UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K/A Amendment No. 1 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(b) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ________________. Commission file number: 0-4041 HATHAWAY CORPORATION (Exact name of registrant as specified in its charter) Colorado 84-0518115 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 8228 Park Meadows Drive Littleton, Colorado 80124 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (303) 799-8200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value ------------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of September 9, 1999, the aggregate market value of voting stock held by non-affiliates of the Registrant, computed by reference to the average bid and asked prices of such stock approximated $6,368,000. ------------------------------ DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement dated September 23, 1999 are incorporated by reference in Part III of this Report. ------------------------------
HATHAWAY CORPORATION Part IV Item 14. Exhibits, financial Statement Schedules and Reports on Form 8-K. a) 2. Financial Statement Schedules In addition to the documents previously filed pursuant to this section, the financial statements for Beijing Hathaway Si Fang Protection and Control Equipment Co., Ltd. (Si Fang) for the years ended December 31, 1999, 1998 and 1997 prepared in accordance with "Accounting Standards for Enterprises" and "Accounting Regulations of the People's Republic of China for Enterprises with Foreign Investment" are included below. Si Fang uses Chinese Yuan Renminbi (RMB) as its reporting currency. For the five year period from January 1, 1995 through December 31, 1999 the exchange rate has been approximately 8.3RMB to $1USD (US Dollar). Reconciliations of Net Income and Equity per the financial statements to Net Income and Equity per Generally Accepted Accounting Principles in the United States are as follows: Si Fang Reconciliation of Net Income per Financial Statements to Net Income per Generally Accepted Accounting Principles in the United States (RMB, In thousands) For the year ended December 31, 1999 1998 1997 ----------------------------------------------------- Net income as shown in the financial statements 35,754 19,962 12,643 Adjustments to reported income: Provision for bad debts (6,800) (5,700) - Profit appropriations (2,787) (1,264) - Sales to subcontractors, net 1,651 (1,651) - ----------------------------------------------------- Total adjustments to reported income (7,936) (8,615) - ----------------------------------------------------- Net income according to generally accepted accounting principles in the United States 27,818 11,347 12,643 ===================================================== Si Fang Reconciliation of Equity per Financial Statements to Equity per Generally Accepted Accounting Principles in the United States (RMB, In thousands) As of the year ended December 31, 1999 1998 1997 ---------------------------------------------------- Equity as shown in the financial statements 88,847 38,537 22,840 Adjustments to undistributed profits: Provision for bad debts (6,800) (5,700) - Capital contribution received prior to updated business license for new capital - 870 - Sales to subcontractors, net 1,651 (1,651) - ---------------------------------------------------- Total adjustments to undistributed profits (5,149) (6,481) - ---------------------------------------------------- Equity according to generally accepted accounting principles in the United States 83,698 32,056 22,840 ==================================================== There are no material differences between cash flows reported in the financial statements and the cash flows that would be reported in a statement of cash flows prepared in accordance with generally accepted accounting principles in the United States. 2
[LETTERHEAD OF SHINE WING] Report of the Auditors (English translation-for reference only) TO THE BOARD OF DIRECTORS OF BEIJING HATHAWAY SI FANG PROTECTION AND CONTROL EQUIPMENT CO., LTD. We have audited the balance sheet of Beijing Hathaway Si Fang Protection And Control Equipment Co., Ltd. (the"Company") at 31 December 1999, its income statement and cash flows statement for the year then ended. These financial statements are the responsibility of the Company and our responsibility is to express an audit opinion on these statements. We conducted our audit in accordance with Standards for Independent Audits of PRC Certified Public Accountants. We have examined, on a test basis, the accounting records and supporting evidence, and have carried out such audit procedures as we considered necessary. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company at 31 December 1999, the results of its operations and cash flows for the year then ended, in conformity with Accounting Standards for Enterprises and Accounting Regulations of the People's Republic of China for Enterprises with Foreign Investment, and on a consistent basis. Shine Wing Certified Public Accountants Beijing China January 28, 2000 3
BEIJING HATHAWAY SI FANG ------------------------- PROTECTION AND CONTROL EQUIPMENT CO., LTD. ------------------------------------------ BALANCE SHEETS -------------- AS OF DECEMBER 31, 1999 AND 1998 -------------------------------- (Amounts expressed in Renminbi) ASSETS Notes 1999 1998 - ------ ----- --------------------- ------------------------- CURRENT ASSETS Cash 30,795,042 21,956,429 Accounts receivable, net 6 97,301,787 55,042,529 Inventories 7 74,773,525 54,275,542 Prepayments 14,252,368 12,583,250 Due from related parties - 41,528 Other current assets - 4,362,463 --------------------- ------------------------- Total Current Assets 217,122,722 148,261,741 CONSTRUCTION-IN-PROGRESS 17,587,106 2,032,887 FIXED ASSETS, net 8 15,468,803 11,475,125 OTHER ASSETS 6,655,939 1,014,424 --------------------- ------------------------- TOTAL ASSETS 256,834,570 162,784,177 ===================== ========================= LIABILITIES AND OWNERS' EQUITY - ------------------------------ CURRENT LIABILITIES Short-term bank loans 10 50,000,000 20,000,000 Accounts payable 80,677,521 10,518,647 Other payables 7,592,544 15,475,096 Taxes payable 1,957,730 4,097,288 Advances from customers 17,249,029 23,918,774 Accrued expenses 4,472,544 2,774,722 Dividends payable 2,847,500 2,250,000 Salary and welfare payable 3,190,370 5,404,896 Due to related companies - 37,794,359 Due to joint venture partners - 2,013,155 --------------------- ------------------------- Total Current Liabilities 167,987,238 124,246,937 --------------------- ------------------------- OWNERS' EQUITY Paid-in capital 10,870,000 6,005,529 Capital surplus 39,122,460 481,476 Statutory reserves 2,483,195 8,378,700 Retained earnings 36,371,677 23,671,535 --------------------- ------------------------- Total Owners' Equity 88,847,332 38,537,240 --------------------- ------------------------- TOTAL LIABILITIES AND OWNERS' EQUITY 256,834,570 162,784,177 ===================== ========================= The accompanying notes are an integral part of these financial statements. 4
BEIJING HATHAWAY SI FANG ------------------------- PROTECTION AND CONTROL EQUIPMENT CO., LTD. ------------------------------------------ STATEMENTS OF INCOME -------------------- FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 (Amounts expressed in Renminbi) 1999 1998 --------- ------------------------ ------------------------- Sales, net 271,909,576 142,471,643 Less: Cost of sales (216,835,732) (107,229,752) ------------------------ ------------------------- Gross margin 55,073,844 35,241,891 Less: Selling expenses (2,414,570) (1,920,640) General and administrative expenses (11,627,696) (10,890,253) Financial expenses (2,342,919) (1,390,419) Add: Other operating income, net 1,983,389 1,808,706 ------------------------ ------------------------- Operating income 40,672,048 22,849,285 Less: Non-operating expenses, net (34,574) (74,519) ------------------------ ------------------------- Income before taxation 40,637,474 22,774,766 Less: Income tax (4,883,337) (2,812,744) ------------------------ ------------------------- Net income 35,754,137 19,962,022 ======================== ========================= The accompanying notes are an integral part of these financial statements. 5
BEIJING HATHAWAY SI FANG ------------------------- PROTECTION AND CONTROL EQUIPMENT CO., LTD. ------------------------------------------ STATEMENT OF CASH FLOW ---------------------- FOR THE YEAR ENDED DECEMBER 31, 1999 (Amounts expressed in Renminbi) 1999 --------------------- 1. Cash Flows from Operating Activities: Cash received from sales of goods or rendering of services 136,300,136 Other cash received relating to operating activities 10,707,892 --------------------- Sub-total of cash inflows 147,008,028 --------------------- Cash paid for goods and services (120,215,564) Cash paid to and on behalf of employees (14,252,663) Value-added tax on purchases paid (10,927,839) Income tax paid (4,241,013) Taxes paid other than value-added tax and income tax (183,671) Other cash paid relating to operating activities (11,414,268) --------------------- Sub-total of cash outflows (161,235,018) --------------------- Net cash flows used in operating activities (14,226,990) --------------------- 2. Cash Flows from Investing Activities: Net cash received from disposal of fixed assets 39,432 --------------------- Sub-total of cash inflows 39,432 --------------------- Cash paid to acquire fixed assets (18,585,765) --------------------- Sub-total of cash outflows (18,585,765) --------------------- Net cash flows used in investing activities (18,546,333) --------------------- 3. Cash Flows from Financing Activities: Proceeds from borrowings 52,000,000 Proceeds from issuing shares 19,400,000 --------------------- Sub-total of cash inflows 71,400,000 --------------------- Cash payments of amounts borrowed (22,770,000) Cash payments for distribution of dividends (4,402,500) Cash payments of interest expenses (2,615,564) --------------------- Sub-total of cash outflows (29,788,064) --------------------- Net cash flows from financing activities 41,611,936 --------------------- 4. Net Increase in Cash 8,838,613 ===================== The accompanying notes are an integral part of these financial statements. 6
BEIJING HATHAWAY SI FANG ------------------------- PROTECTION AND CONTROL EQUIPMENT CO., LTD. ------------------------------------------ CASH FLOWS STATEMENT (CONTINUED) -------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1999 (Amounts expressed in Renminbi) 1999 -------------------------- Reconciliation of Net Income to Cash Flows from Operating Activities Net income 35,754,137 Add: Provision for bad debt 750,334 Depreciation of fixed assets 1,826,552 Losses on disposal of fixed assets 5,873 Financial expenses 2,342,919 Increase in inventories (20,497,982) Increase in operating receivables (50,383,329) Decrease in operating payables 15,974,506 -------------------------- Net cash flows used in operating activities (14,226,990) ========================== Net Increase in Cash Cash, end of the year 30,795,042 Less: Cash, beginning of the year 21,956,429 -------------------------- Net increase in cash 8,838,613 ========================== The accompanying notes are an integral part of these financial statements. 7
1 General Beijing Hathaway Si Fang Protection and Control Equipment Co.,Ltd (the "Company" ) is a Sino-foreign equity joint venture set up on April 8th, 1994. The registered capital is US$6,020,000.00 (amount to RMB 50,000,000). The equity interests of the investors are as follows: Joint Venture Partner Register % Amounts capital received Beijing Sifang Tongchuang Protection and control Equipment Co., Ltd. 11,050,000 22.1 11,050,000 Nanjing Electric Power Automation Equipment 10,050,000 20.1 10,050,000 General Factory Hathaway Corporation 10,000,000 20 10,000,000 XJ Group Corporation 7,375,000 14.75 7,375,000 China Huadian Power Equipment and 5,025,000 10.05 5,025,000 Engineering (Group) Corporation The State Electrified Netting Materials Co., Ltd. 4,000,000 8 4,000,000 Norva (S.E.A.) Private Limited 2,500,000 5 1,900,000 -------------------- ----------- ---------------------- 50,000,000 100 49,400,000 ==================== =========== ====================== As of December 31st, 1999, Norva (S.E.A.) Private Ltd., has not yet made part of its contribution amounting to RMB 600,000. The Company is located in Beijing, and commenced operation in July 1994. The Company is principally engaged in designing, manufacturing and sales of microprocessor-based relays, power substation automation systems and power system security and stability control systems. 2 Basis of Presentation The financial statements have been prepared in accordance with Accounting Standards for Enterprises and Accounting Regulations of the People's Republic of China for Enterprises with Foreign Investment, promulgated by the Ministry of Finance. The Company uses RMB as its reporting currency. 8
3 Principal Accounting Policies (a) Accounting period The accounting period of the Company is the calendar year. (b) Translation of foreign currencies Foreign currency transactions during the year are translated into RMB at the rates of exchange quoted by the People's Bank of China on the first day of the month in which the transactions occurred. Foreign currency monetary assets and liabilities are translated into RMB at the rates of exchange prevailing at the balance sheet date. Exchange differences arising are included in the operating results. (c) Cash equivalents Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (d) Fixed assets and depreciation Fixed assets purchased or constructed by the Company are stated at cost. Depreciation of fixed assets is calculated on the straight line basis over their expected useful lives, taking into account their estimated residual value of 10% of the original cost of the assets concerned. The useful lives are: Years Buildings 20 Machinery and equipment 5-8 Motor vehicles 6 Office equipment and furniture 5-10 (e) Construction in progress Construction in progress, comprising mainly of Si Fang building, is stated at cost. This includes costs directly related to the construction of such assets and refurbishment expenses, installation and testing costs. (f) Inventories Inventories, comprising mainly of raw materials, work-in-progress and semi- finished goods, are stated at cost, calculated on the first-in-first-out basis. The cost of raw materials includes all costs, transportation, loading and unloading and insurance, in bringing the raw materials to the present location and condition. In the case of work-in-progress and semi-finished goods, costs include the actual cost of direct material, labour and manufacturing expenses. (g) Provision for bad debts Bad debt provision is provided at 3%-5% of year-end accounts receivable balance. (h) Revenue recognition Revenue is recognised when goods are delivered or when projects are completed and installed and title of goods has been transferred to customers. 9
4 Principal Taxation (a) Income tax The Company accounts for corporate income tax using the Tax Payable method under the Accounting for Income Tax method. According to the Article No.7 of Income Tax Law of PRC for Enterprises with Foreign Investment and Foreign Enterprises (the "Income Tax Law") and "Official Reply from State Council on Issues Regarding the Coastal Cities' Policies for Beijing", the Company is entitled to Enterprise Income Tax ("EIT") at the rate of 24% since 1996. According to the Income Tax Law Article No.8, the Company is entitled to full exemption from EIT for 1996 and 1997, and 50% exemption from 1998 to 2000. Therefore, the applicable EIT rate for 1999 is 12%. According to Article No.4 of "Notice Concerning Preferential Tax Treatment on Local Income Tax for Enterprises with Foreign Investment and Foreign Enterprises" issued by the Beijing Local Administration of Taxation, the Company is entitled to full exemption from local income tax from 1996 to 2000, and 50% exemption from 2001 to 2005. (b) Value added tax The Company is subject to value added tax (VAT). The rate for domestic sales is 17%. Input VAT from purchases of raw materials can be netted off against output VAT from sales. VAT payable or receivable is the net difference between output VAT and input VAT. (c) Individual income tax Individual income tax is borne by the individual employees. The Company withholds individual income tax from employees for payment to the tax authorities. 5 Employees' Welfare and Social Insurance Reserve In accordance with the National and Beijing Municipal Regulations on labour administration, the Company should provide a certain percentage of the total salaries of the Chinese employees as welfare and social insurance reserve. The unpaid balance is recorded in accrued payroll. The rates of provision are as follows: Medical care 7.5% Pension fund 20% Education fund 1.5% Housing fund 10% 6 Accounts Receivable 1999 1998 Within 1 year 74,079,813.03 42,434,799.82 Over 1 year 26,231,308.32 14,866,729.61 --------------------- ------------------- Sub-total 100,311,121.35 57,301,529.43 --------------------- ------------------- Less: Provision for doubtful debts 3,009,333.64 2,259,000.00 --------------------- ------------------- Net accounts receivable 97,301,787.71 55,042,529.43 ===================== =================== 10
7 Inventories 1999 1998 Raw materials 11,003,086.20 6,794,368.83 Work-in-progress and semi-finished goods 63,770,438.70 47,481,173.59 Total 74,773,524.90 54,275,542.42 ================= ================= 8 Fixed Assets Machinery Buildings and Motor Vehicles Office Equipment Total Equipment & Furniture ================= ================== ==================== ======================= ====================== Cost or valuation At 1 Jan. 1999 5,420,755.82 2,898,774.43 2,381,380.20 3,552,062.82 14,252,973.27 Additions 3,298,613.00 239,288.30 316,956.40 2,137,962.36 5,992,820.06 Disposals 57,530.00 115,060.00 172,590.00 ----------------- ------------------ -------------------- ----------------------- ---------------------- At 31 Dec. 1999 8,719,368.82 3,138,062.73 2,640,806.60 5,574,965.18 20,073,203.33 ================= ================== ==================== ======================= ====================== Depreciation At 1 Jan. 1999 496,330.88 560,520.86 699,886.15 1,021,109.94 2,777,847.83 Charge for the year 431,800.50 351,190.37 387,653.17 691,325.55 1,861,969.59 Disposals 12,225.12 23,192.00 35,417.12 ----------------- ------------------ -------------------- ----------------------- ---------------------- At 31 Dec. 1999 928,131.38 911,711.23 1,075,314.20 1,689,243.49 4,604,400.30 ================= ================== ==================== ======================= ====================== Net book value At 31 Dec. 1999 7,791,237.44 2,226,351.50 1,565,492.40 3,885,721.69 15,468,803.03 ================= ================== ==================== ======================= ====================== At 31 Dec. 1998 4,924,424.94 2,338,253.57 1,681,494.05 2,530,952.88 11,475,125.44 ================= ================== ==================== ======================= ====================== 11
9 Construction in Progress Projects Process of project 1999 1998 Si Fang Building Construction stage 16,742,663.00 1,087,357.00 Others 844,443.00 945,530.30 ------------- ------------ Total: 17,587,106.00 2,032,887.30 ============= ============ 10 Short-term Loans 1999 1998 Bank loans 50,000,000.00 20,000,000.00 50,000,000.00 20,000,000.00 ============= ============= The annual interest rates of bank loans range from 5.85 % to 7.029 %. The bank loans at the end of the year are guaranteed by certain shareholders of the Company. 11 Taxes payable 1999 1998 VAT payable -578,626.56 3,134,401.38 Income tax payable 2,536,356.25 962,886.37 ------------- ------------ 1,957,729.69 4,097,287.75 ============= ============ 12
12 Profit Distribution and Movements on Reserves 12.1 Profit Distribution 1999 1998 Net Profit 35,754,137.40 19,962,021.79 Less: Provision for staff and worker's bonus and welfare fund, Reserve fund and 9,643,000.00 enterprise expansion fund of 1997 Provision for staff and worker's bonus 1,000,000.00 and welfare fund of 1998 Provision for reserve fund of 1998 2,000,000.00 Plus: Undistributed profit at the beginning of the year 20,443,539.89 16,352,512.71 Profit available for distribution 53,197,677.29 26,671,534.50 ------------- ------------- Less: The adjustments for opening balance 3,227,994.61 Transferred into capital 11,826,000.00 Dividends declared 5,000,000.00 3,000,000.00 ------------- ------------- Undistributed profit at the year end 36,371,677.29 20,443,539.89 ============= ============= The Board of Directors had not made a resolution for the 1999 profit appropriation at the date of the financial statements issued. According to the resolution of the Board of Directors on profit distribution of 1998 , the Company provided the amounts of RMB 2,000,000 and RMB 1,000,000 of reserve fund and staff and worker's bonus and welfare fund respectively, made dividends distribution of RMB 5,000,000 to shareholders, and transferred RMB 11,826,000 to paid-in-capital account. 13
12.2 Movement on Reserves Capital Reserve Fund Enterprise Undistributed Total Surplus Expansion Fund Profit Balance as at 1 January, 1999 481,476.12 1,735,249.00 9,871,445.61 20,443,539.89 32,531,710.62 Current year addition: Provision for reserve fund of 2,000,000.00 2,000,000.00 1998 Current year profit 35,754,137.40 35,754,137.40 Premium on capital contribution 110,983.98 110,983.98 Current year deduction: Transferred into paid-in-capital (1,314,474.50) (9,809,025.50) (11,826,000.00) (22,949,500.00) Dividends declared (5,000,000.00) (5,000,000.00) Provision for staff and worker's bonus and welfare fund and reserve fund for 1998 (3,000,000.00) (3,000,000.00) ---------------- ---------------- ---------------- --------------------- --------------- Balance as at 31 December, 1999 592,460.10 2,420,774.50 62,420.11 36,371,677.29 39,447,332.00 ================ ================ ================ ===================== =============== 13 Capital 1998 ADD LESS 1999 Beijing Sifang Protection and 4,500,000 3,652,500 8,152,500 --- control Equipment Co., Ltd. Beijing Sifang Tongchuang Protection and control Equipment 11,050,000 11,050,000 Co., Ltd. Nanjing Electric Power Automation 10,050,000 10,050,000 Equipment General Factory Hathaway Corporation 1,505,529 9,037,971 543,500 10,000,000 XJ Group Corporation 7,375,000 7,375,000 China Huadian Power Equipment and 5,025,000 5,025,000 Engineering (Group) Corporation The State Electrified Netting 4,000,000 4,000,000 Materials Co., Ltd. Norva (S.E.A.) Private Limited 1,900,000 1,900,000 ------------------- ----------------- ---------------- -------------------- 6,005,529 52,090,471 8,696,000 49,400,000 =================== ================= ================ ==================== 14
(a). The Company's original registered capital was US$700,000 (amount to RMB6,005,529.27). According to the Resolution of the Board in April 1998, the Company made a capital increase of RMB 4,864,470.73, which includes RMB 235,474.50 and RMB 3,584,025.50 transferred from reserve fund and enterprise expansion fund respectively, and a cash contribution of RMB 1,044,970.73. ( Beijing Sifang Protection and control Equipment Co., Ltd.: RMB 3,652,500, and Hathaway Corporation: RMB 1,211,971.) Equipment Co., Ltd. transferred all its share interest in the company, RMB 8,152,500( USD 975,000) to the following five companies: Beijing Sifang Tongchuang Protection and control Equipment Co.,Ltd.-- RMB 2,402,300(USD 287,300), The State Electrified Netting Materials Co., Ltd. -- RMB869,600(USD 104,000), Nanjing Electric Power Automation Equipment General Factory -- RMB 2,184,900(USD 261,300), XJ Group Corporation -- RMB1,603,300(USD191,750) and China Huadian Power Equipment and Engineering (Group) Corporation -- RMB 1,092,400(USD 130,650). According to the Resolution of the Board in June 1999 and October1999, Hathaway Corporation transferred 5% of its equity, RMB 543,500 (USD 65,000) to Norva (S.E.A.) Private Limited. (c). According to the Resolution of the Board in 1999, the Company made another capital increase of RMB 39,130,000, which includes RMB 1,079,000, RMB 6,225,000 and RMB 11,826,000 transferred from reserve fund, enterprise expansion and undistributed profit, and a cash contribution of RMB 20,000,000. (Nanjing Electric Power Automation Equipment General Factory: RMB 7,865,100, China Huadian Power Equipment and Engineering( Group ) Corporation: RMB 3,932,600, The State Electrified Netting Materials Co., Ltd. : RMB 3,130,400, Beijing Sifang Tongchuang Protection and control Equipment Co. Ltd.: RMB 8,647,700, XJ Group Corporation : RMB 5,771,700, Norva (S.E.A.) Private Limited: RMB 1,356,500, and Hathaway Corporation: RMB 7,826,000.) (d). After the above share transference and capital increases, the shareholding structures of the Company comes to current states shown as the above list. The total amount of increased capital are comprised of RMB 11,826,000, RMB 1,314,474.50 and RMB 9,809,025.50 transferred from undistributed profit, reserve fund and enterprise expansion fund respectively, and a cash contribution of RMB 20,444,970.73. The registered capital was verified by Beijing Ming Ze Cheng CPA firm. (e). As of December 31st, 1999, Norva (S.E.A.) Private Ltd., has not yet make part of its contribution amounting to RMB 600,000. 15
14 Related Party Transaction 14.1 Transactions The Company has the following significant outstanding related party balances and transactions. a) Sales Related Party Relationship Description Amount Amount 1999 1998 Nanjing Electric Power Shareholder Sales of integrated 58,455,698.96 29,747,531.96 Automation Equipment circuits General Factory XJ Group Corporation Shareholder Sales of integrated 28,357,984.35 31,705,555.97 circuits Beijing Sifang Tongchuang Shareholder Sales of integrated 16,951,495.73 Protection and control circuits Equipment Co. Ltd. Beijing Sifang Protection Previous shareholder Sales of integrated 4,723,150.83 and control Equipment Co., circuits Ltd. b) Materials in outside processing and purchases Related Party Relationship Description Amount Amount 1999 1998 Nanjing Electric Power Shareholder Subcontract manufacture 67,592,035.99 55,189,239.19 Automation Equipment General Factory XJ Group Corporation Shareholder Subcontract manufacture 49,101,878.39 28,867,900.00 Beijing Sifang Tongchuang Shareholder Subcontract manufacture 40,163,676.83 Protection and control Equipment Co. Ltd. Hathaway Corporation Shareholder Purchasing raw materials 124,282.16 (c) Payments of technology service fees Related Party Relationship Description Amount Amount 1999 1998 Nanjing Electric Power The Shareholder Pay technical service fee 1,834,347.09 2,730,640.00 Automation Equipment General Factory XJ Group Corporation The Shareholder Pay technical service fee 2,150,838.00 1,595,784.00 Sifang Tongchuang The Shareholder Pay technical service fee 1,725,878.31 Protection and control Equipment Co.,Ltd. Sifang Protection and Pay technical service fee 400,000.00 control Equipment Co.,Ltd. 16
14.2 Outstanding balance with related parties Description Related Party Amount Amount 1999 1998 Accounts receivable Nanjing Electric Power Automation 74,974.36 Equipment General Factory XJ Group Corporation 58,691.67 Beijing Sifang Tongchuang 11,567,190.39 Protection and control Equipment Co. Ltd Hathaway Corporation 29,430.70 Accounts payable Nanjing Electric Power Automation 25,366,277.11 18,722,869.16 Equipment General Factory XJ Group Corporation 28,885,400.58 17,771,489.43 Beijing Sifang Tongchuang 7,644,485.27 Protection and control Equipment Co. Ltd. Hathaway Corporation 558,736.24 17
BEIJING HATHAWAY SI FANG PROTECTION AND CONTROL EQUIPMENT CO., LTD. FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997 TOGETHER WITH AUDITORS' REPORT The reader is advised that this report has been prepared originally in Chinese. In the event of a conflict between this report and the original Chinese version or difference in interpretation between the versions of the report, the Chinese language report shall prevail. 18
AUDITORS' REPORT ---------------- To the Board of Directors of Beijing Hathaway Si Fang Protection and Control Equipment Co., Ltd.: Arthur Andersen . Hua Qiang Certified Public Accountants (hereinafter referred to as "We") have audited the accompanying balance sheets of Beijing Hathaway Si Fang Protection and Control Equipment Co., Ltd. (the "Company") as of December 31, 1998 and 1997, the statements of income and retained earnings for the years then ended, and the statement of cash flow for the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with "The Independent Auditing Guidelines for Certified Public Accountants" of the People's Republic of China (the "PRC"). Our audits included such tests of the accounting records and such other auditing procedures as we considered necessary under the circumstances. In our opinion, the financial statements referred to above comply with the requirements of "Accounting Standards for Business Enterprises" and "Accounting Regulations for Enterprises with Foreign Investment" of the PRC, and present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1997, the results of its operations for the years then ended, and the cash flows for the year ended December 31, 1998. The accounting policies adopted in these financial statements have been applied on a consistent basis. Arthur Andersen . Hua Qiang Certified Public Accountants Certified Public Accountants Beijing, People's Republic of China /s/ Wang Lijun -------------------------------- March 16, 1998 Wang Lijun /s/ Wang Wei -------------------------------- Wang Wei NOTICE TO READERS The accompanying financial statements are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than the PRC. 19
BEIJING HATHAWAY SI FANG ------------------------- PROTECTION AND CONTROL EQUIPMENT CO., LTD. ------------------------------------------ BALANCE SHEETS -------------- AS OF DECEMBER 31, 1998 AND 1997 -------------------------------- (Amounts expressed in Renminbi) ASSETS Notes 1998 1997 - ------ ----------- ------------------- ------------------- CURRENT ASSETS Cash 21,956,429.36 18,143,473.14 Accounts receivable, net 3 55,042,529.43 30,029,848.29 Inventories 4 54,275,542.42 13,071,368.46 Prepayments 12,583,249.32 4,929,661.97 Due from related parties 5 41,527.52 - Due from joint venture partners 6 - 3,644,805.25 Other current assets 4,362,462.59 1,703,251.71 --------------------- -------------------- Total Current Assets 148,261,740.64 71,522,408.82 CONSTRUCTION-IN-PROGRESS 2,032,887.30 - FIXED ASSETS, net 7 11,475,125.44 10,106,280.26 OTHER ASSETS Organization expense - 14,343.00 Long-term receivables 8 1,014,424.00 2,280,715.90 --------------------- -------------------- TOTAL ASSETS 162,784,177.38 83,923,747.98 ===================== ==================== LIABILITIES AND OWNERS' EQUITY - ------------------------------ CURRENT LIABILITIES Short-term bank loans 9 20,000,000.00 3,204,500.00 Accounts payable 10,518,647.50 1,975,911.36 Other payables 15,475,095.90 6,048,408.21 Taxes payable 4,097,287.75 15,480.40 Advances from customers 23,918,774.16 19,724,260.00 Accrued expenses 2,774,722.60 2,308,311.90 Dividends payable 2,250,000.00 317,500.00 Salary and welfare payable 10 5,404,896.43 2,250,954.16 Due to related companies 5 37,794,358.59 24,973,653.28 Due to joint venture partners 6 2,013,154.56 265,250.57 --------------------- -------------------- Total Current Liabilities 124,246,937.49 61,084,229.88 --------------------- -------------------- OWNERS' EQUITY Paid-in capital 1 6,005,529.27 6,005,529.27 Capital surplus 481,476.12 481,476.12 Statutory reserves 8,378,700.00 - Retained earnings 23,671,534.50 16,352,512.71 --------------------- -------------------- Total Owners' Equity 38,537,239.89 22,839,518.10 --------------------- -------------------- TOTAL LIABILITIES AND OWNERS' EQUITY 162,784,177.38 83,923,747.98 ===================== ==================== The accompanying notes are an integral part of these financial statements. 20
BEIJING HATHAWAY SI FANG ------------------------- PROTECTION AND CONTROL EQUIPMENT CO., LTD. ------------------------------------------ STATEMENTS OF INCOME AND RETAINED EARNINGS ------------------------------------------ FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 (Amounts expressed in Renminbi) Notes 1998 1997 ---------- ------------------- ------------------- Sales, net 5, 6 142,471,643.43 73,927,854.64 Less: Cost of sales 5, 6 (107,229,752.24) (55,429,016.97) ------------------- ------------------- Gross margin 35,241,891.19 18,498,837.67 Less: Selling expenses (1,920,640.72) (2,273,715.88) General and administrative expenses (10,890,252.94) (2,890,995.59) Financial expenses (1,390,419.04) (731,995.56) Add: Other operating income, net 1,808,706.18 47,118.24 ------------------- ------------------- Operating income 22,849,284.67 12,649,248.88 Less: Non-operating expenses, net (74,518.77) (6,230.78) ------------------- ------------------- Income before taxation 22,774,765.90 12,643,018.10 Less: Income tax 11 (2,812,744.11) - ------------------- ------------------- Net income 19,962,021.79 12,643,018.10 Add: Retained earnings, beginning of year 16,352,512.71 4,709,494.61 Less: Provisions for staff welfare and bonus fund, reserve fund and enterprise expansion fund (9,643,000.00) - Dividends (3,000,000.00) (1,000,000.00) ------------------- ------------------- Retained earnings, end of year 23,671,534.50 16,352,512.71 =================== =================== The accompanying notes are an integral part of these financial statements. 21
BEIJING HATHAWAY SI FANG ------------------------- PROTECTION AND CONTROL EQUIPMENT CO., LTD. ------------------------------------------ STATEMENT OF CASH FLOW ---------------------- FOR THE YEAR ENDED DECEMBER 31, 1998 (Amounts expressed in Renminbi) 1998 ------------------ (Note 12) 1. Cash Flows from Operating Activities: Cash received from sales of goods or rendering of services 131,630,647.71 Value-added tax on sales received 22,006,554.11 Other cash received relating to operating activities 243,246.14 Sub-total of cash inflows 153,880,447.96 ------------------ Cash paid for goods and services (120,530,681.21) Cash paid to and on behalf of employees (6,677,641.65) Value-added tax on purchases paid (19,434,925.05) Income tax paid (1,849,857.74) Taxes paid other than value-added tax and income tax (64,812.30) Other cash paid relating to operating activities (11,213,461.72) ------------------ Sub-total of cash outflows (159,771,379.67) Net cash flows used in operating activities (5,890,931.71) ------------------ 2. Cash Flows from Investing Activities: Net cash received from disposal of fixed assets 408,359.27 Sub-total of cash inflows 408,359.27 ------------------ Cash paid to acquire fixed assets (5,488,058.10) ------------------ Sub-total of cash outflows (5,488,058.10) ------------------ Net cash flows used in investing activities (5,079,698.83) ------------------ 3. Cash Flows from Financing Activities: Proceeds from borrowings 20,000,000.00 Other cash received relating to financing activities 141,600.00 Sub-total of cash inflows 20,141,600.00 ------------------ Cash payments of amounts borrowed (2,870,100.00) Cash payments for distribution of dividends (817,500.00) Cash payments of interest expenses (1,670,413.24) Sub-total of cash outflows (5,358,013.24) Net cash flows from financing activities 14,783,586.76 ------------------ 4. Net Increase in Cash 3,812,956.22 ================== The accompanying notes are an integral part of these financial statements. 22
BEIJING HATHAWAY SI FANG ------------------------- PROTECTION AND CONTROL EQUIPMENT CO., LTD. ------------------------------------------ CASH FLOWS STATEMENT (CONTINUED) -------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1998 (Amounts expressed in Renminbi) 1998 ------------------ (Note 12) Reconciliation of Net Income to Cash Flows from Operating Activities Net income 19,962,021.79 Add: Provision for bad debt 2,259,000.00 Depreciation of fixed assets 1,332,820.49 Amortization of intangible assets 14,343.00 Losses on disposal of fixed assets 32,991.86 Financial expenses 1,586,729.24 Increase in inventories (41,204,173.96) Increase in operating receivables (32,714,909.74) Decrease in operating payables 42,840,245.61 ------------------ Net cash flows used in operating activities (5,890,931.71) ================== Net Increase in Cash Cash, end of the year 21,956,429.36 Less: Cash, beginning of the year (18,143,473.14) ------------------ Net increase in cash 3,812,956.22 ================== The accompanying notes are an integral part of these financial statements. 23
BEIJING HATHAWAY SI FANG ------------------------- PROTECTION AND CONTROL EQUIPMENT CO., LTD. ------------------------------------------ NOTES TO FINANCIAL STATEMENTS ----------------------------- AS OF DECEMBER 31, 1998 AND 1997 -------------------------------- (Amounts expressed in Renminbi ("RMB") unless otherwise stated) 1 ORGANIZATION AND OPERATIONS --------------------------- Beijing Hathaway Si Fang Protection and Control Equipment Co., Ltd. (the "Company") was registered as a Sino-foreign equity joint venture on April 8, 1994 in Beijing by Beijing Si Fang Protection and Control Company ("Si Fang") and Hathaway Company Ltd. ("Hathaway"). The operating period of the Company is twenty years. The Company's operations commenced in July 1994. The Company is principally engaged in the designing, manufacturing and sales of microprocessor-based relays, power substation automation systems and power system security and stability control systems. The Company's original registered capital was US$ 700,000 and was fully contributed by the partners before December 1994. The original joint venture partners and their respective capital contributions are as follows: Joint Venture Percentage of Contribution RMB Partner Ownership US$ Equivalent ------------- ------------- ------------ ------------ Si Fang 75% 525,000 4,500,000.00 Hathaway 25% 175,000 1,505,529.27 ------------- ------------ ------------ 100% 700,000 6,005,529.27 ============= ============ ============ In accordance with an agreement between the State Electrified Netting Materials Co., Ltd. ("SENM") and the Company, and approved by the board of directors meeting on October 28, 1997, Si Fang will transfer 8% of its interest to SENM. The new capital structure of the Company will be as follows: Si Fang 67% Hathaway 25% SENM 8% -------- Total 100% ======== In addition, SENM has agreed to contribute additional capital to the Company and RMB870,000 was received in June 1997. Such amounts have been recorded as other payable in the accompanying financial statements. When the Company completes the necessary legal procedures to register an ownership change, including having its capital verified and obtaining an updated business license from the State Industrial and Commercial Administration Bureau, the contribution will be reflected as paid-in capital. 24
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ These financial statements are prepared in conformity with generally accepted accounting principles of the PRC, as set out is "Enterprise Accounting Standards" and "Accounting Regulations for Enterprise with Foreign Investments" of the PRC ("PRC GAAP"). Certain generally accepted accounting principles in other countries are not applicable in the PRC. Significant differences between PRC GAAP and generally accepted accounting principles in the United States include: . Provision for bad debts . Deferred tax (1) Foreign currency translation The Company maintains its books and records in RMB. Transactions in foreign currencies are translated into RMB at the exchange rates quoted by the People's Bank of China ("PBOC") on the dates of the transaction. At the end of each month, monetary assets and liabilities denominated in foreign currencies are translated into RMB at the prevailing exchange rates quoted by the PBOC. Any exchange gain or loss arising is included in the income statement. (2) Bad debt provision Bad debt is provided at 3% of accounts receivable balance as of year end. (3) Inventories Inventories are stated at the lower of cost, calculated on the first- in first-out basis, and net realizable value. Work-in-process and semi-finished goods include direct material, direct labor and the related overhead. (4) Fixed assets Fixed assets, which mainly comprise of buildings, plant, machinery and equipment, vehicles, and office furniture and equipment, are stated at cost less accumulated depreciation. Depreciation of fixed assets is provided using the straight-line method over the following estimated useful lives, taking into account an estimated residual value of 10% of cost. Buildings 20 years Plant, machinery and equipment 5-10 years Vehicles 6 years Office furniture and equipment 5-10 years 25
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ------------------------------------------------------ (5) Taxation Income tax ---------- The Company is subject to the Enterprise Income Tax ("EIT") on the basis of its taxable income calculated at the applicable rate in accordance with the Income Tax Law of the PRC for Enterprises with Foreign Investment and Foreign Enterprises (the "Income Tax Law"). Value-added tax ("VAT") ----------------------- Effective January 1, 1994, VAT is levied at 17% of domestic sales. An input credit is available whereby VAT previously paid on the purchase of raw materials can be used to offset against the VAT on sales to determine the net VAT payable. (6) Sales Sales represents the invoiced value of goods sold or project completed, net of VAT, sales discounts and sales returns, and is recognized when goods are delivered or when projects are completed and installed and title has been transferred to customers. 3. ACCOUNTS RECEIVABLE, net ------------------------ As of December 31, 1998 and 1997, accounts receivable balances consisted of: 1998 1997 -------------- -------------- Accounts receivable 57,301,529.43 30,029,848.29 Less: Bad debt provision (2,259,000.00) - -------------- -------------- Accounts receivable, net 55,042,529.43 30,029,848.29 ============== ============== As of December 31, 1998 and 1997, accounts receivable balances included receivable aged over one year amounting to RMB14,866,729.61 and RMB5,440,164.90, respectively. 26
4. INVENTORIES ----------- As of December 31, 1998 and 1997, inventories comprised of: 1998 1997 -------------- -------------- Raw materials 6,794,368.83 3,660,912.75 Work-in-process and semi-finished goods 47,481,173.59 9,376,560.66 Low-value items - 33,895.05 -------------- -------------- Total 54,275,542.42 13,071,368.46 ============== ============== 5. RELATED PARTY TRANSACTIONS -------------------------- Name of Related Party Relationship Nature of Major Transactions --------------------------- ------------------- ------------------------------- Beijing Power Machinery Investor of Si Fang Reimbursement of expenses Bureau Nanjing General Plant of Investor of Si Fang Subcontract manufacturing fees, Electric Automated commissions, and sales of Equipment integrated circuits Xuchang Relay Factory Investor of Si Fang Subcontract manufacturing fees, commissions, and sales of integrated circuits North China Electric Power Investor of Si Fang Short term financing University (Beijing) As of December 31, 1998 and 1997, balances with related parties were as follows: 1998 1997 ------------- ------------- Due from related parties ------------------------ Beijing Power Machinery Bureau 41,527.52 - ============= ============= Due to related parties ---------------------- Nanjing General Plant of Electric Automated Equipment 18,722,869.16 1,770,045.90 Xuchang Relays Factory 17,771,489.43 21,903,607.38 North China Electric Power University (Beijing) 1,300,000.00 1,300,000.00 ------------- ------------- Total 37,794,358.59 24,973,653.28 ============= ============= Balances with related parties are unsecured, non-interest bearing and have no fixed repayment date. 27
5. RELATED PARTY TRANSACTIONS (CONTINUED) -------------------------------------- Related party transactions during 1998 and 1997 were as follows: 1998 1997 ------------- ------------- Payments of subcontract manufacturing fee Nanjing General Plant of Electric Automated Equipment 55,189,239.19 19,287,767.57 Xuchang Relays Factory 28,867,900.00 31,473,744.30 ------------- ------------- Total 84,057,139.19 50,761,511.87 ============= ============= Payments of technology use fee Nanjing General Plant of Electric Automated Equipment 2,730,640.00 - Xuchang Relays Factory 1,595,784.00 - ------------- ------------- Total 4,326,424.00 - ============= ============= Sales Nanjing General Plant of Electric Automated Equipment 29,747,531.96 9,924,096.46 Xuchang Relays Factory 31,705,555.97 9,689,434.62 ------------- ------------- Total 61,453,087.93 19,613,531.08 ============= ============= 6. JOINT VENTURE PARTNER TRANSACTIONS ---------------------------------- Name of Joint Venture Partner Major Transaction Nature ----------------------------- -------------------------------------------------- Si fang Payments of subcontract manufacturing fee, microprocessor based protective relays, payments of office building rental, and sales of integrated circuit Hathaway Reimbursement of expenses As of December 31, 1998 and 1997, balances with joint venture partners were as follows: 1998 1997 ------------ ------------ Si fang 1,797,306.11 3,644,805.25 Hathaway 215,848.45 (265,250.57) ------------ ------------ Total net amount 2,013,154.56 3,379,554.68 ============ ============ Balances with joint venture partners are unsecured, non-interest bearing and have no fixed repayment date. 28
6. JOINT VENTURE PARTNER TRANSACTIONS (CONTINUED) ---------------------------------------------- Transactions with the joint venture partners during 1998 and 1997 were as follows: 1998 1997 ------------- ------------- Si Fang Payments of processing fee 5,106,695.00 669,988.97 Rental 500,000.00 500,000.00 Sales 2,586,100.00 952,061.67 7. FIXED ASSETS, net ----------------- As of December 31, 1998 and 1997, fixed assets comprised of: 1998 1997 ------------- ------------- Buildings 5,420,755.82 4,355,130.00 Plant, machinery and equipment 5,545,917.25 4,273,381.00 Vehicles 2,381,380.20 1,872,067.00 Office furniture and equipment 904,920.00 1,177,773.75 ------------- ------------- Total cost 14,252,973.27 11,678,351.75 Less: Accumulated depreciation (2,777,847.83) (1,572,071.49) ------------- ------------- Fixed assets, net 11,475,125.44 10,106,280.26 ============= ============= 8. LONG-TERM RECEIVABLES --------------------- Long-term receivables represented advances to managers or key employees of the Company. These advances are non-interest bearing and are unsecured. Part of the advances will be deducted from the employees' monthly salary over five years starting from 1998. The remaining amount will be offset against the Company's staff welfare and bonus fund. 9. SHORT-TERM BANK LOANS --------------------- As of December 31, 1998, the Company had RMB20,000,000 borrowings with the bank. The Company repaid one RMB10,000,000 loan with annual interest rate of 9.504% on March 10, 1999. The other RMB10,000,000 loan with annual interest rate of 7.623% is due on August 11, 1999. Such loan is guaranteed by Beijing Strong High-Tech Development Corporation. 29
10.EMPLOYEE BENEFITS ----------------- Pursuant to the regulations of the Beijing Labor Bureau, Beijing Finance Bureau and Beijing Housing Reform Commission, the Company is required to provide various employee benefits for its PRC employees, including medical care, employee education, welfare subsidies, unemployment insurance, postretirement benefits and housing fund, etc. The total provision is calculated at 54.5% of the employees' actual salaries. For the year ended December 31, 1998, the provision for employee benefits was RMB3,191,767.04 (1997: RMB1,269,339.00). 11.INCOME TAX ---------- According to the Income Tax Law Article No. 7 and "Official Reply from State Council on Issues Regarding the Coastal Cities' Policies for Beijing ", the Company is entitled to EIT at the rate of 24% since 1996. According to the Income Tax Law Article No. 8, the Company is entitled to full exemption from EIT for 1996 and 1997, and 50% exemption from 1998 to 2000. Therefore, the applicable EIT rate for 1998 is 12%. According to Article No. 4 of "Notice Concerning Preferential Tax Treatment on Local Income Tax for Enterprises with Foreign Investment and Foreign Enterprises" issued by the Beijing Local Administration of Taxation, the Company is entitled to full exemption from local income tax from 1996 to 2000, and 50% exemption from 2001 to 2005. 12.CASH FLOWS STATEMENT -------------------- The Company has presented a statement of cash flow for the year ended December 31, 1998 in accordance with the Accounting Standard for Business Enterprise -Cash Flows Statement. The Company has selected not to present comparative cash flow figures for 1997 as the above Standard does not require comparative statements and management has determined that the cost of preparation would not be justified. 13.COMPARATIVE FIGURES ------------------- Certain figures in the 1997 financial statements have been reclassified to conform to the current year presentation. 30
HATHAWAY CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HATHAWAY CORPORATION By /s/ Richard D. Smith ---------------------- Richard D. Smith President, Chief Executive Officer and Chief Financial Officer Date: June 30, 2000 31