Company Reflects the Acquisition of the Remaining 35% Interest in Starway
Management Limited Subsidiary
HONG KONG, Aug. 23 /Xinhua-PRNewswire/ -- China Energy Savings Technology, Inc. , a leading provider of energy management products in China, announced today results for its third fiscal quarter for the period ended June 30, 2005. The Company had revenue of $9.6 million compared to revenue of $13.7 million for the fiscal 2004 third quarter. China Energy Savings had net income of $4.5 million, or $0.18 per diluted share, compared to net income of $4.04 million, or $0.23 per diluted share in the fiscal 2004 third quarter. The fiscal 2005 third quarter results include a one-time non- cash reduction in revenue of $2.1 million that was caused by the Company taking a conservative approach to discount its notes receivable from customers. Results were also impacted by the Company's decision to pursue energy-saving sharing agreements with its customers, which provide the Company recurring revenue over a five to seven year time period, but there is an immediate decrease in the up-front revenue, gross profit and net income, compared to outright equipment sales. The results include the acquisition of the 35% interest in Starway Management Limited ("Starway") that the Company did not previously own.
For the nine months ended June 30, 2005, the Company had revenue of $32.5 million compared to $34.1 million during the same nine months in fiscal 2004. China Energy Savings generated net income of $12.8 million for the first nine months of fiscal 2005, or $0.62 per diluted share, compared to net income of $8.2 million, or $0.46 per diluted share in the comparable year-earlier period. Revenue for the nine-month period declined when compared to the same period in fiscal 2004, while net income increased as 2004 revenue was generated solely from equipment sales, while current fiscal year's revenue was derived primarily from energy-saving sharing agreements. As of June 30, 2005, the Company had its strongest balance sheet ever, with cash and cash equivalents of $24.6 million, compared to $18.4 million at the end of its fiscal year on September 30, 2005.
On July 12, 2005, the Company issued a press release where it announced preliminary results for its operating subsidiary Starway for the quarter ended June 30, 2005, where it expected to report quarterly revenue of approximately $12.17 million and net income of approximately $7.35 million, resulting in fiscal third quarter earnings per diluted share of $0.30. Subsequently, while China Energy Savings Technology was consolidating its financial statements with its subsidiaries, it elected to make a one-time adjustment for revenue to be recognized under its energy-saving sharing agreements, discounting certain future notes receivables. As a result, the Company will recognize the revenue under GAAP over a longer period of time. The Company has notes receivable generated through energy-saving contracts of $6.6 million in 2006, $6 million in 2007, $4.5 million in 2008, $4 million in 2009 and $2.8 million in 2010.
On February 1, 2005, the Company acquired the 35% interest in Starway that it did not previously own from Sky Beyond Investments Limited by issuing a total of 7,807,569 shares of common stock. Sky Beyond had acquired the 35% interest in Starway from the Hong Kong-listed company Golden Resorts Group Limited. However, the Company subsequently learned that the stock sale between Sky Beyond and Golden Resorts Group Limited was subject to approval by the shareholders of Golden Resorts. On July 28, 2005, the shareholders of Golden Resorts approved the sale of the Starway interest to Sky Beyond. The second quarter financial statements of the Company did not record the additional earnings and additional paid in capital attributed to the acquisition until the transaction was approved. Since the transaction has been approved, the Company has reflected the earnings and additional paid in capital from February 1, 2005 in the financial statements of June 30, 2005 and will amend its quarterly results for March 31, 2005 to reflect the increased earnings as a result of the acquisition being completed.
Since the acquisition by China Energy Savings of the 35% interest in Starway has been confirmed with an effective date of February 1, 2005, the Company held a 100% interest in Starway, effective as of that date. On a pro forma basis, assuming the acquisition as of that date, the Company would have had pro forma revenue of $32.5 million, resulting in net income of $16.2 million, or $0.66 per diluted share for the first nine months of its fiscal year. The Company plans to restate its March, 2005 and June, 2005 quarterly results to effect the consummation of the transaction.
"With the acute power shortage and the strong endorsement of the government of energy savings, we continue to see unprecedented demand for our energy saving products," said Sun Li, Chairman and CEO of China Energy Savings Technology. "We are now in our strongest quarter of the year in which most of the revenue will come from energy-sharing agreements, as energy use in China soars during the summer months. With electricity costs rising significantly, large corporate customers and municipalities are increasingly turning to us for our energy management solutions. Our decision to focus principally on energy-sharing agreements instead of outright equipment sales, while impacting our earnings in the near-term, will generate a highly predictable recurring revenue stream which will result in increased long-term profitability."
China Energy Savings believes pro forma non-GAAP reporting, giving effect to the adjustments for the acquisition of Starway at the beginning of it is fiscal year, provides meaningful information and therefore uses it to supplement its GAAP reporting. China Energy Savings has chosen to provide this supplemental information to investors, analysts and other interested parties to enable them to perform additional analyses of operating results and to illustrate the results of operations giving effect to such pro forma non-GAAP adjustments. The pro forma non-GAAP financial information presented herein should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.
About China Energy Savings Technology
China Energy Savings Technology, Inc., through its ownership interest in Starway Management Limited engages in the development, manufacture, sale, and distribution of energy-saving products for use in commercial and industrial settings in the People's Republic of China. According to test reports by various PRC authorities including the National Center of Supervision & Inspection on Electric Light Source Quality (Shanghai) issued in September 2002, Shenzhen Academy of Metrology & Quality Inspection issued in December 2002 and approved by the State Quality Supervision Inspection Department, the energy saving products of Starway's subsidiaries may provide energy saving rates ranging from approximately 25% to 45%. The energy saving projects conducted by Starway's subsidiaries mostly relate to public or street lighting systems, government administration units, shopping malls, supermarkets, restaurants, factories and oil fields, etc. There are small and large-scaled projects: the small-scaled projects relate to restaurants, shops, small arcades, offices and households through the sale of equipment, and the large- scaled projects relate to large shopping malls, supermarkets, factories and public bodies through the provision and installation of equipment over a term usually extended for years.
Safe Harbor Statement
As a cautionary note to investors, certain matters discussed in this press release may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such matters involve risks and uncertainties that may cause actual results to differ materially, including the following: changes in economic conditions; general competitive factors; the Company's ability to execute its business model and strategic plans; and the risks described from time to time in the Company's SEC filings.
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