ITEM 1. BUSINESS
HISTORY AND DEVELOPMENT
The Company was incorporated in Wyoming on February 23, 1973. The Company had insignificant assets and had not generated significant revenues between April 2004 and the close of the reverse acquisition described below.
On June 15, 2005, pursuant to the Securities Purchase Agreement and Plan of Reorganization dated as of May 2, 2005 by and among the Company, Bestip Development International Limited, a British Virgin Islands company ("Bestip"), and the shareholders of Bestip, the shareholders of Bestip transferred to the Company all of the outstanding capital shares of Bestip in exchange for the issuance of 28,000,000 shares of the Company's common stock to the shareholders of Bestip (representing approximately 95% of the Company's capital stock outstanding after giving effect to its acquisition of Bestip) (the "Reorganization"). As a result of the Reorganization, Bestip became a wholly-owned subsidiary of the Company.
Effective August 6, 2005, the Company changed its name from Wyoming Oil & Minerals, Inc. to Sun Motor International, Inc. to reflect the change in the Company's business.
Since the shareholders of Bestip acquired approximately 95% of the Company's issued and outstanding common shares and the Bestip management team and board of directors became the management team and board of directors of the Company, according to FASB Statement No. 141 - "Business Combinations," the Reorganization has been treated as a recapitalization for accounting purposes, in a manner similar to reverse acquisition accounting. In accounting for this transaction:
o Bestip is deemed to be the purchaser and surviving company for accounting purposes. Accordingly, its net assets are included in the Company's balance sheet at their historical book values; and
o Control of the net assets and business of the Company was acquired effective June 15, 2005. This transaction has been accounted for as a purchase of the assets and liabilities of the Company by Bestip. The historical cost of the net liabilities assumed was $0.
SUMMARY
Sun Motor International, Inc. (the "Company") through its operating companies (see the organizational structure shown below) is an original design manufacturer and supplier of micro-motors to the global market with a broad range of applications in automotive parts, power tools, home appliances, business equipment, medical equipment, personal care products and consumer electronics. The Company operates in one industry segment, which includes the design, manufacture and sales of custom-designed and standard micro-motors. As used herein, the Company includes Bestip and its various operating companies.
The Company, established by Mr. Simon Shi Kai Biu, Chairman and Chief Executive Officer, in 1983 in Hong Kong, is headquartered in Hong Kong and operates four manufacturing plants in China with a total manufacturing area of approximately 484,000 square feet. The Company's plants, located in Gong Ming, Xing Feng and Feng Gang in Guangdong Province of the People's Republic of China, are vertically integrated to facilitate the manufacture of high quality products at competitive prices. Production capability at the Company's manufacturing facilities encompasses assembling, machining, pressing, tooling, mold making and plastic injection molding to produce components and final products.
The Company's products are distributed mainly through direct sales by its Sales and Marketing Department and also through four exclusive agents for the North America, Europe and Southeast Asian markets. The Company's agents act on an exclusive basis and sell products on the basis of either product category or geographic region. Agency arrangements are reviewed and renewed annually. The Company provides technical support to the direct sales team and sales agents together with in-house product engineering for customers to develop custom solutions for micro-motor requirements.
***Sun Motor Manufactory Limited is the toy motors trading arm of the Company; it is 90% and 10% held by the Company and Miss Lau Lee Tsun, an unrelated third party, respectively.
GROWTH STRATEGY
The Company seeks to achieve continued revenue growth, improved profit margins and increased market share as one of the premier global producers of micro-motors. This growth strategy encompasses:
o PENETRATING THE RAPIDLY GROWING HIGH TECHNOLOGY AND AUTOMOTIVE SECTORS. As micro-motor applications in the automotive components and technology industries increase, the Company intends to exploit its production facilities to develop a key role in these sectors. China's automobile sales have expanded at over 30% per annum over the past two years. At the same time, China is being increasingly used by multinationals as a subcontract manufacturer for a wide variety of products, both automotive and technology based, utilizing an increasing level of micro-motor engineered components. Micro-motors are widely used, for example, in passenger sedans' power windows and door lock systems, ABS braking systems, headlamp adjusters, rear-view mirror adjusters, seat adjusters and air conditioning systems.
o EXPANSION OF PRODUCTION CAPACITY TO MEET INCREASING ORDERS FROM CUSTOMERS. The production lines of the Company's assembly manufacturing facilities are operating largely at full capacity. Currently, the Company produces approximately 500,000 micro-motors per day. Based on existing available factory area and with additional investment in assembly stations, dies, molds and machines, the Company believes it can increase the daily production capacity to 800,000 units, or 60% higher than current capacity. The Company intends to expand its existing manufacturing facilities to enable it to meet the needs of its customers and to address future needs from new customers
o BROADEN PRODUCT APPLICATION BY ACQUISITIONS. The Company will also consider strategic acquisitions that provide access to new markets or provide for manufacturing cost savings through utilization of the Company's Chinese manufacturing capabilities. The Company's strategy is based on acquisition of key clients and the ability to shift production from Europe and the US to its China facilities to enhance profitability and efficiency.
o MOVE UP THE VALUE CHAIN TO BECOME A SYSTEM SOLUTION PROVIDER. The Company intends to offer its customers complete solutions, which also carry higher margins than individual components. In addition, being a systems supplier will enable the Company to strengthen its customer relationships. The Company is actively developing its capacity to provide system or module solutions to its customers.
PRODUCT CATEGORIES
Micro-motors are a category of motors typically applied to consumer and business products. Motors are the devices that provide the actual speed and torque in a drive. The Company's product line covers both AC (alternating current) and DC (direct current) motors. Motors can be categorized into AC motors (single and multiphase motors, universal motors, servo motors, induction motors, synchronous motors, and gear motors) and DC motors (brushless motors, servo motors, and gear motors) as well as linear, stepper and air motors, and motor contactors and starters. AC motors require an alternating current or voltage source, for their power, which can be accessed in wall outlets in one's house, to function properly. DC motors require a direct current or voltage source (like the voltage from batteries) to make them work.
AC MOTORS
AC (alternating current) motors encompass single/multiphase, universal, servo, induction, synchronous, and gear-motor types. The magnetic field generated by AC motors is produced by an electromagnet powered by the same AC voltage as the motor coil. There are many advantages in the use of AC motors aside from the wide availability of AC power.
Some types of AC motors do not use brushes or commutators. This eliminates many problems of maintenance and wear, and also eliminates the problem of dangerous sparking. AC motors are also particularly well-suited for constant-speed applications, as the motor speed is determined by the frequency of the AC voltage applied to the motor terminals.
There are two distinct types of AC motors: synchronous and induction. A synchronous motor consists of a series of three windings in the stator section with a simple rotating area. A current is passed through the coil, generating torque on the coil. Since the current is alternating, the motor will run smoothly only at the frequency of the sine wave. This allows for constant, unvarying speed from no load to full load with no slip.
Induction motors are the more common of the two motor types. They use electric current to induce rotation in the coils rather than supplying the rotation directly. Induction motors use shorted wire loops on a rotating armature and obtain their torque from currents induced in these loops by the changing magnetic field produced in the field coils.
DC MOTORS
DC motors are configured in many sizes and types, including brushless, servo, and gear. DC motors consist of a rotor and a permanent magnetic field stator. The magnetic field is maintained using either permanent magnets or electromagnetic windings. DC motors are most commonly used in variable speed and torque applications.
Brushed DC motors have built-in commutation, meaning that as the motor rotates, mechanical brushes automatically commutate coils on the rotor. Brushless DC motors use an external power drive to allow commutation of the coils on the stator. Brush-type motors are used when cost is a priority, while brushless motors are selected to fulfill specific requirements, such as maintenance-free operation, high speeds, and hazardous environments where sparking could be dangerous.
PRODUCT MIX
The Company's revenue growth by product type and product mix for the past three years ended March 31 is as shown below:
The Company classifies product applications into five areas: automotive products, home appliances, power tools, business and personal care products, and audio and visual products.
SALES AND MARKETING
The Company's sales methods encompass direct sales, agency arrangements, participation in trade shows, referrals, advertising, and the Company's website.
The Company sells to customers in Hong Kong, Japan, Shanghai and Shenzhen by direct sales from our offices in China, Japan and Hong Kong. The Company sells to US, European and Southeast Asian customers through four sales agents that represent the Company in different geographic regions and for different products.
For markets in China, Hong Kong, Taiwan and Japan, we engage in direct sales from our sales offices in China, Hong Kong and Japan. The sales team in Hong Kong consists of 17 staff, including a Marketing Manager, six Engineers and ten Account Managers.
For US, European and other markets, the Company sells its products through four agents including SMA Industrial LLC in the US, H3R Global Beschaffungs Agenture in Germany, Eloy & Becker Sprl in Europe and Device Electronics Pte. Ltd. in Southeast Asia.
No end user accounted for more than 10% of total revenues. The Company does not believe that the loss of any single customer would have a material effect on its total business.
COMPETITION
From its beginnings as a relatively simple component of basic toys, household products and personal care equipment, the micro-motor has evolved into an integral part of daily life with an enormous range of applications. Increasing automation across the consumer spectrum has resulted in micro-motors becoming a key component of the automotive, technology, communication and health care markets. The ubiquitous nature of micro-motors in today's consumer market, as well as the trend toward outsourcing to China the manufacturing of consumer products have resulted in a largely fragmented industry with most of the lower-end, basic motors being supplied by a large number of small manufacturers based in China.
Smaller competitors focus on supplying local manufacturers of lower-end high-volume products in the mass market, and they generally lack the quality standards, technology and efficiency demanded by international brand companies necessary to meet higher-end applications.
At the other end of the micro-motor spectrum, the industry is dominated by two major companies, Johnson Electric Holdings Ltd of Hong Kong and Mabuchi Motor Company of Japan, which together control approximately 80% of the global micro-motor market. While both companies produce for the audio and visual, automotive, business equipment, and home appliance markets, Johnson Electric is the market leader in automotive products and Mabuchi has a larger market share in business equipment and audio and visual products.
In the past years, the Company has succeeded in obtaining orders from key clients, including the largest printer company in the world, which were originally intended for competitors. The Company was able to secure these orders for inkjet printers on price and tolerance levels.
The Company's competitive advantage over smaller firms lies in its vertically integrated production capability, which enables the Company to achieve better quality, better cost-controls and production schedules that meet customers' demanding just-in-time production requirements.
Although larger competitors have greater resources, the Company is often able to offer lower prices and customized solutions. As the global outsource trend persists, multinational customers typically prefer to diversify their purchasing sources among more than two suppliers. The Company is considered by major multinational customers as a premier supplier comparable to larger members of the peer group. Smaller competitors are generally not vertically integrated nor do they have the capability to provide any design and engineering services, hence, they are typically unable to offer customized solutions or secure the quality and cost advantages of outsourced components. As such, smaller competitors can typically supply only to the lower-end of the market, such as motors used in toys and personal care products.
RAW MATERIALS AND SUPPLIERS
Key raw materials for micro-motors consist of (1) brushes, (2) cold rolled steel, (3) copper wire, (4) magnets and (5) silica steel. The raw material supply sources are widely available and diversified. The Company currently has at least three suppliers for each of the five categories of raw materials. The Company does not implement a hedging policy against the fluctuation of raw material prices.
EMPLOYEES
As of Aug 15, 2007 the Company had approximately 4,000 employees.
INTELLECTUAL PROPERTY
The Company has obtained a trademark for the Company's logo. The Company has not obtained patent protection for any of its intellectual property. The Company has obtained agreements from its key employees with respect to protecting the Company's trade secrets and confidential know-how.
ITEM 1A.
ITEM 1A. RISK FACTORS
The following risk factors relating to the Company should be carefully considered. Any of the following risks could materially harm the business of the Company.
OUR OPERATIONS DEPEND HIGHLY ON SHI KAI BIU, SIMON, OUR CHIEF EXECUTIVE OFFICER, AND A SMALL NUMBER OF OTHER EXECUTIVES.
The success of operations depends greatly on a small number of key managers. The loss of the services of Mr. Shi Kai Biu, Simon, or any of the other senior executives could adversely affect our ability to conduct our business. Although we believe we would be able to find other managers to replace any of these managers, the search for such managers and the integration of such managers into our business will inevitably occur only over an extended period of time. During that time the lack of senior leadership could affect adversely our sales and manufacturing, as well as our research and development efforts.
THE COMPANY IS SUBJECT TO INTENSE COMPETITION IN WHICH IT MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
The Company's business is subject to intense competition, changes in consumer preferences and global economic conditions. Many of the Company's competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than the Company has and may be able to respond more quickly than it can to new or changing opportunities and customer requirements. Increased competition can reduce sales for the Company. To be successful, it must continue to:
promote its brands successfully; anticipate and respond to new consumer trends; develop new products and markets in order to compete effectively; improve productivity; and respond effectively to changing prices for raw materials.
COMMODITY PRICE INCREASES WILL INCREASE OPERATING COSTS AND MAY REDUCE PROFITS.
The Company uses a broad range of raw materials in its products. Such materials are subject to price volatility caused by commodity market fluctuations, supply and demand, currency fluctuations, and changes in governmental regulation and we do not engage in hedging transactions. Price increases will result in increases in cost of sales. The Company may not be able to increase its product prices to offset these increased costs, and increasing prices may result in reduced sales volume and profitability. However, we currently have at least three suppliers for each of our key categories of raw materials.
THE COMPANY'S QUARTERLY REVENUES, OPERATING RESULTS AND PROFITABILITY WILL VARY FROM QUARTER TO QUARTER, WHICH MAY RESULT IN VOLATILITY OF ITS STOCK PRICE.
The Company's quarterly revenues, operating results and profitability have varied in the past and are likely to vary significantly from quarter to quarter. This may lead to volatility in its stock price. The factors that are likely to cause these variations may include the introduction of new products or services by the Company or its competitors and a combination of the other adverse developments as discussed in these risk factors. Additionally, the Company's business has been seasonal. Historically, approximately 60% of the Company's total revenues occurred in the six month period May 1 to October 30 in advance of the Christmas retailing season. However, during the current fiscal year, the Company's manufacturing facilities have been operating at substantially full capacity. Accordingly, the Company does not believe that seasonality will be a factor until such time as the Company's manufacturing capacity exceeds orders for the Company's products.
NONDISCLOSURE AGREEMENTS WITH EMPLOYEES AND OTHERS MAY NOT ADEQUATELY PREVENT DISCLOSURE OF TRADE SECRETS AND OTHER PROPRIETARY INFORMATION.
The Company has not obtained patent protection for its intellectual property. In order to protect the Company's proprietary technology and processes, it relies in part on nondisclosure agreements with its employees, consultants, agents and other organizations to which it discloses its proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases it could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of its proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect its competitive business position. Since the Company relies on trade secrets and nondisclosure agreements, to protect some of its intellectual property, there is a risk that third parties may obtain and improperly utilize its proprietary information to its competitive disadvantage.
THE COMPANY DOES NOT HAVE LONG TERM CONTRACTS WITH ITS CUSTOMERS
The Company typically has not entered into written long term agreements with customers. As a result, customers may, without notice or penalty, terminate their relationship with the Company at any time. In addition, even if customers should decide to continue their relationship with the Company, there can be no guarantee that they will purchase the same amounts of products as in the past. Any loss of a customer, or decrease in the volume of products purchased by a customer could have a material adverse effect on the Company's business, operating results and financial condition.
LOSS OF KEY EXECUTIVES AND FAILURE TO ATTRACT QUALIFIED MANAGEMENT COULD LIMIT GROWTH AND NEGATIVELY IMPACT OPERATIONS.
The Company depends highly upon its senior management team. It will continue to depend on management personnel with industry experience. At this time, the Company does not know the availability of such experienced management personnel or how much it may cost to attract and retain such personnel. The loss of the services of any member of senior management or the inability to hire experienced management personnel could have a material adverse effect on the operations and financial condition of the Company.
THE LACK OF PUBLIC COMPANY EXPERIENCE OF THE COMPANY'S MANAGEMENT COULD IMPAIR ITS ABILITY TO COMPLY WITH LEGAL AND REGULATORY REQUIREMENTS.
The Company's management team has historically operated its business as a privately-owned company. Until recently, the individuals who now constitute the Company's senior management have never had responsibility for managing a publicly-traded company. Such responsibilities will include complying with federal securities laws and making required disclosures on a timely basis. There can be no assurance that our management will be able to effectively and timely implement programs and policies that adequately respond to such increased legal, regulatory compliance and reporting requirements.
THE COMPANY IS A HOLDING COMPANY WITH SUBSTANTIALLY ALL OF ITS OPERATIONS CONDUCTED THROUGH ITS SUBSIDIARIES.
The Company has no operations independent of those of Bestip and its subsidiaries, and its principal assets are its investments in Bestip and its subsidiaries. As a result, the Company is dependent upon the performance of Bestip and its subsidiaries and will be subject to the financial, business and other factors affecting Bestip as well as general economic and financial conditions.
As substantially all of the Company's operations are and will be conducted through its subsidiaries, it will be dependent on the cash flow of its subsidiaries to meet its obligations. Because virtually all of the Company's assets are and will be held by operating subsidiaries, the claims of its shareholders will be structurally subordinate to all existing and future liabilities and obligations, and trade payables of such subsidiaries. In the event of the Company's bankruptcy, liquidation or reorganization, the Company's assets and those of its subsidiaries will be available to satisfy the claims of its shareholders only after all of the Company's and its subsidiaries' liabilities and obligations have been paid in full.
THE COMPANY IS SUBJECT TO ENVIRONMENTAL AND SAFETY REGULATIONS.
The Company is subject to the requirements of environmental and occupational safety and health laws and regulations in China. The Company cannot assure you that it has been or will be at all times in full compliance with all of these requirements, or that it will not incur material costs or liabilities in connection with these requirement. Additionally, these regulations may change in a manner that could have a material adverse effect on the Company's business, results of operations and financial condition. We have made and will continue to make capital and other expenditures to comply with environmental requirements.
NON-PERFORMANCE BY THE COMPANY'S SUPPLIERS MAY ADVERSELY AFFECT ITS OPERATIONS.
The Company purchases various types of equipment, raw materials and manufactured component parts from its suppliers. The Company would be materially and adversely affected by the failure of its suppliers to perform as expected. The Company could experience delivery delays or failures caused by production issues or delivery of non-conforming products if its suppliers failed to perform, and the Company also faces these risks in the event any of its suppliers becomes insolvent or bankrupt.
THE COMPANY'S INTERNATIONAL EXPANSION PLANS SUBJECT IT TO RISKS INHERENT IN DOING BUSINESS INTERNATIONALLY.
The Company's long-term business strategy relies on the expansion of the Company's international sales by targeting markets, such as the United States and Europe. Risks affecting the Company's international expansion include challenges caused by distance, language and cultural differences, conflicting and changing laws and regulations, foreign laws, international import and export legislation, trading and investment policies, foreign currency fluctuations, the burdens of complying with a wide variety of laws and regulations, protectionist laws and business practices that favor local businesses in some countries, foreign tax consequences, higher costs associated with doing business internationally, restrictions on the export or import of technology, difficulties in staffing and managing international operations, trade and tariff restrictions, and variations in tariffs, quotas, taxes and other market barriers. These risks could harm the Company's international expansion efforts, which could in turn materially and adversely affect the Company's business, operating results and financial condition.
THE COMPANY FACES RISKS ASSOCIATED WITH CURRENCY EXCHANGE RATE FLUCTUATIONS.
Although the Company is incorporated in the United States, the majority of its current revenues are in Hong Kong dollars. Conducting business in currencies other than U.S. dollars subjects the Company to fluctuations in currency exchange rates that could have a negative impact on the Company's reported operating results. Fluctuations in the value of the U.S. dollar relative to other currencies impact the Company's revenues, cost of revenues and operating margins and result in foreign currency translation gains and losses. Historically, the Company has not engaged in exchange rate hedging activities. Although the Company may implement hedging strategies to mitigate this risk, these strategies may not eliminate the Company's exposure to foreign exchange rate fluctuations and involve costs and risks of their own, such as ongoing management time and expertise, external costs to implement the strategy and potential accounting implications.
THE COMPANY IS RESPONSIBLE FOR THE INDEMNIFICATION OF OUR OFFICERS AND DIRECTORS WHICH COULD RESULT IN SUBSTANTIAL EXPENDITURES, WHICH WE MAY BE UNABLE TO RECOUP.
Our Bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of us. This indemnification policy could result in substantial expenditures, which we may be unable to recoup.
RISKS ASSOCIATED WITH DOING BUSINESS IN CHINA
CHANGES IN THE LAWS AND REGULATIONS IN THE PEOPLES REPUBLIC OF CHINA MAY ADVERSELY AFFECT THE COMPANY'S ABILITY TO CONDUCT ITS BUSINESS.
The Company's operating subsidiaries have all of their manufacturing facilities located in China. Changes in existing laws or new interpretations of such laws may have a significant impact on our methods and costs of doing business. For example, new legislative proposals for manufacturing requirements may be proposed and adopted. Such new legislation or regulatory requirements may have a material adverse effect on our financial condition, results of operations or cash flows, by, for example, making more difficult to enforce our rights against the Chinese enterprises that own our manufacturing facilities or making it more difficult or impossible to recover our assets located in such facilities. In addition, we will be subject to varying degrees of regulation and licensing by governmental agencies in The Peoples Republic of China. There can be no assurance that the future regulatory, judicial and legislative changes will not have a material adverse effect on the Company's Chinese operating subsidiaries, that regulators or third parties will not raise material issues with regard to its Chinese subsidiaries or its compliance or non-compliance with applicable laws or regulations or that any changes in applicable laws or regulations will not have a material adverse effect on our operations.
THE COMPANY MAY HAVE DIFFICULTY ESTABLISHING ADEQUATE MANAGEMENT, LEGAL AND FINANCIAL CONTROLS IN THE PEOPLES REPUBLIC OF CHINA.
The People's Republic of China historically has been deficient in Western style management and financial reporting concepts and practices, as well as in modern banking, computer and other control systems. The Company may have difficulty in hiring and retaining a sufficient number of qualified employees to work in The Peoples Republic of China. As a result of these factors, it may experience difficulty in establishing management, legal and financial controls, collecting financial data, books of account and records and instituting business practices that meet Western standards.
RISKS RELATED TO THE COMPANY'S COMMON STOCK
THE COMPANY'S STOCK IS THINLY TRADED, SO YOU MAY BE UNABLE TO SELL YOUR SHARES AT OR NEAR THE QUOTED BID PRICES IF YOU NEED TO SELL A SIGNIFICANT NUMBER OF YOUR SHARES.
The shares of the Company's common stock are thinly-traded on the OTC Bulletin Board, meaning that the number of persons interested in purchasing its common shares at or near bid prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that the Company is a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if it came to the attention of such persons, they tend to be risk-averse and may be reluctant to follow the Company. As a consequence, there may be periods of several days or more when trading activity in the shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. The Company cannot give you any assurance that a broader or more active public trading market for its common shares will develop or be sustained, or that current trading levels will be sustained. Due to these conditions, the Company can give you no assurance that you will be able to sell your shares at or near bid prices or at all if you need money or otherwise desire to liquidate your shares.
YOU MAY HAVE DIFFICULTY SELLING THE COMPANY'S SHARES BECAUSE THEY ARE DEEMED "PENNY STOCKS".
Since the Company's common stock is not listed on the Nasdaq Stock Market, if the trading price of its common stock remains below $5.00 per share, trading in its common stock will be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally defined as an investor with a net worth in excess of $1,000,000 or annual income exceeding $200,000 individually or
$300,000 together with a spouse). For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to the sale. The broker-dealer also must disclose the commissions payable to the broker-dealer, current bid and offer quotations for the penny stock and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Such information must be provided to the customer orally or in writing before or with the written confirmation of trade sent to the customer. Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The additional burdens imposed upon broker-dealers by such requirements could discourage broker-dealers from effecting transactions in the Company's common stock, which could severely limit the market liquidity of the common stock and the ability of holders of the common stock to sell their shares.
POTENTIAL ISSUANCE OF ADDITIONAL COMMON AND PREFERRED STOCK COULD DILUTE EXISTING SHAREHOLDERS.
The Company is authorized to issue up to 50,000,000 shares of common stock and 2,000,000 shares of preferred stock. To the extent of such authorization, the Company's Board of Directors has the ability, without seeking shareholder approval, to issue additional shares of common stock and/or preferred stock in the future for such consideration as the Board of Directors may consider sufficient. The issuance of additional capital stock in the future will reduce the proportionate ownership and voting power of the common stock currently outstanding.
THE COMPANY'S PRINCIPAL SHAREHOLDER HOLDS A SUBSTANTIAL AMOUNT OF ITS COMMON STOCK AND MAY BE ABLE TO PREVENT OTHER SHAREHOLDERS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS.
As of Aug 15, 2007, Mr. Simon Shi beneficially owns approximately 72.7% of the Company's outstanding common stock. As a result, Mr. Shi is able to direct the outcome of matters requiring approval of the shareholders, including the election of its directors and other corporate actions such as:
o its merger with or into another company;
o a sale of substantially all of its assets; and
o amendments to its certificate of incorporation.
The decisions of Mr. Shi may conflict with its interests or those of the Company's other shareholders.
SUBSTANTIAL SALES OF COMMON STOCK COULD CAUSE THE STOCK PRICE TO FALL.
As of Aug 15, 2007, the Company had outstanding 29,440,067 shares of common stock, of which approximately 24,770,421 shares were "restricted securities" (as that term is defined under Rule 144 promulgated under the Securities Act of 1933, as amended). Only approximately 4,669,646 shares are currently freely tradable shares. These 24,770,421 shares of restricted stock will become eligible for public resale under Rule 144 at various times. Although Rule 144 restricts the number of shares that any one holder can sell during any three-month period under Rule 144, because more than one shareholder holds these restricted shares, a significant number of shares could legally be sold commencing in one year. No prediction can be made as to the effect, if any, that sales of the shares subject to Rule 144 sales commencing in one year, or the availability of such shares for sale, will have on the market prices prevailing from time to time. Nevertheless, the possibility that substantial amounts of common stock may be sold in the public market may adversely affect prevailing market prices for its common stock and could impair its ability to raise capital through the sale of its equity securities.
THE OCCURRENCE OF SALES OF A LARGE NUMBER OF SHARES OF OUR COMMON STOCK, OR THE PERCEPTION THAT THESE SALES COULD OCCUR, MAY AFFECT OUR STOCK PRICE AND COULD IMPAIR OUR ABILITY TO OBTAIN CAPITAL THROUGH AN OFFERING OF EQUITY SECURITIES.
The occurrence of sales of a large number of shares of our common stock, or the perception that these sales could occur, may affect our stock price and could impair our ability to obtain capital through an offering of equity securities. This will have an adverse affect on the business by restricting access to working capital to fund growth and operations. Furthermore, the current ratios of ownership of our common stock reduce the public float and liquidity of our common stock which can in turn affect the market price of our common stock.
THE MARKET PRICE OF THE COMPANY'S STOCK MAY BE ADVERSELY AFFECTED BY MARKET VOLATILITY.
The market price of the Company's common stock is likely to be volatile and could fluctuate widely in response to many factors, including:
o announcements of technological innovations by the Company or its competitors;
o announcements of new products or new contracts by the Company or its competitors;
o actual or anticipated variations in its operating results due to the level of expenses and other factors;
o changes in financial estimates by securities analysts and whether its earnings meet or exceed such estimates;
o conditions and trends in the micro-motor and other industries;
o new accounting standards;
o general economic, political and market conditions and other factors; and
o the occurrence of any of the risks described in this Form 10-K.
WE DO NOT INTEND TO PAY DIVIDENDS ON SHARES OF OUR COMMON STOCK IN THE FORESEEABLE FUTURE.
We have never paid cash dividends on our common stock. Our current Board of directors does not anticipate that we will pay cash dividends in the foreseeable future. Indeed, we intend to retain future earnings for reinvestment in our business and/or to fund future acquisitions.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
The Company believes that its facilities, including equipment and machinery, are in good condition, suitable for current operations, adequately maintained and insured. The following table contains information with respect to the Company's properties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company does not believe there are any pending or threatened legal proceedings that, if adversely determined, would have a material adverse effect on the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the year ended March 31, 2007.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock currently trades over the counter and quotations are currently reported on the OTC Bulletin Board sponsored and operated by the NASD. The following table shows the range of high and low bid prices for our common stock for the last four fiscal quarters as reported by the NASD. All prices have been adjusted to reflect a one for ten stock-split effective January 19, 2004. Prices represent quotations between dealers, do not include retail mark-ups, mark-downs or commissions, and do not necessarily represent prices at which actual transactions occurred.
FISCAL QUARTER ENDED HIGH LOW ---------------------------------- ------------- ------------- March 31, 2007 3.25 0.60 ---------------------------------- ------------- ------------- December 31, 2006 0.85 0.60 September 30, 2006 1.50 0.65 June 30, 2006 2.45 1.00 March 31, 2006 3.25 2.05
As of March 31, 2007, there were 1,481 record holders of our common stock.
The Company did not issue nor repurchase any common stock during the year ended March 31, 2007. The Company has not implemented any equity compensation plan.
No cash dividends have been paid with respect to our common stock and we have no plan to pay dividends in the foreseeable future. Payment of future dividends, if any, will be a the discretion of our Board of Directors after taking into account various factors, including our financial condition, results of operations, current and anticipated cash needs and plans for expansion.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Information concerning revenues, net earnings per share, dividends per share, long-term obligations and total assets from audited consolidated financial statements for the fiscal years ended March 31, 2003 to March 31, 2007 are incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET SALES
Net sales increased by $5.0 million, or 9.8% from $50.8 million in fiscal year 2006 to $55.8 million in fiscal year 2007. The increase in net sales in fiscal year 2007 is mainly attributable to the increased sales of AC motors for home appliances from three existing customers, which represents increased sales to PRC, Japan and France.
COST OF SALES
Cost of sales for fiscal year 2007 increased to $47.3 million ( 84.8% of net sales ), compared to $39.9 million ( 78.5% of net sales ) for fiscal year 2006. The decrease in gross margins was mainly attributable to a significant increase in raw material costs in heavy metal including copper, steel and iron.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased by $68,654 or 16.7% from $411,650 in fiscal year 2006 to $480,304 in fiscal year 2007 owing to increase in investments in fixed assets.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $216,260 (2.1%) to $10.3 million for fiscal year 2007 compared with $10.1 million in the fiscal year 2006. The increase was primarily due to the increase in staff cost as a result of strengthening of the Hong Kong management team.
OTHER INCOME
Other income increased by $880,908 (279%) from $315,425 in fiscal year 2006 to $1,196,333 in fiscal year 2007. This increase was mainly attributable to the increase in services fee income of $476,334 charged to the former subsidiary in Zhao Qing, China, increase in bank interest income and sale of scrap metal.
INTEREST AND CAPITAL LEASE CHARGES
Interest and capital lease charges increased by $388,287 (40.2%) from $964,999 in fiscal year 2006 to $1,353,286 in fiscal year 2007. The increase was primarily due to the increased usage of bank facilities to finance the rise of raw material costs, the credit tightening from suppliers of heavy metals and continued investment in production equipment to enhance the quality of products.
NET INCOME
Net income decreased by $4,996,394 from a net profit of $3,081,753 in fiscal year 2006 to a net loss of $1,914,641in fiscal year 2007. The decrease was a result of the increase in costs of heavy metal and the absence of profit from the subsidiary which was sold in 2006.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements
LIQUIDITY AND CAPITAL RESOURCES
The cash balance increased slightly by $0.10 million as at March 31, 2007, as compared to $0.16 million as at March 31, 2006. The Company had a positive cash flow of $3.0 million generated from operating activities which was partly offset by the cash used in investing in plant and equipment amounting to $2.6 million to improve the product quality. The net cash of $0.9 million was mainly used to repay bank loans and capital lease obligations.
The Company believes that $1.0 million of working capital and the net cash provided by operations as well as financing activities are sufficient to meet the working capital needs for the next 12 months. The company is negotiating with our bankers to increase the banking facilities in order to facilitate the next 12 months' expected growth.
As of May 31, 2007, the Company had short term revolving banking facilities (overdrafts and letters of credit), term loans and lease financing of $18.5 million, $1.9 million and $2.4 million, respectively from financial institutions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of 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. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.
The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company's financial statements.
For certain of the Company's financial instruments, including cash and cash equivalents, trade receivables and payables, prepaid expenses, advances and other current assets, short-term bank borrowings, and other payables and accruals, the carrying amounts approximate fair values due to their short maturities.
A related party is generally defined as (i) any person that holds 10% or more of the Company's securities and their immediate families, (ii) the Company's management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.
ACCOUNTING METHOD
The Company uses the accrual method of accounting which recognizes revenues when earned and expenses when incurred.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company presents accounts receivable, net of allowance for doubtful accounts. The allowance is calculated based on review of individual customer accounts.
INVENTORIES
Inventories are stated at the lower of cost or net realizable value. Cost is calculated on the weighted average basis and includes all costs to acquire and other costs incurred in bringing the inventories to their present location and condition. The Company evaluates the net realizable value of its inventories on a regular basis and records a provision for loss to reduce the computed weighted-average cost if it exceeds the net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The initial cost of the asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Depreciation is provided using the straight-line method over the assets estimated useful life for periods ranging from five to fifty years. Significant improvements and betterments are capitalized where it is probable that the expenditure resulted in an increase in the future economic benefits expected to be obtained form the use of the asset beyond its originally assessed standard of performance. Routine repairs and maintenance are expensed when incurred. Gains and losses on disposal of fixed assets are recognized in the income statement based on the net disposal proceeds less the carrying amount of the assets.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income taxes whereby deferred taxes are determined based on the temporary differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
REVENUE RECOGNITION
The Company recognizes revenue from product sales when goods are shipped or delivered and rewards and risk of ownership and title pass to the customer. Revenues consist of the invoice value of the sale of goods and services net of rebates and discounts, certain sales incentives, trade promotions, and product returns. Revenue dilution is accounted for as reductions in sales in the same period the related sales are recorded.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of accounts receivable. The Company performs ongoing credit evaluations with respect to the financial condition of its creditors, but does not require collateral. In order to determine the value of the Company's accounts receivable, the Company records a provision for doubtful accounts to cover probable credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectibility of outstanding accounts receivable. The Company is exposed to the following risk factors:
(i) Credit risks - The Company has policies in place to ensure that sales of products are made to customers with an appropriate credit history.
(ii) Liquidity risks - Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and ability to close out market positions.
(iii) Interest rate risk - The interest rate and terms of repayments of short-term and long-term bank borrowings are approximately 9% per annum. The Company has no significant interest-bearing assets. The Company maintains all of its borrowings in floating rate instruments.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company has the following material capital expenditures commitments:
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
An increase in the cost of heavy metals would increase the cost of production. The Company does not have any market risk with respect to such factors as equity prices and other market changes that affect market risk sensitive investments. A 10 basis point change in the Company's average debt interest rate would not have a material effect on the Company's results of operations.
With respect to foreign currency exchange rates, the effect of a devaluation or fluctuation of the HK dollar against the US dollar would affect the Company's results of operations, financial position and cash flows, when presented in US dollars (based on a current exchange rate) as compared to HK dollars.
As the Company's debt obligations are primarily short-term in nature, the Company does not have any risk from an increase in market interest rates. However, to the extent that the Company arranges new borrowings in the future, an increase in market interest rates would cause a commensurate increase in the interest expense related to such borrowings.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are incorporated herein by this reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms. Our disclosure controls and procedures are also designed to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer as appropriate.
As of March 31, 2007, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of the Company's management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)), which are designed to ensure that material information required to disclose in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized, and reported within the required time periods specified in the SEC's rules and forms. Disclosure controls and procedures are also designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to the Company's management including its principal executive officer and principal financial officer as appropriate to allow timely decision regarding required disclosures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that a high staff turnover of senior finance staff affected the controls and timely submission of reports. The top management is well aware of the importance of good internal controls and procedures and will allocate more resources to improve the effectiveness of controls in the coming year.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our internal control over financial reporting that occurred during the fourth fiscal quarter of the fiscal year covered by this Annual Report that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resources constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can only be reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our executive officers, together with their respective information, are set forth below:
Shi Kai Biu, Simon - President, Chief Executive Officer and Chairman of Board of Directors
Mr. Shi founded the Company and its predecessor in 1983 and currently directs the Company's strategic planning and overall business development efforts. He has over 25 years of manufacturing and marketing experience in electrical products and the micro-motor industry. Mr. Shi has received numerous awards, including: Young Industrialist of Hong Kong, Ten Outstanding Young Persons of Hong Kong, and the Governor's Award for Industry. Mr. Shi is currently President of the Hong Kong Small and Medium Enterprises Association, President of the China National Micro-motor Industry Association and Vice Chairman of the Hong Kong Productivity Council - Hong Kong Automotive Industry Group. Mr. Shi received a Certificate in Electrical Engineering from Hong Kong Polytechnic University.
Ho Koon Lun - Chief Operating Officer
Mr. Ho joined the Company in 1988 and currently directs the Company's product development and production engineering in DC motors. Mr. Ho's work experience dates back to 1981, and prior to joining the Company, Mr. Ho managed product design, quality assurance, research and development and production departments for numerous industrial companies in Hong Kong. Mr. Ho received a B.S. degree in Electrical Engineering from National Taiwan University.
Kenny Lo - Chief Financial Officer
Mr. Lo joined the Company in 2007 and currently manages the Company's finance department. Mr. Lo has 20 years of accounting and finance experience in various industries including retail, manufacturing, logistics, securities and M&A. Mr. Lo was the Associate Director in a construction and properties development company from 2004 to 2007 and the Chief Financial Officer of a multi-national logistic company from 2000 to 2004. Mr. Lo received a MBA degree from Heriot-Watt University and is a member of the Chartered Institute of Management Accountants in UK and a member of the Hong Kong Institute of Certified Public Accountants.
Chang Yung Ying - Vice President of Sales and Marketing
Miss Chang joined the Company in 2004. She is responsible for the marketing and business development of the Company, with emphasis on the PRC and Taiwan. From 1990 to 2003, Miss Chang was the General Manager of Cheng Ying Company Limited, a building materials trading and construction engineering company based in Taiwan.
Shi Kin Bon, Jacky - Vice President
Mr. Jacky Shi joined the Company in 2005. Mr. Shi is responsible for sales and business development of Sun Motor Japan. Mr. Shi is also responsible for improving the efficiency of the manufacturing process for the purpose of optimal cost structure. Mr. Shi graduated with the Bachelor of Law, Bachelor of Commerce and Diploma in Japanese from the University of Melbourne, Australia in 2005. Mr. Shi is Mr. Simon Shi's second eldest son.
Teruo Ito - Vice President of Research and Development
Mr. Ito joined the Company in 2003 and currently manages the Company's R&D department. Mr. Ito has over 38 years of experience in the micro-motor industry. Prior to joining Sun Motor, Mr. Ito was a key member of the product development department for Mitsumi Group of Japan, where he spent 33 years of his career. Mr. Ito has a bachelor's degree in Electronic Engineering from Yamagata University.
Bernard Lenormand - Vice President of Research and Development (Europe)
Mr. Lenormand joined the Company in 2004 and is responsible for motor research and development. From 1972 to 2004, Mr. Lenormand worked for Moulinex and Euromoteurs of France in product research and development. He has extensive experience in the design of micro-motors and electrical home appliances and contributes much to the business development in Europe.
Hiroshi Tokoro - Vice President of Quality Assurance
Mr. Tokoro joined the Company in 1999 and currently manages the Company's quality assurance department. Mr. Tokoro has over 40 years of experience as a quality assurance manager. Prior to joining Sun Motor, Mr. Tokoro was a key member of the quality assurance department for Fuji Micro Corporation of Japan, where he spent 32 years of his career.
Shi Kai Bon, Jeffrey - Director
Mr. Jeffrey Shi joined the Company in 2001. Mr. Jeffrey Shi manages the Company's metal parts operations and is also responsible for marketing and business development of the Company. Mr. Shi was employed by Rockwell Automation Australia Limited from January 2001 through December 2001 in software programming. In 1999, Mr. Shi received a bachelor's degree in Computer Science from the University of Monash in Australia. Mr. Jeffrey Shi is Mr. Simon Shi's eldest son.
The Company intends to add three additional directors who will be independent under NASDAQ rules and who will constitute a majority of the board of directors. The Company also intends to establish audit and compensation committees, the members of which will be independent.
RELATED-PARTY TRANSACTIONS
As of March 31, 2007, Mr. Simon Shi and certain of his affiliated companies were indebted to the Company in the aggregate amount of $34,831. The loans bear interest based on the Company's cost of funds plus 1.5% per annum and are repayable on demand. The Company received interest income of $31,564, $61,533 and $113,098 with respect to such loans during the years ended March 31, 2007, 2006 and 2005 respectively. Also,
(a) At March 31, 2007, in order to secure the banking facilities granted to the Company:
o Mr. Shi had issued personal guarantees amounting to $4.87 million; and
o Mr. Shi had issued unlimited personal guarantees; and
o Mr. Shi had pledged his own properties.
(c) The Company received market rental value of $1,795, $10,769 and $10,769 from a related company, of which Mr. Simon Shi holds 49% interest, during fiscal 2007, 2006, and 2005 respectively.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3 and 4 forwarded to us pursuant to Rule 16a-3(e) of the Exchange Act during our most recent fiscal year, all officers, directors and owners of 10% or more of our outstanding shares have filed all forms required by Section 16(a) of the Exchange Act
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table set forth certain information concerning the annual and long-term compensation for services rendered to Bestip prior to the Reorganization and to the Company subsequent to the Reorganization in all capacities for the fiscal years ended March 31, 2007, 2006 and 2005 of (i) all persons who served as the Chief Executive Officer of the Company during the fiscal year ended March 31, 2007 and (ii) each other person who was an executive officer of the Company on March 31, 2007 and whose total annual salary and bonus during the fiscal year ended March 31, 2007 exceeded $100,000. Mr. Shi was not an officer of the Company prior to the Reorganization.
ANNUAL COMPENSATION ---------------------------------------------- NAME AND PRINCIPAL POSITION YEAR SALARY BONUS - -------------------------------- -------------- -------------- --------------
Shi Kai Biu, Simon 2006/2007 $338,462 $28,205 ( Chief Executive Officer ) 2005/2006 $338,462 $28,205 2004/2005 $230,769 $28,205 Ho Koon Lun 2006/2007 $84,615 $22,435 ( Chief Operating Officer ) 2005/2006 $84,615 $22,435
STOCK OPTION GRANT EXERCISES
The Company presently does not have any equity incentive plans. None of our named executive officers received any grants of options or other stock compensation during the fiscal year ended March 31, 2007.
EMPLOYMENT AGREEMENTS
The Company maintains employment relations with a number of its executive officers through a set of standard labor contract or employment agreement. The terms and conditions of these employment agreements are determined via negotiations between the employee parties and the Company, and the framework and structure of the agreements are in compliance with applicable laws governing labor contract.
SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS
There are no severance or change of control arrangements.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
As permitted by Wyoming law, we have adopted provisions in our amended and restated certificate of incorporation and bylaws, both of which will become effective upon the closing of this offering, that limit or eliminate the personal liability of our directors and officers to the fullest extent permitted by Wyoming law, as it now exists or may in the future be amended, and against all expenses and liabilities reasonably incurred in connection with their service for or on behalf of the Company. In addition, certificate of incorporation provides that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors, unless they violated their duty of loyalty to us or our stockholders, acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper personal benefit from their action as directors.
At present, we are not aware of any pending or threatened litigation or proceeding involving any of our directors, officer, employees or agents in which indemnification would be required or permitted. We believe provisions in our certificate of incorporation and indemnification agreements are necessary to attract and retain qualified persons as directors and officers.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The table below sets forth certain information with respect to beneficial ownership of our stock as of Aug 15, 2007 by:
o persons known by us to be the beneficial owners of more than five percent (5%) of our issued and outstanding common stock;
o each of our executive officers and directors; and
o all of our officers and directors as a group.
Percentages are computed using a denominator of 29,440,067 shares of common stock outstanding.
(1) Address is Block B, G/F., Prince Industrial Building, 106 King Fuk Street, San Po Kong, Kowloon, Hong Kong.
(2) Shi Kai Bon (Jeffrey) is Shi Kai Biu (Simon)'s eldest son.
(3) Address is c/o Mitsubishi UFJ Securities ( HK ) Company Limited, 11/F, AIG Tower, No. 1 Connaught Road, Central, Hong Kong.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
None of the company's directors is independent under the rules of NASDAQ. The company does not have a separate audit committee. The Board of Directors acts in the capacity of an Audit Committee.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PKF, an independent registered public accounting firm, was selected as the Company's auditor for fiscal 2007. The table below sets forth fees for professional services rendered by PKF for the audit of financial statements for fiscal years 2007 and 2006, and fees for other services rendered by PKF during fiscal 2007 and 2006.
2007 2006 ---- ---- Audit fees ( 2007 : including tax fees ) $97,436 $61,539
Audit-related fees -- --
Tax fees $5,128 $5,128
All other fees $23,077 $23,077
PART IV
ITEM 15.
ITEM 15. SIGNATURES, EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 15th day of Aug 2007.
SUN MOTOR INTERNATIONAL, INC.
By /s/ SHI KAI BIU ------------------------------
Shi Kai Biu, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBITS
The following is a list of exhibits filed or incorporated by reference into this Report:
Exhibit 2(1) Securities Purchase Agreement and Plan of Reorganization by and among Wyoming Oil & Minerals, Inc., and Bestip Development International Limited, an international business company organized under the laws of the British Virgin Islands, dated May 2, 2005.
Exhibit 3.1(2) Articles of Incorporation of Wyoming Coal Corporation as filed with the Wyoming Secretary of State effective February 23, 1973.
Exhibit 3.2(2) Articles of Amendment to the Articles of Incorporation of Wyoming Coal Corporation as filed with the Wyoming Secretary of State effective March 5, 1974.
Exhibit 3.3(2) Articles of Amendment to the Articles of Incorporation of Wyoming Coal Corporation as filed with the Wyoming Secretary of State effective August 18, 1981.
Exhibit 3.4(2) Articles of Amendment to the Articles of Incorporation by Shareholders of Wyoming Oil & Minerals, Inc. as filed with the Wyoming Secretary of State effective February 18, 2000.
Exhibit 3.5(2) By-laws of Wyoming Oil & Minerals, Inc., as amended.
Exhibit 3.6(3) Articles of Amendment to the Articles of Incorporation by Shareholders of Wyoming Oil & Minerals, Inc.
Exhibit 31.1(4) Section 302 Certification --- Chief Financial Officer
Exhibit 31.2(4) Section 302 Certification --- Chief Executive Officer
Exhibit 32(4) Section 906 Certification --- Chief Executive Officer & Chief Financial Officer
(1) Filed as an Exhibit to the Company's Form 8-K May 2, 2005 and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form S-8 filed on March 3, 2000, SEC File No. 333-31936 and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Information Statement on Schedule 14C filed on July 11, 2005 and incorporated herein by reference.
(4) Filed with this Report.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Sun Motor International, Inc.
We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Financial Statements of Sun Motor International, Inc. and subsidiaries for 2007 and 2006 included in this Form 10-K, and have issued our report thereon dated August 3, 2007. Our audits for the years ended March 31, 2007, 2006 and 2005, were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Financial Statement Schedules listed in Item 15 for Sun Motor International, Inc. and subsidiaries is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
PKF Certified Public Accountants Hong Kong, China August 3, 2007
SUN MOTOR INTERNATIONAL, INC.
Consolidated Financial Statements (Stated in United States Dollars) March 31, 2007
SUN MOTOR INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
(Stated in United States Dollars)
Contents
Pages
Report of Independent Registered Public Accounting Firm 1
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Sun Motor International, Inc.
We have audited the accompanying consolidated balance sheets of Sun Motor International, Inc. (the "Company") and its subsidiaries as of March 31, 2007 and 2006, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended March 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of March 31, 2007 and 2006 and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2007 in conformity with accounting principles generally accepted in the United States of America.
PKF Certified Public Accountants Hong Kong, China August 3, 2007
1. CORPORATE INFORMATION
Sun Motor International, Inc. (the "Company") was incorporated in State of Wyoming on February 23, 1973. The Company's shares are quoted for trading on the Over-The-Counter Bulletin Board in the United States of America. Following the reverse acquisition in 2005 as detailed below, the Company changed its name from Wyoming Oil & Minerals, Inc. to Sun Motor International, Inc. to reflect the change in the Company's business. The financial year end date of the Company has also been changed from February 28 to March 31.
Pursuant to the Plan of Reorganization dated May 2, 2005, the Company acquired 100% ownership interest in Bestip Development International Limited ("Bestip"), a limited company incorporated in the British Virgin Islands, in consideration for the issuance of the Company's 28,000,000 common shares to the former stockholders of Bestip ("Bestip Former Stockholders").
The aforesaid transaction was completed on June 15, 2005 and thereafter Bestip became a wholly owned subsidiary of the Company and Bestip Former Stockholders became the majority stockholders of the Company. This transaction constituted a reverse takeover transaction ("RTO").
Following the RTO, the Company through Bestip and its subsidiaries acts as an original design manufacturer and supplier of both standard and custom-designed micro-motors to the global market with a broad range of applications in automotive parts, power tools, home appliances, business equipment, medical equipment, personal care products and consumer electronics.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF PRESENTATION AND CONSOLIDATION
The RTO has been accounted for as a recapitalization of Bestip whereby the assets and liabilities and operations of Bestip become the assets and liabilities and operations of the Company with no adjustment to the historical basis of the assets and liabilities of Bestip and the operations consolidated.
At the RTO completion date on June 15, 2005, the Company did not have any assets or liabilities. Thus the 1,430,067 shares of the Company's common stock issued and outstanding immediately prior to the RTO are accounted for at nil value. These financial statements reflect the recapitalization of the stockholders' equity as if the RTO occurred as of the beginning of the reporting years presented.
The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America.
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
The results of subsidiaries acquired or disposed of during the years are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
MINORITY INTERESTS
Minority interests resulted from the consolidation of a 90% owned subsidiary, Sun Motor Manufactory Limited.
USE OF ESTIMATES
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting years. These accounts and estimates include, but are not limited to, the valuation of accounts receivable, inventories, deferred income taxes and the estimation on useful lives of property, plant and machinery. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, restricted cash, trade receivables and promissory note receivables. As of March 31, 2007 and 2006, substantially all of the Company's cash and cash equivalents and restricted cash were held by major financial institutions located in Hong Kong, which management believes are of high credit quality. With respect to trade receivables, the Company extends credit based on an evaluation of the customer's financial condition, generally without requiring collateral. The Company maintains an allowance for doubtful accounts of trade receivables. In respect of the promissory note receivable, the Company requests securities for its acceptance. More details of the securities are set out in note 14.
The Company's five largest customers accounted for approximately 36%, 26% and 50% respectively, of net sales during 2007, 2006 and 2005. No customers accounted for sales of 10% or more during the years.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all cash, deposits in banks and other highly liquid investments with initial maturities of three months or less. As of March 31, 2007 and 2006, the cash and cash equivalents denominated in Hong Kong Dollars amounted to $487,292 and $363,653 respectively whilst the remaining balances were denominated in Renminbi ("RMB") of $123,623 and $127,558, which are not freely convertible into foreign currencies, and in other currencies of $12,437 and $34,779 respectively.
RESTRICTED CASH
Restricted cash consists primarily of bank deposits held as collateral under pledge for bank borrowings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
ALLOWANCE FOR DOUBTFUL DEBTS
The Company establishes an allowance for doubtful accounts based on management's assessment of the collectibility of accounts receivable. A considerable amount of judgment is required in assessing the realization of the receivables, including the current creditworthiness of each customer and the related ageing analysis.
Based on the above assessment, during the reporting years, the management establishes the general provisioning policy, which is considered to be adequate, for the potentially uncollectible amounts as follows :-
General provision Age of Debts Percentage ------------ ----------
1 - 2 years 50% Over 2 years 100%
In the normal course of business the Company extends unsecured credit to customers ranging from 30 to 60 days after the invoice date. The Company does not accrue interest on trade accounts receivable.
If accounts receivable in excess of the provided allowance is determined uncollectible, they are charged to expense in the year that determination is made. Bad debts are written off when identified.
PROMISSORY NOTE
The promissory note receivable is initially measured at fair value and subsequently measured at amortized cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognized in profit or loss when there is objective evidence that the asset is impaired. The allowance recognized is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined on a weighted average basis and includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition. In assessing the ultimate realization of inventories, the management makes judgments as to future demand requirements compared to current or committed inventory levels. Our reserve requirements generally increase as our projected demand requirements; decrease due to market conditions, product life cycle changes.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
INVENTORIES (cont'd)
During the reporting years, the management establishes the general provisioning policy for inventories based on past experience as follows :-
General provision Age of Inventories Percentage ------------------ ----------
1 - 2 years 50% Over 2 years 100%
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized.
Depreciation and amortization are provided using the straight-line method over the estimated useful lives at the following annual rates :-
Land Over the term of the lease Buildings 2% Building improvements 20% Machinery and equipment 10% - 20%
IMPAIRMENT OF ASSETS OF LONG-LIVED ASSETS
Long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets in the event that the net book values of such assets exceed the future undiscounted cashflows attributable to such assets.
During the reporting years, the Company has not identified any indicators that would require testing for impairment and no impairment was made.
STOCK-BASED COMPENSATION
The Company adopted the SFAS No. 123R, "Share-Based Payment" ("SFAS 123R") using the modified prospective method. Under SFAS 123R, equity instruments issued to service providers for their services are measured at the grant-date fair value and recognized in the statement of operations over the vesting period. The company has not issued any options and accordingly the adoption of SFAS 123R has not effect on the current period financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
REVENUE RECOGNITION
The company recognizes revenue, net of discounts and returns, when risks and rewards of ownership of the products have been transferred to buyers, persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collectibility is reasonably assured.
Revenue from product sales is generally recognized upon shipment of the products to the buyers in accordance with the terms of the sales agreement.
COST OF SALES
Cost of sales consists primarily of material costs, employee compensation, depreciation and related expenses, which are directly attributable to the production of products. Write down of inventory to lower of cost or market is also recorded in cost of sales.
ADVERTISING, TRANSPORTATION, RESEARCH AND DEVELOPMENT EXPENSES
Advertising, transportation, research and development, and other product-related costs are charged to expense as incurred.
Advertising expenses amounted to $69,024, $177,783 and $106,744 during 2007, 2006 and 2005 respectively are included in selling expenses.
Transportation expenses amounted to $590,648, $565,388 and $455,937 during 2007, 2006 and 2005 respectively are included in selling expenses.
No research and development expenses are incurred during 2007, 2006 and 2005.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income taxes whereby deferred taxes are determined based on the temporary differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
DIVIDENDS
Dividends are recorded in Company's financial statements in the period in which they are declared.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
COMPREHENSIVE INCOME
The Company has adopted SFAS 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income, its components and accumulated balances.
Comprehensive income during the reporting years is analyzed as below :-
The other comprehensive income shown on the consolidated statements of stockholders' equity represents the foreign currency translation in prior periods.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is Hong Kong Dollars ("HKD"). The Company maintains its financial statements in the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transactions. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective years.
For financial reporting purposes, the financial statements of the Company which are prepared using the functional currency have been translated into United States Dollars ("$"). Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders' equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders' equity.
During 2007, 2006 and 2005, there has been no significant change in exchange rates. The exchange rates in effect throughout the reporting years were approximately HKD7.8 for $1.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of the Company's financial instruments, including cash and cash equivalents, restricted cash, accounts and other receivables, amounts due from related parties, accounts and other payables and amounts due to related parties approximate their fair values due to the short-term maturity of such instruments. The carrying amounts of promissory note receivable and bank borrowings approximate their fair values because the applicable interest rates approximate current market rates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
FAIR VALUE OF FINANCIAL INSTRUMENTS (cont'd)
It is management's opinion that the Company is not exposed to significant price or credit risks arising from these financial instruments.
In respect of foreign currency risk, the Company is exposed to this risk arising from import purchase and export sales transactions and recognized trade receivables and payables as they will affect the future operating results of the Company. The Company did not have any hedging transactions during the reporting years.
The Company is also exposed to interest rate risk arising from bank borrowings. The changes in market interest rates may affect the operating results of the Company. The Company did not have any hedging transactions during the reporting years.
BASIC AND DILUTED EARNINGS PER SHARE
The Company reports basic earnings per share in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per share are computed using the weighted average number of shares outstanding during the periods presented. The weighted average number of shares of the Company represents the common stock outstanding during the years. The weighted average number of shares outstanding for 2005 represents the number of shares issued by the Company in conjunction with the RTO (Notes 1 and 2).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes". This interpretation provides recognition thresholds and measurement of a tax position taken or expected to be taken in a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company does not anticipate that the adoption of this standard will have a material impact on these consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurement". SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement shall be effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The provisions of this statement should be applied prospectively as of the beginning of the fiscal year in which this statement is initially applied, except in some circumstances where the statement shall be applied retrospectively. The Company is currently evaluating the effect of SFAS No. 157 on these consolidated financial statements.
In September 2006, the FASB released SFAS No. 158 "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans: an amendment of FASB Statements No. 87, 88, 106, and 132(R) " which requires an employer to recognize the over funded or under funded status of defined benefit and other postretirement plans as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through an adjustment to comprehensive income. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. This statement is effective for fiscal year ending after December 15, 2006. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (cont'd)
In September 2006, the SEC issued SAB No. 108, which provides guidance on the process of quantifying financial statement misstatements. In SAB No.108, the SEC staff establishes an approach that requires quantification of financial statement errors, under both the iron-curtain and the roll-over methods, based on the effects of the error on each of the Company's financial statements and the related financial statement disclosures. SAB No. 108 is generally effective for annual financial statements in the first fiscal year ending after November 15, 2006. The transition provisions of SAB No. 108 permits existing public companies to record the cumulative effect in the first year ending after November 15, 2006 by recording correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115". SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with few exceptions. SFAS 159 also establishes presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect of SFAS No. 159 on these consolidated financial statements.
3. ACCOUNTS RECEIVABLE, NET MARCH 31, ------------------------------ 2007 2006 $ $
Accounts receivable 10,040,578 10,640,920 Less : Allowance for doubtful accounts (202,765) (233,373) -------------- --------------
9,837,813 10,407,547 ============== ==============
The Company incurred $202,765, $233,373 and $764,163 of doubtful debt expense during 2007, 2006 and 2005 respectively.
In 2007, 2006 and 2005, the Company wrote off $233,373,$1,673,175 and $1,449,810 of bad debts of which $233,373, $1,140,776 and $1,434,200 were against the allowance for doubtful debts whilst $nil, $532,399 and $16,386 were charged to its statement of income respectively.
4. INVENTORIES, NET
MARCH 31, ------------------------------ 2007 2006 $ $
Raw materials 8,650,785 8,302,395 Work in progress 548,295 602,252 Finished goods 1,880,736 2,273,296 -------------- --------------
11,079,816 11,177,943 Less : Allowance for obsolete inventories (575,905) (268,964) -------------- --------------
10,503,911 10,908,979 ============== ==============
The Company charged $575,905, $268,964 and $108,332 of allowance for obsolete inventories during 2007, 2006 and 2005 respectively which were included in cost of sales.
In 2007, 2006 and 2005, the Company wrote off $268,964, $108,332 and $728,435 of inventories against the allowance for obsolete inventories respectively.
5. PREPAYMENTS, DEPOSITS AND OTHER RECEIVABLES
At March 31, 2007 and 2006, the balances comprised of the following :-
a) Temporary payments are repayable by several installments, all of which are due within 12 months.
6. AMOUNT DUE FROM A DIRECTOR
The amount is due from the Company's director, Mr. Shi Kai Bui Simon ("Simon Shi") who is also a major stockholder of the Company. It is unsecured, bears interest calculated based on the cost of funding of the Company plus 1.5% per annum which approximates 8.5% per annum during the reporting years (Note 24(a)) and is repayable on demand.
7. AMOUNT DUE FROM ULTIMATE HOLDING COMPANY
The entire issued and outstanding common stock of the ultimate holding company is owned by Simon Shi. The amount represents advance to ultimate holding company and is interest-free, unsecured and repayable on demand.
8. PROPERTY, PLANT AND EQUIPMENT, NET
(i) Machinery and equipment with net book values of $2,485,590 (cost of $4,220,226 less accumulated depreciation of $1,734,636) and $2,775,232 (cost of $4,131,758 less accumulated depreciation of $1,356,526) were under capital lease obligations at March 31, 2007 and 2006 respectively.
Depreciation on machinery and equipment under capital lease obligations amounted to $402,452, $358,502 and $293,627 for 2007, 2006 and 2005 respectively.
(ii) At March 31, 2007, land and buildings with carrying amount of $932,783 was pledged to banks for banking facilities granted to the Company (Note 11(b)).
(iii) Depreciation and amortization expenses for 2007, 2006 and 2005 were $3,261,254, $2,939,562 and $2,348,357 respectively and $2,780,950 , $2,527,912 and $1,868,828 of these expenses were included in factory overheads.
(iv) No disposal of machinery and equipment was made in 2007. During 2006 and 2005, machinery and equipment with carrying amounts of $16,021 and $471,329 value were disposed of at considerations of $40,385 and $305,905 resulting in gain of $24,364 and loss of $165,424 respectively.
9. ACCRUED EXPENSES AND OTHER PAYABLES
At March 31, 2007 and 2006, accrued expenses and other payables comprised of the following :-
10. AMOUNTS DUE FROM/TO RELATED COMPANIES
The related companies are controlled by Simon Shi. These amounts are interest-free, unsecured and repayable on demand.
11. BANK BORROWINGS
(a) Bank borrowings composed of the followings :
The Company is obliged to make the following principal payments :-
(b) At March 31, 2007, the Company's available banking facilities to the extent of approximately $24.01 million were secured by the following:
(i) The Company's short-term bank deposits;
(ii) The Company's land and buildings (Note 8 (ii));
(iii) Limited to the extent of $3.68 million together with outstanding interest and unlimited guarantees executed by the Company's subsidiaries in favor of banks for outstanding facilities granted to the Company;
11. BANK BORROWINGS (CONT'D)
(b) (cont'd)
(iv) Limited to the extent of $4.87 million together with outstanding interest and unlimited personal guarantees put up by Simon Shi in favor of banks for outstanding facilities granted to the Company (Note 24(b));
(v) The properties owned by Simon Shi; and
(vi) The guarantees including those executed by the subsidiaries and Simon Shi are exercisable by the banks upon default on repayment by the Company. The maximum exposure to these guarantees is $24.01 million representing available banking facilities together with outstanding interest. At March 31, 2007, the guaranteed amount utilized by the Company amounted to $15.69 million.
In addition, the Company was obliged to meet the covenants of maintaining tangible net worth and net worth at certain levels. The Company was not in breach of any such covenants throughout the years.
At March 31, 2007, the amount of unused available banking facilities, including unused letters of credit of approximately $7.59 million, was approximately $8.32 million.
The interest rates of bank borrowings were Hong Kong best lending rate minus 0.65% to plus 2.5% per annum, HIBOR plus 0% to 2.5% per annum and prime rate plus 0% to plus 2.5% per annum.
12. CAPITAL LEASE OBLIGATIONS
The Company leases certain machinery and equipment under non-cancelable leases classified as capital leases. The following is a schedule of future minimum lease payments for capital leases together with the present value of the net minimum lease payments :-
Details of capitalized assets are set out in note 8(i).
13. OTHER INCOME
Other income included the followings:
14. DISPOSAL OF A SUBSIDIARY
Pursuant to a sale and purchase agreement entered into between the Company and an independent third party (the "Purchaser") on March 31, 2006, the Company agreed to dispose of a wholly owned subsidiary (the "Subsidiary"), which owns and operates a production line in the People's Republic of China (the "PRC"), to the Purchaser at a consideration of $3,800,000. This consideration was settled by a Promissory Note issued by the Purchaser with interest-free installments payable as follows:
INSTALLMENTS PAYMENT DATES $
380,000 September 30, 2006 760,000 March 31, 2007 2,660,000 March 31, 2008 ----------------
3,800,000 ================
As continuing securities for the Promissory Note accepted by the Company, the Purchaser executed a First Fixed Charge on the entire equity interest in the Subsidiary (i.e. its entire issued and outstanding common stock) in favor of the Company. In addition, the Subsidiary also entered into a Debenture which incorporates a Fixed and Floating Charges on all of its assets in favor of the Company.
The promissory note receivable is analyzed as below:
$ Note receivable 3,800,000 Discount (292,760) -------------- Adjusted fair value 3,507,240 ==============
14. DISPOSAL OF A SUBSIDIARY (CONT'D)
The face value of note receivable is adjusted using interest rate of 5% per annum resulting in a discount of $292,760. The 5% is determined by the management after consideration of credit standing of the Purchaser, the securities given and current market interest rate. The discount is amortized as an interest income using effective interest rate method over 2 years the term of the promissory note.
This disposal transaction completed on March 31, 2006 and resulted in a gain of $3,466,316 calculated as follows:
$ Consideration Note receivable 3,800,000 Discount (292,760) -------------- 3,507,240
The Subsidiary's net assets - Machinery and equipment 417,752 - Receivables 363,660 - Cash 13,775 - Payables (754,263) 40,924 -------------- --------------
Gain on disposal 3,466,316 ==============
As the consideration was settled by the promissory note, net cash outflow from the disposal amounted to $13,775.
This Subsidiary did not generate any revenue from external customers during the reporting years. It was responsible for certain production processes of low-end products of the Company. During the years ended March 31, 2006 and 2005, the Subsidiary incurred production cost of $708,388 and $nil, which is included in cost of sales, and administrative expenses of $380,673 and $316,824 respectively.
Subsequent to its disposal, this Subsidiary continues to be a sub-contractor for the Company's low-end products in its capacity as a third party and the Company pays the relevant charge for the subcontracting service rendered.
In view that the Company continues to be engaged in the distribution of such products, the disposal did not constitute a discontinued operation.
At March 31, 2007 and 2006, the promissory note receivable is analyzed as follows:
15. INCOME TAXES
The components of the income/(loss) from continuing operations before income taxes are:
15. INCOME TAXES (CONT'D)
The income tax expenses/(income) consists of the following:
The Company is subject to income tax rate in the United States as follows:
Statutory federal rate 34.00% State income tax rate 4.95% --------------
38.95% ==============
The Company's subsidiaries incorporated in BVI are not subject to income taxes under the current laws of the BVI.
The Company's subsidiaries operating in Hong Kong are subject to profits tax rate of 17.5% on the estimated assessable profits during the reporting years.
The Company's subsidiary operating in the PRC is subject to enterprise income tax rate of 33%. No provision for PRC enterprise income tax has been made as the PRC subsidiary had no assessable profits throughout the years.
The effective income tax expenses differs from the statutory rate of 34% in the United States as follows:
15. INCOME TAXES (CONT'D)
The major components of deferred tax recognized in the consolidated balance sheets as of March 31, 2007 and 2006 are as follows:
The deferred taxes recognized can be analyzed as follows:
At March 31, 2007, the Company had tax losses carried forward amounting to $7,115,125. $3,797,855 of these tax losses can be utilized for an unlimited period of time in Hong Kong and the remaining $3,317,270, if unutilized, will expire through to 2026 in the United States.
At March 31, 2006, the Company had tax losses carried forward amounting to $4,566,177. $1,258,138 of these tax losses can be utilized for an unlimited period of time in Hong Kong and the remaining $3,308,039, if unutilized, will expire through to 2025 in the United States.
In 2007, the management determined that the tax losses of $3,317,270 in the United States and of $180,285 in Hong Kong did not meet the realization criteria and thereby valuation allowance of $1,159,422 was made against the deferred tax asset as of March 31, 2007.
In 2006, the management determined that the tax losses of $3,308,039 in the United States and of $32,370 in Hong Kong did not meet the realization criteria and thereby valuation allowance of $1,130,398 was made against the deferred tax asset as of March 31, 2006.
16. BASIC AND DILUTED NET INCOME/(LOSS) PER SHARE
The Company has no dilutive instruments and accordingly the basic and diluted net income per share are the same.
17. DIVIDEND
During the year ended March 31, 2005, an interim dividend of $30,769.23 per share totaling $3,076,923 was declared by Bestip.
18. SEGMENT INFORMATION
The Company solely designs, manufactures, sells and distributes micro motors of different functions and features, and they are used for toys, electrical appliances, office equipment, automobile accessories, camera, Digital Video Disc ("DVD") and Moving Picture Experts Group Audio Layer 3 ("MP3") player.
The Company has two reportable segments, Alternating Current ("AC") and Direct Current ("DC") motors, based on manufacturing processes. Information for the two segments is disclosed under FAS 131, "Disclosures about Segments of an Enterprise and Related Information" as below:
A reconciliation is provided for unallocated amounts relating to corporate operations which is not included in the segment information.
18. SEGMENT INFORMATION (CONT'D)
Long-lived assets with net book value of $13,428,747 and $13,319,992 are located in the PRC and $935,118 and $1,043,273 are located in Hong Kong at March 31, 2007 and 2006 respectively.
Geographic information about the revenues is set out as follows :-
Note: They are classified based on location of the customers.
19. PENSION PLANS
The Company participates in a defined contribution pension scheme under the Mandatory Provident Fund Schemes Ordinance ("MPF Scheme") for all of its eligible employees in Hong Kong.
The MPF Scheme is available to all employees aged 18 to 64 with at least 60 days of service in the employment in Hong Kong. Contributions are made by the Company's subsidiary operating in Hong Kong at 5% of the participants' relevant income with a ceiling of HK$20,000. The participants are entitled to 100% of the Company's contributions together with accrued returns irrespective of their length of service with the Company, but the benefits are required by law to be preserved until the retirement age of 65.
19. PENSION PLANS (CONT'D)
As stipulated by the PRC government regulations, the Company's subsidiary operating in the PRC is required to contribute to the PRC insurance companies organized by the PRC Government which are responsible for the payments of pension benefits to retired staff. The monthly contribution was equal to 28.5% of the salaries of the staff. The Company has no obligation for the payment of pension benefits beyond the annual contributions described above.
The assets of the schemes are controlled by trustees and held separately from those of the Company. Total pension cost was $154,392, $94,030 and $58,159 during 2007, 2006 and 2005 respectively.
20. COMMON STOCK
On June 15, 2005, the Company issued 28,000,000 common shares to Bestip Former Stockholders as a consideration for the acquisition of Bestip in conjunction with the RTO. As detailed in note 1, this transaction constituted a reverse takeover transaction and accordingly the 28,000,000 common shares issued by the Company for the acquisition was taken as the outstanding number of common shares for the year 2005.
The Company's 1,430,067 outstanding common shares immediately prior to the RTO were regarded as the shares issued for recapitalization.
On October 15, 2005, the Company issued 10,000 restricted common shares at $2.85 per share to an independent contractor for investor relation service provided to the Company. These shares were fully vested to this contractor upon issuance of such shares. The $2.85 was the market price on the same date.
21. STOCK OPTION AND STOCK GRANT PLAN
In April 2004, the Company approved the Non-Qualified Stock Option and Stock Grant Plan (the "Plan"). This Plan expires in April 2014 and provides that the board of directors is authorized to appropriate, grant options and make stock grants with respect to, and otherwise issue and sell for the purposes of the Plan, a total number not in excess of 250,000 shares of the Company's common stock. No option was granted under the Plan.
The Plan was terminated immediately prior to the RTO.
22. COMMITMENTS AND CONTINGENCIES
(i) The Company leases office and factory premises under various non-cancelable operating lease agreements that expire at various dates through years 2007 to 2013. Minimum future commitments under these agreements with term in excess of one year as of March 31, 2007 were as follows:
YEAR $
2008 400,367 2009 355,873 2010 350,015 2011 345,006 2012 345,006 Thereafter 28,751 ---------------------
1,825,018 =====================
Rental expense was $838,229, $858,601 and $850,858 during 2007, 2006, and 2005 respectively.
(ii) At March 31, 2007, the Company has capital commitments in respect of acquisition of property, plant and equipment, which are contracted for but not provided for in the financial statements amounting to $660,927.
23. SUPPLEMENTAL CASH FLOW INFORMATION
24. RELATED PARTY TRANSACTIONS
Apart from the transactions as disclosed elsewhere in these financial statements, the Company entered into the following related party transactions during the reporting years :-
(a) Interest income amounting to $31,564, $61,533 and $113,098 were received from Simon Shi during 2007, 2006 and 2005 respectively. The interest was calculated based on the cost of funding of the Company plus 1.5% per annum, which approximates 8.5% for each of 2007, 2006 and 2005 on the outstanding amount (Note 6).
(b) At March 31, 2007, in order to secure the banking facilities granted to the Company, Simon Shi has issued the following guarantees (Note 11(b)) :-
- Limited personal guarantees to the extent of $4.87 million to four banks; and - Unlimited personal guarantee to four banks.
(c) Rentals of $1,795, $10,769 and $10,769 were received from a related company, of which Simon Shi holds 49% issued and outstanding common stock, during 2007, 2006 and 2005 respectively. In November 2003, a rental agreement was signed between this related company and the Company for leasing certain portion of land and buildings at a monthly rent of $1,795, which was determined by both parties with reference to the market rental. The arrangement covered the period from January 1, 2004 to December 31, 2005 with a six-month rent-free period per annum in the leasing period. Since January 1, 2006, both parties verbally agreed to continue the leasing arrangement. The leasing arrangement was subsequently terminated in June 2006.
25. COMPARATIVE AMOUNTS
Certain amounts included in prior years' consolidated balance sheet and the consolidated statements of income and cash flows have been reclassified to conform to the current year's presentation. These reclassifications had no effect on reported total assets, liabilities, shareholders' equity, or net income.