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, 1998
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: 7,460,418 Common Shares, par value $0.0001, were issued and outstanding
as of December 31, 1998.
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
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Item 1 Description of Business............................................ 1
Item 2 Description of Property............................................ 14
Item 3 Legal Proceedings.................................................. 15
Item 4 Control of Registrant.............................................. 15
Item 5 Nature of Trading Market........................................... 16
Item 6 Exchange Controls and Other Limitations Affecting Security
Holders...................................................... 16
Item 7 Taxation........................................................... 17
Item 8 Selected Financial Data............................................ 17
Item 9 Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 21
Item 10 Directors and Officers of Registrant............................... 27
Item 11 Compensation of Directors and Officers............................. 28
Item 12 Options to Purchase Securities from Registrant or Subsidiaries..... 29
Item 13 Interest of Management in Certain Transactions..................... 29
Part II
Item 14 Description of Securities to be Registered......................... 32
Part III
Item 15 Defaults upon Senior Securities.................................... 32
Item 16 Changes in Securities and Changes in Security for
Registered Securities........................................ 32
Part IV
Item 17 Financial Statements............................................... 32
Item 18 Financial Statements............................................... 32
Item 19 Financial Statements and Exhibits.................................. 32
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."
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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") and Bothgreat Technology Limited
("Bothgreat") Another affiliate - China Electrocon Ltd. ("CEL") - became dormant
in 1998.
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 1998 sales,
including sales to affiliates, were approximately $16,519,452, on which its net
income was $27,910. 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
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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 and 36% of its chips in 1998. EPL also
serves as the distributor for Zilog, Inc., Linfinity Microelectronics 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."
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 1998 sales, including sales to affiliates,
were approximately $8,523, and it incurred a net loss of approximately $176,275.
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. EPL
subsequently acquired the remaining 10% of Bothgreat. Bothgreat is a distributor
of golf course irrigation products and systems and turf equipment for sales in
Hong Kong, Macao and China. During 1998, Bothgreat's total sales were
$5,639,605, and its net loss was $344,342.
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 had a network of seven
branches in China. During 1998, EPRC's share of net loss in 1998 was $121,296.
CEL became dormant in 1998.
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. 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 74.8% of its
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operating revenues for the year ended December 31, 1998. 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 See "Suppliers" and
"Competition."
The Company sells hundreds of types of chips, from standard "commodity"
chips, which account for approximately 35% of the revenues derived from chips
sold by the Company, to "high-tech" microprocessors. "Commodity" chips include
various large volume and low technology content 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 65% of the chips sold by the Company.
There was no shortage of chips in 1998, 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 20%), consumer electronics, including voice prom and
optocouplers (approximately 45%), telecommunications (approximately 30%) and
others (approximately 5%). The Company supplies over 500 customers in Hong Kong
and 280 customers in China, with no individual chip customer accounting for over
10% of the Company's 1998 chip sales. Total sales of chips and electronic spare
parts were $16,473,418 during 1998 compared to $23,151,881 in 1997. The decline
in the Company's revenues from its semiconductor business in 1998 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 1998, 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
1998 by approximately 14%, while the semiconductor industry in Hong Kong is
estimated to have grown by approximately 2.8%. The Company's revenue from its
chip business declined by approximately 27.9% during 1998, 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 16 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 and 36% in 1998. The Company also represents TDK Semiconductor
Corporation (which supplied approximately 19.5% of the chips sold by the Company
during 1998) and numerous California companies, including Zilog, Inc. (which
supplied approximately 29% of the chips sold by the Company during 1998),
Linfinity Microelectronics (which supplied approximately 14% of the chips sold
by the Company during 1998) and SEEQ Technology Inc., Quality Technology, Inc.,
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Integrated Circuits Systems and others which together accounted for
approximately 1.5% of the Company's business in the year ended December 31,
1998. The Company represents these manufacturers on a non-exclusive basis in
Hong Kong and China.
Most of the Company's arrangements with its chip 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 agreements with
its 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.
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, 1998, the
Company's inventory of chips was valued at approximately $1,829,718.
Approximately 40% of these inventories represent the most commonly sold
commodity items and have a relatively fast turnover. The 60% 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 provide for $113,515 of inventory in 1998 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 1998. 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 Arrow
China, Atek Electronics and WPI HK Ltd. in Hong Kong, and Gold Insignia, Arrow
China and WPI HK Ltd. in China. In addition to these main competitors, the
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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 product reliability, technical
support and excellent customer service.
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 and Club Car, Inc. Bothgreat's
distributorship agreements are one-year agreements covering China (south of the
Pearl River delta) and Macau. Bothgreat previously had a distributor greement
with J.R. Simplot; however, in January 1999, J.R. Simplot elected not to renew
that agreement.
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 1998 Bothgreat's net sales
were $5,639,605, with a net loss of $344,342. Of the more than 100 customers of
Bothgreat, no one customer accounted for 10% or greater of the net sales for
1998.
In April 1998, the Company acquired all of the assets and business of
Flownet Irrigation Engineering Services Company in exchange for 300,000 shares
of the Company's common stock. The pump service capability obtained by the
Company through this transaction provided a solution to the problems of the
Company's various irrigation projects in China, and management is currently
studying the possibility of extending the pump service into other Asian
territories such as Taiwan.
Other Investments and Activities
Other than the Flownet transaction described above, the Company did not
acquire or dispose of any other investments or engage in any other business
activities during the fiscal year ended December 31, 1998. In July 1999, the
Company entered into a license agreement with an unaffiiliated third party which
grants it the right to manufacture, use and sell certain technology in exchange
for 250,000 shares of the Company's common stock. Management is currently
investigating the feasibility of pursuing that business opportunity.
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
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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.
Employees
As of March 31, 1999, the Company employed 40 persons on a full-time basis,
of whom 22 were associated with its chip distribution business, 17 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 had one managerial employee. 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, 1998, 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, 1998, 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.
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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
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
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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.
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
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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.
The Hong Kong dollar and the United States dollar 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. There can be no assurance that this will
continue 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
-10-
<PAGE>
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.
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 and 36% in 1998. Management anticipates that TI HK will
represent an even smaller percent of the Company's computer chip purchases in
1999. Discontinuance of the TI HK DRAM product line has had a material adverse
effect on the Company's revenues. There can be no assurance that the Company
will succeed in obtaining new suppliers to replace the revenues lost by
discontinuing the DRAM line of computer chips.
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<PAGE>
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
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.
-12-
<PAGE>
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 7,500 square feet, houses the Company's
executive offices and warehouse space. The Company leases the space through EPL
from an unaffiliated company for a base rent of approximately $6,250 per month
and additional expenses of approximately $2,936 per month in maintenance and
other fees. The lease expires on September 6, 2001.
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<PAGE>
Residential Property. Since 1991, 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. Clement Cheung, a Director 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 were 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, and was paid in full in 1995. The Company sold these two
properties in 1998 for an aggregate of $338,214.
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, 1999, 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 2,022,500 shares(1),(2) 26.2%
Edward Ting, Viola Ting
and David Nominees
Limited
Officers and directors 2,062,500 shares(2) 26.7%
as a group (3 persons)
- --------------------
(1) Of these shares, 1,467,500 shares are owned outright by Edward Ting, an
officer and director of the Company, 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 Viola Ting. Mr. Ting disclaims ownership of the
Common Stock owned by his wife.
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<PAGE>
(2) Includes 250,000 warrants to purchase common stock of the Company owned by
Mr. Ting. Does not include 365,163 shares held by an entity of which Edward
Ting and Clement Cheung are officers and directors.
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 1997
March 31, 1997 $2.0625 $1.00
June 30, 1997 $1.1875 $0.50
September 30, 1997 $1.75 $0.625
December 31, 1997 $1.9375 $0.75
Fiscal 1998
March 31, 1998 $2.0625 $1.00
June 30, 1998 $1.125 $0.59375
September 30, 1998 $0.56 $0.28
December 31, 1998 $0.38 $0.19
Fiscal 1999
March 31, 1999 $0.38 $0.13
June 30, 1999 $1.47 $0.16
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.
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<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, 1997 and 1998 and for the fiscal years
ended December 31, 1996, 1997 and 1998 have been audited by independent auditors
and appear elsewhere herein. The Consolidated Financial Statements at December
31, 1994, 1995 and 1996 and for the fiscal years ended December 31, 1994 and
1995 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, 1994 Dec. 31, 1995 Dec. 31, 1996 Dec. 31, 1997 Dec. 31, 1998
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of
Operations Data(1)
- -----------------
Net Sales 32,739,471 45,094,812 53,510,211 29,086,564 22,338,588
Gross Profit on Sales 2,175,917 4,666,282 3,431,425 3,274,858 3,750,792
Operating Expenses 2,306,037 3,227,311 3,563,450 3,502,226 4,003,868
Income (Loss)
from Operations (130,120) 1,438,971 (132,025) (227,368) (253,076)
Other Income - Net 47,571 373,892 83,903 151,115 37,845
Income (Loss) from
Continuing
Operations
before Income
Taxes (281,504) 1,672,647 (153,865) (345,805) (649,399)
Provision (Credit) for
Income Taxes 57,094 261,865 (106,086) 21,041 23,906
Net Income (Loss)
before Minority
Interest (338,598) 1,410,782 (47,779) (366,846) (673,305)
Minority Interest (2,195) (32,211) -- -- --
Net Income (Loss) (340,793) 1,378,571 (47,779) (366,846) (673,305)
Net Income (Loss)
per Common Share
and Common Share
Equivalent (2) (0.0520) 0.2095 (0.0073) (0.054) (0.091)
</TABLE>
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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, 1994 Dec. 31, 1995 Dec. 31, 1996 Dec. 31, 1997 Dec. 31, 1998
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance Sheet
Data (1)
- ------------------
Accounts Receivable-
Net 3,677,746 4,101,452 4,791,683 5,738,649 4,366,540
Inventories 2,672,388 3,498,279 4,444,163 3,394,900 2,425,248
Total Current
Assets 10,452,960 11,869,356 13,464,919 13,165,590 11,287,450
Fixed Assets-Net 352,453 1,138,983 1,100,213 1,004,794 670,251
Total Assets 10,907,946 13,266,160 14,827,854 14,393,400 12,468,763
Total Current
Liabilities 10,348,474 11,147,000 12,913,878 11,860,603 10,307,547
Non-Current
Liabilities 44,179 168,679 11,274 25,148 45,472
Stockholders'
Equity 487,023 1,950,481 1,902,702 2,507,649 2,115,744
</TABLE>
- ----------------------
(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) Based on 7,370,009 shares for the year ended December 31, 1998, 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 and 6,553,211 shares for the year ended December 31, 1994.
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.
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<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 1998, 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 1998, as
in previous years, the Company purchased the majority of its chips from TI HK.
(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 for a period of one year, at which
time they are renewable. These agreements authorize the Company to represent or
carry the product lines of these chip manufacturers in Hong Kong and China. The
Company now sells to over 780 small and medium-size Hong Kong customers and
approximately 280 small and medium-size Chinese customers. Net sales in 1998
from this business segment were approximately $16,698,983.
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 supplies Rain Bird irrigation systems to
golf courses in Hong Kong and Macau, and sells golf and turf equipment to over
60 golf courses in Hong Kong, China and Macau. Net sales in 1998 from this
business were approximately $5,639,605.
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 1996 1997 1998
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales (93.6) (88.7) (83.2)
Gross profit 6.4 11.3 16.8
Operating expenses (6.7) (12.0) (17.9)
Operating (loss) (0.2) (0.7) (1.1)
Other income (expense), net (0.4) (0.4) (1.8)
(Loss) before income tax (0.3) (1.2) (2.9)
Income tax (expense)/benefit (0.2) (0.1) 0.1
Net(loss) (0.1) (1.3) (3.0)
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<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales. Net sales from different industry segments were as follows:
1997 1998 % Change
---- ---- --------
Semiconductor Business $23,151,881 $16,698,983 (27.9)%
Turf and Irrigation
Equipment Business 5,934,683 5,639,605 (5.0)%
------------- ------------- -------
$29,086,564 $22,338,588 (23.2)%
Total revenues from the chip distribution business for the year were
$16,698,983, a decrease of approximately 28%, due primarily to lower prices in
DRAMs and, to a lesser extent, to a near collapse in the global market for
memory chips This had an impact on the Company's financial performance. It is
not the first time the memory market has experienced such volatility, and it
probably will not be the last. This is the reason the Company has been working
to reduce its exposure to this commodity-type business for a number of years -
investing instead in differentiated products being manufactured by other reputed
chip makers such as Zilog, TDK and Linfinity.
Net sales from the turf and irrigation equipment business decreased by 5%
due primarily to the loss of JR Simplot distributorship, and to a lesser extent,
to the sluggishness in the industry following the economic crisis in Asia.
Gross Profits. Gross profits from the different industry segments were as
follows:
1997 1998 % Change
---- ---- --------
Semiconductor business $2,219,479 $2,074,036 (6.6)%
Turf and irrigation equipment
business $1,055,379 $1,676,756 58.9%
---------- ---------- -----
$3,274,858 $3,750,792 14.5%
The decline of 7% in gross profit in the semiconductor business was due to
the reasons explained above. The overall improvement in gross profit and margin
was attributable to a tremendous increase in the gross profit in the turf and
irrigation equipment business. Several long-term projects that the Company had
committed last year yielded good returns.
Operating Expenses. Operating expenses were $4,003,868 in 1998 compared to
$3,502,226 in 1997, representing a 14% increase. This increase was primarily due
to provisions created for bad and doubtful accounts ($135,774) and obsolete
inventory ($113,515) in the Company's core subsidiaries, as well as stock
warrant expenses ($75,000).
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Other Income (Expenses), Net. The details of other expenses, net, are as
follows: Year Ended December 31, 1997 1998
Interest income $229,252 $224,438
Interest expense (461,329) (537,310)
--
Share of losses of an affiliated company (37,475) (121,296)
Others, net 151,115 37,845
--------- ---------
($118,437) ($396,323)
========= =========
Interest expenses increased because the Company had to borrow from one of
its directors on a short-term basis. The Company's share of losses in CEL
increased substantially because CEL discontinued its operations in the later
part of 1998 following substantial losses from its operations.
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, 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 (45.64)%
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% due to 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.
Liquidity and Capital Resources
Over the last three years, the Company lost $157,387 in operations before
depreciation, amortization and other non-cash items, and used $974,131 in
additional working capital resulting in $1,131,518 of cash flows used in
operations. In addition, the Company generated $215,842 from other normal
business operations including the sale of property, plant and equipment
($357,060), cash acquired from purchase of a business ($100,557), purchase of
property, plant and equipment ($222,544) and investment in an affiliated company
($19,231). The Company also used $293,948 for repayments of its obligations
under capital lease and increased its restricted cash by $804,874. This was
financed by short-term borrowings of $733,202, a loan from a related party of
$500,000 and advances from a director aggregating $134,991. This resulted in a
net decrease in cash of $646,305.
In 1998, the Company lost $199,885 in operations before depreciation,
amortization and other non-cash items, and used $49,283 in additional working
capital resulting in a use of $249,168 in operating activities. In addition, the
Company used funds for the purchase of property, plant and equipment amounting
to $68,050. The Company also used $12,713 for repayment of its obligations under
capital leases, $285,023 for repayment of short-term borrowings and $127,639 for
repayment of advances from a director, and increased its restricted cash by
$242,011. This was financed by advances from a director aggregating $134,991, a
loan from a related party of $500,000, proceeds from the disposal of property,
plant and equipment of $334,214 and cash acquired from the purchase of a
business of $100,557. This resulted in a net increase in cash of $89,158.
At June 30, 1999, the Company had approximately $15,000 in commitments for
capital expenditures. This will be funded principally by retained earnings.
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.
-22-
<PAGE>
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 the
period. 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.
Item 10. DIRECTORS AND OFFICERS OF REGISTRANT
The directors and executive officers of the Company at December 31, 1998
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 44 Director
Chris G. Mendrop 47 Director
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 August 1996. 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.
-23-
<PAGE>
CHRIS G. MENDROP was appointed a director of the Company in March 1998. Mr.
Mendrop is the Chief Executive Officer of Blake Street Group LLC, Blake Street
Securities LLC and Blake Street Advisors LLC (collectively the "Blake Street
Group"). He has served as the Chief Executive Officer of each of the companies
included in the Blake Street Group since those companies were formed in January,
March and July 1998. From July 1992 until January 1998, Mr. Mendrop was Chief
Executive Officer of Corporate Development Capital, Inc., an investment advisory
and financial consulting firm located in Denver, Colorado. 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 each of the
Company's executive officers and directors whose cash compensation exceeded
$60,000 and for all executive officers as a group for the year ended December
31, 1998:
<TABLE>
<CAPTION>
Cash Non-Cash
Name of Individual Capacities in Which Served Compensation Compensation
- ------------------ -------------------------- ------------ -----------
<S> <C> <C> <C>
Edward Y.F. Ting President, Chief Executive Officer,
Chief Financial Officer, Chairman
of the Board and Director $ 146,000 $ 67,346(1)
Clement W. Cheung Secretary, Treasurer and Director $ 37,657 $ 33,691
All directors and
officers as a group (5 persons) $ 189,657 $101,037
</TABLE>
- ---------------------
(1) Includes the value of housing provided to Mr. Ting valued at $24,000 during
fiscal 1998. (See Item 13, "Interest of Management in Certain
Transactions.")
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 $26,037 pursuant to the plan for the fiscal year ended
December 31, 1998, and $33,319 pursuant to the plan for the fiscal year ended
December 31, 1997.
Item 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR
SUBSIDIARIES
There are no options to purchase securities of the Company outstanding as
of the date of this Annual Report. Mr. Edward Ting, the President of the
Company, holds the right to be issued a warrant exercisable for a period of five
years from March 25, 1998 to purchase 250,000 shares of the Company's Common
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. See Item
13, "Interest of Management in Certain Transactions," below.
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 1998, 1997 and 1996.
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.
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"). At that time, Mr. Edward Ting was Chief Executive Officer,
Chairman of the Board of Directors and a principal shareholder of Glas-Aire and
Chris G. Mendrop and Clement Cheung were 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 Common 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
-24-
<PAGE>
1%, also payable in advance, for the six-month period immediately following the
initial six-month period, if the collateral continued to be utilized for the
letter of credit, with the understanding that the collateral would 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. In November
1998, the Company defaulted on the letter of credit and $250,000 of the
collateral was seized, resulting in the Company being indebted to Glas-Aire in
the amount of $250,000. In December 1998, Glas-Aire made a loan to the Company
in the principal amount of $500,000 and $250,000 of the loan proceeds was used
to repay Glas-Aire for the seized collateral for the letter of credit. This loan
was evidenced by a promissory note, bore interest at the rate of 10% per annum,
unless a default occurred in which case the interest rate would increase to 12%,
and was payable on demand. The loan was secured by a first priority lien on
212,331 shares of Glas-Aire common stock owned by Mr. Edward Ting and a second
priority lien on the remaining 301,584 shares of Glas-Aire common stock owned by
Edward and Viola Ting which had previously been pledged to secure the letter of
credit arrangement. In April 1999, Mr. Edward Ting purchased the promissory note
from Glas-Aire in order to enable him to sell his Glas-Aire shares which were
encumbered by the debt. As a result, the Company is now indebted to Mr. Ting in
the amount of $500,000, plus interest. In addition, Glas-Aire transferred the
warrant to Mr. Ting.
During 1998, 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.
-25-
<PAGE>
PART II
Item 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not Applicable.
PART III
Item 15. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
Item 16. CHANGES IN SECURITIES 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.
-26-
<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 F-1
Consolidated Financial Statements for Years Ended
December 31, 1998 and 1997
Report of Independent Auditors on the F-2
Consolidated Financial Statements for Year Ended
December 31, 1996
Consolidated Balance Sheets at December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1998, 1997 and 1996 F-6
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-9
(b) Financial Statements schedules.
All schedules are omitted as they are not applicable.
(c) There are no exhibits filed with this Form 20-F for the year ended
December 31, 1998.
-27-
<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: July 31, 1999 By: /s/ Edward Ting
----------------------------------------
Edward Ting, President, Chief Executive
Officer, Chief Operating Officer,
Chief Financial Officer and
Chairman of the Board
<PAGE>
ELECTROCON INTERNATIONAL INC.
Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
<PAGE>
ELECTROCON INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS PAGE(S)
Independent Auditors' Report on the Consolidated Financial Statements
for the years ended December 31, 1998 and 1997 1
Independent Auditors' Report on the Consolidated
Financial Statements for the year ended December 31, 1996 2
Consolidated Balance Sheets at December 31, 1998 and 1997 3 & 4
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996 5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 6
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996 7 & 8
Notes to Consolidated Financial Statements 9 - 22
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF ELECTROCON INTERNATIONAL INC.
We have audited the accompanying consolidated balance sheets of Electrocon
International Inc. and its subsidiaries as of December 31, 1998 and 1997 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the two years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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 audits provide 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
its subsidiaries at December 31, 1998 and 1997 and the results of their
operations and their cash flows for the two years in the period ended December
31, 1998 in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte Touche Tohmatsu
DELOITTE TOUCHE TOHMATSU
Hong Kong
June 15, 1999, except for note 19 as to which is dated July 1, 1999
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
ELECTROCON INTERNATIONAL INC.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Electrocon International Inc. and its
subsidiaries for the year ended December 31, 1996. 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 consolidated results of the operations and cash flows of
Electrocon International Inc. and its subsidiaries for the year ended December
31, 1996 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>
ELECTROCON INTERNATIONAL INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(Amounts stated in United States Dollars)
December 31,
1998 1997
ASSETS ---- ----
<S> <C> <C>
Current assets
Cash and cash equivalents $ 303,990 $ 214,832
Restricted cash (Note 8) 3,956,385 3,714,374
Accounts receivable:
- Trade, less allowance for doubtful accounts of
$233,162 (1997: $180,193) 3,866,119 5,153,691
- Affiliated company, less allowance for doubtful accounts
of $82,805 (1997: Nil) 280,146 428,903
- Others 220,275 156,055
Inventories (Note 3) 2,425,248 3,394,900
Costs in excess of billings on construction contracts (Note 4) 153,808 -
Prepaid expenses and deposits 81,479 61,624
Prepaid income taxes - 41,311
----------- -----------
Total current assets 11,287,450 13,165,690
Property and equipment, net (Note 6) 670,251 1,004,794
Investment in an affiliated company 2,234 123,530
Investments in Golf Club memberships, at cost 410,055 99,386
Intangible asset (Note 7) 98,773 -
----------- -----------
Total assets $12,468,763 $14,393,400
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ELECTROCON INTERNATIONAL INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(Amounts stated in United States Dollars)
December 31,
1998 1997
LIABILITIES AND STOCKHOLDERS' EQUITY ---- ----
<S> <C> <C>
Current liabilities
Short-term borrowings (Note 8) $ 5,481,296 $ 5,766,319
Current portion of obligation under capital leases (Note 9) 9,744 7,167
Loan from related party (Note 10) 500,000 -
Accounts payable and accrued expenses
- Trade 3,769,818 5,676,670
- Others 337,467 132,747
Billings in excess of costs on construction contracts (Note 5) 74,231 150,061
Amount due to director (Note 13) 134,991 127,639
----------- -----------
Total current liabilities 10,307,547 11,860,603
Obligations under capital leases, net of current portion (Note 9) - 3,582
Deferred income taxes (Note 12) 45,472 21,566
----------- -----------
Total liabilities 10,353,019 11,885,751
----------- -----------
Commitments and contingencies (Note 14)
Stockholders' equity
Common stock, par value $0.0001 per share;
authorized 20,000,000 shares;
issued and outstanding 1998: 7,460,420 shares
and 1997: 7,160,420 shares 746 716
Additional paid-in capital 6,223,997 5,942,627
Accumulated deficit (4,071,655) (3,398,350)
Foreign currency translation adjustment (37,344) (37,344)
----------- -----------
Total stockholders' equity 2,115,744 2,507,649
----------- -----------
Total liabilities and stockholders' equity $12,468,763 $14,393,400
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ELECTROCON INTERNATIONAL INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts stated in United States Dollars)
Year ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net revenue $22,338,588 $29,086,564 $53,510,211
Cost of sales 18,587,796 25,811,706 50,078,786
----------- ----------- -----------
Gross profit 3,750,792 3,274,858 3,431,425
Selling, administrative and general expenses 4,003,868 3,502,226 3,563,450
----------- ----------- -----------
Loss from operations (253,076) (227,368) (132,025)
Interest income 224,438 229,252 214,212
Interest expense (537,310) (461,329) (307,956)
Equity in loss of an affiliated company (121,296) (37,475) (11,999)
Other income (Note 11) 37,845 151,115 83,903
----------- ----------- -----------
Loss before income taxes (649,399) (345,805) (153,865)
Provision (credit) for income taxes (Note 12) 23,906 21,041 (106,086)
----------- ----------- -----------
Net loss $ (673,305) $ (366,846) $ (47,779)
------------ ----------- -----------
Loss per share - basic $ (0.091) $ (0.054) $ (0.0073)
------------ ----------- -----------
Weighted average number of shares outstanding 7,370,009 6,780,844 6,624,211
------------ ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ELECTROCON INTERNATIONAL INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts stated in United States Dollars)
Foreign Total
Common stock 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, 1996 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 (Note 1) 70,000 7 39,368 - - 39,375
Stock issued in settlement
of payable (Note 1) 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
Stock issued on purchase of
business (Note 1) 300,000 30 206,370 - - 206,400
Issuance of warrant (Note 10) - - 75,000 - - 75,000
Loss for the year - - - (673,305) - (673,305)
--------- ------- --------- ---------- ------- ---------
Balance at December 31, 1998 7,460,420 $746 $6,223,997 $(4,071,655) $(37,344) $2,115,744
--------- ------- --------- ---------- ------- ---------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ELECTROCON INTERNATIONAL INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts stated in United States Dollars)
Year ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (673,305) $ (366,846) $ (47,779)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Share of loss of an affiliated company 121,296 37,475 11,999
Issuance of stock bonus to employees - 39,375 -
Issuance of warrant (Note 10) 75,000 - -
Depreciation and amortization 149,230 142,852 161,350
Gain on disposal of property and equipment (31,786) - (5,959)
Provision for doubtful debts 135,774 28,039 86,333
Deferred income taxes 23,906 21,041 (65,382)
Changes in assets and liabilities:
Accounts receivable 954,564 (975,005) (776,564)
Inventories 969,652 1,049,263 (945,884)
Costs in excess of billings of construction contracts (153,808) 145,010 (92,171)
Prepaid expenses and deposits (19,496) 57,878 (4,522)
Prepaid income taxes 41,311 49,084 (90,395)
Accounts payable and accrued expenses (1,765,676) (1,108,570) 1,870,002
Billings in excess of costs on construction contracts (75,830) 150,061 -
Income taxes payable - - (253,035)
---------- ---------- ----------
Net cash used in operating activities (249,168) (730,343) (152,007)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of business, net of cash acquired 100,557 - -
Proceeds from disposal of property and equipment 338,214 - 18,846
Additions to property and equipment (68,050) (45,102) (109,392)
Investment in affiliated company - - (19,231)
---------- ---------- ----------
Net cash provided by (used in) investing activities 370,721 (45,102) (109,777)
---------- ---------- ----------
Balance carried forward $ 121,553 $ (775,445) $(261,784)
---------- ---------- ----------
- 7 -
F-7
<PAGE>
ELECTROCON INTERNATIONAL INC.
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(Amounts stated in United States Dollars)
Year ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance carried forward $ 121,553 $(775,445) $(261,784)
---------- ---------- ----------
Cash flows from financing activities:
Payment of obligations under capital leases (12,713) (109,939) (171,296)
(Decrease) increase in short-term borrowings (285,023) 812,785 205,440
Increase in restricted cash (242,011) (220,865) (341,998)
Advances from director 134,991 127,639 -
Repayment of advances from director (127,639) - -
Loan from related party 500,000 - -
---------- ---------- ----------
Net cash (used in) provided by financing activities (32,395) 609,620 (307,854)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 89,158 (165,825) (569,638)
Cash and cash equivalents at beginning of year 214,832 380,657 950,295
---------- ---------- ----------
Cash and cash equivalents at end of year $ 303,990 $ 214,832 $ 380,657
---------- ---------- ----------
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest paid $ 556,014 $ 451,464 $ 310,132
Income taxes (refund) (41,311) (49,084) 302,727
Non cash transactions:
Stock issued in settlement of payable $ - $ 932,418 $ -
Stock issued for purchase of business 206,400 - -
Property acquired under capital leases - - 23,744
Golf Club memberships acquired in lieu of settlement
of account receivable 313,000 - -
Purchase of business:
Fair value of assets acquired $ 121,037 $ - $ -
Stock issued (206,400) - -
Cash received 44,411 - -
Goodwill on purchase 116,204 - -
---------- ---------- ----------
Liabilities assumed $ 75,252 $ - $ -
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
ELECTROCON INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts stated in United States Dollars)
1. ORGANIZATION AND ACTIVITIES
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. China Electrocon Limited became dormant in
1998. China Electrocon Limited became dormant in 1998.
On June 10, 1997, the Company issued 70,000 shares of its
common stock as bonuses to its employees. These shares were valued at
$39,375 for the purpose of calculating stock compensation to employees
based on the quoted market price of the Company's common stock of
$0.5625 on the date of issuance.
On September 30, 1997, the Company issued 466,209 shares of
its common stock to a creditor at a price of $2 per share for the
settlement of debt amounting to $932,148.
On April 10, 1998, the Company acquired the entire interest in
Flownet Irrigation Service Company, an unincorporated business in Hong
Kong, for a total consideration of $161,989, which was satisfied by the
issue of 300,000 shares of common stock less a cash adjustment received
from the vendor of $44,411. The major activity of the acquired business
is the provision of irrigation engineering services. The acquisition
has been accounted for as a purchase and accordingly, the assets and
liabilities of the acquired business have been recorded at their
estimated fair value at the date of acquisition. The excess of purchase
price over the estimated fair value of the net assets acquired, in the
amount of $116,204, has been recorded as goodwill and is amortized over
5 years.
The pro forma results for 1997 and 1998, assuming this
acquisition had been made at the beginning of 1997, would not be
materially different from the reported results for these years.
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.
(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.
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.
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. Where construction costs incurred plus
aggregate estimated profits less foreseeable losses exceed the progress
billings, the excess is shown in the balance sheet under current
assets. For contracts where progress billings exceed construction costs
incurred plus aggregate estimated profits 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.
Valuation of long-lived assets - The Company periodically
evaluates the carrying value of long-lived assets to be held and used,
including goodwill and other intangible assets, when events and
circumstances warrant such a review. The carrying value of a long-lived
asset is considered impaired when the anticipated undiscounted cash
flow from such asset is separately identifiable and is less than its
carrying value. In that event, a loss is recognized based on the amount
by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk
involved. Losses on long-lived assets to be disposed of are determined
F-10
<PAGE>
ELECTROCON INTERNATIONAL INC.
in a similar manner, except that fair market values are reduced for the
costs to dispose.
(Amounts stated in United States Dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Loss per share - Loss per share is calculated based upon the
weighted average number of common shares and common share equivalents
outstanding. The dilutive effect of share options and warrants 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. The adoption of
this new standard had no impact on the Company. The effect of stock
options and warrants on loss per share would be anti-dilutive and no
diluted loss per share is disclosed. The stock options expired during
the year ended December 31, 1998.
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.
Stock-based compensation - The FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation" in October 1995. SFAS 123
encourages companies to adopt a fair value approach to accounting for
stock options that would require compensation cost to be recognized
based on the fair value of stock options granted. The Company has
elected, as permitted by the standard, to continue to follow the
intrinsic value based method of accounting for stock options issued to
employees consistent with Accounting Principles Board (APB) Option No.
25, "Accounting for Stock Issued to Employees." Under the intrinsic
method, compensation cost for stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at the
measurement date over the exercise price.
F-11
<PAGE>
ELECTROCON INTERNATIONAL INC.
(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.
New accounting standards adopted - In 1999, the Company
adopted SFAS No. 130 "Reporting comprehensive Income", SFAS No.131
"Disclosures about Segments of an Enterprise and Related Information
and SFAS No. 132 "Employers' Disclosures about Pensions and the other
Post-retirement Benefits".
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. Since the Company did
not have any items of other comprehensive income in the years reported,
the net loss reported in the consolidated statements of operations is
equivalent to total comprehensive loss.
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. The adoption of SFAS No. 131 had no significant
effect on disclosure.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Post-retirement Benefits", amends the disclosure requirements for
pensions and other post-retirement benefits. Adoption of this standard
did not change the Company's financial statement disclosures.
New accounting standard not yet adopted - The Financial
Accounting Standards Board has issued a new standard SFAS No.133
"Derivative Instruments and Hedging Activities". Management has not yet
completed the analysis of the impact this would have on the financial
statements of the Company.
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.
F-12
<PAGE>
ELECTROCON INTERNATIONAL INC.
(Amounts stated in United States Dollars)
3. INVENTORIES
The components of inventories were as follows:
December 31,
1998 1997
---- ----
Finished goods $2,176,867 $2,501,729
Raw materials and spare parts 248,381 893,171
---------- ----------
$2,425,248 $3,394,900
---------- ----------
4. COSTS IN EXCESS OF BILLINGS ON CONSTRUCTION CONTRACTS
Costs in excess of billings on construction contracts included
the following:
December 31,
1998 1997
---- ----
Costs incurred $652,769 $ 2,517
Add: Estimated profit 265,864 13,637
-------- --------
918,633 16,154
Less: Progress billings (764,825) (16,154)
-------- --------
$153,808 $ -
-------- --------
F-13
<PAGE>
ELECTROCON INTERNATIONAL INC.
(Amounts stated in United States Dollars)
5. BILLINGS IN EXCESS OF COSTS ON CONSTRUCTION CONTRACTS
Billings in excess of costs on construction contracts included
the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Costs incurred $ 59,614 $ 10,730
Add: Estimated profit 61,732 -
-------- --------
121,346 10,730
Less: Progress billings 195,577 160,791
-------- --------
$ 74,231 $150,061
-------- --------
</TABLE>
6. PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Cost
Land and buildings held under long lease $ - $ 314,920
Furniture, fixtures and office equipment 561,317 529,724
Motor vessels 477,148 477,148
Motor vehicles 254,425 185,952
Leasehold improvements 115,714 128,535
--------- ---------
Total 1,408,604 1,636,279
Less: Accumulated depreciation and amortization 738,353 631,485
--------- ----------
$ 670,251 $1,004,794
--------- ----------
</TABLE>
Included in property and equipment are the following assets acquired under
capital leases:
December 31,
1998 1997
---- ----
Cost
Motor vehicles $54,282 $23,744
Less: Accumulated amortization 15,938 10,447
------- -------
$38,344 $13,297
------- -------
F-14
<PAGE>
ELECTROCON INTERNATIONAL INC.
(Amounts stated in United States Dollars)
Motor vessels with net book values amounting to $268,518 and
$315,903 as of December 31, 1998 and 1997, respectively, are registered
in the name of a third party as trustee for the Company.
7. INTANGIBLE ASSET
December 31,
1998 1997
---- ----
Goodwill on purchase of business (note 1) $ 116,204 $ -
Less: Amortization 17,431 -
--------- ---------
$ 98,773 $ -
--------- ---------
8. 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:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Credit facilities granted $6,089,744 $6,243,590
--------- ---------
Utilized $5,481,296 $5,766,319
--------- ---------
Weighted average interest rate on borrowings
at end of year 10.8% 9.8%
--------- ---------
</TABLE>
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, 1998 the above banking facilities were
secured by bank deposits of approximately $3.9 million. In addition, at
December 31, 1998 a director has pledged personal bank deposits to a
bank as collateral for facilities of approximately $2,948,718 provided
to the Company of which approximately $2,660,689 was utilized at the
balance sheet date. No charges have been made in respect of the
provision of the collateral.
F-15
<PAGE>
ELECTROCON INTERNATIONAL INC.
(Amounts stated in United States Dollars)
9. OBLIGATIONS UNDER CAPITAL LEASES
Obligations under capital leases consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Capital leases at 7.25% per annum, due in
installments to June 1999 $ 3,582 10,749
Capital lease at 12.75% per annum, due in
installments to October 1999 6,162 -
-------- --------
9,744 10,749
Less: Current portion of obligations under capital leases 9,744 7,167
-------- --------
$ - $ 3,582
-------- --------
</TABLE>
10. LOAN FROM RELATED PARTY
In March 1998, a subsidiary of the Compay 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"). At that time,
Mr. Edward Ting was Chief Executive Officer, Chairman of the Board of
Directors and a principal shareholder of Glas-Aire and Chris G. Mendrop
and Clement Cheung were 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) 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 Common 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 continued to
be utilized for the letter of credit, with the understanding that the
collateral would 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. The Company has recognized
expense of $75,000 in 1998 in respect of the warrant. In November 1998,
the Company defaulted on the letter of credit and $250,000 of the
collateral was seized, resulting in the Company being indebted to
Glas-Aire in the amount of $250,000. In December 1998, Glas-Aire made a
loan to the Company in the principal amount of $500,000 and $250,000 of
the loan proceeds was used to repay Glas-Aire for the seized collateral
for the letter of credit. This loan was evidenced by a promissory note,
bore interest at the rate of 10% per annum, unless a default occurred
in which case the interest rate would increase to 12% and was payable
on demand. The loan was secured by a first priority lien on 212,331
shares of Glas-Aire common stock owned by Mr. Edward Ting and a second
priority lien on the remaining 301,584 shares of Glas-Aire common stock
owned by Edward and Viola Ting which had previously been pledged to
secure the letter of credit arrangement. In April 1999, Mr. Edward Ting
purchased the promissory note from Glas-Aire in order to enable him to
sell his Glas-Aire shares which were encumbered by the debt. As a
result, the Company is now indebted to Mr. Ting in the amount of
$500,000, plus interest. In addition, Glas-Aire transferred the warrant
to Mr. Ting.
F-16
<PAGE>
ELECTROCON INTERNATIONAL INC.
11. OTHER INCOME
Years ended December 31,
1998 1997 1996
---- ---- ----
Foreign exchange gain $ - $ 64,668 $37,418
Other 37,845 86,447 46,485
-------- -------- --------
$ 37,845 $151,115 $83,903
-------- -------- --------
12. 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%, 16.5% and 16.5% for the years ended
December 31, 1998, 1997 and 1996 to the subsidiaries' estimated taxable
income which was 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 represents Hong Kong taxation
as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current year provision $ - $ - $ -
Overprovision in prior years - - (40,704)
-------- -------- --------
- - (40,704)
Deferred tax provision (credit) 23,906 21,041 (65,382)
-------- -------- --------
Provision (credit) for income taxes $ 23,906 $ 21,041 $(106,086)
-------- -------- --------
</TABLE>
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:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Hong Kong statutory tax rate 16% 16.5% 16.5%
Income tax at Hong Kong statutory
rate on pre-tax loss $(72,237) $(71,080) $ (22,252)
Over-provision of tax in prior year - - (40,703)
Operating loss (profit) not subject to income tax 96,143 92,121 (40,325)
Other - - (2,806)
-------- -------- --------
$ 23,906 $ 21,041 $(106,086)
-------- -------- --------
</TABLE>
F-17
<PAGE>
ELECTROCON INTERNATIONAL INC.
(Amounts stated in United States Dollars)
At the balance sheet date, the major components of deferred income tax
liabilities are as follows:
December 31,
1998 1997
---- ----
Tax loss carry forwards $ 245,092 $151,489
Depreciation (64,681) (89,110)
Valuation allowances (225,883) (83,945)
-------- --------
Deferred income tax liability $(45,472) $(21,566)
-------- --------
At December 31, 1998 the Company had tax losses of $1,531,822
which are available for carry forward indefinitely.
13. 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 1998, 1997 and
1996, respectively.
c) In 1997, the Company issued 70,000 shares of its common
stock as bonus to its employees and a director received 20,000
of those shares.
d) In 1997, a director advanced $127,639, to the Company
bearing interest at 10% per annum. The advance was repaid in
1998.
e) In 1998, another director advanced $134,991 to the Company
interest-free without repayment terms.
f) At December 31, 1998, a director has also provided
collateral for banking facilities provided to the Company as
detailed in Note 8.
g) Sales by the Company to China Electrocon Limited, a 50%
held affiliate, totalled $Nil in 1998, $81,000 in 1997and
$950,416 in 1996.
F-18
<PAGE>
ELECTROCON INTERNATIONAL INC.
(Amounts stated in United States Dollars)
14. OPERATING LEASE COMMITMENTS
The Company leases premises under operating leases expiring
through September 2001. Rental expense under operating leases was
$170,788 in 1998, $219,679 in 1997 and $252,524 in 1996. As of December
31, 1998, future minimum rental payments under operating leases were as
follows:
1999 $159,006
2000 110,128
2001 58,686
--------
Total minimum lease payments $327,820
--------
15. 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
At January 1, 1996 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
Expired (741,672) 1.50
--------- -----
December 31, 1998 - $ -
--------- -----
F-19
<PAGE>
ELECTROCON INTERNATIONAL INC.
(Amounts stated in United States Dollars)
The grant-date fair value of the options granted in 1995 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.
16. 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 $26,037 in 1998,
$33,319 in 1997 and $36,897 in 1996.
17. SUPPLEMENTARY INFORMATION
Movements on allowances for doubtful accounts are as follows:
<TABLE>
<CAPTION>
Balance at Charged to Balance
beginning cost and at end
of year expenses of year
<S> <C> <C> <C> <C>
Year ended December 31, 1998 $180,193 $135,774 $315,967
-------- -------- --------
Year ended December 31, 1997 $152,154 $ 28,039 $180,193
-------- -------- --------
Year ended December 31, 1996 $ 65,821 $ 86,333 $152,154
-------- -------- --------
</TABLE>
18. 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 and short-term
borrowings are reasonable estimates of their fair value.
F-20
<PAGE>
ELECTROCON INTERNATIONAL INC.
(Amounts stated in United States Dollars)
19. SUBSEQUENT EVENT
In July 1999, the Company entered into a license
agreement with an unaffiliated third party which grants it the right to
manufacture, use and sell certain technology in exchange for 250,000
shares of the Company's common stock. Management is currently
investigating the feasibility of pursuing this business opportunity.
20. 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
assets, major customers and suppliers for the years ended December 31,
1998, 1997 and 1996 are shown as follows:
Geographical segments
<TABLE>
<CAPTION>
Other
regions of
Hong Kong the PRC Total
<S> <C> <C> <C>
Year ended December 31, 1998:
Net revenues $10,557,498 $11,781,090 $22,338,588
Operating income (loss) 93,676 (346,752) (253,076)
Total assets 8,741,455 3,727,308 12,468,763
Long-lived assets 646,157 532,922 1,179,079
----------- ----------- -----------
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 8,864,269 5,529,131 14,393,400
Long-lived assets 921,216 182,964 1,104,180
----------- ----------- -----------
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 12,515,969 2,311,885 14,827,854
Long-lived assets 1,022,512 179,418 1,201,930
----------- ----------- -----------
</TABLE>
F-21
<PAGE>
ELECTROCON INTERNATIONAL INC.
(Amounts stated in United States Dollars)
20. SEGMENT INFORMATION - continued
Business segments
<TABLE>
<CAPTION>
Distribution Distribution
and sale of and installation
semi-conductors of golf
and electronic equipment
spare parts and systems Total
<S> <C> <C> <C>
Year ended December 31, 1998:
Net revenues $16,698,983 $5,639,605 $22,338,588
Operating income (loss) 91,266 (344,342) (253,076)
Total assets as of December 31 9,138,068 3,330,695 12,468,763
Capital expenditure 18,798 49,252 68,050
Depreciation and amortization 97,453 51,777 149,230
----------- ----------- -----------
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
----------- ----------- -----------
</TABLE>
Major customers and suppliers
No single customer accounted for 10% or more of total sales
for the years ended December 31, 1998, 1997 and 1996. The Company's
principal suppliers are Texas Instruments Asia Limited, Zilog Inc. and
TDK Semiconductor Corporation which represented, respectively, 32%, 25%
and 15% in 1998 and 47%, 13% and 12% in 1997 of total purchases. The
Company's principal supplier is Texas Instruments Asia Limited which
represented 87% in
1996 of total purchase.
F-22
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