SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-17250
ELECTROCON INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
British Virgin Islands
(Jurisdiction of incorporation or organization)
Prosperity Centre
8/F, Block B
77 Container Port Road
Kwai Chung
New Territories, Hong Kong
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Shares,$0.0001 par value per share
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
NONE
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: 7,160,420 Common Shares, par value $0.0001, were issued and outstanding
as of December 31, 1997.
Indicate by check mark whether the registrant: (i) 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 (ii) 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 [ ] Item 18 [X]
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TABLE OF CONTENTS
Part I Page
Item 1 Description of Business.......................................... 1
Item 2 Description of Property.......................................... 11
Item 3 Legal Proceedings................................................ 12
Item 4 Control of Registrant............................................ 12
Item 5 Nature of Trading Market......................................... 13
Item 6 Exchange Controls and Other Limitations
Affecting Security Holders.................................... 13
Item 7 Taxation......................................................... 14
Item 8 Selected Financial Data.......................................... 14
Item 9 Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 17
Item 10 Directors and Officers of Registrant ............................ 21
Item 11 Compensation of Directors and Officers........................... 22
Item 12 Options to Purchase Securities from Registrant or Subsidiaries... 23
Item 13 Interest of Management in Certain Transactions................... 23
Part II
Item 14 Description of Securities to be Registered....................... 24
Part III
Item 15 Defaults upon Senior Securities.................................. 24
Item 16 Changes in Securities and Changes in
Security for Registered Securities............................ 24
Part IV
Item 17 Financial Statements............................................. 24
Item 18 Financial Statements............................................. 24
Item 19 Financial Statements and Exhibits................................ 25
This Annual Report on Form 20-F contains forward-looking statements. These
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those anticipated in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the section entitled "Risk Factors"
under Item 1 - "Description of Business."
Readers should not place undue reliance on forward-looking statements,
which reflect management's view only as of the date of this Report. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect subsequent events or circumstances. Readers should also carefully review
the risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission.
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PART I
Item 1. Description of Business
As used in this Annual Report, "China" refers to all parts of the People's
Republic of China other than the Special Administrative Region of Hong Kong. The
term "Company" refers to Electrocon International Inc. and, where the context so
requires or suggests, its direct and indirect subsidiaries.
The Company
Electrocon International Inc. ("the Company") was incorporated in March
1988 as a limited liability International Business Company under the laws of the
British Virgin Islands to serve as a holding company for the Company's wholly
owned subsidiary, Electrocon Products Limited ("EPL"), a Hong Kong corporation.
As an International Business Company, the Company is prohibited from doing
business with persons resident in the British Virgin Islands, from owning real
estate in the British Virgin Islands and from acting as a bank or insurance
company. The Company was incorporated in the British Virgin Islands principally
to facilitate trading in its shares. The government of Hong Kong imposes duty on
the transfer of securities of Hong Kong corporations. No such duty is imposed by
the British Virgin Islands, and the Company is also exempt from income tax in
the British Virgin Islands. The Company's corporate administrative matters are
conducted through its registered agent, CITCO Trust Corporation Limited,
Wickhams Cay, P. O. Box 662, Road Town, Tortola, British Virgin Islands. The
Company's principal executive offices are located at Prosperity Centre, 8/F,
Block B, 77 Container Port Road, Kwai Chung, New Territories, Hong Kong;
telephone: 852-2481-6022; facsimile: 852-2481-5804.
The Company is a diversified, Hong Kong-based holding company that conducts
operations through its subsidiaries primarily in two separate business segments
- -- the distribution of semiconductor products (primarily computer chips) to
small and medium-sized manufacturers located in Hong Kong and China and the
distribution of golf carts, irrigation products and systems, fertilizer and turf
equipment to golf clubs in Hong Kong, Macau and China. In 1995, the Company also
entered the business of distributing personal computer products, and in 1996 it
entered the business of distributing non-personal computer related products.
The Company's principal operating entities are Electrocon Products Limited
("EPL"), Electrocon (PRC) Limited ("EPRC"), Bothgreat Technology Limited
("Bothgreat") and China Electrocon Ltd. ("CEL").
Electrocon Products Limited
EPL, the operating entity through which the Company conducts its chip
distribution business, was incorporated under the laws of Hong Kong as a limited
liability company in 1978 and became a wholly-owned subsidiary of the Company in
May 1988. (See "Computer Chip Distribution Business.") EPL's total 1997 sales,
including sales to affiliates, were approximately $22,624,679, on which its net
income was $40,055. EPL sells the chips produced by a number of well-known
semiconductor producers to small and medium-sized manufacturers in Hong Kong and
China. EPL serves as a distributor for Texas Instruments Asia Limited ("TI HK"),
the Hong Kong subsidiary of Texas Instruments Incorporated, to sell TI HK's
broad-based semiconductor product lines in the Hong Kong market. TI HK supplied
approximately 87% of the computer chips sold by the Company in the year ended
December 31, 1996. During 1997, the Company experienced a decline in the margins
relating to the DRAM product line of computer chips purchased from TI HK.
Accordingly, in order to avoid exposure to volatile prices and other high risk
factors associated with the DRAM product line supplied by TI HK, the Company
made a strategic decision to drop that product. As a result, the Company bought
only 47% of its chips from TI HK in 1997. EPL also serves as the distributor for
Cylink Corporation, Sensory Circuits, Inc., Silicon Systems Incorporated,
Linfinity Microelectronics Inc., Integrated Silicon Solution, Inc. and TDK
Semiconductor Corporation in Hong Kong and China. The Company has continued to
expand the number of semiconductor manufacturers it represents and the variety
of chips it sells. (See "Computer Chip Distribution Business.")
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Electrocon (PRC) Limited
EPRC, a Hong Kong corporation, was formed in 1993 as a wholly-owned
subsidiary of EPL for the purpose of marketing and distributing the TI line of
chips in China. The function of the EPRC liaison office, which is located in
Shenzhen, China, is to contact new customers and take orders on behalf of EPL.
EPRC does not directly sell chips to these customers, as such an arrangement is
not legal in China unless the Company forms a joint venture with a local
corporation or person. EPRC's total 1997 sales, including sales to affiliates,
were approximately $7,347,334, and it incurred a net loss of approximately
$93,604.
Bothgreat Technology Limited
In 1993, EPL acquired 90% of the now-outstanding common stock of Bothgreat,
a Hong Kong corporation, from two officers and directors of the Company.
Bothgreat is a distributor of golf course irrigation products and systems and
turf equipment for sales in Hong Kong, Macao and China. During 1997, Bothgreat's
total sales were $5,934,683, and its net loss was $226,054.
China Electrocon Ltd.
On August 2, 1995, EPRC entered into a Partnership Agreement with Segos
Electronics (HK) Limited ("Segos"), a non-affiliate, to develop CEL as a joint
venture subsidiary organized in China. CEL is 50% owned by EPRC and 50% owned by
Segos. CEL distributes personal computer products and currently has a network of
seven branches in China.
Computer Chip Distribution Business
The Company, principally through EPL and EPRC, is engaged in the
distribution and sale of computer chips in Hong Kong and China. The Company acts
as agent or distributor for a number of well-known semiconductor manufacturers
in Hong Kong, the United States and elsewhere. (See "Suppliers.") The Company's
customers, primarily small and medium-sized manufacturers or traders, all of
which are located in Hong Kong and China, use the chips in a variety of
electronic products, principally personal computers and consumer electronics
products. This segment of the Company's business accounted for approximately
79.6% of its operating revenues for the year ended December 31, 1997. Management
of the Company intends to continue their efforts to reduce the Company's
dependence on commodity chips used in the manufacture of clocks and other
commodity products and to concentrate on more profitable lines of chips. (See
"Competition.")
The Company sells hundreds of types of chips, from standard "off-the-shelf"
chips, which account for approximately 75% of the revenues derived from chips
sold by the Company, to "high-tech" microprocessors. "Off-the-shelf" chips
include various general purpose computer and memory chips. The group of custom
and semi-custom chips, which includes ASICs (application specific integrated
circuits), programmable logic devices, standard cell components and chips with
gate arrays, accounts for approximately 25% of the chips sold by the Company.
There was no shortage of chips in 1997, and there was a continuous supply of all
variety of chips.
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Customers and Marketing
The Company's chip customers, all in Hong Kong and China, are primarily
small and medium-sized manufacturers and traders who purchase chips for use in a
variety of electronic products. These products include personal computers and
peripherals (approximately 40%), calculators, radios, audio equipment and other
consumer electronics (approximately 30%), telecommunications (approximately 25%)
and others (approximately 5%). The Company supplies over 600 customers in Hong
Kong and 200 customers in China, with no individual chip customer accounting for
over 10% of the Company's 1997 chip sales. Total sales of chips and electronic
spare parts were $23,151,881 during 1997 compared to $47,679,740 in 1996. The
decline in the Company's revenues from its semiconductor business in 1997 was
primarily due to the elimination in 1997 of the DRAM product line of chips
previously supplied by TI HK. (See "Suppliers," below.)
As no single customer accounted for more than 10% of the Company's chip
sales during 1997, the Company believes that the loss of a single customer would
not have a material adverse impact on its revenues and earnings.
The Company estimates that the worldwide semiconductor industry grew in
1997 by approximately 14%, while the semiconductor industry in Hong Kong is
estimated to have grown by approximately 30%. The Company's revenue from its
chip business declined by approximately 51% during 1997, primarily as a result
of its elimination of TI HK's DRAM product line. (See "Suppliers," below.) The
Company forecasts that chip demand will continue to grow in the entire Eastern
Asian region and that China will offer the greatest potential for growth during
the next several years. The Company has established a liaison office in
Shenzhen, PRC with the intent of benefiting from opportunities that may arise in
China.
For the most part, advertising and market promotion expenses for particular
products for which the Company acts as a distributor are incurred by the chip
manufacturers who supply the chips to the Company. The Company's costs for
marketing such products are thus minimal.
Suppliers
In Hong Kong, the Company represents, either as distributor or agent,
several of the world's largest semiconductor manufacturers. The Company has done
business with TI HK for over 15 years. TI HK supplied approximately 87% of the
computer chips sold by the Company in the year ended December 31, 1996. During
1997, the Company experienced a decline in the margins relating to the DRAM
product line of computer chips purchased from TI HK. Accordingly, in order to
avoid exposure to volatile prices and other high risk factors associated with
the DRAM product line supplied by TI HK, the Company made a strategic decision
to drop that product. As a result, the Company bought only 47% of its chips from
TI HK in 1997. The Company has in the past also distributed the chips of
Unitrode, a California company. Unitrode and several other of the Company's
suppliers, taken together, accounted for approximately 5% of the Company's
business in 1996. Due to technological obsolescence in the Unitrode line of
chips, the Company became unable to market those chips in Hong Kong and China.
As a consequence, Unitrode terminated its distributorship agreement with EPL as
of February 15, 1997. The Company has since signed agreements with TDK
Semiconductor Corporation and other well-known vendors to serve as alternate
sources of chips. The Company also represents numerous California companies,
including Zilog, Inc. (which supplied approximately 13% of the chips sold by the
Company during 1997), SEEQ Technology Inc., Quality Technology, Inc., Integrated
Circuits Systems and others which together accounted for approximately 40% of
the Company's business in the year ended December 31, 1997. The Company
represents these manufacturers on a non-exclusive basis in Hong Kong, and
represents TI HK on a non-exclusive basis in Hong Kong and China.
Most of the Company's arrangements with its suppliers are evidenced by
formal distributorship or sales representative agreements that are typically
non-exclusive and are for a period of one year. The Company's agreement with TI
HK authorizes the Company to market and distribute the TI line of chips in
China. The Company's agreements with other suppliers authorize the Company to
represent or carry the product lines of these chip manufacturers in Hong Kong
and China. To date, the Company has not experienced any problems in renewing
most agreements, and the Company believes that it has a fairly stable
relationship with its suppliers. The Company has no set return policies with its
existing suppliers.
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Seasonality and Backlog
The seasonal cycles in the Company's business are related to the seasonal
cycles in the electronics business generally and the types of finished products
made with chips supplied by the Company. Sales of the Company's chips that are
incorporated into toys, clocks and radios, for example, generally increase from
April through October, as the manufacturers of these consumer products increase
their production in anticipation of the Christmas holiday season. Sales of the
Company's chips used in computers are steady throughout the year. To facilitate
fast, "off-the-shelf" delivery, the Company currently maintains an average
inventory of approximately four weeks of sales. As of December 31, 1997, the
Company's inventory of chips was valued at approximately $2,501,729.
Approximately 78% of these inventories represent the most commonly sold
commodity items and have a relatively fast turnover. The 22% remainder
represents custom and semi-custom items or add-on cards. New and improved chips
are constantly being developed. As a consequence, inventories of chips can be
rendered obsolete within relatively short periods of time. Although the Company
has not regularly experienced technological obsolescence in its inventories, it
did write off $6,951 of inventory in 1997 as obsolete and, therefore, of no
further value to the Company.
Transportation
At present, the Company incurs minimal transportation costs in its chip
distribution business, as its customers are located in Hong Kong and China. The
Company bears all transportation costs on shipments of chips from local
suppliers in Hong Kong to customers in Hong Kong and China. The Company paid an
insignificant amount in transportation costs in 1997. Transportation costs may
increase somewhat if the Company further expands its business into China or
other countries.
Competition
The sale and marketing of computer chips is a highly competitive business.
The Company's major competitors are other authorized distributors and agents for
the products the Company represents as well as other product lines. A number of
the major manufacturers, such as Motorola, National Semiconductor Ltd., Toshiba
and NEC, also market their own products. These companies, however, sell
primarily to larger customers, while the Company markets to small and
medium-sized customers. The Company's major competitors in Hong Kong are Atek
Electronics, Free Tune Electronics, WPI HK Ltd., Texny GloryTact and Marubun in
Hong Kong, and Gold Insignia, Arrow China and Gaintune in China. In addition to
these main competitors, the Company estimates that there are thousands of small
to medium-sized companies that compete with the Company. These companies have
lower overheads than the Company and are, therefore, aggressively price
competitive. The Company's success in the market is primarily due to its price,
reliability, technical support and excellent customer service.
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Turf and Irrigation Business
In 1993, EPL acquired 90% of the now-outstanding common stock of Bothgreat
Technology Limited ("Bothgreat"), a Hong Kong corporation that was controlled by
Edward Y.F. Ting and Frederick T.F. Ko, both of whom were officers and directors
of the Company. Bothgreat was organized in 1992 to act as a distributor of golf
turf and irrigation systems to businesses in China. Bothgreat currently acts as
a non-exclusive distributor for several American companies that manufacture such
products, such as Rain Bird, John Deere, Club Car and J.R. Simplot. Bothgreat's
distributorship agreements are one-year agreements covering China (south of the
Pearl River delta) and Macau.
Bothgreat has organized its operation among two divisions -- irrigation and
turf equipment -- and attempts to compete in its markets by providing better
service to its customers than do its competitors. In 1997 Bothgreat's net sales
were $5,934,683, with a net loss of $226,054. Of the more than 100 customers of
Bothgreat, no one customer accounted for 10% or greater of the net sales for
1997.
Other Investments and Activities
The Company did not acquire or dispose of any investments or engage in any
other business activities during the fiscal year ended December 31, 1997.
Government Regulation
United States export laws impose restrictions on the export and re-export
of all U.S.-origin goods and technology, whether shipped directly from the U.S.
or from foreign subsidiaries or affiliates of U.S. companies. The primary
purpose of these restrictions is to prevent certain strategic goods and
technology from being delivered to communist and other "restricted"
destinations. Thus, exporters may generally ship U.S.-origin goods and
technology only under an export license granted by the United States Department
of Commerce and only upon receipt from the importer of certain representations
as to the final destination of the goods or technology being shipped. Further,
neither the exporter, the importer nor any other person may, without Department
of Commerce approval, re-export U.S.-origin goods or technology or foreign
products containing U.S.-origin parts or components or based on technical data
of U.S.-origin from the authorized destination to any other restricted
destination. Since most of the Company's chip suppliers are either U.S.
companies or subsidiaries or affiliates of U.S. companies, and its customers use
U.S.-origin components, virtually all of the chips sold by the Company are
subject to U.S. export laws. U.S. export laws also apply to the components (and
end products using these components) obtained from U.S. suppliers for the
Company's electronics business.
The export and import of goods into and out of Hong Kong must be made under
a license granted by the Hong Kong government. The Company may also be subject
to the import, export and trading laws of other countries where it does or may
do business.
A violation of any export, import or trading law by the Company or any of
its affiliates or suppliers that results in the denial of export or trading
privileges to any of such parties could have a material adverse effect on the
Company and its operations. The Company believes that it is in compliance with
all applicable export, import and trading laws and that it has taken all steps
necessary to ensure continued compliance with such laws. The Company is also not
aware of any denial orders restricting the ability of any of its suppliers from
exporting chips or components to the Company. However, there can be no assurance
that such an order will not be issued in the future.
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Employees
As of March 31, 1998, the Company employed 63 persons on a full-time basis,
of whom 35 were associated with its chip distribution business, 27 were
associated with its turf and irrigation equipment business and one employee was
a full-time management employee employed by Electrocon International Inc. In
addition, CEL has 20 employees. The Company and its subsidiaries are not parties
to any material labor contract or collective bargaining agreement.
Licenses, Franchises, Concessions and Royalty Agreements
As of December 31, 1997, the Company has no licenses, franchises,
concessions or royalty agreements that are material to its business as a whole,
except for the distributorship and sales representative agreements with its chip
and golf related products suppliers.
Patents and Trademarks
As of December 31, 1997, the Company does not hold and has not applied for
any patents or trademarks in the United States or other countries.
Certain Foreign Issuer Considerations
Transfer of Sovereignty over Hong Kong to China. The principal executive
offices of the Company and all operations and assets of the Company are located
in Hong Kong and China. Prior to July 1, 1997, Hong Kong was a British Crown
Colony with responsibility for administering its own internal affairs. After
several years of negotiations concerning Hong Kong's future, Great Britain and
China signed (December 1984) and ratified (May 1985) the Sino-British Joint
Declaration on the Future of Hong Kong (the Sino-British Agreement). Pursuant to
the Sino-British Agreement, Hong Kong was restored to China on July 1, 1997.
Ownership of Real Property. All land in Hong Kong is owned by the
Government of the Hong Kong Special Administrative Region (the Government).
Prior to July 1, 1997, the Government granted Crown Leases to persons, firms and
corporations on the basis of an annual crown rental payment and other terms and
conditions therein contained. Crown Leases were freely assignable during their
term. In implementation of the Sino-British Agreement, the New Territories
Leases (Extension) Ordinance was enacted and came into effect on April 25, 1988.
Pursuant to that Ordinance, all leases in the New Territories of Hong Kong were
extended up to June 30, 2047. Such extension was at no premium but was subject
to an annual fee equivalent to 3% of the ratable value of the property to be
charged with effect from the date on which the original lease would have
expired.
The land ownership system in China is similar to Hong Kong, in which all
land is owned by the government. The Chinese government and its various
government instrumentalities grant leases to persons, firms and corporations on
the basis of an annual rental payment and other terms and conditions. Such
leases are generally freely transferable during their term.
Enforceability of Certain Civil Liabilities and Certain Foreign Issuer
Considerations. The Company is a British Virgin Islands holding corporation.
Outside the United States, it may be difficult for investors to enforce
judgments against the Company obtained in the United States in any action
brought against it under the securities laws of the United States, including
actions predicated upon civil liability provisions of the United States
securities laws. In addition, most of the Company's officers and directors
reside outside the United States and most of the assets of these persons and of
the Company are located outside of the United States. As a result, it may be
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difficult or impossible for investors to effect service of process within the
United States upon such persons, or to enforce against the Company or such
persons judgments obtained in United States courts predicated upon the liability
provisions of the United States securities laws. The Company has been advised by
its British Virgin Islands counsel and by its Hong Kong counsel that there is
substantial doubt as to the enforceability against the Company or any of its
directors and officers located outside the United States in original actions or
in actions for enforcement of judgments of United States courts of liabilities
predicated solely on the civil liability provisions of the United States
securities laws.
The Company has been advised by its counsel that no treaty exists between
Hong Kong or the British Virgin Islands and the United States providing for the
reciprocal enforcement of foreign judgments. However, the courts of Hong Kong
and the British Virgin Islands are generally prepared to accept a foreign
judgment as evidence of a debt due. An action may then be commenced in Hong Kong
or the British Virgin Islands for recovery of this debt. A Hong Kong or British
Virgin Islands court will only accept a foreign judgment as evidence of a debt
due if: (i) the judgment is for a liquidated amount in a civil matter; (ii) the
judgment is final and conclusive and has not been stayed or satisfied in full;
(iii) the judgment is not directly or indirectly for the payment of foreign
taxes, penalties, fines or charges of a like nature (in this regard, a Hong Kong
or British Virgin Islands court is unlikely to accept a judgment for an amount
obtained by doubling, trebling or otherwise multiplying a sum assessed as
compensation for the loss or damage sustained by the person in whose favor the
judgment was given); (iv) the judgment was not obtained by actual or
constructive fraud or duress; (v) the foreign court has taken jurisdiction on
grounds that are recognized by the common law rules as to conflict of laws in
Hong Kong or the British Virgin Islands; (vi) the proceedings in which the
judgment was obtained were not contrary to natural justice; (vii) the
proceedings in which the judgment was obtained, the judgment itself and the
enforcement of the judgment are not contrary to the public policy of Hong Kong
or the British Virgin Islands; (viii) the person against whom the judgment is
given is subject to the jurisdiction of the Hong Kong or the British Virgin
Islands court; and (ix) the judgment is not on a claim for contribution in
respect of damages awarded by a judgment that does not satisfy the foregoing.
Enforcement of a foreign judgment in Hong Kong or the British Virgin Islands may
also be limited or affected by applicable bankruptcy, insolvency, liquidation,
arrangement, moratorium or similar laws relating to or affecting creditors'
rights generally and will be subject to a statutory limitation of time within
which proceedings may be brought.
Under United States law, majority and controlling shareholders generally
have certain fiduciary responsibilities to the minority shareholders.
Shareholder action must be taken in good faith and actions by controlling
shareholders that are obviously unreasonable may be declared null and void. The
British Virgin Islands law protecting the interests of the minority shareholders
may not be as protective in all circumstances as the law protecting minority
shareholders in United States jurisdictions. While British Virgin Islands law
does permit a shareholder of a British Virgin Islands company to sue its
directors derivatively, i.e. in the name of and for the benefit of the company
and to sue the company and its directors for his benefit and the benefit of
others similarly situated, the circumstances in which any such action may be
brought and the procedures and defenses that may be available in respect of any
such action may result in the rights of shareholders of a British Virgin Islands
company being more limited than those rights of shareholders in a United States
company.
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Risk Factors
THIS ANNUAL REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT") AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934 (THE "EXCHANGE ACT"). ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS
AS A RESULT OF THE RISK FACTORS SET FORTH BELOW. PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER, TOGETHER WITH THE OTHER INFORMATION APPEARING IN THIS ANNUAL
REPORT, THE FOLLOWING FACTORS, AMONG OTHERS, IN EVALUATING THE COMPANY AND ITS
BUSINESS.
Important Factors Related to Forward-Looking Statements and Associated
Risks. The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission (the "Commission"), in press
releases and in reports to shareholders. The forward-looking statements included
herein are based on current expectations that involve a number of risks and
uncertainties. These forward-looking statements are based on assumptions that
competitive conditions affecting the Company will not change materially or
adversely, that demand for the Company's products will be strong, that the
Company will retain existing key management personnel, that the Company's
forecasts will accurately anticipate market demand and that there will be no
material adverse change in the Company's operations or business. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond the control of the Company. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could prove inaccurate and, therefore, there
can be no assurance that the results contemplated in forward-looking information
will be realized.
In addition, as disclosed elsewhere under other risk factors, the business
and operations of the Company are subject to substantial risks which increase
the uncertainty inherent in such forward-looking statements. In light of the
significant uncertainties inherent in the forward-looking information included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. The Private Securities Reform Act of 1995
contains a safe harbor for forward-looking statements on which the Company
relies in making such disclosures. In connection with this "safe harbor" the
Company is hereby identifying important factors that could cause actual results
to differ materially from those contained in any forward-looking statements made
by or on behalf of the Company. Any such statement is qualified by reference to
the cautionary statements included in this Annual Report on Form 20-F.
China and Hong Kong and the Sino-British Agreement. The principal executive
and corporate offices of the Company and all operations and assets of the
Company are located in Hong Kong and China. Prior to July 1, 1997, Hong Kong was
a British Crown Colony with responsibility for administering its own internal
affairs. Sovereignty over Hong Kong was transferred effective July 1, 1997 to
China. Although management believes that any changes in conditions in Hong Kong
are not likely to have a material effect upon the Company, there can be no
assurance as to the continued stability of political, economic or commercial
conditions in Hong Kong, and any instability could have an adverse impact on the
Company's business.
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The Hong Kong dollar and the United States dollars have been fixed at
approximately 7.80 Hong Kong dollars to $1.00 U.S. since 1983. The Chinese
government has expressed its intention in the basic law to maintain the
stability of the Hong Kong currency after the sovereignty of Hong Kong is
transferred to China. There can be no assurance that this will occur and the
Company could face increased currency risks if the current exchange rate
mechanism is changed.
Internal Political and Other Risks. The Company maintains several branches
in China and serves as distributor of certain products in China. As a result,
the Company's operations and assets are subject to significant political,
economic, legal and other uncertainties associated with doing business in China.
Changes in policies by the Chinese government resulting in changes in laws,
regulations or the interpretation thereof, confiscatory taxation, restrictions
on imports and sources of supply, import duties, corruption, currency
revaluations or the expropriation of private enterprise could materially and
adversely affect the Company. Under Deng Xiaoping's leadership, the Chinese
government pursued economic reform policies including the encouragement of
private economic activity and greater economic decentralization. With the death
of Deng Xiaoping there can be no assurance that the Chinese government will
continue to pursue such policies, that such policies will be successful if
pursued, that such policies will not be significantly altered from time to time
or that business operations in China would not become subject to the risk of
nationalization, which could result in the total loss of investment in that
country. Economic development may be limited as well by the imposition of
austerity measures intended to reduce inflation, the inadequate development of
infrastructure and the potential unavailability of adequate power, water
supplies, transportation and communications. If for any reason the Company were
required to discontinue doing business in China, the Company's profitability
would be substantially impaired.
Uncertain Legal System and Application of Laws. The legal system of China
relating to foreign investments is both new and continually evolving, and
currently there can be no certainty as to the application of its laws and
regulations in particular instances. China does not have a comprehensive system
of laws. Enforcement of existing laws or agreements may be sporadic and
implementation and interpretation of laws inconsistent. The Chinese judiciary is
relatively inexperienced in enforcing the laws that exist, leading to a higher
than usual degree of uncertainty as to the outcome of any litigation. Even where
adequate law exists in China, it may not be possible to obtain swift and
equitable enforcement of that law.
Inherent Risks of Doing Business in China. Conducting business in China is
inherently risky. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices are common in China. There can be no assurance that the
Company will not suffer losses relating to such practices.
Relations Between China and Taiwan. Relations between China and Taiwan have
been unresolved since Taiwan was established in 1949. The general election in
Taiwan in 1996 heightened tensions between them. Although not directly a threat
to the Company, peaceful and normal relations between China and its neighbors
reduces the potential for events which could have an adverse impact on the
Company's business.
Asian Economic Problems. Recently, several countries in Southeast Asia have
experienced a significant devaluation of their currencies and decline in the
value of their capital markets. In addition, several Asian countries have
experienced a number of bank failures and consolidations. The Company does not
believe that the declines in Southeast Asia will affect the demand for the
Company's products. However, because the Company sells most of its products in
Hong Kong dollars and pays for most of its products in U.S. dollars, a
devaluation in the Hong Kong dollar, if such were to occur despite assurances to
the contrary by the Chinese government, would have a material adverse effect on
the Company's operations. Investors are cautioned that there can be no assurance
that the decline in Southeast Asia will not have a material adverse effect on
the Company's business, financial condition, results of operations or market
price of its securities.
-9-
<PAGE>
Dependence on Single Major Supplier. TI HK supplied approximately 87% of
the computer chips sold by the Company in the year ended December 31, 1996.
During 1997, the Company experienced a decline in the margins relating to the
DRAM product line of computer chips purchased from TI HK. Accordingly, in order
to avoid exposure to volatile prices and other high risk factors associated with
the DRAM product line supplied by TI HK, the Company made a strategic decision
in 1997 to drop that product. As a result, the Company bought only 47% of its
chips from TI HK in 1997. Discontinuance of the TI HK DRAM product line has had
a material adverse effect on the Company's revenues. Management anticipates that
the demand for TI HK's other product lines will increase in 1998 and that the
Company will purchase a substantially higher percentage of its computer chips in
1998 from TI HK. However, there can be no assurance that this will be the case
or that the Company will succeed in obtaining new suppliers to replace the
revenues lost by discontinuing the DRAM line of computer chips.
Dependence on Key Personnel. The Company's future performance will depend
to a significant extent upon the efforts and abilities of certain members of
senior management as well as upon the Company's ability to attract and retain
other qualified personnel. In particular, the Company is largely dependent upon
the continued efforts of Mr. Edward Ting, the Company's President, Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer and Chairman
of its Board of Directors, and Mr. Clement Cheung, Secretary, Treasurer and a
director of the Company. To the extent that the services of Mr. Ting or Mr.
Cheung would be unavailable to the Company, the Company would be required to
obtain other personnel to perform the duties that they otherwise would perform.
There can be no assurance that the Company would be able to employ another
qualified person or persons, with the appropriate background and expertise, to
replace Mr. Ting or Mr. Cheung on terms suitable to the Company.
Potential Fluctuations in Operating Results. The Company's quarterly and
annual operating results are affected by a wide variety of factors that could
materially and adversely affect net sales, gross profit and profitability. This
could result from any one or a combination of factors, many of which are beyond
the control of the Company. Results of operations in any period should not be
considered indicative of results to be expected in any future period, and
fluctuations in operating results may also result in fluctuations in the market
price of the Company's Common Stock.
Year 2000. The Company has customized business management software
developed by a local Hong Kong company. Management of the Company is in the
process of evaluating its software to ensure that it is Year 2000 compliant and
has engaged a programmer to perform this task. Management believes that this
software will be Year 2000 compliant by the end of 1998; however, there can be
no assurance that the Company's software will function properly in the year
2000. Computer malfunctions due to Year 2000 problems could have a material
adverse effect on the Company's operations.
Enforceability of Civil Liabilities. The Company is a holding corporation
organized as an International Business Company under the laws of the British
Virgin Islands and its principal operating subsidiary is organized under the
laws of Hong Kong, where the Company's principal executive offices are also
located. Outside the United States, it may be difficult for investors to enforce
judgments against the Company obtained in the United States in actions brought
against the Company, including actions predicated upon civil liability
provisions of federal securities laws. In addition, most of the Company's
-10-
<PAGE>
officers and directors reside outside the United States and most of the assets
of these persons and of the Company are located outside of the United States. As
a result, it may not be possible for investors to effect service of process
within the United States upon such persons, or to enforce against the Company or
such persons judgments predicated upon the liability provisions of U.S.
securities laws. The Company has been advised by its Hong Kong counsel and its
British Virgin Islands counsel that there is substantial doubt as to the
enforceability against the Company or any of its directors or officers located
outside the United States in original actions or in actions for enforcement of
judgments of U.S. courts of liabilities predicated solely on the civil liability
provisions of federal securities laws.
Certain Legal Consequences of Incorporation in the British Virgin Islands.
The Company is organized under the laws of the British Virgin Islands.
Principles of law relating to matters affecting the validity of corporate
procedures, the fiduciary duties of the Company's management, directors and
controlling shareholders and the rights of the Company's shareholders differ
from, and may not be as protective of shareholders as, those that would apply if
the Company were incorporated in a jurisdiction within the United States.
Directors of the Company have the power to take certain actions without
shareholder approval, including an amendment of the Company's Memorandum or
Articles of Association, a change in the Company's authorized capital and
certain fundamental corporate transactions, including reorganizations, certain
mergers or consolidations, and the sale or transfer of assets. In addition,
there is doubt that the courts of the British Virgin Islands would enforce
liabilities predicated upon U.S. securities laws.
Exemptions under the Exchange Act as a Foreign Private Issuer. The Company
is a foreign private issuer within the meaning of rules promulgated under the
Exchange Act. As such, and though its Common Stock is registered under Section
12(g) of the Exchange Act, it is exempt from certain provisions of the Exchange
Act applicable to United States public companies including: the rules under the
Exchange Act requiring the filing with the Commission of quarterly reports on
Form 10-Q or current reports on Form 8-K, the sections of the Exchange Act
regulating the solicitation of proxies, consents or authorizations in respect to
a security registered under the Exchange Act and the sections of the Exchange
Act requiring insiders to file public reports of their stock ownership and
trading activities and establishing insider liability for profits realized from
any "short-swing" trading transaction (i.e., a purchase and sale, or sale and
purchase, of the issuer's equity securities within six months or less). Because
of the exemptions under the Exchange Act applicable to foreign private issuers,
shareholders of the Company are not afforded the same protections or information
generally available to investors in public companies organized in the United
States.
Volatility of Stock Price. The markets for equity securities have been
volatile and the price of the Company's Common Stock has been and could continue
to be subject to wide fluctuations in response to quarter to quarter variations
in operating results, news announcements, trading volume, sales of Common Stock
by officers, directors and principal shareholders of the Company, general market
trends and other factors.
Item 2. DESCRIPTION OF PROPERTY
British Virgin Islands
The registered office of the Company is located in the CITCO Building,
Wickhams Cay, P.O. Box 662, Road Town, Tortola, British Virgin Islands. Only
corporate administrative matters are conducted at such office, through the
Company's registered agent, CITCO Trust Corporation Limited. The material
properties of the Company and its subsidiaries, both owned and leased, are
described below.
Hong Kong
Commercial Property. Since October 1989, the Company's principal executive
offices have been located in the Prosperity Centre, Kwai Chung, Hong Kong. This
facility, consisting of approximately 3,725 square feet on the third floor and
approximately 7,500 square feet on the eighth floor, houses the Company's
executive offices and a warehouse facility. The Company leases the space through
EPL from an unaffiliated company for a base rent of approximately $7,949 per
month and additional expenses of approximately $2,860 per month in maintenance
and other fees. The lease expires on September 6, 1999.
-11-
<PAGE>
Residential Property. Since 1992, the Company has provided its President,
Mr. Edward Ting, with a leased accommodation in Hong Kong for his use. This
property, located on Broadcast Street in Hong Kong, consists of approximately
1,000 square feet and the rental rate is approximately $2,000 per month. The
property is leased on a monthly basis under an oral arrangement. (See Item 11,
"Compensation of Officers and Directors," Item 13, "Interest of Management in
Certain Transactions," and Note 11 to the Financial Statements included
herewith.)
China
The Company leases a commercial property consisting of approximately 1,762
square feet at Bellview Tower, Lo Hu District, Shenzhen City, Guangdong
Province, China which it utilizes for its China liaison office. The property is
owned by Mr. Edward Ting, the President of the Company. The Company pays a
monthly rent of approximately $2,821 pursuant to a three-year lease which
expires May 31, 2000. (See Item 13, "Interest of Management in Certain
Transactions.")
In 1995, the Company purchased two townhouse units located at Oriental
Pearl Gardens, Units B8 and B9, in Shanghai, China, which are utilized as
offices and staff quarters for EPL and Bothgreat. Each unit consists of
approximately 1,500 square feet. The purchase price of each property was
approximately $150,000. The purchase prices were paid in full in 1995.
Item 3. LEGAL PROCEEDINGS
The Company is not aware of any legal proceedings contemplated by any
governmental authority involving the Company, its subsidiaries or their
property. No director, officer or affiliate of the Company or any associate of a
director, officer or affiliate of the Company is an adverse party or has an
adverse interest in any legal proceedings involving the Company or its
subsidiaries. The Company and its ordinary subsidiaries are not parties to any
legal proceedings other than routine litigation incidental to their businesses,
nor are there any pending material legal proceedings with respect to the
property of the Company and its subsidiaries.
Item 4. CONTROL OF REGISTRANT
The Company is not directly or indirectly owned or controlled by another
corporation or by any foreign government. The following table sets forth, as of
June 1, 1998, the beneficial ownership of the Company's Common Stock by each
person known by the Company to own beneficially more than 10% of the Common
Stock of the Company outstanding as of such date and by the officers and
directors of the Company as a group. Except as otherwise indicated, all shares
are owned directly.
Identity of Amount Percent of
persons or groups Beneficially Owned Class
----------------- ------------------ -----
Group consisting of 1,804,500 shares(1),(3) 25.20%
Edward Ting, Viola Ting
and David Nominees
Limited
Officers and directors 1,844,500 shares(2),(3) 25.76%
as a group (3 persons)
- --------------------
(1) Of these shares, 588,250 shares are owned outright by Edward Ting, an
officer and director of the Company, 911,250 shares are held in trust for
him by David Nominees Limited and 305,000 shares are owned outright by his
wife, Viola Ting. Mr. Ting is deemed to be the beneficial owner of the
Common Stock held by David Nominees Limited and may be deemed to be the
beneficial owner of the Common Stock owned by Viola Ting. Mr. Ting
disclaims ownership of the Common Stock owned by his wife.
(2) Includes the share ownership of David Nominees Limited, as this entity
holds its shares in trust for Edward Ting, the share ownership of Viola
Ting, as she is Edward Ting's wife and a director of the Company, and the
share ownership of Clement Cheung, an officer and director of the Company.
(3) Does not include 365,163 shares held by an entity of which Edward Ting and
Clement Cheung are officers and directors.
-12-
<PAGE>
There are no arrangements known to the Company the operation of which may
at a subsequent date result in a change in control of the Company.
Item 5. NATURE OF TRADING MARKET
The Company's Common Stock is traded only in the United States
over-the-counter market. The Common Stock has been quoted on the National
Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ")
under the trading symbol "EPLTF."
The table set forth below presents the range, on a quarterly basis, of high
and low sale prices per share of Common Stock as reported by NASDAQ for the last
two fiscal years and for the first two quarters of the fiscal year ending
December 31, 1998. The quotations represent prices between dealers and do not
include retail markup, markdown or commissions and may not necessarily represent
actual transactions.
Quarter Ended High Low
------------- ---- ---
Fiscal 1996
March 31, 1996 $3 1/2 $1 15/16
June 30, 1996 $2 7/8 $1 13/16
September 30, 1996 $1 1/8 $1
December 31, 1996 $1 3/16 $1
Fiscal 1997
March 31, 1997 $2 1/16 $1
June 30, 1997 $1 3/16 $ 1/2
September 30, 1997 $1 3/4 $ 5/8
December 31, 1997 $1 15/16 $ 3/4
Quarter Ended High Low
------------- ---- ---
Fiscal 1998
March 31, 1998 $2 1/16 $1
June 30, 1998 $1 1/8 $ 19/32
Transfer Agent. The transfer agent for the Company's securities is
Corporate Stock Transfer, Inc., Denver, Colorado.
Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are no exchange control restrictions on payments of dividends on the
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. Other jurisdictions
in which the Company conducts operations may have various exchange controls.
Taxation and repatriation of profits regarding the Company's China operations
are regulated by Chinese laws and regulations. To date, these controls have not
had and are not expected to have a material impact on the Company's financial
results. There are no material British Virgin Islands laws which impose foreign
exchange controls on the Company or that affect the payment of dividends,
interest or other payments to nonresident holders of the Company's securities.
British Virgin Islands law and the Company's Memorandum and Articles of
Association impose no limitations on the right of nonresident or foreign owners
to hold or vote the Company's securities.
-13-
<PAGE>
Item 7. TAXATION
No reciprocal tax treaty regarding withholding exists between the United
States and the British Virgin Islands. Under current British Virgin Islands law,
dividends, interest or royalties paid by the Company to individuals are not
subject to tax as long as the recipient is not a resident of the British Virgin
Islands. If the Company were to pay a dividend, the Company would not be liable
to withhold any tax, but shareholders would receive gross dividends, if any,
irrespective of their residential or national status.
Dividends, if any, paid to any United States resident or citizen
shareholder would be treated as dividend income for United States federal income
tax purposes. Such dividends would not be eligible for the 70%
dividends-received deduction allowed to United States corporations on dividends
from a domestic corporation under Section 243 of the United States Internal
Revenue Code of 1986 (the "Internal Revenue Code"). Various Internal Revenue
Code provisions impose special taxes in certain circumstances on non-United
States corporations and their shareholders. Shareholders of the Company are
urged to consult their tax advisors with regard to such possibilities and their
own tax situation.
In addition to United States federal income taxation, shareholders may be
subject to state and local taxes upon their receipt of dividends.
Item 8. SELECTED FINANCIAL DATA
The selected financial information set forth below is derived from the
audited Consolidated Financial Statements of the Company, which are prepared in
accordance with generally accepted accounting principles in the United States of
America ("U.S. GAAP") and stated in United States dollars. The Consolidated
Financial Statements at December 31, 1996 and 1997 and for the fiscal years
ended December 31, 1995, 1996 and 1997 have been audited by independent auditors
and appear elsewhere herein. The Consolidated Financial Statements at December
31, 1993, 1994 and 1995 and for the fiscal years ended December 31, 1993 and
1994 also have been audited by independent auditors but do not appear in this
Annual Report. The selected consolidated financial data are qualified in their
entirety by reference to, and should be read in conjunction with, the
Consolidated Financial Statements, related Notes and Item 9, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Annual Report.
The Company prepares its financial statements in U.S. dollars for the
following reasons: (i) the Company is incorporated in the British Virgin
Islands, whose currency is the U.S. dollar; (ii) the Company conducts the
majority of its business transactions in U.S. dollars; and (iii) the exchange
rate between the Hong Kong dollar and the United States dollar has been fixed at
7.80 Hong Kong dollars to $1.00 U.S. since 1983. Accordingly, there are no
material adjustments on the translation of Hong Kong dollar amounts into U.S.
dollar amounts.
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<PAGE>
<TABLE>
<CAPTION>
Selected Financial Data
(Stated in United States dollars)
Year Ended Year Ended Year Ended Year Ended Year Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Statement of
Operations Data(1)
- ------------
<S> <C> <C> <C> <C> <C>
Net Sales 26,573,978 32,739,471 45,094,812 53,510,211 29,086,564
Gross Profit on Sales 3,543,014 2,175,917 4,666,282 3,431,425 3,274,858
Selling,
Administrative
and General Expenses
2,680,370 2,306,037 3,227,311 3,563,450 3,502,226
Income (Loss)
from Operations 862,644 (130,120) 1,438,971 (132,025) (227,368)
Other Income - Net 69,085 47,571 373,892 83,903 151,115
Income (Loss) from
Continuing Operations
before Income
Taxes
852,435 (281,504) 1,672,647 (153,865) (345,805)
Provision (Credit) for Income Taxes
669,308 57,094 261,865 (106,086) 21,041
Net Income (Loss) before Minority Interest
183,127 (338,598) 1,410,782 (47,779) (366,846)
Minority Interest (13,255) (2,195) (32,211)
Net Income (Loss) from Continuing Operations
169,872 (340,793) 1,378,571 (47,779) (366,846)
Loss from Disposal of Discontinued Business
(861,578)
Net Income (Loss) (691,706) (340,793) 1,378,571 (47,779) (366,846)
Net Income (Loss) per Common Share
and Common Share Equivalent (2)
Continuing
Operations
Discontinued 0.0216 (0.0520) 0.2095 (0.0073) (0.054)
Operations
(0.1096)
(0.0880) (0.0520) 0.2095 (0.0073) (0.054)
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<PAGE>
Selected Financial Data
(Stated in United States dollars)
Year Ended Year Ended Year Ended Year Ended Year Ended
Dec. 31, 1993 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1996 Dec. 31, 1997
------------- ------------- ------------- ------------- -------------
Balance Sheet
Data (1)
- ------------------
Accounts Receivable-Net
3,450,844 3,677,746 4,101,452 4,791,683 5,738,649
Inventories 3,236,458 2,672,388 3,498,279 4,444,163 3,394,900
Total Current
Assets 10,863,532 10,452,960 11,869,356 13,464,919 13,165,590
Fixed Assets-Net 390,421 352,453 1,138,983 1,100,213 1,004,794
Total Assets 11,333,953 10,907,946 13,266,160 14,827,854 14,393,400
Total Current
Liabilities 9,703,995 10,348,474 11,147,000 12,913,878 11,860,603
Non-Current
Liabilities 3,263 44,179 168,679 11,274 25,148
Stockholders'
Equity 1,600,620 487,023 1,950,481 1,902,702 2,507,649
- ----------------------
(1) Assets and liabilities are translated into United States dollars using the
approximate rate of exchange ruling at the balance sheet date. Income and
expenses are translated at the average rate in effect during the period.
The exchange rate has remained fixed at 7.80 Hong Kong dollars to $1. 00
U.S. since 1983.
(2) Before extraordinary items. Based on 6,780,844 shares for the year ended
December 31, 1997, 6,624,211 shares for the year ended December 31, 1996,
6,579,082 shares for the year ended December 31, 1995, 6,553,211 shares for
the year ended December 31, 1994, and 7,861,211 shares for the year ended
December 31, 1993.
(3) Reclassifications have been made to prior year amounts to conform to the
1997 presentation. These reclassifications had no impact on net income
(loss) or stockholders' equity.
</TABLE>
The Company has no set dividend policy, and future dividends, if any, will
depend on the Company's net income, financial position and capital requirements,
economic and market conditions, industry standards and other factors.
Accordingly, there is no assurance that future dividends will be paid.
-16-
<PAGE>
Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Item 8, "Selected Financial Data" and the Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Annual Report.
Overview
During 1997, the Company derived its revenues from two primary facets of
operations, namely distribution and sales of computer chips in Hong Kong and
China and distribution and sales of turf and irrigation equipment in China, Hong
Kong and Macau.
Computer Chip Business. The Company is currently an agent and distributor
for a number of well-known suppliers of computer chips through EPL. In 1997, as
in previous years, the Company purchased more chips from TI HK than from any
other supplier. TI HK supplied approximately 87% of the computer chips sold by
the Company in the year ended December 31, 1996. During 1997, the Company
experienced a decline in the margins relating to the DRAM product line of
computer chips purchased from TI HK. Accordingly, in order to avoid exposure to
volatile prices and other high risk factors associated with the DRAM product
line supplied by TI HK, the Company made a strategic decision to drop that
product. As a result, the Company bought only 47% of its chips from TI HK in
1997. The Company has in the past also distributed the chips of Unitrode, a
California company. Unitrode and several other of the Company's suppliers, taken
together, accounted for approximately 5% of the Company's business in 1996. Due
to technological obsolescence in the Unitrode line of chips, the Company became
unable to market those chips in Hong Kong and China. As a consequence, Unitrode
terminated its distributorship agreement with EPL as of February 15, 1997. The
Company has since signed agreements with TDK Semiconductor Corporation and other
well-known vendors to serve as alternate sources of chips. (See Item 1,
"Description of Business-Computer Chip Distribution Business.") The Company's
distribution and representation agreements with these manufacturers are
typically non-exclusive and are for a period of one year, at which time they are
renewable. The Company's agreement with TI HK authorizes the Company to market
and distribute the TI line of chips in China. The Company's agreements with
other suppliers authorize the Company to represent or carry the product lines of
these chip manufacturers in Hong Kong and China. The Company now sells computer
chips to over 600 small and medium-size Hong Kong customers and over 200 small
and medium-size Chinese customers. Net sales for the computer chip business were
approximately $23,151,881 for the year ended December 31, 1997.
Turf and Irrigation Equipment Business. The Company commenced its business
of distributing and selling turf and irrigation equipment in China in 1993. The
products include Rain Bird irrigation systems and John Deere and Club Car golf
cart and utility vehicles. The Company supplied Rain Bird irrigation systems to
golf courses in Hong Kong and Macau, and sold golf and turf equipment to over 30
golf courses in Hong Kong, China and Macau. Net sales in 1997 from this business
were approximately $5,934,683.
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<PAGE>
Results of Operations
The following table sets forth selected income data as a percentage of net
sales for the fiscal years indicated.
Year ended December 31,
Income Statement Data 1995 1996 1997
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales (89.7) (93.6) (88.7)
Gross profit 10.3 6.4 11.3
Selling, administrative and
general expenses (7.1) (6.7) (12.0)
Operating income/(loss) 3.2 (0.3) (0.7)
Income (loss) before income tax 3.7 (0.3) (1.2)
Income tax (expense)/benefit (0.6) 0.2 (0.1)
Income (loss) before minority interest 3.1 (0.1) (1.3)
Minority interest (0.1) -- --
Net income/(loss) 3.0% (0.1)% (1.3)%
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. Net sales from different industry segments were as follows:
1996 1997 % Change
---- ---- --------
Semiconductor Business $ 47,679,740 $ 23,151,881 (51.44)%
Turf and Irrigation
Equipment Business 5,830,471 5,934,683 1.79 %
------------ ------------ -----
$ 53,510,211 $ 29,086,564 (45.65)%
Net sales from the chip business decreased approximately 51% due primarily
to the Company's strategic decision to drop the DRAM product line supplied by TI
HK to avoid its exposure to volatile prices and other high risk factors
associated with that product. As a result, the Company bought only 47% of its
chips from TI HK in 1997, compared to 87% in 1996. The Company has since signed
agreements with TDK Semiconductor Corporation and other well-known vendors to
sustain its revenues and increase its gross margin.
Net sales from the turf and irrigation equipment business increased
modestly by 1.8%. Management believes that this increase would have been larger
but for the volatility in the region following the economic crisis in Asia.
Gross Margins. Gross margins were as follows:
1996 1997 % Change
---- ---- --------
$3,431,425 3,274,858 (4.56)%
The slight decline in gross profit was due to the reasons explained above.
Despite the significant decline in revenues, the Company was successful in
obtaining new distributorships in Hong Kong and China. The new product lines
improved the gross margin and enabled the Company to preserve its gross profit
dollars.
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<PAGE>
Selling Administrative and General Expenses. Selling, administrative and
general expenses were $3,502,226 in 1997 compared to $3,563,450 in 1996,
representing a 1.7% decrease. This decrease was due to austerity measures
established by all the companies in the group.
Other Income (Expenses), Net. The details of other income (expenses), net,
are as follows:
Year Ended December 31,
1996 1997
---- ----
Exchange gain $ 37,418 $ 64,668
Others 46,485 86,447
-------- --------
$ 83,903 $151,115
Other income increased from $46,485 in 1996 to $86,447 in 1997, an increase
of approximately 85.96%. This increase was primarily the result of higher bank
interest income and the write-back of certain unclaimed customer deposits.
The Company's future operating results may be affected by a number of
factors, including, but not limited to, sales price erosion uncertainties
relative to Asian economic conditions, its ability to effectively integrate
acquired products and operations in China, its ability to successfully maintain
or increase market share and its ability to effectively manage fixed and
variable expense growth relative to revenue growth.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Certain amounts have been reclassified to conform to the 1997 financial
statement presentation. These reclassifications had no impact on net income
(loss) or stockholders' equity.
Net Sales. Net sales from different industry segments were as follows:
1995 1996 % Change
---- ---- --------
Semiconductor Business $39,754,785 $47,679,740 19.9%
Turf and Irrigation
Equipment Business 5,340,027 5,830,471 9.2%
----------- ----------- ----
$45,094,812 $53,510,211 18.7%
Net sales from the chip business increased approximately 19.9% due to
increased sales in China.
The turf and irrigation equipment business registered a revenue increase of
approximately 9.2% from 1995 to 1996 primarily because of additional revenue
from existing customers in China.
Gross Margins. Gross margins were as follows:
1995 1996 % Change
---- ---- --------
$4,666,282 $3,431,425 (26.5)%
The significant decrease in the gross margins was primarily the result of
pricing pressures of all of the Company's products in 1996.
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<PAGE>
Selling Administrative and General Expenses. Operating expenses were
$3,563,450 in 1996 compared to $3,227,311 in 1995, representing a 10.4%
increase. The increase was due to additional expenses incurred to open
additional branches in China.
Other Income (Expenses), Net. The details of other income (expenses), net
are as follows:
Year Ended December 31,
1995 1996
Exchange gain 65,477 37,418
Gain on disposal of golf club memberships 207,220 --
Others 101,195 46,485
-------- --------
$373,892 $ 83,903
======== ========
Other income decreased from $373,892 in 1995 to $83,903 in 1996, a decrease
of approximately 77.6%. The decrease was primarily the result of a gain, in
1995, on the disposal of golf club memberships.
Liquidity and Capital Resources
During the years ended December 31, 1995 and 1996, respectively, the
Company generated $1,560,122 and $140,562 from operations, and during the year
ended December 31, 1997, it lost $98,064 in operations before depreciation,
amortization and other non-cash items. The Company also generated (used in)
working capital of $94,879, $(292,569) and $632,279, resulting in net cash
provided by (used in) operating activities of $1,655,001, $(152,007) and
($730,343) for the years ended December 31, 1995, 1996 and 1997, respectively.
In 1997, the Company used funds for the purchase of property, plant and
equipment amounting to $45,102. The Company also used $109,939 for repayments of
its obligations under a capital lease and increased its restricted cash by
$220,865. This was financed by short-term borrowings of $812,785 and advances
from a director aggregating $127,639. This resulted in a net decrease in cash of
$165,825. In 1995 and 1996, the Company used $647,237 and $109,777,
respectively, for other normal business operations including the purchase of
property, plant and equipment ($560,860), investment in an affiliated company
($192,308) and other immaterial items ($3,846) in the aggregate over the two
years. For the years ended December 31, 1995 and 1996, the Company also used
$193,835 and $171,296, respectively, for repayments of its obligations under a
capital lease and increased its restricted cash by $931,527 and $341,998,
respectively. The Company decreased its short-term borrowings by $20,446 in 1995
and increased its short-term borrowings by $205,440 in 1996, resulting in a net
decrease in cash of $138,044 and $569,638 for the years ended December 31, 1995
and 1996, respectively.
At June 30, 1998, the Company had approximately $15,000 in commitments for
capital expenditures. This will be funded from internal sources.
The Company is not aware of any commitments, contingencies or events within
its control which may significantly change its ability to generate sufficient
cash from internal or external sources to meet its needs.
Exchange and Dividend Controls
The Company believes that there are no material restrictions on the ability
of the Company's subsidiaries to transfer funds to the Company in the form of
cash dividends, loans, advances or product/material purchases.
Exchange Rates
The Company sells most of its products in Hong Kong dollars and pays for
most of its products in U.S. dollars. Because the Hong Kong dollar is fixed to
the U.S. dollar and has been since 1983, the Company does not hedge exchange
rate fluctuations between these currencies.
-20-
<PAGE>
The Company's financial statements have been stated in United States
dollars, the official currency used in the British Virgin Islands. Although the
operating facilities are located in Hong Kong and China, the United States
dollar is the currency of the primary economic environment in which the
Company's consolidated operations are conducted. The exchange rate between the
Hong Kong dollar and the U.S. dollar has been fixed (7.80 Hong Kong dollars to
$1.00 U.S.) since October 1983. The amounts in these financial statements are
translated in accordance with the requirements of Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation." Under this
translation method, adjustments resulting from translating the financial
statements of certain foreign subsidiaries are recorded as a separate component
of shareholders' equity.
Foreign Currency Exchange
Uncertainty in world economies and the expectations for higher U.S.
interest rates caused a gradual strengthening of the U.S. dollar during 1997.
Most of the Company's total revenue was derived from sales in Asia. The net
income effect of foreign currency exchange rate fluctuations versus the U.S.
dollar on the Company's Asian operations was minimal.
Impact of Inflation
Other than increased salary rates for all employees in Hong Kong and
increased product prices, the Company believes that Hong Kong's recent increased
inflation rate has not had a material impact on its business. The Company has
generally been able to increase the prices of its products to keep pace with
inflation, except for products that are earmarked for sale below market prices
due to obsolescence. Moreover, the Company believes that any possible
significant increases in material costs would also affect the entire electronics
industry, and thus would not have a material negative impact on the Company's
competitive position. In 1997, the inflation rate in Hong Kong was approximately
8.7%.
Item 10. DIRECTORS AND OFFICERS OF REGISTRANT
The directors and officers of the Company at December 31, 1997 are
identified below. The directors are elected at the annual meeting of
shareholders and each serves until his successor takes office or until his
earlier death, resignation or removal. The officers serve at the pleasure of the
Board of Directors of the Company.
Name Age Position with the Company
- ---- --- -------------------------
Edward Y. F. Ting 52 President, Chief Executive Officer,
Chief Operating Officer, Chief Financial
Officer, Chairman of the Board and
Director
Clement W. Cheung 43 Secretary, Treasurer and Director
Viola Ting 55 Director
James Mak 43 Director
Chris G. Mendrop 46 Director
-21-
<PAGE>
EDWARD Y. F. TING has served as Chief Executive Officer, Chief Financial
Officer, Chairman of the Board, President and a director of the Company since
its inception. He has served as the Company's Chief Operating Officer since
April 1994. He has also served as Managing Director of EPL since March 1980, and
served as an officer and director of several other entities during the time that
they were subsidiaries of the Company.
CLEMENT CHEUNG was elected a director of the Company in October 1992 and
appointed Secretary and Treasurer in July 1997. Mr. Cheung joined EPL in 1990 as
an accounting and administrative manager. Prior to joining EPL, Mr. Cheung was
the controller for Econ Electronics Limited, which was acquired by the Company
in 1990.
VIOLA TING was elected a director of the Company in 1995. Mrs. Ting is a
homemaker.
JAMES MAK was appointed a director of the Company in March 1998. Mr. Mak is
a manager of the Australian Consulate General where he is responsible for
information technology and financial control functions. He was employed as
general manager of EPL and as vice president, group operations of the Company
from 1994 until 1996. Prior to joining EPL, Mr. Mak was the manager of
management information systems of the Province of Nova Scotia in Canada. Mr. Mak
received a Bachelor of Science degree, with honors, in Computer Science from the
University of Manitoba in 1977 and a Masters of Business Administration degree
from Dalhousie University in Canada in 1983.
CHRIS G. MENDROP was appointed a director of the Company in March 1998. Mr.
Mendrop has been Chief Executive Officer of Corporate Development Capital, Inc.,
an investment advisory and financial consulting firm located in Denver,
Colorado, since July 1992. From December 1990 until its sale in December 1992,
Mr. Mendrop was a principal of Asset Income Securities, Inc., a NASD member
broker-dealer which provided financial consulting and placement agent services
to alternate credit companies seeking asset securitization to access the capital
markets. From May 1990 to July 1992, he served as Corporate Secretary to Western
Acceptance Corporation, in which position he guided that company in financial
policy and assisted in capital raising, in the development of the first
insurance premium securitized financing in the United States and other asset
backed financing. Mr. Mendrop holds a Masters of Business Administration degree
in Finance from the University of Colorado.
Except for Edward Ting and Viola Ting, who are husband and wife, no family
relationship exists among any of the named directors and executive officers.
Except as described herein, no arrangement or understanding exists between any
such director or officer and any other persons pursuant to which any director or
executive officer was elected as a director or executive officer of the Company.
Item 11. COMPENSATION OF DIRECTORS AND OFFICERS
The following table sets forth certain information as to compensation paid
to each of the Company's executive officers and to all directors and officers as
a group for the year ended December 31, 1997:
<TABLE>
<CAPTION>
Cash Other
Name of Individual Capacities in Which Served Compensation Remuneration
- ------------------ -------------------------- ------------ ------------
<S> <C> <C> <C>
Edward Y.F. Ting President, Chief Executive Officer,
Chief Financial Officer, Chairman
of the Board and Director $ 150,000 $ 71,845(1)
Clement W. Cheung Secretary, Treasurer and Director $ 30,833 $ 31,415(2)
--
All directors and
officers as a group (5 persons) $ 180,833 $ 103,260
- ----------------------
(1) Includes the value of housing provided to Mr. Ting valued at $24,000 during
fiscal 1997 and other items of remuneration. (See Item 13, "Interest of
Management in Certain Transactions.")
(2) Includes a stock bonus of 20,000 shares of Common Stock of the Company,
valued at $11,250, which was paid in June 1997 and other items of
remuneration. (See Item 13, "Interest of Management in Certain
Transactions.")
-22-
<PAGE>
</TABLE>
In 1996, the Company instituted a defined contribution retirement plan
which covers the employees of Bothgreat and EPL. The Company and its
subsidiaries set aside $33,319 pursuant to the plan for the fiscal year ended
December 31, 1997, and $36,897 pursuant to the plan for the fiscal year ended
December 31, 1996.
Item 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR; SUBSIDIARIES
In July 1995, the Company granted stock options to its employees to
purchase up to 325,017 shares of common stock. Edward Ting and Clement Cheung
were granted options to purchase 120,000 shares and 45,000 shares, respectively,
of the 325,017 options granted to employees. Under the plan, a maximum of
108,339 shares of common stock might be acquired at a price of $1 per share
within the period from July 28, 1995 to December 31, 1996, a maximum of 108,339
shares of common stock might be acquired at a price of $1.25 per share within
the calendar year commencing January 1, 1997; and a maximum of 108,339 shares of
common stock might be acquired at a price of $1.50 per share within the calendar
year commencing January 1, 1998. The right to acquire these shares is cumulative
and non-assignable. These options expire upon termination of employment with the
Company. No stock compensation to employees was calculated as the exercise price
was in excess of the quoted market price for the Company's common stock
($0.3125) on the date these options were first granted. None of the options were
exercised during the year ended December 31, 1997.
In August 1995, the Board of Directors granted options to purchase an
aggregate of 1,900,000 shares of the Company's common stock to certain of the
Company's shareholders as follows: Edward Ting - 250,000 shares; Viola Ting -
200,000 shares; David Nominees Limited - 450,000 shares; and 1,000,000 shares to
Silver Beam Limited at an exercise price of $1.50 per share. The options granted
to the shareholders are exercisable until December 31, 1998, with one-third of
the shares being exerciseable from the date of grant until December 31, 1996,
and an additional one-third becoming exerciseable in each of the subsequent
calendar years. The right of the shareholders to acquire the shares is
cumulative and assignable. None of the options were exercised during the year
ended December 31, 1997.
Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Since 1992, the Company has provided a director, Mr. Edward Ting, with a
leased accommodation in Hong Kong for his use. This property, located on
Broadcast Street in Hong Kong, consists of approximately 1,000 square feet, and
the rental rate is approximately $2,000 per month. The property is leased on a
monthly basis under an oral arrangement.
The Company leases a commercial property in Bellview Tower, Lo Hu District,
Shenzhen City, China, from Edward Ting, the President of the Company. The
Company pays a monthly rent of approximately $2,821 pursuant to a three-year
lease which expires on May 31, 2000. Rent paid by the Company to Mr. Ting
amounted to $33,846 in each of 1997, 1996 and 1995.
During 1995, the Company paid commissions to a director in the amount of
$17,470.
During 1995, the Board of Directors granted stock bonuses to employees of
the Company in an aggregate amount of 71,000 shares. Edward Ting and Clement
Cheung received 40,000 and 20,000 of those shares, respectively.
During 1997, the Board of Directors granted stock bonuses to employees of
the Company in an aggregate amount of 70,000 shares. Clement Cheung received
20,000 of those shares.
During 1997, a director advanced short-term loans to the Company in the
amount of $127,639. The loans bear interest at the rate of 10% per annum and are
repayable within one year.
-23-
<PAGE>
In March 1998, Bothgreat obtained a standby letter of credit for one of its
suppliers from a bank. The letter of credit was collateralized by a security
interest in a $500,000 deposit owned by Glas-Aire Industries Group Ltd.
("Glas-Aire"). Mr. Edward Ting is Chief Executive Officer, Chairman of the Board
of Directors and a principal shareholder of Glas-Aire. Chris G. Mendrop and
Clement Cheung are directors of Glas-Aire. As consideration for Glas-Aire
agreeing to provide the security for the letter of credit, the Company agreed as
follows: (i) to issue to Glas-Aire a warrant exercisable for a period of five
years from March 25, 1998 to purchase 250,000 shares of the Company's Comon
Stock at an exercise price of $1.00 per share during the first year, $1.10 per
share during the second year, $1.20 per share during the third year, $1.50 per
share during the fourth year and $1.75 per share during the fifth year; (ii) to
pay Glas-Aire a fee in the amount of 1% of the collateral, or $5,000, payable in
advance for the six month period beginning on the date the letter of credit was
issued by the bank and an additional fee of 1%, also payable in advance, for the
six-month period immediately following the initial six-month period, if the
collateral continues to be utilized for the letter of credit, with the
understanding that the collateral shall be made available by Glas-Aire to
collateralize the letter of credit for a period not to exceed one year; and
(iii) the pledge to Glas-Aire by Mr. Ting of all shares of Glas-Aire common
stock owned by him, his wife or under his control.
During 1997, there were no other material transactions, and none are
presently proposed, to which the Company or any of its subsidiaries was or is to
be a party, in which either (i) any director or officer of the Company, or (ii)
any corporation or foreign corporation directly or indirectly owning or
controlling the Company or (iii) any relative or spouse of any of the foregoing,
or any relative of such spouse, who has the same home as such person or who is a
director or officer of any subsidiary of the Company had or is to have a direct
or indirect material interest.
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 AND CHANGES IN SECURITY FOR REGISTERED SECURITIES
There have been no material modifications in the constituent instruments
defining the rights of the holders of any class of the Company's registered
securities or any material limitations in the rights evidenced by any class of
the Company's registered securities.
PART IV
Item 17. FINANCIAL STATEMENTS
Not Applicable.
Item 18. FINANCIAL STATEMENTS
Reference is made to Item 19(a) for a list of all financial statements
filed as part of this Annual Report on Form 20-F, which are hereby incorporated
by this reference and made a part hereof.
-24-
<PAGE>
Item 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) The following Financial Statements are filed as part of this Annual
Report:
Page
----
Report of Independent Auditors on the
Consolidated Financial Statements for Year Ended
December 31, 1997 F-1
Report of Independent Auditors on the
Consolidated Financial Statements for Years Ended
December 31, 1996 and 1995 F-2
Consolidated Balance Sheets at December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1997, 1996 and 1995 F-6
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-9
(b) Financial Statements schedules.
All schedules are omitted as they are not applicable.
(c) No Exhibits are filed with this Annual Report:
-25-
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
ELECTROCON INTERNATIONAL INC.
We have audited the accompanying consolidated balance sheet of Electrocon
International Inc. and subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Electrocon International Inc. and
subsidiaries at December 31, 1997 and the results of their operations and their
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte Touche Tohmatsu
- -----------------------------------
DELOITTE TOUCHE TOHMATSU
Hong Kong
June 30, 1998
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
ELECTROCON INTERNATIONAL INC.
We have audited the accompanying consolidated balance sheet of Electrocon
International Inc. and its subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1996 and 1995. 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 auditing standards generally accepted
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 statements 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
Electrocon International Inc. and its subsidiaries as of December 31, 1996 and
the consolidated results of their operations and their cash flows for the years
ended December 31, 1996 and 1995 in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO Binder
- --------------------------
BDO Binder
Hong Kong
July 14, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------
(Amounts stated in United States Dollars)
December 31,
------------
1997 1996
---- ----
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 214,832 $ 380,657
Restricted cash (Note 7) 3,714,374 3,493,509
Accounts receivable:
- Trade, less allowance for doubtful accounts of
$180,193 (1996: $152,154) 5,153,691 3,863,117
- Affiliated company 428,903 769,070
- Others 156,055 159,496
Inventories (Note 3) 3,394,900 4,444,163
Costs in excess of billings on construction contracts (Note 4) -- 145,010
Prepaid expenses and deposits 61,624 119,502
Prepaid income taxes 41,311 90,395
----------- -----------
Total current assets 13,165,590 13,464,919
Property and equipment, net (Note 6) 1,004,794 1,100,213
Investment in an affiliated company 123,530 161,005
Other 99,386 101,717
----------- -----------
Total assets $14,393,400 $14,827,854
=========== ===========
See notes to consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------
(Amounts stated in United States Dollars)
December 31,
------------
1997 1996
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Short-term borrowings (Note 7) $ 5,766,319 $ 4,953,534
Current portion of obligations under capital leases (Note 8) 7,167 109,939
Accounts payable and accrued expenses
- Trade 5,676,670 7,737,253
- Other 132,747 113,152
Billings in excess of costs on construction contracts (Note 5) 150,061 --
Amount due to a director (Note 11) 127,639 --
------------ ------------
Total current liabilities 11,860,603 12,913,878
Obligations under capital leases,
net of current portion (Note 8) 3,582 10,749
Deferred income taxes (Note 10) 21,566 525
------------ ------------
Total liabilities 11,885,751 12,925,152
------------ ------------
Commitments and contingencies (Note 12)
Stockholders' equity
Common stock, par value $0.0001 per share;
authorized 20,000,000 shares;
issued and outstanding 1997: 7,160,420 shares
and 1996: 6,624,211 shares 716 662
Additional paid-in capital 5,942,627 4,970,888
Accumulated deficit (3,398,350) (3,031,504)
Foreign currency translation adjustment (37,344) (37,344)
------------ ------------
Total stockholders' equity 2,507,649 1,902,702
------------ ------------
Total liabilities and stockholders' equity $ 14,393,400 $ 14,827,854
============ ============
See notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------
(Amounts stated in United States Dollars)
Year ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net revenue $ 29,086,564 $ 53,510,211 $ 45,094,812
Cost of sales 25,811,706 50,078,786 40,428,530
------------ ------------ ------------
Gross profit 3,274,858 3,431,425 4,666,282
Selling, administrative and general expenses 3,502,226 3,563,450 3,227,311
------------ ------------ ------------
(Loss) income from operations (227,368) (132,025) 1,438,971
Interest income 229,252 214,212 214,471
Interest expense (461,329) (307,956) (335,383)
Equity in loss of an affiliated company (37,475) (11,999) (19,304)
Other income (Note 9) 151,115 83,903 373,892
------------ ------------ ------------
(Loss) income before income taxes (345,805) (153,865) 1,672,647
Provision (credit) for income taxes (Note 10) 21,041 (106,086) 261,865
------------ ------------ ------------
(Loss) income before minority
interest (366,846) (47,779) 1,410,782
Minority interest -- -- (32,211)
------------ ------------ ------------
Net (loss) income $ (366,846) $ (47,779) $ 1,378,571
============ ============ ============
(Loss) earnings per share $ (0.054) $ (0.0073) $ 0.2095
============ ============ ============
Weighted average number of
shares outstanding 6,780,844 6,624,211 6,579,082
============ ============ ============
See notes to consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------
(Amounts stated in United States Dollars)
Common stock Foreign Total
----------------------- Additional currency stock-
Shares paid-in Accumulated translation holders'
outstanding Amount capital deficit adjustment equity
----------- ------ ------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1995 6,553,211 $ 655 $ 4,886,008 $(4,362,296) $ (37,344) $ 487,023
Contribution by minority
shareholders (Note 1) -- -- 60,481 -- -- 60,481
Issuance of stock bonus to
employees (Note 1) 71,000 7 24,399 -- -- 24,406
Net income for the year -- -- -- 1,378,571 -- 1,378,571
----------- ----------- ----------- ----------- ----------- -----------
Balance at
December 31, 1995 6,624,211 662 4,970,888 (2,983,725) (37,344) 1,950,481
Loss for the year -- -- -- (47,779) -- (47,779)
----------- ----------- ----------- ----------- ----------- -----------
Balance at
December 31, 1996 6,624,211 662 4,970,888 (3,031,504) (37,344) 1,902,702
Issuance of stock bonus
to employees 70,000 7 39,368 -- -- 39,375
Stock issued in settlement
of payable 466,209 47 932,371 -- -- 932,418
Loss for the year -- -- -- (366,846) -- (366,846)
----------- ----------- ----------- ----------- ----------- -----------
Balance at
December 31, 1997 7,160,420 $ 716 $ 5,942,627 $(3,398,350) $ (37,344) $ 2,507,649
=========== =========== =========== =========== =========== ===========
See notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
(Amounts stated in United States Dollars)
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (366,846) $ (47,779) $ 1,378,571
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Share of loss of an affiliated company 37,475 11,999 19,304
Minority interest -- -- 32,211
Issuance of stock bonus to employees 39,375 -- 24,406
Depreciation and amortization 142,852 161,350 126,198
(Gain) loss on disposal of property and equipment -- (5,959) 2,333
Provision (write-back) for doubtful debts 28,039 86,333 (55,457)
Deferred income taxes 21,041 (65,382) 32,556
Changes in assets and liabilities:
Accounts receivable (975,005) (776,564) (368,249)
Inventories 1,049,263 (945,884) (825,891)
Costs in excess of billings of construction contracts 145,010 (92,171) (52,839)
Stock of unsold golf club memberships -- -- 200,000
Prepaid expenses and deposits 57,878 (4,522) 479,523
Prepaid income taxes 49,084 (90,395) --
Accounts payable and accrued expenses (1,108,570) 1,870,002 507,642
Billings in excess of costs on construction contracts 150,061 -- --
Income taxes payable -- (253,035) 154,693
----------- ----------- -----------
Net cash (used in) provided by operating activities (730,343) (152,007) 1,655,001
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from disposal of property and equipment -- 18,846 1,595
Additions to property and equipment (45,102) (109,392) (471,909)
Investment in affiliated company -- (19,231) (173,077)
Other -- -- (3,846)
----------- ----------- -----------
Net cash used in investing activities (45,102) (109,777) (647,237)
----------- ----------- -----------
Balance carried forward $ (775,445) $ (261,784) $ 1,007,764
----------- ----------- -----------
F-7
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
(Amounts stated in United States Dollars)
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Balance Carried Forward $ (775,445) $ (261,784) $ 1,007,764
----------- ----------- -----------
Cash flows from financing activities:
Payment of obligations under capital leases (109,939) (171,296) (193,835)
Increase (decrease) in short-term borrowings 812,785 205,440 (20,446)
Increase in restricted cash (220,865) (341,998) (931,527)
Advances from director 127,639 -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities 609,620 (307,854) (1,145,808)
----------- ----------- -----------
Net decrease in cash and cash equivalents (165,825) (569,638) (138,044)
Cash and cash equivalents at beginning of year 380,657 950,295 1,088,339
----------- ----------- -----------
Cash and cash equivalents at end of year $ 214,832 $ 380,657 $ 950,295
=========== =========== ===========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest paid 451,464 310,132 319,603
Income taxes (refund) (49,084) 302,727 74,616
Non cash transactions:
Stock issued in settlement of payable 932,418 -- --
Property acquired under capital leases -- 23,744 444,872
See notes to consolidated financial statements
F-8
</TABLE>
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(Amounts stated in United States Dollars)
1. ORGANIZATION
Electrocon International Inc. ("the Company") is incorporated with limited
liability in the British Virgin Islands.
The Company is a diversified, Hong Kong-based holding company that conducts
operations through its subsidiaries, all wholly-owned, primarily in two
separate business segments - the distribution of semiconductor products
(primarily computer chips) to small and medium-sized manufacturers located
in the Hong Kong Special Administrative Region ("Hong Kong") of the
People's Republic of China ("PRC") and in other regions of the PRC and the
distribution of golf carts, irrigation products and systems, fertilizer and
turf equipment to golf clubs in Hong Kong, Macau and the PRC. In 1995, the
Company also entered into the business of distributing personal computer
related products through its 50% held affiliated company, China Electrocon
Limited, and, in 1996, began distribution of non-personal computer related
products.
The Company formed Bothgreat Technology Limited ("Bothgreat"), a limited
company in Hong Kong, to sell and distribute golf course irrigation
products and systems, turf equipment and other golf related products and
installation of irrigation and drainage systems in golf clubs in the PRC.
Bothgreat was formed with 100,000 shares of common stock of $1.28 (HK$10)
each, of which, 90,000 shares of common stock (90%) were subscribed for at
par by Electrocon Products Limited ("EPL"), a wholly-owned subsidiary of
the Company. The other 10% was issued to Mr. Fred Ko, a former director of
the Company, as an incentive for his active participation in the management
of Bothgreat. The minority interest relates to Mr. Ko's interest in
Bothgreat. In August 1995, EPL acquired 10,000 shares of common stock (10%)
of Bothgreat from Mr. Ko for no present or future consideration.
On August 21, 1995 and June 10, 1997, the Company issued 1,000 and 70,000
shares, respectively, of its common stock as bonuses to its employees.
These shares were valued at $24,406 and $39,375, respectively, for the
purpose of calculating stock compensation to employees based on the quoted
market price of the Company's common stock of $0.34375 and $0.5625,
respectively, on the dates of issuance.
On September 30, 1997, the Company issued 466,209 shares of its common
stock to a creditor at a price of $2.00 per share for the settlement of
debt amounting to $932,148.
The consolidated financial statements of the Company and its subsidiaries
have been prepared in accordance with generally accepted accounting
principles in the United States of America ("U.S. GAAP") which differ from
those used in the statutory accounts of most of its subsidiaries. There are
no material differences between the U.S. GAAP amounts and the amounts used
in the statutory accounts of the subsidiaries.
F-9
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
(Amounts stated in United States Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Intercompany balances and transactions are eliminated
on consolidation.
Investments in affiliated companies, owned 20% to 50% inclusive, are
accounted for using the equity method.
Inventories
-----------
Inventories, which comprise electronic components and spare parts held for
resale, are stated at the lower of cost or market value. Cost, which
comprises direct materials, sub-contracting charges and freight, is
calculated using the weighted-average method.
Construction contracts
----------------------
Construction contracts are stated at cost plus estimated profit, less
provision for any foreseeable losses and progress billings. Cost includes
direct materials, direct labor and allocated overhead expenses. For
contracts where progress billings exceed construction costs incurred plus
aggregate estimated profit less foreseeable losses, the excess amount is
shown in the balance sheet under current liabilities.
Property and equipment
----------------------
Property and equipment is stated at cost less accumulated depreciation. The
costs of major improvements are capitalized whereas the costs of
maintenance and repairs are expensed in the year incurred. Depreciation and
amortization are provided on the declining balance method except for
leasehold land in the PRC held under long lease, which is amortized on a
straight-line basis, at the following rates per annum:
Leasehold land in the PRC held under long lease 2%
Buildings erected thereon 2%
Furniture, fixtures and office equipment 15% - 25%
Motor vehicles 25%
Motor vessels 15%
Leasehold improvements 15%
Long lease is defined as a lease having 50 or more years to run.
F-10
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
(Amounts stated in United States Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
(Loss) earnings per share
-------------------------
(Loss) earnings per share are calculated based upon the weighted average
number of common shares and common share equivalents outstanding as
adjusted for stock splits and reverse stock splits. The dilutive effect of
share options which are common share equivalents is calculated using the
treasury stock method. On March 3, 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share". This pronouncement provides for the
calculation of basic and diluted earnings per share which is different from
the current calculation of primary and fully diluted earnings per share.
The adoption of this new standard had no impact on the Company. The effect
of stock options on (loss) earnings per share would be anti-dilutive and no
diluted (loss) earnings per share is disclosed.
Revenue recognition
-------------------
The Company recognizes revenue from the sale of goods and services at the
time when shipments of products and services rendered are made to customers
and provides an allowance for estimated costs associated with returns of
non-conforming products. Profits from construction contracts which are
expected to last for over one year are recognized under the
percentage-of-completion method, using progress billings in relation to
estimated total revenue of the contracts to measure the stage of
completion. Estimated profit is recognized only when a contract is more
than 20% completed at the balance sheet date.
Income taxes
------------
Deferred income taxes are provided at enacted statutory rates for temporary
differences resulting from differences between the book and tax bases of
assets and liabilities in accordance with SFAS No. 109 "Accounting for
Income Taxes".
Foreign currency translation
----------------------------
Assets and liabilities of foreign subsidiaries are translated at year end
exchange rates, while revenues and expenses are translated at average
currency exchange rates during the year. Adjustments resulting from
translating foreign currency financial statements are reported as a
separate component of stockholders' equity. Gains or losses from foreign
currency transactions are included in the statement of operations.
Post-retirement and post-employment benefits
--------------------------------------------
The Company does not provide post-retirement benefits, other than pensions,
and post-employment benefits, if any, are not significant.
F-11
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
(Amounts stated in United States Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Concentration of credit risk
----------------------------
The Company sells to customers located in Hong Kong and other regions of
the PRC. The Company grants credit to all qualified customers on an
unsecured basis but does not believe it is exposed to any undue
concentration of credit risk to any significant degree.
Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and cash equivalents
-------------------------
Cash and cash equivalents include cash on hand, cash accounts, interest
bearing savings accounts and time certificate of deposit accounts with an
original maturity of three months or less.
New accounting standards not yet adopted
----------------------------------------
In June 1997, FASB issued two new disclosure standards. Results of
operations and financial position will be unaffected by implementation of
these new standards.
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS No. 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise", establishes standards for the way that
public enterprises report information about operating segments in interim
financial statements issued to the public. It also establishes standards
for disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance.
F-12
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
(Amounts stated in United States Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
New accounting standards not yet adopted - continued
----------------------------------------------------
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evaluate the impact,
if any, they may have on future financial statement disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits", which amends the
disclosure requirements for pensions and other post-retirement benefits.
Adoption of the standard will not significantly change the Company's
financial statement disclosures.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the 1997
presentation. These reclassifications had no impact on net income (loss) or
stockholders' equity.
3. INVENTORIES
The components of inventories were as follows:
December 31,
------------
1997 1996
---- ----
Finished goods $2,501,729 $3,067,115
Raw materials and spare parts 893,171 1,377,048
---------- ----------
$3,394,900 $4,444,163
========== ==========
F-13
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
(Amounts stated in United States Dollars)
4. COSTS IN EXCESS OF BILLINGS ON CONSTRUCTION CONTRACTS
Costs in excess of billings on construction contracts included the
following:
December 31,
------------
1997 1996
---- ----
Costs incurred $ 2,517 $ 577,045
Add: Estimated profit 13,637 705,422
----------- -----------
16,154 1,282,467
Less: Progress billings (16,154) (1,137,457)
----------- -----------
$ -- $ 145,010
=========== ===========
5. BILLINGS IN EXCESS OF COSTS ON CONSTRUCTION CONTRACTS
Billings in excess of costs on construction contracts included the
following:
December 31,
------------
1997 1996
---- ----
Costs incurred $ 10,730 $ --
Add: Estimated profit -- --
-------- ----------
10,730 --
Less: Progress billings 160,791 --
-------- ----------
$150,061 $ --
======== ==========
F-14
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
(Amounts stated in United States Dollars)
6. PROPERTY AND EQUIPMENT, NET
December 31,
------------
1997 1996
---- ----
Cost
Land and buildings held under long lease $ 314,920 $ 314,920
Furniture, fixtures and office equipment 529,724 492,431
Motor vessels 477,148 477,148
Motor vehicles 185,952 178,143
Leasehold improvements 128,535 128,535
---------- ----------
Total 1,636,279 1,591,177
Less: Accumulated depreciation and amortization 631,485 490,964
---------- ----------
$1,004,794 $1,100,213
========== ==========
Included in property and equipment are the following assets acquired under
capital leases:
December 31,
------------
1997 1996
---- ----
Cost
Motor vessels $ -- $477,148
Motor vehicles 23,744 23,744
-------- --------
Total 23,744 500,892
Less: Accumulated amortization 10,447 110,246
-------- --------
$ 13,297 $390,646
======== ========
Motor vessels with net book values amounting to $315,903 and $371,651 as of
December 31, 1997 and 1996, respectively, are registered in the name of a
third party as trustee for the Company.
F-15
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
(Amounts stated in United States Dollars)
7. SHORT-TERM BORROWINGS
The outstanding amounts at the balance sheet dates represent overdrafts,
letters of credit and trust receipts loan balances with various banks. The
facilities and the amounts utilized at the balance sheet dates are as
follows:
December 31,
------------
1997 1996
---- ----
Credit facilities granted $6,243,590 $7,435,898
========== ==========
Utilized $5,766,319 $4,953,534
========== ==========
Weighted average interest rate
on borrowings at end of year 9.8% 9.3%
========== ==========
The Company maintains short-term bank credit lines in Hong Kong for use in
its operations in Hong Kong and other regions of the PRC. Interest rates
are generally based on the banks' prime lending rates, and cost of funds
and the credit lines are normally subject to annual review. At December 31,
1997 the above banking facilities were secured by bank deposits of
approximately $3.7 million. In addition, at December 31, 1997 a director
has pledged personal bank deposits to a bank as collateral for facilities
of approximately $9,102,000 provided to the Company of which approximately
$808,000 was utilized at the balance sheet date. No charges have been made
in respect of the provision of the collateral.
F-16
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
(Amounts stated in United States Dollars)
8. OBLIGATIONS UNDER CAPITAL LEASES
Obligations under capital leases consist of the following:
December 31,
------------
1997 1996
---- ----
7.25% per annum, due in installments to June 1999 $ 10,749 $ 17,916
8.75% per annum, due in installments to May 1997 -- 2,707
Prime rate plus 2% per annum, due in installments
to August 1997 -- 100,065
-------- --------
10,749 120,688
Less: Current portion of obligations
under capital leases 7,167 109,939
-------- --------
$ 3,582 $ 10,749
======== ========
The future minimum lease payments under capital leases for the years
subsequent to 1997 are as follows:
1998 $ 8,726
1999 4,363
--------
13,089
Less: Amount representing interest 2,340
--------
Present value of minimum lease payments $ 10,749
========
F-17
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
(Amounts stated in United States Dollars)
9. OTHER INCOME
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Foreign exchange gain $ 64,668 $ 37,418 $ 65,477
Gain on disposal of golf club memberships -- -- 207,220
Other 86,447 46,485 101,195
-------- -------- --------
$151,115 $ 83,903 $373,892
======== ======== ========
10. INCOME TAXES
Under current law, the Company's income is not subject to taxation in the
British Virgin Islands. The Hong Kong subsidiaries' income tax provision
has been calculated by applying the Hong Kong statutory income tax rates of
16.5% for the years ended December 31, 1997, 1996 and 1995 to the
subsidiaries' estimated taxable income which were earned in or derived from
Hong Kong during the respective years. Each company in Hong Kong files a
separate tax return and tax losses are available only against that
company's taxable income. The Company is not subject to income tax in other
regions of the PRC.
The provision for income taxes representing Hong Kong taxation consists of
the following:
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Current year provision $ -- $ -- $ 230,129
Overprovision in prior years -- (40,703) (820)
--------- --------- ---------
-- (40,703) 229,309
Deferred tax provision (credit) 21,041 (65,383) 32,556
--------- --------- ---------
Provision (credit) for income taxes $ 21,041 $(106,086) $ 261,865
========= ========= =========
F-18
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
(Amounts stated in United States Dollars)
10. INCOME TAXES - continued
A reconciliation of income tax provision (credit) to the amount computed by
applying the Hong Kong statutory income tax rates to (loss) income before
income taxes in the consolidated statements of operations is as follows:
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Hong Kong statutory tax rate 16.5% 16.5% 16.5%
Income tax at Hong Kong statutory
rate on pre-tax (loss) income $ (71,080) $ (22,252) $ 275,987
Over-provision of tax in prior year -- (40,703) (820)
Operating (profit) loss not subject
to income tax 92,121 (40,325) (17,065)
Other -- (2,806) 3,763
--------- --------- ---------
$ 21,041 $(106,086) $ 261,865
========= ========= =========
At the balance sheet date, the major components of deferred income tax
liabilities are as follows:
December 31,
------------
1997 1996
---- ----
Tax loss carryforwards $ 151,489 $ 99,716
Depreciation (89,110) (79,950)
Valuation allowances (83,945) (20,291)
--------- ---------
Deferred income tax liability $ (21,566) $ (525)
========= =========
At December 31, 1997 the Company had tax losses of $927,093 which are
available for carryforward indefinitely.
F-19
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
(Amounts stated in United States Dollars)
11. RELATED PARTY TRANSACTIONS
Related party transactions not described elsewhere in these financial
statements are as follows:
a) The Company has provided a director with leased accommodation on a
monthly basis for his use since 1992 at a monthly rental of
approximately $2,000.
b) The Company leases residential accommodation from a director at a
monthly rental of approximately $2,821 under a lease which is
renewable on an annual basis. Rental expenses amounted to $33,846,
$33,846 and $33,846 in 1997, 1996 and 1995, respectively.
c) During 1995, the Company paid commission to a director amounting to
$17,470.
d) In 1997, a director advanced short-term loans to the Company amounting
to $127,639. These loans carry interest at 10% per annum and are
repayable within one year.
e) At December 31, 1997, a director has also provided collateral for
banking facilities provided to the Company as detailed in Note 7.
f) Sales by the Company to China Electrocon Limited, a 50% held
affiliate, totalled $81,000 in 1997, $950,416 in 1996 and $847,073 in
1995.
g) During 1995, stock bonuses of 60,000 shares were granted to two of the
directors and during 1997, stock bonuses of 20,000 shares were granted
to a director.
12. OPERATING LEASE COMMITMENTS
The Company leases premises under operating leases expiring through May
2000. Rental expense under operating leases was $219,679 in 1997, $252,524
in 1996 and $251,150 in 1995. As of December 31, 1997, future minimum
rental payments under operating leases were as follows:
1998 $159,428
1999 101,165
2000 14,103
--------
Total minimum lease payments $274,696
========
F-20
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
(Amounts stated in United States Dollars)
13. STOCK OPTION PLANS
In July 1995, the Company granted stock options to its employees to
purchase up to 325,017 shares of common stock. Under the plan, a maximum of
108,339 shares of common stock may be acquired at a price of $1 per share
within the period from July 28, 1995 to December 31, 1996; a maximum of
108,339 shares of common stock may be acquired at a price of $1.25 per
share within the calendar year commencing January 1, 1997; and a maximum of
108,339 shares of common stock may be acquired at a price of $1.50 per
share within the calendar year commencing January 1, 1998. The right to
acquire these shares is cumulative and non-assignable. These options expire
upon termination of employment with the Company. No stock compensation to
employees was calculated as the exercise price was in excess of the quoted
market price for the Company's common stock ($0.3125) on the date these
options were first granted.
In August 1995, the Company also granted stock options to its shareholders,
some of whom are officers, to purchase 1,900,000 shares of common stock at
a price of $1.50. Under the plan, a maximum of 633,334 shares of common
stock may be acquired within the period from August 22, 1995 to December
31, 1996, a maximum of 633,333 shares of common stock may be acquired
within the calendar year commencing January 1, 1997; and a maximum of
633,333 shares of common stock may be acquired within the calendar year
commencing January 1, 1998. The right to acquire the shares is cumulative
and may be assigned.
The following summarizes the stock options outstanding:
Number Average
of shares exercise price
--------- --------------
January 1, 1995 $ --
Granted 2,225,017 1.46
---------- ------
December 31, 1995 2,225,017 1.46
Expired (741,673) 1.43
---------- ------
December 31, 1996 1,483,344 1.48
Expired (741,672) 1.46
---------- ------
December 31, 1997 741,672 $ 1.50
========== ======
The grant-date fair value of the options is estimated to be $0.07 per share
using the Black-Scholes option pricing model with the following
assumptions: (a) risk-free interest rate 5.56%; (b) expected life - 2 years
(c) expected volatility - 91.1%; expected dividend yield - Nil.
The Company has accounted for the stock options using the intrinsic value
method. As the effect on net income, basic and diluted earnings per share
is insignificant had the Company adopted the fair value based method of
accounting for stock options, no separate disclosure is noted.
F-21
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
(Amounts stated in United States Dollars)
14. EMPLOYEE BENEFIT PLAN
Commencing January 1996 the employees of the entities located in Hong Kong
are covered under a defined contribution plan covering all full-time
monthly-paid permanent staff under the employment of the entities located
in Hong Kong. The plan provides for annual contributions by the Company of
5% of eligible compensation of employees based on length of service.
The expense related to the above plan was $33,319 in 1997 and $36,897 in
1996.
15. SUPPLEMENTARY INFORMATION
Movements on allowances for doubtful accounts are as follows:
Charged to
Balance at (write-back of) Balance
beginning cost and at end
of year expenses of year
------- -------- -------
Year ended December 31, 1997 $152,154 $ 28,039 $180,193
======== ======== ========
Year ended December 31, 1996 $ 65,821 $ 86,333 $152,154
======== ======== ========
Year ended December 31, 1995 $121,278 $(55,457) $ 65,821
======== ======== ========
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107
"Disclosures About Fair Value of Financial Instruments". The estimated fair
value amounts have been determined by the Company, using available market
information and appropriate valuation methodologies. The estimates
presented herein are not necessarily indicative of the amounts that the
Company could realize in a current market exchange. The carrying amounts of
cash and cash equivalents, inventories; accounts receivable, accounts
payable, short-term borrowings, and long-term debt are reasonable estimates
of their fair value. The interest rate on the Company's long-term debt
approximates that which would have been available at December 31, 1997 for
debt of the same remaining maturities.
F-22
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
(Amounts stated in United States Dollars)
17. SEGMENT INFORMATION
The Company's operations comprise the distribution of electronic components
in Hong Kong and the distribution of golf equipment and installation of
golf course irrigation and drainage systems in Hong Kong and in other
regions of the PRC. The geographical and industrial distribution of sales,
operating income (loss) and total assets, major customers and suppliers for
the years ended December 31, 1997, 1996 and 1995 are shown as follows:
Geographical segment
Other
regions of
Hong Kong the PRC Total
--------- ------- -----
Year ended December 31, 1997:
Net revenues $ 16,438,529 $ 12,648,035 $ 29,086,564
Operating income (loss) 66,811 (294,179) (227,368)
Total assets at December 31 $ 8,864,269 $ 5,529,131 $ 14,393,400
------------ ------------ ------------
Year ended December 31, 1996:
Net revenues $ 43,870,274 $ 9,639,937 $ 53,510,211
Operating income (loss) 815,173 (947,198) (132,025)
Total assets at December 31 $ 12,515,969 $ 2,311,885 $ 14,827,854
============ ============ ============
Year ended December 31, 1995:
Net revenues $ 33,148,678 $ 11,946,134 $ 45,094,812
Operating income 1,079,900 359,071 1,438,971
Total assets at December 31 $ 11,545,279 $ 1,720,881 $ 13,266,160
============ ============ ============
F-23
<PAGE>
ELECTROCON INTERNATIONAL INC. AND SUBSIDIARIES
- ----------------------------------------------
(Amounts stated in United States Dollars)
17. BUSINESS SEGMENT INFORMATION - continued
Business segment
Distribution Distribution
and sale of and installation
semi-conductors of golf
and electronic equipment
spare parts and systems Total
----------- ----------- -----
Year ended December 31, 1997:
Net revenues $ 23,151,881 $ 5,934,683 $ 29,086,564
Operating income (loss) 61,950 (289,318) (227,368)
Total assets as of
December 31 10,333,770 4,059,630 14,393,400
Capital expenditure 22,263 22,839 45,102
Depreciation $ 115,232 $ 25,289 $ 140,521
============ ============ ============
Year ended December 31, 1996:
Net revenues $ 47,679,740 $ 5,830,471 $ 53,510,211
Operating income (loss) (446,329) 314,304 (132,025)
Total assets as of
December 31 11,768,643 3,059,211 14,827,854
Capital expenditure 80,521 52,615 133,136
Depreciation $ 133,562 $ 25,457 $ 159,019
============ ============ ============
Year ended December 31, 1995:
Net revenues $ 39,754,785 $ 5,340,027 $ 45,094,812
Operating income 1,136,212 302,759 1,438,971
Total assets as of
December 31 11,545,279 1,720,881 13,266,160
Capital expenditure 886,973 29,808 916,781
Depreciation $ 100,214 $ 23,653 $ 123,867
============ ============ ============
Major customers and suppliers
No single customer accounted for 10% or more of total sales for the years
ended December 31, 1997, 1996 and 1995. The Company's principal supplier is
Texas Instruments Asia Limited which represented 47% in 1997, 87% in 1996
and 78% in 1995 of total purchases.
F-24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities and Exchange
Act of 1934, the registrant certifies that it meets all 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.
ELECTROCON INTERNATIONAL INC.
Date: ____________, 1998 By: /s/ Edward Ting
--------------------
Edward Ting, President, Chief Executive
Officer, Chief Operating Officer,
Chief Financial Officer and
Chairman of the Board
-26-
