|
Long-term
liabilities:
|
||||||||
|
Deferred
tax liabilities
|
- | 15,455 | ||||||
|
Obligation
under capital leases
|
124,293 | 68,711 | ||||||
|
Bank
borrowings
|
- | 47,205 | ||||||
|
Convertible
debenture
|
- | 1,264,406 | ||||||
|
Total
long-term liabilities
|
124,293 | 1,395,777 | ||||||
|
Total
liabilities
|
6,445,102 | 5,920,452 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
(deficit) equity:
|
||||||||
|
Common
stock, $0.001 par value; 200,000,000 shares authorized; 24,744,177 and
24,744,177 shares issued and outstanding as of December 31, 2008 and
2007
|
2,474 | 2,474 | ||||||
|
Additional
paid-in capital
|
3,455,421 | 3,455,421 | ||||||
|
(Accumulated
deficit) retained earnings
|
(6,619,390 | ) | 2,507,417 | |||||
|
Accumulated
other comprehensive income
|
61,747 | 66,121 | ||||||
|
Total
stockholders’ (deficit) equity
|
(3,099,748 | ) | 6,031,433 | |||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
|
$ | 3,345,354 | $ | 11,951,885 | ||||
See
accompanying notes to consolidated financial statements.
F-4
ASIAMART,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND
COMPREHENSIVE
LOSS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
Years
ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
REVENUE,
NET:
|
||||||||
|
Sale
of products
|
$ | 34,636,938 | $ | 56,987,173 | ||||
|
Sale
of products, related parties
|
- | 997,636 | ||||||
|
Referral
income
|
- | 426,642 | ||||||
|
Service
income
|
389,980 | - | ||||||
|
Total
revenue, net
|
35,026,918 | 58,411,451 | ||||||
|
COST OF REVENUE
(exclusive of depreciation)
|
22,840,546 | 36,069,653 | ||||||
|
GROSS
PROFIT
|
12,186,372 | 22,341,798 | ||||||
|
Operating
expenses:
|
||||||||
|
Sales
and marketing
|
11,733,432 | 15,455,353 | ||||||
|
Depreciation
|
275,202 | 258,773 | ||||||
|
Impairment
loss on long-lived assets
|
235,709 | - | ||||||
|
Uncollectible
receivable write-off
|
398,040 | - | ||||||
|
Allowance
for doubtful accounts
|
2,175,748 | - | ||||||
|
General
and administrative
|
6,483,930 | 7,704,491 | ||||||
|
Total
operating expenses
|
21,302,061 | 23,418,617 | ||||||
|
LOSS
FROM OPERATIONS
|
(9,115,689 | ) | (1,076,819 | ) | ||||
|
Other
income (expenses):
|
||||||||
|
Other
income
|
348,379 | 581,306 | ||||||
|
Foreign
exchange gain
|
933,059 | 1,041,112 | ||||||
|
Interest
income
|
140 | 5,737 | ||||||
|
Interest
expense
|
(1,265,603 | ) | (1,327,396 | ) | ||||
|
Other
expense
|
- | (197,875 | ) | |||||
|
Total
other income
|
15,975 | 102,884 | ||||||
|
LOSS
BEFORE INCOME TAXES
|
(9,099,714 | ) | (973,935 | ) | ||||
|
Income
tax expense
|
27,093 | 96,093 | ||||||
|
NET
LOSS
|
$ | (9,126,807 | ) | $ | (1,070,028 | ) | ||
|
Other
comprehensive income:
|
||||||||
|
-
Foreign currency translation (loss) gain
|
(4,374 | ) | 18,563 | |||||
|
COMPREHENSIVE
LOSS
|
$ | (9,131,181 | ) | $ | (1,051,465 | ) | ||
|
Net
loss per share – Basic and diluted
|
$ | (0.37 | ) | $ | (0.04 | ) | ||
|
Weighted
average shares outstanding – Basic and diluted
|
24,744,177 | 24,617,442 | ||||||
See
accompanying notes to consolidated financial statements.
F-5
ASIAMART,
INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”))
|
Years
ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (9,126,807 | ) | $ | (1,070,028 | ) | ||
|
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
||||||||
|
Depreciation
|
275,202 | 258,773 | ||||||
|
Amortization
of discount and debt issuance costs on convertible
debenture
|
1,128,725 | 1,128,722 | ||||||
|
Obsolete
inventory write-back
|
(475,295 | ) | - | |||||
|
Uncollectible
receivables write-off
|
398,040 | - | ||||||
|
Allowance
for doubtful accounts
|
2,175,748 | - | ||||||
|
Impairment
loss on long-lived assets
|
235,709 | - | ||||||
|
Change
in operating assets and liabilities:
|
||||||||
|
Accounts
receivable, trade
|
(322,916 | ) | 2,367,289 | |||||
|
Inventories
|
4,132,941 | (2,775,191 | ) | |||||
|
Deposits,
prepaid expenses and other receivables
|
14,769 | (294,805 | ) | |||||
|
Income
tax recoverable
|
(105,511 | ) | - | |||||
|
Accounts
payable
|
(1,377,854 | ) | 800,782 | |||||
|
Accrued
liabilities and other payables
|
1,982,196 | 16,492 | ||||||
|
Customers
deposit
|
13,223 | 84,108 | ||||||
|
Amounts
due to stockholders
|
1,871 | - | ||||||
|
Income
tax payable
|
- | (367,151 | ) | |||||
|
Deferred
tax liabilities
|
- | (53 | ) | |||||
|
Net
cash (used in) provided by operating activities
|
(1,049,959 | ) | 148,938 | |||||
|
Cash
flows from investing activities:
|
||||||||
|
Increase
in amount due from shareholders
|
- | (17,775 | ) | |||||
|
Long-term
loans to travel agencies
|
- | (180,963 | ) | |||||
|
Proceeds
from disposal of plant and equipment
|
- | - | ||||||
|
Purchase
of plant and equipment
|
(71,154 | ) | (428,876 | ) | ||||
|
Net
cash used in investing activities
|
(71,154 | ) | (627,614 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Proceeds
from installment loan
|
- | 302,316 | ||||||
|
Repayment
of installment loan
|
(342,311 | ) | (470,198 | ) | ||||
|
Proceeds
from capital lease
|
- | 326,655 | ||||||
|
Repayment
of capital lease
|
(250,164 | ) | (441,816 | ) | ||||
|
Net
cash used in financing activities
|
(592,475 | ) | (283,043 | ) | ||||
|
Effect
of exchange rate change on cash and cash equivalents
|
(4,374 | ) | 18,563 | |||||
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
(1,717,962 | ) | (743,156 | ) | ||||
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
1,817,148 | 2,560,304 | ||||||
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
$ | 99,186 | $ | 1,817,148 | ||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||
|
Cash
paid for interest expense
|
$ | 14,890 | $ | 62,965 | ||||
|
Cash
paid for income taxes
|
$ | 118,401 | $ | 463,244 | ||||
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
||||||||
|
Partial
settlement of long-term loans receivable against travel agencies’
commission payable
|
$ | 613,774 | $ | - | ||||
|
Plant
and equipment purchased under capital lease
|
$ | 182,920 | $ | - | ||||
|
Cashless
conversion of warrants
|
$ | - | $ | 20 | ||||
See
accompanying notes to consolidated financial statements
F-6
ASIAMART,
INC AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
|
Common
stock
|
Additional
|
Retained
earnings
(accumulated
|
Accumulated
other
Comprehensive
|
Total
stockholders’
|
||||||||||||||||||||
|
No.
of shares
|
Amount
|
paid-in
capital
|
deficit)
|
income
|
equity
(deficit)
|
|||||||||||||||||||
|
Balance
as of January 1, 2007
|
24,535,755 | $ | 2,454 | $ | 3,455,441 | $ | 3,577,445 | $ | 47,558 | $ | 7,082,898 | |||||||||||||
|
Net
loss for the year
|
- | - | - | (1,070,028 | ) | - | (1,070,028 | ) | ||||||||||||||||
|
Cashless
conversion of warrants
|
208,422 | 20 | (20 | ) | - | - | - | |||||||||||||||||
|
Foreign
currency translation adjustment
|
- | - | - | - | 18,563 | 18,563 | ||||||||||||||||||
|
Balance
as of December 31, 2007
|
24,744,177 | $ | 2,474 | $ | 3,455,421 | $ | 2,507,417 | $ | 66,121 | $ | 6,031,433 | |||||||||||||
|
Net
loss for the year
|
- | - | - | (9,126,807 | ) | - | (9,126,807 | ) | ||||||||||||||||
|
Foreign
currency translation adjustment
|
- | - | - | - | (4,374 | ) | (4,374 | ) | ||||||||||||||||
|
Balance
as of December 31, 2008
|
24,744,177 | $ | 2,474 | $ | 3,455,421 | $ | (6,619,390 | ) | $ | 61,747 | $ | (3,099,748 | ) | |||||||||||
See
accompanying notes to consolidated financial statements
F-7
ASIAMART,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(Currency
expressed in United States Dollars (“US$”), except for number of
shares)
1. DESCRIPTION
OF BUSINESS AND ORGANIZATION
Asiamart,
Inc. (“AAMA” or the “Company”) was incorporated under the laws of the State of
Delaware on August 25, 1997 as WT Holdings Corporation. On November 30, 2006,
the Company further changed to its current name.
The
Company through its subsidiaries, engages in two operating segments, trading and
retailing. Trading consists of selling products wholesale to other retail
operators and retailing consists of selling products primarily to tourist
through two discount shopping centers in Hong Kong.
Description of wholly-owned
subsidiaries
|
Company
name
|
Trading
name
|
Place/date
of
incorporation
|
Particulars
of
issued
share
capital
|
Principal
activities
|
||||||
|
1
|
Profits
Dream Development Limited (“Profits Dream”)
|
N/A
|
British
Virgin Islands, July 26, 2002
|
1,000
issued shares of common stock of $1 each
|
Investment
holdings
|
|||||
|
2
|
Raffle
Limited
(“Raffle”)
|
N/A
|
Hong
Kong, August 7, 1998
|
2,000,000
issued shares of ordinary shares of HK$1 each
|
Trading
of general merchandise
|
|||||
|
3
|
Sure
Profits Trading Limited
(“Sure
Profits”)
|
N/A
|
Hong
Kong, August 3, 2001
|
1,000,000
issued shares of ordinary shares of HK$1 each
|
Trading
of general merchandise
|
|||||
|
4
|
Manigood
International Industrial Limited (“Manigood”)
|
Hong
Kong (Duty Free) Center
|
Hong
Kong, December 15, 2003
|
1,000,000
issued shares of ordinary shares of HK$1 each
|
Operating
a discount shopping center in Hong Kong
|
|||||
|
5
|
Allied
Fine Development Limited (“Allied Fine”)
|
Super
Star Department Store
|
Hong
Kong, September 19, 2003
|
10,000
issued shares of ordinary shares of HK$1 each
|
Operating
a discount shopping center in Hong Kong
|
|||||
|
6
|
Max
Surplus International Development Limited (“Max Surplus”)
|
Golden
Bauhinia Duty Free
|
Hong
Kong, July 26, 2004
|
2
issued shares of ordinary shares of HK$1 each
|
Dormant
|
F-8
The
Company’s outlets and discount shopping centers cater to tourists visiting Hong
Kong from other parts of China (“mainland China”) who are transported directly
to the Company’s shopping centers by a large network of travel companies and
tour operators. The Company’s outlets and shopping centers offer the tourists
discount prices on a limited selection of international branded and selected
private label products in a wide range of merchandise categories such as
consumer electronics, cosmetics, watches, dietary supplements, health care
products and optical instruments. A number of travel companies and tour
operators have agreements, partnerships or affiliation arrangements with the
Company to transport tourists from mainland China to the Company’s outlets and
shopping centers for shopping. All current operations and assets of the Company
are located in Hong Kong.
AAMA and
its subsidiaries are hereinafter referred to as “the Company”.
|
2.
|
GOING
CONCERN UNCERTAINTIES
|
These
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern, which contemplates the realization of assets
and the discharge of liabilities in the normal course of business for the
foreseeable future.
For the
year ended December 31, 2008, the Company had incurred a net loss of $9,126,807 and generated a
negative operating cash flow of $1,049,959. Additionally, the Company had a
working capital deficit of $3,646,663 and an accumulated deficit of $6,619,390, as of December 31,
2008. The continuation of the Company is dependent upon the continuing
financial support of shareholders and the anticipation of business restructuring
plan. As a result, the consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of the Company’s ability to continue as a going
concern.
|
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
|
l
|
Basis
of presentation
|
These
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of
America.
|
l
|
Basis
of consolidation
|
The
consolidated financial statements include the financial statements of AAMA and
its subsidiaries.
F-9
All
significant inter-company balances and transactions within the Company have been
eliminated upon consolidation.
|
l
|
Use
of estimates
|
In
preparing these consolidated financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities in
the balance sheets and revenues and expenses during the years reported. Actual
results may differ from these estimates.
|
l
|
Cash
and cash equivalents
|
Cash and
cash equivalents are carried at cost and represent cash on hand, demand and time
deposits with banks and liquid investments with an original maturity of three
months or less as of the purchase date of such investments.
|
l
|
Accounts
receivable
|
Accounts
receivable consist primarily of trade receivables and amounts due from banks for
customer credit card transactions. Accounts receivable are recognized and
carried at original invoiced amount less an allowance for any uncollectible
accounts. Management reviews the adequacy of the allowance for doubtful accounts
on an ongoing basis, using historical collection trends and aging of
receivables. Management also periodically evaluates individual customer’s
financial condition, credit history, and the current economic conditions to make
adjustments in the allowance when it is considered necessary. Account balances
are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote.
|
l
|
Inventories
|
The
Company values inventory at the lower of cost or market, using the first-in,
first-out or weighted average method, and regularly reviews the book value of
discontinued product lines and stock to determine if these items are properly
valued. If the market value of the product is less than cost, management will
write down the related inventory to its estimated net realizable value. The
management regularly evaluates the composition of its inventory to identify
slow-moving and obsolete inventories to determine if additional write-downs are
required. This valuation requires significant judgment from management as to the
salability of its inventory based on forecasted sales. It is particularly
difficult to judge the potential sales of new products. Should the forecasted
sales not materialize, it would have a significant impact on the Company’s
results of operations and the valuation of its inventory, resulting in a charge
to income in the period if such determination is made.
|
l
|
Plant
and equipment
|
Plant and
equipment are stated at cost less accumulated depreciation and accumulated
impairment losses, if any. Depreciation is calculated on the straight-line basis
over the following expected useful lives from the date on which they become
fully operational:
F-10
|
Depreciable
life
|
||
|
Leasehold
improvements
|
the
shorter of the useful life or the remaining lease term
|
|
|
Furniture
and fixtures
|
5
years
|
|
|
Office
equipment
|
5
years
|
|
|
Motor
vehicles
|
5
years
|
Expenditure
for repairs and maintenance is expensed as incurred. When assets have retired or
sold, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is recognized in the results of
operations.
|
l
|
Capital
leases
|
Leases
that transfer substantially all the rewards and risks of ownership to the
lessee, other than legal title, are accounted for as capital leases.
Substantially all of the risks or benefits of ownership are deemed to have been
transferred if any one of the four criteria is met: (i) transfer of ownership to
the lessee at the end of the lease term, (ii) the lease containing a bargain
purchase option, (iii) the lease term exceeding 75% of the estimated economic
life of the leased asset, (iv) the present value of the minimum lease payments
exceeding 90% of the fair value. At the inception of a capital lease, the
Company as the lessee records an asset and an obligation at an amount equal to
the present value of the minimum lease payments. The leased asset is amortized
over the shorter of the lease term or its estimated useful life if title does
not transfer to the Company, while the leased asset is depreciated in accordance
with the Company’s normal depreciation policy if the title is to eventually
transfer to the Company. The periodic rent payments made during the lease term
are allocated between a reduction in the obligation and interest element using
the effective interest method in accordance with APB Opinion No. 21, “Interest on Receivables and Payables”.
|
l
|
Impairment
of long-lived assets
|
The
Company accounts for impairment of plant and equipment and long-term loans
receivables in accordance with SFAS No. 144, “Accounting for Impairment or
disposal of Long-Lived Assets”, which requires the Company to evaluate a
long-lived asset for recoverability when there is event or circumstance that
indicates the carrying value of the asset may not be recoverable. An impairment
loss is recognized when the carrying amount of a long-lived asset or asset group
is not recoverable (when carrying amount exceeds the gross, undiscounted cash
flows from use and disposition) and is measured as the excess of the carrying
amount over the asset’s (or asset group’s) fair value.
|
l
|
Revenue
recognition
|
In
accordance with the SEC’s Staff Accounting Bulletin No. 104, “Revenue Recognition”, the
Company records revenue when services are received by the customers and realized
the amounts net of provisions for discounts, allowance and taxes which are
recognized at the time of services performed.
Sale of
products represents the sale of watches and electronic appliances at retail
outlets and through trading network. Sale of products is recognized when the
following four revenue criteria are met: persuasive evidence of an arrangement
exists, delivery has occurred, the selling price is fixed or determinable, and
collectability is reasonably assured. Revenue is recorded, net of sales discount
and actual returns at the time when the merchandise is sold to the customer.
Based on historical experience, management estimates that sales returns are
immaterial and has not made allowance for estimated sales
returns.
F-11