UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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OR |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2005
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-22113
EURO TECH
HOLDINGS COMPANY LIMITED
(Exact name of Registrant as specified in its charter)
EURO TECH HOLDINGS COMPANY
LIMITED
(Translation of Registrant’s
name into English)
British Virgin Islands
(Jurisdiction of incorporation or organization)
18/F Gee Chang Hong Centre, 65
Wong Chuk Hong Road, Hong Kong
(Address of principal
executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
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Name of each exchange |
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Title of each class |
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on which registered |
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Not Applicable |
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
Ordinary Shares, $0.01 par value
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
(Title of Class)
Indicate the number of issued and outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
8,198,641 Ordinary Shares
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.
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Yes x |
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No o |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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Yes o |
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No x |
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
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Yes o |
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No x |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one).
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer x
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes o |
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No x |
Indicate by check mark which financial statement item the registrant has elected to follow.
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Item 17 o |
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Item 18 x |
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MATERIAL MODIFICATION TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
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ii
In this Form 20-F, reference to “us”, “we”, the “Company” and “Euro Tech” are to Euro Tech Holdings Company Limited and its subsidiaries unless otherwise expressly stated or the context otherwise requires.
This annual report contains forward looking statements. Additional written or oral forward looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission (the “Commission”) or otherwise. Such forward looking statements are within the meaning of that term in Section 21E of the Exchange Act of 1934. Such statements may include, but not be limited to, projections of revenues, income, or loss, capital expenditures, plans for future operations, financing needs or plans, and plans relating to products or services of the Company, as well as assumptions relating to the foregoing. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” and similar expressions identify forward looking statements, which speak only as of the date the statement was made. Forward looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward looking statements. Statements in this Annual Report, including those contained in the sections entitled Part I, Item 3D. “Risk Factors” and Item 5. “Operating and Financial Review and Prospects” and the notes to the Company’s Consolidated Financial Statements, describe factors, among others, that could contribute to or cause such differences.
iii
The following glossary of terms may be helpful in understanding the terminology used in this Annual Report.
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Anaerobic: |
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Treating waste water biologically in the absence of air. |
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Ambient Air: |
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Atmospheric air (outdoor as opposed to indoor air). |
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Atomic Spectrometer: |
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An analytical instrument used to measure the presence of an element in a substance by testing a sample which is aspirated into a flame and atomized. The amount of light absorbed or emitted is measured. The amount of energy absorbed or emitted is proportional to the concentration of the element in the sample. |
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Coalescer: |
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A process that coalesces smaller oil particles to form larger oil particles that can readily float to a tank’s surface. |
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Colorimeter: |
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An analytical instrument that measures substance concentration by color intensity when the substance reacts to a chemical reagent. |
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Flow Injection Analyzer: |
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An analytical instrument with a special sampling system that uses a continuous stream of reagent(s) into which fluid samples are injected. |
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Human Machine Interface |
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Software: |
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A type of software to interface (or coordinate) the interaction between machine or equipment and a human being. |
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Lamella: |
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Synthetic media installed in a clarifier tank to assist in particle flocculation (coming together in a “floc” or “flakes”) |
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pH Controller: |
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A process instrument that measures and controls the acidity or alkalinity of a fluid. |
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Reagent: |
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A chemical substance used to cause a chemical reaction and detect another substance. |
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Mass Spectrometer: |
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An analytical instrument that separates and identifies chemical constituents according to their mass-to-charge ratios and is used to identify organic compounds. |
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Multi-Channel Digital |
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Recorder: |
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A device that measures and records more than one input of a digitized signal (signal in the form of pulses). |
1
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Multi-Channel and Analogue |
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Recorder: |
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A device that measures and records more than one input of a signal in multi-voltage or milliamp ere (e.g. temperature in degrees Centigrade or degrees Fahrenheit). |
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Process Analyzer: |
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An analyzer that continuously samples, monitors and measures fluids or gases. |
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Process Feed: |
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Treating water that had been used industrially. |
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Process Turbidimeter: |
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An analytical instrument that continually measures the clarity of water based on light scattering or deflection. |
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Programmable Logic |
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Controller: |
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A device used to automate the monitoring and control of an industrial plant. |
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SCADA: |
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Supervisory Control and Data Acquisition. An industrial device used to monitor and control an industrial plant’s status and provide facilities to record the progress of a machine or project. |
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Sequential Event Recorder: |
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High-speed instrumentation that can record a sequence of events in chronological order in millisecond resolution. |
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Telemetry: |
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The science and technology of automatic measurement and transmission of data by wire, radio or other means from remote sources. |
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Total Organic Carbon |
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Analyzer: |
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An analytical instrument that measures organic contamination in water. |
2
Not applicable.
Not applicable.
SELECTED
FINANCIAL INFORMATION
(Amounts expressed in thousands, except
share and per share data and unless otherwise stated)
The selected consolidated income statement data for years ended December 31, 2005, 2004 and 2003, and the selected consolidated balance sheet data as of December 31, 2005 and 2004 set forth below are derived from audited consolidated financial statements of the Company included herein and should be read in conjunction with, and are qualified in their entirety by reference to such financial statements, including the notes thereto and Item 5. “Operating and Financial Review and Prospects.” The selected consolidated income statement data for the years ended December 31, 2002 and 2001 and the selected consolidated balance sheet data as of December 31, 2003, 2002 and 2001 set forth below are derived from audited consolidated financial statements of the Company which are not included herein.
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As of December 31, |
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2005 |
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2004 |
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2003 |
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2002 |
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2001 |
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US$ |
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US$ |
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US$ |
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US$ |
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US$ |
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Balance Sheet Data: |
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Cash and cash equivalents |
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5,362 |
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5,242 |
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2,752 |
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3,173 |
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3,551 |
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Working capital(1) |
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6,931 |
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5,457 |
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4,914 |
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4,363 |
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4,123 |
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Total assets |
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17,377 |
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15,699 |
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13,308 |
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12,716 |
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11,379 |
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Short-term debt(2) |
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0 |
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0 |
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0 |
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0 |
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90 |
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Net assets |
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9,754 |
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7,837 |
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7,243 |
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6,714 |
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6,206 |
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Capital Stock |
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74 |
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68 |
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45 |
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32 |
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32 |
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(1) Current assets minus current liabilities.
(2) Short-term debt includes short-term borrowings and current portion of long-term bank loans.
3
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For the Year Ended December 31, |
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2005 |
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2004 |
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2003 |
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2002 |
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2001 |
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US$ |
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US$ |
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US$ |
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US$ |
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US$ |
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Income Statement Data: |
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Revenue |
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31,250 |
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32,282 |
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27,442 |
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23,497 |
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19,685 |
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Cost of revenue |
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(24,681 |
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(27,033 |
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(22,805 |
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(18,735 |
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(15,396 |
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Gross profit |
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6,569 |
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5,249 |
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4,637 |
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4,762 |
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4,289 |
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Selling and Administrative Expenses |
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(5,418 |
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(4,801 |
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(4,108 |
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(4,173 |
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(3,734 |
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Operating income |
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1,151 |
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448 |
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529 |
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589 |
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555 |
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Interest Income |
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35 |
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17 |
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13 |
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18 |
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66 |
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Other income, net |
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172 |
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104 |
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6 |
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9 |
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126 |
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Income before taxes |
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1,358 |
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569 |
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548 |
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616 |
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747 |
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Income taxes |
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(328 |
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(167 |
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(108 |
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(123 |
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(163 |
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Share of equity in net income of affiliates |
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21 |
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192 |
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91 |
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7 |
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— |
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Minority Interest |
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(318 |
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— |
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— |
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— |
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— |
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Net income |
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733 |
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594 |
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531 |
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500 |
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584 |
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Net income per Ordinary Share |
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Basic |
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0.11 |
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0.09 |
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0.08 |
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0.08 |
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0.09 |
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Diluted |
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0.07 |
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0.06 |
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0.08 |
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0.08 |
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0.09 |
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Weighted Average Number of Ordinary Shares Outstanding |
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Basic |
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6,598,201 |
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6,434,667 |
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6,434,667 |
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6,434,667 |
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6,434,667 |
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Diluted |
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10,698,482 |
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10,034,687 |
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6,434,667 |
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6,434,667 |
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6,434,667 |
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The Company maintains its books and records in United States dollars (“US$”). Its subsidiaries, retail shops and affiliates maintain their books and records either in Hong Kong dollars or in Chinese Renminbi (“RMB”).
The Hong Kong dollar is freely convertible into other currencies (including the US dollar). Since 1983, the Hong Kong dollar has effectively been officially linked to the US dollar at the rate of approximately HK$7.80 = US$1.00. However, the market exchange rate of the Hong Kong dollar against the US dollar continues to be influenced by the forces of supply and demand in the
4
foreign exchange market. Exchange rates between the Hong Kong dollar and other currencies are influenced by the rate between the US dollar and the Hong Kong dollar.
Since 1994, the conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China, which are set daily based on the previous day’s interbank foreign exchange market rates. From 1994 through 2004, the official exchange rate for the conversion of Renminbi to U.S. dollars was generally been stable and maintained at the rate of approximately RMB8.30 = US$1.00. However, in 2005, the Renminbi appreciated and at the end of 2005, the exchange rate was approximately RMB8.0702 = US$1.00. The value of the Renminbi fluctuates and is subject to changes in PRC political and economic conditions.
The high, low and average exchange rate set forth below:
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Low |
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High |
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Average |
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The Following Months |
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US$ to RMB |
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July 2005 |
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8.1156 |
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8.2865 |
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8.2381 |
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August 2005 |
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8.1054 |
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8.1162 |
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8.1116 |
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September 2005 |
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8.0987 |
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8.1118 |
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8.1049 |
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October 2005 |
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8.0954 |
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8.1078 |
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8.1027 |
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November 2005 |
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8.0830 |
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8.1068 |
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8.0896 |
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December 2005 |
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8.0734 |
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8.0860 |
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8.0802 |
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US$ to HK$ |
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July 2005 |
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7.7650 |
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7.7820 |
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7.7749 |
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August 2005 |
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7.7692 |
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7.7720 |
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7.7718 |
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September 2005 |
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7.7538 |
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7.7722 |
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7.7626 |
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October 2005 |
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7.7447 |
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7.7595 |
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7.7557 |
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November 2005 |
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7.7513 |
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7.7577 |
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7.7547 |
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December 2005 |
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7.7529 |
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7.7561 |
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7.7543 |
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Not applicable.
Not applicable.
You should carefully consider all of the information set forth in this annual report and the following risk factors. The risks below are not the only ones we face. Additional risks not currently known by us or that we deem immaterial may also impair our business operations. Our business, financial condition or results of operations could be materially adversely effected by any of these risks. This annual report also contains forward looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward looking
5
statements as a result of certain factors, including the risks we face as described below and elsewhere. See “Forward Looking Statements.”
Certain Risks Relating to Doing Business in Hong Kong and the People’s Republic of China (the “PRC” or “China”).
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PRC Sovereignty Over |
· |
The Company’s executive and principal offices are located in Hong Kong, a Special Administrative Region of China (or “SAR”; Hong Kong is sometimes herein referred to as the “Hong Kong SAR”). |
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· |
As provided in the Sino-British Joint Declaration on the Question of Hong Kong (the ”Joint Declaration”) and the Basic Law of the Hong Kong SAR of China (the “Basic Law”), the Hong Kong SAR is provided a high degree of autonomy except in foreign and defense affairs. The PRC’s political system and policies are not practiced in Hong Kong. Under this principle of “one country, two systems”, Hong Kong maintains a legal system that is based on common law and is different from that of the PRC. |
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· |
The Company’s results of operations and financial condition may be influenced by the political situation in Hong Kong and by the general state of the Hong Kong economy. See “ — Economic Stability Uncertain.” |
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· |
There can be no assurance that these past or any prospective future changes in political, economic or commercial conditions in Hong Kong and the PRC will not result in a material adverse effect upon the Company. |
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Economic Stability Uncertain |
· |
Most economies in the Far East had suffered from large debts, declining company earnings and economic growth, and significant currency devaluation. Although the region, including the PRC, appears to have recovered, there can be no assurance that the recovery will continue. |
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The PRC’s Economic, Political and Social Conditions. |
· |
The PRC economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past twenty years, growth has been |
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6
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uneven, both geographically and among the various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by changes in tax regulations that are applicable to us. |
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· |
The PRC economy appears to be moving from a planned economy to a more market-oriented economy. Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in the PRC is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over the PRC’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. These actions, as well as future actions and policies of the PRC government, could materially affect our business and operations. |
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· |
The success of the Company’s activities in the PRC depends on the Company’s continued ability to overcome circumstances specifically effecting the industrial sector, including the relatively poor infrastructure, road transportation and communications network and an uncertain legal and regulatory environment |
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Economic Reforms May Not Continue or Impact Positively On The Company; Changing |
· |
Over the past several years, the PRC’s government has pursued economic reform policies including encouraging private economic activities and decentralization of economic deregulation. The PRC government may not continue to pursue these policies or may significantly alter them to our detriment from time to time without notice. |
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7
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Changes in policies by the PRC government resulting in changes in laws, regulations, or their interpretation, or the imposition of confiscatory taxes, restrictions on currency conversion and imports could materially and adversely effect our business and operating results. The nationalization or other expropriations of private enterprises by the PRC government could result in a loss of our investments in actual funds and time and effort, in China. |
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The Company’s results at times may also be adversely effected by: |
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changes in political, economic and social conditions in the PRC; |
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by changes in government policies such as changes in laws and regulations (or their interpretation); |
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the introduction of additional measures to control inflation; |
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changes in the rate or method of taxation; |
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imposition of additional restrictions on currency conversion remittances abroad; |
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reduction in tariff protection and other import restrictions; |
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We are subject to international |
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Doing business outside the United States subjects us to various risks, including changing economic and political conditions, exchange controls, currency fluctuations, armed conflicts and unexpected changes in United States and foreign laws relating to tariffs, trade restrictions, transportation regulations, foreign investments and taxation. We have no control over most of these risks and other unforeseeable risks and may be unable to anticipate changes in international economic and political conditions and, therefore, unable to alter our business practice in time to avoid the adverse effect of any of these changes. |
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From December 2002 to June 2003, the PRC and certain other countries experienced an outbreak of a new and highly contagious form of atypical pneumonia now known as severe acute respiratory syndrome, or SARS. On July 5, 2003, the World Health Organization declared that the |
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SARS outbreak had been contained. Since September 2003, however, a number of isolated new cases of SARS have been reported, most recently in central China in April 2004. During May and June of 2003, many businesses in the PRC were closed by the PRC government to prevent transmission of SARS. Recently, concerns have been raised with respect to the spread of avian flu in various regions in the PRC. Any recurrence of the SARS outbreak, outbreak of avian flu or the development of a similar health hazard in the PRC, may adversely affect our business and operating results. For instance, a recurrence of SARS, outbreak of avian flu or any other epidemic may reduce the level of economic activity in affected areas and, as a result, have a material and adverse effect on our business. In addition, health or other government regulations may require temporary closure of offices, or the offices of our suppliers and customers, which will severely disrupt our business operations and have a material adverse effect on our financial condition and results of operations. |
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Uneven Economic Growth |
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The PRC’s economy has experienced significant growth in recent years, but that growth has been uneven among various geographic regions and economic sectors. Economic reforms and growth in the PRC have been more successful in certain provinces than in others, and the continuation or increase of such disparities could adversely effect political or social stability. |
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PRC Inflation |
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In recent years, the PRC has not experienced significant inflation, and thus inflation has not had a significant effect on our business historically. In response to the increased inflation rate during 2004, the Chinese government announced measures to restrict lending and investment in the PRC in order to reduce inflationary pressure on the PRC’s economy; and the inflation rate reduced in 2005. If the PRC experiences increased inflation in future, the Chinese government may introduce further measures intended to reduce the inflation rate in the PRC. Any such measures adopted by the Chinese government may not be successful in reducing or slowing the increase in the PRC’s inflation rate. Sustained or |
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increased inflation in the PRC may have an adverse impact on the PRC’s economy and may materially and adversely affect our business and financial results. |
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Uncertain Legal System and Application of Laws |
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The legislative trend in the PRC over the past decade has been to enhance the protection afforded to foreign investment and allow for more active control by foreign parties of foreign invested enterprises. There can be no assurance that this will continue. In addition, as the PRC economy, business and commercial framework and legal system all continue to develop, that development may adversely effect the Company’s activities in the PRC or the ability of the Company to enter into Sino-foreign agreements. |
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PRC Legal System Business Laws Developing |
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The PRC does not yet possess a comprehensive body of business law or a consolidated body of laws governing foreign investment enterprises. As a result, the enforcement, interpretation and implementation of existing laws, regulations or agreements may be sporadic, inconsistent and subject to considerable discretion. The PRC’s judiciary has not had sufficient opportunity to gain experience in enforcing laws that exist, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. As the legal system develops, entities such as the Company may be adversely effected by new laws, changes to existing laws (or interpretations thereof) and preemption of provincial or local laws by national laws. Even when adequate law exists in the PRC, it may not be possible to obtain speedy and equitable enforcement of the law. |
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Government Currency Controls |
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The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of its currency, Renminbi (“RMB”) into foreign exchange and through restrictions on foreign imports. The conversion of RMB into Hong Kong and United States Dollars (“U.S. Dollars”) must be based on rates set by the People’s Bank of China (“PBOC”), which rates are set daily based on the previous day’s Chinese interbank foreign exchange market rate with reference to current exchange rates on the world financial markets. |
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Although the RMB to U.S. dollar exchange rate has generally been stable since January 1, 1994 and the PRC |
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government has stated its intention to intervene in the future to support the value of the RMB, there can be no assurance that exchange rates will not again become volatile or that the RMB will not devalue further against the U.S. dollar or Hong Kong dollar. Exchange rate fluctuations may adversely effect the Company because of foreign currency denominated liabilities, and may materially adversely effect the value, translated into U.S. dollars, of the Company’s net fixed assets situated and to be situated in the PRC, earnings and dividends. |
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Turbulent Relations with the |
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Differences between the United States and PRC governments on some political issues continue occasionally to color the relationship. These occasional controversies could materially and adversely effect our business and operations. Political or trade friction between the two countries could also materially and adversely effect the market price of our Ordinary Shares, whether or not they adversely effect our business. |
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Certain Risks Relating to Company’s Business. |
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We Have Made and May Make Further Acquisitions Without Your Approval |
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Although we endeavor to evaluate the risks inherent in any particular acquisition, there can be no assurance that we will properly or accurately ascertain all such risks. We will have virtually unrestricted flexibility in identifying and selecting prospective acquisition candidates and in deciding if they should be acquired for cash, equity or debt, and in what combination of cash, equity and/or debt. |
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In October of 2005, we completed our acquisition of 51% of the capital stock of two entities, making the two entities our majority owned subsidiaries. We will not seek stockholder approval for any additional acquisitions unless required by applicable law and regulations. Our stockholders will not have an opportunity to review financial and other information on acquisition candidates prior to consummation of any acquisitions under almost all circumstances. |
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Investors will be relying upon our management, upon whose judgment the investor must depend, with only limited information concerning management’s specific intentions. |
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There can be no assurance that the Company will locate and successfully complete such additional acquisition, or any acquisition will perform as anticipated, will not result in significant unexpected liabilities or will ever contribute significant revenues or profits to the Company or that the Company will not lose its entire investment in any acquisition candidate. |
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Dependence upon Management |
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The Company is dependent upon the services of its executive officers, in particular Mr. T.C. Leung, the Chairman of the Company’s Board of Directors and its Chief Executive Officer. The business of the Company could be adversely effected by the loss of services of, or a material reduction in the amount of time devoted to the Company by its executive officers. The Company does not maintain “Key Man” life insurance on the lives of any of its officers and directors. See Item 6. “Directors, Senior Management and Employees.” |
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Adverse Impact upon Company of PRC’s Credit Restrictions |
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The Company faces competition from other distributors of substantially similar products and manufacturers themselves, both foreign and Chinese. The Company faces its principal competition from foreign manufacturers and other distributors of their products situated in Hong Kong and the PRC. Competition may cause purchaser demands for price reductions and reduced profit margin. |
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Competition with Vendors |
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As the Company plans to assemble products of the kind that it presently distributes, the Company may directly compete with certain of its vendors. Any such direct competition may adversely effect its relationship with its vendors. See Item 4. “Information on the Company.” |
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Dependence on Vendors; |
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The Company distributes supplies manufactured by a number of vendors, including Hioki E.E. Corp. (“Hioki”), US Filter/Chemical Feed and Disinfection Group (“USF”) and Lachat Instruments, Inc. (“Lachat”), which are the |
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Company’s largest suppliers. The Company has only a letter from Hioki appointing the Company as Hioki’s sales representative in the PRC, Hong Kong and Macau. Although alternative sources of supply exist, there can be no assurance that the termination of the Company’s relationship with any of the above or other vendors would not have a short-term adverse effect on the Company’s operations due to the Company’s dependence on these vendors. |
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Risks Relating to the Company |
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T.C. Leung, the Company’s Chairman of the Board and Chief Executive Officer, as a practical matter, is able to nominate and cause the election of all the members of the Company’s Board of Directors, control the appointment of its officers and the day-to-day affairs and management of the Company. As a consequence, Mr. Leung can have the Company managed in a manner that would be in his own interests and not in the interests of the other shareholders of the Company. See Item 7. “Major Shareholders and Related Party Transactions” and Item 6. “Directors, Senior Management and Employees.” |
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Certain Legal Consequences British Virgin Islands; |
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Principles of British Virgin Islands (“BVI”) corporate law relating to such matters as the validity of the Company procedures, the fiduciary duties of management and the rights of the Company’s shareholders may differ from those that would apply if the Company were incorporated in a jurisdiction within the United States. |
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The rights of shareholders under British Virgin Islands law are not as extensive as the rights of shareholders under legislation or judicial precedent in many United States jurisdictions. Under United States law, majority and controlling shareholders generally have certain “fiduciary” responsibilities to the minority shareholders. United States shareholder action must be taken in good faith and actions by controlling shareholders in a United States jurisdiction and executive compensation which are obviously unreasonable may be declared null and void. |
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The BVI law protecting the interests of the minority shareholders is not as protective in all circumstances as the law protecting minority shareholders in United States jurisdictions. The shareholders of the Company may have more difficulty in protecting their interests in the face of actions by the Company’s Board of Directors, and may have more limited rights, than they might have as shareholders of a company incorporated in many United States jurisdictions. |
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Anti-takeover Provisions |
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The Company has 5,000,000 shares of “blank check preferred stock” authorized. The “blank check preferred stock” is intended to strengthen the Company’s ability to resist an unsolicited takeover bid and may be deemed to have an anti-takeover effect. The Board of Directors has the right to fix the rights, terms and preferences at the time of issue of “blank check preferred stock” without further action by our shareholders. |
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Uncertainty of |
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There is some uncertainty whether BVI courts would enforce judgments of the courts of the United States and of other foreign jurisdictions, or enforce actions brought in the BVI which are based upon the securities laws of the United States. A final monetary judgment obtained in the United States will be treated as a cause of action in itself by the BVI courts so that no retrial of the issues would be necessary, provided that material preconditions are met and the proceedings pursuant to which judgment was obtained were not contrary to the rules of natural justice. |
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All of the Company’s directors and executive officers reside outside of the United States, service of process upon the Company and such persons may be difficult to effect in the United States upon all such directors and officers. |
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All of the Company’s assets are and will be located outside of the United States, in Hong Kong and the PRC, and any judgment obtained in the United States may not be enforced in those jurisdictions. Hong Kong courts will not directly enforce against the Company or such persons judgments obtained in the United States. There is also substantial doubt as to the enforceability in the PRC of actions to enforce judgments of the United States’ courts arising out of or based on the ownership of the securities, including judgments arising out of or based on the civil liability provisions of |
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United States federal or state securities laws or otherwise. See “— Certain Legal Consequences of Incorporation in the British Virgin Islands; Rights of Shareholders not as Extensive as in U.S. Corporations.” |
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Being a Foreign Private |
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We are a foreign private issuer within the meaning of rules promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). As such, we are exempt from certain provisions applicable to United States public companies including: |
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System (“NASDAQ”) |
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the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; |
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the provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information; |
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the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction (i.e., a purchase and sale, or sale and purchase, of the issuer’s equity securities within less than six months); |
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Because of these exemptions, investors are not afforded the same protections or information generally available to investors holding shares in public companies organized in the United States. |
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Our Securities Must Continue |
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Our securities are quoted and traded on the NASDAQ SmallCap Market. There can be no assurance that we will continue to meet both the qualitative and quantitative criteria for continued quotation and trading of our securities on the NASDAQ SmallCap Market. That criteria, which undergoes periodic NASDAQ review. |
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If we are unable to meet the continued quotation criteria of the NASDAQ SmallCap Market and are suspended from trading on these markets, our securities could possibly be traded in the over-the-counter market and be quoted in the so-called “pink sheets” or, if then available, the OTC Bulletin Board. In such an event, an investor would likely find it more difficult to dispose of, or even obtain accurate quotations of, our securities. See “- We Are Also Required To Meet Certain, But Not All NASDAQ Corporate Governance Criteria.” |
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We Are Also Required To |
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Although, in the past, we have been able to satisfy NASDAQ’s SmallCap Market corporate governance criteria, those criteria are difficult to comply with and include, among other things: |
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a heightened degree of independence of members of the board of directors with independent directors to, among other things: hold regular meetings among themselves only; |
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establishment of a code of conduct addressing compliance with laws; and |
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a limit on payments to independent directors and their family members (other than for services on the board of directors). |
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These corporate governance requirements and a strict definition of “independent director” make it more difficult to find independent directors for our Board of Directors. There is intense competition for qualified independent directors, including those persons with accounting |
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experience and financial statement acumen to serve on audit committees. We believe that continued compliance with NASDAQ’s corporate governance requirements may be difficult and increase our costs and expenses as the costs of finding and compensating independent directors escalate and the costs of administering their new powers and responsibilities is an added financial burden. If we are unable to attract and keep a sufficient number of independent directors willing to take on the responsibilities imposed by such rules on what we believe to be commercially reasonable terms, our securities may be delisted from NASDAQ. (See “-Being a ‘Controlled Company’ Exempts Us From Certain Other NASDAQ Corporate Governance Criteria.”) |
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Being a “Controlled |
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As a result of T.C. Leung, the Company’s Chairman of the Board and Chief Executive Officer beneficially owning in excess of the majority voting power of our Ordinary Shares, we are a “controlled company” as that term is defined in NASDAQ’s rules and regulations. As a “controlled company”, we are not required to comply with certain NASDAQ corporate governance criteria, including, among other things, the requirements that the majority of our Board be independent directors, and their having the authority to approve director nominations and executive officer compensation. |
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We Are Not Subject To |
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Recent Federal legislation, including the Sarbanes-Oxley Act of 2002 (“SOX”), has resulted in the adoption of various corporate governance measures by securities exchanges and NASDAQ designed to promote the integrity of the corporate management and the securities markets. Being a “controlled company,” we will be exempt from many, but not all, of those requirements. Furthermore, the absence of such practices with respect to our Company may leave our shareholders without protections against interested director transactions, conflicts of interest and similar matters. |
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Pursuant to Section 404 of SOX, the SEC adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports, including Form 20-F. In addition, the independent registered public accounting firm auditing a company’s financial statements must also attest to and report on management’s assessment of the effectiveness of a company’s internal controls over financial reporting as well as the operating effectiveness of a company’s internal controls. We were not subject to these requirements for the fiscal year ended December 31, 2005. We are evaluating our internal control systems in order to allow our management to report on, and our independent auditors attest to, our internal controls, as a required part of our Annual Report on Form 20-F beginning with our report for the fiscal year to end December 31, 2007. |
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While we expect to expend significant resources in developing the necessary documentation and testing procedures required by SOX, there is a risk that we will not comply with all of these requirements. At present, there is no precedent available with which to measure compliance adequacy. Accordingly, there can be no assurance that we will receive a positive attestation from our independent auditors. |
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In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent auditors with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements, our ability to obtain equity or debt financing could suffer and the market price of our shares could decline. |
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The Market Price Of Our |
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During the past five years, the market price of our Ordinary Shares has been subject to wide fluctuations. Additionally, the Company knows of no reason for these wide fluctuations. See Item 9.A - “Markets.” |
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There Are Risks In |
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If our securities were to be suspended or delisted from the NASDAQ SmallCap Market, they could be subject to rules under the Securities Exchange Act of 1934 (“Exchange Act”) which impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established clients and “accredited investors” (for example, individuals with a net worth in excess of US$1,000,000 or an annual income exceeding US$200,000 or US$300,000 together with their spouses). For transactions covered by such rules, a broker-dealer must make a special suitability determination of the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. Consequently, such rules may affect the ability of broker-dealers to sell our securities and the ability to sell any of our securities in any secondary market that may develop for such securities. |
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The SEC has enacted rules that define a “penny stock” to be any equity security that has a price (as therein defined) of less than US$5.00 per share or an exercise price of less than US$5.00 per share, subject to certain exceptions, including securities listed on the NASDAQ SmallCap Market or on designated exchanges. For any transaction involving a penny stock, unless exempt, the rules require the delivery, prior to any transaction in a penny stock, of a disclosure statement prepared by the SEC relating to the penny stock market. Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading. In the event our securities are no longer listed on the NASDAQ SmallCap Market or are not otherwise exempt from the provisions of the SEC’s “penny stock” rules, such rules may also affect the ability of broker-dealers and investors to sell our securities. |
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There Is No Assurance Of A Continued Public Market For Our Securities |
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There can be no assurance that a trading market for our Ordinary Shares will continue. |
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Item 4A. History and Development of the Company
The Company was organized under the laws of the British Virgin Islands on September 30, 1996 for the purposes of raising capital and for acquiring all the outstanding capital stock of Euro Tech (Far East) Limited, a Hong Kong corporation (“Far East”). The Company successfully completed a public offering (“Public Offering”) receiving net proceeds of approximately US$1,817,000, in March 1997. Contemporaneously, the Company acquired all the issued and outstanding capital stock of Far East and it became a wholly-owned subsidiary and the primary operational entity of the Company. Far East was established in 1971 and has been in continuous operation since that time. See Item 5. “Operating and Financial Review and Prospects.” Far East engages in its core business of distributing various equipment, instruments and supplies used in connection with the treatment, analysis and testing of water and wastewater.
Far East was established in 1971 under the name of Eurotherm (Far East) Limited, to market and distribute its ex-parent’s industrial control equipment in Hong Kong and Southeast Asia, and expanded its activities into the PRC in 1973. In the early 1980’s, Far East began distributing high-tech equipment manufactured in the United States, Europe and Japan within the PRC, in addition to its distribution of its parent’s products. In 1988, the activities of the parent and Far East were separated into Eurotherm International and Far East. In or around 1994, all the capital stock of Far East was purchased by its management, principally T.C. Leung, the Company’s Chairman of the Board of Directors and Chief Executive Officer. See Item 7. “Major Shareholders and Related Party Transactions.”
During Fiscal 2005, we completed our plan to increase our equity position in Yixing Pact Environmental Technology Company Limited (“Yixing”) and Pact Asia Pacific Limited (“Pact”). We had previously owned thirty (30%) percent of their capital stock. With the addition of twenty-one (21%) percent of Pact’s and Yixing’s capital stock in October 2005, they became our majority-owned subsidiaries.
The Company is engaged in three different major activities:
(1) Trading.
The Company is primarily a distributor of a wide range of advanced water treatment equipment (including chlorination equipment), laboratory instruments, analyzers, test kits and related supplies and power generation equipment (including recorders and power quality analyzers).
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The Company acts as an exclusive and non-exclusive distributor for well-known manufacturers of such equipment, primarily to commercial customers and governmental agencies or instrumentalities in Hong Kong and the PRC. During its fiscal year ended December 31, 2005 (“Fiscal 2005”) the Company distributed products to in excess of 1,000 customers, including the Hong Kong Environmental Protection Department, China Light & Power Co., Ltd., Hong Kong Electric Co., Ltd., the Kowloon-Canton Railway Corporation, China’s National Environmental Protection Agency, Harbin Water, Harbin Environmental Monitoring Center, Inbev Group, Beijing Huai Rou and Shunyi District CDC, Liaoning Jinzhou Wastewater Treatment Plant and to subdistributors located in Hong Kong, the PRC and Macau. These products are manufactured by a substantial number of major American, European and Japanese corporations, including Hioki, USF and Lachat, which are the Company’s largest suppliers, with purchases from them accounting for approximately 15%, 4% and 7%, respectively, of the Company’s Fiscal 2004 sales and approximately 29%, 8% and 6%, respectively, of the Company’s sales during Fiscal 2005.
The Company distributes products through its Hong Kong headquarters, its representative offices located in Beijing, Shanghai, Guangzhou, Chongqing, Xi´An, Shenyang, Wuhan and Fuzhou, and through non-exclusive arrangements with independent sub-distributors located in Hong Kong, the PRC and Macau.
The Company believes that the continuing growth of industrial activity in particular and overall business activity in general, in the PRC over the last five years has produced a strong and increasing demand for its products in the PRC. The Company further believes that in the near future the need and demand for the products it distributes will grow as a result of increased regulations governing the environment and industrial pollution output, projected growing demands of the PRC’s population for clean water and a healthier and safer environment, the potential for the contamination or depletion of existing clean fresh water sources and the burgeoning demand for power in the PRC.
(2) Manufacturing.
The Company believes that by assembling the products it distributes, it may realize increased gross profit margins and greater revenues and net income than if it remained only a distributor of such products with sales of the Company first product offering, an Infrared Photometric Oil Analyzer, commencing in 2003. Similarly, the Company believes that by expanding its regional sales efforts in the PRC, it may realize higher revenues and net income.
(3) Engineering.
In January 2002, we acquired a 30% equity interest in Pact and Yixing. Pact and Yixing were privately owned engineering firms situated in Shanghai specializing in the design, manufacture and operation of water and wastewater treatment plant in several industries situated in China, Pact and Yixing, through associates and business alliances, also conduct similar operations in the Middle East.
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In October 2005, we, through our subsidiary Euro Tech (Far East) Limited (“Far East”) purchased approximately 21% of the issued and outstanding shares of Pact and Yixing for approximately US$1,000,000 from Tamworth Industrial Limited (“Tamworth”).
Also, during Fiscal 2005, our Special Products and Engineering Department continued to take on engineering projects in the wastewater treatment for power generation industries. This department is currently working on a project to treat 40,000 cubic meters of wastewater per day for a power plant in Inner Mongolia.
Expansion Plans for the Near Term
Acid rain and sulphur dioxide emissions are serious problems in China, we are planning to expand our activities in the air pollution control business by investing or acquiring some interest in companies involved in (i) the dust removal and/or (ii) the flue gas desulphurization for power plant industries and other similar industries.
We have engaged a business consultant to assist in this search, and are in discussions with several companies engaged in manufacturing these products and equipment and in engineering companies which design and build pollution control systems. We anticipate that the costs of any such acquisition would be drawn from our general working capital and, possibly, by private sales of our securities including the potential exercise by officers and directors of their options. We have no commitments or indications of interest for the private sales of our securities and only a few persons have exercised their options to date.
As revenue and income from trading activities are declining gradually due to a greater number of our significant suppliers apparently plan to market and sell their products into the China market through other distributors as well as the Company. Many of these other distributors are local Chinese companies and can operate with a lower overhead.
Our plans for the near term, include, but are not limited to the following:
· Continued use of our retail shops to sell “low-tech” products such as those manufactured by Hioki and our own products. We believe that these shops are operating with a lower overhead than the rest of the Company.
· We believe that the continued “low-tech” product sales through our retail shops coupled with our “on-line” product sales will allow us to continue to offer products at lower prices than our competitors.
Having “low-tech” products offered through our retail shops and the availability of “on-line” product offering are anticipated to allow our sales force to focus on “high-tech” and other products requiring personal or telephone contact directly with customers and potential customers.
Our plan to establish our own calibration laboratory in Hong Kong has been cancelled in November 2005. Most of the equipment and instruments that we planned to calibrate and issue certificates for, are now sold in the PRC and it is not economical and, in some instances, not
22
feasible to have the equipment and instruments returned to Hong Kong and then returned to their origin. We are in the process of gathering further information to determine if establishing a calibration laboratory in our Shanghai factory is feasible.
Manufacturing
Sales of the Infrared Photometric Oil Analyzer commenced in 2003. During 2004, we began selling turbidity instruments and spectrometers that we developed and manufactured ourselves and began assembling and selling the Total Organic Analyzer of O.I. Corporation. During 2005, the Company built a demonstration Integrated Water Quality Monitoring System (“WQMS”) that incorporates, among other features: intake sampling, flow through testing with the ability to “auto clean” sensors with monitoring for ammonia, nitrate and organic pollution; electronic measurements, transmission (via telephone, radio data network, cellular or similar transmission for monitoring purposes) and recordation; and housing to customer’s specifications.
In 2005, the Company also began offering two new company manufactured turbidimeters. One of the new turbidimeters is directed at water treatment plans, environmental monitoring status, hydrological stations and the second is directed at beer and other beverage processing facilities and it analyzes the particles contained in the beverage. See “- Product Assembly Operations”. During the next twelve months, we intend to assemble and/or manufacture additional products in the future and seek opportunities with our suppliers to assemble their products, secure manufacturing and/or assembly facilities and seek another manufacturer of analytical instruments to acquire.
Engineering
To allow the Company to bid on larger water, wastewater and power generation projects, we acquired Pact and Yixing and continue our search for other engineering companies and/or a system integrator (a company that provides hardware, software and solutions in the field of engineering) or enter into a joint venture with a third party to work in connection with our process control and engineering department.
Pact-Yixing have completed a substantial number of industrial water and wastewater treatment projects in the PRC. The majority of these projects are for large multinational manufacturing facilities for clients from the USA, Europe and Japan. Process design as well as mechanical and electrical engineering are completed in-house and manufacturing contracted to approved fabricators of components. Fabrication drawings are also done in-house for submittal to said fabricators under the supervision of Pact-Yixing’s quality control engineers.
Pact-Yixing clients cover a varied spectrum of industries covering semiconductor, pharmaceutical, petrochemicals, auto & auto parts, steel, food & beverage and beauty products.
The water and wastewater treatment processes applied at Pact-Yixing cover chemical, physical, biological and membrane separation. A combination of those processes are normally used to treat a specific industrial process feed or effluent. With respect to the water treatment side of Pact-Yixing’s business, they design and build filtration equipment, ion-exchange softeners and demineralizers, reverse osmosis, electro-deionization, chemical treatment systems
23
and package type mobile water treatment plants. As for wastewater treatment, Pact-Yixing design and build biological treatment systems, oil coalscers, dissolved air flotation, lamella clarifiers, chemical reactor tanks, ultrafiltration, microfilitration, dewatering systems and package type mobile sewage treatment plants. Biological treatment plants cover both aerobic and anaerobic processes. State-of-the-art aerobic processes of SBR (sequential batch reactors) and MBBR (membrane bioreactors) are technologies also covered by Pact-Yixing. See “Glossary.”
In 2006, Pact-Yixing commenced selling water and wastewater treatment equipment. The equipment are components of systems traditionally marketed by Pact-Yixing. The equipment are partially manufactured to Pact-Yixing’s in-house design and partially procured from approved Chinese suppliers. It is contemplated that Pact-Yixing’s trading operation will mainly sell equipment to clients from outside China, starting with the Middle East, Africa and European and American companies operating in the Middle East and Africa.
The Company believes that the Pact-Yixing business is complementary to the Company’s business as the Company continues to sell and market products of others. The Company expects that with this acquisition it may be able to gain a competitive advantage by offering customers and potential customers not only hardware but solutions to engineering problems as well. Also, the Company believes that its equity stake in Pact-Yixing enhances its position as a supplier to Pact. The Company continues to seek to make a similar acquisition of an engineering company specializing in air pollution control or other complementary environmental protection fields or in the power generation field. See Item 10.C “Material Contracts.”
A purpose of this acquisition was to reconfirm our direction to place a greater emphasis on developing an engineering solution business, instead of relying on its then current activities.
During Fiscal 2005, Fiscal 2004 and Fiscal 2003, our share of Pact-Yixing’s net income represented 48%, 32% and 17%, respectively, of our net income.
Products, Services and Customers
Laboratory instruments, analyzers and test kits are used to analyze the chemical content and ascertain the level of impurities or other contaminants in water. The Company distributes analytical re-agents and chemicals to support testing systems of laboratory and portable instruments, process analyzers and portable test kits and assist in the analysis process. The Company offers a wide variety of test kits to test water quality. The Company believes that these portable test kits are easy to use and preadapted for rugged field use. These test kits are used to monitor drinking water distribution systems.
Laboratory and portable instruments generally consist of analytical instruments including but not limited to the following: spectrophotometers, colorimeters, turbidimeters, ion-selective electrodes, chemical oxygen demand apparati, digestion apparati, and precision re-agent dispensing devices which are used to test and monitor impurities and contaminants in water systems. See “Glossary.”
24
The Company also distributes continuous-reading process analyzers, process turbidimeters, pH controllers and analyzer accessories. These products are generally used to monitor and control drinking water quality to ensure that water treatment procedures comply with regulatory standards. See “Glossary.”
Scientific Instruments. The Company distributes analytical instruments, environmental monitoring instruments and general purpose laboratory instruments. Analytical instruments include, but are not limited to, chromatographs, mass spectrometers, flow injector analyzers and atomic spectrometers. Environmental monitoring instruments include both air and water quality monitoring instruments. Air quality monitoring instruments are generally divided into those which monitor ambient (i.e., atmospheric) air, and those which monitor pollution sources. Additionally, the Company offers general purpose laboratory instruments including a variety of water quality monitoring and analysis equipment, such as continuous reading process analyzers, process turbidimeters, pH controllers, and test kits for monitoring chemical content in water (i.e., chlorine, fluorides, etc.). See “Glossary.”
Customers for the analytical instruments include government agencies, academic and research institutions and major laboratories. The Company also distributes products to beverage producers and restaurants, including water quality test kits to more than twelve bottling plants of a well known United States soft drink producer, which are located in the PRC; water quality monitoring instruments to well known United States fast food franchisor’s restaurants located in Hong Kong and the PRC, and to well known United States and European beer producers bottling plants located in Wuhan, PRC. Each such soda producer, restaurant and beer bottler do not account for a significant portion of our sales.
Customers for air and water quality monitoring instruments also include government agencies such as the Hong Kong Environmental Protection Department, which uses a Company distributed water quality monitoring system to monitor the water quality of Hong Kong’s Victoria Harbor, more than ten water treatment plants located in the PRC (including sites at Beijing, Tianjin, Guangzhou and Wuhan), China’s National Environmental Protection Agency, Harbin Water, Harbin Environmental Monitoring Centre, Beijing Huai Rou, Shunyi District CDC and Liaoning Jinzhou Wastewater Treatment Plant and the Beijing Environmental Monitoring Centre.
The Company derived approximately 34.8%, 37% and 41.3% of its revenues from the sale of Scientific Instruments during Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively.
Process Control and Engineering Products. The Company provides process control systems specifically designed for the industrial needs of clients including sensors, temperature gauges, pressure gauges, flow meters, valves, temperature and pressure transmitters and control devices, temperature and pressure calibrators, moisture, power, energy and harmonic analyzers. Chlorination disinfection systems are also distributed by Far East in conjunction with water treatment, sewage discharge and swimming pool water treatment. Customers for the foregoing distributed products include government water supply agencies, water treatment facilities, power and electric companies, petrochemical plants and instrument manufacturers. For example, the Company distributes chlorination disinfection systems to Hong Kong’s Chek Lap Kok airport and its environs.
25
The Company derived approximately 30.4%, 21.8% and 21.6% of its revenues from the sale of Process Control and Engineering Products during Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively.
Special Projects and Engineering Department. In conjunction with the distribution of products such as programmable logic controllers, telemetry units and SCADA systems and software, the Company also provides systems engineering to government agencies, wastewater treatment and power generation plants and beverage producers.
The Company derived approximately 10.2%, 22.3% and 20.7% of its revenue from its Special Project Operation during Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively. This revenue was derived primarily from sales of products and supply systems. The Company is placing a greater emphasis on developing an engineering solution to business as one of our key suppliers Eurotherm has been directly marketing and selling their process automation product directly into the PRC.
Our special projects and engineering department is believed by the Company to be the main contractor and system integrator of a large number of industrial and municipal wastewater, water treatment and power generation plants in the PRC. Specific services provided by this group include automated control system design, the operation and management of various wastewater, water and power generation projects. We endeavor to introduce, develop, and promote new and advanced technologies, products, and appropriate technical developments from abroad. We have also been cooperating with established technology companies and engage in systems and special projects in Programmable Logic Control, Telemetry unit, SCADA systems, Human Machine Interface Software and Sequential Event Recording.
Other Products. The Company distributes general testing and measuring equipment including multi-channel digital and analogue recorders, signal amplifiers and calibration equipment and power quality analyzers to industries including power plants, railway and aero-space industries, utilities, educational institutions and telecommunications companies.
The Company derived approximately 23.3%, 17.6% and 14.8% of its revenues from the sale of these Other Products during Fiscal 2005, Fiscal 2004 and Fiscal 2003, respectively.
Technical Support. The Company’s technical support staff provides customers with maintenance, installation assistance, and calibration services, and assists sales personnel in giving technical advice to and performing product demonstrations for customers. The Company derived approximately 1.3%, 1.3% and 1.6% of its revenues from Technical Support Operations during Fiscal 2005, Fiscal 2004, Fiscal 2003, respectively.
Customers. During Fiscal 2004, the Company distributed products to in excess of 1,000 customers, including sub-distributors, located in Hong Kong, the PRC and Macau. During Fiscal 2005, the State Environmental Protection Agency accounted for approximately 6% of the Company’s revenues. No other single customer accounted for more than 5% of the Company’s
26
revenues during Fiscal 2005. The Company does not believe that any single customer or sub-distributor is material to its operations.
Product Assembly Operations
The Company, through its PRC Corporation, Shanghai Euro Tech Limited established in 1999 in the Pudong Jin Qiao Export Processing Zone of Shanghai, engages in the development, production, sales and servicing of environmental equipment, including the development of modern laboratory analyzers, on-line measuring equipment and other analyzers for chemicals. Our products are “tailor-made” for the diversified needs of equipment users. Main products include Infrared Photometric Oil Analyzer (IPOA), COD analyzers, Total Organic Carbon Analyzer, turbidity meters, total suspended solid analyzers, dissolved oxygen analyzers, various types of spectrophotometers as well as a full spectrum of matching chemical reagents. In late 2005, we began offering two new turbidity meters, manufactured by the Company and our own WQMS.
This facility produces the Infrared Photometric Oil Analyzer, together with the two types of specialized reagents have been the best customer accepted products from this plant. Sale of the Infrared Photometric Oil Analyzer commenced in 2003. This plant also manufactures multi-function reactors, spectrophotometers, reagents for chemical oxygen demand and chlorine and silica measurement, used in water-related testing, monitoring and treatment. The manufacturing plant moved to a larger facility in 2003 under a lease that now expires in July 2006. It is contemplated that the Company will import components, assemble the finished products and then distribute the products through its distribution network. The Company believes that by establishing product assembly operations in the PRC and expanding the number of its regional sales offices in the PRC, it will not only increase revenues by expanding its customer base and increasing distribution capabilities, but also its net income since the Company believes it will enjoy higher overall profit margins by assembling certain products which it now distributes rather than by only purchasing the finished product from vendors.
In June 2003, the Company entered into an agreement with O.I. Corporation (“O.I.”) permitting the Company to assemble O.I.’s Total Organic Carbon Analyzer (“TOC”) at the Company’s manufacturing facility. The Company believes that O.I.’s TOC is more advanced than the products currently sold by the Company and that by assembling O.I.’s TOC, it may be able to increase its market share for advanced analytical equipment at more competitive prices than it is now offering. Also, the Company anticipates that this agreement will trigger closer cooperation with its vendors to develop other products. Although the Company had entered into assembly agreements for products with other vendors, this agreement is a departure from past practice because, for the first time, the Company is assembling advanced analytical equipment for one of our vendors as opposed to “lower tech” analytical equipment. We believe that by producing products locally in the PRC, we can reduce our production costs and be able to compete better with lower costs to our customers while maintaining our profit margins. During 2005, we succeeded in producing all components locally in the PRC and developed a Chinese version of the necessary software to build and operate the TOC. Previously, all component parts and only an English language version of the software were provided by O.I.
27
Infrared Photometric Oil Analyzer
The Company developed an Infrared Photometric Oil Analyzer by infrared absorption method and began sales of this product in 2004. This analyzer detects concentrations of petroleum, animal and vegetable oils in surface water, underground water, municipal and industrial wastewater. Customers are environmental water monitoring stations, water purification and waste treatment facilities, underground water and harbor water monitoring stations located in China.
Our perceived advantage of the analyzer is that samples under its testing protocols are measured by three different wavelengths simultaneously thus giving more accurate readings against one fixed wavelength used by most of our potential competitors’ products.
Sources of Supply
The Company distributes products manufactured by a number of vendors, including Hioki, USF and Lachat, which are the Company’s primary suppliers, see “- Business Overview”. The Company has exclusivity agreements for specified geographic areas with many of its suppliers for certain products. Those agreements do not encompass all products distributed by the Company or all of the market areas serviced by the Company. In addition, some of these agreements are memorialized not as formal contracts but rather through other acknowledgements or correspondence which may contain a vague, if any, description of the terms and conditions of such agreement or arrangement, and therefore may be unenforceable. The Company has only a letter from Hioki appointing the Company as Hioki’s sales representative in the PRC, Hong Kong and Macau. The Company’s agreement with USF continues in effect for successive renewal terms of one year each, unless either party gives written notice of non-renewal at least 30 days prior to the end of any renewal term. The Company’s agreement with Lachat continues in effect for successive renewal terms of one year and is terminable on ninety days notice by either party. The Company’s agreement with Hach is terminable on ninety days notice by either party. Although alternative sources of supply exist, there can be no assurance that the termination of the Company’s relationship with any of the above or other vendors would not have a short-term adverse effect on operations.
Expansion
The Company continues to seek: development of manufacturing and engineering operations as part of its core business through (a) the development and assembly of more of the Company’s own environment-related equipment (see “ — Product Assembly Operations”), (b) forming joint ventures with some of our suppliers, (c) potential acquisitions of manufacturing plants in the air pollution business, and (d) potential acquisitions of engineering companies to enhance our ability to bid for and take on larger engineering projects.
Regulatory Environment
Concerns about and awareness of pollution problems and environmental issues have grown at all levels of PRC government as the PRC experienced economic growth. Environmental
28
protection laws and strict regulations have been enacted and are buttressed by increased budget allocations for environmental regulation, monitoring and enforcement. The PRC’s primary environmental protection agency is the State Environmental Protection Agency (SEPA), under which there are Environment Protection Bureaus in each city and county. According to oral information received by management from SEPA, under bureau management, there are two environment monitoring systems: one system consists of over 2,200 monitoring stations to collect and analyze the environmental data of each city and county; another system consists of over 2,500 stations to monitor specific industrial districts or factories which have been identified as major pollution sources due to their non-compliance with environmental regulations. The Company has supplied water and air quality monitoring and analytic instruments to these monitoring stations for several years. There can be no assurance that the agencies will continue to use the Company’s products for these purposes, or that other market competitors will not enter the market with superior products, distribution systems or more competitive prices. See “ — Competition.”
Competition
The Company faces competition from other distributors of substantially similar products as well as the manufacturers of such products, and in both foreign and Chinese markets. The Company faces its principal competition from manufacturers and other distributors of its core products located in Hong Kong and the PRC. Moreover, the Company has implemented plans to assemble products of the kind that it presently distributes (see “-Product Assembly Operations”). Assembly operations have developed to the stage where some products have already been presented to the market and the Company is in direct and unavoidable competition with certain of its vendors. There can be no assurance that the existence of this direct competition will not impair the Company’s ability or such competitor’s willingness to continue providing other products for continued distribution by the Company and that such a development would not materially adversely effect the Company’s core business.
During Fiscal 2005, Fiscal 2004 and Fiscal 2003, the Company’s gross profit margins were approximately 21%, 16.3% and 16.9%, respectively. The Company believes that it competes with the PRC manufacturers on the basis of quality and technology. The Company believes it offers foreign-manufactured products which are of higher quality and use more advanced technology than products manufactured in the PRC. The Company believes that it competes with foreign manufacturers and other distributors of their products on the basis of the Company’s more extensive distribution network and an established reputation.
29
B2B Website
The Company, through its subsidiary, ChinaH2O.com Limited, a Hong Kong corporation, has a bilingual Business-to-Business (“B2B”) internet platform. The website is located at (http://www.chinah2o.com). The B2B website is directed at environmental businesses in China. The purpose of the B2B website is to connect manufacturers, distributors and suppliers of environmental protection equipment and related consultants and engineering firms in the West with potential clients in China (i.e., water, wastewater treatment plants, environmental protection bureaus, environmental monitoring stations, and related industries). The website provides environmental news, directories of western suppliers, potential clients in China, advertisement space and business opportunities. The business and other activities generated by ChinaH2O.com Limited have had a synergistic effect with those of the Company indirectly by feeding market information, sales leads and tender information to the Company.
Sales and Marketing
The Company distributes products through its principal office located in Hong Kong and its representative PRC offices located in Beijing, Shanghai, Guangzhou, Chongqing, Xi´An, Shenyang, Wuhan and Fuzhou. The Company has a marketing and sales force of 80 people who are paid a salary plus commission based on sales. The Company’s offices also coordinate the sales efforts of approximately fifty other companies located in the PRC which act as sub-distributors. These sub-distributors are engaged on a non-exclusive basis to distribute the products of other distributors. Each of the fifty sub-distributors accounted for less than two percent of the Company’s sales during Fiscal 2005, Fiscal 2004 and Fiscal 2003.
Following the opening of our first retail shop in Shanghai in 2001, Euro Tech retail outlets are now found in a number of major cities in the PRC, including Beijing and Guangzhou. Our staff at these shops assists customers in selecting the equipment, auxiliary parts and products to suit customer specifications. Equipment that needs to be repaired or provided with routine maintenance can be returned to us via these shops, as our retail shops, except for the Beijing shop, are also maintenance centers. The Company has found the seven existing shops to be useful as demonstration locations easily accessed by local customers who can pay in local currency while “off the shelf” sales are made which move its inventory more readily. In addition to the shops, we also have four branches or representative offices of these shops. All of the foregoing are perceived by the Company to have had a positive impact on its business reputation while reducing the Company’s dependency on sub-distributors who may not be loyal to the Company and distribute products of our competitors. As foreign entities are not generally permitted to own these facilities, these shops are owned by non-officer/director, employees of the Company with funds from the Company through non-fixed term loans aggregating approximately US$388,000 bearing a nominal rate of interest. The shops do not have financing from other sources. There can be no assurance that these shops will continue to be economically viable, that the Company will not sustain losses in connection with the loans to the shops; or the shops will result in any significant revenues or profits for the Company. Also, similar shops may be established by our competitors and/or third parties. These shops (or their representative offices) were opened on the following dates:
30
|
Retail Shops |
||
|
Shanghai |
|
April 2001 |
|
Beijing |
|
October 2001 |
|
Chongqing |
|
March 2002 |
|
Guangzhou |
|
June 2002 |
|
Xi´An |
|
July 2002 |
|
Wuhan |
|
November 2002 |
|
Shenyang |
|
December 2002 |
|
|
|
|
|
|
|
|
|
Representative Offices |
||
|
|
||
|
Dalian |
|
November 2003 |
|
Suzhou |
|
July 2004 |
|
Dongguan |
|
September 2004 |
|
ChengDu |
|
February 2005 |
|
Qingdao |
|
April 2005 |
|
Urumqi |
|
September 2005 |
The Company presently wholly-owns Far East, a Hong Kong corporation, which, in turn, owns the following corporations:
Wholly-Owned
· Euro Tech Trading (Shanghai) Limited — a People’s Republic of China corporation
· Euro Tech (China) Limited — a Hong Kong corporation
· ChinaH2O.com Limited — a Hong Kong corporation
· Shanghai Euro Tech Limited — a People’s Republic of China corporation
Majority Owned
· Yixing Pact Environmental Technology Company Limited — a PRC corporation
· Pact Asia Pacific Limited — a BVI corporation
The Company’s wholly-owned subsidiary and primary operational arm is Far East, which it acquired in March 1997. Far East has engaged in the distribution of various industrial control equipment, which continues to be the core business of the Company, since its inception in 1971.
The Company maintains an executive office at 18/F Gee Chang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong. The Company occupies approximately 12,800 square feet of office and warehouse storage space under a two (2) year lease that expires in May 2007 for
31
monthly rental payments of approximately US$7,050. The warehouse storage space is used to hold products for distribution to our customers via common carriers.
In August 1995, the Company purchased approximately 1,200 square feet of space in a building in Hong Kong. This property is now used as ChinaH2O.com Limited’s office.
The Company also maintains representative offices within the PRC in the cities of Beijing, Shanghai, Guangzhou, Chongqing, Xi´An, Wuhan, Shenyang and Fuzhou. The Beijing and Shanghai sales offices are owned by the Company. The Beijing and Shanghai sales offices are situated on Company owned property. The remaining sales offices are rented pursuant to short-term leases aggregating approximately US$3,000 per month.
One of Euro Tech Trading (Shanghai) Ltd.’s office is rented pursuant to a lease expiring in August 2006 that provides for a monthly rental of approximately US$237, with a second office rented pursuant to a lease expiring in July 2006 that provides for a monthly rental of approximately US$618. Shanghai Euro Tech Limited’s premises are rented pursuant to a lease expiring in July 2006 with monthly rental payments of approximately US$2,800.
Pact occupies a 700 square meter facility in Shanghai, pursuant to a 3 year lease expiring in March, 2008, providing for a monthly rental of approximately US$5,136.
The Company’s registered office in the British Virgin Islands is located at TrustNet Chambers, P.O. Box 3444, Road Town, Tortola, British Virgin Islands and its telephone number is (284) 494-5296.
Overview
The Company is primarily a distributor of a wide range of advanced water treatment equipment (including chlorination equipment), laboratory instruments, analyzers, test kits and related supplies and power generation equipment (including recorders and power quality analyzers).
The Company’s operations are located almost entirely within, and revenues are almost entirely generated from Hong Kong and the PRC. The Company derived approximately 19% and approximately 80% of its revenue from Hong Kong and the PRC, respectively in Fiscal 2005. Net income increased approximately US$457,000, or 76.9%, in Fiscal 2005 to US$1,051,000, compared to US$594,000 in Fiscal 2004, primarily due to the Company’s diversification into engineering and contributions from its engineering subsidiary, Yixing-Pact.
The Company continued to expand its trading business by expanding its regional sales efforts in the PRC and using the retail shops and online ordering in the PRC to sell the Company’s products. The Company manufacturers and sells its own developed products such as Infrared Photometric Oil Analyzer, turbidity instruments and spectrophotometers and assembles and sells the Total Organic Analyzer of O.I. Corporation. The Company intends to assemble
32
and/or manufacture additional products in the future and seek opportunities with its suppliers to assemble their products, secure manufacturing and/or assembly facilities and seek another manufacturer of analytical instruments to acquire.
The Company continued to accept more engineering projects in water and wastewater industries and also in power generation industries. During 2005, the Company acquired a majority interest in Yixing-Pact. The Company intends to continue its search for acquisition candidates of other firms engaged in engineering and/or system integration or enter into a joint venture with a third party to work in connection with its process control and engineering department.
Background - Political and Economic Conditions in Hong Kong and the People’s Republic of China
The Company’s operations are located almost entirely within, and revenues are almost entirely generated from Hong Kong and the PRC. Set forth below are the approximate percentage of the Company’s sales made to customers in the PRC and Hong Kong for the fiscal years indicated:
|
Fiscal Year |
|
PRC |
|
Hong Kong |
|
|
2003 |
|
74 |
% |
26 |
% |
|
2004 |
|
78 |
% |
21 |
% |
|
2005 |
|
80 |
% |
19 |
% |
Sales to customers situated in Macau and elsewhere in Fiscal 2003 through Fiscal 2005 were nominal. This makes the Company particularly susceptible to changes in the political and economic climate of either Hong Kong or the PRC.
Hong Kong. Hong Kong has been one of the prime centers for commercial activity and economic development recently in Southeast Asia. On July 1, 1997, sovereignty over Hong Kong was transferred from the United Kingdom to the PRC. As provided in the Sino-British Joint Declaration and the Basic Law, the Hong Kong SAR is provided a high degree of autonomy except in foreign and defense affairs. The Basic Law provides that the Hong Kong SAR is to have its own legislature, legal and judicial system and full economic autonomy for 50 years after the transfer of sovereignty. Based on the current political conditions and the Company’s understanding of the Basic Law, the Company does not believe that the transfer of sovereignty over Hong Kong has had or will have an adverse impact on its financial and operating environment. Although the Chinese government has pledged to maintain the economic and political autonomy of Hong Kong over its internal affairs, there is no assurance that such pledge will continue to be honored if there are changes in the Chinese political or economic climate. See Item 3D. “Key Information — Risk Factors.”
33
PRC. The PRC has been a socialist state since 1949. For more than forty years, the PRC’s economy has been, and presently continues to be, a socialist economy operating under government controls promulgated under various State Plans adopted by central Chinese government authorities and implemented, to a large extent, by provincial and local authorities which may set production and development targets. However, since approximately the early 1980s, the PRC’s national government has undertaken certain reforms to permit greater provincial and local economic autonomy and private economic activities. Any change in political or economic conditions may substantially adversely effect these reform initiatives and, in turn, the Company. See Item 3D. “Key Information — Risk Factors.”
Results from Operations
The following operating and financial review should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this Annual Report. All financial data referred to in the following discussion has been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”).
The following table presents selected statement of operations data expressed in thousands of US$ and as a percentage of revenue for the Company’s fiscal years indicated below:
|
|
|
Year Ended December 31, |
|
||||||||||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
||||||||
|
|
|
US$ |
|
US$ |
|
US$ |
|
US$ |
|
||||||||
|
Revenue |
|
31,250 |
|
100 |
% |
32,282 |
|
100 |
% |
27,442 |
|
100 |
% |
23,497 |
|
100.0 |
% |
|
Cost of revenue |
|
24,681 |
|
79.0 |
% |
27,033 |
|
83.7 |
% |
22,805 |
|
83.1 |
% |
18,735 |
|
79.7 |
% |
|
Gross Profit |
|
6,569 |
|
21.0 |
% |
5,249 |
|
16.3 |
% |
4,637 |
|
16.9 |
% |
4,762 |
|
20.3 |
% |
|
Selling and administrative expenses |
|
5,418 |
|
17.3 |
% |
4,801 |
|
14.9 |
% |
4,108 |
|
15.0 |
% |
4,173 |
|
17.8 |
% |
|
Income before income taxes |
|
1,358 |
|
4.3 |
% |
569 |
|
1.8 |
% |
548 |
|
2.0 |
% |
616 |
|
2.6 |
% |
|
Income taxes |
|
328 |
|
1.0 |
% |
167 |
|
0.5 |
% |
108 |
|
0.4 |
% |
123 |
|
0.5 |
% |
|
Share of equity in net income of affiliates |
|
21 |
|
0.0 |
% |
192 |
|
0.6 |
% |
91 |
|
0.3 |
% |
7 |
|
0.0 |
% |
|
Net income |
|
1,051 |
|
3.3 |
% |
594 |
|
1.8 |
% |
531 |
|
1.9 |
% |
500 |
|
2.1 |
% |
|
|
|
|
|
||||||||||||||
|
|
|
|
|
|
|
2001 |
|
|
|
|
|
|
|
||||
|
Revenue |
|
|
|
|
|
19,685 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
Cost of revenue |
|
|
|
|
|
15,396 |
|
|
|
78.2 |
% |
|
|
|
|
|
|
|
Gross Profit |
|
|
|
|
|
4,289 |
|
|
|
21.8 |
% |
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
|
|
|
3,734 |
|
|
|
19.0 |
% |
|
|
|
|
|
|
|
Income before income taxes |
|
|
|
|
|
747 |
|
|
|
3.8 |
% |
|
|
|
|
|
|
|
Income taxes |
|
|
|
|
|
163 |
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
Share of equity in net income of affiliates |
|
|
|
|
|
0 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
584 |
|
|
|
3.0 |
% |
|
|
|
|
|
|
34
Fiscal Year Ended December 31, 2005 Compared to Fiscal Year Ended December 31, 2004
Revenue; Gross Profit and Cost of Revenue. Revenue decreased by approximately US$1,032,000 or 3.2% to approximately US$31,250,000 in Fiscal 2005 from approximately US$32,282,000 in Fiscal 2004. The decrease in revenues included a decrease of approximately US$4,694,000 in revenues from continuing operations that were primarily due to declining revenues from trading activities as a greater number of our key or exclusive suppliers have been marketing their products or selling into the China market, either directly or through other distributors, as well as the Company. This decrease was partially offset by the inclusion of revenues approximately US$3,662,000 from Yixing-Pact for the period after the Company acquired its majority interest in October 2005 as their results were consolidated with the Company’s.
Gross profits increased by approximately US$1,320,000 or 25.1% to approximately US$6,569,000 for Fiscal 2005 as compared to approximately US$5,249,000 for Fiscal 2004. During Fiscal 2005, the Company’s cost of revenue was approximately US$24,681,000, or 79% of revenue, in comparison to approximately US$27,033,000, or 83.7% of revenue for Fiscal 2004. Cost of revenue expressed as a percentage of revenue decreased by 4.7% in Fiscal 2005 as compared with Fiscal 2004. Gross profits from continuing operations increased by approximately US$310,000 or 5.9% to approximately US$5,539,000 for Fiscal 2005 as compared to approximately US$5,249,000 for Fiscal 2004. The gross profit margin percentage increase was due principally to an increase in revenues from our engineering solution business of approximately US$1,113,000, representing an approximately 41% of our gross profit margin. Yixing-Pact contributed approximately US$1,010,000 to our gross profit margin in Fiscal 2005.
Selling and Administrative Expenses. Selling and administrative expenses were approximately US$5,418,000 in Fiscal 2005, an increase of approximately US$617,000 or 12.9% from approximately US$4,801,000 in Fiscal 2004. Expenses from continuing operations increased approximately US$495,000 principally as a result of employee expenses increasing as a result of the hiring of additional personnel, incremental increases in the salaries of our employees and other expenses resulting from general inflation. Yixing-Pact expenses of approximately $122,000 were included in our expenses for Fiscal 2005.
Equity in Profit of Affiliates. Equity in profit of affiliates decreased by approximately US$171,000 or 89% to approximately US$21,000 in Fiscal 2005 from approximately US$192,000 in Fiscal 2004. The decrease in equity in profit of affiliates was principally due to the results of Yixing-Pact being consolidated after the Company acquired its majority interest in October 2005.
Interest Income. Interest income increased by approximately US$18,000 or 105.9% to approximately US$35,000 in Fiscal 2005 from approximately US$17,000 for Fiscal 2004. The increase of $12,000 from our continuing operations was primarily due to the general increase in interest rates for bank deposits during Fiscal 2005. The US$6,000 balance of the increase in interest income was contributed by Yixing-Pact.
35
Other Income. Other income increased by approximately US$68,000 or 65.4% to approximately US$172,000 in Fiscal 2005 from approximately US$104,000 in Fiscal 2004. The increase in other income was principally due to increase in exchange gain of US$85,000 in Fiscal 2005.
Income Taxes. Taxes increased by US$161,000 to approximately US$328,000 in Fiscal 2005 from approximately US$167,000 in Fiscal 2004. This increase was primarily the result of increased taxable profits.
Net Income. Income from continuing operations increased by approximately US$457,000 or 76.9% to approximately US$1,051,000 in Fiscal 2005 from approximately US$594,000 in Fiscal 2004. The Company’s net income, excluding Yixing-Pact’s contribution, was approximately US$381,000 and US$402,000 for Fiscal 2005 and Fiscal 2004, respectively. The slight decrease of US$21,000 was primarily due to the decrease in revenues with the effect on the Company being cushioned by the increase in revenues from our engineering solution business that has a higher gross profit margin. The net income from Yixing Pact was approximately US$670,000 for 2005. The Company recognized equity in profit of Yixing-Pact of approximately US$192,000 for its 30% share ownership in Fiscal 2004. Net income attributable to the shareholders of the Company, after deducting minority interest amounted to US$733,000 and US$594,000 for Fiscal 2005 and Fiscal 2004, respectively.
Fiscal Year Ended December 31, 2004 Compared to Fiscal Year Ended December 31, 2003
Revenue; Gross Profit and Cost of Revenue. Revenue increased by approximately US$4,840,000 or 17.6% to approximately US$32,282,000 in Fiscal 2004 from approximately US$27,442,000 in Fiscal 2003. The increase was primarily due to: the inclusion of revenue of approximately US$1,200,000, the retail shops as these shops are qualified as Variable Interest Entities (“VIE”) as the Company is subject to a majority of risk of loss from the VIE activities and entitled to receive a majority of the VIE residual returns, and their results were consolidated starting in Fiscal 2004; increase in revenues from special project and engineering department sales to water and power plants of approximately US$1,700,000 and increased revenues from sales of Hioki products of approximately US$1,200,000 to power industries as a result of our expansion of the Company’s distribution and retail network. Revenue increased from special projects and engineering department sales as a result of (a) increasing demand from water suppliers and waste water treatment plants, following increased PRC regulations governing pollution output and an overall increasing demands for clear water; and (b) the construction of new power generation plants to meet the burgeoning demand for electricity in the PRC. The increased sales of Hioki products was the result of (a) the Company establishing representative offices in Suzhou and Dongguan, (b) on-line internet ordering; (c) increasing our sales staff, (d) our enhancing Hioki’s “brand name” in the PRC via promotional activities (i.e. seminars and attending/giving exhibitions) in past years, and (c) with Hioki’s assistance, a limitation on sales of Hioki’s products by other dealers.
Gross profits increased by approximately US$612,000 or 13.2% to approximately US$5,249,000 for Fiscal 2004 as compared to approximately US$4,637,000 for Fiscal 2003. During Fiscal 2004, the Company’s cost of revenue was approximately US$27,033,000, or
36
83.7% of revenue, in comparison to approximately US$22,805,000, or 83.1% of revenue for Fiscal 2003. Cost of revenue expressed as a percentage of revenue increased by 0.6% in Fiscal 2004 as compared with Fiscal 2003. The gross profit margin percentage decrease is attributed to the fact that the Company sold a greater amount of low tech products through its retail shops. The weakening of US$ against other foreign currencies also had an adverse impact on the gross margin percentage as the Company’s sales were mainly denominated in US$, HK$ and RMB while some of the Company’s cost of revenue were denominated in Japanese Yen, the Euro and Sterling Pound, such as cost of revenue for Hioki products was denominated in Japanese Yen.
Selling and Administrative Expenses. Selling and administrative expenses were approximately US$4,801,000 in Fiscal 2004, an increase of approximately US$693,000 or 16.87% from approximately US$4,108,000 in Fiscal 2003. The increase was primarily due to inclusion of expenses of the retail shops of approximately US$417,000 as these shops are qualified as VIEs and its results were consolidated starting from Fiscal 2004, and the expense increase resulted from increases in sales, general inflation and audit and consulting fees. Audit and consulting fee increases are the result of newly adopted securities laws, rules and regulations that impose further responsibilities and potential liabilities on companies and their officers, directors, auditors and attorneys that are publicly traded in the U.S.
Equity in Profit of Affiliates. Equity in profit of affiliates increased by approximately US$101,000 or 111% to approximately US$192,000 in Fiscal 2004 from approximately US$91,000 in Fiscal 2003. The increase in equity in profit of affiliates was principally due to the increase in net profits of Yixing-Pact from approximately US$304,000 in Fiscal 2003 to approximately US$641,000 in Fiscal 2004.
Interest Income. Interest income increased by approximately US$4,000 or 30.8% to approximately US$17,000 in Fiscal 2004 from approximately US$13,000 for Fiscal 2003. The increase was primarily due to the increase in bank deposits during the year. There was no interest expense in Fiscal 2004 and Fiscal 2003 because the Company has not utilized any loan or overdraft facilities under its banking arrangements.
Other Income. Other income increased by approximately US$98,000 or 1,633.3% to approximately US$104,000 in Fiscal 2004 from approximately US$6,000 in Fiscal 2003. The increase in other income was principally due to an exchange gain of US$73,000 in Fiscal 2004 compared with an exchange loss of approximately US$35,000 in Fiscal 2003.
Income Taxes. Taxes increased by US$59,000 to approximately US$167,000 in Fiscal 2004 from approximately US$108,000 in Fiscal 2003. This increase was primarily the result of increased taxable profits, and an increase of valuation allowances.
Net Income. Income from continuing operations increased by approximately US$63,000 or 11.9% to approximately US$594,000 in Fiscal 2004 from approximately US$531,000 in Fiscal 2003. The increase in net income resulted from an increases in gross profit. However, the general increase in selling and administrative expenses and inclusion of expenses of PRC retail shops resulted in a decrease of operating profit. Nevertheless, the Company achieved an increase
37
in net income for Fiscal 2004 as a result of the exchange gain and the contribution from its share of the profits of approximately US$192,000 from Pact.
The Company has primarily used its funds to finance accounts receivable, inventories, and capital expenditures including purchases of property, office furniture and equipment, computers and calibration equipment. The Company has historically met its cash requirements from cash flows from operations, short-term borrowings, bank lines of credit, and long-term mortgage bank loans. The Company expects, but can make no assurances that its present cash reserves, cash from operations, existing available bank credit facilities and proceeds from the issuance of our ordinary shares pursuant to stock option exercises would be sufficient to fund its future capital expenditure requirements. Working capital at the end of Fiscal 2005 and Fiscal 2004 was approximately US$6,931,000 and US$5,457,000, respectively.
During Fiscal 2004, the Company generated net cash of approximately US$2,536,000 in its operating activities from net income, reduction in accounts receivable, increase in accounts payable while funding an increase in inventories resulting from delays in shipments in customers. During Fiscal 2005, the Company used approximately US$258,000 in its operating activities to fund the increase in accounts receivable, a reduction in the amounts due to related companies and other payables, that in total, exceeded the funds generated from net income and a decrease in inventory. At the end of Fiscal 2005 and Fiscal 2004, the Company’s accounts receivable were approximately US$5,467,000 and US$4,139,000, respectively.
The Company generated approximately US$72,000 from investing activities in fiscal 2005 and used approximately US$46,000 for investing activities in Fiscal 2004. The Company used approximately US$110,000 and US$101,000 to purchase facilities and equipment in Fiscal 2005 and Fiscal 2004, respectively. During Fiscal 2005, the Company derived approximately US$486,000 from its acquisition of Yixing-Pact. Although the cash consideration, plus other costs paid by the Company, was US$1,034,000 for Yixing-Pact, Yixing-Pact had approximately US$1,520,000 in cash on hand at the time of their acquisition During Fiscal 2005, the Company used approximately US$304,000 as restricted cash to issue performance guarantees to its customers through its banks. During Fiscal 2004, the Company received a US$55,000 dividend from Pact.
The Company received approximately US$306,000 in Fiscal 2005 from financing activities resulting from the issuance of its ordinary shares being issued on stock options that were exercised while in the prior two fiscal years no expenditures were needed for financing activities. The Company had various banking facilities available for overdraft, import and export credits and foreign exchange contracts from which the Company can access up to approximately US$4,167,000 at December 31, 2005. The aforementioned available credit facilities were obtained on the conditions that, among other things, the Company not create a charge or lien on its other assets in favor of third parties without such bank’s consent, and the Company maintaining a certain level of net worth.
38
Cash increased from approximately US$5,242,000 at the end of Fiscal 2004 to approximately US$5,660,000 at the end of Fiscal 2005. The principal reasons for the increase in cash were the decreases in inventories of approximately US$2,387,000, a net cash inflow of approximately US$486,000 of Yixing-Pact’s cash on hand, proceeds of approximately US$306,000 from the exercise of stock options by Company management and employees. However, the Company used cash to fund its increases in accounts receivable of approximately US$1,237,000, decrease the amounts due to related companies by approximately US$1,267,000 and decrease the other payables by approximately US$1,665,000. During Fiscal 2004, the Company received a US$55,000 dividend from an affiliate, Pact. The Company plans to use cash on hand primarily to acquire a manufacturing plant and/or environmental engineering company in the PRC and to expand its manufacturing plant and environmental engineering business.
The Company’s net accounts receivable increased from approximately US$4,139,000 at the end of Fiscal 2004 to approximately US$5,467,000 at the end of Fiscal 2005. This increase is principally attributable to the inclusion of Yixing-Pact’s accounts receivable of approximately US$1,028,000.
The Company’s inventory decreased from approximately US$3,564,000 at the end of Fiscal 2004 to approximately US$2,732,000 at the end of Fiscal 2005. This decrease at the end of Fiscal 2005 was principally due to inventory of approximately US$835,000 for a SEPA contract not yet shipped at the end of Fiscal 2004 that was shipped in 2005.
The Company’s capital expenditures were approximately US$101,000 and US$110,000 in Fiscal 2004 and Fiscal 2005, respectively. Capital expenditures during Fiscal 2004 and Fiscal 2005 were incurred primarily in connection with the purchase of office equipment, furniture and fixtures. The Company continues to seek targets for acquisition, such as facilities for assembly operations or engineering companies. If such acquisitions are indeed made, the Company may expect to incur significantly larger capital expenditures, for which the Company presently intends, but as to which no assurance can be made, to use existing cash reserves, cash from operations, available bank credit facilities and proceeds from the issuance of our ordinary shares to fund such capital expenditures.
Anticipated Future Resources and Uses of Cash
The Company has historically funded its working capital and capital expenditure needs from operations, available bank credit facilities and proceeds from the issuances of our ordinary shares and expects to continue funding its 2006 working capital requirements from operations, available bank credit facilities and proceeds from the issuances of our ordinary shares. The Company may use its funds to acquire other businesses, form strategic alliances with third parties, invest in product research and development, or expand its sales offices and retail shops or, with third parties, seek to acquire new products or businesses or form strategic alliances. The Company expects, but can make no assurances that its present cash reserves, cash from operations and existing available bank credit facilities would be sufficient to fund its future cash requirements.
39
Inflation
The Company believes generally declining rates of inflation in the PRC have had a positive effect on its results from operations. The Company believes, although no assurance can be given, that as credit restrictions are gradually lifted, Far East will be able to increase prices in the market for its products and thus realize increased profit margins.
Critical Accounting Policies
Revenue Recognition
Pursuant to the revenue recognition criteria set forth in Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 104: “Revenue Recognition”, the Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, the product has been delivered, the sales price is fixed or determinable and collectibility is reasonably assured. For certain products where installation is necessary, revenue is recognized upon completion of installation. Revenue earned from customer support, which represents a minor percentage of total revenues, it is recognized when such services are provided.
Revenues and profits in long term fixed price contracts are recorded under the percentage of completion method. This approach relies on estimates of total expected direct costs of completion, which are compared to actual direct costs incurred to date to arrive at an estimate of revenue and profit earned to date. Recognized revenue and profit are subject to revisions as the contract progresses to completion. Revisions to profit estimate are reflected in income in the period in which the facts that give rise to the revision become known.
Inventory Valuation
The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional write-downs may be required.
Deferred Taxes
As part of the process of preparing its consolidated financial statements, the Company is required to estimate its income taxes and tax bases of assets and liabilities in each of the jurisdictions in which it operates. This process involves the Company estimating its current tax exposure together with assessing temporary differences resulting from its differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s consolidated balance sheet. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income, and, to the extent the Company believes that recovery is more unlikely than likely, it must establish a valuation
40
allowance. To the extent the Company establishes a valuation allowance or increases this allowance in a period, it must include an expense within the tax provision in the statement of operations.
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS N. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 requires that abnormally high vacancy, wasted material, freight and processing costs not be part of recognizable production costs. Such cost must instead be expensed as incurred. Accordingly fixed costs shall henceforth be allocated to inventory based on normal production capacity. The standard is effective for the fiscal year beginning January 1, 2006. It is not expected that SFAS No., 151 will have a material effect on the Company’s consolidated financial statement.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment” that will require the Company to expense costs related to share-based payment transactions with employees. With limited exception, SFAS No. 123 (R) requires that the fair value of share-based payments to employees be expensed over the period service is received. SFAS No. 123 (R) becomes mandatory effective for the Company on July 1, 2005. The Company intends to adopt this standard using the modified retrospective method of transition, effective as of January 1, 2006.
SFAS No. 123 (R) allows the use of both closed form models (e.g., Black-Scholes Model) and open form models (e.g., lattice models) to measure the fair value of the share-based payment as long as that model is capable of incorporating all of the substantive characteristics unique to share-based awards. In accordance with the transition provisions of SFAS No. 123 (R), the expense attributable to an award will be measured in accordance with the Company’s measurement model at that award’s date of grant.
The Company believes that the total expense recorded in future periods will depend on several variables, including the number of share-based awards that vest and the fair value of those vested awards.
In March 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which was a replacement of APB Opinion No. 20 and FAS No. 3 effective for accounting changes made in fiscal periods beginning after December 15, 2005. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. It also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. SFAS also requires that a change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. The Group is currently assessing the impact of this statement on our results of operations, financial position and cash flows upon adoption and has not yet completed that assessment.
In February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for Derivative Instruments and
41
Hedging Activities”, and SFAF No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for all financial instruments acquired or issued after the beginning of the Group’s first fiscal year that begins after September 15, 2006. The Group’ management has not evaluated the impact of this pronouncement on the Group’s financial statements.
In March 2006 FASB issued SFAS 156 “Accounting for Servicing of Financial Assets” this Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:
Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable.
Permits an entity to choose ‘Amortization method’ or Fair value measurement method’ for each class of separately recognized servicing assets and servicing liabilities. At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value. Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. An entity should adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006.
The Group’s management believes that this statement will not have a significant impact on the Group’s financial statement.
In June 2005, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus to amend EITF No. 96-16, “Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholders Have Certain Approval or Veto Rights”. The EITF agreed to amend the Protective Rights section of this consensus, as well as Example of Exhibit 96-16A, to be consistent with the consensus reached in Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or
42
Similarly Entity When the Limited Partners Have Certain Rights.” The provisions of this amendment should be applied prospectively to new investments and to investment agreements that are modified after June 29, 2005. The Group’s management believes the adoption of this pronouncement will not have a material effect on the Group’s consolidated financial statements. In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements (“EITF 05-6.”) EITF 05-6 provides guidance on determining the amortization period for leasehold improvements acquired in a business combination or acquired subsequent to lease inception. The guidance in EITF 05-6 will be applied prospectively and is effective for periods beginning after June 29, 2005. EITF 05-6 is not expected to have a material effect on the Group’s consolidated financial position or results of operations.
During Fiscal 2005, Fiscal 2004 and Fiscal 2003, the Company expensed approximately US$48,000, US$56,000 and US$12,000, respectively, on the development of its products. See Item 4B. “Business Overview.” It is anticipated that an additional US$250,000 in research and development costs will be expended on similar projects and potential research and development projects for the development of on line water testing equipment during Fiscal 2006.
There are increasing demands in the PRC for clean water, greater industrial pollution controls, waste management and electricity. We also see additional distributors competing with us. However, given the political situation in the PRC, trends could quickly disappear and we do not know if they will continue in the future. We note that, as evidenced by our recent acquisition of Pact-Yixing, we are placing greater emphasis on developing our engineering solution business in an effort to capitalize on these increased demands (clean water, pollution controls and waste management).
The Company believes that the expenses incurred in product development may result in increases in revenue but such increases are unlikely to allow for a recovery of the expenses for approximately the next two years.
Not applicable.
43
|
Contractual |
|
|
|
Less than |
|
|
|
|
|
After |
|
|
Operating Leases |
|
US$423,000 |
|
US$283,000 |
|
US$140,000 |
|
— |
|
— |
|
|
Total Contractual Cash Obligations |
|
US$423,000 |
|
US$283,000 |
|
US$140,000 |
|
— |
|
— |
|
Information concerning the Directors and Executive Officers of the Company are as follows:
|
Name |
|
Age |
|
Position |
|
|
T.C. Leung |
|
62 |
|
Chairman of the Board of Directors |
|
|
|
|
|
and Chief Executive Officer |
|
|
|
Jerry Wong |
|
47 |
|
Director and Chief Financial Officer |
|
|
Nancy Wong |
|
57 |
|
Director |
|
|
C.P. Kwan |
|
47 |
|
Director |
|
|
Alex Sham |
|
42 |
|
Director |
|
|
Y.K. Liang |
|
76 |
|
Director |
|
|
Ka Chong Cheang |
|
77 |
|
Director |
|
|
Xu Hong Wang |
|
38 |
|
Director |
|
|
Li Da Weng |
|
61 |
|
Director |
|
Set forth below is a brief background of the executive officers and directors based upon the information supplied by them to the Company:
T.C. Leung has been Chief Executive Officer and Chairman of the Board of Directors of both the Company and Far East since their inception. Before establishing Far East, Mr. Leung was an engineer for English Electric in England, from 1965 to 1968, and Lockheed Aircraft in Hong Kong, from 1968 to 1970. Mr. Leung also served as managing director of Eurotherm (Far East) Ltd.
44
between 1971 and 1992. Since 1988, Mr. Leung has also served as managing director of Eurotherm Hong Kong. Mr. Leung received a Masters degree in Business Administration from the University of East Asia, Macau in 1986 and is a Chartered Engineer, a title bestowed upon a member of the Council of Engineering Institutions in the United Kingdom.
Jerry Wong has served as Director and Chief Financial Officer of Far East since 1994 and has been with Far East since 1987. Mr. Wong has been the Chief Financial Officer and a Director of the Company since its inception. From 1985 until 1987, Mr. Wong worked for MUA Agencies Ltd., a subsidiary of a Hong Kong publicly listed company engaged in the insurance business, as deputy manager of its secretarial, legal and accounting department. From 1981 until 1985, Mr. Wong served as a senior accountant in Price Waterhouse-Hong Kong. He is a Fellow of the Association of Chartered Certified Accountants in the United Kingdom and a Certified Public Accountant in Hong Kong.
Nancy Wong has been a Director of the Company since its inception and a Director of Far East, and its Personnel Manager, since 1994. Ms. Wong has been with Far East since 1971. Ms. Wong is also Far East’s Chief Representative in China. Ms. Wong received a Bachelor of Science degree in Business Administration from the University of East Asia, Macau in 1989.
C.P. Kwan joined Far East in 1984 and has served as a Director and Manager of its Process Equipment Department since 1991. Mr. Kwan has been a Director of the Company since its inception. Before joining Far East, he was employed by Haven Automation (H.K.) Ltd., a company involved in the water treatment and process control business between 1981 and 1984. Mr. Kwan received a Masters Degree in Business Administration from the Open University of Hong Kong in 2001.
Alex Sham has been a Director of the Company since its inception. Mr. Sham joined Far East in 1988 and has been its Sales Manager since 1993 and became a Director of Far East in 1996. Mr. Sham received a Bachelor of Science in Applied Chemistry from Hong Kong Baptist University in 1990. Prior to joining Far East, Mr. Sham was employed by the Environmental Protection Department of the Hong Kong Government from 1986 until 1988. Mr. Sham received a Master’s Degree in Business Administration from the University of Adelaide in 2003.
Y.K. Liang has been a Director of the Company since February 1998. Mr. Liang is a director of Wong Liang Consultants Ltd. (“Consultants”) and a member of the certified public accounting firm of Y.K. Liang & Co. (“LCO”). Mr. Liang has been associated with both Consultants and LCO for more than the past five years. Consultants is a general business consulting firm.
Ka Chong Cheang has been a Director of the Company since December 2005. From 1952 until 1977, he had been shipping manager for John Swine & Sons (Hong Kong) Ltd., a firm engaged in the importing and exporting shipping industry. For more than the past five years, Mr. Chong has been a business consultant.
Xu Hong Wang has been a director of the Company since August 2002. Mr. Wang is the East China sales manager of Euro Tech (Far East) Limited, a wholly-owned subsidiary of the
45
Company, since mid 1994. From mid 1997 until joining Euro Tech, he was employed as a Research Associate and Lecturer at the Analysis and Research Center of Shanghai’s Tongji University. Wang Xu Hong received Bachelor’s and Master’s degrees in Science from Fudan University in 1984 and 1988, respectively.
Li Da Weng, from 1993 until January 2005, was the General Director of the Yangtze Valley Water Resources Protection Bureau (“YVWRPB”). He was employed by the YVWRPB in various positions, for more than 25 years, before he became the General Director in 1993. Since 2005, he has been the Secretary General of Yangtze Forum, a group of governments, businesses, universities and research institutes meeting on occasion to discuss issues on protecting and developing the Yangtze River, and since 1994 he has been a member of the Science and Technical Committee of Changjiang Water Resources Commission. Mr. Li Da Weng graduated from Hengyang Mining and Metallurgy College (now known as Nanhua University) in 1965 with a Bachelor’s Degree in Analytical Chemistry. From December 1981 to December 1983, he was a visiting scholar at the Canada’s Centre for Inland Waters, National Water Research Institute .
Directors of the Company serve until the next annual meeting of shareholders of the Company and until their successors are elected and duly qualified. Officers of the Company are elected annually by the Board of Directors and serve at the discretion of the Board of Directors.
None of the Company’s directors, officers or beneficial owners of ten percent or more of its Common Stock are required to file any reports pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended (the “1934 Act”).
The Company had two meetings of its Board of Directors during Fiscal 2005, while its Audit Committee had six meetings during Fiscal 2005.
Mr. Choi Chiu Ho and Mr. Siu Hung Lau resigned as directors in December 2005 and June 2006, respectively.
There are no material legal proceedings involving any director, officer or affiliate of the Company, owner of record or beneficially of more than five percent of the Company’s Common Stock or any associate of any of the foregoing.
Key Employees
George Hayek, Managing Director. He is the founder of Pact and Yixing and is a civil engineer (1967) and post-graduate certificate holder in sanitary engineering and environmental management from the American University of Beirut and the University of California at Irvine (in 1971 and 1988, respectively). Since 1971, he has occupied several key posts in water and wastewater treatment companies in the USA, the UK, Spain, Cyprus, The Middle East, Southeast Asia and the last 12 years in the PRC. From 1998 to date, he has been the managing director of Pact. His international experience helped Pact in securing most of the contracts with European and American multinational industries in the PRC.
46
Yvonne Xia manages Pact and Yixing’s Procurement Department, as well as assisting the managing director in management of the various departments. She joined Pact-Yixing at the time of their formation in 1998. Ms. Xia is an environmental engineering graduate from Qing Hua University of Beijing (1989) and an EMBA graduate from the Olin School of Management of the Washington University (2003). She has several positions of increasing responsibility, including management of engineering, sales, procurement and projects.
The following table sets forth certain summary information with respect to the compensation paid by the Company and Far East and its subsidiaries, for services rendered in all capacities to the Company and Far East during Fiscal 2005, Fiscal 2004 and Fiscal 2003 to the Chairman of the Board and Chief Executive Officer and a key employee of the Company. No other executive officer or employee received in excess of US$100,000 as cash compensation during those fiscal periods.
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
Salary (US$) |
|
Bonus (US$) |
|
|
|
|
2005 |
|
162,000 |
|
— |
|
|
T.C. Leung, Chairman of the Board of |
|
2004 |
|
100,000 |
|
34,600 |
|
|
Directors and Chief Executive Officer |
|
2003 |
|
100,000 |
|
18,449 |
|
|
George Hayek |
|
2005 |
|
108,000 |
|
— |
|
As part of our agreements with Tamworth, Mr. Hayek is to continue his employment relationship with Pact and Yixing for a period of three years, with a salary of US$108,000 per year for 2005, with annual salary increments. For 2006, his salary has been increased to US$110,000.
Compensation of Directors. Directors of the Company do not receive compensation for their services as directors; however, the Board of Directors may authorize the payment of compensation to directors for their attendance at regular and annual meetings of the Board and for attendance at meetings of committees of the Board as is customary for similar companies. Directors will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with their duties to the Company.
Pension Plan. Prior to December 1, 2000, the Company had only one defined contribution pension plan for all its Hong Kong employees. Under this plan, all employees were entitled to pension benefits equal to their own contributions plus 50% to 100% of individual fund account balances contributed by the Company, depending on their years of service with the Company. The Company was required to make specific contributions at approximately 10% of the basic salaries of the employees to an independent fund management company.
47
With the introduction of the Mandatory Provident Fund Scheme, a defined contribution scheme managed by an independent trustee on December 1, 2000, each of the Company and its employees who joined the Company subsequently makes monthly contributions to the scheme at 5% of the employee’s cash income as defined under the Mandatory Provident Fund legislation. Contributions of both the Company and its employees are subject to a maximum of HK$1,000 per month and thereafter contributions are voluntary and are not subject to any limitation. The Company and its employees made their first contributions in December 2000.
As stipulated by the rules and regulations in the PRC, the Company contributes to state-sponsored retirement plans for its employees in the PRC. The Company contributes approximately 10% to 22% of the basic salaries of its employees, and has no further obligations for the actual payment of pension or post-retirement benefits beyond the annual contributions. The state-sponsored retirement plans are responsible for the entire pension obligations payable to retired employees.
During the years ended December 31, 2005, 2004 and 2003, the aggregate contributions of the Company to the aforementioned pension plans and retirement benefit schemes were approximately US$191,000, US$166,000 and US$137,000, respectively.
Management Option Plan. The Company had authorized the issuance of Options to purchase up to an aggregate of 4,586,400 Ordinary Shares (the “Management Options”) to its officers, directors and employees as the Company’s Chairman of the Board and Chief Executive Officer may direct. The Management Options became exercisable on March 14, 1998 and will expire on March 14, 2007.
The exercise price and the number of Ordinary Shares purchasable upon exercise of any Management Options are subject to adjustment upon the occurrence of certain events, including stock dividends, reclassification, reorganizations, consolidations, mergers, and certain issuances and redemptions of Ordinary Shares and securities convertible into or exchangeable for Ordinary Shares excluding certain issuances of shares. No adjustments in the exercise price will be required to be made with respect to the Management Options until cumulative adjustments amount to US$0.05.
In the event of any capital reorganization, certain reclassifications of the Ordinary Shares, any consolidation or merger involving the Company (other than (i) a consolidation or merger which does not result in any reclassification or change in the outstanding Ordinary Shares, or (ii) sale of the properties and assets of the Company, as, or substantially as, an entirety to any other corporation), Management Options will thereupon become exercisable only for the number of shares of stock or other securities, assets, or cash to which a holder of the number of Ordinary Shares of the Company purchasable (at the time of such reorganization, reclassification, consolidation, merger, or sale) upon exercise of such Management Options would have been entitled upon such reorganization, reclassification, consolidation, merger, or sale.
The table below shows, as to each of the executive officers and directors of the Company and as to all executive officers and directors of the Company as a group, the following
48
information with respect to Management Options: (i) the aggregate amounts of Ordinary Shares subject to Management Options; and (ii) the per share exercise price for the Management Options granted to these individuals at June 2, 2006.
Each of the following persons also received options under the Company’s 2000 and 2002 Officers and Directors Plans.
|
Name of Executive |
|
|
|
Shares Subject To |
|
Per Share |
|
|
|
|
|
|
|
|
(US$) |
|
|
T.C. Leung |
|
2,350,000 |
|
1.6789 |
|
||
|
Alex Sham |
|
125,444 |
|
1.6789 |
|
||
|
|
|
65,520 |
|
1.221 |
|
||
|
Jerry Wong |
|
124,064 |
|
1.6789 |
|
||
|
Nancy Wong |
|
92,820 |
|
1.6789 |
|
||
|
|
|
24,570 |
|
1.221 |
|
||
|
C.P. Kwan |
|
73,710 |
|
1.6789 |
|
||
|
|
|
24,570 |
|
1.221 |
|
||
|
Xu Hong Wang |
|
27,294 |
|
1.6789 |
|
||
|
All Executive Officers and Directors as a group (9 persons) |
|
2,907,992 |
|
1.221–1.6789 |
(1) |
||
(1) Price range.
Other officers and/or employees of the Company have been or will be granted management options to purchase an aggregate of 282,984 Management Options, all of which will be exercisable at US$1.6789 per share.
As of June 2, 2006, Mr. Leung has exercised 1,253,600 Management Options (1,146,000 options at US$1.221 per share and 107,000 options at US$1.6789 per share).
Company Option Plans. The Company’s 2000 Officers and Directors Plan and 2002 Officers and Directors Plan (collectively referred to as the “Officers Plans”) provide for the grant of options to acquire Ordinary Shares to the Company’s executive officers and directors and persons holding the same positions with the Company’s subsidiaries. The 2000 Employees Plan and 2002 Employees Plan (collectively referred to as the “Employees Plan”) provides for the
49
grant of options to acquire Ordinary Shares to key employees of the Company and its subsidiaries. All four plans are collectively referred to as the “Plans”.
692,580 and 1,637,160 shares had been originally authorized for issuance under the Employees Plan and the Officers Plans, respectively.
The Board of Directors or a committee (the “Committee”) appointed by the Board of Directors administers the Plans. The Board of Directors or the Committee has the authority to interpret the Plans, prescribe, amend and rescind rules and regulations relating to them, determine the terms and provisions of options granted under the Plans (which need not be identical), and make other determinations as it deems necessary and advisable for the administration of the Plans. The Board of Directors or the Committee also has the authority to delegate decisions with respect to Options granted to key employees under the Employees Plan who are not elected officers or directors of the Company or its subsidiaries and to delegate decisions with respect to key employees to the Chief Executive Officer.
Any decision by the Committee or the Chief Executive Officer to grant an award under the Plans is subject to ratification by the Board of Directors of the Company. The Board is also to ratify any decision that effects the terms or conditions of options awarded to elected officers or directors of the Company or its subsidiaries.
In the event that the Ordinary Shares of the Company are subdivided or consolidated as a result of a reorganization, stock split, payment of a stock dividend, reverse stock split or other change in the Company’s capitalization, the Committee or the Board of Directors has the authority to make appropriate adjustments in the Ordinary Shares available for issuance under the Plans, the number of shares subject to options that may have been or may be awarded to any participant in any 12 month period, the price, number of Ordinary Shares or kind of securities subject to outstanding options, or the terms of such options in order to prevent dilution or enlargement of rights under the options. In addition, the Board may also change the kind of securities available for grant under the Plans to reflect any such corporate changes.
The Committee or the Chief Executive Officer has the discretion to determine which employees constitute key employees to whom options will be awarded under the Employees Plan.
The Committee or Chief Executive Officer, as the case may be, determines the number of Ordinary Shares subject to options to be granted.
The purchase price per share of the Ordinary Shares to be paid upon the exercise of the option must be at least 100% of the fair market value of an Ordinary Shares on the date on which the option was granted. Under the Plans, if the Ordinary Shares are principally traded on a national securities exchange or the Nasdaq Stock Market’s National Market or Small Cap Market at the time of grant, the Company is required to use, as fair market value, the average of the closing prices of the Ordinary Shares for the ten consecutive trading days immediately before the date of grant. If the Ordinary Shares are traded on a national securities exchange or the Nasdaq Stock Market’s National Market or Small Cap Market, but no closing prices are reported for such ten-day period, or if the Ordinary Shares are principally traded in the over-the-counter market, the Company is required to use, as fair market value, the average of the mean between the bid and asked prices reported for the Company’s Ordinary Shares at the close of trading during such
50
ten-day period before the date of grant. If the Ordinary Shares are traded neither on a national securities exchange, the Nasdaq Stock Market’s National Market, Small Cap Market nor in the over-the-counter market or if bid and asked prices are otherwise not available, the fair market value of the Ordinary Shares on the date of grant will be determined in good faith by the Committee or the Board of Directors, as the case may be.
The Board of Directors or the Committee, as the case may be, or, to the extent that such authority has been delegated to the Chief Executive Officer, the Chief Executive Officer determines, at the time of grant, when each option granted under the Plans will become exercisable. Notwithstanding the foregoing, all options held by a key employee of the Company or its subsidiaries become immediately exercisable, whether or not exercisable at the time, upon the death or disability.
No option is to be exercisable more than ten years from the date the option is granted.
Payment of Exercise Price for Options. Under the Plans, payment for shares purchased upon exercise of an option may be made by any of the following methods, subject to certain requirements: (1) in cash, paid by either the optionholder or a broker to whom the optionee has tendered the option; (2) in Ordinary Shares valued at the fair market value of such shares on the date of exercise, provided that such shares were held by the optionholder for not less than six months prior to the date of exercise of the option; (3) by any other medium of payment that the Board, Committee or the Chief Executive Officer, as applicable, has authorized at the time of grant (other than the withholding of shares issuable upon the exercise of options); or (4) by any combination of the preceding methods.
Transfer Of Options. Under the Plans, an option may not be sold, assigned or otherwise transferred except to:
· the spouse or lineal descendant of a plan participant;
· the trustee of a trust for the primary benefit of a plan participant’s spouse or lineal descendant;
· a partnership of which a plan participant and lineal descendants are the only partners; or
· a charitable organization.
These assignments are only permitted if the assigning optionee does not receive any compensation in connection with the assignment and the assignment is expressly approved by the Board or Committee, as the case may be.
51
The Company indemnifies the members of any Committee and its delegates and the Chief Executive Officer against (1) reasonable expenses incurred in connection with the defense of any action, suit or proceeding to which they may be a party by reason of any action taken or failure to act in connection with the Plans, and (2) all amounts paid by them in settlement of or satisfaction of a judgment entered in any such action, suit or proceeding, except in cases where such a person is adjudged liable for gross negligence or gross misconduct in the performance of his or her duties.
The Board may terminate, suspend, or amend the Plans at any time without the authorization of shareholders to the extent allowed by law or the rules of any market on which the Company’s shares are then listed or quoted.
During Fiscal 2000 and in January 2002, the Company granted options to certain of its officers and directors pursuant to the 2000 Officers and Directors Plan and, in November 2002, options were granted to certain of its officers and directors pursuant to the 2002 Officers and Directors Plan. The table below shows, as to each of the executive officers and directors of the Company and as to all executive officers and directors of the Company as a group, the aggregate amounts of Ordinary Shares remaining (unexercised), subject to such options.
|
Names of Executive |
|
|
|
Shares Subject |
|
Per Share |
|
|
T.C. Leung |
|
567,000 |
(1) |
0.5857 |
|
||
|
|
|
205,800 |
(2) |
0.8191 |
|
||
|
|
|
|
|
|
|
||
|
Alex Sham |
|
84,000 |
(1) |
0.5857 |
|
||
|
|
|
94,500 |
(2) |
0.8191 |
|
||
|
|
|
|
|
|
|
||
|
Nancy Wong |
|
42,000 |
(1) |
0.5857 |
|
||
|
|
|
21,840 |
(2) |
0.5787 |
|
||
|
|
|
23,100 |
(2) |
0.8191 |
|
||
|
|
|
|
|
|
|
||
|
C.P. Kwan |
|
42,000 |
(1) |
0.5857 |
|
||
|
|
|
16,380 |
(2) |
0.5787 |
|
||
|
|
|
22,680 |
(2) |
0.8191 |
|
||
|
|
|
|
|
|
|
||
|
Xu Hong Wang |
|
42,000 |
(1) |
0.5857 |
|
||
|
|
|
10,920 |
(3) |
0.5787 |
|
||
|
|
|
31,500 |
(3) |
0.8191 |
|
||
|
|
|
|
|
|
|
||
|
All executive officers and Directors as a group |
|
1,203,720 |
|
0.5787 |
— |
||
|
|
|
|
|
0.8191 |
(4) |
||
(1) Granted pursuant to the 2002 Officers and Directors Plan.
52
(2) Granted pursuant to the 2000 Officers and Directors Plan.
(3) Granted pursuant to the 2000 Employees Plan.
(4) Price range.
The foregoing options will expire in August 2010.
Pursuant to its 2000 Employees Plan, the Company had originally granted options to 32 of its non-officer/director employees to purchase an aggregate of 398,580 of its Ordinary Shares exercisable at a price of US$0.5787 per share for a ten year term expiring in February 2011.
Pursuant to its 2002 Employees Plan, the Company had originally granted options to 32 of its non-officer/director employees to purchase an aggregate of 294,000 of its Ordinary Shares exercisable at a price of US$0.7618 per share for a ten year term expiring in April 2012.
As of June 2, 2006, 451,080 options had been exercised, including 300,300 options exercised by Mr. Leung at a price of US$0.5857 per share.
The Company has set forth in this Report all required disclosure of additional compensation to its executive officers and directors including personal benefits and securities or properties paid or distributed which was not offered on the same terms to all full time employees during Fiscal 2005.
Changes in outstanding options under various plans mentioned above were as follows:
|
|
|
As of December 31, |
|
||||||||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
||||||
|
|
|
Number of |
|
Weighted |
|
Number of |
|
Weighted |
|
Number of |
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of year |
|
6,724,042 |
|
1.26 |
|
6,862,632 |
|
1.24 |
|
6,862,632 |
|
1.24 |
|
|
Granted |
|
— |
|
— |
|
46,000 |
|
1.68 |
|
— |
|
— |
|
|
Cancelled |
|
(104,706 |
) |
(1.16 |
) |
(184,590 |
) |
(0.93 |
) |
— |
|
— |
|
|
Exercised |
|
(604,530 |
) |
(0.78 |
) |
— |
|
— |
|
— |
|
— |
|
|
Outstanding, end of year |
|
5,978,806 |
|
1.31 |
|
6,724,042 |
|
1.26 |
|
6,862,632 |
|
1.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year |
|
5,978,806 |
|
1.31 |
|
6,724,042 |
|
1.26 |
|
6,862,632 |
|
1.24 |
|
53
As of December 31, 2005, the options outstanding and exercisable had exercise prices in the range of US$0.5787 to US$1.6789 and a weighted average unexpired life of approximately 2.5 years.
The Company accounts for stock-based compensation using the intrinsic value method prescribed by APB Opinion No. 25, under which no compensation cost is recognized as all stock options granted under the Management Options, the 2000 Stock Options, the 2002 Employee Stock Option and the 2002 D&O Stock Options have exercise prices at or above the fair market value of the underlying stock at the date of grant.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The weighted average fair values of stock options at date of grant of US$1.44 per option for the year ended December 31, 2004, were estimated using the Black-Scholes option pricing model with the following assumptions. There were no options granted during the years ended December 31, 2003 and 2005.
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
Risk-free interest rate |
|
— |
|
2.88 |
% |
— |
|
|
Expected dividend yield |
|
— |
|
0 |
% |
— |
|
|
Expected option life |
|
— |
|
2.3 years |
|
— |
|
|
Expected stock price volatility |
|
— |
|
208 |
% |
— |
|
|
|
|
|
|
|
|
|
|
The Black-Scholes option-pricing model requires the input of subjective assumptions, including the expected volatility of stock price. Because changes in subjective input assumptions can materially effect the fair value estimate, in directors’ opinion, the existing model may not necessarily provide a realizable measure of the fair value of the stock options.
Had compensation expense for the Company’s stock-based compensation plan been recognized based on the fair value of the options on the grant date in accordance with SFAS No. 123, the Company’s pro forma net income and earnings per common share would have been as follows:
|
|
|
As of December 31, |
|
||||
|
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
US$ |
|
US$ |
|
US$ |
|
|
|
|
(amounts expressed in thousands, except share and per share data) |
|
||||
|
Net income as reported |
|
733 |
|
594 |
|
531 |
|
|
Less: Stock compensation expense determined under the fair value method, net of tax |
|
(39 |
) |
(27 |
) |
(216 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income/(loss) |
|
694 |
|
567 |
|
315 |
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic, as reported |
|
US$0.11 |
|
US$0.09 |
|
US$0.08 |
|
|
|
|
|
|
|
|
|
|
|
Diluted, as reported |
|
US$0.07 |
|
US$0.06 |
|
US$0.08 |
|
|
|
|
|
|
|
|
|
|
|
Basic, pro forma |
|
US$0.11 |
|
US$0.09 |
|
US$0.05 |
|
|
|
|
|
|
|
|
|
|
|
Diluted, pro forma |
|
US$0.07 |
|
US$0.06 |
|
US$0.05 |
|
54
The term of each of the Company’s directors expires at the election and qualification of their successors at the next annual meeting of the Company’s shareholders, anticipated to be held in August of this year. Of the Company’s nine directors, seven were elected at the Company’s last annual meeting of shareholders in August 2005 and the eighth and ninth members were appointed to the Board in December 2005 and June 2006.
The Board has a standing Audit Committee to assist the Board in carrying out its duties. The Audit Committee has a written charter approved by the Board. The chair of the Audit Committee determines the meeting agenda of the Audit Committee. The Audit Committee members receive materials in advance of Committee meetings allowing them to prepare for the meeting.
During Fiscal 2005, the Audit Committee met six times, being attended by all members.
The Audit Committee assists the Board in monitoring the Company’s financial accounting, controls, planning and reporting. Among its duties, the Audit Committee:
Ÿ reviews the Company’s auditing, accounting and financial reporting process;
Ÿ reviews the adequacy of the Company’s internal controls;
Ÿ reviews the independence, fee arrangements, audit scope, and performance of the Company’s independent auditors, and recommends the appointment or replacement of independent auditors to the Board of Directors;
Ÿ reviews and approves all non-audit work, if any, to be performed by the auditors;
Ÿ reviews the scope of our internal auditing and the adequacy of the organizational structure and qualifications of the internal auditing staff;
Ÿ reviews, before release, the audited financial statements and operating and financial review and prospects contained in the Company’s Annual Report on Form 20-F, and recommends that the Board of Directors submit these items to the shareholders’ meeting for approval;
55
Ÿ provide an open avenue of communication among the Company’s independent auditors, financial and senior management, the internal audit function and the Board of Directors;
Ÿ review and update the Company’s Code of Business Conduct and Ethics and ensure that there is a system to enforce same and that this Code complies with all applicable rules and regulations;
Ÿ ensure that the Company’s management and auditors assess current financial reporting issues and practices; and
Ÿ review and pre-approve both audit and non-audit services to be provided by the Company’s auditors.
The Audit Committee is currently composed of Y.K. Liang, Ka Chong Cheang and Li Da Weng. The Audit Committee’s “financial expert” is Y.K. Liang. The Board has determined that the membership of the Audit Committee meets the current independence requirements of the NASDAQ listing standards as same applies to private foreign issuers and the applicable rules and regulations of the SEC.
The Company (exclusive of Pact-Yixing) has approximately 180 full-time employees. At December 31, 2005, 2004 and 2003, staffing levels were approximately as follows:
|
|
2005* |
|
2004* |
|
2003* |
|
|
|
Marketing and sales |
|
76 |
|
72 |
|
62 |
|
|
Administrative |
|
59 |
|
53 |
|
40 |
|
|
Technical |
|
45 |
|
37 |
|
23 |
|
|
Total full time employees |
|
180 |
|
162 |
|
125 |
|
* For 2003 does not include, but for 2004 and 2005 does include, employees situated in our retail shops and their representative offices.
Pact and Yixing had approximately 30 full-time employees at December 31, 2005, including 21 engineers and 9 administrative employees.
The Company’s management consists of its officers and directors.
The Company is not subject to any collective bargaining agreement and believes that its relations with its employees are good.
56
With respect to the share ownership of the directors and senior management of the Company, reference is made to Item 7. “Major Shareholders and Related Party Transactions.”
The following table sets forth, as of June 1, 2006, certain information concerning beneficial ownership of the Company’s Ordinary Shares with respect to (i) each person known to the Company to own 5% or more of the outstanding Ordinary Shares, (ii) each director and executive officer of the Company, and (iii) all officers and directors of the Company as a group:
|
|
Amount and |
|
Approximate |
|
|
|
T.C. Leung (1)(2) |
|
7,222,645 |
|
63.8 |
% |
|
Pearl Venture Ltd.(1)(2) |
|
2,536,445 |
|
30.9 |
% |
|
Alex Sham(1)(3) |
|
402,224 |
|
4.7 |
% |
|
Jerry Wong(1)(3) |
|
297,704 |
|
3.6 |
% |
|
Nancy Wong(1)(3) |
|
204,330 |
|
2.4 |
% |
|
C.P. Kwan(1)(3) |
|
238,316 |
|
2.8 |
% |
|
Y.K. Liang(1) |
|
* |
|
* |
|
|
Xu Hong Wang(1)(3) |
|
111,714 |
|
1.3 |
% |
|
Ka Chong Cheang(1) |
|
* |
|
* |
% |
|
Li Da Weng(1) |
|
* |
|
* |
% |
|
All Executive Officers And Directors of the Company as a group (9 persons)(2) (3) |
|
8,476,933 |
|
68.9 |
% |
* Denotes Nil.
57
(1) The address for the Company’s officers and directors is c/o Euro Tech (Far East) Ltd., 18/F Gee Chang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong. The address for Pearl is Columbus Centre Building, Wichhams Cay, Road Town, Tortola, British Virgin Islands.
(2) Includes shares of the Company’s Common Stock owned of record by Pearl, which is a trust established for the benefit of Mr. Leung. Also includes those Company Ordinary Shares owned of record by Regent, of which Pearl is the majority shareholder.
(3) Gives effect to the exercise of Management Options and 2000 Officers and Directors Plan, 2000 Employees Plan and 2002 Officers and Directors Plan Options owned of record by such persons and which have vested or will vest within six (6) months of the date of this Report. See Item 6B. “Compensation.”
The related companies with which the Company has engaged in material transactions are Eurotherm and Armtison Limited (“Armtison”) and Patwin Inc. (“Patwin”).
During Fiscal 2005, 2004 and 2003, the Company made sales to Eurotherm of approximately US$Nil, US$27,000 and US$43,000, respectively. During Fiscal 2005, 2004 and 2003, the Company made purchases from Armtison of approximately US$Nil, US$Nil and US$4,000, respectively. During Fiscal 2005, 2004 and 2003, the Company made purchases from Eurotherm of approximately US$242,000, US$7,503,000 and US$7,219,000, respectively. Additionally, during Fiscal 2005, 2004 and 2003, the Company paid approximately US$11,000, US$25,000 and US$33,000, respectively to Armtison for office space rentals, and for Fiscal 2005, 2004 and 2003, paid Eurotherm approximately US$4,000, US$29,000 and US$29,000 in management fees to assist in the management of some of the Company’s PRC offices while the Company earned approximately US$2,000, US$30,000 and US$34,000 from Eurotherm for office space rentals during Fiscal 2005, 2004 and 2003, respectively. The payments to Armtison and Eurotherm were based on actual office space usage and the time cost of personnel used, respectively. During Fiscal 2005 and 2004, the Company received management fees of US$2,000 and US$9,000 from Armiston for accounting and administrative services. The Company also paid approximately US$18,000, US$30,000 and US$30,000 in management fees to Patwin to represent the Company in the United States for each of Fiscal 2005, 2004 and 2003, respectively. At the end of Fiscal 2004 and 2003, the Company was obligated to Eurotherm for approximately US$1,265,000 and US$1,330,000, respectively, for normal trade indebtedness. This indebtedness is repayable on normal trading terms, is unsecured and does not bear interest. T.C. Leung, the Company’s Chairman of the Board and Chief Executive Officer was also a director of Eurotherm as at December 31, 2004 and 2003 and retired in February 2005. Patwin is beneficially owned by the brother of T.C. Leung.
As of December 31, 2003, approximately US$261,000 of other current assets represent to certain PRC employees of the Company. The advances are provided to those PRC employees in order for them to finance the operations of certain retail shops established in PRC by the employees to sell the Company’s products. The advances are unsecured, bear interest at a nominal rate and have no fixed repayment terms. During Fiscal 2003, an allowance for doubtful debt in respect of such advances of US$45,000 was made. The Company does not account for the related sales to these retail shops until the inventories are sold to third parties. As at
58
December 31, 2005 and 2004, the Company has included the financial results of these retail shops with the application of FIN 46 “Consolidation of Variable Interest Entities”. All material intercompany balances and transactions have been eliminated in consolidation.
Not applicable.
Item 8A.1 See Item 18.
Item 8A.2 See Item 18.
Item 8A.3 See Reports of Independent Registered Public Accounting Firms, pages F-2 and F-3.
Item 8A.4 We have complied with this requirement.
Item 8A.5 Not applicable.
Item 8A.6 Not applicable.
Item 8A.7 Legal Proceedings.
The Company is not a party to any material legal proceedings.
Item 8A.8 Dividend Policy.
The Company has not paid cash dividends to date. The payment of cash dividends, if any, in the future is within the discretion of the Board of Directors. The payment of cash dividends, if any, in the future will depend upon the Company’s earnings, capital requirements and financial conditions and other relevant factors. The Company’s Board of Directors does not presently intend to declare any cash dividends in the foreseeable future, but instead intends to retain all earnings, if any, for use in the Company and Far East’s business operations.
There has not been any significant change since the date of the annual financial statements included in this Report.
59
The Company has one class of securities presently registered: Ordinary Shares. These securities are presently traded on the NASDAQ SmallCap Market under the trading symbols “CLWT”, and have so traded since the Company’s Public Offering in March 1997.
The following prices are not adjusted to reflect stock dividends of 20%, 30%, 40% and 50% issued in September 1999, August 2001, September 2003 and August 2004, respectively.
The high and low prices for the Ordinary Shares in the periods indicated, as reported by NASDAQ, are set forth below:
|
Years Ended December 31, |
|
Low |
|
High |
|
|
|
|
US$ |
|
US$ |
|
|
2001 |
|
0.4293 |
|
1.6857 |
|
|
2002 |
|
0.5786 |
|
1.3707 |
|
|
2003 |
|
0.650 |
|
3.7143 |
|
|
2004 |
|
0.933 |
|
7.327 |
|
|
2005 |
|
2.700 |
|
6.590 |
|
|
Quarters Ended |
|
Low |
|
High |
|
|
|
|
US$ |
|
US$ |
|
|
June 30, 2004 |
|
1.700 |
|
5.280 |
|
|
September 30, 2004 |
|
2.074 |
|
5.447 |
|
|
December 31, 2004 |
|
2.360 |
|
6.940 |
|
|
March 31, 2005 |
|
3.000 |
|
4.680 |
|
|
June 30, 2005 |
|
2.700 |
|
4.900 |
|
|
September 30, 2005 |
|
3.300 |
|
6.590 |
|
|
December 31, 2005 |
|
3.050 |
|
4.850 |
|
|
March 31, 2006 |
|
3.250 |
|
3.800 |
|
|
The Following Months |
|
Low |
|
High |
|
|
|
|
US$ |
|
US$ |
|
|
January 2006 |
|
3.020 |
|
3.600 |
|
|
February 2006 |
|
3.200 |
|
4.440 |
|
|
March 2006 |
|
3.340 |
|
4.240 |
|
|
April 2006 |
|
3.300 |
|
3.740 |
|
|
May 2006 |
|
3.250 |
|
3.460 |
|
The Ordinary Shares were held by approximately 41 holders of record as of June 2, 2006. Based upon information received from broker-dealers, clearing firms and others, the Company believes that it has approximately at least 1,700 beneficial shareholders of its Ordinary Shares.
Not Applicable.
60
See Item 9A. “Listing Details.”
Not Applicable.
Not Applicable.
Not Applicable.