Vantage Equities, Inc.

March 21, 2000 PSE CIRCULAR FOR BROKERS NO. 723-00 SUBJECT : Vantage Equities, Inc. Further to Circular for Brokers No. 712-2000 dated March 20, 2000 relative to Vantage Equities, Inc.'s ("V") Memorandum of Agreement with the information technology and internet consortium which paved way for its acquisition of WS Computer Publishing Corporation, Nexus Technologies, Inc., Jupiter Systems, Inc. and Wordtext System, Inc., attached are copies of the Audited Financial Statements of the above-mentioned companies for the year ended December 31, 1998. In view thereof, the suspension of trading of V shares is hereby lifted today, March 21, 2000. For your information. (SGD.) MARIA ISABEL T. GARCIA OIC, Listings and Disclosure Group REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS TO ACCOMPANY INCOME TAX RETURN JUPITER SYSTEMS, INCORPORATED Don Pablo Bldg., 114 Amorsolo St. Legaspi Village, Makati City I have examined the financial statements of JUPITER SYSTEMS, INCORPORATED as of December 31, 1998, on which I have rendered the attached report dated April 15, 1999. In compliance with Revenue Regulations V-20, I am stating the following: 1. The taxes paid or accrued by the above company for the year ended December 31, 1998 are shown in the Schedule of Taxes and Licenses attached to the income tax return. 2. I am not related by consanguinity or affinity to the president, manager or principal stockholders of the company. HTDcCE (SGD.) SUSAN ALPASAN-TAN CPA Cert. No. 41951 PTR No. 259853 January 13 1999 Quezon City April 15, 1999 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS THE BOARD OF DIRECTORS JUPITER SYSTEMS, INCORPORATED I have audited the accompanying balance sheet of JUPITER SYSTEMS, INC. as of December 31, 1998, and the related statements of income and retained earnings and cash flows for the year then ended- These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. The financial statements for the year ended December 31, 1997, which are presented for comparative purposes, were audited by other auditors whose report dated February 28, 1998 expressed an unqualified opinion on those statements. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit a1so includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provide a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of JUPITER SYSTEMS, INC as of December 31, 1998, and the results of its operations and cash flows for the year then ended in conformity with generally accepted accounting principles. (Signed by Susan Tan) PTR No. 259850 January 13, 1999 Quezon City April 15, 1999 JUPITER SYSTEMS, INCORPORATED BALANCE SHEETS DECEMBER 31 1998 1997 A S S E T S CURRENT ASSETS Cash and cash equivalents P1,474,789 P3,321,526 Receivables 791,520 1,704,347 Refundable income tax 376,699 307,498 Prepaid expenses 225,269 193,717 Deferred charges MCIT 55,690 - 2,927,967 5,527,088 OFFICE FURNITURE AND EQUIPMENT (Note 2) 2,916,923 3,697,043 OTHER ASSETS 56,000 85,544 P5,900,890 P9,309,675 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) CURRENT LIABILITIES Accounts payable and accrued expenses P4,120,878 P3,399,407 Loans payable 3,400,000 1,060,000 7,520,878 4,459,407 STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) Capital stock P10 par value Authorized 3,000,000 shares Fully paid 100,000 shares 1,000,000 1,000,000 Subscribed 880,392 shares (net of subscription receivable of P1,575,000) P7,228,920 7,228,920 Additional paid-up capital 303,412 303,412 8,532,332 8,532,332 Deficit (10,152,320) (3,682,064) (1,619.988) 4,850,268 P5,900,890 P9,309,675 ======== ======== See accompanying Notes to Financial Statements. JUPITER SYSTEMS, INCORPORATED STATEMENTS OF CASH FLOWS DECEMBER 31 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net loss (P6,470,256) (P4,121,68) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 1,549,133 1,092,61 Gain on sale of furniture and fixtures (9,840) - (Increase) decrease in assets Receivables 912,827 (1,222,85 Refundable income tax (69,201) (307,49 Prepaid expenses (31,552) 42,29 Deferred charges MCIT (59,690) - Other assets 29,544 - Increase (decrease) in liabilities Accounts payable and accrued expenses 721,471 (1,496,32 Loans payable 2,340,000 1,060,00 Cost of office equipment disposed - (45.99 Net cash used by operating activities (1,087,564) (4,999,45 CASH FLOWS USED BY INVESTING ACTIVITIES Additions to property and equipment (816,173) (1,573.32 CASH FLOWS FROM FINANCING ACTIVITIES Subscriptions to capital stock - 6,028,92 Additional paid-in capital - 196,08 Proceeds from sale of furniture and fixtures 57,000 - Net cash provided by financing activities 57,000 6,225,000 NET DECREASE IN CASH AND CASH EQUIVALENTS (1,846,737) (347,78 CASH AND CASH EQUIVALENTS, BEGINNING 3,321,526 3,669,307 CASH AND CASH EQUIVALENTS, END P1,474,789 P3,321,520 ======== ======== See accompanying Notes to Financial Statements. JUPITER SYSTEMS, INCORPORATED STATEMENTS OF INCOME AND DEFICIT INCOME Services P21,745,615 P16,676,928 Foreign exchange gain 710,624 629,102 Others 1,333,241 2,148,692 23,789,480 19,454,722 EXPENSES Salaries, bonuses and allowances 17,028,235 12,620,313 Rent and utilities 2, 851, 692 2,514,632 Employees' benefits 2,363,396 1,926,188 Representation and entertainment 2,276,058 2,195,438 Depreciation 1,549,133 1,092,611 Travel, transportation and delivery 814,209 1,102,115 Office supplies 650,073 382,573 Training and seminar 496,620 245,231 Repairs and maintenance 410,690 291,111 Commission 408,794 138,194 Interest and bank charges 348,767 223,473 Insurance 344,794 89,958 Professional fees 298,700 71,000 Taxes and licenses 163,077 183,359 Bad-debts 104,062 - Advertising and promotion 67,660 138,062 Distributor's fees - 49,688 Miscellaneous 83,776 312,464 30,259,736 23,576,410 NET LOSS 6,470,256 4,121,688 RETAINED EARNINGS (DEFICIT), BEGINNING (3,682,064) 439,624 DEFICIT END P10,152,320 P3,682,064 ========= ======== See accompanying Notes to Financial Statements. JUPITER SYSTEMS, INCORPORATED NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Cash Equivalents The Company considers all highly liquid debt instrument purchased with a maturity of three months or less from date of acquisition to be cash equivalents. Office Furniture and Equipment Office furniture and equipment are carried at cost less accumulated depreciation. Depreciation is computed on the straight-line method based on the estimated useful lives of the assets. aSECAD The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized. 2. OFFICE FURNITURE AND EQUIPMENT 1998 1997 Office equipment P5,732,965 P5,025,253 Computer software 1,422,490 1,422,490 Furniture and fixtures 1,151,734 1,148,188 Leasehold improvement 435,688 428,314 Audio visual equipment 218,692 210,232 General service equipment 418,157 385,349 9,379,726 8,619,826 Accumulated depreciation 6,462,803 4,922,783 P2,916,923 P3,697,043 ======== ======== 3. PENSION PLAN On July 29, 1994 the company entered into a contract with Philam Plans, Inc. (PPI) to set up a non-contributory pension plan covering certain employees. Under the plan, the Company shall make regular payments to PPI, for a period of 10 years. During the effectivity of the plan, the planholders shall- be entitled to the foIlowing benefits: a) Group creditable life insurance coverage b) Accidental death and dismembership benefit c) Total and permanent disability benefit The contracted lumpsum pension benef its shall be paid to the planholder/employee after 20 years of continuous service or upon the employee's reaching the age of 65. 4. REVISED COMPRENSIVE TAX REFORM PROGRAM (CTRP) On December 11, 1997, Republic Act (RA) No. 8424 entitled ''An Act Amending the National Internal Revenue Code, As Amended, and For Other Purposes," was passed into law effective January 1, 1998. Among others, the RA includes the following significant. revisions to the current rules of taxation: a. Change in the corporate income tax rate to 34% in 1998, 33% in 1999 and 32% in 2000 and onwards; b. Imposition of minimum corporate income tax of 2% of gross income, as defined; c. Introduction of a three-year net operating loss carryover. d. Imposition to the employer of final tax on the grossed up monetary value of fringe benefits granted to employees (except rank and file) at the following rates: 34% in 1998, 33% in 1999 and 32% in 2000 and onwards; e. Interest on local and foreign currency deposits and deposit substitute will be subject to 20% and 7.5% final tax respectively. DSHcTC f. Reduction of the interest expense allowed as deductible expense by an amount equivalent to a certain percentage of the interest income subjected to final tax as follows: 41% starting January 1, 1998, 39% starting January 1, 1999 and 38% starting January 1, 2000 and onwards. 5. RECLASSIFICATION OF ACCOUNT Certain accounts in 1997 were reclassified to conform with the 1998 financial statements presentation. NEXUS TECHNOLOGIES, INC. G/F Don Pablo Bldg., 114 Amorsolo Street Legaspi Village, Makati City FINANCIAL REPORTS December 31, 1998 and 1997 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors NEXUS TECHNOLOGIES, INC. G/F Don Pablo Bldg., 114 Amorsolo Street Legaspi Village, Makati City We have audited the accompanying balance sheets of NEXUS TECHNOLOGIES, INC., as of December 31, 1998 and 1997, and the related statements of income and cash flows for the years then ended. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above fairly, in all material respects, the financial position of NEXTUS TECHNOLOGIES, INC., as of December 31, 1998 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. (SGD.) ERNESTO A. BANARIA Board Cert. #16494 PTR No. 284778 January 20, 1999 Quezon City Exhibit B NEXUS TECHNOLOGIES, INC. STATEMENTS OF INCOME Years ended December 31, 1998 and 1997 1 9 9 8 1 9 9 7 NET SALES P493,618,380.15 P160,846,770.46 COST OF SALES Merchandise inventory, beginning P78,293,038.16 P20,000,844.34 Purchases 381,941,707.68 187,149,278.60 Merchandise inventory, end (19,279,680.86 78,293,038.16 Total (P440,955,064.98) (P128,857,084.78) GROSS PROFIT ON SALES P52,663,315.17 P31,989,685.68 OPERATING EXPENSES (Schedule 1) (48,710,069.52) (26,337,402.50) OPERATING INCOME P3,953,245.65 P5,652,283.18 OTHER INCOME (CHARGES) Miscellaneous income 767,868.75 37,960.00 Interest income 581,312.66 241,403.69 Gain (Loss) on foreign exchange 852,227.82 (4,140,801.14) INCOME BEFORE TAX P6,154,854.88 P1,790,845.63 Provision for income tax (Note 3) (2,011,768.00) (542,305.00) NET INCOME (To Exhibit A) P4,142,888.88 P1,248,540.63 (See accompanying notes to financial statements) Exhibit C NEXUS TECHNOLOGIES, INC. STATEMENT OF CASH FLOWS Year ended December 31, 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net Income P4,142,886.88 Adjustments to reconcile net income to net cash provided by operating activities Depreciation P3,699,672.02 Changes in operating assets and liabilities Decrease (increase) in: Accounts receivable net (25,489,340.27) Merchandise inventory 59,013,357.30 Advances to officers and employees 50,894.01 Other receivables (1,039,406.06) Creditable income tax (1,324,910.91) Creditable input tax 4,387,629,06 Miscellaneous deposits 520,281.46 Increase (decrease) in: Loans payable (2,748,324.16) Due to suppliers (8,633,055.88) Withholding tax payable 1,973,531.89 SSS and Pag-IBIGpremium payable (80,381.38) SSS and Pag-IBIGloan payable (31,079.61) Accrued expenses and other liabilities 444,523.06 Net cash provided by operating activities P33,845,714.49 CASH FLOWS FROM INVESTING ACTIVITIES Increase in investments (P20,857,089.11) Net increase in properties and equipments (2,045,200.37) Net cash used in investing activities P22,902,289.48 CASH FLOWS FROM FINANCING ACTIVITIES Additional paid-up capital P5,200,000.00 Payment of cash dividend (4,500,000.00) Net cash provided by financing activities P700,000.00 NET INCREASE IN CASH AND CASH EQUIVALENTS P11,643,425.01 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 2,797,250.18 CASH AND CASH EQUIVALENTS AT END OF THE YEAR P14,440,675.19 Schedule 1 NEXUS TECHNOLOGIES, INC. SCHEDULES OF OPERATING EXPENSES Years ended December 31, 1998 and 1997 1998 1997 Salaries, wages and allowances P10,664,955.50 P8,498,483.01 Sales incentives 10,461,912.69 2,130,791.53 Depreciation 3,699,672.02 2,209,861.81 Rent 3,585,991.12 2,253,692.00 Bonuses 3,464,211.39 1,082,389.72 Bank and interest charges 3,184,423.95 1,522,706.50 Advertising and promotion 3,016,902.16 2,427,910.48 Insurance 1,033,893.38 712,325.00 Training and seminar 922,108.37 151,482.24 Transportation and travel 914,357.55 546,611.45 Telephone, telegraph and cables 887,595.37 524,471.27 Taxes and licenses (Schedule 2) 881,670.16 641,644.67 Christmas giveaways 792,650.38 528,551.12 Representation and entertainment 633,570.66 177,235.14 SSS, medicare and EC and Pag-IBIG contributions 622,174.52 598,380.17 Servicing cost 533,784.20 243,185.32 Subscription and dues 533,632.67 204,517.59 Unused vacation leave 525,078.92 340,262.54 Repairs and maintenance 423,884.35 267,202.36 Office supplies 376,947.79 257,300.30 Computer system and supplies 372,439.19 249,750.00 Professional fees 312,910.00 181,280.00 Gas and oil 237,991.63 169,346.79 Office uniforms 186,550.00 152,750.00 Light and water 178,216.51 134,710.36 Company outing and conferences 91,211.25 65,824.55 Delivery and freight charges 72,287.45 54,280.26 Donations and contributions 18,945.46 8,272.73 Miscellaneous 80,100.88 183.59 TOTAL P48,710,069.52 P26,337,402.50 =========== =========== Schedule 2 NEXUS TECHNOLOGIES, INC SCHEDULE OF TAXES AND LICENSES Year ended December 31, 1998 Community tax P10,500.00 Municipal license 806,568.16 Documentary stamps 52,000.00 Car registration fee 11,602.00 Annual registration fee 1,000.00 T o t a l P881,670.16 ========== NEXUS TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1998 Note 1 Significant Accounting Policies Merchandise Inventory are stated at cost. Properties and Equipment cCTIaS Depreciation of fixed assets is computed on the straight-line method over the estimated useful lives of the various classes of assets. All expenditures for betterment and additions are capitalized to the property accounts. Expenditures in the nature of normal repairs are charged to operations as incurred. Note 2 Loan Payable This account represents unsecured loans from local bank with maturity ranging from 180 days to 360 days, at fluctuating interest rates ranging from 15.00 to 16.50% per annum. Note 3 Creditable income tax Creditable income tax payable for the year was computed as follows: Income before tax P6,154,654.88 Add: Reduced value of interest expense 297,923.00 Deficiency income tax 45,700.00 Less: Income already subjected to tax interest income 581,312.66 Taxable income P5,916,965.22 Tax rate 34% Provision for income tax P2,011,758.00 Deferred income tax - 1997 P1,992,672.42 Creditable income tax 3,336,678.91 5,329,351.33 Total P3,317,583.33 =========== Note 4 Cash Dividend Declaration As per Boad Resolution No. 015 Series of 1998, dated July 23, 1998, the Company declared P15.00 per share cash dividends out of the Corporate retained earnings as of December 31, 1997 as per audited financial statements to all stockholders of record as of December 31, 1997, amounting to P4,500,000.00 Note 5 Reclassification of Accounts Certain accounts in 1997 financial statements were reclassified to conform to 1998 financial statements presentation. STV WS Computer Publishing Corporation Report on examination of Financial Statements December 31, 1998 Independent Auditors' Report The Board of Directors and Stockholders WS Computer Publishing Corporation 5/F SEDCCI I Building Rada corner Legaspi Streets Legaspi Village, Makati City We have audited the accompanying balance sheet of WS Computer Publishing Corporation as of December 31, 1998, and the related statements of income and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion. LibLex The financial statements of WS Computer Publishing Corporation for the year ended December 31, 1997 were examined by another certified public accountant whose original report dated April 8, 1998, expressed an unqualified opinion. At the request of management and in consideration of the company's application for the increase in authorized capital stock, the financial statements for 1997 have been restated and the previous report of the other certified public accountant has been reissued on May 26, 1999 to reflect the application of the additional capital infused during 1997 to the subscription receivable as of December 31, 1996. These statements are presented herein for comparative purposes only. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of WS Computer Publishing Corporation as of December 31, 1998, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The Company's shares of stocks are owned by less than twenty (20) stockholders and are not traded in the stock exchanges or sold in over-the counter markets. Accordingly, the Company is not subject to the Securities and Exchange Commission's regulations governing the form and content of financial statements to be submitted to the Commission. SANTOS TARDECILLA VERDOLAGA & Co. TIN 049-004-482-043 By: (SGD.) VIRGILIO R. SANTOS PTR No. 0453993 January 8, 1999 City of Makati BALANCE SHEET DECEMBER 31, 1998 (with comparative figures for 1997) 1998 1997 ASSETS Current assets Cash P611,471 P634,311 Accounts receivable-trade (net of allowance for bad debts of P148.15M in 1998 19,810,789 20,468,387 Accounts receivable-others 759,057 1,043,216 Advances to affiliates [Note 6] 577,701 0 Prepayments [Note 2] 401,463 927,349 Total current assets 22,160,481 23,073,263 Property and equipment-net [Notes 1 and 3] 5,117,983 5,219,288 Other assets Investments [Notes 1 and 4] 2,552,611 1,921,657 Deposits 1,037,537 451,413 3,590,148 2,373,070 TOTAL ASSETS P30,868,612 P30,665,621 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses P4,884,534 P6,912,406 Advances from officers [Note 6] 3,810,170 1,542,800 Unearned subscription income 1,128,690 417,696 Unearned exhibition income 0 5,737 Total current liabilities 9,823,394 8,878,639 Loans payable [Note 5] 10,000,000 10,000,000 Stockholders' equity Capital Stock-P100 par value per share Authorized 100,000 shares P10,000,000 Subscribed 40,000 shares 4,000,000 4,000,000 Deposit for future subscription [Note 7] 6,000,000 6,000,000 Retained earnings 1,045,218 1,786,982 Total stockholders' equity 11,045,218 11,786,982 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY P30,868,612 P30,665,621 WS COMPUTER PUBLISHING CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 3. Property and equipment net This account consists of: 1998 1997 Office equipment P6,967,514 P5,640,578 Office furniture and fixtures 1,892,273 1,815,718 Delivery equipment 861,591 813,591 Leasehold improvements 250,089 171,011 9,971,467 8,440,898 Less accumulated depreciation 4,853,484 3,221,610 P5,117,983 P5,219,228 4. Investments This consists of: 1998 1997 Investments at Equity Acquisition cost WS Research Corporation (100%) P1,500,000 P1,500,000 WS Fiesta Online Corporation (40%) 840,000 0 2,340,000 1,500,000 Equity in net loss of subsidiaries (767,176) 0 Balance, end of year 1,572,824 1,500,000 Investments at Cost 979,787 421,657 Total P2,552,611 P1,921,657 5. Loans payable This represents non-interest bearing obligations from certain individuals, which are payable on demand. 6. Related party transactions In the ordinary course of business, the company has transactions with some officers and some affiliated companies for, among others, working capital requirements. 7. Deposit for future subscription The Board of Directors and Stockholders during their meeting on July 2, 1996 approved the issuance of shares of stock out of the unissued capital stock to the existing stockholders. The approval for the issuance of additional shares is still pending with the Securities and Exchange Commission. 8. Income Tax On January 1, 1998 R.A. 8424 entitled "An Act Amending the National Internal Revenue Code, As Amended, and For Other Purposes" became effective. The new tax laws provided, among others, the following significant revisions to the current taxation rules: a. Reduction of the income tax rate from 35% to 24% for 1998, 33% for 1999 and 32% for the year 2000 and onwards; b. Imposition of the minimum corporate income tax of 2% gross profit or 34% of net income whichever is higher beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its business operations; c. Imposition on the employer of a final tax on the grossed monetary value of fringe benefits granted to employees, except rank and file, at the following rates: 34% in 1998; 33% in 1999 and 32% in 2000 and onwards. d. Introduction of a three-year net operating loss carryover. e. Imposition of tax on cash and/or property dividends on cincome earned on or after January 1, 1998 at the following rates; 6% in 1998; 8% in 1999 and 10% in 2000 and onwards. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, subject to tax. f. Imposition of improperly accumulated earnings tax at 10%. 9. Provision for income tax The net income (loss) for the period was adjusted for certain unallowable expenses and nontaxable income for income tax purposes. Thus the Company has a provision for income tax for 1998 despite the net loss incurred during the year. 10. Reclassification of accounts Certain accounts in the 1997 financial statements were reclassified to conform with the current year's presentation. ATSIED WORDTEXT SYSTEMS, INC. Report on examination of Financial Statements December 31, 1998 Independent Auditors' Report The Board of Directors and Stockholders Wordtext Systems, Inc. Room 704 SEDCCO Building I Rada corner Legaspi Streets Legaspi Village, Makati City We have audited the accompanying balance sheet of Wordtext Systems, Inc. as of December 31, 1998, and the related statements of income and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provides a reasonable basis for our opinion. The financial statements of Wordtext Systems, Inc. for the year ended December 31, 1997 were examined by another certified public accountant whose report dated April 6, 1998, expressed an unqualified opinion. These statements are presented herein for comparative purposes only. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Wordtext Systems, Inc. as of December 31, 1998, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. In compliance with Revenue Regulations V-20, we are stating that no partner of our firm is related by consanguinity or affinity to the president, manager or principal stockholder of the Company. SANTOS TARDECILLA VERDOLAGA & Co. TIN 049-004-482-043 By: (SGD.) VIRGILIO R. SANTOS PTR No. 0453993 January 8, 1999 City of Makati BALANCE SHEET DECEMBER 31, 1998 (with comparative figures for 1997) 1998 1997 ASSETS Current assets Cash P3,093,389 P3,195,617 Accounts receivable [Note 2] 34,859,102 18,505,200 Inventories [Note 1] 48,931,368 36,790,552 Prepayments 320,804 110,824 Input tax 5,108,014 5,279,929 Total current assets 92,312,677 63,882,122 Property and equipment-net [Notes 1 and 3] 3,920,878 3,721,529 Other assets 1,140,584 596,878 TOTAL ASSETS P97,374,139 P68,200,529 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses P2,445,474 P23,292,066 Loans payable [Note 4] 28,500,000 18,500,000 Advances from officers [Note 5] 12,259,059 3,398,732 Dividends payable [Note 6] 3,000,000 0 Total current liabilities 56,204,533 45,190,798 Stockholders' equity Capital Stock-P100 par value per share Authorized 800,000 shares in 1998 and 200,000 shares in 1997 P80,000,000 [Note 7] Paid up capital 400,000 shares in 1998 and 100,000 share in 1997 40,000,000 10,000,000 Deposit for future subscription [Note 7] 0 16,000,000 Retained earnings 1,169,606 3,009,731 Total stockholders' equity 41,169,606 23,009,731 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY P97,374,139 P68,200,529 WORDTEXT SYSTEMS, INC. STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1998 (with comparative figures for 1997) 1998 1997 REVENUES Sales net [Note 1] P227,005,724 P166,158,392 Service income 931,196 774,241 227,936,920 166,932,633 COST OF GOODS SOLD 201,884,447 147,845,780 GROSS PROFIT 26,052,473 19,086,853 OPERATING EXPENSES 17,902,322 13,430,798 INCOME FROM OPERATIONS 8,150,151 5,656,055 OTHER INCOME (CHARGES) NET (6,429,324) (4,986,267) INCOME BEFORE INCOME TAX 1,720,827 669,788 PROVISION FOR INCOME TAX 560,952 209,681 NET INCOME 1,159,875 460,107 CASH DIVIDENDS [Note 6] (3,000,000) 0 RETAINED EARNINGS BEGINNING 3,009,731 2,549,624 RETAINED EARNINGS END P1,169,606 P3,009,731 WORDTEXT SYSTEMS, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 (with comparative figures for 1997) 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net income P1,159,875 P460,107 Adjustment to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,208,681 1,136,419 (Increase) decrease in operating assets Accounts receivable (16,353,902) 4,516,005 Inventories (12,140,816) 9,770,176 Prepayments (209,980) 451,301 Input tax 171,915 1,201,212 Increase (decrease) in operating liabilities Accounts payable and accrued expenses (20,846,592) 3,125,069 Dividends payable 3,000,000 0 Advances from officers 8,860,327 (2,817,884) Net cash provided by (used in) operating activities (35,150,492) 17,842,405 CASH FLOWS FROM INVESTING ACTIVITIES Disposal (acquisition) of property and equipment net (1,408,030) (2,747,745) (Increase) in other assets (543,706) (55,699) Net cash used for investing activities (1,951,736) (2,803,444) CASH FLOWS FROM FINANCING ACTIVITIES Additional paid in capital 20,000,000 0 Increase (decrease) in loans payable 20,000,000 (17,410,602) Cash dividends declared (3,000,000) 0 Net cash provided by (used in) financing activities 37,000,000 (17,410,602) NET DECREASE IN CASH (102,228) (2,371,641) CASH BALANCE BEGINNING 3,195,617 5,567,258 CASH BALANCE END P3,093,389 P3,195,617 WORDTEXT SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 1. Summary of significant accounting policies Inventories Inventories are valued at the lower of cost or market, cost being determined on the first-in, first-out method. Property and equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on the estimated useful lives of the related assets. Maintenance and repairs are charged to operations while major renewals and/or betterments which extend the estimated economic life of the assets are capitalized. Upon retirement or disposal of the asset, the cost and related accumulated depreciation are eliminated from the accounts and any gain or loss is reflected in the income for the period. Revenue recognition Sales are recognized upon passage of title to the buyer which generally coincides with delivery. Income tax In compliance with Accounting Standards Council (ASC) Statement No. 23, "Accounting for Income Taxes" the Company adopted the liability method of accounting for income taxes. Under ASC Statement No. 23, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial reporting bases of assets and liabilities and their related tax bases. Deferred tax assets and liabilities are measured using tax rates applicable to taxable income in the years in which those temporary differences are expected to be recovered or settled. 2. Accounts receivable This consists of: 1998 1997 Trade P34,122,544 P17,831,743 Others 736,558 673,457 P34,859,102 P18,505,200 ========== ========== 3. Property and equipment net 1998 1997 Transportation equipment P2,640,000 P7,267,750 Office equipment 1,520,730 1,257,535 Furniture and fixtures 759,606 784,882 Leasehold improvements 509,651 244,412 5,429,987 9,554,579 Less accumulated depreciation 1,509,109 5,833,050 P3,920,878 P3,721,522 4. Loans payable This account consists of: 1998 1997 Banks P36,500,000 P18,500,000 Individuals 2,000,000 0 P38,500,000 P18,500,000 The loans payable to banks principally consist of short-term loans bearing interest at rates ranging from 17.25% to 18.50% and are secured by way of chattel mortgage on various transportation equipment and continuing suretyship of the officers of the Company. The loans payable to individuals are non-interest bearing and are payable on demand. 5. Advances from officers Advances from officers represent non-interest bearing obligations which are payable on demand. 6. Cash dividends The Board of Directors, in its meeting on July 24, 1998, declared cash dividends of Three Million (P3,000,000) Pesos from its 1997 retained earnings to stockholders of record as of July 30, 1998 payable on or before December 31, 1998.