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FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1998
OR
[ ] TRANSITION 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
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(Exact name of Registrant as specified in its charter)
EURO TECH HOLDINGS COMPANY LIMITED
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(Translation of Registrant's name into English)
BRITISH VIRGIN ISLANDS
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(Jurisdiction of incorporation or organization)
18/F GEE CHANG HONG CENTRE, 65 WONG CHUK HONG ROAD, HONG KONG
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each Name of each exchange
class on which registered
NOT APPLICABLE
- ------------------------------------ --------------------------------------
NOT APPLICABLE
- ------------------------------------ --------------------------------------
Securities registered or to be registered pursuant to Section 12(g) of the Act.
COMMON STOCK, $.01 PAR VALUE
- --------------------------------------------------------------------------------
(Title of Class)
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
- --------------------------------------------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
- --------------------------------------------------------------------------------
(Title of Class)
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Indicate the number of 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.
2,068,200 SHARES OF COMMON STOCK
--------------------------------
1,680,000 WARRANTS
--------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark which financial statement item the registrant
has elected to follow.
Item 17 |X| Item 18 |_|
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes |_| No |_|
<PAGE>
GLOSSARY
The following glossary of terms may be helpful in understanding the
terminology used in this Annual Report.
Ambient Air: Atmospheric air (outdoor as opposed to
indoor air).
Colorimeter: An analytical instrument that measures
substance concentration by color intensity
when the substance reacts to a chemical
reagent.
Flow Injection Analyzer: An analytical instrument with a special
sampling system that uses a continuous
stream of reagent(s) into which fluid
samples are injected.
pH Controller: A process instrument that measures and
controls the acidity or alkalinity of a
fluid.
Reagent: A chemical substance used to cause a
chemical reaction and detect another
substance.
Mass Spectrometer: An analytical instrument that separates and
identifies chemical constituents according
to their mass-to-charge ratios and is used
to identify organic compounds.
Multi-Channel Digital
Recorder: A device that measures and records more than
one input of a digitized signal (signal in
the form of pulses).
Multi-Channel and Analogue
Recorder: A device that measures and records more than
one input of a signal in multi-voltage or
milliampere (e.g. temperature in degrees
Centigrade or degrees Fahrenheit).
Atomic Spectrometer: 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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Process Analyzer: An analyzer that continuously samples,
monitors and measures fluids or gases.
Process Turbidimeter: An analytical instrument that continually
measures the clarity of water based on light
scattering or deflection.
Total Organic Carbon Analyzer: An analytical instrument that measures
organic contamination in water.
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TABLE OF CONTENTS
PART I.........................................................................1
ITEM 1. DESCRIPTION OF BUSINESS.............................................1
ITEM 2. DESCRIPTION OF PROPERTY............................................17
ITEM 3. LEGAL PROCEEDINGS..................................................18
ITEM 4. CONTROL OF REGISTRANT..............................................18
ITEM 5. NATURE OF TRADING MARKET...........................................19
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING
SECURITYHOLDERS....................................................20
ITEM 7. TAXATION...........................................................21
ITEM 8. SELECTED FINANCIAL DATA............................................22
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..........................................24
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........32
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT..............................33
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS............................34
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES....36
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS...................36
PART II.......................................................................41
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED........................41
PART III......................................................................41
ITEM 15. DEFAULTS UPON SENIOR SECURITIES...................................41
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED
SECURITIES AND USE OF PROCEEDS....................................41
PART IV.......................................................................42
ITEM 17. FINANCIAL STATEMENTS..............................................42
ITEM 18. FINANCIAL STATEMENTS..............................................42
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.................................43
FORWARD LOOKING STATEMENTS. 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 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 Item 1.
"Business - Risks" and Item 9. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in the notes to the Company's
Financial Statements, describe factors, among others, that could contribute to
or cause such differences.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Euro Tech Holdings Company Limited (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) Ltd., a Hong Kong corporation ("Far East"). The Company successfully
completed a public offering (the "Public Offering") of approximately 618,200
shares of Common Stock, $.01 par value, and 690,000 Redeemable Common Stock
Purchase Warrants (the "Common Stock"), from which the Company received net
proceeds of approximately $1,817,000, in or about March 1997. Pursuant to and
concurrently with the Public Offering, the Company acquired all the issued and
outstanding capital stock of Far East, and thereafter Far East became a
wholly-owned subsidiary and the primary operational tool of the Company. Far
East was established in 1971 and has been in continuous operation since that
time. See Item 9. "Management's Discussion and Analysis of Financial Condition
and Results of Operations." 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 waste water. Where appropriate,
references to the business of the Company refer to the business of Far East.
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. 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 People's Republic of China (the "PRC").
The Company distributes products to more than 400 regular customers, including
the Hong Kong Environmental Protection Department, the Beijing Hydrology
station, China Light & Power Co., Ltd., Hong Kong Electric Co., Ltd., and the
Kowloon-Canton Railway Corporation, and to sub-distributors located in Hong
Kong, the PRC and Macao. These products are manufactured by a substantial number
of major American, European and Japanese corporations, including Wallace &
Tiernan Pacific Pty. Ltd. ("Wallace"), Hach Company, Inc. ("Hach"), Hioki E.E.
Corp. ("Hioki") and Finnigan Corporation ("Finnigan") (now a wholly-owned
subsidiary of ThermoQuest Corporation ("ThermoQuest"), which are the Company's
largest suppliers, with purchases from them accounting for approximately 6%,
14%, 11% and 8%, respectively, of the Company's sales during its fiscal year
ended December 31, 1997 ("Fiscal 1997") and 7%, 17%, 7% and 9%, respectively, of
the Company's sales during its fiscal year ended December 31, 1998 ("Fiscal
1998").
The Company distributes products through its Hong Kong headquarters,
its regional sales offices located in Beijing, Shanghai, Guangzhou, Chongqing,
Xian and Shenyang, and through non-exclusive arrangements with independent
sub-distributors located in Hong Kong, the PRC and Macao.
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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, and the potential for the contamination or depletion of
existing clean fresh water sources.
In or about March 1997, the Company began its Public Offering and
thereby sold 618,200 shares of Common Stock at $5.00 per share and 690,000
Warrants at a purchase price of $.15 per share, each entitling the holder
thereof to purchase one share of Common Stock at $5.50 (the "Exercise Price"),
subject to adjustment, commencing in or about March 1998, for aggregate net
proceeds of approximately $1,817,000. At December 31, 1998, no Warrants had been
exercised.
The Company used a portion of the net proceeds of the Public Offering
to (a) establish an operation for the assembly of the type of products now
distributed by the Company, including certain water-related testing, monitoring
and treatment equipment, and (b) to expand its product assembly operations to
other products of the kind now distributed by the Company, either pursuant to an
agreement to be entered into with a PRC-based entity for assembly-process
assistance through partnerships or joint ventures, or for the acquisition of a
manufacturing plant, and (c) to expand its marketing efforts by, among other
things, opening additional regional sales offices in the PRC. 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. Similarly, the Company believes
that by expanding its regional sales efforts in the PRC, it may realize higher
revenues and net income. In the event the Company is unable to complete a
definitive agreement with STIP, it intends to continue to seek assembly-process
assistance through partnerships or joint ventures with or the acquisition of
other PRC-based entities.
The Company has engaged a business consultant to assist with
identifying manufacturing plants and engineering companies which would make
suitable acquisition targets. The Company contemplates , but as to which no
assurance can be made, that such entities, if acquired, would assist in the
assembly of its products and offer customer turnkey projects and solutions.
During Fiscal 1997 and Fiscal 1998, the Company had sales of
approximately $12,510,000 and $12,757,000, respectively, and net income of
approximately $438,000 and $255,000, respectively.
BACKGROUND
The Company presently has three subsidiaries, all of which are
wholly-owned.
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.
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Far East was established in 1971, under the name of Eurotherm (Far
East) Ltd., as a subsidiary of a United Kingdom publicly traded company
(Eurotherm Ltd.) to market and distribute Eurotherm Ltd.'s industrial control
equipment in Hong Kong and Southeast Asia. Far East expanded its activities into
PRC in 1973. In the early 1980's, Far East began the distribution of high-tech
equipment manufactured in the United States, Europe and Japan into PRC, in
addition to its distribution activities on behalf of its parent. In 1988, the
activities of the parent and Far East were separated into Eurotherm
International ("Eurotherm") and Far East. By 1994, all of the capital stock of
Far East had been purchased by its management and Far East changed its name from
Eurotherm (Far East) Ltd. to its current name. See Item 13. "Interest of
Management in Certain Transactions."
Another subsidiary of the Company is Euro Tech Trading (Shanghai)
Limited ("Trading"). The core business of trading is similar to that of Far
East. The Company also has an inactive subsidiary, Euro Tech (China) Limited
("Limited").
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."
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, 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."
3
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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 softdrink producer, which are located in the PRC; total organic carbon
analyzers to the People's Liberation Army (the PRC armed forces), 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 accounts for less than one percent of
the Company's sales and the People's Liberation Army accounts for approximately
one percent of the Company's 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), and the Beijing Environmental Monitoring Centre. The Company is also one
of two distributors supplying continuous water monitoring systems to Beijing's
Hydrology Station.
The Company derived approximately 48.5% and 48.3% of its sales from the
sale of Scientific Instruments during Fiscal 1997 and Fiscal 1998, 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 new Chek Lap Kok
airport and its environs.
The Company derived approximately 28.3% and 29% of its sales from the
sale of Process Control and Engineering Products during Fiscal 1997 and Fiscal
1998, respectively.
OTHER PRODUCTS. The Company distributes general testing and
telecommunications testing equipment to industries, utilities, educational
institutions and telecommunications companies. The Company also distributes
multi-channel digital and analogue recorders and similar products. Customers for
telecommunications products include government departments and telephone
companies and utilities.
The Company derived approximately 14.8% and 12.1% of its sales from the
sale of these Other Products during Fiscal 1997 and Fiscal 1998, respectively.
4
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SPECIAL PROJECTS AND TECHNICAL SUPPORT. In conjunction with the
distribution of computer hardware and software, the Company provides computer
programming hardware and software to government agencies, industrial plants and
beverage producers.
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 8.4% and 10.6% of its sales from
Special Projects and Technical Support Operations during Fiscal 1997 and Fiscal
1998, respectively.
CUSTOMERS. At the end of Fiscal 1998, the Company had more than 400
regular customers, including sub-distributors, located in Hong Kong, the PRC and
Macao. During Fiscal 1998, no single customer accounted for more than 5% of the
Company's sales and the Company does not believe that any single customer or
sub-distributor is material to its operations.
OTHER DISTRIBUTION LINES. The Company has previously established
subsidiaries to distribute products not directly related to its core business of
distributing water and waste-water-related products, but it has consolidated its
operations to focus more on this core business, spinning off its subsidiaries
which are incompatible with its core business.
One such former subsidiary had been established to distribute
telecommunication products. Manufacturers of telecommunication products
generally distributed their products directly to end users without using
distributors, and technical expertise with telecommunication products was also
found to be necessary for entering this market. Hence, this subsidiary never
progressed past a start-up stage.
Another former subsidiary, an industrial computer distributor, lost its
principal source manufacturer when the manufacturer sold its industrial computer
production line to another supplier, while another major manufacturer of
industrial computers established its own distribution operation in Hong Kong and
the PRC.
The Company has also from time to time been involved with other
businesses not related to its core business, including investing in real estate.
The Company currently owns real property in Hong Kong which it intends to sell.
Although the Company is presently discontinuing or disposing of operations not
related to its core business, in the future, the Company may establish
subsidiaries or divisions to distribute products that are unrelated to its
current core product lines, and it may make future investments in real estate.
See Item 2.
"Description of Property."
SOURCES OF SUPPLY
The Company has exclusivity agreements covering specific geographic
areas with many of its suppliers for certain products. Such agreements do not
encompass all products distributed by the Company and all market areas served by
the Company. The Company's agreement with Finnigan for most products does not
include the PRC and similarly, the Company's agreement with Wallace
5
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is limited to Hong Kong. The Company has written confirmation from Hach that the
Company is Hach's sole representative in the PRC, Hong Kong and Macao authorized
to supply, install and commission Hach's products and accessories. The Company
also has exclusive distribution agreements with Royce Instrument Corporation for
certain of that manufacturer's products in Hong Kong and the PRC.
The Company distributes products manufactured by a number of vendors,
including Wallace, Hach, Hioki and Finnigan, which are the Company's primary
suppliers, with purchases from them accounting for approximately 6%, 14% 11% and
8%, respectively, of the Company's sales during Fiscal 1997 and 7%, 17%, 7% and
9%, respectively, of the Company's sales during Fiscal 1998. The Company has
exclusivity agreements for specified geographic areas with many of its suppliers
for certain products, including Wallace and Finnigan. Those agreements do not
encompass all products distributed by the Company or all of the market areas
serviced by the Company. The Company's agreement with Finnigan for most products
does not include the PRC, while the Company's agreement with Wallace is limited
to Hong Kong. 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 written confirmation from Hach that the Company is Hach's sole
representative in the PRC, Hong Kong and Macao authorized to supply, install and
commission Hach's products and accessories. The Company has only a letter from
Hioki appointing the Company as Hioki's sales representative in the PRC, Hong
Kong and Macao. The Company's agreement with Wallace is terminable by either
party on thirty days notice prior to its annual renewal date. The Company's
agreement with Finnigan is terminable on ninety days notice by either party. The
Company's agreement with Hach expires in May 2000, unless renewed. 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
Other than the potential acquisitions of manufacturing plants and
engineering companies for proposed product - assembly operation, the Company has
no other plans for expansion. In addition, although the Company has disposed of
certain subsidiaries in transactions with affiliates and disposed of certain
realty held for investment purposes, in an effort to streamline its structure
and concentrate on its core business, in the future the Company may establish
subsidiaries or divisions to distribute products that are unrelated to its
current core product lines, and it may make future investments in real estate.
6
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REGULATORY ENVIRONMENT
Concerns about and awareness of pollution problems and environmental
issues have grown at all levels of PRC government as the PRC has experienced
economic growth. Environmental 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 the Company, 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. According to the Company, SEPA
has recently identified 100,000 enterprises as new major pollution sources and
the number of monitoring stations for industrial firms is anticipated to
increase to 400,000 in the next five years, according to government estimates.
The Company has supplied water and air quality monitoring and analytic
instruments to these monitoring stations for several years. Despite this
anticipated growth in monitoring stations, there can be no assurance that the
agencies will continue to use the Company's products for these purposes, 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 begun to implement plans to assemble
products of the kind that it presently distributes. Should an assembly operation
be developed to the stage where products are presented to the market, the
Company may be in direct 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 affect the Company's core business.
In 1994, the PRC tightened its credit nationwide and, as a result, the
Company believes that purchasers of the products distributed by the Company
sought reduced prices. The products distributed by the Company were
foreign-manufactured and higher-priced than products manufactured in the PRC. As
a result, the Company reduced its sales prices to remain competitive, with a
corresponding negative impact upon profit margins. During Fiscal 1996, Fiscal
1997 and Fiscal 1998, the Company's profit margins were approximately 22.7%,
24.9%, and 24.3% 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.
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PROPOSED PRODUCT ASSEMBLY OPERATIONS
The Company plans to assemble certain products which the Company
currently distributes, including certain water-related testing, monitoring and
treatment equipment. The Company has engaged a business consultant to look for
suitable manufacturing plant targets for acquisition. 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 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.
It is anticipated that any acquired manufacturing plant will provide
the Company with leased space for the Company to assemble, warehouse and
distribute its products from and provide the Company with technical and
non-technical employees. The Company has decided not to go forward with a
preliminary agreement with the Shanghai Termometric Instrument Plant ("STIP") as
the Company has determined that its facilities were not suitable for the
Company's purposes as STIP is primarily engaged in the temperature control
industry. The Company is now discussing its potential expansion with environment
protection instrument companies. There is no assurance that the Company will be
able to make satisfactory arrangements or commence assembly operations.
SALES AND MARKETING
The Company distributes products through its principal office located
in Hong Kong and its regional PRC offices located in Beijing, Shanghai,
Guangzhou, Chongqing, Xian and Shenyang. The Company has a marketing and sales
force of 32 people who are paid a salary plus commission based on sales. The
Company's offices also coordinate the sales efforts of approximately twelve
other companies located in the PRC which act as sub-distributors. These
sub-distributors are paid a commission on sales they generated, and are engaged
on a non-exclusive basis to distribute the products of other distributors. Each
of the twelve sub-distributors accounted for less than two percent of the
Company's sales during Fiscal 1997 and Fiscal 1998.
EMPLOYEES
The Company has approximately 63 full-time employees, including a
marketing and sales staff of 32, an administrative staff of 20 and a technical
support staff of 11.
The Company's management consists of its officers and directors.
The Company is not subject to any collective bargaining agreement and
believes that its relationship with its employees are good.
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RISKS
CERTAIN RISKS RELATING TO DOING BUSINESS IN HONG KONG AND PRC.
PRC SOVEREIGNTY OVER
HONG KONG STILL DEVELOPING o The Company's executive and
principal offices are located in
Hong Kong, a Special
Administrative Region of China
(an "SAR"; Hong Kong is
sometimes herein referred to as
the "Hong Kong SAR").
o 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.
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 an
adverse impact on its financial
and operating environment.
o 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 Instability; Currency
Exchange Rate."
o There can be no assurance that
these past or any prospective
future changes in political or
other conditions will not result
in a material adverse affect
upon the Company or Far East.
ECONOMIC INSTABILITY;
CURRENCY EXCHANGE RATE o Most economies in the Far East
are suffering from large debts,
declining company earnings and
economic growth, and significant
currency devaluation. The region
has also suffered from the
effects of the resulting capital
flight from financial
institutions.
o On June 22, 1998, the Hong Kong
Chief Executive announced an
immediate freeze on new
government land sales through
April 22, 1999 in an attempt to
stabilize property prices which
have on average fallen
approximately 43% from their
1997 peak, and ease tightening
credit. Financial institutions
could face additional pressure
from possible defaults on loans
made for property. Issuer stock
valuations also dropped sharply
from a 1997 high on the main
Hong Kong stock index (the Hang
Seng). On August
9
<PAGE>
7, 1997, the Hang Seng Index was
16,673.27. On June 11, 1999,
that index stood at 12,839.12.
There can be no assurance that
these problems will not abate or
worsen or that recovery will
occur in the near future, if at
all, in which event the Company
may likely be materially
adversely affected.
ECONOMY MAY BE
UNSTABLE o Unlike many other countries
economies, the PRC government's
economic philosophy is based
upon a "planned" economy model
as opposed to a "free
enterprise" or "capitalist"
model with moderate government
regulation which is the typical
model in most developed, Western
nations. For more than forty
years, the PRC economy has been,
and presently continues to be, a
socialist economy operating
under government controls
promulgated under various one-,
five- and ten-year plans
(collectively, "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.
o Since approximately the early
1980s the Chinese government has
implemented certain policies
that emphasize decentralization
of decision-making power and
responsibility with respect to
matters such as allocation of
funds and the regionalization of
economic development, reduce the
role of government planning and
permit some utilization of
market forces in the development
of its economy. Such economic
reform measures or other
policies, if continued, may be
inconsistent, ineffectual, or
discontinued at any time with or
without notice, and the Company
may not be able to benefit from
any or all such reforms or
policies.
o The success of the Company's
activities in the PRC depends on
the Company's continued ability
to overcome circumstances
specifically affecting the
industrial sector, including the
relatively poor infrastructure,
road transportation and
communications network and an
uncertain legal and regulatory
environment.
ECONOMIC REFORMS MAY
NOT CONTINUE OR IMPACT
POSITIVELY ON THE
COMPANY; CHANGING
BUSINESS ENVIRONMENT o During much of the past twenty
years, the PRC has been
reforming its economic and
political systems in the
direction
10
<PAGE>
of a more "free market" economy.
Many of the reforms are
unprecedented for the PRC and
can be expected to be refined
and readjusted. This refinement
and readjustment process may not
always have a positive effect on
the Company.
o The Company's results at times
may also be adversely affected
by:
o changes in
political, economic
and social
conditions in the
PRC
o by changes in
government policies
such as changes in
laws and regulations
(or their
interpretation)
o the introduction of
additional measures
to control inflation
o changes in the rate
or method of
taxation
o imposition of
additional
restrictions on
currency conversion
remittances abroad
o reduction in tariff
protection and other
import restrictions
o a return to the more
centrally-planned
economy that existed
prior.
UNEVEN ECONOMIC
GROWTH o 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
affect political or social
stability.
PRC INFLATION o The PRC has recently experienced
substantial rates of inflation,
although inflation has declined
in the most recent years. The
PRC government's measures to
restrain inflation have had a
significant adverse impact on
the Company in the past and more
measures in this regard or other
actions by the PRC government
could materially and adversely
affect the Company, its business
and results of operations. See
--"Adverse Impact upon Company
of PRC's Credit Restrictions."
11
<PAGE>
REGIONAL ECONOMIC
PROBLEMS o Most economies in the Far East
are suffering from large debts,
declining company earnings and
economic growth, and significant
currency devaluation. The region
has also suffered from the
effects of the resulting capital
flight on financial
institutions. These problems may
materially adversely affect
political and economic
conditions in Hong Kong and the
PRC. There can be no assurance
that such problems will not
abate or worsen, or continue for
a protracted period, or that
recovery will occur in the near
future, if at all, in which
event the Company may likely be
materially adversely affected.
UNCERTAIN LEGAL SYSTEM
AND APPLICATION OF LAWS o 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
affect the Company's activities
in the PRC or the ability of the
Company to enter into
Sino-foreign agreements.
PRC LEGAL SYSTEM
BUSINESS LAWS DEVELOPING o 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 affected 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.
GOVERNMENT CURRENCY
CONTROLS o The PRC government imposes
control over its foreign
currency reserves in part
through direct regulation of the
conversion of Renminbi into
foreign exchange and through
12
<PAGE>
restrictions on foreign imports.
The conversion of Rmb into Hong
Kong and United States 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.
o The official Rmb to U.S. dollar
exchange rate declined from
Rmb3.73 to US$1.00 at the
beginning of 1989 to Rmb5.81 to
US$1.00 at the end of 1993. In
1993, there was significant
volatility in the swap rate of
Rmb to U.S. dollars, and there
was a significant devaluation in
the exchange rate on January 1,
1994, to Rmb 8.70 to U.S.$1.00,
in connection with the abolition
of the official exchange rate
and implementation of the new
managed floating rate foreign
exchange system.
o Although the Rmb to U.S. dollar
exchange rate has generally been
stable since January 1, 1994 and
the PRC 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
affect the Company because of
foreign currency denominated
liabilities, and may materially
adversely affect 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.
TURBULENT RELATIONS
WITH THE UNITED STATES o The United States has from time
to time considered
discontinuance of the PRC's Most
Favored Nation ("MFN") trade
status, which provides the PRC
with the trading privileges
available generally to trading
partners of the United States.
The United States and the PRC
have been involved in
controversies over (a) the
protection in the PRC of
intellectual property rights
that threatened a trade war
between the countries, (b) the
terms of the PRC's entrance into
the World Trade Organization,
(c) the NATO bombing on May 7,
1999 of the PRC's Embassy in
Belgade, and (d) the protection
of human rights in the PRC. The
United States annually
reconsiders the renewal of the
PRC's MFN status. However, there
can be no assurance that the
United States will not revoke or
refuse to extend the PRC's MFN
status in
13
<PAGE>
the future.
CERTAIN RISKS RELATION TO COMPANY'S BUSINESS.
DISPOSED OF SUBSIDIARIES o The Company disposed of several
unsuccessful subsidiaries which
had sustained losses in
businesses outside the Company's
core business.
o The Company has from time to
time invested in real estate in
Hong Kong. Although the Company
has derived past profits from
some of its investments in Hong
Kong real estate, there can be
no assurance that the Company
will ever derive a profit from
any future investments in Hong
Kong realty. As a result of the
recent transfer of sovereignty
over Hong Kong from the United
Kingdom to China, any investment
in Hong Kong realty will be
subject to the risks arising
from that transfer, including
but not limited to the possible
appropriation of realty by the
Chinese government. In addition,
in Mid-1998 the Government of
Hong Kong froze public land
sales and dispositions of
property through April 1999 in
order to stabilize Hong Kong
property values which had
substantially declined from
their peak in 1997. See "Item 9.
"Management's Discussion and
Analysis of Financial Condition
and Results of Operations."
DEPENDENCE
UPON MANAGEMENT o 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. Although the
Company is the beneficiary of a
"Key Person" life insurance
policy in the amount of
$1,000,000 on the life of Mr.
Leung, there can be no assurance
that such coverage will be
sufficient to compensate the
Company for the loss of the
services of Mr. Leung. See Item
10. "Directors and Officers of
Registrant."
ADVERSE IMPACT UPON
COMPANY OF PRC'S
CREDIT RESTRICTIONS o 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
14
<PAGE>
distributors of their products
situated in Hong Kong and the
PRC. In 1994, the PRC tightened
its credit nationwide and, as a
result, the Company believes
that purchasers of the products
distributed by the Company
sought reduced prices. The
products distributed by the
Company were foreign
manufactured and higher priced
than Chinese manufactured
products. The Company reduced
its sales prices and its profit
margins to remain competitive.
COMPETITION WITH VENDORS o 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 affect its
relationship with its vendors.
See Item 1. "Description of
Business."
DEPENDENCE ON VENDORS;
LACK OF LONG
TERM AGREEMENTS o The Company distributes supplies
manufactured by a number of
vendors, including Wallace,
Hach, Hioki and Thermoquest,
which are the 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 Macao, its agreements
with each of Wallace and
ThermoQuest are terminable on
thirty days notice by either
party prior to the renewal date
and the agreement with Hach
expires in May 2000, unless
renewed. 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.
CONTROL BY T.C.
LEUNG; POTENTIAL
CONFLICT OF INTERESTS o 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 4. "Controls of Registrant"
and Item 10. "Directors and
Officers of Registrant."
15
<PAGE>
CERTAIN LEGAL CONSEQUENCES
OF INCORPORATION IN THE
BRITISH VIRGIN ISLANDS;
RIGHTS OF SHAREHOLDERS
NOT AS EXTENSIVE
AS IN U.S. CORPORATIONS; o 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.
o 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
action by controlling
shareholders which are obviously
unreasonable may be declared
null and void.
o 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.
UNCERTAINTY OF
ENFORCING UNITED STATES
JUDGMENTS o 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.
o All but one of the Company's
directors reside outside of the
16
<PAGE>
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.
o 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
offered hereby, including
judgments arising out of or
based on the civil liability
provisions of 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" and "--
Uncertainty of Enforcing U.S.
Judgments."
ITEM 2. DESCRIPTION OF PROPERTY
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 lease expiring
in May 1999 for monthly rental payments of approximately $13,700. The warehouse
storage space is used to hold products for distribution to its customers via
common carriers.
In August 1995, the Company purchased approximately 1,200 square foot
of space in a building in Hong Kong. The Company financed the purchase and as of
December 31, 1998, had an outstanding mortgage of approximately $328,000 in
principal, bearing interest at Hong Kong's prime rate plus 1.75%, which mortgage
repayable in eighty-four monthly installments through approximately November
2002. In April 1997, the Company leased out the property at a monthly rental of
approximately $2,200.
The Company also maintains regional sales offices within the PRC in the
cities of Beijing, Shanghai, Guangzhou, Chongqing, Xian and Shenyang. The
Beijing and Shanghai sales offices are owned by the Company. The Beijing sales
office is situated on property purchased in November 1994. The Shanghai sales
office is situated on property purchased in August 1995. The Guangzhou sales
office is rented pursuant to a lease expiring in March 2000 for approximately
$520 per month. The Chongqing sales office is rented pursuant to a lease
expiring in January 2000 for approximately $240 per month. The Xian sales office
is rented pursuant to a lease expiring in December 1999 for approximately $290
per month. The Shenyang office is rented pursuant to a lease expiring in
17
<PAGE>
December 1999 for approximately $270 per month. The Company's office in Shanghai
is rented pursuant to a lease expiring in April 2000 for approximately $270 per
month.
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 (809) 494-5296.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. CONTROL OF REGISTRANT
The following table sets forth, as of May 14, 1999, certain information
concerning beneficial ownership of shares of Common Stock with respect to (i)
each person known to the Company to own 10% or more of the outstanding shares of
Common Stock, and (ii) all officers and directors of the Company as a group:
18
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND APPROXIMATE
NATURE OF PERCENTAGE
BENEFICIAL OF COMMON
OWNERSHIP STOCK OWNED
--------- -----------
<S> <C> <C>
T.C. Leung(1)(2)(3) ................................ 2,500,000 79%
Pearl Venture Ltd.(1)(2)............................ 2,500,000 79%
Regent Earning Ltd.(1).............................. 1,027,600 50%
All Executive Officers
and Directors of the
Company as a group
(7 persons)(4)...................................... 2,650,000 80%
</TABLE>
ITEM 5. NATURE OF TRADING MARKET
The Company has two classes of securities presently registered: Common
Stock and Warrants. These securities are presently traded on the NASDAQ SmallCap
Market under the trading symbols "CLWT" and "CLWTW," respectively, and have so
traded since the Company's Public Offering in March 1997.
The high and low bid price quotations for the Common Stock securities
in every calendar quarter of trading since the Public Offering are as follows:
- ----------
(1) The address for Mr. Leung 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 Venture
Ltd. ("Pearl") is Columbus Centre Building, Wichhams Cay, Road Town, Tortola,
British Virgin Islands. The address for Regent Earning Ltd. ("Regent") is Room
101,.Chong Kin Commercial Building, No. 11 Wing Ho Street, Central Hong Kong.
(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
shares of the Company's Common Stock owned of record by Regent, of which Pearl
is the majority shareholder. See Item 13. "Interest of Management in Certain
Transactions."
(3) Does not include such person's proportionate interest in shares of the
Company's Common Stock held of record by Regent or Broadskill Investments Inc.
("Broadskill"). Broadskill is a Hong Kong Corporation which owns an approximate
34% equity interest in Regent. See Item 13. "Interest of Management in Certain
Transactions."
(4) Gives effect to the exercise of Management Options owned of record by the
Company's executive officers and directors. See Item 13. "Interest of Management
in Certain Transactions."
19
<PAGE>
<TABLE>
<CAPTION>
HIGH LOW
- --------------------------------------------------------------------------------
$ $
<S> <C> <C>
Quarter Ended March 31, 1997 .................. 7.75 6.375
Quarter Ended June 30, 1997 ................... 9.50 5.25
Quarter Ended September 30, 1997 .............. 8.50 6.25
Quarter Ended December 31, 1997 ............... 8.875 4.00
Quarter Ended March 31, 1998 .................. 7.00 4.125
Quarter Ended June 30, 1998 ................... 6.75 5.328125
Quarter Ended September 30, 1998 .............. 6.50 4.25
Quarter Ended December 31, 1998 ............... 4.50 2.50
Quarter Ended March 31, 1999 .................. 3.625 2.125
Period Commencing April 1, 1999
through June 15, 1999 ....................... 2.125 .75
</TABLE>
The Common Stock was held by approximately 16 holders of record, of
which 13 were located or resident in the United States, as of May 14, 1999.
Based upon information received from broker-dealers, clearing firms and others,
the Company believes that it has approximately at least 400 beneficial
shareholders of its Common Stock.
The high and low bid price quotations for the Warrants in every
calendar quarter of trading are as follows since the Public Offering:
<TABLE>
<CAPTION>
HIGH LOW
- --------------------------------------------------------------------------------
$ $
<S> <C> <C>
Quarter Ended March 31, 1997 .................. 2.50 1.50
Quarter Ended June 30, 1997 ................... 3.00 1.875
Quarter Ended September 30, 1997 .............. 3.625 2.03125
Quarter Ended December 31, 1997 ............... 4.00 2.00
Quarter Ended March 31, 1998 .................. 2.50 1.375
Quarter Ended June 30, 1998 ................... 1.75 1.125
Quarter Ended September 30, 1998 .............. 1.5625 .50
Quarter Ended December 31, 1998 ............... .9375 .50
Quarter Ended March 31, 1999 .................. .8125 .125
Period Commencing April 1, 1999
through June 15, 1999 ....................... .3125 .125
</TABLE>
The Warrants were held by approximately 18 holders of record, of which
17 were located or resident in the United States, as of May 14, 1999.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITYHOLDERS
There are no exchange control restrictions on payment of dividends on
the
20
<PAGE>
Company's Common Stock or on the conduct of the Company's operations either in
Hong Kong, where the Company's principal executive offices are located, or the
British Virgin Islands, where the Company is incorporated. There are no British
Virgin Islands laws which impose foreign exchange controls on the Company or
that affect the payment of dividends, interest, or other payments to
non-resident holders of the Company's securities. British Virgin Islands laws
and the Company's Memorandum and Articles of Association impose no limitations
on the right of non-resident or foreign owners to hold the Company's securities
or vote the Company's Common Stock. Under BVI law, dividends may only be
declared and paid by an International Business Company (which the Company is
classified as under BVI law) out of surplus, such that after payment of
dividends such company must be able to satisfy its liabilities as they become
due in the ordinary course of business and the realizable value of the assets of
such company must not be less than the sum of its liabilities (other than
deferred taxes and capital). There are no other BVI restrictions regarding
dividends. However, the PRC has established a unified exchange rate system and
system of exchange controls to which the Company is subject. See "Risks."
ITEM 7. TAXATION.
The Company is exempt from taxation in the British Virgin Islands.
The Company's two subsidiaries organized in Hong Kong Far East and
Limited, pay the Hong Kong profits tax at a rate of 16% on their income for
financial reporting purposes, after adjustments for income and expense items
which are not assessable or deductible for profits tax purposes. Hong Kong
levies no capital gains or dividends tax.
The Company's third subsidiary, Euro Tech Trading (Shanghai) Limited
("Trading"), is fully exempt from the PRC state unified income tax pursuant to
the tax laws applicable to foreign investment enterprises in the PRC. This
unified income tax is levied at a rate of 33%. Trading was fully exempt from the
unified income tax for the period from July 1, 1997 to December 31, 1998, and
enjoys a 50% reduction in the regular levied unified income tax for the next
two years, ending on December 31, 2000. See -- Note 2d, page 9 of the Financial
Statements.
21
<PAGE>
ITEM 8. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL INFORMATION
(Amounts expressed in thousands, except
share and per share data and unless otherwise stated)
The selected income statement data for years ended December 31, 1996,
1997, and 1998 and the selected balance sheet data as of December 31, 1997 and
1998 set forth below are derived from audited financial statements of the
Company 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 9. "Management's Discussion and Analysis of Financial Condition and
Results of Operation." The selected income statement data for the years ended
December 31, 1994 and 1995 and the selected balance sheet data as of December
31, 1994, 1995 and 1996 set forth below are derived from audited financial
statements of Euro Tech (Far East) Limited which are not included therein.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
US$(1) US$(1) US$ US$ US$
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents 440 597 1,400 2,539 3,045
Working capital (2) 937 631 1,307 3,292 3,493
Total assets 6,782 7,717 8,278 8,084 8,559
Short-term debt (3) 1,007 831 1,201 75 68
Long-term bank loans 430 905 586 329 260
Shareholders' equity 2,275 2,289 2,734 4,972 5,194
</TABLE>
- ----------
(1) Translation solely for convenience of the readers at the exchange rate of
HK$7.74-US$1.
(2) Current assets minus current liabilities.
(3) Short-term debt includes short-term borrowings and current portion of
long-term bank loans.
22
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
US$(1) US$ US$ US$ US$
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Net sales ............ 13,374 13,667 13,758 12,510 12,757
Cost of goods ........ (10,459) (10,633) (10,633) (9,399) (9,662)
---------- ---------- ---------- ---------- ----------
sold
Gross profit ......... 2,915 3,034 3,125 3,111 3,095
Selling and
Administrative
Expenses ............ (2,610) (2,773) (2,703) (2,812) (2,924)
---------- ---------- ---------- ---------- ----------
Operating income ..... 305 261 422 299 171
Interest (expenses)
Income, net ......... (64) (113) (98) 18 86
Other income, net .... 373 153 242 183 69
---------- ---------- ---------- ---------- ----------
Income before
Taxes ............... 614 301 566 500 326
Income taxes ......... (55) (9) (97) (62) (71)
---------- ---------- ---------- ---------- ----------
Net income from
Continuing
Operations .......... 559 292 469 438 255
Discontinued
Operations Income
(loss) of subsidiary
companies sold in
1996 ................ (189) (213) -- -- --
---------- ---------- ---------- ---------- ----------
Net income ........... 370 79 469 438 255
========== ========== ========== ========== ==========
Income from continuing
operations per common
Share ............... 0.20 0.32 0.23 0.12
Loss from
Discontinued opera-
tions per common
Share ............... (0.15) -- -- --
Net income per
Common share ........ 0.05 0.32 0.23 0.12
Weighted average
Number of
Common share
Outstanding ......... 1,450,000 1,450,000 1,888,000 2,068,200
</TABLE>
23
<PAGE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. In Fiscal
1998 approximately 67% and 31% of the Company's sales were made to customers
located in the PRC and Hong Kong, respectively. During Fiscal 1997 approximately
69% and 30% of the Company's sales were made to customers located in the PRC and
Hong Kong, respectively. Sales to customers situated in Macao and elsewhere in
both years 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 1. "Description of Business -- Risks." Company stock
valuations have also dropped sharply from a 1997 high, on the main Hong Kong
stock index (the Hang Seng). On August 7, 1997, the Hong Seng Index was
16,673.27. On June 11, 1999, that index stood at 12,839.12. There can be no
assurance that these problems will not abate or worsen or that recovery will
occur in the near future, if at all, in which event the Company may likely be
materially adversely affected.
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 one-,
five- and ten-year plans (collectively, "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 affect these reform initiatives and, in
turn, the Company. See Item 1. "Description of Business -- Risks."
OVERVIEW
On March 14, 1997, the Company commenced its Public Offering and
thereby sold 618,200 shares of Common Stock, par value of $0.01 per share, and
690,000 redeemable common stock
24
<PAGE>
purchase warrants for aggregate net proceeds of approximately $1,817,000. Upon
the completion of the Public Offering, the Company acquired all of the issued
and outstanding ordinary shares of Far East in consideration for its issuance of
1,027,600 and 372,400 shares of Common Stock to Regent Earning Limited, a
company incorporated in Hong Kong, and Pearl Venture Limited, a company
incorporated in the British Virgin Islands, respectively. Regent Earning Limited
and Pearl Venture Limited previously had in the aggregate held 100% of the
outstanding shares of Far East. This transaction has been accounted for as a
reorganization of companies under common control in a manner similar to a
pooling of interests. See Item 13. "Interest of Management in Certain
Transactions."
Prior to its incorporation, the businesses of the Company were engaged
in by Far East, which in 1997 was acquired by, and is now a wholly-owned
subsidiary of the Company. Far East was established in 1971, under the name of
Eurotherm (Far East) Ltd., as a subsidiary of a United Kingdom publicly traded
company, Eurotherm Ltd., to market and distribute its parent company'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. Far East thereafter
changed its name from Eurotherm (Far East) Ltd. to its current name. See Item
4."Control of Registrant" and Item 13. "Interest of Management in Certain
Transactions."
The following discussion and analysis should be read in conjunction
with the Audited 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 United States GAAP.
RESULTS FROM OPERATIONS
During the fiscal years ended October 31, 1991 ("Fiscal 1991"), October
31, 1992 ("Fiscal 1992"), a two-month transition period from November 1, 1992 to
December 31, 1992 (accounting for the Company's change of its fiscal year end
from October 31 to December 31, effective December 31, 1993) and the fiscal year
ended December 31, 1993 ("Fiscal 1993"), the Company experienced a gradual
increase in sales revenues. During the fiscal years ended December 31, 1994
("Fiscal 1994") and December 31, 1995 ("Fiscal 1995"), Far East's sales revenues
remained substantially unchanged. Management of the Company believes that Far
East's lack of sales growth during Fiscal 1994 and Fiscal 1995 resulted from the
PRC'S economic austerity measures undertaken to halt inflation in the PRC, which
was approximately 27% in 1994 in comparison to 1993. These economic austerity
measures included the tightening of credit, when coupled with a devaluation of
the RMB in 1993 and the imposition of a value tax imposed by the PRC on imports
into the PRC, caused products manufactured in the PRC to become more competitive
with the United States, European and Japanese manufactured products distributed
by Far East even though the products distributed by Far East were of better
quality. Cost became an overriding issue with
25
<PAGE>
many of PRC's customers and, in response, Far East reduced its sales prices and,
therefore, its profit margins to remain competitive with PRC manufacturers.
During Fiscal 1996, Far East also began streamlining its operations and focusing
its efforts on its current product lines by disposing of three of its
subsidiaries, Euro Electron (Far East) Ltd. ("Euro Electron"), Action
Instruments (China) Ltd. ("Action") and Armtison Ltd. ("Armtison").
Euro Electron had been established to distribute telecommunication
products. However, Far East believes that manufacturers of these products
generally distributed their products directly to end users, instead of using
intermediary distributors such as Far East. Far East also believes that
technical expertise in this product line, which it lacked, was a necessity for
successfully entering this market. Far East attributes the inability of Euro
Electron to ever develop its core business to the foregoing factors. Action had
been established to distribute industrial computers. During Fiscal 1994, Action
lost its principal vendor when such vendor sold its industrial computer
production line to another supplier. Additionally, another major manufacturer of
industrial computers established its own Hong Kong and PRC distribution
operation. Armtison was principally a holding company for Euro Electron and
Action.
The following table presents selected statement of operations data
expressed as a percentage of net sales for the Company's Fiscal 1994, Fiscal
1995, Fiscal 1996, Fiscal 1997 and Fiscal 1998.
<TABLE>
<CAPTION>
==========================================================================================================
YEAR ENDED DECEMBER 31,
----------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 78.2% 77.8% 77.3% 75.1% 75.7%
Gross Profit 21.8% 22.2% 22.7% 24.9% 24.3%
Selling and administrative expenses 19.5% 20.3% 19.6% 22.5% 22.9%
Operating income 4.6% 2.2% 4.1% 4.0% 2.6%
Income tax provision .4% .1% .7% .5% .6%
Net income 2.8% .6% 3.4% 3.5% 2.0%
====== ====== ====== ====== =====
==========================================================================================================
</TABLE>
RESULTS OF OPERATIONS
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
SALES; GROSS PROFIT AND COST OF GOODS SOLD. Sales increased by
approximately $247,000 or 2% to approximately $12,757,000 in Fiscal 1998 from
approximately $12,510,000 in Fiscal 1997. The Company's business was adversely
affected by the deterioration of the economy in Hong Kong and China coupled with
the Asian currency crisis. However, the contribution from the three new PRC
sales offices opened in 1997 reduced the impact and attributed to the increase
in sales.
Gross profits decreased by approximately $16,000 or 0.5% to
approximately $3,095,000 for Fiscal 1998 as compared to approximately $3,111,000
for Fiscal 1997. This decrease was
26
<PAGE>
attributable to the decrease in gross profit margins from 24.9% in Fiscal 1997
to 24.3% in Fiscal 1998. During Fiscal 1998, the Company's cost of goods sold
was $9,662,000, or 75.7% of sales, in comparison to $9,399,000 or 75.1% of sales
for Fiscal 1997. Cost of goods sold expressed as a percentage of sales increased
by 0.6% in Fiscal 1998 as compared with Fiscal 1997. The gross profit margin
decreased and the percentage increase in cost of goods sold were attributed to
the fact that the Company reduced sale prices to compete under the poor economic
situation in the region.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses were approximately $2,924,000 in Fiscal 1998, an increase of
approximately $112,000 or 4.0% from approximately $2,812,000 in Fiscal 1997. The
increase was primarily due to additional expenses incurred in connection with
the Company's listing on the NASDAQ SmallCap Market, such as but not limited to
legal fees for the SEC filing and repurchase of underwriter's warrants,
maintenance fees, and management fees.
INTEREST INCOME. Net interest income increased by approximately $68,000
or 378% to approximately $86,000 in Fiscal 1998 from approximately $18,000 for
Fiscal 1997. Interest income increased by approximately $21,000 or 20.6% to
approximately $133,000 in Fiscal 1998 from approximately $102,000 in Fiscal
1997. The increase was primarily due to the increase in bank deposits from funds
generated from operations and proceeds from the issuance of common stock and
warrants. Interest expense decreased by approximately $37,000 or 44% to
approximately $47,000 in Fiscal 1998 from approximately $84,000 for Fiscal 1997.
The decrease was a result of the Company's reduced utilization of credit
facilities under its banking arrangements.
OTHER INCOME. Other income decreased by approximately $114,000 or 62.3%
to approximately $69,000 in Fiscal 1998 from approximately $183,000 in Fiscal
1997. The decrease in other income was principally due to loss of approximately
$37,000 from a repurchase of underwriter's warrants and less exchange gains.
PROVISION FOR PROFIT TAX. Provisions for taxes increased by $9,000 to
approximately $71,000 in Fiscal 1998 from approximately $62,000 in Fiscal 1997.
The increase was due primarily to provisions for taxes in 1997 being lower
resulting from the write-back of prior years' over-provisions for taxes.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations
decreased by approximately $183,000 or 41.8% to approximately $255,000 in Fiscal
1998 from approximately $438,000 in Fiscal 1997. The decrease in net income was
primarily due to the decrease in the gross margin percentage as a result of the
poor economic situation in the market, increase in selling and administrative
expenses due to additional listing expenses and the loss and legal expenses
incurred on repurchase of underwriter's warrants.
FISCAL YEAR ENDED DECEMBER 31, 1997 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1996
SALES; GROSS PROFIT AND COST OF GOODS SOLD. Sales decreased by
approximately $1,248,000 or 9% to approximately $12,510,000 in Fiscal 1997 from
approximately $13,758,000 in Fiscal 1996. The decrease is primarily due to (i)
streamlining of product line offerings to concentrate on
27
<PAGE>
the Company's core business of the water and waste water treatment business, and
the discontinuation of certain product lines not related to the Company's core
business, some medical lines, and (ii) the economic slowdown in Asia in the
second half of the year.
Gross profit decreased by approximately $14,000 or 0.4% to
approximately $3,111,000 for Fiscal 1997 as compared to approximately $3,125,000
for Fiscal 1996. This decrease was attributable to the increase in gross profit
margins from 22.7% in Fiscal 1996 to 24.9% in Fiscal 1997. During Fiscal 1997,
the Company's cost of goods sold was $9,399,000, or 75.1% of sales, in
comparison to $10,633,000 or 77.3% of sales for Fiscal 1996. Cost of goods sold
expressed as a percentage of sales decreased by 2.2% in Fiscal 1997 as compared
with Fiscal 1996. The gross profit margin increase and the percentage decrease
in cost of goods sold are attributed to the discontinuation or disposition of
the lower margin businesses such as the medical products line.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses were approximately $2,812,000 in Fiscal 1997, an increase of
approximately $109,000 or 4.0% from approximately $2,703,000 in Fiscal 1996. The
increase is primarily due to additional expenses incurred in connection with the
Company's preparations for its Public Offering, including its application for
listing on the NASDAQ SmallCap Market, such as but not limited to legal fees,
maintenance fees, consultant fees and management fees, and operating expenses
for the three new PRC sales offices opened during the year.
INTEREST INCOME/EXPENSE. Net interest changed from net interest expense
of approximately $98,000 in Fiscal 1996 to net interest income of approximately
$18,000 in Fiscal 1997. Interest income increased by approximately $35,000 or
52.2% to approximately $102,000 in Fiscal 1997 from approximately $67,000 for
Fiscal 1996. The increase is primarily due to the increase in bank deposits from
funds generated from operations and proceeds from the issuance of common stock
and warrants. Interest expense decreased by approximately $81,000 or 49.1% to
approximately $84,000 in Fiscal 1997 from approximately $165,000 for Fiscal
1996. The decrease was a result of the Company's reduced utilization of credit
facilities under its banking arrangements.
OTHER INCOME. Other income decreased by approximately $59,000 or 24.4%
to approximately $183,000 in Fiscal 1997 from approximately $242,000 in Fiscal
1996. The decrease in other income is principally due to a non-recurring profit
of approximately $118,000 from sales of investment property in Fiscal 1996.
PROVISION FOR PROFIT TAX. Provisions for taxes decreased by $35,000 to
approximately $62,000 in Fiscal 1997 from approximately $97,000 in Fiscal 1996.
The decrease was due primarily to the decrease in operating income and
over-provision in 1996.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations
increased by approximately $87,000 or 24.8% to approximately $438,000 in Fiscal
1997 from approximately $351,000 (total income of approximately $469,000 less
non-recurring profit of approximately $118,000 from sales of property) in Fiscal
1996. The increase in net income was primarily due to the improvement in the
gross margin percentage and the reduction in interest expenses.
28
<PAGE>
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1995
SALES; GROSS PROFIT AND COST OF GOODS SOLD. Sales increased by
approximately $91,000 or 0.7% to approximately $13,758,000 in Fiscal 1996 from
approximately $13,667,000 in Fiscal 1995. These results reflect the phasing out
of the distribution of medical business-related products essentially being
offset by the increase in sales for products relating to the Company's core
business for water and waste water treatment. Gross profit increased by
approximately $91,000 or 3% to approximately $3,125,000 for Fiscal 1996 compared
to approximately $3,034,000 for Fiscal 1995 which was attributable to the
increase in gross profit margins from 22.2% in Fiscal 1995 to 22.7% in Fiscal
1996. During Fiscal 1996, the Company's cost of goods sold were $10,633,000 or
77.3% of sales in comparison to $10,633,000 or 77.8% of sales for Fiscal 1996 as
compared with Fiscal 1995. The gross profit margin increase and the percentage
decrease in costs of goods sold were principally the result of increases in
demand for products with higher gross profit margins.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses were approximately $2,703,000 in Fiscal 1996, a decrease of
approximately $70,000 or 2.5% from approximately $2,773,000 in Fiscal 1995. The
decrease is primarily due to improved operating efficiencies resulting in the
reduction of operating expenses in the Company's PRC sales offices, lower
advertising costs incurred in exhibitions, and decreased rental expenses for the
Company's sales offices as a result of the Company's replacement of rented
office space with the use of self-owned properties in Shanghai and Beijing.
INTEREST EXPENSE. Net interest expense decreased by approximately
$15,000 or 13.3% to approximately $98,000 in Fiscal 1996 from approximately
$113,000 for Fiscal 1995. The decrease is primarily the net result of (a) the
increase in mortgage loan interest of approximately $50,000 due to Far East's
long-term borrowings incurred in September and October 1995 which were used to
finance the purchase of properties situated in Shanghai and Hong Kong,
respectively; and (b) the decrease in interest expenses for short term
borrowings from banks and the increase in interest income received from an
affiliated company.
OTHER INCOME. Other income increased by approximately $89,000 or 58.2%
to approximately $242,000 in Fiscal 1996 from approximately $153,000 in Fiscal
1995. The increase in other income results from a gain of approximately $118,000
from sales of an investment property.
PROVISION FOR PROFIT TAX. Provisions for taxes increased by $88,000 to
approximately $97,000 in Fiscal 1996 from approximately $9,000 in Fiscal 1995.
The increase was due primarily to the exceptional low provision in Fiscal 1995
attributable to an adjustment of tax on profit from previous years of
approximately $45,000, resulting from a review by Hong Kong's Commissioner of
Inland Revenue.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations
increased by approximately $177,000 or 61.0% to approximately $469,000 in Fiscal
1996 from approximately $292,000 in Fiscal 1995. The increase in net income was
primarily due to profit of approximately $118,000 from the disposal of an
investment property, and a significant reduction in sales and
29
<PAGE>
administrative expenses. The decrease in sales and administrative expenses was
principally attributable to a reduction in selling expenses (such as business
travel, advertising and exhibition costs), as the Company believes that its
sales efforts in prior years have created a solid network of distributors, a
recognized name, an established reputation and a stable PRC sales force, and
that this strength now permits the Company to force its resources elsewhere.
DISCONTINUED OPERATIONS. The Company's shareholders decided to separate
the main operating company (Far East) from its subsidiaries in early 1996 to
focus on its core business and discontinue operations inconsistent with its core
business. The Company disposed of the following subsidiaries: Euro Electron,
Action and Armtison. The Company's investment in the foregoing three
subsidiaries was transferred back to Far East's shareholders directly at a price
equal to book value (HK$10,000). As a result, no income (loss) to those
subsidiaries is reported in Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has primarily used its cash to fund 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 under bank lines of credit, and long-term mortgage bank
loans. The Company expects, but as to which no assurance may be made, that its
present cash reserves, cash from operations and existing available bank credit
facilities would be sufficient to fund its capital expenditures. Working capital
at the end of Fiscal 1997 and Fiscal 1998 was approximately $3,292,000 and
$3,493,000, respectively.
The Company used $74,000 in continuing operating activities in Fiscal
1996, and generated net cash of $793,000 and $696,000 from operating activities
in Fiscal 1997 and Fiscal 1998, respectively, on net income of $469,000,
$438,000 and $255,000 in Fiscal 1996, Fiscal 1997 and Fiscal 1998, respectively.
The Company believes that cash from operations in Fiscal 1996 was adversely
impacted by the increase in prepayments, particularly resulting from expenses
relating to preparations for the Company's Public Offering and an increase in
net amount due from affiliated companies in Fiscal 1996. At the end of Fiscal
1997, the Company's accounts receivable were approximately $2,585,000 while at
the end of Fiscal 1998, the Company's accounts receivable were approximately
$2,726,000.
The Company generated net cash from investing activities of $1,105,000
in Fiscal 1996, and used $71,000 and $44,000 for investing activities in Fiscal
1997 and Fiscal 1998, respectively. Cash used in investing activities in Fiscal
1998 and Fiscal 1997 was mainly used to purchase facilities and equipment. Cash
in the amount of approximately $871,000 was received in Fiscal 1996 from the
sale of an investment property in Hong Kong.
The Company used $228,000 in financing activities in Fiscal 1996,
generated $422,000 in Fiscal 1997, and used $151,000 in Fiscal 1998,
respectively. The Company had various banking facilities for overdraft, import
and export credits and foreign exchange contracts from which the Company can
access up to approximately $5,021,000, and of which approximately $4,247,000
remained unused as at December 31, 1998. Approximately $2,904,000 of the
aforementioned
30
<PAGE>
available credit facilities were obtained on the conditions that, among other
things, the Company mortgage its properties as security for the credit
facilities, not to create a charge or lien on its other assets in favor of other
parties without such bank's consent, and the Company maintaining a certain level
of net worth. The Company also has a bank loan from the Hong Kong and Shanghai
Banking Corporation to finance the purchase of its properties with outstanding
indebtedness at December 31, 1998 of approximately $328,000, which loan bears
interest at Hong Kong's prime rate plus 1.75% and is repayable in monthly
installments through November 2002.
Cash increased from approximately $2,539,000 at the end of Fiscal 1997
to approximately $3,045,000 at the end of Fiscal 1998. The principal reasons for
the increase in cash were (i) cash generated from operations; and (ii) increase
in accounts payable as some suppliers extended increased lines of credit to the
Company. The Company plans to use cash on hand for, among other purposes, to
acquire a manufacturing plant and/or engineering company in Hong Kong and/or the
PRC.
The Company's net accounts receivable increased from $2,585,000 at
December 31, 1997 to $2,726,000 at December 31, 1998. The increase was
attributed to the Company's approximate 2% increase in sales in 1998 and the
Company increasing the credit lines of certain of its good customers.
Inventory decreased from approximately $574,000 at the end of Fiscal
1997 to approximately $486,000 at the end of Fiscal 1998. The Company seeks to
maintain a low level of inventory consisting mostly of low-tech products to fill
its regular customers' orders, and parts and accessories for warranty purposes,
with the Company policy to order products upon customer demand. The higher
inventory level at the end of Fiscal 1997 was principally due to goods received
near year end but not delivered to customers for several reasons, including but
not limited to, a multi-component order awaiting shipment of a component while
another customer order had arrived without the customer's letter of credit or
other provision for payment having been received.
The Company's outstanding short-term bank borrowings consisted of
import and export bank loans. Short-term borrowings were reduced from
approximately $16,000 at the end of Fiscal 1997 to $0 at the end of Fiscal 1998
as the Company repaid such debt during the year. As at December 31, 1998, the
Company had various banking facilities from which total available credit was
approximately $5,021,000, of which approximately $4,247,000 remained unused as
at such date. The Company's long-term bank loans are secured by certain of the
Company's realty, and bear interest at 12% per annum. As at December 31, 1998,
the Company had outstanding long-term bank loans in the amount of approximately
$328,000.
The Company's capital expenditures were approximately $49,000 in 1998,
a decrease from expenditures of approximately $74,000 in 1997. Capital
expenditures in 1998 were incurred primarily in connection with the purchase of
office equipment and furniture, computers and calibration equipment (for a
calibration laboratory). A source of funds for these capital expenditures
included net proceeds from the Public Offering. The Company is presently seeking
31
<PAGE>
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 and available bank credit facilities to fund
such capital expenditures.
INFLATION
The annual rate of inflation in the PRC has declined significantly in
recent years. In 1996, 1997 and 1998 the rate of inflation was approximately
8.3%, 2.8% and -0.8%, respectively, in comparison to the preceding years,
respectively. In 1994, however, inflation grew at approximately 21.7% over 1993.
The Company believes this declining inflation rate has had a positive effect on
its results from operations. The Company believes, although no assurance can be
given as to the correctness of the Company's belief, that credit restrictions
will be gradually lifted, and that as a result Far East will be able to increase
prices in the market for its products and thus realize increased profit margins.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (Year 2000) approaches. The "Year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the latter two digit year value
to 00. The issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. Management of the Company, however, has assessed the "Year 2000"
compliance expense and related potential effect on the Company's earnings and
believes it is "Year 2000" compliant.
Most of the recordkeeping of the sales, financial and accounting
functions is done in manual format or with third-party developed software.
Computerized information is kept on PCs which are believed to be Year 2000
compliant, as to the hardware and third-party developed software. Additionally,
in the locale of the Company's operations computerized record creation and
maintenance is not widespread and clientele and supply bases are not believed to
be computer dependent. The Company has performed an analysis of its Year 2000
compliance. The Year 2000 remediation plan is expected to be completed before
the end of Fiscal 1999 at an approximate cost of $20,000. The Company has
received assurances from most of its key customers, clients and vendors that
they are Year 2000 compliant. The Company has received assurances from all of
its key vendors which sell and/or maintain software to or from it, as the case
may be, that the key vendors' software is Year 2000 compliant.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
32
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
The directors and executive officers of Euro Tech Holdings Company
Limited are as follows:
Name Age Position
---- --- --------
T.C. Leung 55 Chairman of the Board of Directors
and Chief Executive Officer
Jerry Wong 39 Director and Chief Financial Officer
Nancy Wong 49 Director
C.P. Kwan 39 Director
Alex Sham 35 Director
Adam L. Goldberg 40 Director
Y.K. Liang 69 Director
Set forth below is a brief background of the executive officers and
directors based upon the information supplied by them:
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.
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, Macao 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 Chartered Association of 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
33
<PAGE>
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. During
the last several years, Ms. Wong has played a pivotal role in Far East's
business expansion in China. Ms. Wong received a Bachelor of Science degree in
Business Administration from the University of East Asia, Macao 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.
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.
ADAM L. GOLDBERG has been a director of the Company since February 16,
1998. Mr. Goldberg is an attorney who has maintained his own practice in New
York City since 1993. From 1989 until 1993, Mr. Goldberg was employed as a staff
attorney with the New York City Department of Housing Preservation and
Development. Mr. Goldberg is the designee of May Davis Group, Inc., the
underwriter of the Company's initial public offering.
Y.K. LIANG has been a director of the Company since February 16, 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.
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 will be elected annually by the Board of
Directors and serve at the discretion of the Board of Directors.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
EXECUTIVE COMPENSATION
The following table sets forth certain summary information with respect
to the compensation paid by Far East for services rendered in all capacities to
Far East during Fiscal 1998 and Fiscal 1997 by Far East's Chairman of the Board
and Chief Executive Officer.
34
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND
PRINCIPAL POSITION YEAR SALARY($) BONUS($)
- ------------------ ---- --------- --------
<S> <C> <C> <C>
T.C. Leung, Chairman of the Board of 1998 100,000 30,000
Directors and Chief Executive Officer 1997 78,890 32,269
</TABLE>
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 special 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
The Company has a defined contribution pension plan for all of its
employees. Under this plan, all employees are entitled to a pension benefit
equal to 50% to 100% of their individual fund account balances at their dates of
resignation or retirement which depends on their years of services. The Company
is required to make specific contributions at approximately 10% of the basic
salaries of the employees to an independent fund management company. The Company
has no future obligations for the pension payment or any post-retirement
benefits beyond the annual contributions made. The independent fund management
company is responsible for the ultimate pension liabilities to those resigned or
retired employees. During the years ended December 31, 1996, 1997 and 1998, the
Company made total pension contributions of approximately $53,500, $115,000 and
$127,000, respectively.
EMPLOYMENT AGREEMENT - T.C. LEUNG
T.C. Leung's services to the Company and Far East are provided pursuant
to a five year personal services agreement between the Company, Far East and
Shereman Enterprises Ltd., a management company, pursuant to which Mr. Leung
will continue to serve as the Chairman of the Board of Directors and Chief
Executive Officer of the Far East and the Company. The agreement requires that
Mr. Leung devote substantially all of his business time to the affairs of the
Company and Far East. The agreement provides for the payment of $100,000 and six
percent of the Company's consolidated pre-tax income to the management company
in exchange for Mr. Leung's services during the first year of the agreement's
term with compensation past the first year to be renegotiated annually. The
agreement contains a confidentiality provision and a covenant not to compete
with the Company or Far East for a period of one year following termination of
the agreement under certain circumstances.
35
<PAGE>
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
STOCK OPTION PLAN
In November 1996, the Board of Directors adopted the Company's 1996
Stock Option Plan (the "1996 Stock Option Plan" or, the "Plan"). As certain net
income thresholds were not met, no options may be granted under the Plan.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
The Company was incorporated under the laws of the British Virgin
Islands on September 30, 1996. Shortly after incorporation, the Company sold
50,000 shares of its Common Stock to Gusrae, Kaplan & Bruno and 100,000 shares
of its Common Stock to Sidford for aggregate cash consideration of $1,500 or
$.01 per share. Gusrae, Kaplan & Bruno is United States counsel to the Company
and was granted the right to purchase said shares in partial consideration of
its services rendered to the Company in connection with the Company's initial
public offering ("Public Offering"). Sidford has been and is a business
consultant to Far East which initially was paid HK$5,000 by Far East and granted
the option to purchase the aforementioned 100,000 shares. In January 1997, Far
East amended its consulting agreement with Sidford to pay Sidford $5,000 per
month for twenty months. At that same time, the Company repurchased the 100,000
shares of its Common Stock held by Sidford.
Pearl is a British Virgin Islands company which is a trust for the
benefit of T.C. Leung, the Company's Chairman of the Board and Chief Executive
Officer. Regent is a Hong Kong corporation.
Concurrently with the closing of the Company's Public Offering in March
of 1997, the Company consummated the acquisition of Far East by exchanging
1,400,000 shares of the Company's Common Stock for the 1,000,000 issued and
outstanding shares of the Common Stock of Far East at a ratio of 1.4 (one and
four-tenths) shares of the Company's Common Stock for each issued and
outstanding share of Far East's Common Stock.
Pearl was one of the original shareholders of Far East. Prior to 1995,
Pearl and Regent purchased and accumulated 266,000 and 734,000 shares (or 100%
in the aggregate) of the issued and outstanding common stock of Far East for an
aggregate consideration of approximately HK$11,130,000. Broadskill is a Hong
Kong corporation which owns an approximate 34% equity interest in Regent which
if converted into shares of the Company's Common Stock would represent
approximately 15% of the Company's presently issued and outstanding shares of
Common Stock. No executive officer or director of the Company is an officer or
director of Pearl, Regent or Broadskill. In addition to its direct record
ownership of 372,400 shares of the Company's Common Stock, Pearl is also the
beneficial owner of approximately 527,069 shares of the Company's Common Stock
through its equity interest in Regent. Mr. Kwan, and each of Messrs. Wong, Sham
and Ms. Wong, Executive Officers and Directors of the Company and Far East, have
equity interests in Regent and/or Broadskill which if converted into shares of
the Company's Common Stock would
36
<PAGE>
represent less than 5% in the case of Mr. Kwan, and less than 1% of the
Company's Common Stock for each of Messrs. Wong and Sham and Ms. Wong,
respectively.
During its fiscal year ended December 31, 1996 ("Fiscal 1996"), the
Company transferred its equity interests in three former subsidiaries, Armtison
(a wholly owned subsidiary), Action (a 51% owned subsidiary) and Euro Electron
(an 80% owned subsidiary) to Regent and Pearl in exchange for the book value
price (an aggregate of HK$10,000) of the Company's interest in these three
subsidiaries.
On November 11, 1996 the Company completed a private placement of an
aggregate of 1,000,000 Warrants (the "Private Warrants") at $.15 per Warrant and
received therefrom aggregate gross proceeds of $150,000. May Davis Group, Inc.
("May Davis") acted as the Company's placement agent in connection with this
private placement and received an aggregate of $19,500 in commissions and
non-accountable expenses. The terms and conditions of the Private Warrants are
identical to the Warrants sold in the Public Offering in March 1997 (the "Public
Warrant"). In March 1997, the Company repurchased 70,000 Private Warrants at
their purchase price for an aggregate repayment of $10,500.
Mr. Leung may be deemed to be a "promoter" of the Company as such term
is defined by the rules promulgated by the Commission under the Securities Act.
As so defined, a promoter is any person who (i) acting alone or in conjunction
with others, took the initiative in founding and organizing an issuer's business
or enterprise, or (ii) in connection with founding and organizing the business
or enterprise of an issuer, receives in consideration for services and/or
property, ten percent or more or either of any class of the issuer's securities
or the proceeds therefrom. Mr. Leung was the proponent of the Public Offering to
raise capital for the Company and Far East and of establishing a company in the
British Virgin Islands for that purpose. Mr. Leung is the beneficial owner of
approximately 79% of the Company's shares of Common Stock after giving effect to
the exercise of the 1,100,000 Management Options owned by him.
The Company intends that all transactions between the Company and its
executive officers and directors be on terms no less favorable than could be
obtained from independent third parties and be approved by a majority of the
Company's directors who are not interested in such transactions.
All outstanding balances with related parties are unsecured,
non-interest bearing and are repayable in 1999. The related companies with which
the Company has engaged in transactions are Euro Electron, Eurotherm, Action and
Armtison. During Fiscal 1998 the Company made sales to Action and Eurotherm of
approximately $4,000, and $48,000, respectively. During Fiscal 1998 the Company
made purchases from Action, Armtison and Eurotherm of approximately $24,000,
$56,000 and $491,000, respectively. Additionally, during Fiscal 1998, the
Company paid approximately $46,000 to Armtison for office space rentals, and
approximately $25,000 in management fees to Eurotherm to assist in the
management of some of the Company's PRC offices. The payments to Armtison and
Eurotherm were based on actual office space usage and the time cost of personnel
used, respectively.
37
<PAGE>
No loans or advances have been or will be made in the future to the
Company's officers, directors or shareholders of at least five (5%) percent of
the issued and outstanding shares of any class of equity securities ("5%-plus
Shareholders"), or their respective affiliates unless such loans are for bona
fide business purposes.
In connection with the Public Offering, the Company sold to May Davis,
for the sum of $10.00, Warrants to purchase up to 60,000 shares of the Company's
Common Stock at $8.25 and Warrants, at a price of $.2475 per Warrant to purchase
up to an additional 60,000 shares of the Company's Common Stock at $5.50 per
share (the "May Davis Warrants") which are exercisable until March 14, 2002. For
the life of the May Davis Warrants, the holders thereof are given the
opportunity to profit from a rise in the market price of the Warrants and/or
Common Stock of the Company with a resulting dilution in the interest of other
securityholders. The Company may find it more difficult to raise additional
equity capital if it should be needed for the business of the Company while the
May Davis Warrants are outstanding, and at any time when the holder of the May
Davis Warrants might be expected to exercise them, the Company would probably be
able to obtain additional equity capital on terms more favorable than those
provided in the May Davis Warrants. The Company has agreed, at its expense, to
register under the Act, on one occasion, and at May Davis' expenses on another
occasion, the May Davis Warrants and/or the underlying securities at the request
of the holder thereof. The Company has also agreed to certain "piggy-back"
registration rights for the holders of the May Davis Warrants and securities
issuable upon exercise thereof.
On October 16, 1998, the Company repurchased a portion of the May Davis
Warrants. The Company purchased the right to obtain 60,000 warrants and said
right to thereby acquire 60,000 shares at an exercise price of $5.50 and any and
all rights, and powers granted pursuant to the May Davis Warrants relating to
the warrants and the Shares in consideration of the sum of $75,150.
May Davis had indicated its desire to exercise the demand registration
rights. The Company reviewed the situation and determined that to file a new
registration statement or post-effective amendment to its registration
statement, the cost to the Company would far exceed $75,000.
The Company has also agreed with May Davis, that if the Company, its
current or future subsidiaries, if any, and its principal shareholders, or their
respective affiliates, will until March 14, 2000 provide May Davis with a Right
of First Refusal with respect to any public or private offering of securities to
raise capital. May Davis must agree to undertake any such financing on the same
or better terms as any other financing proposal.
The Company has agreed that for a period of time ending not earlier
than March 14, 2000, May Davis will have the right to designate a person to be a
non-voting advisor to the Company's Board of Directors who will receive the same
compensation as a member of the Board of Directors and who will be indemnified
by the Company against any claims arising out of his participation at meetings
of the Board of Directors. Alternatively, May Davis has the right, during such
period, to designate one person to be elected to the Company's Board of
Directors. The Company has agreed to use its best effort to obtain the election
of the May Davis designee and such person shall be
38
<PAGE>
entitled to receive the same compensation, expense reimbursement and other
benefits as any other non-employee Director of the Company, if any. May Davis
has designated Mr. Goldberg for the Company's Board of Directors. At the
completion of the Public Offering, the Company retained May Davis to act as a
financial consultant for a period of time concluding on March 14, 2000 for fees
aggregating $108,000 which were paid in full at that time.
The Company has authorized the issuance of 1,400,000 Options to
purchase up to an aggregate of 1,400,000 shares of Common Stock (the "Management
Options") to its officers, directors and employees in such numbers and to such
persons as the Company's Chairman of the Board and Chief Executive Officer may
direct. The Management Options became exercisable on March 14, 1998 for a term
of ten years.
The exercise price and the number of shares of Common Stock 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 Common Stock and securities convertible into or exchangeable for Common Stock
excluding certain issuances of shares of the Company's Common Stock. No
adjustments in the exercise price will be required to be made with respect to
the Management Options until cumulative adjustments amount to $.05. In the event
of any capital reorganization, certain reclassifications of the Common Stock,
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 shares of Common Stock or (ii) the acquisition of Far East or
any other business), or 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 shares of Common
Stock 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 information with respect to Management
Options: (i) the aggregate amounts of shares of Common Stock subject to
Management Options; and (ii) the per share exercise price for the Management
Options granted to these individuals. No other options to these individuals were
issued and outstanding as of December 31, 1998.
39
<PAGE>
<TABLE>
<CAPTION>
Names of Executive Shares Subject Per Share
Officers and Directors to Options Exercise Price
- ---------------------- -------------- --------------
<S> <C> <C>
T.C. Leung...................... 750,000 $5.50
350,000 $4.00
Alex Sham....................... 30,000 $5.50
20,000 $4.00
Jerry Wong...................... 25,000 $5.50
15,000 $4.00
Nancy Wong...................... 22,500 $5.50
7,500 $4.00
C.P. Kwan....................... 22,500 $5.50
7,500 $4.00
All Executive Officers and
Directors as a Group (7 persons) 1,250,000 $4.00-$5.50(1)
</TABLE>
Other officers and/or employees of the Company have been or will be
granted management options to purchase an aggregate of 150,000 Management
Options, all of which will be exercisable at $5.50 per share.
As of June 8, 1999, no Management Options have been exercised.
- ----------
(1) Price Range.
40
<PAGE>
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
Not Applicable.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
As to Use of Proceeds, See Item 9. "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
41
<PAGE>
PART IV
ITEM 17. FINANCIAL STATEMENTS.
See pages F-1 through F-16 annexed hereto for the following
consolidated financial statements of the Company.
Euro Tech Holdings Company Limited and Subsidiaries
Report of Independent Public Accountants .......... F-1
Consolidated Statements of Income for the Year
Ended December 31, 1996, 1997 and 1998 ............ F-2
Consolidated Balance Sheets as of
December 31, 1997 and 1996 ........................ F-3
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1997 and 1998 ............ F-5
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended December 31, 1996,
1997 and 1998 ..................................... F-6
Notes to Consolidated Financial Statements ........ F-7 - F-15
ITEM 18. FINANCIAL STATEMENTS.
Not Applicable.
42
<PAGE>
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) List of Financial Statements.
Reference is made to Item 17 for all financial statements filed as part
of this Annual Report.
(b) List of Exhibits (filed herewith).
Exhibit
No. Description
------- -----------
10.22 Dealer Agreement between Royce Instrument Corporation
and Euro Tech (Far East) Ltd.
23.2 Consent of Arthur Anderson & Co., Hong Kong
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EURO TECH HOLDINGS COMPANY LIMITED
----------------------------------
(Registrant)
/s/ T.C. LEUNG
-------------------------------------------------
Chief Executive Officer and Chairman of the Board
Dated: June 23, 1999
<PAGE>
Draft 11
EURO TECH HOLDINGS COMPANY LIMITED AND SUBSIDIARIES
======================================================
AUDITED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
AND
CONSOLIDATED STATEMENTS OF INCOME,
CASH FLOWS AND CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
TOGETHER WITH AUDITORS' REPORT
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND DIRECTORS OF EURO TECH HOLDINGS COMPANY LIMITED
We have audited the accompanying consolidated balance sheets of Euro Tech
Holdings Company Limited (the "Company"), incorporated in the British Virgin
Islands, and subsidiaries (the "Group") as of December 31, 1997 and 1998, and
the related consolidated statements of income, cash flows and changes in
shareholders' equity for the years ended December 31, 1996, 1997 and 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Group as of December 31, 1997 and 1998, and the results of its operations and
cash flows for the years ended December 31, 1996, 1997 and 1998 in conformity
with generally accepted accounting principles in the United States of America.
/s/ Arthur Andersen & Co.
Certified Public Accountants
June 23, 1999
Hong Kong,
March 5, 1999.
F-1
<PAGE>
EURO TECH HOLDINGS COMPANY LIMITED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(Amounts in thousands except for share and per share data)
<TABLE>
<CAPTION>
Notes 1 9 9 6 1 9 9 7 1 9 9 8
--------- ------------------ ------------------ -----------------
US$ US$ US$
<S> <C> <C> <C> <C>
Net sales 10 13,758 12,510 12,757
Cost of goods sold (10,633) (9,399) (9,662)
------------------ ------------------ -----------------
Gross profit 3,125 3,111 3,095
Selling and administrative expenses
10 (2,703) (2,812) (2,924)
------------------ ------------------ -----------------
Operating income 422 299 171
Interest (expenses) income, net 10 (98) 18 86
Other income, net 3 & 10 242 183 69
------------------ ------------------ -----------------
Income before income taxes 566 500 326
Income taxes 4 (97) (62) (71)
------------------ ------------------ -----------------
Net income 469 438 255
================== ================== =================
Foreign currency translation adjustment
- (5) 5
------------------ ------------------ -----------------
Comprehensive income 469 433 260
================== ================== =================
Net income per common share 0.32 0.23 0.12
================== ================== =================
Weighted average number of common
shares outstanding (pro forma for
1996) 1,450,000 1,888,000 2,068,200
================== ================== =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
EURO TECH HOLDINGS COMPANY LIMITED
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1998
(Amounts in thousands except for share data)
<TABLE>
<CAPTION>
Note 1 9 9 7 1 9 9 8
--------- ------------------- -------------------
US$ US$
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 2,539 3,045
Accounts receivable, net 5 2,585 2,726
Bills receivable 73 131
Due from related companies 10 16 -
Prepayments and other current assets 288 210
Inventories, net 6 574 486
------------------- -------------------
Total current assets 6,075 6,598
Property, plant and equipment, net 7 2,009 1,961
------------------- -------------------
Total assets 8,084 8,559
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings 16 -
Long-term bank loans, current portion 8 59 68
Accounts payable 1,917 2,637
Bills payable 179 45
Due to related companies 10 143 35
Accrued expenses 440 287
Taxation payable 29 33
------------------- -------------------
Total current liabilities 2,783 3,105
------------------- -------------------
Long-term bank loans 8 329 260
------------------- -------------------
Shareholders' equity:
Common stock, par value US$0.01 each, 20,000,000
shares authorized; 2,068,200 shares issued and
outstanding 21 21
Additional paid-in capital 2,092 2,054
Warrants 172 172
Cumulative translation adjustment (5) -
Retained earnings 2,692 2,947
------------------- -------------------
Total shareholders' equity 4,972 5,194
------------------- -------------------
Total liabilities and shareholders' equity 8,084 8,559
=================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
EURO TECH HOLDINGS COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
----------------- ----------------- -----------------
US$ US$ US$
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 469 438 255
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Amortization of organization costs - 8 -
Depreciation of property, plant and equipment 72 70 96
Gain on disposals of property, plant and
equipment - (3) (4)
Gain on disposal of an investment property (118) - -
Expenses on repurchase of warrants - - 37
(Increase) decrease in assets:
Accounts receivable (121) 384 (141)
Bills receivable 61 249 (58)
Due from subsidiaries 202 - -
Due from related companies (308) 328 16
Prepayments and other current assets (595) 481 78
Inventories 199 (113) 88
Increase (decrease) in liabilities:
Accounts payable 128 (719) 720
Bills payable 6 173 (134)
Due to related companies 101 42 (108)
Due to a director 3 (6) -
Accrued expenses 29 (472) (153)
Taxation payable 52 (67) 4
Net liabilities of discontinued operations (254) - -
----------------- ----------------- -----------------
Net cash (used in) provided by operating
activities (74) 793 696
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in organization costs (8) - -
Additions to property, plant and equipment (14) (74) (49)
Proceeds from disposals of property, plant and
equipment - 3 5
Proceeds from disposal of an investment property 871 - -
Proceeds from disposals of subsidiaries 256 - -
----------------- ----------------- -----------------
Net cash provided by (used in) investing
activities 1,105 (71) (44)
----------------- ----------------- -----------------
</TABLE>
(Continued)
F-4
<PAGE>
EURO TECH HOLDINGS COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
----------------- ----------------- -----------------
US$ US$ US$
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayment of) short-term bank
borrowings 413 (1,098) (16)
Repayment of long-term bank loans (361) (285) (60)
Issuance of common stock 2 1,727 -
Repurchase of common stock - (1) -
Issuance of warrants 93 90 -
Repurchase of warrants - (11) (75)
Dividends paid (375) - -
----------------- ----------------- -----------------
Net cash (used in) provided by financing
activities (228) 422 (151)
----------------- ----------------- -----------------
Net increase in cash and cash equivalents 803 1,144 501
Cash and cash equivalents, beginning of year 597 1,400 2,539
Effect of exchange rate change on cash and cash
equivalents - (5) 5
----------------- ----------------- -----------------
Cash and cash equivalents, end of year 1,400 2,539 3,045
================= ================= =================
Supplementary information
Interest received 67 102 133
Interest paid 165 84 47
Income taxes paid 67 129 57
Non-cash transaction
- transfer of net liabilities of subsidiaries
to the Company's shareholders 254 - -
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
EURO TECH HOLDINGS COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
Accumulated
compre-
hensive
income -
Additional cumulative
Common paid-in translation Retained
stock capital Warrants adjustment earnings Total
------------ ------------ ------------ ------------ ------------ ------------
US$ US$ US$ US$ US$ US$
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, - 129 - - 2,160 2,289
1996
Net income - - - - 469 469
Dividends - - - - (375) (375)
Effect of transfer of
subsidiaries to the
Company's shareholders - 256 - - - 256
Issuance of common stock 2 - - - - 2
Issuance of warrants - - 93 - - 93
------------ ------------ ------------ ------------ ------------ ------------
Balance as of December
31, 1996 2 385 93 - 2,254 2,734
Net income - - - - 438 438
Issuance of common stock 6 1,721 - - - - 1,727
Repurchase of common (1) - - - - (1)
stock
Share swap 14 (14) - - - -
Issuance of warrants - - -90 - - 90
Repurchase of warrants - - (11) - - (11)
Foreign exchange
translation - - - (5) - (5)
adjustments
------------ ------------ ------------ ------------ ------------ ------------
Balance as of December
31, 1997 21 2,092 172 (5) 2,692 4,972
Net income - - - - 255 255
Repurchase of warrants - (38) - - - (38)
Foreign exchange
translation - - - 5 - 5
adjustments
------------ ------------ ------------ ------------ ------------ ------------
Balance as of December
31, 1998 21 2,054 172 - 2,947 5,194
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
EURO TECH HOLDINGS COMPANY LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in United States Dollars unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Euro Tech Holdings Company Limited (the "Company") was incorporated in the
British Virgin Islands on September 30, 1996.
Far East (Far East) Limited ("Far East"), is the principal operating subsidiary
of the company. It is principally engaged in the marketing and trading of water
and waste water related process control, analytical and testing instruments,
disinfection equipment, supplies and related automation systems in Hong Kong and
in the People's Republic of China (the "PRC").
In March 1997, the Company completed an initial public offering (the "Offering")
of 618,200 common shares, par value of $0.01 per share, and 690,000 redeemable
common share purchase warrants for aggregate net proceeds of approximately
$1,817,000. In connection with the Offering, the Company issued 120,000
redeemable common share purchase warrants to May Davis Group, Inc., the
underwriter of the Company's Offering, at aggregate cost of $10.
Upon the completion of the Offering, the Company acquired all of the issued and
outstanding ordinary shares of Far East by the issuance of 1,027,600 and 372,400
common shares of the Company to Regent Earning Limited, a company incorporated
in Hong Kong, and Pearl Venture Limited, a company incorporated in the British
Virgin Islands, respectively. Regent Earning Limited and Pearl Venture Limited
previously in aggregate held 100% of the outstanding shares of Far East. Upon
consummation of the above transaction, Far East became a wholly owned subsidiary
of the Company. This transaction has been accounted for as a reorganization of
companies under common control in a manner similar to a pooling of interests,
since the ownership has remained the same.
F-7
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Cont'd)
In October 1998, the Company entered into an agreement with May Davis Group,
Inc. to purchase from May Davis Group, Inc. 60,000 redeemable common share
purchase warrants at a consideration of $75,150.
As of December 1998, the Company had 2,068,200 common shares and 1,680,000
redeemable common share purchase warrants issued and outstanding.
The consolidated financial statements of the Company and its subsidiaries (the
"Group") include the results of the companies now comprising the Group as if the
current structure of the Group has been in existence throughout the years
covered by these financial statements or since their respective dates of
incorporation where this is a shorter period. The Company's directors are of
opinion that the consolidated financial statements prepared on a basis similar
to a pooling of interests present fairly the financial position and the results
of operations and cash flows of the Group as a whole.
Details of the Company's subsidiaries are summarized as follows:
<TABLE>
<CAPTION>
Percentage of
equity Place of
Name ownership incorporation Principal activities
- ------------------------------------ ------------------ ------------------ -----------------------------
<S> <C> <C> <C>
Euro Tech (Far East) Limited 100% Hong Kong Marketing and trading of
water and waste water
related process control,
analytical and testing
instruments,
disinfection equipment,
supplies and related
automation systems
Euro Tech (China) Limited 100% Hong Kong Inactive
Euro Tech Trading (Shanghai) Limited 100% The PRC Marketing and trading of
water and waste water
related process control,
analytical and testing
instruments,
disinfection equipment,
supplies and related
automation systems
</TABLE>
F-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. BASIS OF CONSOLIDATION
The consolidated financial statements include the financial statements
of the Company and its subsidiaries. All material intra-group balances
and transactions have been eliminated on consolidation.
b. SUBSIDIARIES
A subsidiary is a company in which the Company holds, directly or
indirectly, more than 50% of its issued capital.
c. SALES
Sales represent the invoiced value of goods supplied to customers.
Sales are recognized upon delivery of goods and passage of title to
customers.
d. TAXATION
The Company is exempt from taxation in the British Virgin Islands.
Far East and Euro Tech (China) Limited provide for Hong Kong profits
tax at a rate of 16% on the basis of their income for financial
reporting purposes, adjusting for income and expense items which are
not assessable or deductible for profits tax purposes.
Pursuant to the relevant income tax laws applicable to foreign
investment enterprises in the PRC, Euro Tech Trading (Shanghai) Limited
is fully exempt from the PRC State unified income tax, which is levied
at a rate of 33%, for the period from July 1, 1997 to December 31,
1998, followed by a 50% reduction of the income tax for the next two
years ending on December 31, 2000.
Deferred income taxes are provided using the liability method. Under
the liability method, deferred income taxes are recognized for all
significant temporary differences between the tax and financial
statements bases of assets and liabilities. The tax consequences of
those differences expected to occur in subsequent years are classified
as an asset or a liability.
e. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with
banks.
F-9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
f. INVENTORIES
Inventories are stated at the lower of cost, on a specific
identification basis, or net realizable value. Costs include purchase
and related costs incurred in bringing each product to its present
location and condition. Net realizable value is calculated based on the
estimated normal selling price, less further costs expected to be
incurred to disposal. Provision is made for obsolete, slow moving or
defective items, where appropriate.
g. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation of property, plant and equipment is computed
using the straight-line method over the assets' estimated useful lives.
The estimated useful lives are as follows:
Land Terms of the leases
Buildings 15 - 51 years
Leasehold improvements Terms of the leases
Furniture, fixtures and office equipment 3 - 5 years
Motor vehicles 4 years
Testing equipment 3 years
h. OPERATING LEASES
Leases where substantially all the risks and rewards of ownership of
the leased assets remain with the lessors are accounted for as
operating leases. Rental payments under operating leases are charged to
expenses on the straight-line basis over the period of the relevant
leases.
i. FOREIGN CURRENCY TRANSLATION
The Company maintains its books and records in United States dollars.
Its subsidiaries maintain their books and records either in Hong Kong
dollars or Chinese Reminbi ("functional currency"), respectively.
Foreign currency transactions during the year are translated into the
functional currency at the applicable rates of exchange at the dates of
the transactions. Monetary assets and liabilities denominated in
foreign currencies are translated into the functional currency using
the exchange rates prevailing at the balance sheet date. Gain or losses
from foreign currency transactions are recognized in the statements of
income during the period in which they occur. Translation adjustments
on subsidiaries' equity are included as cumulative translation
adjustment.
j. EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") is computed on the basis of the
average number of shares of common stock outstanding. No dilutive EPS
is calculated as the exercise prices of the redeemable common share
purchase warrants and stock options were higher than the average market
price of the common stock.
F-10
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
k. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could
differ from those estimates.
3. OTHER INCOME, NET
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
----------------- ----------------- -----------------
'000 '000 '000
<S> <C> <C> <C>
Gain on disposals of property, plant and
equipment 118 3 4
Exchange gain, net 56 110 17
Service fee income 21 - -
Rental income 47 70 85
Loss on repurchase of warrants - - (37)
----------------- ----------------- -----------------
242 183 69
================= ================= =================
</TABLE>
4. INCOME TAXES
The reconciliations of the Hong Kong statutory income tax rate to the effective
income tax rate as stated in the consolidated statements of income are as
follows:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
----------------- ----------------- -----------------
<S> <C> <C> <C>
Statutory tax rate 16.5% 16.5% 16.0%
Permanent differences 1.5% - 3.5%
Write-back of over-provision in prior year
- (4.8%) -
Others (0.9%) 0.7% 2.3%
----------------- ----------------- -----------------
Effective tax rate 17.1% 12.4% 21.8%
================= ================= =================
</TABLE>
F-11
<PAGE>
5. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------------------- ------------------
'000 '000
<S> <C> <C>
Trade and other receivables 2,610 2,783
Less: Allowance for doubtful debts (25) (57)
------------------- ------------------
2,585 2,726
=================== ==================
</TABLE>
6. INVENTORIES
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------------------- ------------------
'000 '000
<S> <C> <C>
Trading equipment and accessories 656 569
Less: Provision for inventory obsolescence (82) (83)
------------------- ------------------
574 486
=================== ==================
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------------------- ------------------
'000 '000
<S> <C> <C>
Land and buildings 2,067 2,067
Leasehold improvements 43 43
Furniture, fixtures and office equipment 81 83
Motor vehicles 112 113
Testing equipment 27 46
------------------- ------------------
2,330 2,352
Less: Accumulated depreciation (321) (391)
------------------- ------------------
2,009 1,961
=================== ==================
</TABLE>
As of December 31, 1997 and 1998, land and buildings with net book values of
$1,147,000 and $1,120,000, respectively, were pledged to secure certain banking
facilities of Far East (see Note 8).
F-12
<PAGE>
8. LONG-TERM BANK LOANS
Long-term bank loans are secured by certain of the Group's land and buildings,
and bear interest at prime lending rate plus 1.75% per annum. Future maturities
of long-term bank loans are as follows:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------------------- ------------------
'000 '000
<S> <C> <C>
Within one year 59 68
During the second year 66 76
During the third year 74 85
During the fourth year 83 96
During the fifth year 94 3
Over five years but not exceeding nine years 12 -
------------------- ------------------
388 328
=================== ==================
</TABLE>
As of December 31, 1998, the Group had various banking facilities available from
financial institutions amounting to approximately $5,021,000 (1997 - $5,800,000)
of which $4,247,000 (1997 - $4,765,000) remained unused.
9. STOCK OPTIONS
A total of 1,400,000 shares of common stock have been reserved for issuance
under the Company's management options plan ("Management Options"). The
Management Options provide for the grant of options to its officers, directors
and employees in such numbers and to such persons as the Company's Chairman of
the Board of Directors and Chief Executive Officer may direct. Upon the Offering
in 1997, the Company granted its officers, directors and employees Management
Options, which allow them to purchase up to 1,329,000 shares of common stock. No
Management Options were granted during the year. Such Management Options became
exercisable on March 14, 1998 and have a term of up to ten years. The exercise
price of the Management Options is $4.00 per share for 400,000 of such options
and $5.50 per share for the remaining 929,000. The exercise price of those
Management Options, which have not been granted, is $5.50 per share. As of
December 31, 1998, no options had been exercised. Weighted-average exercise
price of Management Options outstanding and exercisable as of December 31, 1998
was approximately $5.05 per share.
F-13
<PAGE>
9. STOCK OPTIONS (Cont'd)
A total of 150,000 shares of common stock have been reserved for issuance under
the Company's 1996 Stock Option Plan (the "1996 Stock Option Plan"). The 1996
Stock Option Plan provides for the grant of options to employees, officers,
directors and consultants of the Company. The 1996 Stock Option Plan is
administered by the Board of Directors or a committee appointed by the Board of
Directors, which determines the terms of options granted, including the exercise
price, the number of shares subject to the option and the terms and conditions
of exercise. The total number of shares of common stock for which options may be
granted under the 1996 Stock Option Plan is 150,000 shares and the exercise
price of all options granted must be at least $5.50 per share. The maximum term
of options granted under the 1996 Stock Option Plan is six years. Options shall
become exercisable at such times and in such installments as the Board of
Directors or a committee of the Board shall provide in the terms of each
individual option, provided, however, that 50,000 and 100,000 options, by their
terms automatically terminate unless the Company achieves net income levels of
not less than $990,000 and $1,800,000, respectively, during the Company's fiscal
years ended December 31, 1997 and 1998. During the year, no options had been
granted under the 1996 Stock Option Plan. As the Company did not achieve the net
income level of $990,000 and $1,800,000 for the fiscal years ended December 31,
1997 and 1998, the right to grant the 50,000 and 100,000 options was
automatically terminated.
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion
No. 25, under which no compensation cost for stock options is recognized for
stock option awards granted at or above fair market value. Had compensation
expense for the Company's Management Options been determined based upon fair
values at the grant dates in accordance with SFAS No. 123, the Company's pro
forma net income during the year ended December 31, 1997 would be approximately
$206,000 and the pro forma net loss for the year ended December 31, 1998 would
be approximately $37,000. The Company's pro forma basic and diluted net loss
per common share would be approximately $0.02 for the year ended December 31,
1998.
F-14
<PAGE>
9. STOCK OPTIONS (Cont'd)
Weighted average fair value of Management Options granted during the year ended
December 31, 1997 is estimated on the date of grant using the Black-Scholes
option-pricing model to be $2.20. The fair value of Management Options is
estimated on the date of grant using the following assumptions:
<TABLE>
<CAPTION>
1 9 9 7
-------------------
<S> <C>
Risk-free interest rate 5.52%
Expected dividend yield 0%
Expected option life 10 years
Expected stock price volatility 20%
</TABLE>
10. RELATED PARTY TRANSACTIONS
The transactions with related parties are summarized as follows:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 7 1 9 9 8
---------------- ----------------- ----------------
'000 '000 '000
<S> <C> <C> <C>
Sales to related companies 183 226 52
Purchases from related companies 329 640 571
Service income received from a related company
9 - -
Interest income received from a related company
56 - 11
Rental income received from a related company
47 54 59
Rental expenses paid to a related company - 30 46
Management fee paid to a related company 20 26 25
Transfer of investment in subsidiaries to the
Company's shareholders 1 - -
</TABLE>
All outstanding balances with related parties are unsecured, non-interest
bearing and are repayable in 1999.
F-15
<PAGE>
11. PENSION PLAN
The Group has a defined contribution pension plan for all its employees except
for a few employees who work in the PRC. Under this plan, all employees are
entitled to a pension benefit equals to their own contributions plus 50% to 100%
of individual fund account balances contributed by the Group, depending on their
years of service with the Group. The Group is required to make specific
contributions at approximately 10% of the basic salaries of the employees to an
independent fund management company. The Group has no future obligations for the
pension payment or any post-retirement benefits beyond the annual contributions
made. The independent fund management company is responsible for the ultimate
pension liabilities to those resigned or retired employees. During the years
ended December 31, 1996, 1997 and 1998, the Group made total pension
contributions of approximately $53,500, $115,000 and $127,000, respectively.
12. COMMITMENTS AND CONTINGENT LIABILITIES
a. Operating lease commitments
The Group has various operating lease agreements for office and
industrial premises, which extend through May 2000. Rental expenses for
the years ended December 31, 1996, 1997 and 1998 were approximately
$213,000, $209,000 and $223,000, respectively. Future minimum rental
payments as of December 31, 1997 and 1998, under agreements classified
as operating leases with non-cancellable terms, are as follows:
The future minimum rental commitments as of December 31, 1998, were as
follows:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------------------ ------------------
'000 '000
<S> <C> <C>
1999 11 166
2000 167 65
------------------ ------------------
Total minimum lease payments 178 231
================== ==================
</TABLE>
b. Capital commitments
As of December 31, 1997 and 1998, the Group had outstanding contractual
commitments for purchase of land and buildings in the PRC of
approximately $219,000.
c. Contingent liabilities
As of December 31, 1997 and 1998, the Group had the following
contingent liabilities:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 8
------------------ ------------------
'000 '000
<S> <C> <C>
Guarantees on performance bonds and bid bonds
57 44
================== ==================
</TABLE>
F-16
<PAGE>
Exhibit 10.22
[LETTERHEAD OF ROYCE INSTRUMENT CORPORATION, USA]
DEALER AGREEMENT
THIS AGREEMENT, made as of the commencement date in clause 1 below, is between
Royce Instrument Corporation, whose business address is 13555 Gentilly Road, New
Orleans, Louisiana 70129, U.S.A. ("Royce") and EURO TECH (FAR EAST) LTD. herein
referred to as ("Dealer") .
1. Royce appoints Dealer as its authorized Dealer for the sale, leasing,
rental and servicing of the Royce Instruments under the Royce
Instrument Corporation label ("Instruments") and accessories in the
following area (the "Territory"):
HONG KONG AND MAINLAND CHINA
for the term of 1 YEAR commencing OCTOBER 28, 1998. Said term shall
automatically continue thereafter until either party hereto shall
notify the other in writing to the contrary at least sixty (60) days
before an expiration date stated in such notice. During the term of
this Agreement (including any automatic continuation) Royce shall not
appoint any other Dealer in the Territory for the Instruments under the
Royce Instrument Corporation label.
2. The products manufactured by Royce Instrument Corporation may be
offered for sale from time to time under the trade name or trademarks
of other companies, i.e. private label. Representative shall have no
responsibilities or rights (including commissions) in connection with
the sale of such products carrying name plates other than Royce
Instrument Corporation. It is understood that Dealer shall not receive
commissions on any intercompany orders.
3. Dealer shall do everything reasonably possible actively and continually
to promote and encourage the sale, leasing, rental and servicing of the
Instruments in the Territory. In particular, Dealer shall establish and
maintain an adequate number of competent, trained personnel and
maintain an adequate inventory of spare parts to assure prompt service
of the Instruments.
4. Dealer shall undertake to translate and print necessary data sheets and
operating manuals as required for effective promotion of the product
line.
<PAGE>
5. This agreement does not constitute Dealer as the legal agent of Royce;
it does not authorize Dealer to transact business in the name of, for,
or on account of Royce nor to assume or create any obligations or
responsibility binding upon Royce in any way. The rights and privileges
of the Dealer under this Agreement may not be assigned, and will not
inure to the benefit of any receiver, trustee in bankruptcy, or other
legal representative unless consented to in writing by Royce. If Dealer
is a firm rather than a natural person, sale of a controlling interest
in Dealer or change in the managing personnel of Dealer shall be
treated as assignment from Dealer to a third party.
6. Royce will sell, and Dealer will purchase, the Instruments and the
accessories, supplies and parts therefore at the prices shown on
Royce's standard price list effective at the time of purchase, less a
discount of 25%. However, all others are subject to credit and other
approval; and Royce shall not be bound thereby unless it accepts such
order in writing. Royce intends to offer to Dealer, as products covered
by this Agreement, any improvements of existing instruments and any
extensions of the Royce Instrument line; provided, however, that Royce
reserves the right not to do so if, due to different target markets,
different sales method requirements, or other reasonable differences,
Royce reasonably believes that Dealer is not the appropriate outlet in
the Territory.
7. Royce may, from time to time, issue policy manuals, circular letter and
service manuals and bulletins relating to various matters, including
but not limited to, new products, national accounts, interterritorial
transfers, servicing standards, prices, transfer of installation and
warranty charges, tip payments, use of trademarks, advertising (such as
Yellow Pages) and the furnishing of general market information to
Royce. It is understood and agreed that such manuals, letters and
bulletins shall be part of this Agreement. Royce intends to send notice
to Dealer of any price increase at least one (1) month prior to the
effective date thereof. However this cannot be guaranteed. Dealer shall
not rely on the price information in his possession as being binding
upon Royce unless such price is guaranteed by Royce in a fixed price
contract or fixed price quotation applicable to the transaction in
question.
-2-
<PAGE>
8. When purchasing Instruments, accessories, supplies and parts, Dealer
agrees to be bound by the normal terms and conditions (including
revised versions that Royce may adopt from time to time as new
generally applicable terms and conditions), as published to Dealer or
as used on Royce's sales forms and invoices.
All shipments shall be made by Air Parcel Post unless otherwise
requested by Dealer at time of purchase request. Dealer may direct
shipment through a United States based shipping agent of Dealer's
choice. However, this must be specified on the purchase order.
9. During the term of this Agreement, the Dealer shall not act as agent,
distributor, representative or manufacturer of, nor will the Dealer
sell nor offer for sale, any products which are in anyway competitive
with any of the Royce Instruments, without the prior written consent of
Royce. Dealer represents that it is not at the time of its signing this
Agreement, involved in any agency, distributorship, representation,
manufacturing or selling arrangement which may be reasonably considered
to infringe the terms of this section and will during the period of
this Agreement notify Royce in writing in advance of any agency,
distributorship, representation or manufacturing or selling arrangement
in which it intends to become engaged which may reasonably be
considered to infringe the terms of this section.
10. Royce or Dealer may terminate this Agreement immediately by telegraphic
or written notice to the other party if he should be declared bankrupt
or insolvent, or have a receiver appointed over his property, or
petition for reorganization or other benefits under the applicable
Insolvency or Bankruptcy Laws as now or hereafter existing, or if he
should make an assignment for the benefit of creditors, or if, after
notice and reasonable opportunity to cure, Dealer shall breach any
provision of this Agreement or fail to pay sums due and owing to
Royce.
11. Acceptance of orders by Royce from Dealer after termination of this
Agreement, shall not constitute a renewal of this Agreement or a waiver
of Royce's right to treat this Agreement as terminated.
12. Termination of this Agreement shall not release either party from the
payment of any sums then owing, or from other unsatisfied obligations.
-3-
<PAGE>
13. In the event of termination of this Agreement, Dealer shall discontinue
using the "Royce" or any other Royce Instrument Corp. trade name or
trademark. Dealer shall also remove all signs from his place of
business, letterheads, calling cards, advertising, telephone listing,
etc. which might indicate or imply that Dealer is an authorized
representative of Royce. Dealer shall also return all printed matter,
engineering data, catalogs, price lists, selling materials, and all
other supplies furnished Dealer by Royce.
14. Royce certifies that it has obtained adequate liability insurance for
the protection of both Royce and Dealer against potential product
liability claims. Dealer agrees to comply with the following procedures
regarding product liability occurrences/claims:
A. Notify Royce, if there was bodily injury or more than $10,000
U. S. dollars property damage, immediately by phone upon
learning of a claim or occurrence.
B. Preserve all information as to witnesses, the occurrence,
claim, the product, etc. and write the facts in a memo to
Royce Instrument Corporation. Dealer is to mark the memo
"Confidential to Counsel."
C. Assist the manufacturer in any further investigation required.
15. This agreement supersedes all previous agreements between the parties
regarding the distribution of any products of the Royce Instrument
Corporation and, this is the complete Agreement. Any waiver of any
provision of this Agreement by Royce shall not constitute a waiver of
any other provisions, nor shall it be considered a continuing waiver
unless otherwise agreed in writing.
16. Any suit or other legal proceeding against Royce under this Agreement
shall be brought in a court of competent jurisdiction in the United
States of America. Any suit or other legal proceeding against Dealer
shall be brought in a court of competent jurisdiction in the Territory.
-4-
<PAGE>
17. If a court or administrative agency of any government exercising
jurisdiction over either party shall determine that any provision of
this Agreement is unlawful or unenforceable, the provisions not
affected by such determination shall remain in effect; provided
however, that in such event either party shall have the right to
terminate this Agreement in its entirety.
ROYCE INSTURMENT CORPORATION DEALER:
---------------------------------------
EURO TECH (FAR EAST) LTD.
BY: ILLEGIBLE BY: ILLEGIBLE
NAME: JAMES R. DARTEZ NAME: ALEX SHAM
TITLE: PRESIDENT TITLE: DIRECTOR
DATE: October 28. 1998 DATE: Dec. 18, 1998
-5-
<PAGE>
EXHIBIT A
I. INSTRUMENTS
The products to be handled by the Dealer are those Royce standard Instrument
Products defined as follows.:
Dissolved oxygen Analyzers
pH/ORP Analyzers
Suspended Solids Analyzers
Interface Level Analyzers (ILA)
Products not listed above are specifically excluded for sales by Dealer without
prior written approval of Royce.
ROYCE INSTURMENT CORPORATION DEALER:
---------------------------------------
EURO TECH (FAR EAST) LTD.
BY: ILLEGIBLE BY: ILLEGIBLE
NAME: JAMES R. DARTEZ NAME: ALEX SHAM
TITLE: PRESIDENT TITLE: DIRECTOR
DATE: October 28. 1998 DATE: Dec. 18, 1998
-6-ex-
<PAGE>
[Arthur Andersen Letterhead]
Exhibit 23.2
June 23, 1999
The Directors
Euro Tech Holdings Company Limited
18/F Gee Chang Hong Centre
65 Wong Chuk Hang Road
Hong Kong
Dear Sirs,
As independent public accountants, we hereby consent to the use of our report
dated June 23, 1999 included in your Form 20-F for the year ended December
31, 1998 and all references to our Firm included in that Form 20-F.
Very truly yours,
/s/ Arthur Andersen & Co.
