FORM 20-F
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2007 | ||
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OR | ||
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-22113
EURO TECH HOLDINGS COMPANY LIMITED
(Exact name of Registrant as specified in its charter)
EURO TECH HOLDINGS COMPANY LIMITED
(Translation of Registrant¡¯s name into English)
British Virgin Islands
(Jurisdiction of incorporation or organization)
18/F Gee Chang Hong Centre, 65 Wong Chuk Hong Road, Hong Kong
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
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Title of each class |
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Name of each exchange
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Not Applicable |
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
Ordinary Shares, $0.01 par value
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
(Title of Class)
Indicate the number of issued and outstanding shares of each of the issuer¡¯s classes of capital or common stock as of the close of the period covered by the annual report.
11,684,250 Ordinary Shares
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Yes x |
No o |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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Yes o |
No x |
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If this is an annual or transitional report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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Yes o |
No x |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ¡°accelerated filer and large accelerated filer¡± in Rule 12b-2 of the Exchange Act (check one).
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Large Accelerated Filer o |
Accelerated Filer o |
Non-Accelerated Filer x |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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x U.S. GAAP |
o International Financial Reporting Standards
as issued |
o Other |
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
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Yes o |
No x |
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Indicate by check mark which financial statement item the registrant has elected to follow.
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Item 17 o |
Item 18 x |
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MATERIAL MODIFICATION TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
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iii
In this Form 20-F, reference to ¡°us¡±, ¡°we¡±, the ¡°Company¡± and ¡°Euro Tech¡± are to Euro Tech Holdings Company Limited and its subsidiaries unless otherwise expressly stated or the context otherwise requires.
This annual report contains forward looking statements. Additional written or oral forward looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission (the ¡°Commission¡±) or otherwise. Such forward looking statements are within the meaning of that term in Section 21E of the Exchange Act of 1934. Such statements may include, but not be limited to, projections of revenues, income, or loss, capital expenditures, plans for future operations, financing needs or plans, and plans relating to products or services of the Company, as well as assumptions relating to the foregoing. The words ¡°believe,¡± ¡°expect,¡± ¡°anticipate,¡± ¡°estimate,¡± ¡°project,¡± and similar expressions identify forward looking statements, which speak only as of the date the statement was made. Forward looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward looking statements. Statements in this Annual Report, including those contained in the sections entitled Part I, Item 3D. ¡°Risk Factors¡± and Item 5. ¡°Operating and Financial Review and Prospects¡± and the notes to the Company¡¯s Consolidated Financial Statements, describe factors, among others, that could contribute to or cause such differences.
The following glossary of terms may be helpful in understanding the terminology used in this Annual Report.
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Ambient Air: |
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Atmospheric air (outdoor as opposed to indoor air). |
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Anaerobic: |
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Treating waste water biologically in the absence of air. |
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Atomic Spectrometer: |
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An analytical instrument used to measure the presence of an element in a substance by testing a sample which is aspirated into a flame and atomized. The amount of light absorbed or emitted is measured. The amount of energy absorbed or emitted is proportional to the concentration of the element in the sample. |
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Coalescer: |
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A process that coalesces smaller oil particles to form larger oil particles that can readily float to a tank¡¯s surface. |
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Colorimeter: |
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An analytical instrument that measures substance concentration by color intensity when the substance reacts to a chemical reagent. |
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Flow Injection Analyzer: |
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An analytical instrument with a special sampling system that uses a continuous stream of reagent(s) into which fluid samples are injected. |
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Human Machine Interface Software: |
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A type of software to interface (or coordinate) the interaction between machine or equipment and a human being. |
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Lamella: |
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Synthetic media installed in a clarifier tank to assist in particle flocculation (coming together in a ¡°floc¡± or ¡°flakes¡±) |
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Mass Spectrometer: |
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An analytical instrument that separates and identifies chemical constituents according to their mass-to-charge ratios and is used to identify organic compounds. |
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Membrane Biological Reactor (MBR) : |
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A suspended-growth bioreactor combined with a membrane liquid/solids separation unit. The ¡°MBR¡± uses an advanced membrane technology that treats biological wastes to a quality level which in many industries is sufficient for reuse or low-cost disposal to sewers. |
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Moving Bed Biofilm Reactor (MBBR) |
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A biological wastewater treatment process that uses synthetic plastic media floating or fixed in the aeration stage of the treatment process to increase the contact area between the wastewater and the biomass (bacteria). The result is a higher efficiency of treatment in a unit volume of wastewater, hence smaller footprint. An additional advantage is reduction of the amount of sludge produced. |
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Multi-Channel Digital Recorder: |
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A device that measures and records more than one input of a digitized signal (signal in the form of pulses). |
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pH Controller: |
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A process instrument that measures and controls the acidity or alkalinity of a fluid. |
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Reagent: |
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A chemical substance used to cause a chemical reaction and detect another substance. |
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Sequential Batch Reactor (SBR) : |
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A waste-water treatment process that combines aeration and settling in one reactor tank thus saving on space. Used for the treatment of industrial waste-water as well as municipal sewage. The SBR is a batch process that is ideal for waste-waters of changing characteristics . |
3
SELECTED FINANCIAL INFORMATION
(Amounts expressed in thousands, except
share and per share data and unless otherwise stated)
The selected consolidated income statement data for years ended December 31, 2007, 2006 and 2005, and the selected consolidated balance sheet data as of December 31, 2007 and 2006 set forth below are derived from audited consolidated financial statements of the Company included herein and should be read in conjunction with, and are qualified in their entirety by reference to such financial statements, including the notes thereto and Item 5. ¡°Operating and Financial Review and Prospects.¡± The selected consolidated income statement data for the years ended December 31, 2004 and 2003 and the selected consolidated balance sheet data as of December 31, 2005, 2004 and 2003 set forth below are derived from audited consolidated financial statements of the Company which are not included herein.
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2007 |
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2006 |
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2005 |
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2004 |
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2003 |
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US$ |
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US$ |
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US$ |
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US$ |
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US$ |
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Balance Sheet Data: |
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Cash and cash equivalents |
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9,387 |
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9,160 |
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5, 362 |
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5,242 |
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2,752 |
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Working capital (1) |
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10,099 |
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10,267 |
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6,931 |
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5,457 |
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4,914 |
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Total assets |
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25,482 |
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19,975 |
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17,377 |
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15,699 |
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13,308 |
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Short-term debt (2) |
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0 |
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0 |
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0 |
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0 |
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0 |
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Net assets |
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17,958 |
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12,990 |
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9,754 |
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7,837 |
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7,243 |
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Capital Stock |
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120 |
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94 |
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74 |
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68 |
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45 |
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(1) Current assets minus current liabilities.
(2) Short-term debt includes short-term borrowings and current portion of long-term bank loans.
4
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2007 |
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2006 |
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2005 |
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2004 |
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2003 |
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US$ |
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US$ |
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US$ |
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US$ |
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US$ |
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Income Statement Data: |
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Revenue |
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27,230 |
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27,161 |
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31,250 |
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32,282 |
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27,442 |
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Cost of revenue |
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(20,398 |
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(20,606 |
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(24,681 |
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(27,033 |
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(22,805 |
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Gross profit |
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6,832 |
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6,555 |
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6,569 |
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5,249 |
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4,637 |
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Selling and Administrative Expenses |
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(6,585 |
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(5,961 |
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(5,418 |
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(4,801 |
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(4,108 |
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Operating income |
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247 |
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594 |
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1,151 |
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448 |
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529 |
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Interest Income |
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256 |
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95 |
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35 |
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17 |
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13 |
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Other income, net |
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161 |
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146 |
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172 |
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104 |
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6 |
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Income before taxes |
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664 |
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835 |
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1,358 |
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569 |
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548 |
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Income taxes |
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(144 |
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(156 |
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(328 |
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(167 |
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(108 |
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Minority Interest in profits of subsidiaries |
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(345 |
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(318 |
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(318 |
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¡ª |
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¡ª |
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Equity in profit of affiliates |
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247 |
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¡ª |
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21 |
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192 |
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91 |
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Net income |
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422 |
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361 |
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733 |
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594 |
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531 |
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Net income per Ordinary Share |
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Basic |
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0.04 |
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0.04 |
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0.11 |
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0.09 |
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0.08 |
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Diluted |
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0.03 |
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0.03 |
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0.07 |
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0.06 |
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0.08 |
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Weighted Average Number of Ordinary Shares Outstanding |
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Basic |
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11,105,556 |
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8,047,911 |
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6,598,201 |
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6,434,667 |
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6,434,667 |
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Diluted |
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12,095,335 |
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10,787,420 |
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10,698,482 |
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10,034,687 |
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6,434,667 |
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5
The Company maintains its books and records in United States dollars (¡°US$¡±). Its subsidiaries, retail shops and affiliates maintain their books and records either in Hong Kong dollars (¡°HK$¡±) or in Chinese Renminbi (¡°RMB¡±).
The Hong Kong dollar is freely convertible into other currencies (including the US dollar). Since 1983, the Hong Kong dollar has effectively been officially linked to the US dollar at the rate of approximately HK$7.80 = US$1.00. However, the market exchange rate of the Hong Kong dollar against the US dollar continues to be influenced by the forces of supply and demand in the foreign exchange market. Exchange rates between the Hong Kong dollar and other currencies are influenced by the rate between the US dollar and the Hong Kong dollar.
Since 1994, the conversion of Renminbi into foreign currencies, including U.S. dollars, has been based on rates set by the People¡¯s Bank of China, which are set daily based on the previous day¡¯s interbank foreign exchange market rates. From 1994 through 2004, the official exchange rate for the conversion of Renminbi to U.S. dollars has generally been stable and maintained at the rate of approximately RMB8.30 = US$1.00. However, in 2007, the Renminbi appreciated and at the end of 2007, the exchange rate was approximately RMB 7 .3141 = US$1.00. The value of the Renminbi fluctuates and is subject to changes in PRC political and economic conditions.
The high, low and average exchange rate set forth below:
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Rate at Period End |
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Low |
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High |
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Average |
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US$ to RMB |
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Fiscal 2003 |
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8.2867 |
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8 .2570 |
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8.2700 |
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8 .2872 |
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Fiscal 2004 |
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8.2865 |
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8 .2354 |
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8 .2870 |
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8.2782 |
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Fiscal 2005 |
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8.0734 |
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8.0566 |
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8 .2666 |
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8 .2033 |
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Fiscal 200 6 |
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7.8175 |
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7 .7845 |
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8 .0715 |
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7.9819 |
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Fiscal 2007 |
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7.3141 |
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7.2941 |
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7.8062 |
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7.6172 |
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US$ to HK$ |
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Fiscal 2003 |
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7.7648 |
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7.6886 |
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7.8931 |
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7.7885 |
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Fiscal 2004 |
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7.7760 |
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7.7511 |
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7.8063 |
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7.7893 |
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Fiscal 2005 |
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7.7535 |
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7.7431 |
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7.8116 |
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7.7779 |
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Fiscal 200 6 |
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7.7794 |
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7.7502 |
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7.7946 |
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7.7690 |
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Fiscal 2007 |
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7.8049 |
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7.7488 |
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7.9102 |
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7.8026 |
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The Following Months |
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Low |
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High |
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Average |
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US$ to RMB |
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July 2007 |
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7.5445 |
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7.6035 |
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7.5877 |
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August 2007 |
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7.5330 |
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7.5955 |
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7.5849 |
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September 2007 |
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7.4915 |
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7.5413 |
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7.5335 |
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October 2007 |
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7.4515 |
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7.5183 |
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7.5135 |
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November 2007 |
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7.3673 |
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7.4615 |
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7.4334 |
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December 2007 |
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7.2941 |
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7.4035 |
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7.3832 |
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6
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US$ to HK$ |
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July 2007 |
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7.8109 |
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7.8254 |
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7.8201 |
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August 2007 |
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7.7952 |
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7.8301 |
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7.8175 |
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September 2007 |
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7.7556 |
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7.8007 |
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7.7855 |
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October 2007 |
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7.7488 |
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7.7731 |
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7.7560 |
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November 2007 |
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7.7494 |
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7.7942 |
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7.7762 |
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December 2007 |
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7.7843 |
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7.8076 |
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7.7983 |
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You should carefully consider all of the information set forth in this annual report and the following risk factors. The risks below are not the only ones we face. Additional risks not currently known by us or that we deem immaterial may also impair our business operations. Our business, financial condition or results of operations could be materially adversely effected by any of these risks. This annual report also contains forward looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward looking statements as a result of certain factors, including the risks we face as described below and elsewhere. See ¡°Forward Looking Statements.¡±
Certain Risks Relating To Doing Business In Hong Kong And The People¡¯s Republic Of China (the ¡°PRC¡± or ¡°China¡±).
PRC Sovereignty Over Hong Kong Still Developing.
The Company¡¯s executive and principal offices are located in Hong Kong, a Special Administrative Region of China (or ¡°SAR¡±; Hong Kong is sometimes herein referred to as the ¡°Hong Kong SAR¡±).
As provided in the Sino-British Joint Declaration on the Question of Hong Kong (the ¡°Joint Declaration¡±) and the Basic Law of the Hong Kong SAR of China (the ¡°Basic Law¡±), the Hong Kong SAR is provided a high degree of autonomy except in foreign and defense affairs. The PRC ¡¯s political system and policies are not practiced in Hong Kong. Under this principle of ¡°one country, two systems¡±, Hong Kong maintains a legal system that is based on common law and is different from that of the PRC.
The Company¡¯s results of operations and financial condition may be influenced by the political situation in Hong Kong and by the general state of the Hong Kong economy. See ¡° ¨C Economic Stability Uncertain.¡±
There can be no assurance that these past or any prospective future changes in political, economic or commercial conditions in Hong Kong and the PRC will not result in a material adverse effect upon the Company.
Economic Stability Uncertain; Earthquake.
Most economies in the Far East had suffered from an economic instability. Although the region, including the PRC, appears to have recovered, there can be no assurance that the recovery
7
will continue, most especially in light of the recent catastrophic earthquakes that caused many deaths and widespread destruction. Continued growth in the PRC is dependent upon an adequate supply of energy and the recovery from recent earthquakes. There is no assurance that adequate supplies of energy can be developed or found to fuel the PRC¡¯s continued economic growth. The impact, if any, upon the Company of the recent catastrophes in the PRC cannot be predicted at this time.
The PRC¡¯s Economic, Political And Social Conditions.
The PRC economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past twenty years, growth has been uneven, both geographically and among the various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall PRC economy, but may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by changes in applicable tax regulations.
The PRC economy appears to be moving from a planned economy to a more market-oriented economy. Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in the PRC are still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over the PRC¡¯s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. These actions, as well as future actions and policies of the PRC government, could materially affect our business and operations.
The success of the Company¡¯s activities in the PRC depends on the Company¡¯s continued ability to overcome circumstances specifically effecting the industrial sector, including the relatively poor infrastructure, road transportation and communications network and an uncertain legal and regulatory environment.
Economic Reforms May Not Continue Or Impact Positively On The Company; Changing Business Environment.
Over the past several years, the PRC¡¯s government has pursued economic reform policies including encouraging private economic activities and decentralization of economic deregulation. The PRC government may not continue to pursue these policies or may significantly alter them to our detriment from time to time without notice. Changes in policies by the PRC government resulting in changes in laws, regulations, or their interpretation, or the imposition of confiscatory taxes, restrictions on currency conversion and imports could materially and adversely effect our
8
business and operating results. The nationalization or other expropriations of private enterprises by the PRC government could result in a loss of our investments in actual funds and time and effort, in China.
The Company¡¯s results at times may also be adversely effected by: (1) changes in political, economic and social conditions in the PRC; (2) changes in government policies such as changes in laws and regulations (or their interpretation); (3) the introduction of additional measures to control inflation; (4) changes in the rate or method of taxation; (5) imposition of additional restrictions on currency conversion remittances abroad; (6) reduction in tariff protection and other import restrictions; and (7) a return to the more centrally-planned economy that existed previously.
We Are Subject To International Economic And Political Risks, Over Which We Have Little Or No Control.
Doing business outside the United States subjects us to various risks, including changing economic and political conditions, exchange controls, currency fluctuations, armed conflicts and unexpected changes in United States and foreign laws relating to tariffs, trade restrictions, transportation regulations, foreign investments and taxation. We have no control over most of these risks and other unforeseeable risks and may be unable to anticipate changes in international economic and political conditions and, therefore, unable to alter our business practice in time to avoid the adverse effect of any of these changes.
Uneven Economic Growth.
The PRC¡¯s economy has experienced significant growth in recent years, but that growth has been uneven among various geographic regions and economic sectors. Economic reforms and growth in the PRC have been more successful in certain provinces than in others, and the continuation or increase of such disparities could adversely effect political or social stability.
PRC Inflation .
In recent years, the PRC has not experienced significant inflation, and thus inflation has not had a significant effect on our business historically. In response to the increased inflation rate during 2004, the Chinese government announced measures to restrict lending and investment in the PRC in order to reduce inflationary pressure on the PRC¡¯s economy; and the inflation rate was reduced in 2005 and 2006, but escalated in 2007. If the PRC rate of inflation continues to increase, the Chinese government may introduce further measures intended to reduce the inflation rate in the PRC. Any such measures adopted by the Chinese government may not be successful in reducing or slowing the increase in the PRC¡¯s inflation rate. Sustained or increased inflation in the PRC may have an adverse impact on the PRC¡¯s economy and may materially and adversely affect our business and financial results.
Uncertain Legal System And Application Of Laws.
The legislative trend in the PRC over the past decade has been to enhance the protection afforded to foreign investment and allow for more active control by foreign parties of foreign
9
invested enterprises. There can be no assurance that this will continue. In addition, as the PRC economy, business and commercial framework and legal system all continue to develop, that development may adversely effect the Company¡¯s activities in the PRC or the ability of the Company to enter into Sino-foreign agreements.
PRC Legal System Business Laws Developing.
The PRC does not yet possess a comprehensive body of business law or a consolidated body of laws governing foreign investment enterprises. As a result, the enforcement, interpretation and implementation of existing laws, regulations or agreements may be sporadic, inconsistent and subject to considerable discretion. The PRC¡¯s judiciary has not had sufficient opportunity to gain experience in enforcing laws that exist, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. As the legal system develops, entities such as the Company may be adversely effected by new laws, changes to existing laws (or interpretations thereof) and preemption of provincial or local laws by national laws. Even when adequate law exists in the PRC, it may not be possible to obtain speedy and equitable enforcement of the law.
Government Currency Controls.
The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of its currency, Renminbi (¡°RMB¡±) into foreign exchange and through restrictions on foreign imports. The conversion of RMB into Hong Kong and United States Dollars (¡°U.S. Dollars¡±) must be based on rates set by the People¡¯s Bank of China (¡°PBOC¡±), which rates are set daily based on the previous day¡¯s Chinese interbank foreign exchange market rate with reference to current exchange rates on the world financial markets.
Although the RMB to U.S. dollar exchange rate has generally been stable from 1994 through 2004, in 2007, the RMB appreciated against the U.S. Dollar. The PRC government has stated its intention to intervene in the future to support the value of the RMB, there can be no assurance that exchange rates will not become volatile. Exchange rate fluctuations may adversely effect the Company because of foreign currency denominated liabilities, and may materially adversely effect the value, translated into U.S. dollars, of the Company¡¯s net fixed assets situated and to be situated in the PRC, earnings and dividends.
Foreign Currency Risk.
The Company operates in Hong Kong, the PRC and trades with both local and overseas customers, and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to purchases in, Hong Kong dollar, Renminbi and Euro. Foreign exchange risk arises from committed and unmatched future commercial transactions, such as confirmed import purchase orders and sales orders, recognized assets and liabilities, and net investment in the PRC operations. The Company uses derivative financial instruments such as foreign exchange contracts to hedge certain foreign currency exposures. There can be no assurances that the Company¡¯s hedging strategies will be adequate to avoid this foreign exchange risk.
Turbulent Relations With The United States Of America (¡°United States¡±).
D ifferences between the United States and PRC governments on some political issues, as the recent political conflicts over Myanmar, continue occasionally to color the relationship. These occasional controversies could materially and adversely effect our business and operations. Political or trade friction between the two countries could also materially and adversely effect the market price of our Ordinary Shares, whether or not they adversely effect our business.
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Certain Risks Relating To The Company¡¯s Business
We Have Made And May Make Further Acquisitions Without Your Approval.
Although we endeavor to evaluate the risks inherent in any particular acquisition, there can be no assurance that we will properly or accurately ascertain all such risks. We will have virtually unrestricted flexibility in identifying and selecting prospective acquisition candidates and in deciding if they should be acquired for cash, equity or debt, and in what combination of cash, equity and/or debt.
In October of 2005, we completed our acquisition of 51% of the capital stock of two entities, making the two entities our majority owned subsidiaries, and we have taken and are seeking to take equity positions in related businesses. We will not seek stockholder approval for any additional acquisitions unless required by applicable law and regulations. Our stockholders will not have an opportunity to review financial and other information on acquisition candidates prior to consummation of any acquisitions under almost all circumstances.
Investors will be relying upon our management, upon whose judgment the investor must depend, with only limited information concerning management¡¯s specific intentions.
There can be no assurance that the Company will locate and successfully complete any such additional acquisitions, or any acquisition will perform as anticipated, will not result in significant unexpected liabilities or will ever contribute significant revenues or profits to the Company or that the Company will not lose its entire investment in any acquisition.
Dependence Upon Management.
The Company is dependent upon the services of its executive officers, in particular Mr. T.C. Leung, the Chairman of the Company¡¯s Board of Directors and its Chief Executive Officer. The business of the Company could be adversely effected by the loss of services of, or a material reduction in the amount of time devoted to the Company by its executive officers. The Company does not maintain ¡°Key Man¡± life insurance on the lives of any of its officers and directors. See Item 6. ¡°Directors, Senior Management and Employees.¡±
Adverse Impact Upon The Company Of PRC¡¯s Credit Restrictions.
The Company faces increasing competition from other distributors of substantially similar products and manufacturers themselves, both foreign and Chinese. The Company faces its principal competition from foreign manufacturers and other distributors of their products situated in Hong Kong and the PRC. Competition may cause purchaser demands for price reductions and reduced profit margin.
Competition With Vendors.
As the Company plans to assemble products of the kind that it presently distributes, the Company may directly compete with certain of its vendors. Any such direct competition may
11
adversely effect its relationship with its vendors. See Item 4. ¡°Information on the Company.¡±
Dependence On Vendors; Lack Of Long Term Agreements.
The Company distributes supplies manufactured by a number of vendors, including Hioki E.E. Corp. (¡°Hioki¡±), US Filter/Chemical Feed and Disinfection Group (¡°USF¡±) and Lachat Instruments, Inc. (¡°Lachat¡±) , which are the Company¡¯s largest suppliers. The Company has only a letter from Hioki appointing the Company as Hioki¡¯s sales representative in the PRC, Hong Kong and Macau. Although alternative sources of supply exist, there can be no assurance that the termination of the Company¡¯s relationship with any of the above or other vendors would not have a short-term adverse effect on the Company¡¯s operations due to the Company¡¯s dependence on these vendors. A substantial number of the Company¡¯s suppliers have been selling their products into China directly and through other distributors.
Risks Relating To The Company Itself; Control By T.C. Leung; Potential Conflict Of Interests.
T.C. Leung, the Company¡¯s Chairman of the Board and Chief Executive Officer, as a practical matter, is able to nominate and cause the election of all the members of the Company¡¯s Board of Directors, control the appointment of its officers and the day-to-day affairs and management of the Company. As a consequence, Mr. Leung can have the Company managed in a manner that would be in his own interests and not in the interests of the other shareholders of the Company. See Item 7. ¡°Major Shareholders and Related Party Transactions¡± and Item 6. ¡°Directors, Senior Management and Employees.¡±
Certain Legal Consequences Of Incorporation In The British Virgin Islands; Rights Of Shareholders Not As Extensive As In U.S. Corporations.
Principles of British Virgin Islands (¡°BVI¡±) corporate law relating to such matters as the validity of the Company procedures, the fiduciary duties of management and the rights of the Company¡¯s shareholders may differ from those that would apply if the Company were incorporated in a jurisdiction within the United States.
The rights of shareholders under British Virgin Islands law are not as extensive as the rights of shareholders under legislation or judicial precedent in many United States jurisdictions. Under United States law, majority and controlling shareholders generally have certain ¡°fiduciary¡± responsibilities to the minority shareholders. United States shareholder action must be taken in good faith and actions by controlling shareholders in a United States jurisdiction and executive compensation which are obviously unreasonable may be declared null and void.
The BVI law protecting the interests of the minority shareholders is not as protective in all circumstances as the law protecting minority shareholders in United States jurisdictions. The shareholders of the Company may have more difficulty in protecting their interests in the face of actions by the Company¡¯s Board of Directors, and may have more limited rights, than they might have as shareholders of a company incorporated in many United States jurisdictions.
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Anti-Takeover Provisions.
The Company has 5,000,000 shares of ¡°blank check preferred stock¡± authorized. The ¡°blank check preferred stock¡± is intended to strengthen the Company¡¯s ability to resist an unsolicited takeover bid and may be deemed to have an anti-takeover effect. The Board of Directors has the right to fix the rights, terms and preferences at the time of issue of ¡°blank check preferred stock¡± without further action by our shareholders.
Uncertainty Of Enforcing United States Judgments.
There is some uncertainty whether BVI courts would enforce judgments of the courts of the United States and of other foreign jurisdictions, or enforce actions brought in the BVI which are based upon the securities laws of the United States. A final monetary judgment obtained in the United States will be treated as a cause of action in itself by the BVI courts so that no retrial of the issues would be necessary, provided that material preconditions are met and the proceedings pursuant to which judgment was obtained were not contrary to the rules of natural justice.
All of the Company¡¯s directors and executive officers reside outside of the United States, service of process upon the Company and such persons may be difficult to effect in the United States upon all such directors and officers.
All of the Company¡¯s assets are and will be located outside of the United States, in Hong Kong and the PRC, and any judgment obtained in the United States may not be enforced in those jurisdictions. Hong Kong courts will not directly enforce against the Company or such persons judgments obtained in the United States. There is also substantial doubt as to the enforceability in the PRC of actions to enforce judgments of the United States¡¯ courts arising out of or based on the ownership of the securities, including judgments arising out of or based on the civil liability provisions of United States federal or state securities laws or otherwise. See ¡°¨C Certain Legal Consequences of Incorporation in the British Virgin Islands; Rights of Shareholders not as Extensive as in U.S. Corporations.¡±
Being A Foreign Private Issuer Exempts Us From Certain Securities And Exchange Commission (¡°Commission¡±) And National Association Of Securities Dealers Automated Quotation System (¡°NASDAQ¡±) Requirements.
We are a foreign private issuer within the meaning of rules promulgated under the Securities Exchange Act of 1934 (the ¡°Exchange Act¡±). As such, we are exempt from certain provisions applicable to United States public companies including: (1) 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; (2) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; (3) the provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information; (4) 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
13
issuer¡¯s equity securities within less than six months); (5)Because of these exemptions, investors are not afforded the same protections or information generally available to investors holding shares in public companies organized in the United States.
Our Securities Must Continue To Meet Qualitative And Quantitative Listing Maintenance Criteria For The NASDAQ SmallCap Market.
Our securities are quoted and traded on the NASDAQ SmallCap Market. There can be no assurance that we will continue to meet both the qualitative and quantitative criteria for continued quotation and trading of our securities on the NASDAQ SmallCap Market. That criteria undergoes periodic review.
If we are unable to meet the continued quotation criteria of the NASDAQ SmallCap Market and are suspended from trading on these markets, our securities could possibly be traded in the over-the-counter market and be quoted in the so-called ¡°pink sheets¡± or, if then available, the OTC Bulletin Board. In such an event, an investor would likely find it more difficult to dispose of, or even obtain accurate quotations of, our securities. See ¡°- We Are Also Required To Meet Certain, But Not All Corporate Governance Criteria¡± Applicable to NASDAQ Listed Issuers.
We Are Also Required To Meet Certain, But Not All, Corporate Governance Criteria Applicable To NASDAQ Listed Issuers.
Although, in the past, we have been able to satisfy corporate governance criteria applicable to NASDAQ¡¯s SmallCap Market, those criteria are difficult to comply with and include, among other things: (a) a heightened degree of independence of members of the board of directors with independent directors to, among other things: hold regular meetings among themselves only; (b) establishment of a code of conduct addressing compliance with laws; and (c) a limit on payments to independent directors and their family members (other than for services on the board of directors).
These corporate governance requirements and a strict definition of ¡°independent director¡± make it more difficult to find independent directors for our Board of Directors. There is intense competition for qualified independent directors, including those persons with accounting experience and financial statement acumen to serve on audit committees. We believe that continued compliance with the corporate governance requirements applicable to NASDAQ listed issuers may be difficult and increase our costs and expenses as the costs of finding and compensating independent directors escalate and the costs of administering their new powers and responsibilities is an added financial burden. If we are unable to attract and keep a sufficient number of independent directors willing to take on the responsibilities imposed by such rules on what we believe to be commercially reasonable terms, our securities may be delisted from NASDAQ. (See ¡°-Being a ¡®Controlled Company¡¯ Exempts Us From Certain Other Corporate Governance Criteria Applicable to NASDAQ Listed Issuers.¡±)
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Being A ¡°Controlled Company¡± Exempts Us From Certain Other Corporate Governance Criteria Applicable To NASDAQ Listed Issuers.
As a result of T.C. Leung, the Company¡¯s Chairman of the Board and Chief Executive Officer beneficially owning in excess of the majority voting power of our Ordinary Shares, we are a ¡°controlled company¡± as that term is defined in rules and regulations applicable to NASDAQ listed issuers. As a ¡°controlled company¡±, we are not required to comply with certain NASDAQ corporate governance criteria including, among other things, the requirements that the majority of our Board be independent directors, and their having the authority to approve director nominations and executive officer compensation.
We Are Not Subject To Various Corporate Governance Measures, Which May Result In Shareholders Having Limited Protections.
Recent Federal legislation, including the Sarbanes-Oxley Act of 2002 (¡°SOX¡±), has resulted in the adoption of various corporate governance measures by securities exchanges and NASDAQ designed to promote the integrity of the corporate management and the securities markets. Being a ¡°controlled company,¡± we are exempt from many, but not all, of those requirements. Furthermore, the absence of such practices with respect to our Company may leave our shareholders without protections against interested director transactions, conflicts of interest and similar matters.
We May Be Exposed To Potential Risks Relating To Our Internal Controls Over Financial Reporting And Having Those Controls Attested To By Our Independent Auditors.
Pursuant to Section 404 of SOX, the SEC adopted rules requiring public companies to include a report of management on the company¡¯s internal controls over financial reporting in their annual reports, including Form 20-F. In addition, the independent registered public accounting firm auditing a company¡¯s financial statements must also attest to and report on management¡¯s assessment of the effectiveness of a company¡¯s internal controls over financial reporting as well as the operating effectiveness of a company¡¯s internal controls. We were not subject to these requirements for the fiscal year ended December 31, 2007 as a result of temporary rules adopted by the SEC. We are evaluating our internal control systems in order to allow our management to report on, and our independent auditors attest to, our internal controls, as a required part of our Annual Report on Form 20-F beginning with that report required when the temporary rules cease being effective .
While we expect to expend significant resources in developing the necessary documentation and testing procedures required by SOX, there is a risk that we will not comply with all of these requirements. At present, there is no precedent available with which to measure compliance adequacy. Accordingly, there can be no assurance that we will receive a positive attestation from our independent auditors.
In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent auditors with respect to our internal controls, investors and
15
others may lose confidence in the reliability of our financial statements, our ability to obtain equity or debt financing could suffer and the market price of our shares could decline.
The Market Price Of Our Securities Has Been Fluctuating Widely.
During the past five years, the market price of our Ordinary Shares has fluctuated widely on occasion. Additionally, the Company knows of no reason for these wide fluctuations. See Item 9.C- ¡°Markets.¡±
There Are Risks In Purchasing Low-Priced Securities.
If our securities were to be suspended or delisted from the NASDAQ SmallCap Market, they could be subject to rules under the Exchange Act which impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established clients and ¡°accredited investors¡± (for example, individuals with a net worth in excess of US$1,000,000 or an annual income exceeding US$200,000 or US$300,000 together with their spouses). For transactions covered by such rules, a broker-dealer must make a special suitability determination of the purchaser and have received the purchaser¡¯s written consent to the transaction prior to the sale. Consequently, such rules may affect the ability of broker-dealers to sell our securities and the ability to sell any of our securities in any secondary market that may develop for such securities.
In the event our securities are no longer listed on the NASDAQ SmallCap Market or are not otherwise exempt from the provisions of the SEC¡¯s ¡°penny stock¡± rules, such rules may also affect the ability of broker-dealers and investors to sell our securities.
There Is No Assurance Of A Continued Public Market For Our Securities.
There can be no assurance that a trading market for our Ordinary Shares will continue.
The Company was organized under the laws of the British Virgin Islands on September 30, 1996 for the purposes of raising capital and for acquiring all the outstanding capital stock of Euro Tech (Far East) Limited, a Hong Kong corporation involved in the distribution of advanced water treatment equipment (¡°Far East¡±). In March 1997, the Company acquired all the issued and outstanding capital stock of Far East and it became a wholly-owned subsidiary and was the primary operational entity of the Company.
During Fiscal 2005, we completed our plan to increase our equity position in Yixing Pact Environmental Technology Company Limited (¡°Yixing¡±) and Pact Asia Pacific Limited (¡°Pact¡±), a company engaged in water and waste-water treatment solution business. We had previously owned thirty (30%) percent of their capital stock. With the addition of twenty-one (21%) percent of Pact¡¯s and Yixing¡¯s capital stock in October 2005, they became our majority-owned subsidiaries.
16
During Fiscal 200 7 , we purchased twenty (20%) percent of the equity in a company engaged in the air pollution control business. In January 2008, we purchased twenty (20%) percent of the equity in another related industry business. China¡¯s rapid economic growth had led it to become one of the world¡¯s largest emitters of sulfur dioxide. The damage due to acid rain caused by sulfur dioxide is vast, and is also affecting the neighboring countries as air currents transport sulfur dioxide. To tackle these environmental and geo-political issues, China has established targets to reduce key pollutants, namely, sulfur dioxide, nitrogen oxides and suspended particulates. Heavy polluters are being warned to reduce their emissions or face penalties. We believe that as a result, the demand of desulphurization and dust removal equipment will increase accordingly.
We are in the process of shifting our emphasis from the distribution of instruments and equipment to engineering and manufacturing activities. Revenues from our ¡°trading¡± activities have fallen-off as a substantial number of our suppliers have been selling their products into China directly and through other distributors. Revenues and net income generated from our environmental engineering department and our majority owned subsidiaries, Pact and Yixing (companies engaged in the water and waste water treatment solution business), have more than offset our falling ¡°trading¡± revenues.
In November of 2006 we established Shanghai Euro Tech Environmental Engineering Company Ltd. (¡°Shanghai ¨C Environmental¡±) as a wholly-owned subsidiary under the laws of the People¡¯s Republic of China, to carry on our environmental engineering department with that line of business and its personnel transferred from our subsidiary, Euro Tech (Far East) Ltd. Shanghai ¨C Environmental is focusing on our water and waste-water treatment engineering business and is planned to be the home of our planned expansion into the air pollution control business.
The Company is engaged in three different major activities:
(1) Equipment and Instrument Distribution.
The Company had been primarily a distributor of a wide range of advanced water treatment equipment (including chlorination equipment), laboratory instruments, analyzers, test kits and related supplies and power generation equipment (including recorders and power quality analyzers). The Company acts as an exclusive and non-exclusive distributor for well-known manufacturers of such equipment, primarily to commercial customers and governmental agencies or instrumentalities in Hong Kong and the PRC. During its fiscal year ended December 31, 2007 (¡°Fiscal 2007¡±) the Company distributed products to in excess of 1,000 customers, including the Hong Kong Environmental Protection Department, Hong Kong Water Supplies Department, Government Laboratory, Drainage Services Department China¡¯s National Environmental Protection Agency, Harbin Water, Harbin Environmental Monitoring Center, Guangzhou Water, Guiyang Environmental Monitoring Centre and to subdistributors located in Hong Kong, the PRC and Macau. These products are manufactured by a substantial number of major American, European
17
and Japanese corporations, including Hioki, USF and Lachat, which are the Company¡¯s largest suppliers, with purchases from them accounting for approximately 36%, 9% and 8%, respectively, of the Company¡¯s sales during Fiscal 2006 and approximately 32 %, 10 %, and 5 %, respectively of the Company¡¯s sales during Fiscal 2007.
The Company distributes products through its Hong Kong headquarters, its retail shops and representative offices located in Beijing, Shanghai, Guangzhou, Chongqing, Xi´An, Shenyang, Wuhan , Fuzhou, Chengdu and Urumqi and through non-exclusive arrangements with independent sub-distributors located in Hong Kong, the PRC and Macau.
(2) Manufacturing.
The Company believes that by assembling the products it distributes, it may realize increased gross profit margins and greater revenues and net income than if it remains only a distributor of such products with sales of the Company first product offering, an Infrared Photometric Oil Analyzer, commencing in 2003. Similarly, the Company believes that by using its existing regional sales efforts in the PRC, it may be better able to compete with increased competition from our own suppliers and other distributors.
(3) Environmental Services.
In January 2002, we acquired a 30% equity interest in Pact and Yixing. Pact and Yixing were privately owned engineering firms situated in Shanghai specializing in the design, manufacture and operation of water and waste-water treatment plant in several industries situated in China, Pact and Yixing, through associates and business alliances, also conduct similar operations in the Middle East. In October 2005, through our subsidiary Euro Tech (Far East) Limited (¡°Far East¡±) we purchased approximately 21% of the issued and outstanding shares of Pact and Yixing for approximately US$1,000,000 from Tamworth Industrial Limited (¡°Tamworth¡±).
In August 2007 , Far East acquire d a 20% equity interest in Zhejiang Tianlan Desulfurization and Dust-Removal Co. Ltd. (¡°BlueSky¡±), a company in flue gas desulphurization, flue gas de-nitration, dust removal and purification of industrial waste gases, for approximately US$4,648,000.
Blue Sky, founded in 2000, is a growing concern that we believe provides a comprehensive service for design, general contract, equipment manufacturing, installation, testing and operation management of the treatment of waste gases emitted from various boilers and industrial furnaces of power plants, steel works and chemical plants.
We expect that by securing an equity stake in BlueSky¡¯s business, we have a strategic partner to work within China¡¯s environmental protection business. With BlueSky¡¯s technology and technical support, we believe we are able to provide services and environmental solutions not only for water and waste-water treatment but also for air pollution control for industrial clients in China.
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Expansion Plans.
Acid rain and sulfur dioxide emissions are serious problems in China. We are planning to expand our activities in the air pollution control business by forming joint ventures, investing or acquiring some interest in companies, such as Blue Sky, involved in (i) the dust removal and/or (ii) the flue gas desulphurization for power plant industries and other similar industries.
We continu ously search for other companies engaged in manufacturing these products and equipment and in engineering companies which design and build pollution control systems. We anticipate that the costs of any such acquisition would be drawn from our general working capital and, possibly, by private sales of our securities including the potential exercise by officers and directors of their options. We have no commitments or indications of interest for the private sales of our securities.
In January 2008, we acquired a 20% equity interest in Zhejiang Jia Huan Electronic Co. Ltd., (¡°Jia Huan¡±) for approximately US$2,500,000. Jia Huan has been in the environmental protection business since 1969 and is based in Jin Hua, Zhejiang.
In June 2006, PACT entered into a letter of intent with Pact Engineering FZC (¡°PACTFZC¡±), a Middle Eastern water treatment company based in Dubai, and Ecomacchine S.p.A. (¡°ECO¡±), an Italian based company engaged in the manufacture of sludge and dewater ing equipment. In June 2007, the joint venture Pact Environmental Equipment Co. Limited, was registered in the PRC. PACT invested US$300,000 and has a 60% controlling interest of the JV, and ECO and PACTFCZ, (a company majority owned by George Hayek, the Company¡¯s Managing Director), each invested US$100,000 in consideration for 20% interests.
Revenue and income from distribution activities are decli ni ng gradually due to a greater number of our significant suppliers marketing and selling their products into the China market through other distributors as well as the Company. Many of these other distributors are local Chinese companies and can operate with a lower overhead.
Our plans for the near term also include: (a) continued use of our retail shops to sell ¡°low-tech¡± products and our own products. We believe that these shops are operating with a lower overhead than the rest of the Company; and (b) we believe that the continued ¡°low-tech¡± product sales through our retail shops coupled with our ¡°on-line¡± product sales will allow us to continue to offer products at lower prices than our competitors.
Having ¡°low-tech¡± products offered through our retail shops and the availability of ¡°on-line¡± product offering are anticipated to allow our sales force to focus on ¡°high-tech¡± and other products requiring personal or telephone contact directly with customers and potential customers.
Manufacturing
Sales of the Infrared Photometric Oil Analyzer commenced in 2003. During 2004, we began selling turbidity instruments and spectrometers that we developed and manufactured
19
ourselves and began assembling and selling the Total Organic Analyzer of O.I. Corporation. In November 2006, we began actively marketing our Total Organic Carbon (TOC) analytical instrument that measures the degree of the pollution level of drinking water, ground water and waste water. Our TOC analyzer has been two and a half years in research, development and field testing of prototypes sold to our customers. A number of target customers showed their interest in this product during our trade shows and seminars. We had made some modifications to this product to improve the quality and obtained updated Chinese Metrology Certification , a certificate issued by Bureau of Quality and Technical Supervision in November 2007. We have also upgraded other existing instruments and developed a quick response Chemical Oxygen Demand (¡°COD¡±) test instrument in 2007, for use on surface water, underground water and domestic and industrial wastewater.
In 2005, the Company also began offering two new company manufactured turbidimeters. One of the new turbidimeters is directed at water treatment plan t s, environmental monitoring status, hydrological stations and the second is directed at beer and other beverage processing facilities and it analyzes the particles contained in the beverage. See ¡°- Product Assembly Operations¡±. During the next twelve months, we intend to assemble and/or manufacture additional products in the future and seek opportunities with our suppliers to assemble their products, secure manufacturing and/or assembly facilities and seek another manufacturer of analytical instruments to acquire.
Environmental Services
To allow the Company to bid on larger water, waste-water and power generation projects, we acquired Pact and Yixing (¡°Pact-Yixing¡±) and continue our search for other engineering companies and/or a system integrator (a company that provides hardware, software and solutions in the field of engineering) or enter into a joint venture with a third party to work in connection with our process control and engineering department.
Pact-Yixing have completed a substantial number of industrial water and waste-water treatment projects in the PRC. The majority of these projects are for large multinational manufacturing facilities for clients from the USA, Europe and Japan. Process design as well as mechanical and electrical engineering are completed in-house and manufacturing contracted to approved fabricators of components. Fabrication drawings are also done in-house for submittal to said fabricators under the supervision of Pact-Yixing¡¯s quality control engineers.
Pact-Yixing clients cover a varied spectrum of industries covering semiconductor, pharmaceutical, petrochemicals, auto and auto parts, steel, food and beverage and beauty products.
The water and waste-water treatment processes applied at Pact-Yixing cover chemical, physical, biological and membrane separation. A combination of those processes are normally used to treat a specific industrial process feed or effluent. With respect to the water treatment side of Pact-Yixing¡¯s business, they design and build filtration equipment, ion-exchange softeners and demineralizers, reverse osmosis, electro-deionization, chemical treatment systems and package type mobile water treatment plants. As for waste-water treatment, Pact-Yixing design and build biological treatment systems, oil coalescers, dissolved air flotation, lamella clarifiers, chemical reactor tanks, ultrafiltration, microfilitration, dewatering systems and package
20
type mobile sewage treatment plants. Biological treatment plants cover both aerobic and anaerobic processes. State-of-the-art aerobic processes of SBR (sequential batch reactors) and MBR (membrane biological reactors) are technologies also covered by Pact-Yixing. See ¡° Glossary .¡±
In 2006, Pact-Yixing commenced selling water and waste-w