-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PwPGCargnyRElbZtCj6reOf7fWBTcUpgT0vDyQ+bSnCEyGobeoAnfKwBKXi7uQ/o PMCjHef0Gd2cTvrYdMsSKw== 0000912057-02-025849.txt : 20020628 0000912057-02-025849.hdr.sgml : 20020628 20020628161713 ACCESSION NUMBER: 0000912057-02-025849 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EURO TECH HOLDINGS CO LTD CENTRAL INDEX KEY: 0001026662 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PROFESSIONAL & COMMERCIAL EQUIPMENT & SUPPLIES [5040] STATE OF INCORPORATION: D8 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-22113 FILM NUMBER: 02691670 BUSINESS ADDRESS: STREET 1: C/O EURO TECH (FAR EAST) LTD 18 F GEE STREET 2: CHANG HONG CENTRE 65 WONG CHUK HANG ROAD CITY: HONG KONG STATE: K3 ZIP: 00000 BUSINESS PHONE: 0118522814 MAIL ADDRESS: STREET 1: BRITISH VIRGIN ISLANDS LTD STREET 2: TRUSTNET CHAMBERS PO BOX 3444 CITY: ROAD TOWN TORROLA BR STATE: D8 ZIP: 00000 20-F 1 a2083297z20-f.txt FORM 20-F 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, 2001 ------------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________________ to_______________________ Commission file number 000-22113 ---------------------------------------------------------- EURO TECH HOLDINGS COMPANY LIMITED - -------------------------------------------------------------------------------- (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. Name of each exchange Title of each class on which registered ------------------- ------------------- NOT APPLICABLE - ------------------------------------ -------------------------------------- NOT APPLICABLE - ------------------------------------ -------------------------------------- Securities registered or to be registered pursuant to Section 12(g) of the Act. COMMON STOCK, $.01 PAR VALUE - -------------------------------------------------------------------------------- (Title of Class) REDEEMABLE COMMON STOCK PURCHASE WARRANTS - -------------------------------------------------------------------------------- (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. - -------------------------------------------------------------------------------- (Title of Class) 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. 3,064,151 ORDINARY SHARES ---------------------------------------------- WARRANTS TO PURCHASE 2,527,200 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. Yes |X| No |_| Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 |_| Item 18 |X| (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes |_| No |_| TABLE OF CONTENTS INTRODUCTION....................................................................................................iii GLOSSARY..........................................................................................................1 PART I............................................................................................................2 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.............................................2 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE...........................................................2 ITEM 3. KEY INFORMATION...................................................................................2 ITEM 3A. SELECTED FINANCIAL DATA.........................................................................2 ITEM 3B. CAPITALIZATION AND INDEBTEDNESS.................................................................3 ITEM 3C. REASONS FOR THE OFFER AND USE OF PROCEEDS.......................................................3 ITEM 3D. RISK FACTORS....................................................................................3 ITEM 4. INFORMATION ON THE COMPANY.......................................................................13 ITEM 4A. HISTORY AND DEVELOPMENT OF THE COMPANY.........................................................13 ITEM 4B. BUSINESS OVERVIEW..............................................................................13 ITEM 4C. ORGANIZATIONAL STRUCTURE.......................................................................21 ITEM 4D. PROPERTY, PLANT AND EQUIPMENT..................................................................21 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.....................................................22 ITEM 5A. OPERATING RESULTS..............................................................................22 ITEM 5B. LIQUIDITY AND CAPITAL RESOURCES................................................................27 ITEM 5C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES.................................................31 ITEM 5D. TREND INFORMATION..............................................................................31 ITEM 5E. SIGNIFICANT RELATED PARTY TRANSACTIONS...........................................................31 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.......................................................31 ITEM 6A. DIRECTORS AND SENIOR MANAGEMENT................................................................31 ITEM 6B. COMPENSATION...................................................................................33 ITEM 6C. BOARD PRACTICES................................................................................40 ITEM 6D. EMPLOYEES......................................................................................40 ITEM 6E. SHARE OWNERSHIP................................................................................40 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS................................................41 ITEM 7A. MAJOR SHAREHOLDERS.............................................................................41 ITEM 7B. RELATED PARTY TRANSACTIONS.....................................................................42 ITEM 8. FINANCIAL INFORMATION............................................................................42 ITEM 8A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION........................................42 ITEM 8B. SIGNIFICANT CHANGES............................................................................43 ITEM 9. THE OFFERING AND LISTING.........................................................................43 ITEM 9A. LISTING DETAILS AND 9.C PRINCIPAL TRADING MARKET...............................................43 ITEM 9B. PLAN OF DISTRIBUTION...........................................................................45 ITEM 9C. SELLING SHAREHOLDERS...........................................................................45 ITEM 9D. DILUTION.......................................................................................45 ITEM 9E. EXPENSES OF THE ISSUE..........................................................................45 i ITEM 10. ADDITIONAL INFORMATION...........................................................................46 ITEM 10A. SHARE CAPITAL..................................................................................46 ITEM 10B. MEMORANDUM AND ARTICLES OF ASSOCIATION.........................................................49 ITEM 10C. MATERIAL AGREEMENTS............................................................................52 ITEM 10D. EXCHANGE CONTROLS..............................................................................52 ITEM 10E. TAXATION.......................................................................................53 ITEM 10F. DIVIDENDS AND PAYING AGENTS....................................................................53 ITEM 10G. STATEMENT BY EXPERTS...........................................................................53 ITEM 10H. DOCUMENTS ON DISPLAY...........................................................................53 ITEM 10I. SUBSIDIARY INFORMATION.........................................................................53 ITEM 11. QUANTITATIVE AND QUALIFICATION DISCLOSURES ABOUT MARKET RISK................................................................................54 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECUIRITIES..........................................54 PART II..........................................................................................................55 ITEM 13. DEFAULTS, DIVIDENDS, ARREARAGES AND DELINQUENCIES................................................55 ITEM 14. MATERIAL MODIFICATION TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.............................................................55 ITEM 15. [RESERVED].......................................................................................55 ITEM 16. [RESERVED].......................................................................................55 PART III.........................................................................................................56 ITEM 17. FINANCIAL STATEMENTS.............................................................................56 ITEM 18. FINANCIAL STATEMENTS.............................................................................56 ITEM 19. EXHIBITS.........................................................................................57 SIGNATURES.......................................................................................................58
ii INTRODUCTION In this Form 20-F, reference to "us", "we", the "Company" and "EuroTech" are to EuroTech Holding Company Limited and its subsidiaries unless otherwise expressly stated or the context otherwise requires FORWARD LOOKING STATEMENTS. This annual report contains forward looking statements. Additional written or oral forward looking statements may be made by the Company from time to time in filings with the 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. "Operation and Financial Review and Prospects" and the notes to the Company's Financial Statements, describe factors, among others, that could contribute to or cause such differences. iii GLOSSARY The following glossary of terms may be helpful in understanding the terminology used in this Annual Report. Ambient Air: Atmospheric air (outdoor as opposed to indoor air). Colorimeter: An analytical instrument that measures substance concentration by color intensity when the substance reacts to a chemical reagent. Flow Injection Analyzer: An analytical instrument with a special sampling system that uses a continuous stream of reagent(s) into which fluid samples are injected. pH Controller: A process instrument that measures and controls the acidity or alkalinity of a fluid. Reagent: A chemical substance used to cause a chemical reaction and detect another substance. Mass Spectrometer: An analytical instrument that separates and identifies chemical constituents according to their mass-to-charge ratios and is used to identify organic compounds. Multi-Channel Digital Recorder: A device that measures and records more than one input of a digitized signal (signal in the form of pulses). Multi-Channel and Analogue Recorder: A device that measures and records more than one input of a signal in multi-voltage or milliampere (e.g. temperature in degrees Centigrade or degrees Fahrenheit). Atomic Spectrometer: An analytical instrument used to measure the presence of an element in a substance by testing a sample which is aspirated into a flame and atomized. The amount of light absorbed or emitted is measured. The amount of energy absorbed or emitted is proportional to the concentration of the element in the sample. Process Analyzer: An analyzer that continuously samples, monitors and measures fluids or gases. Process Turbidimeter: An analytical instrument that continually measures the clarity of water based on light scattering or deflection. Total Organic Carbon Analyzer: An analytical instrument that measures organic contamination in water. 1 PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. ITEM 3. KEY INFORMATION ITEM 3A. SELECTED FINANCIAL DATA SELECTED FINANCIAL INFORMATION (Amounts expressed in thousands, except share and per share data and unless otherwise stated) The selected income statement data for years ended December 31, 1999, 2000 and 2001, and the selected balance sheet data as of December 31, 2000 and 2001 set forth below are derived from audited financial statements of the Company and should be read in conjunction with, and are qualified in their entirety by reference to such financial statements, including the notes thereto and Item 5. "Operating and Financial Review and Prospects." The selected income data for the years ended December 31, 1997 and 1998 and the selected balance sheet data as of December 31, 1997, 1998 and 1999 set forth below are derived from audited financial statements of the Company which are not included herein.
AS OF DECEMBER 31, -------------------------------------------------------------------- 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- US$ US$ US$ US$ US$ BALANCE SHEET DATA: Cash and cash equivalents 2,539 3,045 3,691 3,963 3,551 Working capital(1) 3,292 3,493 3,632 3,686 4,123 Total assets 8,084 8,559 9,637 10,092 11,379 Short-term debt(2) 75 68 85 94 90 Long-term bank loans 329 260 178 92 0 Net assets 4,972 5,194 5,533 5,878 6,206
- --------------------- (1) Current assets minus current liabilities. (2) Short-term debt includes short-term borrowings and current portion of long-term bank loans. 2
FOR THE YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- US$ US$ US$ US$ US$ INCOME STATEMENT DATA: Net sales ......... 12,510 12,757 13,107 15,010 19,685 Cost of goods sold (9,399) (9,662) (9,896) (11,467) (15,396) ---------- ---------- ---------- ---------- ---------- Gross profit ...... 3,111 3,095 3,211 3,543 4,289 Selling and Administrative Expenses .......... (2,812) (2,924) (2,946) (3,301) (3,734) ---------- ---------- ---------- ---------- ---------- Operating income .. 299 171 265 242 555 Interest (expenses) Income, net ....... 18 86 85 113 66 Other income, net . 183 69 67 97 126 ---------- ---------- ---------- ---------- ---------- Income before taxes 500 326 417 452 747 Income taxes ...... (62) (71) (78) (94) (163) ---------- ---------- ---------- ---------- ---------- Net income ........ 438 255 339 358 584 ========== ========== ========== ========== ========== Net income per Ordinary Share Basic.............. 0.15 0.08 0.11 0.11 0.18 Diluted............ 0.15 0.08 0.11 0.11 0.18 Weighted average Number of Ordinary Shares Outstanding ....... 2,945,280 3,226,366 3,226,366 3,226,366 3,226,366
Currency exchange rates as of the date of this Report are: US$1 = HK $7.8 US$1 = RMB 8.3 ITEM 3B. CAPITALIZATION AND INDEBTEDNESS Not applicable. ITEM 3C. REASONS FOR THE OFFER AND USE OF PROCEEDS Not applicable. ITEM 3D. RISK FACTORS 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, 3 financial condition or results of operations could be materially adversely affected 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 PRC. PRC SOVEREIGNTY OVER HONG KONG STILL DEVELOPING o The Company's executive and principal offices are located in Hong Kong, a Special Administrative Region of China (an "SAR"; Hong Kong is sometimes herein referred to as the "Hong Kong SAR"). o As provided in the Sino-British Joint Declaration on the Question of Hong Kong (the "Joint Declaration") and the Basic Law of the Hong Kong SAR of China (the "Basic Law"), the Hong Kong SAR is provided a high degree of autonomy except in foreign and defense affairs. Based on the current political conditions and the Company's understanding of the Basic Law, the Company does not believe that the transfer of sovereignty over Hong Kong has had an adverse impact on its financial and operating environment. o The Company's results of operations and financial condition may be influenced by the political situation in Hong Kong and by the general state of the Hong Kong economy. See " - Economic Instability; Currency Exchange Rate." o There can be no assurance that these past or any prospective future changes in political or other conditions will not result in a material adverse affect upon the Company. ECONOMIC INSTABILITY; CURRENCY EXCHANGE RATE o Most economies in the Far East are suffering from large debts, declining company earnings and economic growth, and significant currency devaluation. The region has also suffered from the effects of the resulting capital flight from financial institutions. o On June 22, 1998, the Hong Kong Chief Executive announced an immediate freeze on new government land sales through April 22, 1999 in an attempt to stabilize property prices which have on average fallen approximately 43% from their 1997 peak, and ease tightening credit. Financial institutions could face additional pressure from 4 possible defaults on loans made for property. Issuer stock valuations also dropped sharply from a 1997 high on the main Hong Kong stock index (the Hang Seng). On August 7, 1997, the Hang Seng Index was 16,673.27. On June 20, 2002, that index stood at 10,754.41. There can be no assurance that these problems will not continue to abate or worsen or that recovery will continue in the near future in which event the Company may likely be materially adversely affected. ECONOMY MAY BE UNSTABLE o Unlike many other countries' economies, the People's Republic of China (the "PRC") government's economic philosophy is based upon a "planned" economy model as opposed to a "free enterprise" or "capitalist" model with moderate government regulation which is the typical model in most developed, Western nations. For more than forty years, the PRC economy has been, and presently continues to be, a socialist economy operating under government controls promulgated under various one-, five- and ten-year plans (collectively, "State Plans") adopted by central Chinese government authorities and implemented, to a large extent, by provincial and local authorities which may set production and development targets. o Since approximately the early 1980s the Chinese government has implemented certain policies that emphasize decentralization of decision-making power and responsibility with respect to matters such as allocation of funds and the regionalization of economic development, reduce the role of government planning and permit some utilization of market forces in the development of its economy. Such economic reform measures or other policies, if continued, may be inconsistent, ineffectual, or discontinued at any time with or without notice, and the Company may not be able to benefit from any or all such reforms or policies. o The success of the Company's activities in the PRC depends on the Company's continued ability to overcome circumstances specifically affecting the industrial sector, including the relatively poor infrastructure, road transportation and communications network and an uncertain legal and regulatory environment. 5 ECONOMIC REFORMS MAY NOT CONTINUE OR IMPACT POSITIVELY ON THE COMPANY; CHANGING BUSINESS ENVIRONMENT o During much of the past twenty years, the PRC has been reforming its economic and political systems in the direction of a more "free market" economy. Many of the reforms are unprecedented for the PRC and can be expected to be refined and readjusted. This refinement and readjustment process may not always have a positive effect on the Company. o The Company's results at times may also be adversely affected by: o changes in political, economic and social conditions in the PRC; o by changes in government policies such as changes in laws and regulations (or their interpretation); o the introduction of additional measures to control inflation; o changes in the rate or method of taxation; o imposition of additional restrictions on currency conversion remittances abroad; o reduction in tariff protection and other import restrictions; o a return to the more centrally-planned economy that existed prior. UNEVEN ECONOMIC GROWTH o The PRC's economy has experienced significant growth in recent years, but that growth has been uneven among various geographic regions and economic sectors. Economic reforms and growth in the PRC have been more successful in certain provinces than in others, and the continuation or increase of such disparities could adversely affect political or social stability. PRC INFLATION o The PRC has recently experienced substantial rates of inflation, although inflation has declined in the most recent years. The PRC government's measures to restrain inflation have had a significant adverse impact on the Company in the past and more measures in this regard or other actions by the PRC government could materially and adversely affect the Company, its business and results of operations. See - "Adverse Impact upon Company of PRC's Credit Restrictions." 6 REGIONAL ECONOMIC PROBLEMS o Most economies in the Far East have suffered from large debts, declining company earnings and economic growth, and significant currency devaluation. The region has also suffered from the effects of the resulting capital flight on financial institutions. These problems may materially adversely affect political and economic conditions in Hong Kong and the PRC. There can be no assurance that such problems will abate or become worse, or continue for a protracted period, or that recovery will occur in the near future, if at all, in which event the Company may likely be materially adversely affected. UNCERTAIN LEGAL SYSTEM AND APPLICATION OF LAWS o The legislative trend in the PRC over the past decade has been to enhance the protection afforded to foreign investment and allow for more active control by foreign parties of foreign invested enterprises. There can be no assurance that this will continue. In addition, as the PRC economy, business and commercial framework and legal system all continue to develop, that development may adversely affect the Company's activities in the PRC or the ability of the Company to enter into Sino-foreign agreements. PRC LEGAL SYSTEM BUSINESS LAWS DEVELOPING o The PRC does not yet possess a comprehensive body of business law or a consolidated body of laws governing foreign investment enterprises. As a result, the enforcement, interpretation and implementation of existing laws, regulations or agreements may be sporadic, inconsistent and subject to considerable discretion. The PRC's judiciary has not had sufficient opportunity to gain experience in enforcing laws that exist, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. As the legal system develops, entities such as the Company may be adversely affected by new laws, changes to existing laws (or interpretations thereof) and preemption of provincial or local laws by national laws. Even when adequate law exists in the PRC, it may not be possible to obtain speedy and equitable enforcement of the law. 7 GOVERNMENT CURRENCY CONTROLS o 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 must be based on rates set by the People's Bank of China ("PBOC"), which rates are set daily based on the previous day's Chinese interbank foreign exchange market rate with reference to current exchange rates on the world financial markets. o The official Rmb to U.S. dollar exchange rate declined from Rmb3.73 to US$1.00 at the beginning of 1989 to Rmb5.81 to US$1.00 at the end of 1993. In 1993, there was significant volatility in the swap rate of Rmb to U.S. dollars, and there was a significant devaluation in the exchange rate on January 1, 1994, to Rmb 8.70 to U.S.$1.00, in connection with the abolition of the official exchange rate and implementation of the new managed floating rate foreign exchange system. o Although the Rmb to U.S. dollar exchange rate has generally been stable since January 1, 1994 and the PRC government has stated its intention to intervene in the future to support the value of the Rmb, there can be no assurance that exchange rates will not again become volatile or that the Rmb will not devalue further against the U.S. dollar or Hong Kong dollar. Exchange rate fluctuations may adversely affect the Company because of foreign currency denominated liabilities, and may materially adversely affect the value, translated into U.S. dollars, of the Company's net fixed assets situated and to be situated in the PRC, earnings and dividends. TURBULENT RELATIONS WITH THE UNITED STATES o PRC's political relations with the United States temporarily deteriorated following the accidental bombing of the Chinese Embassy in Belgrade, Yugoslavia, in May 1999 and again following the collision of a U.S. EP-3 reconnaissance aircraft and a Chinese fighter in international airspace in April 2001. Bilateral relations have gradually recovered from both incidents, though differences between the United States and PRC governments on some political issues continue occasionally to color the relationship. 8 CERTAIN RISKS RELATING TO COMPANY'S BUSINESS. PAST INVESTMENTS o The Company has from time to time IN REAL ESTATE invested in real estate in Hong Kong. Although the Company has derived past profits from some of its investments in Hong Kong real estate, there can be no assurance that the Company will ever derive a profit from any future investments in Hong Kong realty. As a result of the recent transfer of sovereignty over Hong Kong from the United Kingdom to China, any investment in Hong Kong realty will be subject to the risks arising from that transfer, including but not limited to the possible appropriation of realty by the Chinese government. In addition, in Mid-1998 the Government of Hong Kong froze public land sales and dispositions of property through April 1999 in order to stabilize Hong Kong property values which had substantially declined from their peak in 1997. See Item 5. "Operating and Financial Review and Prospects." DEPENDENCE UPON MANAGEMENT o The Company is dependent upon the services of its executive officers, in particular Mr. T.C. Leung, the Chairman of the Company's Board of Directors and its Chief Executive Officer. The business of the Company could be adversely effected by the loss of services of, or a material reduction in the amount of time devoted to the Company by its executive officers. Although the Company is the beneficiary of a "Key Person" life insurance policy in the amount of US$1,000,000 on the life of Mr. Leung, there can be no assurance that such coverage will be sufficient to compensate the Company for the loss of the services of Mr. Leung. See Item 6. "Directors, Senior Management and Employees." ADVERSE IMPACT UPON COMPANY OF PRC'S CREDIT RESTRICTIONS o The Company faces competition from other distributors of substantially similar products and manufacturers themselves, both foreign and Chinese. The Company faces its principal competition from foreign manufacturers and other distributors of their products situated in Hong Kong and the PRC. In 1994, the PRC tightened its credit nationwide and, as a result, the Company believes that purchasers of the 9 products distributed by the Company sought reduced prices. The products distributed by the Company were foreign manufactured and higher priced than Chinese manufactured products. The Company reduced its sales prices and its profit margins to remain competitive. COMPETITION WITH VENDORS o As the Company plans to assemble products of the kind that it presently distributes, the Company may directly compete with certain of its vendors. Any such direct competition may adversely affect its relationship with its vendors. See Item 4. "Information on the Company." DEPENDENCE ON VENDORS; LACK OF LONG TERM AGREEMENTS o The Company distributes supplies manufactured by a number of vendors, including Wallace & Tiernan Pacific Pty. Ltd. ("Wallace"), Hach Company, Inc. ("Hach"), Hioki E.E. Corp. ("Hioki") and ThermoQuest Corporation ("ThermoQuest"), which are the Company's largest suppliers. The Company has only a letter from Hioki appointing the Company as Hioki's sales representative in the PRC, Hong Kong and Macao, its agreements with each of Wallace and ThermoQuest are terminable on thirty days notice by either party prior to the renewal date and the agreement with Hach will expire in February 2003. Although alternative sources of supply exist, there can be no assurance that the termination of the Company's relationship with any of the above or other vendors would not have a short-term adverse effect on the Company's operations due to the Company's dependence on these vendors. CONTROL BY T.C. LEUNG POTEN- TIAL CONFLICT OF INTERESTS o T.C. Leung, the Company's Chairman of the Board and Chief Executive Officer, as a practical matter, is able to nominate and cause the election of all the members of the Company's Board of Directors, control the appointment of its officers and the day-to-day affairs and management of the Company. As a consequence, Mr. Leung can have the Company managed in a manner that would be in his own interests and not in the interests of the other shareholders of the Company. See Item 7. "Major Shareholders and Related Party Transactions" and Item 6. "Directors, Senior Management and Employees." 10 CERTAIN LEGAL CONSEQUENCES OF INCORPORATION IN THE BRITISH VIRGIN ISLANDS; RIGHTS OF SHARE- HOLDERS NOT AS EXTENSIVE AS IN U.S. CORPORATIONS o Principles of British Virgin Islands ("BVI") corporate law relating to such matters as the validity of the Company procedures, the fiduciary duties of management and the rights of the Company's shareholders may differ from those that would apply if the Company were incorporated in a jurisdiction within the United States. o The rights of shareholders under British Virgin Islands law are not as extensive as the rights of shareholders under legislation or judicial precedent in many United States jurisdictions. Under United States law, majority and controlling shareholders generally have certain "fiduciary" responsibilities to the minority shareholders. United States shareholder action must be taken in good faith and actions by controlling shareholders in a United States jurisdiction and executive compensation which are obviously unreasonable may be declared null and void. o The BVI law protecting the interests of the minority shareholders is not as protective in all circumstances as the law protecting minority shareholders in United States jurisdictions. The shareholders of the Company may have more difficulty in protecting their interests in the face of actions by the Company's Board of Directors, and may have more limited rights, than they might have as shareholders of a company incorporated in many United States jurisdictions. ANTI-TAKEOVER PROVISIONS o 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. 11 UNCERTAINTY OF ENFORCING UNITED STATES JUDGMENTS o There is some uncertainty whether BVI courts would enforce judgments of the courts of the United States and of other foreign jurisdictions, or enforce actions brought in the BVI which are based upon the securities laws of the United States. A final monetary judgment obtained in the United States will be treated as a cause of action in itself by the BVI courts so that no retrial of the issues would be necessary, provided that material preconditions are met and the proceedings pursuant to which judgment was obtained were not contrary to the rules of natural justice. o All 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. o All of the Company's assets are and will be located outside of the United States, in Hong Kong and the PRC, and any judgment obtained in the United States may not be enforced in those jurisdictions. Hong Kong courts will not directly enforce against the Company or such persons judgments obtained in the United States. There is also substantial doubt as to the enforceability in the PRC of actions to enforce judgments of the United States' courts arising out of or based on the ownership of the securities offered hereby, including judgments arising out of or based on the civil liability provisions of United States federal or state securities laws or otherwise. See "- Certain Legal Consequences of Incorporation in the British Virgin Islands; Rights of Shareholders not as Extensive as in U.S. Corporations" and "- Uncertainty of Enforcing U.S. Judgments." 12 ITEM 4. INFORMATION ON THE COMPANY ITEM 4A. HISTORY AND DEVELOPMENT OF THE COMPANY The Company was organized under the laws of the British Virgin Islands on September 30, 1996 for the purposes of raising capital and for acquiring all the outstanding capital stock of Euro Tech (Far East) Ltd., a Hong Kong corporation ("Far East"). The Company successfully completed a public offering ("Public Offering") from which the Company received net proceeds of approximately US$1,817,000, in March 1997. Pursuant to and concurrently with the Public Offering, the Company acquired all the issued and outstanding capital stock of Far East, and thereafter Far East became a wholly-owned subsidiary and the primary operational tool of the Company. Far East was established in 1971 and has been in continuous operation since that time. See Item 5. "Operating and Financial Review and Prospects." Far East engages in its core business of distributing various equipment, instruments and supplies used in connection with the treatment, analysis and testing of water and waste water. Prior to its incorporation, the businesses of the Company were engaged in by Far East, which in 1997 was acquired by, and is now a wholly-owned subsidiary of the Company. Far East was established in 1971, under the name of Eurotherm (Far East) Ltd., as a subsidiary of a United Kingdom publicly traded company, Eurotherm Ltd., to market and distribute its parent company's industrial control equipment in Hong Kong and Southeast Asia, and expanded its activities into the PRC in 1973. In the early 1980's, Far East began distributing high-tech equipment manufactured in the United States, Europe and Japan within the PRC, in addition to its distribution of its parent's products. In 1988, the activities of the parent and Far East were separated into Eurotherm International and Far East. In or around 1994, all the capital stock of Far East was purchased by its management, principally T.C. Leung, the Company's Chairman of the Board of Directors and Chief Executive Officer. Far East thereafter changed its name from Eurotherm (Far East) Ltd. to its current name. See Item 7. "Major Shareholders and Related Party Transactions." The Company used portions of the net proceeds of the Public Offering to (a) establish an operation for the assembly of the type of products now distributed by the Company, including certain water-related testing, monitoring and treatment equipment (approximately US$200,000), (b) to expand its marketing efforts by, among other things, opening additional regional sales offices in the PRC (approximately US$200,000), (c) purchase equipment (approximately US$135,000), (d) establish a subsidiary to develop and operate a B2B website (approximately US$331,000), (e) repurchase securities from the underwriter of the Company's Public Offering (approximately US$105,000), (f) pay expenses incurred in seeking acquisition candidates and hiring an agent in the United States (approximately US$170,000), (g) development costs of an Infrared Photometric Oil Analyzer (approximately US$60,000), and (h) repurchase its own Ordinary Shares in the open market (approximately US$237,000). ITEM 4B. BUSINESS OVERVIEW The Company is primarily a distributor of a wide range of advanced water treatment equipment (including chlorination equipment), laboratory instruments, analyzers, test kits and 13 related supplies. The Company acts as an exclusive and non-exclusive distributor for well-known manufacturers of such equipment, primarily to commercial customers and governmental agencies or instrumentalities in Hong Kong and the PRC. The Company distributes products to more than 400 regular customers, including the Hong Kong Environmental Protection Department, the Beijing Hydrology station, China Light & Power Co., Ltd., Hong Kong Electric Co., Ltd., and the Kowloon-Canton Railway Corporation, China's National Environmental Protection Agency, a joint venture between the China Great Wall Industry I/E Corp. and Austria's Aqua Engineering to construct one of Beijing's water treatment plants, and to subdistributors located in Hong Kong, the PRC and Macao. These products are manufactured by a substantial number of major American, European and Japanese corporations, including Wallace, Hach, Hioki and ThermoQuest, which are the Company's largest suppliers, with purchases from them accounting for approximately 7%, 23%, 12% and 7%, respectively, of the Company's sales during the Company's fiscal year ended December 31, 2000 ("Fiscal 2000") and 5%, 22%, 11% and 9%, respectively, during its fiscal year ended December 31, 2001 ("Fiscal 2001"). The Company distributes products through its Hong Kong headquarters, its regional sales offices located in Beijing, Shanghai, Guangzhou, Chongqing, Xian and Shenyang, and through non-exclusive arrangements with independent sub-distributors located in Hong Kong, the PRC and Macao. The Company believes that the continuing growth of industrial activity in particular, and overall business activity in general, in the PRC over the last five years has produced a strong and increasing demand for its products in the PRC. The Company further believes that in the near future the need and demand for the products it distributes will grow as a result of increased regulations governing the environment and industrial pollution output, projected growing demands of the PRC's population for clean water and a healthier and safer environment, and the potential for the contamination or depletion of existing clean fresh water sources. The Company believes that by assembling the products it distributes, it may realize increased gross profit margins and greater revenues and net income than if it remained only a distributor of such products. Similarly, the Company believes that by expanding its regional sales efforts in the PRC, it may realize higher revenues and net income. The Company is continually identifying manufacturing plants and engineering companies which would make suitable acquisition targets. The Company contemplates, but as to which no assurance can be made, that such entities, if acquired, would assist in the assembly of its products and offer customer turnkey projects and solutions. On January 31, 2002, the Company acquired a 30% equity interest in Pact Asia Pacific Ltd. and Yixing Pact Environment Company Ltd. ("Pact") for approximately US$288,000. Pact is a privately owned engineering firm situated in Shanghai that specializes in the design, manufacture and operation of water and waste water treatment plants in several industries situated in China. The Company believes that Pact's business is complementary to the Company's business as the Company continues to focus on sales and marketing of products of others. The Company believes that by aligning itself with an engineering firm, such as Pact, it may be able to gain a competitive advantage by offering customers and potential customers not only hardware but solutions to engineering problems as well. Also, the Company anticipates that by 14 securing an equity stake in Pact, its ability to become a supplier to Pact is enhanced. It took the Company approximately ten months to complete the acquisition of an equity stake in Pact, during which it investigated Pact, its finances, weighed tax consequences and obtained approval from governmental authorities in China. The Company is now seeking to make a similar acquisition of an engineering company specializing in air pollution control or other complementary environmental protection fields. There can be no assurance that the Company will locate any such additional acquisition candidate, successfully complete such additional acquisition, Pact or any additional 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 Pact or any other acquisition candidates. PRODUCTS, SERVICES AND CUSTOMERS Laboratory instruments, analyzers and test kits are used to analyze the chemical content and ascertain the level of impurities or other contaminants in water. The Company distributes analytical re-agents and chemicals to support testing systems of laboratory and portable instruments, process analyzers and portable test kits and assist in the analysis process. The Company offers a wide variety of test kits to test water quality. The Company believes that these portable test kits are easy to use and preadapted for rugged field use. These test kits are used to monitor drinking water distribution systems. Laboratory and portable instruments generally consist of analytical instruments including but not limited to the following: spectrophotometers, colorimeters, turbidimeters, ion-selective electrodes, chemical oxygen demand apparati, digestion apparati, and precision re-agent dispensing devices which are used to test and monitor impurities and contaminants in water systems. See "Glossary." The Company also distributes continuous-reading process analyzers, process turbidimeters, pH controllers and analyzer accessories. These products are generally used to monitor and control drinking water quality to ensure that water treatment procedures comply with regulatory standards. See "Glossary." SCIENTIFIC INSTRUMENTS. The Company distributes analytical instruments, environmental monitoring instruments and general purpose laboratory instruments. Analytical instruments include, but are not limited to, mass spectrometers, flow injector analyzers and atomic spectrometers. Environmental monitoring instruments include both air and water quality monitoring instruments. Air quality monitoring instruments are generally divided into those which monitor ambient (i.e., atmospheric) air, and those which monitor pollution sources. Additionally, the Company offers general purpose laboratory instruments including a variety of water quality monitoring and analysis equipment, such as continuous reading process analyzers, process turbidimeters, pH controllers, and test kits for monitoring chemical content in water (i.e., chlorine, fluorides, etc.). See "Glossary." 15 Customers for the analytical instruments include government agencies, academic and research institutions and major laboratories. The Company also distributes products to beverage producers and restaurants, including water quality test kits to more than twelve bottling plants of a well known United States softdrink producer, which are located in the PRC; total organic carbon analyzers to the People's Liberation Army (the PRC armed forces), water quality monitoring instruments to well known United States fast food franchisor's restaurants located in Hong Kong and the PRC, and to well known United States and European beer producers bottling plants located in Wuhan, PRC. Each such soda producer, restaurant and beer bottler accounts for less than one percent of the Company's sales and the People's Liberation Army accounts for approximately one percent of the Company's sales. Customers for air and water quality monitoring instruments also include government agencies such as the Hong Kong Environmental Protection Department, which uses a Company distributed water quality monitoring system to monitor the water quality of Hong Kong's Victoria Harbor, more than ten water treatment plants located in the PRC (including sites at Beijing, Tianjin, Guangzhou and Wuhan), and the Beijing Environmental Monitoring Centre. The Company is also one of two distributors supplying continuous water monitoring systems to Beijing's Hydrology Station. The Company derived approximately 49.8%, 55.2% and 56.1% of its sales from the sale of Scientific Instruments during Fiscal 1999, Fiscal 2000 and Fiscal 2001, respectively. PROCESS CONTROL AND ENGINEERING PRODUCTS. The Company provides process control systems specifically designed for the industrial needs of clients including sensors, temperature gauges, pressure gauges, flow meters, valves, temperature and pressure transmitters and control devices, temperature and pressure calibrators, moisture, power, energy and harmonic analyzers. Chlorination disinfection systems are also distributed by Far East in conjunction with water treatment, sewage discharge and swimming pool water treatment. Customers for the foregoing distributed products include government water supply agencies, water treatment facilities, power and electric companies, petrochemical plants and instrument manufacturers. For example, the Company distributes Chlorination disinfection systems to Hong Kong's new Chek Lap Kok airport and its environs. The Company derived approximately 25.5%, 21.0% and 17.7% of its sales from the sale of Process Control and Engineering Products during Fiscal 1999, Fiscal 2000 and Fiscal 2001, respectively. OTHER PRODUCTS. The Company distributes general testing and telecommunications testing equipment to industries, utilities, educational institutions and telecommunications companies. The Company also distributes multi-channel digital and analogue recorders and similar products. Customers for telecommunications products include government departments and telephone companies and utilities. The Company derived approximately 12.8%, 13.4% and 11.5% of its sales from the sale of these Other Products during Fiscal 1999, Fiscal 2000 and Fiscal 2001, respectively. 16 SPECIAL PROJECTS AND TECHNICAL SUPPORT. In conjunction with the distribution of computer hardware and software, the Company provides computer programming hardware and software to government agencies, industrial plants and beverage producers. The Company's technical support staff provides customers with maintenance, installation assistance, and calibration services, and assists sales personnel in giving technical advice to and performing product demonstrations for customers. The Company derived approximately 11.9%, 10.4% and 14.7% of its sales from Special Projects and Technical Support Operations during Fiscal 1999, Fiscal 2000 and Fiscal 2001, respectively. CUSTOMERS. At the end of Fiscal 2001, the Company had more than 400 regular customers, including sub-distributors, located in Hong Kong, the PRC and Macao. During Fiscal 2001, no single customer accounted for more than 5% of the Company's sales, and the Company does not believe that any single customer or sub-distributor is material to its operations. PROTOTYPE INFRARED PHOTOMETRIC OIL ANALYZER In May 2000, the Company signed an agreement with the Shanghai Institute Optics Instrument to jointly develop an Infrared Photometric Oil Analyzer by infrared absorption method. Potential prototypes of the analyzer have been completed. Potential customers, who are evaluating the analyzer, have advised that the prototypes have been received. This analyzer is intended to detect concentrations of petroleum, animal and vegetable oils in surface water, underground water, municipal and industrial wastewater. Potential customers are environmental water monitoring stations, water purification and waste treatment facilities, underground water and harbor water monitoring stations located in China. Our perceived advantage of the analyzer is that the sample under that test is measured by three different wavelengths simultaneously thus giving more accurate readings against one fixed wavelength used by most of our potential competitors' products. There can be no assurance that any such analyzer will: be fully developed past the prototype stage; become a commercially viable product; and not result in losses to the Company. 17 SOURCES OF SUPPLY The Company has exclusivity agreements covering specific geographic areas with many of its suppliers for certain products. Such agreements do not encompass all products distributed by the Company and all market areas served by the Company. The Company's agreement with Finnigan for most products does not include the PRC and similarly, the Company's agreement with Wallace is limited to Hong Kong. The Company has written confirmation from Hach that the Company is Hach's representative in the PRC, Hong Kong and Macao authorized to supply, install and commission Hach's products and accessories. The Company also has exclusive distribution agreements with Royce Instrument Corporation for certain of that manufacturer's products in Hong Kong and the PRC. The Company distributes products manufactured by a number of vendors, including Wallace, Hach, Hioki and Finnigan, which are the Company's primary suppliers, with purchases from them accounting for approximately 7%, 23%, 12% and 7%, respectively, of the Company's sales during Fiscal 2000 and 5%, 22%, 11% and 9%, respectively, of the Company's sales during Fiscal 2001. The Company has exclusivity agreements for specified geographic areas with many of its suppliers for certain products, including Wallace and Finnigan. Those agreements do not encompass all products distributed by the Company or all of the market areas serviced by the Company. The Company's agreement with Finnigan for most products does not include the PRC, while the Company's agreement with Wallace is limited to Hong Kong. In addition, some of these agreements are memorialized not as formal contracts but rather through other acknowledgements or correspondence which may contain a vague, if any, description of the terms and conditions of such agreement or arrangement, and therefore may be unenforceable. The Company has written confirmation from Hach that the Company is Hach's representative in the PRC, Hong Kong and Macao authorized to supply, install and commission Hach's products and accessories. The Company has only a letter from Hioki appointing the Company as Hioki's sales representative in the PRC, Hong Kong and Macao. The Company's agreement with Wallace is terminable by either party on thirty days notice prior to its annual renewal date. The Company's agreement with Finnigan is terminable on ninety days notice by either party. The Company's agreement with Hach expires in February 2003. Although alternative sources of supply exist, there can be no assurance that the termination of the Company's relationship with any of the above or other vendors would not have a short-term adverse effect on operations. EXPANSION The Company continues to seek: (1) potential acquisitions of manufacturing plants and engineering companies for proposed product-assembly operation, and (2) the development of the Infra and Photometic Oil Analyzer. Also, the Company recently opened "pilot" shops in Shanghai and Beijing and plans to open additional shops over the next 24 months. (See " - Sales and Marketing.") In addition, although the Company has disposed of certain subsidiaries in transactions with affiliates and disposed of certain realty held for investment purposes, in an effort to streamline its structure and concentrate on its core business, in the future the Company may establish subsidiaries or divisions to distribute products that are unrelated to its current core product lines, and it may make future investments in real estate. 18 REGULATORY ENVIRONMENT Concerns about and awareness of pollution problems and environmental issues have grown at all levels of PRC government as the PRC has experienced economic growth. Environmental protection laws and strict regulations have been enacted and are buttressed by increased budget allocations for environmental regulation, monitoring and enforcement. The PRC's primary environmental protection agency is the State Environmental Protection Agency (SEPA), under which there are Environment Protection Bureaus in each city and county. According to the Company, under bureau management, there are two environment monitoring systems: one system consists of over 2,200 monitoring stations to collect and analyze the environmental data of each city and county; another system consists of over 2,500 stations to monitor specific industrial districts or factories which have been identified as major pollution sources due to their non-compliance with environmental regulations. SEPA has recently identified 100,000 enterprises as new major pollution sources and the number of monitoring stations for industrial firms is anticipated to increase to 400,000 in the next five years, according to government estimates. The Company has supplied water and air quality monitoring and analytic instruments to these monitoring stations for several years. Despite this anticipated growth in monitoring stations, there can be no assurance that the agencies will continue to use the Company's products for these purposes, that other market competitors will not enter the market with superior products, distribution systems or more competitive prices. See " - Competition." COMPETITION The Company faces competition from other distributors of substantially similar products as well as the manufacturers of such products, and in both foreign and Chinese markets. The Company faces its principal competition from manufacturers and other distributors of its core products located in Hong Kong and the PRC. Moreover, the Company has begun to implement plans to assemble products of the kind that it presently distributes (see " - Product Assembly Operations.") Should an assembly operation be developed to the stage where products are presented to the market, the Company may be in direct competition with certain of its vendors. There can be no assurance that the existence of this direct competition will not impair the Company's ability or such competitor's willingness to continue providing other products for continued distribution by the Company, and that such a development would not materially adversely affect the Company's core business. In 1994, the PRC tightened its credit nationwide and, as a result, the Company believes that purchasers of the products distributed by the Company sought reduced prices. The products distributed by the Company were foreign-manufactured and higher-priced than products manufactured in the PRC. As a result, the Company reduced its sales prices to remain competitive, with a corresponding negative impact upon profit margins. During Fiscal 1999, Fiscal 2000 and Fiscal 2001, the Company's profit margins were approximately 24.5%, 23.6% and 21.8%, respectively. The Company believes that it competes with the PRC manufacturers on the basis of quality and technology. The Company believes it offers foreign-manufactured products which are of higher quality and use more advanced technology than products manufactured in the PRC. The Company believes that it competes with foreign manufacturers and other distributors of their products on the basis of the Company's more extensive distribution network and an established reputation. 19 B2B WEBSITE B2B website. In or about March 2000, the Company established Chinah2o.com.Ltd., a Hong Kong corporation. Through Chinah2o.com.Ltd., the Company launched a bilingual Business-to-Business ("B2B") internet platform in August 2000. The website is located at (http://www.chinah2o.com). The B2B website is directed at environmental businesses in China. The purpose of the B2B website is to connect manufacturers, distributors and suppliers of environmental protection equipment and related consultants and engineering firms in the West with potential clients in China (i.e., water, wastewater treatment plants, environmental protection bureaus, environmental monitoring stations, and related industries). The website provides environmental news, directories of western suppliers, potential clients in China, advertisement space and business opportunities. The business and other activities generated by Chinah2o.com.Ltd. have had a synergistic effect with those of the Company indirectly by feeding market information, sales leads and tender information to the Company. PRODUCT ASSEMBLY OPERATIONS The Company, through its PRC Corporation, Shanghai Euro Tech Limited, plans to assemble certain products which the Company currently distributes, including certain water-related testing, monitoring and treatment equipment. The Company has obtained a one-year lease expiring in January 2003 to a manufacturing plant and has commenced assembly operations for water and waste water test instruments after receiving PRC government approvals in December 1999. It is contemplated that the Company will import components, assemble the finished products and then distribute the products through its distribution network. The Company believes that by establishing product assembly operations in the PRC and expanding the number of its regional sales offices in the PRC, it will not only increase revenues by expanding its customer base and increasing distribution capabilities, but also net income since the Company believes it will enjoy higher overall profit margins by assembling certain products which it now distributes rather than by only purchasing the finished product from vendors. It is planned that the Company's obligations pursuant to the Agreement with the Shanghai Institute will be met through the Pudong Shanghai Assembly Plant. The Infrared Photometric Oil Analyzer, together with the two types of specialized reagents have been the best customer accepted products from this plant. This plant also manufactures reagents for chemical oxygen demand and chlorine and silica measurement. SALES AND MARKETING The Company distributes products through its principal office located in Hong Kong and its regional PRC offices located in Beijing, Shanghai, Guangzhou, Chongqing, Xian and Shenyang. The Company has a marketing and sales force of 44 people who are paid a salary plus commission based on sales. The Company's offices also coordinate the sales efforts of approximately fifteen other companies located in the PRC which act as sub-distributors. These sub-distributors are paid a commission on sales they generated, and are engaged on a non-exclusive basis to distribute the products of other distributors. Each of the fifteen sub-distributors accounted for less than two percent of the Company's sales during Fiscal 2000 and Fiscal 2001. 20 In April of 2001, the Company opened a "pilot" shop in Shanghai to sell inventoried water and other electronics testing equipment to potential customers. This was followed by a second shop in Beijing in the last quarter of 2001 and third and fourth shops in Chongqing and Guangzhou in March and June of 2002, respectively. In view of China's accession to the WTO, and as a result of favorable customer reaction to the shops in Shanghai and Beijing, Euro Tech is planning to open four more shops over the next 24 months in the cities of Xian, Dalian, Wuhan and Shenyang. The Company plans to continue financing each of the shops with its own operational cash flow and not use outside financing. The Company has found its four existing shops to be useful as demonstration locations easily accessed by local customers who can pay in local currency while the Company can make "off the shelf" sales and move its inventory more easily. All of the foregoing are perceived by the Company to have had a positive impact on its business reputation while reducing the Company's dependency on sub-distributors who may not be loyal to the Company and distribute products of its competitors. As foreign entities are not generally permitted to own these facilities, the Company's four shops are actually owned by non-officer-director, employees of the Company with the shops being financed by the Company through non-fixed term loans bearing a nominal rate of interest. There can be no assurances that; these shops will prove to be economically viable, the Company will not sustain losses in connection with the founding costs of opening and running the shops, hiring personnel and similar expenses; the shops will result in any significant revenues or profits to the Company. Also, similar shops may be established by its competitors and/or third parties. ITEM 4C. ORGANIZATIONAL STRUCTURE The Company presently wholly-owns Euro Tech (Far East) Limited ("Far East") which, in turn, wholly owns the following corporations: o Euro Tech Trading (Shanghai) Limited - a People's Republic of China corporation o Euro Tech (China) Limited - a Hong Kong corporation o Chinah2o.com Limited - a Hong Kong corporation o Shanghai Euro Tech Limited - a People's Republic of China corporation The Company's wholly-owned subsidiary and primary operational arm is Far East, which it acquired in March 1997. Far East has engaged in the distribution of various industrial control equipment, which continues to be the core business of the Company, since its inception in 1971. ITEM 4D. PROPERTY, PLANT AND EQUIPMENT The Company maintains an executive office at 18/F Gee Chang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong. The Company occupies approximately 12,800 square feet of office and warehouse storage space under a lease expiring in May 2003 for monthly rental payments of approximately US$9,160. The warehouse storage space is used to hold products for distribution to its customers via common carriers. In August 1995, the Company purchased approximately 1,200 square foot of space in a building in Hong Kong. The Company financed the purchase and as of December 31, 2001, had an outstanding mortgage of approximately US$90,000 in principal, bearing interest at the best lending 21 rate offered by the Company's bank plus 1.75%, which mortgage is repayable in eighty-four monthly installments through approximately November 2002. This property is now used as Chinah2o.com Ltd.'s office. The Company also maintains regional sales offices within the PRC in the cities of Beijing, Shanghai, Guangzhou, Chongqing, Xian and Shenyang. The Beijing and Shanghai sales offices are owned by the Company. The Beijing sales office is situated on property purchased in November 1994. The Shanghai sales office is situated on property purchased in August 1995. The Guangzhou sales office is rented pursuant to a lease expiring in July 2002 for approximately US$790 per month. The Chongqing sales office is rented pursuant to a lease expiring in May 2003 for approximately US$630 per month. The Xian sales office is rented pursuant to a lease expiring in March 2004 for approximately US$200 per month. The Shenyang office is rented pursuant to a lease expiring in March 2003 for approximately US$370 per month. Euro Tech Trading's Shanghai's office is rented pursuant to a lease expiring in April 2003 for approximately US$250 per month. Euro Tech's Shanghai office is rented pursuant to a lease expiring in January 2003 for approximately US$1,050 per month. The Company's registered office in the British Virgin Islands is located at TrustNet Chambers, P.O. Box 3444, Road Town, Tortola, British Virgin Islands and its telephone number is (809) 494-5296. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS ITEM 5A. OPERATING RESULTS BACKGROUND - POLITICAL AND ECONOMIC CONDITIONS IN HONG KONG AND THE PEOPLE'S REPUBLIC OF CHINA The Company's operations are located almost entirely within, and revenues are almost entirely generated from Hong Kong and the PRC. In Fiscal 2001, approximately 72% and 26% of the Company's sales were made to customers located in the PRC and Hong Kong, respectively. During Fiscal 2000, approximately 68% and 29% of the Company's sales were made to customers 22 located in the PRC and Hong Kong, respectively. During the Company's fiscal year ended December 31, 1999 ("Fiscal 1999"), approximately 68% and 30% of the Company's sales were made to customers located in the PRC and Hong Kong, respectively. Sales to customers situated in Macao and elsewhere in Fiscal 1999, Fiscal 2000 and Fiscal 2001 were nominal. This makes the Company particularly susceptible to changes in the political and economic climate of either Hong Kong or the PRC. HONG KONG. Hong Kong has been one of the prime centers for commercial activity and economic development recently in Southeast Asia. On July 1, 1997, sovereignty over Hong Kong was transferred from the United Kingdom to the PRC. As provided in the Sino-British Joint Declaration and the Basic Law, the Hong Kong SAR is provided a high degree of autonomy except in foreign and defense affairs. The Basic Law provides that the Hong Kong SAR is to have its own legislature, legal and judicial system and full economic autonomy for 50 years after the transfer of sovereignty. Based on the current political conditions and the Company's understanding of the Basic Law, the Company does not believe that the transfer of sovereignty over Hong Kong has had or will have an adverse impact on its financial and operating environment. Although the Chinese government has pledged to maintain the economic and political autonomy of Hong Kong over its internal affairs, there is no assurance that such pledge will continue to be honored if there are changes in the Chinese political or economic climate. See Item 3D. "Key Information - Risk Factors." PRC. The PRC has been a socialist state since 1949. For more than forty years, the PRC's economy has been, and presently continues to be, a socialist economy operating under government controls promulgated under various one-, five- and ten-year plans (collectively, "State Plans") adopted by central Chinese government authorities and implemented, to a large extent, by provincial and local authorities which may set production and development targets. However, since approximately the early 1980s, the PRC's national government has undertaken certain reforms to permit greater provincial and local economic autonomy and private economic activities. Any change in political or economic conditions may substantially adversely affect these reform initiatives and, in turn, the Company. See Item 3D. "Key Information - Risk Factors." RESULTS FROM OPERATIONS The following operating and financial review should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this Annual Report. All financial data referred to in the following discussion has been prepared in accordance with United States GAAP. The following table presents selected statement of operations data expressed in thousand US$ and as a percentage of net sales for the Company's Fiscal 1997, Fiscal 1998, Fiscal 1999, Fiscal 2000 and Fiscal 2001 years.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- Net Sales 12,510 100.0% 12,757 100.0% 13,107 100.0% 15,010 100.0% 19,685 100.0% Cost of goods sold 9,399 75.1% 9,662 75.7% 9,896 75.5% 11,467 76.4% 15,396 78.2% Gross Profit 3,111 24.9% 3,095 24.3% 3,211 24.5% 3,453 23.6% 4,289 21.8% Selling and administrative expenses 2,812 22.5% 2,924 22.9% 2,946 22.5% 3,301 22.0% 3,734 19.0%
23
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- Income before income tax 500 4.0% 326 2.6% 417 3.2% 452 3.0% 747 3.8% Income tax provision 62 0.5% 71 0.6% 78 0.6% 94 0.6% 163 0.8% Net income 438 3.5% 255 2.0% 339 2.6% 358 2.4% 584 3.0% ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
RESULTS OF OPERATIONS FISCAL YEAR ENDED DECEMBER 31, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2000 NET SALES; GROSS PROFIT AND COST OF GOODS SOLD. Net sales increased by approximately US$4,675,000 or 31.1% to approximately US$19,685,000 in Fiscal 2001 from approximately US$15,010,000 in the Company's year ended December 31, 2000 ("Fiscal 2000"). The increase was primarily due to the diversification and strengthening of the Company's distribution network. Gross profits increased by approximately US$746,000 or 21.1% to approximately US$4,289,000 for Fiscal 2001 as compared to approximately US$3,543,000 for Fiscal 2000. This increase was attributable to the increase in net sales in Fiscal 2001. During Fiscal 2001, the Company's cost of goods sold was approximately US$15,396,000, or 78.2% of sales, in comparison to approximately US$11,467,000, or 76.4% of net sales for Fiscal 2000. Cost of goods sold expressed as a percentage of net sales increased by 1.8% in Fiscal 2001 as compared with Fiscal 2000. The gross profit margin decrease and the percentage increase in cost of goods sold were attributed to the fact that the Company had reduced the selling prices to compete with other companies during Fiscal 2001 as a result of the Company placing tighter controls over its expenses. SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses were approximately US$3,734,000 in Fiscal 2001, an increase of approximately US$433,000 or 13.1% from approximately US$3,301,000 in Fiscal 2000. The increase was primarily due to the general increase in expenses related to the increase in net sales. However, measured as a percentage of net sales, selling and administrative actually declined by 3% from 22% in Fiscal 2000 to 19% in Fiscal 2001. INTEREST INCOME. Net interest income decreased by approximately US$47,000 or 41.6% to approximately US$66,000 in Fiscal 2001 from approximately US$113,000 for Fiscal 2000. Interest income decreased by approximately US$57,000 or 41.3% to approximately US$81,000 in Fiscal 2001 from approximately US$138,000 in Fiscal 2000. The decrease was primarily due to the general decrease in the interest rate from bank deposits during the year. Interest expense decreased by approximately US$10,000 or 40.0% to approximately US$15,000 in Fiscal 2001 from approximately US$25,000 for Fiscal 2000. The decrease was a result of the Company's reduced utilization of credit facilities under its banking arrangements. OTHER INCOME. Other income increased by approximately US$29,000 or 29.9% to approximately US$126,000 in Fiscal 2001 from approximately US$97,000 in Fiscal 2000. The 24 increase in other income was principally due to increase in exchange gains of approximately US$24,000 and rental income of approximately US$8,000. PROVISION FOR PROFIT TAX. Provisions for taxes increased by US$69,000 to approximately US$163,000 in Fiscal 2001 from approximately US$94,000 in Fiscal 2000. The increase was due primarily to an increase in operating profit. The increase in effective tax rate from 20.8% in Fiscal 2000 to 21.8% in Fiscal 2001 was due to the net operating loss of some subsidiaries for which no benefit was realized. NET INCOME. Income from continuing operations increased by approximately US$226,000 or 63.1% to approximately US$584,000 in Fiscal 2001 from approximately US$358,000 in Fiscal 2000. The increase in net income was primarily due to the increase in net sales and the increase in the gross margin. FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 1999 NET SALES; GROSS PROFIT AND COST OF GOODS SOLD. Net sales increased by approximately US$1,903,000 or 14.5% to approximately US$15,010,000 in Fiscal 2000 from approximately US$13,107,000 in the Company's year ended December 31, 1999 ("Fiscal 1999"). The increase was primarily due to improvement of the economy in the PRC. Gross profits increased by approximately US$332,000 or 10.3% to approximately US$3,543,000 for Fiscal 2000 as compared to approximately US$3,211,000 for Fiscal 1999. This increase was attributable to the increase in net sales in Fiscal 2000. During Fiscal 2000, the Company's cost of goods sold was approximately US$11,467,000, or 76.4% of sales, in comparison to approximately US$9,896,000 or 75.5% of net sales for Fiscal 1999. Cost of goods sold expressed as a percentage of net sales increased by 0.9% in Fiscal 2000 as compared with Fiscal 1999. The gross profit margin decreased and the percentage increase in cost of goods sold were attributed to the fact that the Company had less engineering assignments during Fiscal 2000. SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses were approximately US$3,301,000 in Fiscal 2000, an increase of approximately US$355,000 or 12.1% from approximately US$2,946,000 in Fiscal 1999. The increase was primarily due to (i) the general increase in expenses related to the increase in net sales, and (ii) additional expenses for the two new subsidiary companies, i.e. Shanghai Euro Tech Limited and Chinah2o.com Limited. INTEREST INCOME. Net interest income increased by approximately US$28,000 or 32.9% to approximately US$113,000 in Fiscal 2000 from approximately US$85,000 for Fiscal 1999. Interest income increased by approximately US$24,000 or 21.1% to approximately US$138,000 in Fiscal 2000 from approximately US$114,000 in Fiscal 1999. The increase was primarily due to the general increase in the interest rate from bank deposits and increase in bank deposits during the year. Interest expense decreased by approximately US$4,000 or 13.8% to approximately US$25,000 in Fiscal 2000 from approximately US$29,000 for Fiscal 1999. The decrease was a result of the Company's reduced utilization of credit facilities under its banking arrangements. 25 OTHER INCOME. Other income increased by approximately US$30,000 or 44.8% to approximately US$97,000 in Fiscal 2000 from approximately US$67,000 in Fiscal 1999. The increase in other income was principally due to increase in exchange gains. PROVISION FOR PROFIT TAX. Provisions for taxes increased by US$16,000 to approximately US$94,000 in Fiscal 2000 from approximately US$78,000 in Fiscal 1999. The increase was due primarily to an increase in operating profit. The increase in effective tax rate was due to the net operating loss of some subsidiaries for which no benefit was realized. NET INCOME. Net income increased by approximately US$19,000 or 5.6% to approximately US$358,000 in Fiscal 2000 from approximately US$339,000 in Fiscal 1999. The increase in net income was primarily due to the increase in net sales and the increase in the gross margin. However, the increase in net income was substantially offset by the operating loss of some newly set up subsidiaries. 26 ITEM 5B. LIQUIDITY AND CAPITAL RESOURCES The Company has primarily used its cash to fund accounts receivable, inventories, and capital expenditures including purchases of property, office furniture and equipment, computers and calibration equipment. The Company has historically met its cash requirements from cash flows from operations, short-term borrowings under bank lines of credit, and long-term mortgage bank loans. The Company expects, but as to which no assurance may be made, that its present cash reserves, cash from operations and existing available bank credit facilities would be sufficient to fund its capital expenditures. Working capital at the end of Fiscal 2000 and Fiscal 2001 was approximately US$3,686,000 and US$4,123,000, respectively. The Company generated net cash of US$928,000 and US$675,000 from operating activities in Fiscal 1999 and Fiscal 2000, respectively, on net income of US$339,000 and US$358,000 in Fiscal 1999 and Fiscal 2000, respectively. From its net income in Fiscal 2001 of approximately US$584,000, the Company used approximately US$60,000 in net cash in its operating activities. At the end of Fiscal 1999, Fiscal 2000 and Fiscal 2001, the Company's accounts receivable were approximately US$2,826,000, US$2,497,000 and US$2,717,000, respectively. The Company used approximately US$217,000, US$313,000 and US$0 for investing activities in Fiscal 1999, Fiscal 2000 and Fiscal 2001, respectively. Cash used in investing activities in Fiscal 2000 was mainly used to purchase property, facilities and equipment. The Company used US$65,000, US$93,000 and US$317,000 in Fiscal 1999, Fiscal 2000 and Fiscal 2001 for financing activities, respectively. The Company had various banking facilities for overdraft, import and export credits and foreign exchange contracts from which the Company can access up to approximately US$3,761,000, and of which approximately US$2,952,000 remained unused as at December 31, 2001. The aforementioned available credit facilities were obtained on the conditions that, among other things, the Company mortgage its properties as security for the credit facilities, not to create a charge or lien on its other assets in favor of other parties without such bank's consent, and the Company maintaining a certain level 27 of net worth. The Company also has a bank loan from the Hong Kong and Shanghai Banking Corporation to finance the purchase of its properties with outstanding indebtedness at December 31, 2001 of approximately US$90,000, which loan bears interest at the best lending rate offered by the Company's bank plus 1.75% and is repayable in monthly installments through December 2002. Cash decreased from approximately US$3,963,000 at the end of Fiscal 2000 to approximately US$3,551,000 at the end of Fiscal 2001. The principal reasons for the decrease in cash were (i) cash used in operations; (ii) increase in accounts receivable; (iii) increase in inventories and accounts payable and decrease in bills payable; and (iv) purchase of treasury stock. The Company plans to use cash on hand for, among other purposes, to acquire a manufacturing plant and/or engineering company in Hong Kong and/or the PRC. The Company's net accounts receivable increased from approximately US$2,497,000 at December 31, 2000 to approximately US$2,717,000 at December 31, 2001. The increase is attributed to the Company's net sales increase during Fiscal 2001. The Company's inventory increased from approximately US$945,000 at the end of Fiscal 2000 to approximately US$2,003,000 at the end of Fiscal 2001. The higher inventory level at the end of Fiscal 2001 was principally due to (i) increase in inventory necessary to stock our retail shops to meet our customer's demands for "off-the-shelf" purchases; (ii) production inventory at our Pudong assembly plant; and (iii) goods received near year end but not delivered to customers for several reasons, including, but not limited to, multi-component orders awaiting shipment and receipt of additional components, and orders received without a corresponding letter of credit or other payment provisions having been received by the Company. The Company's outstanding short-term bank borrowings consisted of import and export bank loans. Short-term borrowings were US$0 at the end of both Fiscal 2000 and Fiscal 2001. As of December 31, 2001, the Company had various banking facilities from which total available credit was approximately US$3,761,000, of which approximately US$2,952,000 remained unused as at such date. The Company's long-term bank loans are secured by certain of the Company's realty, and bear interest at 6.875% per annum. At December 31, 2001, the Company had outstanding long-term bank loans in the amount of approximately US$90,000. The Company acquired a 30% equity interest in Pact for approximately US$288,000. The Company's capital expenditures were approximately US$0 in Fiscal 2001, a decrease from expenditures of approximately US$313,000 in Fiscal 2000. Capital expenditures in 2000 were incurred primarily in connection with the purchase of office equipment, furniture and fixtures. A source of funds for these capital expenditures included net proceeds from the Public Offering. The Company continues to seek targets for acquisition, such as facilities for assembly operations or engineering companies. If such acquisitions are indeed made, the Company may expect to incur significantly larger capital expenditures, for which the Company presently intends, but as to which no assurance can be made, to use existing cash reserves, cash from operations and available bank credit facilities to fund such capital expenditures. 28
Contractual Obligations Total Less than 1 1-3 years 4-5 years After 5 year years - ------------------------------------------------------------------------------------------------------- Long-Term Debt US$ 90,000 US$ 90,000 - - - Operating Leases US$201,000 US$136,000 US$65,000 - - Total Contractual Cash Obligations US$291,000 US$226,000 US$65,000 - -
INFLATION The annual rate of inflation in the PRC has declined significantly in recent years. In 1999, 2000 and 2001, the rate of inflation was approximately - -1.4%, 0.4% and .7%, respectively, in comparison to the preceding years, respectively. The Company believes this declining inflation rate has had a positive effect on its results from operations. The Company believes, although no assurance can be given as to the correctness of the Company's belief, that credit restrictions will be gradually lifted, and that as a result Far East will be able to increase prices in the market for its products and thus realize increased profit margins. SHARE REPURCHASE PROGRAM In December 2000, the Company approved a program to repurchase up to 162,500 shares (as adjusted for the Company's August 2001 30% forward stock-split effected in the form of a dividend) of its issued and outstanding stock by December 31, 2001. Under this program, the Company has the ability to purchase the stock in the open market or through negotiated or block transactions from time to time based on market and business conditions until the end of 2001. 162,215 of the Company's Ordinary Shares have been purchased by the Company under this program. CRITICAL ACCOUNTING POLICIES REVENUE RECOGNITION The Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition" provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. SAB No. 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Based on the above criteria our revenue is recognized when product has been shipped and title to the product has transferred to the customer. Title of the product may transfer to the end customer or distributor when shipped or when received by the customer based on a specific agreement. INVENTORY VALUATION We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional write-downs may be required. DEFERRED TAXES As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes and tax bases of assets and liabilities in each of the jurisdictions in which we operate. This process involves us estimating our current tax exposure together with assessing 29 temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is more unlikely than likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141: "Business Combinations" and SFAS No. 142 : "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001. The adoption of SFAS No. 141 did not have a material impact on the Company's financial statements. SFAS No. 142 requires, among other provisions, companies to assess the possible impairment of goodwill existing at the date of adoption and perform subsequent impairment tests on an annual basis. Additionally, existing goodwill and intangible assets must be reassessed and classified consistently in accordance with the Statement's criteria. The Company is required to and will adopt SFAS No. 142 on January 1, 2002. The adoption of SFAS No. 142 is not expected to have a material impact on the Company's financial statements. In August 2001, FASB issued SFAS No. 143: "Accounting for Asset Retirement Obligations". This Statement requires, among other provisions, retirement obligations to be recognized when they are incurred and displayed as liabilities, with a corresponding amount capitalized as part of the related long lived asset. The capitalized element is required to be expensed using a systematic and rational method over its useful life. The Company is required to and will adopt SFAS No. 143 on January 1, 2002. The adoption of SFAS No. 143 is not expected to have a material impact on the Company's financial statements. In October 2001, FASB issued SFAS No. 144: "Accounting for Impairment or Disposal of Long-Lived Assets". The Statement supersedes SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and modifies APB Opinion No. 30, : "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events". For long-lived assets to be held and used, the Statement retains the requirements of SFAS No. 121, whereby an impairment loss is recognized if the carrying value of the assets is not recoverable from its undiscounted cash flows and an impairment loss is measured as the difference between fair values and carrying values of the asset. The new Statement requires long-lived assets to be disposed of other than by sale be considered held and used until it is disposed of. The Statement also broadens the scope of APB Opinion 30 provisions for the presentation of discontinued operations separately from continuing operations to include a component of an entity that either has been disposed of or is classified as held for sale. In addition, discontinued operations are no longer measured on a net realizable value basis, and expected future operating losses must be reflected in the periods incurred, rather than at the measurement date as previously required by APB Opinion No. 30. The Company is required to and will adopt SFAS No. 144 on January 1, 30 2002. The adoption of SFAS No. 144 is not expected to have a material impact on the Company's financial statements. In April 2002, FASB issued SFAS No. 145: "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement made revisions to the accounting for gains and losses from the extinguishment of debt, rescinded Statement No. 44, and required certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This statement is required to be adopted by the Company beginning on January 1, 2003. The Company is in the process of evaluating the effect of the adoption of this standard on the consolidated results of operations, financial position and cash flows, if any. ITEM 5C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES During Fiscal 1999, as is true for historical prior periods, the Company (due to the nature of its business), did not expend any material funds on company sponsored research and development activities. However, during Fiscal 2000 and Fiscal 2001, the Company expended approximately US$40,000 and US$20,000, respectively, on the development of an Infrared Photometric Oil Analyzer pursuant to its agreement with the Shanghai Institute Optics Instrument. See Item 4B. "Business Overview." It is anticipated that an additional US$50,000 in research and development costs will be expended on this project, similar projects and potential research and development projects for the development of on line water testing equipment during Fiscal 2002. ITEM 5D. TREND INFORMATION The Company believes that the expenses incurred in opening "pilot" shops and product research and development may result in increases in revenue but such increases are unlikely to allow for a recovery of the expenses for approximately the next two years. ITEM 5E. SIGNIFICANT RELATED PARTY TRANSACTIONS During Fiscal 1999, Fiscal 2000 and Fiscal 2001, the Company made purchases from Eurotherm of approximately US$850,000, US$845,000 and US$2,114,000 respectively. The Company also received rental income from Eurotherm during Fiscal 1999, Fiscal 2000 and Fiscal 2001 of approximately US$36,000, US$34,000 and US$34,000, respectively. Additionally, during Fiscal 1999, Fiscal 2000 and Fiscal 2001, the Company paid management fees to Eurotherm of approximately US$23,000, US$29,000 and US$27,000 respectively. Mr. T.C. Leung, Chief Executive Officer and Chairman of the Board of Directors of the Company, is also director of Eurotherm. ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES ITEM 6A. DIRECTORS AND SENIOR MANAGEMENT Information concerning the Directors and Executive Officers of the Company are as follows:
NAME AGE POSITION ---- --- -------- T.C. Leung 58 Chairman of the Board of Directors and Chief Executive Officer Jerry Wong 43 Director and Chief Financial Officer 31 NAME AGE POSITION ---- --- -------- Nancy Wong 53 Director C.P. Kwan 43 Director Alex Sham 38 Director Y.K. Liang 72 Director Ho Choi Chiu 70 Director
Set forth below is a brief background of the executive officers and directors based upon the information supplied by them to the Company: T.C. LEUNG has been Chief Executive Officer and Chairman of the Board of Directors of both the Company and Far East since their inception. Before establishing Far East, Mr. Leung was an engineer for English Electric in England, from 1965 to 1968, and Lockheed Aircraft in Hong Kong, from 1968 to 1970. Mr. Leung also served as managing director of Eurotherm (Far East) Ltd. between 1971 and 1992. Since 1988, Mr. Leung has also served as managing director of Eurotherm Hong Kong. Mr. Leung received a Masters degree in Business Administration from the University of East Asia, Macao in 1986 and is a Chartered Engineer, a title bestowed upon a member of the Council of Engineering Institutions in the United Kingdom. JERRY WONG has served as Director and Chief Financial Officer of Far East since 1994 and has been with Far East since 1987. Mr. Wong has been the Chief Financial Officer and a Director of the Company since its inception. From 1985 until 1987, Mr. Wong worked for MUA Agencies Ltd., a subsidiary of a Hong Kong publicly listed company engaged in the insurance business, as deputy manager of its secretarial, legal and accounting department. From 1981 until 1985, Mr. Wong served as a senior accountant in Price Waterhouse-Hong Kong. He is a Fellow of the Association of Chartered Certified Accountants in the United Kingdom and a Certified Public Accountant in Hong Kong. NANCY WONG has been a Director of the Company since its inception and a Director of Far East, and its Personnel Manager, since 1994. Ms. Wong has been with Far East since 1971. Ms. Wong is also Far East's Chief Representative in China. During the last several years, Ms. Wong has played a pivotal role in Far East's business expansion in China. Ms. Wong received a Bachelor of Science degree in Business Administration from the University of East Asia, Macao in 1989. C.P. KWAN joined Far East in 1984 and has served as a Director and Manager of its Process Equipment Department since 1991. Mr. Kwan has been a Director of the Company since its inception. Before joining Far East, he was employed by Haven Automation (H.K.) Ltd., a company involved in the water treatment and process control business between 1981 and 1984. 32 ALEX SHAM has been a Director of the Company since its inception. Mr. Sham joined Far East in 1988 and has been its Sales Manager since 1993 and became a Director of Far East in 1996. Mr. Sham received a Bachelor of Science in Applied Chemistry from Hong Kong Baptist University in 1990. Prior to joining Far East, Mr. Sham was employed by the Environmental Protection Department of the Hong Kong Government from 1986 until 1988. Y.K. LIANG has been a director of the Company since February 1998. Mr. Liang is a director of Wong Liang Consultants Ltd. ("Consultants") and a member of the certified public accounting firm of Y.K. Liang & Co. ("LCO"). Mr. Liang has been associated with both Consultants and LCO for more than the past five years. Consultants is a general business consulting firm. HO CHOI CHIU has been a director of the Company since October 2000. Mr. Chiu is a certified public accountant, is a senior partner in the accounting firm of C.C. Ho & Company, a firm that he has been associated with for more than the past five years. Directors of the Company serve until the next annual meeting of shareholders of the Company and until their successors are elected and duly qualified. Officers of the Company are elected annually by the Board of Directors and serve at the discretion of the Board of Directors. None of the Company's directors, officers or beneficial owners of ten percent or more of its Common Stock are required to file any reports pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934 Act"). The Company had one meeting of its Board of Directors during Fiscal 2001. The Company has not had any directors resign or decline to stand for re-election at any time during or since December 31, 1998. However, at the Company's 2000 annual meeting, the Company's shareholders did not re-elect one director, Adam L. Goldberg. There are no material legal proceedings involving any director, officer or affiliate of the Company, owner of record or beneficially of more than five percent of the Company's Common Stock or any associate of any of the foregoing. ITEM 6B. COMPENSATION The following table sets forth certain summary information with respect to the compensation paid by the Company and Far East for services rendered in all capacities to the Company and Far East during Fiscal 2001 and Fiscal 2000 to the Chairman of the Board and Chief Executive Officer. 33 SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION YEAR SALARY US($) BONUS US($) --------------------------- ---- ------------ ----------- T.C. Leung, Chairman of the Board of 2001 100,000 61,000 Directors and Chief Executive Officer 2000 100,000 44,000
COMPENSATION OF DIRECTORS. Directors of the Company do not receive compensation for their services as directors; however, the Board of Directors may authorize the payment of compensation to directors for their attendance at regular and annual meetings of the Board and for attendance at meetings of committees of the Board as is customary for similar companies. Directors will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with their duties to the Company. PENSION PLAN. The Company has a defined contribution pension plan for all of its employees. Under this plan, all employees are entitled to a pension benefit equal to 50% to 100% of their individual fund account balances at their dates of resignation or retirement which depends on their years of service. The Company is required to make specific contributions at approximately 10% of the basic salaries of the employees to an independent fund management company. The Company has no future obligations for the pension payment or any post-retirement benefits beyond the annual contributions made. The independent fund management company is responsible for the ultimate pension liabilities to those resigned or retired employees. During the years ended December 31, 2000 and 2001, the Company made total pension contributions of approximately US$97,000 and US$135,000, respectively, to this Plan. EMPLOYMENT AGREEMENT - T.C. LEUNG. T.C. Leung's services to the Company and Far East were provided pursuant to a personal services agreement between the Company, Far East and Shereman Enterprises Ltd., a management company (the "Employment Agreement"). The Employment Agreement terminated in March 2002, however, Mr. Leung continues to serve in those capacities while the Company negotiates an extension of his Employment Agreement. Pursuant to this Employment Agreement Mr. Leung serves as the Chairman of the Board of Directors and Chief Executive Officer of Far East and the Company. The Employment Agreement requires that Mr. Leung devote substantially all of his business time to the affairs of the Company and Far East. The Employment Agreement provides for the payment of US$100,000 and six percent of the Company's consolidated pre-tax income to the management company in exchange for Mr. Leung's services during the first year of the agreement's term with compensation past the first year to be renegotiated annually. The Employment Agreement contains a confidentiality provision and a covenant not to compete with the Company or Far East for a period of one year following termination of the agreement under certain circumstances. Mr. Leung's employment agreement requires the Company to provide his beneficiaries and him, respectively, with twelve months salary in the event of his death or disability and also contains provisions for payment of salary and benefits following a change of control (as defined) of the Company, the failure to reappoint him to his position, a salary reduction or the Company's failure to perform its obligation under the employment agreement. In general, under such circumstances, Mr. Leung would be entitled to a cash payment equivalent to his salary for the remaining term of his Agreement, and continued life, health and disability benefits for a period of one year. 34 MANAGEMENT OPTION PLAN. The Company has authorized the issuance of Options to purchase up to an aggregate of 2,184,000 Ordinary Shares (the "Management Options") to its officers, directors and employees in such numbers and to such persons as the Company's Chairman of the Board and Chief Executive Officer may direct. The Management Options became exercisable on March 14, 1998 for a term of ten years. The exercise price and the number of Ordinary Shares purchasable upon exercise of any Management Options are subject to adjustment upon the occurrence of certain events, including stock dividends, reclassification, reorganizations, consolidations, mergers, and certain issuances and redemptions of Ordinary Shares and securities convertible into or exchangeable for Ordinary Shares excluding certain issuances of shares. No adjustments in the exercise price will be required to be made with respect to the Management Options until cumulative adjustments amount to $.05. In the event of any capital reorganization, certain reclassifications of the Ordinary Shares, any consolidation or merger involving the Company (other than (i) a consolidation or merger which does not result in any reclassification or change in the outstanding Ordinary Shares, or (ii) sale of the properties and assets of the Company, as, or substantially as, an entirety to any other corporation), Management Options will thereupon become exercisable only for the number of shares of stock or other securities, assets, or cash to which a holder of the number of Ordinary Shares of the Company purchasable (at the time of such reorganization, reclassification, consolidation, merger, or sale) upon exercise of such Management Options would have been entitled upon such reorganization, reclassification, consolidation, merger, or sale. The table below shows, as to each of the executive officers and directors of the Company and as to all executive officers and directors of the Company as a group, the following information with respect to Management Options: (i) the aggregate amounts of Ordinary Shares subject to Management Options; and (ii) the per share exercise price for the Management Options granted to these individuals. Each of the following persons also received options under the Company's 2000 Officers and Directors Plan.
NAME OF EXECUTIVE SHARES SUBJECT PER SHARE OFFICERS AND DIRECTORS TO MANAGEMENT OPTIONS EXERCISE PRICE ---------------------- --------------------- -------------- (US$) T.C. Leung 1,170,000 3.5256 546,000 2.5641 Alex Sham 59,735 3.5256 31,200 2.5641 Jerry Wong 51,935 3.5256 23,400 2.5641 35 NAME OF EXECUTIVE SHARES SUBJECT PER SHARE OFFICERS AND DIRECTORS TO MANAGEMENT OPTIONS EXERCISE PRICE ---------------------- --------------------- -------------- (US$) Nancy Wong 44,200 3.5256 11,700 2.5641 C.P. Kwan 35,100 3.5256 11,700 2.5641 All Executive Officers and 1,984,970 2.5641 - 3.5256(1) Directors as a group (7 persons)
- ---------- (1) Price Range. Other officers and/or employees of the Company have been or will be granted management options to purchase an aggregate of 199,030 Management Options, all of which will be exercisable at US$3.5256 per share. As of May 31, 2002, no Management Options have been exercised. At May 31, 2002, none of the options were "in the money," although by their terms they are exercisable. COMPANY OPTION PLANS. The 2000 Officers and Directors Plan provides for the grant of options to acquire Ordinary Shares to the Company's executive officers and directors and persons holding the same positions with the Company's subsidiaries. The 2000 Employees Plan provides for the grant of options to acquire Ordinary Shares to key employees of the Company and its subsidiaries. The 2000 Officers and Directors Plan and 2000 Employees Plan are collectively referred to as the "2000 Plans". 189,800 and 379,600 shares are authorized for issuance under the 2000 Employees Plan and 2000 Officers and Directors Plan, respectively. The Board of Directors or a committee (the "Committee") appointed by the Board of Directors administers the 2000 Plans. The Board of Directors or the Committee has the authority to interpret the Plans, prescribe, amend and rescind rules and regulations relating to it, determine the terms and provisions of options granted under the Plans (which need not be identical), and make other determinations as it deems necessary and advisable for the administration of the Plans. The Board of Directors or the Committee also has the authority to delegate decisions with respect to Options granted to key employees under the 2000 Employees Plan who are not elected officers or directors of the Company or its subsidiaries and to delegate decisions with respect to key employees to the Chief Executive Officer. 36 Any decision by the Committee or the Chief Executive Officer to grant an award under the 2000 Plans are subject to ratification by the Board of Directors of the Company. The Board is also to ratify any decision that affects the terms or conditions of options awarded to elected officers or directors of the Company or its subsidiaries. In the event that the Ordinary Shares of the Company are subdivided or consolidated as a result of a reorganization, stock split, payment of a stock dividend, reverse stock split or other change in the Company's capitalization, the Committee or the Board of Directors has the authority to make appropriate adjustments in the Ordinary Shares available for issuance under the 2000 Plans, the number of shares subject to options that may have been or may be awarded to any participant in any 12 month period, the price, number of Ordinary Shares or kind of securities subject to outstanding options, or the terms of such options in order to prevent dilution or enlargement of rights under the options. In addition, the Board may also change the kind of securities available for grant under the 2000 Plans to reflect any such corporate changes. The Committee or the Chief Executive Officer has the discretion to determine which employees constitute key employees to whom options will be awarded under the 2000 Employees Plan. The Committee or Chief Executive Officer, as the case may be, determines the number of Ordinary Shares subject to options to be granted. The purchase price per share of the Ordinary Shares to be paid upon the exercise of the option must be at least 100% of the fair market value of an Ordinary Shares on the date on which the option was granted. Under the 2000 Plans, if the Ordinary Shares are principally traded on a national securities exchange or the Nasdaq Stock Market's National Market or Small Cap Market at the time of grant, the Company is required to use, as fair market value, the average of the closing prices of the Ordinary Shares for the ten consecutive trading days immediately before the date of grant. If the Ordinary Shares are traded on a national securities exchange or the Nasdaq Stock Market's National Market or Small Cap Market, but no closing prices are reported for such ten-day period, or if the Ordinary Shares are principally traded in the over-the-counter market, the Company is required to use, as fair market value, the average of the mean between the bid and asked prices reported for the Company's Ordinary Shares at the close of trading during such ten-day period before the date of grant. If the Ordinary Shares are traded neither on a national securities exchange, the Nasdaq Stock Market's National Market, Small Cap Market nor in the over-the-counter market or if bid and asked prices are otherwise not available, the fair market value of the Ordinary Shares on the date of grant will be determined in good faith by the Committee or the Board of Directors, as the case may be. The Board of Directors or the Committee, as the case may be, or, to the extent that such authority has been delegated to the Chief Executive Officer, the Chief Executive Officer determines, at the time of grant, when each option granted under the Plans will become exercisable. Notwithstanding the foregoing, all options held by a key employee of the Company 37 or its subsidiaries become immediately exercisable, whether or not exercisable at the time, upon the death or disability. No option is to be exercisable more than ten years from the date the option is granted. PAYMENT OF EXERCISE PRICE FOR OPTIONS. Under the 2000 Plans, payment for shares purchased upon exercise of an option may be made by any of the following methods, subject to certain requirements: (1) in cash, paid by either the optionholder or a broker to whom the optionee has tendered the option; (2) in Ordinary Shares valued at the fair market value of such shares on the date of exercise, provided that such shares were held by the optionholder for not less than six months prior to the date of exercise of the option; (3) by any other medium of payment that the Board, Committee or the Chief Executive Officer, as applicable, has authorized at the time of grant (other than the withholding of shares issuable upon the exercise of options); or (4) by any combination of the preceding methods. TRANSFER OF OPTIONS. Under the 2000 Plans, an option may not be sold, assigned or otherwise transferred except to: -- the spouse or lineal descendant of a plan participant; -- the trustee of a trust for the primary benefit of a plan participant's spouse or lineal descendant; -- a partnership of which a plan participant and lineal descendants are the only partners; or -- a charitable organization. These assignments are only permitted if the assigning optionee does not receive any compensation in connection with the assignment and the assignment is expressly approved by the Board or Committee, as the case may be. The Company indemnifies the members of any Committee and its delegates and the Chief Executive Officer against (1) reasonable expenses incurred in connection with the defense of any action, suit or proceeding to which they may be a party by reason of any action taken or failure to act in connection with the 2000 Plans, and (2) all amounts paid by them in settlement of or satisfaction of a judgment entered in any such action, suit or proceeding, except in cases where such a person is adjudged liable for gross negligence or gross misconduct in the performance of his or her duties. The Board may terminate, suspend, or amend the 2000 Plans at any time without the authorization of shareholders to the extent allowed by law or the rules of any market on which the Company's shares are then listed or quoted. During Fiscal 2000 and in January 2002, the Company granted options to certain of its officers and directors pursuant to its 2000 Officers and Directors Plan. The table below shows, as 38 to each of the executive officers and directors of the Company and as to all executive officers and directors of the Company as a group, the aggregate amounts of Ordinary Shares subject to such options.
SHARES SUBJECT TO 2000 OFFICERS NAMES OF EXECUTIVE AND DIRECTORS PER SHARE OFFICERS AND DIRECTORS PLAN OPTIONS EXERCISE PRICE - ---------------------- -------------------- -------------- (US$) T.C. Leung 143,000 1.2154 98,000 1.72 Alex Sham 15,600 1.2154 45,000 1.72 Jerry Wong 13,000 1.2154 25,000 1.72 Nancy Wong 10,400 1.2154 11,000 1.72 C.P. Kwan 7,800 1.2154 10,800 1.72 All executive officers and Directors as a group 379,600 1.2154 - 1.72(1)
- ---------- (1) Price Range. The foregoing options will expire in August 2010. Pursuant to its 2000 Employees Plan, the Company has also granted options to 37 of its non-officer/director employees to purchase an aggregate of 163,800 of its Ordinary Shares exercisable at a price of US$1.2154 per share for a ten year term expiring in February 2011. At December 31, 2001, no options had been exercised. The Company continues to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion No. 25, under which no compensation cost for stock options is recognized for stock option granted at or above fair market value. Had compensation expense 39 for the Company's options been determined based upon fair values at the grant dates in accordance with SFAS No. 123, the Company's pro forma net income for the year ended December 31, 2001 would be approximately US$325,000. The Company's pro forma basic and diluted net income per common share would be approximately US$0.09 for the year ended December 31, 2001. Weighted average fair value of 2000 Stock Options granted during the year ended December 31, 2000 of US$1.43 is estimated on the date of grant using the Black-Scholes option-pricing model. Fair values of 2000 Stock Options are estimated on the date of grant using the following assumptions:
2000 ---- Risk-free interest rate 6.1% Expected dividend yield 0% Expected option life 7 years Expected stock price volatility 127%
ITEM 6C. BOARD PRACTICES The term of each of the Company's seven directors expires at the election and qualification of their successors at the next annual meeting of the Company's shareholders, anticipated to be held in August of this year. All of the Company's seven directors were elected at the Company's last annual meeting of shareholders in August 2001. Mr. Leung, the Company's Chief Executive Officer and the Chairman of its Board of Directors has an employment agreement with the Company, that provides him with benefits upon the termination of his employment in certain events. See Item 6B. "Compensation." ITEM 6D. EMPLOYEES The Company has approximately 92 full-time employees, including a marketing and sales staff of 44, an administrative staff of 30 and a technical support staff of 18. The Company's management consists of its officers and directors. The Company is not subject to any collective bargaining agreement and believes that its relationship with its employees are good. ITEM 6E. SHARE OWNERSHIP With respect to the share ownership of the directors and senior management of the Company, reference is made to Item 7. "Major Shareholders and Related Party Transactions." 40 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS ITEM 7A. MAJOR SHAREHOLDERS The following table sets forth, as of June 11, 2002, certain information concerning beneficial ownership of the Company's Ordinary Shares, giving effect to the Company's repurchase of 162,215 of its Ordinary Shares, with respect to (i) each person known to the Company to own 5% or more of the outstanding Ordinary Shares, (ii) each director and executive officer of the Company, and (iii) all officers and directors of the Company as a group:
AMOUNT AND APPROXIMATE NATURE OF PERCENTAGE BENEFICIAL OF ORDINARY OWNERSHIP SHARES OWNED --------- ------------ T.C. Leung(1)(2)............................................ 3,623,236 72.2% Pearl Venture Ltd.(1)(2).................................... 1,468,370 47.9% Alex Sham(3)................................................ 173,375 5.4% Jerry Wong(3)............................................... 124,255 3.9% Nancy Wong(3)............................................... 99,140 3.2% C.P. Kwan(3)................................................ 163,909 5.2% Y.K. Liang(3)............................................... 0 ____ Ho Choi Chiu(3)............................................. 0 ____ Yeung Kai Tai(4)............................................ 196,563 6.4% All Executive Officers And Directors of the Company as a group (7 persons)(3).............................................. 4,183,915 77.1%
- -------- (1) The address for Mr. Leung is c/o Euro Tech (Far East) Ltd., 18/F Gee Chang Hong Centre, 65 Wong Chuk Hang Road, Hong Kong. The address for Pearl is Columbus Centre Building, Wichhams Cay, Road Town, Tortola, British Virgin Islands. (2) Includes shares of the Company's Common Stock owned of record by Pearl, which is a trust established for the benefit of Mr. Leung. Also includes those Company Ordinary Shares owned of record by Regent, of which Pearl is the majority shareholder. (3) Gives effect to the exercise of Management Options and 2000 Officers and Directors Plan Options owned of record by such persons. See Item 6B. "Compensation." (4) The address for Yeung Kai Tai is 37-37A Jordan Road, 4th Floor, Doubleset Commercial Centre, Kowloon, Hong Kong. 41 ITEM 7B. RELATED PARTY TRANSACTIONS. All outstanding balances with related parties are unsecured, non-interest bearing and are repayable in 2002. The related companies with which the Company has engaged in transactions are Euro Electron (Far East) Ltd. ("Euro Electron"), Eurotherm, Action Instruments (China) Ltd. ("Action") and Armtison Limited ("Armtison"). During Fiscal 2001, the Company made sales to Eurotherm of approximately US$30,000. During Fiscal 2001, the Company made purchases from Action, Armtison and Eurotherm of approximately US$7,000, US$68,000 and US$2,114,000, respectively. Additionally, during Fiscal 2001, the Company paid approximately US$46,000 to Armtison for office space rentals, and approximately US$27,000 in management fees to Eurotherm to assist in the management of some of the Company's PRC offices. The payments to Armtison and Eurotherm were based on actual office space usage and the time cost of personnel used, respectively. T.C. Leung, the Company's Chairman of the Board and Chief Executive Officer is also a director of Eurotherm. As of December 31, 2001, approximately $120,000 of other current assets represents advances to certain PRC employees of the Company. The advances are used to finance the operations of certain retail shops established in the PRC by the employees to sell the Company's products. The advances are unsecured, bear interest at a nominal rate and have no fixed repayment terms. ITEM 8. FINANCIAL INFORMATION ITEM 8A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION Item 8A.1 See Item 18. Item 8A.2 See Item 18. Item 8A.3 See Report of Independent Accountant page F-1. Item 8A.4 We have complied with this requirement. Item 8A.5 Not applicable. Item 8A.6 Not applicable. Item 8A.7 Legal Proceedings. The Company is not a party to any material legal proceedings. Item 8A.8 Dividend Policy. The Company has not paid cash dividends to date. The payment of cash dividends, if any, in the future is within the discretion of the Board of Directors. The payment of cash dividends, if any, in the future will depend upon the Company's earnings, capital 42 requirements and financial conditions and other relevant factors. The Company's Board of Directors does not presently intend to declare any cash dividends in the foreseeable future, but instead intends to retain all earnings, if any, for use in the Company and Far East's business operations. The Company declared a 30% stock dividend on its Ordinary Shares with a record date of August 27, 2001. The dividend resulted in each record holder of the Company's Ordinary Shares on that date receiving three Ordinary Shares for ten Ordinary Shares held at the opening of business on the day after August 27, 2001. The anti-dilution provisions of the Warrants resulted in the holders of Warrants being entitled to purchase thirteen Ordinary Shares for each ten Warrants held with proportional adjustments being made in the exercise and redemption target prices of the Warrants. ITEM 8B. SIGNIFICANT CHANGES. There has not been any significant change since the date of the annual financial statements included in this Report. ITEM 9. THE OFFERING AND LISTING. ITEM 9A. LISTING DETAILS AND 9.C PRINCIPAL TRADING MARKET. The Company has two classes of securities presently registered: Ordinary Shares and Warrants. These securities are presently traded on the NASDAQ SmallCap Market under the trading symbols "CLWT" and "CLWTW," respectively, and have so traded since the Company's Public Offering in March 1997. The following quotations have not been adjusted for a 20% stock dividend issued in September 1999 and the 30% stock dividend issued in August 2001. ORDINARY SHARES The high and low bid price quotations for the Ordinary Shares in the periods indicated are as follows:
YEARS END DECEMBER 31, HIGH LOW - --------------------------- ----------------------------------- $ $ 1997 (from March) 9.125 4.00 1998 6.75 2.5 1999 3.625 0.25 2000 15.00 0.031250 2001 2.790 0.781
43
QUARTERS ENDED HIGH LOW - --------------------------- ----------------------------------- $ $ March 31, 2000 15.00 1.03125 June 30, 2000 4.6875 1.00 September 30, 2000 2.375 0.25 December 31, 2000 1.375 0.25 March 31, 2001 2.00 0.78125 June 30, 2001 2.450 1.688 September 30, 2001 2.790 1.00 December 31, 2001 2.320 1.130 March 31, 2002 1.800 1.050 PERIOD - ------------------------------------ From April 1, 2002 to June 11, 2002 2.450 1.688 THE FOLLOWING MONTHS HIGH LOW - --------------------------- ----------------------------------- December 2001 1.820 1.580 January 2002 1.790 1.350 February 2002 1.800 1.350 March 2002 1.610 1.050 April 2002 1.650 1.380 May 2002 1.580 1.100
The Ordinary Shares was held by approximately 49 holders of record as of June 11, 2002. Based upon information received from broker-dealers, clearing firms and others, the Company believes that it has approximately at least 400 beneficial shareholders of its Ordinary Shares. WARRANTS The high and low bid price quotations for the Warrants in the periods indicated are as follows:
YEARS END DECEMBER 31, HIGH LOW - --------------------------- ----------------------------------- $ $ 1997 (from March) 3.0625 0.50 1998 2.00 0.25 1999 0.812 0.0625 2000 3.71875 0.031250 2001 0.320 0.031
44
QUARTERS ENDED HIGH LOW - ------------------------------------ ----------------------------------- $ $ March 31, 2000 3.75 0.125 June 30, 2000 1.00 0.03125 September 31, 2000 0.59375 0.15625 December 31, 2000 0.3125 0.03125 March 31, 2001 0.1875 0.03125 June 30, 2001 0.230 0.080 September 30, 2001 0.320 0.100 December 31, 2001 0.220 0.150 March 31, 2002 0.200 0.100 PERIOD - ------------------------------------ From April 1, 2002 to June 11, 2001 0.140 0.100 THE FOLLOWING MONTHS HIGH LOW - ------------------------------------ ----------------------------------- $ $ December 2001 0.200 0.150 January 2002 0.200 0.150 February 2002 0.200 0.100 March 2002 0.140 0.120 April 2002 0.140 0.120 May 2002 0.140 0.100
The Warrants were held by approximately 35 holders of record as of June 11, 2002. For information concerning the possible effect on the rights of the Company's Ordinary Shareholders of issuances of authorized Preferred Stock and for a description of the terms and conditions of the Company's Warrants, see Item 10. Additional Information. ITEM 9B. PLAN OF DISTRIBUTION NOT APPLICABLE ITEM 9C. SELLING SHAREHOLDERS Not Applicable. ITEM 9D. DILUTION Not Applicable. ITEM 9E. EXPENSES OF THE ISSUE Not Applicable. 45 ITEM 10. ADDITIONAL INFORMATION ITEM 10A. SHARE CAPITAL AUTHORIZED CAPITAL. The authorized capital of the Company is US$250,000 comprised of 20,000,000 Ordinary Shares and 5,000,000 shares of Preferred Stock. As of December 31, 2001 there were 3,064,151 Ordinary Shares and no shares of Preferred Stock, issued and outstanding. All of the Company's shares of capital stock have a par value of $.01 per share. Holders of the Company's Ordinary Shares are entitled to one vote for each whole share on all matters to be voted upon by shareholders, including the election of directors. Holders of Ordinary Shares do not have cumulative voting rights in the election of directors. All shares of Ordinary Shares are equal to each other with respect to liquidation and dividend rights. Holders of Ordinary Shares are entitled to receive dividends if and when declared by the Company's Board of Directors out of funds legally available under British Virgin Islands law. In the event of the liquidation of the Company, all assets available for distribution to the holders of Ordinary Shares are distributable among them according to their respective share holdings. Holders of Ordinary Shares have no preemptive rights to purchase any additional, unissued shares of Ordinary Shares. All of the outstanding shares of Ordinary Shares of the Company are duly authorized, validly issued, fully paid and non-assessable. Pursuant to the Company's Memorandum and Articles of Association and pursuant to the laws of the British Virgin Islands, the Company's Memorandum and Articles of Association may be amended by a resolution of the Board of Directors without shareholder approval. This includes amendments to increase or reduce the authorized capital stock of the Company or to increase or reduce the par value of its shares. The ability of the Company to amend its Memorandum and Articles of Association without shareholder approval could have the effect of delaying, deterring or preventing a change in control of the Company without any further action by the shareholders including but not limited to, a tender offer to purchase the Common Stock at a premium over then current market prices. 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 which are obviously unreasonable may be declared null and void. The British Virgin Islands 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. While British Virgin Islands law does not 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 that may be available in respect of any such action may result in the rights of shareholders of a British Virgin Island company being more limited than those rights of shareholders in a United States company. The Board of Directors of the Company, without further shareholder action, may issue shares of Preferred Stock in any number of series and may establish as to each such series the 46 designation and number of shares to be issued and the relative rights and preferences of the shares of each series, including provisions regarding voting powers, redemption, dividend rights, rights upon liquidation and conversion rights. The issuance of shares of Preferred Stock by the Board of Directors could adversely affect the rights of holders of Ordinary Shares by, among other matters, establishing preferential dividends, liquidation rights and voting power. The Company has not issued any shares of Preferred Stock and has no present intention to issue shares of Preferred Stock. The issuance thereof could discourage or defeat efforts to acquire control of the Company through acquisition of Ordinary Shares. WARRANTS. The Company has Warrants, to purchase an aggregate of 2,527,200 Ordinary Shares, issued in its initial public offering (the "Warrants"). Each Warrant is issued pursuant to a Warrant Agreement between the Company and American Stock Transfer & Trust Company, as warrant agent. The following description is subject to the detailed provisions of and are qualified in their entity by reference to a Warrant Agreement, which was included as an exhibit to the Registration Statement for the Company's initial public offering. Exercise. Each holder of a Warrant may exercise such Warrant, in whole or in part, by surrendering the certificate evidencing such Warrant, with the form of election to purchase attached to such certificate properly completed and executed, together with payment of the exercise price and any required transfer taxes, to the Company. No Warrants may be exercised unless at the time of exercise there is a current prospectus covering the Ordinary Shares of Common Stock issuable upon the exercise of such Warrants under an effective registration statement. The exercise price and any required transfer taxes are payable in cash or by certified or official bank check payable to the Company. If fewer than all of the Warrants evidenced by a warrant certificate are exercised, a new certificate will be issued for the remaining number of Warrants. Certificates evidencing the Warrants may be exchanged for new certificates of different denominations by presenting the Warrant certificate at the offices of the Company. The exercise price and any required transfer taxes are payable in cash or by certified or official bank check payable to the Company. If fewer than all of the Warrants evidenced by a warrant certificate are exercised, a new certificate will be issued for the remaining number of Warrants. Certificates evidencing the Warrants may be exchanged for new certificates of different denominations by presenting the Warrant certificate at the offices of the Company. Adjustments. The exercise price and the number of Ordinary Shares purchasable upon exercise of any Warrants are subject to adjustment upon the occurrence of certain events, including stock dividends, stock splits, reverse stock splits, reclassification, reorganizations, consolidations, mergers, and certain issuances and redemptions of Ordinary Shares and securities convertible into or exchangeable for Ordinary Shares (below the lesser of the then exercise price of the Warrants or the fair market value of the Company's Ordinary Shares) excluding issuances of shares of the Company's Ordinary Shares prior to its initial public offering, the acquisition of Far East, any issuances of the Company's securities in connection with its initial public offering, Company stock option plans or the Management Options. No adjustments in the exercise price will be required to be made with respect to the Warrants until cumulative adjustments amount to 47 $.05. In the event of any capital reorganization, certain reclassifications of the Ordinary Shares, any consolidation or merger involving the Company (other than (i) a consolidation or merger which does not result in any reclassification or change in the outstanding Ordinary Shares, or (ii) the acquisition of Far East or any other business), or sale of the properties and assets of the Company, as, or substantially as, an entirety to any other corporation, Warrants will thereupon become exercisable only for the number of shares of stock or other securities, assets, or cash to which a holder of the number of Ordinary Shares of the Company purchasable (at the time of such reorganization, reclassification, consolidation, merger, or sale) upon exercise of such Warrants would have been entitled upon such reorganization, reclassification, consolidation, merger, or sale. Other Rights. In the event of an adjustment in the number of Ordinary Shares issuable upon exercise of the Warrants, the Company will not be required to issue fractional Ordinary Shares upon exercise of the Warrants. In lieu of fractional Ordinary Shares, there will be paid to the holders of the Warrants, at the time of such exercise, an amount in cash equal to the same fraction of the current market price of an Ordinary Share. Warrant holders do not have voting or any other rights of shareholders of the Company and are not entitled to dividends, if any. Redemption of Warrants. During any time the Warrants are exercisable, if the average closing bid price of the Ordinary Shares for twenty (20) consecutive trading days shall exceed certain prices, the Company may redeem the Warrants by paying holders $.10 per Warrant, provided that notice of such redemption is mailed not later than ten (10) days after the end of such period and prescribes a redemption date at least thirty (30) days thereafter. Warrantholders will be entitled to exercise Warrants at any time up to the business day next preceding the redemption date. Additionally, the Warrants may not be redeemed unless at the time of redemption there is a current prospectus covering the Ordinary Shares issuable upon exercise of such Warrants under an effective registration statement. Stock Dividends. The Company issued twenty (20%) and thirty (30%) percent stock dividends to holders of its Ordinary Shares in September 1999 and August 2001. Ordinary shareholders on the record dates received one share for each five Ordinary Shares held and three shares for each ten Ordinary Shares held, respectively. The issuance of the dividend shares caused certain adjustments to be made to the exercise prices, numbers of shares and, where redemption is applicable, the market price required to be maintained to "trigger" the Company's right to redeem the warrants (the "Target Price"). Exercise prices and target prices are set forth below. All Warrants expire on March 14, 2003.
POST-DIVIDENDS -------------- A. Maximum Number of Shares Exercisable For 2,527,200 B. Per Share Exercise Price US$3.5256 C. Target Price US$5.4487
48 ITEM 10B. MEMORANDUM AND ARTICLES OF ASSOCIATION Set forth below is a summary of the material provisions of our Memorandum and Articles of Association (the "Articles) and the British Virgin Islands ("BVI") Companies Act relating to the shares. This description does not purport to be complete and is qualified in its entirety by reference to BVI statutory law and to the Articles. SHARE REGISTER AND VOTING RESTRICTIONS. The Company maintains a share register at its registered office in the BVI. The Company's registered number is 200960. The objects of the Company are to engage in any act or activity that is not prohibited under any law of the BVI. See Regulation 4(1) of the Articles. Under the Articles, the Company is not required to treat the holder of a registered share in the Company as a shareholder until that person's name has been entered in the share register. The holders of Ordinary Shares have one vote for each Ordinary Share held of record. The holders of Preferred Shares have such voting powers, full or limited, or no voting powers and such restrictions as may be stated and expressed in the resolution providing for the issuance of the Preferred Shares. SHAREHOLDERS MEETING. The directors of the Company may convene meeting on the shareholders of the Company at such times and in such manner and places within or outside the BVI as the directors consider necessary or desirable. Upon the written request of the shareholders holding ten (10%) percent or more of the outstanding voting shares in the Company the directors must convene a meeting of shareholders. The directors must give not less than seven days notice of meetings of shareholders to those persons whose names on the date of the notice is given appear as shareholders in the share register of the Company and are entitled to vote at the meeting. The directors may fix the date notice is given of a meeting of shareholders as the record date for determining those shares that are entitled to vote at the meeting. The inadvertent failure of the directors to give notice of a meeting to a shareholder, or the fact that a shareholder has not received notice, does not invalidate the meeting. A shareholder may be represented at a meeting of shareholders by a proxy who may speak and vote on behalf of the shareholder. A shareholder may participate at a meeting of shareholders by telephone or other electronic means, as long as all shareholders participating in the meeting are able to hear each other. A meeting of shareholders is duly constituted if, at the commencement of the meeting, there are present in person or by proxy not less than fifty (50%) percent of the votes of the shares or class series of shares entitled to vote on resolutions of shareholders to be considered at the meeting. If a quorum is not present, the meeting, if convened upon the requisition of shareholders, shall be dissolved; in any other case it shall stand adjourned to the next business day at the same time and place or to such other time and place as the directors may determine, and if at the adjourned meeting there are present in person or by proxy not less than one third of the votes of 49 the shares or each class or series of shares entitled to vote on the resolutions to be considered by the meeting, those present shall constitute a quorum but otherwise the meeting shall be dissolved. At every meeting of shareholders, the chairman of the board of directors shall preside as chairman of the meeting. The chairman may, with the consent of the meeting, adjourn any meeting from time to time, and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. At any meeting of the shareholders the chairman shall be responsible for deciding in such manner as he shall consider appropriate whether any resolution has been carried or not ant the result of his decision shall be announced to the meeting and recorded in the minutes thereof. An action that may be taken by the shareholders at a meeting may also be taken by a resolution of shareholders consented to in writing or by written electronic communication, without the need for any notice, but if not a unanimous writing, a copy of such resolution shall be sent to all non-consenting shareholders. NET PROFITS AND DIVIDENDS. Under BVI law, dividends may only be declared and paid by an International Business Company (which the Company is classified as under BVI law) out of surplus, such that after payment of dividends such company must be able to satisfy its liabilities as they become due in the ordinary course of business and the realizable value of the assets of such company must not be less than the sum of its liabilities (other than deferred taxes and capital). There are no other BVI restrictions regarding dividends. PRE-EMPTIVE RIGHTS. The holders of Ordinary Shares and Preferred Shares are not entitled to any pre-emptive or similar rights. BORROWING POWER. The directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or obligation of the Company or of any third party. CONFLICT OF INTERESTS. No agreement or transaction between the Company and one or more of its directors or any person in which any director has a financial interest or to whom any director is related, including as a director of that other person, is void and voidable for this reason only, or by reason only that the director is present at the meeting of directors, or at the meeting of the committee of directors that approves the agreement or transaction, or that the vote or consent of the director is counted for that purpose, if the material facts of the interest of each director in the agreement or transaction and his interest in or relationship to any other party to the agreement or transaction are disclosed in good faith, or are known by the other directors. A director who has an interest in any particular business to be considered at a meeting of directors or shareholders may be counted for purposes of determining whether the meeting is duly constituted. 50 REPURCHASE OF SHARES. The Company may purchase, redeem or otherwise acquire and hold its own shares, but only out of surplus or in exchange for newly issued shares of equal value. Subject to provisions to the contrary in: (a) the designations, powers, preferences, rights, qualifications, limitations and restrictions with which the shares were issued; or (b) the subscription agreement for the issue of the shares, the Company may not purchase, redeem or otherwise acquire its own shares without the consent of shareholders whose shares are to be purchased, redeemed or otherwise acquired. Generally, no purchase, redemption or other acquisition of shares shall be made unless the directors determine that immediately after purchase, redemption or other acquisition the Company will be able to satisfy its liabilities as they become due in the ordinary course of its business and the realizable value of the assets of the Company will not be less than the sum of its total liabilities, other than deferred taxes, as shown in the books of account, and its capital and, in the absence of fraud, the decision of the directors as to the realizable value of the assets of the Company is conclusive, unless a question of law is involved. NOTICES. Any notice, information or written statement to be given by the Company to shareholders may be served, in the case of shareholders holding registered shares in any way by which it can reasonably be expected to reach each shareholder or by mail addressed to each shareholder at the address shown in the share register and in the case of shareholders holdings shares issued to bearer, in the manner provided in the Memorandum of Association. PURPOSE, DURATION, LIQUIDATION, MERGER. The Company is empowered under BVI law and its Memorandum of Association to engage in any act or activity that is not prohibited under any law in the BVI. The Company shall continue until wound-up and dissolved by a resolution of shareholders, or under the terms of any insolvency or liquidation laws in force in the BVI. Under BVI law the Company may merge with another company, including a parent company or subsidiary, incorporated in the BVI, or in a jurisdiction outside of the BVI where the laws of that jurisdiction permit the merger. A merger must be authorized by the directors of the Company and approved by the shareholders. DISCLOSURE OF PRINCIPAL SHAREHOLDERS. Under the laws of the BVI the identity of the shareholders of the Company is confidential and is not disclosed in any public document. BOARD OF DIRECTORS. The business and affairs of the Company are managed by the directors who may exercise all such powers of the Company as are not by BVI law or by the Company's Articles required to be exercised by the shareholders of the Company. 51 ITEM 10C. MATERIAL AGREEMENTS Pursuant to the Company's distribution agreement with Hach, the Company is Hach's sole representative in the PRC, Hong Kong and Macao and is authorized to supply, install and commission Hach's products and accessories. The Company's agreement with Hach expires in March 2003 unless renewed. T.C. Leung's services to the Company and Far East are provided pursuant to the Employment Agreement between the Company, Far East and Shereman Enterprises Ltd., a management company. The Employment Agreement, dated March 14, 1997, terminated in March 2002. Pursuant to the Employment Agreement Mr. Leung serves as the Chairman of the Board of Directors and Chief Executive Officer of Far East and the Company. The Employment Agreement requires that Mr. Leung devote substantially all of his business time to the affairs of the Company and Far East. The Employment Agreement provides for the payment of US$100,000 and six percent of the Company's consolidated pre-tax income to the management company in exchange for Mr. Leung's services during the first year of the Employment Agreement's term with compensation past the first year to be renegotiated annually. The Employment Agreement contains a confidentiality provision and a covenant not to compete with the Company or Far East for a period of one year following termination of the Employment Agreement under certain circumstances. Mr. Leung and the Company are negotiating the terms of an extension of his Employment Agreement. Pursuant to an equity interest transfer agreement between the Company and Tamworth Industrial Ltd. ("Tamworth") and an equity interest and transfer agreement among the Company, Tamworth and Pact Asia Pacific Limited, on January 31, 2002, the Company acquired a 30% equity interest in Pact for approximately US$288,000, Pact, a privately owned engineering firm situated in Shanghai that specializes in the design, manufacture an operation of water and waste water treatment plants in several industries situated in China. There are no other material contracts other than those entered into in the ordinary course of business. ITEM 10D. EXCHANGE CONTROLS There are no exchange control restrictions on payment of dividends on the Company's Ordinary Shares or on the conduct of the Company's operations either in Hong Kong, where the Company's principal executive offices are located, or the British Virgin Islands, where the Company is incorporated. There are no British Virgin Islands laws which impose foreign exchange controls on the Company or that affect the payment of dividends, interest, or other payments to non-resident holders of the Company's securities. British Virgin Islands laws and the Company's Memorandum and Articles of Association impose no limitations on the right of non-resident or foreign owners to hold the Company's securities or vote the Company's Ordinary Shares. The PRC government has established a unified exchange rate system and system of exchange controls to which the Company is subject. 52 ITEM 10E. TAXATION The Company is exempt from taxation in the British Virgin Islands. The Company's subsidiaries organized in Hong Kong, Far East, Limited and Chinah20, pay the Hong Kong profits tax at a rate of 16% on their income for financial reporting purposes, after adjustments for income and expense items which are not assessable or deductible for profits tax purposes. Hong Kong levies no capital gains or dividends tax. In accordance with the relevant income tax laws and regulations applicable to foreign investment enterprises in the PRC, Euro Tech Trading (Shanghai) Limited and Shanghai Euro Tech Limited, subsidiaries of the Company, are exempt from PRC enterprise income tax of 15% for two years starting from their first profit-making year, after offsetting losses brought forward, if any, followed by a 50% reduction for the next three years thereafter. The Company's effective tax rates for Fiscal 1999, Fiscal 2000 and Fiscal 2001 were 18.7%, 20.8% and 21.8%, respectively. A statutory tax rate of 16% was in effect during each of these three fiscal years. Principal adjustments to this statutory tax rate were valuation allowances of 2.7%, 5.5% and 4.9% during Fiscal 1999, Fiscal 2000 and Fiscal 2001, respectively. Income taxes represent Hong Kong's current profits tax. As the Company's PRC subsidiaries were still in tax loss positions at the end of each of the last three fiscal years, no PRC enterprise income tax was provided for. The Company's PRC subsidiaries had accumulated tax losses available to offset gains in future profits, if any, of US$34,648, US$67,815 and US$103,453 for Fiscal 1999, Fiscal 2000 and Fiscal 2001, respectively. ITEM 10F. DIVIDENDS AND PAYING AGENTS Not applicable. ITEM 10G. STATEMENT BY EXPERTS Not applicable. ITEM 10H. DOCUMENTS ON DISPLAY The documents that are exhibits to or incorporated by reference in this annual report can be read at the U.S. Securities and Exchange Commission's public reference facilities at Room 1024, 450 Fifth Street, N.W., Washington, DC 20549 or on the Commission's website: WWW.SEC.GOV. ITEM 10I. SUBSIDIARY INFORMATION Not applicable. 53 ITEM 11. QUANTITATIVE AND QUALIFICATION DISCLOSURES ABOUT MARKET RISK The Company's primary risk exposures arise from changes in interest rates and foreign currency exchanges rates. FOREIGN CURRENCY RISKS The Company is exposed to risk from changing foreign currency exchanges rates. The Company's sales are denominated either in HK dollar or Chinese Renminbu ("RMB"). The majority of the Company's expenses are denominated in HK dollars, followed by RMB and U.s. dollars. The Company is subject to a variety of risks associated with changes among the relative value of the U.S. dollar, HK dollar and RMB. The Company does not currently hedge its foreign exchange positions. Any material increase in the value of the HK dollar and RMB relative to the U.S. dollar would increase the Company's expenses and therefore would have a material adverse effect on the Company's business, financial condition and results of operations. If exchange rates on such currencies were to fluctuate 10%, the Company believes that its results from operations and cash flows would not be adversely affected. INFLATION Although the Company cannot accurately determine the precise effect of inflation on its operations, it does not believe inflation has had a material effect on sales or results of operations. The Company is currently not exposed to material future earnings or cash flow exposures from changes in interest rates on debt obligations since the Company's only debt is bank debt in the principal amount of $90,000 and is repayable in full in November 2002. The Company does not currently anticipate entering into interest rate swaps and/or similar instruments. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 54 PART II ITEM 13. DEFAULTS, DIVIDENDS, ARREARAGES AND DELINQUENCIES. None. ITEM 14. MATERIAL MODIFICATION TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS For a Discussion of the Use of Proceeds from the Company's Public Offering, See Item 4A. History and Development of the Company. ITEM 15. [RESERVED] ITEM 16. [RESERVED] 55 PART III ITEM 17. FINANCIAL STATEMENTS Not applicable. ITEM 18. FINANCIAL STATEMENTS The following financial statements are filed as part of this annual report on Form 20-F Index to consolidated financial statements Report of Independent certified public accountants F-1 Consolidated income statements F-2 Consolidated balance sheets F-3 Consolidated cash flow statements F-4-5 Consolidated statement of changes in shareholders' equity F-6 Notes to the consolidated financial statements F-7-21 56 ITEM 19. EXHIBITS Lists of Exhibits EXHIBIT NO. DESCRIPTION 1.1 Amended and Restated Memorandum and Articles of Association (1) 1.2 Amendments to Exhibit 3.1 adopted by shareholders on August 15, 2000 (3) 4.1 Employment Agreement among Registrant, EuroTech (Far East) Limited, Ltd. etc (for the services of T.C. Leung) (1) 4.2 Management Stock Option Plan (1) 4.3 Agreement with Shanghai Institute of Optics Instruments (2) 4.4 Agreement with Hach Company, Inc. (2) 4.5 2000 Officers and Directors Stock Option and Incentive Plan (3) 4.6 2000 Employees' Stock Option and Incentive Plan (3) 4.7 Equity Interest Transfer Agreement between Tamworth Industrial Ltd. ("Tamworth") and Registrant (4) 4.8 Equity Interest Transfer and Shareholders' Agreement among Tamworth, Registrant and Pact Asia Pacific Limited (4) 4.9 Letters to the Securities and Exchange Commission pursuant to Temporary Note 3T 60 Article 3 of Regulation S-X (5) 8.1 List of Subsidiaries (3) - ---------- (1) Incorporated by reference, previously filed as an Exhibit to Registration Statement, SEC File No. 333-16277 and is incorporated by reference herein. (2) Incorporated by reference, previously filed as an Exhibit to Registrant's Report on Form 20-F for its year ended December 31, 1999. (3) Incorporated by reference, previously filed as an Exhibit to Registrant's Report on Form 20-F for its year ended December 31, 2000. (4) Incorporated by reference, previously filed as an Exhibit to Registrant's Report on Form 6-K filed on February 11, 2002. (5) Filed herewith. 57 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. EURO TECH HOLDINGS COMPANY LIMITED ---------------------------------- (Registrant) /s/ T.C. Leung --------------------------------------- T.C. Leung, Chief Executive Officer and Chairman of the Board Dated: June 28, 2002 58 EURO TECH HOLDINGS COMPANY LIMITED AND SUBSIDIARIES ======================================================== AUDITED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND 2001 AND CONSOLIDATED STATEMENTS OF INCOME, CASH FLOWS AND CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001 TOGETHER WITH AUDITORS' REPORT REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS AND DIRECTORS OF EURO TECH HOLDINGS COMPANY LIMITED We have audited the accompanying consolidated balance sheets of Euro Tech Holdings Company Limited (the "Company"), incorporated in the British Virgin Islands, and subsidiaries (the "Group") as of December 31, 2000 and 2001, and the related consolidated statements of income and comprehensive income, cash flows and changes in shareholders' equity for the years ended December 31, 1999, 2000 and 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2000 and 2001, and the results of its operations and cash flows for the years ended December 31, 1999, 2000 and 2001 in conformity with generally accepted accounting principles in the United States of America. /s/ Arthur Andersen & Co CERTIFIED PUBLIC ACCOUNTANTS Hong Kong, May 24, 2002. F-1 EURO TECH HOLDINGS COMPANY LIMITED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001 (Amounts in thousands of United States dollars except for share and per share data)
Notes 1999 2000 2001 ---------- ---------- ---------- ---------- Net sales 15 & 17 13,107 15,010 19,685 Cost of goods sold 15 (9,896) (11,467) (15,396) ---------- ---------- ---------- Gross profit 3,211 3,543 4,289 Selling and administrative expenses 15 (2,946) (3,301) (3,734) ---------- ---------- ---------- Operating income 265 242 555 Interest income 15 85 113 66 Other income, net 3 & 15 67 97 126 ---------- ---------- ---------- Income before income taxes 417 452 747 Income taxes 4 (78) (94) (163) ---------- ---------- ---------- Net income 339 358 584 ========== ========== ========== Foreign currency translation adjustment - 3 (35) ---------- ---------- ---------- Comprehensive income 339 361 549 ========== ========== ========== Net income per common share - Basic $ 0.11 $ 0.11 $ 0.18 ========== ========== ========== - Diluted $ 0.11 $ 0.11 $ 0.18 ========== ========== ========== Weighted average number of common shares outstanding - Basic 3,226,366 3,226,366 3,226,366 ========== ========== ========== - Diluted 3,226,366 3,226,366 3,226,366 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-2 EURO TECH HOLDINGS COMPANY LIMITED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND 2001 (Amounts in thousands of United States dollars except for share and per share data)
Notes 2000 2001 ---------- ---------- ---------- ASSETS Current assets: Cash and cash equivalents 3,963 3,551 Accounts receivable, net 5 2,497 2,717 Bills receivable 194 669 Prepayments and other current assets 15 209 330 Inventories 6 945 2,003 Value-added tax recoverable - 26 ---------- ---------- Total current assets 7,808 9,296 Property, plant and equipment, net 7 & 17 2,284 2,083 ---------- ---------- Total assets 10,092 11,379 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Long-term bank loan, current portion 8 94 90 Accounts payable 1,987 3,358 Bills payable 857 137 Due to related companies 15 255 340 Other payable and accrued expenses 9 881 1,150 Taxation payable 48 98 ---------- ---------- Total current liabilities 4,122 5,173 ---------- ---------- Long-term bank loan 8 92 - ---------- ---------- Shareholders' equity: Common stock, par value $0.01 each, 20,000,000 (2000 - 20,000,000) shares authorized; 3,226,366 (2000 - 2,481,838) shares issued and outstanding 10 25 32 Preferred stock, par value $0.01 each, 5,000,000 (2000 - 5,000,000) shares authorized; nil (2000 - nil) shares issued and outstanding - - Additional paid-in capital 2,050 2,043 Warrants 11 172 172 Treasury stock, at cost 12 (16) (237) Cumulative translation adjustments 3 (32) Retained earnings 3,644 4,228 ---------- ---------- Total shareholders' equity 5,878 6,206 ---------- ----------- Total liabilities and shareholders' equity 10,092 11,379 ========== ==========
The accompanying notes are an integral part of these financial statements. F-3 EURO TECH HOLDINGS COMPANY LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001 (Amounts in thousands of United States dollars)
1999 2000 2001 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income 339 358 584 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation of property, plant and equipment 99 109 201 Gain on disposal of property, plant and equipment - (1) - (Increase) decrease in assets: Accounts receivable (100) 329 (220) Bills receivable (38) (25) (475) Prepayments and other current assets (93) 94 (121) Inventories (83) (376) (1,058) Value-added tax recoverable - - (26) Increase (decrease) in liabilities: Accounts payable (73) (577) 1,371 Bills payable 389 423 (720) Due to related companies 200 20 85 Other payable and accrued expenses 283 311 269 Taxation payable 5 10 50 ---------- ---------- ---------- Net cash provided by (used in) operating activities 928 675 (60) ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (217) (313) - ---------- ---------- ---------- (Continued)
F-4 EURO TECH HOLDINGS COMPANY LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd) FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001 (Amounts in thousands of United States dollars)
1999 2000 2001 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term bank loan (65) (77) (96) Purchase of treasury stock - (16) (221) ---------- ---------- ---------- Net cash used in financing activities (65) (93) (317) ---------- ---------- ---------- Effect of exchange rate changes on cash and cash equivalents - 3 (32) ---------- ---------- ---------- Net (decrease) increase in cash and cash 646 269 (380) equivalents Cash and cash equivalents, beginning of year 3,045 3,691 3,963 ---------- ---------- ---------- Cash and cash equivalents, end of year 3,691 3,963 3,551 ========== ========== ========== Supplementary information Interest received 114 138 81 Interest paid 29 25 15 Income taxes paid 82 84 113 Income taxes refund 8 - -
The accompanying notes are an integral part of these financial statements. F-5 EURO TECH HOLDINGS COMPANY LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001 (Amounts in thousands of United States dollars)
Additional Cumulative Common paid-in Treasury translation Retained stock capital Warrants Stock adjustment earnings Total ----------- ----------- ---------- ---------- ---------- ---------- ----------- $'000 Balance as of January 1, 1999 21 2,054 172 - - 2,947 5,194 Net income - - - - - 339 339 Stock split effected in the form of a dividend 4 (4) - - - - - ----------- ----------- ---------- ---------- ---------- ---------- ----------- Balance as of December 31, 1999 25 2,050 172 - - 3,286 5,533 Net income - - - - - 358 358 Purchase of treasury stock - - - (16) - - (16) Foreign exchange translation adjustment - - - - 3 - 3 ----------- ----------- ---------- ---------- ---------- ---------- ----------- Balance as of December 31, 2000 25 2,050 172 (16) 3 3,644 5,878 Net income - - - - - 584 584 Purchase of treasury stock - - - (221) - - (221) Stock split effected in the form of a dividend 7 (7) - - - - - Foreign exchange translation adjustment - - - - (35) - (35) ----------- ----------- ---------- ---------- ---------- ---------- ----------- Balance as of December 31, 2001 32 2,043 172 (237) (32) 4,228 6,206 =========== =========== ========== ========== ========== ========== ===========
The accompanying notes are an integral part of these financial statements. F-6 EURO TECH HOLDINGS COMPANY LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in United States dollars unless otherwise stated) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES Euro Tech Holdings Company Limited (the "Company") was incorporated in the British Virgin Islands on September 30, 1996. Euro Tech (Far East) Limited ("Far East") is the principal operating subsidiary of the Company. It is principally engaged in the marketing and trading of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems in Hong Kong and in the People's Republic of China (the "PRC"). Details of the Company's subsidiaries are summarized as follows:
Name Percentage of Place of Principal activities equity ownership incorporation - -------------------------------------- ------------------ ------------------ ----------------------------- Euro Tech (Far East) Limited 100% Hong Kong Marketing and trading of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems Euro Tech (China) Limited 100% Hong Kong Inactive ChinaH2O.com Limited 100% Hong Kong Internet content provider and provision of marketing services for environmental industry to group companies Euro Tech Trading (Shanghai) Limited 100% The PRC Marketing and trading of water and waste water related process control, analytical and testing instruments, disinfection equipment, supplies and related automation systems Shanghai Euro Tech Limited 100% The PRC Manufacturing of analytical and testing equipment
F-7 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. BASIS OF CONSOLIDATION The consolidated financial statements include the financial statements of the Company and its subsidiaries (the "Group"). All material intra-group balances and transactions have been eliminated on consolidation. b. SUBSIDIARIES A subsidiary is a company in which the Company holds, directly or indirectly, more than 50% of its outstanding voting share capital and over which it is able to exercise control. c. REVENUE RECOGNITION The Company adopted the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 101: "Revenue Recognition". SAB No. 101 requires that the four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. The Company's revenue arising from sale of goods is recognized upon delivery of goods and passage of title to customers. The Company grants discounts or allowances on merchandise and accounts for these discounts and allowances as a deduction from sales. d. TAXATION The Company accounts for income tax under the provision of Statement of Financial Accounting Standards ("SFAS") No. 109: "Accounting for Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred income taxes are provided using the liability method. Under the liability method, deferred income taxes are recognized for the tax effects of temporary differences between the tax and financial statements bases of assets and liabilities and for credit and loss carryforwards. To the extent that a deferred tax asset will more likely than not go unrealised, a valuation allowance is recognised. e. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and demand deposits with banks. f. INVENTORIES Inventories are stated at the lower of cost, on the first-in, first-out method, or net realizable value. Costs include purchase and related costs incurred in bringing each product to its present location and condition. Net realizable value is calculated based on the estimated normal selling price, less further costs expected to be incurred to disposal. Provision is made for obsolete, slow moving or defective items, where appropriate. F-8 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) g. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation. Gains or losses on disposal are reflected in current operations. Major expenditures for betterments and renewals are capitalized. All ordinary repair and maintenance costs are expensed as incurred. Depreciation of property, plant and equipment is computed using the straight-line method over the assets' estimated useful lives as follows: office premises - 47 to 51 years, leasehold improvements - over terms of the leases, furniture, fixtures and office equipment - 3 to 5 years, motor vehicles - 4 years, and testing equipment - 3 years. The Company accounts for the impairment of long-lived assets to be held and used by recognizing impairment loss on the assets when the sum of the projected undiscounted cash flows is less than the carrying amount of the assets. Measurement of the impairment loss is based on the fair value of the assets, as determined by the discounted cash flow method. Assets to be disposed of are reported at the lower of the carrying amount or fair value of such assets less costs to sell. In the opinion of the management, no indication of impairment existed as of December 31, 2000 and 2001. h. OPERATING LEASES Leases where substantially all the risks and rewards of ownership of the leased assets remain with the lessors are accounted for as operating leases. Rental payments under operating leases are charged to expenses on the straight-line basis over the period of the relevant leases. i. FOREIGN CURRENCY TRANSLATION The Company maintains its books and records in United States dollars. Its subsidiaries maintain their books and records either in Hong Kong dollars or Chinese Renminbi ("functional currencies"). Foreign currency transactions during the year are translated into the respective functional currencies at the applicable rates of exchange at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the respective functional currencies using the exchange rates prevailing at the balance sheet dates. Gain or losses from foreign currency transactions are recognized in the statements of income during the year in which they occur. Translation adjustments on subsidiaries' equity are included as cumulative translation adjustments. j. COMPREHENSIVE INCOME The Company has adopted Statement of Financial Accounting Standards (the "SFAS") No. 130: "Reporting Comprehensive Income," which requires the Company to report all changes in equity during a period, except for those resulting from investment by owners and distribution to owners, in the financial statements for the period in which they are recognized. The Company has presented comprehensive income, which encompasses net income and foreign currency translation adjustments, in the statements of income and comprehensive income. F-9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) k. EARNINGS PER COMMON SHARE Earnings per common share ("EPS") is computed in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share", by dividing the net income by the weighted average number of shares of common stock outstanding during the period. Basic and diluted EPS are the same as the exercise prices of the redeemable common share purchase warrants and stock options were higher than the average market prices of the common stock for the years ended December 31, 1999, 2000 and 2001. l. STOCK-BASED COMPENSATION The Company accounts for employee stock options in accordance with Accounting Principles Board ("APB") Opinion No. 25: "Accounting for Stock Issued to Employees". Compensation expense related to employee stock options is recorded only if the fair value of the underlying stock exceeds the exercise price on the date of grant. Also, the Company has adopted the disclosure-only requirement of SFAS No. 123: "Accounting of Stock-Based Compensation," which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and provide pro-forma net income and pro-forma earnings per share disclosures for employee stock grants as if the fair-value-based method of accounting as prescribed in SFAS No. 123 had been applied to these transactions. m. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. n. FINANCIAL INSTRUMENTS The carrying values of financial instruments, which consist of cash and cash equivalents, accounts receivable and accounts payable, bills receivable, bills payable and due to related companies approximate their fair values due to the short-term nature of these instruments. The carrying value of long-term bank loan approximates its fair value based upon rates available to the Company for borrowings with similar terms and maturities. F-10 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) o. NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141: "Business combinations" and SFAS No. 142 : "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001. The adoption of SFAS No. 141 did not have a material impact on the Company's financial statements. SFAS No. 142 requires, among other provisions, companies to assess the possible impairment of goodwill existing at the date of adoption and perform subsequent impairment tests on an annual basis. Additionally, existing goodwill and intangible assets must be reassessed and classified consistently in accordance with the Statement's criteria. The Company is required to and will adopt SFAS No. 142 on January 1, 2002. The adoption of SFAS No. 142 is not expected to have a material impact on the Company's financial statements. In August 2001, FASB issued SFAS No. 143: "Accounting for Asset Retirement Obligations". This Statement requires, among other provisions, retirement obligations to be recognized when they are incurred and displayed as liabilities, with a corresponding amount capitalized as part of the related long lived asset. The capitalized element is required to be expensed using a systematic and rational method over its useful life. The Company is required to and will adopt SFAS No. 143 on January 1, 2002. The adoption of SFAS No. 143 is not expected to have a material impact on the Company's financial statements. In October 2001, FASB issued SFAS No. 144: "Accounting for Impairment or Disposal of Long-Lived Assets". The Statement supersedes SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and modifies APB Opinion No. 30, : "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events". For long-lived assets to be held and used, the Statement retains the requirements of SFAS No. 121, whereby an impairment loss is recognized if the carrying value of the assets is not recoverable from its undiscounted cash flows and an impairment loss is measured as the difference between fair values and carrying values of the asset. The new Statement requires long-lived assets to be disposed of other than by sale be considered held and used until it is disposed of. The Statement also broadens the scope of APB Opinion 30 provisions for the presentation of discontinued operations separately from continuing operations to include a component of an entity that either has been disposed of or is classified as held for sale. In addition, discontinued operations are no longer measured on a net realizable value basis, and expected future operating losses must be reflected in the periods incurred, rather than at the measurement date as previously required by APB Opinion No. 30. The Company is required to and will adopt SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 is not expected to have a material impact on the Company's financial statements. F-11 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd) o. NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS (Cont'd) In April 2002, FASB issued SFAS No. 145: "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This statement made revisions to the accounting for gains and losses from the extinguishment of debt, rescinded Statement No. 44, and required certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This statement is required to be adopted by the Company beginning on January 1, 2003. The Company is in the process of evaluating the effect of the adoption of this standard on the consolidated results of operations, financial position and cash flows, if any. 3. OTHER INCOME, NET
1999 2000 2001 ------------------- ------------------- ------------------- $'000 $'000 $'000 Gain on disposal of property, plant and equipment - 1 - Exchange gain, net 23 56 80 Service fee income - 6 - Rental income 44 34 46 ------------------- ------------------- ------------------- 67 97 126 =================== =================== ===================
4. INCOME TAXES The Company is exempt from taxation in the British Virgin Islands. Far East, Euro Tech (China) Limited and ChinaH2O.com Limited provide for Hong Kong profits tax at a rate of 16% on the basis of their income for financial reporting purposes, adjusting for income and expense items which are not assessable or deductible for profits tax purposes. In accordance with the relevant income tax laws and regulations applicable to foreign investment enterprises in the PRC, Euro Tech Trading (Shanghai) Limited and Shanghai Euro Tech Limited, subsidiaries of the Company, are exempt from the PRC enterprise income tax of 15% for two years starting from their first profit-making year, after offsetting losses brought forward, if any, followed by a 50% reduction for the next three years thereafter. F-12 4. INCOME TAXES (Cont'd) - --------------------- The reconciliations of the Hong Kong statutory income tax rate to the effective income tax rate as stated in the consolidated statements of income are as follows:
1999 2000 2001 ------------------- ------------------- ------------------- $'000 $'000 $'000 Statutory tax rate 16.0% 16.0% 16.0% Valuation allowances 2.7% 5.5% 4.9% Others - (0.7%) 0.9% ------------------- ------------------- ------------------- Effective tax rate 18.7% 20.8% 21.8% =================== =================== ===================
Income taxes represent current Hong Kong profits tax. No PRC enterprise income tax was provided for the years ended December 31, 1999, 2000 and 2001 as the PRC subsidiaries were still in tax loss positions. The accumulated tax losses of the PRC subsidiaries available to offset again future profit were $34,648, $67,815 and $103,453, respectively for the years ended December 31, 1999, 2000 and 2001. The components of deferred tax assets are as follows:
2000 2001 ------------------- ------------------ $'000 $'000 Deferred tax assets arising from PRC tax losses 25 53 Less: Valuation allowances (25) (53) ------------------- ------------------ Net deferred tax assets - - =================== ==================
5. ACCOUNTS RECEIVABLE
2000 2001 ------------------- ------------------ $'000 $'000 Trade receivables 2,543 2,756 Less: Allowance for doubtful debts (46) (39) ------------------- ------------------ 2,497 2,717 =================== ==================
F-13 6. INVENTORIES
2000 2001 ------------------- ------------------ $'000 $'000 Raw materials 32 18 Finished goods 913 1,985 ------------------- ------------------ 945 2,003 =================== ==================
7. PROPERTY, PLANT AND EQUIPMENT
2000 2001 ------------------- ------------------ $'000 $'000 Office premises 2,271 2,271 Leasehold improvements 46 46 Furniture, fixtures and office equipment 389 388 Motor vehicles 126 126 Testing equipment 51 52 ------------------- ------------------ 2,883 2,883 Less: Accumulated depreciation (599) (800) ------------------- ------------------ 2,284 2,083 =================== ==================
As of December 31, 2000 and 2001, office premises with net book values of $1,066,000 and $1,033,000, respectively, were pledged to secure certain banking facilities of the Group (see Note 8). F-14 8. LONG-TERM BANK LOAN Long-term bank loan is secured by certain of the Group's office premises, bears interest at the best lending rate offered by the Group's bank plus 1.75% per annum and matures at various dates before December 2002. Future maturities of long-term bank loan are as follows:
2000 2001 ------------------- ------------------ $'000 $'000 Within one year 94 90 During the second year 92 - ------------------- ------------------ 186 90 =================== ==================
As of December 31, 2001, the Group had various banking facilities available from financial institutions amounting to approximately $3,761,000 (2000 - $4,496,000), of which approximately $2,952,000 (2000 - $3,033,000) remained unused. 9. OTHER PAYABLE AND ACCRUED EXPENSES Other payable and accrued expenses mainly represent deposits received from customers and accurals for operating expenses. 10. COMMON STOCK In September 1999, the Company effected a two-for-ten stock split effected in the form of a dividend, resulting in an increase of approximately 413,000 shares of common stock of $0.01 each. In August 2001, the Company effected a three-for-ten stock split effected in the form of a dividend, resulting in an increase of approximately 745,000 shares of common stock of $0.01 each. The effects of the above two-for-ten and three-for-ten stock splits effected in the form of a dividend have been reflected retroactively in the financial statements and all earnings per share computations. F-15 11. WARRANTS A total of 2,620,800 warrants were issued in 1997, which comprised 1,076,400 public warrants, 1,450,800 private warrants and 93,600 underwriting warrants issued under the Company's warrants plan. Each public and private warrant entitles the holder thereof to acquire one share of the Company's common stock at the exercise price of $3.52 during the period from March 14, 1998 to March 14, 2003. Each underwriter warrant entitles the holder thereof to acquire one share of the Company's common stock at the exercise price of $5.29 during the period from March 14, 1998 to March 14, 2002. If the closing bid price of the Company's common stocks is above $5.4487 for twenty consecutive days, the Company has the right to redeem the warrants at the price of $0.10 each. For the year ended December 31, 1999, 2000 and 2001, no warrants were exercised. 12. TREASURY STOCK The Company authorized a stock buyback program in December 2000 pursuant to which up to 162,500 shares, not to exceed $281,250 in value, of the Company's common stock could be purchased in the open market from time to time as market and business conditions warrant. During the years ended December 31, 2000 and 2001, the Company repurchased a total of 17,355 and 144,860 shares of common stock for a consideration of approximately $16,000 and $221,000, respectively. There was no reissuance of treasury stock during the years ended December 31, 2000 and 2001. 13. STOCK OPTIONS A total of 2,184,000 shares of common stock have been reserved for issuance under the Company's management options plan (the "Management Options"). The Management Options provides for the grant of options to its officers, directors and employees in such numbers and to such persons as the Company's Chairman of the Board of Directors and Chief Executive Officer may direct. In 1997, the Company granted its officers, directors and employees options under the Management Options, which allow them to purchase up to 2,073,240 shares of common stock. The exercise price of the options granted is $2.56 per share for 624,000 of such options and $3.53 per share for the remaining 1,449,240. During the year ended December 31, 2000, 17,160 options with the exercise price of $3.53 were cancelled. During the same year, the Company has further granted 115,570 options under the Management Options with the exercise price of $3.53 per share to its officers, directors and employees, which allow them to purchase up to 115,570 shares of common stock. The options vested for a period of one year and expired in March 2007. For the year ended December 31, 2001, no Management Options were granted or exercised. During the year ended December 31, 2000, a total of 569,400 shares of common stock have been reserved for issuance under the Company's 2000 Stock Option Plan (the "2000 Stock Options"). The 2000 Stock Options provides for the grant of options to its officers, directors and employees in such numbers and to such persons as the Company's Chairman of the Board of Directors and Chief Executive Officer may direct. During the year ended December 31, 2000, the Company granted such options to its officers, directors and employees under the 2000 Stock Options, which allow them to purchase up to 353,600 shares of common stock. The exercise price of all options granted is $1.22 per share. The options vest within a six-month to one-year period and will be expired in August 2010. During the year ended December 31, 2001, no option under 2000 Stock Options were granted or exercised. F-16 13. STOCK OPTIONS (Cont'd) Changes in outstanding options under various plans mentioned above were as follows:
1999 2000 2001 -------------------------- -------------------------- -------------------------- Weighted Weighted Weighted average average average Number of exercise Number of exercise Number of exercise options price options price options price ------------ ------------ ------------ ------------ ------------ ------------ $ $ $ Outstanding, beginning 2,073,240 3.24 of year 2,073,240 3.24 2,525,250 2.97 Granted - - 469,170 1.79 - - Exercised - - - - - - Cancelled - - (17,160) (3.53) - - ------------ ------------ ------------ ------------ ------------ ------------ Outstanding, end of 2,073,240 3.24 year 2,525,250 2.97 2,525,250 2.97 ============ ============ ============ ============ ============ ============ Exercisable, end of 2,073,240 3.24 year 2,171,650 3.25 2,525,250 2.97 ============ ============ ============ ============ ============ ============
As of December 31, 2001, the options outstanding and exercisable had exercise price in the range of $1.22 to $3.53 and a weighted average unexpired life of approximately 7.58 years The Company accounts for stock-based compensation using the intrinsic value method prescribed by APB Opinion No. 25, under which no compensation cost is recognized as all stock options granted under the Management Options and the 2000 Stock Options have exercise prices at or above fair market value of the underlying stock at the date of grant. Had compensation expense for the Company's stock-based compensation plan been recognized based on fair value of the options on the grant date in accordance with SFAS No. 123, the Company's pro forma net income and earnings per common share would have been as follows:
1999 2000 2001 ---------------- ---------------- ---------------- $'000 $'000 $'000 Pro forma net income 339 102 325 ================ ================ ================ Reported net income 339 358 584 ================ ================ ================ Pro forma earnings per common share - Basic $ 0.11 $ 0.03 $ 0.09 - Diluted $ 0.11 $ 0.03 $ 0.09 ================ ================ ================ Reported earnings per common share - Basic $ 0.11 $ 0.11 $ 0.18 - Diluted $ 0.11 $ 0.11 $ 0.18 ================ ================ ================
Weighted average fair value of Management Options and 2000 Stock Options granted during the year ended December 31, 2000 of $1.43 is estimated on the date of grant using the Black-Scholes option-pricing model. Fair values of Management Options and 2000 Stock Options are estimated on the date of grant using the following assumptions:
1999 2000 2001 ---------------- ---------------- ---------------- Risk-free interest rate - 6.1% - Expected dividend yield - 0% - Expected option life - 7 years - Expected stock price volatility - 127% -
F-17 13. STOCK OPTIONS (Cont'd) The Black-Scholes option-pricing model requires the input of subjective assumptions, including the expected volatility of stock price. Because changes in subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing model may not necessarily provide a realiable measure of the fair value of the stock options. 14. PENSION PLAN Prior to December 1, 2000, the Group had a defined contribution pension plan for all its Hong Kong employees. Under this plan, all employees were entitled to pension benefits equal to their own contributions plus 50% to 100% of individual fund account balances contributed by the Group, depending on their years of service with the Group. The Group was required to make specific contributions at approximately 10% of the basic salaries of the employees to an independent fund management company. The Group had no future obligations for the pension payment or any post-retirement benefits beyond the annual contributions made. The independent fund management company was responsible for the ultimate pension liabilities to those resigned or retired employees. With the introduction of the Mandatory Provident Fund Scheme, a defined contribution scheme managed by an independent trustee, by the Hong Kong Government on December 1, 2000, each of the Group and its employees makes monthly contributions to the scheme at 5% of the employee's cash income as defined under the Mandatory Provident Fund legislation. Contributions of both the Group and its employees are subject to a maximum of HK$1,000 per month and thereafter contributions are voluntary and are not subject to any limitation. The Group and its employees made their first contributions in December 2000. As stipulated by the rules and regulations in the PRC, the Group contributes to state-sponsored retirement plans for its employees in Mainland China. The Group contributes approximately 7% (1999 and 2000 - 7%) of the basic salaries of its employees, and has no further obligations for the actual payment of pension or post-retirement benefits beyond the annual contributions. The state-sponsored retirement plans are responsible for the entire pension obligations payable to retired employees. During the years ended December 31, 1999, 2000 and 2001, the aggregate contributions of the Group to the aforementioned retirement benefit schemes were approximately $124,000, $97,000 and $135,000, respectively. F-18 15. RELATED PARTY TRANSACTIONS a. The transactions with related parties are summarized as follows:
1999 2000 2001 ------------------- ------------------- ------------------- $'000 $'000 $'000 Sale of goods to Eurotherm Limited 33 26 30 Purchase of goods from - Armtison Limited 38 72 68 - Actions Instruments (China) Limited 7 8 7 - Eurotherm Limited 850 845 2,114 Interest income on trade receivables earned from Armtison Limited 10 10 10 Interest income from advances to employees - - 1 Rental income for office premises earned from Eurotherm Limited 36 34 34 Rental expense for office premises charged by Armtison Limited 46 46 46 Management fee charged by Eurotherm Limited 23 29 27 =================== =================== ===================
b. Details of amounts due to related companies are as follows:
2000 2001 ------------------- ------------------ $'000 $'000 Armtison Limited 11 7 Actions Instruments (China) Limited 1 2 Eurotherm Limited 243 331 ------------------- ------------------ 255 340 =================== ==================
The amount due to related companies are trade in nature, unsecured, non-interest bearing and are repayable in 2002. c. As of December 31, 2001, approximately $120,000 of other current assets represented advances to certain PRC employees of the Company. The advances are used to finance the operations of certain retail shops established in PRC by the employees to market the Company's products. The advances are unsecured, bear interest at a nominal rate and have no fixed repayment terms. Armtison Limited and Actions Instruments (China) Limited are beneficially owned by Mr. T. C. Leung, Chief Executive Officer and Chairman of the Board of Directors. Mr. T. C. Leung is also a director of Eurotherm Limited. F-19 16. OPERATING LEASE COMMITMENTS The Group has various operating lease agreements for office and industrial premises. Rental expenses for the years ended December 31, 1999, 2000 and 2001 were approximately $206,000, $191,000 and $201,000, respectively. Future minimum rental payments as of December 31, 2001 and 2002, under agreements classified as operating leases with non-cancellable terms, are as follows:
2 0 0 0 2 0 0 1 ------------------- ------------------ $'000 $'000 2001 57 - 2002 - 136 ------------------- ------------------ Total minimum lease payments 57 136 =================== ==================
17. SEGMENT INFORMATION a. NET SALES Geographical analysis of net sales is as follows:
1999 2000 2001 ------------------- -------------------- ------------------- $'000 $'000 $'000 Hong Kong 3,801 4,503 5,119 The PRC 8,913 10,207 14,173 Others 393 300 393 ------------------- -------------------- ------------------- 13,107 15,010 19,685 =================== ==================== ===================
b. LONG-LIVED ASSETS * Geographical analysis of long-lived assets is as follows:
2000 2001 -------------------- ------------------- $'000 $'000 Hong Kong 1,385 1,230 The PRC 899 853 -------------------- ------------------- 2,284 2,083 ==================== ===================
* Long-lived assets represent property, plant and equipment, net. F-20 17. SEGMENT INFORMATION (Cont'd) c. MAJOR SUPPLIERS Details of individual suppliers accounting for more than 5% of the Group's purchases are as follows:
1999 2000 2001 ------------------- -------------------- ------------------- $'000 $'000 $'000 Wallace & Tiernan Pacific Pty. Ltd. 8% 7% 5% Hach Company Inc. 20% 23% 22% Hioki E.E. Corp. 11% 12% 11% ThermoQuest Corporation 5% 7% 9% =================== ==================== ===================
Some of the purchase agreements signed with the Group's suppliers are memorialized and are not as formal contracts but rather through other acknowledgements or correspondence which may contain a vague, if any, description of the terms and conditions of such agreements, and therefore may be unenforceable. 18. SUBSEQUENT EVENTS a. During the year ended December 31, 2001, Far East entered into two agreements with Tamworth Industrial Ltd., an independent third party, to acquire 30% equity interests in Yixing Pact Environmental Technology Co., Ltd., a wholly foreign-owned enterprise incorporated in the PRC, and Pact Asia Pacific Limited, a company incorporated in the British Virgin Islands, for a total consideration of $288,000. The acquisitions were completed on January 30, 2002. These associated companies are principally engaged in design, manufacture and operation of water and waste water treatment machinery and equipment in China. b. In March 2002, the Company established another stock option plan, 2002 Employees' Stock Option and Incentive Plan (the "2002 Stock Options"), which provides for the grant of options to its officers, directors and employees in such numbers and to such persons as the Company's Chairman of the Board of Directors and Chief Executive Officer may direct. A total of 140,000 shares of common stock of the Company have been reserved for issuance under the 2002 Stock Options at an exercise price not less than the fair market value of the common stock at the time such options are granted. c. In January 2002, the Company granted options to certain of its officers and directors pursuant to the 2000 Stock Options, which allow them to purchase up to 189,800 shares of common stock at a price of $1.72 per share. The options vest for a period of 6 month and are expiring in August 2010. F-21 EX-4.9 3 a2083297zex-4_9.txt EXHIBIT 4.9 Exhibit 4.9 Euro Tech Holdings Company Limited Form 20-F Fiscal year: December 31, 2001 EURO TECH HOLDINGS COMPANY LIMITED 18/F GEE CHANG HONG CENTRE 65 WONG CHUK HANG ROAD HONG KONG TEL: (852) 2814 0311 FAX: (852) 2873 4887 June 27, 2002 Securities and Exchange Commission Washington, DC Arthur Andersen & Co has represented to the Board of Directors of Euro Tech Holdings Company Limited that its audit of the consolidated financial statements of Euro Tech Holdings Limited and Subsidiaries as of and for the year ended December 31, 2001 was subject to the firm's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards and that there was appropriate continuity of Arthur Andersen & Co personnel working on the audit, availability of U.S. national office consultation and availability of personnel at foreign affiliates of Arthur Andersen & Co to conduct the relevant portions of the audit. Yours faithfully, EURO TECH HOLDINGS COMPANY LTD /s/ T.C. Leung T.C. Leung Chairman -----END PRIVACY-ENHANCED MESSAGE-----