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Monday, October 03, 2005

FP Group (FPGR)

FP Group (website) makes the paper gift stuff you see at places like Hallmark card shops. They just landed a huge account with a large US cardmaker (I don't know if it's Hallmark or not).

Let's look at an unaudited financial statement certified by the CEO (who is in Hong Kong).
everything is US dollars

Balance sheet, August 31, 2005:
cash: $162K
AR trade: $1.6 million
AR other: $5.6K
AR related party: $702K
Inventories: $292K
total current assets: $2.75 million
PP&E: $989K, more than half depreciated
other assets: $8.9K
total assets: $3.75 million

note payable: $350K
capital lease oblig curr: $95K
AP: $965K
due related parties: $71K
total current liabilities: $1.48 million
noncurrent capital lease oblig: $716K
preferred stock 10 million authorized, none outstanding
common: 100 million authorized, 37 million outstanding
retained earnings: $1.1 million
total equity: $1.55 million

Income statement for 5 months ended Aug 31, 2005:
sales: $2.15 million (up slightly from year earlier)
gross margin: $689K
SG&A: $313K
operational income: $375K
net income: $355K
basic and diluted income per share: slightly less than 1 cent
all of this is slightly better than the year earlier
number of shares has been steady at exactly 37 million shares, although weighted average listed shows 40 million for some reason.

Cash flow for this 5 month period is bad. For other time periods, cash flow is not too far from earnings, but for the 5 months ending Aug 31, it's significantly negative (they list it only in HK dollars). Capex is about 2/3 of earnings.

Everything is depreciated over 5 years.
The statement looks kind of haphazzard.

Here's a 15c2-11 information statement:
Incorporated in Colorado
reverse merger on November 19, 2004
40.2 million shares issued, 3.2 million were offered on 12/16/04
14 shareholders
fiscal year ends March 31
no legal proceedings
SIC code matches their own business description (commercial printing)
no parents or subsidiaries or affiliates
650 employees, 400 full-time
4 major customers, loss of any 1 wouldn't be material (seems hard to believe)

2 properties: a small leased office in Kowloon ($19K/year), a manufacturing facility in Shenzhen ($128K/year). All are 60% utilized.

CEO: Wong Kai Tung (aka Leo Wong) controls most of the stock (24 million shares) via Sky Logistics Consultants Ltd (owned 90% by Wong)
CFO: Cho Chun Wai (Peter)
Director: Wong Kai Tung (Leo)
Director: Cho Chun Wai (Peter)
Director: Wong Kwok Biu, father of Leo
San Angelo Sunrise Investments (Dallas, TX), controlled by Mark Shelley owns 3.2 million shares

Leo Wong has a high school education and was a printing manager from 1997-2000
Wong Kwok Biu was also printing manager during the same time with a high school education

Cho Chun Wai was senior accountant for Linefan Technology Holsing Ltd 2002-2003
accountant for Ocean Grand Holdings 2000-2002
staff accountant for Gallium Electronics Ltd 1998-2000
1998 BA (Honors) HK Polytechnic U.
CPA 2002

David B. Stocker, Ltd
Lawyer in Phoenix, AZ.
rendered an opinion on the sale of stock (which is fairly limited, in real terms. no indpendent verification)
non-reporting company, obviously
sale followed Regulation D Rule 504 for limited sales to accredited investors of less than $1 million per year.

Unaudited financial statement
9 month results show earnings of 2.5 cents for 9 months ending Dec 31, 2004. 37 million weighted ave shares.
Cash flow from ops looks good with free cash flow matching earnings very closely.
Deprec offsets AR related party. AR other offsets AR. AP decrease is huge at $4.4 million. Increase due related parties is up $1.2 million.
Cash flow used in financing is mostly dividends ($5 million of $6.6 million). The dividend was paid in Sept 2004 before the reverse merger. Why?

The reverse merger required Johnstone Management Corporation to secure at least $500K of equity capital by Jan 31, 2005.

On Dec 16, 2003, 3.2 million shares issued for $249,600.

Jan 11, 2005: Added to the Pink Sheets

Feb 1, 2005: Chinese design firm created
Located in HK. FP owns 60% of it, the other owners are other design firms. One is JP & Associates (almost no info on JP). Initially 5 designers, increased to 15.

Feb 23, 2005: Q3 Results
Sales: $1.28 million (92% increase over prior year) some new customers, foreign importers
Gross margin: $344K (85% increase) roughly 28% margin
Net income: $230K (132% increase)

9 Month Results
Sales: $4.3 million (60% increase) primarily increased orders from existing customers
Gross margin: $1.2 million (58% increase)
Net income: $920K (140% increase)
net income per share: 2.5 cents

March 8, 2005: Partnership with Innotime
This is a clock manufacturer so FP can create a paper clock series (developed internally and proprietary).

May 16, 2005: Million Base acquisition should produce more growth in 2006, expect $800K of additional net income. FP issued an unspecified convertable note. Anything less than 26 million shares would be accretive, assuming they're correct about the $800K of additional net income.

May 23, 2005: New product launch
Paper music boxes. Target is 200K units in the first batch of orders.

May 24, 2005: significant growth in year ended March 31, 2005
Sales $5.7 million (from $4.1 million)
Gross margin $1.79 million (from $1.29 million)
Net income $1.1 million (from $786K)
basic and diluted earnings per share 3 cents (from 2 cents).
The increase was due to sales efforts expanding customer base and larger orders from existing customers. Targeting foreign importers.
This is all very good, with 40+% growth in revenue and income, but audited results are needed.

June 21, 2005: Acuiring a wooden box manufacturer
Entered into discussions with Jin Ye Wood Company, Shenzhen. Will take 12-18 months to finalize. Their goal is $50 million in revenue.

June 23, 2005: New production plant in Huizhou
Letter of intent. Planned for Q4. Will double capacity. The location is due to a major customer moving there. Should lower costs by 15%. Funded by working capital.

July 6, 2005: Expanded operations in China
FPGR opened an office in Guanghou for marketing/sales and sourcing/logistics. Three more offices planned in 18 months (Beijing, Shanghai, Ningbao). The goal is $30 million revenue. Reduced from June's $50 million for some reason.

July 12, 2005: Announces agreement with large US Greeting card company
FPGR will become "one of that company's contract manufacturers of greeting cards." Printing to be done in Shenzhen. Must pass a factory visit in early August by card company before moving forward. They expect $6 million revenues per year with 30% gross profits. Also discussing expanding to other paper products.

Some various links
Hong Kong business directory location doesn't match, but phone number does
Money Due and Owing court case of HK$598,808.03 (US$77K). FP was defendent against K.C. Ltd. This was as of Dec 2002.
An industry directory shows correct phone number
Some registry delisted Full Prosperity
Another directory listing
Someone did a credit report on Full Prosperity, address matches
...but then again, someone searched Fuk Yue Trading Company
Here's a paper clock made in the USA
Paper clock announcement
Good quality paper products provider FP GROUP LTD (FPG) announced that it will be presenting its new product line of paper clocks at a Clock and Watch Show sponsored by Million Base ('MB'), a Hong Kong based global sourcing and marketing company.

As previously announced FPG is in the process of acquiring a majority interest in MB. MB expects gross revenue in 2005 of approximately US$4,000,000 and net income of approximately US$800,000. This will significantly increase FPG consolidated revenue and net income.

FPG and MB expect that their line of paper clocks will be well received by those attending the show. The paper clock product is not only a time piece but can be used as gift boxes for small items such as jewelry and accessories. FPG's design staff works with customers to manufacture the clocks to fit special needs such as shape and size.

Comments and Conclusion
I don't know what to think about this company. The really big negative is the lack of audited results. The company is worth between 50 and 75 cents. Recent trades have been at 11 cents. To get into the company with any amount of money would probably have a cost basis of around 25 cents, maybe more. I'm not sure it's worth the risk.

UPDATE Oct 11, 2005: I've decided not to invest in FPGR because the combination of 1) CEO controls most of the stock, 2) the results are unaudited, 3) the $5 million dividend before raising a small amount of money going public, and especially 4) no response whatsoever to my questions from the company

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