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
Our
historical Consolidated Financial Statements are prepared in accordance with
accounting principles generally accepted in the United States (“GAAP”) and
presented in United States dollars. The selected financial information set
forth
below is derived from the consolidated financial statements of the Company.
The
selected information is qualified in its entirety by reference to, and should
be
read in conjunction with, such consolidated financial statements, related
notes
and “Operating and Financial Review and Prospects” included as Item 5 in this
report.
Selected
Consolidated Financial Information (In thousands, except per share
data):
|
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
|
Income
Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
17,543
|
|
$
|
19,432
|
|
$
|
20,370
|
|
$
|
25,356
|
|
$
|
27,678
|
|
|
Gross
profit
|
|
|
2,492
|
|
|
3,384
|
|
|
3,882
|
|
|
5,094
|
|
|
5,130
|
|
|
Operating
income (loss)
|
|
|
(1,029
|
)
|
|
(241
|
)
|
|
159
|
|
|
875
|
|
|
(269
|
)
|
|
Net
income (loss)
|
|
|
(1,252
|
)
|
|
(231
|
)
|
|
485
|
|
|
982
|
|
|
(152
|
)
|
|
Dividend
declared and paid
(1)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
237
|
|
|
323
|
|
|
Per
share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)-basic
|
|
$
|
(0.43
|
)
|
$
|
(0.08
|
)
|
$
|
0.17
|
|
$
|
0.32
|
|
$
|
(0.05
|
)
|
|
Net
income (loss)-diluted
|
|
$
|
(0.43
|
)
|
$
|
(0.08
|
)
|
$
|
0.17
|
|
$
|
0.30
|
|
$
|
(0.05
|
)
|
|
Dividend
declared & paid
(1)
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0.08
|
|
|
0.10
|
|
|
Weighted
average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,905
|
|
|
2,904
|
|
|
2,902
|
|
|
3,030
|
|
|
3,260
|
|
|
Diluted
|
|
|
2,905
|
|
|
2,904
|
|
|
2,902
|
|
|
3,258
|
|
|
3,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
$
|
4,723
|
|
$
|
4,243
|
|
$
|
3,657
|
|
$
|
3,780
|
|
|
3,473
|
|
|
Working
capital
|
|
|
6,425
|
|
|
6,716
|
|
|
7,753
|
|
|
8,774
|
|
|
9,850
|
|
|
Total
assets
|
|
|
15,644
|
|
|
15,701
|
|
|
16,494
|
|
|
18,688
|
|
|
20,100
|
|
|
Long
Term Debt
|
|
|
49
|
|
|
112
|
|
|
230
|
|
|
385
|
|
|
967
|
|
|
Shareholders’
equity
|
|
|
11,697
|
|
|
11,466
|
|
|
11,907
|
|
|
12,842
|
|
|
13,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Dividends
declared for all periods were declared as cash
dividends.
|
RISK
FACTORS
The
Company’s business and operations involve numerous risks, some of which are
beyond the Company’s control, that may affect future results and the market
price of the Company’s Common Shares. The following discussion highlights some
of the risks the Company faces.
Risks
Relating to Operating in China
Dependence
on Agreements with Chinese State-Owned Enterprises
.
All of
the Company’s operations are currently dependent on its manufacturing operations
conducted in China. Pursuant to its five leases (the “Premises Leases”), the
Company utilizes approximately 450,000 square feet of space for manufacturing
operations and dormitory facilities at the site of its principal factory
complex
in Long Hua, Shenzhen, China where the Company to date has conducted all
of its
manufacturing operations
.
The
Company’s operations in Long Hua, Shenzhen, are conducted pursuant to agreements
entered into between certain China companies set up by the local government
and
the Shenzhen City Baoan District Foreign Economic Development Head Company
and
its designees (collectively, the “BFDC”) (the agreements, collectively the “BFDC
Agreements”). The Premises Leases currently expire on February 28, 2009.
However, the Premises Leases may be terminated at any time prior to 2009
by
either the Company or the landlord upon six months notice to the other party.
Should the landlord elect to terminate the Premises Leases before 2009, or
should the Premises Lease be terminated for any other reason, the entire
operations of the Company would have to be relocated to other facilities.
Any
such relocation would be costly and would disrupt the Company’s operations. Any
unplanned termination by the landlord would have a severe adverse affect
on the
Company, its operations, its viability and its financial condition. While
the
Company believes that it could find suitable alternative facilities, the
terms
of such alternate facilities could be less favorable to the Company. Any
contractual dispute under either of the BFDC Agreements or the Premises Leases
could have a material adverse affect on the Company’s operations and financial
condition. Although the Company currently is considering relocating its
principal facilities from Long Hua, Shenzhen, to one or more alternative
sites,
the Company currently is still dependent on its principal facilities, and
any
disruption of its lease arrangements at its Long Hua, Shenzhen, facilities
would
materially, and adversely affect the Company.
To
facilitate the Company’s operations in Long Hua, Shenzhen, the local government
initially set up three separate China companies that are parties to the BFDC
Agreements. The term of two of these agreements have been extended with the
remaining two China companies, and these two agreements now expire in 2016
(by
the mutual consent of the parties, the third agreement with the local government
agency was retired during the past year). The BFDC is owned by the local
government of Long Hua, the town in which the factory is located. Pursuant
to
the BFDC Agreements, the BFDC is the party responsible for providing
manufacturing facilities and supplying workers to the Company and the Company
is
responsible for paying a management fee, and certain other charges to the
BFDC.
As a result of structuring its operations so that they are conducted pursuant
to
the BFDC Agreements and the Premises Leases, the Company’s operations in Long
Hua, Shenzhen, are not subject to certain rules and regulations that would
be
imposed on entities which are considered under China law to be doing business
in
China by utilizing other business structures such as joint ventures or wholly
owned subsidiaries organized in China. For example, the Company has not been
required to apply for permits or licenses in China or to register to do business
in China. Should there be any adverse change in the Company’s dealings with the
BFDC, or should the local or federal government change the rules under which
the
Company currently operates, all of the Company’s operations and assets could be
jeopardized.
To
date,
the Company and the BFDC have been dealing with each other on terms different
in
certain respects than those contained in the BFDC Agreements. There can be
no
assurance that the BFDC will not insist upon a change in the current practices
so as to require adherence to the terms of the BFDC Agreements, which the
Company considers less favorable to it than the practices currently in effect,
or that the Company or BFDC may not be required to do so by the Ministry
of
Foreign Trade and Economic Co-operation of China and other relevant authorities.
There can also be no assurances that the Company will be able to negotiate
extensions and further supplements to any of the BFDC Agreements or that
the
Company will be able to continue its operations in China. If the Company
were
required to adhere to the terms of the BFDC Agreements, the Company’s business
and results of operations could be materially and adversely affected.
The
BFDC
Agreements and the Premises Leases are dependent on the Company’s continuing
good relationship with the designees of the local government. In the event
of a
dispute involving the BFDC Agreements or the Premises Leases, the current
arrangement under which the Company conducts its business may be difficult
to
enforce in China. The Company’s operations and prospects will be materially and
adversely affected by the failure of the BFDC or Land & Sun Company to honor
or extend the current arrangement or renew the BFDC Agreements or the Premises
Leases, respectively.
Internal
Political and Other Risks
.
As of
the date of this Annual Report, all of the Company’s manufacturing facilities
are located in China. As a result, the Company’s operations and assets are
subject to significant political, economic, legal and other uncertainties
associated with doing business in China. Changes in policies by the Chinese
government resulting in changes in laws, regulations, or the interpretation
thereof, confiscatory taxation, restrictions on imports and sources of supply,
currency re-valuations or the expropriation of private enterprise could
materially adversely affect the Company. An example of such uncertainty and
rapid changes was China’s sudden imposition in 2000 on the metals industry of
the Customs License Deposit, which resulted in the Company being forced to
pay a
20% deposit on all imported steel metals. The Customs License Deposit rules
have
since been modified and partially repealed.
The
Chinese government has been pursuing economic reform policies, including
the
encouragement of private economic activity and greater economic
decentralization. There can be no assurance, however, that the Chinese
government will continue to pursue such policies, that such policies will
be
successfully pursued, that such policies will not be significantly altered
from
time to time, or that business operations in China would not become subject
to
the risk of nationalization, which could result in the total loss of investments
in that country. Economic development may be limited as well by other factors,
such as the imposition of austerity measures intended to reduce inflation,
the
inadequate development of an infrastructure, and the potential unavailability
of
adequate transportation, adequate power, adequate water supplies, satisfactory
roads and communications and raw materials and parts. Certain parts of China,
including the Company’s facilities in Long Hua, Shenzhen, have in the past and
recently experienced severe shortages of electricity and water, which could
negatively affect the Company. During the past fiscal year, the Company has
experienced both water and electricity shortages, which have caused the Company
to supplement its electricity needs through its diesel electricity generators.
If for any reason the Company were required to move its manufacturing operations
outside of China, the Company’s favorable cost structure could be eliminated,
its competitiveness and market position would be materially jeopardized,
and
there would be substantial doubt as to whether the Company could continue
its
operations.
Revaluation
of Renminbi Yuan.
As a
company whose operations are entirely based in China, it is exposed to
fluctuations in the value of the renminbi yuan, or RMB, the local currency
of
China. The United States and certain European countries have recently been
calling for the re-valuation of the RMB, which revaluation would result in
the
appreciation of the RMB. Should the Chinese government allow a significant
RMB
appreciation, the Company’s cost structure and pricing could change and have a
material negative effect on its operations, sales and financial
results.
Possible
Reoccurrence of SARS.
During
2002/2003, Severe Acute Respiratory Syndrome (SARS) became a major world-wide
health concern. SARS is believed to have originated in China and most SARS
infections and deaths occurred in China. Because SARS is a highly contagious
disease, a number of countries and health organizations, including the World
Health Organization, strongly advised people to avoid traveling to Hong Kong
or
the Guangdong province in mainland China. The Company’s offices and facilities
are located in both Hong Kong and in the Guangdong province. While SARS did
not
affect the Company’s workers, the disease did materially and adversely affect
business in China. Should SARS reoccur in China in the future, the Company’s
employees and operations could be affected. In addition, the Company’s
international customers may reduce their contacts and business with the Company
by shifting their manufacturing needs to manufacturers located outside of
China
or by purchasing products manufactured outside of China. Any such future
shift
of work orders or product purchases from the Company to companies based in
countries that are not so affected by SARS would have a material affect on
the
Company, its operations, and on its financial condition.
Uncertain
Legal System and Application of Laws
.
The
legal system of China is often unclear and is continually evolving, and
currently there can be no certainty as to the application of its laws and
regulations in particular instances. China does not have a comprehensive
system
of laws, and the existing regional and local laws are often in conflict and
subject to inconsistent interpretation, implementation and enforcement. New
laws
and changes to existing laws occur quickly and sometimes unpredictably. As
is
the case with all businesses operating in China, the Company often is also
required to comply with informal laws and trade practices imposed by local
and
regional administrators. Local taxes and other charges are levied depending
on
the local needs for tax revenues and may not be predictable or evenly applied.
These local and regional taxes/charges and governmentally imposed business
practices often affect the Company’s cost of doing business and require the
Company to constantly modify its business methods to both comply with these
local rules and to lessen the financial impact and operational interference
of
such policies. For example, the Company and other companies have periodically
been taxed on foreign currency bank transfers, which taxes can be substantial.
In addition, it is often extremely burdensome for businesses to comply with
some
of the local and regional laws and regulations. As a result, with the general
knowledge and tacit approval of the local and regional agencies, most businesses
fail to fully comply with certain of these more burdensome laws and regulations.
Recently, however, the local and regional agencies have increasingly enforced
rules that previously were not enforced, thereby increasing the burden on
the
Company and the other businesses operating in the region. While the Company
has,
to date, been able to operate with the newly enforced rules and within these
changing administratively imposed business practices, no assurance can be
given
that it will continue to be able to do so in the future. Should the local
or
regional governments or administrators impose new practices or levies that
the
Company cannot effectively respond to, or should the administrators continue
to
enforce more of those rules that they have not previously enforced, the
Company’s operations and financial condition could be materially and adversely
impacted. The Company’s ability to appeal many of the local and regionally
imposed law and regulations is limited, and the Company may not be able to
seek
adequate redress for laws that materially damage its business. The Chinese
judiciary is relatively inexperienced in enforcing the laws that exist, leading
to a higher than usual degree of uncertainty as to the outcome of any
litigation. Even where adequate laws do exist in China, it may not be possible
to obtain swift and equitable enforcement of that law.
Current
Favorable Tax Policy Could Change
.
Under
the BFDC Agreements, the Company is not considered by local tax authorities
to
be doing business in China; therefore, the Company’s activities in China have
not been subject to local taxes on its operations. The BFDC is responsible
for
paying its own taxes incurred as a result of its operations under the BFDC
Agreements. Since the Company reimburses the BFDC for its expenses related
to
the Company’s activities in China, the Company indirectly pays some taxes on its
operations. There can be no assurances, however, that the Company will not
be
subject to direct taxation on its operations in the future. If China did
impose
a direct tax upon the Company, the tax could materially adversely affect
the
Company’s business and results of operations. See Note 3 of Consolidated
Financial Statements for additional information on taxation.
Recent
Turbulent Relations with the United States
.
Relations between the U.S. and China have during the past few years been
strained as a result of numerous events, including the demands by the United
States that China permit the RMB exchange rate to fluctuate, China’s opposition
to the U.S. war in Iraq in 2003, the strained relations between the U.S.
and
North Korea (a neighbor of China), the U.S. Navy reconnaissance plane that
was
downed on Hainan Island in China in April 2001, allegations by the U.S. that
certain thermonuclear military technology of the U.S. has been stolen by
China’s
spies, the continuous support by the U.S. of Taiwan, and the continuous
allegations by the U.S. of human rights abuses in China. In addition, the
U.S.
and China have recently been involved in controversies over the protection
in
China of intellectual property rights that threatened a trade war between
the
countries. These strains on U.S./China relations could affect the ability
of
companies operating in China, such as the Company, from engaging in business
with, or selling to the U.S. or U.S. companies. Any disruption of the current
trade relations with the U.S. could have a material adverse effect on the
Company’s business. No assurance can be given that these and any other future
controversies will not change the status quo involving peaceful trade relations
between the U.S. and China, or that the Company’s business and operations in
China will not be materially and adversely affected. Even if trade relations
between the U.S. and China are not affected by political difficulties between
the two countries, such political friction could adversely affect the prevailing
market price for the Company’s Common Shares.
Labor
Shortages
.
One of
the principal economic advantages of locating the Company’s operations in China
has been the availability of low cost labor. Due to the enormous growth in
manufacturing in China and the effects of China’s one-child policy, the Company
has recently experienced some difficulty in filling its labor needs. In addition
to making labor more difficult to obtain, the shortage of low-cost labor
could
also force the Company to increase its wages, thereby negatively affecting
its
cost advantage. In order to address the increase in labor costs in Long Hua,
Shenzhen, the Company has been exploring opening one or more alternative
locations for its manufacturing facilities in area that have lower labor
costs.
The new, smaller facility that the Company will begin leasing in July 2005
in He
Yuan, China, currently offers lower labor rates than those prevailing in
Long
Hua, Shenzhen. In addition to the recently developing tight labor market,
the
Company has also been affected by cyclical trends and other shortages in
labor
supply. For approximately two months each year, there are labor shortages
in
China as a result of the Chinese New Year during which time the Company follows
the customary practice at its factory complex of temporarily discontinuing
operations. In addition, the availability of labor is also restricted during
the
harvest periods of the year. There is also a large turnover of employees
in
China each year, particularly following the Chinese New Year holiday. The
Company has experienced labor shortages in the past as a result of road and
weather conditions and natural disasters. Any material or prolonged shortage
of
labor would have a material adverse effect on the Company’s results of
operations.
Risks
Related to its Operations
Significant
Financial and Operational Costs Expected to Arise Due To The Current
Restructuring of the Company’s Business Segments
In order
to remain competitive and viable, the Company must continuously revise and
improve its operations and must anticipate and react to changing market forces.
The Company has recently identified a number of changes in the markets in
which
it operates and, in response thereto, is considering either modifying or
selling
some or all of two of its operations. The Company believes that the
proliferation of digital cameras and the photographic capabilities of mobile
telephones will materially and adversely affect its film-based camera
operations. In addition, the Company believes that the market for alarm clocks
will continue to decrease and become increasingly price competitive.
Accordingly, the Company is re-evaluating its ability to compete with these
highly competitive, low margin (and often unprofitable) operations, and has
decided to exit its single-use camera operations. In addition, the Company
continues to focus on its strengths as an OEM manufacturer and to sell or
otherwise reduce its financial exposure associated with its “Kienzle” brandname
product sales operations. These changes will require the Company to
significantly restructure its operations, to reallocate its assets, and to
transition existing facilities and personnel to new uses. The Company’s actions
are expected to disrupt its operations and detract from its principal operations
while it disposes of certain of its existing businesses and/or reorganizes
its
OEM manufacturing operations. Although the Company believes that the disposition
and restructuring of some of its operations will, in the long-term, improve
the
Company’s operations, profitability and financial condition, in the short-term
these actions could have a negative affect on its operations and financial
condition. No assurance can be given that the Company has correctly identified
market changes or that these changes in its business will improve the Company’s
future profitability.
In
addition to the changes that the Company currently is making to its operations,
it will, in the future, also have to react to the continuously changing
manufacturing market. The failure to anticipate, detect or react to market
changes can have severe adverse affects on the Company’s operations. No
assurance can be given that the Company will be able to detect and correctly
react to other future changes in its principal markets, or that its investments
in anticipation of such changes will result in the anticipated return. Should
the Company incorrectly react to market changes, its business, operations
and
financial condition could be adversely affected.
The
Company is Increasingly Financially Dependent Upon a Few Major Customer.
Historically,
a substantial percentage of the Company’s sales has been to small number of
customers. The Company’s current business plan calls for reducing the number of
smaller clients and shifting the Company’s sales and operations to a fewer,
large customers. During the years ended March 31, 2003, 2004 and 2005, the
Company’s sales to its three largest customers for such periods accounted for
approximately 40.6%, 46.1% and 43.9% of net sales respectively. See
“Business
—
Major
Customers.” The Company’s success will depend to a significant extent on
maintaining its major customers and on the success achieved by its major
customers. The Company could be materially adversely affected if it loses
any
major customers or if the business and operations of its major customers
decreases. While the Company has in the past been able to replace major
customers, no assurance can be given that the Company will be able to do
so in
the future. Most of the Company’s sales transactions with its customers are
based on purchase orders received by the Company from time to time. While
the
Company is a party to certain longer term manufacturing agreements that contain
fixed purchase requirements, the Company is to a large extent dependent upon
receiving new purchase orders for future sales. In addition, orders under
fixed
purchase agreements are sometimes not placed with the Company as scheduled,
and
the Company may be unable or unwilling to enforce the terms of such fixed
purchase requirements. As a result, most of the Company’s revenues are dependent
upon periodic orders and the amount of sales to its customers fluctuate from
time to time. In addition, with fewer, larger customers, the Company’s
operations have become more dependent upon fewer customers and would be more
significantly impacted by a delay or reduction of any anticipated purchase
orders or by the loss of any one or more of its major customers.
In
addition to its increasing dependence on generating revenues from fewer,
larger
customers, the Company’s risk exposure to the collection of its accounts
receivable likewise is increasing as the size of receivables from individual
clients increases. A substantial portion of the Company’s sales to its major
customers are made on credit, which exposes the Company to the risk of
significant revenue loss if a major customer is unable to honor its credit
obligations to the Company. Any material delay in being paid by its larger
customers, or any default by a major customer on its obligations to the Company
would significantly and adversely affect the Company’s liquidity. During the
fiscal years ended March 31, 2003, 2004 and 2005, accounts receivable from
the
five customers with the largest receivable balances at year-end represented
49.0%, 61.5% and 67.4% of the total outstanding receivables, and one customer’s
accounts receivable represented 30.8% of the Company’s total receivables as of
March 31, 2005. As of March 31, 2005, the total amount of the Company’s accounts
receivable was $5,165,000.
The
Company Faces Significant Competition From Numerous Larger, Better Capitalized,
and International Competitors
The
Company competes against numerous manufacturers for all of its current products.
Such competition arises from both third party manufacturers (such as the
Company) and from the in
–
house
manufacturing capabilities of existing customers. To a large extent, the
Company
competes in its OEM business on the basis of quality, price, service, and
the
ability to deliver products on a reliable basis. Due to intense price
competition, the Company has during the past few years had to reduce its
price
and its operating margins in all three of its business units. This has led
to
lower sales in some product lines, lower gross margins, and to net losses
in
some product lines. During the past few years, the Company has at times refused
certain purchase orders of manufacturing contracts because of pricing pressures,
which has lowered the Company’s net sales and lowered its market share. Unless
the Company can increase its gross margins, the Company will continue to
operate
at very narrow profit margins, which will negatively affect the Company’s
financial position and its stock price. While the Company intends to reduce
its
operations in the highly competitive, low margin business lines by focusing
its
efforts on offering more proprietary services and increasing sales for its
fully
integrated and complex technical manufacturing services, no assurance can
be
given that the Company will, in fact, be able to compete against its numerous
competitors.
Since
locating its facilities in Shenzhen, China, in 1991, the Company has been
able
to compete with other manufacturers based its cost of operations in Shenzhen,
the availability of a large labor pool, its favorable tax status, and its
convenient access to Hong Kong’s shipping port and business/banking facilities.
Since the Company first moved to Shenzhen as one of the first manufacturers
in
that locality, however, many other manufacturers have re-located or established
new facilities in Shenzhen, and the Company’s competitive advantage has been
significantly diminished. In addition, many of the larger, international
companies that have established competing facilities in Shenzhen have also
established manufacturing facilities in other low-cost manufacturing locations,
many located sites outside of China, which have given those competitors the
ability to shift their manufacturing to those locations whenever costs at
those
other locations was cheaper than in Shenzhen. Accordingly, the Company has
indirectly been competing against both the competitors in Shenzhen as well
as
the other facilities outside of China. No assurance can be given that the
Company will continue to be able to compete effectively in its principal
businesses.
At
times,
the Company competes against a number of Chinese clock manufacturers, some
of
whom the Company believes may be directly or indirectly subsidized by the
state.
These companies often have cost structures that the Company cannot compete
against, thereby forcing the Company to withdraw from certain product markets.
For example, the Company has experienced significant competition from Chinese
clock manufacturers that manufacture the low quality, extremely inexpensive
quartz clocks that are sold at prices significantly below the Company’s cost of
raw materials for these products. These low-price clocks have recently flooded
the clock market and reduced the demand for the more expensive and higher
quality clocks manufactured by the Company and its principal original equipment
manufacturer clients. These clock manufacturers, including those that that
the
Company believes are state-owned or supported, are causing the Company to
re-evaluate the desirability of manufacturing clocks for its own account.
“See,
Item 4. Information on the Company - Reorganization.”
Dependence
on Single China Factory Complex
.
All of
the Company’s products are currently manufactured at a single factory complex
located in Long Hua, Shenzhen in southern China. The Company currently maintains
fire, casualty and theft insurance aggregating approximately $20,000,000
covering various of its stock in trade goods and merchandize, furniture and
equipment in China. The proceeds of this insurance may not be sufficient
to
cover material damage to, or, the loss of, all or material portions of the
factory complex due to fire, severe weather, flood, or other act of God or
cause, and such damage or loss would have a material adverse effect on the
Company’s financial condition, business and prospects. Although the Company is
currently considering relocating its main manufacturing facilities, and in
that
context has entered into a lease for a new smaller manufacturing facility
in He
Yuan, the Company will continue to be solely dependent upon the Long Hua
in the
near future.
The
Company’s Operations May be Significantly Disrupted and Negatively Affected if
The Company Relocates its Manufacturing Facilities.
The
Company is currently considering relocating its facilities to a new or newer
facility outside of Long Hua, Shenzhen. While the Company has not yet located
and secured an alternative facility, the Company may find such a new facility
and may move its entire manufacturing facilities to such a new facility within
one or two years. If the Company does relocate its facilities, its entire
operations, including its business, its manufacturing operations, and its
relationships with clients and local government offices and landlords, could
be
adversely affected by while the Company disassembles, moves and reinstalls
its
equipment and manufacturing capabilities. Any such disruption could affect
the
Company’s relationship with its vendors and customers. In addition, the Company
expects to incur significant expenses in relocating its entire facilities.
All
of the foregoing factors related to any relocation are expected to negatively
impact the Company’s revenues and financial position during the fiscal year(s)
in which the relocation occurs.
Fluctuation
in Foreign Currency Exchange Rates
Because
the Company engages in international trade, the Company is subject to the
risks
of foreign currency exchange rate fluctuations. In prior years, the Company’s
exposure to currency fluctuations was limited because most of its sales were
denominated in either U.S. or Hong Kong dollars. However, as a result of
its
increasing unit sales of its clocks and cameras in Germany and increases
in
metal manufacturing for European customers, which sales are paid in euros,
the
Company has becoming exposed to the risks associated with possible foreign
currency controls, currency exchange rate fluctuations or devaluations. Although
the Company plans to sell or reduce its sales offices and operations in Germany,
thereby reducing the amount of revenues its generates in currencies other
than
the U. S. and Hong Kong dollar, the Company will remain exposed to exchange
rate
fluctuations in the future.
The
Company’s financial results have, from time to time, been affected by currency
fluctuations. For example, during the fiscal years ended March 31, 2003,
2004,
and 2005, the Company recognized net foreign currency exchange gains of
$344,000, $278,000 and $249,000, respectively. However, foreign currency
exchange rates can also result in material losses. For example, during the
fourth quarter of the fiscal year ended March 31, 2005, the Company recognized
a
net foreign currency exchange loss for $181,000. Notwithstanding these currency
transaction fluctuations, the Company does not attempt to hedge its currency
exchange risks and, therefore, will continue to experience gains or losses
due
to changes in foreign currency exchange rates. However, even if the Company
were
to engage in currency hedging transactions, no assurance can be given that
the
Company will not suffer future losses as a result of either currency
fluctuations or as a result of such hedging transactions.
Significant
Worldwide Political, Economic, Legal And Other Risks Related To International
Operations.
The
Company is incorporated in the British Virgin Islands and has active
subsidiaries incorporated in Hong Kong and Germany. The Company’s executive and
administrative offices are located in Hong Kong. All of the Company’s products
are manufactured in China, and almost all of its net book value of its total
fixed assets is located in China. The Company sells its products to customers
in
Hong Kong, North America, Europe, and Japan. As a result, its international
operations are subject to significant political and economic risks and legal
uncertainties, including changes in international and domestic customs
regulations, changes in tariffs, trade restrictions, trade agreements and
taxation, changes in economic and political conditions and in governmental
policies, difficulties in managing or overseeing foreign operations, and
wars,
civil unrest, acts of terrorism and other conflicts. The occurrence or
consequences of any of these factors may restrict the Company’s ability to
operate in the affected region and decrease the profitability of our operations
in that region.
Risks
Relating to Hong Kong
Political
and Economic Developments Affecting Hong Kong
.
The
Company’s registered offices and sales offices and several of its principal
customers and suppliers are located in Hong Kong. Accordingly, the Company
may
be materially adversely affected by factors affecting Hong Kong’s political
situation and its economy or its international, political and economic
relations. Pursuant to a Joint Declaration (the “Joint Declaration”) signed
between the governments of China and Britain on December 19, 1984, China
recovered sovereignty over Hong Kong on July 1, 1997. The Joint Declaration
provides Hong Kong with a high degree of legislative, judicial and economic
autonomy (except in foreign and defense affairs) and the laws currently in
force
in Hong Kong have remained basically unchanged (the Joint Declaration
contemplates that the policies expressed therein will remain in effect for
a
period of at least fifty (50) years from July 1, 1997), there can be no
assurance as to the continued stability of political, economic or commercial
conditions in Hong Kong and that the Company’s financial conditions and results
of operations will not be adversely affected as a consequence of these
events.
A
substantial portion of the Company’s net sales and expenses are denominated in
the Hong Kong monetary unit, the Hong Kong dollar. Since 1983, the exchange
rate
between Hong Kong dollar and the U.S. dollar has been fixed at approximately
HK$7.78 to $1.00. However, due to the currency turmoil that has affected
many
countries in Southeast Asia, there has been pressure to devalue the Hong
Kong
dollar. All dollar amounts (“$”) set forth in this Annual Report are in U.S.
dollars. The peg of the Hong Kong dollar to the U.S. dollar has remained
and
been defended by the Hong Kong Special Administrative Region Government.
While
the Hong Kong Government has indicated that it has no plans to break the
peg
with the U.S. dollars, no assurances can be given that this will remain so
in
the future. The Company incurs its major expenses in Hong Kong dollars and
in
China’s renminbi and generates its revenue’s primarily in U.S. dollars and would
therefore benefit from depreciation of the Hong Kong dollar or renminbi.
However, an appreciation of the renminbi or Hong Kong dollar against the
U.S.
dollar would increase the expenses of the Company when translated into U.S.
dollars and could adversely affect profit margins. There can be no assurance
that the exchange rate of the Hong Kong dollar will not fluctuate in the
future
and that such fluctuations will not have a materially adverse effect on the
Company’s business and results of operations.
Certain
Legal Consequences of Incorporation in the British Virgin
Islands
The
Company is incorporated under the laws of the British Virgin Islands, and
its
corporate affairs are governed by its Memorandum of Association and Articles
of
Association and by the International Business Companies Act of the British
Virgin Islands. Principles of law relating to such matters as the validity
of
corporate procedures, the fiduciary duties of the Company’s management,
directors and controlling shareholders and the rights of the Company’s
shareholders differ from those that would apply if the Company were incorporated
in a jurisdiction within the U.S. Further, the rights of shareholders under
British Virgin Islands law are not as clearly established as the rights of
shareholders under legislation or judicial precedent in existence in most
U.S.
jurisdictions. Thus, the public shareholders of the Company may have more
difficulty in protecting their interests in the face of actions of the
management, directors or controlling shareholders than they might have as
shareholders of a corporation incorporated in a U.S. jurisdiction. In addition,
there is doubt that the courts of the British Virgin Islands would enforce,
either in original action or in an action for enforcement of judgments of
U.S.
courts, liabilities that are predicated upon the securities laws of the
U.S.
Further,
pursuant to the Company’s Memorandum and Articles of Association and pursuant to
the laws of the British Virgin Islands, the Company Memorandum and Articles
of
Association may be amended by the board of directors without shareholder
approval (provided that a majority of the Company’s independent directors do not
vote against such amendment). Until successors are elected, the Company’s
independent directors consist of Benson Lee, Terrence A. Noonan, Mark Majzner
and Dirk Hermann. Amendments which may be made by the board of directors
without
shareholder approval include amendments increasing or reducing the authorized
capital stock of the Company and increasing or reducing the par value of
its
securities.
Risks
Associated With An Investment in the Company’s Securities
Volatility
Of Market Price Of the Company’s Shares.
The
markets for equity securities have been volatile and the price of the Company’s
Common Shares has been and could continue to be subject to material fluctuations
in response to quarter to quarter variations in operating results, news
announcements, trading volume, sales of Common Shares by officers, directors
and
principal shareholders of the Company, news issued from competing companies,
customers, suppliers or other publicly traded companies, general market trends
both domestically and internationally, currency movements and interest rate
fluctuations. Certain events, such as the issuance of Common Shares upon
the
exercise of outstanding stock options of the Company could also adversely
affect
the prevailing market prices of the Company’s securities.
Exemptions
Under The Exchange Act As A Foreign Private Issuer
.
The
Company is a foreign private issuer within the meaning of rules promulgated
under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”). As such,
and though its Common Shares are registered under Section 12(g) of the Exchange
Act, it is exempt from certain provisions of the Exchange Act applicable
to
United States public companies including: the rules under the Exchange Act
requiring the filing with the Commission of quarterly reports on Form 10-Q
or
current reports on Form 8-K; the sections of the Exchange Act regulating
the
solicitation of proxies, consents or authorizations with respect to a security
registered under the Exchange Act; the sections of the Exchange Act requiring
insiders to file public reports of their stock ownership and trading activities
and establishing insider liability for profits realized from any “short-swing”
trading transaction (i.e., a purchase and sale, or sale and purchase, of
the
issuer’s equity securities within six months or less), and the provisions of
Regulation FD aimed at preventing issuers from making selective disclosures
of material information. In addition, certain provisions of the Sarbanes-Oxley
Act of 2002 either do not apply to the Company or the implementation of the
provisions has been deferred. Because of the exemptions under the Exchange
Act
and Sarbanes-Oxley Act applicable to foreign private issuers, shareholders
of
the Company are not afforded the same protections or information generally
available to investors in public companies organized in the United
States.
The
Financial Costs and Administrative Burdens of Implementing The Sarbanes-Oxley
Act of 2002 Could Materially and Adversely Affect Our Financial Results and
Financial Condition.
To date,
the Company has been exempted from some of the regulations under the
Sarbanes-Oxley Act of 2002 that are applicable to U.S. public companies,
and the
costs of complying with the Sarbanes-Oxley Act of 2002 have, to date, not
been
material. Except for the provisions of Section 404 of the Sarbanes-Oxley
Act,
all of the provisions of that act that will apply to the Company must now
be
implemented. These rules require the Company to make a number of changes
in some
of its corporate governance, securities disclosure and compliance practices.
In
addition, in response to the requirements of the Sarbanes-Oxley Act, the
Nasdaq
Stock Market has also promulgated new rules on a variety of subjects. Compliance
with all of these new rules imposed by the SEC and by the Nasdaq Stock Market
and the as well as the Sarbanes-Oxley Act of 2002 will significantly increase
the Company’s legal, financial and accounting costs, and the Company expects
these increased costs to continue in the future. To date, as a foreign private
issuer, the Company has not had to implement certain of the regulations and,
accordingly, has been spared a portion of the cost associated with the
implementation of the new rules. However, commencing this year, the Company
expects to incur significant additional financial and administrative burdens,
particularly in its accounting, auditing and legal fees and expenses, which
expenses could negatively impact the Company’s operations and profitability.
Item
4.
Information
on the Company
History
and Development of the Company.
Highway
Holdings Limited is a holding corporation that was incorporated on July 20,
1990
as a limited liability International Business Company under the laws of the
British Virgin Islands. The Company’s corporate administrative matters are
conducted in the British Virgin Islands through its registered agent: HWR
Services Limited, P.O. Box 71, Craigmuir Chambers, Road Town, Tortola, British
Virgin Islands. The Company’s principal executive offices are located in Hong
Kong at Suite No. 810, Level 8, Landmark North, Sheung Shui, New Territories,
Hong Kong. Highway Holdings Limited currently operates through eight active
controlled subsidiaries.
The
Company began its operations in 1990 in Hong Kong as a metal stamping company.
In 1991, the Company transferred the metal stamping operations to a factory
in
Long Hua, Shenzhen, China, where the metal stamping and the Company’s other
operations have been conducted pursuant to agreements entered into between
certain China companies set up by the local government and the Shenzhen City
Baoan District Foreign Economic Development Head Company and its designees
(collectively, the “BFDC”) (the agreements, collectively the “BFDC Agreements”).
As a result of the BFDC Agreements, the Company is provided with manufacturing
facilities and labor by affiliates of local government instrumentalities,
for
which the Company pays management fees, based on a negotiated sum per factory
worker, and other charges, as well as rent for the factory complex.
Since
its
organization in 1990, the Company has primarily been a manufacturer of high
quality metal parts for major Japanese and German original equipment
manufacturers (“OEMs”). The Company’s metal stamping capabilities have, however,
over the years been supplemented with additional manufacturing and assembly
capabilities, such as the ability to manufacture and assemble plastic parts
and
electronic circuits. As a result, the Company has evolved from a company
that
was only engaged in manufacturing simple metal parts to a company that has
the
capabilities to manufacture and assemble larger complex components, subsystems,
subassemblies and even entire products for its OEM clients. The manufacturing
operations have, since the formation of the Company, always been the largest
segment of the Company’s business and have generated most of the revenues for
the Company.
After
establishing its metal manufacturing operations, the Company in 1991 began
its
camera manufacturing business by acquiring the Hi-Lite Camera Company, a
Hong
Kong camera company, from Benson Lee, who continues to serve the Company
as one
of the Company’s directors. The Company’s camera operations have consisted
primarily of manufacturing 35mm cameras and recycling single-use cameras.
Camera
sales during the three years ended March 31, 2005, 2004, and 2003 accounted
for
13.8%, 23.6% and 24.1% of net sales, respectively. The Company mainly
manufactured cameras for distribution in Europe, the United States and Hong
Kong. Prior to the fiscal year ended March 31, 1999, most of the Company's
camera revenues were derived from the sale of one-time-use cameras that the
Company recycled. In June 1999, in response to an action filed by Fuji Photo
Film Co. with the United States International Trade Commission (ITC), the
importation of the Company’s recycled one-time-use cameras into the United
States was effectively barred. Because the U.S. market represented a large
portion of the Company’s operations, the loss of the U.S. single-use camera
sales significantly and adversely affected the Company’s sales and financial
results. Although the Company continued to distribute its recycled single-use
cameras in Europe and continued to sell its low-end 35mm re-usable cameras
after
the Fuji Photo Film Co. proceedings, the advent and massive proliferation
during
the past few years of digital cameras and mobile telephones with photographic
capabilities has significantly, and negatively affected the film camera industry
and with it the Company’s film-based camera business. Accordingly, as discussed
below, the Company has decided to sell or close its single-use camera operations
in the current fiscal year ending March 31, 2006. The Company also is
considering modifying or separating itself from some of its other film-based
camera operations.
In
1997,
the Company purchased substantially all the assets of Kienzle Uhrenfabrik
GmbH
(
“
Kienzle
Uhren
”
),
a
clock and watch manufacturer that traces its origin back to 1822 in Germany,
that was at the time in receivership. The purchase included the trademark
to the
“Kienzle” name and the equipment, machinery, tools, patents and furniture and
office equipment of Kienzle Uhren. Subsequent to purchasing the equipment,
the
assets of Kienzle Uhren were dismantled, packed and shipped from Germany
to the
Company
’
s
facilities in Hong Kong and China. Thereafter, the Company commenced
manufacturing clocks for third parties for sale under various brand names
(such
as Braun, Swatch, and more recently Casio), as well as clocks for the Company’s
own account (which clocks were sold under the Company’s own “Kienzle” brand
name). In addition, the Company has also recently been using the manufacturing
capabilities of the clock/watch division to manufacture electronic products
and
components for its non-clock OEM manufacturing business. During the fiscal
years
ended March 31, 2003 and 2004, the Company has also licensed the “Kienzle” mark
for use with various other products in Europe, which products were manufactured
by others. During the past two years, the Company also has been manufacturing
and selling watches, both under its “Kienzle” brand name and for sale under
other labels. Revenues from its clock/watch division, consisting of sales
of
clocks and watches (including revenues derived by the clock/watch division
for
OEM manufacturing for the Company’s other divisions), during the fiscal years
ended March 31, 2005, 2004 and 2003 have been 21.9%, 18.1%, and 18.5%,
respectively, of the Company’s net sales. The Company believes that the market
for its clock products is diminishing and becoming extremely price competitive.
As a result, the Company is considering modifying, reducing or otherwise
separating itself from its German clock/watch marketing and distribution
operations during the current fiscal year ending March 31,2005, and may seek
to
sell or license the rights to the Kienzle trademark for watches and clocks
(in
June 2005, the Company sold the rights to the “Kienzle” trademark for uses other
than watches and clocks).
Current
Reorganization and Revised Business Strategy
The
Company continuously monitors the strength and weaknesses of its own operations
as well as market changes that affect its operations and prospects. The Company
believes that the following are the primary factors that currently affect
its
business and its proposed reorganization in response to these
changes:
Manufacturing
Operations
.
Since
its organization, the Company’s principal and most profitable business segment
has been as an OEM manufacturer. Its manufacturing capabilities have improved
and evolved over the past few years, and it is now able to manufacture complete
subassemblies and products for its customers. Unlike most of its smaller
competitors in Shenzhen that can either (i) only manufacture metal parts
or (ii)
only manufacture plastic and electronic parts, the Company has the ability
to
manufacture and assemble high quality parts, components and products that
require all of the foregoing metal, plastic and electronic manufacturing
capabilities. The Company believes that it should further develop and leverage
its multi-disciplinary manufacturing strengths, its cost structure, its
logistical advantages, its reputation as a high-quality manufacturer, and
its
existing relationships with blue chip Japanese and European customers to
further
expand its manufacturing operations. The Company has always used the
manufacturing capabilities that it developed by manufacturing its own products
as a basis for obtaining more complex OEM manufacturing business. However,
because of the substantial changes in the film camera and clock manufacturing
industries, the Company has made the strategic decision to make its OEM
manufacturing operations the principal focus its future operations.
The
Company’s OEM manufacturing business has historically been directed primarily at
manufacturing and assembling metal parts used in subsystems or other products.
As part of its business strategy to capture more of the revenues related
to the
manufacture of end-products, the Company has recently been attempting to
leverage its complete manufacturing capabilities to the manufacture of the
subsystems, subassemblies, larger components, and even completed end-products
for its clients. In addition, the Company is attempting to diversify the
types
of products that it manufactures, and, in that context, now manufactures
a wider
variety of parts and components for its European OEM customers, including
electrical connectors, coils for induction motors, ballasts casings, lighting
fixtures, and friction clutch assemblies.
As
its
manufacturing capabilities and the complexity and quality of products have
improved, the Company has attracted larger, more prestigious clients. In
order
to maintain and increase the amount of business it conducts with these larger,
internationally known clients, the Company has been improving its operating
capabilities, has been improving and upgrading its manufacturing facilities,
and
has taken steps to improve its image as a manufacturer to such clients. In
addition, in order to improve and enhance its systems, in 2002 the Company
received its ISO 9001 quality management system certification, and in 2004
it
also received its ISO 14001 environmental management systems
certification.
As
part
of restructuring its operations and its focus on its OEM operations, the
Company
continues to invest in, and to explore the use of, new technologies with
long-term growth potential, and to enhance its technical expertise and
capabilities in manufacturing finished products. The Company’s goal is to
eventually become an OEM manufacturer of such newer and technologically advanced
products, including more complex electronic products. For example, the Company
has recently been developing LCD television/computer monitors for certain
niche
markets. The Company has manufactured a limited number of these new products
and
has test marketed some of these new products. While the Company has received
positive reviews on its products, the Company is still developing its business
model for these products and is still evaluating the feasibility and
desirability of entering into any new markets. Accordingly, the Company has
not
yet committed to any such new products, and no assurance can be given that
the
Company will, in fact, manufacture any of the new product lines that it is
currently evaluating.
Clocks,
Watches and the “Kienzle” Trademark
.
The
Company has been manufacturing clocks, clock movements since its acquisition
of
Kienzle Uhren in 1997. Most recently, the Company also has been manufacturing
watches. The Company manufactured clock and clock movements on an OEM basis
for
other clock companies, such as Braun and Casio, as well as for its own account
as “Kienzle” products. In addition, the Company has maintained a Kienzle
marketing subsidiary in Germany for the purpose of selling Kienzle branded
clocks and watches in Europe. In order to further leverage the “Kienzle” brand
name in Germany and other parts of Europe, the Company in 2003 entered into
a
supply and licensing agreement with Kienzle AG, then an unaffiliated German
distributor. In connection with the license agreement (which agreement the
Company terminated in 2004), the Company also invested 100,000 euros
(approximately $131,000 based on current exchange rates) in Kienzle AG and
became a minority owner of Kienzle AG. As discussed below, in connection
with
the recent sale of some “Kienzle” trademark rights to Kienzle AG, the Company’s
100,000 euro minority interest may also be returned in full.
During
the past few years, the world-wide market for clocks has been shrinking and
has
become extremely price competitive. As a consequence, the Company’s sales and
marketing organization in Germany has continuously operated at a loss. As
a
result of these factors, the Company is (i) considering selling the Company’s
remaining rights to the “Kienzle” name for watches and clocks, and (ii)
re-evaluating the future of its low-margin clock/watch manufacturing operations
as well as its unprofitable marketing arm in Germany. While the Company may
reduce or restructure certain of its clock/watch manufacturing operations,
it
expects to continue to manufacture clocks on an OEM basis for certain of
its
major OEM clock clients (such as Braun and Casio).
The
Company in March 2005 entered into an agreement to sell all of its rights
to the
“Kienzle” trademark in all markets other than clocks and watches, to Kienzle AG
and its affiliates. The purchase price for the non-clock/watch rights to
the
“Kienzle” trademark was $1,000,000, which amount was required to be paid in full
at the closing of the sale. The sale was initially scheduled to close in
April
2005. Kienzle AG did not pay the purchase price in April 2005, and the closing
date was first extended to the middle of May 2005, and then was again extended
to the end of June 2005. However, in June 2005, the Company did transfer
the
non-clock/watch rights to the Kienzle trademark in accordance with the agreement
and did receive the $1,000,000 payment (the check has been received and
deposited, but as of the date of this Annual Report, the U.S. funds have
not yet
been confirmed). Kienzle AG has also agreed to repurchase the Company’s
investment in Kienzle AG for the 100,000 euro purchase price that the Company
initially paid for the investment. The repurchase of the Kienzle AG investment
currently is scheduled to occur in July 2005.
In
addition to selling the non-watch/clock right in “Kienzle” to Kienzle AG, the
Company is currently considering selling/licensing the rights to the “Kienzle”
trademark for use with clocks and watches, but has not entered into any
agreements to do so. The Company believes that the rights to the “Kienzle” brand
name for use with clocks and watches in Europe is a valuable asset. However,
no
assurance can be given that the Company will be able to sell its remaining
rights to the “Kienzle” trademark or that any sale will generate significant
sales proceeds.
The
Company also is re-evaluating its German marketing operations, which operations
have operated at a significant loss. If the Company is not able to end the
heavy
losses its continues to incur from its German marketing operations, the Company
may have to restructure, sell or even close the offices in Germany later
during
the current fiscal year ending March 31, 2006.
Camera
Operations
.
The
Company’s camera operations consist of the manufacture of (i) reusable low-end
35mm cameras, (ii) single-use cameras, and (iii) niche camera products, such
as
the Company’s underwater camera and other accessories for underwater cameras.
Many of these products are based on traditional film photography. During
the
past few years, however, the sale of digital cameras has increased
significantly, thereby affecting the demand for traditional film cameras.
However, more importantly, the sale and use of mobile telephones that have
the
ability to take and transmit digital pictures has exploded, thereby
significantly affecting the demand for the Company’s film-based camera products
and, in particular, for the Company’s single-use cameras. All of the Company’s
single-use cameras aimed at the market for convenient, low-end photographic
products, which market is being reduced by mobile camera telephones. The
rise of
digital camera alternatives to film-based cameras has reduced the market
for
film-based cameras and has increased the price competition between manufacturers
of film-based cameras.
Because
of the dwindling future market prospects for low-end film-based cameras,
the
Company has decided to discontinue manufacturing its single-use camera
operations during the current fiscal year ending March 31, 2006, a process
that
has already started and is expected to be completed during the current fiscal
year. As part of exiting the single-use camera business, the Company is
currently considering selling its inventory of single-use cameras and all
assets
related to its single-use camera business to one or more potential buyers.
However, the Company has not yet entered into any agreement to sell these
assets, and no assurance can be given that the Company will, in fact, be
able to
sell any of these assets. In the event that the Company is not able to sell
the
single-use camera inventory and operations, it will nevertheless discontinue
these operations. The Company will continue to manufacture its underwater
cameras and products for others on an OEM basis. The underwater camera products
market represent a viable and profitable niche market.
New
Manufacturing Facilities
.
The
Company has been in its current facilities since 1991. Although the Company’s
landlord has periodically upgraded the current facilities, the Company believes
that the current facilities do not reflect the image that the Company believes
it needs to retain and increase the amount of business that it conducts with
its
multi-national customers. In addition, because so many competitors have
established their facilities in Shenzhen, and the area has grown so much
recently, the costs of operating in Shenzhen have increased significantly.
The
Company believes that there are other manufacturing facilities available
outside
of Shenzhen that offer (i) newer facilities, (ii) lower operating costs
(including lower rent, lower labor, and cheaper utilities), (iii) easy access
by
highway or rail to Hong Kong and the other major markets and sea ports, and
(iv)
greater availability of lower cost labor. As part of these efforts, the Company
in May 2005 entered into a three-year lease for a 2,500 square meter
manufacturing facility in He Yuan, a city about 125 kilometers from the
Company’s current site in Long Hua, Shenzhen. These facilities will initially
house a portion of the Company’s plastics operations. If the Company can
successfully operate at this location, the Company will consider relocating
all
of its manufacturing facilities to this location. Any relocation of the
Company’s entire facilities will depend upon the operations of the He Yuan
facilities and would not commence until 2006, at the earliest. No assurance
can
be given that the Company will find the He Yuan facilities to be satisfactory
or
that the Company will re-locate its existing facilities.
Business
Overview
The
Company is primarily an integrated manufacturer of high quality parts and
components, clocks and clock movements, and cameras for major Japanese, German
and United States OEMs and contract manufacturers. The Company also manufactures
clocks and watches for its own account under its own “Kienzle” brandname. In
addition, the Company has sold watches and other products to a European
distributor for sale in Europe under the “Kienzle” brand name. All of the
Company’s manufacturing activities are currently conducted at a factory complex
located in Long Hua, in Shenzhen, China, which the Company occupies pursuant
to
an arrangement with affiliates of the local government. The Company has leased
a
new, smaller facility in He Yuan, China, at which it will conduct some of
its
manufacturing operations.
To
date,
the Company’s largest revenue source has been from its metal manufacturing
operations. The Company manufactures and supplies a wide variety of high
quality
metal parts, components and products which are used by the Company’s customers
in the manufacturing of such products as photocopiers, laser printers, compact
disc players, laser disc players, cassette players, computer equipment,
electronic components, electrical connectors, cameras, clocks, automobiles,
vacuum cleaners, light fixtures and car audio and other audio equipment.
As part
of its manufacturing operations, the Company assists customers in the design
and
development of the tooling used in the metal stamping process and provides
a
broad array of other manufacturing services, including spray painting, screen
printing, plastic injection molding, pad printing and electronic assembly
services. The electronic assembly services include chip on board assembly,
IC-bonding, and SMT automatic assembly of printed circuit boards. By providing
these services, which complement the Company’s core metal stamping operations
and eliminate the need to outsource these needed functions, the Company is
better able to assure product quality, control overall manufacturing costs
and
provide timely product delivery, all of which management believes is essential
to maintaining, expanding and increasing the Company’s customer base. The
Company believes its historical success as a supplier to respected
multi-national companies is due in large part to: (i) its international
management structure which includes Japanese, German and Chinese
nationals;
(ii) its low labor and operating costs resulting from locating its manufacturing
operations in China; (iii) its ability to consistently manufacture the type
of
high quality products required by the Company’s targeted customers; (iv) its
expertise in manufacturing these products in the required quality at a
reasonable cost; (v) the unique breadth of its manufacturing capabilities,
and
(vi) its engineering design and development capabilities (which it uses to
assist its customers to design their products).
In
prior
years, the Company has continuously tried to strategically align its
manufacturing operations to attract new OEM clients. For example, the Company
combined the specialized manufacturing skills and technologies it developed
for
its clock and camera operations with its metal manufacturing strengths. The
combination of these capabilities led to orders for more complex products
from
internationally known companies such as Berger Lahr GmbH and Miele & Cie.
KG., for whom the Company manufactures products using a combination of metal,
electronic and plastics manufacturing.
The
Company believes that its ability to manufacture products using a combination
of
metal, electronic and plastics components has tempered the competitive pricing
pressures that have developed during the past few years from the competing
metal
manufacturers in Shenzhen. During the past few years, a number of metal
manufacturers have been established in Shenzhen that are also able to produce
high-quality, low cost metal parts. As a result, the manufacture of many
metal
parts had become a commodity operation that competes primarily based on price.
In order to distinguish itself from these other stamping operations, the
Company
therefore adopted a plan in which it shifted its focus from smaller, simple
metal stamping projects for which the Company competes solely on price to
the
manufacture of more complex parts, components and entire products that utilize
more of the Company’s vertically integrated technologies. Since the Company has
the ability to design, manufacture and assemble complete components containing
metal, plastic and electronics, and not just metal stamped parts, the Company’s
new focus is on manufacturing more customized products for global companies.
By
shifting to the manufacturing of larger, customized products that utilize
more
of the Company’s vertically integrated and multi-disciplinary capabilities, the
Company believes that it will be able to increase its revenues and gross
margins
and reduce the costs associated with setting up and manufacturing small run,
metal stamping parts. The Company believes that its restructured strategy
has
led to the manufacturing agreements with (i) OSRAM, a subsidiary of Siemens
AG,
(ii) Berger Lahr GmbH, a subsidiary of Schneider Electric, (iii) major German
companies such as Miele & Cie. KG., and (iv) Japanese companies such as KEM,
an indirect supplier of functional assemblies to IBM lap top computers.
The
Company currently still manufactures (i) clocks and watches for its own Kienzle
branded line of timepieces, and (ii) clocks and clock components on an OEM
basis
for internationally known clock companies. However, the Company expects to
re-evaluate these operations during the current fiscal year ending March
31,
2006. The Company currently manufactures high-quality quartz clocks for both
its
own Kienzle brand name line of clocks and for other internationally known
companies, primarily Braun of Germany, and Casio of Japan. However, the
international market for quartz clocks has, during the past few years, strongly
declined, and the Company anticipates that this market will not increase
in the
foreseeable future. As a result, sales of certain lines of clocks (primarily
quartz clocks) previously manufactured by the Company have decreased during
each
of the past three years. In addition to the manufacture of quartz clocks,
during
the fiscal year ended March 31, 2005, the Company’s clock and watch operations
also included the following:
|
·
|
The
Company manufactured clocks that set themselves with radio signals
broadcast from atomic clock stations.
|
|
·
|
The
Company has supplemented sales of Kienzle clocks with clocks, wrist
watches and other timekeeping products that are manufactured by
others and
then marketed in Europe by the Company’s German marketing subsidiary under
the Kienzle brandname.
|
|
·
|
The
Company manufactured and sold wrist watches under the “Kienzle” name,
mostly in Germany.
|
The
Company’s third existing line of operations is the manufacture of low cost
cameras for OEMs in the United States, Japan and Europe. Until June 1999,
the
United States had been the Company’s largest market for single use (disposable)
cameras. In 1999, in response by an action initiated by Fuji Film against
a
number of camera importers, the United States International Trade Commission
(ITC) issued an order that effectively barred the Company’s OEMs from importing
recycled one-time-use cameras into the United States. The Company responded
to
the loss of its largest camera market by increasing its sales into Europe
and
Asia, increasing its manufacturing and sales of low-end 35mm cameras, developing
other new camera products (such as a new line underwater photographic products),
and developing new camera products (such as the Company’s patented pre-loaded,
reusable 35mm camera that was designed to compete in the single-use camera
market). The Company delayed the introduction of the patented 35mm camera
into
the U.S. due to the Fuji action. However, because of the recent downturn
in the
low-end film based camera market, the Company does not expect that it will
pursue the distribution of this camera in the U.S. Other than in certain
niche
markets (such as its underwater camera products), the Company has competed
in
the camera business based primarily on price. During the past few years,
the
pricing competition has been severe, and the market for the Company’s low-end
film-based cameras has decreased due to the proliferation digital cameras
and
mobile telephones that have the ability to take and transmit photographs.
As a
result, the Company has decided to sell or close down it single-use camera
operations during the current fiscal year ending March 31, 2006, and is
considering modifying or selling some or all of its other film-based camera
operations. See, “Current Reorganization and Revised Business Strategy,”
above.
Industry
Overview
Management
believes that the third-party manufacturing industry has experienced major
increases over the past decade as manufacturers increasingly outsource the
manufacture of some or all of their component and/or product requirements
to
independent manufacturers. The benefits to OEMs of using contract manufacturers
include: access to manufacturers in regions with low labor and overhead cost,
reduced time to market, reduced capital investment, improved inventory
management, improved purchasing power and improved product quality. The metal
manufacturing business of the Company represented approximately 64.3% of
the
Company’s gross revenues in the fiscal year ended March 31, 2005 and has
historically been the largest segment of the Company’s business. In addition,
since the Company expects revenues from clock/watch and camera manufacturing
to
be less during the current fiscal year ending March 31, 2006 (due to market
conditions and the Company’s actions to reduce losses from its camera and
clock/watch manufacturing operations), the metal and OEM manufacturing business
is expected to become the predominant operations of the Company in the
future.
The
Company first commenced its metal stamping operations in China in 1990. At
that
time, the Company gained a significant cost and logistical advantage over
other
manufacturers by basing its manufacturing facilities in Long Hua, Shenzhen,
China, less than 30 miles from Hong Kong. During the past few years, however,
many other manufacturers have located their facilities in Shenzhen and in
other
similar low-cost areas in China and Asia. As a result, the Company now faces
significantly more competition as a manufacturer of OEM parts. The Company
has
responded to the increased competition by restructuring its operations and
by
trying to move from manufacturing low margin, low-cost individual parts to
manufacturing higher margin, more expensive components, subassemblies and
even
complete units for its OEM customers. The Company’s metal manufacturing business
also was primarily directed at OEMs located in Asia, primarily in China and
Japan. As part of its new strategy, the Company has also increased its sales
to
European customers.
Historically,
the Company has manufactured high-quality metal parts, mostly for Japanese
customers. The Company did not engage in any active marketing efforts to
develop
its business for its metal manufacturing operations. Recently, however, because
of all of the competition that has developed, in Shenzhen and elsewhere,
for low
cost metal stamping, the Company has changed its customer focus, its
manufacturing goals, and its marketing efforts. As part of its business strategy
to capture more of the revenues related to the manufacture of end-products,
the
Company has recently been attempting to leverage its complete manufacturing
capabilities to the manufacture of the subsystems, subassemblies, larger
components, and even completed end-products for its clients. In addition,
the
Company is attempting to diversify the types of products that it manufactures.
The Company has also increased its marketing efforts and now attends trade
shows
and engages in direct marketing efforts. In order to upgrade its technical
manufacturing abilities and to suit its international customers, the Company
has
obtained its ISO 9001 quality management systems certification and its 14001
environment management systems certification.
Although
the Company does not have any definitive data regarding worldwide clock
manufacturing and sales, the Company believes that there is an industry-wide
decline in sales underway, and that numerous clock manufacturers are being
driven out of business. The Company believes that sales of the sort of clocks
that are manufactured by the Company have been declining worldwide during
the
past few years for the following reasons: (i) Higher quality clocks have
a long
useful life and, therefore, are not replaced frequently. Consequently, unlike
other consumer products, replacement sales are less frequent. (ii) The market
has been flooded by inexpensive quartz clocks manufactured by companies owned
or
subsidized by governments or other similar means that have often been sold,
in
the opinion of the Company, at prices that are significantly below the raw
materials costs of such clocks. Until recently, the Company believed that
it
could overcome some of these market forces developing its radio controlled
clock
technologies and by increasing its marketing efforts. Accordingly, while
the
Company believed that it could distinguish itself from its competitors by
selling clocks and watches under the “Kienzle” brandname and by manufacturing
clocks that set themselves by radio signals broadcast from atomic clock
stations. During the past few years, these radio clocks were particularly
popular in Europe and Japan and constituted a significant portion of total
clock
sales in Europe and Japan. Despite these efforts, it may no longer be in
the
Company’s best interests to try to compete in these markets. As a result,
management of the Company is considering focusing the Company’s principal
efforts on its OEM and related manufacturing operations and may, as a result,
decide to modify or sell some or all of its clock manufacturing operations
and
to try to sell its remaining clock/watch rights to the “Kienzle” trademark. See,
“Current Reorganization and Revised Business Strategy,” above.
The
Company’s camera operations consist of manufacturing low cost single-use and
35mm cameras and selling the Company’s own line of niche underwater camera
products. Sales by the Company of its single-use cameras and of its low-end
reusable 35 mm cameras have drastically decreased, and price competition
in
these markets has increased. In order to counter the changes in this industry,
the Company developed niche-market products, such as its line of underwater
camera products. The Company, however, believes that the market for film-based
cameras, such as the Company’s products, have been negatively impacted and will
further decline as the market transitions from the traditional film camera
to
the digital cameras. The growing use and availability of digital photography
with mobile telephones and other portable devices is expected to further
contribute to the future decrease in demand for the Company’s cameras,
particularly the single-use disposable cameras. Accordingly, the Company
has
decided to discontinue its single-use camera operations during the current
fiscal year. See, “Current Reorganization and Revised Business Strategy,”
above.
The
Company’s Strategy
Management
believes that the Company’s future growth and profitability depend on its
ability to compete as a third party manufacturer, as well as its ability
to
exploit other manufacturing opportunities that are complimentary to its
strengths.
Capitalize
on its manufacturing cost structure and logistical advantages:
By
locating the Company’s principal manufacturing facility in Long Hua, Shenzhen,
China, less than 30 miles from Hong Kong, the Company is able to take advantage
of the low overhead costs and inexpensive labor available in China. The close
proximity of the factory complex to Hong Kong facilitates transportation
of the
Company’s products out of China to customers in Hong Kong and beyond through the
port of Hong Kong. Management believes that there has been an increase in
the
number of Japanese and German OEMs establishing factories or using contract
manufacturers in southern China and this provides the Company with a large
customer base within close proximity to the Company’s operations in China. In
order to further reduce its manufacturing cost structure, the Company has
been
considering relocating its manufacturing facilities from Long Hua, Shenzhen
to
other locations in southern China, such as the new facility in He Yuan, China,
that the Company will begin leasing in July 2005. If the Company determines
that
it can operate at a lower cost facility that is further from Hong Kong, such
as
the one in He Yuan, then it may, in the future, relocate its entire operations
to that facility.
Capitalize
on, and leverage its manufacturing strength
:
Unlike
many of its metal part manufacturing competitors, primarily those in Shenzhen,
China, the Company has a vertically integrated manufacturing facility that
can
design, manufacture and assemble more complex components and subassemblies.
In
addition, unlike some of its competitors in Shenzhen that are limited to
either
metal stamping or to electronics and plastics manufacturing, the Company
also
has the ability to combine metal stamping and electronics and plastics
manufacturing. Accordingly, the Company’s strategy is to focus on manufacturing
more complex products that utilize the Company’s various manufacturing
strengths. As the Company expands its manufacturing capabilities into new
and
varied products, the Company has commenced promoting the use of its assembly
facilities to manufacture more of the end-product than just some parts or
components by emphasizing the efficiencies of assembling the products by
one
manufacturer. Management believes that the Company’s close relationships with
its customers can increase the number of parts and services the Company provides
to its customers. In addition, as more German and other European companies
seek
to establish a manufacturing base in China, the Company will provide
manufacturing solutions for these European companies.
Change
its product line in response to market conditions
:
The
Company’ strategy is to respond to changes in market conditions by changing its
product offerings. Recent examples of its ability to respond to market and
other
conditions include the development of a new line of underwater camera products
and the development of a clock that sets itself based on radio signal
broadcasts. The Company has also been exploring manufacturing other products,
such as LCD monitors and LCD televisions, which business may require the
Company
to enter into a business relationship or partnership with a manufacturer
of LCD
monitors and related components. However, it is unclear if the Company will
commit to large scale manufacturing of LCD monitor products or that it will
be
able to develop viable business connections to further the LCD monitor and
LCD
television business and/or to compete in this market.
Expansion
by acquisition, merger and other means
:
The
Company believes it has the opportunity to expand its business through
acquisitions and through the establishment of additional manufacturing
facilities. The Company has previously been successful at purchasing supplier
companies and transferring the manufacturing operations to its facility in
China
to take advantage of the low labor and operating costs associated with
manufacturing in China. Management may seek similar opportunities in Europe,
Japan and the United States. No assurances can be given that the Company
will
identify acquisition prospects or that such prospects, if identified, will
result in an acquisition.
In
addition to expanding its manufacturing capabilities through acquisition,
merger, etc., the Company may also establish additional manufacturing facilities
in other countries that offer benefits similar to those available in China.
The
Company believes that there are other countries that offer low labor and
operating costs and locations close to the Company’s customers. However, no such
other locations have been identified, and no assurance can be given that
the
Company will be able to duplicate its China business in other
countries.
Maintain
production quality
:
Management believes that maintaining close relations with the Company’s
customers is important to the success of the Company’s business. Understanding
each customer’s needs and efficiently and quickly addressing its needs is vital
to maintaining a competitive advantage. Certain Japanese and German companies
have built the goodwill associated with their products and tradenames on
a high
level of perceived quality. By employing the type of high quality management
standards, production standards and quality control standards historically
utilized by many leading Japanese and German companies, the Company has been
able to satisfy the stringent requirements of its customers which ordinarily
cannot be written into a specification or contract. Management believes that
the
Company’s commitment to high level service, attention to detail and quality has
the effect of providing customers with a sense of confidence and security
that
their product requirement will be met and their products will be delivered
on
time and a competitive price.
The
Company conducts most of its manufacturing operations in accordance with
typical
Japanese manufacturing standards, paying particular attention to cleanliness,
incoming material control, in process quality control, finished goods quality
control and final quality audit. The Company’s metal factory complex has
received ISO 9001 quality management system certification and an ISO 14001
environmental management systems certification. The Company’s quality system
helps to minimize defects and customer returns and create a higher confidence
level among customers. Management believes that these factors increase demand
for the Company’s services and products.
Metal
Manufacturing
The
Company’s metal manufacturing business consists of various stages: (i) tooling
design and production; (ii) manufacturing parts using metal stamping and
plastic
infection molding; (iii) mechanical and/or electric/electronic assemblies,
and
(iv) finishing, packaging and shipping.
Tooling
design and production
:
The
metal manufacturing process generally begins when a customer has completed
the
design of a new product and contacts the Company to supply certain metal
components to be used in the product. Generally, the Company must design
and
fabricate the tooling necessary to manufacture these components in its tooling
workshop. In some instances, however, the customer already possesses the
tooling
necessary to manufacture the metal component and simply delivers the tools
to
the Company. Customer will sometimes also pay the Company to purchase and
install the equipment necessary to manufacture the customer’s products. The
Company uses computer-aided design and manufacturing equipment to produce
a long
lasting, high quality metal stamping tool designed to produce a high quality
product in efficient manner. As many of the metal parts manufactured by the
Company make use of progressive, multi-stage stamping techniques, tools and
machines must be precisely fine tuned and aligned to achieve the required
quality standard and maximum efficiency.
The
tool
making process form metal parts generally takes between 14 to 45 working
days
depending on the size and complexity of the tool. Customers typically bear
the
cost of producing the tools and, as is customary in the industry, the customers
hold title to the tooling. However, the Company maintains and stores the
tools
at its factory for use in production and the Company usually does not make
tooling for customers unless they permit the Company to store the tools on
site
and manufacture the related parts.
The
Company also makes some basic plastic injection molds. Other, more complicated
molds are made for the Company by qualified suppliers.
Metal
Stamping; Plastic Injection Molding
:
Following the completion of the tooling, the materials required for the specific
product is selected and purchased. See “Raw Material, Components Parts and
Suppliers.” Often the customer specifies the materials to be used as well as the
supplier. The completed tooling is fitted to the press which is selected
for its
size and pressing force.
Using
separate shifts, part stamping can be conducted 24 hours a day, seven days
per
week other than during normal down time periods required for maintenance
and
changing of tools and during the traditional Chinese New Year holidays. Due
to
the strict quality requirements of customers, each machine is subject to
stringent in-process quality controls; the Company’s quality control personnel
inspect the products produced each hour and update in-process logs at each
pressing machine in which they record the quantity produced, defect rate
and
product dimensions and specifications. When defects are found during production,
the Company’s maintenance personnel inspect the tooling and the machine to
determine which is responsible. If the tooling is the cause of the defect,
it
will be immediately removed from the machine and serviced or repaired by
a team
of technicians from the Company’s tooling maintenance department. If the machine
is the source of the defect, the machine is serviced immediately by the
Company’s technicians and engineers. In a continuous effort to assure quality,
all stages of the production process are closely monitored so that all equipment
and tools can be well maintained. The Company’s
wholly
owned subsidiary Nissin Precision Metal Manufacturing Limited, has been
registered for ISO 9001
quality
management system certification and for ISO 14001 environmental management
systems certification.
Electronic
Assembly
:
The
Company’s electronic assembly manufacturing consists of chip on board assembly,
IC-bonding and SMT technology.
Finishing,
Packaging and Shipping
:
After
pressing, the metal parts are degreased, inspected for defects and checked
with
custom-built test gauges. Some components are then sprayed in the Company’s
dedicated spray-paint facilities. After being painted, the parts are baked
at
high temperatures in drying ovens before final inspection and packaging.
Some
parts are also screen printed by the Company. In addition, for certain metal
products, the Company assembles metal components and these parts are delivered
to the assembly department for spot welding, threading, riveting other
sub-assembly processed. Each of the parts, assemblies and products is then
inspected, packaged to the customer’s specific requirement and delivered to the
final quality audit department for final quality inspection which is conducted
on a random sample basis. All parts, assemblies and products are shipped
by
truck directly from the factory to the customer’s factory in China or elsewhere
through the port of Shenzhen.
The
Company’s metal and related OEM manufacturing operations accounted for 57.4%,
58.3% and 64.3% of the Company’s total sales during the years ended March 31,
2003, 2004 and 2005, respectively.
Clock
and Watch Manufacturing
The
Company has been manufacturing clocks and clock components since June 1995.
Prior to April 1997, the Company manufactured clocks for Kienzle Uhren GmbH,
a
clock manufacturer that traces its origin back to 1822 in Germany. In April
1997, the Company acquired the “Kienzle” trademark and substantially all of the
assets of the clock manufacturer. The equipment and parts that the Company
acquired were located in Germany but were moved to, and reassembled in the
Company’s facilities in China. Since acquiring the Kienzle assets, the Company
has also increased its plastic-injection capacity, and its dial printing
and
established a new auto lathe operation for round metal parts to handle the
Company’s additional manufacturing needs.
The
Company’s clock business is divided into the manufacture and sale of clock
movements and finished alarm and wall clocks. During the past fiscal year,
the
Company manufactured clocks for Braun and other OEMs. Approximately 55% of
its
watch and clock manufacturing (measured in terms of dollars of sales) were
watches/clocks that Company sold under its Kienzle trademark, and 45% of
the
watch/clock manufacturing was for its OEM clients.
The
“Kienzle” name is a registered trademark in approximately 50 countries
world-wide including major markets of the United States, U.K., Germany and
Japan. The Company believes that the “Kienzle” brand is regarded as a quality
manufacturer of clocks and watches. The Company also believes that the
reputation of the Kienzle name can be carried over to other high quality
products, particularly in Germany.
Since
fiscal 2003, the Company has also been manufacturing wrist watches, most
of
which are sold under the Kienzle brandname.
Revenues
from watch manufacturing increased from $260,000 in fiscal 2004 to $310,000
in
fiscal 2005. The Company has supplemented its distribution of Kienzle wrist
watches that it manufactures with wrist watches manufactured by other
manufacturers, which watches are branded and sold under the Kienzle name.
During
fiscal 2005 sales of third party manufactured watches sold under the Kienzle
name represented $1,675,000 in sales.
In
addition to the clocks traditionally manufactured and sold under Kienzle
name,
the Company is attempting to increase the line of clock products it offers.
For
example, the Company recently introduced a line of clocks that are synchronized
with radio signals broadcast from atomic clock transmitters. These radio
synchronized clocks automatically set themselves with split second accuracy
and
adjust for daylight saving time and leap year. The radio synchronized clocks
are
very popular in Europe (where there are two atomic clock broadcast stations)
and
are growing in popularity in Japan, although they are not popular in the
U.S.
The Company has recently developed three radio-controlled clocks for
Braun
GmbH
.
The
Company was issued a patent relating to radio controlled clocks in 2005 by
the
European Patent Office and has filed several patent applications for aspects
of
its own radio controllable clocks in Europe, Hong Kong, Germany and the U.S.
The
Company has used the electrical and electronic skills and technologies that
it
acquired from its clock operations to enhance its OEM metal manufacturing
capabilities.
Camera
Assembly
The
camera products that the Company manufactures consist of (i) reusable 35mm
film-based cameras, (ii) lens-fitted film packages, commonly referred to
as
single-use cameras, and (iii) niche camera products, such as the Company’s
underwater camera and other accessories for underwater cameras. Camera sales
during the three years ended March 31,2005, 2004 and 2003 accounted for 13.9%,
23.6% and 24.1% of net sales, respectively. The Company’s cameras are sold
worldwide through various distributors.
In
order
to develop potential new markets for re-usable cameras, the Company developed
a
new reusable lens-fitted film package, a camera that has a different design
and
functional mechanism from that utilized in the single-use lens-fitted film
package cameras currently on the market. The Company’s reusable lens fitted film
package can, however, also compete and be sold in the same market as the
single-use lens-fitted film package. To date, since the Company has not been
able to sell the camera in the U.S. as a result of the legal proceedings
brought
in the U.S. by Fuji Photo Co., and, more recently, because of the decline
in
sales in the film camera market, revenues from this camera have not been
material, and the Company no longer is pursuing the market expansion of this
product.
In
order
to expand its camera product offerings, the Company has also developed a
low
cost, fully automatic, compact 35mm camera with flash lighting and waterproof
housing, which allows the camera to take photographs underwater in depths
of up
to 60 feet. The Company also manufactures and markets (i) an underwater
single-use camera, (ii) underwater products for digital camera use, and (iii)
a
variety of underwater camera accessories such as waterproof video/flash lights.
The
Company fabricates many of the components used in its camera internally.
Other
key components such as the lens, printed circuit board, integrated circuits,
carrying cases and packaging are purchased from outside vendors in Hong Kong,
China, Taiwan and Japan.
Raw
Material, Component Parts and Suppliers
Metal
Parts
.
The
primary raw materials used by the Company to manufacture its metal stamped
parts
are various types of steel including pre-painted steel sheet, electrolytic
zinc
plated steel sheet, PVC laminated steel sheet and cold roll steel sheet.
The
Company selects suppliers based on the price they charge and the quality
and
availability of their materials. Often, the customer requires the Company
to use
specific suppliers. Most of the Company’s suppliers of steel operate through
Hong Kong or China-based companies which deliver the materials directly to
the
site of the Company’s operations in China.
During
the past fiscal year, the price of metal and plastics raw materials has
increased significantly, and there have been shortages for some materials.
The
Company estimates that the cost or some metal and plastic products increased
during the past year by between 20% and 50% on some materials. The increase
in
raw materials prices has also increased the price of packaging. The increases
in
these prices has reduced the Company’s gross margins on some of its OEM
manufacturing products. The Company has also required some of its customers
who
have low gross margin products to accept a price increase due to the material
price increases, which has resulted in some reduction of new purchase
orders.
Finished
Products
.
Camera
and clock manufacturing primarily involves the production of plastic injected
and metal stamped components as well as integrated circuits, lenses, crystals,
magnets and paper packaging products. While these materials are subject to
price
fluctuations, the Company has not been materially adversely affected by price
increases or shortages of supply. The recycling of single-use cameras requires
empty camera shells purchased mainly from Japanese and German agents for
recycling in the factory complex in China. The supply of quality shells can
be
limited at times based on overall market use of single-use cameras; however,
the
supply of shells is typically only restricted by the purchase price for such
shells.
Transportation
The
Company transports components and finished products to customers in China
and to
and from Hong Kong and China by truck. Generally, the Company sells its products
“free-on-forwarder” (“F.O.F.”) Hong Kong or “free-on-board” (F.O.B.) Hong Kong.
To date the Company has not been materially affected by any transportation
problems as it uses subcontract trucking services which have been readily
available in the past. Similarly, recent improvements in the roads and highways
in China have facilitated intra-China transportation. The Hong Kong and China
customs departments have opened additional border crossings, extended their
operating hours, and have been working continually to improve the flow of
cross-border goods. In considering establishing new manufacturing facilities
for
the Company, the Company expects to move away from Shenzhen and Hong Kong.
However, any new facility that the Company considers will have good
transportation connections to Hong Kong and other key delivery sites, although
transportation costs may increase due to the additional distance to the delivery
sites.
Customers
and Marketing
The
Company’s sales are generated from sales in Hong Kong/China, Europe, the United
States, and other Asian countries. Net sales to customers by geographic area
are
determined by reference to the shipping destinations specified by the Company’s
customers (except for sales to China). For example, if the products are
delivered to the customer in China, the sales are recorded as generated in
Hong
Kong; if the customer directs the Company to ship its products to Europe,
the
sales are recorded as sold in Europe. Payments are paid in Hong Kong dollars,
United States dollars and European euros. Net sales as a percentage of net
sales
to customers by geographic area consisted of the following for the years
ended
March 31, 2003, 2004 and 2005:
|
|
|
Year
Ended March 31
|
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
|
GEOGRAPHIC
AREAS
:
|
|
|
|
|
|
|
|
|
Hong
Kong & China
|
|
|
63.7
|
%
|
|
66.1
|
%
|
|
62.4
|
%
|
|
Europe
|
|
|
25.7
|
%
|
|
23.7
|
%
|
|
30.8
|
%
|
|
Other
Asian countries
|
|
|
1.3
|
%
|
|
2.4
|
%
|
|
1.4
|
%
|
|
United
States
|
|
|
7.5
|
%
|
|
2.4
|
%
|
|
4.0
|
%
|
|
Others
|
|
|
1.8
|
%
|
|
5.4
|
%
|
|
1.4
|
%
|
The
Company’s customers for its metal stamping products are OEMs and contract
manufacturers. While the Company sells its products in Hong Kong (which includes
sales made to China which are recorded as sales in Hong Kong because the
purchase orders are issued by the Hong Kong offices of the China factories),
Europe (primarily Germany), the United States, and other Asian countries
(predominantly Japan and Malaysia), the Company’s products are sold primarily to
Japanese and German owned companies with OEM or contract manufacturers in
China.
Until
recently, the Company has marketed its metal stamping products and services
to
existing customers primarily through direct contact with the Company’s
management and senior purchasing officers of the customers. Historically,
metal
pressing sales were primarily conducted by the managing director of the metal
stamping company, Nissin, Mr. Satoru Saito, a Japanese national, and Mr.
Roland
Kohl, a German national, who serves as the Chief Executive Officer, using
existing contacts, word-of-mouth referrals and references from associated
or
related companies of the customers. During the past few years, the Company
has
gradually increased the number of German and Japanese sales person to complement
the activities of Mr. Kohl and Saito. Due to the international nature of
senior
management, the Company believes that is has been able to set itself apart
from
its competitions and bridge the cultural, language and quality gaps that
most
Japanese and German companies fear when dealing in China. In connection with
the
recent realignment of its operations, shift in manufacturing strategy, and
its
increased focus on increasing overall sales of higher quality components
for
global customers, the Company has initiated a more direct and active marketing
strategy, including advertising in trade publications, attending trade
shows/exhibitions and using the internet and its websites as marketing
tools.
The
Company’s customers for its non-Kienzle branded clocks include internationally
recognized clock manufacturers such as Braun and Casio. The ultimate customers
of the Kienzle branded clocks consist of importers, wholesalers and large
retailers, primarily in Europe where the Kienzle brand name has strong brand
recognition. The Company also markets it watches and clocks through its
marketing office located in Germany. Previously, the Company also marketed
its
clocks and watches in Europe through Kienzle AG, a third party distributor
under
a licensing and supply agreement that the Company that was cancelled in January
2004.
Camera
sales are conducted primarily through existing importers and distributors
who
market the cameras under their own brands.
Major
Customers
For
the
fiscal year ended March 31, 2005, two customers each accounted for more than
10%
of the Company’s gross revenues (or 35.8% collectively of the Company’s net
sales). No other customers individually accounted for more than 10% of the
Company’s gross revenues during this recent past fiscal year. During the past
few years, the Company has relied to a large extent on a few larger customers
and on many smaller customers. If the Company loses any of its major customers
who account for a material portion of total net sales, or if any of these
customer’s order decrease substantially, the Company’s results of operations and
financial position would be materially and adversely affected if the Company
is
unable to replace any of its major customers.
Customers
place metal manufacturing orders with the Company in the form of purchase
orders
which are usually supported by a delivery schedule covering one to two months
of
orders. Customers usually do not provide long term contracts for their purchases
and are able to cancel or amend their orders at any time without penalty.
In
addition, certain customers enter into agreements with the Company in which
the
parties agree upon their purchase and sale procedures, but such agreements
do
not contain any specific purchase orders or purchase requirements. However,
customers often provide the Company with non-binding forecasts of their
anticipated needs for the next year. Orders from such customers are thereafter
received from time to time by customers based on the customers’ needs, not on
contractually fixed amounts or time periods. Accordingly, backlog has not
been
meaningful to the Company’s business. Sales of metal manufactured products are
primarily on credit terms of up to 45 to 90 days with payment in Hong Kong
dollars while the sale of cameras and clocks is through letters of credit,
wire
transfer advance payment and, for older established accounts, some open accounts
payable within 30 to 90 days of shipment in United States dollars. Management
constantly communicates with its credit sale customers and closely monitors
the
status of payment in an effort to keep its default rate low. However, as
a
result of the concentration of sales among a few of the Company’s larger
customers, the Company is required to bear significant credit risk with respect
to these customers. Typically, metal part orders are spread over a three-month
period and the Company is able to withhold delivery or slow down shipments
in
the event of any delinquency in payment for past shipments. Parts are generally
shipped 30-40 days after an order has been placed unless the Company is required
to manufacture new tools which requires approximately 14-45 days to complete
prior to commencing manufacturing. While the Company has not experienced
material difficulty in securing payment from its major customers, there can
be
no assurance that the Company’s favorable collection experience will continue.
The Company could be adversely affected if a major customer was unable to
pay
for the Company’s products or services.
Patents,
Licenses and Trademarks
In
November 1998, the Company acquired the worldwide rights (other than in Italy)
to the “Kienzle” trade name and trademark for use with clocks, watches and
certain other timekeeping instruments. Thereafter, the Company also acquired
the
rights to the “Kienzle” trademark for use in numerous other product categories,
other than with respect to products used in the automobile industry. In June
2005, the Company sold the rights to use the “Kienzle” trade mark for all uses
that it held other than for clocks and watches. The Company currently also
intends to sell or license its remaining rights in the “Kienzle” trade mark. The
trade name and trademark is registered in approximately 50 countries, including
Germany, the United States, the UK and Japan.
The
Company has two patents, and has applied for one other patent relating to
its
clock business. The Company’s two patents are: (i) a U.S. patent that covers
technology concerning the company’s “global clock,” a LCD timepiece that
provides simultaneous analog and digital display of 24 time zones, which
are
divided into work, leisure and sleep categories, along with a calendar week
scheduler; and (ii) a European patent that covers technology related to radio
controlled clocks. The global clock is designed for use by international
travelers. The pending patent application also relates to the Company’s Radio
Controllable Clock.
In
connection with developing new camera technologies, the Company was issued
a
patent in the United States
,
U.S.
Patent Number 6,522,835 B2, that covers the Company’s “photographic film
package” with a detachable cartridge. The package is integral to the Company’s
pre-loaded camera, and the patent applies specifically to alternative
photographic cameras that can compete in the market place with single-use
cameras. Applications relating to this U.S. patent application are still
pending
in Europe, Japan, China and Hong Kong. The Company
has
applied for patents in the United States for its camera cassette assembly
apparatus and method.
As
a
manufacturer of parts, components and finished products for OEMs and contract
manufacturers, the Company has no patents, licenses, franchises, concessions
or
royalty agreements which it considers material to its OEM manufacturing
business.
Competition
The
Company competes against numerous manufacturers in all of its product and
business lines. The Company competes with both smaller local companies and
large
international companies. For example, management believes that firms which
are
smaller than the Company make up the largest segment of the metal manufacturing
industry although it is not aware of any empirical data defining the metal
manufacturing industry in China. These metal stamping companies compete with
the
Company for standard metal stamping work. As a vertically integrated,
multi-disciplinary manufacturer of complex components and products, the Company
also competes against numerous global OEM manufacturers, whether those other
manufacturers are located in Shenzhen, China or elsewhere. Most of the
international competitors of the Company have substantially greater
manufacturing, financial and marketing resources than the Company. The Company
believes that the significant competitive factors are quality, price, service,
and the ability to deliver products on a reliable basis. The Company believes
that it is able to compete in its segment of the OEM manufacturing market
by
providing good quality products at a competitive prices with reliable delivery
and service.
The
camera and clock manufacturing industry traditionally has been highly
competitive and fragmented. However, the Company believes that the market
for
quartz clocks is strongly declining due to the influx of alternative timekeeping
products, including products such as mobile phones, PDAs, and even MP3 players.
The Company also competes against a number of Chinese clock manufacturers,
some
of whom it believes are supported by the state or are state-owned or controlled
companies and are able to sell their products at prices that are below the
Company’s price of raw materials, thereby making it financially impractical for
the Company to compete in this clock market. The Company believes that most
major brands of clocks and watches have significantly greater marketing and
distribution capabilities and financial resources than the Company. In the
single-use camera market, customers generally are attracted to manufacturers
based on the price of the product and timely delivery. As a result of the
decreasing market for single-use cameras and the available amount of such
cameras, margins for single-use cameras are extremely thin. The Company does
not
believe that it is the best use of its resources to compete against the other
single-use camera manufacturers based primarily on price. Since the Company
cannot distinguish its products in the single-use camera manufacturing market,
the Company has decided to modify, sell or otherwise end its camera operations
and to reallocate its resources to higher margin products.
Certain
of the new product markets that the Company is considering entering into
also
are extremely competitive and are dominated by well-capitalized, international
companies. For example, the Company is considering manufacturing LCD monitor
and
flat panel televisions. There are numerous large, multi-national companies
that
currently compete in these markets.
Other
Activities
The
markets in which the Company operates are continuously changing, and the
Company
regularly seeks both (i) new or alternate products that it can manufacture
and
sell, and (ii) new methods of operating that may enhance its business. Certain
of changes in the Company’s products and operations evolve from its existing
business. For example, the Company’s quartz clock manufacturing has evolved into
the manufacture of radio-controlled clocks and other electronics products.
In
addition, the manufacture of single-use cameras and low-end 35mm cameras
has
spawned the Company’s underwater camera product line. Certain other actions
deviate significantly from the Company’s existing manner of operations and are,
as a result, subject to greater uncertainties. The following are some of
the
other actions that the Company has taken, and is taking:
A.
The
Company owns the worldwide rights (other than in Italy) to the name “Kienzle”
for clocks, watches and certain other timekeeping instruments. The Company
believes that the Kienzle name is associated with quality and prestige in
Europe, particularly in Germany. Although the Kienzle name is traditionally
associated with watches and clocks, the Company believes that the reputation
of
the name can also be used to market other high quality products, such as
electronic and household products. Rather than attempt to commercially exploit
the value of the Kienzle name, the Company recently decided to sell or license
the rights to the Kienzle name to others. In June 2005, the Company sold
the
rights to use the Kienzle name for all products other than clocks and watches.
The Company is also currently considering selling/licensing the clock/watch
rights to the “Kienzle” trademark.
B.
The
Company is exploring the possible manufacture and distribution of liquid
crystal
display (LCD) products, such as flat panel televisions and computer monitors
for
use in niche markets. The Company recognizes that it is unable to compete
against the dominant multi-national manufacturers of LCD general purpose
LCD
televisions and monitors and, therefore, is attempting to develop LCD based
products for niche markets in which products are less price sensitive. The
Company currently has the ability to manufacture the chassis, the
television/monitor stand, and the complete electronic circuits of LCD
televisions/monitors and to assemble complete LCD televisions/monitors. The
Company is considering developing niche products such as wireless LCD monitors
and LCD Monitors with built-in memory card readers for commercial application,
as well as dust and water proof LCD TV/Monitor for outdoor usage. To date,
sales
of these LCD products by the Company have been limited to sales made for
test
marketing purposes and have been insignificant.
C.
In
August
2003, the Company acquired a 50% interest in
Kayser
Photo (Overseas) Corp.,
a new
corporation established in Panama to distribute film, cameras, batteries
and
single-use cameras in Central and South America. Under its agreement with
Kayser
Photo (Overseas) Corp., the Company will sell certain products to that company
and will receive one-half of the company’s profits. The products marketed by
Kayser Photo (Overseas) Corp. are sold under the “Kayser” brandname.
Sales
to
date from this new venture have been insignificant, and no assurance can
be
given that the Company will determine that these operations will be further
developed or will eventually become a viable business.
Organizational
Structure
Highway
Holdings Limited is a holding company that operates through its subsidiaries.
As
of March 31, 2005, Highway Holdings Limited owned eleven subsidiaries, ten
of
which were wholly-owned by Highway Holdings Limited. However, the Company
currently conducts is business primarily through eight of these subsidiaries,
six of which are incorporated in Hong Kong, one that is incorporated in Germany,
and one that is organized in Bulgaria. For details regarding the names of
these
subsidiaries, the principal activities of subsidiaries, the country of their
incorporation, and the dates of their organization, see Note 1 to the
Consolidated Financial Statements appearing in Item 18 of this Annual Report.
The
Company also is a 50% equity owner of a Panamanian company that it and an
unrelated third party established in August 2003 to engage in film, battery
and
camera trading activities, a 50% equity owner in a dormant U.S. entity
established to market Kienzle branded clocks in the U.S.A.
The
Company acquired a 20% equity stake in Kienzle AG in 2003 for 100,000 euros
(approximately $131,000 at current exchange rates). The Company has sold
to
Kienzle AG all of its rights to the “Kienzle” trademark in all markets other
than clocks and watches. In connection with the foregoing sale of the Kienzle
rights, Kienzle AG has also agreed to repurchase the Company’s investment in
Kienzle AG for 100,000 euros, in which event the Company’s investment in Kienzle
AG will terminate.
Property,
Plants and Equipment
British
Virgin Islands
The
Registered Office of the Company is located at Craigmuir Chambers, Road Town,
Tortola British Virgin Islands. Only corporate administrative matters are
conducted at these offices, through the Company’s registered agent, HWR Service
Ltd. The Company does not own or lease any property in the British Virgin
Islands.
Hong
Kong
The
Company leases Suite 810, Level 8, Landmark North, 39 Lung Sum Avenue, Sheung
Shui, New Territories, Hong Kong as its executive offices. These premises
are
leased under a lease that expires in July 2006. The Company believes that
suitable alternative facilities are available if the Company cannot extend
the
lease on satisfactory terms.
The
Company also rents an approximately 5,000 sq. ft. warehouse in Hong Kong
at a
rental cost of $1,500 per month under an agreement that expires in January
2006.
China
The
Company currently leases a total of approximately 450,000 square feet of
space
at the site of its factory complex located at Long Hua, Shenzhen, China from
the
Shenzhen Land & Sun Industrial & Trade Co., Ltd. pursuant to five
related leases. The leased space consists of 378,000 square feet of
manufacturing space, with the balance representing dormitories for the Company’s
employees. This space is used predominately for the Company’s metal
manufacturing, OEM product assembly, camera and clock manufacturing, spray
painting, screen printing, plastic injection, tooling workshop and warehouse
operations. There are also offices for management and administration on the
premises. The term of the leases expires on February 28, 2009. The Company
estimates that, depending on the Company’s operations, the utilization rate of
these facilities during the fiscal year ended March 31, 2005 fluctuated between
an estimated 50% and 80% of its maximum capacity. Accordingly, the Company
has
sufficient manufacturing space for its current needs, and its current facilities
will continue to satisfy the Company’s space needs in the near future.
The
Company also obtains materials and assets under its two BFDC Agreements which
expire in 2016. The BFDC is the local government of Long Hua, the town in
which
the factory complex is located. Pursuant to the BFDC Agreements, the BFDC
is the
party responsible for providing manufacturing facilities and supplying workers
to the Company. The Company is responsible for paying a management fee, and
certain other charges to the BFDC.
As
is
common in southern China, the factory complex has dormitory facilities to
accommodate factory workers. The Company has leased approximately 72,000
square
feet of space at Long Hua, Shenzhen, China which is used as dormitories for
approximately 1,000 factory workers.
The
Company has also entered into two three-year leases (from July 1, 2005 through
June 1, 2008) for (i) an approximately 2,500 square meter manufacturing facility
and (ii) an approximately 1,000 square meters of dormitory living quarters
in He
Yuan City, China. The Company has the right to terminate the leases before
the
end of the three year terms under certain conditions, including if it purchases
and builds its own buildings in the He Yuan district. The new facilities
in He
Yuan are approximately 125 kilometers from the Company’s current principal
facilities in Long Hua, Shenzhen, approximately 130 kilometers from the nearest
ocean port, and are located near a major railroad station and highway. Under
the
lease, the Company will pay $3,300 per month as rent. The facilities will
initially be used to house a part of the Company’s plastics manufacturing
facilities. If the Company’s operations are successful at He Yuan, the Company
may consider relocating all of its operations to He Yuan in the
future.
Germany
The
Company leases a 152 square meter marketing office and a 1,080 square meter
warehouse in Germany, related to sales of Kienzle branded products in Germany.
The lease for this facility expires in October 2005.
Item
5.
Operating
and Financial Review and Prospects
Overview
The
Company’s net sales are derived primarily from (i) the manufacture and sale of
metal components, assemblies and products for its multi-national clients,
(ii)
clocks and watches, and (iii) cameras. During the past fiscal year, all of
the
Company manufacturing operations were conducted at its principal facilities
in
Shenzhen, China. The Company also maintained a marketing branch in Germany.
Until December 2003, the Company also operated a small assembly facility
in
Bulgaria.
The
metal
manufacturing operations currently account for the largest portion of the
Company’s net sales and, during the fiscal year ended March 31, 2005, was the
only segment of the Company’s operations that generated operating income. The
gross profit margin on metal stamping is generally higher than that of camera
and clock manufacturing, but it is typically more affected by fluctuations
in
raw material prices, particularly prices of rolled steel. During the past
year,
prices for metal raw materials, a major component of the Company’s manufacturing
costs, increased between 20% and 50%. The Company’s manufacturing costs were
also impacted during the past fiscal year by increases in other costs, such
as
the price of plastics and energy prices.
The
location of the Company’s executive offices in Hong Kong enables the Company to
pay low rates of income tax due to Hong Kong’s tax structure. The Company’s
income arising from its Hong Kong operations or derived from its operations
within Hong Kong is subject to Hong Kong income tax. The Company has
successfully claimed a tax benefit from the Hong Kong Inland Revenue Department
by providing support for its position that more than half of its income is
derived from its activities outside of Hong Kong, namely in China. The statutory
tax rate in Hong Kong currently is 17.5%, and there are no taxes on dividends
or
capital gains. Since most of its income is subject to Hong Kong income tax,
the
Company has historically benefited from favorable overall income tax rates
(the
Company’s income tax rate for the fiscal year ended March 31, 2004 was 9.2%).
However, for the fiscal year ended March 31, 2005, the Company generated
$1,067,000 income that is subject to Hong Kong taxes, but incurred a significant
loss (particularly from its operations in Germany) from operations that are
not
subject to Hong Kong taxation. Since the losses in Germany do not offset
the
taxable income in Hong Kong for Hong Kong tax purposes, the effective tax
rate
applicable to the Company for the March 31, 2005 fiscal year was 132.3%.
Unlike
companies which have wholly-owned subsidiaries located in China or operate
under
joint venture agreements in China, under the BFDC Agreements pursuant to
which
it operates in China, the Company does not pay taxes in China because it
is not
considered to be doing business in China under current China law. The BFDC
is
responsible for paying its own taxes incurred as a result of its operations
under the BFDC Agreements (which taxes are indirectly passed through to the
Company). Arrangements such as the BFDC Agreements under which the Company
operates in China are one of the most common types of arrangements in southern
China for Hong Kong manufacturers. Management believes the Company will continue
to benefit from a low overall effective tax rate in the future, barring
unforeseen changes in tax laws.
Net
sales
to customers by geographic area are generally determined by the shipping
destinations specified by the customers. In China, however, net sales are
always
recorded as generated in Hong Kong because the purchase orders are issued
by
Hong Kong-based companies. For example, if a customer directs the Company
to
ship a product to the U.S. (or any other overseas market), the sale is recorded
as a sale to the U.S. (or the specified market). However, if a product is
delivered to a customer in China, the sales will be recorded as generated
in
Hong Kong.
Results
of Operations
General
During
the past three years discussed below, the Company’s revenues have been derived
primarily from the manufacture and sale of (i) OEM manufacture of metal parts
and components and products, (ii) clocks, clock movements and watches, and
(iii)
cameras and camera accessories. Revenues during these periods also include
revenues generated by the Company from the sale of “Kienzle” branded watches and
other products that it did not manufacture.
The
following table sets forth the percentages of net sales of certain income
and
expense items of the Company for each of the three most recent fiscal
years.
|
|
|
Year
Ended March 31,
|
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
Cost
of sales
|
|
|
80.9
|
|
|
79.9
|
|
|
81.5
|
|
|
Gross
profit
|
|
|
19.1
|
|
|
20.1
|
|
|
18.5
|
|
|
Selling,
general and administrative expenses
|
|
|
18.3
|
|
|
16.6
|
|
|
18.0
|
|
|
Impairment
loss of industrial property right
|
|
|
0
|
|
|
0
|
|
|
0.2
|
|
|
Impairment
loss of property, plant & equipment
|
|
|
0
|
|
|
0
|
|
|
1.3
|
|
|
Operating
income/(loss)
|
|
|
0.8
|
|
|
3.5
|
|
|
(1.0
|
)
|
|
Interest
expense
|
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
(0.4
|
)
|
|
Other
income
|
|
|
2.1
|
|
|
1.5
|
|
|
1.1
|
|
|
Impairment
of investment in an affiliate
|
|
|
0
|
|
|
(0.4
|
)
|
|
0
|
|
|
Income/(loss)
before income taxes
|
|
|
2.7
|
|
|
4.3
|
|
|
(0.3
|
)
|
|
Income
taxes
|
|
|
(0.3
|
)
|
|
(0.4
|
)
|
|
(0.3
|
)
|
|
Income/(loss)
before minority interest
|
|
|
2.4
|
|
|
3.9
|
|
|
(0.6
|
)
|
|
Minority
interest
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Net
income/(loss)
|
|
|
2.4
|
%
|
|
3.9
|
%
|
|
(0.6
|
)%
|
Year
Ended March 31, 2005 Compared to Year Ended March 31, 2004
Net
sales
for the year ended March 31, 2005 (“fiscal 2005”) increased by $2,322,000, or
9.2%, from the year ended March 31, 2004 (“fiscal 2004”). The increase in net
sales was due to a $3,006,000 increase in sales of all of the Company’s metal
manufacturing and OEM operations from fiscal 2005 compared to fiscal 2004.
The
Company’s other two business segments (clocks and cameras) decreased in sales
compared to the prior fiscal year. As discussed in this Annual Report, the
Company believes that the markets for both its film-based camera products
and
for its clocks are declining and, as a result, the Company has decided to
sell
or discontinue its single-use camera operations and is re-evaluating its
other
camera and clock operations. Accordingly, the Company anticipates that sales
of
clocks and cameras during the current fiscal year will be substantially below
the already lower sales amounts for fiscal 2005.
Sales
of
metal manufactured parts and components increased during fiscal 2005 by
$3,006,000 to $17,792,000. Sales to the Company’s European, primarily German,
customers represented the largest increase in metal manufacturing in fiscal
2005. Metal and OEM manufacturing sales represented 64.3% of the Company’s total
sales in fiscal 2005 compared to 58.3% of the Company’s total sales in fiscal
2004. The increase in metal and OEM manufacturing sales is a result of the
Company’s focus on manufacturing more complex components and products for
larger, European customers.
Net
sales
of cameras decreased in fiscal 2005 by $2,154,000 due to the declining market
for film-based cameras. The Company has decided that in the current fiscal
year
ending March 31, 2006, the Company would discontinue the manufacture and
sales
of single-use cameras. Net sales of cameras represented 13.9% of the Company’s
total net sales in fiscal 2005 compared to 23.6% in fiscal 2004.
Sales
of
clocks and watches for the year ended March 31, 2005 also decreased compared
to
fiscal 2004. The Company has also been using the clock/watch division to
manufacture OEM electronic products for the Company’s OEM manufacturing
divisions. During fiscal 2005, sales of clocks, watches and other, and revenues
generated from the OEM manufacturing operations, represented 21.9%, of the
Company’s net sales, compared to 18.1% of the Company’s net sales for the year
ended March 31, 2004. The total amount of revenues attributed to the clock/watch
division for non-clock/watch OEM manufacturing during fiscal 2005 was
approximately $1,730,000. In addition to the decline in net sales of clocks
and
watches manufactured by the Company, net sales of “Kienzle” labeled products
distributed by Kienzle AG, a German distribution company, also decreased
significantly and generated only approximately $20,000 of revenues in fiscal
2005 compared to $1,665,000 of revenues in fiscal 2004. The distribution
agreement with Kienzle AG has been terminated, and in June 2005 the Company
sold
its rights to the “Kienzle” trademark to Kienzle AG, or its appointees, for
products other than clocks and watches. The purchase price for the rights
to use
the “Kienzle” trademark for products other than clocks and watches was
$1,000,000. Sales of the Company’s principal clock products, quartz clocks,
declined in fiscal 2005 due to low priced clocks sold by competing clock
manufacturers, some of whom the Company believes are, directly or indirectly,
subsidized by the Chinese government and therefore are able to sell clocks
at
very low prices, often below the cost of raw materials. The Company currently
is
considering restructuring and possibly selling its loss making German marketing
business. In order to reduce its losses in its clock/watch manufacturing
operations, management may also consider modifying or reducing its current
clock
and watch manufacturing operations.
The
Company’s gross profits as a percentage of its net sales decreased from 20.1% in
the year ended March 31, 2004 to 18.5% in the year ended March 31, 2005.
Cost of
sales as a percentage of net sales increased from 79.9% to 81.5% as a result
of
increases in raw materials, particularly the significant increases in the
cost
of raw metal and plastics. During fiscal 2005, the Company continued to write
off some of its inventory by writing off $409,000 of its inventories (compared
to a major $640,000 write-off of inventory for the fiscal year ended March
31,
2004).
The
Company periodically writes down inventory for estimated obsolete or
unmarketable inventory equal to the difference between the costs of inventory
and estimated market value, based upon assumptions about future demand and
market conditions.
In
fiscal 2003, the Company wrote off only $52,000 of obsolete inventory.
The
Company attributes the large inventory written off during fiscal 2005 to
the
decline in the Company’s camera and clock businesses and to the decline in the
market for these products.
The low
gross margins also are a reflection of the increasing cost of operating in
Shenzhen, including the increasing cost of labor and other operating costs,
such
as the cost of water and electricity. As a result of the increasing costs,
the
Company has been exploring obtaining alternative manufacturing facilities
and
has entered into a lease for a smaller, additional facility in He Yuan. The
Company believes that the cost of operations generally is less in He Yuan.
The
Company will, however, continue to conduct substantially all of its current
operations at its existing facilities in Shenzhen, China, during the current
fiscal year ending March 31, 2006.
Selling,
general and administrative expenses for the year ended March 31, 2005 increased
by $766,000, or 18.2%, over fiscal 2004. As a result, selling, general and
administrative expenses represented 18.0% of total net sales, compared to
16.6%
in fiscal 2004. The increase in selling, general and administrative expenses
as
a percentage of net sales was due in part to the increase in net sales, to
$337,000 of non-cash compensation expenses, and to $414,000 impairment losses
for its camera, clock and watch property, plant and equipment and industrial
property rights. The foregoing write off of certain of the Company’s camera and
clock/watch assets during fiscal 2005 reflected the losses that the Company
has
sustained from these divisions in the past, and the likelihood that the Company
will not generate increased revenues or profits from these assets and divisions
in the future. During fiscal 2005, the Company paid certain professional
fees by
issuing options to purchase 50,000 shares at an exercise price of $1.00 per
share. This option grant was reflected as a $177,000 compensation expense.
In
addition, under its employment agreement with Mr. Kohl, the Company’s Chief
Executive Officer, the Company was obligated to issue 29,154 shares to Mr.
Kohl
in fiscal year 2005. No shares were issued to Mr. Kohl in prior years. The
Company is obligated to issue 29,154 shares per year to Mr. Kohl in future
years
under the employment agreement. Selling, general and administrative expenses
also increased due to increases in marketing activities, through trade shows,
advertisements, and new catalogues. The Company recognized an expense of
$160,000 for the issuance of these shares. Selling, general and administrative
expenses are expected to increase further in the current fiscal year ending
March 31, 2006 as the Company implements additional financial controls and
procedures that are required under the Sarbanes-Oxley Act of 2002.
During
the fiscal year ended March 31, 2005, the Company realized a $249,000 gain
due
to currency exchange rate fluctuations. The Company realized a currency exchange
rate gain of $278,000 in fiscal 2004. The gains were the result of the strength
of the euro compared to the U.S. dollar, which increased the value of payments
the Company received in euros from it sales in Europe. Since the Company
does
not undertake any currency hedging transactions, its financial results will
continue to be affected by the fluctuations of currencies.
The
Company’s interest expenses increased in fiscal 2005 by $33,000 over the prior
fiscal year due to an increase in the amounts borrowed under its line of
credit
and to an increase in the overall rate of interest paid by the Company.
The
decrease in gross margins combined with the increase in selling, general
and
administrative expenses and the impairment loss of property, plant and equipment
and industrial property rights, resulted in the Company’s recognizing an
operating loss of $269,000 compared to operating income of $875,000 in fiscal
2004. After taxes, the Company’s fiscal 2005 net loss was $152,000 compared to
net income of $982,000 in fiscal 2004.
Year
Ended March 31, 2004 Compared to Year Ended March 31, 2003
Net
sales
for the year ended March 31, 2004 increased by $4,986,000, or 24.5%, from
the
year ended March 31, 2003 (“fiscal 2003”). The increase in net sales was due to
an increase in sales of all of the Company’s product segments compared to the
prior fiscal year.
Sales
of
metal manufactured parts and components for the year ended March 31, 2004
experienced the largest increase both in dollar amount and as a percentage.
Metal manufacturing sales increased by $3,098,000, or 26.5%, as compared
to the
year ended March 31, 2003, and represented 58.3% of the Company’s total sales.
Net sales from the metal stamping segment for the year ended March 31, 2003
represented 57.4% of the Company’s net sales. The increase in sales of OEM
manufactured products was primarily due to the increase in sales to Germany
customers and by an increase in sales to Hong Kong/China.
Net
sales
of cameras increased in fiscal 2004 in each of the Company’s principal
geographic markets for the Company’s cameras, other than sales in the U.S.A,
which decreased by $1,062,000. The decrease in sales to the U.S.A. was due
to
the loss of the Company’s principal U.S. customer. While net sales of cameras
increased by $1,080,000, or 22%, in fiscal 2004, cameras constituted 23.6%
of
the Company’s net sales, compared to 24.1% in the prior year due to the
relatively larger increase in the Company’s overall net sales.
Sales
of
clocks and watches for the year ended March 31, 2004 increased by $808,000,
or
21.4% as compared to the year ended March 31, 2003, and represented 18.1%,
of
the Company’s March 31, 2004 fiscal year sales compared to 18.5% of the
Company’s net sales for the year ended March 31, 2003. In January 2003, the
Company entered into a license and distribution agreement with Kienzle AG,
a
German distribution company, to sell watches, clocks and other products
manufactured by other makers in Europe under its own “Kienzle” trademark. Sales
under this agreement generated approximately $521,000 of revenues in fiscal
2003
(the three months from January through March, 2003) and $1,665,000 of revenues
in fiscal 2004. Since the amount of sales made in calendar 2003 by Kienzle
AG
under the distribution agreement did not meet the minimum established under
the
distribution agreement, the Company terminated the distribution agreement
with
Kienzle AG. Although the distribution agreement was terminated in 2004, both
parties conducted business with each other in substantially the same manner
as
before (except with respect to clocks and watches) during the fiscal year.
Sales
of the Company’s principal clock products, quartz clocks, continued to decline
in fiscal 2004.
The
Company’s gross profits as a percentage of its net sales increased from 19.1% in
the year ended March 31, 2003 to 20.1% in the year ended March 31, 2004.
Cost of
sales as a percentage of net sales decreased from 80.9% to 79.9% despite
a
one-time $640,000 write-off of inventory for the fiscal year ended March
31,
2004.
The
Company periodically writes down inventory for estimated obsolete or
unmarketable inventory equal to the difference between the costs of inventory
and estimated market value, based upon assumptions about future demand and
market conditions.
In
fiscal 2003, the Company wrote off only $52,000 of obsolete inventory. The
reasons for the 1% increase in gross margins in fiscal 2004 include the higher
margins the Company has realized in its metal manufacturing because of the
increasing emphasis on manufacturing subassemblies and components, and the
on-going benefits of the Company-wide cost reduction efforts that were initiated
during fiscal 2003. Although the Company’s gross profits as a percentage of its
net sales increased during the past year, the percentage is still below the
levels the Company has previously achieved. The Company attributes the lower
gross profits to the loss of its competitive advantage that it used to have
due
to its operations in Shenzhen, China. Since many other manufacturers have
now
also established facilities in Shenzhen and elsewhere in China, competition
has
been increasing which has resulted in higher labor and materials costs, and
lower prices for manufactured products.
Selling,
general and administrative expenses for the year ended March 31, 2004 increased
by $496,000, or 13.3%, over fiscal 2003 but decreased as a percentage of
total
net sales from 18.3% to 16.6%. The decrease in selling, general and
administrative expenses as a percentage of net sales was due to the 24.5%
increase in net sales. The increase in selling, general and administrative
expenses is due in part to a $142,000 bad debt expense that the Company
recognized during fiscal 2004. Selling, general and administrative expenses
for
both years included expenses related to the Bulgaria that the Company closed
in
December 2003. Unless the Company re-opens the Bulgaria operations, the Company
will not bear the costs of the Bulgaria facilities in the future.
In
connection with the licensing and distribution agreement the Company entered
into with Kienzle AG in January 2003, the Company also agreed to acquire
a
minority equity interest in Kienzle AG. The amount that the Company has invested
to date is 100,000 euros ($109,000 at the exchange rates then in effect).
As a
result of Kienzle AG’s failure to meet its minimum purchase commitment for the
year ended December 31, 2003, the Company terminated the distribution agreement
and wrote off its $109,000 investment in Kienzle AG.
During
the fiscal year ended March 31, 2004, the Company realized a $278,000 gain
due
to currency exchange rate fluctuations. The Company realized a currency exchange
rate gain of $344,000 in fiscal 2003. The gains were the result of the strength
of the euro compared to the U.S. dollar, which increased the value of payments
the Company received in euros from it sales in Europe. Since the Company
does
not undertake any currency hedging transactions, its financial results will
continue to be impacted by the fluctuations of currencies.
The
Company’s interest expenses increased slightly for the fiscal year ended March
31, 2004 from the prior fiscal year, while the Company’s interest income for the
most recent fiscal year decreased from the prior fiscal year ended March
31,
2003. The minor changes reflect the increase in the Company’s cash balances and
the increase in the amounts borrowed under its line of credit.
As
a
result of increased sales and an improved gross profit as a percentage of
net
sales, the Company’s net income increased from $485,000 for the March 31, 2003
fiscal year to net income of $982,000 in the most recently completed fiscal
year.
Liquidity
and Capital Resources
At
March
31, 2005, the Company had a working capital of $9,850,000, compared to working
capital of $8,774,000 at March 31, 2004.
The
Company has historically generated sufficient funds from its operating
activities to finance its operations and there has been little need for external
financing other than capital leases which are used to finance equipment
acquisitions. During the fiscal year ended March 31, 2005, the Company generated
$625,000 of cash from its operating activities. Cash from operating activities
was arrived at after taking into account the effect of a $550,000 increase
in
accounts payable, a $442,000 increase in other liabilities, a $1,402,000
increase in accounts receivable, and a $668,000 increase in inventories.
Net
cash from operations, however, was reduced by the cash dividend the Company
paid
in 2005, by the repayment of long-term debt, and by the decrease in its
short-term borrowings. The Company received $450,000 during fiscal 2005 from
the
proceeds of stock option exercises. The foregoing amounts used in investment
activities and in financing activities exceeded the amount of net cash provided
in operating activities, thereby reducing the Company’s net cash/cash
equivalents by $210,000 as of March 31, 2005 to $3,948,000.
The
Company’s liquidity has been improved by the June 2005 sale of all of its rights
to the “Kienzle” trademark in all markets other than clocks and watches, to
Kienzle AG and its affiliates. The purchase price for the non-clock/watch
rights
to the “Kienzle” trademark was $1,000,000 in cash (the check has been received
and deposited, but as of the date of this Annual Report, the U.S. funds have
not
yet been confirmed). In addition, Kienzle AG has also agreed to return the
Company’s 100,000 euro investment in Kienzle AG (approximately $131,000 at
current exchange rates), which payment, if received, will also improve the
Company’s liquidity.
Because
of the Company’s international operations, the Company’s banking facilities
provide the Company with credit facilities for letters of credit and import
loans. In addition, in order to fund certain of the Company’s capital
requirements, the Company also has borrowed funds from its banks to finance
some
of its machinery and equipment purchases and some of its building costs.
The
foregoing banking facilities are currently being provided to the Company
through
a credit facility with the Hong Kong and Shanghai Banking Corporation Limited
(HSBC) and a credit facility with DBS Bank (Hong Kong) Limited.
The
HSBC
credit facility is in favor of the Company’s camera and metal manufacturing
subsidiaries and, as of the date of this Annual Report, provides for a maximum
credit facility of $1,928,000 (subject to various sub-limits). The HSBC credit
facility consists of an import loan facility that bears interest at 1.0%
over
the banks’ best lending rate as in effect in Hong Kong from time to time, and is
secured by a charge on certain time deposits the Company maintains at the
bank
and cross guarantees and indemnities among certain of the Company’s
subsidiaries.
The
DBS
facility is in favor of the Company’s metal, clock and camera subsidiaries and
provides for a maximum letter or credit/trust receipt facility of $1,928,000
and
for an aggregate of $1,024,000 for capital expenditure/equipment loans. The
interest rates under the DBS letter of credit facility is 1% over the best
lending rate quoted by the bank from time to time for Hong Kong dollar credits,
and the bank’s standard bills rate for U.S. dollar credits. The DBS capital
expenditure loans are repayable in monthly installments ranging from 16 months
to 36 months. Interest rates under the DBS capital expenditure facility vary
from 0.25% below the prime rate quoted by the bank from time to time, to
1.5%
over the prime rate quoted from time to time. The DBS facility is also secured
by a charge on various accounts maintained by the Company at that bank and
by
cross guarantees indemnities by Highway Holdings Limited and the various
borrowing subsidiaries. As of March 31, 2005, the Company had borrowings
of a
total of $1,449,000 outstanding under its credit facilities and had a total
of
$2,407,000 of available credit remaining under the two credit facilities.
The
Company’s long-term debt was $967,000 as of March 31, 2005.
As
a
result of its currently available working capital and its internal projections
for the next year, the Company expects that its working capital requirements
and
capital needs for at least the next 12 months can be funded through a
combination of internally generated funds and existing facilities. The Company’s
additional manufacturing facility that has been leased effective July 1,
2005
and will be operated during the current fiscal year is not projected to have
any
negative effect on the Company’s liquidity as the operating savings are
projected to offset the additional leasing and transportation
costs.
During
the current fiscal year (ending March 31, 2005), the Company anticipates
that,
company-wide, it will spend between $200,000 and $500,000 on capital
expenditures. A portion of the capital expenditures will purchased from the
Company’s existing funds, some equipment purchases will be funded by borrowings
under the Company’s existing banking facilities, and some equipment will be
acquired under capital leases.
The
Company is not a party to off-balance sheet arrangements and does not engage
in
trading activities involving non-exchange traded contracts. In addition,
the
Company has no financial guarantees, debt or lease agreements or other
arrangements that could trigger a requirement for an early payment or that
could
change the value of the Company’s assets.
The
following is a summary of the Company’s contractual obligations as of March 31,
2005 is as follows:
|
|
|
Payment
due by Year Ended March 31,
|
|
|
Contractual
Obligations
|
|
Total
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
and thereafter
|
|
|
|
|
000’s
|
|
000’s
|
|
000’s
|
|
000’s
|
|
000’s
|
|
000’s
|
|
|
Facility
Leases
|
|
|
3,232
|
|
|
875
|
|
|
878
|
|
|
772
|
|
|
706
|
|
|
1
|
|
|
Finance
Leases
|
|
|
967
|
|
|
409
|
|
|
395
|
|
|
163
|
|
|
--
|
|
|
--
|
|
|
Purchase
obligations
|
|
|
2,134
|
|
|
2,134
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Short
term borrowing
|
|
|
1,449
|
|
|
1,449
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Total
|
|
|
7,782
|
|
|
4,867
|
|
|
1,273
|
|
|
935
|
|
|
706
|
|
|
1
|
|
Impact
of Inflation
The
Company believes that inflation has not had a material effect on its
business.
Seasonality
The
first
calendar quarter (the last quarter of the Company’s March 31 fiscal year) is
typically the Company’s lowest sales period because, as is customary in China,
the Company’s manufacturing facilities in China are usually closed for one to
two weeks for the Chinese New Year holidays. The Company does not experience
any
other significant seasonal fluctuations. The Company does not consider any
issues with respect to seasonality to be material.
Exchange
Rates
The
Company transacts its business with its vendors and customers primarily in
U.S.
dollars, Hong Kong dollars and euros. In addition, all of the payments the
Company is required to make under the BFDC Agreements for its manufacturing
facilities, its factory workers, as management fees and other operating charges
are based on the Hong Kong dollar. The exchange rate between the U.S. dollar
and
the Hong Kong dollar has been fixed since 1983 at approximately HK $7.78
to US
$1.00. Accordingly, the Company has not been subject to material currency
fluctuations with respect to these aspects of its operations. However, since
the
Company’s clock and other sales in Europe are denominated in euros, the Company
is subject to the risks of exchange rate fluctuations. During the fiscal
year
ended March 31, 2004 and 2005, the Company experienced net currency exchange
gains of $278,000 and $249,000, respectively. The recent exchange rate gains
are
due to the improved exchange rate between the euro and the U.S. dollar and
the
increasing amount of sales denominated in euros. The Company does not utilize
any form of financial hedging or option instruments to limit its exposure
to
exchange rate or material price fluctuations and has no current intentions
to
engage in such activities in the future. Accordingly, material fluctuations
in
the exchange rates between the U.S. dollar and other currencies, the euro
in
particular, could have a material impact on the Company’s future
earnings/losses.
Critical
Accounting Policies
The
Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America.
The
preparation of these financial statements requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. On an on-going basis, the Company evaluates its estimates and judgments,
including those related to bad and doubtful debts, inventories, income taxes,
impairment of assets, intangible assets and litigation. The Company bases
its
estimates and judgments on historical experience and on various other factors
that the Company believes are reasonable. Actual results may differ from
these
estimates under different assumptions or conditions.
The
following critical accounting policies affect the more significant judgments
and
estimates used in the preparation of the Company’s consolidated financial
statements.
Revenue
recognition - The Company recognizes revenue when all of the following
conditions are met (i) persuasive evidence of an arrangement exists; (ii)
delivery has occurred; (iii) price to the customer is fixed or determinable;
and
(iv) collectibility is reasonably assured. Although the Company in March
2005
entered into an agreement to sell all of its rights to the “Kienzle” trademark
in all markets other than clocks and watches for a purchase price of $1,000,000
(and to have its 100,000 euro investment in Kienzle AG returned), because
there
was substantial doubt that transaction would be consummated and that the
payment
would be received, the sale of the non-watch/clock rights was not recognized
as
a sale in the fiscal year ended March 31, 2005.
Bad
and
doubtful debts - The Company maintains allowances for its bad and doubtful
accounts for estimated losses resulting from the inability of its customers
to
make required payments. If the financial condition of its customers changed,
changes to these allowances may be required, which would impact the Company’s
future operating results.
Inventories
- Inventories, consisting of finished goods, raw materials and packaging
materials, are stated at the lower of cost or market with cost determined
using
the first-in, first-out method. The Company makes certain obsolescence and
other
assumptions to adjust inventory based on historical experience and current
information. The Company writes down inventory for estimated obsolete or
unmarketable inventory equal to the difference between the costs of inventory
and estimated market value, based upon assumptions about future demand and
market conditions. These assumptions, although consistently applied, can
have a
significant impact on current and future operating results and financial
position.
Income
taxes - The Company records a valuation allowance to reduce its deferred
tax
assets to the amount that the Company believes is more likely than not to
be
realized. In the event the Company was to determine that it would be able
to
realize its deferred tax assets in the future in excess of its recorded amount,
an adjustment to the deferred tax asset would increase income in the period
such
determination was made. Likewise, should the Company determine that it would
not
be able to realize all or part of its net deferred tax asset in the future,
an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made.
Impairment
of assets - The Company's long-lived assets principally include property,
plant
and equipment and intangible assets. In assessing the impairment of these
assets, the Company has made assumptions regarding the estimated future cash
flows and other factors to determine the fair value of the respective assets.
If
these estimates or the related assumptions change in the future, the Company
may
be required to record impairment charges for these assets. For the year ended
March 31, 2005, the Company wrote off (i) its $5,000 investment in Kayser
Photo
Overseas Corp., and (ii) $347,000 in molds.
Industrial
property rights - Industrial property rights represent the patents, technology
and the rights relating to the name “Kienzle” and are stated at cost.
Amortization is provided on a straight-line basis over a period of 10 years
which is the estimated useful lives of these assets. In the year ended March
31,
2005, the Company reassessed the assets value of these assets and recognized
an
impairment loss of $67,000.
Item
6.
Directors,
Senior Management and Employees
Directors
and Executive Officers
The
Directors and executive officers of the Company as of June 27, 2005 are listed
below. The Directors hold office until the next annual meeting of shareholders,
which currently is scheduled to be held on July 28, 2005.
|
Name
|
Age
|
Positions
|
|
|
|
|
|
Roland
W. Kohl
|
56
|
Chief
Executive Officer, Director, Chairman of the Board
|
|
Satoru
Saito
|
56
|
Sales
Director, Metal Stamping Operations, Director
|
|
Fong
Po Shan
|
39
|
Chief
Financial Officer, Secretary
|
|
May
Tsang Shu Mui
|
45
|
Administration
Manager, Director
|
|
Quan
Vinh Can (Joseph)
|
56
|
Factory
Manager, Metal Stamping Operations
|
|
Tiko
Aharonov
|
58
|
Director
|
|
Benson
Lee
(1)
(2)
|
63
|
Director
|
|
Mark
Majzner
(1)
|
39
|
Director
|
|
Dirk
Hermann
(1)
|
41
|
Director
|
|
(1)
|
Member
of Audit Committee.
|
|
(2)
|
Member
of Compensation Committee
|
Roland
W. Kohl
.
Mr.
Kohl was the founder of the Company and has been its Chief Executive Officer
since its inception in 1990. He has been a Director of the Company since
March
1, 1995. He has overall responsibility for the day-to-day operations of the
Company and its subsidiaries. Prior to forming the Company, Mr. Kohl was
the
Managing Director of Dialbright Company Limited, a camera manufacturer located
in China. Mr. Kohl received a degree in mechanical engineering and has over
twenty year’s experience in managing factories and manufacturing operations in
China. Mr. Kohl is a German national and resides in Hong Kong.
Satoru
Saito
.
Mr.
Saito has been employed by the Company since its inception and has been a
Director since September 14, 1996. Mr. Saito’s responsibilities include
supervision of sales and marketing in the metal manufacturing division. Mr.
Saito has extensive experience in working with Japanese companies in Japan
and
China. Mr. Saito is a Japanese national and resides in Hong Kong.
Fong
Po Shan
.
Ms.
Fong was employed as a Chief Financial Officer and Secretary of the Company
in
January 1998. Ms. Fong’s responsibilities include planning financial development
and setting up the internal systems. From 1995-1997, Ms. Fong worked at Philips
Hong Kong Limited and KONE Elevator (HK) Limited as a Management Accountant
and
Financial Control and Supply Manager, respectively. From 1991-1994 Ms. Fong
was
employed as an Accounting Manager of the Company. She is a member of CPA
Australia and Hong Kong Institute of Certified Public Accountants. She graduated
from Simon Fraser University with a Bachelor Degree in Business Administration
in Canada in 1990 and received a Masters in Accounting from the Charles Stuart
University in 1994.
Tiko
Aharonov
.
Mr.
Aharonov has been a Director of the Company since its inception in 1990 and
was
a General Manager of the Company’s camera operations from 1998 to 2004. Until
the closing of the Company’s Bulgarian facility in 2004, Mr. Aharonov acted as
the General Manager of the Bulgarian operations. Mr. Aharonov currently is
a
Director of several unaffiliated Israeli companies. He was a bank manager
for a
leading Israeli commercial and retail bank in the past five years has operated
his own real estate and investment company for high net worth individuals
desiring to invest in real estate in Israel.
May
Tsang Shu Mui
.
Ms.
Tsang has been the Company’s Factory Manager in charge of camera manufacturing
and a Director of the Company since 1990. In 2001, Ms. Tsang became the
Company’s Administration Manager. Ms. Tsang is a Chinese national and resides in
Hong Kong.
Quan
Vinh Can (Joseph)
.
Mr.
Quan has been employed as the Company’s Factory Manager since 1994. He is
responsible for all of the Company’s manufacturing operations. Mr. Quan joined
the Company’s metal stamping operations in 1990 as an assistant Production
Manager. He graduated from the national Taiwan University with a Bachelors
Degree in Electrical Engineering in 1974.
Benson
Lee
.
Mr. Lee
was the founder of Hi-Lite Camera Company has been a director of the Company
since 1991. Mr. Lee has been involved in property investment and development
in
Hong Kong, China and the U.S. over the past five years and has more than
30
years of manufacturing and business experience.
Mark
Majzner
.
Mr.
Majzner was appointed as a director of the Company in November 2004. Mr.
Majzner
has been the managing director of Antipodes Premium Wines AB, a Swedish importer
of Australian wines that he founded in May 2004. From August 2002 to May
2004,
Mr. Majzner served in Stockholm as the business affairs director for Naxos
Group, the world’s leading independent classical music CD-company based in Hong
Kong. Mr. Majzner attended Stockholm University’s International Executive Master
of Business Administration program during 2001 until his graduation in August
2002. He also previously served as interim chief executive officer for Virionyx
Corporation, a New Zealand- and Australia-based biotechnology company, and
as
chief executive officer of Milestone Ventures Australia Pty Ltd, an e-commerce
development company, and managing director of US Capital Consultant Pty Ltd.,
a
business consulting firm. Majzner served as chief financial officer and
corporate secretary of Highway Holdings Limited from October 1994 through
May
1997, and was responsible for managing the company’s initial public offering in
December 1996.
Dirk
Hermann.
Dr.
Hermann was appointed to the Board of Directors in January 2003. Dr. Hermann
currently serves as the regional marketing manager for the southwestern region
of Germany for Allianz Versicherungs-AG. He joined Allianz, the German insurance
firm, in 1994 as a marketing executive assistant based in Munich. Prior,
he held
a marketing position with MSU Management Consulting GmbH. He began his marketing
career with Gruber, Titze and Blank GmbH, a
management
consulting firm based in Germany. Dr. Hermann graduated from the University
of
Konstanz in Germany with a bachelor’s degree in business administration. He also
holds a master’s degree in business administration from the University of St.
Gallen in Switzerland. He earned a Ph.D. degree in business administration
from
the University of Leipzig, in Germany.
Dr.
Hermann is the brother-in-law of Roland Kohl. Other than the foregoing
relationship, there is no family relationship between any of the above-named
officers, directors or employees. To the Company’s knowledge, no arrangement or
understanding exists between any such director and executive officer and
any
major shareholder, customer, supplier or other party pursuant to which any
director or executive officer was elected as a director or executive officer
of
the Company.
Board
Compensation
During
the past fiscal year, the Company paid each non-executive director (Messrs.
Lee,
Hermann, Noonan, Aharonov and Majzner) an annualized director’s fee of $6,000
(Mr. Majzner joined the Board of Directors in November and received a fee
of
$2,917), and reimbursed them for their reasonable expenses incurred in
connection with their services as directors (Terrence Noonan resigned as
a
director on June 25, 2005). In addition, members of any Board committee are
paid
an additional fee of $1,000 per year for each committee on which they serve.
In
the past, the Company has also granted stock options to its non-executive
director, outside directors, although the Company did not grant any options
to
its directors during the fiscal year ended March 31, 2005.
Board
Practices
Directors
of the Company are elected each year at the Company’s annual meeting of
shareholders and serve until their successors take office, or until their
death,
resignation or removal. The Company generally holds its annual meeting of
shareholders within 90 days after the filing of its Annual Report on Form
20-F
with the Commission. Executive officers serve at the pleasure of the Board
of
Directors of the Company. As of the date of this Annual Report, there are
no
agreements with any of the Directors that would provide the Directors with
any
benefits upon termination of employment.
Audit
Committee
The
members of the both the Audit Committee of the Board of Directors are Benson
Lee, Mark Majzner and Dirk Hermann. (During the past fiscal year, until his
resignation on June 25, 2005, Terrence A. Noonan was an independent director
who
served as a member of the Company’s Audit Committee and Compensation Committee.)
The Audit Committee reviews, acts on and reports to the Board of Directors
on
various auditing and accounting matters, including the selection of the
Company’s auditors, the scope of the annual audits, fees to be paid to the
auditors, the performance of the independent auditors, any additional services
to be provided by the auditors, and the Company’s accounting practices. Each of
these individuals is a non-employee director and is independent as defined
under
the Nasdaq Stock Market’s listing standards, and each has significant knowledge
of financial matters (two of the members have received advanced degrees in
business administration). Mr. Majzner has been designated by the Board as
the
“audit committee financial expert” as defined under Item 401(h) (2) of
Regulation S-K of the Securities Exchange Act of 1934, as amended. The Audit
Committee met once during fiscal 2005. The Audit Committee operates under
a
formal charter that governs its duties and conduct.
Compensation
Committee
During
the past fiscal year, the Compensation Committee of the Board of Directors
consisted of Benson Lee and Terrence A. Noonan. The Compensation Committee
administers the Company’s 1996 Stock Option Plan and provides recommendations
for the salaries and incentive compensation of the executive officers of
the
Company, which compensation levels are then approved by the Board of Directors.
To
date,
all eight of the Company's directors (four of whom are independent directors)
have participated in the selection of qualified director nominees. Accordingly,
the Board of Directors has not found it necessary to have a separate Nominating
Committee. However, the Board is currently considering establishing a Nominating
Committee consisting of independent directors. The Board of Directors has
not
established any specific minimum qualifications for director candidates or
any
specific qualities or skills that a candidate must possess in order to be
considered qualified to be nominated as a director. Qualifications for
consideration as a director nominee may vary according to the particular
areas
of expertise being sought as a complement to the existing board composition.
In
making its nominations, the Board of Directors generally will consider, among
other things, an individual’s business experience, industry experience,
financial background, breadth of knowledge about issues affecting our company,
time available for meetings and consultation regarding company matters and
other
particular skills and experience possessed by the individual.
Employees
As
of
March 31, 2005, the Company a total of 1,525 persons were working on a full-time
basis for the Company. Of these, all workers in China were supplied to the
Company by the BFDC under the BFDC Agreements. The persons working in Germany
and in Hong Kong were employees of the Company’s subsidiaries. Of the foregoing
workers and employees, 53 were engaged in the administration of the Company,
1,405 were engaged in manufacturing (including research and development,
design,
engineering, quality control, and shipping), 25 were engaged in marketing,
and
the balance (42 employees) were engaged in miscellaneous other supporting
functions. Of the foregoing workers/employees, 1,481 were employed in China,
36
in Hong Kong, and eight in Germany. The employees in Germany are principally
engaged in marketing. The Company requires most of its Hong Kong staff to
regularly visit the Company’s China facilities to oversee local management and
provide technical assistance.
The
persons working at the Company’s facilities in China are employed by BFDC
pursuant to the BFDC Agreements. The number of workers employed by the BFDC
fluctuates largely due to the availability of workers and the time of year.
The
seasonality is also dependent, to a lesser extent, on orders held by the
Company. The Company has experienced temporary shortages of labor and has
taken
action to attract additional workers from other provinces of China to its
factory complex in Long Hua, Shenzhen. From time to time, labor supply has
been
adversely affected primarily due to transportation difficulties in bringing
workers to Shenzhen due to flooding or other natural disasters as well as
seasonal demands on labor such as harvesting when the mainly rural-based
laborers are required to return to their village. Due to the nature of the
labor
force working at facilities such as the Company’s in Shenzhen, the Company
experiences high turnover of employees annually.
The
Company’s employees are not parties to any labor union or collective bargaining
agreement, and the Company has, to date, not experienced any material labor
stoppages. The Company believes that its relations with employees are good.
Options
of Directors and Senior Management
The
following table sets forth the number of Common Shares that each current
Director and executive officer of the Company could purchase as of June 27,
2005, together with the exercise price of such options and the expiration
date
of the options.
|
Name
of Beneficial Owner Or Identity of Group
|
Number
of Common Shares
|
Expiration
Date
|
Exercise
Price
|
|
Roland
W. Kohl
|
100,000
|
June
2, 2008
|
$1.55
|
|
|
|
|
|
|
Tiko
Aharonov
|
3,000
|
June
2, 2008
|
$1.47
|
|
|
6,000
|
October
27, 2008
|
$3.17
|
|
|
|
|
|
|
May
Tsang Shu Mui
|
3,000
|
June
2, 2008
|
$1.47
|
|
|
6,000
|
October
27, 2008
|
$3.17
|
|
|
|
|
|
|
Benson
Lee
|
6,000
|
October
27, 2008
|
$3.17
|
|
|
|
|
|
|
Satoru
Saito
|
6,000
|
October
27, 2008
|
$3.17
|
|
|
|
|
|
|
Dirk
Hermann
|
2,000
|
June
2, 2008
|
$1.47
|
|
|
4,000
|
October
27, 2008
|
$3.17
|
|
|
|
|
|
|
Quan
Vinh Can (Joseph)
|
3,000
|
June
2, 2008
|
$1.47
|
|
|
6,000
|
October
27, 2008
|
$3.17
|
For
additional information regarding the share ownership in the Company by the
Company’s directors, executive officers, and principal shareholders is set forth
in Item 7, “Major Shareholders and Related Party Transactions,”
below.
The
Company has adopted the 1996 Stock Option Plan (the “Option Plan”) that
currently covers 600,000 shares of the Common Shares. The Option Plan provides
for the grant of options to purchase Common Shares to employees, officers,
directors and consultants of the Company. The Option Plan is administered
by the
Compensation Committee appointed by the Board, which determines the terms
of the
options granted, including the exercise price (provided, however, that the
option price shall not be less than the fair market value or less than the
par
value per share on the date the options granted), the number of Common Shares
subject to the option and the option’s exercisability. As of March 31, 2005,
options granted under the Option Plan to purchase a total of 142,150 Common
Shares were still outstanding. The maximum term of options granted under
the
Option Plan is five years. The average weighted exercise price of all options
outstanding on March 31, 2005 was $1.94 per share.
In
addition to the options that can be granted under the Option Plan, the Company
also granted Common Share purchase rights to certain of the directors and
key
employees prior to its December 1996 initial public offering, of which rights
to
purchase a total of 100,000 of Common Shares were still outstanding as of
June
20, 2005 (the rights for the purchase of 100,000 Common Shares that were
granted
to Mr. Kohl in June 2003 to replace 100,000 share purchase rights that were
granted to him in 1996, and which rights expired in January 2003). The average
weighted exercise price of the Common Share purchase rights outstanding on
March
31, 2005 was $1.55 per share.
As
of
June 20, 2005 the Company had outstanding stock options and Common Share
purchase rights for an aggregate total of 242,150 Common Shares.
As
part
of the compensation that the Company has agreed to issue to Mr. Kohl, the
Company’s Chief Executive Officer, commencing on April 1, 2004 and continuing
annually thereafter, 29,154 Common Shares. The 29,154 shares issuable for
the
fiscal year ended March 31, 2005 were physically issued in June
2005.
Item
7.
Major
Shareholders and Related Party Transactions
Major
Shareholders
.
The
Company is not directly or indirectly owned or controlled by any other
corporation or any foreign government. The following table sets forth, as
of
June 27, 2005, certain information with respect to the beneficial ownership
of
the Company’s Common Shares by each person (i) who is an executive officer or
director of the Company, or (ii) known by the Company to own beneficially
more
than 5% of the outstanding Common Shares outstanding as of such date.
|
Name
of Beneficial Owner or Identity of Group
(1)
|
|
Number
of Common Shares Beneficially Owned
|
|
Percent
Beneficially Owned
(**)
|
|
|
Roland
W. Kohl
|
|
|
443,951
|
(2)
|
|
13.23
|
%
|
|
Mark
Majzner
|
|
|
5,666
|
|
|
*
|
|
|
Benson
Lee
|
|
|
339,830
|
(4)
|
|
10.60
|
%
|
|
Tiko
Aharonov
|
|
|
268,900
|
(5)
|
|
8.28
|
%
|
|
Dirk
Hermann
|
|
|
6,000
|
(3)
|
|
*
|
|
|
Satoru
Saito
|
|
|
355,980
|
(4)
|
|
10.61
|
%
|
|
May
Tsang Shu Mui
|
|
|
69,171
|
(5)
|
|
2.06
|
%
|
|
Cartwright
Investments Limited
|
|
|
346,830
|
|
|
10.34
|
%
|
|
Fong
Po Shan
|
|
|
1,283
|
|
|
*
|
|
|
Quan
Vinh Can
|
|
|
37,665
|
(5)
|
|
*
|
|
|
Seth
W. Hamot
|
|
|
165,309
|
(6)
|
|
4.93
|
%
|
|
**
|
Under
the rules of the Securities and Exchange Commission, shares of
Common
Shares that an individual or group has a right to acquire within
60 days
pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage ownership
of such
individual or group, but are not deemed to be outstanding for the
purpose
of computing the percentage ownership of any other person shown
in the
table.
|
|
(1)
|
The
address of each of the named holders is c/o Highway Holdings Limited,
Suite 810, Level 8, Landmark North, 39 Lung Sum Avenue, Sheung
Shui New
Territories Hong Kong.
|
|
(2)
|
Includes
stock options to purchase 100,000 Common Shares which are currently
exercisable.
|
|
(3)
|
Represents
currently exercisable stock options to purchase Common
Shares.
|
|
(4)
|
Includes
stock options to purchase 6,000 Common Shares which are currently
exercisable.
|
|
(5)
|
Includes
stock options to purchase 9,000 Common Shares which are currently
exercisable.
|
|
(6)
|
According
to a Schedule 13G filed on February 4, 2005, Mr. Seth W. Hamot
is the
President of Roark, Rearden & Hamot LLC, which is the general partner
of Costa Brava Parnerhip L.P., the owner of the 165,309
shares.
|
There
are
no arrangements known to the Company, the operation of which may at a subsequent
date result in a change in control of the Company. All holders of the Common
Shares have the same voting rights, and the Company’s major shareholders do not
have different voting rights.
Related
Party Transactions
.
The
Company did not engage in any related party transactions during the fiscal
year
ended March 31, 2005.
Item
8.
Financial
Information.
The
Company’s consolidated financial statements for the three-year period ended
March 31, 2005 are set forth under Item 18 “Financial Statements.” The
Company’s unaudited quarterly financial information for the year ended March 31,
2005 and 2004 are set out below:
|
|
|
1
st
Quarter
|
|
2
nd
Quarter
|
|
3
rd
Quarter
|
|
4
th
Quarter
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
6,148
|
|
$
|
6,404
|
|
$
|
7,309
|
|
$
|
7,817
|
|
|
Gross
profit
|
|
|
1,476
|
|
|
1,107
|
|
|
1,198
|
|
|
1,349
|
|
|
Operating
income (loss)
|
|
|
342
|
|
|
(26
|
)
|
|
(169
|
)
|
|
(416
|
)
|
|
Net
income (loss)
|
|
|
346
|
|
|
28
|
|
|
116
|
|
|
(642
|
)
|
|
Earnings
(loss) per share - basic
|
|
|
0.11
|
|
|
0.01
|
|
|
0.04
|
|
|
(0.21
|
)
|
|
Earnings
(loss) per share - diluted
|
|
|
0.10
|
|
|
0.01
|
|
|
0.03
|
|
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
5,953
|
|
$
|
6,234
|
|
$
|
6,457
|
|
$
|
6,712
|
|
|
Gross
profit
|
|
|
1,139
|
|
|
1,128
|
|
|
1,198
|
|
|
1,629
|
|
|
Operating
income
|
|
|
78
|
|
|
209
|
|
|
76
|
|
|
511
|
|
|
Net
income
|
|
|
159
|
|
|
201
|
|
|
214
|
|
|
408
|
|
|
Earnings
per share - basic
|
|
|
0.05
|
|
|
0.07
|
|
|
0.07
|
|
|
0.13
|
|
|
Earnings
per share - diluted
|
|
|
0.05
|
|
|
0.06
|
|
|
0.07
|
|
|
0.12
|
|
Dividend
Policy
.
The
Company paid a cash dividend of $0.10 per share in August 2004 to all holders
of
its common shares and a cash dividend of $0.08 per share in August 2003.
Prior
to the 2003 dividend, the Company had not paid a dividend since the fiscal
year
ended March 31, 2000 due to its operating losses. Since the Company has now
returned to profitability, the Company is considering reinstating its policy
of
paying cash dividends annually. However, any future dividend will be paid
at the
discretion of the Board of Directors and will depend upon, among other things,
the Company’s net profit after taxes, the anticipated future earnings of the
Company, the success of the Company’s business activities, the Company’s capital
requirements, and the general financial conditions of the Company. Although
it
is the Company’s intention to pay dividends during profitable fiscal years, no
assurance can be given that the Company will pay, in fact, pay any dividends
in
the future even if its has a profitable year or is otherwise capable of doing
so.
Legal
Proceedings
.
In
the
Matter of Certain Lens-Fitted Film Packages
,
Inv.
No. 337-TA-406 Consolidated Enforcement and Advisory Opinion Proceeding.
The
International Trade Commission (“ITC”) issued a “Notice Of Institution Of Formal
Enforcement And Advisory Opinion Proceedings” on July 31, 2001. The proceedings
are directed to Lens-Fitted Film Packages which are inexpensive, single use
cameras. The Notice named a number of parties to the Formal Enforcement
proceedings and a number of parties to the Advisory Opinion proceedings.
The
Company was originally named as an Advisory Opinion respondent. The ITC referred
the case to an Administrative Law Judge (“ALJ”) to conduct a hearing and address
other issues pertaining to the proceedings. Subsequent to the initial filing,
a
motion was filed with the ALJ to add the Company as an Enforcement respondent.
This motion was granted by the ALJ.
On
February 11-16, 2002, a hearing was conducted. On May, 2, 2002 the ALJ made
an
Initial Determination regarding the merits of the case. At issue for the
Company
were certain claims in four US Patents assigned to Fuji Photo Film Co., Ltd.:
US
Patent No. 4,884,087 (“the ‘087Patent”), US Patent No. 5,381,200 (“the ‘200
Patent”), US Patent No. Re 34,168 (“the ‘168 Patent”), and US Patent No.
4,972,649 (the ‘649 Patent”) and whether the Company’s HL-1 model camera
violated one or more of those patents. During the proceedings preparatory
to the
hearing, the Company sought to introduce its HL-2 camera into the proceedings.
The HL-2 camera was designed to be outside the scope of all patents at issue
in
the proceeding, and in particular the ‘200 Patent and the ‘649 Patent.
Introduction of the HL-2 camera into the ITC proceeding was denied by the
ALJ.
In
the
Initial Determination regarding the Company, the ALJ found that the HL-1
camera
did not infringe the ‘087 Patent and the ‘168 Patent. The ALJ also found that
the HL-1 camera infringed the ‘200 Patent and the ‘649 Patent. The ALJ did not
assess any enforcement sanctions against the Company.
On
August
7, 2002, the ITC decided not to review any of the ALJ's findings concerning
these five patent claims. Nonetheless, due to further disputes between Fuji
and
other parties, additional hearings to which the Company was not a party,
were
required. The ALJ made his determinations and the ITC adopted the ALJ's views
and issued a final order on May 15, 2003. In its order, the ITC also adopted
the
ALJ's recommendations concerning relief. As a result, the Company is subject
only to a general exclusion order which is applicable to all companies importing
products into the United States prohibiting them from importing items that
infringe the patents at issue in the ITC proceeding. The ITC rejected Fuji's
request to issue a cease and desist order against the Company or to impose
civil
penalties upon it.
On
October 7, 2002, while further proceedings between Fuji and other parties
were
taking place before the ALJ, Fuji filed a notice of appeal of the decision
by
the ITC on the Company’s issues. The appeal identified the International Trade
Commission as the respondent and was filed with the U.S. Court of Appeals
for
the Federal Circuit. On November 26, 2002, the Court of Appeals granted the
Company's motion to intervene in the appeal. The Court of Appeals subsequently
stayed and suspended its review to allow the ITC to reach a final
decision.
On
October 7, 2004, the Court of Appeals affirmed the ITC's conclusion that
the
Company's H-1 camera did not infringe the asserted claims of 2 of the patents
(the '087 and '495 patents). The Court did, however, vacate its decision
on the
('649 patent) remanded it for a new determination on infringement.
The
Company is not involved in any other material legal proceedings.
Item
9.
The
Listing
The
Company’s Common Shares are currently traded on The Nasdaq SmallCap Market under
the symbol “HIHO” and are not listed for trading in any trading market outside
the United States. On June 20, 2005, the last reported sale price of our
common
shares on The Nasdaq SmallCap Market was $3.75 per share. As of June 20,
2005,
there were 52 holders of record of the Company’s Common Shares. However, the
Company believes that are a significantly greater number of “street name”
shareholders of the Common Shares.
The
following table sets forth the high and low closing sale prices as reported
by
The Nasdaq Stock Market for years for each of the last five years ended March
31, 2005:
|
Year
Ended
|
|
High
|
|
Low
|
|
|
March
31, 2005
|
|
$
|
5.80
|
|
$
|
3.09
|
|
|
March
31, 2004
|
|
$
|
7.39
|
|
$
|
1.40
|
|
|
March
31, 2003
|
|
$
|
2.00
|
|
$
|
0.47
|
|
|
March
31, 2002
|
|
$
|
1.33
|
|
$
|
0.60
|
|
|
March
31, 2001
|
|
$
|
1.625
|
|
$
|
0.625
|
|
The
following table sets forth the high and low closing sale prices of the Common
Shares as reported by Nasdaq during each quarter of the two most recent fiscal
years.
|
Quarter
Ended
|
|
High
|
|
Low
|
|
|
March
31, 2005
|
|
$
|
4.75
|
|
$
|
4.15
|
|
|
December
31, 2004
|
|
$
|
4.75
|
|
$
|
3.09
|
|
|
September
30, 2004
|
|
$
|
5.80
|
|
$
|
4.18
|
|
|
June
30, 2004
|
|
$
|
5.60
|
|
$
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2004
|
|
$
|
7.39
|
|
$
|
4.72
|
|
|
December
31, 2003
|
|
$
|
3.91
|
|
$
|
2.65
|
|
|
September
30, 2003
|
|
$
|
4.60
|
|
$
|
1.99
|
|
|
June
30, 2003
|
|
$
|
2.10
|
|
$
|
1.40
|
|
The
following table sets forth the high and low closing sale prices of the Company’s
Common Shares as reported by The Nasdaq Stock Market during each of the most
recent six months.
|
Month
Ended
|
|
High
|
|
Low
|
|
|
May
31, 2005
|
|
$
|
3.82
|
|
$
|
3.50
|
|
|
April
30, 2005
|
|
$
|
4.80
|
|
$
|
4.02
|
|
|
March
31, 2005
|
|
$
|
4.70
|
|
$
|
4.42
|
|
|
February
28, 2005
|
|
$
|
4.72
|
|
$
|
4.15
|
|
|
January
31, 2005
|
|
$
|
4.75
|
|
$
|
4.15
|
|
|
December
31, 2004
|
|
$
|
4.69
|
|
$
|
4.17
|
|
Item
10.
Additional
Information
Share
Capital
The
Company’s authorized capital consists of 20,000,000 Common Shares, $0.01 par
value per share. As of March 31, 2005 and June 20, 2005, there were 3,316,154
and 3,355,598 Common Shares, respectively, outstanding, net of 37,800 treasury
shares, all of which was fully paid.
The
number of shares outstanding could increase by the shares issued upon the
exercise of currently issued and outstanding options (see, “Item 6, Share
Ownership,” above) and by an option to purchase 50,000 shares of Common Shares
that the Company issued as payment for certain legal services it received
in
connection with proceedings initiated by Fuji Photo Film Co., Ltd. before
the
International Trade Commission. These proceedings have now been terminated.
The
foregoing options are exercisable at a price of $1.00 per share and expire
on
December 29, 2005.
As
of
March 31, 2005, the Company no longer had any warrants to purchase Common
Shares
outstanding.
Memorandum
And Articles Of Association
Highway
Holdings Limited is registered at Craigmuir Chambers, P.O. Box 71, Road Town,
Tortola, British Virgin Islands and has been assigned company number 32576.
The
objectives or purposes of the Company are to engage in any act or activity
that
is not prohibited under British Virgin Islands law as set forth in Clause
4 of
the Memorandum of Association. The Company does not believe that there are
any
restrictions in its charter or under British Virgin Island law that materially
limit the Company’s current or proposed operations.
Regulation
60 of the Company’s Articles of Association (the “Articles”) provides that a
favorable vote of a majority of the Company’s independent directors is required
as to any related party transaction between the Company and any 5% or more
members of the Company and/or officer or director of the Company. It also
provides that the Company shall use its best efforts to at all times maintain
at
least 2 independent directors. However, a director may vote or consent with
respect to any contract or arrangement in which the director is materially
interested, 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. Regulation 88 of the Articles allows the directors to vote
compensation to themselves in respect of services rendered to the
Company.
There
is
no provision in the Articles for the mandatory retirement of directors.
Directors are not required to own shares of the Company in order to serve
as
directors.
The
authorized share capital of the Company is $200,000 divided into 20,000,000
Common Shares with par value of $0.01 each. Holders of our Common Shares
are
entitled to one vote for each whole share on all matters to be voted upon
by
members, including the election of directors. Holders of our Common Shares
do
not have cumulative voting rights in the election of directors. All of our
Common Shares are equal to each other with respect to liquidation and dividend
rights. Holders of our Common Shares are entitled to receive dividends if
and
when declared by our Board of Directors out of surplus in accordance with
British Virgin Islands law. In the event of our liquidation, all assets
available for distribution to the holders of our Common Shares are distributable
among them according to their respective holdings. Holders of our Common
Shares
have no preemptive rights to purchase any additional, unissued Common
Shares.
Regulation
17 provides that the Company may purchase, redeem or otherwise acquire and
hold
its own shares out of surplus or in exchange for newly issued shares of equal
value. However, no purchase, redemption or other acquisition shall be made
unless, immediately after the 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 Company will not be insolvent.
Regulation
10 of the Articles provide that without prejudice to any special rights
previously conferred on the holders of any existing shares, the unissued
shares
in the Company are at the disposal of the directors who may offer, allot,
grant
options over or otherwise dispose of shares to such persons, at such times
and
upon such terms and conditions as the Company may by resolution of the directors
determine.
Clause
10
of the Memorandum of Association provides that if at any time the authorized
share capital is divided into different classes or series of shares, the
rights
attached to any class or series may be varied with the consent in writing
of the
holders of not less than three fourths of the issued shares of that class
or
series and of the holders of not less than three fourths of any other class
or
series of shares which may be affected by such variation.
Clause
15
of the Memorandum of Association (which is subject to the provisions of
regulation 60 of the Articles) provide that the Memorandum and Articles of
Association of the Company may be amended by a resolution of members or a
resolution of directors. Regulation 60 of the Articles provides that any
proposed change in the Memorandum and Articles of Association not otherwise
approved by the majority vote of the shares held by the Company’s non-management
members shall be approved by a majority of the Company’s directors and not
disapproved by a majority of the Company’s independent directors. Subject to the
preceding sentence, our Board of Directors without shareholder approval may
amend our Memorandum and Articles of Association. This includes amendments
to
increase or reduce our authorized capital stock. The Company’s ability 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, including a tender offer to purchase our Common Shares at a premium
over the then current market price.
Provisions
in respect of the holding of general meetings and extraordinary general meetings
are set out in Regulations 38 to 58 of the Articles and under the International
Business Companies Act. The directors may convene meetings of the members
of the
Company at such times and in such manner and places as the directors consider
necessary or desirable, and they shall convene such a meeting upon the written
request of members holding 10 percent or more of the outstanding voting shares
in the Company. An annual meeting of members is held for the election of
directors of the Company and in the manner provided in the Articles of
Association. Any other proper business may be transacted at the annual meeting.
If the annual meeting for election of directors is not held on the date
designated therefore, the directors shall cause the meeting to be held as
soon
thereafter as convenient. If the Company fails to hold the annual meeting
for a
period of 30 days after the date designated for the annual meeting, or if
no
date has been designated for a period of 13 months after the Company’s last
annual meeting, a court of competent jurisdiction of the British Virgin Islands
may summarily order a meeting to be held upon the application of any member
or
director.
British
Virgin Islands law and the Company’s Memorandum and Articles of Association
impose no limitations on the right of nonresident or foreign owners to hold
or
vote such securities of the Company.
There
are
no provisions in the Memorandum of Association or Articles of Association
governing the ownership threshold above which shareholder ownership must
be
disclosed.
The
full
text of the Articles and Memorandum of the Company are attached to this Annual
Report on Form 20-F as Exhibit 1.1.
Material
Contracts
The
following is a summary of each material contract, other than contracts entered
into in the ordinary course of business, to which the Company or any member
of
the group is a party, for the two years immediately preceding the filing
of this
Annual Report:
Effective
October 1, 2003, Nissin Precision Metal MFG, Ltd., the Company’s metal stamping
subsidiary, entered into that certain Purchase and Sales Agreement (worldwide
FRAME) with OSRAM Gesellshaft mit beschraenkter Haftung (”OSRAM”), with OSRAM
acting on its own behalf and on behalf of certain of its subsidiaries. The
agreement establishes the procedures under which OSRAM or its listed
subsidiaries can order and purchase electronic ballast casings from the Company.
Under the agreement, the Company has agreed to manufacture, package and ship
these products for OSRAM and its subsidiaries under the terms and conditions,
and at the fixed specified prices listed in the agreement. Although OSRAM
agreed
to purchase at least 60% of it annual needs from the Company, there is no
minimum number that OSRAM must purchase from the Company. The Purchase and
Sales
Agreement shall remain in effect until September 30, 2005, but may be extended
by the parties for successive one-year periods by agreeing on a new price
list
for the following year.
Effective
October 15, 2003, Nissin Precision Metal MFG, Ltd. entered into that certain
Long Term Sales and Purchase Agreement with OSRAM. Under the agreement, the
Company agreed to manufacture various lighting products for OSRAM at fixed
specified prices. The Company has agreed to manufacture an amount of such
lighting products as OSRAM may, from time to time order. The agreement was
extended through September 2005.
On
April
29, 2004, Kayser Technik Ltd., the Company’s metal manufacturing subsidiary,
entered into that certain General Business Agreement with Berger Lahr GmbH
&
Co. KG for the manufacture by Kayser Technik Ltd. of motor coils and such
other
products as the parties may subsequently agree upon. The term of the agreement
expires in December 2010.
The
Company is also a party to (i) the BFDC Agreements and related agreements
described in Item 4 “Information on our Company” and filed as exhibits to the
Company’s Securities and Exchange Commission filings, (ii) the leases, and
extensions thereof, described in the Property, Plant and Equipment section
of
Item 4 “Information on our Company” and filed as exhibits to the Company’s
Securities and Exchange Commission filings, and (iii) the bank lines of credit
described in the Liquidity and Capital Resources section under Item 5 “Operating
and Financial Review and Prospects”.
Exchange
Controls
There
are
no exchange control restrictions on payment of dividends on the Company’s Common
Shares or on the conduct of the Company’s operations either in Hong Kong, where
the Company’s principal executive officers are located, or the British Virgin
Islands, where the Company is incorporated. Other jurisdictions in which
the
Company conducts operations may have various exchange controls. Taxation
and
repatriation of income regarding the Company’s China operations are regulated by
Chinese laws and regulations. To date, these controls have not had and are
not
expected to have a material impact on the Company’s financial results. There are
no material British Virgin Islands laws which impose foreign exchange controls
on the Company or that affect the payment of dividends, interest or other
payments to nonresident holders of the Company’s securities.
Taxation
No
reciprocal tax treaty regarding withholding tax exists between the U.S. and
the
British Virgin Islands. Under current British Virgin Islands law, dividends,
interest or royalties paid by the Company to individuals and gains realized
on
the sale or disposition of shares are not subject to tax as long as the
recipient is not a resident of the British Virgin Islands. The Company is
not
obligated to withhold any tax for payments of dividends and shareholders
receive
gross dividends irrespective of their residential or national
status.
Documents
On Display
The
documents concerning the Company which are referred to in this Annual Report
may
be inspected by shareholders of this Company at the offices of this Company
in
Hong Kong.
Item
11.
Quantitative
and Qualitative Disclosures About Market Risk.
The
Company pays its labor costs and overhead expenses in renminbi, the currency
of
China (the basic unit of which is the yuan). However, the Company sells most
of
our products in Hong Kong dollars, U.S. dollars, and in euros. The exchange
rate
between the U.S. dollar and Hong Kong dollar has remained stable, as has
the
exchange rate between the yuan and the U.S. dollar. However, the exchange
rate
between the euro and the U.S. and Hong Kong dollars has fluctuated, resulting
in
currency exchange gains and losses. Since the Company engages in transactions
in
Europe that are denominated in euros, the Company is subject to fluctuations
in
the rates of exchange between the dollar and the euro, which fluctuations
will
affect the Company’s results of operations. An increase in the value of a
particular currency (such as the euro) relative to the dollar will increase
the
dollar reporting value for transactions in that particular currency, and
a
decrease in the value of that currency relative to the dollar will decrease
the
dollar reporting value for those transactions. This effect on the dollar
reporting value for transactions is generally only partially offset by the
impact that currency fluctuations may have on costs. The United States and
certain European countries have recently been calling for the re-valuation
of
the renminbi, which revaluation would result in the appreciation of the
renminbi. Should the Chinese government allow a significant renminbi
appreciation, the Company’s cost structure and pricing could change and have a
material negative effect on its operations, sales and financial
results.
The
Company has not engaged in currency hedging transactions to offset the risks
associated with variations in currency exchange rates. Consequently, significant
foreign currency fluctuations and other foreign exchange risks may have a
material adverse effect on the Company’s business, financial condition and
results of operations. The Company does not currently own any market risk
sensitive instruments. However, the Company may in the future undertake hedging
or other transactions or invest in market risk sensitive instruments if it
determines that such instruments can offset these risks is a sound and
cost-efficient manner.
The
Company is also exposed to interest rate fluctuations as a result of the
short-term investments that it makes and the borrowings it incurs. The Company
maintains its excess cash in short-term borrowings that are subject to interest
rate fluctuations. The Company had $1,449,000 of short-term borrowings that
are
subject to interest rate changes and $967,000 of long-term borrowings
outstanding as of March 31, 2005. However, taking into consideration that
the
Company had cash and cash equivalents of $3,948,000 available as of March
31,
2005, the Company believes that its interest rate risk on these borrowing
was
acceptable.
Item
12.
Description
of Securities Other Than Equity Securities
Not
applicable.