Exhibit 99.1
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SHANGHAI COPYTELE ELECTRONICS CO., LTD.
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(Registered in the People's Republic of China)
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INDEX TO FINANCIAL STATEMENTS
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OCTOBER 31, 1999
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Page
Report of Independent Public Accountants F-1
Balance Sheets as of October 31, 1999 and 1998 F-2
Statements of Operations for each of the three years ended
October 31, 1999 F-3
Statements of Cash Flows for each of the three years
ended October 31, 1999 F-4 - F-5
Statements of Owners' Equity for each of the three years ended
October 31, 1999 F-6
Notes to Financial Statements F-7 - F-14
Information required by schedules called for under Regulation S-X is either not
applicable or is included in the financial statements or notes thereto.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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To the Investors of
Shanghai CopyTele Electronics Co., Ltd.
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We have audited the accompanying balance sheets of Shanghai CopyTele Electronics
Co., Ltd. (established in the People's Republic of China) as of October 31, 1999
and 1998, and the related statements of operations, cash flows and owners'
equity for each of the three years ended October 31, 1999. These financial
statements are the responsibility of the management of Shanghai CopyTele
Electronics Co., Ltd. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Shanghai CopyTele Electronics
Co., Ltd. as of October 31, 1999 and 1998, and the results of its operations,
cash flows and the changes in its owners' equity for each of the three years
ended October 31, 1999, in conformity with generally accepted accounting
principles in the United States of America.
The accompanying financial statements have been prepared assuming that Shanghai
CopyTele Electronics Co., Ltd. (the "Company") will continue as a going concern.
As discussed in Note 1 to the financial statements, the Company continues to
have negative working capital and is incurring losses from its operations that
raises substantial doubt about its ability to continue as a going concern. The
Company is taking action to improve its liquidity and believes that it has
sufficient resources to continue in operation. Nevertheless, as discussed in
Notes 3 and 8 to the financial statements, the Company remains heavily dependent
upon its principal customer and major shareholder, CopyTele, Inc., for future
sales and profitability. Inventories have been stated at cost in the financial
statements, on the assumption that gross margins on sales to CopyTele, Inc. will
improve. The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
Shanghai, PRC
November 24, 1999
F-2
Shanghai CopyTele Electronics Co., Ltd.
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BALANCE SHEETS
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AS OF OCTOBER 31, 1999 AND 1998
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(Amounts expressed in United States Dollars)
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Note October 31, 1999 October 31, 1998
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ASSETS
CURRENT ASSETS:
Cash on hand and at banks 17,793 51,760
Due from CopyTele, Inc. 8 861,611 661,592
Inventories 3 1,574,315 3,568,202
Other current assets 5,812 68,581
------------------- -------------------
Total current assets 2,459,531 4,350,135
PROPERTY, PLANT AND EQUIPMENT, net 4 1,641,066 1,812,310
LAND USE RIGHT, net 5 287,055 293,273
------------------- -------------------
TOTAL ASSETS 4,387,652 6,455,718
=================== ===================
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Short-term loans 6 1,080,268 999,316
Accounts payable 206,680 221,459
Due to CopyTele, Inc. 8 2,269,072 3,916,628
Other current liabilities 104,046 116,593
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Total current liabilities 3,660,066 5,253,996
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OWNERS' EQUITY
Paid-in capital 1 3,500,000 3,500,000
Accumulated deficit (2,772,414) (2,298,278)
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Total Owners' Equity 727,586 1,201,722
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TOTAL LIABILITIES AND OWNERS' EQUITY 4,387,652 6,455,718
=================== ===================
The accompanying notes are an integral part of these balance sheets.
F-3
Shanghai CopyTele Electronics Co., Ltd.
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STATEMENTS OF OPERATIONS
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FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
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(Amounts expressed in United States Dollars)
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For the years ended October 31,
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Note 1999 1998 1997
-------- ---------------- --------------- ----------------
SALES, net 8 - - -
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SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (399,782) (631,101) (594,375)
---------------- --------------- ----------------
Operating loss (399,782) (631,101) (594,375)
OTHER OPERATING INCOME (EXPENSES)
Interest expenses, net (76,115) (56,117) (19,870)
Foreign exchange (loss) gain, net 551 169 5,002
Others, net 1,210 1,196 (559)
---------------- --------------- ----------------
Loss before taxation (474,136) (685,853) (609,802)
TAXATION 7 - - -
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NET LOSS (474,136) (685,853) (609,802)
ACCUMULATED DEFICIT, beginning of year (2,298,278) (1,612,425) (1,002,623)
---------------- --------------- ----------------
ACCUMULATED DEFICIT, end of year (2,772,414) (2,298,278) (1,612,425)
================ =============== ================
The accompanying notes are an integral part of these statements.
F-4
Shanghai CopyTele Electronics Co., Ltd.
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STATEMENTS OF CASH FLOWS
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FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
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(Amounts expressed in United States Dollars)
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For the years ended October 31,
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1999 1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from sales of goods 460,113 1,111,118 455,375
Interest received 1,405 2,124 6,468
Interest paid (77,520) (58,241) (26,338)
Payment to suppliers, employees and others (498,917) (1,553,313) (809,641)
---------------- --------------- ----------------
Net cash used in operating activities (114,919) (498,312) (374,136)
---------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment for purchases of property, plant and
equipment - (85,122) (991,839)
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Net cash used in investing activities - (85,122) (991,839)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of short-term loans 80,952 499,304 500,012
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Net cash provided by financing activities 80,952 499,304 500,012
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Net Decrease in cash and cash equivalents (33,967) (84,130) (865,963)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 51,760 135,890 1,001,853
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CASH AND CASH EQUIVALENTS AT END OF YEAR 17,793 51,760 135,890
================ =============== ================
F-5
Shanghai CopyTele Electronics Co., Ltd.
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STATEMENTS OF CASH FLOWS (Continued)
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FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
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(Amounts expressed in United States Dollars)
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For the years ended October 31,
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1999 1998 1997
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RECONCILIATIONS OF NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
NET LOSS (474,136) (685,853) (609,802)
Depreciation and amortization 177,462 176,708 106,143
Interest income (1,405) (2,124) (6,468)
Interest expenses 77,520 58,241 26,338
Decrease (increase) in inventories 1,993,887 1,262,259 (4,830,407)
(Increase) decrease in due from CopyTele, Inc. and
other current assets (137,250) (698,185) 212,127
(Decrease) increase in accounts payable, due to
CopyTele, Inc. and other current liabilities (1,674,882) (553,241) 4,747,803
Interest received 1,405 2,124 6,468
Interest paid (77,520) (58,241) (26,338)
---------------- --------------- ----------------
Net cash used in operating activities (114,919) (498,312) (374,136)
================ =============== ================
The accompanying notes are an integral part of these statements.
F-6
Shanghai CopyTele Electronics Co., Ltd.
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STATEMENTS OF OWNERS' EQUITY
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FOR THE YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
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(Amounts expressed in United States Dollars)
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Accumulated
Paid-in capital deficit Total
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BALANCE, October 31, 1996 3,500,000 (1,002,623) 2,497,377
Net loss for the year - (609,802) (609,802)
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BALANCE, October 31, 1997 3,500,000 (1,612,425) 1,887,575
Net loss for the year - (685,853) (685,853)
---------------- --------------- ----------------
BALANCE, October 31, 1998 3,500,000 (2,298,278) 1,201,722
Net loss for the year - (474,136) (474,136)
---------------- --------------- ----------------
BALANCE, October 31, 1999 3,500,000 (2,772,414) 727,586
================ =============== ================
The accompanying notes are an integral part of these statements.
F-7
Shanghai CopyTele Electronics Co., Ltd.
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NOTES TO FINANCIAL STATEMENTS
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(Amounts expressed in United States Dollars ("USD") unless otherwise stated)
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1. ORGANIZATION AND PRINCIPAL ACTIVITIES
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Shanghai CopyTele Electronics Co., Ltd. (the "Company") is an equity joint
venture registered in the People's Republic of China ("PRC") on May 18, 1995
with an operating period of twenty years. The Company's scope of business
consists of the manufacture and sale of multifunctional telecommunications
products. The Company commenced its commercial production in February 1997.
The registered capital of the Company is USD 3.5 million. As of October 31,
1999, the joint venture partners and their respective capital contributions to
the Company are as follows:
Country of Percentage of Capital
-
Joint Venture Partner Incorporation Ownership Contributed
----------------------------------------- ------------------- ---------------- -----------------
USD
CopyTele, Inc. United States of 55% 1,925,000
America
Shanghai Electronic Components PRC 35% 1,225,000
Corporation
Shanghai International Trade and PRC 10% 350,000
Investment Developing Corp.
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Total 100% 3,500,000
================ =================
Shanghai Electronic Components Corporation has assigned a 30% interest to
Shanghai Instrumentation and Electronics Holding Group Company and a 5% interest
to Shanghai International Trade and Investment Developing Corp.
As of October 31, 1999, the Company had net current liabilities of approximately
USD 1,201,000, and was incurring losses from its operations. The current working
capital includes approximately USD 2,459,000 (inclusive of approximately USD
1,574,000 of inventories) of current assets and approximately USD 3,660,000
(inclusive of approximately USD 2,269,000 due to CopyTele, Inc.) of current
liabilities. The Company believes that these resources will be sufficient to
continue its operations, as presently conducted, after giving effect to
anticipated reductions in the Company's requirements for component purchases and
reductions in administrative and support personnel, if necessary.
F-8
The Company is seeking to improve its liquidity through the sale of products,
deferral of repayment of amounts due to CopyTele, Inc., and additional borrowing
of bank loans, although there can be no assurance that any of these plans can be
implemented at terms that will be favorable to the Company.
2. PRINCIPAL ACCOUNTING POLICIES
-----------------------------
The financial statements were prepared in accordance with generally accepted
accounting principles in United States of America ("US GAAP"). This basis of
accounting differs from that used in the statutory accounts prepared in
accordance with the accounting principles and the relevant financial regulations
applicable to joint venture enterprises as established by the Ministry of
Finance of China ("PRC GAAP").
The principal adjustments made to conform the statutory accounts of the Company
to US GAAP were:
o Charge the expenses and exchange loss incurred during the
pre-operating period, which were capitalized as non-current assets in
its statutory accounts, to the statements of operations.
o Write off the technical know-how contributed by CopyTele, Inc. as
paid-in capital, which was capitalized as intangible assets in its
statutory accounts, to the statements of operations.
The financial statements of the Company were prepared in conformity with US GAAP
as if those standards had been consistently applied throughout the years. The
following accounting policies were adopted in the preparation of these financial
statements:
(a) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand and time
deposits with banks and liquid investments with on original maturity
of three months or less.
(b) Inventories
Inventories are stated at the lower of cost, calculated using the
weighted-average method, and net realizable value.
(c) Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is provided using the straight-line method
over the estimated useful lives of the property, plant and equipment,
after taking into account an estimated residual value of 10% of cost.
The estimated useful lives are as follows:
F-9
Buildings 18 years
Machinery and equipment 10 years
Motor vehicles 5 years
Office equipment 5 years
(d) Land Use Right
Land use right is stated at cost less accumulated amortization.
Amortization of land use right is provided using the straight-line
method over 50 years
(e) Foreign Currency Translations and Balances
The Company maintains its books and accounting records in Renminbi
("RMB"), which is not a freely convertible currency. Transactions in
foreign currencies are translated into RMB at the exchange rates
prevailing at the date of transactions. Monetary assets and
liabilities denominated in foreign currencies at the balance sheet
date are translated into RMB at the exchange rates prevailing at that
date. Exchange differences are included in the determination of
income.
The management determines that USD is the Company's functional
currency. The accounts of the Company are translated into USD as if
the Company's books and records had been initially recorded in USD.
To accomplish that result, all non-monetary accounts are translated
at historical exchange rates between USD and RMB.
(f) Sales Recognition
Sales represent the invoiced value of goods, net of discounts,
returns and surtaxes. Sales are recognized upon passing of title to
customers.
(g) Taxation
The Company provides for Enterprise Income Tax ("EIT") on the basis
of its statutory profit for financial reporting purposes, adjusted
for income and expense items which are not assessable or deductible
for EIT purposes.
Other taxes are provided in accordance with the prevailing PRC tax regulations.
Deferred taxation is provided under the liability method whereby deferred
taxation is recognized for temporary differences using enacted tax rates in
effect in the years in which the differences are expected to reverse. Temporary
differences are the differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
F-10
(h) Use of estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
3. INVENTORIES
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1999 1998
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Raw materials 1,366,773 2,718,262
Work-in-process 173,187 681,982
Finished goods 34,355 167,958
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1,574,315 3,568,202
==================== ====================
As discussed in Note 8, the Company relies very heavily on CopyTele, Inc. for
its purchase of the Company's products. Therefore, the ultimate realizability of
the Company's inventories is dependent on future sale of products to CopyTele,
Inc.. During its fiscal years ended October 31, 1999, 1998 and 1997, the Company
incurred a gross loss of approximately USD 192,000, USD 189,000 and USD 225,000
respectively for its sales to CopyTele, Inc. Management has recorded the
Company's inventories as of October 31, 1999 at cost and a provision to state
inventories at their net realizable value has not been made on the basis that
sales prices are expected to improve. To date, shipments of the Company's
products have been limited. Accordingly, there can be no assurance that the
Company will not be required to reduce the selling price of its products below
their current carrying value to accomplish certain business strategies, which
would require a reduction of such carrying value.
4. PROPERTY, PLANT AND EQUIPMENT
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1999 1998
-------------------- --------------------
Buildings 908,101 908,101
Machinery and equipment 951,153 951,153
Motor vehicles 52,971 52,971
Office equipment 184,764 184,764
-------------------- --------------------
2,096,989 2,096,989
Less: Accumulated depreciation (455,923) (284,679)
-------------------- --------------------
Net 1,641,066 1,812,310
==================== ====================
F-11
As of October 31, 1999 and 1998, the Company's buildings with net book value of
approximately USD 772,000 and USD 815,000 respectively were used as mortgage of
short-term bank loans (Note 6).
5. LAND USE RIGHT
---------------
1999 1998
-------------------- --------------------
Cost 309,473 309,473
Accumulated amortization (22,418) (16,200)
-------------------- --------------------
Net 287,055 293,273
==================== ====================
All land in the PRC is owned by the state or is subject to collective ownership
and neither individuals nor legal entities may own land. The Company acquired
the right to use the land on which its factory is located for USD 309,473.
6. SHORT-TERM LOANS
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1999 1998
----------------------------------- -----------------------------------
Interest rate Interest rate
per annum Amount per annum Amount
---------------- ----------------- ----------------- ----------------
Bank loans 5.86%-7.13% 999,328 7.69%-8.64% 999,316
Loan from a joint
venture partner 5.86% 80,940 -
----------------- ----------------
1,080,268 999,316
================= ================
As of October 31, 1999 and 1998, bank loans were secured by the Company's
buildings (Note 4).
Based on the borrowing rates currently available to the Company, the carrying
amount of its short-term loans approximated its fair value.
7. TAXATION
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(a) Value-Added Tax ("VAT")
The Company is subject to VAT, which is charged on top of the selling price at a
general rate of 17%. An input credit is available whereby VAT previously paid on
purchases of semi-finished products or raw materials etc. can be used to offset
the VAT on sales to determine the net VAT payable.
As the Company was established after January 1, 1994, its exports are
"zero-rated" for VAT purpose. Accordingly, subject to the changes described
below, the Company charges no VAT on its exports and is entitled to claim a
refund for the input tax incurred in respect of these exports.
F-12
Pursuant to subsequent tax authority circulars, with effect from July 1, 1995,
the Company may no longer recover fully the input tax of its exports. An amount
equivalent to "17% minus the applicable refund rate" times the FOB value of the
exports will be noncreditable and nonrefundable. As the Company has a "bonded"
arrangement with the customs authority and enjoys duty-exemption on its imported
materials to be used for producing its exports, the amount of noncreditable and
nonrefundable input tax will be "17% minus the applicable refund rate" times
"the FOB value of the exports minus the (composite assessable) value of the
duty-exempt imported materials matching the exports". This noncreditable and
nonrefundable input tax shall be absorbed by the Company as part of the costs of
exports. The applicable refund rate is currently 17% (1998: 11%).
(b) Enterprise Income Tax ("EIT")
In accordance with the "Income Tax Law of the PRC for Enterprises with Foreign
Investment and Foreign Enterprises", the Company is entitled to full exemption
from EIT for the first three years and a 50% reduction for the next three years,
commencing from the first profitable year after offsetting all tax losses
carried forward from the previous years (at most five years).
The tax effects of temporary differences between financial and taxable income
that give rise to deferred tax assets are principally related to the following:
1999 1998
-------------------- --------------------
Net operating loss carryforward 702,835 500,218
Income tax basis in excess of financial basis of
- Pre-operating expenses 48,572 69,971
- Technical know-how 168,213 190,902
-------------------- --------------------
Total gross deferred tax assets 919,620 761,091
Less valuation allowance (919,620) (761,091)
-------------------- --------------------
Net deferred tax assets - -
==================== ====================
The valuation allowance refers to the portion of the deferred tax
assets that are not currently realizable. The realization of these
benefits depends upon the Company's income in future years.
F-13
8. RELATED PARTY TRANSACTIONS
---------------------------
The Company relies very heavily on CopyTele, Inc. for its purchase of the
Company's products, its supplies to the Company of raw materials and components
required for production. For the years ended October 31, 1999, 1998 and 1997,
sales to CopyTele, Inc. accounted for 100 per cent of the Company's net sales.
The Company purchases most of the required raw materials and imported components
through CopyTele, Inc. For the years ended October 31, 1999, 1998 and 1997,
purchase of materials and components through CopyTele, Inc. amounted to
approximately Nil, USD 168,000 and USD 4,480,000 respectively. Purchase returns
to CopyTele, Inc. during the year ended October 31, 1999 amounted to USD
1,467,000 (1998 and 1997: Nil)
The amounts due from/to CopyTele, Inc. arose mainly from the above transactions,
are interest-free and have no fixed repayment terms.
9. COMMITMENTS
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As of October 31, 1999, the Company had no material rental, capital or other
purchase commitments.
10. EMPLOYEES' PENSION PLAN
------------------------
The Company contributes annually to a government-sponsored pension scheme an
amount equivalent to 25.5% of the total basic salary of its employees. This
government-sponsored pension scheme will be responsible for payment of the
pension liabilities relating to the retirees of the Company. Pension cost, which
approximated USD 17,000, USD 37,000 and USD 18,000 for the years ended October
31, 1999, 1998 and 1997 respectively, has been accrued and funded on a current
basis.
F-14