Date of event requiring this shell company report
_________________________
(Name, Telephone, E-mail and/or Facsimile number
and Address of Company Contact Person)
Securities registered or to be registered pursuant
to Section 12(b) of the Act.
Securities registered or to be registered pursuant
to Section 12(g) of the Act.
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act.
Indicate the number of outstanding shares of
each of the issuer’s classes of capital or ordinary shares as of the close of the period covered by the annual report (June
30, 2016): 59,598,099 ordinary shares.
Indicate by check mark if the registrant is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
x
Yes
¨
No
If this report is an annual or transition report,
indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
¨
Yes
x
No
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
x
Yes
¨
No
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
x
Yes
¨
No
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statements included in this filing:
If “Other” has been checked in response
to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨
Yes
x
No
Except as otherwise indicated by the context,
references in this annual report to:
This annual report contains forward-looking
statements and information relating to us that are based on the current beliefs, expectations, assumptions, estimates and projections
of our management regarding our company and industry. When used in this annual report, the words “may”, “will”,
“anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”
and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. These
statements reflect management's current view of us concerning future events and are subject to certain risks, uncertainties and
assumptions, including among many others: our potential inability to achieve similar growth in future periods as we did historically,
a decrease in the availability of our raw materials, the emergence of additional competing technologies, changes in domestic and
foreign laws, regulations and taxes, changes in economic conditions, uncertainties related to China’s legal system and economic,
political and social events in China, the volatility of the securities markets, and other risks and uncertainties which are generally
set forth under the heading, “Key information - Risk Factors” and elsewhere in this annual report. Should
any of these risks or uncertainties materialize, or should the underlying assumptions about our business and the commercial markets
in which we operate prove incorrect, actual results may vary materially from those described as anticipated, estimated or expected
in this annual report.
All forward-looking statements included herein
attributable to us or other parties or any person acting on our behalf are expressly qualified in their entirety by the cautionary
statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we
undertake no obligations to update these forward-looking statements to reflect events or circumstances after the date of this annual
report or to reflect the occurrence of unanticipated events.
PART I
|
ITEM 1.
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not applicable.
|
ITEM 2.
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not applicable.
|
A.
|
Selected Consolidated Financial Data
|
The following table presents selected
financial data regarding our business. It should be read in conjunction with our consolidated financial statements and
related notes contained elsewhere in this annual report and the information under Item 5, “Operating and Financial
Review and Prospects.” The selected consolidated statement of comprehensive income data for the fiscal years
ended June 30, 2014, 2015 and 2016 and the consolidated balance sheet data as of June 30, 2015 and 2016 have been derived
from the audited consolidated financial statements of Hollysys that are included in this annual report beginning on page
F-1. The selected statement of comprehensive income data for the fiscal years ended June 30, 2012 and 2013, and balance
sheet data as of June 30, 2012, 2013 and 2014 have been derived from our audited financial statements that are not included
in this annual report.
The audited consolidated financial statements
for the years ended June 30, 2014, 2015 and 2016 are prepared and presented in accordance with generally accepted accounting principles
in the United States, or US GAAP. The selected financial data information is only a summary and should be read in conjunction
with the historical consolidated financial statements and related notes of Hollysys contained elsewhere herein. The
financial statements contained elsewhere fully represent our financial condition and operations; however, they are not indicative
of our future performance.
Financial information in this report is reported
in United States dollars, the reporting currency of the Company.
(In USD thousands, except share numbers and per share data)
|
|
|
Years ended June 30,
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Statement of Comprehensive Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
321,704
|
|
|
|
349,055
|
|
|
|
521,332
|
|
|
|
531,379
|
|
|
|
544,325
|
|
Operating income
|
|
|
65,438
|
|
|
|
57,702
|
|
|
|
98,407
|
|
|
|
130,107
|
|
|
|
120,583
|
|
Income before income taxes
|
|
|
66,926
|
|
|
|
60,618
|
|
|
|
91,312
|
|
|
|
125,227
|
|
|
|
137,742
|
|
Net income attributable to Hollysys
|
|
|
56,222
|
|
|
|
51,994
|
|
|
|
69,620
|
|
|
|
96,527
|
|
|
|
118,471
|
|
Add: Share-based compensation costs
|
|
|
1,139
|
|
|
|
1,599
|
|
|
|
2,986
|
|
|
|
2,492
|
|
|
|
3,860
|
|
Amortization of acquired intangible assets
|
|
|
-
|
|
|
|
2,848
|
|
|
|
5,413
|
|
|
|
4,454
|
|
|
|
818
|
|
Acquisition-related consideration fair value adjustments
|
|
|
-
|
|
|
|
1,163
|
|
|
|
8,920
|
|
|
|
(166
|
)
|
|
|
(1,745
|
)
|
Fair value adjustments of a bifurcated derivative
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
|
|
93
|
|
Non-GAAP net income attributable to Hollysys
|
|
|
57,361
|
|
|
|
57,605
|
|
|
|
86,939
|
|
|
|
103,342
|
|
|
|
121,497
|
|
Weighted average ordinary shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
55,659,765
|
|
|
|
56,167,592
|
|
|
|
57,926,333
|
|
|
|
58,612,596
|
|
|
|
59,170,050
|
|
Diluted
|
|
|
55,828,361
|
|
|
|
56,412,469
|
|
|
|
58,426,642
|
|
|
|
60,134,203
|
|
|
|
60,611,456
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.01
|
|
|
|
0.93
|
|
|
|
1.20
|
|
|
|
1.65
|
|
|
|
2.00
|
|
Diluted
|
|
|
1.01
|
|
|
|
0.92
|
|
|
|
1.19
|
|
|
|
1.61
|
|
|
|
1.97
|
|
Non-GAAP earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.03
|
|
|
|
1.03
|
|
|
|
1.50
|
|
|
|
1.76
|
|
|
|
2.05
|
|
Diluted
|
|
|
1.03
|
|
|
|
1.02
|
|
|
|
1.49
|
|
|
|
1.72
|
|
|
|
2.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
437,672
|
|
|
|
546,448
|
|
|
|
729,893
|
|
|
|
806,640
|
|
|
|
827,310
|
|
Total assets
|
|
|
552,755
|
|
|
|
744,633
|
|
|
|
926,695
|
|
|
|
983,686
|
|
|
|
1,004,156
|
|
Total current liabilities
|
|
|
188,829
|
|
|
|
268,452
|
|
|
|
398,891
|
|
|
|
374,596
|
|
|
|
297,326
|
|
Total liabilities
|
|
|
213,470
|
|
|
|
329,158
|
|
|
|
434,637
|
|
|
|
398,301
|
|
|
|
321,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
|
339,285
|
|
|
|
415,475
|
|
|
|
492,058
|
|
|
|
585,385
|
|
|
|
682,685
|
|
Non controlling interests
|
|
|
1,184
|
|
|
|
1,747
|
|
|
|
3,583
|
|
|
|
6,285
|
|
|
|
8,529
|
|
Stockholders’ equity
|
|
|
338,101
|
|
|
|
413,728
|
|
|
|
488,475
|
|
|
|
579,100
|
|
|
|
674,156
|
|
In evaluating our results, the non-GAAP measures
of “Non-GAAP general and administrative expenses (“Non-GAAP G&A expenses”)”,“Non-GAAP cost of
integrated contracts”, “Non-GAAP other income (expenses), net”, “Non-GAAP interest expenses”, “Non-GAAP
net income attributable to Hollysys” and “Non-GAAP earnings per share” serve as additional indicators of our
operating performance and not as a replacement for other measures in accordance with US GAAP. We believe these non-GAAP measures
are useful to investors as they exclude: 1) share-based compensation expenses, 2) amortization of acquired intangible assets, 3)
acquisition-related consideration adjustments and 4) fair value adjustments of a bifurcated derivative. All of above will not result
in any cash inflows or outflows. We believe that using non-GAAP measures help our shareholders have a better understanding of our
operating results and growth prospects. In addition, given the business nature of Hollysys, it has been a common practice for investors
and analysts to use such non-GAAP measures to evaluate the Company. Specifically, the non-GAAP measures excluded the following
items:
1) Share-based compensation expenses, which
are calculated based on the number of shares or options granted and the fair value as of grant date.
2) Amortization of acquired intangible assets,
which is a non-cash expense relating primarily to acquisitions. At the time of an acquisition, the identifiable definite-lived
intangible assets of the acquired company, such as customer relationships and order backlog, are valued and amortized over their
estimated lives. Value is also assigned to the acquired indefinite-lived intangible assets, which comprise goodwill that are not
subject to amortization.
3) Acquisition-related consideration adjustments
are accounting adjustments to report contingent share consideration liabilities at fair value and cash consideration at present
value. These adjustments can be highly variable and are excluded from our assessment of performance because they are considered
non-operational in nature and, therefore, are not indicative of current or future performance or ongoing costs of doing business.
4) Fair value adjustments of a bifurcated derivative
are accounting adjustments to report the change of fair value of the feature bifurcated as a derivative from the underlying host
instrument of a convertible bond, and accounted for as a liability at its fair value.
The following table provides a reconciliation
of U.S. GAAP measures to the non-GAAP measures for the periods indicated:
(In
USD thousands, except share numbers and per share data)
|
|
Years ended June 30,
|
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Cost of integrated contracts
|
|
|
189,153
|
|
|
|
218,586
|
|
|
|
330,039
|
|
|
|
300,332
|
|
|
|
310,545
|
|
Less: Amortization of acquired intangible assets
|
|
|
-
|
|
|
|
2,848
|
|
|
|
5,413
|
|
|
|
4,454
|
|
|
|
818
|
|
Non-GAAP cost of integrated contracts
|
|
|
189,153
|
|
|
|
215,738
|
|
|
|
324,626
|
|
|
|
295,878
|
|
|
|
309,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A expenses
|
|
|
26,025
|
|
|
|
29,648
|
|
|
|
39,716
|
|
|
|
50,786
|
|
|
|
45,832
|
|
Less: Share-based compensation expenses
|
|
|
1,139
|
|
|
|
1,599
|
|
|
|
2,986
|
|
|
|
2,492
|
|
|
|
3,860
|
|
Non-GAAP G&A expenses
|
|
|
24,886
|
|
|
|
28,049
|
|
|
|
36,730
|
|
|
|
48,294
|
|
|
|
41,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses), net
|
|
|
1,068
|
|
|
|
80
|
|
|
|
(6,452
|
)
|
|
|
2,601
|
|
|
|
4,061
|
|
Add: Acquisition-related incentive share contingent consideration fair value adjustments
|
|
|
-
|
|
|
|
855
|
|
|
|
7,989
|
|
|
|
(368
|
)
|
|
|
(1,745
|
)
|
Add: Fair value adjustments of a bifurcated derivative
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
|
|
93
|
|
Non-GAAP other income (expenses), net
|
|
|
1,068
|
|
|
|
935
|
|
|
|
1,537
|
|
|
|
2,268
|
|
|
|
2,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses
|
|
|
(3,098
|
)
|
|
|
(2,170
|
)
|
|
|
(1,998
|
)
|
|
|
(1,821
|
)
|
|
|
(1,404
|
)
|
Add: Acquisition-related cash consideration adjustments
|
|
|
-
|
|
|
|
308
|
|
|
|
931
|
|
|
|
202
|
|
|
|
-
|
|
Non-GAAP interest expenses
|
|
|
(3,098
|
)
|
|
|
(1,862
|
)
|
|
|
(1,067
|
)
|
|
|
(1,619
|
)
|
|
|
(1,404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Hollysys
|
|
|
56,222
|
|
|
|
51,994
|
|
|
|
69,620
|
|
|
|
96,527
|
|
|
|
118,471
|
|
Add: Share-based compensation expenses
|
|
|
1,139
|
|
|
|
1,599
|
|
|
|
2,986
|
|
|
|
2,492
|
|
|
|
3,860
|
|
Amortization of acquired intangible assets
|
|
|
|
|
|
|
2,848
|
|
|
|
5,413
|
|
|
|
4,454
|
|
|
|
818
|
|
Acquisition-related consideration adjustments
|
|
|
-
|
|
|
|
1,163
|
|
|
|
8,920
|
|
|
|
(166
|
)
|
|
|
(1,745
|
)
|
Fair value adjustments of a bifurcated derivative
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35
|
|
|
|
93
|
|
Non-GAAP net income attributable to Hollysys
|
|
|
57,361
|
|
|
|
57,605
|
|
|
|
86,939
|
|
|
|
103,342
|
|
|
|
121,497
|
|
Weighted average number of ordinary shares outstanding used in computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
55,659,765
|
|
|
|
56,167,592
|
|
|
|
57,926,333
|
|
|
|
58,612,596
|
|
|
|
59,170,050
|
|
Diluted
|
|
|
55,828,361
|
|
|
|
56,412,469
|
|
|
|
58,426,642
|
|
|
|
60,134,203
|
|
|
|
60,611,456
|
|
Non-GAAP earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.03
|
|
|
|
1.03
|
|
|
|
1.50
|
|
|
|
1.76
|
|
|
|
2.05
|
|
Diluted
|
|
|
1.03
|
|
|
|
1.02
|
|
|
|
1.49
|
|
|
|
1.72
|
|
|
|
2.02
|
|
Exchange Rate
Information
A majority of our business is conducted in China. We also operate in Singapore
,
Malaysia and several other jurisdictions in Asia and Middle East through HAP, Concord, and Bond. We use US dollars as our reporting
currency in our financial statements in this annual report. For entities whose functional currencies are not US dollars, assets
and liabilities are translated into US dollars at the balance sheet date rates; equity accounts are translated at historical exchange
rates and revenues, expenses, gains and losses are translated using the average rate for the year as published by the International
Monetary Fund. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component
of other comprehensive income in the consolidated statement of comprehensive income and changes in equity. Transactions and amounts
in other parts of this annual report in foreign currencies recorded at the rates of exchange prevailing when the transactions occurred.
With respect to amounts not recorded in our consolidated financial statements but included elsewhere in this annual report, all
conversion between RMB and US dollars were made at a rate of RMB 6.4156 to $1.00, and all conversion between Singapore dollars
and US dollars were made at a rate of SGD 1.3773 to $1.00, as set forth by the International Monetary Fund. We make no representation
of any kind that RMB, Singapore dollar, US dollar or any other currency referenced in this report could have been, or could be,
converted into the other stated currencies at the rates stated below, any particular rate, or at all. The Chinese government imposes
control over its foreign-currency reserves through both direct regulation concerns conversion of RMB into foreign exchange and
through restrictions on foreign trade. On September 13, 2016, the closing rate for using RMB and SGD to buy $1.00 was 6.6797 and
1.3579 respectively, as set forth by the International Monetary Fund.
The following table sets forth information
concerning exchange rates between the RMB, Singapore dollars and the US dollar for the periods indicated. These rates are provided
solely for your convenience and are not necessarily the exchange rates that we used in this annual report on Form 20-F or will
use in the preparation of our periodic reports or any other information to be provided to you.
|
|
Exchange Rate between RMB and US$
|
|
|
Exchange Rate between SGD and US$
|
|
Period
|
|
Period End
|
|
|
Average
|
|
|
Low
|
|
|
High
|
|
|
Period End
|
|
|
Average
|
|
|
Low
|
|
|
High
|
|
Calendar year 2011
|
|
|
6.2939
|
|
|
|
6.4630
|
|
|
|
6.2939
|
|
|
|
6.6364
|
|
|
|
1.2948
|
|
|
|
1.2565
|
|
|
|
1.3135
|
|
|
|
1.2007
|
|
Calendar year 2012
|
|
|
6.2301
|
|
|
|
6.2990
|
|
|
|
6.2221
|
|
|
|
6.3879
|
|
|
|
1.2214
|
|
|
|
1.2492
|
|
|
|
1.2973
|
|
|
|
1.2159
|
|
Calendar year 2013
|
|
|
6.0537
|
|
|
|
6.1478
|
|
|
|
6.0537
|
|
|
|
6.2438
|
|
|
|
1.2622
|
|
|
|
1.2511
|
|
|
|
1.2203
|
|
|
|
1.2831
|
|
Calendar year 2014
|
|
|
6.2046
|
|
|
|
6.1620
|
|
|
|
6.0402
|
|
|
|
6.2591
|
|
|
|
1.3244
|
|
|
|
1.2665
|
|
|
|
1.2376
|
|
|
|
1.3244
|
|
Calendar year 2015
|
|
|
6.4778
|
|
|
|
6.2827
|
|
|
|
6.1870
|
|
|
|
6.4896
|
|
|
|
1.4166
|
|
|
|
1.3746
|
|
|
|
1.3171
|
|
|
|
1.4337
|
|
January 2016
|
|
|
6.5752
|
|
|
|
6.5726
|
|
|
|
6.5219
|
|
|
|
6.5932
|
|
|
|
1.4241
|
|
|
|
1.4325
|
|
|
|
1.4241
|
|
|
|
1.4414
|
|
February 2016
|
|
|
6.5525
|
|
|
|
6.5501
|
|
|
|
6.5154
|
|
|
|
6.5795
|
|
|
|
1.4055
|
|
|
|
1.4052
|
|
|
|
1.3881
|
|
|
|
1.4269
|
|
March 2016
|
|
|
6.4480
|
|
|
|
6.5027
|
|
|
|
6.4480
|
|
|
|
6.5500
|
|
|
|
1.3462
|
|
|
|
1.3724
|
|
|
|
1.3462
|
|
|
|
1.4012
|
|
April 2016
|
|
|
6.4738
|
|
|
|
6.4754
|
|
|
|
6.4571
|
|
|
|
6.5004
|
|
|
|
1.3454
|
|
|
|
1.3496
|
|
|
|
1.3366
|
|
|
|
1.3629
|
|
May 2016
|
|
|
6.5798
|
|
|
|
6.5259
|
|
|
|
6.4738
|
|
|
|
6.5798
|
|
|
|
1.3778
|
|
|
|
1.3695
|
|
|
|
1.3421
|
|
|
|
1.3824
|
|
June 2016
|
|
|
6.6445
|
|
|
|
6.5892
|
|
|
|
6.5590
|
|
|
|
6.6481
|
|
|
|
1.3490
|
|
|
|
1.3533
|
|
|
|
1.3391
|
|
|
|
1.3780
|
|
July 2016
|
|
|
6.6371
|
|
|
|
6.6771
|
|
|
|
6.6371
|
|
|
|
6.7013
|
|
|
|
1.3431
|
|
|
|
1.3513
|
|
|
|
1.3423
|
|
|
|
1.3623
|
|
August 2016
|
|
|
6.6776
|
|
|
|
6.6466
|
|
|
|
6.6239
|
|
|
|
6.6778
|
|
|
|
1.3630
|
|
|
|
1.3476
|
|
|
|
1.3384
|
|
|
|
1.3638
|
|
September 13, 2016
|
|
|
6.6797
|
|
|
|
6.6707
|
|
|
|
6.6600
|
|
|
|
6.6790
|
|
|
|
1.3579
|
|
|
|
1.3549
|
|
|
|
1.3465
|
|
|
|
1.3630
|
|
|
B.
|
Capitalization and Indebtedness
|
Not applicable.
|
C.
|
Reasons for the Offer and Use of Proceeds
|
Not applicable.
An investment in our capital stock involves
a high degree of risk. You should carefully consider the risks described below, together with all of the other information included
in this annual report, before making an investment decision. If any of the following risks actually occurs, our business, prospects,
financial condition or results of operations could suffer. In that case, the trading price of our capital stock could decline,
and you may lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
We commit substantial resources to new
product and service development and acquisition opportunities in order to stay competitive and grow our business, and we may fail
to offset the increased cost of such investment with a sufficient increase in net sales or margins.
The success of our business depends in great
measure on our ability to keep pace with, or even lead, changes that occur in our industry and expand our product and service offerings. Traditionally,
the automation and control systems business was relatively stable and slow moving. Successive generations of products offered
only marginal improvements in terms of functionality and reliability. However, the emergence of computers, computer networks
and electronic components as key elements of the systems that we design and build has accelerated the pace of change in our industry. Where
there was formerly as much as a decade or more between successive generations of automation systems, the time between generations
is now as little as two to three years. Technological advances and the introduction of new products, new designs and new manufacturing
techniques by our competitors could adversely affect our business unless we are able to respond with similar advances. To
remain competitive, we must continue to incur significant costs in product development, equipment and facilities and to make capital
investments and seek complementary acquisitions. These costs may increase, resulting in greater fixed costs and operating
expenses than we have incurred to date. As a result, we could be required to expend substantial funds for and commit significant
resources to the following:
|
·
|
Research and development activities on existing and potential product solutions;
|
|
·
|
Additional engineering and other technical personnel;
|
|
·
|
Advanced design, production and test equipment;
|
|
·
|
Manufacturing services that meet changing customer needs;
|
|
·
|
Technological changes in manufacturing processes;
|
|
·
|
Expansion of manufacturing capacity; and
|
|
·
|
Acquiring technology through licensing and acquisitions.
|
Our future operating results will depend to
a significant extent on our ability to continue providing new product and service solutions that compare favorably on the basis
of time to market, cost and performance, with competing third-party suppliers and technologies. However, we may develop new
products and services that do not gain market acceptance, which would result in the failure to recover the significant costs for
design and manufacturing for new product solutions or service development, thus adversely affecting operating results.
We may experience trade barriers in expanding
to our targeted emerging markets and may be subject to tariffs and taxes that will result in significant additional costs for our
business and products.
We may experience barriers to conducting business
and trade in our planned expansion to emerging markets. These barriers may be in the form of delayed customs clearances, customs
duties or tariffs. In addition, we may be subject to repatriation taxes levied upon the exchange of income from local currency
into foreign currency, substantial taxes of profits, revenues, assets and payroll, as well as value-added tax. The markets
into which we may expand may impose onerous and unpredictable duties, tariffs and taxes on our business and products. These
barriers or expenses could have an adverse effect on our operations and financial results.
To the extent we acquire businesses and
technologies from others, we will need to integrate these into our business, which if not successful will adversely impact our
business and increase our financial expenses.
One important aspect of our expansion has been
and will be the use of acquisitions, which may include acquiring an operating business or specific assets. Examples of this strategy
have been the acquisitions of Concord
in 2011 and Bond in 2013.
As with any acquisition, we will have to integrate the business with our operations so as to achieve the value of our investment.
Accommodating different business cultures, operating systems and product lines, as well as understanding and implementing different
regulatory issues, often takes time and can result in unexpected expenses. Acquisitions are not always successful, resulting in
unintended expenses and write-downs. Any failure to smoothly integrate acquired businesses and technologies may adversely affect
our business operations.
As we expand our business outside of
mainland China, we will encounter the increasing need for international certifications and compliance with the regulation of different
governments, which if not obtained and complied with may adversely impact our business.
We are expanding our business outside of mainland
China, including seeking business opportunities in Hong Kong SAR, Singapore, Malaysia, India, and the Middle East. For our marketing
both in China and in other jurisdictions, we seek international certifications and have obtained certificates such as the European
Safety Standard Certification Level 4. As we operate in jurisdictions other than China, we will have to comply with local laws,
some of which relate to various safety and quality requirements for the kinds of products we provide. The failure to have any necessary
or beneficial certifications and the failure to comply with local laws will have an adverse impact on our marketing and business,
and may result in additional costs and expenses.
During our expansion into overseas market,
a lack of qualified local engineers and the inability to relocate enough China’s experienced engineers to overseas could
delay our international projects’ execution and lose potential business opportunities.
In our international business expansion to
Southeast Asia, India and the Middle East, we may not be able to find adequate and qualified local engineers to bid and complete
sizable rail transportation orders and industrial automation projects, and because of the visa problems, we may have difficulties
to relocate adequate engineers from China to various foreign countries and have them stay there long enough to finish the projects,
which could cause adverse impact on our international business expansion.
We do not have long-term purchase commitments
from our customers, so our customers are free to choose products from our competitors, which increases our marketing expenses to
continually find new clients and win new contracts.
We are engaged in the design, production and
installation of automation and process control systems. As a result, our revenues result from numerous individual contracts that
are nonrecurring in nature. Furthermore, customers may change or delay or terminate orders for products and services without notice
for any reasons unrelated to us, including lack of market acceptance for the products to be produced by the process that our system
was designed to control. As a result, in order to maintain and expand our business, we must expend increasing amounts on marketing
to identify clients and win contracts so as to be able to replenish the orders in our pipeline on a continuous basis. Increased
marketing expenses and the inability to continue with current contracts or win new sources of revenue could result in a decline
in revenues and profitability.
Although we do not have a concentration
of business with any customer at this time, our business has become more dependent on a few significant customers
.
We have developed significant customer relationships
with several local subway providers and railway authorities in respect of the high speed train system in China. We currently also
have significant contracts with the MTR Corporation Ltd. of Hong Kong, Land Transport Authority of Singapore, and Mitsubishi Heavy
Industries, Ltd. Qatar Branch. We expect that these relationships will continue to grow, and we will win more contracts with them
over time. To the extent that these customer groups or specific customers with a group represent an increasing proportion of our
business, we will become more dependent on them for our revenues and business growth. In that case, our cash flows also will become
more dependent on those customers’ payment practices and overall public funding policies, including the lengthening of collection
times under contracts that have been performed. Therefore, the loss of one or more of these customers or market groups as customers
would have a material adverse impact on our revenues and our business operations and development.
We have a backlog of contracts, the execution
of unfinished contracts in the backlog may be lengthened due to various external reasons, and the increase of backlog may not
necessarily reflect our business expansion.
To date, our backlog has been a reflection
of our ability to sell our products and services and increase our business. This represents an amount of unrealized revenue to
be earned from contracts secured by the Company. Backlog, however, can also reflect upon our inability to perform our contracts
on a timely basis. Therefore, when evaluating our backlog, analysis should be made as to whether or not it is a reflection of an
expanding business, successful marketing and increasing acceptance of our products and services in the marketplace or problems
in our contract performance and acceptance.
A lack of adequate engineering resources
could cause our business to have diminished profitability and lose potential business prospects.
Among the competitive advantages and key business
advantages that we enjoy are the plentiful supply of engineering talent in China and the comparatively lower cost of our engineering
staff compared to those of our Western and Japan-based competitors. Recently, however, our costs for these persons have been subject
to increased wage pressures due to the economic growth of China and certain inflationary pressures and additional employment related
taxation. If the available supply of engineers were to be absorbed by competing demands, or otherwise not as plentiful as
we have experienced to date, then the costs of hiring, training and retaining capable engineers would likely increase. If
we are unable to pass any additional costs through to our customers, this could result in a reduction in our profitability, and
the inability to have qualified and trained persons could adversely affect our business prospects or could even cause a change
in our business strategy.
Our products may contain design or manufacturing
defects, which could result in reduced demand for our products or services, customer claims and uninsured liabilities.
Our products are very complex, integrated
systems, often with elements designed specifically for the particular situation of a customer, which may have undetected design
or manufacturing issues or defects until put into actual use. Also, we manufacture spare parts for maintenance and replacement
purposes after completion of integrated solution contracts. While there have been no significant issues or defects identified
so far, any issues or defects in the design, manufacture and spare parts we provide may result in returns, claims, delayed shipments
to customers or reduced or cancelled customer orders and other forms of damages asserted against the Company. If these issues
or defects occur, we will incur additional costs, and if they occur in large quantity or frequency, we may sustain a permanent
increase in costs, a loss of business reputation and legal liability. Moreover, we are increasingly active in the conventional
and nuclear power generation and railway control systems sectors. Each of these sectors poses a substantially higher risk of liability
in the event of a system failure, than was present in the industrial process controls markets in which we traditionally compete.
We generally do not carry large amounts of
insurance, and in the future we may not be able to obtain adequate insurance coverage. The typical practice of the industries
with which we are involved is for the customers to obtain insurance to protect their own operational risks. As a practice,
we do not carry insurance coverage to protect against the risks related to product failure. It is possible that customers
could assert claims against us for any damages caused by a failure in one of our systems, and as a result, the failure of any of
our designs, manufacture and installation of our products could result in a liability that would seriously impair our financial
condition or even force us out of business.
Our failure to adequately protect our
intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights
may be costly.
Our business is based on a number of proprietary
products and systems, some of which are patented and others of which we protect as trade secrets. We strive to strengthen
and differentiate our product portfolio by developing new and innovative products and product improvements. As a result, we
believe that the protection of our intellectual property will become increasingly important to our business as the functionality
of automation systems increases to meet customer demand and as we try to open new markets for our products.
Currently, we hold PRC utility patents that
relate to various product configurations and product components and software copyrights and have pending PRC patent applications.
We will continue to rely on a combination of patents, trade secrets, trademarks and copyrights to provide protection in this regard,
but this protection may be inadequate.
Our pending or future patent applications may
not be approved or, if allowed, they may not be of sufficient strength or scope. As a result, third parties may use the technologies
and proprietary processes that we have developed and compete with us, which could negatively affect any competitive advantage we
enjoy, dilute our brand and harm our operating results.
In addition, policing the unauthorized use
of our proprietary technology can be difficult and expensive. Litigation may be necessary to enforce our intellectual property
rights. Protection of intellectual property and proprietary rights in China may not be as effective as in other countries. Given
the fact that the majority of our intellectual property rights are in China and under Chinese law, the relative unpredictability
of China’s legal system and potential difficulties of enforcing a court judgment in China may result in an outcome that is
unfavorable to us when we assert intellectual property ownership in a particular situation. Furthermore, any litigation may
be costly and may divert management attention away from our business operations. An adverse determination in any lawsuit involving
our intellectual property is likely to jeopardize our business prospects and reputation and result in additional expense for penalties,
licensing and redesign. We have no insurance coverage against litigation costs so we would be forced to bear all litigation
costs if we cannot recover them from other parties. All of the foregoing factors could harm our business and financial condition.
As we are going to sell more of our proprietarily
developed products and systems to foreign countries, we may not continue to have the protection of our patents and software copyright
in foreign countries for some of our proprietary products, which could negatively impact our competitive position and our business
expansion in overseas.
Although the Company’s goodwill
outstanding as of June 30, 2016 was assessed not impaired, it may be impaired in the future depending on the future market development
and the outcome of the operations in Singapore, Malaysia and the Middle East.
The goodwill outstanding as of June 30, 2016
was related to the acquisition of Concord in 2011 and Bond in 2013. Based on our quantitative assessment, the goodwill was not
impaired as at June 30, 2016. However, the fair value of Concord calculated using discounted cash flow method was only 11.6% higher
than its carrying value as at June 30, 2016. The fair value of Concord is highly dependent on the future market development and
the outcome of the Company operations in Singapore, Malaysia and the Middle East. Slowing down in mechanical and electrical engineering
sector, or fewer than expected contract awards to Concord may result in goodwill impairment in the future.
We performed a qualitative assessment for Bond
in 2016 and evaluated all relevant factors, weighed all factors in their entirety and concluded that no impairment charge for Bond
was needed as of June 30, 2016.
RISKS RELATED TO THE INDUSTRY IN
WHICH WE OPERATE
The Company mainly operates in the industrial
and manufacturing automation sectors, the high-speed rail, subway and nuclear power automation sectors; in some industry verticals
within the industrial automation sector, we may experience the inconstant growth rate from time to time, which may present variation
of business opportunities; the contracts for high-speed rail, subway and nuclear power are substantially larger which may result
in a greater dependence on a particular customer or business sector, and could cause significant fluctuations in our revenues.
The principal focus of our business has been
to provide Distributed Control Systems, Programmable Logic Controller and related industrial automation and control solution to
industrial and manufacturing companies. Even though there are enormous opportunities in the industrial automation arena, some industry
verticals may experience slower growth or decreased growth that will provide us with fewer opportunities and contract awards from
the industry and manufacturing sectors. Both high-speed rail and nuclear power sectors have one or few customers and are closely
related to the national development policies, and the contract size for these two sectors is usually much larger, and as a result,
there could be severe fluctuation of these sectors’ growth, which may affect our business and revenues.
Although China is committed to expanding its
energy production with nuclear power and building a high speed railway network, both these industries have experienced various
setbacks due to higher than expected accidents for various reasons
several
years ago. The future growth rate of these two sectors may not be as fast as the market previously expected but on a more sustainable
and safer basis, thus we will, likely experience slower annual growth or possibly even a reduction in these sectors’ revenues.
International business recently has expands
to Southeast Asia and the Middle East area. Projects awarded in these areas may be exposed to potential delay in construction
progress due to political reasons.
To the extent that our business is
more dependent on large contracts and contracts from a few customers, our revenues, cash flows and profits will be influenced by
this type of contracting and the timely payment for our products and services.
As we develop our business with the entities
responsible for building municipal subway systems and railroads, power plants and larger system contract customers, such as building
retrofits, we will be entering into contracts for larger sized projects than in the past, which will be for significantly greater
contract value. These contracts will require us to commit greater operating resources to a more limited number of customers and
contract fulfillment. Therefore, our revenues, cash flows and profits will become increasingly dependent on our ability to perform
these contracts and collect the payments due on a timely basis. Some of the entities ultimately responsible for the funding of
infrastructure projects are governmental authorities or ministries, our contract requirements and collections will become subject
to these entities being able to adequately budget and have the revenues to timely pay for our products and services. We expect
a long collection period in some of our business. To some extent, we may become subject to delays and reductions in scope of project
due to changes in the policies, objectives and budgeting of any of the public entities which control the projects on which we are
contracting. We will also become increasingly subject to government contract requirements in the performance of contracts that
are ultimately the responsibility of public bodies.
At this time, contracting with the entities
that provide the subway and rail systems and power plants for which we provide control systems is similar to contracting with the
customers we have sold to in the past. Therefore, our contracts are written on a similar basis as before, and we expect that we
will be operating under these contracts and accounting for their revenues in a similar manner as before.
Many of our competitors have substantially
greater resources than we do, allowing them to compete on an advantageous basis.
We operate in a very competitive environment
with many major international and domestic companies, such as Honeywell, General Electric, ABB, Siemens, Emerson, Yokogawa and
Hitachi. Many of our competitors are much better established and more experienced than we are, have substantially greater
financial resources, operate in more international markets and are much more diversified than we are. As a result, they are
in a stronger position to compete effectively with us. These large competitors are also in a better position than we are to
weather any extended weaknesses in the market for automation and control systems. Other emerging companies or companies in
related industries may also increase their participation in our market, which would add to the competitive pressures that we face.
A decrease in the rate of growth in China’s
industrial activity and the Chinese economy in general may lead to a slower growth or decrease in our revenues because industrial
companies in China are significant sources of revenues for us.
Industrial companies operating in China are
significant sources of revenues for us. Our business benefited in the past from the rapid expansion of China’s industrial
activity, which has created additional demand from existing companies and led to the formation of numerous additional companies
that have need for our products and services. We have also benefited from the infrastructure projects of the different governmental
authorities of China, such as power production and transportation systems. China’s industrial and infrastructure expansion
has been fueled in large measure by international demand for the low-cost goods that China is able to produce due to labor advantages
and other comparative advantages, such as governmental subsidies to offset research and development expenses and taxes and reduced
land use/facilities costs for targeted industries. The failure of Chinese economy to sustain this rate of growth in the future
and any reduction in the rate of China’s industrial growth or a shrinking of China’s industrial base could adversely
affect our revenues. We may also be impacted as major infrastructure projects are completed. The resulting increase in
competition for customers might also cause erosion of profit margins that we have been able to achieve historically.
Our efforts to operate in the international
automation market may not prove successful, and we may expend capital resources without achieving value and needlessly divert management’s
time and attention from our principal market.
We are penetrating international markets, emphasizing
Southeast Asia, India, and the Middle East with the objective of diversifying our products, clients and places of operations and
growing our overall business. Our expansion is likely to use substantial resources, including substantial amounts of capital
and equity and deploy meaningful amounts of management time and attention. Our products and our overall approach to the automation
and controls system business may not be accepted in other markets to the extent needed to make that effort profitable. In
addition, the additional demands on our management from these activities may detract from our efforts in the domestic Chinese market
and market of surrounding countries, causing the operating results in our principal markets to be adversely affected.
We depend heavily on key personnel, and
loss of key employees and senior management could harm our business.
Our future business and results of operations
depend in significant part upon the continued contributions of our key technical and senior management personnel. The Company
also depends in significant part upon its ability to attract and retain additional qualified senior executives and management,
technical, marketing and sales and support personnel for our operations. If we lose a key employee, if a key employee fails
to perform in his or her current position or if we are not able to attract and retain skilled employees as needed, our business
could suffer. Turnover in our senior management could significantly deplete institutional knowledge held by our existing senior
management team and impair our operations.
In addition, if any of these key personnel
joins a competitor or forms a competing company, we may lose some of our customers. We have entered into confidentiality and non-competition
agreements with key personnel. However, if any disputes arise between these key personnel and us, it is not clear, in light of
uncertainties associated with the PRC legal system, what the court decisions will be and the extent to which these court decisions
could be enforced in China, where all of these key personnel reside and hold some of their assets.
Our control systems are used in infrastructure
projects such as subway systems, surface railways and nuclear plants; to the extent that our systems do not perform as designed,
we could be found responsible for the damage resulting from that failure.
We face potential responsibility for the failure
of our control systems in performing the various functions for which they are designed and the damages resulting from any such
problem. To the extent that we contract to provide control systems in larger scale projects, the level of damages for which we
may be held responsible is likely to increase. To the extent that any of our installed control systems do not perform as designed
for their intended purposes, and we are held responsible for the consequences of those performance failures and resulting damages,
there may be an adverse impact on our business, business reputation, revenues and profits. We do believe our control systems have
so far performed as designed, and there are no claims asserted against us based on any significant, non-performance event. Notwithstanding
our record, no assurance can be given that no claims will be sought in the future based on the design and performance of our control
systems.
We may be exposed to potential risks
relating to our internal controls over financial reporting and our ability to have those controls positively attested to by our
independent auditors.
As directed by Section 404 of the Sarbanes-Oxley
Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the Company’s internal
controls over financial reporting in their annual reports and the independent registered public accounting firm auditing a company’s
financial statements to attest to and report on the operating effectiveness of such company’s internal controls. No
material weakness has been identified as of June 30, 2016. In the event we identify material weaknesses in our internal controls
that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent auditors with
respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements.
Our auditor, like other independent registered
public accounting firms operating in China, is not permitted to be subject to inspection by the Public Company Accounting Oversight
Board, and as such, investors may be deprived of the benefits of such inspection.
Our
independent registered public
accounting firm that issues the audit reports included in our annual report filed with the SEC, as an auditor of companies that
are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States),
or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance
with the laws of the United States and professional standards. Because our auditor is located in China, a jurisdiction where the
PCAOB is currently unable to conduct inspections without the approval of the PRC authorities like other independent registered
public accounting firms operating in China, is currently not inspected by the PCAOB. In May 2013, PCAOB announced that it had entered
into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission (“CSRC”)
and the Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit
documents relevant to investigations undertaken by PCAOB, the CSRC, or the Ministry of Finance in China and the Department of the
Treasury in the United States respectively. PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to permit
joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.
Inspections of other firms that the PCAOB has
conducted have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed
as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections of independent
registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s
audit procedures or quality control procedures. As a result, investors may be deprived of the benefits of the PCAOB inspections.
Proceedings instituted by the SEC against
five PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements
being determined to be not in compliance with the requirements of the Securities Exchange Act of 1934.
In December 2012, the SEC instituted proceedings
under Rule 102(e)(1)(iii) of the SEC’s Rules of Practice against five PRC-based accounting firms, including our independent
registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations
there
under by failing to provide to the SEC the firms’ work
papers related to their audits of certain PRC-based companies that are publicly traded in the United States. Rule 102(e)(1)(iii)
grants to the SEC the authority to deny to any person, temporarily or permanently, the ability to practice before the SEC who is
found by the SEC, after notice and opportunity for a hearing, to have willfully violated, or willfully aided and abetted the violation
of, any such laws or rules and regulations. On January 22, 2014, an initial administrative law decision was issued, sanctioning
four of these accounting firms and suspending them from practicing before the SEC for a period of six months. The sanction will
not take effect until there is an order of effectiveness issued by the SEC. In February 2014, four of these PRC-based accounting
firms filed a petition for review of the initial decision. In February 2015, each of these four accounting firms agreed to
a censure and to pay fine to the SEC to settle the dispute with the SEC. The settlement stays the current proceeding for four years,
during which time the firms are required to follow detailed procedures to seek to provide the SEC with access to Chinese firms'
audit documents via the CSRC. If a firm does not follow the procedures, the SEC would impose penalties such as suspensions, or
commence a new, expedited administrative proceeding against the non-compliant firm or it could restart the administrative proceeding
against all four firms.
In the event that the SEC restarts the administrative
proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult
or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined
to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about
the proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies
and the market price of our ordinary shares may be adversely affected.
If our independent registered public accounting
firm were denied, temporarily or permanently, the ability to practice before the SEC, and we are unable to find in a timely manner
another registered public accounting firm which can audit and issue a report on our financial statements, our financial statements
could be determined to not be in compliance with the requirements for financial statements of public companies with a class of
securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such a determination could ultimately
lead to the SEC’s revocation of the registration of our ordinary shares under the Exchange Act, which would cause the immediate
delisting of our ordinary shares from the NASDAQ Global Select Market, and the effective termination of the trading market for
our ordinary shares in the United States, which would likely have a significant adverse effect on the value of our ordinary shares.
RISKS RELATED TO DOING BUSINESS
IN CHINA
Changes in the economic and political policies of the PRC
government could have a material and adverse effect on our business and operations.
We conduct a substantial portion of our business
in China. Accordingly, our results of operations, financial condition and prospects are significantly dependent on economic and
political developments in China. China’s economy differs from the economies of developed countries in many aspects, including
the level of development, growth rate and degree of government control over foreign exchange and allocation of resources. While
China’s economy has experienced significant growth in the past 30 years, the growth has been uneven across different regions
and periods and among various economic sectors in China. We cannot assure you that China’s economy will continue to grow,
or that if there is growth, such growth will be steady and uniform, or that if there is a slowdown, such slowdown will not have
a negative effect on its business and results of operations.
The PRC government exercises significant control
over China. Accordingly, our results of operations, financial condition and prospects are significantly dependent on economic and
political developments in China. Certain measures adopted by the PRC government may restrict loans to certain industries, such
as changes in the statutory deposit reserve ratio and lending guidelines for commercial banks by the People’s Bank of China,
or PBOC. These current and future government actions could materially affect our liquidity, access to capital, and ability to operate
our business.
The global financial markets experienced
significant disruptions in 2008 and the United States, Europe and other economies went into recession. Since 2012, growth of the
Chinese economy has slowed down. The PRC government has implemented various measures to encourage economic growth and guide the
allocation of resources. Some of these measures may benefit the overall PRC economy but may also have a negative effect on us.
Our financial condition and results of operation could be materially and adversely affected by government control over capital
investments or changes in tax regulations that are applicable to us. In addition, any stimulus measures designed to boost the Chinese
economy, may contribute to higher inflation, which could adversely affect our results of operations and financial condition. See
“Risks Relating To Doing Business
In China - Future inflation
in China may inhibit our ability to conduct business in China.”
If the CSRC, or another PRC regulatory
agency, determines that CSRC approval of our initial merger was required or if other regulatory obligations are imposed upon us,
we may incur sanctions, penalties or additional costs which would damage our business.
On August 8, 2006, six PRC regulatory agencies,
including the CSRC, promulgated the Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the
M&A Regulations, which became effective on September 8, 2006. Under these regulations, the prior approval of the CSRC is required
for the overseas listing of offshore special purpose vehicles that are directly or indirectly controlled by PRC companies or individuals
and used for the purpose of listing PRC onshore interests on an overseas stock exchange.
On September 20, 2007, we completed a merger
transaction with Chardan North China Acquisition Corporation, or Chardan, which resulted in our current ownership and corporate
structure. We believe that CSRC approval was not required for our merger transaction or for the listing and trading of our
securities on a trading market because we are not an offshore special purpose vehicle that is directly or indirectly controlled
by PRC companies or individuals. Although the M&A Regulations provide specific requirements and procedures, there are
still many ambiguities in the meaning of many provisions. Further regulations are anticipated in the future, but until there
has been clarification either by pronouncements, regulation or practice, there is some uncertainty in the scope of the regulations
and the regulators have wide latitude in the enforcement of the regulations and approval of transactions. If the CSRC or another
PRC regulatory agency subsequently determines that the CSRC’s approval was required, we may face sanctions by the CSRC or
another PRC regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations
in China, limit our operating privileges in China, restrict or prohibit payment or remittance of dividends paid by Hollysys, or
take other actions that could damage our business, financial condition, results of operations, reputation and prospects, as well
as the trading price of our securities.
Fluctuations in exchange rates could
harm our business and the value of our securities.
The value of our securities will be indirectly
affected by the foreign exchange rate between US dollars and those currencies in which our sales may be denominated. Because a
large portion of our earnings and cash assets are denominated in RMB, SGD and MYR, and our financial results are reported in US
dollars, fluctuations in the exchange rate between the US dollar and RMB, SGD and MYR will affect our balance sheet and our earnings
per share as stated in US dollars. In addition, appreciation or depreciation in the value of the RMB, SGD and MYR relative
to the US dollar would affect our financial results reported in US dollar terms without giving effect to any underlying change
in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of any dividend
we issue that will be exchanged into US dollars as well as earnings from, and the value of, any US dollar-denominated investments
we make in the future.
As our main functional currency, the RMB has
no longer been pegged to the US dollar
since July 2005. Although
the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations
in the exchange rate, the RMB may appreciate or depreciate significantly in value against the US dollar in the medium to long term.
Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and
lessen intervention in the foreign exchange market.
Very limited hedging transactions are available
in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While
we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited,
and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be
magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currencies.
Exchange controls that exist in the PRC
may limit our ability to utilize our cash flow effectively.
We are subject to the PRC’s rules
and regulations on currency conversion. In the PRC, the State Administration for Foreign Exchange, or SAFE, regulates the
conversion of the RMB into foreign currencies. Currently, foreign investment enterprises, or FIEs, are required to apply to
the SAFE for “Foreign Exchange Registration Certificates for FIEs.” We believe Beijing Helitong Science &
Technology Exploration Co., Ltd. is an FIE. With such registration certificates, which need to be renewed annually, FIEs are
allowed to open foreign currency accounts including a “basic account” and “capital account.” Currency conversion
within the scope of the “basic account,” such as remittance of foreign currencies for payment of dividends, can be
effected without requiring the approval of the SAFE. However, conversion of currency in the “capital account,”
including capital items such as direct investment, loans and securities, still require approval of the SAFE. We cannot assure
you that the PRC regulatory authorities will not impose further restrictions on the convertibility of the RMB. Any future restrictions
on currency exchanges may limit our ability to use our cash flow for the distribution of dividends to our shareholders or to fund
operations it may have outside of the PRC.
Future inflation in China may inhibit
our ability to conduct business in China.
In recent years, the Chinese economy has experienced
periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation in China
has been as high as 5.9% and as low as -0.7%. These factors have led to the adoption by the Chinese government, from time to time,
of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation
may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could
inhibit economic activity in China, and thereby harm the market for our products and our company.
PRC regulations relating to the establishment
of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our company to liabilities
or penalties, limit our ability to contribute capital to our PRC subsidiaries, limit the ability of our PRC subsidiaries to increase
their registered capital or distribute profits to us, or otherwise materially and adversely affect us.
On July 14, 2014, the SAFE issued the Circular
Relating to Foreign Exchange Administration of Offshore Investment, Financing and Roundtrip Investment by Domestic Residents Through
Special Purpose Vehicles, or Circular 37. Circular 37 repeals and replaces the Notice Concerning Foreign Exchange Controls on Domestic
Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or Circular 75. Under Circular 37,
PRC residents are required to register with the SAFE or its local branches prior to establishing, or acquiring control of, an offshore
company for the purpose of investment or financing that offshore company with equity interests in, or assets of, a PRC enterprise
or with offshore equity interest or assets legally held by such PRC resident. In addition, PRC residents are required to amend
their registrations with the SAFE and its local branches to reflect any material changes with respect to such PRC resident’s
investment in such offshore company, including changes to basic information of such PRC resident, increase or decrease in capital,
share transfer or share swap, merger or division. In the event that a PRC shareholder fails to make the required registration or
update the previously filed registration, the PRC subsidiaries of that offshore special purpose vehicle may be prohibited from
distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to their offshore parent
company, and the offshore parent company may also be prohibited from contributing additional capital into its PRC subsidiaries.
Furthermore, failure to comply with the various foreign exchange registration requirements described above could result in liability
under the PRC laws for evasion of applicable foreign exchange restrictions.
We do not have control over our beneficial
owners and cannot assure you that all of our PRC resident beneficial owners will comply with SAFE regulations. The failure of our
beneficial owners who are PRC residents to comply with these SAFE registrations may subject such beneficial owners or our PRC subsidiaries
to fines and legal sanctions. Furthermore, since Circular 37 was recently promulgated and it is unclear how this regulation, and
any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the relevant
PRC government authorities, we cannot predict how these regulations will affect our business operations or future strategy. Failure
to register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiaries
and limit our PRC subsidiaries’ ability to distribute dividends to our company. These risks may have a material adverse effect
on our business, financial condition and results of operations.
Because Chinese law governs many of our
material agreements, we may not be able to enforce our rights within the PRC or elsewhere, which could result in a significant
loss of business, business opportunities or capital.
Chinese law governs many of our material agreements,
some of which may be with Chinese governmental agencies. We cannot assure you that we will be able to enforce any of our material
agreements or that remedies will be available outside of the PRC. The system of laws and the enforcement of existing laws
and contracts in the PRC may not be as certain in implementation and interpretation as in the United States. The Chinese judiciary
is relatively inexperienced in enforcing corporate and commercial law, leading to a higher than usual degree of uncertainty as
to the outcome of any litigation. The inability to enforce or obtain a remedy under any of our future agreements could result
in a significant loss of business, business opportunities or capital.
If any dividend is declared in the future
and paid in a foreign currency, you may be taxed on a larger amount in US dollars than the US dollar amount that you will actually
ultimately receive.
If you are a U.S. holder, you will be taxed
on the US dollar value of your dividends at the time you receive them, even if you actually receive a smaller amount of US dollars
when the payment is in fact converted into US dollars. Specifically, if a dividend is declared and paid in a foreign currency,
the amount of the dividend distribution that you must include in your income as a U.S. holder will be the US dollar value of the
payments made in the foreign currency, determined at the conversion rate of the foreign currency to the US dollar on the date the
dividend distribution is includible in your income, regardless of whether the payment is in fact converted into US dollars. Thus,
if the value of the foreign currency decreases before you actually convert the currency into US dollars, you will be taxed on a
larger amount in US dollars than the US dollar amount that you will actually ultimately receive.
Legal regulations may limit our ability
to make dividend payments to our shareholders.
We are a holding company in the BVI. We generally
rely on our subsidiaries to provide us with cash flow and to meet our other obligations. For PRC subsidiaries, relevant PRC laws
and regulations permit payment of dividends by a PRC subsidiary only from accumulated distributable profits, if any, determined
in accordance with PRC accounting standards and regulations, and only after setting aside at least 10% of its current year profits
(up to an aggregate amount equal to half of its registered capital). The PRC tax authorities may initiate changes in determining
income of our PRC subsidiaries that would further limit their ability to pay dividends and make other distributions to us. It is
therefore possible that our PRC subsidiaries will not have any distributable profit to pay us, even if they are profitable under
U.S. GAAP.
The ability, as well as the decision, to declare
dividends will also be influenced by the withholding taxes imposed on payments by companies in one jurisdiction to a company in
another jurisdiction. For example, there is a 10% withholding tax imposed on a PRC company paying dividends to a company located
in the BVI. This will reduce the value of any potential dividend to the ultimate shareholders, and therefore the board may determine
that it would be a more prudent use of funds to reinvest funds that could be available for dividends into the business or acquire
other businesses and assets.
Based on the articles of association and the
Companies Act in Singapore and Malaysia, no dividend shall be payable except out of the profits of the companies.
There is no limit to the number of dividend payable as long as there are sufficient profits. There is no withholding tax
imposed on a Singapore and Malaysia company paying dividends to a company located outside of Singapore and Malaysia upon remittance.
Our business could be severely harmed
if the Chinese government changes its policies, laws, regulations, tax structure or its current interpretations of its laws, rules
and regulations relating to our operations in China.
Our results of operations, financial state
of affairs and future growth are, to a significant degree, subject to China’s economic, political and legal development and
related uncertainties. Our operations and results could be materially affected by a number of factors, including, but not limited
to
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Changes in policies by the Chinese government resulting in changes in laws or regulations or the
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Changes in employment restrictions,
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Over the past several years, the Chinese government
has pursued economic reform policies including the encouragement of private economic activities and greater economic decentralization. If
the Chinese government does not continue to pursue its present policies that encourage foreign investment and operations in China,
or if these policies are either not successful or are significantly altered, then our business could be harmed. The China
government also exercises significant control over China’s economic growth through the allocation of resources, controlling
payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular
industries or companies. Continued efforts to increase tax revenues could result in increased taxation expenses being incurred
by us. Economic development may be limited as well by the imposition of austerity measures intended to reduce inflation, the
inadequate development of infrastructure and the potential unavailability of adequate power and water supplies, transportation
and communications. In addition, the Chinese government continues to play a significant role in regulating industry by imposing
industrial policies.
The Chinese laws and regulations which
govern our current business operations are sometimes vague and uncertain and may be changed in a way that hurts our business.
China’s legal system is a civil law system
based on written statutes, in which system decided legal cases have less value as precedents, unlike the common law system prevalent
in the United States or the BVI. There are substantial uncertainties regarding the interpretation and application of Chinese laws
and regulations, including but not limited to the laws and regulations governing our business, or the enforcement and performance
of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. The
Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing
laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce,
taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published
cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations
involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied
retroactively. We are considered an FIE under Chinese laws, and as a result, we must comply with Chinese laws and regulations. We
cannot predict what effect the interpretation of existing or new Chinese laws or regulations may have on our business. If
the relevant authorities find us to be in violation of Chinese laws or regulations, they would have broad discretion in dealing
with such a violation, including, without limitation: levying fines; revoking our business and other licenses; requiring that we
restructure our ownership or operations; and requiring that we discontinue any portion or all of our business.
The implementation of PRC employment
law is likely to result in increased labor costs in China, which may affect our business and profitability.
The Labor Contract Law, which became effective
on January 1, 2008, imposes on employers’ requirements to enter into fixed-term employment contracts, and effects the recruitment
of temporary employees and dismissal of employees. In addition, under the Regulations on Paid Annual Leave for Employees,
which also became effective on January 1, 2008, employees who have worked continuously for more than one year are entitled to paid
vacation time ranging from 5 to 15 days, depending on the length of the employee’s service. Employees who waive such
vacation entitlements at the request of the employer will be compensated for three times their normal daily salaries for each vacation
day so waived. On July 1, 2011, China promulgated the Social Insurance Law to unify pervious scattered laws relating to social
insurance matters. The law clarifies that the social insurance system in China includes pension insurance, medical insurance, unemployment
insurance, work-related injury insurance and maternity insurance, all of which are mandatory benefits for employees of companies
operating in China. Employers are required to make contributions under these insurance schemes, which although local in rates,
are overall expected to increase employee expense over time. There is no assurance that disputes, work stoppages or strikes will
not arise in the future over these and other matters. Increases in the labor costs or future disputes with our employees could
damage our business, financial condition or operating results.
The Security Review Rules may make it
more difficult for us to make future acquisitions or dispositions of our business operations or assets in China.
The Security Review Rules, effective as of
September 1, 2011, provides that when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors
is subject to the national security review by MOFCOM, the principle of substance-over-form should be applied and foreign investors
are prohibited from circumventing the national security review requirement by structuring transactions through proxies, trusts,
indirect investments, leases, loans, control through contractual arrangements or offshore transactions. If the business of any
target company that we plan to acquire falls within the scope subject to national security review, we may not be able to successfully
acquire such company by equity or asset acquisition, capital increase or even through any contractual arrangement.
Heightened scrutiny of acquisition transactions
by PRC tax authorities may have a negative impact on Chinese company’s business operations and its acquisition strategy.
Pursuant to the Notice on Strengthening Administration
of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, effective on January 1, 2008,
and the Announcement on Several Issues Related to Enterprise Income Tax for Indirect Asset Transfer by Non-PRC Resident Enterprises
, or SAT Announcement 7, effective on February 3, 2015, issued by the SAT, if a non-resident enterprise transfers the equity interests
of or similar rights or interests in overseas companies which directly or indirectly own PRC taxable assets through an arrangement
without a reasonable commercial purpose, but rather to avoid PRC corporate income tax, the transaction will be re-characterized
and treated as a direct transfer of PRC taxable assets subject to PRC corporate income tax. SAT Announcement 7 specifies certain
factors that should be considered in determining whether an indirect transfer has a reasonable commercial purpose. However, as
SAT Announcement 7 is newly issued, there is uncertainty as to the application of SAT Announcement 7 and the interpretation of
the term “reasonable commercial purpose.”
Under SAT Announcement 7, the entity which
has the obligation to pay the consideration for the transfer to the transferring shareholders has the obligation to withhold any
PRC corporate income tax that is due. If the transferring shareholders do not pay corporate income tax that is due for a transfer
and the entity which has the obligation to pay the consideration does not withhold the tax due, the PRC tax authorities may impose
a penalty on the entity that so fails to withhold, which may be relieved or exempted from the withholding obligation and any resulting
penalty under certain circumstances if it reports such transfer to the PRC tax authorities.
Although SAT Announcement 7 is generally effective
as of February 3, 2015, it also applies to cases where the PRC tax treatment of a transaction that took place prior to its effectiveness
has not yet been finally settled. As a result, SAT Announcement 7 could be determined by PRC tax authorities to be applicable to
the historical reorganization, and it is possible that these transactions could be determined by PRC tax authorities to lack a
reasonable commercial purpose. As a result, the transfer of shares by certain shareholders to other parties could be subject to
corporate income tax of up to 10% on capital gains generated from such transfers, and PRC tax authorities could impose tax obligations
on the transferring shareholders or subject us to penalty if the transferring shareholders do not pay such obligations and withhold
such tax.
SAT Announcement 7 and its interpretation by
relevant PRC authorities clarify that an exemption provided by SAT Circular 698 for transfers of shares in a publicly-traded entity
that is listed overseas is available if the purchase of the shares and the sale of the shares both take place in open-market transactions.
However, if a shareholder of an entity that is listed overseas purchases shares in the open market and sells them in a private
transaction, or vice-versa, PRC tax authorities might deem such a transfer to be subject to SAT Circular 698 and SAT Announcement
7, which could subject such shareholder to additional reporting obligations or tax burdens. Accordingly, if a holder of the Company’s
ordinary shares purchases such ordinary shares in the open market and sells them in a private transaction, or vice-versa, and fails
to comply with SAT Circular 698 or SAT Announcement 7, the PRC tax authorities may take actions, including requesting to provide
assistance for their investigation or impose a penalty on it, which could have a negative impact on the company’s business
operations.
Under the EIT Law, we may be classified
as a “resident enterprise” of China. Such classification will likely result in unfavorable tax consequences to
us and our non-PRC shareholders.
On March 16, 2007, the National People’s
Congress of China passed a new Enterprise Income Tax Law, or the EIT Law, and on November 28, 2007, the State Council of China
passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of China
with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can
be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law
define de facto management as “substantial and overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise.
On April 22, 2009, the State Administration
of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated
Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application
of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an
enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically
incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties
mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial
assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) at least half
of its directors with voting rights or senior management often resident in China. A resident enterprise would be subject to an
enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends
to its non-PRC shareholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated
by a Chinese natural person. Nor are detailed measures on imposition of tax from non-domestically incorporated resident enterprises
are available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.
We may be deemed to be a resident enterprise
by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise
income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income
tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this
would mean that income such as interest on financing proceeds and non-China source income would be subject to PRC enterprise income
tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries
would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding
tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect
to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes.
Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could
result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC shareholders and with respect
to gains derived by our non-PRC stockholders from transferring our shares.
We may be exposed to liabilities under
the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these laws could have
a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice
Act, or FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and
political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We
have operations, agreements with third parties, and make most of our sales in China. The PRC also strictly prohibits bribery of
government officials. Our activities in China create the risk of unauthorized payments or offers of payments by the employees,
consultants, sales agents, or distributors of our Company, even though they may not always be subject to our control. It is our
policy to implement safeguards to discourage these practices by our employees. However, our existing safeguards and any future
improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors of our Company
may engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result
in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business,
operating results and financial condition. In addition, the U.S. government may seek to hold our Company liable for successor liability
FCPA violations committed by companies in which we invest or that we acquire.
If we become directly subject to the
recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources
to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in
a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have substantially
all of their operations in China, particularly companies like us which have completed so-called reverse merger transactions, have
been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies,
such as the SEC. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting irregularities
and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack
of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the
publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually
worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal
and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative
publicity will have on our Company, our business and our stock price. If we become the subject of any unfavorable allegations,
whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations
and/or defend our company. This situation will be costly and time consuming and distract our management from growing our company.
The disclosures in our reports and other
filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC. Accordingly,
our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where substantially
all of our operations and business are located have conducted any due diligence on our operations or reviewed or cleared any of
our disclosure.
We are regulated by the SEC and our reports
and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under
the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily in the United
States, however, substantially most of our operations are located in China. Since substantially all of our operations and business
takes place in China, it may be more difficult for the staff of the SEC to overcome the geographic and cultural obstacles that
are present when reviewing our disclosure. These same obstacles are not present for similar companies whose operations or business
take place entirely or primarily in the United States. Furthermore, our SEC reports and other disclosure and public pronouncements
are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other
filings are not subject to the review of the China Securities Regulatory Commission, a PRC regulator that is tasked with oversight
of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with
the understanding that no local regulator has done any due diligence on our company and with the understanding that none of our
SEC reports, other filings or any of our other public pronouncements has been reviewed or otherwise been scrutinized by any local
regulator.
RISKS RELATED TO OUR SHARES
The market price of our ordinary shares
is volatile, leading to the possibility of its value being depressed at a time when you want to sell your holdings.
The market price of our ordinary shares is
volatile, and this volatility may continue. Numerous factors, many of which are beyond our control, may cause the market price
of our ordinary shares to fluctuate significantly. These factors include:
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our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating
results or our failure to meet the expectations of financial market analysts and investors;
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changes in financial estimates by us or by any securities analysts who might cover our stock;
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speculation about our business in the press or the investment community;
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significant developments relating to our relationships with our customers or suppliers;
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stock market price and volume fluctuations of other publicly traded companies and, in particular,
those that are in the same industry as we are;
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customer demand for our products;
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investor perceptions of the automation and control industry in general and our company in particular;
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the operating and stock performance of comparable companies;
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general economic conditions and trends;
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major catastrophic events;
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announcements by us or our competitors of new products, significant acquisitions, strategic partnerships
or divestitures;
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changes in accounting standards, policies, guidance, interpretation or principles;
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loss of external funding sources;
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failure to maintain compliance with NASDAQ rules;
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sales of our ordinary shares, including sales by our directors, officers or significant shareholders;
and
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additions or departures of key personnel.
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Securities class action litigation is often
instituted against companies following periods of volatility in their share price. This type of litigation could result in substantial
costs to us and divert our management’s attention and resources. Moreover, securities markets may from time to time experience
significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. For example,
in July 2008, the securities markets in the United States, China and other jurisdictions experienced the largest decline in share
prices since September 2001. These market fluctuations may adversely affect the price of our ordinary shares and other interests
in our company at a time when you want to sell your interest in us.
We are a “foreign private issuer,”
and have disclosure obligations that are different than those of other U.S. domestic reporting companies so you should not expect
to receive the same information about us at the same time as a U.S. domestic reporting company may provide.
Furthermore, if we lose our status as a foreign private issuer, we would be required to comply fully with the reporting
requirements of the Exchange Act applicable to U.S. domestic issuers and would incur significant operational, administrative, legal
and accounting costs that we would not incur as a foreign private issuer.
We are a foreign private issuer and, as a result,
we are not subject to certain of the requirements imposed upon U.S. domestic issuers by the SEC. For example, we are not required
to issue quarterly reports or proxy statements. Also, we are allowed four months to file our annual report with the SEC. We
are not required to disclose certain detailed information regarding executive compensation that is required from U.S. domestic
issuers. Further, our directors and executive officers are not required to report equity holdings and transactions in our
equity under Section 16 of the Securities Act. As a foreign private issuer, we are also exempt from the requirements of Regulation
FD (Fair Disclosure) which, generally, are meant to ensure that select groups of investors are not privy to specific information
about an issuer before other investors. We are, however, still subject to the anti-fraud and anti-manipulation rules of the
SEC, such as Rule 10b-5. Since many of the disclosure obligations required of us as a foreign private issuer are different
than those required by other U.S. domestic reporting companies, our shareholders should not expect to receive information about
us in the same amount and at the same time as information is received from, or provided by, other U.S. domestic reporting companies. We
are liable for violations of the rules and regulations of the SEC which do apply to us as a foreign private issuer. Violations
of these rules could affect our business, results of operations and financial condition.
If we lose our status as a foreign private
issuer at some future time, we will be required to comply fully with the reporting requirements of the Exchange Act applicable
to U.S. domestic issuers and would incur significant operational, administrative, legal and accounting costs that it would not
incur as a foreign private issuer.
The payment of cash dividends depends
on the decision of the Board of Directors and the cash and legal requirements of our company.
The Board of Directors decides if and when
the Company will pay cash dividends. On August 11, 2016, the Board of Directors approved a regular cash dividend policy pursuant
to which future cash dividends are expected to be paid to holders of the Company’s ordinary shares on an annual basis out
of funds legally available for such purpose. However, the declaration and payment of future dividends including the dividend for
2016 will be at the discretion of the Board, and will depend upon many factors, including the Company’s financial condition,
earnings, capital requirements of its businesses, legal requirements, regulatory constraints, industry practice, and other factors
that the Board deems relevant.
If we fail to comply with the continued listing requirements
of NASDAQ, we would face possible delisting, which would result in a limited public market for our shares and make obtaining future
debt or equity financing more difficult for us.
Our ordinary shares are traded and listed on
the Nasdaq Global Select Market under the symbol “HOLI.” The ordinary shares may be delisted if we fail to maintain
certain listing requirements of the Nasdaq Stock Market, or NASDAQ.
We cannot ensure you that we will continue
to comply with the requirements for continued listing on The NASDAQ Global Select Market in the future. If our shares lose their
status on The NASDAQ Global Select Market and we are not successful in obtaining a listing on The NASDAQ Capital Market, our shares
would likely trade in the over-the-counter market. If our shares were to trade on the over-the-counter market, selling our shares
could be more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and
security analysts’ coverage of us may be reduced. In addition, in the event our shares are delisted, broker-dealers have
certain regulatory burdens imposed upon them, which may discourage broker-dealers from effecting transactions in our shares, further
limiting the liquidity of our shares. These factors could result in lower prices and larger spreads in the bid and ask prices for
our shares. Such delisting from The NASDAQ Global Select Market and continued or further declines in our share price could also
greatly impair our ability to raise additional necessary capital through equity or debt financing, and could significantly increase
the ownership dilution to shareholders caused by our issuing equity in financing or other transactions.
As a foreign
private issuer, we are permitted to rely on exemptions from certain NASDAQ corporate governance standards applicable to domestic
U.S. issuers. This may afford less protection to holders of our securities
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We are exempted from certain corporate governance
requirements of the Nasdaq Stock Market by virtue of being a foreign private issuer. As a foreign private issuer, we are permitted
to follow the governance practices of our home country, the BVI in lieu of certain corporate governance requirements of NASDAQ.
As result, the standards applicable to us are considerably different than the standards applied to domestic U.S. issuers. For instance,
we are not required to:
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have a majority of the board be independent (although all of the members of the audit committee
must be independent under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act);
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have a compensation committee and a nominating committee to be comprised solely of "independent
directors; and
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hold an annual meeting of shareholders no later than one year after the end of the Company’s
fiscal year-end.
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As discussed elsewhere in this Annual Report,
we have relied on and intend to continue to rely on some of these exemptions. As a result, our shareholders may not be provided
with the benefits of certain corporate governance requirements of the Nasdaq Stock Market.
You may have difficulty enforcing judgments
obtained against us.
We are a BVI company and substantially all
of our assets are located outside of the United States. A substantial portion of our current business operations are conducted
in the PRC. In addition, almost all of our directors and officers are nationals and residents of countries other than the United
States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult
for you to effect service of process within the United States upon these persons. It may also be difficult for you to enforce in
U.S. courts judgments obtained in U.S. courts including judgments based on the civil liability provisions of the U.S. federal securities
laws against us and our officers and directors, many of whom are not residents in the United States and whose assets are located
in significant part outside of the United States. The courts of the BVI would recognize as a valid judgment, a final and conclusive
judgment in person
is obtained in the federal or state courts in
the United States against the Company under which a sum of money is payable (other than a sum of money payable in respect of multiple
damages, taxes or other charges of a like nature or in respect of a fine or other penalty) and would give a judgment based thereon
provided that (a) such courts had proper jurisdiction over the parties subject to such judgment, (b) such courts did not contravene
the rules of natural justice of the BVI, (c) such judgment was not obtained by fraud, (d) the enforcement of the judgment would
not be contrary to the public policy of the BVI, (e) no new admissible evidence relevant to the action is submitted prior to the
rendering of the judgment by the courts of the BVI and (f) there is due compliance with the correct procedures under the laws of
the BVI. In addition, there is uncertainty as to whether the courts of the BVI or the PRC, respectively, would recognize or enforce
judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the
United States or any state.
Because we are incorporated under the
laws of the BVI, it may be more difficult for our shareholders to protect their rights than it would be for a shareholder of a
corporation incorporated in another jurisdiction.
Our corporate affairs are governed by our memorandum
and articles of association, by the BVI Business Companies Act, 2004 (as amended), or the 2004 Act, and by the common law of the
BVI. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of management and
the rights of our shareholders differ from those that would apply if we were incorporated in the United States or another jurisdiction.
The rights of shareholders under BVI law may not be as clearly established as are the rights of shareholders in the United States
or other jurisdictions. Under the laws of most jurisdictions in the United States, majority and controlling shareholders generally
have certain fiduciary responsibilities to the minority shareholders. Shareholder action must be taken in good faith, and actions
by controlling shareholders which are obviously unreasonable may be declared null and void. BVI law protecting the interests of
minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in United States
jurisdictions. In addition, the circumstances in which a shareholder of a BVI company may sue the company derivatively, and the
procedures and defenses that may be available to the company, may result in the rights of shareholders of a BVI company being more
limited than those of shareholders of a company organized in the United States. Furthermore, our directors have the power to take
certain actions without shareholder approval which would require shareholder approval under the laws of most United States jurisdictions.
The directors of a BVI corporation, subject in certain cases to court approval but without shareholder approval, may implement
a reorganization, merger or consolidation, the sale of any assets, property, part of the business, or securities of the corporation,
subject to a limit of up to 50% of such assets. The ability of our board of directors to create new classes or series of shares
and the rights attached by amending our memorandum of association and articles of association without shareholder approval could
have the effect of delaying, deterring or preventing a change in our control without any further action by the shareholders, including
a tender offer to purchase our ordinary shares at a premium over then current market prices. Thus, our shareholders may have more
difficulty protecting their interests in the face of actions by our board of directors or our controlling shareholders than they
would have as shareholders of a corporation incorporated in another jurisdiction.
We may be classified as a passive foreign
investment company, which could result in adverse United States federal income tax consequences to U.S. shareholders.
We believe that we currently are not considered
a “passive foreign investment company,” or PFIC, for United States federal income tax purposes. However,
each year we must make a separate determination as to whether we are a PFIC. We cannot assure you that we will not be
a PFIC for our future tax years. If a non-U.S. corporation either (i) has at least 75% of its gross income is passive income
for a tax year or (ii) has at least 50% of the value of its assets (based on an average of the quarterly values of the assets during
a tax year) attributable to assets that produce or are held for the production of passive income, then the non-U.S. corporation
will be deemed a PFIC. The market value of our assets may be determined to a large extent by the market price of our ordinary
shares. If we are treated as a PFIC for any tax year during which U.S. shareholders hold ordinary shares, certain adverse
United States federal income tax consequences could apply to such U.S. holders.
Our Shareholder Rights Plan and charter
documents may hinder or prevent change of control transactions.
Our shareholder rights plan and provisions
contained in our Memorandum and Articles of Association may discourage transactions involving an actual or potential change in
our ownership. In addition, our Memorandum and Articles of Association authorizes our board of directors to issue up to 90,000,000
shares of preferred stock without any further action by the stockholders. Please see Item 10, Additional Information
for more information regarding our shareholder rights plan. Such restrictions and issuances could make it more difficult,
delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders
from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price
of our ordinary shares, even if you or our other stockholders believe that such actions are in the best interests of us and our
stockholders.
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ITEM 4.
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INFORMATION ON THE COMPANY
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A.
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History and Development of the Company
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We were established under the laws of the BVI
on February 6, 2006, as HLS Systems International, Ltd., in order to merge with Chardan North China Acquisition Corporation (“Chardan”),
a Delaware special purpose acquisition company, originally established on March 10, 2005, with the primary purpose of effecting
a business combination with an unidentified operating business that has its primary operating facilities located in China, in any
city or province north of Yangtze River. On September 20, 2007, we acquired all of the issued and outstanding ordinary shares of
GTH, a BVI company. On August 1, 2008, our ordinary shares started trading on NASDAQ Global Select Market. On July 17,
2009, we changed our name to Hollysys Automation Technologies Ltd. to more accurately reflect our core value of leveraging proprietary
technologies to provide state-of-the-art automation and control solutions for our clients.
On July 1, 2011, we purchased 100% of the equity
of Concord
for a combination consideration of cash and stock for
a total value of approximately $42.9 million. Concord provides electric solutions with end-to-end design, engraving, engineering,
procurement, project management, construction and commissioning, and maintenance, active in the rail industry in Singapore, UAE
and Saudi Kingdom and the building retrofit market in Singapore.
On April 1, 2013,
we purchased 100% of the equity of Bond for a purchase price of approximately US$73 million, payable 50% in cash and 50% in ordinary
shares of Hollysys.
The stock will be issued to the Bond shareholders
in three installments over three years, 60% of which are incentive shares and will be based on
certain performance targets for calendar years 2013 and 2014. Additional ordinary shares, as a premium on performance, will
be issuable to the Bond shareholders, if Bond outperforms the established targets, but the premium will not exceed 15% of the total
incentive shares in any case. The operating results of Bond have been included in our consolidated financial statements effective
from April 1, 2013. Bond provides complete mechanical and electrical solutions with end to end capabilities in design, engineering,
procurement, project management, construction and commissioning, and maintenance to a wide array of industries, including factories,
data centers, banks, hospitals, airports, power stations, gas and instrumentation plants, hotels, commercial centers, residential
buildings and infrastructure works. We seek to take advantage of Bond’s strong presence and brand name in Southeast Asia
and to strengthen our Southeast Asian business.
On November 24, 2015, the Company established Concord Electrical Contracting, Ltd. (“CECL”) to
explore the market in Qatar. CCPL has a 49% direct ownership of CECL and the remaining 51% equity interest is held by a nominee
shareholder. Through a series of contractual arrangements, CCPL is entitled to appoint majority of directors of CECL who ha
ve
the power to direct the activities that significantly impact CECL’s economic performance. Further, CCPL is entitled to 95%
of the variable returns from CECL’s operations. As a result, despite of its minority direct ownership of CECL arrangements,
CCPL is considered the primary beneficiary of CECL. The consolidated amounts and financial performance related to CECL included
in the Company’s consolidated balance sheet, statement of comprehensive income and statement of cash flows were immaterial
for the year ended June 30, 2016.
We are a leading provider of automation and
control technologies and products in China and increasingly in Southeast Asia, India and the Middle East that enable our diversified
industry and utility customers to improve operating safety, reliability, and efficiency. Founded in 1993, we have approximately
3,600 employees with a nationwide China presence and with subsidiaries and offices in Southeast Asia, India and the Middle East.
We serve over approximately 6,000 customers in the industrial, railway, subway, nuclear power, and mechanical and electronic industries
in China, Southeast Asia, India, Europe and the Middle East. Our proprietary technologies are applied through our industrial automation
solution suite, including the DCS (Distributed Control System), PLC (Programmable Logic Controller), RMIS (Real-time Management
Information System), HAMS (HolliAS Asset Management System), OTS (Operator Training System), HolliAS BATCH (Batch Application Package),
HolliAS APC Suite (Advanced Process Control Package), SIS (Safety Instrumentation System), high-speed railway signaling system
of TCC (Train Control Center), ATP (Automatic Train Protection), Subway Supervisory and Control platform, nuclear power non-safety
automation and control system HolliAs-NMS DCS and other products.
We historically focused our efforts on the
area of DCS, which are networks of controllers, sensors, actuators and other devices that can be programmed to control outputs
based on input conditions and/or algorithms, which are mainly used to control continuous manufacturing processes. Our DCS have
been widely used in the industries involving continuous flow of material handling, such as power generation, petro-chemical, chemical,
cement manufacturing, and waste water recycling. We also command a position in China’s nuclear power automation and control
market as the only proven local automation and control product provider to the non-safety control for both nuclear island and conventional
island of nuclear power reactors in nuclear power stations.
We have a substantial reputation in the PRC
domestic industrial automation industry for our comprehensive capabilities and have focused on the development of this market.
We carry out integrated solution projects for, render automation services to, or sell our products to, national or multi-provincial
companies with subsidiaries located throughout China. To date, we have served more than 6,000 industrial enterprise customers including
state-owned enterprises, multinational corporations and local private companies and have undertaken over 20,000 projects. We believe
that the quality of our systems is unsurpassed by local Chinese competitors and comparable to high-end foreign suppliers of DCS
and the history of our projects supports that view. For example, after three years of review and analysis, BASF, a large multi-national
company, has designated us as a potential qualified DCS vendor for the company, a distinction shared with large multinationals
such as ABB and Emerson.
We have also entered the PLC market, which
is mainly used in discrete control applied to a wide array of industries. PLCs are usually integrated together into machines providing
control at the machinery level. With more of our proprietary products introduced into the market and the behavioral change of customers’
purchasing practice, we gradually changed our market and sales positioning from a single DCS/PLC product provider, to a total solution
provider encompassing third-party hardware-centric products such as instrumentation and actuators, our proprietary DCS/PLC products,
and valued-added software packages such as AMS (Asset Management System), MES (Manufacturing Execution System), APC (Advanced Process
Control), OTS Simulation (Operator Training System), and others. The safety system SIS (Safety Instrumentation System), certified
under European safety standards and newly introduced to the market in July 2012 have furthered our proprietary product suite in
the industrial automation segment.
We have branched out from the industrial
automation domain into the subway and surface rail businesses, leveraging on our core competency and strong research and development
capabilities, and have already established an important position in the high-speed rail signaling market and subway SCADA (Supervisory
Control and Data Acquisition) market. Besides, we have developed our proprietary high-speed rail signaling system and subway signaling
system, and certified both according to European Safety Standard Certification Level 4.
Internationally, we have a strong presence
in Southeast Asia and increasingly in the Middle East, India and Hong Kong SAR. Through the acquisitions of Concord and Bond, we
are expanding and deepening our ability to offer mechanical and electrical solutions in design, engineering, procurement, project
management, construction and commissioning, and maintenance to a wide range of industries, such as manufacturing, banks, hospitals,
airports, power plants, commercial centers, hotels, and infrastructure works. We believe that our present leadership position in
the high-growth segments is attributable to our vision, execution, and strong research and development capabilities.
During the
past several years we have achieved a number of significant contract wins, including (i) contracts with MTR Corporation of Hong
Kong SAR to provide a complete suite of high-speed rail signaling systems to Guangzhou-Shenzhen-Hong Kong Express Rail Hong Kong
Section; (ii) a contract with SMRT Trains Ltd. in Singapore to provide design, electrification and installation for station renovations
on North-South and East-West lines and a contract with Thales Solutions Asia Pte. Ltd. to provide design, installation, testing
and commission for replacing the existing signaling systems for the North-South and East-West lines and install new signaling systems
for the Tuas West Extension line in Singapore; (iii) a contract with Land Transport Authority in Singapore to provide the Integrated
Supervisory Control System for the Thomson & Eastern Region Lines in Singapore; (iv)
a
contract with Mitsubishi Heavy Industries Ltd. to provide electrical installation services for part of the Power Distribution System
Package of the first Phase of Doha Metro. We believe that our international stature will be further enhanced by our obtaining international
certifications such as the European Safety Standard Certification Level 4 for our proprietary high-speed rail signaling and subway
signaling systems.
Our revenue increased from approximately $349.1
million in fiscal year 2013, to approximately $544.3 million in fiscal year 2016, representing a compounded annual growth rate
(CAGR) of approximately 16.0% for the past three years. During the same period, our non-GAAP net income attributable to Hollysys
increased by a CAGR of approximately 28.2% from $57.6 million in fiscal year 2013 to $121.5 million in fiscal year 2016. These
significant increases reflect our success in exploring new business areas and our increasing performance. We continually seek to
increase our performance in broadening our market reach, while exploring international market to fulfill our mission of sustainable
and high growth.
Strategy
The goal for Hollysys is
to become one of the world's well-known
automation and control
technology and product providers. To meet this goal we plan to enhance the core competencies that have made us a leading domestic
automation and control solutions provider in China, the only Chinese company qualified to design and manufacture non-safety
control systems of nuclear power stations, and a leader in the industrial automation and in the high-speed rail and subway sectors.
The principal elements of our core business strategies are as follows:
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To further establish our leadership position as a dominant automation and control solutions
provider across all the addressable market segments
– We seek to be a potential industry consolidator in China and
Southeast Asia to become a leading provider of industrial automation and control technology applications for clients in various
industries, by presenting ourselves as a total solution provider. We seek to further penetrate the industrial automation and
railway business with more proprietary products to enhance our leading position and market share. Since the majority of our customers
operate in a wide range of industries, we stand to be a prime beneficiary of China’s and increasingly Southeast Asia’s
industrial automation market growth, driven by environment protection, clean energy, lower carbon emission, national economic development,
and rising labor costs in the Asia region. Our combination of patented technologies, strong research and development capabilities,
ability to leverage strategic alliances and acquisitions to enter and penetrate new market segments, and a comprehensive understanding
of the Chinese and Southeast
Asia markets should allow us to capitalize
on these growth opportunities.
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To continuously enhance our leadership position in technology
– We have long been
recognized as a pioneer in the development of industrial automation and control technology and applications in China. We are
continuously seeking ways to improve our existing product lines while being committed to the development of new applications, platforms,
and products. In order to maintain our leadership in technology, we have devoted significant resources to the research and development
that is undertaken by a group of trained and skilled experts and engineers. We have improved5th generation DCS named HOLLiAS-K,
which is superior to the performance of the 4th generation in terms of reliability, flexibility, and ease of use. Hollysys has
applied its years of experiences from nuclear DCS into the design of HOLLiAS-K. Flexible architectures of P-to-P (Peer to Peer),
C/S (Client/Server), or hybrid system can be selected according to the project scale. Industry specific software solutions are
designed for better customization leveraging our deep industry knowhow and expertise. Further advantages such as vertical mounting,
modular connection, and tilted I/O design make the engineering and wiring more effective and deliver the customers faster and more
stable field installation. We also developed China’s first proprietary Safety Instrumented System, named HiaGuard-SIS, and
passed Safety Integrity Level 3 certification in compliance with the most stringent European standards. HiaGuard-SIS is a critical
safety protection system comprising sensors, logic solvers and actuators for the purposes of taking a process to a safe state when
normal predetermined set points are exceeded, or safe operating conditions are violated. The SIS developed by Hollysys is applicable
to ESD (Emergency Shutdown System), PSD (Process Shutdown System), FGS (Fire and Gas Systems), BMS (Burner Management System),
and ETS (Emergency Trip System). Besides, we are continuously devoting resources to research and development on our addressable
market related technologies and products, and international market, including track circuit subway signaling system, industrial
automation motion control, machinery control products and technologies to complement our existing product portfolio.
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To actively explore and prepare for international market expansion–
Management is
pursuing a strategy for Hollysys to have meaningful revenue generated from the international market and to become one of the prominent
and well-known automation and control players in the world. We made significant progress in this business objective through the
acquisitions of Concord and Bond, which are headquartered in Singapore and Malaysia respectively, by which we obtained a well-established
distribution channel and customer/partner bases to cross-sell our products in the rail and industrial automation segments and building
automation and retrofit segments, and seasoned management teams to form the core of our international team. We have also increased
our mechanical and engineering solution capabilities and are expanding to be able to serve a wider array of industries. We entered
into a contract with Hong Kong MTR Corporation to supply the entire high-speed rail signaling system to Shenzhen-Hong Kong Express
Rail with a total contract value amounted to approximately US$85 million, including the main contract signed and the supplementary
contracts obtained subsequently, In addition, we signed the contract with Land Transport Authority in Singapore to provide the
Integrated Supervisory Control System for the Thomson & Eastern Region Lines in Singapore valued at approximately SGD 16 million.
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The high-speed rail signaling system
includes the on-board ATP (Automatic Train Protection) system that is used to protect the train from travelling at excessive speeds,
the ground based TCC (Train Control Center) for ground safety control of trains, and other auxiliary interfacing products. Based
on our own technologies, we are able to customize our system platforms to meet every level of requirements from conventional rail
signaling systems to the most state-of-the-art, high-speed rail applications, not only for the Chinese market but also for the
international market.
Because China Railway Corporation employs its own administrative admission system, our high-speed rail
signaling products that are currently deployed in China’s high-speed rail lines do not have European safety standard certification,
which is a prerequisite for the rail market outside of China. To enter
the
overseas rail market and satisfy international requirements, we have redesigned the whole set of our high-speed rail signaling
systems, based wholly on our own proprietary technologies, and passed European Safety Standards SIL 4 certification (Safety Integrity
Level 4) including ATP (Automatic Train Protection), TCC (Train Control Center), LEU (Line-Side Electronic Unit), BTM (Balise Transmission
Module), TSRS (Temporary Speed Restriction Server), HVC (Hollysys Vital Computer) and Interlocking system in the high-speed rail
sector.
In the subway sector, the proprietary
ATS (Automatic Train Supervision) and CBI (Computer Based Interlocking) passed SIL2 and SIL4 certification respectively in 2011.
And in early 2013, we finished the development and certified ZC (Zone Controller), LEU (Line-side Electronic Unit) and Balise for
subway signaling system according to SIL4 requirements. The ATP (Automatic Train Protection) for subway signaling was developed
and passed SIL4 certification in the end of 2013, thus all subway signaling products have been certified according to SIL4.
Products and Services
As a leading provider of automation and control
technology and applications in China, and increasingly in Southeast Asia, we provide our customers with our standard and customized
products and corresponding services based on each client’s specific requirements. We are committed to providing reliable,
advanced and cost-effective solutions to help customers optimize their processes to achieve higher quality, greater reliability
and better productivity and profitability.
Industrial Automation
:
Our principal offering is a comprehensive suite
of automation systems for a wide spectrum of industrial market clientele, ranging from petrochemical, thermal power industries,
to nuclear and pharmaceutical industries. Our comprehensive suite of automation solution consists of third-party hardware-centric
products such as instrumentation and actuators, our proprietary software-centric DCS/PLC, and valued-added software packages such
as RMIS (Real-time Management Information System), HAMS (HolliAS Asset Management System), OTS (Operator Training System), HolliAS
BATCH (Batch Application Package), HolliAS APC Suite (Advanced Process Control Package), and SIS (Safety Instrumentation System).
The two mainstream products for this market segment are our DCS products and our PLC. DCS are a network of controllers, sensors,
actuators and other devices that can be programmed to control outputs based on input conditions through logic calculations. In
an automated production line, sensors or so-called “instrumentations” are distributed across the production facility
to monitor sub-systems like the robots, CNC machines, and logistic tools. These sensors are like human eyes, which monitor
the process, and detect any abnormal situations. The information collected from those sensors is then transmitted to the DCS
for centralized data processing through communication networks. The central computer (brain) processes information and generates
commands, based on sophisticated algorithmic and pre-set parameters. These commands are then sent to actuators (muscles/bones)
through communication devices to execute the orders and maintain production flow. PLCs are computer devices installed on machines
or equipment, for example, on a factory assembly line, for manufacturing automation.
As the only proven domestic automation control
systems provider to the nuclear power industry in China, we provide our HOLLiAS-NMS DCS product to China’s nuclear power
industry. In a nuclear power station, the nuclear island operates to transform nuclear energy to heat energy, and pass on
the steam generated by the steam generator to the conventional island, where steam drives the turbine to generate the electricity,
and pass on to the transformer for loading onto the grid. Our HOLLiAS-NMS proprietary control systems are now used for non-safety
operation control. The know-how was accumulated from our industrial DCS applications in high-end, conventional energy power plants,
with much more sophisticated software and hardware specifications, and more stringent production and quality assurance process.
Our nuclear joint venture with China General Nuclear Power Corporation and China Techenergy Co., Ltd., has already successfully
completed developing its proprietary safety nuclear power automation and control system and has started to commercialize such technology.
Rail Transportation:
Hollysys has successfully scaled its automation
application from industrial manufacturing to rail and subway industry, with proprietary product lines including, TCC (Train Control
Center) and ATP (Automation Train Protection). An ATP essentially acts as the train over-speed protection mechanism, which
collects real-time information like speed limit ahead, train operation status, line data, instructions from train control center,
then combines that information with the train parameters to produce train protection curves. In case of any human errors,
like driver’s negligence at the red light, it applies emergency brakes automatically. TCCs are an on-ground control
center at railway stations or equipment
stations which monitor
route condition, track status, train schedules, distance between trains, and the working status of other essential function devices,
and then through logic calculation, generate control instructions and commands. The command information from the TCC is then
transmitted to the ATP located on the locomotives/trains, through track circuits and electronic beacons located at various points
along the railway line, or wireless.
We have provided our SCADA system to China’s
subway market for many years, including the Beijing Metro, Guangzhou Metro, Shenzhen Metro,
Tianjin Metro and Dalian Metro. SCADA is an open software platform to enable integrated and unified monitoring of all
necessary sub-systems of the subway, including the Power Supervisory Control and Data Acquisition System, Building Automatic System,
Fire Alarm System, Platform Screen Door System, Access Control System, Closed Circuit Television, Passenger Information System,
Passenger Train Information System, and Alarm System. Given the exponential growth in China’s subway market and the
continued growth expected for the decades to come, Hollysys has developed its proprietary Subway Signaling System, based on its
strong research and development capability and technical know-how of signaling application accumulated from high-speed rail. Currently
the development and certification according to the European safety standards are basically finished. The current subway signaling
market is predominantly occupied by multi-national corporations, such as Siemens, Alstom and Thales.
We are supplying the entire high-speed rail
signaling system to Shenzhen-Hong Kong high-speed rail line for the Hong Kong MTR, which marked our breakthrough to the international
high-speed rail signaling market. In addition, we signed a contract with Land Transport Authority ("LTA") in Singapore
to provide our proprietary Integrated Supervisory Control System for Thomson & Eastern Region Lines in Singapore.
Mechanical and Electrical:
We established a stronger foot-hold in Southeast
Asia through two acquisitions of Concord and Bond in 2011 and 2013 respectively. Concord and Bond mainly provide mechanical and
electrical solutions, including design, engineering, procurement, project management, construction and commissioning, and maintenance
related services. Concord mainly focuses on railway transportations in Singapore, UAE and Saudi Kingdom markets, and Bond mainly
focuses on factories, data centers, banks, hospitals, airports, power stations, gas and instrumentation plants, hotels, commercial
centers, residential buildings and infrastructure works in Malaysia.
Through
the acquisitions, the Company seeks to expand the existing distribution and marketing channels to cross sell the Company’s
existing product lines to the fast growing Southeast Asia and the Middle East markets.
Project Implementation:
We establish a project group for each potential
customer, which has a team of systems engineers and managers to provide total integrated solutions to our customers to meet their
specific requirements. Each project group is staffed with a dedicated team of sales engineers, technical engineers and project
management professionals. The sales engineers and technical engineers work together to offer the best customized solutions as a
result of their understanding of the customer’s detailed requirements through on-site studies. The technical engineers are
responsible for hardware assembly, software configuration, testing and installation, commissioning and trial operation, and start-up
and training; while the project management professionals oversee budgetary matters, coordinate the work force, ensure adequacy
of resources and monitor progress and quality to ensure the timely completion of each project. Our integrated solutions projects
involve one or more of the following activities:
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Solution planning
– We provide our customers with strategic and tactical reviews of
their current operations and future requirements. The planning includes defining client business requirements, developing appropriate
hardware and software, and selecting preferred technology.
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Solution design
– We detail the industry specifications and implementation tactics
necessary to achieve our customer’s objectives. Hollysys also considers how the new technology will integrate hardware and
software integrated in the solution with the customer’s existing hardware and software and how it will be managed on an ongoing
basis. Examples of these services include defining functional requirements for the system and our components, developing integration
plans and designing of customer-specific system and services applications.
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Solution implementation
– We install the recommended systems and provide essential
services throughout the whole solution implementation process, to better meet our customers' specific requirements. Key activities
include project management, hardware procurement and production, software development, configuration and field installation and
testing, and development of customized system and services management applications.
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Our integrated solutions based on our proprietary
technology and products create value for and improve the competitive strengths of our customers by:
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Generating synergy and improving efficiency of our customers through integrating communications,
marketing and service functions;
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Utilizing our industry and process knowledge to develop customized solutions that improve the efficiency
of our customers;
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Providing a software platform for the optimization of management operations, which provides real-time
automation and information solutions throughout a business; and
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Offering maintenance and training services to our customers, which help to cut costs and improve
operating efficiency.
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We customize our floor plans based on careful
on-site studies, build design-specific network systems using our proprietary technology and software, and offer manufacturing execution
system services to ensure that real-time management control is available to our customers in a streamlined and easy-to-use manner.
We believe that our product design and applications
that are integrated in the solutions are unmatched among our domestic competitors. We also believe that the sophistication
and quality of our products rival those of the multi-national automation and control product suppliers, while our ability to understand
and meet the needs of our Chinese customers gives it a leading edge over foreign competitors. The value of this combination
is reflected in our strong revenue and profit growth over the years.
Markets
Industrial Automation Market
According to the Gong Kong Data, an industry
research group, the DCS and PLC market in China, which excluding related software and specific controller, is around US$663 million
and US$1,082 million respectively in 2015. With the experience of our actual projects, if adding software and specific controller,
the market would be multiple.
The industrial automation and control industry
is a healthily growing market with huge potential. China is facing a shortage of labor and increased labor cost because of demographic
change. To solve this problem and improve manufacturing efficiency, manufacturers begin to adopt or consider adopting automation
and control technologies and devices to replace labor and more scientifically manage the whole manufacturing process. China is
undergoing industrial upgrading, and as a result automation and control technologies innovation and application will play an important
role in that process. Besides, the consciousness and trend for environmental protection and waste material emission treatment and
recycling will bring the demand for automation and control technology applications as well.
Currently, the vast majority of the global
automation market is still controlled by a handful of multi-national companies, most of them with western roots. Our competition
includes some very recognizable names: Honeywell (US); Siemens (Germany); Emerson (US); ABB (Sweden); Rockwell (US); Yokogawa (Japan)
and Hitachi (Japan). The western roots of automation are not surprising, as that is also where industrialization began and progressed
the farthest during the 19th and 20th centuries. However, a new focus of the automation market is China and increasingly Southeast
Asia, where the tremendous growth in industrialization is by now a very familiar story. Manufacturing jobs in the US and other
western economies over the past two decades have steadily decreased, while the industrial base in China, Southeast Asia and the
Middle East has expanded. In particular, China’s shift from a developing country to one of the world’s leading manufacturers
of industrial equipment and consumer goods has created a substantial and growing demand for the automation systems that help to
make those manufacturing processes more efficient, reliable and safe.
We believe China’s industrial automation
growth rate will continue to be significant. We see China is enjoying a healthy growth rate given its relative current lower penetration
rate and the rising cost of labor. The client base includes large state-owned enterprises, multi-national companies, and other
domestic companies. Our main competitors in this field are global players such as ABB, Siemens, and Emerson, as well as Supcon
from China. We believe that the Hollysys brand recognition and market reputation, and our strong research and development capabilities
will continuously enable us to penetrate high-margin market segments currently dominated by foreign companies.
We are well-positioned to benefit from
China’s nuclear power development. At present, China’s nuclear power sector is relatively underdeveloped, with the
vast majority of power generated by coal-fired power plants. According to figures announced by China Nuclear Energy Association,
as of May 26, 2016 there were 32 nuclear reactors in commercial operation in China, providing approximately 26 GW of power. This
represents a very small fraction of the total installed gross capacity of power generation. In terms of electricity generated watt
per hour, the nuclear electricity generated by now is approximately 2%-3%, lagging far behind the world average of 15%, with France
being the highest with 70% of its power generated from nuclear power plants. Driven by clean energy initiatives and China’s
commitment of reducing its carbon emission by 45% per GDP unit by 2020, China’s installed nuclear power generating capacity
is expected to reach 70GW-80GWby 2020. Typically, one nuclear reactor generates 1GW electricity.
We are penetrating into international markets
with primary focus on Singapore, Malaysia, Indonesia, India and the Middle East, all of which are largely developing areas. The
strong growth of infrastructure and increased demand for automation technologies will benefit us in these areas.
Rail Transportation Market
Another important end-market for Hollysys is
the high-speed rail market in China, where we command a leading position in providing high-speed rail signaling systems to ensure
the safety of passenger train movement. The China Railway Corporation developed a national high-speed rail signaling technological
standard, the China Train Control System, or the CTCS. Under the CTCS, the standard governing the 200-250km/hour speed category
is called C2, while C3 governs the 300-350km/hour category. These standards are different from the international standards propounded
by European organizations or Japan.
According to China’s 13th Five Year Plan
and the recent industry estimate, China is planning to build up to around 30,000 kilometers length of high-speed railway lines
by the end of 2020. China’s high-speed rail network construction will consist of the current building artery lines
and future planning inter-city lines. The artery lines are “the Four Horizontals and the Four Verticals” referring
to their positions on the map of China. The Four Vertical lines include the Beijing-Guangzhou line, Beijing–Shanghai
line, Harbin-Dalian-Shenyang-Beijing line, and Shanghai-Hangzhou-Shenzhen line. The Four Horizontal lines include the Lanzhou-Xian-Zhengzhou-Lianyungang
line, Shanghai-Wuhan-Chongqing-Chengdu line, Hangzhou-Changsha-Kunming line, and Taiyuan-Shijiazhuang-Qingdao line. The inter-city
high-speed lines are mainly planned for economically well-developed regions with high densities of population, such as Zhu Jiang
River Delta (Guangzhou-Shenzhen region), Yangtze River Delta (Shanghai-Hangzhou region), and Beijing-Tianjin-Tangshan region. As
one of the three high-speed rail signaling products providers in the C2 category in China, and one of the two high-speed rail signaling
products providers to the C3 segment, we believe that Hollysys is well positioned to benefit from this unprecedented, world leading
high-speed railway build-out.
We also worked to expand our rail products
supply such as track circuit. We have finished testing of track circuit and the official admission progress and got the permit
to enter track circuit market which is another sizable market. We are entering into this market and expecting to gain our first
track circuit contract in the near future.
We also provide our proprietary software
platform and solutions of SCADA to the subway market. China’s subway market is expected to receive significant government
investment due to urbanization and environmental concerns. It is estimated that China is going to build up to around 4,700km of
subway lines by 2017 and approximately 8,300km of subway lines by 2020. Leveraging on our know-how from high-speed surface rail
signaling technology and our well-recognized brand name, we have finished the development of our proprietary subway signaling system,
and are preparing for bidding subway signaling projects both in China and abroad. We believe it will present a better value positioning
to our subway customers by bundling our proprietary subway SCADA system with our proprietary signaling system, in this way we are
also expecting our market share and gross margin to expand in this business sector.
In Southeast Asia, there are also extensive
subway lines construction and subway signaling system reconstruction projects due to the operation safety and efficiency concern
in high population density areas such as Hong Kong, Singapore and Malaysia. There are several subway lines in construction in Hong
Kong and Southeast Asia, including Hong Kong Shatin to Central Link, South Island Line East, Kwun Tong Line Extension and West
Island Line in Hong Kong, and Thomson Line (TSL) in Singapore and MRT Line No. 2 in Kuala Lumpur, Malaysia. Besides, the reconstruction
of subway signaling systems will be a huge opportunity, like the North-South and East-West lines which Hollysys has participated
in the signaling reconstruction in Singapore. As more and more subway signaling systems in developed countries approach their over
mature period, which will offer continuous opportunities for Hollysys to be the subway signaling system replacement and upgrading
provider.
Mechanical and Electrical Solutions Market
We offer mechanical and electrical solutions
(M&E) through Concord and Bond in Southeast Asia, the Middle East and Hong Kong. Through acquisitions of the above entities,
we are expanding and deepening our ability to offer mechanical and electrical solutions in design, engineering, procurement, project
management, construction and commissioning, and maintenance to a wide range of industries, such as manufacturing, banks, hospitals,
airports, power plants, commercial and residential buildings, hotels, and railway and subway lines.
Extensive constructions in infrastructure
in Southeast Asia and Middle East
result in significant demands
for M&E solutions. Taking Malaysia for example, the estimated total gross development value (GDV) in Iskandar development area
is around $118 billion, where estimated M&E sector potential worth is $23.56 billion in the areas such as education, commercial,
residential, factories and theme park project; the estimated total GDV in Sabah development area is around $32.3 billion, where
estimated M&E potential worth is $6.5 billion including residential, resorts, commercial, oil & gas projects; the estimated
total GDV of Sarawak Corridor is around $102.7 billion, where estimated M&E potential worth is $20.5 billion including renewable
energy and energy resources, residential, commercial, factories projects.
In the rail transportation field, there
are several subway lines under construction in Hong Kong and Southeast Asia, including, among others, Hong Kong Shatin to Central
Link, South Island Line East, Kwun Tong Line Extension and West Island Line in Hong Kong, and Thomson Line (TSL) in Singapore and
MRT Line No. 2 in Kuala Lumpur, Malaysia. Concord participated in the Singapore North-South and East-West subway lines signaling
reconstruction project cooperating with Thales, Concord was responsible for design, installation, testing and commission for replacement
of existing signaling systems. Bond and Concord will actively explore the M&E opportunities, and cooperate with Hollysys for
the installation and implementation works for industrial automation and railway transportation total solution works in South East
Asia and the Middle East.
Integrated Contracts
The main channel through which we get our
automation system business is the procurement bidding process. Customers seeking bids propose their requirements and specifications
in legal bidding documents and those companies that are interested in obtaining these contracts make a bid in written form.
If we win the bid, we finalize an integrated contract. We derive a large percentage of our total consolidated revenues
from the integrated contracts that we win through the bid process. In addition, we also generate revenue from products sales
of spare parts and component products to customers for maintenance and replacement purposes after the completion of the integrated
solution contract, and from provision of service such as maintenance and training which tends to provide a recurring revenue stream.
The purpose of an integrated contract is to
furnish an automation system that provides the customer with a total solution for the automation or process control requirement
being addressed. The automation system and total solution that we offer consists of hardware, software and services, all of
which are customized to meet the particular needs and technical specifications of our customers. None of the hardware, software
and service has independent functionality, and therefore cannot be sold separately to customers.
The major terms of an integrated solution contract
include solution planning and design, system installation, customer acceptance, payment milestones and warranty. The process
of fulfilling an integrated contract consists of the following four stages:
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Solution planning and design
- We provide customers with a customized plan for achieving
the required solution by establishing a project group for each contract. The project group includes system engineers who propose
and discuss and agree on the system design and implementation plan with the technical personnel of the customers
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System manufacturing and installation
- Based on the design and implementation plan, and
in accordance with the project schedule, we enter into the process of purchasing the necessary hardware, manufacturing components
for the hardware, developing software platform, re-configuring the software embedded in the hardware, and fabricating the integrated
hardware into cabinets, on-site installation and testing, and training customer’s personnel about how to use the automation
and total solution.
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Customer acceptance
- The procedures for customer inspection and acceptance of the system
are typically contained in the contracts. The initial inspection usually occurs when the hardware is delivered to the customer’s
site for the purpose of detecting any obvious physical damage during shipping and to confirm that the entire order was delivered. A
final acceptance will be performed upon the satisfaction of integrated solution testing.
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Warranty period
- The integrated solution contracts customarily provide our customers with
a one-year warranty (although sometimes the warranty period may be more than one year depending on the customer and the negotiations
for the contract), which runs from the date of the final customer acceptance. The end of the warranty period represents fulfillment
of the entire contract.
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Because of the nature of customized integrated
contracts, a customer does not have the right to return the products that we deliver, so long as such products conform and perform
to the customer’s specification. Prior to delivering our products to a customer’s site, we perform an internal
test to ensure that the automation system works as intended. After installing the products on a customer’s site, any problems
are solved during trial runs. Once the testing requirements have been satisfied, a customer will execute a customer acceptance
document, which marks the beginning of the warranty period. Due to the nature of this process, many companies in the automation
systems business generally do not carry product liability insurance.
The size of an integrated contract is determined
by a customer’s needs in terms of the amount of equipment needed and the complexity of the integrated solution. The
size of an integrated contract drives the revenues generated by the contract. Because certain contracts will require working
periods longer than one year, the best way to measure the contract revenue realized is to use the percentage-of-completion method. Ultimately,
our revenue stream will be driven by the average price of an integrated contract and how many integrated contracts have started
in each reporting period.
Our backlog of contracts presents the amount
of unrealized revenue to be earned from the contracts that we have won. Accordingly, any increase or decrease in new contracts
won by us, or any change of scheduled delivery dates will have a future impact on our future revenue streams. In the event
of a delay in the delivery schedule, then the time of inspection, installation, trial run and customer acceptance will be delayed
accordingly, all of which will affect our revenue recognition. If the delay of delivering the specified automation systems
was a result of our inability to deliver the system on a timely basis, then we will be held responsible for this delay, in accordance
with the terms specified in the respective integrated contracts.
Competition
We compete with various domestic and international
corporations offering automation and control systems. We believe that our proprietary technologies and products provide us
with a strong competitive advantage over our domestic Chinese competitors. However, a number of multinational companies, some of
whom have substantially greater financial and other resources than we currently have, have been offering first rate automation
systems in competition with us. We believe that our primary competitors in the industrial automation market in China for our
products are multi-national corporations, such as ABB, Honeywell, Emerson and Siemens, and the local company Supcon, a private
company affiliated with Zhejiang University.
In the Southeast Asian
and Middle Eastern markets, our principal competitors for industrial automation are the multinational corporations such as ABB,
Siemens, Emerson, Yokogawa and Honeywell.
In the PRC high-speed rail business, as
the China Railway Corporation employs an administrative admission system and China has established its national rail technology
standard, the China Train Control Standard (CTCS), we believe that competition from multi-national companies will decrease
gradually. Currently, Hollysys is one of three entities that supply signaling products to China’s 200-250km/h segment
of the high-speed rail market. The other two are China Academy of Railway Science and Zhuzhou CSR. Hollysys is one of two signaling
product providers to China’s 300-350km/h segment of the high-speed rail market. The other provider is CRSC. In the subway
business and the SCADA market, we mainly compete with Nanjing Automation Research Institute (NARI). In the nuclear automation segment,
we mainly compete with multi-national corporations such as Siemens, Areva, and Invensys.
The major competitors in the international rail and subway signaling markets are Bombardier and Alstom.
For the mechanical and electrical solutions
business, the main competitors for Concord and Bond include Bintai Kinden Corporation Berhad, PJI Holding Berhad, and LFE Corporation
Berhad, Kurihara, Sanyo, Bintai KDK and Gammon Construction.
When compared to our competitors, apart from
satisfying certain local based criteria, we believe that our key competitive edge is the provision of better value for money to
our customers with the following distinctive attributes:
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Emphasis on Engineering
. Engineers are a critical element of effective design of both
hardware and software components of automation equipment and systems. For western companies, they are also a very costly element
of the process. Even the largest western companies face constraints in the size of their engineering staff due to the high
salaries and attendant costs. One of our competitive advantages is the lower cost of engineers in China relative to those
in the Western nations. Applying high levels of engineering effort to each product enables us to provide a solution that is
tailored not only to the industry in which the customer operates, but also to the customer’s specific needs. That custom
solution is provided at a cost that is typically lower than the generic products of our competitors.
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Industry Process Knowledge
. We devote substantial time and effort to understand our
customers and their business. This knowledge helps to ensure that the systems we design will provide the optimum in benefits for
our customers. We maintain this information in an extensive
“library”
of industry process information that
we utilize to speed up the system design process and to maximize the quality of the result, while at the same time minimizing costs. As
a result, we were able to take into account the widely varying degrees of sophistication and resources that our customers possess. The
result of this strategy is to broaden our potential customer base and to consistently deliver products that are of value to these
customers.
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Integration Services
. Western automation system companies are principally system platform
suppliers and the role of integrating the systems into the customer’s overall management information system is generally
left to independent firms. While such firms are widespread in western countries, China and other emerging market countries
do not have a large number of systems integration companies to perform this work, as these companies have been historically unprofitable
in China. We have bridged this gap by providing a vertically integrated solution to our customers that includes the integration
of our hardware into the customers’ overall manufacturing and information systems. This combination of the two aspects
of system design and installation take further advantage of a lower cost of engineering services and provides another benefit,
as the design and integration teams can work together to produce the best result more quickly and efficiently, again lowering costs.
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Core Technologies
. Although we deliver tailored systems, our systems are based on basic
modules of automation technology that are common across a broad array of industries and applications. Using these modules
as a starting point, development of an industry and customer-specific product is both more efficient and produces a better result
than starting from scratch each time. That means, with our labor cost advantages, we can provide a highly customized automation
product at a very favorable cost.
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Use of Engineering Sales Personnel
. The use of trained engineers in product and system design
is complemented by the use of engineers in the sales process as well. With engineers included in the sales process, we provide
the ability to understand from the beginning the needs of the customer and how to address their issues and the ability to convey
that information to the team that will ultimately develop the system to be installed.
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Providing service for the Broad Array of Chinese Customers’ Capabilities
. China’s
rapid growth and industrialization distinguish it from other manufacturing nations in some ways. There are many
“established”
Chinese companies that operate in facilities that are decades old, many companies that operate in new or recently upgraded facilities,
and the largest number that fall somewhere in between. We understand, to a greater extent than our western competitors, the
full range of needs and capabilities that Chinese customers possess, and we have designed our business to meet them. As a
result, we are able to offer even the most basic control systems solution while also providing the most sophisticated systems available
to applications that meet the rigorous requirement of the highly complex and demanding nuclear power industry.
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Pace of Product Development
. Another way that we keep ahead of our competitors is by
our pace of development. HOLLiAS-K is the 5th generation of Distributed Control System developed by us and released to the
market. In 1993, we developed China’s first proprietary DCS to the market as our first generation system. During the past
20 years, we continuously moved ahead of the market and developed leading technologies, including China’s first proprietary
large scale PLC in 2005, the earliest and till now the only domestic approved and applied nuclear power automation and control
system HOLLiAS-NMS, China’s earliest subway SCADA and high-speed rail signaling system. We believe we have the capability
to identify high-growth markets and quickly develop and deliver the most advanced technologies, while leveraging our strong R&D
and innovative capabilities.
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Manufacturing
We design and manufacture the hardware of our
products in Beijing and Hangzhou facilities, and in rare cases we outsource the production depending on special circumstances and
delivery requirements. The core part of the hardware of our products is the printed circuit board. We manufacture the printed circuit
boards in our SMT (Surface Mounting Technology) lines and plug-in mounting lines, and assemble them into various types of modules
and then form the modules into the final products. The raw materials which we procure mainly include bare printed circuit boards
from vendors based on our requirements and design considerations, and electronic components, chips, cabinets and cables among other
factors. Our products are subjected to rigorous testing in our facilities prior to shipment.
Several subsidiaries of the Company, including
Beijing Hollysys, Hangzhou Hollysys, Hollysys Intelligent, and
Hollysys
Electronics, have passed several or all of the GB/T 19001/ISO 9001 international quality management system certification,
GB/T 24001/ISO 14001environmental management system certification, and GB/T 28001 occupational health and safety management system
certification.
The GB/T 19001/ISO 9001 international quality
management system certificate is valid for production, and technical service of industrial automatic control system equipment.
The other two certificates are valid for production, technical service and related management activities of industrial automatic
control system equipment.
Seasonality
Like many other companies operating in China and Southeast Asia, our businesses experience lower levels of
revenues
in the quarter ending on March 31 due to the
Chinese New Year holiday.
Regulation
PRC.
We operate a significant portion of our business in China under a legal regime that consists, at the national level,
of the State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries
and agencies under its leadership, including: the Ministry of Agriculture and its local authorities; the Ministry of Commerce and
its local authorities; SAFE and its local authorities; the State Administration of Industry and Commence and its local authorities;
and the State Administration of Taxation, and the Local Taxation Bureau. The following sets forth a summary of significant
regulations or requirements that affect our business activities in China and our shareholders’ right to receive dividends
and other distributions from us.
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Foreign Currency Regulations
. We are subject to the PRC’s foreign currency regulations. The
PRC government has control over RMB reserves through, among other things, direct regulation of the conversion of RMB into other
foreign currencies. Although foreign currencies which are required for “current account” transactions can be bought
freely at authorized Chinese banks, the proper procedural requirements prescribed by Chinese law must be met. See Item 10
“Additional Information – D. Exchange Controls” for detailed discussion of PRC foreign exchange control rules.
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Taxation
.
The EIT Law, as further clarified by the Implementation Rules of the EIT Law and
the Notice on Implementation of Enterprise Income Tax Transition Preferential Policy
under the EIT Law, applies a unified enterprise income tax, or EIT, rate at 25% to both
FIEs and domestic invested enterprises. The EIT rate applicable to the enterprises established
before March 16, 2007 those were eligible for preferential tax rate according to the
effective tax laws and regulations will gradually transition to the uniform 25% EIT rate
by January 1, 2013. In addition, certain enterprises may still benefit from a preferential
tax rate of 15% under the EIT Law if they qualify as “High and New Technology Enterprises
strongly supported by the state,” (“HNTE”) subject to certain general
factors described therein. “Administrative Measures for Assessment of High-New
Tech Enterprises,” or Measures, and “Catalogue of High/New Tech Domains Strongly
Supported by the State,” or Catalogue (2008), jointly issued by the Ministry of
Science and Technology and the Ministry of Finance and State Administration of Taxation
set forth general guidelines regarding criteria as well as application procedures for
qualification as a HNTE under the New EIT Law. Both Beijing Hollysys and Hangzhou
Hollysys have met the qualifications for the HNTE designation, effective from January
1, 2011 to December 31, 2016, and are accordingly subject to a reduced national enterprise
income tax of 15% for the effective period. According to the Notification on Preferential
Enterprise Income Tax of Software and Integrated Circuit Industry, Caishui [2016] No.
49, which was issued in May 2016 by the China State Administration of Taxation (“SAT”)
and the Ministry of Finance (“MOF”), Beijing Hollysys and Hangzhou Hollysys
satisfied the definitions of Key Software Enterprise, and applied a preferential tax
rate of 10% effective for the year from January 1, 2015 to December 31, 2015, instead
of the 15% used by the Company in calendar year 2015.
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In addition to the changes to the
current tax structure, under the EIT Law, an enterprise established outside of China with “de facto management bodies”
within China is considered a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing
rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall
management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.” If the PRC tax
authorities subsequently determine that we should be classified as a resident enterprise, then our public holding company’s
global income will be subject to PRC income tax of 25%. For detailed discussion of PRC tax issues related to resident enterprise
status, see Item 3 “Key information—D. Risk Factors—Risks Relating to Doing Business in China—Under the
New Enterprise Income Tax Law, we may be classified as a ‘resident enterprise’ of China. Such classification will likely
result in unfavorable tax consequences to us and our non-PRC shareholders.”
|
·
|
Dividend Distribution
. Under PRC law, FIEs in China, may pay dividends only out of
their accumulated profits, if any, determined in accordance with PRC accounting principles. In addition, FIEs in China are required
to set aside at least 10% of their after-tax profit based on PRC accounting standards each year for their general reserves until
the accumulative amount of such reserves reaches 50% of registered capital. These reserves are not distributable as loans,
advances or cash dividends. The board of directors of a FIE has the discretion to allocate a portion of its after-tax profits
to staff welfare and bonus funds, and expansion (development) funds, which, once allocated, may not be distributed to equity owners
except in the event of liquidation. In addition, under the new EIT Law, effective as of January 2008, dividends from our PRC
subsidiaries to us are subject to a withholding tax of 10%.
|
The foregoing summary does not purport to be
complete and is qualified by reference to the relevant provisions of applicable law in the jurisdictions in which we operate. We
believe that we are currently in compliance with all applicable laws and regulations relating to our business.
Southeast Asia.
The kinds of currency
regulation, taxation regimes and dividend restrictions imposed in China are not replicated in Singapore, Malaysia, and other Southeast
Asian markets in which we operate. Generally these markets are free-trade based economies, with no direct or indirect currency
or similar operational barriers.
Marketing, Sales and Customer Support
Our marketing and sales activities are
focused on the development of and addressing the growing demand for automation and control products, systems and services in the
Chinese domestic market and the Southeast Asian, Indian and Middle Eastern markets. We insist on building cooperative relationships
with our customers, educating them about technological developments and reflecting their needs in our products and services.
Our sales teams consist of a complementary
group of sales personnel and hardware and software engineers from a variety of disciplines to tailor products to specific customer
needs. Employing a pool of skilled personnel in the early stage of a project accelerates the design and the subsequent production
of a particular customized solution, typically exceeding that of our competitors. Our sales teams possess significant hands-on,
industry-specific experience which permit them to do on-site process analyses, which in turn, makes the design and implementation
of upgrades simpler. The result is an automation system that is more effective, efficient and reliable, which in turn leads to
a truly satisfied customer.
Our sales force is organized into three principal
groups, (i) regional sales, to provide business consulting, promote pre-sale activity and serve as customer contacts, (ii) customer
relationship management, to manage relations with contracted customers and improve customer satisfaction by coordinating responses
to the client’s information requests, sale of supplemental parts or components and make customer visits, and (iii) market
planning, to facilitate strategic cooperation with certain specialized manufacturers, to expand the specific fields for our products.
We identify and target market segments and
select target sales opportunities within our markets and conduct sales opportunity studies to ensure that adequate sales resources
are available. Sales quotas are assigned to all sales personnel according to annual sales plans. We classify market segments and
target opportunities on national and regional levels. Segmentation of our markets helps us to determine our primary sales targets
and to prepare monthly and quarterly sales forecasts. The sales team approves target projects, develops detailed sales promotion
strategies and prepares reports on order forecasts, technical evaluation, sales budgeting expense, schedules and competition analysis.
After the report has been approved, a marketing group is appointed, consisting of sales personnel and engineers. We employ marketing
personnel to conduct market research, to analyze user requirements and to organize marketing communications.
Our marketing team engages in a variety of
marketing activities, including:
|
·
|
publishing internal research reports and customer newsletters;
|
|
·
|
conducting seminars and conferences;
|
|
·
|
conducting ongoing public relations programs; and
|
|
·
|
creating and placing advertisements
|
We actively participate in technology-related
conferences and demonstrate our products at trade shows or at exhibitions targeted at our existing and potential customers. We
also evaluate a range of joint-marketing strategies and programs with our business partners in order to take advantage of their
strategic relationships and resources. We also support our customers by offering field services such as maintenance and training
services, which help customers to cut their costs and improve their operating efficiency.
As of June 30, 2016, we employed
over 600 direct sales personnel through our subsidiaries in China, Southeast Asia, and the Middle East.
|
C.
|
Organizational Structure
|
The following diagram illustrates our corporate
structure as of the date of this annual report. We are a holding company with no operations of our own. We conduct
our operations in China mainly through our Chinese operating companies, and in Southeast Asia and the Middle East mainly through
Concord and Bond.
* On November
24, 2015, the Company established Concord Electrical Contracting, Ltd. (“CECL”) to explore the market in Qatar. CCPL
has a 49% direct ownership of CECL and the remaining 51% equity interest is held by a nominee shareholder. Through
a series of contractual arrangements, CCPL is entitled to appoint majority of directors of CECL who have the power to direct the
activities that significantly impact CECL’s economic performance. Further, CCPL is entitled to 95% of the variable returns
from CECL’s operations. As a result, despite of its minority direct ownership of CECL arrangements, CCPL is considered the
primary beneficiary of CECL. The consolidated amounts and financial performance related to CECL included in the Company’s
consolidated balance sheet, statement of comprehensive income and statement of cash flows were immaterial for the year ended June
30, 2016.
Our corporate headquarters are located at No.
2 Disheng Middle Road, Beijing Economic-Technological Development Area, Beijing, 100176, China. Our telephone number is (+86)
10 58981386. We maintain a website at
http://www.Hollysys.com
that contains information about our company, but that
information is not a part of this annual report.
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D.
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Property, Plant and Equipment
|
Since 2010, our principal executive offices
have been located at No. 2 Disheng Middle Road, Beijing Economic-Technological Development Area, Beijing, 100176, China. At
this location in Beijing, we have ample room for substantial expansion, as our needs require. We own the prepaid land leases
to the properties at the following principal locations, each of which contains principal administrative offices, sales and marketing
offices, research and development facilities, and manufacturing facilities:
Location
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|
Approximate Sq. Meters
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Beijing
|
|
120,000
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Hangzhou
|
|
25,000
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Singapore
|
|
1,200
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Malaysia
|
|
3,400
|
The manufacturing facilities at the Beijing
and Hangzhou locations are used for the system integration production, including hardware testing instruments, auxiliary material
processing, packaging and shipping, and for self-made product integration production, including inspection and testing.
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ITEM
4A.
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UNRESOLVED STAFF COMMENTS
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There are no unresolved staff comments.
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ITEM 5.
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
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The following discussion and analysis of our
financial condition and results of operations should be read in conjunction with our consolidated financial statements and the
related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements
based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of various factors, including the risk factors and the discussion of
our business set forth in other parts of this annual report on Form 20-F.
Overview
Through our operating subsidiaries, we are
one of the leading automation solutions providers in China, developing a number of core technologies and completing numerous projects
utilizing a wide array of automation products. With our philosophy of sincere concern for customers and our technical innovation
capabilities, we specialize in the research, development, production, sale and distribution of industrial automation for digital
railway signals and information systems, e-government, motor drive transmissions and non-safety controls for nuclear power reactors.
The main channel through which we obtain our
automation system business is the procurement bidding process. Customers propose their requirements and specifications via
legally binding bid documents. Companies interested in obtaining the contract can respond with an appropriate bid.
We derive our revenue mainly from three operating
segments including industrial automation, railway transportation and mechanical and electrical solutions.
Around 90% of our total consolidated revenues derived from integrated contracts we have won through the bid process. In
addition, we generate revenue from sales of spare parts and component products to customers for maintenance and replacement purposes
after the completion of the integrated solution contract, and from providing maintenance and training service, after the warranty
period to customers for efficiency improvement or environment protection purpose; which tends to provide a recurring revenue stream.
Spare part and component sales and services rendered are not part of the integrated solutions contracts.
The purpose of an integrated solutions contract
is to furnish an automation system that provides the customer with a total solution for the automation or process control requirement
being addressed. The automation system and total solution we offer, consisting of hardware, software and services, is customized
to meet the customer’s particular needs and technical specifications. None of the hardware, software and services has
independent functionality, and therefore, is not sold separately to customers. The following table sets forth the information
regarding the integrated contracts we won during the last three fiscal years and the integrated backlog at the dates indicated:
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|
Years Ended June 30,
|
|
|
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2014
|
|
|
2015
|
|
|
2016
|
|
Number of new contracts won during the year
|
|
|
3,362
|
|
|
|
2,256
|
|
|
|
2,031
|
|
Total amount of new contracts (million)
|
|
$
|
635.1
|
|
|
$
|
587.7
|
|
|
$
|
527.9
|
|
Average price per contract
|
|
$
|
188,899
|
|
|
$
|
260,505
|
|
|
$
|
259,916
|
|
|
|
Years Ended June 30,
|
|
Backlog Situation:
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Contracts newly entered and unfinished (million)
|
|
$
|
257.5
|
|
|
$
|
280.4
|
|
|
$
|
284.2
|
|
Contracts entered in the prior year and unfinished (million)
|
|
$
|
297.6
|
|
|
$
|
288.1
|
|
|
$
|
243.0
|
|
Total amount of backlog (million)
|
|
$
|
555.1
|
|
|
$
|
568.5
|
|
|
$
|
527.2
|
|
Key Factors Affecting Our Growth,
Operating Results and Financial Condition
Our future growth, operating results and financial
condition will be affected by a number of factors including:
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·
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The ability in developing and acquiring new products and systems in order to improve competitiveness,
which can increase both sales revenue and margins. The success of our business depends in great measure on our ability to
keep pace with or even lead changes that occur in our industry.
|
|
·
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The success in expanding our business in targeted emerging markets and overseas markets, which
may require us to overcome domestic competition and trade barriers.
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|
·
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Our ability to retain our existing customers and to obtain additional business opportunities. Since
we do not have long-term purchase commitments from customers, our customers can shift to other competitors for future projects. It
is important to maintain our customer base in order to sustain and expand our business.
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|
·
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The success of our business also depends on securing a steady stream of new customers. In
order for our business to continue to succeed and grow, it is vital to secure contracts with new customers on a regular basis.
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|
·
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The ability to secure adequate engineering resources and relatively low cost engineering staff
can increase our profitability and potential business prospects. One of the competitive advantages that we enjoy is the access
to lower cost engineering staff as compared to those of our Western and Japan-based competitors. The plentiful supply of affordable
engineering talent in China is a key element of our overall business strategy.
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·
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Further improvement in product design and maintaining high standard of quality control, which can
reduce or avoid product defects. Any product defects will result in additional costs and cause damage to our business reputation.
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|
·
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The ability to secure and protect our intellectual property rights is critical, as our business
is based on a number of proprietary products and systems, and we strive to strengthen and differentiate our product portfolio by
developing new and innovative products and product improvements.
|
|
·
|
The success in penetrating into the railway, conventional and nuclear power market sectors can
develop revenue streams and improve margins. In addition to the traditional industrial automation business, our plan for future
growth includes an increasing emphasis on rail control systems, power generation control systems and mechanical and electrical
solutions both in China and internationally.
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|
·
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The ability to obtain greater financial resources to match or even exceed our major competitors,
in order to compete effectively with them, and to weather any extended weaknesses in the automation and control market.
|
|
·
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The continued growth in the Chinese and Southeast Asia industry in general. This continued
growth will create more business opportunities for us, because industrial companies in Asia are our principal source of revenues.
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|
·
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The ability to maintain key personnel and senior management, who will have significant impact and
contribution to our future business. The ability to attract and retain additional qualified management, technical, sales and
marketing personnel will be vital.
|
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·
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The continuation of the preferential tax treatment and subsidies currently available to our PRC
subsidiaries will be critical to our future operating results. If governmental subsidies were reduced or eliminated, our after-tax
income would be adversely affected.
|
|
·
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The exchange rate fluctuation of RMB and SGD against US dollars will result in future translation
gain or loss as most of our assets are denominated in RMB and SGD. In addition, some of our raw materials, components and
major equipment are imported from overseas. In the event that the RMB and SGD appreciate against other foreign currencies,
our costs will decrease and our profitability will increase. However, the impact will be the other way around if RMB and SGD depreciate
against other foreign currencies.
|
Critical Accounting Policies
Business combinations
The Company accounts for its business
combinations using the purchase method of accounting in accordance with Accounting Standards Codification (“ASC”)
Topic 805,
Business Combinations
(“ASC 805”). The purchase method of accounting requires that the consideration
transferred to be allocated to the assets, including separately identifiable assets and liabilities the Company acquired based
on their estimated fair values. The consideration transferred of an acquisition is measured as the aggregate of the fair values
at the date of exchange of the assets given, liabilities incurred, and equity instruments issued as well as the contingent considerations
and all contractual contingencies as of the acquisition date. Identifiable assets, liabilities and contingent liabilities acquired
or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling
interests. The excess of (i) the total cost of the acquisition, fair value of the noncontrolling interests and acquisition date
fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the
acquiree, is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary
acquired, the difference is recognized directly in the statements of comprehensive income.
The determination and allocation of fair
values to the identifiable assets acquired, liabilities assumed and noncontrolling interests is based on various assumptions and
valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount
rates, terminal values, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Company determines
discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons.
Terminal values are based on the expected life of assets and forecasted cash flows over that period.
Acquisition-related costs are recognized
as general and administrative expenses in the statements of comprehensive income as incurred.
Revenue recognition
Integrated solutions contracts
Revenues generated from designing, building,
and delivering customized integrated industrial automation systems are recognized over the contractual terms based on the percentage
of completion method. The contracts for designing, building, and delivering customized integrated industrial automation systems
are legally enforceable and binding agreements between the Company and customers. The duration of contracts depends on the contract
size and ranges from 6 months to 5 years excluding the warranty period. The majority of the contract duration is longer than one
year.
Revenue generated from mechanical and electrical
solution contracts for the construction or renovation of buildings, rail or infrastructure facilities are also recognized over
the contractual terms based on the percentage of completion method. The contracts for mechanical and electrical solution services
are legally enforceable and binding agreements between the Company and customers. The duration of contracts depends on the contract
size and the complexity of the construction work and ranges from 6 months to 3 years excluding the warranty period. The majority
of the contract duration is longer than one year.
In accordance with ASC 605-35,
Revenue Recognition - Construction-Type and Production-Type Contracts
(“ASC
605-35”), recognition is based on an estimate of the income earned to date, less income recognized in earlier periods. Extent
of progress toward completion is measured using the cost-to-cost method where the progress (the percentage complete) is determined
by dividing costs incurred to date by the total amount of costs expected to be incurred for the integrated solutions contract.
Revisions in the estimated total costs of integrated solutions contracts are made in the period in which the circumstances requiring
the revision become known. Provisions, if any, are made in the period when anticipated losses become evident on uncompleted contracts.
The Company reviews and updates the estimated
total costs of integrated solutions contracts at least semi-annually. The Company accounts for revisions to contract revenue and
estimated total costs of integrated solution contracts, including the impact due to approved change orders, in the period in which
the facts that cause the revision become known as changes in estimates. Unapproved change orders are considered claims. Claims
are recognized only when it has been awarded by customers. Excluding the impact of change orders, if the estimated total costs
of integrated solution contracts, which were revised during the years ended June 30, 2014, 2015 and 2016, had been used as a basis
of recognition of integrated contract revenue since the contract commencement, net income for the years ended June 30, 2014, 2015
and 2016 would have been decreased by $4,436, $26,232, and $30,270, respectively; basic net income per share for years ended June
30, 2014, 2015 and 2016 would have been decreased by $0.08, $0.45, and $0.51, respectively; and diluted net income per share for
the years ended June 30, 2014, 2015 and 2016, would have decreased by $0.08, $0.44, and $0.50, respectively. Revisions to the estimated
total costs for the years ended June 30, 2014, 2015 and 2016 were made in the ordinary course of business.
The Company combines a group of contracts
as one project if they are closely related and are, in substance, parts of a single project with an overall profit margin. The
Company segments a contract into several projects, when they are of different business substance, for example, with different business
negotiation, solutions, implementation plans and margins.
Revenue in excess of billings on the contracts
is recorded as costs and estimated earnings in excess of billings. Billings in excess of revenues recognized on the contracts are
recorded as deferred revenue until the above revenue recognition criteria are met.
The Company generally recognizes 100% of
the contractual revenue when the customer acceptance has been obtained, and no further major costs are estimated to be incurred,
normally this is also when the warranty period commences. Revenues are presented net of taxes collected on behalf of the government.
Product sales
Revenue generated from sales of products
is recognized when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.
Service rendered
The Company has in recent years extended
its service offerings as described below. The Company mainly provides two types of services:
Revenue from one-off services: the Company
provides different types of one-off services, including on-site maintenance service and training services which are generally completed
on site within a few working days. Revenue is recognized when the Company has completed all the respective services described in
the contracts, there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection is reasonably assured.
Revenue from services covering a period
of time: the Company also separately sells extended warranties to their integrated solution customers for a fixed period. Such
arrangements are negotiated separately from the corresponding integrated solution system and are usually entered into upon the
expiration of the warranty period attached to the integrated solution contract. During the extended warranty period, the Company
is responsible for addressing issues related to the system. Part replacement is not covered in such services. The Company recognizes
revenue on a pro-rata basis over the contractual term.
Inventories
Inventories are composed of raw materials, work in progress,
purchased
and manufactured finished goods and low value consumables. Inventories are stated at the lower of cost or market. The Company elected
to change the inventory costing method from the “first-in first-out method” to the weighted average cost method. The
Company believes the weighted average cost method is preferable because it more closely aligns with the physical flow of inventory
and the information system calculates inventory at weighted average cost. The impact of the change in accounting principle was
immaterial to all periods presented and thus, not applied retrospectively.
The Company assesses the lower of cost
or market for non-saleable, excess or obsolete inventories based on its periodic review of inventory quantities on hand and the
latest forecasts of product demand and production requirements from its customers. The Company writes down inventories for non-saleable,
excess or obsolete raw materials, work-in-process and finished goods by charging such write-downs to cost of integrated contracts
and/or costs of products sold.
Warranties
Warranties represent a major term under
an integrated contract, which will last, in general, for one to three years or otherwise specified in the terms of the contract.
The Company accrues warranty liabilities under an integrated contract as a percentage of revenue recognized, which is derived from
its historical experience, in order to recognize the warranty cost for an integrated contract throughout the contract period. In
addition, the Company estimates whether or not the accrued warranty liabilities are adequate by considering specific conditions
that may arise and the number of contracts under warranty period at each reporting date. The Company adjusts the accrued warranty
liabilities in line with the results of its assessment.
Accounts receivable
and costs and estimated earnings in excess of billings
Performance of the integrated contracts
will often extend over long periods and the Company’s right to receive payments depends on its performance in accordance
with the contractual agreements. There are different billing practices in the PRC and overseas operating subsidiaries including
Concord and Bond. For the Company’s PRC subsidiaries, billings are issued based on milestones specified in contracts negotiated
with customers. In general, there are four milestones: 1) project commencement, 2) system manufacturing and delivery, 3) installation,
trial-run and customer acceptance, and 4) expiration of the warranty period. The amounts to be billed at each milestone are specified
in the contract. All contracts have the first milestone, but not all contracts require prepayments. The length of each interval
between two continuous billings under an integrated contract varies depending on the duration of the contract (under certain contracts,
the interval lasts more than a year) and the last billing to be issued for an integrated solution contract is scheduled at the
end of a warranty period. For Concord and Bond, billing claims rendered are subject to the further approval and certification of
the customers or their designated consultants. Payments are made to Concord or Bond based on the certified billings according to
the payment terms mutually agreed between the customers and Concord or Bond. Certain amounts are retained by the customer and payable
to Concord and Bond upon satisfaction of final quality inspection or at the end of the warranty period. The retained amounts which
were recorded as accounts receivable were $9,653, $10,380 and $10,848 for the three years ended June 30, 2014, 2015 and 2016,
respectively. Prepayments received are recorded as deferred revenue. The deferred revenue will be recognized as revenue under the
percentage of completion method along with the progress of a contract. If no prepayment is received by the Company, revenue will
be recognized through costs and estimated earnings in excess of billings.
The Company does not require collateral
from its customers. Based on the prevailing collection practices in China, it is a reasonable expectation for the enterprises in
the automation industry to take over one year to collect the accounts receivable in full.
The Company does not charge interest for
late payments by its customers. The Company periodically reviews the status of contracts and decides how much of an allowance for
doubtful accounts should be made based on factors surrounding the credit risk of customers and historical experience. The Company
sets up a doubtful account for a customer based on the aging of the outstanding amount as well as the customer’s credit worthiness.
Goodwill
Goodwill represents the excess of the purchase
price over the estimated fair value of net tangible and identifiable intangible assets acquired. The Company’s goodwill outstanding
at June 30, 2016 was related to the acquisition of Concord and Bond. In accordance with ASC 350,
Intangibles, Goodwill
and Other
(“ASC 350”), goodwill is not amortized, but rather is tested for impairment at least annually or more
frequently if there are indicators of impairment present.
Goodwill is tested for impairment on June
30 in each year. The Company performs a qualitative assessment to determine if it is more likely than not that the fair value of
each identified reporting unit is less than its carrying amount. If this is the case, the Company is not required to calculate
the fair value of its reporting unit(s) and perform the two-step impairment test. However, if the Company concludes otherwise,
the first step of the two-step impairment test is performed by comparing the carrying value of its reporting unit to its fair value.
If the carrying value of the reporting unit is greater than its fair value, the second step is performed, where the implied fair
value of goodwill is compared to its carrying value. The Company recognizes an impairment charge for the amount by which the carrying
amount of goodwill exceeds its implied fair value.
All of the Company’s goodwill is
allocated to the mechanical and electrical solutions segment for which $25,111 and $36,589 is allocated to the Concord and
Bond reporting units, respectively.
For the year ended June 30, 2015, the Company
recorded an impairment charge of $1,855 for Concord. For the year ended June 30, 2016, the Company engaged an independent third-party
appraiser to assist with determining the fair value of the Concord reporting unit by using an income approach, particularly, the
discounted cash flow approach. In performing the step one impairment test, the Company estimated the fair value of Concord to be
$44,323, which represented headroom of $4,608 or 11.6% compared to the carrying amount of $39,715. As the fair value of Concord
exceeded it carrying amount, the Company concluded there was no impairment of Concord’s goodwill as of June 30, 2016.
Estimating the fair value of Concord requires
the Company to make assumptions and estimates regarding its future plans, market share, industry and economic conditions of the
various geographical areas in which it operates which includes Singapore, Malaysia and the Middle East. In applying the discounted
cash flow approach, key assumptions include the amount and timing of future expected cash flows, terminal value growth rates and
appropriate discount rates. The Company estimates future expected cash flows for each geographical area in which it operates and
calculates the net present value of those estimated cash flows using risk adjusted discount rates ranging from 13.5% to 16.4% and
a terminal value growth rate was 2%. If the discount rates adopted increased or decreased by 1.0%, the fair value of Concord would
decrease or increase by $3,018 and $3,527, respectively. If the terminal value growth rates adopted increased or decreased by 1.0%,
the fair value of Concord would increase or decrease by $1,871 and $1,611, respectively.
There are uncertainties surrounding the amount
and timing of future expected cash flows as they may be impacted by negative events such as a slowdown in the mechanical and electrical
engineering sector, deteriorating economic conditions in the geographical areas Concord operates in, political, economic and social
uncertainties in the Middle East, increasing competitive pressures and fewer than expected mechanical and electrical solution contracts
awarded to Concord. These events can negatively impact demand for Concord’s services and result in actual future cash flows
being less than forecasted or delays in the timing of when those cash flows are expected to be realized. Further, the timing of
when actual future cash flows are received could differ from the Company’s estimates, which are based on historical trends
and does not factor in unexpected delays in project commencement or execution.
Impairment of long-lived
assets other than goodwill
The Company evaluates its long-lived assets
or asset group including acquired intangibles with finite lives for impairment whenever events or changes in circumstances (such
as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying
amount of a group of long-lived assets may not be fully recoverable. When these events occur, the Company evaluates the impairment
by comparing the carrying amount of the assets to future undiscounted cash flows expected to result from the use of the assets
and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets,
the Company recognizes an impairment loss based on the excess of the carrying amount of the asset group over its fair value, generally
based upon discounted cash flows or quoted market prices.
There was no impairment loss for the periods
presented.
Income taxes
The Company follows the liability method
of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period
in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based
on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not
be realized. The effect on deferred taxes of a change in tax rate is recognized in tax expense in the period that includes the
enactment date of the change in tax rate.
The Company adopted ASC 740,
Income
Taxes
(“ASC 740”)
,
which clarifies the accounting and disclosure for uncertainty in income taxes. Interests
and penalties arising from underpayment of income taxes shall be computed in accordance with the related tax laws. The amount of
interest expense is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized
and the amount previously taken or expected to be taken in a tax return. Interests and penalties recognized in accordance with
ASC 740 are classified in the financial statements as a component of income tax expense. In accordance with the provisions of ASC
740, the Company recognizes in its financial statements the impact of a tax position if a tax return position or future tax position
is “more likely than not” to prevail based on the facts and technical merits of the position. Tax positions that meet
the “more likely than not” recognition threshold are measured at the largest amount of tax benefit that has a greater
than fifty percent likelihood of being realized upon settlement. The Company’s estimated liability for unrecognized tax positions
which is included in the accrued liabilities is periodically assessed for adequacy and may be affected by changing interpretations
of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations.
The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases,
appeal or litigation process. The actual benefits ultimately realized may differ from the Company’s estimates. As each audit
is concluded, adjustments, if any, are recorded in the Company’s financial statements. Additionally, in future periods, changes
in facts, circumstances, and new information may require the Company to adjust the recognition and measurement estimates with regard
to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes
occur.
Share-based compensation
The Company accounts for share-based compensation
in accordance with ASC 718,
Compensation-Stock Compensation
(“ASC 718”). The Company recognizes compensation
cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service
period for the entire award. The compensation cost for each vesting tranche in an award subject to performance vesting is recognized
ratably from the service inception date to the vesting date for each tranche. To the extent the required service and performance
conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating
to those awards are reversed. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary,
in a subsequent period if actual forfeitures differ from initial estimates.
For share-based awards that are subject to performance-based vesting conditions in addition to time-based
vesting, the Company recognizes the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based
compensation expense over the vesting period based upon the Company’s determination of whether it is probable that the performance-based
criteria will be achieved. At each reporting period, the Company reassesses the probability of achieving the performance-based
criteria. Determining whether the performance-based criteria will be achieved involves judgment, and the estimate of share-based
compensation expense may be revised periodically based on changes in the probability of achieving the performance-based criteria.
Revisions are reflected in the period in which the estimate is changed. If the performance-based criteria are not met, no share-based
compensation expense is recognized, and, to the extent share-based compensation expense was previously recognized, such share-based
compensation expense is reversed.
Fair value measurements
The Company has adopted ASC 820,
Fair
Value Measurements and Disclosures
(“ASC 820”), which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements,
but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.
It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may
be used to measure fair value and include the following:
Level 1
|
-
|
Quoted prices in active markets for identical assets or liabilities.
|
Level 2
|
-
|
Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
Level 3
|
-
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Classification within the hierarchy is
determined based on the lowest level of input that is significant to the fair value measurement.
ASC 820 describes three main approaches
to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market
approach uses prices and other relevant information generated from market transactions involving identical or comparable assets
or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement
is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount
that would currently be required to replace an asset.
Recent Accounting Pronouncements
In January 2015, FASB issued ASU No. 2015-01,
Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating
the Concept of Extraordinary Items (“ASU 2015-01”)
, this update eliminates from GAAP the concept of extraordinary
items.
Subtopic 225-20, Income Statement—Extraordinary and Unusual Items
, required that an entity separately classify,
present, and disclose extraordinary events and transactions. The amendments in ASU 2015-01 are effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance
is applied from the beginning of the fiscal year of adoption. The Company will adopt ASU No. 2015-01 on July 1, 2016, and does
not expect the adoption of this update to have a material effect on the consolidated financial statements.
In February 2015, the FASB issued ASU No.
2015-02,
Consolidation (Topic 810): Amendments to the Consolidation Analysis
(“ASU 2015-02”). ASU No. 2015-02
focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate
certain legal entities. ASU No. 2015-02 simplifies consolidation accounting by reducing the number of consolidation models from
four to two. In addition, the new standard simplifies the FASB Accounting Standards Codification and improves current guidance
by: (i) placing more emphasis on risk of loss when determining a controlling financial interest; (ii) reducing the frequency of
the application of related-party guidance when determining a controlling financial interest in variable interest entities (“VIEs”);
(iii) changing consolidation conclusion for public and private companies in several industries that typically make use of limited
partnerships or VIEs. ASU No. 2015-02 is effective for periods beginning after December 15, 2015. Early adoption is permitted,
including adoption in an interim period. The Company will adopt ASU No. 2015-02 on July 1, 2016, and does not expect the adoption
of this update to have a material effect on the consolidated financial statements.
In April 2015, FASB issued ASU No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-03”). The amendments in this update require that
debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying
amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs
are not affected by the amendments in this update. An entity should apply the new guidance on a retrospective basis, wherein the
balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new
guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle.
These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description
of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement
line items (that is, debt issuance cost asset and the debt liability). For public business entities, the amendments in ASU No.
2015-03 are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within
those fiscal years. Early adoption of the amendments in ASU 2015-03 is permitted for financial statements that have not been previously
issued. The Company has early adopted ASU 2015-03 on a retrospective basis. There were no prior-period adjustments made to the
consolidated financial statements for the years ended June 30, 2014, 2015 and 2016, as there were no debt issuance costs incurred.
In addition, the impact on current fiscal year’s consolidated financial statements was immaterial.
In July 2015, FASB issued ASU No. 2015-11,
Simplifying the Measurement of Inventory
(“ASU 2015-11”). The amendments in ASU 2015-11 do not apply to inventory
that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which
includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within
the scope of ASU 2015-11 at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in
the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement
is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, the amendments in
ASU 2015-11 are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.
The Company will adopt ASU 2015-11 on July 1, 2016, and does not expect the adoption of this update to have a material effect on
the consolidated financial statements.
In August 2015, the FASB issued Accounting
Standards Update 2015-14, which defers the effective date of ASU 2014-09
Revenue from Contracts with Customers (Topic 606)
(" ASU 2014-09") one year, and would allow entities the option to early adopt the new revenue standard as of the original
effective date. Issued in May 2014, ASU 2014-09 provided guidance on revenue recognition on contracts with customers to transfer
goods or services or on contracts for the transfer of nonfinancial assets. ASU 2014-09 requires that revenue recognition on contracts
with customers depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. For public companies, ASU 2014-09 would have been effective
for fiscal years, and interim periods within those years, beginning after December 15, 2017. The standard provided for either the
retrospective or cumulative effect transition method. The Company is currently assessing the impact of the adoption of ASU 2014-09
will have on its consolidated financial statements, if any.
In September 2015, the FASB issued ASU
No. 2015-16 (“ASU 2015-16”),
Business Combinations (Topic 805) Simplifying the Accounting for Measurement –
Period Adjustments
. ASU 2015-16 requires the acquirer to recognize adjustments to provisional amounts that are identified during
the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record,
in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income
effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the
acquisition date. In addition, an entity is required to present separately on the face of the income statement or disclose in the
notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been
recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.
For public business entities, ASU 2015-16 is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted.
The Company will adopt ASU 2015-16 on July 1, 2016, and does not expect the adoption of this update to have a material effect on
the consolidated financial statements.
In November 2015, the FASB issued ASU No.
2015-17 (“ASU 2015-17”),
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
. ASU 2015-17
simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities
and assets into current and noncurrent amounts in the consolidated balance sheet. The amendments in the update require that all
deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update
are effective for fiscal years beginning after December 15, 2016, and interim periods therein and may be applied either prospectively
or retrospectively to all periods presented. Early adoption is permitted. The Company will adopt ASU 2015-17 on July 1, 2017, and
does not expect this adoption of this update to have a material effect on the consolidated financial statements.
In February 2016, the FASB issued ASU No.
2016-02 (“ASU 2016-02”),
Leases
. ASU 2016-02 specifies the accounting for leases. For operating leases, ASU
2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the
lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that
the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for public
companies for annual reporting periods, and interim periods within those years beginning after December 15, 2018. Early adoption
is permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
On March 30, 2016, the FASB issued ASU
2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”),
which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for
share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or
liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years beginning
after December 15, 2016, including interim periods within those fiscal years. The new standard will be effective for the Company
for the fiscal year beginning July 1, 2017. Early adoption is permitted. The Company is in the process of evaluating the impact
of this accounting standard on its consolidated financial statements, but does not expect the impact of adoption to be material.
In August 2016, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-15,
“Statement of Cash Flows (Topic 230): Classification
of Certain Cash Receipts and Cash Payments.”
This new standard will make eight targeted changes to how cash receipts
and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning
after December 15, 2017, which means that it will be effective for us in the first quarter of our fiscal year beginning August
1, 2018. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case we
would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently evaluating
the impact of our pending adoption of ASU 2016-15 on our consolidated financial statements.
The following are some financial highlights
for the fiscal year ended June 30, 2016:
|
·
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Total assets increased by approximately $20.5 million, from approximately $983.7 million as of
June 30, 2015, to approximately $1,004.2 million as of June 30, 2016. The increase was mainly due to an increase of approximately
$21.3 million in cash and cash equivalents.
|
|
·
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Cash and cash equivalents increased by $21.3 million, from approximately $207.8 million as of June
30, 2015, to approximately $229.1 million as of June 30, 2016. The increase was mainly due to $46.7 million cash generated from
operating activities.
|
|
·
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Accounts receivable at June 30, 2016 were approximately $237.2 million, a decrease of approximately
$15.3 million, or 6.1%, compared to approximately $252.5 million at June 30, 2015. The decrease was mainly due to the fact
that the Company more successfully collected its receivables.
|
|
·
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Cost and estimated earnings in excess of billings as of June 30, 2016, were approximately $189.9
million compared to approximately $165.3 million as of June 30, 2015, representing an increase of approximately $24.6 million,
or 14.9%. The cost and estimated earnings in excess of billings were accounted for based on the difference between percentages
of completion and progress billings. Different contracts have different billing arrangements, and consequently result in different
cost and estimated earnings in excess of billings. The higher or lower balance of cost and estimated earnings in excess of billings
as of the balance sheet date was due to the different contracts mix with different billing arrangements.
|
|
·
|
Inventory
increased by approximately
$1.7 million, from approximately $34.7 million as of June 30, 2015, to approximately $36.4 million as of June 30, 2016.
|
|
·
|
Property, plant and equipment and prepaid land leases decreased by approximately $1.2 million,
from approximately $91.9 million as of June 30, 2015, to approximately $90.7 million as of June 30, 2016.
|
|
·
|
Investments in equity investees increased by approximately $6.2 million, from $12.5 million as
of June 30, 2015, to approximately $18.7 million as of June 30, 2016. The increase was mainly due to gains realized from equity
investees.
|
|
·
|
Total liabilities decreased by approximately $76.8 million
or 19.3%, from approximately $398.3 million at June 30, 2015, to approximately $321.5 million as of June 30, 2016.
The decrease in liabilities was mainly due to a decrease of approximately $56.6 million in deferred revenue, a decrease of approximately
$15.1 million in acquisition-related contingent payment, and a decrease of approximately $13.2 million in short-term bank loans;
all of which were partially offset by the increase of accrued liabilities of approximately $13.1 million.
|
|
·
|
Short-term bank loans decreased by approximately $13.2 million, from approximately $16.3 million
at June 30, 2015, to $3.1 million at June 30, 2016. The decrease was mainly due to reduced need of short-term financing as a result
of increased cash inflow generated from operating activities during fiscal 2016.
|
|
·
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Accounts payable increased by approximately $1.5 million, or 1.4% from approximately $105.3 million
at June 30, 2015, to $106.8 million at June 30, 2016.
|
|
·
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Deferred revenue decreased by approximately $56.6 million, or 40.8%, from approximately $138.6
million at June 30, 2015, to approximately $82.0 million at June 30, 2016. The decrease was mainly due to part of deferred revenue
converted into revenues during fiscal year 2016.
|
|
·
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Deferred tax assets were $8.9 million as of June 30, 2016. Based on the Company’s historical
operating results and order backlog, the Company believes that it is more than likely that the deferred tax assets net of valuation
allowance would be realized.
|
Comparison of Fiscal
Years Ended June 30, 2016 and 2015
Revenues
: For the fiscal year ended
June 30, 2016, total revenues amounted to approximately $544.3 million, an increase of approximately $12.9 million, compared to
approximately $531.4 million for the prior fiscal year, representing an increase of 2.4%.
Integrated contract revenue accounted for approximately
$477.8 million of total revenues, a decrease of approximately $3.2 million
or 0.7%, compared to approximately $481.0 million for the prior fiscal year. The decrease in integrated revenues was
mainly composed of a decrease of approximately $40.0 million or 21.3% in industrial automation projects and a decrease of approximately
$14.2 million or 13.0% in mechanical and electrical solutions business. The revenue decrease was partially offset by an increase
of $51.0 million or 27.7% in rail transportation.
Approximately $54.5 million of total revenues
was generated from product sales, an increase of approximately $14.7 million, or 36.9% compared to approximately $39.8 million
in product sales revenue for the prior year. Product sales revenue depends on overall demand for the Company’s spare
parts for customers’ maintenance and replacement purposes.
Approximately $12.0 million of total revenue
was generated from service rendered, an increase of $1.4 million or 13.2% compared to $10.6 million of last year.
The Company’s total revenue by segments
was as follows:
(In USD millions)
|
|
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Fiscal year ended June 30,
|
|
|
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2015
|
|
|
2016
|
|
|
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$
|
|
|
% to Total Revenue
|
|
|
$
|
|
|
% to Total Revenue
|
|
Industrial Automation
|
|
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213.3
|
|
|
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40.1
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%
|
|
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182.9
|
|
|
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33.6
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%
|
Rail Transportation
|
|
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193.3
|
|
|
|
36.4
|
%
|
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240.3
|
|
|
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44.2
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%
|
Mechanical and Electrical Solution
|
|
|
110.0
|
|
|
|
20.7
|
%
|
|
|
95.3
|
|
|
|
17.5
|
%
|
Miscellaneous
|
|
|
14.8
|
|
|
|
2.8
|
%
|
|
|
25.8
|
|
|
|
4.7
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%
|
Total
|
|
|
531.4
|
|
|
|
100.0
|
%
|
|
|
544.3
|
|
|
|
100.0
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%
|
Integrated Contract Revenue Backlog
: An
important measure of the stability and growth of the Company’s business is the size of its integrated contract backlog, which
represents the total amount of unrecognized integrated contract revenue associated with existing contracts. Our integrated
contract backlog as of June 30, 2016 amounted to approximately $527.2 million, representing a decrease of approximately $41.2 million,
or 7.3%, compared to approximately $568.5 million as of June 30, 2015.
Of the total integrated contract backlog as
of June 30, 2016, the unrecognized revenue associated with new contracts signed in the fiscal year 2016 was approximately $284.2
million and the amount brought forward from prior periods was approximately $243.0 million, comparing to the total backlog
as of June 30, 2015 of approximately $280.5 million from new contracts signed in fiscal year 2015, and approximately $288.1 million
from contracts carried forward from prior year.
Cost of revenues
: Mirroring the
categories of revenues the cost of revenues can also be divided
into
three components including cost of integrated contracts, cost of products sold
and cost of service rendered. For the fiscal year ended June 30, 2016, the total cost of revenues amounted to approximately
$338.6 million, an increase of approximately $21.6 million, or 6.8%, compared to approximately $317.0 million for the prior fiscal
year. The increase was due to an approximate $10.2 million
increase
in the cost of integrated contracts, and an increase of approximately $11.5 million or 91.5% in the cost of products.
The cost of integrated contract revenue
consists primarily of three components: cost of equipment and materials, labor costs and other manufacturing expenses including
but not limited to detecting expense, technology service fee, all of which incurred during the designing, building and delivering
customized automation solutions process to customers. For the fiscal year ended June 30, 2016, the total cost of integrated contracts
was approximately $310.5 million, compared to approximately $300.3 million for the prior fiscal year, representing an increase
of approximately $10.2 million, or 3.4%. The increase was primarily due to an increase of approximately $8.2 million
in cost of equipment and materials, an increase of approximately $1.0 million in other manufacturing expenses, and an increase
of approximately $1.0 million in labor cost. Of the total cost of integrated contract revenue
for the fiscal year 2016, cost of equipment and materials accounted for approximately $202.8 million, compared to approximately
$194.6 million for the prior fiscal year; labor cost accounted for approximately $71.6 million, compared to approximately $70.6
million for the prior fiscal year; and other manufacturing expenses accounted for approximately $36.2 million, compared to approximately
$35.1 million for the prior fiscal year. Of the total integrated contract revenue for the fiscal year 2016, cost of equipment and
materials accounted for
37.2%, compared to 36.6% for the prior
fiscal year; labor cost accounted for 13.2%, compared to 13.3% for the prior fiscal year; and other manufacturing expenses accounted
for 6.6%, compared to 6.6% for the prior fiscal year. The cost components of integrated contracts were determined and varied according
to requirements of different customers.
Sales of products represent sales of spare
parts (either company manufactured or purchased from outside vendors) to customers for maintenance and replacement purposes. Given
the fact that the products purchased from outside vendors have different functions and capabilities from our self-made products,
we decide whether to purchase or
manufacture the necessary products
based on the needs and preferences of different customers while considering the efficiency factor. Therefore, as a
percentage of the cost of products sold, the self-made products and purchased products have varied significantly from time to time. The
cost of products sold for the fiscal year ended June 30, 2016 was approximately $24.0 million, an increase of approximately $11.5
million, compared to approximately $12.5 million for the prior fiscal year.
The majority of the cost of the service
revenue is labor cost. Our employees spend time and incur expenses while they are with the customers. From time to time, materials
costs related to the service are incurred, especially for providing extended warranty services. The cost of service revenue for
fiscal year ended June 30, 2016 was approximately $4.0 million, stayed at about the same level, compared to approximately $4.1
million for the prior fiscal year.
Gross margin
: For the fiscal year
ended June 30, 2016, as a percentage of total revenues, the overall gross margin was 37.8%, compared to 40.3% for the prior fiscal
year. The gross margin for integrated contracts was 35.0% for the year ended June 30, 2016, compared to 37.6% for the prior
year. The decrease in gross margin for integrated contracts was mainly due to our different sales mix during the fiscal year
2016. The gross margin for products sold was 56.0% for the fiscal year ended June 30, 2016, compared to 68.4% for the prior
fiscal year.
The gross margin for service provided was 66.4% for
the fiscal year ended June 30, 2016, compared to 61.4% for the prior fiscal year.
Selling expenses
: Selling expenses
mainly consist of compensation, traveling and administrative expenses related to marketing, sales and promotion activities incurred
by the Company’s marketing departments. Selling expenses were approximately $25.6 million for the fiscal year ended
June 30, 2016, a decrease of 2.7%, or approximately $0.7 million, compared to approximately $26.3 million for the prior fiscal
year. As a percentage of total revenues, selling expenses accounted for 4.7% and 4.9% for the fiscal year ended June 30, 2016 and
2015, respectively. The Company has established guidelines specifically tailored for different industries and regions to monitor
and evaluate sales performance, and to control selling expenses.
General and administrative expenses
: General
and administrative expenses mainly include compensation, traveling and other administrative expenses of non-sales-related departments,
such as the finance department, information systems department and human resources department. General and administrative
expenses amounted to approximately $45.8 million for the fiscal year ended June 30, 2016, representing a decrease of approximately
$5.0 million, or 9.8%, compared to approximately $50.8 million for the prior fiscal year. The decrease was mainly due to a decrease
of $6.5 million in bad debt provision. As a percentage of total revenues, general and administrative expenses were 8.4% and 9.6%
for the fiscal years ended June 30, 2016 and 2015, respectively.
Research and development expenses
: Research
and development expenses represent mostly employee compensation, materials consumed and experiment expenses related to specific
new product research and development, as well as any expenses incurred for basic research on advanced technologies. For the fiscal
year ended June 30, 2016, research and development expenses were approximately $36.6 million, representing an approximately $0.8
million, or 2.2%, compared to approximately $35.8 million for the prior fiscal year. As a percentage of total revenues, research
and development expenses were 6.7% and 6.7 % for the fiscal years ended June 30, 2016 and 2015, respectively.
VAT refunds and government subsidies
: The
state tax bureaus in China provide refunds out of the value added tax (“VAT”) they collect in order to encourage the
research and development efforts made by certain qualified enterprises. Some of our subsidiaries in China received such
refunds. All VAT refunds, that have no further conditions to be met, are recognized in the statements of comprehensive income
when cash or approval from the tax bureaus is received. For the fiscal year ended June 30, 2016, VAT refunds were approximately
$20.0 million, compared to approximately $25.5 million for the prior fiscal year, decreasing by approximately $5.5 million, or
21.6%. As a percentage of total revenues, VAT refunds were 3.7% and 4.8% for the fiscal years ended June 30, 2016 and 2015,
respectively.
The local governments in China also provide
financial subsidies to encourage research and development efforts made by certain qualified enterprises. Some of our subsidiaries
received such subsidies. For the government subsidies that have no further conditions to be met, the funds received are recognized
in the statements of comprehensive income; for the subsidies that have certain operating conditions yet to be met, the fund received
are recorded as liabilities and will be released to income when the conditions are met.
Subsidy income from the government
amounted to approximately $2.9 million and $4.9 million for the fiscal years ended June 30, 2016 and 2015, respectively, a decrease
of approximately $2.0 million, or 40.8%.
Income from operations
: Income
from operations decreased by approximately $9.5 million, from approximately $130.1 million for the fiscal year ended June 30, 2015
to approximately $120.6 million for the fiscal year ended June 30, 2016. The decrease was mainly due to the decrease of $8.7 million
in the gross profit.
Interest income
: For the fiscal
year ended June 30, 2016, interest income increased by approximately $2.2 million, or 59.5% from approximately $3.7 million for
the prior year, to approximately $5.9 million for the current period. As a percentage of total revenue, interest income accounted
for 1.1% and 0.7% for the fiscal years ended June 30, 2016 and 2015, respectively. The interest income was mainly earned from time
deposits with maturities over three months.
Interest expenses
: For the fiscal
year ended June 30, 2016, interest expenses decreased by approximately $0.4 million, or 22.2% from approximately $1.8 million for
the prior year, to approximately $1.4 million for the current period. As a percentage of total revenue, interest expenses accounted
for 0.3% and 0.3% for the fiscal years ended June 30, 2016 and 2015, respectively. The interest expenses were incurred by the short-term
and long-term loan/bond we had.
Other income (expenses), net
: For the
fiscal year ended June 30, 2016, the other income (expenses), net increased by approximately $1.5 million from approximately $2.6
million for the prior year, to approximately $4.1 million for the current period. The increase was mainly due to the fluctuation
of fair value of the contingent consideration related to the acquisition of Bond. We recorded approximately $1.7 million gain for
current year as compared to approximately $0.4 million gain from the prior fiscal year.
Income tax expenses
: For
the year ended June 30, 2016, the Company’s income tax expense was approximately $14.2 million for financial reporting purposes,
a decrease of approximately $11.8 million, as compared to $26.0 million for the prior year. According to the
Notification
on Preferential Enterprise Income Tax of Software and Integrated Circuit Industry, Caishui [2016] No. 49,
which was issued
in May 2016 by the China SAT and the MOF, Beijing Hollysys and Hangzhou Hollysys satisfied the definitions of Key Software Enterprise,
and applied for a preferential tax rate of 10% effective for the year from January 1, 2015 to December 31, 2015. As a result,
the Company recorded a tax benefit of $7.0 million during the fourth quarter of fiscal 2016. In addition, a $3.1 million income
tax expense was accrued and withheld for the expected profits distribution from PRC to overseas. The remaining retained earnings
of the Company’s PRC entities are expected to be reinvested for its operations. Excluding the impact of the abovementioned
tax benefit and withholding tax expenses, the effective tax rate for the current year is 13.2%.
Net income attributable to noncontrolling
interests
: The noncontrolling interests of the Company include noncontrolling shareholders’ interests in each subsidiary.
For fiscal 2016, the noncontrolling interests are the ownership interests of 49% in Hollycon, 1% in Hollycon Italy, and
5% in CECL. The net income attributable to noncontrolling interests for the fiscal year ended June 30, 2016 was approximately $5.0
million, an increase of approximately $2.3 million, from approximately $2.7 million for the prior year.
Net income and earnings per share attributable
to Hollysys
: For the fiscal year ended June 30, 2016, net income attributable to Hollysys amounted to approximately $118.5
million, representing an increase of approximately $22.0 million, as compared to approximately $96.5 million for the prior year.
The basic and diluted earnings per share were $2.00 and $1.97 for the year ended June 30, 2016, as compared to $1.65 and $1.61
for the prior year, representing an increase of $0.35 and $0.36, respectively. The increase was primarily due to the higher
net income attributable to Hollysys compared to fiscal 2016.
Comparison of Fiscal
Years Ended June 30, 2015 and 2014
Revenues
: For the fiscal year ended
June 30, 2015, total revenues amounted to approximately $531.4 million, an increase of approximately $10.0 million, compared to
approximately $521.3 million for the prior fiscal year, representing an increase of 1.9%.
Integrated contract revenue accounted for approximately
$481.0 million of total revenues, an increase of approximately $2.7 million or 0.6%, compared to approximately $478.3 million for
the prior fiscal year. The increase in integrated revenues was mainly attributable to an increase of approximately $10.9 million
or 6.3% in rail transportation, and an increase of approximately $3.0 million or 2.8% in mechanical and electrical solutions business.
The revenue increase was offset by a decrease of $11.0 million or 5.5% in industrial automation projects.
Approximately $39.8 million of total revenues
was generated from product sales, an increase of approximately $7.8 million, or 24.6%, compared to approximately $31.9 million
in product revenue for the prior year. Product revenue depends on overall demand for the Company’s spare parts for customers’
maintenance and replacement purposes.
Approximately $10.6 million of total revenue
was generated from service rendered, a slightly decrease of $0.5 million compared to $11.1 million of last year.
The Company’s total revenue by segments
was as follows:
(In USD millions)
|
|
|
Fiscal year ended June 30,
|
|
|
|
2014
|
|
|
2015
|
|
|
|
$
|
|
|
% to Total Revenue
|
|
|
$
|
|
|
% to Total Revenue
|
|
Industrial Automation
|
|
|
224.4
|
|
|
|
43.0
|
%
|
|
|
213.3
|
|
|
|
40.1
|
%
|
Rail Transportation
|
|
|
178.1
|
|
|
|
34.2
|
%
|
|
|
193.3
|
|
|
|
36.4
|
%
|
Mechanical and Electrical Solution
|
|
|
108.8
|
|
|
|
20.9
|
%
|
|
|
110.0
|
|
|
|
20.7
|
%
|
Miscellaneous
|
|
|
10.0
|
|
|
|
1.9
|
%
|
|
|
14.8
|
|
|
|
2.8
|
%
|
Total
|
|
|
521.3
|
|
|
|
100.0
|
%
|
|
|
531.4
|
|
|
|
100.0
|
%
|
Integrated Contract Revenue Backlog
: An
important measure of the stability and growth of the Company’s business is the size of its integrated contract backlog, which
represents the total amount of unrecognized integrated contract revenue associated with existing contracts. Our integrated
contract backlog as of June 30, 2015, amounted to approximately $568.6 million, representing an increase of approximately $13.5
million, or 2.4%, compared to approximately $555.1 million as of June 30, 2014.
Of the total integrated contract backlog as
of June 30, 2015, the unrecognized revenue associated with new contracts signed in the fiscal year 2015 was approximately $280.5
million and the amount brought forward from prior periods was approximately $288.1 million, comparing to the total backlog
as of June 30, 2014 of approximately $257.5 million from new contracts signed in fiscal year 2014, and approximately $297.6 million
from contracts carried forward from prior year.
Cost of revenues
: Mirroring the
categories of revenues the cost of revenues can also be divided into three components including cost of integrated contracts, cost
of products sold and cost of service rendered. For the fiscal year ended June 30, 2015, the total cost of revenues amounted
to approximately $317.0 million, a decrease of approximately $28.7 million, or 8.3%, compared to approximately $345.7 million for
the prior fiscal year. The decrease was due to an approximate $29.7 million decrease in the cost of integrated contracts.
The cost of integrated contract revenue consists
primarily of three components: cost of equipment and materials, labor costs and other manufacturing expenses including but not
limited to detecting expense, technology service fee, all of which incurred during the designing, building and delivering customized
automation solutions process to customers. For the fiscal year ended June 30, 2015, the total cost of integrated contracts was
approximately $300.3 million, compared to approximately $330.0 million for the prior fiscal year, representing a decrease of approximately
$29.7 million, or 9.0%. The decrease was primarily due to a decrease of approximately $38.0 million in cost of equipment
and materials, which was partially offset by an increase of approximately $14.4 million in labor cost, and a decrease of approximately
$6.2 million in other manufacturing expenses. Of the total cost of integrated contract revenue for the fiscal year 2015, cost of
equipment and materials accounted for approximately $194.6 million, compared to approximately $232.5 million for the prior fiscal
year; labor cost accounted for approximately $70.6 million, compared to approximately $56.2 million for the prior fiscal year;
and other manufacturing expenses accounted for approximately $35.1 million, compared to approximately $41.3 million for the prior
fiscal year. Of the total integrated contract revenue for the fiscal year 2015, cost of equipment and materials accounted for 36.6%,
compared to 48.2% for the prior fiscal year; labor cost accounted for 13.3%, compared to 11.6% for the prior fiscal year; and other
manufacturing expenses accounted for 6.6%, compared to 8.6% for the prior fiscal year. The cost components of integrated contracts
were determined and varied according to requirements of different customers.
Sales of products represent sales of spare
parts (either company manufactured or purchased from outside vendors) to customers for maintenance and replacement purposes. Given
the fact that the products purchased from outside vendors have different functions and capabilities from our self-made products,
we decide whether to purchase or manufacture the necessary products based on the needs and preferences of different customers while
considering the efficiency factor. Therefore, as a percentage of the cost of products sold, the self-made products and purchased
products have varied significantly from time to time. The cost of products sold for the fiscal year ended June 30, 2015 was
approximately $12.5 million, an increase of approximately $1.0 million, compared to approximately $11.6 million for the prior fiscal
year.
The majority of the cost of the service
revenue is labor cost. Our employees spend time and incur expenses while they are with the customers. From time to time, materials
costs related to the service are incurred, especially for providing extended warranty services. The cost of service revenue for
fiscal year ended June 30, 2015 was approximately $4.1 million, stayed at about the same level, compared to approximately $4.1
million for the prior fiscal year.
Gross margin
: For the fiscal year
ended June 30, 2015, as a percentage of total revenues, the overall gross margin was 40.3%, compared to 33.7% for the prior fiscal
year. The gross margin for integrated contracts was 37.6% for the year ended June 30, 2015, compared to 31.0% for the prior
year. The increase in gross margin for integrated contracts was mainly due to our different sales mix during the fiscal year
2015. The gross margin for products sold was 68.4% for the fiscal year ended June 30, 2015, compared to 63.7% for the prior
fiscal year. The gross margin for service provided was 61.4% for the fiscal year ended June 30, 2015, compared to 63.3% for the
prior fiscal year.
Selling expenses
: Selling expenses
mainly consist of compensation, traveling and administrative expenses related to marketing, sales and promotion activities incurred
by the Company’s marketing departments. Selling expenses were approximately $26.3 million for the fiscal year ended
June 30, 2015, a decrease of 7.1%, or approximately $2.0 million, compared to approximately $28.3 million for the prior fiscal
year. As a percentage of total revenues, selling expenses accounted for 4.9% and 5.4% for the fiscal year ended June 30, 2015 and
2014, respectively. The Company has established guidelines that specifically tailored for different industries and regions
to monitor and evaluate sales performance, and to control selling expenses.
General and administrative expenses
: General
and administrative expenses mainly include compensation, traveling and other administrative expenses of non-sales-related departments,
such as the finance department, information systems department and human resources department. General and administrative
expenses amounted to approximately $50.8 million for the fiscal year ended June 30, 2015, representing an increase of approximately
$11.1 million, or 27.9%, compared to approximately $39.7 million for the prior fiscal year. The increase was mainly due to an increase
of $6.9 million in bad debt provision, an increase of $2.7 million in employee compensation expenses, and an increase of $0.8 million
in depreciation expenses. As a percentage of total revenues, general and administrative expenses were 9.6% and 7.6% for the fiscal
years ended June 30, 2015 and 2014, respectively.
Research and development expenses
: Research
and development expenses represent mostly employee compensation, materials consumed and experiment expenses related to specific
new product research and development, as well as any expenses incurred for basic research on advanced technologies. For the fiscal
year ended June 30, 2015, research and development expenses were approximately $35.8 million, representing an approximately $0.7
million, or 1.9% decrease, compared to approximately $36.5 million for the prior fiscal year. As a percentage of total revenues,
research and development expenses were 6.7% and 7.0% for the fiscal years ended June 30, 2015 and 2014, respectively.
VAT refunds and government subsidies
: The
state tax bureaus in China provide refunds out of the value added tax (“VAT”) they collect in order to encourage the
research and development efforts made by certain qualified enterprises. Some of our Beijing and Hangzhou subsidiaries
received such refunds. All VAT refunds, that have no further conditions to be met, are recognized in the statements of comprehensive
income when cash or approval from the tax bureaus is received. For the fiscal year ended June 30, 2015, VAT refunds were approximately
$25.5 million, compared to approximately $22.1 million for the prior fiscal year, increasing by approximately $3.4 million, or
15.3%. As a percentage of total revenues, VAT refunds were 4.8% and 4.2% for the fiscal years ended June 30, 2015 and 2014,
respectively.
The local governments in China also provide
financial subsidies to encourage research and development efforts made by certain qualified enterprises. Some of our subsidiaries
received such subsidies. For the government subsidies that have no further conditions to be met, the funds received are recognized
in the statements of comprehensive income; for the subsidies that have certain operating conditions yet to be met, the fund received
are recorded as liabilities and will be released to income when the conditions are met.
Subsidy income from the government
amounted to approximately $4.9 million and $5.1 million for the fiscal years ended June 30, 2015 and 2014, respectively, a decrease
of approximately $0.2 million, or 4.8%.
Income from operations
: Income
from operations increased by approximately $31.7 million, from approximately $98.4 million for the fiscal year ended June 30, 2014
to approximately $130.1 million for the fiscal year ended June 30, 2015. Due to the improved efficiency we were able
to generate same level of revenue while reducing the overall operating cost.
Interest income
: For the fiscal
year ended June 30, 2015, interest income increased by approximately $0.4 million, or 13.3% from approximately $3.3 million for
the prior year, to approximately $3.7 million for the current period. As a percentage of total revenue, interest income accounted
for 0.7% and 0.6% for the fiscal years ended June 30, 2015 and 2014, respectively. The interest income was mainly earned from time
deposits with maturities over three months.
Interest expenses
: For the fiscal
year ended June 30, 2015, interest expenses decreased by approximately $0.2 million, or 8.9% from approximately $2.0 million for
the prior year, to approximately $1.8 million for the current period. As a percentage of total revenue, interest expenses accounted
for 0.3% and 0.4% for the fiscal years ended June 30, 2015 and 2014, respectively. The interest expenses were incurred by the short-term
and long-term loan/bond we had.
Other income (expenses), net
: For the
fiscal year ended June 30, 2015, the other income (expenses), net increased by approximately $9.1 million from approximately $6.5
million expenses for the prior year, to approximately $2.6 million income for the current period. The increase was mainly due to
the fluctuation of fair value of the contingent consideration related to the acquisition of Bond. We recorded approximately $0.4
million gain for current year as compared to approximately $8.0 million loss from the prior fiscal year.
Income tax expenses
: For the year
ended June 30, 2015, the Company’s income tax expense was approximately $26.0 million for financial reporting purposes, an
increase of approximately $6.2 million, as compared to $19.9 million for the prior year. Among the income tax expenses recorded
for the current year, $3.3 million was accrued and withheld for the expected profits distribution from PRC to overseas. The remaining
retained earnings of the Company’s PRC entities are expected to be permanently reinvested for its operations. Excluding the
withholding tax impact, the effective tax rate for the current year is 18.2%.
Net income attributable to noncontrolling
interests
: The noncontrolling interests of the Company include noncontrolling shareholders’ interests in each subsidiary.
For fiscal 2015, the noncontrolling interests are the ownership interests of 49% in Hollycon and 1% in Hollycon Italy. The net
income attributable to noncontrolling interests for the fiscal year ended June 30, 2015 was $2.7 million, an increase of approximately
$0.8 million, from approximately $1.8 million for the prior year.
Net income and earnings per share attributable
to Hollysys
: For the fiscal year ended June 30, 2015, net income attributable to Hollysys amounted to approximately $96.5
million, representing an increase of approximately $26.9 million, as compared to approximately $69.6 million for the prior year.
The basic and diluted earnings per share were $1.65 and $1.61 for the year ended June 30, 2015, as compared to $1.20 and $1.19
for the prior year, representing an increase of $0.45 and $0.41, respectively. The increase was primarily due to the higher
net income attributable to Hollysys compared to fiscal 2014.
|
B.
|
Liquidity and Capital Resources
|
We believe our working capital is sufficient
to meet our present requirements. We may, however, require additional cash due to changing business conditions or other future
developments, including any investments or acquisitions we may decide to pursue. In the long-term, we intend to rely primarily
on cash flow from operations and additional borrowings from banks to meet our anticipated cash needs. If our anticipated cash flow
and borrowing capacity is insufficient to meet our requirements, we may also seek to sell additional equity, debt or equity-linked
securities. We cannot assure you that any financing will be available in the amounts we need or on terms acceptable to us, if at
all.
In line with the industry practice, we typically
have a long receivable collection cycle. As a result, our cash provided by our operations in any given year may not be sufficient
to fully meet our operating cash requirements in that year. We will use available financing means, including bank loans, to provide
sufficient cash inflows to balance timing differences in our cash flows.
We estimate our liquidity needs for investing
and financing activities for fiscal 2017 will be approximately $17.4 million, which will be primarily related to the repayment
of bank borrowings and capital expenditures. Our future working capital requirements will depend on many factors, including, among
others, the rate of our revenue growth, the timing and extent of expansion of our sales and marketing activities, the timing of
introductions of new products and/or enhancements to existing products, and the timing and extent of expansion of our manufacturing
capacity.
Our long-term liquidity needs will relate
primarily to working capital to pay our suppliers, and third-party manufacturers, as well as any increases in manufacturing capacity
or acquisitions of third party businesses that we may seek in the future. We expect to meet these requirements primarily through
our current cash holdings, revolving bank borrowings, as well as our cash flow from operations. For fiscal year 2017, we expect
$7.5million of capital expenditures, mainly related to information system enhancement and manufacturing facility upgrades. We currently
do not have any plan to incur significant capital and investing expenditures for the foreseeable future beyond 2017.
Cash Flow and Working Capital
As of June 30, 2016, we had total assets of
approximately $1,004.2 million, of which cash and cash equivalents amounted to $229.1 million, time deposits with original maturities
over three months amounted to $42.4 million, accounts receivable amounted to $237.2 million and inventories amounted to $36.4 million.
While working capital was approximately $530.0 million, equity amounted to $682.7 million and our current ratio was approximately
2.8.
See Item 8, Financial Information, A. Consolidated
Statements and Other Financial Information, Dividend Policy, for information on the ability of certain of our subsidiaries in China
to make dividends to their respective parent companies.
The following table shows our cash flows with
respect to operating activities, investing activities and financing activities for the fiscal years ended June 30, 2014, 2015 and
2016:
(In USD thousands)
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Item
|
|
Fiscal Years Ended June 30
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Net cash provided by operating activities
|
|
$
|
83,278
|
|
|
$
|
83,952
|
|
|
$
|
46,737
|
|
Net cash used in investing activities
|
|
$
|
(25,230
|
)
|
|
$
|
(39,895
|
)
|
|
$
|
(2,454
|
)
|
Net cash (used in) provided by financing activities
|
|
$
|
(8,327
|
)
|
|
$
|
1,261
|
|
|
$
|
(6,780
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
$
|
209
|
|
|
$
|
357
|
|
|
$
|
(16,242
|
)
|
Net increase in cash and cash equivalents
|
|
$
|
49,930
|
|
|
$
|
45,675
|
|
|
$
|
21,261
|
|
Cash and cash equivalents, beginning of year
|
|
$
|
112,229
|
|
|
$
|
162,159
|
|
|
$
|
207,834
|
|
Cash and cash equivalents, end of year
|
|
$
|
162,159
|
|
|
$
|
207,834
|
|
|
$
|
229,095
|
|
Operating Activities
For the fiscal year ended June 30, 2016, net
cash provided by operating activities was approximately $46.7 million, compared to approximately $84.0 million for prior
fiscal year 2015. The net cash inflow of operating activities in fiscal year 2016 was primarily consisted of net income
of approximately $123.5 million, and changes in working capital attributable to a decrease in deferred revenue of approximately
$47.6 million, a decrease of costs and estimated earnings in excess of billings approximately of $37.0 million, a decrease in accounts
receivable of approximately $16.4 million, a decrease in income tax payable and other tax payable of approximately $5.0 million
combined, and a decrease in inventories of approximately $4.6 million, all of which were partially offset by an increase in accounts
payable of approximately $8.3million, and an increase in due from related parties of approximately $8.2 million.
For the fiscal year ended June 30, 2015, net
cash provided by operating activities was approximately $84.0 million, compared to approximately $83.3 million for prior
fiscal year 2014. The net cash inflow of operating activities in fiscal year 2015 primarily consisted of net income
of approximately $99.2 million, and changes in working capital attributable to a decrease in accounts payable of approximately
$25.5 million, a decrease of due from related parties approximately of $15.2 million, a decrease in accounts receivable of approximately
$7.6 million and a decrease in income tax payable and other tax payable of approximately $13.8 million combined, all of which were
partially offset by an increase in cost and estimated earnings in excess of billings of approximately $10.5 million.
For the fiscal year ended June 30, 2014,
net cash provided by operating activities was approximately $83.3 million, compared to approximately $30.7 million for prior fiscal
year 2013. The net cash inflow of operating activities in fiscal year 2014 was primarily consist of net income of approximately
$71.5 million, and changes in working capital attributable to an increase in deferred revenue of approximately $63.3 million, an
increase in accounts payable of approximately $24.2 million and a combined increase in income tax payable and other tax payable
of $12.3 million, all of which were partially offset by an increase in accounts receivable of approximately $88.6 million, and
an increase in cost and estimated earnings in excess of billings of approximately $38.9 million.
Investing Activities
For the fiscal years ended June 30, 2016,
net cash used in investing activities was approximately $2.5 million, compared to approximately $39.9 million for prior fiscal
year 2015. The net cash used in investing activities in fiscal year 2016 mainly consisted of
a cash outflow of approximately $7.9 million for capital expenditures, a cash outflow of approximately $107.1 million
transferred from current accounts to time deposits in banks with original maturities between six months and one year, and a cash
inflow of approximately $112.0 million from maturity of time deposits.
For the fiscal years ended June 30, 2015,
net cash used in investing activities was approximately $39.9 million, compared to approximately $25.2 million for the prior
fiscal year 2014. The net cash used in investing activities in fiscal year 2015 mainly consisted of
a cash outflow of approximately $14.6 million paid for acquisition of Bond, net of cash acquired, a cash outflow of approximately
$4.6 million for capital expenditures, a cash outflow of approximately $33.4 million transferred from current accounts
to time deposits in banks with original maturities between six months and one year, and a cash inflow of approximately $11.6 million
from maturity of time deposits.
For the fiscal years ended June 30, 2014, net
cash used in investing activities was approximately $25.2 million, compared to approximately $12.1 million for prior fiscal year
2013. The net cash used in investing activities in fiscal year 2014 mainly consisted of a cash outflow of approximately $5.5 million
paid for acquisition of Bond, net of cash acquired, a cash outflow of approximately $8.4 million for capital expenditures, a cash
outflow of approximately $18.9 million transferred from current accounts to time deposits in banks with original maturities between
six months and one year, and a cash inflow of approximately $11.6 million from maturity of time deposits.
Financing Activities
For fiscal year ended June 30, 2016, net cash
used in financing activities was approximately $6.8 million, as compared to approximately $1.3 million cash provided
for the prior year. The net cash used in financing activities in fiscal year 2016 mainly consisted of a repayment of short-term
bank loans of approximately $17.0 million, a repayment of long-term bank loans of approximately $9.7 million, partially offset
by proceeds from issuance of shares of a subsidiary of approximately $7.7 million, and proceeds from exercise of share options
of approximately $5.4 million.
For fiscal year ended June 30, 2015, net
cash provided by financing activities was approximately $1.3 million, as compared to approximately $8.3 million cash
used for the prior year. The net cash provided by financing activities in fiscal year 2015 mainly consisted of proceeds of short-term
loans and IFC convertible bond of approximately $25.1 million and $20.0 million respectively. The cash inflow was partially offset
by a dividend payout of approximately $23.3 million, a repayment of long-term bank loans of approximately $12.6 million, and
a repayment of short-term bank loans of approximately $8.8 million.
For fiscal year ended June 30, 2014, net cash
used in financing activities was approximately $8.3 million, as compared to approximately $3.7 million for the prior year. The
net cash used in financing activities in fiscal year 2014 mainly consisted of a repayment of long-term bank loans of approximately
$9.2 million, a repayment of short-term bank loans of approximately $13.8 million, and proceeds of short-term loans of approximately
$14.6 million.
|
C.
|
Research and Development, Patents and Licenses
|
Research and Development Efforts
As a high-technology company, our business
and long-term development rely highly on our research and development capabilities. Our research and development process is
based on Capability Maturity Model Integration Level 2&3 and can be classified into the following seven phases:
We use standard product development life cycle
models, including the waterfall model, increment model, iterative model and prototype. As a technology leader we continually develop
and patent new automation technologies. We also continually review and evaluate technological changes affecting the
automation and integrated system industries and invest substantially in application-based research and development. We currently
employ over 700 staff in the research and development department or engaged in research and development work.
Our core technologies achieved from our research
and development efforts include:
|
·
|
Large scale software platform architecture design;
|
|
·
|
Proprietary network design and development technologies;
|
|
·
|
Safety computer platform design and manufacturing;
|
|
·
|
Efficient I/O (Input /Output) signal processing design technology; and
|
|
·
|
Embedded system design and manufacturing.
|
We are committed to incorporating the latest
advances in electronics and information system technology into its products and, whenever possible, developing state-of-the-art
proprietary products based on its extensive internal expertise and research efforts. We currently spend approximately
6-9% of our annual revenues on research and development. Our recent major research and development focuses include:
|
·
|
Transportation Automation;
|
|
·
|
Manufacturing Automation; and
|
Our research and development efforts have led
to the invention of several proprietary systems in the fields of DCS, PLC and transportation automation systems. We improved
our 5th generation DCS (Distributed Control System), which represents higher reliability, stability, better safety protection and
user-friendliness with advanced system architecture, hardware, software designs and industry expert solutions. We completed the
development and certified our SIS (Safety Instrumented System) –HiaGuard with SIL3 (Safety Integrity Level 3) in compliance
with international standards. HiaGuard is the first domestically developed SIS technology and breaks the monopoly held by foreign
systems in China in this product. Hollysys’ HiaGuard can be applied for ESD (Emergency Shutdown System), PSD (Process Shutdown
System), and FGS (Fire and Gas Systems) used in various industries. We also invented several series of PLC (Programmable Logic
Controller) products, and the most successful applications include the mining safety protection systems and Traditional Chinese
Medicine manufacturing and packaging machine and dispensing machine. Our core technologies provide a platform that is designed
to enable the rapid and efficient development of our technologies for specific applications that are quickly, efficiently and affordably
tailored to particular industries and to the needs of our customers. Our software development tools enable us to program our systems
rapidly, allowing us to apply digital technologies that take advantage of the tremendous advances in electronics and information
technology to improve quality and reliability while reducing cost. The market for our products includes, not only the large number
of factories that are continually under construction in China’s rapidly expanding industrial base, but also extends to the
replacement and upgrading of outdated legacy systems to bring a higher degree of control and efficiency to the automation of processes,
delivering increasing benefits to customers as they meet increased competition. In the future we expect that the market for our
products will extend further into South Asia and the Middle East.
We already have our proprietary high-speed
rail signaling system including ATP (Automatic Train Protection), TCC (Train Control Center), LEU (Line-Side Electronic Unit),
BTM (Balise Transmission Module), TSRS (Temporary Speed Restriction Server), HVC (Hollysys Vital Computer) and Interlocking system
been certified according to international standards and have passed the Safety Integrity Level 4 (SIL4) certification. For the
subway signaling system, the proprietary ATS (Automatic Train Supervision) and CBI (Computer Based Interlocking) have passed SIL2
and SIL4 certification respectively by the end of 2011. And in March 2013 we finished the development and certified ZC (Zone Controller),
LEU (Line-side Electronic Unit) and Balise according to SIL4 (Safety Integrity Level 4) requirements in compliance of international
standards, the certification of ATP (Automatic Train Protection) for subway signaling system was finished at the end of calendar
year 2013. For both of the signaling systems, Hollysys is one of the earliest domestic companies in developing and certifying the
signaling systems according to the international standards. Hollysys will be one of the few companies in the world which command
the most leading and safety critical technologies of rail signaling system and we will compete with multinational companies such
as Siemens, Alston and Bombardier in domestic and world arena. We believe our research and development efficiency, latest technology,
strong customization and better value for money proposition will give us an unparalleled advantage in the high-speed rail and subway
signaling markets.
For the fiscal years 2016, 2015, and 2014,
aggregate annual research and development expenses were approximately $36.6 million, $35.8 million, and $36.5 million, respectively.
Intellectual Property Rights
We rely on a combination of copyright, patent,
trademark and other intellectual property laws, nondisclosure agreements and other protective measures to protect our proprietary
rights. We also utilize unpatented proprietary know-how and trade secrets and employ various methods to protect them. As of
June 30, 2016, we held 150 software copyrights, 171 authorized patents, 215 patent applications and 8 registered trademarks. Our
earliest software copyrights will expire in 2048. Our invention patents have terms of 20 years. The first expiration will
be in 2020 and the second will be in 2025 and our utility patents and design patents have terms of 10 years. We are expecting four
utility patents expire in 2017 and one design patent expires in fiscal years 2017.
Although we employ a variety of intellectual
property in the development and manufacturing of products, we believe that only a few of our intellectual property rights are critical
to our current operations. However, when taken as a whole, we believe that our intellectual property rights are significant and
that the loss of all or a substantial portion of such rights could have a material adverse effect on our results of operations. Also,
from time to time, we may desire or be required to renew or to obtain licenses from others in order to further develop and manufacture
commercially viable products effectively.
We market our DCS products mainly under the
brand name of “HOLLiAS”. Our brand name is well-established and is recognized as associated with high quality
and reliable products by industry participants and customers. We have obtained trademark protection for our brand name “HOLLiAS”
in the PRC as well as in other countries in the world. In addition, we have also registered or applied for a series of trademarks
including brand names for us and our products. The trademarks are issued for 10-year periods and may be renewed prior to expiration.
Other than as disclosed in the foregoing disclosures
and elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the fiscal
year 2016 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or
capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results
or financial conditions.
|
E.
|
Off-Balance Sheet Arrangements
|
We do not believe that we have any off-balance
sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are
material to an investment in our securities.
|
F.
|
Tabular Disclosure of Contractual Obligations
|
The following table sets forth our contractual
obligations, including long-term loans and operating leases and capital and operational commitments as of June 30, 2016.
(In USD thousands)
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More than 5
years
|
|
Short-term & Long-term loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Principal
|
|
|
30,392
|
|
|
|
10,043
|
|
|
|
20,230
|
|
|
|
98
|
|
|
|
21
|
|
-Interest
|
|
|
1,277
|
|
|
|
462
|
|
|
|
804
|
|
|
|
9
|
|
|
|
2
|
|
Operating Lease Obligations
(1)
|
|
|
2,107
|
|
|
|
1,429
|
|
|
|
579
|
|
|
|
99
|
|
|
|
-
|
|
Purchase Obligations
(2)
|
|
|
156,090
|
|
|
|
136,039
|
|
|
|
13,434
|
|
|
|
5,634
|
|
|
|
983
|
|
Capital Obligations
(3)
|
|
|
1,796
|
|
|
|
1,746
|
|
|
|
50
|
|
|
|
-
|
|
|
|
-
|
|
Standby letters of credit
(4)
|
|
|
40,800
|
|
|
|
40,800
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Performance Guarantees
(5)
|
|
|
58,747
|
|
|
|
26,793
|
|
|
|
28,272
|
|
|
|
3,383
|
|
|
|
299
|
|
Total
|
|
|
291,209
|
|
|
|
217,312
|
|
|
|
63,369
|
|
|
|
9,223
|
|
|
|
1,305
|
|
|
(1)
|
Operating lease obligations
|
It represents the future minimum
payments under non-cancelable operating leases.
As of June 30, 2016, the Company
had approximately $156.1 million in purchase obligations for the coming fiscal year, for purchases of inventories. The inventories
will be mainly used for fulfilling existing contracts or new contracts resulted from the expansion of our operations.
As of June 30, 2016, the Company
had approximately $1.8 million in capital obligations for the coming fiscal year, mainly for the Company’s information system
construction.
|
(4)
|
Standby letters of credit
|
We have issued letters of credit
to our suppliers to serve as assurance of payment. When a letter of credit is issued, a proportion of the total amount covered
by the letter of credit may be required to be deposited in the bank, and is not available until the payment has been settled or
the letter of credit has expired. As of June 30, 2016, we had approximately $40.8 million in standby letters of credit obligations,
with $20.3 million of restricted cash deposited in banks for standby letter of credit.
|
(5)
|
Performance guarantees
|
We have provided performance guarantees to our customers to
serve as assurance of performance for the contractual obligations. When a performance guarantee is issued, a proportion of the
total guarantee amount may be required to be deposited in the bank, and is not available until the guarantee is expired. As of
June 30, 2016, we had approximately $58.7 million performance guarantees obligation, with $7.3 million of restricted cash deposited
in banks for performance guarantees.
Other than the contractual obligations and
commercial commitments set forth above, we did not have any other long-term debt obligations, operating lease obligations, capital
commitments, purchase obligations or other long-term liabilities as of June 30, 2016.
See "Forward-Looking Information"
on page 7.
|
ITEM 6.
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
|
A.
|
Directors and Senior Management
|
The following table sets forth certain information
regarding our directors and senior management as of June 30, 2016.
Name
|
|
Age
|
|
Position
|
|
|
|
|
|
Jianfeng He
|
|
54
|
|
Chairman of Board of Directors
|
Baiqing Shao
|
|
48
|
|
Chief Executive Officer and Director
|
Herriet Qu
|
|
46
|
|
Chief Financial Officer
|
Colin Sung
|
|
50
|
|
Director
|
Jerry Zhang
|
|
44
|
|
Director
|
Jianyun Chai
|
|
54
|
|
Director
|
Dr. Jianfeng He,
has served as
our Chairman of the Company since November 30, 2013. Prior to that, Dr. He served as the Chief Operating Officer of the Company
from 2012 to 2013. He also served as Chairman of Hollysys Group since December 2013. From 2010 to 2013, he served as General Manager
of Hollysys Group, Chairman of Hangzhou Hollysys and Chairman of Beijing Hollysys. From 2008 to 2010, Dr. He was Vice President
and President of Beijing Hollysys. From 2004 to 2008, he served as Deputy General Manager and General Manager of Hangzhou Hollysys.
Dr. He holds a PhD Degree from South China University of Technology in automation and control theory and application.
Mr. Baiqing Shao
,
one of the main founders of the Company, has served as our Executive Officer since November 30, 2013. He was the former Senior
Vice President, Business Development of the Company from February 2012 to November 2013. Since 2010, Mr. Shao also served as Vice
General Manager of Hollysys Groupand Chairman of Hollysys Intelligent. From 2002 to 2010, he served as the General Manager of Beijing
Hollysys Information Technology Co., Ltd.(currently known as “Shenhua Hollysys Information Technology Co., Ltd.”),
one of our indirectly equity investees. Mr. Shao has served the Company for more than eighteen years as one of the founding group
of engineers. Mr. Shao holds a Master Degree of Computer Science from the 6th Research Institute of China Electronics Corporation
and an MBA degree from Peking University.
Ms. Herriet Qu,
has served as our Chief
Financial Officer since February 2012. Prior to that, Ms. Qu served as the Financial Controller of the Company from October 2007
to January 2012. Ms. Qu holds an MBA degree from Oklahoma City University and a Bachelor’s degree from Tianjin University
of Finance & Economics.
Mr. Colin Sung,
has served as a member of the Board of Directors and Chairman of the Audit Committee of Board of Directors of the Company
since February 2008. Mr. Sung is the Chief Financial Officer for eHi Auto Services Limited since April 2013. Mr. Sung also
has served as adviser of NeWorld Education Group, Inc. since August 2012 and served as Chief Financial Officer of NeWorld Education
Group since August 2011. Prior to joining NeWorld, he was the CFO of Lighting the Box from March 2011. Mr. Sung served as the deputy
Chief Executive Officer and the Chief Financial Officer of Linktone Ltd., a NASDAQ-listed wireless interactive entertainment service
provider in China, from 2009 to 2011. From 2008 to 2009, he served as the Chief Financial Officer and President of China Cablecom
Holdings, Ltd. From 2005 to 2008, he was the Chief Financial Officer of Linktone Ltd., where he also served as the acting Chief
Executive Officer in 2006 and as its director of board from 2007 to 2008. From 2004 to 2005, Mr. Sung was the Corporate Controller
of UTI, United States, Inc., a subsidiary of International Freight Forwarder (NASDAQ: UTIW), and from 2001 to 2004, was a Vice
President of finance and Corporate Controller of USF Worldwide, Inc., a subsidiary of US Freightways. From 1997 to 2001, Mr. Sung
was Vice President and Corporate Controller for US Operation of Panalpina Welttransport Holding, (PWTN.SW). Mr. Sung received his
bachelor’s degree in accounting from William Paterson University in 1992 and his MBA degree from American InterContinental
University in 2004. Mr. Sung is a Certified Public Accountant and Certified Global Management Accountant.
Ms. Jerry Zhang,
has served as a member
of the Board of Directors of the Company since September 2007. Ms. Jerry Zhang is Executive Vice Chairman and Chief Executive Officer
(“CEO”) of Standard Chartered Bank (China) Limited (“Standard Chartered China”). Prior to this role, she
has held a variety of senior roles at Standard Chartered China. She was the bank’s Deputy CEO, China and CEO, North China
and General Manager, Beijing Branch. Her key focuses were strategic planning, business development and corporate governance of
the Bank’s operations in North China. As the General Manager of Beijing Branch, Ms. Zhang was also responsible for overall
management of Beijing Branch. Ms. Zhang enjoys a strong track record in setting up good relationship with clients and creating
value both for the bank and the clients. In her position as Head of Financial Institutions (“FI”), Ms. Zhang has led
to achieve frog leap developments of the Bank’s FI business, which has become the biggest FI business amongst all foreign
banks in China in almost all aspects. Ms. Zhang joined Standard Chartered China in 1994, and has accumulated rich implementation
and management experiences in wholesale banking business. She has successfully established non-banking financial institutions business
in China for the Bank. In 2009, Ms. Zhang has left the bank for a short duration during which she acted as Chief Representative
of Fidelity International Asset Management Co. Beijing Representative Office. Mrs. Zhang received her M.B.A. from Lancaster University.
Dr. Jianyun Chai,
has served as
a member of the Board of Directors of the Company since June 2008. Dr. Chai is currently a professor and the head of the
Institute of Power Electronic and Electrical Machine System at Tsinghua University in China. Before he joined Tsinghua University
as an Associate Professor in 1999, Dr. Chai spent eight years working in the motor and information industries in Japan. Dr. Chai
is also a member of various societies and organizations, including the China Renewable Energy Society, the Chinese Society for
Electrical Engineering, and the Chinese Wind Energy Association. Dr. Chai received a Bachelor’s degree and a PhD in Electrical
Engineering from Tsinghua University in 1984 and 1989.
There is no arrangement or understanding with
any major shareholders, customers, suppliers or others, pursuant to which any person named above was selected as a director or
member of senior management.
No family relationship exists between any of
the persons named above.
Executive Compensation
The aggregate cash compensation paid to our
executive officers as a group was $1,058,775 for the fiscal year ended June 30, 2016.
In the fiscal year ended June 30, 2012, we
granted stock options for a total of 1,476,000 ordinary shares under the long-term incentive plan of the Company to key employees,
including options to purchase 561,000 ordinary shares to the senior executives listed in the table below under the caption “2012
Options” in this section. All of the grants have specific performance milestones. Additionally, the awards have a provision
that if in certain instances the milestones are exceeded by specified targets, then additional ordinary shares will vest for the
related period. The exercise periods for the options are five years from the date of grant, February 20, 2012. As of June 30, 2016,
1,476,000 options granted to the above-mentioned executive officers were vested, and 754,500 ordinary shares were exercised and
the remaining 721,500 vested options under “2012 Options” have not been exercised.
In the fiscal year ended June 30, 2015, the
Company granted 1,740,000 stock options to key employees, including options to purchase 675,000 ordinary shares to the senior executives
listed in the table below under the caption “2015 Options” in of this section. The current outstanding awards have
vesting periods of up to five years depending on the person’s position and all of the grants have specific performance milestones.
Additionally, the outstanding awards have a provision that if in certain instances the milestones are exceeded by specified targets,
then additional ordinary shares will vest for the related period. The exercise periods for the options are five years from the
date of grant, May 14, 2015. As of June 30, 2016, none of the options granted to the above-mentioned executive officers were vested
or exercised.
Director Compensation
We pay each of our independent directors who
are
not Company employees a monthly fee as compensation for the services to be provided by him as an independent director. During
fiscal 2016, we paid $4,000 a month to Colin Sung, $3,000 to Jerry Zhang, $2,000 to Jianyun Chai. We also reimburse our independent
directors for out-of-pocket expenses incurred in attending meetings.
As an additional consideration, in 2008 we
granted to each of the independent directors an option to purchase a certain amount of the Company’s ordinary shares, which
vest in equal installments on a quarterly basis over a three-year period beginning on the grant date. Specifically, we granted
a stock option to Colin Sung for the purchase of 45,000 ordinary shares, Jerry Zhang for the purchase of 36,000 ordinary shares
and each of Dr. Jianyun Chai and Mr. Qingtai Chen for the purchase of 30,000 ordinary shares in 2008, all the options granted as
director compensation have been exercised as of June 30, 2014.
In 2011, as the compensation for their continuous
service on the Board, we granted to each of the independent directors restricted shares (“2011 Restricted Shares”),
which vested in equal installments on a quarterly basis over a three-year period beginning on the grant date, which included 22,500
restricted shares granted to Colin Sung, and 15,000 restricted shares to each of Jerry Zhang, Jianyun Chai and Qingtai Chen. As
of June 30, 2016, all the 2011 Restricted Shares were vested and 22,500 restricted shares granted to Colin Sung were issued.
In 2014, as the compensation for their continuous
service on the Board, we granted to each of the independent directors restricted shares (“2014 Restricted Shares”),
which will vest in equal installments on a quarterly basis over a three-year period beginning on the service inception date,
which included 22,500 restricted shares granted to Colin Sung, and 15,000 restricted shares to each of Jerry Zhang and Jianyun
Chai, respectively. As of June 30, 2016, 38,125 shares of the 2014 Restricted Shares were vested and none were issued.
For the fiscal year ended June 30, 2016, the
aggregate amount of cash compensation paid to our directors as a group was $108,000.
2006 Stock Plan
On September 7, 2007, our stockholders
approved the 2006 Stock Plan, or the 2006 Plan. The 2006 Plan was assumed by us as of the closing of the merger of Chardan
with and into us. The 2006 Plan provided for 3,000,000 ordinary shares for issuance in accordance with the 2006 Plan’s
terms.
As of the date of this report, there are 708,000 shares
available under the 2006 Plan, 2,292,000 shares have been allocated to outstanding awards that have not vested or been exercised. A
copy of the 2006 Stock Plan was filed with the Registration Statement on Form S-8 (No. 333-170811) and is incorporated herein
by reference.
2015 Equity Plan
On May 14, 2015, the Board of Directors
approved 2015 Equity Incentive Plan (the “2015 Equity Plan”). The 2015 Equity Plan authorized the issuance of five
million shares. It will terminate ten years following the date that it was adopted by the Board of Directors. The purposes of
2015 Equity Plan are similar as the 2006 Plan, which is used to promote the long-term growth and profitability of the Company
and its affiliates by stimulating the efforts of employees, directors and consultants of the Company and its affiliates who are
selected to be participants, aligning the long-term interests of participants with those of shareholders, heightening the desire
of participants to continue in working toward and contributing to the success of the Company, attracting and retaining the best
available personnel for positions of substantial responsibility, and generally providing additional incentive for them to promote
the success of the Company’s business through the grant of awards of or pertaining to shares of the Company’s ordinary
shares. The 2015 Equity Plan permits the grant of incentive share options, Non-statutory share options, restricted shares, restricted
share units, share appreciation rights, performance units and performance shares as the Company may determine. A copy of
2015 Equity Plan was filed with the Registration Statement on Form S-8 (No. 333-208615) and is incorporated herein by reference.
2012 Options
The following table sets forth options granted
on February 20, 2012 to the following senior management of the Company.
Name
|
|
Number of Ordinary Shares
Issuable upon Exercise of
Options
|
|
|
Number of
Ordinary
Shares
Vested
|
|
|
Exercise
Price
|
|
|
Date of Grant
|
|
|
Date of
Expiration
|
|
Jianfeng He
1
|
|
|
198,000
|
|
|
|
198,000
|
|
|
$
|
8.89
|
|
|
|
2012-2-20
|
|
|
|
2017-2-19
|
|
Herriet Qu
2
|
|
|
198,000
|
|
|
|
198,000
|
|
|
$
|
8.89
|
|
|
|
2012-2-20
|
|
|
|
2017-2-19
|
|
Baiqing Shao
3
|
|
|
165,000
|
|
|
|
165,000
|
|
|
$
|
8.89
|
|
|
|
2012-2-20
|
|
|
|
2017-2-19
|
|
1
198,000 options vest on the
24, 36 and 48 month anniversaries of the date of grant if the CAGR of the Non-GAAP diluted EPS form fiscal year 2011 to fiscal
year 2014 exceeds stated thresholds on those dates. As of June 30, 2016, the securities reported as held by Mr. Jianfeng He include
options to purchase 198,000 ordinary shares that are vested.
2
198,000 options vest on the
24, 36 and 48 month anniversaries of the date of grant if the CAGR of the Non-GAAP diluted EPS form fiscal year 2011 to fiscal
year 2014 exceeds stated thresholds on those dates. As of June 30, 2016, the securities reported as held by Ms. Herriet Qu include
options to purchase 198,000 ordinary shares that are vested.
3
165,000 options vest on the
24, 36 and 48 month anniversaries of the date of grant if the CAGR of the Non-GAAP diluted EPS form fiscal year 2011 to fiscal
year 2014 exceeds stated thresholds on those dates. As of June 30, 2016, the securities reported as held by Mr. Baiqing Shao include
options to purchase 165,000 ordinary shares that are vested.
These options were part of options to purchase
an aggregate of 1,476,000 ordinary shares issued to certain individuals on February 20, 2012, all with similar vesting provisions.
On February 9, 2015, the Company announced
a special cash dividend of US$ 0.40 per share to the holders of the Company’s ordinary shares. Shareholders of record as
of the close of business on February 23, 2015 were eligible to receive the dividend. As a result, the options to be exercised by
the above optionees after February 24, 2015 will be subject to an adjusted exercise price of US$8.89.
The above options vest annually over a period
of four years from their grant date, subject to different performance conditions and are exercisable once vested for up to five
years from the date of grant. As of June 30, 2016, all of the 1,476,000 options have vested among which 754,500 options have been
exercised.
2015 Options
On May 14, 2015, the Company granted an aggregate
of 1.74 million of options to certain officers and employees of the Company pursuant to the 2015 Equity Plan. The options vest
annually over a period of four years from their grant date
of May
14, 2015, subject to different performance conditions and are exercisable up to five years from the date of grant.
As of June 30, 2016, none of the options have vested.
The following table sets forth options granted
on May 14, 2015 to the following named directors and officers:
Name
|
|
Number of Ordinary Shares
Issuable upon Exercise of
Options
|
|
|
Number of
Ordinary
Shares
Vested
|
|
|
Exercise
Price
|
|
|
Date of Grant
|
|
|
Date of
Expiration
|
|
Jianfeng He
1
|
|
|
225,000
|
|
|
|
-
|
|
|
$
|
22.25
|
|
|
|
2015-5-14
|
|
|
|
2020-5-13
|
|
Herriet Qu
1
|
|
|
225,000
|
|
|
|
-
|
|
|
$
|
22.25
|
|
|
|
2015-5-14
|
|
|
|
2020-5-13
|
|
Baiqing Shao
1
|
|
|
225,000
|
|
|
|
-
|
|
|
$
|
22.25
|
|
|
|
2015-5-14
|
|
|
|
2020-5-13
|
|
1
The total Option Shares to be granted
will be determined by the CAGR of Non-GAAP diluted earnings per share (“EPS”) from June 30, 2014 to June 30, 2017.
An aggregate of up to 150,000 Options in total will vest to the optionee if the yearly growth rate of Non- GAAP diluted earnings
per share (“EPS”) from June 30, 2014 to June 30, 2017 equals or exceed stated thresholds on those dates; an aggregate
of up to 187,500 Options in total will vest to the optionee if the CAGR of Non-GAAP diluted EPS from June 30, 2014 to June 30,
2017 equals or exceeds
an additional threshold; and an aggregate
of up to 225,000 Options will vest to the optionee if the CAGR of Non-GAAP diluted EPS from June 30, 2014 to June 30, 2017 equals
or exceeds
foregoing threshold.
These options were part of an aggregate of
1,740,000 ordinary shares underlying options issued to optionees on May14, 2015, all with similar vesting provisions.
2011 Restricted shares:
The following table sets forth the 2011 Restricted
Shares granted to the following independent directors:
Name
|
|
Number of Restricted
Shares Granted
|
|
|
Date of Grant
|
|
|
Number of Restricted
Shares Vested
|
|
|
Number of Restricted
Shares Issued
|
|
Jerry Zhang
|
|
|
15,000
|
|
|
|
2011-1-1
|
|
|
|
15,000
|
|
|
|
-
|
|
Colin Sung
|
|
|
22,500
|
|
|
|
2011-2-1
|
|
|
|
22,500
|
|
|
|
22,500
|
|
Jianyun Chai
|
|
|
15,000
|
|
|
|
2011-6-2
|
|
|
|
15,000
|
|
|
|
-
|
|
The restricted shares set forth in the table
above vest quarterly over a period of 3 years from their respective grant date. As of June 30, 2016, all the 2011 restricted shares
were vested, and 22,500 of them have been issued to Colin Sung.
2014 Restricted shares:
The following table sets forth the 2014 Restricted
Shares granted to the following independent directors:
Name
|
|
Number of Restricted
Shares Granted
|
|
|
Date of Grant
|
|
|
Number of Restricted
Shares Vested
|
|
|
Number of Restricted
Shares Issued
|
|
Jerry Zhang
|
|
|
15,000
|
|
|
|
2014-6-23
|
|
|
|
12,500
|
|
|
|
-
|
|
Colin Sung
|
|
|
22,500
|
|
|
|
2014-6-23
|
|
|
|
18,750
|
|
|
|
-
|
|
Jianyun Chai
|
|
|
15,000
|
|
|
|
2014-6-23
|
|
|
|
11
,250
|
|
|
|
-
|
|
The restricted shares set forth in the table
above vest quarterly over a period of 3 years from their respective service inception date. As of June 30, 2016, 38,125 restricted
shares were vested, and none of them have been issued.
Employment Agreements
We entered into a three-year employment agreement
with Chairman, Dr. Jianfeng He on November 30, 2013. Dr. He is entitled to insurance benefits, five weeks’ vacation,
a car and reimbursement of business expenses and, if necessary, relocation expenses. The agreement may be terminated by us
for death, disability and cause. Dr. He may terminate the employment agreement for good reason, which includes our breach;
the executive’s not being a member of the board of directors, and change of control. The agreements contain provisions
for the protection of confidential information and a three-year-after employment non-competition period within China.
We entered into a three-year employment agreement
with our Chief Executive Officer, Mr. Baiqing Shao on November 30, 2013. Mr. Shao is entitled to insurance benefits, four
weeks’ vacation, and reimbursement of business expenses and, if necessary, relocation expenses. The agreement may be
terminated by us for death, disability and cause. Mr. Shao may terminate the employment agreement for any good reason at any
time. The agreements contain provisions for the protection of confidential information and a three-year-after employment non-competition
period within China.
We entered into a three-year employment agreement
with our Chief Financial Officer, Ms. Herriet Qu on February 1, 2015. Ms. Qu is entitled to insurance benefits, four weeks’
vacation, and reimbursement of business expenses and, if necessary, relocation expenses. The agreement may be terminated by
us for death, disability and cause. Ms. Qu may terminate the employment agreement for any good reason at any time. The
agreements contain provisions for the protection of confidential information and a three-year-after employment non-competition
period within China.
Terms of Directors and Executive
Officers
Our board consisted of five directors for fiscal
year 2016. Our directors are not subject to a term of office limitation, and hold office until the next annual meeting of members
or until such director’s earlier resignation, removal from office, death or incapacity. Any vacancy on our board resulting
from death, resignation, removal or other cause, and any newly created directorship resulting from any increase in the authorized
number of directors between meetings of members, may be filled either by the affirmative vote of a majority of all the directors
then in office (even if less than a quorum) or by a resolution of members.
In addition, the service agreement between us and the directors do not provide benefits upon termination of their services
In connection with the adoption of the 2010 Rights Plan, we amended our Memorandum and Articles of Association to provide that
directors may only be removed by shareholders for cause.
Our executive officers are appointed by our
board. The executive officers shall hold office until their successors are duly elected and qualified, but any officer elected
or appointed by the directors may be removed at any time, with or without cause, by resolution of directors. Any vacancy
occurring in any office may be filled by resolution of directors.
Independence of Directors
We have elected to follow the rules of NASDAQ
to determine whether a director is independent. Our board will also consult with counsel to ensure that our board’s
determinations are consistent with those rules and all relevant securities and other laws and regulations regarding the independence
of directors. Rule 5605(a)(2) of Listing Rules of The NASDAQ Stock Market, Inc., or the NASDAQ Listing Rules, defines an “independent
director” generally as a person, other than an officer of the Company, who does not have a relationship with the Company
that would interfere with the director’s exercise of independent judgment. Consistent with these considerations,
our board has affirmatively determined that, Mr. Colin Sung, Mr. Jianyun Chai and Ms. Jerry Zhang are our current independent directors.
Board Committees
Our board has established an audit committee,
a compensation committee and a corporate governance and nominating committee. Each committee is comprised solely of independent
directors within the meaning of Rule 5605(a)(2) of the Nasdaq Listing Rules, and meet the criteria for independence set forth in
Rule 10A-3(b)(1) of the Exchange Act.
Audit Committee
Our audit committee consists of Mr. Colin Sung,
Ms. Jerry Zhang, and Mr. Jianyun Chai, with Mr. Sung serving as the Chair. Our board has determined that all of our audit committee
members are independent directors within the meaning of applicable NASDAQ listing rules, and meet the criteria for independence
set forth in Rule 10A-3(b)(1) of the Exchange Act.
Our board has determined that each of the committee
members has an understanding of generally accepted accounting principles and financial statements, the ability to assess the general
application of such principles in connection with our financial statements, including estimates, accruals and reserves, experience
in analyzing or evaluating financial statements of similar breadth and complexity as our financial statements, an understanding
of internal controls and procedures for financial reporting, and an understanding of audit committee functions.
Our board believes that Mr. Sung qualifies
as an “audit committee financial expert” within the meaning of all applicable rules. Our board believes that
Mr. Sung has financial expertise from his degrees in business, his activities as a chief executive officer and chief financial
officer of various companies, and his consulting activities in the areas of accounting, corporate finance, capital formation and
corporate financial analysis.
We adopted an audit committee charter under
which the committee is responsible for reviewing the scope, planning and staffing of the audit and preparation of the financial
statements. This includes consultation with management, the auditors and other consultants and professionals involved in
the preparation of the financial statements and reports. The committee is responsible for performing oversight of the relationship
with our independent auditors. The committee also has a general compliance oversight role in assuring that our directors,
officers and management comply with our code of ethics, reviewing and approving of related party transactions, dealing with complaints
regarding accounting, internal controls and auditing matters, and complying with accounting and legal requirements applicable to
us.
Pursuant to the terms of its charter, the audit
committee’s responsibilities include, among other things:
|
·
|
selecting our independent auditors and pre-approving all auditing and non-auditing services permitted
to be performed by our independent auditors;
|
|
·
|
reviewing with our independent auditors any audit problems or difficulties and management’s
response;
|
|
·
|
reviewing and approving all proposed related-party transactions;
|
|
·
|
discussing the annual audited financial statements with management and our independent auditors;
|
|
·
|
reviewing major issues as to the adequacy of our internal controls and any special audit steps
adopted in light of significant internal control deficiencies;
|
|
·
|
annually reviewing and reassessing the adequacy of our audit committee charter;
|
|
·
|
such other matters that are specifically delegated to our audit committee by our board of directors
from time to time;
|
|
·
|
meeting separately and periodically with management and our internal and independent auditors;
and
|
|
·
|
reporting regularly to the full board of directors.
|
Compensation Committee
Our compensation committee consists of Ms.
Jerry Zhang and Mr. Jianyun Chai and Mr. Colin Sung, with Ms. Jerry Zhang serving as its Chair. Our board has determined that
all of our compensation committee members are independent directors within the meaning of applicable NASDAQ listing rules, and
meet the criteria for independence set forth in Rule 10A-3(b)(1) of the Exchange Act.
Our compensation committee assists the board
in reviewing and approving the compensation structure of our executive officers, including all forms of compensation to be provided
to our executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation
is deliberated. The Compensation Committee is responsible for, among other things:
|
·
|
approving and overseeing the compensation package for our chief executive officer and the other
senior executive officers;
|
|
·
|
reviewing and approving corporate goals and objectives relevant to the compensation of our chief
executive officer, evaluating the performance of our chief executive officer in light of those goals and objectives, and setting
the compensation level of our chief executive officer based on this evaluation;
|
|
·
|
reviewing and making recommendations in respect of director compensation;
|
|
·
|
engaging and overseeing compensation consultants;
|
|
·
|
reviewing periodically and making recommendations to the Board regarding any long-term incentive
compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans and
the administration of those plans; and
|
|
·
|
reviewing and making recommendations to the Board regarding succession plans for the chief executive
officer and other senior officers.
|
Corporate Governance and Nominating
Committee
Our corporate governance and nominating committee
consists of Ms. Jerry Zhang, Mr. Jianyun Chai and Mr. Colin Sung with Ms. Zhang acting as the Chair. Each member is “independent”
as that term is defined under the NASDAQ listing rules. The corporate governance and nominating committee assists the
board of directors in identifying individuals qualified to become our directors and in determining the composition of the board
and its committees. The corporate governance and nominating committee is responsible for, among other things:
|
·
|
identifying and recommending to the Board nominees for election or re-election to the board, or
for appointment to fill any vacancy;
|
|
·
|
reviewing annually with the board the current composition of the board in light of the characteristics
of independence, age, skills, experience and availability of service to us;
|
|
·
|
identifying and recommending to the board the directors to serve as members of the board’s
committees; and
|
|
·
|
monitoring compliance with our Corporate Governance Guidelines
|
We had 3,641, 3,632 and 3,575 employees as
of June 30, 2016, 2015, and 2014, respectively. As of June 30, 2016, there were 3,013 employees located in China and 628 employees
outside China. The following table sets forth our employees as of June 30, 2016 based on their functional areas within the
Company:
Category
|
|
China
|
|
|
Overseas
|
|
|
Total
|
|
Sales & Marketing
|
|
|
590
|
|
|
|
17
|
|
|
|
607
|
|
Research and development
|
|
|
722
|
|
|
|
-
|
|
|
|
722
|
|
Engineering
|
|
|
917
|
|
|
|
518
|
|
|
|
1,435
|
|
Production
|
|
|
442
|
|
|
|
-
|
|
|
|
442
|
|
Management
|
|
|
342
|
|
|
|
93
|
|
|
|
435
|
|
Total
|
|
|
3,013
|
|
|
|
628
|
|
|
|
3,641
|
|
We believe that our relationship with our employees
is good. The remuneration payable to employees includes basic salaries and bonuses. We have not experienced any significant
problems or disruption to our operations due to labor disputes, nor have we experienced any difficulties in recruitment and retention
of experienced staff. As required by applicable laws of China, Singapore, Malaysia, Hong Kong, Dubai, Saudi Arabia, India, Italy
and Qatar, we have entered into employment contracts with all of our officers, managers and employees.
Our employees in China participate in a state
pension scheme organized by Chinese municipal and provincial governments. We also contribute to social insurance for our
employees each month, which includes pension, medical insurance, unemployment insurance, occupational injuries insurance and housing
providence fund in accordance with PRC regulations.
Our employees in Singapore, who are Singapore
citizens and Singapore permanent residents, participate in monthly statutory contribution requirements into the Central Provident
Fund organised by the Central Provident Fund Board, a statutory board under the Ministry of Manpower. It is a comprehensive social
security system that enables the qualified to set aside funds for retirement, healthcare, home ownership, family protection and
asset enhancement.
Our employees in Malaysia participate in contributing
into an Employee’s Provident Fund, a monthly mandatory saving and retirement plan organized by the Employee’s Provident
Fund Board, a Malaysian government agency under the Ministry of Finance. We also contribute to social insurance for our employees
each month, which include medical and cash benefits, provision of artificial aids and rehabilitation to employees in order to provide
financial guarantees and protection to the family in accordance to Malaysia regulations.
The following table sets forth information
with respect to the beneficial ownership of our ordinary shares (i) by each of our officers and directors, as of
September 14, 2016; (ii) by each person who is known by us to beneficially own more than 5% of our ordinary shares as of
June 30, 2016 except for Baiqing Shao whose information was updated through September 14, 2016. The table does not include
any preferred shares or ordinary shares that may be issued under the Rights Plan of the Company. The address of each of the
persons set forth below is in care of Hollysys Automation Technologies Ltd., No. 2 Disheng Middle Road, Beijing Economic-Technological
Development Area, Beijing, P. R. China 100176.
Name & Address of
Beneficial Owner
|
|
Office, if Any
|
|
Title of Class
|
|
Amount & Nature
of Beneficial
Ownership
(1)
|
|
|
Percent of
Class
(2)
|
|
Officers and Directors
|
|
|
Jianfeng He
|
|
Chairman
|
|
Ordinary Shares
|
|
|
879,471
|
(3)
|
|
|
*
|
|
Baiqing Shao
|
|
Chief Executive Officer
|
|
Ordinary Shares
|
|
|
4,309,223
|
(4)
|
|
|
7.20
|
%
|
Herriet Qu
|
|
Chief Financial Officer
|
|
Ordinary Shares
|
|
|
198,000
|
(5)
|
|
|
*
|
|
Colin Sung
|
|
Director
|
|
Ordinary Shares
|
|
|
31,250
|
(6)
|
|
|
*
|
|
Jerry Zhang
|
|
Director
|
|
Ordinary Shares
|
|
|
27,500
|
(7)
|
|
|
*
|
|
Jianyun Chai
|
|
Director
|
|
Ordinary Shares
|
|
|
26,250
|
(8)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% Securities Holder
|
|
|
Baiqing Shao
|
|
|
|
Ordinary Shares
|
|
|
4,309,223
|
(4)
|
|
|
7.20
|
%
|
Prudential PLC
|
|
|
|
Ordinary Shares
|
|
|
7,651,086
|
|
|
|
12.79
|
%
|
Schroder Investment Management
|
|
|
|
Ordinary Shares
|
|
|
5,198,235
|
|
|
|
8.69
|
%
|
Unionway Resources Limited
|
|
|
|
Ordinary Shares
|
|
|
4,113,948
|
|
|
|
6.88
|
%
|
* Less than 1%.
|
(1)
|
Beneficial Ownership is determined
in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with
respect to securities. Except as otherwise indicated, each of the beneficial owners listed above has direct ownership
of and sole voting power and investment power with respect to our ordinary shares.
|
|
(2)
|
As of
September
15, 2016, a total of 59,803,599 ordinary shares are outstanding pursuant to SEC Rule 13d-3(d)(1). For each beneficial
owner above, any options exercisable within 60 days have been included in the denominator.
|
|
(3)
|
The securities reported as
held by Mr. Jianfeng He include 681,471 shares of our ordinary shares held indirectly through Golden Result Enterprises Limited.
The foregoing entity is a BVI entity that is wholly-owned and controlled by Mr. Jianfeng He therefore he may be deemed to be the
beneficial owner of the ordinary shares held by it. The securities reported as held by Mr. Jianfeng He also include options to
purchase 198,000 ordinary shares that are vested but do not include options to purchase 225,000 ordinary shares that will not
be vested within 60 days.
|
|
(4)
|
The securities reported as
held by Mr. Baiqing Shao include 4,144,223 shares of our ordinary shares held indirectly through Ace Lead Profits Limited. The
foregoing entity is a BVI entity that is wholly-owned and controlled by Mr. Baiqing Shao therefore he may be deemed to be the
beneficial owner of the ordinary shares held by it. The securities reported as held by Mr. Baiqing Shao also include options to
purchase 165,000 ordinary shares that are vested but do not include options to purchase 225,000 ordinary shares that will not
be vested within 60 days.
|
|
(5)
|
The securities reported as
held by Ms. Herriet Qu include options to purchase 198,000 ordinary shares that are vested, and do
not include options to purchase 225,000 ordinary shares that will not vest within 60 days.
|
|
(6)
|
The securities reported as
held by Mr. Colin Sung include 12,500 ordinary shares that were issued upon vesting 18,750 restricted shares vested but not issued
but do not include 3,750 restricted shares that are not yet vested.
|
|
(7)
|
The securities reported as
held by Ms. Jerry Zhang include 27,500 restricted shares vested but not issued; and do not include 2,500 restricted shares that
are not yet vested.
|
|
(8)
|
The securities reported as
held by Mr. Jianyun Chai includes 26,250 restricted shares vested but not issued, and do not include 3,750 restricted shares that
are not yet vested.
|
None of our major shareholders
have different voting rights from other shareholders. We are not aware of any arrangement that may, at a subsequent date,
result in a change of control of the Company.
|
ITEM 7.
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
Please refer to Item 6.E “Directors,
Senior Management and Employees — Share Ownership.”
|
B.
|
Related Party Transactions
|
The related
party relationships and related party transactions are listed as follows:
Related
party relationships
Name
of related parties
|
|
Relationship
with the Company
|
|
|
|
Shenhua
Hollysys Information Technology Co., Ltd. (“Shenhua Information”)
|
|
20% owned by Beijing Hollysys
|
China Techenergy Co., Ltd. (“China Techenergy”)
|
|
40% owned by Beijing Hollysys
|
Beijing Hollysys Electric Motor Co., Ltd. (“Electric
Motor”)
|
|
40% owned by Beijing Hollysys
|
Beijing
Hollysys Machine Automation Co., Ltd. (“Hollysys Machine”)
|
|
30% owned by Hollysys Investment
|
Heilongjiang
Ruixing Technology Co., Ltd. (“Heilongjiang Ruixing”)
|
|
6% owned by Beijing Hollysys
|
Due
from related parties
(in USD thousands)
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
China Techenergy
|
|
$
|
34,472
|
|
|
$
|
22,579
|
|
Shenhua Information
|
|
|
3,447
|
|
|
|
2,995
|
|
Hollysys Machine
|
|
|
1,158
|
|
|
|
1,367
|
|
Heilongjiang Ruixing
|
|
|
-
|
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,077
|
|
|
$
|
28,012
|
|
The Company’s
management believes that the collection of amounts due from related parties is reasonably assured and accordingly, no provision
had been made for these balances.
Due to related
parties (in USD thousands)
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
China Techenergy
|
|
$
|
837
|
|
|
$
|
1,170
|
|
Shenhua Information
|
|
|
818
|
|
|
|
358
|
|
Electric Motor
|
|
|
49
|
|
|
|
112
|
|
Hollysys Machine
|
|
|
9
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,713
|
|
|
$
|
1,645
|
|
Transactions
with related parties (in USD thousands)
Purchases of goods and services
from:
|
|
Year ended June 30,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Hollysys Machine
|
|
$
|
1,980
|
|
|
$
|
914
|
|
|
$
|
555
|
|
Electric Motor
|
|
|
14
|
|
|
|
50
|
|
|
|
354
|
|
Shenhua Information
|
|
|
323
|
|
|
|
368
|
|
|
|
-
|
|
China Techenergy
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,317
|
|
|
$
|
1,333
|
|
|
$
|
909
|
|
Sales of goods and integrated
solutions to:
|
|
Year ended June 30,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
China Techenergy
|
|
$
|
3,136
|
|
|
$
|
21,936
|
|
|
$
|
3,657
|
|
Shenhua Information
|
|
|
2,726
|
|
|
|
2,128
|
|
|
|
847
|
|
Hollysys Machine
|
|
|
921
|
|
|
|
512
|
|
|
|
235
|
|
Electric Motor
|
|
|
2
|
|
|
|
1
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,785
|
|
|
$
|
24,577
|
|
|
$
|
4,739
|
|
Operating lease income from:
|
|
Year ended June 30,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hollysys Machine
|
|
$
|
65
|
|
|
$
|
41
|
|
|
$
|
40
|
|
The Company
sells automation control systems to China Techenergy which is used for non-safety operations control in the nuclear power industry.
China Techenergy incorporates the Company’s non-safety automation control systems with their proprietary safety automated
control systems to provide an overall automation and control system for nuclear power stations in China. The Company is not a
party to the integrated sales contracts executed between China Techenergy and its customers. The Company’s pro rata shares
of the intercompany profits and losses are eliminated until realized through a sale to outside parties, as if China Techenergy
were a consolidated subsidiary.
The Company
sells automation control systems to Shenhua Information which is used for operations control in the information automation industry.
Shenhua Information incorporates the Company’s automation control systems with their proprietary automated remote control
systems to provide an overall automation and control system to its customers. The Company is not a party to the integrated sales
contracts executed between Shenhua Information and its customers. The Company’s pro rata shares of the intercompany profits
and losses are eliminated until realized through a sale to an outside party as if Shenhua Information were a consolidated subsidiary.
The Company
engages Hollysys Machine to sell the Company’s products to end customers. The Company pays commission to Hollysys Machine
in exchange for its services. The amount of the commission is determined based on the value of the products sold by Hollysys Machine
during the year.
Amounts due
from and due to the related parties relating to the above transactions are unsecured, non-interest bearing and repayable on demand.
|
C.
|
Interests of Experts and Counsel
|
Not applicable.
|
ITEM 8.
|
FINANCIAL INFORMATION
|
|
A.
|
Consolidated Statements and Other Financial Information
|
We have appended consolidated financial statements
filed as part of this Annual Report. See Item 18 “Financial Statements.”
Legal Proceedings
We are currently not a party to any material
legal or administrative proceedings, and we are not aware of threatened material legal or administrative proceedings against us. We
may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business.
Dividend Policy
Historically we have retained our earnings
for use in the expansion and operation of our business except that on February 9, 2015, we declared a special cash dividend of
US$0.40 per share to the holders of the Company’s ordinary shares. The record day was February 23, 2015 and payment day was
March 16, 2015. Continental Stock Transfer & Trust acted as the paying agent. During the fiscal year of 2016, no cash dividend
was declared and paid. On August 11, 2016, the Board of Directors approved a regular cash dividend policy pursuant to which future
cash dividends are expected to be paid to holders of the Company’s ordinary shares on an annual basis out of funds legally
available for such purpose. However, the declaration and payment of future dividends including the dividend for 2016 will be at
the discretion of the Board, and will depend upon many factors, including the Company’s financial condition, earnings, capital
requirements of its businesses, legal requirements, regulatory constraints, industry practice, and other factors that the Board
deems relevant. As a BVI company, we may only declare and pay dividends if our directors are satisfied, on reasonable grounds,
that immediately after the distribution (i) the value of our assets will exceed our liabilities and (ii) we will be able to pay
our debts as they fall due.
Notwithstanding the understanding that earnings
will be accumulated, our ability to pay dividends depends substantially on the receipt of dividends to us by our subsidiaries.
For the PRC subsidiaries, each of them may
pay dividends only out of its accumulated distributable profits, if any, determined in accordance with its articles of association
and the accounting standards and regulations in China. Pursuant to applicable PRC laws and regulations, 10% of after-tax profits
of each of our consolidated PRC entities are required to be set aside in a statutory surplus reserve fund annually until the reserve
balance reaches 50% of such PRC entity’s registered capital. Allocations from these statutory surplus reserves may only be
used for specific purposes and are not distributable to us in the form of loans, advances, or cash dividends.
Under the New EIT Law and its implementation
rules issued by the PRC State Council, both of which became effective on January 1, 2008, dividends from our PRC subsidiaries to
us may be subject to a withholding tax at the rate of 10% if the dividend is derived from profits generated after January 1, 2008.
If we are deemed to be a PRC resident enterprise, the withholding tax may be exempted, but in such a case we will be subject to
a 25% tax on our global income, and our non-PRC investors may be subject to PRC income tax withholding. For a more detailed discussion
of the New EIT Law, see Item 10 - Additional Information, Subpart E, Taxation in China of this Form 20-F.
For the Singapore and Malaysia subsidiaries,
each of them may pay dividends only out of its profits based on the articles of association and the Companies Act in Singapore
and Malaysia.
There is no limit to the amount of dividend payable
as long as there are sufficient profits. There is no withholding tax imposed on a Singapore and Malaysia company paying dividends
to a company located outside of Singapore and Malaysia upon remittance.
For the Qatar subsidiary, it may pay dividends only out of its profits based on the articles of association
and the Companies Act in Qatar.
Pursuant to applicable
Qatari laws and regulations, 10% of after-tax profits are required to be set aside in a statutory surplus reserve fund annually
until the reserve balance reaches 50% of registered capital. The statutory reserve can be used to cover the losses of the companies
or to increase the capital of the companies with a decision by the general assembly. There is no withholding tax imposed on the
Qatar company paying dividends to parent company located in Singapore.
We have not experienced any significant changes
since the date of our audited consolidated financial statements included in this Annual Report.
|
ITEM 9.
|
THE OFFER AND LISTING
|
|
A.
|
Offer and Listing Details
|
Since August 1, 2008, our ordinary shares
have been listed on the NASDAQ Global Select Market under the symbol “HOLI”.
The following table provides the high and low reported market prices of our ordinary shares as reported by Yahoo! Finance
for the periods indicated.
|
|
Nasdaq Price per Share
|
|
|
|
High
|
|
|
Low
|
|
Annual Market Prices
(1)
|
|
|
|
|
|
|
|
|
Fiscal Year 2012
|
|
$
|
12.20
|
|
|
|
7.30
|
|
Fiscal Year 2013
|
|
$
|
13.96
|
|
|
|
7.33
|
|
Fiscal Year 2014
|
|
$
|
24.94
|
|
|
|
11.79
|
|
Fiscal Year 2015
|
|
$
|
26.84
|
|
|
|
17.18
|
|
Fiscal Year 2016
|
|
$
|
23.49
|
|
|
|
15.21
|
|
|
|
|
|
|
|
|
|
|
Quarterly Market Prices
|
|
|
|
|
|
|
|
|
First Quarter 2015 ended September 30, 2014
|
|
$
|
24.15
|
|
|
|
21.56
|
|
Second Quarter 2015 ended December 31, 2014
|
|
$
|
25.94
|
|
|
|
20.75
|
|
Third Quarter 2015 ended March 31, 2015
|
|
$
|
26.32
|
|
|
|
17.18
|
|
Fourth Quarter 2015 ended June 30, 2015
|
|
$
|
26.84
|
|
|
|
19.85
|
|
First Quarter 2016 ended September 30, 2015
|
|
$
|
23.49
|
|
|
|
15.89
|
|
Second Quarter 2016 ended December 31, 2015
|
|
$
|
22.60
|
|
|
|
17.34
|
|
Third Quarter 2016 ended March 31, 2016
|
|
$
|
21.74
|
|
|
|
15.21
|
|
Fourth Quarter 2016 ended June 30, 2016
|
|
|
20.80
|
|
|
|
15.95
|
|
|
|
|
|
|
|
|
|
|
Monthly Market Prices
|
|
|
|
|
|
|
|
|
March 2016
|
|
$
|
21.65
|
|
|
|
18.86
|
|
April 2016
|
|
$
|
20.80
|
|
|
|
19.17
|
|
May 2016
|
|
$
|
18.69
|
|
|
|
15.95
|
|
June 2016
|
|
$
|
18.49
|
|
|
|
16.75
|
|
July 2016
|
|
$
|
20.20
|
|
|
|
16.95
|
|
August 2016
|
|
$
|
21.29
|
|
|
|
19.34
|
|
September 2016 (through September 13, 2016)
|
|
$
|
21.80
|
|
|
|
21.02
|
|
(1) All periods end June 30 of the stated year,
unless otherwise noted.
Not applicable
See our disclosures under “Item 9. A.
Offer and Listing.”
Not Applicable
Not Applicable
Not Applicable
|
ITEM 10.
|
ADDITIONAL INFORMATION
|
Not applicable
|
B.
|
Memorandum and Articles of Association
|
The following represents a summary of certain
key provisions of the Company’s amended and restated memorandum and articles of association. The summary does not purport
to be a summary of all of the provisions of our memorandum and articles of association and of all relevant provisions of BVI law
governing the management and regulation of BVI companies.
Register
The Company was incorporated in the BVI on February 6, 2006 under the BVI Business Companies Act
(the
“Act”). The Company filed a Certificate of Change of Name to change its name from HLS Systems International,
Inc. to Hollysys Automation Technologies Ltd. on July 17, 2009. On May 26, 2016, the Board of Directors the Company approved
the amended and restated memorandum and articles of association (the “Amended and Restated M&A”) to exclude the
application of Sections 60 and 61 of the Act. The Amended and Restated M&A became effective upon the registration by the Registrar
of Corporate Affairs of the British Virgin Islands on May 27, 2016. The Board of Directors believes that such change is desirable
and to the benefit of all of the shareholders of the Company because it will provide the Company with increased flexibility of
action to purchase its own shares from time to time based on market conditions, stock prices, and other factors without the delay
and expense involved in offering to purchase share from all shareholders or obtaining written consent on such purchase from the
shareholders as otherwise required under Sections 60 and 61 of the Act. The Amended and Restated M&A authorizes the issuance
of up to 100,000,000 ordinary shares of $0.001 par value, and (ii) 90,000,000 preferred shares of $0.001 par value.
Objects and Purposes
The Company’s Amended and Restated M&A
grants the Company full power and capacity to carry on or undertake any business or activity and do any act or enter into
any transaction not prohibited by the Act or any other BVI legislation.
Directors
A director must, immediately after becoming
aware of the fact that he is interested in a transaction entered into or to be entered into by us, disclose such interest to the
board of directors, unless (i) the transaction or proposed transaction is between the director and the company and (ii) the transaction
or proposed transaction is or is to be entered into in the ordinary course of our business and on usual terms and conditions. The
director who is interested in a transaction entered into or to be entered into by the Company may (i) vote on a matter relating
to the transaction; (ii) attend a meeting of directors at which a matter relating to the transaction arises and be included in
the quorum; and (iii) sign a document on behalf of the Company, or do any other thing in his capacity as a director, that relates
to the transaction.
The directors may fix their compensation for
services rendered to us.
By a resolution of directors, the directors
may exercise all our powers to borrow money, mortgage or charge our undertakings and property, issue debentures, denture stock
and other securities whenever money is borrowed or as security for any debt, liability or obligation occurred by us or of any third
party.
Each director holds office until his successor
takes office or until his earlier death, resignation or removal by the members or a resolution passed by the majority of the remaining
directors.
A director shall not require a share qualification.
Directors may only be removed for cause by
the shareholders.
Rights and Obligations of Shareholders
Dividends
Subject to the Act, the directors may, by resolution
of directors, declare dividends and distributions by the Company to members and authorize payment on the dividends or distributions
so long as that immediately after the distribution, the value of the Company’s assets exceeds its liabilities and the Company
is able to pay its debts as they fall due. Any distribution payable in respect of a share which has remained unclaimed
for three years from the date when it became due for payment shall, if the board of the directors so resolves, be forfeited and
cease to remain owing by the Company. The directors may, before authorizing any distribution, set aside out of the profits
of the Company such sum as they think proper as a reserve fund, and may invest the sum so set apart as a reserve fund upon such
securities as they may select.
The holder of each ordinary share has the right
to an equal share in any distribution paid by the Company.
Voting Rights
Each ordinary share confers on the shareholder
the right to one vote at a meeting of the members or on any resolution of members on all matters before the shareholders of the
Company.
Rights in the event of winding up
The holder of each ordinary share is entitled
to an equal share in the distribution of the surplus assets of the Company on a winding up.
Redemption
The Company may purchase, redeem or otherwise
acquire and hold its own shares with the consent of members whose shares are to be purchased, redeemed or otherwise acquired unless
the Company is permitted by the Act or any provision of the Amended and Restated M&A to purchase, redeem or otherwise acquire
the shares without their consent.
The Company may purchase, redeem or otherwise
acquire its shares at a price lower than the fair value if permitted by, and then only in accordance with, the terms of the Amended
and Restated M&A or a written agreement for the subscription for the shares to be purchased, redeemed or otherwise acquired.
Changes in the rights of shareholders
The rights attached to any class of shares
(unless otherwise provided by the terms of issue of the shares of that class) may, whether or not the Company is being wound-up,
be varied with the consent in writing of not less than three-fourths of the issued shares of that class and the holders of not
less than three-fourths of the issued shares of any other class of shares which may be affected by such variation.
Meetings
The directors may convene meetings of the members of the Company at such times and in such manner and places
as the directors consider necessary or desirable. A meeting of members must be held if requested by members holding at least 30%
of the voting rights in respect of the matter for which the meeting is being held. No less than seven days' notice of meetings
is required to be given to members.
A meeting of members is properly constituted
if at the commencement of the meeting the holder or holders present in person or by proxy entitled to exercise at least fifty percent
of the voting rights of the shares of each class or series of shares entitled to vote as a class or series thereon and the same
proportion of the votes of the remaining shares entitled to vote thereon.
A member shall be deemed to be present at the
meeting if he participates by telephone or other electronic means and all members participating in the meeting are able to hear
each other.
A resolution of members may be approved at
a duly constituted meeting of members by the affirmative vote of a simple majority of the votes of those members entitled to vote
and voting on the resolution.
A meeting of members held in contravention
of the requirement to give notice is valid if members holding not less than 90% of:(a) the total voting rights on all matters to
be considered at the meeting; or (b) the votes of each class or series of shares where members are entitled to vote thereon as
a class or series together with an absolute majority of the remaining votes, have waived notice of the meeting. Attendance at the
meeting is deemed to constitute waiver.
The inadvertent failure of the directors to
give notice of a meeting to a member, or the fact that a member has not received notice, does not invalidate the meeting.
A member may be represented at a meeting of
members by a proxy who may speak and vote on behalf of the member. A written instrument giving the proxy such authority
must be produced at the place appointed for the meeting before the time for holding the meeting at which such person proposes to
vote.
Limitations on Ownership of Securities
There are no limitations on the right of non-residents
or foreign persons to own the Company’s securities imposed by BVI law or by the Amended and Restated M&A
Change in Control of Company
While directors of the Company may be appointed
by the members or directors for such terms as may be determined at the time of such appointment, and may be removed by resolution
of directors with or without cause, directors may not be removed by the members except for cause.
The unissued shares
of the Company are at the disposal of the directors who may offer, allot, grant options over or otherwise dispose of them to such
persons at such times and for such consideration, being not less than the par value of the shares being disposed of, and upon such
terms and conditions as the directors may determine.
Ownership Threshold
There are no provisions governing the ownership
threshold above which shareholder ownership must be disclosed.
Changes in Capital
Subject to the provisions of the Act, we may,
by a resolution of directors or members, amend the Amended and Restated M&A to increase or decrease the number of shares authorized
to be issued. The directors of the Company may, by resolution, authorize a distribution (including a capital distribution)
by the Company at a time, of an amount, and to any members they think fit if they are satisfied, on reasonable grounds, that the
Company will, immediately after the distribution, satisfy the solvency test. The solvency test is satisfied if the value of
the Company’s assets exceeds its liabilities, and the Company is able to pay its debts as they fall due.
Differences in Corporate Law
The company law of the BVI differs from laws
applicable to U.S. corporations and their shareholders. Set forth below is a summary of the significant differences
between the provisions of the companies law applicable to us and the laws applicable to companies incorporated in the United States
and their shareholders.
Protection for minority shareholders
Under the laws of most U.S. jurisdictions,
majority and controlling shareholders of a company generally have certain “fiduciary” responsibilities to the minority
shareholders. Corporate actions taken by majority and controlling shareholders that are unreasonable and materially
detrimental to the interests of minority shareholders may be declared null and void. Minority shareholders may have
less protection for their rights under BVI law than they would have under U.S. law.
Powers of directors
Unlike most U.S. jurisdictions, the directors
of a BVI company, subject in certain cases to court’s approvals but without shareholders’ approval, may implement the
sale, transfer, exchange or disposition of any asset, property, part of the business, or securities of the company, with the exception
that shareholder approval is required for the disposition of over 50% in the value of the total assets of the company.
Conflict of interests
Similar to the laws of most U.S. jurisdictions,
when a director becomes aware of the fact that he has an interest in a transaction which we are to enter into, he must disclose
it to our board. However, with sufficient disclosure of interest in relation to that transaction, the director who is interested
in a transaction entered into or to be entered into by the Company may (i) vote on a matter relating to the transaction; (ii) attend
a meeting of directors at which a matter relating to the transaction arises and be included in the quorum; and (iii) sign a document
on behalf of us, or do any other thing in his capacity as a director, that relates to the transaction.
Written consent and cumulative voting
Similar to the laws of most U.S. jurisdictions,
under the BVI law, shareholders are permitted to approve matters by way of written resolution in place of a formal meeting. BVI
law does not make a specific reference to cumulative voting, and our current Amended and Restated M&A have no provision authorizing
cumulative voting.
Takeover provisions
On August 27, 2010, our Board of Directors
adopted the 2010 Rights Plan. In connection with the 2010 Rights Plan, the Board of Directors declared a dividend distribution
of one “Right” for each outstanding ordinary share to shareholders of record at the close of business on August 27,
2010, effective as of September 27, 2010. Each Right entitles the shareholder to buy one share of our Class A Preferred Stock
at a price of $160. Unless terminated earlier by our Board of Directors, the 2010 Rights Plan will expire on September
27, 2020.
Initially, the Rights will be attached to all
certificates representing ordinary shares then outstanding, and no separate Rights certificates or stock statements will be distributed
or provided. The Rights will separate from the ordinary shares and become exercisable if a person or group announces
an acquisition of 20% or more of our outstanding ordinary shares, or announces commencement of a tender offer for 20% or more of
the ordinary shares. In that event, the Rights permit shareholders, other than the acquiring person, to purchase our
ordinary shares having a market value of twice the exercise price of the Rights, in lieu of the Class A Preferred Stock. In
addition, in the event of certain business combinations, the Rights permit the purchase of the ordinary shares of an acquiring
person at a 50% discount. Rights held by the acquiring person become null and void in each case.
The 2010 Rights Plan is designed to ensure
that all of our shareholders receive fair and equal treatment in the event of any proposed takeover of us and to guard against
partial tender offers, open market accumulations and other abusive or coercive tactics to gain control of us without paying all
shareholders a control premium. The Rights will cause substantial dilution to a person or group that acquires 20% or more
of our stock on terms not approved by the our Board of Directors, but the Rights should not interfere with any merger or other
business combination approved by the Board of Directors at any time prior to the first date that a person or group has become an
acquiring person.
Shareholder’s access to corporate
records
A shareholder is entitled, on giving written
notice to the Company, to inspect the Company’s (i) Memorandum and Articles of Association; (ii) register of members; (iii)
register of directors; and (iv)minutes of meetings and resolutions of members and of those classes of members of which the shareholder
is a member.
The directors may, if they are satisfied that
it would be contrary to the company’s interests to allow a member to inspect any document listed above (or any part thereof),
refuse the member to inspect the document or limit the inspection of the document. Our board may also authorize a member
to review the company account if requested.
Indemnification
Under BVI law and our Amended and Restated
M&A, we may indemnify against all expenses, including legal fees, and against all judgements, fines and amounts paid in settlement
and reasonably incurred in connection with legal, administrative or investigative proceedings any person who: (a) is or was a party
or is threatened to be made a party to any threatened, pending or completed proceedings, whether civil, criminal, administrative
or investigative, by reason of the fact that the person is or was a director of the Company; or (b) is or was, at the request of
the Company, serving as a director of, or in any other capacity is or was acting for, another body corporate or a partnership,
joint venture, trust or other enterprise.
To be entitled to indemnification, these persons must have acted honestly and in good faith and in what he
believes to be the best interest of the Company, and they must have had no reasonable cause to believe their conduct was unlawful.
Furthermore, such a person must be indemnified by the Company if he has been successful in the defense of any proceedings.
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers or persons controlling us under the foregoing provisions,
we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
Mergers and similar arrangements
Under the laws of the BVI, two or more companies
may merge or consolidate in accordance with Section 170 of the Act. A merger means the merging of two or more constituent companies
into one of the constituent companies, and a consolidation means the uniting of two or more constituent companies into a new company.
In order to merge or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation
which must be authorized by a resolution of shareholders.
Shareholders not otherwise entitled to vote
on the merger or consolidation may still acquire the right to vote if the plan of merger or consolidation contains any provision
which, if proposed as an amendment to the memorandum or articles of association, would entitle them to vote as a class or series
on the proposed amendment. In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective
of whether they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation.
The shareholders of the constituent companies
are not required to receive shares of the surviving or consolidated company but may receive debt obligations or other securities
of the surviving or consolidated company, or other assets, or a combination thereof. Further, some or all of the shares of a class
or series may be converted into a kind of asset while the other shares of the same class or series may receive a different kind
of asset. As such, not all the shares of a class or series must receive the same kind of consideration.
After the plan of merger or consolidation has
been approved by the directors and authorized by a resolution of the shareholders, articles of merger or consolidation are executed
by each company and filed with the Registrar of Corporate Affairs in the BVI.
Dissenter Rights
A shareholder may dissent from a mandatory
redemption of his shares, an arrangement (if permitted by the court), a merger (unless the shareholder was a shareholder of the
surviving company prior to the merger and continues to hold the same or similar shares after the merger) and a consolidation. A
shareholder properly exercising his dissent rights is entitled to payment in cash of the fair value of his shares.
A shareholder dissenting from a merger or consolidation
must object in writing to the merger or consolidation before the vote by the shareholders on the merger or consolidation, unless
notice of the meeting was not given to the shareholder. If the merger or consolidation is approved by the shareholders, the company
must within 20 days give notice of this fact to each shareholder who gave written objection, and to each shareholder who did not
receive notice of the meeting. Such shareholders then have 20 days to give their written election in the form specified by the
Act to dissent from the merger or consolidation, provided that in the case of a merger, the 20 days starts when the plan of merger
is delivered to the shareholder.
Upon giving notice of his election to dissent,
a shareholder ceases to have any rights of a shareholder except the right to be paid the fair value of his shares. As such, the
merger or consolidation may proceed in the ordinary course notwithstanding the dissent.
Within seven days of the later of the delivery
of the notice of election to dissent and the effective date of the merger or consolidation, the company must make a written offer
to each dissenting shareholder to purchase his shares at a specified price that the company determines to be their fair value.
The company and the shareholder then have 30 days to agree upon the price. If the company and a shareholder fail to agree on the
price within the 30 days, then the company and the shareholder shall each designate an appraiser and these two appraisers shall
designate a third appraiser. These three appraisers shall fix the fair value of the shares as of the close of business on the day
before the shareholders approved the transaction without taking into account any change in value as a result of the transaction.
Under BVI law, shareholders are not entitled
to dissenters’ rights in relation to liquidation.
Shareholders’ suits
Similar to the laws of most U.S. jurisdictions,
BVI law permits derivative actions against its directors. However, the circumstances under which such actions may be brought,
and the procedures and defenses available may result in the rights of shareholders of a BVI company being more limited than those
of shareholders of a company incorporated and/or existing in the United States.
The High Court of the BVI may, on the application
of a shareholder of a company, grant leave to that shareholder to bring proceedings in the name and on behalf of that company,
or intervene in proceedings to which the company is a party for the purpose of continuing, defending or discontinuing the proceedings
on behalf of the company. In determining whether to grant leave, the High Court of the BVI must take into account (i) whether
the shareholder is acting in good faith; (ii) whether the derivative action is in the interests of the company taking account of
the views of the company’s directors on commercial matters; (iii) whether the proceedings are likely to succeed; (iv) the
costs of the proceedings in relation to the relief likely to be obtained; and (v) whether an alternative remedy to the derivative
claim is available.
Leave to bring or intervene in proceedings
may be granted only if the court is satisfied that (i) the company does not intend to bring, diligently continue or defend,
or discontinue the proceedings, as the case may be; or (ii) it is in the interests of the company that the conduct of the proceedings
should not be left to the directors or to the determination of the shareholders as a whole.
Except for the following, we have not entered
into any material contracts other than in the ordinary course of business and other than those described in Item 4, “Information
on the Company,” Item 7, “Major Shareholders and Related Party Transactions,” or Item 5. Operating And Financial
Review And Prospects – Contractual Obligations,”
or
elsewhere in this annual report.
On May 18, 2011, the Company entered into a
stock purchase agreement (the “SPA”) to acquire 100% ownership of Concord which is engaged in the provision of electrical
works and infrastructure engineering services in South East Asia and the Middle East. The total consideration of the acquisition
consisted of cash consideration of SGD$41.5 million (approximately $33,789,285), and 1,006,788 ordinary shares of the Company.
The effective date of the acquisition of Concord
was July 1, 2011, at which time it became a wholly owned subsidiary of the Company, and its operation results are included in our
consolidated financial statements effective from July 1, 2011.
In addition, the Company was obligated to issue
an aggregate of 1,510,181 ordinary shares of the Company (“Incentive Shares”) to the management of the Concord, if
Concord’s net income equals or exceeds $10 million and $11.5 million for the fiscal years ended June 30, 2012 and 2013, respectively
(“Targeted Net Income Threshold”), in accordance with the SPA. The Company would issue 50% of Incentive Shares to the
management of the Concord on an all or none basis per year when the Targeted Net Income Threshold is achieved. The Incentive Shares
were granted with service conditions such that if the recipients terminate their employment agreements within two years after the
acquisition, the Incentive Shares will be forfeited. Because the Targeted Net Income Thresholds were not achieved for either of
the two fiscal years, no Incentive Shares were issued.
On March 6, 2013, the Company signed a stock
purchase agreement, referred to as the (“Bond SPA”), to acquire 100% ownership of Bond. The total purchase price for
the acquisition is a combination of cash and stock, aggregating an equivalent of approximately $73.0 million, including a two-year
incentive program payable in ordinary shares and additional incentive shares if Bond meets certain performance targets. Pursuant
to the Bond SPA, the Company paid$16.4 million within one month after signing the Bond SPA as a deposit, an additional $5.5 million
upon closing, and$14.6 million to be paid within 18 months after signing the Bond SPA, respectively.
After the closing, the Company issued 1,407,907
ordinary shares
to the shareholders of Bond on May 30, 2013, worth
$14.6 million (40% of total share purchase price). The Bond shareholders also are entitled to the Company ordinary shares worth
$11.0 million (30% of total share purchase price) as incentive shares in each of the next two fiscal years if Bond’s USGAAP
audited net income equals or exceeds $8.8 million and $10.6 million for calendar year 2013 and calendar year 2014, respectively.
Additional ordinary shares, as a premium on performance, will be issued to the Bond shareholders if Bond outperforms the targets
mentioned above, but the premium will not exceed 15% of the total incentive shares in any case. The Company and Bond have also
agreed upon the compensation and incentives to be given to the management team of Bond to maintain the team stability after the
acquisition.
The performance target for calendar year 2013 incentive
was achieved and 648,697 shares were issued in Oct 2014. The performance targets for calendar year 2014 incentive and for the premium
shares were achieved, a total number of 627,578 were issuable as of June 30, 2015.
On April 3, 2013, Beijing Hollysys entered
into an operating lease agreement to lease out one of its buildings located in Beijing. The lease term is 10 years from September
1, 2013 to August 31, 2023.The annual minimum lease payment receivable after five years are subject to renegotiation in case the
Chinese consumer price index published by the government exceeds 5%.
On May 30, 2014, the Company entered into a
convertible loan agreement with International Finance Corporation, an international organization established by Articles of Agreement
among its member countries including the British Virgin Islands ("IFC"), under which the Company will borrow $20,000,000
from IFC (the “Convertible Bond”) (Note 16) with an interest rate of 2.1% per annum and commitment fee of 0.5% per
annum paid in rear semi-annually. The Company received the loan disbursement on August 30, 2014, and the loan interest started
accumulating since then.
BVI Exchange Controls
There are no material exchange controls restrictions
on payment of dividends, interest or other payments to the holders of our ordinary or preferred shares or on the conduct of our
operations in the BVI, where we were incorporated. There are no material BVI laws that impose any material exchange controls
on us or that affect the payment of dividends, interest or other payments to nonresident holders of our ordinary or preferred shares. BVI
law and our Amended and Restated Memorandum and Articles of Association do not impose any material limitations on the right of
non-residents or foreign owners to hold or vote our ordinary or preferred shares.
Exchange Controls in China
Under the Foreign Currency Administration Rules
promulgated in 1996 and revised in 1997, and various regulations issued by SAFE and other relevant PRC government authorities,
RMB is convertible into other currencies without prior approval from SAFE only to the extent of current account items, such as
trade related receipts and payments, interest and dividends and after complying with certain procedural requirements. The conversion
of RMB into other currencies and remittance of the converted foreign currency outside PRC for the purpose of capital account items,
such as direct equity investments, loans and repatriation of investment, requires the prior approval from SAFE or its local office.
Payments for transactions that take place within China must be made in RMB. Unless otherwise approved, PRC companies must repatriate
foreign currency payments received from abroad. Foreign-invested enterprises may retain foreign exchange in accounts with designated
foreign exchange banks subject to a cap set by SAFE or its local office. Unless otherwise approved, domestic enterprises must convert
all of their foreign currency proceeds into RMB.
On October 21, 2005, SAFE issued the Notice
on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Reverse Investment Activities of Domestic Residents
Conducted via Offshore Special Purpose Companies, which became effective as of November 1, 2005. According to the notice, a special
purpose company, or SPV, refers to an offshore company established or indirectly controlled by PRC residents for the special purpose
of carrying out financing of their assets or equity interest in PRC domestic enterprises. Prior to establishing or assuming control
of an SPV, each PRC resident, whether a natural or legal person, must complete the overseas investment foreign exchange registration
procedures with the relevant local SAFE branch. The notice applies retroactively. As a result, PRC residents who have established
or acquired control of these SPVs that previously made onshore investments in China were required to complete the relevant overseas
investment foreign exchange registration procedures by March 31, 2006. These PRC residents must also amend the registration with
the relevant SAFE branch in the following circumstances: (i) the PRC residents have completed the injection of equity investment
or assets of a domestic company into the SPV; (ii) the overseas funding of the SPV has been completed; (iii) there is a material
change in the capital of the SPV. Under the rules, failure to comply with the foreign exchange registration procedures may result
in restrictions being imposed on the foreign exchange activities of the violator, including restrictions on the payment of dividends
and other distributions to its offshore parent company, and may also subject the violators to penalties under the PRC foreign exchange
administration regulations.
On August 29, 2008, SAFE promulgated Circular
142 which regulates the conversion by a foreign-funded enterprise of foreign currency into RMB by restricting how the converted
RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011 in order to clarify the application of Circular
142. Under Circular 142 and Circular 45, the RMB capital converted from foreign currency registered capital of a foreign-invested
enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not
be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital
converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed
without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans
have not been used. Violations of Circular 142 and Circular 45 could result in severe penalties, such as heavy fines as set out
in the relevant foreign exchange control regulations.
On April 8, 2015, SAFE released the Notice
on the Reform of the Administration Method for the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises, or SAFE
Circular 19, which came into force and superseded SAFE Circular 142 on June 1, 2015. Circular 19 allows foreign
invested enterprises to settle their foreign exchange capital on a discretionary basis according to the actual needs of their business
operation and provides the procedures for foreign invested companies to use Renminbi converted from foreign currency-denominated
capital for equity investment. Nevertheless, Circular 19 also reiterates the principle that Renminbi converted from foreign
currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business
scope. Since Circular 19 was only recently promulgated, there are uncertainties on how it will be interpreted and implemented
in practice.
In February 2015, SAFE also promulgated the
Circular of Further Simplifying and Improving the Policies of Foreign Exchange Administration Applicable to Direct Investment,
or SAFE Circular 13, which became effective on June 1, 2015. Under SAFE Circular 13, the current foreign exchange procedures will
be further simplified, and foreign exchange registrations of direct investment will be handled by the banks designated by the foreign
exchange authority instead of SAFE and its branches. However, the foreign invested enterprises are still prohibited by SAFE Circular
13 to use the RMB converted from foreign currency-registered capital to extend entrustment loans, repay bank loans or inter-company
loans.
The following is a general summary of certain
material BVI, China and U.S. federal income tax considerations. The discussion is not intended to be, nor should it
be construed as, legal or tax advice to any particular prospective shareholder. The discussion is based on laws and
relevant interpretations thereof in effect as of the date hereof, all of which are
subject to change or different interpretations,
possibly with retroactive effect.
BVI Taxation
The BVI does not impose a withholding tax on
dividends paid to holders of our ordinary shares, nor does the BVI levy any capital gains or income taxes on us. Further, a holder
of our ordinary shares who is not a resident of the BVI is exempt from the BVI income tax on dividends paid with respect to the
ordinary shares. Holders of ordinary shares are not subject to the BVI income tax on gains realized on the sale or disposition
of the ordinary shares.
Our ordinary shares are not subject to transfer
taxes, stamp duties or similar charges in the BVI. However, as a company incorporated under the 2004 Act, we are required to pay
the BVI government an annual license fee based on the number of shares we are authorized to issue.
There is no income tax treaty or convention
currently in effect between the United States and the BVI.
Taxation in China
We are a holding company incorporated in the
BVI, which indirectly holds our equity interests in our PRC operating subsidiaries. The EIT Law and its implementation rules, both
of which became effective as of January 1, 2008, provide that a PRC enterprise is subject to a standard income tax rate of 25%
and China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its overseas parent, will normally
be subject to PRC withholding tax at a rate of 10%, unless there are applicable treaties between the overseas parent’s jurisdiction
of incorporation and China to reduce such rate.
Under the Arrangement between the Mainland
and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
respect to Taxes on Income, or the Double Taxation Arrangement, effective as of January 1, 2007, such dividend withholding tax
rate is reduced to 5% if a Hong Kong resident enterprise owns over 25% of the PRC company distributing the dividends. Under the
aforesaid arrangement, any dividends that our PRC operating subsidiaries pay to their Hong Kong holding companies may be subject
to a withholding tax at the rate of 5% if they are not considered to be a PRC “resident enterprise” as described below.
However, if the Hong Kong holdings companies are not considered to be the “beneficial owner” of such dividends under
the Notice Regarding Interpretation and Recognition of Beneficial Owners under Tax Treaties promulgated by the State Administration
of Taxation on October 27, 2009 (and not a PRC “resident enterprise”), such dividends would be subject to the withholding
tax rate of 10%. The withholding tax rate of 5% or 10% applicable will have a significant impact on the amount of dividends to
be received by us and ultimately by shareholders.
According to the Notice Regarding Interpretation
and Recognition of Beneficial Owners under Tax Treaties, the term “beneficial owner” refers to a person who has the
right to own and dispose of the income and the rights or properties generated from the said income. The “beneficial owner”
may be an individual, a company or any other organization which is usually engaged in substantial business operations. A conduit
company is not a “beneficial owner.” The term “conduit company” refers to a company which is usually established
for purposes of dodging or reducing taxes, and transferring or accumulating profits. Such a company is only registered in the country
of domicile to satisfy the organizational form as required by law, but it does not engage in such substantial business operations
as manufacturing, distribution and management.
In addition to the changes to the current tax
structure, under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China
is considered a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing rules
define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management
and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.”
It remains unclear whether the PRC tax authorities
would require or permit our overseas registered entities to be treated as PRC resident enterprises. We do not currently consider
our company to be a PRC resident enterprise. However, if the PRC tax authorities determine that we are a “resident enterprise”
for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to
the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations.
In our case, this would mean that income such as interest on offering proceeds and non-China source income would be subject to
PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us
from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be
subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not
yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises
for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident
enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our
non-PRC shareholders and with respect to gains derived by our non-PRC shareholders from transferring our shares.
United States Federal Taxation
The following is a discussion of certain material
U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares by U.S. holders (as defined
below). It does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular
person’s situation. The discussion applies only to U.S. holders that hold their ordinary shares as capital assets (generally
property held for investment) within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, or the Code.
This discussion is based on the Code, income tax regulations promulgated there
under, judicial positions, published positions of the Internal Revenue Service, or the IRS, and other applicable authorities,
all as in effect as of the date hereof and all of which are subject to change, possibly with retroactive effect. This discussion
is general in nature and is not exhaustive of all possible tax considerations, nor does the discussion address any state, local
or foreign tax considerations or any U.S. tax considerations (e.g., estate or gift tax) other than U.S. federal income tax considerations,
that may be applicable to particular holders.
This discussion does not address all aspects
of U.S. federal income taxation that may be relevant in light of particular circumstances, nor does it address the U.S. federal
income tax consequences to persons who are subject to special rules under U.S. federal income tax law, including:
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banks, insurance companies or other financial institutions;
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persons subject to the alternative minimum tax;
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tax-exempt organizations;
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controlled foreign corporations, passive foreign investment companies and corporations that accumulate
earnings to avoid United States federal income tax;
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certain former citizens or long-term residents of the United States;
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dealers in securities or currencies;
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traders in securities that elect to use a mark-to-market method of accounting for their securities
holdings;
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persons that own, or are deemed to own, more than five percent of our capital stock;
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holders who acquired our stock as compensation or pursuant to the exercise of a stock option;
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persons who hold our common stock as a position in a hedging transaction, “straddle,”
or other risk reduction transaction; or
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persons who do not hold our ordinary shares as a capital asset (within the meaning of Section 1221
of the Code).
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For purposes of this discussion, a U.S. holder
is (i) an individual who is a citizen or resident of the United States for U.S. federal income tax purposes; (ii) a corporation,
or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the
United States (or treated as such under applicable U.S. tax laws), any state thereof, or the District of Columbia; (iii) an
estate the income of which is subject to U.S. federal income tax regardless of its source; or (iv) a trust if (a) a U.S.
court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority
to control all substantial decisions of the trust, or (b) it has a valid election in effect under applicable law and regulations
to be treated as a U.S. person for U.S. federal income tax purposes. A non-U.S. holder is a holder that is neither a U.S. holder
nor a partnership or other entity classified as a partnership for U.S. federal income tax purposes.
In the case of a partnership or entity classified
as a partnership for U.S. federal income tax purposes, the U.S. federal income tax treatment of a partner generally will depend
on the status of the partner and the activities of the partnership. Partners of partnerships should consult their tax advisors
regarding the U.S. federal income tax consequences to them of the merger or of the ownership and disposition of our ordinary shares.
Distributions
On August 11, 2016, the Board of Directors
approved a regular cash dividend policy pursuant to which future cash dividends are expected to be paid to holders of the Company’s
ordinary shares on an annual basis out of funds legally available for such purpose. The gross amount of such distributions will
be included in the gross income of the U.S. holder as dividend income on the date of receipt to the extent that the distribution
is paid out of current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such dividends
will be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S.
corporations. Dividends received by non-corporate U.S. holders, including individuals, may be subject to reduced rates of taxation
under current law. A U.S. holder may be eligible to claim a foreign tax credit with respect to any PRC withholding tax imposed
on dividends paid by us. However, the foreign tax credit rules are complex, and their application in connection with Section 7874
of the Code and the Agreement Between the Government of the United States of America and the Government of the People’s Republic
of China for the Avoidance of Double Taxation and the Prevention of Tax Evasion with Respect to Taxes on Income, or the U.S.-PRC
Tax Treaty, is not entirely clear at this time. U.S. holders should consult their own tax advisors with respect to any benefits
they may be entitled to under the foreign tax credit rules and the U.S.-PRC Tax Treaty.
To the extent that dividends paid on our ordinary
shares exceed current and accumulated earnings and profits, the distributions will be treated first as a tax-free return of tax
basis on our ordinary shares, and to the extent that the amount of the distribution exceeds tax basis, the excess will be treated
as gain from the disposition of those ordinary shares.
Sale or Other Disposition
U.S. holders of our ordinary shares will recognize
taxable gain or loss on any sale, exchange, or other taxable disposition of ordinary shares equal to the difference between the
amounts realized for the ordinary shares and the U.S. holder’s tax basis in the ordinary shares. This gain or loss generally
will be capital gain or loss. Under current law, non-corporate U.S. holders, including individuals, are eligible for reduced tax
rates if the ordinary shares have been held for more than one year. The deductibility of capital losses is subject to limitations.
A U.S. holder may be eligible to claim a foreign tax credit with respect to any PRC withholding tax imposed on gain from the sale
or other disposition of ordinary shares. However, the foreign tax credit rules are complex, and their application in connection
with Section 7874 of the Code and the U.S.-PRC Tax Treaty is not entirely clear at this time. U.S. holders should consult
their own tax advisors with respect to any benefits they may be entitled to under the foreign tax credit rules and the U.S.-PRC
Tax Treaty.
Unearned Income Medicare Contribution
Certain U.S. holders who are individuals, trusts
or estates are required to pay an additional 3.8% Medicare tax on, among other things, dividends on and capital gains from
the sale or other disposition of shares of stock for taxable years beginning after December 31, 2013. U.S. holders should consult
their own advisors regarding the effect, if any, of this legislation on their ownership and disposition of our ordinary shares.
Foreign Account Tax Compliance
The Foreign Account Tax Compliance provisions
of the Hiring Incentives to Restore Employment Act (generally referred to as “FATCA”), when applicable, will impose
a U.S. federal withholding tax of 30% on certain “withholdable payments” (generally certain U.S.-source income, including
dividends, and the gross proceeds from the sale or other disposition of assets producing U.S. source dividends or interest ) to
foreign financial institutions and other non-U.S. entities that fail to comply with certain certification and information reporting
(generally relating to ownership by U.S persons of interests in or accounts with those entities). The obligation to withhold under
FATCA applies to, among other items, (i) U.S.-source dividend income that is paid on or after July 1, 2014 and (ii) to gross proceeds
from the disposition of property that can produce U.S.-source dividends paid on or after January 1, 2017. Non-U.S. holders should
consult their tax advisors concerning application of FATCA to our ordinary shares in their particular circumstances.
Information Reporting and Backup Withholding
Payments of dividends or of proceeds on the
disposition of stock made to a holder of our ordinary shares may be subject to information reporting and backup withholding at
a current rate of 28% unless such holder provides a correct taxpayer identification number on IRS Form W-9 (or other appropriate
withholding form) or establishes an exemption from backup withholding, for example by properly certifying the holder’s non-U.S.
status on a Form W-8BEN, Form W-8BEN-E or another appropriate version of IRS Form W-8. Payments of dividends to holders must generally
be reported annually to the IRS, along with the name and address of the holder and the amount of tax withheld, if any. A similar
report is sent to the holder. Pursuant to applicable income tax treaties or other agreements, the IRS may make these reports available
to tax authorities in the holder’s country of residence.
Backup withholding is not an additional tax;
rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the IRS, provided that the required
information is furnished to the IRS in a timely manner.
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F.
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Dividends and Paying Agents
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On February 9, 2015, we declared a special
cash dividend of US$0.40 per share to the holders of the Company’s ordinary shares. The record day was February 23
rd
,
2015, and payment day was March 16
th
, 2015.Continental Stock Transfer & Trust acted as the paying agent. During
the fiscal year of 2016, no cash dividend was declared and paid.
On August 11, 2016,
the Board of Directors of the Company approved a regular cash dividend policy pursuant to which future cash dividends are expected
to be paid to holders of the Company’s ordinary shares on an annual basis out of funds legally available for such purpose.
However, the declaration and payment of future dividends including the dividend for 2016 will be at the discretion of the Board
of Directors, and will depend upon many factors, including the Company’s financial condition, earnings, capital requirements
of its businesses, legal requirements, regulatory constraints, industry practice, and other factors that the Board of Directors
deems relevant.
Not applicable.
We have filed this Annual Report on Form 20-F
with the SEC under the Exchange Act. Statements made in this Annual Report as to the contents of any document referred to
are not necessarily complete. With respect to each such document filed as an exhibit to this Annual Report, reference is made
to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
We are subject to the informational requirements
of the Exchange Act as a foreign private issuer and file reports and other information with the SEC. Reports and other information
filed by us with the SEC, including this Annual Report on Form 20-F, may be inspected and copied at the public reference room of
the SEC at 100 F. Street, N.E., Washington D.C. 20549. You can also obtain copies of this Annual Report on Form 20-F
by mail from the Public Reference Section of the SEC, 100 F. Street, N.E., Washington D.C. 20549, at prescribed rates. Additionally,
copies of this material may be obtained from the SEC’s Internet site at
http://www.sec.gov
. The SEC’s
telephone number is 1-800-SEC-0330.
As a foreign private issuer, we are exempt
from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers,
directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section
16 of the Exchange Act.
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I.
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Subsidiary Information
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Not applicable.
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ITEM 11.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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Interest Rate Risk
We are exposed to interest rate risk primarily
with respect to our bank loans. A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities under
which we had outstanding borrowings as of June 30, 2016, would decrease income before income taxes by approximately $0.3 million
for the fiscal year ended June 30, 2016. Management monitors the banks’ prime rates in conjunction with our cash requirements
to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging
transactions in an effort to reduce our exposure to interest rate risk.
Foreign Exchange Risk
While our reporting currency is the U.S. dollar,
82.2% of our consolidated revenues and consolidated costs and expenses are denominated in RMB, and 82.5% of our assets are denominated
in RMB, and the remaining are mainly denominated in SGD. As a result, we are exposed to foreign exchange risk as our
revenues and results of operations may be affected by fluctuations in the exchange rates
of the U.S. dollar, RMB and SGD. If the RMB or SGD depreciates against the U.S. dollar, the value of our RMB
or SGD revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. Assets and liabilities
are translated at exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates
and shareholders’ equity is translated at historical exchange rates. Any resulting translation adjustments are
not included in determining net income but are included in determining other comprehensive income, a component of shareholders’
equity. An average appreciation or depreciation of the RMB against the US dollar of 5% would increase or decrease our
comprehensive income by $10,953 and $12,106, respectively. An average appreciation or depreciation of the SGD against the US dollar
of 5% would decrease or increase our comprehensive income by $350,280 or $387,151 respectively, based on our current revenues,
costs and expenses, assets, and liabilities denominated in RMB or SGD as of June 30, 2016.
Very limited hedging transactions are available
in China to reduce our exposure to exchange rate fluctuations for the RMB. To date, we have not entered into any hedging transactions
in an effort to reduce our exposure to foreign currency exchange risk in any of the currencies in which we operate. While we may
enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and it
may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by
PRC exchange control regulations that restrict its ability to convert RMB into foreign currencies.
Inflation
Inflation in China and the other regions in
which we operate has not materially impacted our results of operations. Although we have not been materially affected by inflation
in the past, we can provide no assurance that we will not be affected in the future by higher rates of inflation. To the extent
that we operate in a more diverse range of countries and regions, the risk of inflation on our operations is minimized.
If inflation were a significant factor in our financial performance, then certain operating costs and expenses, such as
employee compensation and office operating expenses may increase. Additionally, because a substantial portion of our assets from
time to time consists of cash and cash equivalents and time deposits with original maturities over three months, high inflation
could significantly reduce the value and purchasing power of these assets.
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ITEM 12.
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DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
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A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
We do not have any American Depositary Shares.
(*) The respective issuances and sales
of shares of a subsidiary were not completed as of June 30, 2016 (note 25).
* The share capital increase for the issuance of ordinary shares
upon exercise of options, restricted share and Incentive and Premium Shares for Bond are less than $1.
The Company is principally engaged in the manufacture,
sale and provision of integrated automation systems and services, mechanical and electrical solution services and installation
services in the PRC, Hong Kong, Southeast Asia and the Middle East through its operating subsidiaries.
The consolidated financial statements include
the financial statements of the Company and its subsidiaries. All significant inter-company transactions and balances are eliminated
upon consolidation. The consolidated financial statements have been prepared in accordance with the accounting principles generally
accepted in the United States of America (“U.S. GAAP”).
The preparation of financial statements in
conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Management evaluates estimates, including those related to the expected total costs of
integrated contracts, expected gross margins of integrated solution contracts, allowance for doubtful accounts, fair values of
share options, fair value of bifurcated derivative, purchase price allocation and contingent consideration with respect to business
combinations, warranties, valuation allowance of deferred tax assets and impairment of goodwill and other long-lived assets. Management
bases the estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of
which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially
from those estimates.
The Company, GTH, Clear Mind and World
Hope’s functional currency is the United States dollars (“US dollars” or “$”); whereas the
Company’s subsidiaries use the primary currency of the economic environment in which their operations are conducted as
their functional currency. Renminbi (“RMB”) is determined to be the functional currency of all PRC subsidiaries;
Singapore dollar (“SGD”) is determined to be the functional currency of HI, HAP, CCPL, CEPL, BCPL and BMSG;
Malaysian Ringgit (“MYR”) is determined to be the functional currency of CESB, BMJB and BMKL; and United Arab
Emirates Dirham (“AED”), Hong Kong dollar (“HKD”), Macau Pataca (“MOP”), Indian Rupee
(“INR”), Euro (“EUR”) and Qatar Riyal (“QAR”) are the functional currencies of Dubai,
CSHK, CMDE, HAIP, Hollycon Italy and CECL, respectively. The Company uses the US dollars as its reporting currency.
The Company translates the assets and liabilities
into US dollars using the rate of exchange prevailing at the balance sheet date, and the statements of comprehensive income are
translated at average rates during the reporting period. Adjustments resulting from the translation of financial statements from
the functional currency into US dollars are recorded in stockholders’ equity as part of accumulated other comprehensive income.
Transactions dominated in currencies other than the functional currency are translated into functional currency at the exchange
rates prevailing on the transaction dates, and the exchange gains or losses are reflected in the consolidated statements of comprehensive
income for the reporting period.
Transactions denominated in foreign currencies
are measured into the functional currency at the exchange rates prevailing on the transaction dates. Foreign currency denominated
financial assets and liabilities are re-measured at the exchange rates prevailing at the balance sheet date. Exchange gains and
losses are included in earnings, except for those raised from intercompany transactions with investment nature, which are recorded
in other comprehensive income.
For the years ended June 30, 2014, 2015 and
2016, the Company recorded foreign exchange gain (loss), net of $794, $(6,765) and $(299), respectively.
The Company accounts for its business combinations using the purchase method of accounting in accordance with
Accounting Standards Codification (“ASC”) Topic 805,
Business Combinations
(“ASC 805”). The purchase
method of accounting requires that the consideration transferred to be allocated to the assets, including separately identifiable
assets and liabilities the Company acquired based on their estimated fair values. The consideration transferred of an acquisition
is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments
issued as well as the contingent considerations and all contractual contingencies as of the acquisition date. Identifiable assets,
liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date,
irrespective of the extent of any noncontrolling interests. The excess of (i) the total cost of the acquisition, fair value of
the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the
fair value of the identifiable net assets of the acquiree, is recorded as goodwill. If the cost of acquisition is less than the
fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the statements of comprehensive
income.
The determination and allocation of fair values
to the identifiable assets acquired, liabilities assumed and noncontrolling interests is based on various assumptions and valuation
methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates,
terminal values, as well as the assumptions and estimates used to determine the cash inflows and outflows. The Company determines
discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons.
Terminal values are based on the expected life of assets and forecasted cash flows over that period.
Acquisition-related costs are recognized as
general and administrative expenses in the statements of comprehensive income as incurred.
Cash and cash equivalents consist of cash on
hand and bank deposits, which are unrestricted as to withdrawal and use. All highly liquid investments that are readily convertible
to known amounts of cash with original stated maturities of three months or less are classified as cash equivalents.
Time deposits with original maturities over
three months consist of deposits placed with financial institutions with original maturity terms from four months to one year.
As of June 30, 2016, $35,318, $7,042 and $8 of time deposits with original maturities over three months were placed in financial
institutions in the PRC, Singapore and Malaysia, respectively. As of June 30, 2015, $29,051, $14,721 and $5,878 of time deposits
with original maturities over three months were placed in financial institutions in the PRC, Singapore and Malaysia, respectively.
Restricted cash mainly consists of the cash
deposited in banks pledged for performance guarantees, or bank loans. These cash balances are not available for use until these
guarantees are expired or cancelled, or the loans are repaid.
Revenues generated from designing, building,
and delivering customized integrated industrial automation systems are recognized over the contractual terms based on the percentage
of completion method. The contracts for designing, building, and delivering customized integrated industrial automation systems
are legally enforceable and binding agreements between the Company and customers. The duration of contracts depends on the contract
size and ranges from 6 months to 5 years excluding the warranty period. The majority of the contract duration is longer than one
year.
Revenue generated from mechanical and electrical
solution contracts for the construction or renovation of buildings, rail or infrastructure facilities are also recognized over
the contractual terms based on the percentage of completion method. The contracts for mechanical and electrical solution services
are legally enforceable and binding agreements between the Company and customers. The duration of contracts depends on the contract
size and the complexity of the construction work and ranges from 6 months to 3 years excluding the warranty period. The majority
of the contract duration is longer than one year.
In accordance with ASC 605-35, Revenue Recognition
- Construction-Type and Production-Type Contracts (“ASC 605-35”), recognition is based on an estimate of the income
earned to date, less income recognized in earlier periods. Extent of progress toward completion is measured using the cost-to-cost
method where the progress (the percentage complete) is determined by dividing costs incurred to date by the total amount of costs
expected to be incurred for the integrated solutions contract. Revisions in the estimated total costs of integrated solutions contracts
are made in the period in which the circumstances requiring the revision become known. Provisions, if any, are made in the period
when anticipated losses become evident on uncompleted contracts.
The Company reviews and updates the
estimated total costs of integrated solutions contracts at least semi-annually. The Company accounts for revisions to contract
revenue and estimated total costs of integrated solution contracts, including the impact due to approved change orders, in
the period in which the facts that cause the revision become known as changes in estimates. Unapproved change orders are
considered claims. Claims are recognized only when it has been awarded by customers. Excluding the impact of change orders,
if the estimated total costs of integrated solution contracts, which were revised during the years ended June 30, 2014, 2015
and 2016, had been used as a basis of recognition of integrated contract revenue since the contract commencement, net income
for the years ended June 30, 2014, 2015 and 2016 would have been decreased by $4,436, $26,232, and $30,270, respectively;
basic net income per share for years ended June 30, 2014, 2015 and 2016 would have been decreased by $0.08, $0.45, and $0.51,
respectively; and diluted net income per share for the years ended June 30, 2014, 2015 and 2016, would have decreased by
$0.08, $0.44, and $0.50, respectively. Revisions to the estimated total costs for the years ended June 30, 2014, 2015 and
2016 were made in the ordinary course of business.
The Company combines a group of contracts as
one project if they are closely related and are, in substance, parts of a single project with an overall profit margin. The Company
segments a contract into several projects, when they are of different business substance, for example, with different business
negotiation, solutions, implementation plans and margins.
Revenue in excess of billings on the contracts
is recorded as costs and estimated earnings in excess of billings. Billings in excess of revenues recognized on the contracts are
recorded as deferred revenue until the above revenue recognition criteria are met.
The Company generally recognizes 100% of the
contractual revenue when the customer acceptance has been obtained, and no further major costs are estimated to be incurred, normally
this is also when the warranty period commences. Revenues are presented net of taxes collected on behalf of the government.
Revenue generated from sales of products is
recognized when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii)
delivery has occurred, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.
The Company has in recent years extended its
service offerings as described below. The Company mainly provides two types of services:
Revenue from one-off services: the Company
provides different types of one-off services, including on-site maintenance service and training services which are generally completed
on site within a few working days. Revenue is recognized when the Company has completed all the respective services described in
the contracts, there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection is reasonably assured.
Revenue from services covering a period of
time: the Company also separately sells extended warranties to their integrated solution customers for a fixed period. Such arrangements
are negotiated separately from the corresponding integrated solution system and are usually entered into upon the expiration of
the warranty period attached to the integrated solution contract. During the extended warranty period, the Company is responsible
for addressing issues related to the system. Part replacement is not covered in such services. The Company recognizes revenue on
a pro-rata basis over the contractual term.
Inventories are composed of raw materials, work in progress, purchased and manufactured finished goods and
low value consumables. Inventories are stated at the lower of cost or market. The Company elected to change the inventory costing
method from the “first-in first-out method” to the weighted average cost method. The Company believes the weighted
average cost method is preferable because it more closely aligns with the physical flow of inventory and the information system
calculates inventory at weighted average cost. The impact of the change in accounting principle was immaterial to all periods presented
and thus, not applied retrospectively.
The Company assesses the lower of cost or market
for non-saleable, excess or obsolete inventories based on its periodic review of inventory quantities on hand and the latest forecasts
of product demand and production requirements from its customers. The Company writes down inventories for non-saleable, excess
or obsolete raw materials, work-in-process and finished goods by charging such write-downs to cost of integrated contracts and/or
costs of products sold.
Warranties represent a major term under an
integrated contract, which will last, in general, for one to three years or otherwise specified in the terms of the contract. The
Company accrues warranty liabilities under an integrated contract as a percentage of revenue recognized, which is derived from
its historical experience, in order to recognize the warranty cost for an integrated contract throughout the contract period. In
addition, the Company estimates whether or not the accrued warranty liabilities are adequate by considering specific conditions
that may arise and the number of contracts under warranty period at each reporting date. The Company adjusts the accrued warranty
liabilities in line with the results of its assessment.
Performance of the integrated contracts
will often extend over long periods and the Company’s right to receive payments depends on its performance in
accordance with the contractual agreements. There are different billing practices in the PRC and overseas operating
subsidiaries including Concord and Bond. For the Company’s PRC subsidiaries, billings are issued based on milestones
specified in contracts negotiated with customers. In general, there are four milestones: 1) project commencement, 2) system
manufacturing and delivery, 3) installation, trial-run and customer acceptance, and 4) expiration of the warranty period. The
amounts to be billed at each milestone are specified in the contract. All contracts have the first milestone, but not all
contracts require prepayments. The length of each interval between two continuous billings under an integrated contract
varies depending on the duration of the contract (under certain contracts, the interval lasts more than a year) and the last
billing to be issued for an integrated solution contract is scheduled at the end of a warranty period. For Concord and Bond,
billing claims rendered are subject to the further approval and certification of the customers or their designated
consultants. Payments are made to Concord or Bond based on the certified billings according to the payment terms mutually
agreed between the customers and Concord or Bond. Certain amounts are retained by the customer and payable to Concord and
Bond upon satisfaction of final quality inspection or at the end of the warranty period. The retained amounts which were
recorded as accounts receivable were $9,653, $10,380 and $10,848 for the three years ended June 30, 2014, 2015 and 2016,
respectively. Prepayments received are recorded as deferred revenue. The deferred revenue will be recognized as revenue under
the percentage of completion method along with the progress of a contract. If no prepayment is received by the Company,
revenue will be recognized through costs and estimated earnings in excess of billings.
The Company does not require collateral from
its customers. Based on the prevailing collection practices in China, it is a reasonable expectation for the enterprises in the
automation industry to take over one year to collect the accounts receivable in full.
The Company does not charge interest for late
payments by its customers. The Company periodically reviews the status of contracts and decides how much of an allowance for doubtful
accounts should be made based on factors surrounding the credit risk of customers and historical experience. The Company sets up
a doubtful account for a customer based on the aging of the outstanding amount as well as the customer’s credit worthiness.
Property, plant and equipment, other than construction
in progress, are recorded at cost and are stated net of accumulated depreciation and impairment, if any. Depreciation expense is
determined using the straight-line method over the estimated useful lives of the assets as follows:
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
Buildings
|
30 -50 years
|
Machinery
|
5 - 10 years
|
Software
|
3 - 5 years
|
Vehicles
|
5- 6 years
|
Electronic and other equipment
|
3 - 10 years
|
Construction in progress represents uncompleted
construction work of certain facilities which, upon completion, management intends to hold for production purposes. In addition
to costs under construction contracts, other costs directly related to the construction of such facilities, including duty and
tariff, equipment installation and shipping costs, and borrowing costs are capitalized. Depreciation commences when the asset is
placed in service.
Maintenance and repairs are charged directly
to expenses as incurred, whereas betterment and renewals are capitalized in their respective accounts. When an item is retired
or otherwise disposed of, the cost and applicable accumulated depreciation are removed and the resulting gain or loss is recognized
for the reporting period.
Prepaid land leases, net
Prepaid land lease payments, for the land use
right of three parcels of land in the PRC, three parcels of leasehold land in Malaysia and one parcel of leasehold land in Singapore,
are initially stated at cost and are subsequently amortized on a straight-line basis over the lease terms of 49 to 88 years.
Acquired intangible assets,
net
Acquired intangible assets are carried
at cost less accumulated amortization and any impairment. Intangible assets acquired in a business combination are recognized initially
at fair value at the date of acquisition. Intangible assets, except for which are estimated to have an indefinite useful life,
are amortized using a straight-line method. Intangible assets estimated to have an indefinite useful life are not amortized but
tested for impairment annually or more frequently when indicators of impairment exist.
The estimated useful lives for the acquired
intangible assets are as follows:
Category
|
|
Estimated
useful life
|
Customer relationship
|
|
57 - 60 months
|
Order backlog
|
|
21 - 33 months
|
Residual values are considered nil.
Goodwill
Goodwill represents the excess of the
purchase price over the estimated fair value of net tangible and identifiable intangible assets acquired. The Company’s
goodwill outstanding at June 30, 2016 was related to the acquisition of Concord and Bond (see note 3). In accordance with ASC
350,
Intangibles, Goodwill and Other
(“ASC 350”), goodwill is not amortized, but rather is tested for
impairment at least annually or more frequently if there are indicators of impairment present.
Goodwill is tested for impairment on June 30
in each year. The Company performs a qualitative assessment to determine if it is more likely than not that the fair value of each
identified reporting unit is less than its carrying amount. If this is the case, the Company is not required to calculate the fair
value of its reporting unit(s) and perform the two-step impairment test. However, if the Company concludes otherwise, the first
step of the two-step impairment test is performed by comparing the carrying value of its reporting unit to its fair value. If the
carrying value of the reporting unit is greater than its fair value, the second step is performed, where the implied fair value
of goodwill is compared to its carrying value. The Company recognizes an impairment charge for the amount by which the carrying
amount of goodwill exceeds its implied fair value.
For the year ended June 30, 2015, the Company recorded an impairment
charge of $1,855 for Concord (notes 10 and 15). For the year ended June 30, 2016, the Company engaged an independent third-party
appraiser to assist with determining the fair value of the Concord reporting unit by using an income approach, particularly, the
discounted cash flow approach. In performing the step one impairment test, the Company’s estimate of the fair value of Concord
exceeded its carrying amount and concluded there was no impairment of Concord’s goodwill as of June 30, 2016.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
Impairment of long-lived
assets other than goodwill
The Company evaluates its long-lived assets
or asset group including acquired intangibles with finite lives for impairment whenever events or changes in circumstances (such
as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying
amount of a group of long-lived assets may not be fully recoverable. When these events occur, the Company evaluates the impairment
by comparing the carrying amount of the assets to future undiscounted cash flows expected to result from the use of the assets
and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets,
the Company recognizes an impairment loss based on the excess of the carrying amount of the asset group over its fair value, generally
based upon discounted cash flows or quoted market prices.
There was no impairment loss for the periods
presented.
Shipping and handling
costs
All shipping and handling fees charged to customers
are included in net revenue. Shipping and handling costs incurred are included in cost of integrated contracts and/or costs of
products sold as appropriate.
Income taxes
The Company follows the liability method of
accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between
the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the period in
which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based
on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not
be realized. The effect on deferred taxes of a change in tax rate is recognized in tax expense in the period that includes the
enactment date of the change in tax rate.
The Company adopted ASC 740,
Income Taxes
(“ASC 740”)
,
which clarifies the accounting and disclosure for uncertainty in income taxes. Interests and penalties
arising from underpayment of income taxes shall be computed in accordance with the related tax laws. The amount of interest expense
is computed by applying the applicable statutory rate of interest to the difference between the tax position recognized and the
amount previously taken or expected to be taken in a tax return. Interests and penalties recognized in accordance with ASC 740
are classified in the financial statements as a component of income tax expense. In accordance with the provisions of ASC 740,
the Company recognizes in its financial statements the impact of a tax position if a tax return position or future tax position
is “more likely than not” to prevail based on the facts and technical merits of the position. Tax positions that meet
the “more likely than not” recognition threshold are measured at the largest amount of tax benefit that has a greater
than fifty percent likelihood of being realized upon settlement. The Company’s estimated liability for unrecognized tax positions
which is included in the accrued liabilities is periodically assessed for adequacy and may be affected by changing interpretations
of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations.
The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases,
appeal or litigation process. The actual benefits ultimately realized may differ from the Company’s estimates. As each audit
is concluded, adjustments, if any, are recorded in the Company’s financial statements. Additionally, in future periods, changes
in facts, circumstances, and new information may require the Company to adjust the recognition and measurement estimates with regard
to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes
occur.
Research and development
costs
Research and development costs consist primarily
of salaries, bonuses and benefits for research and development personnel. Research and development costs also include travel expenses
of research and development personnel as well as depreciation of hardware equipment and software tools and other materials used
in research and development activities. Research and development costs are expensed as incurred. Software development costs are
also expensed as incurred as the costs qualifying for capitalization have been insignificant.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
VAT refunds and government
subsidies
Pursuant to the laws and regulations of
the PRC, the Company remits 17% of its sales as valued added tax (“VAT”), and then is entitled to a refund of the
portion that the Company’s actual VAT burden exceeding 3% levied on all sales containing internally developed software
products. VAT refunds are recognized in the statements of comprehensive income when cash refunds or the necessary approval
from the tax authority has been received. Certain subsidiaries of the Company located in the PRC receive government subsidies
from local PRC government agencies. Government subsidies are recognized in the statement of comprehensive income when the
attached conditions have been met. Government grants received for the years ended June 30, 2014, 2015 and 2016 amounted to
$5,792, $7,593 and $6,085 respectively, of which $5,103, $2,191 and $2,886 were included as a credit to operating expenses in
the statements of comprehensive income for the years ended June 30, 2014, 2015 and 2016, respectively.
Appropriations to statutory
reserve
Under the corporate law and relevant regulations in the
PRC,
all of the subsidiaries of the Company located in the PRC are required to appropriate a portion of its retained earnings to statutory
reserve. All subsidiaries located in the PRC are required to appropriate 10% of its annual after-tax income each year to the statutory
reserve until the statutory reserve balance reaches 50% of the registered capital. In general, the statutory reserve shall not
be used for dividend distribution purposes. In Qatar and Dubai, companies are required to appropriate 10% of its annual after-tax
income each year to the statutory reserve and the appropriation may be suspended by the shareholders if the reserve reaches 50%
of the registered capital. The statutory reserve can be used to cover the losses of the companies or to increase the capital of
the companies with a decision by the general assembly of CCDB and CECL.
Segment reporting
In accordance with ASC 280,
Segment
reporting
(“ASC 280”), segment reporting is determined based on how the Company’s chief operating
decision makers review operating results to make decisions about allocating resources and assessing performance of the
Company. According to management’s approach, the Company organizes its internal financial reporting structure based on
its main product and service offerings. The Company operates in three principal business segments in the financial reporting
structure and their management report, namely industrial automation, rail transportation and mechanical and electrical
solutions. The Company does not allocate any assets to the three segments as management does not use the information to
measure the performance of the reportable segments.
Comprehensive income
Comprehensive income is defined as the changes
in equity of the Company during a period from transactions and other events and circumstances excluding transactions resulting
from investments by owners and distributions to owners. In accordance with ASC 220,
Comprehensive Income
(“ASC 220”),
the Company presents components of net income and other comprehensive income in one continuous statement.
Investments in cost and
equity investees
The Company accounts for its equity investments
under either the cost method or the equity method by considering the Company’s rights and ability to exercise significant
influence over the investees. Under the cost method, investments are initially carried at cost. In the event that the fair value
of the investment falls below the initial cost and the decline is considered as other-than-temporary, the Company recognizes an
impairment charge, equal to the difference between the cost basis and the fair value of the investment. A variety of factors are
considered when determining if a decline in fair value below carrying value is other than temporary, including, among others, the
financial condition and prospects of the investee.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
The investments in entities over which the
Company has the ability to exercise significant influence are accounted for using the equity method. Significant influence is generally
considered to exist when the Company has an ownership interest in the voting stock of the investee between 20% and 50%. Other factors,
such as representation on the investee’s board of directors and the impact of commercial arrangements, are also considered
in determining whether the equity method of accounting is appropriate.
Under the equity method, original investments
are recorded at cost and adjusted by the Company’s share of undistributed earnings or losses of these entities, by the amortization
of any basis difference between the amount of the Company’s investment and its share of the net assets of the investee, and
by dividend distributions or subsequent investments. Unrealized inter-company profits and losses related to equity investees are
eliminated. An impairment charge, being the difference between the carrying amount and the fair value of the equity investee, is
recognized in the consolidated statements of comprehensive income when the decline in value is considered other than temporary.
The impairment loss on investment in cost investees
for the years ended June 30, 2014, 2015 and 2016 were $325, nil and nil, respectively. There was no impairment loss on investments
in equity investees for the years ended June 30, 2014, 2015 and 2016, respectively.
Capitalization of interest
Interest incurred on borrowings for the Company’s
construction of facilities and assembly line projects during the active construction period are capitalized. The capitalization
of interest ceases once a project is substantially complete. The amount to be capitalized is determined by applying the weighted-average
interest rate of the Company’s outstanding borrowings to the average amount of accumulated capital expenditures for assets
under construction during the year and is added to the cost of the underlying assets and amortized over their respective useful
lives.
Income per share
Income per share is computed in accordance
with ASC 260,
Earnings Per Share
(“ASC 260”). Basic income per ordinary share is computed by dividing income
attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the period. Diluted
income per ordinary share reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares
were exercised or converted into ordinary shares.
Share-based compensation
The Company accounts for share-based compensation
in accordance with ASC 718,
Compensation-Stock Compensation
(“ASC 718”). The Company recognizes compensation
cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service
period for the entire award. The compensation cost for each vesting tranche in an award subject to performance vesting is recognized
ratably from the service inception date to the vesting date for each tranche. To the extent the required service and performance
conditions are not met resulting in the forfeiture of the share-based awards, previously recognized compensation expense relating
to those awards are reversed. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary,
in a subsequent period if actual forfeitures differ from initial estimates.
For share-based awards that are subject to performance-based vesting conditions in addition to time-based
vesting, the Company recognizes the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based
compensation expense over the vesting period based upon the Company’s determination of whether it is probable that the performance-based
criteria will be achieved. At each reporting period, the Company reassesses the probability of achieving the performance-based
criteria. Determining whether the performance-based criteria will be achieved involves judgment, and the estimate of share-based
compensation expense may be revised periodically based on changes in the probability of achieving the performance-based criteria.
Revisions are reflected in the period in which the estimate is changed. If the performance-based criteria are not met, no share-based
compensation expense is recognized, and, to the extent share-based compensation expense was previously recognized, such share-based
compensation expense is reversed.
Fair value measurements
The Company has adopted ASC 820,
Fair
Value Measurements and Disclosures
(“ASC 820”), which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value measurements. It does not require any new fair value measurements,
but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information.
It establishes a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may
be used to measure fair value and include the following:
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
Level 1
|
-
|
Quoted prices in active markets for identical assets or liabilities.
|
Level 2
|
-
|
Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
Level 3
|
-
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Classification within the hierarchy is determined
based on the lowest level of input that is significant to the fair value measurement.
ASC 820 describes three main approaches to
measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market
approach uses prices and other relevant information generated from market transactions involving identical or comparable assets
or liabilities. The income approach uses valuation techniques to convert future amounts to a single present value amount. The measurement
is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount
that would currently be required to replace an asset.
Leases
Leases have been classified as either capital
or operating leases. Leases that transfer substantially all the benefits and risks incidental to the ownership of assets are accounted
for as if there was an acquisition of an asset and incurrence of an obligation at the inception of the lease. All other leases
are accounted for as operating leases wherein rental payments are expensed as incurred.
Accounting for lessor
Minimum contractual rental from leases are
recognized on a straight-line basis over the non-cancelable term of the lease. With respect to a particular lease, actual amounts
billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized
for the period. Straight-line rental revenue commences when the customer assumes control of the leased premises. Accrued straight-line
rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with
lease agreements. Contingent rental revenue is accrued when the contingency is removed.
Concentration of risks
Concentration of credit risk
Assets that potentially subject the Company
to significant concentration of credit risk primarily consist of cash and cash equivalents, time deposits with original maturities
over three months, restricted cash, accounts receivable, other receivables and amounts due from related parties. The maximum exposure
of such assets to credit risk is their carrying amounts as of the balance sheet date. As of June 30, 2016, substantially all of
the Company’s cash and cash equivalents and time deposits with original maturities exceeding three months were managed by
financial institutions located in the PRC, Singapore, Malaysia and Dubai, which management believes are of high credit quality.
Accounts receivable, other receivables and amounts due from related parties are typically unsecured and the risk with respect to
accounts receivable is mitigated by credit evaluations the Company performs on its customers and its ongoing monitoring process
of outstanding balances.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
The Company has no customer that individually
comprised 10% or more of the outstanding balance of accounts receivable as of June 30, 2015 and 2016, respectively.
Concentration of business and economic
risk
A majority of the Company’s net revenue
and net income are derived in the PRC. The Company’s operations may be adversely affected by significant political, economic
and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 20 years,
no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly
altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting
the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of
economic reforms will be consistent or effective.
Concentration of currency convertibility
risk
A majority of the Company’s businesses
are transacted in RMB, which is not freely convertible into foreign currencies. All foreign exchange transactions take place either
through the People’s Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted
by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other regulatory
institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed
contracts.
Concentration of foreign currency exchange
rate risk
The Company’s exposure to foreign
currency exchange rate risk primarily relates to monetary assets or liabilities held in foreign currencies. Since July 21, 2005,
the RMB has been permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. On June
19, 2010, the People’s Bank of China announced the end of the RMB’s de facto peg to USD, a policy which was instituted
in late 2008 in the face of the global financial crisis, to further reform the RMB exchange rate regime and to enhance the RMB’s
exchange rate flexibility. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign
exchange market. The depreciation of the US dollars against RMB was approximately 0.42% and 0.64% for the years ended June 30,
2014 and 2015, respectively, and an appreciation of the US dollars against RMB was approximately 8.68% for the years ended June
30, 2016. Any significant revaluation of RMB may materially and adversely affect the Company’s cash flows, revenues, earnings
and financial position, and the value of its shares in US dollars. An appreciation of RMB against the US dollar would result in
foreign currency translation losses when translating the net assets of the Company from RMB into US dollar.
For the years ended June 30, 2014, 2015 and
2016, the net foreign currency translation gains (losses) resulting from the translation of RMB and SGD functional currencies to
the U.S. dollar reporting currency recorded in other comprehensive income was $2,146, $(1,386) and $(48,841), respectively.
Recent accounting pronouncements
In January 2015, FASB issued ASU No. 2015-01,
Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating
the Concept of Extraordinary Items (“ASU 2015-01”)
, this update eliminates from GAAP the concept of extraordinary
items.
Subtopic 225-20, Income Statement—Extraordinary and Unusual Items
, required that an entity separately classify,
present, and disclose extraordinary events and transactions. The amendments in ASU 2015-01 are effective for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance
is applied from the beginning of the fiscal year of adoption. The Company will adopt ASU No. 2015-01 on July 1, 2016, and does
not expect the adoption of this update to have a material effect on the consolidated financial statements.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
In February 2015, the FASB issued ASU No.
2015-02,
Consolidation (Topic 810): Amendments to the Consolidation Analysis
(“ASU 2015-02”). ASU No. 2015-02
focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate
certain legal entities. ASU No. 2015-02 simplifies consolidation accounting by reducing the number of consolidation models from
four to two. In addition, the new standard simplifies the FASB Accounting Standards Codification and improves current guidance
by: (i) placing more emphasis on risk of loss when determining a controlling financial interest; (ii) reducing the frequency of
the application of related-party guidance when determining a controlling financial interest in variable interest entities (“VIEs”);
(iii) changing consolidation conclusion for public and private companies in several industries that typically make use of limited
partnerships or VIEs. ASU No. 2015-02 is effective for periods beginning after December 15, 2015. Early adoption is permitted,
including adoption in an interim period. The Company will adopt ASU No. 2015-02 on July 1, 2016, and does not expect the adoption
of this update to have a material effect on the consolidated financial statements.
In April 2015, FASB issued ASU No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-03”). The amendments in this update require that
debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying
amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs
are not affected by the amendments in this update. An entity should apply the new guidance on a retrospective basis, wherein the
balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new
guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle.
These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description
of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement
line items (that is, debt issuance cost asset and the debt liability). For public business entities, the amendments in ASU No.
2015-03 are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within
those fiscal years. Early adoption of the amendments in ASU 2015-03 is permitted for financial statements that have not been previously
issued. The Company has early adopted ASU 2015-03 on a retrospective basis. There were no prior-period adjustments made to the
consolidated financial statements for the years ended June 30, 2014, 2015 and 2016, as there were no debt issuance costs incurred.
In addition, the impact on current fiscal year’s consolidated financial statements was immaterial.
In July 2015, FASB issued ASU No. 2015-11,
Simplifying the Measurement of Inventory
(“ASU 2015-11”). The amendments in ASU 2015-11 do not apply to inventory
that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which
includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within
the scope of ASU 2015-11 at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in
the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement
is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, the amendments in
ASU 2015-11 are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.
The Company will adopt ASU 2015-11 on July 1, 2016, and does not expect the adoption of this update to have a material effect on
the consolidated financial statements.
In August 2015, the FASB issued Accounting
Standards Update 2015-14, which defers the effective date of ASU 2014-09
Revenue from Contracts with Customers (Topic 606)
(" ASU 2014-09") one year, and would allow entities the option to early adopt the new revenue standard as of the original
effective date. Issued in May 2014, ASU 2014-09 provided guidance on revenue recognition on contracts with customers to transfer
goods or services or on contracts for the transfer of nonfinancial assets. ASU 2014-09 requires that revenue recognition on contracts
with customers depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. For public companies, ASU 2014-09 would have been effective
for fiscal years, and interim periods within those years, beginning after December 15, 2017. The standard provided for either the
retrospective or cumulative effect transition method. The Company is currently assessing the impact of the adoption of ASU 2014-09
will have on its consolidated financial statements, if any.
In September 2015, the FASB issued ASU
No. 2015-16 (“ASU 2015-16”),
Business Combinations (Topic 805) Simplifying the Accounting for Measurement –
Period Adjustments
. ASU 2015-16 requires the acquirer to recognize adjustments to provisional amounts that are identified during
the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record,
in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income
effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the
acquisition date. In addition, an entity is required to present separately on the face of the income statement or disclose in the
notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been
recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.
For public business entities, ASU 2015-16 is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted.
The Company will adopt ASU 2015-16 on July 1, 2016, and does not expect the adoption of this update to have a material effect on
the consolidated financial statements.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
In November 2015, the FASB issued ASU No.
2015-17 (“ASU 2015-17”),
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
. ASU 2015-17
simplifies the presentation of deferred income taxes by eliminating the separate classification of deferred income tax liabilities
and assets into current and noncurrent amounts in the consolidated balance sheet. The amendments in the update require that all
deferred tax liabilities and assets be classified as noncurrent in the consolidated balance sheet. The amendments in this update
are effective for fiscal years beginning after December 15, 2016, and interim periods therein and may be applied either prospectively
or retrospectively to all periods presented. Early adoption is permitted. The Company will adopt ASU 2015-17 on July 1, 2017, and
does not expect this adoption of this update to have a material effect on the consolidated financial statements.
In February 2016, the FASB issued ASU No.
2016-02 (“ASU 2016-02”),
Leases
. ASU 2016-02 specifies the accounting for leases. For operating leases, ASU
2016-02 requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the
lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that
the cost of the lease is allocated over the lease term, on a generally straight-line basis. ASU 2016-02 is effective for public
companies for annual reporting periods, and interim periods within those years beginning after December 15, 2018. Early adoption
is permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
On March 30, 2016, the FASB issued ASU
2016-09,
Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”),
which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for
share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or
liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years beginning
after December 15, 2016, including interim periods within those fiscal years. The new standard will be effective for the Company
for the fiscal year beginning July 1, 2017. Early adoption is permitted. The Company is in the process of evaluating the impact
of this accounting standard on its consolidated financial statements, but does not expect the impact of adoption to be material.
In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.
This new standard will make
eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The
new standard is effective for fiscal years beginning after December 15, 2017, which means that it will be effective for the Company
in the first quarter of the fiscal year beginning July 1, 2018. The new standard will require adoption on a retrospective basis
unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the
earliest date practicable. The Company is currently evaluating the impact of the pending adoption of ASU 2016-15 on its consolidated
financial statements.
|
NOTE 3 -
|
BUSINESS COMBINATIONS
|
Acquisition of Bond
On April 1, 2013, the Company acquired 100%
equity interest of the Bond Group, a Singapore headquartered mechanical and electrical solutions service contractor of residential,
commercial or industrial building construction and renovation projects in Malaysia and Singapore. The nominal purchase price was
$73,000 combined of cash and ordinary shares, with a total fair value of approximately $73,805 as of the acquisition date, which
consisted of:
|
1)
|
Cash consideration of $36,500, of which $16,390 was paid in April 2013, $5,510 was paid in September
2013, and $14,600 was paid in September 2014
;
t
he
cash consideration installments due in September 2013 and September 2014
had present values of $5,383 and $13,286, respectively
as of the acquisition date.
|
|
2)
|
Share consideration consisting of 1,407,907 ordinary shares with a market value of $16,909 on
April1, 2013 were issued and transferred by the Company on May 30, 2013;
|
|
3)
|
Incentive shares issuable to the selling shareholders (“Incentive Shares for Bond”)
in two equal installments with acquisition-date fair values of $10,941 and $10,896, respectively. Issuance of Incentive Shares
for Bond is subject to Bond achieving pre-determined net income performance targets. The Incentive Shares for Bond, if earned,
are to be issued within 30 days after the filing of the Company’s annual report on Form 20-F for the fiscal years 2014 and
2015, respectively. The net income performance targets for the Incentive Shares for Bond are as follows:
|
|
|
|
First installment
|
|
|
|
Second installment
|
|
Basis of performance target
|
|
|
Net income for the year ending December 31, 2013
|
|
|
|
Net income for the year ending December 31, 2014
|
|
Target net income
|
|
$
|
8,806
|
|
|
$
|
10,567
|
|
Nominal value of shares
|
|
$
|
10,950
|
|
|
$
|
10,950
|
|
Referencing share price to achieve the nominal value of shares
|
|
|
Average closing price of the Company’s shares during the trading days from October 1 to December 31, 2013
|
|
|
|
Average closing price of the Company’s shares during the trading days from October 1 to December 31, 2014
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
|
4)
|
Premium shares issuable to the selling shareholders (“Premium Shares for Bond”) are
capped at 15% of the total Incentive Shares for Bond, or $3,300, which are subject to Bond achieving a pre-determined compound
annual growth rate (“CAGR”) performance target of more than 20% for the two-year period from January 1, 2013 to December
31, 2014. The Premium Shares for Bond, if earned, are to be delivered within 30 days after the filing of the Company’s annual
report on Form 20-F for the fiscal year 2015. The CAGR performance targets for the Premium Shares for Bond for the two-year period
are as follows:
|
CAGR performance target
|
|
Premium shares issuable
|
|
|
|
21%
|
|
3% of Incentive Shares for Bond
|
22%
|
|
6% of Incentive Shares for Bond
|
23%
|
|
9% of Incentive Shares for Bond
|
24%
|
|
12% of Incentive Shares for Bond
|
25% and above
|
|
15% of Incentive Shares for Bond
|
As the Incentive Shares for Bond and Premium
Shares for Bond are not subject to any service condition of the selling shareholders, they were determined to be within the scope
of ASC 820 (note 15). In accordance with ASC 815, “
Derivatives and Hedging
” (“ASC 815”), the Incentive
and Premium Shares for Bond are not considered fixed-for-fixed and therefore, were classified as liabilities as of June 30, 2015.
Until the contingency is resolved, the change in fair value of the Incentive Shares for Bond and Premium Shares for Bond are recognized
in earnings. As of the acquisition date, the fair value of the contingent consideration ranges from $21,837 to $25,112, depending
on whether the 20% - 25% CAGR performance targets disclosed above are achievable.
The acquisition date fair value of the considerations
as of the acquisition date is summarized in the below table:
Considerations
|
|
Fair value as at
April 1, 2013
|
|
|
|
|
|
1) Cash consideration (i)
|
|
$
|
35,059
|
|
2) Ordinary shares
|
|
|
16,909
|
|
3) Incentive Shares for Bond
(ii)
|
|
|
21,837
|
|
4) Premium Shares for Bond (iii)
|
|
|
-
|
|
Total consideration
|
|
$
|
73,805
|
|
(i) The cash installments of $16,390, $5,510
and $14,600 were paid in May 2013, September 2013 and September 2014, respectively. There was no cash consideration outstanding
as of June 30, 2016.
(ii) Bond achieved the performance target of
the first and second installments of the Incentive Shares, and a total number of 648,697 and 461,107 shares were issued in October
2014 and December 2015, respectively. There was no incentive shares consideration outstanding as of June 30, 2016.
(iii) Bond also achieved the performance target
of 25% and above CAGR growth for premium shares, hence a total number of 166,471 shares were issued in December 2015. There was
no premium shares consideration outstanding as of June 30, 2016.
The following table summarizes the estimated
fair values of the assets acquired and liabilities assumed as of the date of acquisition:
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
|
|
April 1, 2013
|
|
Cash and cash equivalents
|
|
$
|
4,460
|
|
Time deposits with original maturities over three months
|
|
|
7,486
|
|
Restricted cash
|
|
|
242
|
|
Accounts receivable
|
|
|
9,966
|
|
Cost and estimated earnings in excess of billings
|
|
|
6,340
|
|
Other receivables
|
|
|
886
|
|
Advances to suppliers
|
|
|
110
|
|
Inventories
|
|
|
133
|
|
Deferred tax assets
|
|
|
105
|
|
Assets held for sale
|
|
|
2,951
|
|
Property, plant and equipment
|
|
|
4,891
|
|
Prepaid land leases
|
|
|
5,884
|
|
Intangible assets
|
|
|
14,359
|
|
Investments in equity investees
|
|
|
261
|
|
Total identifiable assets acquired
|
|
|
58,074
|
|
|
|
|
|
|
Short-term bank loans
|
|
|
5,532
|
|
Accounts payable
|
|
|
8,654
|
|
Deferred revenue
|
|
|
2,315
|
|
Income tax payable
|
|
|
1,015
|
|
Other tax payable
|
|
|
142
|
|
Accrued liabilities
|
|
|
314
|
|
Deferred tax liabilities
|
|
|
3,791
|
|
Long-term bank loans
|
|
|
2,257
|
|
Total liabilities assumed
|
|
|
24,020
|
|
|
|
|
|
|
Net identifiable assets acquired
|
|
|
34,054
|
|
|
|
|
|
|
Goodwill
|
|
|
39,751
|
|
Net assets acquired
|
|
$
|
73,805
|
|
The fair value of accounts receivable acquired
was $9,966. Gross contractual accounts receivable acquired totaled $10,720 and the Company’s best estimate of the contractual
cash flows not expected to be collected at acquisition date totaled $754.
The identified intangible assets include acquired
customer relationship of $2,900, with an estimated useful life of 57 months, and acquired order backlog of $11,459, with an estimated
useful life of 21 to 33 months. Intangible assets were valued using the multi-period excess earnings method.
The goodwill, which is not tax deductible,
is primarily attributable to synergies expected to be achieved from the acquisition, and was assigned to the mechanical and electrical
solutions segment.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
Components of inventories are as follows:
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
12,857
|
|
|
$
|
12,975
|
|
Work in progress
|
|
|
8,157
|
|
|
|
12,770
|
|
Finished goods
|
|
|
13,692
|
|
|
|
10,656
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,706
|
|
|
$
|
36,401
|
|
|
NOTE 5 -
|
ACCOUNTS RECEIVABLE
|
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
286,797
|
|
|
$
|
279,650
|
|
Allowance for doubtful accounts
|
|
|
(34,259
|
)
|
|
|
(42,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
252,538
|
|
|
$
|
237,179
|
|
The movements in allowance for doubtful accounts
are as follows:
|
|
June 30,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of year
|
|
$
|
20,103
|
|
|
$
|
25,691
|
|
|
$
|
34,259
|
|
Additions
|
|
|
7,604
|
|
|
|
13,907
|
|
|
|
12,000
|
|
Written off
|
|
|
(2,104
|
)
|
|
|
(5,499
|
)
|
|
|
(714
|
)
|
Translation adjustment
|
|
|
88
|
|
|
|
160
|
|
|
|
(3,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of year
|
|
$
|
25,691
|
|
|
$
|
34,259
|
|
|
$
|
42,471
|
|
|
NOTE 6 -
|
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
|
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Contracts costs incurred plus estimated earnings
|
|
$
|
827,955
|
|
|
$
|
887,037
|
|
Less: Progress billings
|
|
|
(653,768
|
)
|
|
|
(690,726
|
)
|
Cost and estimated earnings in excess of billings
|
|
|
174,187
|
|
|
|
196,311
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for doubtful accounts
|
|
|
(8,850
|
)
|
|
|
(6,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
165,337
|
|
|
$
|
189,928
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
As of June 30, 2015 and 2016, balances of $29,752
and $36,387 respectively, were related to contracts which have been completed but were still within the warranty period, of which
$1,895 and $4,034, respectively, was expected to be collected after one year.
The movements in allowance for doubtful accounts
are as follows:
|
|
June 30,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of year
|
|
$
|
2,362
|
|
|
$
|
5,839
|
|
|
$
|
8,850
|
|
Additions
|
|
|
3,471
|
|
|
|
3,085
|
|
|
|
(1,823
|
)
|
Written off
|
|
|
-
|
|
|
|
(122
|
)
|
|
|
-
|
|
Translation adjustment
|
|
|
6
|
|
|
|
48
|
|
|
|
(644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
|
$
|
5,839
|
|
|
$
|
8,850
|
|
|
$
|
6,383
|
|
|
NOTE 7 -
|
PROPERTY, PLANT AND EQUIPMENT
|
A summary of property, plant and equipment
is as follows:
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
72,643
|
|
|
$
|
71,037
|
|
Machinery
|
|
|
7,594
|
|
|
|
8,148
|
|
Software
|
|
|
6,263
|
|
|
|
7,377
|
|
Vehicles
|
|
|
4,012
|
|
|
|
3,886
|
|
Electronic and other equipment
|
|
|
25,942
|
|
|
|
23,704
|
|
Construction in progress
|
|
|
1,159
|
|
|
|
5,753
|
|
|
|
$
|
117,613
|
|
|
$
|
119,905
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(37,391
|
)
|
|
|
(39,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
80,222
|
|
|
$
|
79,938
|
|
Total property, plant and equipment with carrying
values of $1,161 and $1,014 were pledged to secure short-term bank loans (note 13) as of June 30, 2015 and 2016, respectively.
Buildings with a total carrying value of $3,479
and $3,976 were pledged to secure lines of credits from various banks in the PRC and Malaysia as of June 30, 2015 and 2016, respectively.
Buildings and vehicles with a total carrying
value of $32,077 and $28,984 were pledged to secure long-term bank loans as of June 30, 2015 and 2016, respectively (note 14).
Construction in progress consists of capital
expenditures and capitalized interest charges related to the construction of facilities and assembly line projects and, in addition,
as of June 30, 2016, the expenditures related to the Company’s information system constructions.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
The depreciation expenses for the years ended
June 30, 2014, 2015 and 2016 were $7,051, $8,508 and $6,266, respectively.
Assets leased to others under operating
leases
The Company has entered into an operating lease
contract with a third party related to certain buildings owned with the carrying amount as shown below:
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Buildings leased to others - at original cost
|
|
$
|
10,962
|
|
|
$
|
10,086
|
|
Less: accumulated depreciation
|
|
|
(3,808
|
)
|
|
|
(3,725
|
)
|
Buildings leased to others - net
|
|
$
|
7,154
|
|
|
$
|
6,361
|
|
|
NOTE 8 -
|
PREPAID LAND LEASES
|
A summary of prepaid land leases is as follows:
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Prepaid land leases
|
|
$
|
13,362
|
|
|
$
|
12,641
|
|
Less: Accumulated amortization
|
|
|
(1,713
|
)
|
|
|
(1,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,649
|
|
|
$
|
10,773
|
|
The amortization for the years ended June 30,
2014, 2015 and 2016 were $245, $197 and $281, respectively.
Of the total prepaid land leases, $5,112 and
4,593 as of June 30, 2015 and 2016, respectively, are pledged to secure the long-term bank loans (note 14).
The annual amortization of prepaid land leases
for each of the five succeeding years is as follows:
Year ending June 30,
|
|
|
|
2017
|
|
$
|
268
|
|
2018
|
|
|
268
|
|
2019
|
|
|
268
|
|
2020
|
|
|
268
|
|
2021
|
|
|
268
|
|
|
|
|
|
|
|
|
$
|
1,340
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
|
NOTE 9 -
|
ACQUIRED INTANGIBLE ASSETS, NET
|
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
Gross
carrying
value
|
|
|
Accumulated
amortization
|
|
|
Net
carrying
value
|
|
|
Gross
carrying
value
|
|
|
Accumulated
amortization
|
|
|
Net
carrying
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
3,155
|
|
|
|
(1,652
|
)
|
|
|
1,503
|
|
|
$
|
3,151
|
|
|
|
(2,308
|
)
|
|
|
843
|
|
Order backlog
|
|
|
11,862
|
|
|
|
(11,672
|
)
|
|
|
190
|
|
|
|
11,848
|
|
|
|
(11,835
|
)
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,017
|
|
|
|
(13,324
|
)
|
|
|
1,693
|
|
|
$
|
14,999
|
|
|
|
(14,143
|
)
|
|
|
856
|
|
The
customer relationships and order backlog were related to Concord and Bond, which were acquired on July 1, 2011 and April 1, 2013,
respectively. The amortization for the years ended June 30, 2014, 2015 and 2016 were $5,413, $4,454 and $814, respectively. The
weighted-average remaining amortization periods for customer relationships, order backlog and total intangible assets are 1.3,
1.0 and 1.3 years as of June 30, 2016.
The
annual amortization expense relating to the existing intangible assets for each of five succeeding years is as follows:
Year ending June 30,
|
|
|
|
2017
|
|
$
|
575
|
|
2018
|
|
|
281
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
|
|
$
|
856
|
|
The changes in the carrying amount of goodwill
are as follows:
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
66,640
|
|
|
$
|
59,918
|
|
Goodwill impairment charge
|
|
|
(1,855
|
)
|
|
|
-
|
|
Translation adjustment
|
|
|
(4,867
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
Balance at the end of year
|
|
$
|
59,918
|
|
|
$
|
59,847
|
|
Concord, as a component of the M&E
operating segment, is considered to be a reporting unit for goodwill impairment purposes as Concord constitutes a business for
which discrete financial information is available and segment management regularly reviews the operating results of Concord. The
amount of goodwill allocated to Concord was $25,141 and $25,111 as of June 30, 2015 and 2016, respectively, before any impairment
charges. The Company engaged an independent third-party appraiser to perform the first step of the two-step goodwill impairment
test. For the year ended June 30, 2015, the Company concluded that the carrying amount of Concord exceeded its fair value and continued
to the second step to measure the amount of impairment loss and recorded a goodwill impairment charge of $1,855 under the caption
of “Goodwill impairment charge” in the statement of comprehensive income. For the year ended June 30, 2016, the Company’s
step one impairment test indicated that the fair value of Concord exceeded its carrying amount and thus no impairment was noted.
The amount of goodwill allocated to Concord after impairment was $23,288 and $23,258 as of June 30, 2015 and 2016.
Estimating the fair value of Concord requires
the Company to make assumptions and estimates regarding its future plans, market share, industry and economic conditions of the
various geographical areas in which it operates which includes Singapore, Malaysia and the Middle East. In applying the discounted
cash flow approach, key assumptions include the amount and timing of future expected cash flows, terminal value growth rates and
appropriate discount rates. The Company estimates future expected cash flows for each geographical area in which it operates and
calculates the net present value of those estimated cash flows using risk adjusted discount rates ranging from 13.5% to 16.4% (2015:
15.0% to 16.9%) and a terminal value growth rate was 2% (2015: 2%). If the discount rates adopted in 2016 increased or decreased
by 1.0%, the fair value of Concord would decrease or increase by $3,018 and $3,527, respectively. If the terminal value growth
rates adopted in 2016 increased or decreased by 1.0%, the fair value of Concord would increase or decrease by $1,871 and $1,611,
respectively.
There are uncertainties surrounding the amount
and timing of future expected cash flows as they may be impacted by negative events such as a slowdown in the mechanical and electrical
engineering sector, deteriorating economic conditions in the geographical areas Concord operates in, political, economic and social
uncertainties in the Middle East, increasing competitive pressures and fewer than expected mechanical and electrical solution contracts
awarded to Concord. These events can negatively impact demand for Concord’s services and result in actual future cash flows
being less than forecasted or delays in the timing of when those cash flows are expected to be realized. Further, the timing of
when actual future cash flows are received could differ from the Company’s estimates, which are based on historical trends
and does not factor in unexpected delays in project commencement or execution.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
The Company also performed a
qualitative assessment with respect to Bond, the other reporting unit, to determine if it is more likely than not that the
fair value of the reporting unit is less than its carrying amount. By identifying the most relevant drivers of fair value and
significant events, and weighing the identified factors, the Company concluded that it was more likely than not that the fair
value of the reporting unit exceeded its carrying amount of $36,633 and $36,589 as of June 30, 2015 and 2016,
respectively.
|
NOTE 11 -
|
INVESTMENTS IN EQUITY AND COST INVESTEES
|
The following long-term investments were accounted
for under either the equity method or the cost method as indicated:
June 30, 2015
|
|
Interest
held
|
|
|
Long-term
investment, at
cost, less
impairment
|
|
|
Share of
undistributed
profits
|
|
|
Advance to
investee
company
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China Techenergy Co., Ltd.
|
|
|
40.00
|
%
|
|
$
|
9,814
|
|
|
|
(5,953
|
)
|
|
|
48
|
|
|
|
3,909
|
|
Beijing Hollysys Electric Motor Co., Ltd.
|
|
|
40.00
|
%
|
|
|
866
|
|
|
|
3,722
|
|
|
|
-
|
|
|
|
4,588
|
|
Beijing IPE Biotechnology Co., Ltd.
|
|
|
23.39
|
%
|
|
|
1,613
|
|
|
|
2,185
|
|
|
|
-
|
|
|
|
3,798
|
|
Beijing Hollysys Machine Automation Co., Ltd.
|
|
|
30.00
|
%
|
|
|
491
|
|
|
|
(491
|
)
|
|
|
-
|
|
|
|
-
|
|
Southcon Development Sdn Bhd.
|
|
|
30.00
|
%
|
|
|
238
|
|
|
|
(21
|
)
|
|
|
-
|
|
|
|
217
|
|
|
|
|
|
|
|
$
|
13,022
|
|
|
|
(558
|
)
|
|
|
48
|
|
|
|
12,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenhua Hollysys Information Technology Co., Ltd.
|
|
|
20.00
|
%
|
|
$
|
2,593
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,593
|
|
Heilongjiang Ruixing Technology Co., Ltd.
|
|
|
8.31
|
%
|
|
|
1,773
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,773
|
|
Zhongjijing Investment Consulting Co., Ltd.
|
|
|
5.00
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Zhejiang Sanxin Technology Co., Ltd.
|
|
|
6.00
|
%
|
|
|
98
|
|
|
|
-
|
|
|
|
-
|
|
|
|
98
|
|
|
|
|
|
|
|
$
|
4,464
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,464
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
June 30, 2016
|
|
Interest
held
|
|
|
Long-term
investment, at
cost, less
impairment
|
|
|
Share of
undistributed
profits
|
|
|
Advance
to
investee
company
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China Techenergy Co., Ltd.
|
|
|
40.00
|
%
|
|
$
|
9,030
|
|
|
|
1,077
|
|
|
|
44
|
|
|
|
10,151
|
|
Beijing Hollysys Electric Motor Co., Ltd.
|
|
|
40.00
|
%
|
|
|
797
|
|
|
|
3,961
|
|
|
|
-
|
|
|
|
4,758
|
|
Beijing IPE Biotechnology Co., Ltd.
|
|
|
23.39
|
%
|
|
|
1,484
|
|
|
|
2,213
|
|
|
|
-
|
|
|
|
3,697
|
|
Beijing Hollysys Machine Automation Co., Ltd.
|
|
|
30.00
|
%
|
|
|
452
|
|
|
|
(452
|
)
|
|
|
-
|
|
|
|
-
|
|
Southcon Development Sdn Bhd.
|
|
|
30.00
|
%
|
|
|
224
|
|
|
|
(116
|
)
|
|
|
-
|
|
|
|
108
|
|
|
|
|
|
|
|
$
|
11,987
|
|
|
|
6,683
|
|
|
|
44
|
|
|
|
18,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenhua Hollysys Information Technology Co., Ltd.
|
|
|
20.00
|
%
|
|
$
|
2,387
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,387
|
|
Heilongjiang Ruixing Technology Co., Ltd.
|
|
|
6.00
|
%
|
|
|
1,631
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,631
|
|
Zhongjijing Investment Consulting Co., Ltd.
|
|
|
5.00
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Zhejiang Sanxin Technology Co., Ltd.
|
|
|
6.00
|
%
|
|
|
90
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90
|
|
|
|
|
|
|
|
$
|
4,108
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,108
|
|
For the year ended June 30, 2014, the Company
recognized an impairment loss of RMB2,000 (equivalent to $325) against the investment in Zhongjijing Investment Consulting Co.,
Ltd. (“Zhongjijing”). As a result, the balance of investment in Zhongjijing was reduced to nil as of June 30, 2014.
The Company expects that the recoverable amount of the investment in Zhongjijing to be nil.
The Company holds a 20% equity interest
of Shenhua Hollysys Information Technology Co., Ltd. (“Shenhua Information”), but uses the cost method to account for
the investment because:
1) Only one out of the five board representatives
is elected by the Company and the remaining 80% equity interest is held by a large state-owned company which, in the view of the
management, operates Shenhua Information without regards to the views of the Company;
2) Key management of Shenhua Information
including the chief executive officer, chief financial officer, chief operating officer and head of accounting are all appointed
by the other shareholder.
3) Based on the articles of association
of Shenhua Information, there are no matters that require unanimous approval of all shareholders and there are no participating
rights for noncontrolling shareholders.
For the year ended June 30, 2015, the Company
received a dividend of $249 from Shenhua Hollysys Information Technology Co. Ltd.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
In April 2016, the Company’s
equity interest in Heilongjiang Ruixing Technology Co., Ltd. was diluted from 8.31% to 6% due to cash injections made by the
other investor. Accordingly, the Company continues to use the cost method to account for the investment.
For the year ended
June 30, 2016, the Company recorded dividend income and a receivable of $1,109 from Heilongjiang Ruixing Technology Co.,
Ltd., out of which nil was received during the year ended as of June 30, 2016.
|
NOTE 12 -
|
WARRANTY LIABILITIES
|
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
7,616
|
|
|
$
|
10,387
|
|
Expense accrued
|
|
|
6,647
|
|
|
|
3,876
|
|
Expense incurred
|
|
|
(3,924
|
)
|
|
|
(3,075
|
)
|
Translation adjustment
|
|
|
48
|
|
|
|
(828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,387
|
|
|
$
|
10,360
|
|
|
|
|
|
|
|
|
|
|
Less: current portion of warranty liabilities
|
|
|
(7,310
|
)
|
|
|
(6,782
|
)
|
Long-term warranty liabilities
|
|
$
|
3,077
|
|
|
$
|
3,578
|
|
|
NOTE 13 -
|
SHORT-TERM BANK LOANS
|
On June 30, 2015, the Company’s short-term
bank borrowings consisted of revolving bank loans of $16,295 from several banks, which were subject to annual interest rates ranging
from 1.5% to 5.12%, with a weighted average interest rate of 1.78%. Some of the short-term loans are secured by the pledge of guarantee
amounting to $19,202 with restricted cash and buildings with carrying values of $18,041 and $1,161 as of June 30, 2015, respectively.
On June 30, 2016, the Company’s short-term
bank borrowings consisted of revolving bank loans of $3,051 from several banks, which were subject to annual interest rates ranging
from 0.8% to 5.12%, with a weighted average interest rate of 1.5%. Some of the short-term loans are secured by the pledge of guarantee
amounting to $3,757 with restricted cash and buildings with carrying values of $2,743 and $1,014 as of June 30, 2016, respectively.
For the years ended June 30, 2014, 2015,
and 2016, interest expenses on short-term bank loans amounted to $5, $286 and $211 respectively.
As of June 30, 2015, the Company had available
lines of credit from various banks in the PRC and Malaysia amounting to $230,074, of which $68,435 was utilized and $161,639 is
available for use. These lines of credit were secured by the pledge of restricted cash and buildings with a carrying value of $4,512
and $3,479, respectively.
As of June 30, 2016, the Company had available
lines of credit from various banks in the PRC, Singapore and Malaysia amounting to $205,129, of which $72,592 was utilized and
$132,537 is available for use. These lines of credit were secured by the pledge of restricted cash and buildings with a carrying
value of $3,754 and $3,976, respectively.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
|
NOTE 14 -
|
LONG-TERM LOANS
|
|
|
|
|
June 30,
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
RMB denominated loan
|
|
(i)
|
|
|
8,996
|
|
|
|
-
|
|
USD denominated loan
|
|
(ii)
|
|
|
4,794
|
|
|
|
4,770
|
|
MYR denominated loan
|
|
(iii)
|
|
|
936
|
|
|
|
830
|
|
SGD denominated loan
|
|
(iv)
|
|
|
364
|
|
|
|
1,939
|
|
Convertible Bond
|
|
(v)
|
|
$
|
19,572
|
|
|
$
|
19,802
|
|
|
|
|
|
|
34,662
|
|
|
|
27,341
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
|
|
(14,111
|
)
|
|
|
(6,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,551
|
|
|
$
|
20,508
|
|
|
i.
|
The RMB denominated loan is repayable in three installments
with the last installment due on March 29, 2016. It carried an annual interest rate of 5.94% subject to yearly adjustments by
reference to the benchmark rate over the same period announced by the People’s Bank of China with nil premiums. The loan
was secured by a pledge of the headquarters facility in Beijing, comprising a prepaid land lease and buildings with an aggregate
carrying value of $35,091 as of June 30, 2015. The Company repaid the loan in the year ended June 30, 2016 and is in the process
of releasing pledges on the mortgaged buildings and prepaid land lease, with an aggregate carrying amount of $32,420 as of June
30, 2016.
|
|
ii.
|
The USD denominated loan is repayable in one installment
by July 31, 2017. It carries an annual interest rate of 4.3%. The borrowing is secured by restricted cash amounting to $5,136
and $4,515 as of June 30, 2015 and 2016, respectively.
|
|
iii.
|
The MYR denominated loans are repayable in 2 to 82 installments
with the last installment due in Aril 2023. For the year ended June 30, 2016, the effective interest rates ranged from 2.3 % to
7.15% per annum. The borrowings are secured by the mortgages of buildings, vehicles, and prepaid land leases in Malaysia, with
an aggregate carrying value of $1,258 and $1,019 as of June 30, 2015 and 2016, respectively.
|
|
iv.
|
The SGD denominated loans are repayable in 10 to 64 installments
with the last installment due on March 15, 2020. For the year ended June 30, 2016, the effective interest rates ranged from 2.6%
to 2.8% per annum. The borrowing is secured by vehicles and restricted cash with a total carrying value of $840 and $3,148 as
of June 30, 2015 and 2016, respectively.
|
On May 30, 2014, the Company
entered into a Convertible Bond agreement with International Finance Corporation ("IFC"), under which the Company borrowed
$20,000 from IFC (the “Convertible Bond”) with an interest rate of 2.1% per annum and commitment fee of 0.5% per annum
paid in arrears semi-annually. The Convertible Bond has a five year term and was drawn down on August 30, 2014 and is repayable
in full on August 29, 2019. The loan may not be prepaid before it is due.
Conversion rate
The initial conversion rate at
the time of the agreement is 38 ordinary shares per $1, and the initial conversion price is $26.35 per share. The initial conversion
rate and conversion price are subject to subsequent adjustments with events that may dilute the unit price per share. Since the
Company paid out a cash dividend of $0.40 per share in March 2015, the conversion rate and conversion price was adjusted to 38.84
ordinary shares per $1 and $25.75 per share, respectively.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
Conversion
The Convertible Bond has both voluntary
and mandatory conversion terms. IFC may at its option convert, in $1,000 increments, the Convertible Bond in whole or in part,
into the Company’s ordinary shares at any time on or prior to the maturity date at a conversion rate and a conversion price
in effect at such time. The conversion rate is subject to anti-dilution. According to the Convertible Bond agreement, 50% of the
principal amount of the Convertible Bond then outstanding will be mandatorily converted into ordinary shares of the Company at
the conversion rate and conversion price then in effect if at any time, with respect to the period of 30 consecutive trading days
ending at such time, the volume weighted average prices for 20 trading days or more in such 30 consecutive trading day period is
equal to or more than 150% of the conversion price in effect at such time. In addition, 100% of the principal amount of the Convertible
Bond then outstanding will be mandatorily converted into ordinary shares at the conversion rate and conversion price then in effect
if at any time, with respect to the period of 30 consecutive trading days ending at such time, the volume weighted average prices
for 20 trading days or more in such 30 consecutive trading day period is equal to or more than 200% of the conversion price in
effect at such time.
Non-conversion compensation
feature
In the event that there remains any
outstanding principal of the Convertible Bond not converted by IFC into ordinary shares at the maturity date, the Company shall
pay to IFC an additional amount equal to 4% of such outstanding principle (“non-conversion compensation feature”).
Registration rights agreement
The Company has filed a shelf-registration
statement with the United States Securities and Exchange Commission with respect to the resale of any ordinary shares issued or issuable
upon conversion of the Convertible Loan. The Company shall maintain the effectiveness of the registration statement for so long
as any registrable securities remain issued and outstanding. In the event that the registration statement is not declared effective
or ceases to remain continuously effective such that IFC is not able to utilize the prospectus to resell its ordinary shares, the
Company shall pay a penalty equal to 0.5% of the aggregate principal amount of the Convertible Bond that was converted into unregistered
ordinary shares then held by IFC. The maximum aggregate penalty payable to IFC shall be 5% of the aggregate principal amount of
the Convertible Bond that was converted.
In accounting for the issuance of the Convertible Bond, the Company bifurcated the non-conversion compensation
feature from the Convertible Bond in accordance with ASC 815-15-30-2. The bifurcated feature is accounted for as a liability at
its fair value in each reporting period. The Company did not bifurcate the conversion option,
as
it is considered indexed to the entity’s own stock and meets the equity classification guidance in ASC 815-40-25, it is eligible
for a scope exception from ASC 815 and does not need to be bifurcated from the underlying debt host instrument. At the commitment
date, there was no beneficial conversion as the conversion price was higher than the stock price. The fees and expenses associated
with the issuance of the Convertible Bond are recorded as a discount to the debt liability in accordance with ASU 2015-03, which
the Company has early adopted in fiscal year ended June 30, 2015. The Convertible Bond, which is the proceeds net of fees and expenses
payable to the creditor and the fair value of the bifurcated derivative, will be accreted to the redemption value on the maturity
date using the effective interest method over the estimated life of the debt instrument. The registration right liability is accounted
for in accordance with ASC 450-20 which defines that a liability should be recorded in connection with the registration rights
agreement when it becomes probable that a payment under the registration rights agreement would be required and the amount of payment
can be reasonably estimated. As of June 30, 2016, the Company did not recognize any liability related to the registration right.
The Company paid up-front fees related
to the issuance of the Convertible Bond amounting to $349.
For fiscal year 2015 and 2016, the
accretion of the Convertible Bond discount was $192 and $230, respectively.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
Scheduled principal payments for
all outstanding long-term loans as of June 30, 2016 are as follows:
Year ending June 30,
|
|
|
|
2017
|
|
$
|
6,992
|
|
2018
|
|
|
345
|
|
2019
|
|
|
19,885
|
|
2020
|
|
|
67
|
|
2021 and onwards
|
|
|
52
|
|
|
|
$
|
27,341
|
|
For the years ended June 30, 2014, 2015, and
2016, interest expenses of long-term loans incurred amounted to $2,791, $1,535 and $1,193, of which $1,998, $1,535 and $1,193 was
recorded as interest expenses, and $793, nil and nil was capitalized as construction in progress, respectively.
|
NOTE 15 -
|
FAIR VALUE MEASUREMENT
|
Financial instruments include cash and
cash equivalents, time deposits with maturities over three months, accounts receivable, other receivables, amounts due to or from
related parties, accounts payable, short-term bank loans, long-term bank loans and bifurcated derivative. The carrying values of
these financial instruments, other than long-term bank loans and a bifurcated derivative (which is a recurring fair value measurement),
approximate their fair values due to their short-term maturities. The carrying value of the Company’s long-term bank loans
other than the Convertible Bond approximates its fair value as the long-term bank loans are subject to floating interest rates.
These assets and liabilities, excluding cash and cash equivalents (which fall into level 1 of the fair value hierarchy), fall into
level 2 of the fair value hierarchy. The carrying value of the Convertible Bond is $19,572 and $19,802 as of June 30, 2015 and
2016, respectively; whereas the fair value is $21,452 and $17,835 as of June 30, 2015 and 2016, respectively. The fair value measurement
of the Convertible Bond falls into level 3 of the fair value hierarchy.
Assets and liabilities measured at fair value
on a recurring basis as of June 30, 2015, and 2016 are stated below:
|
|
June 30, 2015
|
|
|
|
Quoted
prices in
active
markets for
identical
assets
|
|
|
Significant
other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-conversion compensation feature related to the Convertible Bond
(i)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
305
|
|
|
$
|
305
|
|
Acquisition-related consideration
(ii)
|
|
|
15,081
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,081
|
|
Total liabilities measured at fair value on a recurring basis
|
|
$
|
15,081
|
|
|
$
|
-
|
|
|
$
|
305
|
|
|
$
|
15,386
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
|
|
June 30, 2016
|
|
|
|
Quoted prices
in active
markets for
identical assets
|
|
|
Significant
other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-conversion compensation feature related to the Convertible Bond
(i)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
398
|
|
|
$
|
398
|
|
Total liabilities measured at fair value on a recurring basis
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
398
|
|
|
$
|
398
|
|
|
(i)
|
The non-conversion compensation feature represents the fair value of the
non-conversion
compensation feature (note 14). The Company engaged an independent third-party appraiser to assist with the valuation of the feature.
The Company is ultimately responsible for the fair value of the non-conversion compensation feature recorded in the consolidated
financial statements. The Company adopted the binomial model to assess the fair value of such feature as of year-end. The non-conversion
compensation feature is equal to the difference between the fair value of the whole Convertible Bond with the non-conversion compensation
feature and the whole Convertible Bond without the non-conversion feature. The significant unobservable inputs used in the fair
value measurement of the non-conversion compensation feature includes the risk-free rate of return, expected volatility, expected
life of the Convertible Bond and expected ordinary dividend yield. The changes in fair value of the non-conversion compensation
feature during fiscal year 2015 and 2016 are shown in the following table.
|
|
|
Fair value measurements as of
June 30, 2016 using significant
unobservable inputs
|
|
|
|
(Level 3)
|
|
|
|
Non-conversion compensation feature
related to the Convertible Bond
|
|
|
|
|
|
Balance as at June 30, 2015
|
|
$
|
305
|
|
Change in fair-value (included within other expenses, net)
|
|
|
93
|
|
Balance as of June 30, 2016
|
|
$
|
398
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
|
(ii)
|
Acquisition-related consideration represents the fair value of Incentive
Shares and Premium Shares for Bond (note 3). The fair value of the contingent consideration in connection with the acquisition
was estimated using probability-weighted discounted cash flow models. Key assumptions include discount rate, a percent weighted-probability
of Bond achieving net income performance targets and a percent weighted-probability of Bond achieving CAGR performance targets.
As of June 30, 2015, Bond has achieved the net income performance target and the CAGR performance target. In addition, the referencing
share price was determinable as of December 31, 2014 and the remaining input to the fair value of the Incentive and Premium Shares
for Bond is the Company’s share price on the date of issuance, which is observable from an active market. Therefore, the
fair value measurement of the acquisition-related consideration is transferred from Level 3 to Level 1 on December 31, 2014. In
December 2015, all the remaining incentive shares and premium shares consideration were issued. As of June 30, 2015 and June 30,
2016, the fair value of the acquisition-related consideration in connection with Bond totaled $15,081 and nil, respectively.
|
Assets measured at fair value on a nonrecurring
basis as of June 30, 2015 are stated below:
|
|
June 30, 2015
|
|
|
|
Quoted prices in
active markets for
identical assets
|
|
|
Significant other
observable
inputs
|
|
|
Significant
unobservable
inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
(i)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23,285
|
|
|
$
|
23,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value on a non-recurring basis
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23,285
|
|
|
$
|
23,285
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
(i) The Company’s goodwill of
$23,285 is related to the acquisition of Concord and $36,633 is related to the acquisition of Bond (note 3). The Company
engaged an independent third-party appraiser to assist with the valuation of the goodwill related to the Concord acquisition.
The Company is ultimately responsible for the fair value of the goodwill related to Concord acquisition recorded in the
consolidated financial statements. For the purposes of step one of the goodwill impairment test, the Company has adopted the
income approach, in particular the discounted cash flow approach, to evaluate the fair value of the reporting unit. In
applying the discounted cash flow approach, key assumptions include the amount and timing of future expected cash flows,
terminal value growth rates and appropriate discount rates. For the purpose of step two of the goodwill impairment test, the
Company has allocated the fair value of the reporting unit derived in step one to the assets and liabilities of the reporting
unit, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the
price paid to acquire the reporting unit. The Company adopted the multi-period excess earnings model to evaluate the fair
value of the intangible assets of the reporting unit, which was then used to compute the implied fair value of the goodwill
via a residual approach. As a result, the Company recorded a goodwill impairment charge of $1,855 (Note 10).
|
NOTE 16 -
|
STOCKHOLDERS’ EQUITY
|
In August 2010, the Board of Directors adopted
the 2010 Rights Plan. The 2010 Rights Plan provides for a dividend distribution of one preferred share purchase (the “Right”),
for each outstanding ordinary share. Each Right entitles the shareholder to buy one share of the Class A Preferred Stock at
an exercise price of $160. The Right will become exercisable if a person or group announces an acquisition of 20% or more
of the outstanding ordinary shares of the Company, or announces commencement of a tender offer for 20% or more of the ordinary
shares. In that event, the Right permits shareholders, other than the acquiring person, to purchase the Company’s ordinary
shares having a market value of twice the exercise price of the Right, in lieu of the Class A Preferred Stock. In addition, in
the event of certain business combinations, the Right permits the purchase of the ordinary shares of an acquiring person at a 50%
discount. Right held by the acquiring person become null and void in each case. Unless terminated earlier by the Board
of Directors, the 2010 Rights Plan will expire on September 27, 2020. There is no accounting impact related to the Right.
On May 30, 2013, October 29, 2014, and December
9, 2015, pursuant to the terms of the acquisition of Bond, the Company issued 1,407,907, 648,697 and 627,578 ordinary shares, respectively,
as partial consideration (note 3).
On February 9, 2015, the Company declared a
special cash dividend of $0.40 per share to the holders of the Company’s ordinary shares. The record date was February 23,
2015, and the dividend was paid on March 16, 2015.
|
NOTE 17 -
|
SHARE-BASED COMPENSATION EXPENSES
|
On September 20, 2007, the Company adopted
the 2006 Stock Plan (the “2006 Plan”) which allows the Company to offer a variety of incentive awards
to employees, officers, directors and consultants. Options to purchase 3,000,000 ordinary shares are authorized under the 2006
Plan. The Company issues new shares to employees, officers, directors and consultants upon share option exercise or share unit
conversion.
On May 14, 2015, the Board of Directors approved
the 2015 Equity Incentive Plan (the “2015 Equity Plan”). The 2015 Equity Plan provided for 5,000,000 ordinary shares,
and it will terminate ten years following the date that it was adopted by the Board of Directors. The purposes of the 2015 Equity
Plan are similar as the 2006 Plan, which is used to promote the long-term growth and profitability of the Company and its affiliates
by stimulating the efforts of employees, directors and consultants of the Company and its affiliates who are selected to be participants,
aligning the long-term interests of participants with those of shareholders, heightening the desire of participants to continue
in working toward and contributing to the success of the Company, attracting and retaining the best available personnel for positions
of substantial responsibility, and generally providing additional incentive for them to promote the success of the Company’s
business through the grant of awards of or pertaining to the Company’s ordinary shares. The 2015 Equity Plan permits the
grant of incentive share options, non-statutory share options, restricted shares, restricted share units, share appreciation rights,
performance units and performance shares as the Company may determine.
Share options
The Company granted 696,000 share options
in 2008 and 2009 under the 2006 Plan. All the share options had been vested and exercised by June 30, 2013.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
Performance options
Performance share options granted in 2012
(“2012 Performance Options”)
On February 20, 2012, performance share options
to purchase 1,476,000 ordinary shares were granted to certain employees of the Company under the terms of the 2006 Plan. They were
granted with an exercise price of $9.29 per share. These shares options have an expiry period of five years from the date of grant,
and would vest subject to the service and performance conditions shown below:
|
·
|
For 60,000 options, if the Company’s Price/Earnings Ratio (“P/E”) achieves certain
levels and the related investor relations performance targets are achieved during the 36 months after the grant date, 30,000 share
options or 60,000 share options will vest depending on the related manager’s performance; The 60,000 options will cliff vest
on the 36 month anniversary of the grant date, and will remain exercisable from the vesting date until the 60 month anniversary
of the grant date. For this particular type of options, the Company recorded $206, $72 and nil as share-based compensation expenses
in the years ended June 30, 2014, 2015 and 2016, respectively.
|
|
·
|
For 1,416,000 options, if the compound average growth rate of the Company’s Non-GAAP diluted earnings
per share as defined in the 2006 Plan from the year ended June 30, 2011 to the year ended June 30, 2014 (the “EPS Threshold”)
equals or exceeds 15%, but less than 20%, 944,000 options will vest over 24 to 48 months; if the EPS Threshold equals or exceeds
20%, but is less than 25%, an additional 236,000 options will vest
over 48 months; if the EPS Threshold equals or exceeds 25%, an additional 236,000 options will vest over 48 months. Of the total
1,416,000 options, 283,200, 283,200 and 849,600 options will vest on the 24 month, 36 month, and 48 month anniversary of the grant
date, respectively. The vesting schedule for such performance share options is as below:
|
EPS Threshold
|
|
Number of vested options
|
|
Months after the grant date
|
|
|
|
|
|
24 months
|
|
|
36 months
|
|
|
48 months
|
|
Over 15% but below 20%
|
|
944,000
|
|
|
283,200
|
|
|
|
283,200
|
|
|
|
377,600
|
|
Equal or over 20% but below 25%
|
|
Additional 236,000
|
|
|
-
|
|
|
|
-
|
|
|
|
236,000
|
|
25% or above
|
|
Additional 236,000
|
|
|
-
|
|
|
|
-
|
|
|
|
236,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
283,200
|
|
|
|
283,200
|
|
|
|
849,600
|
|
The options will remain exercisable from the vesting date until the 60 month anniversary of the grant date.
The EPS threshold was met as of June 30, 2014 for all of the 1,416,000 options and will vest over requisite service periods of
24 to 48 months. For this particular type of option, the Company recorded $1,222, $1,530 and $251 as share-based compensation expenses
in years ended June 30, 2014, 2015 and 2016, respectively.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
A summary of the 2012 performance option
activity under the 2006 Plan for the year ended June 30, 2016 is as follows:
2012 Performance
Options
|
|
Number of
shares
|
|
|
Weighted
average
exercise price
|
|
|
Weighted average
remaining
contractual life
(years)
|
|
|
Aggregate intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2015
|
|
|
1,333,500
|
|
|
$
|
8.89
|
|
|
|
1.64
|
|
|
$
|
20,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(612,000
|
)
|
|
$
|
8.89
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2016
|
|
|
721,500
|
|
|
$
|
8.89
|
|
|
|
0.64
|
|
|
$
|
6,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at June 30, 2016
|
|
|
721,500
|
|
|
|
8.89
|
|
|
|
0.64
|
|
|
|
6,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2016
|
|
|
721,500
|
|
|
|
8.89
|
|
|
|
0.64
|
|
|
|
6,118
|
|
The aggregated intrinsic value of the 2012
Performance Options exercised during the years ended June 30, 2014, 2015 and 2016 was nil, $2,383 and $6,026, respectively.
The aggregated vested-date fair value of
2012 Performance Options vested during years ended June 30, 2014, 2015, 2016 is $5,480, $6,497 and $15,650 respectively.
The Company recorded share-based compensation
expense relating to 2012 performance share options of $2,654, $1,602 and $251 which is included in general and administrative expenses,
for the years ended June 30, 2014, 2015 and 2016, respectively. As of June 30, 2016, all the share-based compensation expense related
to the 2012 Performance Options has been recognized.
The Company paid out a cash dividend of
$0.40 per share in March 2015 and the exercise price was adjusted to $8.89 according to the term outline in the 2006 Plan and the
performance option agreement.
The valuation-date fair value of each 2012
performance share option granted is estimated on the date of grant using the Black-Scholes-Merton Option Pricing Model. The following
table presents the assumptions used to estimate the fair values of the share options granted in the periods presented:
|
|
For options granted on
February 20, 2012
|
|
|
|
|
|
Risk-free rate of return
|
|
|
0.71
|
%
|
Expected life (in years)
|
|
|
4.17
|
|
Weighted average expected volatility
|
|
|
62.64
|
%
|
Expected dividends
|
|
|
-
|
|
Weighted average risk-free rate of return for
periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant. Expected
option life is estimated based on historical options exercise pattern in accordance with ASC 718
.
Expected volatility is
estimated based on historical volatility of the Company’s stock. Dividend yield is estimated by the Company at zero for the
expected option life. The exercise price of the option will be adjusted in the event dividend paid by the Company.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
Performance options granted in 2015 (“2015
Performance Options”)
On May 14, 2015, certain employees of the
Company were granted share-based compensation awards totaling 1,740,000 performance share options to purchase ordinary shares according
to the terms of the 2015 Equity Plan. The exercise price of these options is $22.25 per share. The exercise price of the option
will be adjusted in the event dividends are paid by the Company.
On the 24, 36, 48 month anniversary of
the grant date, 30%, 30%, 40% of 1,160,000 performance options will vest if the Company’s annual growth rate of Non-GAAP
diluted EPS for fiscal years 2015, 2016 and 2017 equals or exceeds 15% per annum. On the 48 month anniversary of the grant date,
50% of the remaining 580,000 options will vest if the Company’s CAGR of Non-GAAP diluted EPS for fiscal years 2015 to 2017
equals or exceeds 20%, and another 50% of the 580,000 performance options will vest if he Company’s CAGR of Non-GAAP diluted
EPS for fiscal years 2015 to 2017 equals or exceeds 25%.
Moreover, for option grantees who are responsible
for individual businesses, they have to meet the following additional criteria in each year, from fiscal years 2015 to 2017, to
exercise the options in that particular year. The annual revenue growth rate compared to prior fiscal year must equal to or exceed
15%, 5%, 15% and 50% respectively for industrial automation (“IA”), rail transportation (“Rail”), mechanical
and electrical solutions (“M&E”) and medical (“Medical”) revenue streams.
The vesting schedule for such performance
share options is as below:
EPS Threshold
|
|
|
Number of vested
options
|
|
Months after the grant date
|
|
|
|
|
|
|
24
months
|
|
|
36
months
|
|
|
48
months
|
|
Annual growth rate over 15% but below 20%
|
|
|
1,160,000
|
|
|
348,000
|
|
|
|
348,000
|
|
|
|
464,000
|
|
CAGR equals or over 20% but below 25%
|
|
|
Additional 290,000
|
|
|
-
|
|
|
|
-
|
|
|
|
290,000
|
|
CAGR equals 25% or above
|
|
|
Additional 290,000
|
|
|
-
|
|
|
|
-
|
|
|
|
290,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
348,000
|
|
|
|
348,000
|
|
|
|
1,044,000
|
|
The 2015 Performance Options will remain exercisable from the vesting date until the 60 month anniversary
of the grant date. The EPS threshold and the revenue growth thresholds for Rail and Medical were met for fiscal years ended June
30, 2015 and 2016, however, the revenue growth thresholds of IA and M&E was not achieved. The Company expects the annual growth
rate of Non-GAAP diluted EPS for fiscal year 2017 will fall between 15% and 20%, in addition, the revenue growth thresholds are
expected to be met for all revenue streams. Based on this expectation, 950,000 out of 1,740,000 2015 performance options are expected
to be vested.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
A summary of the 2015 performance option activity
for the year ended June 30, 2016 is as shown below:
2015 Performance
Options
|
|
Number of
shares
|
|
|
Weighted
average
exercise price
|
|
|
Weighted
average
remaining
contractual life
(years)
|
|
|
Aggregate intrinsic
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as at June 30, 2015 and
2016
|
|
|
1,740,000
|
|
|
|
22.25
|
|
|
|
3.87
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at June 30, 2016
|
|
|
950,000
|
|
|
|
22.25
|
|
|
|
3.87
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
The weighted averaged grant-date fair value
of the 2015 performance options granted in fiscal year 2015 was $22.22.
There was no 2015 performance options vested
or exercised during fiscal year 2015 and 2016.
The Company recorded share-based compensation
expense relating to the 2015 performance options in the amount of $471 and $3,190 which is included in general and administrative
expenses, in fiscal year 2015 and 2016, respectively. As of June 30, 2015 and 2016, total unrecognized share-based compensation
expense of $10,293 and $6,033 related to 2015 performance options is expected to be recognized over a weighted average vesting
period of 4.87 and 3.87 years, respectively.
For the 2015 performance options, the Company
engaged an independent third-party appraiser to assist with the valuation of the option. The Company has adopted the binomial option
pricing model to assess the fair value as of the valuation date.
The major inputs to the binomial model are
as follows:
|
|
For options granted on
May 14, 2015
|
|
Risk-free rate of return
|
|
|
1.51
|
%
|
Weighted average expected volatility
|
|
|
53.42
|
%
|
Expected life (in years)
|
|
|
5 years
|
|
Expected ordinary dividend yield
|
|
|
nil
|
|
Historically the Company adopted the Black-Scholes-Merton
option pricing model to evaluate the fair value of share-based compensation awards. During the year ended June 30, 2015, the Company
granted new performance options to its employees. The Company engaged an independent third-party appraiser to assist with
the derivation of the fair value of the share-based compensation awards. The Company is ultimately responsible for the determination
of all amounts related to share-based compensation recorded in the consolidated financial statements. Based on the information
available, the Company concluded that the binomial option pricing model, a lattice model, will yield a better estimation of the
fair value compared to the Black-Scholes-Merton option pricing model, which is a closed-form model. Hence, the Company changed
the option-valuation technique to the binomial option pricing model for new share-based compensation awards granted after July
1, 2014 in accordance with ASC 718-10-55-20.
Restricted shares
During the year ended June 30, 2011, the Company
granted 67,500 restricted ordinary shares to certain directors under the 2006 Plan, of which 15,000 shares were granted on January
1, 2011, 22,500 shares were granted on February 1, 2011, and the remaining 30,000 were granted on June 2, 2011. These restricted
shares vest quarterly over a three year period starting from the grant date. Fair value of the restricted shares was determined
with reference to the market closing price at grant date.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
During the year ended June 30, 2014, the
Company granted 52,500 restricted ordinary shares to certain directors under the 2006 Plan. All shares were granted on June 23,
2014. These restricted shares vest quarterly over a three-year period starting from the directors’ respective service inception
date. Fair value of the restricted shares was determined with reference to the market closing price at grant date.
A summary of the restricted share activity
for the year ended June 30, 2016 is as follows:
|
|
Number of restricted shares
|
|
|
Weighted average grant-date fair value
|
|
Un-vested at June 30, 2015
|
|
|
31,875
|
|
|
|
23.95
|
|
Vested
|
|
|
(17,500
|
)
|
|
|
23.95
|
|
Un-vested at June 30, 2016
|
|
|
14,375
|
|
|
|
23.95
|
|
The aggregated grant-date fair value of
restricted shares vested during the years ended June 30, 2014, 2015 and 2016 were $290, $419 and $419 respectively. $290, $419
and $419 were recorded in general and administrative expenses as restricted share compensation expenses, for the years ended June
30, 2014, 2015 and 2016, respectively. As of June 30, 2016, the aggregated unrecognized compensation expense of $274 related to
the restricted shares is expected to be recognized over a weighted-average vesting period of 0.66 years.
|
NOTE 18 -
|
EMPLOYEE BENEFITS
|
The Company contributes to a state pension
scheme run by the Chinese government in respect of its employees in China, a central provision fund run by the Singapore government
in respect of its employees in Singapore, and an employment provident fund in respect of its employees in Malaysia. The expenses
related to these plans were $16,150, $17,018 and $18,235 for the years ended June 30, 2014, 2015 and 2016, respectively. These
schemes were accounted for as defined contribution plans.
BVI
Hollysys, and its subsidiaries, namely GTH
and Clear Mind, are incorporated in the BVI and are not subject to income tax under the relevant regulations.
Singapore
HI, HAP, CCPL, CEPL, BCPL and BMSG, the Company’s wholly owned subsidiaries incorporated in Singapore,
are subject to Singapore corporate tax at a rate of 17% on the assessable profits arising from Singapore.
Malaysia
CESB, BMJB, and BMKL, the Company’s wholly owned subsidiaries incorporated in Malaysia, are subject
to Malaysia corporate income tax at a rate of 25% on the assessable profits arising from Malaysia.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
Dubai
CCPL Dubai, the branch of the Company’s
wholly owned subsidiary, CCPL, is a tax exempt company incorporated in Dubai, and no tax provision has been made for each of the
years ended June 30, 2014, 2015 and 2016.
Hong Kong
World Hope and CSHK, the Company’s wholly
owned subsidiaries incorporated in Hong Kong, are subject to Hong Kong profits tax at a rate of 16.5% on the assessable profits
arising from Hong Kong. No provision for Hong Kong profits tax has been made in the statement of comprehensive income as there
were sustained taxable losses arising from Hong Kong for each of the years ended June 30, 2014, 2015 and 2016.
Macau
CMDE, the Company’s wholly owned subsidiary
incorporated in Macau, is subject to the Macau corporate income tax at a rate of 12% on the assessable profits arising from Macau,
with an exemption up to MOP300. No provision for Macau profits tax has been made in the statement of comprehensive income as there
were no assessable profits arising from Macau for each of the years ended June 30, 2014, 2015 and 2016.
India
HAIP, the Company’s wholly owned subsidiary
incorporated in India, is subject to India corporate tax at a rate of 30% on its worldwide income. No provision for India profits
tax has been made in the statement of comprehensive income as there were no taxable profits noted for each of the years ended June
30, 2014, 2015 and 2016.
Italy
HollyCon Italy, 99% owned by the Company and
was incorporated in Italy, is subject to corporate income tax at the rate of 27.5% and regional production tax at the rate of 3.9%
based on its worldwide income. No tax provision has been made on the statement of comprehensive income as there were no taxable
profits noted for each of the years ended June 30, 2014, 2015 and 2016.
Qatar
This company is subject to the Qatar Corporate
income tax at a rate of 10% on the assessable profit arising from Qatar. No provision for Qatar tax has been made in the statement
of comprehensive income as there were no assessable profits noted from its date of incorporation to June 30, 2016.
PRC
The Company’s subsidiaries incorporated
in the PRC are subject to PRC enterprise income tax (“EIT”) on their respective taxable incomes as adjusted in accordance
with relevant PRC income tax laws. The PRC statutory EIT rate is 25%. The Company’s PRC subsidiaries are subject to the statutory
tax rate except for the followings:
Beijing Hollysys
Beijing Hollysys was certified as a High and
New Technology Enterprise (“HNTE”) which provides a preferential EIT rate of 15% for three calendar years from 2014
to 2016.
Further, Beijing Hollysys was qualified
for the Key Software Enterprise status in 2016 and was entitled to a preferential tax rate of 10% for calendar year 2015.
Beijing Hollysys will be subject to the statutory tax rate of 25% for the 2017 calendar year and onwards, if and when it
fails to be certified or qualified as a HNTE or Key Software Enterprise in the future.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
Hangzhou Hollysys
Hangzhou Hollysys was certified as a HNTE which
provides a preferential EIT rate of 15% for three calendar years from 2014 to 2016.
Further, Hangzhou Hollysys was qualified
for the Key Software Enterprise status in 2016 and was entitled to a preferential tax rate of 10% for calendar year 2015.
Hangzhou Hollysys will be subject to the statutory tax rate of 25% for the 2017 calendar year and onwards, if and when it
fails to be certified or qualified as a HNTE or Key Software Enterprise in the future.
The Company’s income before income taxes
consists of:
|
|
Year ended June 30,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
97,931
|
|
|
$
|
134,657
|
|
|
$
|
142,900
|
|
Non-PRC
|
|
|
(6,619
|
)
|
|
|
(9,430
|
)
|
|
|
(5,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
91,312
|
|
|
$
|
125,227
|
|
|
$
|
137,742
|
|
Income tax expense, most of which is incurred
in the PRC, consists of:
|
|
Year ended June 30,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
|
22,055
|
|
|
|
16,074
|
|
|
|
10,590
|
|
Singapore
|
|
|
2,966
|
|
|
|
1,151
|
|
|
|
235
|
|
Hong Kong
|
|
|
-
|
|
|
|
2,279
|
|
|
|
2,776
|
|
Malaysia
|
|
|
267
|
|
|
|
1,690
|
|
|
|
1,099
|
|
|
|
$
|
25,288
|
|
|
$
|
21,194
|
|
|
$
|
14,700
|
|
Deferred income tax (benefit) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
|
(4,868
|
)
|
|
|
5,834
|
|
|
|
(196
|
)
|
Singapore
|
|
|
(1,982
|
)
|
|
|
(894
|
)
|
|
|
(181
|
)
|
Hong Kong
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Malaysia
|
|
|
1,423
|
|
|
|
(94
|
)
|
|
|
(85
|
)
|
|
|
$
|
(5,427
|
)
|
|
|
4,846
|
|
|
|
(462
|
)
|
|
|
$
|
19,861
|
|
|
$
|
26,040
|
|
|
$
|
14,238
|
|
Reconciliation of the income tax expenses
as computed by applying the PRC statutory tax rate of 25% to income before income taxes and the actual income tax expenses is
as follows:
|
|
Year ended June 30,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Income before income taxes
|
|
$
|
91,312
|
|
|
$
|
125,227
|
|
|
$
|
137,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax expense at statutory tax rate in the PRC
|
|
|
22,828
|
|
|
|
31,307
|
|
|
|
34,436
|
|
Effect of different tax rates in various jurisdictions
|
|
|
2,709
|
|
|
|
1,286
|
|
|
|
2,109
|
|
Effect of preferential tax treatment
|
|
|
(5,027
|
)
|
|
|
(12,453
|
)
|
|
|
(12,296
|
)
|
Effect of non-taxable income
|
|
|
(5,747
|
)
|
|
|
(6,770
|
)
|
|
|
(4,985
|
)
|
Effect of additional deductible research and development expenses
|
|
|
(2,604
|
)
|
|
|
(2,772
|
)
|
|
|
(4,716
|
)
|
Effect of non-deductible expenses
|
|
|
6,379
|
|
|
|
8,402
|
|
|
|
5,569
|
|
Effect of change in tax rate
|
|
|
-
|
|
|
|
(4,191
|
)
|
|
|
(6,613
|
)
|
Change in valuation allowance
|
|
|
2,075
|
|
|
|
1,475
|
|
|
|
540
|
|
Tax rate differential on deferred tax items
|
|
|
(2,193
|
)
|
|
|
3,139
|
|
|
|
(587
|
)
|
Withholding tax on dividend paid by subsidiaries
|
|
|
1,381
|
|
|
|
6,028
|
|
|
|
1,252
|
|
Recognition of temporary difference not recognized in previous years
|
|
|
284
|
|
|
|
323
|
|
|
|
-
|
|
Others
|
|
|
(224
|
)
|
|
|
266
|
|
|
|
(471
|
)
|
Total
|
|
$
|
19,861
|
|
|
$
|
26,040
|
|
|
$
|
14,238
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
Had the above preferential tax treatment
not been available, the tax charge would have been increased by $5,027, $12,453 and $12,296 and the basic net income per share
would have been reduced by $0.09, $0.21 and $0.21 for the years ended June 30, 2014, 2015 and 2016, respectively, and the diluted
net income per share for the years ended June 30, 2014, 2015 and 2016 would have been reduced by $0.09, $0.21 and $0.20, respectively.
The breakdown of deferred tax assets/liabilities
caused by the temporary difference is shown as below:
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Deferred tax assets, current
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
6,885
|
|
|
$
|
9,838
|
|
Inventory provision
|
|
|
148
|
|
|
|
205
|
|
Provision for contract loss
|
|
|
430
|
|
|
|
917
|
|
Long-term assets
|
|
|
14
|
|
|
|
13
|
|
Deferred revenue
|
|
|
5,737
|
|
|
|
3,522
|
|
Deferred subsidies
|
|
|
570
|
|
|
|
1,020
|
|
Warranty liabilities
|
|
|
1,109
|
|
|
|
1,322
|
|
Recognition of intangible assets
|
|
|
107
|
|
|
|
57
|
|
Accrued payroll
|
|
|
899
|
|
|
|
960
|
|
Net operating loss carry forward
|
|
|
5,843
|
|
|
|
6,361
|
|
Valuation allowance
|
|
|
(5,796
|
)
|
|
|
(6,307
|
)
|
Total deferred tax assets, current
|
|
$
|
15,946
|
|
|
$
|
17,908
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities, current
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings
|
|
$
|
(12,685
|
)
|
|
$
|
(16,068
|
)
|
Recognition of intangible assets
|
|
|
(1,246
|
)
|
|
|
(1,060
|
)
|
PRC dividend withholding tax
|
|
|
(4,653
|
)
|
|
|
(3,010
|
)
|
Others
|
|
|
(36
|
)
|
|
|
(24
|
)
|
Total deferred tax liabilities, current
|
|
$
|
(18,620
|
)
|
|
$
|
(20,162
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets, current
|
|
$
|
3,214
|
|
|
$
|
6,659
|
|
Net deferred tax liabilities, current
|
|
$
|
(5,888
|
)
|
|
$
|
(8,913
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, non-current
|
|
|
|
|
|
|
|
|
Long-term assets
|
|
$
|
522
|
|
|
$
|
699
|
|
Deferred subsidies
|
|
|
1,739
|
|
|
|
2,642
|
|
Recognition of intangible assets
|
|
|
63
|
|
|
|
(16
|
)
|
Warranty liabilities
|
|
|
452
|
|
|
|
874
|
|
Total deferred tax assets, non-current
|
|
$
|
2,776
|
|
|
$
|
4,199
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities, non-current
|
|
|
|
|
|
|
|
|
Share of net gains of equity investees
|
|
$
|
99
|
|
|
$
|
(1,733
|
)
|
Intangible assets and other non-current assets
|
|
|
(371
|
)
|
|
|
(330
|
)
|
Total deferred tax liabilities, non-current
|
|
$
|
(272
|
)
|
|
$
|
(2,063
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets-non-current
|
|
$
|
2,581
|
|
|
$
|
2,195
|
|
Net deferred tax liabilities-non-current
|
|
$
|
(77
|
)
|
|
$
|
(59
|
)
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
As of June 30, 2016 the Company had incurred net losses of approximately $1,927, $34,004, $1,116 derived from
entities in the PRC, Singapore and Hong Kong, respectively. The net losses in the PRC can be carried forward for five years, to
offset future net profit for income tax purposes. The net losses in Singapore and Hong Kong can be carried forward without
an expiration date. For the amount as of June 30, 2016, $1,927 will expire, if not utilized, from December 31, 2016 to 2020.
The Company operates mainly through its PRC
subsidiaries and the valuation allowance is considered on an individual entity basis.
Under the EIT Law and the implementation
rules, profits of the Company’s PRC subsidiaries earned on or after January 1, 2008 and distributed by the PRC subsidiaries
to a foreign holding company are subject to a withholding tax at 10% unless reduced by tax treaty. As of June 30, 2015 and 2016,
the aggregate undistributed earnings from the Company’s PRC subsidiaries that are available for distribution are approximately
RMB2,320,060 (equivalent to $355,454) and RMB2,907,542 (equivalent to $447,025), respectively. The Company expects to distribute
a portion of the earnings (approximately RMB200,000 or $30,100) to holding companies located outside mainland China, and has hence
accrued a withholding tax of $3,117 for the year ended June 30, 2016. The remaining undistributed earnings of the Company’s
PRC subsidiaries are intended to be permanently reinvested, and accordingly, no deferred tax liabilities have been provided for
the PRC dividend withholding taxes that would be payable upon the distribution of those amounts to the Company. As of June 30,
2015 and June 30, 2016, the total amounts of undistributed earnings generated from the Company’s PRC subsidiaries for which
no withholding tax has been accrued were $268,793 and $372,040, respectively. Deferred tax liabilities subject to recognize
would have been approximately $20,508 and $30,832, respectively, if all such undistributed earnings planned to be distributed to
the Company in full as of June 30, 2015 and June 30, 2016.
As of June 30, 2015 and June 30, 2016, the
undistributed retained earnings generated from periods prior to January 1, 2008 were $63,716 and $63,716, respectively, which are
not subject to withholding taxes.
The Chinese tax law grants the tax authorities
the rights to further inspect companies’ tax returns retroactively in a three year period (up to five years under certain
special conditions), which means theoretically the tax authorities can still review the PRC subsidiaries’ tax returns for
the years ended December 31, 2011 through 2015. The tax law also states that companies will be liable to additional tax, interest
charges and penalties if errors are found in their tax returns and such errors have led to an underpayment of tax.
Determining income tax provisions involves
judgment on the future tax treatment of certain transactions. The Company performed a self-assessment and concluded that there
was no significant uncertain tax position requiring recognition in its financial statements. The tax treatment of such transactions
is reconsidered periodically to take into account all changes in tax legislations. Where the final tax outcome of these transactions
is different from the amounts that were initially recorded, such difference will impact the income tax and deferred tax provisions
in the year in which such determination is made.
There were no material interest or penalties incurred for
and
as of the years ended June 30, 2014, 2015 and 2016, respectively.
|
NOTE 20 -
|
INCOME PER SHARE
|
The following table sets forth the computation
of basic and diluted net income per share attributable to Hollysys for the years indicated:
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
|
|
Year ended June 30,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Company - basic
|
|
$
|
69,620
|
|
|
$
|
96,527
|
|
|
$
|
118,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the Company - diluted
(i)
|
|
$
|
69,620
|
|
|
$
|
96,877
|
|
|
$
|
119,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding used in computing basic income per share
|
|
|
57,926,333
|
|
|
|
58,612,596
|
|
|
|
59,170,050
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Bond
|
|
|
-
|
|
|
|
644,850
|
|
|
|
776,800
|
|
Share options
|
|
|
482,623
|
|
|
|
839,425
|
|
|
|
642,184
|
|
Restricted shares
|
|
|
17,686
|
|
|
|
37,332
|
|
|
|
22,422
|
|
Weighted average ordinary shares outstanding used in computing diluted income per share
|
|
|
58,426,642
|
|
|
|
60,134,203
|
|
|
|
60,611,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share - basic
|
|
$
|
1.20
|
|
|
|
1.65
|
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share - diluted
|
|
$
|
1.19
|
|
|
|
1.61
|
|
|
|
1.97
|
|
(i) For the year ended June 30, 2015 and 2016,
interest accretion related to the Convertible Bond of $350 and $650, respectively, is added back to derive net income attributable
to the Company for computing diluted income per share.
Vested and unissued restricted shares of 60,625,
58,726 and 75,066 shares are included in the computation of basic and diluted income per share for the years ended June 30, 2014,
2015 and 2016, respectively.
For the year ended June 30, 2014, as the performance
target was achieved for the first installment of the Incentive Shares for Bond, hence 648,697 shares were issuable as of June 30,
2014. These shares were included in the computation of basic and diluted income per share. However, the second installment of Incentive
Shares for Bond and Premium Shares for Bond has been excluded from the computation of diluted income per share because the contingently
issuable common shares would not be issued under the terms of the arrangement if the end of the reporting period were the end of
the contingency period. For the year ended June 30, 2015, Bond has achieved the pre-determined performance target (note 3), and
the second installment of Incentive Shares for Bond and Premium Shares for Bond with 461,107 shares and 166,471 shares respectively
are issuable and have been included in the computation of basic and diluted income per share for year ended June 30, 2015.
|
NOTE 21 -
|
RELATED PARTY TRANSACTIONS
|
The related party relationships and related
party transactions are listed as follows:
Related party relationships
Name of related parties
|
|
Relationship with the Company
|
|
|
|
Shenhua Hollysys Information Technology Co., Ltd. (“Shenhua Information”)
|
|
20% owned by Beijing Hollysys
|
China Techenergy Co., Ltd. (“China Techenergy”)
|
|
40% owned by Beijing Hollysys
|
Beijing Hollysys Electric Motor Co., Ltd. (“Electric Motor”)
|
|
40% owned by Beijing Hollysys
|
Beijing Hollysys Machine Automation Co., Ltd. (“Hollysys Machine”)
|
|
30% owned by Hollysys Investment
|
Heilongjiang Ruixing Technology Co., Ltd. (“Heilongjiang Ruixing”)
|
|
6% owned by Beijing Hollysys
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
Due from related parties
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
China Techenergy
|
|
$
|
34,472
|
|
|
$
|
22,579
|
|
Shenhua Information
|
|
|
3,447
|
|
|
|
2,995
|
|
Hollysys Machine
|
|
|
1,158
|
|
|
|
1,367
|
|
Heilongjiang Ruixing
|
|
|
-
|
|
|
|
1,071
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
39,077
|
|
|
$
|
28,012
|
|
The Company’s management believes that
the collection of amounts due from related parties is reasonably assured and accordingly, no provision had been made for these
balances.
Due to related parties
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
China Techenergy
|
|
$
|
837
|
|
|
$
|
1,170
|
|
Shenhua Information
|
|
|
818
|
|
|
|
358
|
|
Electric Motor
|
|
|
49
|
|
|
|
112
|
|
Hollysys Machine
|
|
|
9
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,713
|
|
|
$
|
1,645
|
|
Transactions with related parties
Purchases of goods and services from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Hollysys Machine
|
|
$
|
1,980
|
|
|
$
|
914
|
|
|
$
|
555
|
|
Electric Motor
|
|
|
14
|
|
|
|
50
|
|
|
|
354
|
|
Shenhua Information
|
|
|
323
|
|
|
|
368
|
|
|
|
-
|
|
China Techenergy
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,317
|
|
|
$
|
1,333
|
|
|
$
|
909
|
|
Sales of goods and integrated solutions to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
China Techenergy
|
|
$
|
3,136
|
|
|
$
|
21,936
|
|
|
$
|
3,657
|
|
Shenhua Information
|
|
|
2,726
|
|
|
|
2,128
|
|
|
|
847
|
|
Hollysys Machine
|
|
|
921
|
|
|
|
512
|
|
|
|
235
|
|
Electric Motor
|
|
|
2
|
|
|
|
1
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,785
|
|
|
$
|
24,577
|
|
|
$
|
4,739
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
Operating lease income from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended June 30,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hollysys Machine
|
|
$
|
65
|
|
|
$
|
41
|
|
|
$
|
40
|
|
The Company sells automation control systems
to China Techenergy which is used for non-safety operations control in the nuclear power industry. China Techenergy incorporates
the Company’s non-safety automation control systems with their proprietary safety automated control systems to provide an
overall automation and control system for nuclear power stations in China. The Company is not a party to the integrated sales contracts
executed between China Techenergy and its customers. The Company’s pro rata shares of the intercompany profits and losses
are eliminated until realized through a sale to outside parties, as if China Techenergy were a consolidated subsidiary.
The Company sells automation control systems
to Shenhua Information which is used for operations control in the information automation industry. Shenhua Information incorporates
the Company’s automation control systems with their proprietary automated remote control systems to provide an overall automation
and control system to its customers. The Company is not a party to the integrated sales contracts executed between Shenhua Information
and its customers. The Company’s pro rata shares of the intercompany profits and losses are eliminated until realized through
a sale to an outside party as if Shenhua Information were a consolidated subsidiary.
The Company engages Hollysys Machine to sell
the Company’s products to end customers. The Company pays commission to Hollysys Machine in exchange for its services. The
amount of the commission is determined based on the value of the products sold by Hollysys Machine during the year.
Amounts due from and due to the related parties
relating to the above transactions are unsecured, non-interest bearing and repayable on demand.
|
NOTE 22 -
|
COMMITMENTS AND CONTINGENCIES
|
Operating lease commitments
The Company leases premises under various
operating leases. Rental expenses under operating leases included in the consolidated statements of comprehensive income were $2,067,
$1,492 and $1,811 for the years ended June 30, 2014, 2015 and 2016, respectively.
Future minimum lease payments under non-cancelable
operating leases with initial terms of one year or more consist of the following:
Years ending June 30,
|
|
Minimum lease payments
|
|
|
|
|
|
2017
|
|
$
|
1,429
|
|
2018
|
|
|
441
|
|
2019
|
|
|
138
|
|
2020
|
|
|
84
|
|
2021 and onwards
|
|
|
15
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
2,107
|
|
The Company’s lease arrangements have
no renewal or purchase options, rent escalation clauses, restriction or contingent rents and are all conducted with third parties.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
Capital commitments
As of June 30, 2016, the Company had approximately
$1,796 in capital obligations for the coming fiscal year, mainly for the Company’s information system construction.
Purchase obligation
As of June 30, 2016, the Company had $156,090
purchase obligations for the coming fiscal year, for purchases of inventories, mainly for fulfillment of in-process or newly
entered contracts resulting from the expansion of the Company’s operations.
Performance guarantee and standby letters
of credit
The Company had stand-by letters of credit
of $40,800 and outstanding performance guarantees of $58,747 as of June 30, 2016, with restricted cash of $27,994 pledged to banks.
The purpose of the stand-by letter of credit and performance guarantees is to guarantee that the performance of the Company’s
deliveries reach the pre-agreed requirements specified in the integrated solutions contracts. The guarantee is to ensure the functionality
of the Company’s own work. The disclosed amount of stand-by letters of credit and outstanding performance guarantees represent
the maximum potential amount of future payments the Company could be required to make under such guarantees.
The Company accounts for performance guarantees
and stand-by letters of credit in accordance with ASC topic 460 (“ASC 460”),
Guarantees.
Accordingly, the Company
evaluates its guarantees to determine whether (a) the guarantee is specifically excluded from the scope of ASC 460, (b) the guarantee
is subject to ASC 460 disclosure requirement only, but not subject to the initial recognition and measurement provisions, or (c)
the guarantee is required to be recorded in the financial statements at fair value.
Both the performance guarantees and the stand-by
letters of credit are for the Company’s commitment of its own future performance, and the outcome of which is within its
own control. As a result, performance guarantees and stand-by letters of credit are subject to ASC 460 disclosure requirements
only.
|
NOTE 23 -
|
OPERATING LEASES AS LESSOR
|
On April 3, 2013, Beijing Hollysys entered
into an operating lease agreement to lease out one of its buildings located in Beijing. The lease term is for a period of 10 years
from the commencement date of September 1, 2013 and will end on August 31, 2023. The minimum rental income in the next five years
is shown as below:
Year ending June 30,
|
|
Minimum lease payments
|
|
|
|
|
|
2017
|
|
$
|
1,464
|
|
2018
|
|
|
1,508
|
|
2019
|
|
|
1,553
|
|
2020
|
|
|
1,600
|
|
2021
|
|
|
1,648
|
|
|
|
|
|
|
Total minimum lease payments to be received in the next five years
|
|
$
|
7,773
|
|
The minimum lease payment receivable after
five years is $3,741.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
|
NOTE 24 -
|
SEGMENT REPORTING
|
The chief operating decision makers have been
identified as the Chairman, Chief Executive Officer and Chief Financial Officer of the Company. The Company organizes its internal
financial reporting structure based on its main product and service offerings.
Based on the criteria established by ASC
280,
Segment Reporting
(“ASC 280”), the Company has determined that the reportable segments of the Company consist
of (1) IA, (2) Rail, (3) M&E and (4) miscellaneous, in accordance with the Company’s organization and internal financial
reporting structure. The chief operating decision makers assess the performance of the operating segments based on the measures
of revenues, costs and gross profit. Other than the information provided below, the chief operating decision makers do not use
any other measures by segments.
Summarized information by segments for the
years ended June 30, 2014, 2015, and 2016 is as follows:
|
|
Year ended June 30, 2014
|
|
|
|
IA
|
|
|
Rail
|
|
|
M&E
|
|
|
Miscellaneous
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
224,366
|
|
|
|
178,134
|
|
|
|
108,846
|
|
|
|
9,986
|
|
|
|
521,332
|
|
Costs of revenue
|
|
|
143,645
|
|
|
|
104,055
|
|
|
|
93,459
|
|
|
|
4,550
|
|
|
|
345,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
80,721
|
|
|
|
74,079
|
|
|
|
15,387
|
|
|
|
5,436
|
|
|
|
175,623
|
|
|
|
Year ended June 30, 2015
|
|
|
|
IA
|
|
|
Rail
|
|
|
M&E
|
|
|
Miscellaneous
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
213,252
|
|
|
|
193,274
|
|
|
|
110,030
|
|
|
|
14,823
|
|
|
|
531,379
|
|
Costs of revenue
|
|
|
119,520
|
|
|
|
97,503
|
|
|
|
93,452
|
|
|
|
6,502
|
|
|
|
316,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
93,732
|
|
|
|
95,771
|
|
|
|
16,578
|
|
|
|
8,321
|
|
|
|
214,402
|
|
|
|
Year ended June 30, 2016
|
|
|
|
IA
|
|
|
Rail
|
|
|
M&E
|
|
|
Miscellaneous
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
$
|
182,901
|
|
|
|
240,310
|
|
|
|
95,277
|
|
|
|
25,837
|
|
|
|
544,325
|
|
Costs of revenue
|
|
|
113,314
|
|
|
|
131,043
|
|
|
|
82,900
|
|
|
|
11,342
|
|
|
|
338,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
69,587
|
|
|
|
109,267
|
|
|
|
12,377
|
|
|
|
14,495
|
|
|
|
205,726
|
|
The Company’s assets are shared among
the segments thus no assets have been designated to specific segments.
The majority of the Company’s revenues
and long-lived assets other than goodwill and acquired intangible assets are derived from and located in the PRC. The following
table sets forth the revenues by geographical area:
|
|
Year ended June 30,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
393,596
|
|
|
$
|
410,644
|
|
|
$
|
443,256
|
|
Non-PRC (including Hong Kong)
|
|
|
127,736
|
|
|
|
120,735
|
|
|
|
101,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
521,332
|
|
|
$
|
531,379
|
|
|
$
|
544,325
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
The following table sets forth the long-lived
assets other than goodwill and acquired intangible assets by geographical area:
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Long-lived assets other than goodwill and acquired intangible assets
|
|
|
|
|
|
|
|
|
PRC
|
|
$
|
95,779
|
|
|
$
|
100,454
|
|
Non-PRC (including Hong Kong)
|
|
|
13,068
|
|
|
|
13,079
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
108,847
|
|
|
$
|
113,533
|
|
|
NOTE 25 -
|
SUBSEQUENT EVENTS
|
In July 2016, the Company’s
subsidiary, Hollycon, issued shares for an aggregate cash consideration of $30,943 to two new investors of which $7,736 of
the proceeds were received prior to the year ended June 30, 2016. Further, the Company disposed of 0.6% of its equity
interest in Hollycon for cash consideration of $464, which was received prior to the year ended June 30, 2016. The result of
these two transactions resulted in dilution of the Company’s equity interest in Hollycon from 51% to 30% and loss of
control. As the Company is able to exercise significant influence, they will use the equity method to account for their
continuing investment in Hollycon.
On August 11, 2016, the Board of Directors
approved a regular cash dividend policy pursuant to which future cash dividends are expected to be paid to holders of the Company’s
ordinary shares on an annual basis out of funds legally available for such purpose. The declaration and payment of future dividends
including the dividend for 2016 will be at the discretion of the Board of Directors.
|
NOTE 26 -
|
ENDORSEMENT OF NOTE RECEIVABLES
|
The Company endorsed bank acceptance bills
to its suppliers as a way of settling accounts payable. The total endorsed but not yet due bank acceptance bills amounted to $37,669
and $31,991 as of June 30, 2015 and 2016, respectively. The endorsement of bank acceptance bills qualify as deemed sales of financial
assets according to ASC 860,
Transfer and Servicing
(“ASC 860”) because the bank acceptance bills have been
isolated from the Company upon transfer, the transferee of the bank acceptance bills have the rights to pledge or exchange, and
the Company has no control over the bank acceptance bills upon endorsement. As a result, bank acceptance bills are derecognized
at the time of endorsement.
|
NOTE 27 -
|
CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
|
Under the PRC laws and regulations, the Company’s PRC subsidiaries’ ability to transfer net assets
in the form of dividend payments, loans, or advances are restricted. The amount restricted was RMB497,789 (equivalent to $73,209)
and RMB538,113 (equivalent to $79,500) as of June 30, 2015, and 2016, respectively.
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
The following represents condensed unconsolidated
financial information of the parent company only:
CONDENSED BALANCE SHEETS
|
|
June 30,
|
|
|
|
2015
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
8,437
|
|
|
$
|
8,571
|
|
Time deposits with original maturities over three months
|
|
|
14,721
|
|
|
|
-
|
|
Amounts due from subsidiaries
|
|
|
114,311
|
|
|
|
72,303
|
|
Prepaid expenses
|
|
|
50
|
|
|
|
63
|
|
Total current assets
|
|
|
137,519
|
|
|
|
80,937
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
|
532,136
|
|
|
|
669,326
|
|
Total assets
|
|
$
|
669,655
|
|
|
$
|
750,263
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accrued payroll and related expense
|
|
$
|
18
|
|
|
$
|
9
|
|
Accrued liabilities
|
|
|
323
|
|
|
|
426
|
|
Amounts due to subsidiaries
|
|
|
70,642
|
|
|
|
55,869
|
|
Total current liabilities
|
|
|
70,983
|
|
|
|
56,304
|
|
|
|
|
|
|
|
|
|
|
Long-term loan
|
|
|
19,572
|
|
|
|
19,802
|
|
Total liabilities
|
|
|
90,555
|
|
|
|
76,106
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares, par value $0.001 per share, 100,000,000 shares authorized; 58,358,521 and 59,598,099 shares issued and outstanding as of June 30, 2015 and 2016, respectively
|
|
|
58
|
|
|
|
60
|
|
Additional paid-in capital
|
|
|
192,768
|
|
|
|
215,403
|
|
Retained earnings
|
|
|
348,689
|
|
|
|
467,160
|
|
Accumulated other comprehensive
income (loss)
|
|
|
37,585
|
|
|
|
(8,466
|
)
|
Total equity
|
|
|
579,100
|
|
|
|
674,157
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
669,655
|
|
|
$
|
750,263
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
|
|
Year Ended June 30,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
3,721
|
|
|
$
|
3,169
|
|
|
$
|
4,484
|
|
Loss from operations
|
|
|
(3,721
|
)
|
|
|
(3,169
|
)
|
|
|
(4,484
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
-
|
|
|
|
(35
|
)
|
|
|
(93
|
)
|
Interest income
|
|
|
-
|
|
|
|
1
|
|
|
|
80
|
|
Interest expenses
|
|
|
-
|
|
|
|
(463
|
)
|
|
|
(705
|
)
|
Foreign exchange gains (losses)
|
|
|
263
|
|
|
|
238
|
|
|
|
(719
|
)
|
Equity in profit of subsidiaries
|
|
$
|
73,078
|
|
|
$
|
99,955
|
|
|
$
|
124,392
|
|
Income before income taxes
|
|
|
69,620
|
|
|
|
96,527
|
|
|
|
118,471
|
|
Income tax expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income
|
|
|
69,620
|
|
|
|
96,527
|
|
|
|
118,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax of nil
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment
|
|
|
2,140
|
|
|
|
(1,427
|
)
|
|
|
(46,052
|
)
|
Comprehensive income
|
|
$
|
71,760
|
|
|
$
|
95,100
|
|
|
$
|
72,419
|
|
HOLLYSYS AUTOMATION TECHNOLOGIES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2014, 2015 AND
2016 – continued
(Amounts in thousands except for number of
shares and per share data)
CONDENSED STATEMENTS OF CASH FLOWS
|
|
Year ended June 30,
|
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
-
|
|
|
$
|
(397
|
)
|
|
$
|
(1,697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
$
|
(4,402
|
)
|
|
$
|
11,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
$
|
-
|
|
|
$
|
13,236
|
|
|
$
|
(9,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
-
|
|
|
$
|
8,437
|
|
|
$
|
134
|
|
Cash and cash equivalents, beginning of year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,437
|
|
Cash and cash equivalents, end of year
|
|
$
|
-
|
|
|
$
|
8,437
|
|
|
$
|
8,571
|
|
Basis of presentation
For the presentation of the parent
company only condensed financial information, the Company records its investment in subsidiaries under the equity method of
accounting as prescribed in ASC 323,
Investments—Equity Method and Joint Ventures
(“ASC 323”). Such
investment is presented on the balance sheets as “Investment in subsidiaries” and the subsidiaries’ profit
as “Equity in profit of subsidiaries” on the statements of comprehensive income. The parent company only
financial statements should be read in conjunction with the Company’s consolidated financial statements.
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