emerging Potential Co. Reg. No.: K

Transcription

1 emerging Potential Co. Reg. No.: K ANNUAL REPORT 2004

2 CONTENTS 01 Corporate Profile 02 Financial Highlights 03 Chairman s Statement 06 Group Structure 07 Management Structure 08 Board of Directors 10 Senior Management Profile 13 Operational Review 18 Global Network

3 EUROPTRONIC GROUP LTD AR 04 1 CORPORATE PROFILE Europtronic Group Ltd is a manufacturer and distributor of electronic components that are essential to electrical, electronic, and information technology products. The Company produces its own brand of film capacitors at two state-of-the-art factories, located in Shenzhen and Suzhou, in the People s Republic of China. These products include metallized and non-metallized polyester film capacitors, metallized and non-metallized polypropylene film capacitors, and metallized polypropylene film capacitors for AC circuits (X2). The Company has also been developing and manufacturing chip inductors and chip beads since In addition, Europtronic distributes various active and passive components for established international brands, including AVX/Kyocera, Sharp, Micro Crystal, Tyco, Formosa Semi and Yo Hua. These include products such as other various capacitors, opto-electronic devices such as transmitters and receivers, flat panel displays, base-band crystals, connectors, and diodes. In all, the Company s ultimate vision is to become a one-stop solution provider for its customers. Originally established in 1977 as Taiwan CTI Industrial Corporation, Europtronic has grown from a trading company into an integrated manufacturer and distributor of electronic components. Today, in addition to the two PRC plants, it has representative offices in Singapore, Hong Kong, Taipei, Beijing, Shenzhen, Shanghai, Qingdao, Manila, and London.

4 2 FINANCIAL HIGHLIGHTS CAGR 24.0% CAGR 37.3% Turnover (S$M) Profit After Tax (S$M) CAGR 11.1% CAGR 32.1% Earnings Per Share (cents) Net Tangible Assets (cents) NTA & EPS for 2000, 2001 based on pre-ipo shares of 187,868,150 NTA & EPS for 2002, 2003, 2004 are adjusted for 5:4 Bonus Share Issue in May 2004

5 EUROPTRONIC GROUP LTD AR 04 3 CHAIRMAN S STATEMENT If the true test of an organization is how it performs in difficult times, then Europtronic did very well in We started the year off on a positive note, generating strong growth from both our manufacturing and distribution divisions. To Our Stakeholders, If the true test of an organization is how it performs in difficult times, then Europtronic did very well in We started the year off on a positive note, generating strong growth from both our manufacturing and distribution divisions. To capitalize on the robust demand, we broadened our sales network by establishing an office in Beijing, and further strengthened our Shanghai and Shenzhen staff. However, momentum slowed in the second half, as Chinese authorities tried to cool off its economy, oil prices rose to record highs, and the US dollar weakened considerably. Consequently, the surge that we usually experience during this period did not materialize this year. Instead, our customers faced lower utilization rates and higher inventory build-up, which in turn weakened our order flow. To stay competitive, we had to buckle down and focus inward on the management of our costs, expenses, and capital expansion plans. Our employees abilities to adapt and to succeed in this volatile environment were certainly tested this year, but they met the challenges head-on. And their hard work and dedication was reflected in the financial results for 2004, which showed a 38.3% growth in revenue and 15.3% growth in net profits. As we head into 2005, I believe Europtronic is well-positioned to capitalize on the trends that are shaping the electronics industry. In recent months, several electronic manufacturers in Asia have been acquiring their US and European counterparts to gain entry into new geographical markets. Some of the largest deals announced included TCL s merger of Thomson s TV business, TPV s acquisition of Philips monitor division, and Lenovo s purchase of IBM s personal computing business. I believe this consolidation trend will continue in the foreseeable future, as manufacturers here look to establish an international presence. Being a major supplier to TPV, TCL, and other well-known Asian electronic manufacturers, this development should benefit us and translate into additional orders for our products down the road. Our distribution business has grown significantly from a year ago, with the Crypson Group acquisition enlarging our product offerings and expanding our customer base. This past year, we made a concerted effort to target the telecommunications industry, a growing segment we previously were not strong in. As a result, this focus landed us with key accounts in China for some of the leading manufacturers in the handphone market. We have also strengthened our Asia presence, securing wins with global players to supply products such as connectors for MP3 players.

6 4 CHAIRMAN S STATEMENT Another critical success factor in our long-term growth is the spirit of innovation, or a willingness to think outside the box. In September, our associate Eucon Holding Limited ( Eucon ) successfully listed on the Singapore Securities Exchange Limited. Although Eucon still remains a market leader in PCB drilling, it has aggressively expanded its Shanghai operations to offer other related services. This year, the attention shifts to capitalizing on the growth in that region, and generating positive cash flow in the process. Turning our attention to 2005, Europtronic has embarked upon a long-term mission to improve operating fundamentals. The recent switch to unleaded materials in our film capacitors has enhanced our competitive position and allowed us to better serve customers. To mitigate the increase in costs, we are developing new techniques to improve the production process so that margins can be at least maintained. We are also monitoring our accounts receivables and inventory actively to free up valuable cash flow, which can be used to support working capital needs. Further, all investments will be considered with specific metrics in mind to justify its merits. And finally, although we largely enjoy natural hedging through the matching of revenue and costs, we will explore financial instrument safeguards to reduce our currency exposure when necessary. We undertake these actions, even as Europtronic continues to grow, because we believe in building a sustainable business for the long term. Another project I initiated late last year involves the re-engineering of our sales and marketing operations. As we transition into a professional company, the reporting structure that we put in place has to reflect this newer, more dynamic mindset. So we have created a marketing team to analyze the overall electronics market, where it is going, what are the trends shaping it, and how we can take advantage of opportunities. They will then work closely with our sales team to help them identify the critical issues and build up capabilities to serve both existing and potential key customers. As the life cycle of electronic products gets shorter, there becomes an increasing need to stay one step ahead of the curve. So another critical success factor in our long-term growth is the spirit of innovation, or a willingness to think outside the box. In recent years, that has meant targeting more design-in type projects to help us migrate into higher end-product segments, and diversifying our customer base within the electronics industry to spread out risk. Going forward, we

7 EUROPTRONIC GROUP LTD AR 04 5 are looking at alternative ways to derive value within this industry. This may lead to more OEM contracts, which increases machine utilization and spreads out fixed costs. Or, it could also mean partnership opportunities to explore the untapped potential of the electronics market. Regardless of the path we take, we remain committed to providing our customers with a comprehensive product range to improve their purchasing efficiency. Although we continue to diversify our product lines, customer base, and end applications, our core focus remains in electronic components. I believe that even though the electronics industry as a whole may not experience substantial growth, Europtronic is in a great position because of two main catalysts: the continuing growth of China as a manufacturing center, and the consolidation of worldwide electronics manufacturers. Thus, I have confidence that we will continue to deliver positive results to our stakeholders in the foreseeable future. On behalf of the Board of Directors, I am pleased to announce that subject to the approval of shareholders, Europtronic has proposed a dividend payout of S$0.01 per share, S$0.003 of which is final and S$0.007 of which is special, both tax-exempt. This is a small reflection of the success we had this past year, and a reward to those who have continued to support us. In an ever challenging operating environment, the ability to innovate and create values becomes crucial. Thus, I invite you to see why Europtronic has only begun to discover its true potential. Sincerely, Huang Shih-An Chairman and CEO

8 6 GROUP STRUCTURE Europtronic Group Ltd 100% Europtronic (H.K.) Company Limited 100% Europtronic Electronic (Shenzhen) Co., Ltd 100% Europtronic (Suzhou) Co., Ltd 100% Europtronic (Singapore) Pte Ltd 100% Europtronic Investment Pte Ltd 100% Crypson Electronics (S) Pte Ltd 100% Eucon Holding Limited 26.9% Crypson Electronics (HK) Co., Limited 100% Crypson Electronics (Shanghai) Pte Ltd 100% Europtronic (Taiwan) Ind. Corp 100% Tecster Technology Co., Ltd 17.3% Europtronic Technology (UK) Limited 100% UPT Component (S) Pte Ltd 100% UPT Component (Shanghai) Co., Limited 100%

9 EUROPTRONIC GROUP LTD AR 04 7 MANAGEMENT STRUCTURE Board of Directors Chairman / CEO Deputy Chairman Group Finance and Accounting Group Sales and Marketing Group IT Group HR Manufacturing Corporate Finance

10 8 BOARD OF DIRECTORS >>> operational and administrative matters Mr. Huang Shih-An Chairman One of the Group s co-founders, Mr. Huang was appointed to the Board in November His primary responsibilities with Europtronic include the charting and reviewing of our corporate developments, strategic initiatives, marketing operations, and overseas businesses. Mr. Huang has over 25 years of management experience in the electronic components industry. He holds a Bachelor Degree in International Trade and Finance from the Chinese Culture University and an Executive MBA from the National University of Singapore. Mrs. Huang Chuang Shueh-Ou Deputy Chairman One of the Group s co-founders, Mrs. Huang is responsible for our as well as investment policies and financial issues. She was appointed to the Board in November In 1999, Mrs. Huang was awarded the title of Model of Overseas Chinese Youth Entrepreneurs by the Association of Entrepeneurs, Republic of China. She holds a Diploma in Management from the Singapore Institute of Management. Mr. Chen Wan Shou Executive Director Mr. Chen Wan Shou was appointed as an Executive Director in January He is responsible for the business process redesign of our sales & marketing operations and supports the Group in fine tuning its organization structure and system. Mr. Chen has over 20 years of work experience in top management positions at Motorola. Before becoming the Vice-President and Regional Director for its Southeast Asia Region, he was the Vice-President and Global Sales Director for the Motorola Semiconductors Consumer Solutions Group. Mr. Chen holds a Master Degree in Solid States Science from National Chiao Tung University in Taiwan.

11 EUROPTRONIC GROUP LTD AR 04 9 BOARD OF DIRECTORS Mr. Chiu Jin Yi, Cheyne Independent Director Mr. Lim Lee Meng Independent Director Mr. Chen Ming Hsing Non-Executive Director Mr. Chiu was appointed to the Board in March He is currently the Chairman of our Nominating and Remuneration Committees, as well as an Audit Committee member. Prior to his retirement in 2000, Mr. Chiu was the Taiwan representative to Singapore from 1994 to 1996, and the Minister for Civil Service of Taiwan from 1996 to He holds a Bachelor Degree in Law from the National Cheng-Chi University and an Executive MBA from the National University of Singapore. Mr. Lim was appointed to the Board in March He is the Chairman of our Audit Committee, as well as a member of our Nominating and Remuneration Committees. Mr. Lim also holds independent directorships in several public listed companies in Singapore, including Datapulse Technology Limited, Teckwah Industrial Corporation Ltd, and Tye Soon Ltd. He is currently a senior partner of an accounting firm and has more than 20 years experience in the industry. Mr. Lim has a MBA degree from Hull University, a Bachelor of Commerce degree from Nanyang University, and a diploma in Business Law from the National University of Singapore. Mr. Chen was appointed as an Executive Director in November 2002, and is responsible for the management of our PRC operations as well as overseeing the activities of our associate. He has over 20 years of experience in the electronic manufacturing services industry, and currently is a director in a Taiwan based company. He holds a degree in Physical Education from the Chinese Culture University and an Executive MBA from the National University of Singapore.

12 10 SENIOR MANAGEMENT PROFILE Mr. Yang Chun is the Managing Director of the Component Manufacturing Business Unit and is responsible for management of the PRC operations. In 1999, Mr. Yang joined Europtronic Electronic (Shenzhen) Co., Ltd as its Assistant Managing Director and was promoted to his current position subsequently. Mr. Yang holds a degree in Marine Engineering from the National Taiwan Ocean University. Ms. Tan Lay See, Chief Financial Officer (effective: March 5, 2005), is responsible for overseeing the finance, accounting, corporate finance, and investor relations functions. She has been with the Group since Ms. Tan graduated with a Bachelor Degree in Accountancy from the University of Glasgow, UK and is a fellow member of the Chartered Association of Certified Accountant of UK and registered as a Chartered Accountant with the Malaysian Institute of Accountants. She is also a Certified Public Accountant. Mr. Huang Chien-Hung is the Group Sales and Marketing Director. In this capacity, Mr. Huang oversees the regional expansion and development of the Group s business activities. Mr. Huang holds a degree in electronic and electrical engineering from the University of London, UK. Mr. Hsieh Min-Tsun is the Deputy Sales and Marketing Director of the Group and is responsible for developing its clientele base and servicing customers. Mr. Hsieh has more than 18 years of working experience in the electronic component industry. Mr. Hsieh graduated from Tung-Fang B.R.E. Vocational High School, Taiwan, ROC. Mr. Albert Chee Min Khun is the Group Marketing Director and is responsible for its overall marketing activities. Mr. Chee has more than 15 years of work experience in the electronic components industry. He joined Europtronic as a Senior Sales Manager in June 2002 and was subsequently promoted to his current position. Mr. Chee obtained a full GCE certificate with A level passes in Economics and Management of Business. Mr. Ang Han Keong is the Marketing Director of the Active Components Unit for the Group. In this capacity, Mr. Ang manages the division s business activities and maintains relationships with key customers and suppliers. Mr. Ang graduated from Ngee Ann Polytechnic with a major in electronic engineering, and received an advanced diploma in material management from the Singapore Institute of Purchasing and Material Management.

13 EUROPTRONIC GROUP LTD AR SENIOR MANAGEMENT PROFILE Mr. Onn Eng Siong is the Marketing Director of the Mechanical Components Unit for the Group. In his capacity, Mr. Onn oversees business activities with several key accounts, as well as manages relationships with the unit s main suppliers. Mr. Onn graduated from Ngee Ann Polytechnic with a degree in electronic engineering. Mr. Howard Ouyang Hao is the Group Investor Relations and Corporate Finance Manager. Mr. Ouyang is responsible for communicating with the investment community and evaluating potential investment opportunities. Mr. Ouyang graduated from Johns Hopkins University with a degree in mechanical engineering, and has a MBA from the Anderson School at UCLA. Ms. Huang Yun Ju is the Group Human Resources Manager. Ms. Huang oversees the planning and execution of the human resources activities across the Asia-Pacific region. Ms. Huang has a Bachelor of Science (Hons) in management from Lancaster University, UK. Mr. Tan Chee Kong is the Group IT Manager, responsible for planning, designing and implementing IT infrastructure and systems. Mr. Tan works with senior management to set IT strategy in line with the Group s business goals. Mr. Tan has over 10 years of experience in the IT industry, and holds a Bachelor Degree in Commerce, Information Technology and Systems from Curtin University in Australia. Mr. Wang Lin is the Research and Development Manager and is responsible for product design and innovation of the Group s manufactured products. Mr. Wang holds a degree in Physics from the Central China Normal University. Mr. Uchita Masami is the Manager of the Engineering Department of Europtronic (Suzhou) Co., Ltd. His responsibilities include product research and development, as well as product engineering. Mr. Uchita graduated from Ibaragi-Kenritsu Shimotade Kougyou High School, Japan.

14 12 hope believe and dare to dream. For growth. The future belongs to those who For success. For global recognition. For a brilliant future that s only just beginning.

15 EUROPTRONIC GROUP LTD AR OPERATIONAL REVIEW MANUFACTURING Despite intensifying market competition, Europtronic generated a revenue increase of 16.0% for its in-house products, from S$29.3 million in 2003 to S$34.0 million in Demand was due to increasing order volumes from existing customers such as TPV, TCL, and LG, as well as other newly acquired customers such as Vestel and Philips. With more global and consumer electronics manufacturers coming on board, the Group has been successful in diversifying its customer base and target markets to rely less on the China region. Under a new EU directive, the use of leaded materials in production will be banned starting in July To comply with this mandate and to satisfy customer requirements, the Group has gradually switched its production process to lead-free materials in the third quarter of The processes associated with producing these materials are more complicated and costly. Thus, prices have increased considerably. In addition, minimum wages for production workers in China was adjusted in the second half of These factors contributed to the lower gross margins in the latter half of To mitigate the effects and reduce the impact on margins, the Group has been developing methods to improve production efficiencies and reduce costs. capacity for the plant reached 778 million pieces in 2004, an increase of 16.2% from the previous year. The growth was slower than in previous years to reflect the Group s cautious stance on the overall growth of the market. The Shenzhen factory reported no major changes to its infrastructure. Annual production capacity remained steady at 204 million pieces. Overall, the combined utilization rates remained steady at 82.2%, and defect rates showed a slight increase to 2.9%. The Group also focused on improving inventory and accounts receivables turnover throughout the year, as part of an initiative to improve operating fundamentals. Inventory turnover dropped from 158 days in 2003 to 113 days in Likewise, accounts receivable turnover dropped 6 days from 143 days in 2003 to 137 days in As a result of the improved ratios, the Group was able to generate 6.2 million in cash from its operating activities, up from 2.2 million the previous year. Breakdown by Business Activities Revenue 2003 Revenue % 48.50% Europtronic Suzhou is now in its third full year of operations. 10 sets of winding machines were brought in during May and October, while 2 sets of forming and cutting machines came in March. Annual production 42.30% Manufacturing Distribution 51.50%

16 14 challenge We obstacles are merely stepping stones that will believe that open new doors to the success we seek.

17 EUROPTRONIC GROUP LTD AR OPERATIONAL REVIEW DISTRIBUTION Europtronic enjoyed significant growth in its distribution business this year, as revenue climbed 68.7% to S$36.1 million in 2004 from S$24.1 million in The marked improvement was due to a full year contribution from Crypson Group, which was acquired in fourth quarter of 2003, as well as continual strengthening of the internal distribution networks within China. Because of strong demand, a new office in Beijing was established in mid-2004 to focus on design-in projects in collaboration with principal suppliers. The Shenzhen and Shanghai staff were also strengthened throughout the year to increase deal flow. Product mix differed compared to previous years, as active components comprised a larger portion of overall revenue. Average selling price for active components were higher than that of passive components; however, their margins tend to be smaller due to the high selling price. Therefore, although profit before tax for the division has increased from previous years, gross margins dropped into single digits. This was offset with higher volumes and newly established customers. products such as connectors for MP3 players. In addition, various distributed products are used in a variety of applications such as notebooks and other entertainment devices. Currently, the Group s relationships with existing principals are strong. The Group has been a non-exclusive distributor for AVX/Kyocera passive components since With the acquisition of Crypson Group, the Group acquired additional principals such as Micro Crystal, JST, and Tyco that contributed to revenue in To tap into the growth in the light-emitting diode (LED) market, the Group signed on Yo Hua Electronics, one of the four companies in the world to hold patent for white LED, as a supplier. These relationships are expected to continue in Breakdown by Geographical Regions Revenue 2003 Revenue % 0.40% 18.70% 1.00% More focus was placed this year on acquiring customers in the telecommunications segment. This was in line with the Group strategy of customer and market diversification. As a result, this division now serves several key accounts in China that comprise some of the leading handphone manufacturers. Presence was also strengthened in the greater Asia region, with wins from global manufacturers to supply 86.70% 80.30% Asia (excl. PRC/HK) PRC (incl. HK) Others

18 16 innovation There achievement than the desire to constantly innovate, to stay is no greater ahead, to grow and exceed all the expectations we have set for ourselves.

19 EUROPTRONIC GROUP LTD AR OPERATIONAL REVIEW ASSOCIATED COMPANIES Contributions from Eucon Holding Limited ( Eucon ) this year was S$3.7 million, down 10.9% from S$4.1 million in This decrease was due to higher administrative costs from setting up the new PCB plants, as well as a foreign exchange loss of S$0.8 million compared to a gain of S$0.05 million in the previous year. In addition, Eucon was listed on the Singapore Securities Exchange Trading Limited in September. As a result of the dilution from the issuance of new shares, and a sale of vendor shares, the Group s effective interest in Eucon has been reduced from 40.0% to 26.9%. Eucon has become the leading independent laser driller in Taiwan, as well as an integrated PCB services provider in China. Its PCB manufacturing plant, which started operations in January 2004, has become profitable in the fourth quarter of Its mass lamination plant has also begun trial production in December Eucon expects to remain profitable and deliver positive results in 2005.

20 18 GLOBAL NETWORK London Suzhou Qingdao Beijing Shanghai Shenzhen Singapore Hong Kong Manila Taipei

21 EUROPTRONIC GROUP LTD AR CORPORATE GOVERNANCE REPORT The Board of Directors (the Board ) and the management of Europtronic Group Ltd ( the Company ) are committed to high standards of corporate governance by complying with the benchmark set by the Code of Corporate Governance (the Code ) issued by the Corporate Governance Committee in Corporate Governance refers to the processes by which corporate affairs are directed and managed with the objective of enhancing long-term shareholder value through improving corporate performance and accountability. Fundamentals of good corporate governance include timely and reliable financial reporting, transparent and efficient management, and respect for stakeholders such as employees, shareholders and customers. The approach of the Company and its group of companies (collectively refer to as the Group ) in FY2004 remains unchanged. The Board will continue to update and review its corporate governance processes. This report outlines the Group s corporate governance processes and structures that were in place throughout the financial year, with specific reference made to each of the principles of the Code. (A) Board Matters Board s Conduct of its Affairs Principle 1: Every Group should be headed by an effective Board to lead and control the Group. Role of the Board of Directors The Board s primary role is to protect and enhance long-term shareholder value. It sets the overall strategy for the Group and supervises executive management. To fulfill this role, the Board is responsible for the overall corporate governance of the Group including setting its strategic direction, establishing goals for management and monitoring the achievement of these goals. Board Processes To assist in the execution of its responsibilities, the Board has established an Audit Committee ( AC ), a Nominating Committee ( NC ), a Remuneration Committee ( RC ), and an Employees Share Option Committee ( ESOC ). These committees function within clearly defined terms of reference and operating procedures, which are reviewed on a regular basis. The Board meets on a quarterly basis. In addition, it holds specific meetings and extraordinary meetings as and when they are deemed necessary. Matters Requiring Board Approval The directors have identified a number of areas in which the Board has direct responsibility for decision-making. The Board meets to consider the following corporate events and actions including, but not limited to: Approval of quarterly, half-yearly and full-year results announcements; Approval of the annual report and accounts; Declaration of interim and proposal of final dividends; Convening of shareholders meetings; Approval of corporate strategies; and Material acquisitions and disposal of assets.

22 20 CORPORATE GOVERNANCE REPORT Matters which are specially reserved to the full Board for decision are those involving a conflict of interest for a substantial shareholder or a director, material acquisitions and disposal of assets, corporate or financial restructuring and share issuances, dividends and other returns to shareholders and matters which require Board approval as specified under the Group s interested person transaction policy. All other matters are delegated to committees whose actions are reported and monitored by the Board. Training of Directors The Group provides extensive background information about its history, mission, and values to its directors. The directors also have the opportunity to visit the Group s operational facilities and meet with management to gain a better understanding of its business operations. The Group also has an on-going training budget for the existing directors to fund the directors participation at industry conferences and seminars. This budget may be utilised by each director subject to approval by the Chairman. Newly appointed directors are also given training appropriate to the level of their previous experiences. Board Composition and Balance Principle 2: There should be a strong and independent element on the Board, which is able to exercise objective judgment on corporate affairs independently, in particular, from the management. No individual or small group of individuals should be allowed to dominate the Board s decision making. The Board comprises six directors of which two are independent directors. They are Mr. Lim Lee Meng and Mr. Chiu Jin Yi, Cheyne. The criterion of independence is based on the definition given in the Code. The Board considers an independent director as one who has no relationship with the Group, its related companies or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director s independent judgment of the conduct of the Group s affairs. With one-third of the directors deemed to be independent, the Board is able to exercise independent judgment on corporate affairs and provide the management with a diverse and objective perspective on issues. Furthermore, the Board will be able to interact and work with the management through a robust exchange of ideas and views to help shape the Group s strategic direction. The composition of the Board is reviewed on an annual basis by the NC to ensure that the Board has the appropriate mix of expertise and experience, and collectively possess the necessary core competencies for effective functioning and informed decision-making. When a vacancy arises under any circumstance, or where it is considered that the Board would benefit from the services of a new director with particular skills, the NC, in consultation with the Board, determines the selection criteria and selects candidates with the appropriate expertise and experience for the position. The Board then nominates the most suitable candidate who is only appointed to the Board by the Group at a general meeting. The Board and NC are of the view that the current composition of six directors is appropriate taking into account the scope and nature of the operations of the Group.

23 EUROPTRONIC GROUP LTD AR CORPORATE GOVERNANCE REPORT Chairman and Chief Executive Officer Principle 3: There should be a clear division of responsibilities at the top of the Group - the working of the Board and the executive responsibility of the Group s business - which will ensure a balance of power and authority, such that no one individual represents a considerable concentration of power. The Board is of the view that it is in the best interests of the Group to adopt a single leadership structure, whereby the CEO and chairman of the Board is the same person, so as to ensure that the decision-making process of the Group would not be unnecessarily hindered. The Group s Executive Chairman and CEO, Mr. Huang Shih-An, plays an instrumental role in developing the business of the Group and provides the Group with strong leadership and vision. His responsibilities include the charting and reviewing of its corporate directions and strategies, which cover areas of marketing and strategic alliances. All major decisions made by the Executive Chairman and CEO are reviewed by the AC. His performance and appointment to the Board is reviewed periodically by the NC and his remuneration package is reviewed periodically by the RC. Each NC and RC comprises independent directors as majority. The Board believes that the independent directors have demonstrated high commitment in their role as directors and have ensured that there is a good balance of power and authority. As such, the Board believes that there are adequate safeguards in place against an uneven concentration of power and authority in a single individual. Board Membership Principle 4: There should be a formal and transparent process for the appointment of new directors to the Board. As a principle of good corporate governance, all directors should be required to submit themselves for re-nomination and re-election at regular intervals. Nominating Committee ( NC ) The NC was established in December 2002 and comprises three members, namely, Mr. Chiu Jin Yi, Cheyne (Chairman), Mr. Lim Lee Meng and Mr. Chen Ming-Hsing (appointed on January 13, 2005 to replace Mr. Hu Lee Ren, who resigned on the same date). Mr. Chiu Jin Yi, Cheyne (Chairman) and Mr. Lim Lee Meng are independent directors. The NC s functions are to develop and maintain a transparent and formal process for the appointment of new directors, the recommendations of directors who are due for retirement by rotation to seek re-election at general meeting, review and evaluation of the Board s performance and the determination of each director and the Board as a whole.

24 22 CORPORATE GOVERNANCE REPORT The directors who are retiring and who, being eligible, will offer themselves for re-election at the forthcoming annual general meeting are named below: Name of director Date of first appointment Date of last re-election Director due for re-election Mr. Huang Shih-An November 18, 2000 April 29, Mrs. Huang Chuang Shueh-Ou November 18, 2000 April 29, Mr. Chen Ming-Hsing November 8, 2002 May 7, 2003 Retiring under Article 89 Mr. Chiu Jin Yi, Cheyne March 12, 2002 May 7, 2003 Retiring under Article 89 Mr. Lim Lee Meng March 12, 2002 May 7, Mr. Hu Lee Ren (*) March 12, 2002 May 7, Mr. Chen Wan Shou, Arthur January 13, Retiring under Article 88 (*) Resigned on January 13, 2005 Other key information on the individual directors of the Company is set out in Pages 8 and 9 of this Annual Report. Their shareholdings in the Company are also disclosed on Page 32 of the Report of the Directors. None of the directors hold shares in the subsidiaries of the Company. Board Performances Principle 5: There should be a formal assessment of the effectiveness of the Board as a whole and the contribution by each director to the effectiveness of the Board. The NC has established a process for assessing the effectiveness of the Board as a whole and for assessing the contribution of each individual director. It considers a set of quantitative and qualitative performance criteria in evaluating the Board s performance. The performance criteria for the Board evaluation includes an evaluation of the size and composition of the Board, the Board s access to information, accountability, Board processes, Board performance in relation to discharging its principal responsibilities in terms of the financial indicators as set out in the Code. The Board and the NC have endeavoured to ensure that directors appointed to the Board possess the experience, knowledge and skills critical to the Group s business, so as to enable the Board to make sound and well-considered decisions. In FY2004, the NC reviews the Board s performance, with inputs from other members of the Board. The findings were analysed and discussed with a view of implementing certain recommendations to further enhance the effectiveness of the Board.

25 EUROPTRONIC GROUP LTD AR CORPORATE GOVERNANCE REPORT Directors Attendance at Board and Board Committee Meetings Audit Nominating Remuneration Board Committee Committee Committee No. of No. of No. of No. of No. of No. of No. of No. of meetings meetings meetings meetings meetings meetings meetings meetings Name of Directors held attended held attended held attended held attended Mr. Huang Shih-An Mrs. Huang Chuang Shueh-Ou Mr. Chen Ming-Hsing Mr. Chiu Jin Yi, Cheyne Mr. Lim Lee Meng Mr. Hu Lee Ren (*) Mr. Chen Wan Shou, Arthur (**) (*) Resigned on January 13, 2005; (**) Appointed on January 13, 2005 The directors submit themselves for re-nomination and re-election at regular intervals of at least once every three years. Pursuant to Article 89 of the Group s Articles of Association, one-third of the directors are to retire from office by rotation at the Group s Annual General Meeting ( AGM ). In addition, Article 88 of the Group s Article of Association provides that a director appointed during the year will hold office only until the next AGM and will be eligible for re-election. Assess to Information Principle 6: In order to fulfill their responsibilities, Board members should be provided with complete, adequate and timely information prior to Board meetings and on an on-going basis. From time to time, directors are furnished with detailed information concerning the Group to enable them to be fully aware and understand the decisions and actions of the Group s executive management. All directors have unrestricted access to the Group s records and information. Detailed Board papers are prepared for each Board meeting and are normally circulated a week in advance of each meeting. The Board papers include sufficient information from the management on financial, business and corporate issues to enable the directors to be properly briefed on issues to be considered at Board meetings. Analysts reports on the Group are forwarded to the directors on an on-going basis as and when received. The directors have also been provided with the phone numbers and particulars of the Group s senior management and the Group Secretary to facilitate access. The Group Secretary attends all Board meetings and is responsible to ensure that established procedures, all the relevant statutes, and regulations that are applicable to the Group are complied with. Each director has the right to seek independent legal and other professional advice concerning any aspect of the Group s operations and undertakings in order to fulfill their duties and responsibilities as directors. Any expense incurred in this regard shall be borne by the Group.

26 24 CORPORATE GOVERNANCE REPORT (B) Remuneration Matters Procedures for Developing Remuneration Policies Principle 7: There should be a formal and transparent procedure for fixing the remuneration packages of individual directors. No director should be involved in deciding his own remuneration. Remuneration Committee ( RC ) The RC was established in December 2002 and comprises three members, namely, Mr. Chiu Jin Yi, Cheyne (Chairman), Mr. Lim Lee Meng and Mr. Chen Ming-Hsing (appointed on January 13, 2005 to replace Mr. Hu Lee Ren, who resigned on the same date). Mr. Chiu Jin Yi, Cheyne (Chairman) and Mr. Lim Lee Meng are independent directors. The RC reviews and approves recommendations on remuneration policies and packages for executive directors, other directors, CEO and employees related to directors and substantial shareholders. The review covers all aspects of remuneration, including but not limited to directors fees, salaries, allowances, bonuses, options and benefit-in-kind. The review of remuneration packages takes into consideration the long-term interests of the Group, industry standards, and ensures that the interests of the executive directors align with that of shareholders. The RC s recommendations are made in consultation with the Chairman of the Board and submitted for endorsement by the entire Board. Employees Share Option Committee ( ESOC ) The ESOC is responsible for the administration of the Europtronic Employees Share Option Scheme (the Share Option Scheme ), which is opened to confirmed employees, associates of substantial shareholders and any director (including non-executive and independent directors) except for those who are our substantial shareholders or any employee who has been selected by ESOC. Details of the Share Option Scheme are set out on pages 33 and 34 of the Report of the Directors. Any matter pertaining or pursuant to the Share Option Scheme and any dispute and uncertainty as to the interpretation of the Share Option Scheme, any rule, regulation or procedure thereunder or any rights under the Share Option Scheme shall be determined by the ESOC. The Group s remuneration policy is to provide compensation packages at market rates which reward good performance and attract, retain and motivate directors. Given that no share options were offered and granted by the ESOC in FY2004, no meetings have been held during the year under review. Level and Mix of Remuneration Principle 8: The level of remuneration should be appropriate to attract, retain and motivate the directors needed to run the Group successfully but companies should avoid paying more for this purpose. A proportion of the remuneration, especially that of executive directors, should be linked to performance. In setting remuneration packages, the Group takes into account pay and employment conditions within the same industry and in comparable companies, as well as the Group s relative performance and the performance of individual directors.

27 EUROPTRONIC GROUP LTD AR CORPORATE GOVERNANCE REPORT The independent directors receive directors fees, in accordance with their contributions, taking into account factors such as effort and time spent, responsibilities of the directors and the need to pay competitive fees to attract, retain and motivate the directors. Directors fees are recommended by the Board for approval at the Company s AGM. The annual reviews of the compensation of the aforementioned individual are carried out by the RC to ensure that their remuneration commensurate with their performance, giving due regard to the financial and commercial health and business needs of the Group. Their performance are reviewed periodically by the RC and the full Board. The remuneration for the executive directors and the key senior executives comprise a basic salary component and a variable component which is the annual bonus, based on the performance of the Group as a whole and their individual performance. Disclosure of Remuneration Principle 9: Each Group should provide clear disclosure of its remuneration policy, level and mix of remuneration, and the procedure for setting remuneration, in the Group s annual report. On March 12, 2002, the Company entered into a separate service agreements with the executive directors, Messrs Huang Shih-An and Huang Chuang Shueh-Ou. The service agreements do not have an expiry date as they were entered prior to the Company admitted in the SGX-ST on April 5, 2002 but may be terminated by either party giving not less than six (6) months notice in writing to the other. The service agreements may also be terminated if any of the executive directors commits a breach of the service agreements, such as being convicted of an offence involving fraud or dishonesty or being adjudicated bankrupt. For competitive reasons, the Group is not disclosing each individual director s remuneration. Instead, we are disclosing the band of remuneration in FY2004 in the compensation table below: Remuneration Band No. of Directors Salary (%) Profit Sharing (%) Directors fees (%) Total (%) Above S$500, S$250,000~S$500, Below S$250, Remuneration of Employees Related to Directors and Substantial Shareholders and Top 5 Key Executives During FY2004, we have 5 remunerated employees who are related to our Directors and substantial shareholders. They are: Mr. Lin Huan-Tang (resigned on October 20, 2004), Mr. Huang Hsuan-Chin, Ms. Huang Chung-Huei, Ms. Huang Yun-Ju, and Mr. Huang Chien-Hung, all of whom are executive officers. The basis of determining the remuneration of these related employees is the same as the basis of determining the remuneration of other unrelated employees. For the year under review, the remuneration of the related employees is below S$150,000.

28 26 CORPORATE GOVERNANCE REPORT Adjustments to the remuneration packages for the related employees are reviewed annually by the RC to ensure that they are in line with our staff remuneration guidelines and commensurate with their job scope and level of responsibility. In the event that a member of the RC is related to the employee under review, he will abstain from the review. The Group s top 5 key executives (who are not directors of the Company) are: Mr. Yang Chun, Ms. Tan Lay See, Mr. Huang Chien-Hung, Mr. Hsieh Min-Tsun and Mr. Albert Chee Min Khun. The table below shows the ranges of gross remuneration received by these top 5 key executives of the Group: Remuneration band FY2004 FY2003 S$250,000~S$500, Below S$250, (C) Accountability and Audit Accountability Principle 10: The Board is accountable to the shareholders while the management is accountable to the Board. In presenting the quarterly, half-yearly and full-year announcements and annual financial statements to shareholders, it is the aim of the Board to provide the shareholders with a detailed analysis, explanation and assessment of the Group s financial position and prospects. In addition, the management currently provides to the executive directors monthly management accounts, which show the Group s performance, position and prospects. The Board is of the view that this arrangement is sufficient. Audit Committee ( AC ) Principle 11: The Board should establish an AC with written terms of reference which clearly set out its authority and duties. The AC was established in March 2002 comprising two independent directors and one non-executive director. The AC is chaired by Mr. Lim Lee Meng and its members are Mr. Chiu Jin Yi, Cheyne and Mr. Chen Ming-Hsing (appointed on January 13, 2005 to replace Mr. Hu Lee Ren, who resigned on the same date). The AC meets regularly to discuss with the Group s external auditors and its executive management to review accounting, auditing and financial reporting matters so as to ensure that an effective control environment is maintained in the Group. The AC also monitors proposed changes in accounting policies, reviews the internal audit functions and discusses the accounting implications of major transactions. In addition, the AC advises the Board regarding the adequacy of the Group s internal controls and the contents and presentation of its reports.

29 EUROPTRONIC GROUP LTD AR CORPORATE GOVERNANCE REPORT Specifically, the AC: reviews the audit plans and scope of audit examination of the internal and external auditors and evaluates their overall effectiveness through regular meetings with each group of auditors; reviews the adequacy of the internal audit function; determines that no restrictions are being placed by the management upon the work of the internal and external auditors; evaluates the adequacy of the internal control systems of the Group by reviewing written reports from the internal and external auditors, and the management s responses and actions to correct any deficiencies; evaluates the adherence to the Group s administrative, operating and internal accounting controls; reviews the quarterly, half-yearly and full year announcement and annual financial statements to shareholders before submission to the Board for adoption; ensures the nature and extent of non-audit services provided by external auditors would not affect their independence as external auditors of the Group; reviews interested person transactions to ensure that they are on normal commercial terms and not prejudicial to the interests of the Group or its shareholders; and considers other matters as requested by the Board. The AC is authorised to investigate any matter within its terms of reference and has full access to the management and resources, which are necessary to enable it to discharge its functions properly. It also has full discretion to invite any executive director or executive management to attend its meetings. Annually, the AC meets with the internal auditors and the external auditors separately, without the presence of the management. This is to review the adequacy of audit arrangements, with particular emphasis on the observations of the auditors, the scope and quality of their audits and the independence and objectivity of the auditors. The AC has conducted an annual review of the volume of non-audit services to satisfy itself that the nature and extent of such services will not prejudice the independence and objectivity of the auditors before confirming their re-nomination. Internal Control Principle 12: The Board should ensure that the management maintains a sound system of internal controls to safeguard the shareholders investments and the Group s assets. The Board acknowledges that it is responsible for the overall internal control framework, but recognises that no cost effective internal control system will preclude all errors and irregularities, as a system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can provide only reasonable and not absolute assurance against material misstatement or loss. Risk assessment and evaluation takes place as an integral part of the annual strategic planning cycle. Having identified the risks to the achievement of their strategic objectives, each business is required to document the management and mitigating actions in place and proposed in respect of each significant risk.

30 28 CORPORATE GOVERNANCE REPORT During the financial year, the AC, on behalf of the Board, has reviewed the effectiveness of the various systems put in place by management and is satisfied that there are adequate internal controls in the Group. Internal Audits Principle 13: The Group should establish an internal audit function that is independent of the activities it audits. The Group has outsourced the internal function to Nexia Tan & Sitoh with effect from February The Group has conducted two internal audit activities during FY2004 and the internal auditors reports were submitted to the AC to review and approve. The internal auditor, Nexia Tan & Sitoh, has adopted the standards for Professional Practice of Internal Auditing set by The Institute of Internal Auditors. (D) Communications with Shareholders Communication with Shareholders Principle 14: Companies should engage in regular, effective and fair communication with shareholders. Greater Shareholder Participation Principle 15: Companies should encourage greater shareholder participation at AGMs, and allow shareholders the opportunity to communicate their views on various matters affecting the Group. The Group does not practice selective disclosure. In line with continuous disclosure obligations of the Group pursuant to the SGX-ST s Listing Rules and the Companies Act, the Board s policy is that all shareholders should be equally and timely informed of all major developments that impact the Group. Information is communicated to shareholders on a timely basis through: Annual reports that are prepared and issued to all shareholders. The Board makes every effort to ensure that the annual report includes all relevant information about the Group, including future developments and other disclosures required by the Companies Act and Singapore Financial Reporting Standards; Quarterly, half-yearly and full year announcements containing a summary of the financial information and affairs of the Group for the period are published through the MASNET (replaced by SGXNet from November 2004) and news releases; Notices of and explanatory memorandums for annual general meetings and extraordinary general meetings; Analyst briefings for the Group s quarterly, half-yearly and full year results as well as other briefings, as appropriate; Press releases on major developments of the Group; Disclosures to the SGX-ST; and The Group s website at at which shareholders can access information on the Group. The website provides, inter alia, corporate announcements, press releases, annual reports, and profiles of the Group.