As filed with the Securities and Exchange Commission on July 3, 1997
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM F-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
ASIA ELECTRONICS HOLDING CO. INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
British Virgin Islands 3679 13-3932739
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)
</TABLE>
<TABLE>
<S> <C>
c/o Harney Westwood Richard A. Peters
& Riegels Harney Westwood
Craigmuir Chambers & Riegels
P.O. Box 71 Craigmuir Chambers
Road Town, Tortola P.O. Box 71
British Virgin Islands Road Town, Tortola
(809) 494-2233 British Virgin Islands
(Address, including zip code, and telephone number, (809) 494-2233
including area code, of registrant's principal (Name, address, including zip code and telephone number
executive offices) including area code, of agent for service)
</TABLE>
---------------
Copies to:
Edward W. Kerson, Esq. Shari K. Krouner, Esq.
Proskauer Rose LLP Kramer, Levin, Naftalis & Frankel
1585 Broadway 919 Third Avenue
New York, New York 10036-8299 New York, New York 10022
(212) 969-3000 (212) 715-9100
---------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
---------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
=================================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Aggregate Offering Amount of
Securities to be Registered Registered Per Share or Note(1) Price(1) Registration Fee
- ---------------------------------------------------- -------------- ---------------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per share (2) 4,600,000 $ 8.50 $39,100,000.00 $11,848.47
- ---------------------------------------------------- ------------ -------- --------------- -----------
Representative's Options (3) 330,000 $ 0.001 $ 330.00 $ 0.09
- ---------------------------------------------------- -------------- -------- --------------- -----------
Shares underlying the Representative's Options (4) 330,000 $10.20 $ 3,366,000.00 $ 1,019.99
- --------------------------------------------------- ---------- -------- --------------- -----------
Advisor Options (3) 70,000 $ 0.001 $ 70.00 $ 0.02
- ---------------------------------------------------- -------------- -------- --------------- -----------
Shares underlying the Advisor Options (4) 70,000 $10.20 $ 714,000.00 $ 216.36
- ---------------------------------------------------- ------------ -------- --------------- -----------
Total -- -- $43,180,400.00 $13,084.96
================================================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(a) under the Securities Act, solely for the
purpose of calculating the registration fee.
(2) Includes an aggregate of 600,000 shares of Common Stock that may be sold in
this Offering pursuant to the Underwriters' over-allotment option. See
"Underwriting."
(3) To be issued upon completion of this Offering.
(4) Pursuant to Rule 416, this Registration Statement also covers such
indeterminable additional shares of Common Stock as may become issuable as
a result of future anti-dilution adjustments in accordance with the terms
of the Representative's Options and Advisor Options, as described in the
Prospectus.
---------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 3, 1997
PROSPECTUS
ASIA ELECTRONICS HOLDING CO. INC.
4,000,000 Shares
Common Stock
-----------
Asia Electronics Holding Co. Inc. ( the "Company") hereby offers 4,000,000
shares of Common Stock, par value $.01 per share (the "Common Stock"), of the
Company (the "Offering"). Prior to this Offering, there has been no public
market for the Common Stock, and there can be no assurance such a market will
develop or be sustained after this Offering. It is currently anticipated that
the initial offering price for the Common Stock will be between $6.50 and $8.50
per share. For information regarding the factors to be considered in
determining the initial public offering price of the Common Stock, see
"Underwriting." The Company is applying to have the Common Stock quoted on The
Nasdaq National Market under the symbol "AEHC."
The Common Stock involves a high degree of risk and immediate substantial
dilution. See "Risk Factors" beginning on page 7 and "Dilution." For a
discussion of certain matters relating to the foreign status of the Company,
its officers and most of its directors, see "Enforceability of Civil
Liabilities and Certain Foreign Issuer Considerations."
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
===============================================================================
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
- --------------------------------------------------------------------------------
Per Share ...... $ $ $
- --------------------------------------------------------------------------------
Total(2) ...... $ $ $
================================================================================
(1) Excludes a non-accountable expense allowance payable by the Company to
Barington Capital Group, L.P., the representative of the Underwriters (the
"Representative"), in an amount equal to 3% of the gross proceeds of this
Offering, and the value of five-year options (the "Representative's
Options") to purchase 330,000 shares of Common Stock at an exercise price
equal to 120% of the initial public offering price being issued to the
Representative. The Company has agreed to indemnify the several
Underwriters against certain civil liabilities, including liabilities
under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $ ,
including the Representative's non-accountable expense allowance.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
600,000 additional shares of Common Stock at the Price to Public, less
Underwriting Discount, to cover over-allotments, if any. If the Underwriters
exercise this option in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters
and subject to the right to reject any order in whole or in part, and subject
to certain other conditions as set forth in the Underwriting Agreement between
the Company and the Underwriters. It is expected that the delivery of
certificates representing the shares of Common Stock will be made against
payment therefor at the offices of the Representative, New York, New York or
through the facilities of The Depositary Trust Company, on or about August ,
1997.
-----------
Barington Capital Group, L.P.
The date of this Prospectus is August , 1997.
[red herring running down left-hand side of page]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
[end red herring]
<PAGE>
[PICTURES]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE OR MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. SEE "UNDERWRITING." IN CONNECTION WITH THIS
OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ALSO ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL
MARKET. SEE "UNDERWRITING."
The Company intends to furnish holders of its Common Stock annual reports that
include audited consolidated financial statements, and may furnish them
quarterly financial reports for each of the first three quarters that contain
unaudited consolidated financial statements. The Company has agreed with the
Representative in the Underwriting Agreement to file its annual reports with
the Securities and Exchange Commission and publicly release quarterly financial
reports within the same time periods as United States companies are required to
file such reports with the Securities and Exchange Commission.
<PAGE>
Unless otherwise indicated, all information in this Prospectus (i) assumes
no exercise of the Underwriters' over-allotment option, the Representative's
Options to purchase an aggregate of 330,000 shares of Common Stock, options to
purchase an aggregate of 70,000 shares of Common Stock to be issued to certain
advisors to the Company (the "Advisor Options") and options to purchase up to
300,000 shares of Common Stock that may be granted under the Company's 1997
Employee Stock Option Plan, (ii) reflects transactions having the effect of a
97-for-one stock split effected on June 24, 1997 and (iii) assumes the
acquisitions of 70% of the equity of Yantai Daewoo Electronics Components Co.,
Ltd. ("Yantai") and 90% of the equity of Xianyang Dnon Tech Special Electro
Technique Co., Ltd. ("Dnon Tech") have been consummated (the "Acquisitions").
Unless the context otherwise requires, all references to the Company shall be
deemed to include the Company and its subsidiaries or its predecessors,
including Yantai and Dnon Tech.
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed information
and financial statements and the notes to the financial statements appearing
elsewhere in this Prospectus.
The Company
General
Asia Electronics Holding Co. Inc. (the "Company") is a British Virgin
Islands company that develops and manufactures deflection yokes for sale to
manufacturers of color television sets and computer monitors. Deflection yokes
are electronic devices attached to color picture tubes ("CPTs") in television
sets and color display tubes ("CDTs") in computer monitors. Deflection yokes
use electro-magnetic forces to aim (i.e., deflect) red, green and blue light
beams at the screen in the front of the CPT or CDT. When the light beams
converge, various levels of intensity within each beam create a picture on the
screen, which varies in movement, color and shape according to the video
signal. In addition to aiming light beams, deflection yokes ensure that the
red, green and blue light beams converge at each point on the screen
simultaneously, thereby causing clarity and focus. The Company believes it is
the largest independent manufacturer of deflection yokes in the People's
Republic of China ("China") and the third largest in the world.
All the Company's sales are to original equipment manufacturers ("OEMs"),
which integrate the Company's deflection yokes into finished goods or remarket
them to other OEMs. The Company's customers include Daewoo Corporation and its
affiliates ("Daewoo"), Sanyo Electric Co., Ltd. and its affiliates ("Sanyo"),
Kanematsu USA, Inc., Sharp-roxy Electronics Corporation, PT. Tosummit
Electronic Devices, Toshiba Corporation ("Toshiba"), India Samtel Color Limited
and IRICO Group ("IRICO").
Since 1994, the Company has experienced substantial growth, both in unit
sales and net sales. On a pro forma consolidated basis, the number of
deflection yokes sold by the Company has increased from approximately 1.6
million units in 1994 to approximately 3.4 million units in 1995 to
approximately 5.2 million units in 1996, and net sales have increased from
approximately $8.3 million in 1994 to approximately $16.5 million in 1995 to
approximately $26.7 million in 1996. This represents a compounded annual growth
rate of approximately 80.0% both in unit sales and in net sales. The Company's
strong growth has continued into the first quarter of 1997, with unit sales of
approximately 1.5 million units for the three months ended March 31, 1997,
compared to approximately 0.7 million units for the three months ended March
31, 1996, and net sales of approximately $8.6 million for the three months
ended March 31, 1997, compared to approximately $3.5 million for the three
months ended March 31, 1996. The Company believes such growth is a result of
its ability to manufacture high quality products on a cost competitive basis
and the trend of OEMs to outsource labor-intensive components of their
manufacturing operations.
Industry
Demand for deflection yokes is directly linked to the demand for cathode
ray tubes ("CRTs"), which are used in both television sets (CPTs) and computer
monitors (CDTs). According to a February 1997 report by Corning Incorporated
(the "Corning Report"), the market for television sets is projected to grow at
a compounded annual rate of 7.1% through the year 2000 and the market for
computer monitors is projected to grow at a compounded annual rate of 19.3%
through the year 2000. According to the Corning Report, China's share of world
CPT and
3
<PAGE>
CDT production is projected to increase from 16.1 million units in 1996 to 39.9
million units in 2000, which represents a compounded annual growth rate of
approximately 26%.
China emerged in the world electronics industry in the 1980s, especially
for products for which the manufacturing process is labor intensive and not
readily subject to automation. Although most major television manufacturers,
such as Daewoo, Toshiba, Matsushita Electric Industrial Corp. ("Matsushita"),
Sony Corporation ("Sony"), Sanyo, Philips Electronics N.V. ("Philips"), Sharp
Corp. ("Sharp") and Samsung Group ("Samsung"), continue to manufacture
deflection yokes to some extent, the Company believes there is a trend among
OEMs to outsource the more labor-intensive segments of their manufacturing
operations. The Company believes the relatively low labor cost in China and the
difficulty of automating significant portions of the manufacturing process for
deflection yokes afford the Company an advantage in being able to capture
additional market share in the deflection yoke industry.
The Company believes that Murata Manufacturing Co. Ltd. ("Murata"), a
Japanese corporation engaged primarily in the business of manufacturing ceramic
capacitors and other electronic components with fiscal 1997 revenues of $2.4
billion, has been the largest manufacturer in the world of deflection yokes for
sale to unaffiliated third parties, producing approximately 10 million units
per year. In April 1997, Murata announced it was selling its deflection yoke
manufacturing facility in Mexico to Totoku Electric Co., Ltd. ("Totoku"), a
Japanese electronics company that manufactures CRTs. The Company believes
Murata intends to exit the deflection yoke business. The Company believes
Murata's deflection yoke business represents approximately 3% of Murata's
annual revenues (or approximately $85 million).
Strategy
The Company's goal is to use its manufacturing expertise and low
manufacturing costs to become the largest independent manufacturer of
deflection yokes in the world. To accomplish this goal, the Company's strategy
is to:
[bullet] Expand its production capacity to meet existing and expected
demand. The Company is expanding its production capacity and
intends to use approximately $15.5 million of the net proceeds of
this Offering to expand capacity further. With the additional
production capacity, the Company will be able to satisfy the
projected growth in demand for deflection yokes, both for
television sets and computer monitors. The Company is expanding
production capacity to accommodate its recent and anticipated
growth. In that connection, the Company had backlog at March 31,
1997 of approximately $30.0 million, compared to backlog at March
31, 1996 of approximately $20.0 million. The Company's planned
expansion will result in total production capacity of
approximately 12.8 million units, compared to total production
capacity of approximately 6.1 million units at the end of 1996.
[bullet] Focus production expansion on higher margin products, such as
deflection yokes for larger screen televisions. The Company
currently manufactures deflection yokes for 14", 20" and 25" CPT
models. The Company's planned expansion will be aimed at
manufacturing the higher margin products, including deflection
yokes for larger screen televisions and for CDTs. Gross profit
margins for deflection yokes for 14" and 20" models generally
average between 10-15%, while gross profit margins for deflection
yokes for 21" (wide), 25" and 29" CPT models generally average
between 30-45%.
[bullet] Expand penetration of CDT market. The Company recently entered
the market for deflection yokes for computer monitors ("CDTs"),
and in 1996 produced approximately 93,000 units. Deflection yokes
for CDTs are more advanced than deflection yokes for CPTs in the
level of design complexity and engineering specifications of each
customer, due to the higher resolution of the display device. The
Company's planned expansion will result in a total annual
production capacity of approximately 2.2 million deflection yokes
for CDTs. The Company expects that margins for CDT products will
be comparable to those of the higher margin CPT products.
[bullet] Expand customer relationships. The Company plans to increase its
sales of deflection yokes by actively marketing its products to
OEMs with a view to adding new customers and developing
additional business from existing customers. The Company believes
its commitment to quality, service and competitive prices will
enable it to continue to forge strong customer relationships. The
Company plans to utilize its strong
4
<PAGE>
supplier relationship with Daewoo to build other strategic
supplier relationships. Recently, the Company has added such
customers as LG Shuguang Electronics Co. Ltd. ("LG Shuguang"),
Fujian Hitachi Television Co., Ltd. ("Fujian Hitachi") and Foshan
Thompson Color Picture Tube Company ("Foshan Thompson").
[bullet] Expand product development. The Company intends to develop other
deflection yoke technologies and to consider opportunities for
the development or acquisition of other products the Company
determines it can manufacture and sell in a cost-effective manner
by leveraging its manufacturing expertise and capacity.
History
The Company was incorporated in the British Virgin Islands in January
1996. In December 1996, the Company acquired 80% of the equity of each of
Xianyang Yongxin Electronics Co., Ltd. ("Yongxin") and Xianyang Daming
Electronics Co., Ltd. ("Daming"), which were established in February 1993 and
October 1992, respectively. Yongxin and Daming previously were members of
Xianyang Pianzhuan Group Corporation ("Pianzhuan Group"), which provides, at
cost, certain administrative and other management services to the Company, as
well as to approximately 20 other companies, including a number of
Chinese-foreign joint ventures. Du Qingsong ("Mr. Du"), the Company's Chairman
and Chief Executive Officer, also is the Chairman of Pianzhuan Group.
The Company has agreed to acquire 70% of the equity of Yantai Daewoo
Electronics Components Co., Ltd. ("Yantai") and 90% of the equity of Dnon Tech
Special Electronic Technical Co., Ltd. ("Dnon Tech"), each a Chinese-foreign
joint venture incorporated in China in 1993. Yantai, like Yongxin and Daming,
develops and manufactures deflection yokes. Dnon Tech manufactures, primarily
for Yongxin, Daming and Yantai, high quality enameled copper wire, which is the
principal raw material used in deflection yokes.
The Company's operating headquarters is located at 70 West Weiyang Road,
Xianyang, Shaanxi Province, People's Republic of China; its telephone number at
that address is (+86) 910 3320891. The Company's principal executive office is
located at c/o Harney Westwood & Riegels, Craigmuir Chambers, Road Town,
Tortola, British Virgin Islands; its telephone number at that address is (809)
494-2233.
This Offering
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Common Stock offered ........................ 4,000,000 shares
Common Stock outstanding:
Before this Offering(1) ..................... 4,850,000 shares
After this Offering(1)(2) .................. 8,850,000 shares
Use of Proceeds .............................. To expand manufacturing facilities; acquire Yantai and
Dnon Tech; expand research and product development
activities; develop the Company's own sales,
marketing and administrative capabilities; and for
general corporate purposes and working capital. See
"Use of Proceeds."
Proposed Nasdaq National Market Symbol ...... AEHC
</TABLE>
- --------------
(1) Does not include 300,000 shares of Common Stock reserved for issuance under
the Company's 1997 Employee Stock Option Plan.
(2) Does not include 330,000 shares of Common Stock reserved for issuance upon
exercise of the Representative's Options, or 70,000 shares of Common Stock
reserved for issuance upon exercise of the Advisor Options.
5
<PAGE>
Summary Unaudited Pro Forma Consolidated Financial Data
The following summary unaudited pro forma consolidated statement of income
and balance sheet data represent a consolidation of the statement of income and
balance sheet data of the Company and its subsidiaries for the periods and at
the dates indicated and assume that the Company had acquired Yongxin and Daming
(subsidiaries acquired in December 1996), as well as Yantai and Dnon Tech
(which are to be acquired contemporaneously with the closing of this Offering),
on January 1, 1996. The data do not purport to be indicative of the results
that would have been achieved, if the acquisitions of Yongxin, Daming, Yantai
and Dnon Tech had actually been consummated on January 1, 1996, or of the
results that may be achieved in the future. The data should be read in
conjunction with "Unaudited Pro Forma Consolidated Financial Information,"
"Selected Combined Financial Data of Yongxin and Daming," "Selected Combined
Financial Data of Yantai and Dnon Tech," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and the notes to the financial statements included elsewhere in this
Prospectus.
Unaudited Pro Forma Consolidated Statement of Income Data:
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Year Ended Three Months Ended
December 31, 1996 March 31,
------------------------ ------------------------------------------------
1996 1997
----------------------- ----------------------
(Amounts in thousands, except per share data)
(Unaudited)
RMB US$ RMB US$ RMB US$
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Net sales ........................... 221,181 26,663 28,805 3,472 71,233 8,587
Gross profit ........................ 58,710 7,078 5,148 621 17,385 2,096
Operating income ..................... 50,705 6,112 3,656 441 14,319 1,726
Net income ........................... 34,117 4,113 2,394 288 9,772 1,178
Pro forma net income per common
share .............................. $0.85 $0.06 $0.24
Pro forma weighted average number
of common shares outstanding ...... 4,850,000 4,850,000 4,850,000
</TABLE>
Unaudited Pro Forma Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
As of March 31, 1997(1)
-------------------------
(Amounts in thousands)
(Unaudited)
RMB US$
<S> <C> <C>
Working capital(2) ................. 216,220 26,065
Total assets ....................... 349,886 42,178
Short-term bank loans .............. 27,010 3,256
Total liabilities(3) .............. 63,852 7,697
Investors' equity ................. 252,601 30,450
</TABLE>
- --------------
(1) Adjusted to reflect the sale of 4,000,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $7.50 per share and
the receipt and application of the net proceeds therefrom, including the
consummation of the Acquisitions. See "Use of Proceeds."
(2) Represents current assets less current liabilities.
(3) Excludes negative goodwill of RMB 10,939,000 ($1,319,000) resulting from
the acquisitions of Yongxin and Daming, which became effective December
31, 1996.
6
<PAGE>
RISK FACTORS
Investment in the Common Stock offered by this Prospectus involves a high
degree of risk. Prospective investors should carefully consider, together with
the other information appearing in this Prospectus, the following factors,
among others, in evaluating the Company and its business, before purchasing the
Common Stock offered by this Prospectus.
Risks Relating to China
General
The economy of China differs from the economies of most countries
belonging to the Organization for Economic Cooperation and Development in such
respects as structure, government involvement, level of development, growth
rate, capital reinvestment, allocation of resources, rate of inflation and
balance of payments position. Since 1949, the economy of China has been a
planned economy subject to one- and five-year state plans adopted by central
Chinese government authorities and implemented, to a large extent, by
provincial and local authorities, which plans set out production and
development targets. Although the majority of productive assets in China are
still owned by the government, economic reform policies since 1978 have
emphasized decentralization and the utilization of market mechanisms in the
development of the Chinese economy. Such economic reform measures adopted by
the Chinese government may be inconsistent or ineffectual, and the Company may
not be able to benefit from all such reforms.
Since 1978, the Chinese government has been reforming, and it is expected
to continue to reform, China's economic systems. Many of the reforms are
unprecedented or experimental, and are expected to be refined and improved.
Other political, economic and social factors, such as political changes,
changes in the rates of economic growth, unemployment or inflation, or in the
disparities in per capita wealth between regions within China, could also lead
to further readjustment of the reform measures. This refining and readjustment
process may not always have a positive effect on the operations of the Company.
The Company's operating results may be adversely affected by changes in China's
political, economic and social conditions and by changes in policies of the
Chinese government, such as changes in laws and regulations (or the
interpretation thereof), measures that may be introduced to control inflation,
changes in the rate or method of taxation or the imposition of additional
restrictions on currency conversion. Although historically there have been
periods of political instability, and certain of the reform measures have from
time to time been readjusted, because of the broad support for the reform
process and because the economic system in China has already undergone
extensive changes as a result of the success of such reforms, the Company
believes that the basic principles underlying the reforms will continue to
provide the framework for China's economic system.
The Chinese economy has experienced rapid growth in recent years, with GNP
increasing at an average annual rate of 12.0% between 1991 and 1995. Such rapid
growth has been accompanied by imbalances in the Chinese economy, especially
with respect to inflation, which reached an annual rate of 21.7% in 1994. The
inflation rate decreased to 14.8% in 1995, and further decreased to 6.1% in
1996.
Economic Technology Development Zones
As part of its economic reform, China has designated certain areas,
including Weihai where the Company will have certain of its manufacturing
facilities, as Economic Technology Development Zones ("ETDZs"). Foreign
Investment Enterprises ("FIE") in these areas generally benefit from greater
economic autonomy and more favorable tax treatment in China. The Company plans
to install a new deflection yoke manufacturing facility in Weihai, which China
has designated as an ETDZ. Accordingly, changes in the policies or laws
governing ETDZs could have a material adverse effect on the Company.
Taxation on Reinvestment of Profits from Certain China Operations
Pursuant to Article 10 of the Income Tax Law of the People's Republic of
China for Enterprises with Foreign Investment and Foreign Enterprises, a
foreign investor of an enterprise with foreign investment that reinvests its
share of the profit obtained from the enterprise directly into that enterprise
(by increasing its registered capital, or uses the profit as capital investment
to establish other enterprises with foreign investment to operate for a period
7
<PAGE>
of not less than five years) is, subject to approval by the tax authorities of
an application filed by the investor, entitled to a refund of 40% of the income
tax already paid on the reinvested amount. If the investor withdraws its
reinvestment before the expiration of five years, it is required to repay the
refunded tax.
Pursuant to Article 81 of the Detailed Rules and Regulations on
Implementation of Income Tax Law of the People's Republic of China for
Enterprises with Foreign Investment and Foreign Enterprises, a full refund may
be granted to a foreign investor who directly re-invests in establishing or
expanding an export-oriented enterprise or technologically advanced enterprise
in China.
Risks Related to the Legal System of China
The Chinese legal system is based on written statutes and, unlike common
law systems, decided legal cases in China have little precedential value. In
1979, China began the process of developing its legal system by undertaking to
promulgate a comprehensive system of laws. On December 29, 1993, the National
People's Congress promulgated the Company Law of The People's Republic of China
(the "Company Law"), which became effective on July 1, 1994. In August 1994,
pursuant to the Company Law, the State Council issued the "PRC Special
Regulations on Overseas Offering and Listing of Shares by Joint Stock Limited
Companies" to regulate joint stock limited companies that offer and list their
shares overseas. The Company Law, the rules and regulations promulgated under
it and legal prescriptions relating to Chinese companies provide the core of
the legal framework governing the corporate behavior of companies, such as the
Company's subsidiaries, and their directors and shareholders. Because these
laws, regulations and legal requirements are relatively recent, their
interpretation and enforcement involve significant uncertainty.
Risks Related to Expansion
The Company is currently engaged in a number of construction and expansion
projects, the timing and cost of completion of which will depend on numerous
factors, including the cost and availability of financing (including foreign
exchange), the ability of the Company to obtain required business licenses or
approvals from relevant Chinese Government authorities and changes in general
economic conditions in China. There can be no assurance that the completion of
the Company's expansion plans will not be adversely affected by any of these
factors or by factors commonly associated with construction and expansion
projects, including shortages of supply or changes in prices of equipment or
materials, adverse weather conditions, natural disasters, accidents and
unforeseen circumstances and problems.
Government Control of Currency Conversion and Exchange Rate Risks
The Renminbi currently is not a freely convertible currency. The State
Administration for Exchange Control ("SAEC"), under the authority of the
People's Bank of China (the "PBOC"), controls the conversion of Renminbi into
foreign currency. Prior to January 1, 1994, Renminbi could be converted to
foreign currency through authorized institutions at official rates fixed daily
by the SAEC. Renminbi also could be converted at swap centers ("swap centers")
open to Chinese enterprises and foreign invested enterprises ("FIEs"), subject
to SAEC approval of each foreign currency trade, at exchange rates negotiated
by the parties for each transaction. Effective January 1, 1994, a unitary
exchange rate system was introduced in China, replacing the dual-rate system
previously in effect. In connection with the creation of a unitary exchange
rate, the Chinese government announced the establishment of an inter-bank
foreign exchange market, the China Foreign Exchange Trading System ("CFETS"),
and the phasing out of the swap centers. However, the swap centers have been
retained as an interim measure.
In general, under existing foreign exchange regulations, domestic
enterprises operating in China must price and sell their goods and services in
China in Renminbi. Any foreign exchange reserves received by such enterprises
must be sold to authorized foreign exchange banks in China. The Company's
subsidiaries currently retain a portion of their foreign exchange receipts in
foreign currency-denominated accounts with certain foreign exchange banks. The
amounts retained are within limits determined annually by the SAEC, based upon
the expected payment obligations in foreign currencies. Each subsidiary's
foreign currency receipts that are in excess of such limits are sold to
designated foreign exchange banks in China at exchange rates announced by the
PBOC. To satisfy foreign currency requirements, in excess of amounts retained
by a particular subsidiary, such subsidiary must, subject to applicable
regulations, purchase such foreign currency from the designated banks. In the
event such purchases were
8
<PAGE>
not permitted or were limited, the Company's subsidiaries would not be able to
acquire foreign currencies to satisfy such requirements.
Yongxin and Daming have FIE status and, upon consummation of the
Acquisitions, Yantai and Dnon Tech will automatically obtain FIE status. FIE
status enables a company to purchase foreign exchange for settlement of current
transactions (as defined in the applicable regulations) and pay dividends
without the prior approval of SAEC.
The value of the Renminbi is subject to changes in central government
policies and to international economic and political developments affecting
supply and demand in the CFETS market. Over the last five years, the Renminbi
has experienced a devaluation against most major currencies, and a significant
devaluation of the Renminbi occurred on January 1, 1994 in connection with the
adoption of the new unitary exchange rate. On that date, the official exchange
rate for conversion of Renminbi to U.S. dollars changed from approximately
RMB5.8000 to $1.00 to approximately RMB8.7000 to $1.00, representing a
devaluation of approximately 50%. Since 1994, the official exchange rate for
the conversion of Renminbi to U.S. dollars has been stable, and the Renminbi
has appreciated slightly against the U.S. dollar. However, there can be no
assurance that such rate will not become volatile again or that there will be
no further devaluation of the Renminbi. Because the Company is not able to
hedge effectively against Renminbi devaluations other than by retaining its
foreign exchange earnings to the extent permitted by the SAEC, any future
movements in the Renminbi could have a material adverse effect on the Company's
results of operations. The Company's results of operations also may be affected
by changes in the value of currencies other than the Renminbi, depending upon
the currencies in which the Company's earnings and obligations are denominated.
Dependence on China Factories
The Company's products are currently manufactured at factories located in
Xianyang and Yantai in China. Firefighting and disaster relief or assistance in
China are primitive by Western standards. The Company currently maintains fire,
casualty and theft insurance aggregating approximately $10 million covering
various of its stock in trade, goods and merchandise, furniture and equipment
and factory buildings in China. The proceeds of this insurance may not be
sufficient to cover material damage to, or the loss of, any of the Company's
factories due to fire, severe weather, flood, or other cause, and such damage
or loss would have a material adverse effect on the Company's financial
condition, business and prospects. Consistent with the customary practice among
enterprises in China, the Company does not carry any business interruption
insurance.
Relations with South Korea
Daewoo, which is the Company's largest customer, is a South Korean
company. The Company's continuing operations depend on its relationship with
Daewoo, and that relationship, in turn, may depend upon the relationship
between China and South Korea and the ability of Chinese companies, in general
to continue to engage in business with South Korean companies. In the past,
China and South Korea have had significant disagreements with respect to
certain issues. No assurance can be given that the relationship between the
Company and Daewoo would not be adversely affected as a result of future
disagreements between China and South Korea.
Dependence on Major Customers
A substantial majority of the Company's business is attributable to
Daewoo, a vertically integrated producer of television sets that currently
ranks number 53 among the world's Fortune 500 companies, and IRICO, the largest
CRT manufacturer in China and the second largest electronics manufacturer in
China. In 1996, Daewoo accounted for approximately 16%, and acted as sales
representative for an additional approximately 24%, of the Company's total pro
forma consolidated net sales. In the three months ended March 31, 1997, Daewoo
accounted for approximately 12%, and acted as sales representative for an
additional approximately 18%, of the Company's pro forma consolidated net
sales. In addition, in 1996 and the three months ended March 31, 1997, 40% and
30%, respectively, of the Company's pro forma consolidated net sales were
attributable to IRICO.
The Company does not have any long-term contracts with Daewoo or IRICO,
and there can be no assurance sales to Daewoo or IRICO will continue in the
future. The loss of Daewoo or IRICO as a customer or a substantial decline in
sales to Daewoo or IRICO would have a material adverse effect on the Company's
financial condition,
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business and prospects. The Company's dependence on Daewoo and IRICO is
expected to continue in the foreseeable future. See "Business--Sales and
Marketing."
Dependence on Key Personnel
The Company's growth and development have depended upon the services of
Mr. Du, the Chairman and Chief Executive Officer of the Company. Although the
Company has been able to attract and retain other qualified management
personnel, the loss of Mr. Du's services for any reason could have a material
adverse effect on the Company. The Company has obtained key man life insurance
on the life of Mr. Du.
Control by Mr. Du
Upon consummation of this Offering and assuming the Underwriter's
over-allotment is not exercised, To Shing Hoi, Mr. Du's son, will own
approximately 51.5% of the outstanding shares of Common Stock. Mr. Du and his
son entered into an agreement, pursuant to which Mr. Du's son has agreed that,
until the tenth anniversary of the effective date of this Offering, (i) he will
not sell or otherwise dispose of any of his shares of Common Stock without Mr.
Du's prior written consent, and (ii) he will vote his shares as Mr. Du directs.
As a consequence, Mr. Du will be able to control virtually all matters
requiring approval by the shareholders of the Company. See "Certain
Relationships and Related Transactions."
Dependence on Pianzhuan Group
The Company relies on Pianzhuan Group for marketing, administrative
functions and research and development. A substantial portion of the Company's
domestic sales are from customer orders placed directly with Pianzhuan Group,
which then fills such orders through the Company's manufacturing facilities. In
1996 and the three months ended March 31, 1997, approximately 40% and 30%,
respectively, of the Company's pro forma consolidated net sales were
attributable to orders placed through Pianzhuan Group. Such sales are made
under Pianzhuan Group's name. Until such time as the Company establishes its
own research and development division, expands its own sales and marketing
activities and develops the Asia Electronics brand name, the loss of services
of Pianzhuan Group for any reason could have a material adverse effect on the
Company. See "Business--Sales and Marketing;" "Certain Relationships and
Related Transactions."
Potential Conflicts of Interest
The Company's Chairman, Mr. Du, also is the Chairman of Pianzhuan Group, a
company that provides, at cost, certain administrative, financial, marketing,
research and development and personnel services for 23 affiliated business
entities, including a manufacturer of deflection yokes and deflection yoke
components, as well as Chinese-foreign joint ventures, government-controlled
businesses and manufacturers of medical equipment, speakers, cameras,
automobiles and chemicals. The Company pays Pianzhuan Group its proportionate
share of the actual cost of providing these services. See "Certain
Relationships and Related Transactions."
Pianzhuan Group and the Company may from time to time compete for the same
business opportunities or engage in transactions with each other. In that
connection, the subsidiaries of the Company and the member entities of Pianzhuan
Group (the "Members") have agreed that, with the exception of deflection yokes
for 18" and 21" (narrow) CPTs, which may continue to be manufactured and sold in
China by a Member, the Members may not sell or market deflection yokes in China.
In addition, the Company has appointed Pianzhuan Group as its exclusive sales
and marketing agent with respect to deflection yokes to be sold in China. In
connection with such arrangement, Pianzhuan Group has agreed that, with the
exception of deflection yokes for 18" and 21" (narrow) CPTs, it will sell or
market in China only the Company's deflection yokes. Subject to certain
conditions, these agreements will terminate on the tenth anniversary of the
closing of this Offering, unless sooner terminated by the Company. See "Certain
Relationships and Related Transactions" and "Principal Shareholders."
Mr. Du has agreed with the Company that, until at least the fifth
anniversary of the closing of this Offering, he intends to devote at least 75%
of his business time to the Company. Nonetheless, Pianzhuan Group and the
Company may from time to time compete for Mr. Du's time and attention. See
"Certain Relationships and Related Transactions."
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Broad Discretion as to Use of Proceeds
Approximately $4,100,000 of the net proceeds of this Offering ($8,100,000,
if the Underwriters' over-allotment option is exercised in full) are for
research and product development and working capital purposes. Research and
product development and working capital could include one or more projects that
are not described in this Prospectus. Investors should consider the broad
discretion of management of the Company in utilizing the net proceeds of this
Offering. See "Use of Proceeds."
Competition
The deflection yoke industry generally is highly competitive. Certain of
the Company's competitors are significantly larger than the Company and have
greater access to capital and other resources. The Company and other deflection
yoke producers increasingly compete on the basis of quality, customer service
and price. To the extent one or more of the Company's competitors becomes more
successful with respect to any of these competitive factors, the Company's
business could be adversely affected.
Emergence of New Technology and Industry Standards
The introduction of products embodying new technology, such as "flat-panel
displays" and the emergence of new industry standards may render the Company's
products obsolete and unmarketable. The Company's success will depend upon its
ability to enhance its existing products and develop new products that keep
pace with technological developments and emerging industry standards in order
to meet the changing needs of the Company's customers. There can be no
assurance that technological changes or evolving industry standards will not
render the Company's products obsolete.
Absence of Protection for Intellectual Property
The Company uses what it considers, based on customary business practices
in China, appropriate measures to protect its technology. These measures may
not provide adequate protection, and the Company's competitors may develop
functionally equivalent technology independently. The Company has applied for a
Chinese patent on a design of a 25" screen deflection yoke; however, there can
be no assurance that this patent will be issued on the basis of that
application or, if issued, will provide material protection for the Company's
technology. In addition, there can be no assurance that such patent will not be
challenged, invalidated or circumvented, in which event the Company may be
adversely affected. Moreover, much of the core technology involved in
manufacturing deflection yokes is not patentable, and as a result there are no
significant barriers to another company's entry into the industry.
Although the Company does not believe it is infringing the intellectual
property rights of others, it may receive in the future notices from third
parties alleging that the Company is infringing such rights. A finding that the
Company has infringed the intellectual property rights of a third party could
have a material adverse effect on the Company.
Holding Company Structure; Restrictions on the Payment of Dividends
The Company has no direct business operations, other than its ownership of
its subsidiaries. While the Company has no intention of paying dividends,
should it decide in the future to do so, as a holding company, the Company's
ability to pay dividends and meet other obligations depends upon the receipt of
dividends or other payments from its operating subsidiaries and other holdings
and investments. In addition, the Company's operating subsidiaries, from time
to time, may be subject to restrictions on their ability to make distributions
to the Company, including as a result of restrictive covenants in loan
agreements, restrictions on the conversion of local currency into U.S. dollars
or other hard currency and other regulatory restrictions.
Service and Enforcement of Legal Process
There is doubt as to whether the courts of the British Virgin Islands or
China would enforce (i) judgments of United States courts against the Company,
its directors or its officers predicated on the civil liability provisions of
the securities laws of the United States or any state thereof or (ii) in
original actions brought in the British Virgin Islands or China, liabilities
against the Company or such non-residents predicated upon the securities laws
of the United States or any state thereof. See "Enforceability of Civil
Liabilities and Certain Foreign Issuer Considerations."
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Political and Economic Risks from International Operations
The Company acquires materials used in the manufacturing and assembling of
deflection yokes from companies located in South Korea, Japan and the United
States, and sells to customers located in South Korea, Japan, Malaysia,
Singapore, India and Mexico. Japan's trade surplus has forced a revaluation of
the Japanese yen on international markets, which may have the effect of making
material or components used by the Company to manufacture its products more
expensive. Because of the international nature of the Company's operations, the
Company's business is subject to political and economic risks beyond those
involving China, including political instability, and changes in import/export
regulations and tariff and freight charges. Changes in tariff structures or
other trade policies could adversely affect the Company's suppliers or
customers or decrease the cost of supplies for the Company's competitors.
Certain Legal Consequences of Incorporation in British Virgin Islands
Pursuant to the Company's Memorandum of Association and Articles of
Association and pursuant to the law of the British Virgin Islands, the
Company's Memorandum of Association and Articles of Association may be amended
by the Board of Directors without shareholder approval (provided a majority of
the Company's independent directors do not vote against the amendment). Until
successors are elected, the Company's independent directors following this
Offering will consist of Robert Adler and Hans Decker. See "Management."
Amendments that can be effected by the Board of Directors without stockholder
approval include amendments increasing or reducing the authorized capital stock
of the Company and increasing or reducing the par value of its shares. The
Board of Directors has no intention of taking any action of this sort at
present, but the ability of the Board of Directors to amend the Memorandum of
Association and Articles of Association without shareholder approval could
delay, deter, or prevent a change in control of the Company, including a tender
offer to purchase Common Stock at a premium over then current market prices.
Under United States law, majority and controlling shareholders generally
have certain "fiduciary" responsibilities to minority shareholders. Shareholder
action must be taken in good faith and actions by controlling shareholders that
are obviously unreasonable may be declared null and void. While the Company
believes there are no material differences between the protection afforded to
minority shareholders of a company organized as an International Business
Company under the law of the British Virgin Islands from those generally
available to shareholders of corporations organized in the United States, there
may be circumstances where the British Virgin Islands law protecting the
interests of minority shareholders may not be as protective as the law
protecting minority shareholders in United States jurisdictions. See
"Enforceability of Civil Liabilities and Certain Foreign Issuer
Considerations."
No Prior Market; Possible Volatility of Share Price; Dilution; NASDAQ Delisting
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance an active trading market will develop and
be sustained after this Offering. The initial public offering price of the
Common Stock will be determined by negotiations among the Company and the
Representative. See "Underwriting." Moreover, there may be significant
volatility in the market price for the Common Stock after this Offering.
Quarterly operating results of the Company, changes in conditions in the
Chinese or international economy or other developments affecting the Company
could cause the market price of the Common Stock to fluctuate substantially.
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in pro forma consolidated net tangible book value per
share of Common Stock from the initial public offering price. See "Dilution."
The Company is applying to have the Common Stock quoted on the Nasdaq
National Market ("NASDAQ"). If the listing is approved, the continued trading
of the Company's Common Stock on NASDAQ is conditioned upon the Company meeting
certain asset, revenue and stock price tests. If the Company fails to meet any
of these tests, the Common Stock may be delisted from trading on NASDAQ, which
could have a material adverse effect on the trading market and price for the
Common Stock. In addition, low price stocks are subject to additional risks,
including additional federal and state regulatory requirements and the
potential loss of effective trading markets.
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Shares Eligible for Future Sale
After the consummation of this Offering, the Company will have 8,850,000
shares of Common Stock outstanding. Of these, the 4,000,000 shares of Common
Stock sold in this Offering will be freely transferable and tradeable (except
by affiliates of the Company) without restriction or further registration under
the Securities Act of 1933, as amended (the "Securities Act"). Of the remaining
shares of Common Stock, all are owned by shareholders who currently are
officers or directors or deemed affiliates of the Company and may only be sold
in the public United States market pursuant to an effective registration
statement, or in accordance with Rule 144 promulgated under the Securities Act
or another exemption therefrom. Officers, directors and shareholders of the
Company holding all 4,850,000 of the outstanding shares of Common Stock prior
to this Offering have agreed not to sell (i.e., they have agreed to "lock up")
such Common Stock for 24 months from and after the effective date of this
Offering ((i) 12 months, if the closing sale price of the Common Stock on
NASDAQ has been at least 250% of the initial public offering price per share of
Common Stock for a period of 20 consecutive trading days ending within five
days of the sale, and the sale is at a price in excess of 250% of the initial
public offering price per share of Common Stock, or (ii) six months, in
connection with certain underwritten public offerings) following the effective
date of this Offering, without the consent of the Representative. In addition,
the Company has agreed not to sell any shares of Common Stock for 12 months
(six months, in connection with certain underwritten public offerings)
following the effective date of this Offering, without the consent of the
Representative, subject to limited exceptions. The Company has been advised by
the Representative that they have no general policy with respect to granting
releases from such lock-up agreements. The Representative may in its discretion
and without notice to the public waive the lock-up and permit sales prior to
the expiration of the lock-up period. Sales of substantial amounts of Common
Stock under Rule 144, Regulation S or otherwise, or even the potential for such
sales, could depress the market price of the Common Stock, and could impair the
Company's ability to raise capital through the sale of its equity securities.
See "Shares Eligible for Future Sale."
Exemptions under the Exchange Act as a Foreign Private Issuer
The Company is a foreign private issuer within the meaning of the rules
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As
such, the Company is exempt from certain provisions applicable to United States
public companies, including: the rules under the Exchange Act requiring the
filing with the Securities and Exchange Commission (the "Commission") of
quarterly reports on Form 10-Q or current reports on Form 8-K; the sections of
the Exchange Act regulating the solicitation of proxies, consents or
authorizations in respect of a security registered under the Exchange Act; and
the sections of the Exchange Act requiring insiders to file public reports of
their stock ownership and trading activities and establishing insider liability
for profits realized from any "short-swing" trading transaction. Because of
these exemptions, investors in this Offering are not afforded the same
protections or information generally available to investors in public companies
organized in the United States. The Company has agreed with the Representative
in the Underwriting Agreement to file its annual reports with the Commission
and publicly release quarterly financial reports within the same time periods
as United States companies are required to file such reports with the
Commission.
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ENFORCEABILITY OF CIVIL LIABILITIES AND CERTAIN
FOREIGN ISSUER CONSIDERATIONS
The Company is a British Virgin Islands holding company, and all or a
substantial portion of the assets of its subsidiaries are located in China. In
addition, most of the directors and officers of the Company are not residents
of the United States, and all or a substantial portion of the assets of such
non-residents are located outside the United States. As a result, it may be
difficult for investors to effect service of process within the United States
upon such non-residents or to enforce against them judgments obtained in United
States courts, including judgments predicated upon the civil liability
provisions of the securities laws of the United States or any state thereof.
The Company has been advised by its China counsel, Jun He Law Office and by its
British Virgin Islands counsel, Harney Westwood & Riegels, that there is
uncertainty as to whether courts of China or the British Virgin Islands,
respectively, would enforce (i) judgments of United States courts obtained
against the Company or such non-residents predicated on the civil liability
provisions of the securities laws of the United States or any state thereof or
(ii) in original actions brought in China or the British Virgin Islands,
liabilities against the Company or such non-residents predicated upon the
securities laws of the United States or any state thereof. The Company intends
to designate CT Corporation System, as its agent for service of process in the
United States with respect to this Offering.
The Company has been advised by its China counsel, Jun He Law Office, and
its British Virgin Islands counsel, Harney Westwood & Riegels, that there are
no treaties between China and the United States, nor between the British Virgin
Islands and the United States, respectively, providing for the reciprocal
enforcement of foreign judgments. However, the courts of China and the British
Virgin Islands may accept a foreign judgment as evidence of a debt due. An
action may then be commenced in China or the British Virgin Islands for
recovery of this debt. However, a China or British Virgin Islands court will
only accept a foreign judgment as evidence of a debt due, if: (i) the judgment
is for a liquidated amount in a civil matter; (ii) the judgment is final and
conclusive and has not been stayed or satisfied in full; (iii) the judgment is
not directly or indirectly for the payment of foreign taxes, penalties, fines
or charges of a like nature (in this regard, a China or British Virgin Islands
court is unlikely to accept a judgment of an amount obtained by doubling,
trebling or otherwise multiplying a sum assessed as compensation for the loss
or damages sustained by the person in whose favor the judgement was given);
(iv) the judgment was not obtained by actual or constructive fraud or duress;
(v) the foreign court has taken jurisdiction on grounds that are recognized by
the private international law rules in China as to conflict of laws in China or
common law rules as to conflict of laws in the British Virgin Islands; (vi) the
proceedings in which the judgment was obtained were not contrary to natural
justice (i.e., the concept of fair adjudication); (vii) the proceedings in
which the judgment was obtained, the judgment itself and the enforcement of the
judgment are not contrary to the public policy of China or the British Virgin
Islands; (viii) the person against whom the judgment is given is subject to the
jurisdiction of the China or the British Virgin Islands court; and (ix) the
judgment is not on a claim for contribution in respect of damages awarded by a
judgment that does not satisfy the foregoing. Enforcement of a foreign judgment
in China or the British Virgin Islands also may be limited or otherwise
affected by applicable bankruptcy, insolvency, liquidation, arrangement,
moratorium or similar laws relating to or affecting creditors' rights generally
and will be subject to a statutory limitation of time within which proceedings
may be brought.
Under United States law, majority and controlling shareholders generally
have certain "fiduciary" responsibilities to minority shareholders. Shareholder
action must be taken in good faith and actions by controlling shareholders that
are obviously unreasonable may be declared null and void. While the Company
believes there are no material differences between the protection afforded to
minority shareholders of a company organized as an International Business
Company under the law of the British Virgin Islands from those generally
available to shareholders of corporations organized in the United States, there
may be circumstances where the British Virgin Islands law protecting the
interests of minority shareholders may not be as protective as the law
protecting minority shareholders in United States jurisdictions. Under British
Virgin Islands law, a shareholder of a company, like the Company, organized as
an International Business Company under the law of the British Virgin Islands
may bring an action against the company, even if other shareholders do not wish
to bring an action and even though no wrong has been done to the shareholder
personally. This is a representative action (i.e., an action on the
shareholder's own behalf and on behalf of other persons in his class, or
similarly situated). Instances where such representative actions may be brought
include: (i) to compel the company to act in a manner consistent with the
Memorandum of Association and Articles of Association; (ii) to restrain
directors from acting on resolutions, where notice of a shareholders' meeting
failed adequately to inform shareholders of a resolution proposed at the
meeting; (iii) to restrain the company, where it proposes to perform an act
ultra vires to the Memorandum of Association and the
14
<PAGE>
Articles of Association or to seek damages from directors to compensate the
company from the consequences of such an ultra vires act, or to recover
property of the company disposed of pursuant to such ultra vires act; (iv) to
restrain the company from acting upon a resolution that was not made in good
faith and for the benefit of shareholders as a whole; (v) to redress where a
resolution passed at a shareholders meeting was not properly passed (e.g., it
was not passed with the necessary majority); (vi) to restrain the company from
performing an act which is contrary to law; and (vii) to restrain the company
from taking any action in the name and for the benefit of the company. Such an
action also may be brought against directors and promoters who have breached
their fiduciary duties to the company, though acts amounting to a breach can be
ratified by a general meeting of shareholders, in the absence of fraud. Such
actions against directors and promoters only may be taken, however, if such
directors and promoters have power to influence the action taken by a general
meeting by means of, for instance, their votes as shareholders, thereby
preventing the company from suing them in the company's name. Although British
Virgin Islands law does permit a shareholder of a British Virgin Islands
company to sue its directors representatively or derivatively, the
circumstances in which any such action may be brought as set forth above may
result in the rights of shareholders of a British Virgin Islands company being
more limited than those of shareholders in a United States company.
FINANCIAL STATEMENTS AND CURRENCY PRESENTATION
The Company has prepared its consolidated financial statements in
accordance with United States generally accepted accounting principles
consistently applied and publishes such statements in Chinese Renminbi, the
functional currency of the Company's subsidiaries and the legal tender currency
of China. All references to "Renminbi" or "RMB" are to Renminbi. All references
to "U.S. Dollars," "dollars" or "$" are to United States dollars. Conversion of
amounts from Renminbi into United States dollars for the convenience of the
reader has been made at the unified exchange rate quoted by the PBOC on March
31, 1997 of US$1.00 = RMB8.2955.
The following table sets forth certain information concerning exchange
rates between Renminbi and U.S. dollars for the periods indicated:
Noon Buying Rate(1)
------------------------------------------------
Period Period End Average(2) High Low
- ---------------- ------------ ------------ -------- -------
(RMB per US$)
1992 ...... 5.7662 5.5309 5.9007 5.4124
1993 ...... 5.8145 5.7776 5.8245 5.7076
1994 ...... 8.4662 8.6303 8.7409 8.4662
1995 ...... 8.3374 8.3852 8.5000 8.2916
1996 ...... 8.3284 8.3387 8.5000 8.3267
- --------------
(1) The noon buying rate in New York for cable transfers payable in foreign
currencies as certified for customs purposes by the Federal Reserve Bank
of New York. Prior to 1994, the noon buying rate was based on the Official
Exchange Rate. Since April 1994, the noon buying rate has been based on
the PBOC Rate. As a result, since April 1994, the noon buying rate and the
PBOC Rate have been substantially similar.
(2) Determined by averaging the rates on the last business day of each month
during the relevant period.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered hereby, assuming an initial public offering price of $7.50
per share and after deducting underwriting discounts and the estimated expenses
of this Offering payable by the Company, are estimated to be approximately
$26.1 million ($30.1 million, if the Underwriters' over-allotment option is
exercised in full). The Company intends to use the net proceeds of this
Offering as follows:
Approximate
Amount Percent
------------- --------
Expansion of manufacturing facilities ...... $15,500,000 59.4%
Acquisitions .............................. 5,500,000 21.1
Research and product development ............ 2,000,000 7.7
Sales and marketing ........................ 1,000,000 3.8
Working capital ........................... 2,100,000 8.0
------------ ------
Total .................................... $26,100,000 100.0%
============ ======
The Company intends to apply approximately $15.5 million of the net
proceeds of this Offering to finance the installation of its new deflection
yoke manufacturing facility in Weihai (approximately $10.0 million), and the
expansion of its two existing deflection yoke manufacturing facilities in
Xianyang (approximately $5.5 million in the aggregate). These expansion efforts
will increase the Company's annual manufacturing capacity from approximately
6.1 million units to approximately 12.8 million units.
On December 26, 1996, the Company entered into a definitive agreement to
acquire 90% of the equity of Dnon Tech for $2.7 million and, on December 28,
1996, the Company entered into a definitive agreement to acquire 70% of the
equity of Yantai for $2.8 million. The Company expects to consummate the
Acquisitions contemporaneously with the closing of this Offering. See "Certain
Relationships and Related Transactions."
The Company believes its ability to accelerate its product development
activities and to take advantage of acquisition opportunities will be enhanced
by the additional capital from this Offering. The Company intends to consider
the development or acquisition of other product lines the Company determines it
can manufacture in a cost-effective manner by leveraging its manufacturing
expertise and efficiencies. In that connection, the Company intends to apply
approximately $2.0 million of the net proceeds of this Offering to research and
product development activities, including the payment of licensing fees to
unrelated third parties for deflection yoke technology and the establishment of
two research and development divisions.
The Company also intends to apply approximately $1.0 million of the net
proceeds of this Offering to sales and marketing activities, including the
establishment of sales and marketing offices in Korea, Japan and the United
States. At present, the Company relies on Pianzhuan Group for research and
development and sales and marketing activities. Following this Offering, the
Company intends to rely increasingly on its own personnel and resources in
these areas. See "Certain Relationships and Related Transactions."
The Company will use the remaining approximately $2.1 million ($6.1
million, if the Underwriters' over-allotment option is exercised in full) of
net proceeds of this Offering for general corporate purposes and working
capital.
Pending such uses, the Company intends to invest the net proceeds of this
Offering in U.S. short-term, investment grade, interest-bearing securities.
The foregoing represents the Company's best estimate of its allocation of
the estimated net proceeds of this Offering and is subject to reapportionment
among the categories listed above or among other categories in response to,
among other things, changes in its plans, regulations and economic and industry
conditions.
DIVIDEND POLICY
The Company currently intends to retain its earnings to support its growth
strategy and does not anticipate paying any dividends on the Common Stock in
the foreseeable future. As a holding company, the ability of the Company to pay
dividends depends upon the receipt of dividends or other payments from its
subsidiaries. See "Risk Factors--Holding Company Structure; Restrictions on the
Payment of Dividends." Any determination to pay dividends in the future will be
at the discretion of the Company's Board of Directors and will depend upon the
Company's results of operations, financial condition, contractual restrictions
and other factors deemed relevant at that time by the Company's Board of
Directors. Dividends, if any, paid in the future on the Common Stock will be
paid in U.S. dollars.
16
<PAGE>
DILUTION
The consolidated net tangible book value of the Company as of March 31,
1997 was approximately RMB47,027,000 ($5,669,000), or approximately RMB9.70
($1.17) per share. Consolidated net tangible book value per share represents
the amount of the Company's total assets (other than intangible assets) less
total liabilities (other than negative goodwill), divided by the number of
shares of Common Stock outstanding.
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of Common Stock in this Offering and the
consolidated net tangible book value per share of Common Stock immediately
after the consummation of this Offering. After giving effect to the sale of
4,000,000 shares of Common Stock in this Offering, the receipt of the net
proceeds therefrom and the application of a portion of such net proceeds to
consummate the Acquisitions, the consolidated net tangible book value of the
Company as of March 31, 1997 would have been approximately RMB249,202,000
($30,041,000) or RMB28.16 ($3.39) per share. This represents an immediate
increase in consolidated net tangible book value of approximately RMB18.46
($2.22) per share to existing shareholders and an immediate dilution in
consolidated net tangible book value of RMB34.06 ($4.11) per share to
purchasers of Common Stock in this Offering, as illustrated in the following
table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share(1) .................. $7.50
Consolidated net tangible book value per share as of
March 31, 1997 ................................................... $1.17
Increase per share attributable to new investors and Acquisitions $2.22
-------
Consolidated net tangible book value per share after this Offering ... 3.39
--------
Dilution per share to new investors ................................. $4.11
========
</TABLE>
- --------------
(1) Before deducting estimated underwriting discounts, commissions and
estimated expenses payable by the Company.
The following table summarizes the differences between existing
shareholders and new investors in this Offering with respect to the number and
percentage of shares of Common Stock purchased from the Company, the amount and
percentage of consideration paid and the average price per share.
<TABLE>
<CAPTION>
Shares Purchased Consideration Average
----------------------- ------------------------- Price
Number Percent Amount Percent Per Share
----------- --------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing Shareholders (1) ...... 4,850,000 54.8% $ 3,322,000 10.0% $0.68
New Investors .................. 4,000,000 45.2% 30,000,000 90.0% 7.50
--------- ------ ------------ ------ ------
Total ........................ 8,850,000 100.0% $33,322,000 100.0%
========= ====== ============ ======
</TABLE>
- --------------
(1) Does not include 300,000 shares of Common Stock reserved for issuance under
the Company's 1997 Employee Stock Option Plan. See "Management--1997
Employee Stock Option Plan."
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1997, (i) as reflected in the Company's consolidated financial statements
and (ii) on a pro forma basis, as adjusted to reflect the sale by the Company
of the 4,000,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $7.50 per share, less Underwriters' discounts and
commissions and the estimated offering expenses of this Offering of $3.9
million, and the receipt and application of the net proceeds received
therefrom, including the consummation of the Acquisitions. See "Unaudited Pro
Forma Consolidated Financial Information."
<TABLE>
<CAPTION>
March 31, 1997
---------------------------------------
Pro Forma, Pro Forma,
Actual As Adjusted As Adjusted
-------- ------------- ------------
(Dollars in
(RMBs in thousands) thousands)
<S> <C> <C> <C>
Short-term bank loans .............................. 13,421 27,010 3,256
====== ======= ======
Investors' Equity:
Common Stock, $0.01 par value per share:
30,000,000 share authorized, 4,850,000 shares issued
and outstanding; 8,850,000 shares issued and
outstanding as adjusted ........................... 414 746 90
Additional paid-in capital ........................ 27,158 243,339 29,334
Dedicated capital ................................. 1,372 1,372 165
Retained earnings ................................. 7,144 7,144 861
------ ------- ------
Total investors' equity ........................ 36,088 252,601 30,450
------ ------- ------
Total capitalization ........................... 36,088 252,601 30,450
====== ======= ======
</TABLE>
18
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated statement of income for the
year ended December 31, 1996 represent a consolidation, adjusted as described
in the accompanying notes, of the audited combined statement of income of
Yongxin and Daming for the year ended December 31, 1996 and the audited
combined statement of income of Yantai and Dnon Tech for the year ended
December 31, 1996, as if the operations of the Company had been consolidated
with the operations of Yongxin, Daming, Yantai and Dnon Tech at January 1,
1996. The Company did not have any operations during the year ended December
31, 1996. The Company acquired 80% of the equity of each of Yongxin and Daming
effective as of December 31, 1996 and intends to acquire 70% and 90%,
respectively, of the equity of Yantai and Dnon Tech upon the consummation of
this Offering. Each of these acquisitions has been or will be treated as a
purchase for accounting purposes.
The following unaudited pro forma consolidated statement of income for the
three months ended March 31, 1996 represent a consolidation, adjusted as
described in the accompanying notes, of the unaudited combined statement of
income of Yongxin and Daming, and the unaudited combined statement of income of
Yantai and Dnon Tech for the three months ended March 31, 1996, as if the
operations of the Company had been consolidated with the operations of Yongxin,
Daming, Yantai and Dnon Tech at the beginning of the three months ended March
31, 1996.
The following unaudited pro forma consolidated statement of income for the
three months ended March 31, 1997 represent a consolidation, adjusted as
described in the accompanying notes, of the unaudited consolidated statement of
income of the Company (which included Yongxin and Daming for the full period)
and the unaudited combined statement of income of Yantai and Dnon Tech for the
three months ended March 31, 1997, as if the operations of the Company had been
consolidated with the operations of Yantai and Dnon Tech at the beginning of
the three months ended March 31, 1997.
The pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable under the circumstances.
The pro forma adjustments include the effects of the accounting for the
Acquisitions under the purchase method, based upon preliminary allocations of
the purchase price. Final allocations are subject to valuations as of each
acquisition date based upon appraisals and other studies which are not yet
completed. Accordingly, the final allocations may result in amounts that are
different from those reflected herein.
The following pro forma consolidated statements of income do not purport
to be indicative of the results that would have been achieved, if the
acquisitions of Yongxin, Daming, Yantai and Dnon Tech had actually been
consummated as of January 1, 1996 or January 1, 1997, as the case may be, or of
the results that may be achieved in the future. The following pro forma
consolidated statements of income should be read in conjunction with, and are
qualified in their entirety by reference to, the consolidated financial
statements of the Company, the combined financial statements of Yongxin and
Daming and of Yantai and Dnon Tech and the unaudited pro forma consolidated
balance sheet and notes to that balance sheet, all appearing elsewhere in this
Prospectus.
19
<PAGE>
Unaudited Pro Forma Consolidated Statement Of Income
<TABLE>
<CAPTION>
Year Ended December 31, 1996
-----------------------------------------------------------------------------------------
Yantai
Asia Yongxin and
Electronics and Dnon Pro
Holdings Daming Tech Forma Pro Forma
Co. Inc. (combined) (combined) Adjustments Consolidated
------------- ------------ ------------ -------------------- ----------------------------
(Amounts in thousands, except per share data)
RMB RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C> <C>
Sales .............................. -- 143,684 86,362 (8,865)(1) 221,181 26,663
Cost of goods sold ............... -- (96,350) (74,737) 8,616(1) (162,471) (19,585)
Selling and administrative
expenses ........................ -- (4,511) (3,494) (8,005) (965)
Interest expense, net ............ -- (1,037) (2,117) (3,154) (380)
Other (expenses) income, net ...... -- (114) 653 3,501(2) 2,481 299
(1,559)(3)
------ ----------
Total costs and expenses ......... -- (102,012) (79,695) 10,558 (171,149) (20,631)
-------- --------- --------- ------ ---------- ----------
Income before income taxes ......... -- 41,672 6,667 1,693 50,032 6,032
Provision for income taxes ......... -- (7,411) 205 (7,206) (869)
-------- --------- --------- ---------- ----------
Income after income taxes ......... -- 34,261 6,872 1,693 42,826 5,163
Minority interest .................. -- -- -- (8,709)(4) (8,709) (1,050)
-------- --------- --------- ------ ---------- ----------
Net income ........................ 34,261 6,872 (7,016) 34,117 4,113
======== ========= ========= ====== ========== ==========
Pro forma net income per common
share .............................. 7.03 0.85
Pro forma weighted average
number of common shares
outstanding ..................... 4,850,000 4,850,000
</TABLE>
- --------------
(1) Adjusted to eliminate inter-company sales and purchases of enameled copper
wire and machines.
(2) Adjusted to record the amortization of negative goodwill arising from the
acquisition of 80% of the equity of each of Yongxin and Daming over a
period of 10 years and to adjust the related depreciation charge of
property, plant and equipment reduced proportionally as a result of the
above acquisitions.
(3) Adjusted to record the amortization of goodwill arising from the
acquisition of 70% of the equity of Yantai and 90% of the equity of Dnon
Tech over a period of 10 years.
(4) Adjusted to account for the minority interests of Yongxin (20%), Daming
(20%), Yantai (30%) and Dnon Tech (10%).
20
<PAGE>
Unaudited Pro Forma Consolidated Statement of Income
<TABLE>
<CAPTION>
Three Months Ended March 31, 1996
----------------------------------------------------------------------------------------
Yantai
Asia Yongxin and
Electronics and Dnon Pro
Holdings Daming Tech Forma Pro Forma
Co. Inc. (combined) (combined) Adjustments Consolidated
------------- ------------ ------------ --------------------- --------------------------
(Amounts in thousands, except per share data)
RMB RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C> <C>
Sales .............................. -- 13,114 16,845 (1,154) 28,805 3,472
Cost of goods sold ............... -- (10,731) (14,080) 1,154(1) (23,657) (2,852)
Selling and administrative
expenses ........................ -- (779) (713) (1,492) (180)
Interest expense, net ............ -- (692) (322) (1,014) (122)
Other (expenses) income, net ...... -- (13) 92 875(2) 564 68
(390)(3)
-------- --------- --------- ------- --------- ----------
Total costs and expenses ......... -- (12,215) (15,023) 1,639 (25,599) (3,086)
-------- --------- --------- ------- --------- ----------
Income before income taxes ......... -- 899 1,822 485 3,206 386
---------
Provision for income taxes ......... -- (157) 75 (82) (10)
-------- --------- --------- ------- --------- ----------
Income after income taxes ......... -- 742 1,897 485 3,124 376
---------
Minority interest .................. -- -- -- (730)(4) (730) (88)
-------- --------- --------- ----------- --------- ----------
Net income ........................ -- 742 1,897 (245) 2,394 288
======== ========= ========= ======= ========= ==========
Pro forma net income per common
share .............................. 0.49 0.06
Pro forma weighted average
number of common shares
outstanding ..................... 4,850,000 4,850,000
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997
---------------------------------------------------------------------------------
Asia
Electronics Yantai and
Holdings Co. Dnon
Inc. & Tech Pro Forma Pro Forma
Subsidiaries (combined) Adjustments Consolidated
-------------- ------------ ------------------ ----------------------------
(Amounts in thousands, except per share data)
RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C>
Sales ........................... 53,905 20,904 (3,576)(1) 71,233 8,587
Cost of goods sold ............... (39,826) (17,598) 3,576(1) (53,848) (6,491)
Selling and administrative
expenses ........................ (1,890) (1,176) (3,066) (370)
Interest expense, net ............ (848) (687) (1,535) (185)
Other income, net ............... 1,211 169 (359)(3) 1,021 123
--------- --------- ------ --------- ----------
Total costs and expenses ......... (41,353) (19,292) 3,217 (57,428) (6,923)
--------- --------- ------ --------- ----------
Income before income taxes ...... 12,552 1,612 (359) 13,805 1,664
Provision for income taxes ...... (1,762) 62 (1,700) (205)
--------- --------- --------- ----------
Income after income taxes ...... 10,790 1,674 (359) 12,105 1,459
Minority interest ............... (1,916) -- (417)(5) (2,333) (281)
--------- --------- ------ --------- ----------
Net income ..................... 8,874 1,674 (776) 9,772 1,178
========= ========= ====== ========= ==========
Pro forma net income per common
share ........................... 2.01 0.24
Pro forma weighted average
number of common shares
outstanding ..................... 4,850,000 4,850,000
</TABLE>
- --------------
(1) Adjusted to eliminate inter-company sales and purchases of enameled copper
wire.
(2) Adjusted to record the amortization of negative goodwill arising from the
acquisition of 80% of the equity of each of Yongxin and Daming over a
period of 10 years and to adjust the related depreciation charge of
property, plant and equipment reduced proportionally as a result of the
above acquisitions.
(3) Adjusted to record the amortization of goodwill arising from the
acquisition of 70% of the equity of Yantai and 90% of the equity of Dnon
Tech over a period of 10 years.
(4) Adjusted to account for the minority interests of Yongxin (20%), Daming
(20%), Yantai (30%) and Dnon Tech (10%).
(5) Adjusted to account for the minority interests of Yantai (30%) and Dnon
Tech (10%).
21
<PAGE>
The following unaudited pro forma consolidated balance sheet represents a
consolidation, adjusted as described in the accompanying notes, of the
unaudited consolidated balance sheet of the Company at March 31, 1997 and the
unaudited combined balance sheet of Dnon Tech and Yantai at March 31, 1997, and
assumes the Company acquired each of Yantai and Dnon Tech as of March 31, 1997.
The pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable under the circumstances.
The pro forma adjustments include the effects of the accounting for the
Acquisitions under the purchase method, based upon preliminary allocations of
the purchase price. Final allocations are subject to valuations as of each
acquisition date based upon appraisals and other studies which are not yet
completed. Accordingly, the final allocations may result in amounts that are
different from those reflected herein.
The following unaudited pro forma consolidated balance sheet should be
read in conjunction with, and is qualified in its entirety by reference to, the
unaudited consolidated financial statements of the Company and the unaudited
combined financial statements of Dnon Tech and Yantai all appearing elsewhere
in this Prospectus.
Unaudited Pro Forma Consolidated Balance Sheet
<TABLE>
<CAPTION>
March 31, 1997
--------------------------------------------------------------------------------------------------
Asia
Electronics
Holding Co. Yantai Pro Forma Pro Forma
Inc. & and Dnon Tech Pro Forma Pro Forma Consolidated Consolidated As
Subsidiaries (combined) Adjustments Consolidated Adjustments Adjusted(1)
-------------- --------------- ------------------ -------------- -------------- ---------------
(Amounts in thousands)
RMB RMB RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets
Cash ........................ 12,065 5,934 (45,625)(2) (27,626) 216,513(1) 188,887 22,770
Accounts receivable ......... 12,958 75 13,033 13,033 1,571
Due from joint venture
partners .................. -- 7,930 7,930 7,930 956
Due from related
companies .................. 43,273 -- (4,229)(3) 32,068 32,068 3,866
(6,976)(4)
Inventories .................. 11,776 16,722 28,498 28,498 3,435
Prepayments and other
current assets ............ 1,982 650 2,632 2,632 317
Deposits ..................... -- 1,575 1,575 1,575 190
Prepaid value-added tax ...... -- 201 201 201 24
Value-added tax credit ...... 4,575 -- 4,575 4,575 552
------- ------- ------- --------- -------- -------- ----
Total current assets ...... 86,629 33,087 (56,830) 62,886 216,513 279,399 33,681
Property, plant and
equipment, net ............ 5,932 48,757 54,689 54,689 6,593
Other assets ............... -- 1,460 1,460 1,460 176
Deferred tax assets ......... -- 432 (432)(5) -- --
Goodwill ..................... -- -- 14,338(2) 14,338 14,338 1,728
------- ------- ------- --------- -------- -------- -----
Total assets ............... 92,561 83,736 (42,924) 133,373 216,513 349,886 42,178
======= ======= ======= ========= ======== ========= ======
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
March 31, 1997
-------------------------------------------------------------------------------------------------
Asia
Electronics
Holding Co. Yantai Pro Forma Pro Forma
Inc. & and Dnon Tech Pro Forma Pro Forma Consolidated Consolidated As
Subsidiaries (combined) Adjustments Consolidated Adjustments Adjusted(1)
-------------- --------------- ------------------ -------------- -------------- -----------------
(Amounts in thousands)
RMB RMB RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C> <C> <C>
LIABILITIES &
INVESTORS' EQUITY:
Current liabilities 27,010 27,010 3,256
Short-term bank loans ......... 13,421 13,589 2,025 2,025 244
Accounts payable ............... -- 2,025 (4,229)(3) 1,415 1,415 170
Due to related companies . -- 12,620 (6,976)(4) -- --
Due to a joint venture
partner ..................... -- 10,327 10,327 10,327 1,245
Accrued expenses ............... 7,065 1,263 8,328 8,328 1,004
Value-added tax payable ...... 5,501 -- 5,501 5,501 663
Income taxes payable ......... 5,343 -- 5,343 5,343 644
Deferred taxation ............ 545 -- 545 545 66
Dividend Payable ............... -- 2,685 2,685 2,685 324
------- ------- -------- -------- -------
Total current
liabilities ............... 31,875 42,509 (11,205) 63,179 63,179 7,616
------- ------- ------- -------- -------- -------
Negative goodwill ............ 10,939 -- 10,939 10,939 1,319
Deferred taxation ............ 1,105 -- (432)(5) 673 673 81
------- ------- ------- -------- -------- -------
Total liabilities ............ 43,919 42,509 (11,637) 74,791 74,791 9,016
------- ------- ------- -------- -------- -------
Minority interests ............ 12,554 -- 9,940(2) 22,494 22,494 2,712
------- ------- ------- -------- -------- -------
Investors' equity
Common stock .................. 414 39,062 (39,062)(2) 414 332(1) 746 90
Additional paid-in capital . 27,158 610 (610)(2) 27,158 216,181(1) 243,339 29,334
Dedicated capital ............ 1,372 -- -- 1,372 1,372 165
Retained earnings ............ 7,144 1,555 (1,555)(2) 7,144 7,144 861
------- ------- ------- -------- ----------- -------- -------
Total investors'
equity ..................... 36,088 41,227 (41,227) 36,088 216,513 252,601 30,450
------- ------- ------- -------- ----------- -------- -------
Total liabilities and
investors' equity ......... 92,561 83,736 (42,924) 133,373 216,513 349,886 42,178
======= ======= ======= ======== =========== ======== =======
</TABLE>
- --------------
(1) Adjusted to reflect the sale of 4,000,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $7.50 per share and
the receipt of the net proceeds therefrom.
(2) Adjusted to record cash paid for the acquisition of 70% of the equity of
Yantai and 90% of the equity of Dnon Tech. Each acquisition is accounted
for as a purchase, with the purchase price allocated to the proportionate
fair value of the acquired assets and assumed liabilities, and results in
goodwill of approximately RMB14,338,000 ($1,728,000).
(3) Adjusted to eliminate inter-company balances.
(4) Adjusted to offset outstanding balances with related companies.
(5) Adjusted to offset deferred tax assets and liabilities.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
(HISTORICAL)
The Company was incorporated on January 3, 1996, but did not conduct any
operations during 1996. The balance sheet data as of December 31, 1996 have
been derived from the Company's audited consolidated financial statements
appearing elsewhere in this Prospectus. The statement of income and balance
sheet data for the three months ended March 31, 1997 have been derived from the
Company's unaudited consolidated financial statements. In the opinion of
management, the data for the interim period presented below include all
adjustments (consisting only of normal, recurring accruals) necessary to
present fairly the financial position and results of operations of the Company
as of the date and for the period indicated on a basis consistent with the
audited financial statements. The results for any interim period are not
necessarily indicative of the results for a full year. The following table does
not reflect the operations of Yantai and Dnon Tech, and reflect the activities
of Yongxin and Daming only from January 1, 1997. The following data are
qualified by reference to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and to the more detailed financial
statements and notes to the financial statements appearing elsewhere in this
Prospectus.
Statement of Income Data:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997
---------------------------------
(Amounts in thousands, except per
share data)
RMB US$
(Unaudited)
<S> <C> <C>
Sales ...................................................... 53,905 6,498
Cost of goods sold ....................................... (39,826) (4,801)
Selling and administrative expenses ........................ (1,890) (228)
Interest expense, net .................................... (848) (102)
Other income, net .......................................... 1,211 146
--------- ----------
Total costs and expenses ................................. (41,353) (4,985)
--------- ----------
Income before income taxes ................................. 12,552 1,513
Provision for income taxes ................................. (1,762) (212)
--------- ----------
Income after income taxes ................................. 10,790 1,301
Minority interest .......................................... (1,916) (231)
--------- ----------
Net income ................................................ 8,874 1,070
========= ==========
Net income per common share .............................. 1.83 0.22
Weighted average number of common shares outstanding ...... 4,850,000 4,850,000
</TABLE>
Balance Sheet Data:
December 31, 1996 March 31, 1997
------------------- ------------------
(Amounts in thousands)
RMB US$ RMB US$
(Unaudited)
Working capital(1) ......... 49,137 5,923 54,754 6,600
Total assets ............... 82,993 10,005 92,561 11,158
Short-term bank loans ...... 14,749 1,778 13,421 1,618
Total liabilities(2) ...... 28,500 3,436 32,980 3,976
Investors' equity ......... 27,556 3,322 36,088 4,350
- --------------
(1) Represents current assets minus current liabilities.
(2) Excludes negative goodwill resulting from the acquisitions of Yongxin and
Daming which became effective December 31, 1996.
24
<PAGE>
SELECTED COMBINED FINANCIAL DATA OF YONGXIN AND DAMING
The following combined statement of income and combined balance sheet data
for the three years ended December 31, 1996 and as of December 31, 1995 and 1996
have been derived from the audited combined financial statements of Yongxin and
Daming appearing elsewhere in this Prospectus. The following combined statement
of income data for the year ended December 31, 1993 and combined balance sheets
data as of December 31, 1993 and 1994 have been derived from the audited
combined financial statements or management accounts of Yongxin and Daming,
which are not included in this Prospectus. The Company acquired 80% of the
equity of each of Yongxin and Daming effective as of December 31, 1996, and
accordingly there is no combined statement of income or balance sheet for any
periods subsequent to such date. The following data are qualified by reference
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and to the more detailed combined financial statements and notes to
the combined financial statements appearing elsewhere in this Prospectus.
Statement of Income Data:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1993(1) 1994 1995 1996 1996
------------- ------------- ------------- ------------- -------------
(Amounts in thousands)
RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C>
Sales ................................. 23,444 68,789 96,713 143,684 17,321
Cost of goods sold .................. (15,767) (51,798) (69,977) (96,350) (11,615)
Selling and administrative
expenses ........................... (60) (634) (2,615) (4,511) (544)
Interest income (expenses), net ...... 2,348 (1,689) (3,214) (1,037) (125)
Other expenses, net .................. -- (219) (36) (114) (14)
--------- --------- --------- --------- ----------
Total costs and expenses ............... (13,479) (54,340) (75,842) (102,012) (12,298)
Income before income
taxes .............................. 9,965 14,449 20,871 41,672 5,023
Provision for income taxes ............ -- -- (2,077) (7,411) (893)
--------- --------- --------- --------- ----------
Net income ........................... 9,965 14,449 18,794 34,261 4,130
========= ========= ========= ========= ==========
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1993(1) 1994 1995 1996 1996
--------- --------- --------- --------- ---------
(Amounts in thousands)
RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C>
Working capital(2) .................. 12,041 1,873 4,098 47,476 5,724
Total assets ........................ 35,083 86,098 88,775 106,678 12,860
Short-term bank loans ............... 9,670 14,060 15,135 14,749 1,778
Total liabilities ..................... 15,956 56,557 44,858 28,500 3,435
Investors' equity ..................... 19,128 29,541 43,917 78,178 9,425
</TABLE>
- --------------
(1) The companies commenced operations during the year ended December 31, 1993.
(2) Represents current assets minus current liabilities.
25
<PAGE>
SELECTED COMBINED FINANCIAL DATA OF YANTAI AND DNON TECH
The following combined statement of income and combined balance sheet data
for the three years ended December 31, 1996 and as of December 31, 1995 and 1996
have been derived from the audited combined financial statements of Yantai and
Dnon Tech appearing elsewhere in this Prospectus. The following combined balance
sheet data as of December 31, 1994 have been derived from the management
accounts of Yantai and Dnon Tech which are not included in this Prospectus. The
following statement of income and balance sheet data for each of the three
months ended March 31, 1996 and 1997 have been derived from the unaudited
combined financial statements of Yantai and Dnon Tech. In the opinion of
management, the data for each interim period presented below include all
adjustments (consisting only of normal, recurring accruals) necessary to present
fairly the financial position and results of operations of Yantai and Dnon Tech
as of the dates and for the periods indicated on a basis consistent with the
audited combined financial statements. The results for any interim period are
not necessarily indicative of the results for a full year. The Company intends
to consummate the acquisitions of Yantai and Dnon Tech contemporaneously with
the closing of this Offering. See "Use of Proceeds." The following data are
qualified by reference to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and to the more detailed combined financial
statements and notes to the combined financial statements appearing elsewhere in
this Prospectus.
Statement of Income Data:
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
-------------------------------------------------- ---------------------------------------
1994(1) 1995 1996 1996 1996 1997 1997
--------- ------------- ------------- ------------ ------------- ------------ ------------
(Amounts in thousands)
RMB RMB RMB US$ RMB RMB US$
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales ........................... -- 39,997 86,362 10,411 16,845 20,904 2,520
Cost of goods sold ............... -- (39,230) (74,737) (9,010) (14,080) (17,598) (2,121)
Selling and administrative
expenses ........................ -- (1,788) (3,494) (422) (713) (1,176) (142)
Interest expenses, net ......... -- (812) (2,117) (255) (322) (687) (83)
Other income, net ............... -- 381 653 79 92 169 20
-- --------- --------- -------- --------- --------- --------
--
Total costs and expenses ......... -- (41,449) (79,695) 9,608 (15,023) (19,292) (2,326)
(Loss) income before income
taxes ........................... -- (1,452) 6,667 803 1,822 1,612 194
Provision for income taxes ...... -- 165 205 25 75 62 7
-- --------- --------- -------- --------- --------- --------
Net (loss) income ............... -- (1,287) 6,872 828 1,897 1,674 201
== ========= ========= ======== ========= ========= ========
Balance Sheet Data:
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------
1994(1) 1995 1996 1996 March 31, 1997
--------- ------------ -------- ------- ---------------------------
(Amounts in thousands)
RMB RMB RMB US$ RMB US$
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Working capital(2) ......... 2,989 (5,283) 659 79 (9,422) (1,136)
Total assets ............... 32,001 60,658 78,783 9,497 83,736 10,094
Short-term bank loans ...... 1,000 5,664 13,560 1,635 13,589 1,638
Total liabilities ......... 6,697 25,243 34,136 4,114 42,509 5,124
Investors' equity ......... 25,304 35,415 44,647 5,383 41,227 4,970
</TABLE>
- --------------
(1) The companies commenced operations during the year ended December 31, 1994
but did not conduct any business until the year ended December 31, 1995.
(2) Represents current assets minus current liabilities.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes to the financial statements appearing
elsewhere in this Prospectus. The amounts reflected in the following discussion
are in Chinese Renminbi ("RMB"), the functional currency of the Company's
subsidiaries and the legal tender currency of China. The effective exchange
rate at March 31, 1997 was 8.2955 RMB per U.S. dollar.
Overview
The Company was formed in 1996 and, at present, owns 80% of the equity of
each of Yongxin and Daming. The Company will use $5,500,000 of the net proceeds
of this Offering to acquire 70% of the equity of Yantai and 90% of the equity
of Dnon Tech.
Yongxin, Daming and Yantai develop, manufacture and sell deflection yokes
for CPTs and CDTs. Dnon Tech manufactures enameled copper wire, the principal
raw material used in deflection yokes, primarily for sales to Yongxin, Daming
and Yantai.
The Company carries out all its manufacturing operations in China, where
it is able to take advantage of low overhead and inexpensive labor.
The Company's goal is to use its manufacturing expertise and low
manufacturing costs to become the largest independent producer of deflection
yokes in the world. To accomplish this goal, part of the Company's strategy is
to focus on manufacturing and selling deflection yokes for CDTs and larger
screen CPTs, which generate higher gross profit margins than those for smaller
screen CPTs. In addition, the Company intends to control a significant portion
of the cost of manufacturing deflection yokes by acquiring Dnon Tech and
thereby controlling the cost of enameled copper wire.
Most selling, administrative, research and development and marketing
services have been performed for the Company's subsidiaries, at cost, by
Pianzhuan Group. After this Offering, the Company expects to expand its own
efforts in these areas and to rely less on Pianzhuan Group. In that connection,
the Company expects to experience increases in selling and administrative
expenses.
The Company's subsidiaries are subject to Chinese Enterprise Income Tax
("EIT"), but have not paid any taxes before 1995 due to certain tax concessions
offered to foreign investment enterprises under Chinese law. The Company is
eligible to apply for a refund of 40% of the EIT paid by its subsidiaries, to
the extent profits are reinvested in its subsidiaries in China. See
"Taxation--China Taxation."
Asia Electronics Holding Co. Inc. Pro Forma Consolidated Results of Operations
The following discussion is based on the unaudited pro forma consolidated
statements of income for the Company for the year ended December 31, 1996 and
each of the three months ended March 31, 1996 and 1997, as if the Company had
acquired each of Yongxin, Daming, Yantai and Dnon Tech at January 1, 1996. See
"Unaudited Pro Forma Consolidated Financial Information."
Year Ended December 31, 1996
For the year ended December 31, 1996, pro forma consolidated net sales
were RMB221,181,000 ($26,663,000), which reflects the sale of 5,154,567 units
of deflection yokes (comprised of 2,007,880 units for 14" CPTs, 1,957,800 units
for 20" CPTs, 102,708 units for 21" CPTs, 1,018,811 units for 25" CPTs and
67,368 units for 14" CDTs). Pro forma consolidated gross profit for the period
was RMB58,710,000 ($7,077,000), or a gross profit margin of 26.5%. Pro forma
consolidated selling and administrative expenses for the period were
RMB8,005,000 ($965,000), or 3.6% of consolidated net sales. As a consequence,
pro forma consolidated income before income taxes for the period was
RMB50,032,000 ($6,032,000), or 22.6% of consolidated net sales, and pro forma
consolidated net income for the period was RMB34,117,000 ($4,113,000), or 15.4%
of consolidated net sales.
27
<PAGE>
Three Months Ended March 31, 1997 Compared with Three Months Ended March 31,
1996
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------------
1997 1996
-------------------------- -------------------------
Amount Percentage Amount Percentage
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales ................................. RMB71,233 100.0% RMB28,805 100.0%
Gross profit .............................. 17,385 24.4 5,148 17.9
Selling and administrative expenses ...... 3,066 4.3 1,492 5.2
Income before income taxes.................. 13,805 19.4 3,206 11.1
Net income ................................. 9,772 13.7 2,394 8.3
</TABLE>
Net Sales. Pro forma consolidated net sales increased by RMB42,428,000
($5,115,000), or approximately 147%, from RMB28,805,000 ($3,472,000) in the
three months ended March 31, 1996 to RMB71,233,000 ($8,587,000) in the three
months ended March 31, 1997. Total units sold increased by 759,767 units, or
approximately 105%, from 726,541 units in the 1996 period to 1,486,308 units in
the 1997 period, which reflects increases in unit sales by product as follows:
Unit Sales
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------
1997 1996
-------------------------------- ------------------------------
Number Percentage of Number Percentage of
of Units Total Units Sold of Units Total Units Sold
----------- ------------------ ---------- -----------------
<S> <C> <C> <C> <C>
14" CPTs ............ 442,800 29.8% 316,600 43.6%
20" CPTs ............ 478,000 32.2 302,800 41.7
21" CPTs (wide) ...... 123,358 8.3 30,800 4.2
25" CPTs ............ 434,350 29.2 76,341 10.5
14" CDTs ............ 7,800 0.5 -- --
---------- ------ -------- ------
1,486,308 100.0% 726,541 100.0%
========== ====== ======== ======
</TABLE>
The increase in net sales was primarily the result of the increase in unit
sales of 25" CPTs. The average price per unit for each type of deflection yoke
remained unchanged from the three months ended March 31, 1996 to the three
months ended March 31, 1997, except for deflection yokes for 25" CPTs, for
which the average unit price decreased slightly in an effort by the Company to
increase its market share. The Company first commenced actively selling
deflection yokes for CDTs in October 1996. The Company believes that the small
number of CDTs sold in the three months ended March 31, 1997 reflects a
temporary reduction, as the Company is in the process of developing a more
advanced CDT, which it anticipates will be available for sale in the third
quarter of 1997. The Company believes sales of CDTs will increase in future
periods.
Gross Profit. Gross profit increased RMB12,237,000 ($1,475,000), or
approximately 238%, from RMB5,148,000 ($621,000), or a gross profit margin of
17.9%, in the three months ended March 31, 1996 to RMB17,385,000 ($2,096,000),
or a gross profit margin of 24.4%, in the three months ended March 31, 1997.
The increase in gross profit margin was primarily the result of the increase in
unit sales generally and, particularly, unit sales of the Company's higher
margin CPT and CDT products, offset by a slight decrease in the average price
per unit of deflection yokes for 25" CPTs.
Selling and Administrative Expenses. Selling and administrative expenses
increased by RMB1,574,000 ($190,000), or approximately 105%, from RMB1,492,000
($180,000), or 5.2% of net sales, in the three months ended March 31, 1996 to
RMB3,066,000 ($370,000), or 4.3% of net sales, in the three months ended March
31, 1997. The increase in selling and administrative expenses was primarily the
result of the increase in net sales. The decrease in selling and administrative
expenses as a percentage of net sales was primarily the result of a decrease in
transportation costs and the ability to increase sales without corresponding
increases in costs at Yongxin and Daming, offset, in part, by increased
marketing costs at Yantai and Dnon Tech.
Income Before Income Taxes. Income before income taxes increased by
RMB10,599,000 ($1,278,000), or approximately 331%, from RMB3,026,000
($386,000), or 11.1% of net sales, in the three months ended March 31, 1996 to
RMB13,805,000 ($1,664,000), or 19.4% of net sales, in the three months ended
March 31, 1997. This
28
<PAGE>
change reflects the changes described above, as well as an increase in net
interest expense from RMB1,014,000 ($122,000) in the 1996 period to
RMB1,535,000 ($185,000) in the 1997 period (which resulted from an increase in
short-term borrowings to fund operations), offset, in part, by a decrease in
average interest costs.
Net Income. Net income increased by RMB7,378,000 ($890,000), or
approximately 308%, from RMB2,394,000 ($288,000), or 8.3% of net sales, in the
three months ended March 31, 1996 to RMB9,772,000 ($1,178,000), or 13.7% of net
sales, in the three months ended March 31, 1997. This change reflects the
changes described above, as well as an increase in income taxes from RMB82,000
($10,000) in the 1996 period to RMB1,700,000 ($205,000) in the 1997 period
(which resulted from the partial expiration of tax holiday benefits).
Combined Results of Operations for Yongxin and Daming
Three Months Ended March 31, 1997 Compared with Three Months Ended March 31,
1996
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------------
1997 1996
---------------------------- ---------------------------
Amount Percentage Amount Percentage
--------------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
Net sales ........................... RMB53,904,604 100.0% RMB13,113,402 100.0%
Gross profit ........................ 14,078,821 26.1 2,382,480 18.2
Selling and administrative expenses 1,890,169 3.5 778,927 5.9
Income before income taxes ......... 11,340,420 21.0 898,561 6.9
Net income ........................ 9,578,874 17.8 741,726 5.7
</TABLE>
Net Sales. Net sales increased by RMB40,791,202 ($4,917,565), or
approximately 311%, from RMB13,113,402 ($1,580,880) in the three months ended
March 31, 1996 to RMB53,904,604 ($6,498,445) in the three months ended March
31, 1997, due primarily to strong unit sales growth in 21" (wide) and 25"
products. The increase in net sales was partially offset by a slight decrease
in the average price per unit of deflection yokes for 25" CPTs.
Gross Profit. Gross profit increased by RMB11,696,341 ($1,410,047), or
approximately 491%, from RMB2,382,480 ($287,219) in the three months ended
March 31, 1996, or a gross profit margin of 18.2%, to RMB14,078,821
($1,697,265) in the three months ended March 31, 1997, or a gross profit margin
of 26.1%. This increase in gross profit margin was primarily due to strong unit
sales of higher margin 25" deflection yokes and other high margin products.
Selling and Administrative Expenses. Selling and administrative expenses
increased by RMB1,111,242 ($133,957), or approximately 143%, from RMB778,927
($93,903), or 5.9% of net sales, in the three months ended March 31,1996 to
RMB1,890,169 ($227,855), or 3.5% of net sales, in the three months ended March
31, 1997. The decrease in selling and administrative expenses as a percentage
of net sales was primarily attributable to the Company's ability to increase
sales without corresponding increases in costs.
Income Before Income Taxes. Income before income taxes increased by
RMB10,441,859 ($1,258,814), or approximately 1,162%, from RMB898,561 ($108,326)
in the three months ended March 31, 1996, or, 6.9% of net sales, to
RMB11,540,420 ($1,391,250) in the three months ended March 31, 1997, or 21.0%
of net sales. This change reflects the changes described above, as well as an
increase in net interest expense from RMB691,879 ($83,409) in the 1996 period
to RMB847,506 ($102,171) in the 1997 period (which resulted from an increase in
short-term borrowings to fund operations and higher interest rates).
Net Income. Net income increased by RMB8,837,148 ($1,065,358), or
approximately 1,191%, from RMB741,726 ($89,418) in the three months ended March
31, 1996, or 5.7% of net sales, to RMB9,578,874 ($1,154,777) in the three
months ended March 31, 1997, or 17.8% of net sales. This change reflects the
changes described above, as well as an increase in the provision for taxes by
RMB1,494,485 ($180,167) from RMB156,835 ($18,907) in the 1996 period to
RMB1,761,546 ($212,362) in the 1997 period (which resulted from the expiration
of certain tax benefits at Yongxin).
29
<PAGE>
Year Ended December 31, 1996 Compared with the Year Ended December 31, 1995
<TABLE>
<CAPTION>
1996 1995
------------------------------ ---------------------------
Amount Percentages Amount Percentage
---------------- ------------- --------------- -----------
<S> <C> <C> <C> <C>
Net sales ................................. RMB143,683,800 100.0% RMB96,712,985 100.0%
Gross profit .............................. 47,333,623 32.9 26,735,777 27.6
Selling and administrative expenses ...... 4,511,155 3.1 2,614,942 2.7
Income before income taxes ............... 41,671,652 29.0 20,870,460 21.6
Net income .............................. 34,260,912 23.8 18,794,452 19.4
</TABLE>
Net Sales. Net sales increased by RMB46,970,815 ($5,662,546), or 48.6%,
from RMB96,712,985 ($11,659,190) in 1995 to RMB143,683,800 ($1,732,174) in
1996. The increase was due primarily to strong unit sales because of increased
demand for larger size CPTs. The increase was partially offset by an average
per unit price decrease of 3% for deflection yokes for 25" CPTs.
Gross Profit. Gross profit increased by RMB20,597,846 ($2,483,164), or
77.0%, from RMB26,735,777 ($3,223,120), or a gross profit margin of 27.6%, in
1995 to RMB47,333,623 ($5,706,284), or a gross profit margin of 32.9%, in 1996.
The increase in gross profit margin was primarily attributable to reduced costs
of raw materials through the increased use of local materials sources and fewer
imported materials, partially offset by increases in the cost of raw materials
for a new deflection yoke model for 21" CPTs. Gross profit also was affected by
improvements in per unit allocated manufacturing overhead costs associated with
higher sales volume, per unit cost of labor improvement due to productivity
gains (despite average hourly labor rate increases) and quality control
improvements evidenced by significantly lower failure rates.
Selling and Administrative Expenses. Selling and administrative expenses
increased by RMB1,896,213 ($228,597), or 72.5%, from RMB2,614,942 ($315,243),
or 2.7% of net sales, in 1995 to RMB4,511,155 ($543,840), or 3.1% of net sales,
in 1996. The increase in selling and administrative expenses was primarily a
result of a substantial increase in transportation costs and allocated
management fees to Pianzhuan Group due to Yongxin's and Daming's larger
proportion of Pianzhuan Group total sales. This increase was partially offset
by cost savings due to product line reorganizations and reductions in stamp
duty and auditing and accounting fees.
Income Before Income Taxes. Income before income taxes increased by
RMB20,801,192 ($2,507,678), or 99.7%, from RMB20,870,460 ($2,516,029), or 21.6%
of net sales, in 1995 to RMB41,671,652 ($5,023,707), or 29.0% of net sales, in
1996. This change reflects the changes described above, as well as a decrease
in net interest expense from RMB3,214,077 ($387,472) to 1,036,500 ($124,955)
(which resulted from increased net interest income and higher interest rates,
as well as a foreign exchange gain).
Net Income. Net income increased by RMB15,466,460 ($1,864,552), or 82.3%,
from net income of RMB18,794,452 ($2,265,757), or 19.4% of net sales, in 1995
to RMB34,260,912 ($4,130,309), or 23.8% of net sales, in 1996. This change
reflects the changes described above, as well as an increase in the provision
for taxes by RMB5,334,000 ($643,038), or approximately 257%, from RMB2,077,000
($250,392) in 1995 to RMB7,410,740 ($893,398) in 1996 due to higher taxable
income and a partial expiration of tax holiday benefits.
Year Ended December 31, 1995 Compared with the Year Ended December 31, 1994
<TABLE>
<CAPTION>
1995 1994
---------------------------- ---------------------------
Amount Percentage Percentages Percentage
--------------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
Net sales ........................... RMB96,713,000 100.0% RMB68,789,000 100.0%
Gross profit ........................ 26,736,000 27.6 16,991,000 24.7
Selling and administrative expenses 2,615,000 2.7 634,000 0.9
Income before income taxes ......... 20,871,000 21.6 14,449,000 21.0
Net income ........................... 18,794,000 19.4 14,449,000 21.0
</TABLE>
30
<PAGE>
Net Sales. Net sales increased by RMB27,924,000 ($3,366,365), or 40.6%,
from RMB68,789,000 ($8,292,827) in 1994 to RMB96,713,000 ($11,659,192) in 1995.
The increase was due primarily to the 22.9% increase in deflection yoke unit
sales from 1,610,000 units in 1994 to 1,978,000 units in 1995. The increase was
partially offset by a 10% reduction in price for deflection yokes for 25" CPTs
in accordance with the Company's strategy in 1995 to reduce prices selectively
to gain market share.
Gross Profit. Gross profit increased by RMB9,745,000 ($1,174,804), or
57.4%, from RMB16,991,000 ($2,048,342), or a gross profit margin of 24.7%, in
1994 to RMB26,736,000 ($3,223,146), or a gross profit margin of 27.6%, in 1995.
The increase in gross profit margin was primarily attributable to increased
unit sales for 14" and 20" CPTs, a decrease in the cost of raw materials,
improvements in productivity (despite an increase in hourly labor rates) and a
reduction in the cost of manufacturing overhead due to the reallocation of
certain costs to the centralized management fee in general and administrative
expenses.
Selling and Administrative Expenses. Selling and administrative expenses
increased by RMB1,981,000 ($238,819), or approximately 312%, from RMB634,000
($76,432), or 0.9% of net sales, in 1994 to RMB2,615,000 ($315,250), or 2.7% of
net sales, in 1995. The increase in selling and administrative expenses as a
percentage of net sales was primarily the result of a substantial increase in
transportation costs and in reallocation for a centralized management fee,
rent, a stamp duty fee and increased charges for insurance and accounting.
Income Before Income Taxes. Income before income taxes increased by
RMB6,422,000 ($774,201), or 44.4%, from RMB14,449,000 ($1,741,893), or 21.0% of
net sales, in 1994 to RMB20,871,000 ($2,516,094), or 20.8% of net sales, in
1995. This change reflects the changes described above, as well as a decrease
in net interest expense from RMB1,689,000 ($203,617) to RMB3,214,000 ($387,462)
(which resulted from an increase in short-term borrowings to fund operations,
partially offset by reduced foreign exchange losses).
Net Income. Net income increased by RMB4,345,000 ($523,810), or 30.1%,
from net income of RMB14,449,000 ($1,741,893), or 21.0% of net sales, in 1994
to RMB18,794,000 ($2,265,702), or 19.4% of net sales, in 1995. This change
reflects the changes described above, as well as an increase in the provision
for taxes by RMB2,077,000 ($250,392) from zero to RMB2,077,000 ($250,392) due
to the beginning of the expiration of tax holidays.
Combined Results of Operations for Yantai and Dnon Tech
Three Months Ended March 31, 1997 Compared with Three Months Ended March 31,
1996
<TABLE>
<CAPTION>
1997 1996
---------------------------------- --------------------------------
Amount Percentage Amount Percentage
--------------------- ------------ -------------------- -----------
<S> <C> <C> <C> <C>
Net sales--Yantai .................. RMB17,328,745 RMB15,691,135
Net sales--Dnon Tech ............... 3,575,582 1,153,554
--------- ---------
Total net sales ..................... 20,904,327 100.0% 16,844,689 100.0%
Gross profit ........................ 3,306,343 15.8 2,765,113 16.4
Selling and administrative expenses 1,176,263 5.6 713,322 4.2
Income before income taxes ......... 1,611,825 7.7 1,821,733 10.8
Net income ........................... 1,673,825 8.0 1,896,733 11.3
</TABLE>
Net Sales. Net sales increased by RMB4,059,638 ($489,408), or 24.1%, from
RMB16,844,689 ($2,030,704) in the three months ended March 31, 1996 to
RMB20,904,327 ($2,520,112) in the three months ended March 31, 1997, due
primarily to increases in export sales of deflection yokes at Yantai and
substantial sales increases in enameled wire at Dnon Tech.
Gross Profit. Gross profit increased by RMB541,230 ($65,248), or 19.6%,
from RMB2,765,113 ($333,347), or a gross profit margin of 16.4%, in the three
months ended March 31, 1996 to RMB3,306,343 ($398,595), or a gross profit
margin of 15.8%, in the three months ended March 31, 1997. The decrease in
gross profit margin was attributable to the production of molds and samples for
prospective customers by Yantai during the 1997 period.
Selling and Administrative Expenses. Selling and administrative expenses
increased by RMB462,941 ($55,810), or 64.9%, from RMB713,322 ($85,994), or 4.2%
of net sales, in the three months ended March 31, 1996 to RMB1,176,263
($141,804), or 5.6% of net sales, in the three months ended March 31, 1997. The
increase
31
<PAGE>
in selling and administrative expenses as a percentage of net sales was
primarily attributable to increased marketing and technical verification costs
at Dnon Tech.
Income Before Income Taxes. Income before income taxes decreased by
RMB209,908 ($25,305), or 11.5%, from RMB1,821,733 ($219,618), or 10.8% of net
sales, in the three months ended March 31, 1996 to RMB1,611,825 ($194,313), or
7.7% of net sales, in the three months ended March 31, 1997. This change
reflects the changes described above, as well as an increase in net interest
expense by RMB365,000 ($44,002) from RMB322,013 ($38,820) to RMB687,000
($82,821) (which resulted from an increase in short-term borrowings to fund
operations and higher interest rates).
Net Income. Net income decreased by RMB222,908 ($26,873), or 11.8%, from
RMB1,896,733 ($228,660) in the three months ended March 31, 1996 to
RMB1,673,825 ($201,787) in the three months ended March 31, 1997. This change
reflects the changes described above, as well as an increase in provision for
taxes because of refunds due to export credits at Yantai.
Year Ended December 31, 1996 Compared with the Year Ended December 31, 1995
<TABLE>
<CAPTION>
1996 1995
---------------------------------- --------------------------------
Percentages Percentage Amount Percentage
--------------------- ------------ -------------------- -----------
<S> <C> <C> <C> <C>
Net sales--Yantai .................. RMB77,863,097 RMB38,788,399
Net sales--Dnon Tech ............... 8,498,841 1,208,769
--------- ---------
Total net sales ..................... 86,361,938 100.0% 39,997,168 100.0%
Gross profit ........................ 11,624,384 13.5 767,443 1.9
Selling and administrative expenses 3,493,746 4.0 1,787,889 4.5
Income before income taxes ......... 6,666,505 7.7 (1,452,048) (3.6)
Net income ........................... 6,871,505 8.0 (1,287,048) (3.2)
</TABLE>
Net Sales. Net sales increased by RMB46,364,770 ($5,589,484), or
approximately 116%, from RMB39,997,168 ($4,821,840) in 1995 to RMB86,361,938
($10,411,324) in 1996, due primarily to increases in unit sales due to
increased exports and to a shift in production to deflection yokes for 14" and
20" CPTs at Yantai and to an increase in metric tons sold by Dnon Tech from 23
tons in 1995 to 176 tons in 1996. Dnon Tech's operations began in September
1995.
Gross Profit. Gross profit increased by RMB10,856,941 ($1,308,854) from
RMB767,443 ($92,519), or a gross profit margin of 1.9%, in 1995 to
RMB11,624,384 ($1,401,372), or a gross profit margin of 13.5%, in 1996. The
increase in gross profit margin was attributable to a decrease at Yantai in per
unit manufacturing expenses due to greater unit production volume, savings on
materials (due to the increased use of locally sourced materials and fewer
imported materials) and the reduction in per unit labor costs because of
productivity gains. At Dnon Tech, gross profit improved from a gross loss
recorded in 1995 because of a 20.6% reduction in materials costs, which
accounted for 90% of cost of sales, partially offset by increased labor and
factory overhead costs on a per kilogram basis.
Selling and Administrative Expenses. Selling and administrative expenses
increased by RMB1,705,857 ($205,649), or 95.4%, from RMB1,787,889 ($215,538),
or 4.5% of net sales, in 1995 to RMB3,493,746 ($421,187), or 4.0% of net sales,
in 1996. The decrease in selling and administrative expenses was primarily due
to the leverage obtained from the increased net sales base and controlled
expenses.
Income Before Income Taxes. Income before income taxes increased by
RMB8,118,553 ($978,729), from a loss of RMB1,452,048 ($175,051) in 1995 to a
gain of RMB6,666,505 ($803,678) in 1996. This change reflects the changes
described above, as well as an increase in net interest expense from RMB812,146
($97,908) to RMB2,116,853 ($255,196) (which resulted from an increase in
short-term borrowings to fund operating expenses and higher interest rates).
Net Income. Net income increased by RMB8,158,853 ($983,587), from a net
loss of RMB1,287,048 ($155,159) in 1995 to net income of RMB6,871,505
($828,391) in 1996. This change reflects the changes described above, as well
as an increase in deferred tax benefits of RMB40,000 ($4,822), from RMB165,000
($19,892) in 1995 to RMB205,000 ($24,714) in 1996.
32
<PAGE>
Liquidity and Capital Resources
Historically, the Company has required funds to finance working capital,
capital expenditures for expansion of production facilities and payments of
dividends. The Company has relied on cash flow from operations, short-
term borrowings from banks and inter-company borrowings from Pianzhuan Group to
meet financial obligations. Subject to the availability of foreign currency,
there are no restrictions on the ability of the subsidiaries to pay dividends.
For certain transactions such as repayment of capital, approval is required by
the State Administration of Foreign Exchange.
A portion of the net proceeds of this Offering will be used for general
corporate purposes and working capital, which will contribute to improved
liquidity. In addition, the Company does not anticipate paying any dividends in
the foreseeable future. Offsetting these developments will be an increase in
state and local income taxes payable in China because of the expiration of tax
holiday benefits for each of the Company's subsidiaries at various times.
At March 31, 1997, the Company had working capital of RMB54,754,000
($6,600,000), compared to RMB49,134,000 ($5,923,000) at December 31, 1996.
Changes in working capital included a decrease in accounts receivable of
RMB2,755,000 ($332,000), a decrease in inventory of RMB2,139,000 ($258,000) and
an increase in payables of RMB5,808,000 ($700,000). At March 31, 1997, the
Company had pro forma working capital of RMB216,220,000 ($26,065,000).
For the years ended December 31, 1994, 1995 and 1996, Yongxin and Daming
had combined net cash flow from operating activities of RMB21,375,000
($2,576,854), RMB17,425,000 ($2,100,663) and RMB (570,000) ($(68,716)),
respectively, and Yantai and Dnon Tech had combined net cash flow from
operating activities of RMB3,986,000 ($480,530), RMB1,562,000 ($188,186) and
RMB (2,701,000) ($(325,618)), respectively. Cash flow from operations in 1996
was negative for Yongxin and Daming because of an increase in receivables due
from a related party and a decrease in short-term debt owed to a related party.
Cash flow from operations was negative for Yantai and Dnon Tech in 1996 because
of an increase in deposits, prepayments and inventory and to a reduction in
liabilities owed to joint venture partners. The Company's combined pro forma
net cash flow from operating activities was RMB570,000 ($69,000) for 1996 and
RMB9,880,000 ($1,190,000) for the three months ended March 31, 1997.
The Company's short-term borrowings are mainly denominated in United
States dollars and are secured by corporate guarantees given by Pianzhuan
Group. At December 31, 1996, Yongxin and Daming had combined short- term
borrowings outstanding of RMB14,749,000 ($1,778,059) and during 1996 Yongxin
and Daming had an average interest rate of 7.6%. Yongxin and Daming have credit
facilities at Peoples Construction Bank of China and China Industrial and
Commercial Bank amounting to total credit of RMB50,000,000 and additional U.S.
dollar denominated credit of $5,000,000. The average interest rate for the
dollar denominated credit in 1996 was 6.0%. Yongxin and Daming may borrow RMB,
if necessary, for future cash requirements at a higher rate.
Yantai has a credit facility at The Bank of China of RMB2,500,000
($301,386). Dnon Tech has a credit facility at Peoples Construction Bank of
China and China Industrial and Commercial Bank denominated in U.S. dollars in
the amount of $1,000,000. At December 31, 1996, Yantai and Dnon Tech had
combined short-term borrowings of RMB13,560,000 ($1,634,720) with an average
interest rate for 1996 of 9.0%.
Yongxin and Daming had combined capital expenditures for property, plant
and equipment for 1994, 1995 and 1996 of RMB29,282,000 ($3,530,000),
RMB12,114,000 ($1,460,000) and RMB691,000 ($83,000), respectively, and Yantai
and Dnon Tech had combined capital expenditures for the same periods of
RMB27,881,000 ($3,361,000), RMB13,392,000 ($1,614,000) and RMB7,366,000
($888,000), respectively. The Company's consolidated pro forma capital
expenditures were RMB8,057,000 ($971,000) for 1996 and RMB7,639,000 ($922,000)
for the three months ended March 31, 1997. The Company expects that capital
expenditures during the next 12 months will be approximately $15.5 million. See
"Use of Proceeds."
The Company anticipates that it will be able to meet its ongoing cash
requirements with cash generated from operations, proceeds from this Offering
and borrowings as needed from existing banking relationships.
Impact of Inflation
The Company does not consider inflation to have had a material impact on
its results of operations during the periods covered.
33
<PAGE>
BUSINESS
Company Overview
The Company is a British Virgin Islands holding company that develops and
manufactures deflection yokes for sale to manufacturers of color television
sets and computer monitors. Deflection yokes are electronic devices attached to
CPTs in television sets and CDTs in computer monitors. Deflection yokes use
electro-magnetic forces to aim (i.e., deflect) red, green and blue light beams
at the screen in the front of the CPT or CDT. When the light beams converge,
various levels of intensity within each beam create a picture on the screen,
which varies in movement, color and shape according to the video signal. In
addition to aiming light beams, deflection yokes ensure that the red, green and
blue light beams converge at each point on the screen simultaneously, thereby
causing clarity and focus. The Company believes it is the largest independent
manufacturer of deflection yokes in China, and the third largest in the world.
The Company is a holding company, which currently owns 80% of the equity
of each of Yongxin and Daming. The Company intends to use a portion of the net
proceeds of this Offering to acquire 70% of the equity of Yantai and 90% of the
equity of Dnon Tech. See "Use of Proceeds." Yantai, like Daming and Yongxin,
develops and manufactures deflection yokes. Dnon Tech manufactures, primarily
for Daming, Yongxin and Yantai, high quality enameled copper wire, which is the
principal raw material used in deflection yokes. Each of Yongxin, Daming,
Yongxin, Yantai and Dnon Tech has all its manufacturing facilities in China.
Industry Overview
Demand for deflection yokes is directly linked to the demand for CPTs and
CDTs, which are used in television sets and computer monitors, respectively.
The following table provides information about the total world-wide demand for
television sets and computer monitors and the total world-wide production of
CPTs and CDTs:
Television/Monitor Demand and CPT/CDT Production by Select Regions in 1996
(in millions of units)
<TABLE>
<CAPTION>
Rest of Total Rest of Total Total
NAFTA West West China East East World
------- --------- ------- ------- --------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Demand:
Televisions ............ 27.1 55.7 82.8 19.4 26.0 45.4 128.2
Monitors ............... 29.1 26.7 55.8 2.0 13.3 15.3 71.1
----- ----- ------ ----- ------ ------ ------
Total Demand ......... 56.2 82.4 138.6 21.4 39.3 60.7 199.3
===== ===== ====== ===== ====== ====== ======
Production:
CPTs .................. 25.0 34.7 59.7 15.6 64.6 80.2 139.9
CDTs .................. 1.0 4.0 1.4 0.5 68.5 69.0 70.4
----- ----- ------ ----- ------ ------ ------
Total Production ...... 26.0 38.7 61.1 16.1 133.1 149.2 210.3
===== ===== ====== ===== ====== ====== ======
</TABLE>
- --------------
Source: Corning Incorporated, February 1997
According to the Corning Report, the production of CPTs is expected to
increase from the present world level of 139.9 million units to 184.1 million
units by the year 2000, a compounded annual growth rate of 7.1%. Although the
television market is mature in most developed countries, the Company believes
population and household growth are likely to sustain continued demand for
televisions. In addition, the television replacement market provides a
continuing source of demand, which the Company expects may increase with the
introduction of HDTVs. See "--Products." World production of CDTs is expected
to increase from the present level of 70.4 million units to 142.7 million units
by the year 2000, a compounded annual growth rate of 19.3%, due to continued
demand for computers and the replacement market for computers and, according to
the Corning Report, China's share of world CPT and CDT production is projected
to increase from 16.1 million units in 1996 to 39.9 million units in 2000,
which represents a compounded annual growth rate of approximately 26%. The
following table shows expected total world-wide demand for television sets and
monitors and world-wide production of CPTs and CDTs in 2000:
34
<PAGE>
Television/Monitor Demand and CPT/CDT Production by Select Regions in 2000 (in
millions of units)
<TABLE>
<CAPTION>
Rest of Total Rest of Total Total
NAFTA West West China East East World
------- --------- ------- ------- --------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Demand:
Televisions ............ 27.4 70.7 98.1 24.1 34.9 59.0 157.1
Monitors ............... 36.0 33.9 69.9 8.9 24.0 32.9 102.8
---- ------ ------ ----- ------ ------ -----
Total Demand ......... 63.4 104.6 168.0 33.0 58.9 91.9 259.9
==== ====== ====== ===== ====== ====== =====
Production:
CPTs .................. 27.5 48.3 75.8 28.3 80.0 108.3 184.1
CDTs .................. 10.6 10.6 21.2 11.6 109.9 121.5 142.7
---- ------ ------ ----- ------ ------ -----
Total Production ...... 38.1 58.9 97.0 39.9 189.9 229.8 326.8
==== ====== ====== ===== ====== ====== =====
</TABLE>
- --------------
Source: Corning Incorporated, February 1997
China emerged in the world electronics industry in the 1980s, especially
for products for which the manufacturing process is labor intensive and not
readily subject to automation. Although most major television manufacturers,
such as Daewoo, Toshiba, Matsushita, Sony, Sanyo, Philips, Sharp and Samsung,
continue to manufacture deflection yokes to some extent, the Company believes
there is a trend among OEMs to outsource the more labor-intensive segments of
their manufacturing operations. The Company believes the relatively low labor
costs in China and the difficulty automating significant portions of the
manufacturing process for deflection yokes afford the Company an advantage in
being able to capture additional market share in the deflection yoke industry.
See "--Sales and Marketing--Customers."
The Company believes that Murata, a Japanese corporation engaged primarily
in the business of manufacturing ceramic capacitors and other electronic
components with fiscal 1997 revenues of approximately $2.4 billion, has been
the largest manufacturer in the world of deflection yokes for sale to
unaffiliated third parties, producing approximately 10 million units per year.
In April 1997, Murata announced that it was selling its deflection yoke
manufacturing facility in Mexico to Totoku, a Japanese electronics company
that manufactures CRTs. The Company believes that Murata intends to exit the
deflection yoke business. The Company believes Murata's deflection yoke
business represents approximately 3% of its annual revenues (or approximately
$85 million).
Business Strategy
The Company's goal is to use its manufacturing expertise and low
manufacturing costs to become the largest independent producer of deflection
yokes in the world. To accomplish this goal, the Company's strategy is to:
[bullet] Expand its production capacity to meet existing and expected
demand. The Company is expanding its production capacity and
intends to use approximately $15.5 million of the net proceeds of
this Offering to expand capacity further. With the additional
production capacity, the Company will be able to satisfy the
projected growth in demand for deflection yokes, both for
television sets and computer monitors. The Company is expanding
production to accommodate its recent and anticipated growth. In
that connection, the Company had backlog at March 31, 1997 of
approximately $30.0 million, compared to backlog at March 31, 1996
of approximately $20.0 million. The Company's planned expansion
will result in total annual production capacity of approximately
12.8 million units, compared to total production capacity of
approximately 6.1 million units at the end of 1996.
[bullet] Focus production expansion on higher margin products, such as
deflection yokes for larger screen televisions. The Company
currently manufactures deflection yokes for 14", 20" and 25" CPT
models. The Company's planned expansion will be aimed at
manufacturing the higher margin products, including deflection
yokes for larger screen televisions and for CDTs. Gross profit
margins for deflection yokes for 14" and 20" models generally
average between 10-15%, while gross profit margins for deflection
yokes for 21" (wide), 25" and 29" models generally average between
30-45%.
35
<PAGE>
[bullet] Expand penetration of CDT market. The Company recently entered the
market for deflection yokes for computer monitors (CDTs), and in
1996 produced approximately 93,000 units. Deflection yokes for
CDTs are more advanced than deflection yokes for CPTs in the level
of design complexity and engineering specifications of each
customer, due to the higher resolution of the display device. The
Company's planned expansion will result in a total annual
production capacity of approximately 2.2 million deflection yokes
for CDTs. The Company expects that margins for CDT products will
be comparable to those of the higher margin CPT products.
[bullet] Expand Customer Relationships. The Company plans to increase its
sales of deflection yokes by actively marketing its products to
OEMs with a view to adding new customers and developing additional
business from existing customers. The Company believes its
commitment to quality, service and competitive prices will enable
it to continue to forge strong customer relationships. The Company
plans to utilize its strong supplier relationship with Daewoo to
build other strategic supplier relationships. Recently, the
Company has added such customers as LG Shuguang, Fujian Hitachi
and Foshan Thompson.
[bullet] Expand Product Development. The Company intends to develop other
deflection yoke technologies and to consider opportunities for the
development or acquisition of other products the Company
determines it can manufacture and sell in a cost-effective manner
by leveraging its manufacturing expertise and capacity.
Products
CPT Products
The Company produced 5,494,000 deflection yokes for CPTs in 1996. The
Company currently offers deflection yokes for 14", 20", 21" and 25" CPTs and
will soon offer deflection yokes for 29" CPTs. The Company's deflection yokes
for 14", 20" and 21" CPTs have basic design similarities, although they are
custom fitted to engineered specifications of each customer. The major
television set producers, such as Daewoo, Toshiba, Panasonic, Sony, Sanyo,
Philips and Samsung, have CPT products within each size category that are
generally proprietary and require unique deflection yoke specifications. As a
result, since its inception, the Company has developed a total of 36 models of
deflection yokes for CPTs to meet the requirements of its customers. Certain of
these models serve the needs of more than one customer.
The Company has recently developed two designs of 25" adaptable deflection
yokes, which can be installed in a variety of 25" CPTs. The Company believes
such designs should reduce the need for extensive product development that is
often necessary to meet the requirements of its customers. The Company intends
to apply this technology to the development of a generic deflection yoke for
29" CPTs. The Company has applied for patents in China for the two designs of
adaptable deflection yokes for 25" CPTs and certain associated components. See
"Risk Factors--Absence of Protection for Intellectual Property." To date, the
Company has sold only a limited number of adaptable deflection yokes for 25"
CPTs and does not plan to increase sales until a patent has been granted.
The Company is a party to a licensing agreement with Toshiba, pursuant to
which the Company will license certain technology from Toshiba for the
production of deflection yokes for 25" and 29" CPTs that are compatible with
Toshiba's televisions.
The Company recently entered the market for deflection yokes for HDTVs
(CPTs). The Company is currently developing deflection yokes for 21" CPTs for
the HDTV market. Deflection yokes for HDTVs are more advanced than deflection
yokes for regular televisions and provide better resolution.
CDT Products
The Company recently entered the rapidly growing market for deflection
yokes for CDTs; the Company produced approximately 93,000 deflection yokes for
CDTs in 1996. Deflection yokes for CDTs are similar to deflection yokes for
CPTs, but provide better resolution. The enhanced resolution is accomplished by
directing the light beam to a single point on the screen, compared to a
slightly larger band area, in the case of CPTs. Although the actual resolution
varies based on the signal source (e.g. broadcast television, videotape
recorders, laserdisc players), conventional analog television is capable of
resolution up to 550 lines per screen, compared with 1,024 lines per screen for
computer monitors.
36
<PAGE>
Backlog
At March 31, 1996 and 1997, the amounts of backlog of firm orders were
approximately $30.0 million and approximately $20.0 million, respectively.
Substantially all the backlog at March 31, 1996 was filled by March 31, 1997,
and the Company expects to fill substantially all the backlog at March 31, 1997
by March 31, 1998.
Sales and Marketing
The Company has focused its marketing efforts on (i) building a reputation
within the deflection yoke industry as the manufacturer of high quality, low
price products and the provider of exceptional customer service and (ii)
penetrating international and domestic Chinese markets.
Pricing
The Company's pricing strategy is to be the low cost provider of high
quality deflection yokes globally. The Company has been able to price its
products competitively, due both to (i) low labor costs in a labor intensive
industry and (ii) manufacturing efficiencies. In addition to the relatively low
labor costs, upon the consummation of the Acquisitions, the Company will
control its supply of enameled copper wire, which represents a significant cost
in the production of deflection yokes. In the past, the Company imported
enameled copper wire from Japan.
Sales
The Company sold 5,154,567 deflection yokes in 1996, approximately
3,350,000 (or 65%) of which were sold to Daewoo. Daewoo redistributes between
50% and 60% of the deflection yokes it purchases from the Company to major
customers, such as Sharp, Toshiba, Hitachi, Sony, Mitsubishi and Matsushita.
The Company sold approximately 1,290,000 deflection yokes (or 25% of the total
number of deflection yokes sold) in 1996 to IRICO, substantially all of which
were sold through Pianzhuan Group. The following table sets forth the Company's
unit sales information by model for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1996 1995
--------------------------- --------------------------
Percent of Percent of
Units Sold Total Units Sold Total
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Product:
Deflection yoke for 14" CPT ...... 2,007,880 38.9% 1,225,217 36.1%
Deflection yoke for 20" CPT ...... 1,957,800 37.9 1,238,362 36.4
Deflection yoke for 21" CPT:
(narrow) ........................ -- -- 102,708 1.2
(wide) ........................... 521,998 15.4 -- --
Deflection yoke for 25" CPT ...... 1,018,811 19.8 412,686 12.1
Deflection yoke for 14" CDT ...... 67,368 1.3 -- --
---------- ------ ---------- ------
Total ........................... 5,154,567 100.0% 3,398,263 100.0%
========== ====== ========== ======
</TABLE>
Historically, the Company's marketing and sales have been implemented
primarily through Pianzhuan Group. Deflection yokes sold domestically are
generally sold to Pianzhuan Group, which resells the deflection yokes under its
brand name. Pianzhuan Group's centralized marketing and sales department
consists of 12 sales personnel for domestic business and nine for overseas
business. Among other things, Pianzhuan Group advertises in trade publications
and select industry publications, and attends important trade shows, such as
the Guangzhou Trade Fair and the Korean Electronics Trade Fair. The Company
reimburses Pianzhuan Group for its proportionate share of the cost of these
services (based on the proportionate share of Company and Pianzhuan Group
combined sales of deflection yokes). See "Risk Factors--Potential Conflicts of
Interest" and "Certain Relationships and Related Transactions."
In addition to sales conducted through Pianzhuan Group, the Company
employs its own sales personnel and, to a limited extent, manufacturers'
representatives, who receive a commission of 1.0% to 1.5% of sales. Sales of
deflection yokes by the Company's independent sales network, which at March 31,
1997, numbered 12, compared
37
<PAGE>
to two at March 31, 1996, are generally made under the Company's brand name. In
the past, the Company conducted its sales primarily in conjunction with Daewoo;
the Company's sales personnel operated out of Daewoo's offices in Seoul, Korea
and Daewoo functioned as a sales agent for the Company from its 200 offices
around the world. The Company recently began actively to market its products,
independently of Daewoo, with the intent of developing a larger customer base
and additional business from existing customers. The Company opened a sales
office in Seoul, Korea in June 1997 and in New York in January 1997 for
servicing American and other Western customers. The Company plans to open
additional sales offices in Nagano, Japan and San Francisco.
Customer Service
The Company seeks to provide a high level of customer service by setting
exacting service-related performance objectives and by employing a skilled
group of nine employees, who meet and consult periodically with customers.
These customer service personnel are trained to understand the special
technologies employed by their customers.
Customers
A majority of the Company's business is attributable to Daewoo and IRICO.
See "--Sales;" and "Risk Factors--Dependence on Major Customers." The Company
believes that its commitment to quality, service and competitive prices has
enabled it to develop strong relationships with Daewoo and IRICO. The Company's
relationship with Daewoo extends to several areas of the Company's business,
including marketing and training. The customers for the Company's deflection
yokes for CDTs include Daewoo, Shenzhen Saige Group, Hitachi, Samsung and LG
Shuguang. Within the last three months, the Company has begun selling products
to LG Shuguang, Fujian Hitachi and Foshan Thompson. The Company has had
preliminary discussions with several domestic Chinese producers of CPTs,
including sales of Beijing Matsushita Color CRT Co., Ltd., Foshan Electronics
Industry Group, Shanghai Novel CRT Corp. Ltd. and Hong Guang Industrial Co.,
Ltd. Cheng Du, regarding the sales of the Company's deflection yokes for 29"
CPTs.
Manufacturing
General
The Company's manufacturing operations are located in the cities of
Xianyang and Yantai. In May 1997, the Company leased an 11,200 square foot
facility in the city of Weihai, where the Company is constructing a deflection
yoke manufacturing operation. See "--Expansion Plans." The Company currently
produces deflection yokes for 14", 20", 21" and 25" CPTs, and also for 14"
CDTs. The Company began producing deflection yokes for 29" CPTs in June 1997.
The following table sets forth the Company's annual production capacity as of
December 31, 1996 and anticipated annual production capacity upon completion of
the Company's expansion projects:
Annual Production Capacity(1)
<TABLE>
<CAPTION>
Anticipated Production
Production Capacity Capacity upon
as of Completion of
December 31, 1996 Expansion Projects(2)
--------------------- -----------------------
<S> <C> <C>
Product:
Deflection yoke for 14" CPT ............ 2,000,000 2,000,000
Deflection yoke for 20" CPT ............ 2,000,000 2,100,000
Deflection yoke for 21" CPT (wide) ...... 400,000 2,200,000
Deflection yoke for 25" CPT ............ 1,600,000 2,500,000
Deflection yoke for 29" CPT ............ -- 1,800,000
Deflection yoke for 14" CDT ............ 100,000 2,200,000
---------- -----------
Total ................................. 6,100,000 12,800,000
</TABLE>
- --------------
(1) Based upon two production shifts operating 5 days per week.
(2) See "--Expansion Plans."
38
<PAGE>
Each 14", 20" and 21" deflection yoke for a CPT consists of two coils of
enameled copper wire, plastic structures, ferrite metal cores and electronic
controllers. The two coils, one for horizontal and the other for vertical
alignment of the light beams, are separated by plastic structures shaped to fit
in the neck of the CRT. The horizontal coil is inside the separator and the
vertical coil is wrapped around a ferrite core, which straddles the exterior of
the separator. The electronic controllers regulate communication between the
coils and the CRT. Deflection yokes for 25" and larger CPTs differ from those
for smaller CPTs in that they require two horizontal coils, a ferrite core that
encases the vertical coil and more complex electronic connectors. Deflection
yokes for CDTs are similar in appearance and structure to deflection yokes for
CPTs. However, electronic controllers and connectors are more elaborate for
deflection yokes for CDTs than those for CPTs. In addition, deflection yokes
for CDTs require two horizontal coils and use less magnetic force to guide the
electron beams.
Manufacturing Processes
The Company's manufacturing process begins with the production of enameled
copper wire, which is supplied by Dnon Tech and certain other suppliers when
Dnon Tech is unable to meet production demand. The Company's production process
for enameling copper wire is accomplished using state-of-the-art machinery with
certain proprietary design features. The Company recently installed a
state-of-the-art machine for enameling copper wire to expand production. The
process involves first feeding copper wire through an industrial oven, which
softens the copper and prepares the wire for stretching to the desired
thickness. Six layers of enamel are then sequentially applied, with a drying
process between each layer. The enameling process provides insulation for the
copper wire, which reduces interference and contributes to the efficiency of
the electronic properties of the deflection yoke. The resulting enameled copper
wire is suitable for winding into vertical coils for all varieties of
deflection yokes. Enameled copper wire for horizontal coils involves a second
process after the enamel is applied, whereby three coats of self-bonding
adhesive are applied to the enameled copper wire. Adhesive coating improves the
flow of electricity and adds cohesiveness and smoothness to the wire for
shaping horizontal coils that are placed inside the plastic separators of
deflection yokes. The Company has the capacity to produce four tons of enameled
copper wire per day, which is sufficient to produce approximately 30,000
deflection yokes per day.
For both vertical and horizontal coils, the enameled copper wire is then
coiled on winding machines. The Company's winding machines for 14", 20" and 21"
deflection yokes are capable of producing approximately 1,600 vertical and
horizontal coils per day, based on two production shifts. Separate machines are
organized in winding lines for the different shapes of vertical and horizontal
coils. The Company's winding machines for 25" deflection yoke models are
capable of producing approximately 9,000 vertical and horizontal coils per day,
based on two production shifts with fewer personnel than are needed to operate
machines for smaller deflection yokes.
Once the horizontal and vertical coils have been produced, they are sent
to the production assembly and testing lines. The assembly and testing
processes are similar for the various sizes of deflection yokes, although
deflection yokes for larger CPTs and all CDTs require more time due to more
complicated components and testing procedures.
Assemblers fit coils onto ferrite cores, attach the coils to separators
and solder connectors to complete the deflection yokes. The Company's
operations include ten production lines, each of which produces an average of
2,000 deflection yokes per day.
After each deflection yoke is assembled, it is forwarded to convergence
testing personnel. Convergence testing is a crucial part of the deflection yoke
production process and is very labor intensive, requiring almost three times as
much labor as the assembly process. Convergence testing is more labor intensive
for deflection yokes for larger CPTs and all CDTs. Generally, a person can test
between 50 and 100 deflection yokes per day.
Testers attach the assembled deflection yokes to the neck of a sample CPT
and check between 11 and 25 individual points (depending on the size of the
deflection yoke) on the surface of a CRT screen to see whether each of the
three colored light beams properly converge on the point being tested. When a
light beam does not meet its required point on the screen, the adjuster
manually removes the deflection yoke and places small metal bridges on the
coils for fine tuning of the magnetic forces controlling the beams. The
deflection yoke is then tested again to ensure that the three beams are
properly focused.
39
<PAGE>
Quality Control
Deflection yokes are inspected by trained personnel. Samples of each
deflection yoke category are periodically collected and submitted to an
inspection facility, where trained personnel check for compliance with customer
specifications. In addition, all production personnel are monitored by video
from a central observation area and are expected to generate a specified number
of units per day. Pension contributions are indexed to the progress each
individual makes in productivity. The Company employs a system that enables it
to identify defective units with the worker responsible. A regular training
program with Daewoo has been established, in which a substantial number of
employees are sent to South Korea to learn new methods of testing and winding.
In addition, production managers have been trained in China, Japan and Korea
for state-of-the-art manufacturing techniques associated with larger deflection
yokes and deflection yokes for CDTs. The Company believes that its quality
control program is an integral part of its manufacturing operation. The failure
rate for the Company's deflection yokes is less than 1%.
The Company believes that quality control of enameled copper wire is
crucial to the production of high quality deflection yokes. The Company employs
a quality control specialist and maintains a program in which Dnon Tech quality
control personnel are trained by the Company's 10% joint venture partner in
Dnon Tech, Dea Tech Machinery S.p.A. ("Dea Tech"), an Italian company engaged
in manufacturing enameling and adhesive industrial machinery.
Expansion Plans
The Company believes the market for CDTs and larger CPTs is growing, with
consumer preferences changing from smaller to larger television screens. The
Company intends to commit substantial resources to the production of deflection
yokes for these growing markets.
The Company plans to expand its production facilities in Xianyang by
installing three new production lines, which will manufacture deflection yokes
for 25" CPTs, 29" CPTs and CDTs. Each new production line will be operated five
days per week with two production shifts. In addition to expanding its existing
facilities in Xianyang, the Company will install a new production facility in
Weihai, and, upon completion of the installation, will shift production from
Daming's facility in Xianyang to the Weihai facility. In connection with the
expansion, the Company plans to hire 750 new employees. Upon completion of the
expansion project, the annual production capacity for deflection yokes for 25"
CPTs, 29" CPTs and CDTs will be increased by approximately 1.8 million units,
1.8 million units and 2.2 million units, respectively. The total projected cost
for the expansion is approximately $15.5 million, which the Company intends to
fund with a portion of the net proceeds of this Offering. See "Use of
Proceeds." The expansion is expected to be completed by the end of 1997.
Raw Materials
The Company's principal raw materials include spools of copper wire,
ferrite cores and polyamide resins. The Company believes that the raw materials
necessary for the production of deflection yokes are generally available in the
market and that the Company is not dependent upon any single supplier or
related group of suppliers.
Research and Development
Pianzhuan Group's research and development department, which consists of
20 scientists and technicians specializing in electrical, chemical and
mechanical engineering, computer science, product design of deflection yokes
and related production equipment, generates new products and related research
and development for the Company. See "Certain Relationships and Related
Transactions." This department recently developed two adaptable deflection
yokes for 25" CPTs. See "--Products--CPT Products." In addition to the 36
models of deflection yokes generated since the Company's inception and the
adaptable deflection yokes for 25" CPTs, Pianzhuan Group's research and
development department has developed several proprietary models of machinery
used in the production of deflection yokes. The Company owns the rights to all
the products Pianzhuan Group has developed for the Company.
The Company plans to establish a research and development division at its
Weihai facility and at its sales office in Seoul, Korea. The Company expects to
hire 13 people for its research and development divisions. In the future, the
Company intends to rely increasingly on its own research and development
personnel.
40
<PAGE>
Competition
The Company's largest competitor is Murata, which produces approximately 10
million units per year. Murata announced in April 1997 that it was selling its
deflection yoke facility in Mexico to Totoku. The Company believes that Murata
intends to exit the deflection yoke business. The Company's other competitors
include Samsung and Dogu Electronics Co. Ltd., a Korean company. The Company
also may face competition from emerging technologies, such as "flat-panel
displays," which could reduce the use of CRTs in the future. See "Risk
Factors--Emergence of New Technology and Industry Standards."
The principal methods of competition in the deflection yoke industry are
price, responsiveness to customer demands generally and quality control. The
Company believes it is a strong competitor on the basis of price and quality
because of its relatively low labor costs, manufacturing efficiencies and
quality control program.
Properties
The Company leases approximately 8,052 square meters in the aggregate in
three adjacent buildings in the city of Xianyang from Pianzhuan Group pursuant
to three separate leases at an aggregate annual cost of approximately $120,000.
See "Certain Relationships and Related Transactions." The leases expire in
2000, 2000 and 2003. The Company also has leased an 11,200 square meter
production facility in the city of Weihai from Weihai Electronic Industrial
Park Weishi Corp. at an annual cost of approximately $20,000 under a ten-year
lease entered into in May 1997. See "Certain Relationships and Related
Transactions." The Company also owns an approximately 8,791 square meter
facility in the city of Yantai. This facility was contributed to the Company by
a joint venture partner as its capital contribution. The Company believes that,
upon completion of the expansion programs currently in progress, its facilities
will be adequate to meet its currently foreseeable needs.
Employees
At May 31, 1997, the Company had 854 employees, including 771 production
personnel. Upon the consummation of the Acquisitions, the Company will have
1,205 employees, including 1,049 production personnel. None of the Company's
employees is covered by a collective bargaining agreement. The Company believes
its employee relations are good.
41
<PAGE>
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position(s) with Company
---- --- ------------------------
<S> <C> <C>
Du Qingsong 51 Chairman of the Board and Chief Executive Officer
Li Liangjie 59 Vice Chairman of the Board and Chief Operating
Officer
Fan Baiyan 51 Chief Financial Officer
Hou Yibin 43 Director and Senior Technology Advisor
Aaron Y.P. Li 50 Director of International Sales
Mary Xia 45 Director
To Shing Hoi 23 Director
Li Wenya 26 Secretary
Robert Adler 62 Nominee for Director
Hans Decker 68 Nominee for Director
</TABLE>
Du Qingsong has been the Chairman and Chief Executive Officer of the
Company since its inception in January 1996 and the Chairman and Chief
Executive Officer of Yongxin and Daming since their inception in 1992 and 1993,
respectively. Du also is Chairman of Pianzhuan Group, a diversified group of
companies, consumer and industrial electronics, transportation and chemicals
businesses. Prior to joining Pianzhuan Group, Mr. Du spent 11 years at Xinping
Fertilizer Corp., the largest manufacturer of fertilizer in Shaanxi Province.
In 1987, he became General Manager of this 4,000 employee organization.
Previously he spent 10 years at Baihe Transportation Company, a large
state-owned transportation company. He received his B.S. in Engineering from
the Shaanxi Transportation University in 1969. Mr. Du is the Honor Professor of
Xian Jiaotong University.
Li Liangjie has been the Vice Chairman and Chief Operating Officer of the
Company since its inception in January 1996. Mr. Li has over 30 years
experience in research and development of deflection yoke products. Mr. Li has
been a leading engineer in the design and development of key deflection yoke
technologies, such as the winding process, and the ferrite core and separator
design. He joined Pianzhuan Group as head of research and development in 1989.
Previously, he was a senior engineer at IRICO for 10 years. From 1963 until
1973, he was a senior research associate at the Electronics Research and Design
Institute of Xian, where he received numerous awards from the Ministry of
Electronics Industry. He received his B.S. in Engineering from Xian Jiaotong
University.
Fan Baiyan has been the Chief Financial Officer of the Company since its
inception in January 1996. Ms. Fan has 22 years of commercial banking and
corporate finance experience. Since 1982, she has served as general manager of
the Shaanxi Province branch of the China Construction Bank. She received her
B.A. from China's Northwest University and has had financial training at
Deutsche Bank GA in Germany, Bank of Osaka in Japan and Citibank in Singapore.
Professor Hou Yibin has been a Director and Senior Technology Advisor of
the Company since its inception in January 1996. Professor Hou is also deputy
head of the Academy of Engineering and Science and Dean of the Computer and
Information Technology Institute of Xian Jiaotong University in Xian, one of
China's leading technology research organizations. He also is an honorary
senior research fellow at the University of Birmingham in England. Professor
Hou received his Ph.D. in Electronic Engineering from Emdnoven University of
Technology, The Netherlands, in 1986.
Aaron Y.P. Li has been Director of International Sales since April 1997.
Mr. Li has been President of China Business Services, a consulting firm since
October 1996. From October 1995 until October 1996, Mr. Li was Director, Sales
and Marketing for Greater China of Graco, Inc., a manufacturer of fluid handling
equipment for automobiles. From September 1988 until October 1995, Mr. Li was
Marketing Manager, Application Engineer of MTS Systems Corporation, a
manufacturer of computer controlled motion simulation systems for structural
evaluation and development. Mr. Li received a B.A. from Jiaotong University,
People's Republic of China in
42
<PAGE>
1970, a M.A. in Engineering from Jiaotong University in 1981 and a M.A. in
Business from the University of Alberta, Canada.
Mary Xia has been a Director of the Company since its inception in January
1996. Since 1995, Ms. Xia has been Executive Vice President, a Director, and an
equity owner of First Pacific Rim (B.V.I.) Inc. ("FPRI"), a company that
provides financial services. From 1992 to 1995, Ms. Xia was the President of
China Development Corp., where she focused on bringing United States capital
market concepts to the China market. Ms. Xia received a B.A. from Hebei
Teachers University in China in 1982, a M.A. in Economics from Scuola Mattei in
Italy in 1986 and an M.B.A. from Long Island University in 1991.
To Shing Hoi has been a Director of the Company since its inception in
January 1996. Mr. To owns Yi Xin Trading Co. Ltd., a Hong Kong-based trading
company. From 1993 to 1995, Mr. To was with the Hong Kong trading concern,
Tianqiang International Inc. Mr. To is Mr. Du's son.
Li Wenya has been the Secretary of the Company since its inception in
January 1996 and director of the general manager's office of Pianzhuan Group
since 1993. Ms. Li received a B.S. in shipping technology from Ha Er Bing
College.
Robert Adler has been nominated as a Director of the Company, and is
expected to become a Director following the consummation of the Offering. Since
November 1991, Mr. Adler has been Vice President, Senior Investment Officer of
BHF Securities Corp., an investment company. From January 1991 to October 1991,
Mr. Adler was Vice President of Vital Management & Consulting Corp., a
consulting company. From July 1985 to December 1990, Mr. Adler was Vice
President, Senior Investment Officer of DG Bank, New York branch.
Hans Decker has been nominated as a Director of the Company, and is
expected to become a Director following the consummation of the Offering. Since
1993, Mr. Decker has been an Adjunct Professor at Columbia University, School
of International and Public Affairs. From 1990 to 1992, Mr. Decker was Vice
Chairman of Siemens Corp., an electronics corporation. From 1971 to 1990, Mr.
Decker was President of Siemens Corp.
Board Committees
The Board of Directors intends to establish an Audit Committee and a
Compensation Committee at or prior to the closing of this Offering. The Audit
Committee, the members of which will be independent directors, will oversee
actions taken by the Company's independent auditors and review the scope and
results of the Company's accounting and control procedures. The Compensation
Committee, the members of which will be independent directors, will review and
approve the compensation of executives of the Company and make recommendations
to the Board of Directors with respect to standards for setting compensation
levels.
Executive Compensation
The aggregate amount of compensation paid by the Company and its
consolidated subsidiaries to all the Company's directors and executive officers
during 1996 was approximately $21,792.
1997 Employee Stock Option Plan
A total of 300,000 shares of Common Stock have been reserved for issuance
under the Company's 1997 Employee Stock Option Plan (the "Option Plan"). The
Option Plan provides for the grant of options to employees, officers, directors
and consultants of the Company. The Option Plan is administered by the Board of
Directors or a committee appointed by the Board, which determines the terms of
options granted, including the exercise price, the number of shares subject to
the option and the option's exercisability. The exercise price of all options
granted under the Option Plan must be at least equal to the fair market value
of such shares on the date of grant. The maximum term of options granted under
the Option Plan is 10 years. At the date of this Prospectus, no options had
been granted under the Option Plan.
43
<PAGE>
PRINCIPAL SHAREHOLDERS
The Company is not directly or indirectly owned or controlled by another
corporation or by any foreign government. The following table shows the
beneficial ownership of Common Stock as of June 30, 1997 of (a) each person who
was known by the Company to own beneficially more than 10% of the outstanding
shares of Common Stock and (b) the total amount owned by directors, nominees
for director and executive officers as a group.
<TABLE>
<CAPTION>
Percent of Class
----------------------
Before After
Person or Group Amount Offering Offering
- ----------------------------------------------------- ------------------------- ---------- ---------
<S> <C> <C> <C>
To Shing Hoi(1) .................................... 4,559,000(2) 94.0% 51.5%
Du Qingsong(3) .................................... 4,559,000(2) 94.0 51.5
All directors, nominees for directors and officers as
a group (8 persons) .............................. 4,850,000(2)(4) 100.0 54.8
</TABLE>
- --------------
(1) Mr. To's address is RM1, 11th Floor, Ocean View Court, 27 Chatham Road,
Tsim Sha Tsui, Kowloon, Hong Kong.
(2) Mr. To and Mr. Du have entered into an agreement, pursuant to which Mr. To
has agreed that, until the tenth anniversary of the closing of this
Offering, (a) he will not sell or otherwise dispose of any of his shares
without Mr. Du's prior written consent, and (b) he will vote his shares as
Mr. Du directs. Accordingly, Mr. Du may be deemed to be the beneficial
owner of Mr. To's shares. See "Certain Relationships and Related
Transactions."
(3) Mr. Du's address is c/o Asia Electronics Holding Co. Inc.,70 West Weiyang
Road, Xianyang, Shaanxi Province, People's Republic of China.
(4) Includes 291,000 shares owned by FPRI, of which Mary Xia, a Director of the
Company, is Executive Vice President, Director and an equity owner. Ms.
Xia disclaims beneficial ownership of these shares. Excludes the 5,000
shares issuable upon exercise of the Advisor Options to be issued to FPRI,
and the 10,000 shares issuable upon exercise of the Advisor Options to be
issued to Robert Adler, upon the closing of the Offering. See "Certain
Relationships and Related Transactions."
44
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Acquisitions of Yongxin, Daming, Yantai and Dnon Tech
Yongxin was formed in 1993 as a joint venture between Pianzhuan Group
(45%) and Hong Kong Yongxin Technology Development Co., Ltd. ("Hong Kong
Yongxin") (55%), a Hong Kong company . In September 1993, Hong Kong Yongxin
transferred its entire interest in Yongxin to Hong Kong Cao Trading Company
Ltd. ("Cao"), an international trading organization. In 1994, Tomei Trading
Company Ltd. ("Tomei"), a major Japanese deflection yoke component parts
supplier, purchased from Cao its 55% interest in Yongxin for $300,000. In
December 1995, Xianyang Pianzhuan Development (the "Key Employees Company"),
which is owned by certain employees of the Company (including Mr. Du, who owns
0.3% of the Key Employees Company) and of which Mr. Du is Chairman, purchased
from Pianzhuan Group its 45% interest in Yongxin for $991,681. In the same
month, Tomei purchased from the Key Employees Company a 25% interest in Yongxin
for $250,000, thereby reducing the Key Employees Company's interest in Yongxin
from 45% to 20%, and increasing Tomei's interest in Yongxin from 55% to 80%. In
May 1996, the Company purchased Tomei's 80% interest in Yongxin for $1,680,000.
In addition to the purchase price, Tomei had previously received cash dividends
of $41,215 from Yongxin. The agreement to effect the acquisition of Tomei's
interest was based on a pre-existing oral understanding between Mr. Du and
Tomei. See Note 4 to the Company's Consolidated Balance Sheet. At present and
immediately after this Offering, the Company owns and will own 80% of Yongxin,
and the Key Employees Company owns and will own 20% of Yongxin.
Daming was formed in 1992 as a joint venture between Pianzhuan Group (75%)
and Tomei (25%). In December 1995, the Key Employees Company purchased from
Pianzhuan Group its 75% interest in Daming for $1,124,868. In the same month,
Tomei purchased from the Key Employees Company a 55% interest in Daming for
$990,000, thereby reducing the Key Employees' interest in Daming from 75% to
20% and increasing Tomei's interest in Daming from 25% to 80%. In May 1996, the
Company purchased Tomei's 80% interest in Daming for $1,440,000. In addition to
the purchase price, Tomei had previously received cash dividends of $527,240
from Daming. The agreement to effect the acquisition of Tomei's interest was
based on a pre-existing oral understanding between Mr. Du and Tomei. See Note 4
to the Company's Consolidated Balance Sheet. At present and immediately after
this Offering, the Company owns and will own 80% of Daming, and the Key
Employees Company owns and will own 20% of Daming.
Yantai was formed in 1993 as a joint venture among Pianzhuan Group (45%),
Tomei (25%) and Muping Gold Industrial Co. ("Gold") (30%), a Chinese gold
mining and gold product manufacturer. In 1994, Gold sold one-third of its 30%
(i.e., 10%) interest in Yantai to an affiliate of Daewoo. In December 1996, the
Company entered into an agreement with Pianzhuan Group and Tomei to purchase
their 70% interest in Yantai (i.e., 45% from Pianzhuan Group and 25% from
Tomei) for $2,800,000 in the aggregate, the closing of which will occur
contemporaneously with the closing of this Offering. As a consequence,
immediately after this Offering, the Company will own 70% of Yantai, Gold will
own 20% of Yantai and the affiliate of Daewoo will own 10% of Yantai.
Dnon Tech was formed in 1993 as a joint venture among Pianzhuan Group
(45%), Xian Jiao Tong University Electrical Technical Engineering Limited (the
"University") (10%), a Chinese company, Wainlink Enterprises Limited
("Wainlink") (25%), a Hong Kong company, and Dea Tech (20%). In December 1996,
the Company entered into an agreement with Pianzhuan Group, the University,
Wainlink and Dea Tech to purchase 90% of Dnon Tech (72.5% from Pianzhuan Group,
5% from the University and 12.5% from Wainlink) for $2,700,000 in the
aggregate, the closing of which will occur contemporaneously with the closing
of this Offering. As a consequence, immediately after this Offering, the
Company will own 90% of Dnon Tech and Dea Tech will own 10% of Dnon Tech.
Relationship With Pianzhuan Group
Historically, Pianzhuan Group, of which Mr. Du is Chairman, has conducted
a substantial portion of the Company's domestic sales and marketing activities.
In 1996 and the three months ended March 31, 1997, the Company effected
$13,859,345 and $6,655,852 of sales, respectively, through Pianzhuan Group. In
addition, Pianzhuan Group has conducted sales and marketing activities for
other members of Pianzhuan Group, including Xianyang Pianzhuan Co., Ltd., a
deflection yoke manufacturing company ("Xianyang"), which produces deflection
yokes for 18" and 21" (narrow) CPTs.
45
<PAGE>
The subsidiaries of the Company and the Members have agreed that, with the
exception of deflection yokes for 18" and 21" (narrow) CPTs, which may continue
to be manufactured and sold by Xianyang, the Members may not sell or market
deflection yokes in China. In addition, the Company has appointed Pianzhuan
Group as its exclusive sales and marketing agent with respect to deflection
yokes to be sold in China. In connection with such arrangement, Pianzhuan Group
has agreed that, with the exception of deflection yokes for 18" and 21" (narrow)
CPTs, it will sell or market in China only the Company's deflection yokes.
Subject to certain conditions, these agreements will terminate on the tenth
anniversary of the closing of this Offering, unless sooner terminated by the
Company.
During 1996 and the three months ended March 31, 1997, Pianzhuan Group
provided sales and marketing, research and development and various
administration and management services to Yongxin, Daming, Yantai and Dnon
Tech, in consideration for which those companies paid Pianzhuan Group the
following amounts.
Three Months Ended
1996 March 31, 1997
---------- -------------------
Yongxin and Daming ......... $428,107 $167,130
Yantai and Dnon Tech ...... $ 13,524 $ 21,665
Following this Offering, the Company intends to rely increasingly on its
own personnel and resources in these areas. See "Business--Sales and
Marketing." However, the Pianzhuan Group Agreement provides that, to the extent
the Company requests such services from Pianzhuan Group in the future,
Pianzhuan Group will provide those services, and the Company will pay Pianzhuan
Group its proportionate share of the costs of these services.
The Company leases approximately 8,052 square meters in three adjacent
buildings in the city of Xianyang from Pianzhuan Group pursuant to three
separate leases at an aggregate annual cost of approximately $120,000. The
leases expire in January 2000, 2000 and 2003. The Company believes the terms of
these leases are at least as favorable as could be obtained from unaffiliated
third parties.
In addition, during 1996 and the three months ended March 31, 1997, the
Company and its subsidiaries and Pianzhuan Group engaged in various other
transactions, for which the Company and its subsidiaries paid Pianzhuan Group
approximately $10,317,000 and $3,000,000, respectively, and Pianzhuan Group
paid the Company and its subsidiaries $14,349,065 and $6,374,780, respectively.
Amounts paid by the Company and its subsidiaries to Pianzhuan Group primarily
reflect purchases of enameled copper wire that were ordered through Pianzhuan
Group. Upon the acquisition of Dnon Tech the Company will own its own source of
enameled wire thereby eliminating a substantial portion of these intercompany
transactions. Amounts paid by Pianzhaun Group to the Company primarily
represent payments for purchases of deflection yokes manufactured by the
Company and sold through the Pianzhuan Group.
Pianzhuan Group has guaranteed short-term bank loans of Daming, the
outstanding balance of which was approximately $1.5 million at each of December
31, 1996 and March 31, 1997.
Mr. Du has entered into an employment agreement with the Company, pursuant
to which Mr. Du has agreed that, until at least the fifth anniversary of the
closing of this Offering, he will devote at least 75% of his business time to
the Company. Nonetheless, Pianzhuan Group and the Company may from time to time
compete for Mr. Du's time and attention.
Other Matters
Daewoo owns 10% of the equity of Yantai. During 1996 and the three months
ended March 31, 1997, the Company's sales to Daewoo were $9,542,759 and
$1,947,110, respectively. The Company believes the terms of such sales were at
least as favorable as could have been obtained from unaffiliated third parties.
In addition to sales to Daewoo, certain of the Company's employees are trained
by Daewoo and the Company conducts a portion of its sales and marketing
activities through Daewoo. See "Business--Sales and Marketing."
During 1996 and the three months ended March 31, 1997, the Company and its
subsidiaries engaged in various transactions with joint venture partners. The
following table sets forth amounts paid by the Company and its subsidiaries to
these joint venture partners, and the amounts these joint venture partners paid
to the Company and its subsidiaries, during the periods indicated:
46
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
1996 March 31, 1997
------------ -------------------
<S> <C> <C>
Amounts paid by the Company and its subsidiaries to:
Gold ............................................. $ 629,106 $ 205,297
Amounts paid to the Company and its subsidiaries by:
Daewoo ............................................. 9,526,000 2,098,628
</TABLE>
Amounts paid by the Company to Gold, its joint venture partner in Yantai
represent equipment purchased by the Company for its facilities, and amounts
paid by Daewoo to the Company represent purchases of deflection yokes by
Daewoo.
In 1996, Mr. To purchased 4,559,000 shares of Common Stock for $3,112,680
and FPRI purchased 291,000 shares of Common Stock in consideration for services
rendered to the Company valued at $199,200.
In connection with this Offering, Mr. Du and his son, Mr. To, have entered
into an agreement, pursuant to which Mr. To has agreed that, until the tenth
anniversary of the closing of this Offering, (a) he will not sell or otherwise
dispose of any of his shares of Common Stock without Mr. Du's prior written
consent, and (b) he will vote his shares as Mr. Du directs.
In connection with this Offering, FPRI will receive from the Company the
Advisor Options entitling it to purchase 5,000 shares of Common Stock for a
purchase price equal to 120% of the initial public offering price.
In connection with this Offering, Robert Adler, who has been nominated as
a director of the Company, will receive from the Company the Advisor Options
entitling him to purchase 10,000 shares of Common Stock for a purchase price
equal to 120% of the initial public offering price.
47
<PAGE>
CAPITAL STOCK
The Company's authorized capital stock consists of 30,000,000 shares of
Common Stock, $.01 par value per share, of which 4,850,000 shares are
outstanding.
Holders of Common Stock are entitled to one vote for each whole share on
all matters to be voted upon by shareholders, including the election of
directors. Holders of Common Stock do not have cumulative voting rights in the
election of directors. All shares of Common Stock are equal to each other with
respect to liquidation and dividend rights. Holders of Common Stock are
entitled to receive dividends if and when declared by the Company's Board of
Directors out of funds legally available under British Virgin Islands law. In
the event of the liquidation of the Company, all assets available for
distribution to the holders of Common Stock are distributable among them
according to their respective holdings. Holders of Common Stock have no
preemptive rights to purchase any additional, unissued shares of Common Stock.
All the outstanding Common Stock, and the Common Stock offered by this
Prospectus will be, when issued against the consideration set forth in this
Prospectus, duly authorized, validly issued, fully paid and nonassessable.
Pursuant to the Company's Memorandum of Association and Articles of
Association and pursuant to the law of the British Virgin Islands, the
Company's Memorandum of Association and Articles of Association may be amended
by the board of directors without shareholder approval (provided a majority of
the Company's independent directors do not vote against such amendment). This
includes amendments to increase or reduce the authorized capital stock of the
Company or to increase or reduce the par value of its shares. The ability of
the Company to amend its Memorandum of Association and Articles of Association
without shareholder approval could have the effect of delaying, deterring or
preventing a change in control of the Company without any further action by the
shareholders, including, but not limited to, a tender offer to purchase the
Common Stock at a premium over then current market prices.
Under United States law, majority and controlling shareholders generally
have certain "fiduciary" responsibilities to minority shareholders. Shareholder
action must be taken in good faith and actions by controlling shareholders that
are unreasonable may be declared null and void. The British Virgin Islands law
protecting the interests of minority shareholders is not as protective in all
circumstances as the law protecting minority shareholders in United States
jurisdictions. While British Virgin Islands law does permit a shareholder of a
British Virgin Islands company to sue its directors derivatively (i.e., in the
name of others similarly situated), the circumstances in which any such action
may be brought that may be available in respect of any such action may result
in the rights of shareholders of a British Virgin Islands company being more
limited that those rights of shareholders in a United States company.
Transfer Agent
Continental Stock Transfer and Trust Company is the transfer agent and
registrar for the Common Stock.
Reports to Shareholders of Shares
The Company intends to furnish holders of its Common Stock annual reports
that include audited consolidated financial statements and may furnish them
quarterly financial reports for each of its first three quarters that contain
unaudited consolidated financial statements. The Company has agreed with the
Representative in the Underwriting Agreement to file its annual reports with
the Commission and publicly release quarterly financial reports within the same
time periods as United States companies are required to file such reports with
the Commission.
Exchange Controls and Other Limitations Affecting Shareholders
There are no exchange control restrictions on payments of dividends on the
Company's Common Stock or on the conduct of the Company's operations in the
British Virgin Islands, where the Company is incorporated. Dividend's
distributions and repatriation by the Company's subsidiaries are regulated by
China's laws and regulations. See "Risk Factors--Holding Company Structure;
Restrictions on the Payment of Dividends" and "Dividend Policy." There are no
material British Virgin Islands laws that impose foreign exchange controls on
the Company or that affect the payment of dividends, interest or other payments
to nonresident holders of the Company's capital stock. British Virgin Islands
law and the Company's Memorandum of Association and Articles of Association
impose no limitations on the right of nonresident or foreign owners to hold or
vote the Common Stock.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The 4,000,000 shares of Common Stock to be sold in this Offering
(4,600,000 shares, if the Underwriters' over-allotment option is exercised in
full) will be available for resale in the public market without restriction or
further registration under the Securities Act, except for shares purchased by
affiliates of the Company (in general, any person who has a control
relationship with the Company), which shares will be subject to the resale
limitations of Rule 144, the Representative's Options and the Advisor Options.
Officers, directors and shareholders of the Company holding all 4,850,000
of the outstanding shares of Common Stock prior to this Offering have agreed
not to sell (i.e., they have agreed to "lock up") such Common Stock for 24
months from and after the effective date of this Offering ((i) 12 months, if
the closing sale price of the Common Stock on NASDAQ has been at least 250% of
the initial public offering price per share of Common Stock for a period of 20
consecutive trading days ending within five days of the sale, and the sale is
at a price in excess of 250% of the initial public offering price per share of
Common Stock, or (ii) six months, in connection with certain underwritten
public offerings), without the consent of the Representative. In addition, the
Company has agreed not to sell any shares of Common Stock for 12 months (six
months in connection with certain underwritten public offerings) following the
effective date of this Offering, without the consent of the Representative,
subject to limited exceptions. The Company has been advised by the
Representative that they have no general policy with respect to granting
releases from such lockup agreements. The Representative may in its discretion
and without notice to the public waive the lock-up and permit sales prior to
the expiration of the lock-up period.
All of the Company's 4,850,000 shares of Common Stock outstanding
immediately prior to the date of this Prospectus are "restricted securities",
as that term is defined under Rule 144 of the Securities Act. Restricted
securities may be sold in open market transactions in compliance with Rule 144,
if the conditions of such rule are satisfied. Under Rule 144 as currently in
effect, any person (or persons whose shares are aggregated) who has
beneficially owned restricted shares for at least one year is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock (88,500 shares
immediately after this Offering) or (ii) the average weekly trading volume
during the four calendar weeks immediately preceding the date on which notice
of the sale is filed with the Commission. Sales pursuant to Rule 144 also are
subject to certain requirements relating to the manner of sale, notice and
availability of the Company at any time during the 90 days immediately
preceding the sale and whose restricted shares have been fully paid for three
years since the later of the date they were acquired from the Company or the
date they were acquired from an affiliate of the Company may sell such
restricted shares under Rule 144(k) without regard to the limitations described
above.
Up to an aggregate of 400,000 shares of Common Stock may be purchased
pursuant to the Representative's Options and the Advisor Options immediately
after the effective date of this Offering. Any and all shares purchased upon
exercise of these options may be freely tradeable, provided that the Company
satisfies certain securities registration and qualification requirements. See
"Underwriting."
Sales of substantial amounts of Common Stock under Rule 144 or otherwise
or even the potential of such sales, could depress the market price of the
Common Stock, and could impair the Company's ability to raise capital through
the sale of its equity securities.
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TAXATION
The following discussion is a summary of certain anticipated material U.S.
federal income tax, British Virgin Islands and China tax consequences of an
investment in the Common Stock and is based upon the advice of Proskauer Rose
LLP, with respect to U.S. federal income taxes, Harney, Westwood & Riegels,
with respect to British Virgin Islands taxes and Jun He Law Office, with
respect to China taxes. The discussion does not deal with all possible tax
consequences relating to an investment in the Common Stock and does not purport
to deal with the tax consequences applicable to all categories of investors,
some of which (such as dealers in securities, insurance companies and
tax-exempt entities) may be subject to special rules. In particular, the
discussion does not address the tax consequences under state, local and other
national (e.g., non-U.S., non-British Virgin Islands and non-China) tax laws.
Accordingly, each prospective investor should consult its own tax advisor
regarding the particular tax consequences to it of an investment in the Common
Stock. The following discussion is based upon laws and relevant interpretations
thereof in effect as of the date of this Prospectus, all of which are subject
to change.
United States Federal Income Taxation
The following discussion addresses only the material U.S. federal income
tax consequences to a U.S. person (i.e., a U.S. citizen or resident, a U.S.
corporation, an estate subject to U.S. tax on all of its income regardless of
source, or a trust (i) the administration of which is subject to primary
supervision of a court within the United States and (ii) one or more United
States fiduciaries of which have the authority to control all of its substantial
decisions) (a "U.S. Investor") making an investment in the Common Stock. In
addition, the following discussion does not address the tax consequences to a
person who holds (or will hold), directly or indirectly, 10% or more of the
Common Stock (a "10% Shareholder"). Non-U.S. persons and 10% Shareholders are
advised to consult their own tax advisors regarding the tax considerations
incident to an investment in the Common Stock.
A U.S. Investor receiving a distribution with respect to the Common Stock
will be required to include such distribution in gross income as a taxable
dividend, to the extent of the Company's current or accumulated earnings and
profits as determined under U.S. federal income tax principles. Any
distributions in excess of such earnings and profits of the Company will first
be treated, for U.S. federal income tax purposes, as a nontaxable return of
capital, to the extent of the U.S. Investor's adjusted tax basis in the Common
Stock, and then as gain from the sale or exchange of a capital asset, provided
that the Common Stock constitutes a capital asset in the hands of the U.S.
Investor. U.S. corporate shareholders will not be entitled to any deduction for
distributions received as dividends on the Common Stock.
Gain or loss on the sale or exchange of the Common Stock will be treated
as capital gain or loss, if the Common Stock is held as a capital asset by the
U.S. Investor. Such capital gain or loss will be long-term capital gain or
loss, if the U.S. Investor has held the Common Stock for more than one year at
the time of the sale or exchange.
Various provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), impose special taxes in certain circumstances on the shareholders of
foreign corporations. The following is a summary of certain provisions that
could have an adverse impact on the U.S. Investors.
Personal Holding Companies
Sections 541 through 547 of the Code relate to the classification of
certain corporations (including foreign corporations) as personal holding
companies ("PHC") and the consequent taxation of such corporations on certain of
their U.S. taxable income, to the extent amounts at least equal to such income
are not distributed to their shareholders ("undistributed PHC income"). A PHC is
a corporation (i) more than 50% of the value of the stock of which is owned,
directly or indirectly, by five or fewer individuals (without regard to their
citizenship or residence), and (ii) that, if a foreign corporation, receives 60%
or more of its U.S.-related gross income, as specifically adjusted, from certain
passive sources (such as dividends, interest, royalties or rents). For this
purpose, "U.S.-related gross income" means the corporation's U.S. source income
and certain types of its foreign source income that is effectively connected
with the conduct of a U.S. trade or business. If the Company is classified as a
PHC, a tax will be levied at the rate of 39.6% on the Company's undistributed
PHC income. While the Company may be closely-held following this Offering, the
Company does not expect that it will have significant, if any, U.S. taxable
income subject to the PHC tax.
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Foreign Personal Holding Companies
Sections 551 through 558 of the Code relate to foreign personal holding
companies ("FPHC") and impute undistributed income of such foreign corporations
to U.S. persons who are shareholders of such corporations. A foreign
corporation will be classified as a FPHC if (i) five or fewer individuals who
are U.S. citizens or residents own, directly or indirectly (including pursuant
to certain constructive ownership rules), more than 50% of the corporation's
stock (measured either by voting power or value) (the "shareholder test") and
(ii) the Company receives 60% (50% for subsequent years) or more of its gross
income (regardless of source), as specifically adjusted, from certain passive
sources such as dividends and interest (the "income test").
While the Company may satisfy the income test, it does not believe that
it, or any of its subsidiaries, will satisfy the shareholder test immediately
after this Offering so as to be classified as a FPHC. Mr. To and FPRI, who will
hold collectively in excess of 54% of the Common Stock immediately after this
Offering, are not U.S. citizens or residents. It is possible that subsequent
events could cause the Company or its subsidiaries to satisfy the shareholder
test.
If the Company were classified as a FPHC (after application of the
shareholder test and the income test), a pro rata portion of its undistributed
income would be imputed to U.S. persons (including U.S. corporations) who owned
Common Stock on the last day of the Company's taxable year on which the
shareholder test was satisfied and would be taxable to such persons as a
dividend, even if no cash dividend is actually paid. In addition, if the
Company becomes a FPHC, U.S. persons who acquire shares from decedents will be
denied the step-up of the tax basis for such shares to fair market value at the
date of death if the decedent's basis was less than the fair market value.
Controlled Foreign Corporations
Sections 951 through 964 and section 1248 of the Code relate to controlled
foreign corporations ("CFC") and may operate to impute certain undistributed
income to certain shareholders and to convert into dividend income gains on
dispositions of shares that would otherwise qualify for capital gains treatment.
The imputation of undistributed income under section 951 only applies if those
U.S. persons who individually own at least 10% of a foreign corporation's voting
stock own, in the aggregate, more than 50% (measured by voting power or value)
of the shares of a foreign corporation. Ownership is measured by reference to
direct and indirect ownership (including pursuant to certain constructive
ownership rules). Even if the Company or any of its subsidiaries were ever to
become a CFC, however, the rules referred to above would only apply with respect
to such 10% Shareholders who are U.S. persons. In addition, section 1248 of the
Code provides that if a U.S. person disposes of stock in a foreign corporation
and such person owned, directly or indirectly (including pursuant to certain
constructive ownership rules), 10% or more of the voting shares of the
corporation at any time during the five-year period ending on the date of
disposition when the corporation was a CFC, any gain from the sale or exchange
of the shares will be treated as ordinary income to the extent of the CFC's
earnings and profits during the period that the shareholder held the shares
(with certain adjustments). The Company does not believe that it or any of its
subsidiaries will be CFCs immediately after this Offering. However, subsequent
events could cause the Company or its subsidiaries to become CFCs.
Passive Foreign Investment Companies
Sections 1291 through 1297 relate to the tax treatment of U.S.
shareholders of a passive foreign investment company ("PFIC"). The Company will
be a PFIC if 75% or more of its gross income (including the pro rata share of
the gross income of any corporation (U.S. or foreign) in which the Company is
considered to own 25% or more of the shares by value) in a taxable year is
passive income. Alternatively, the Company will be considered to be a PFIC if
at least 50% of the assets (averaged over the year and generally determined
based on value) of the Company (including the pro rata share of the assets of
any corporation of which the Company is considered to own 25% or more of the
shares by value) in a taxable year are held for the production of, or produce,
passive income. If the Company becomes a PFIC, each U.S. Investor would
(regardless of whether the Company remains a PFIC), in the absence of an
election by such U.S. Investor to treat the Company as a "qualified electing
fund" (the "QEF election"), as discussed below, upon certain distributions by
the Company and upon disposition of the Company's shares at a gain, be liable
to pay tax at the then prevailing income tax rates on ordinary income plus
interest on the tax, as if the distribution or gain had been recognized ratably
over the taxpayer's holding period for the Common Stock.
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Based on the Company's estimates, the Company does not expect to be a PFIC
at the conclusion of the Offering, or in the foreseeable future. However,
because there are some uncertainties in the application of the PFIC rules, and
because it is an annual test, there can be no assurance that the Company will
not become a PFIC in any year.
If a U.S. Investor has made a QEF election for all taxable years that such
shareholder has held Common Stock and the Company was a PFIC, distributions and
gain will not be deemed to have been recognized ratably over the taxpayer's
holding period or subject to an interest charge, and gain on the sale of Common
Stock will be characterized as capital gain. Instead, each U.S. Investor who
has made a QEF election is required for each taxable year in which the Company
is a PFIC, to include in income a pro rata share of the ordinary earnings of
the Company as ordinary income and a pro rata share of the net capital gain of
the Company as long-term capital gain, regardless of whether the Company has
made any distributions of such earnings or gain.
United States Backup Withholding
A holder of Common Stock may be subject to "backup withholding" at the
rate of 31% with respect to dividends paid on such Common Stock if such
dividends are paid by a paying agent, broker or other intermediary in the
United States or by a U.S. broker or certain United States-related brokers to
such holder outside the United States. In addition, the proceeds of the sale,
exchange or redemption of Common Stock may be subject to backup withholding, if
such proceeds are paid by a paying agent, broker or other intermediary in the
United States.
Actual backup withholding may be avoided by the holder of a Common Stock
if such holder (i) is a corporation or comes within certain other exempt
categories or (ii) provides a correct taxpayer identification number, certifies
that such holder is not subject to backup withholding and otherwise complies
with the backup withholding rules. In addition, holders of Common Stock who are
not U.S. persons ("non-U.S. holders") are generally exempt from backup
withholding, although such holders may be required to comply with certification
and identification procedures in order prove their exemption.
Any amounts withheld under the backup withholding rules from a payment to
a holder will be refunded (or credited against the holder's U.S. federal income
tax liability, if any) provided that amount withheld is claimed as federal
taxes withheld on the holder's U.S. federal income tax return relating to the
year in which the backup withholding occurred. A holder who is not otherwise
required to file a U.S. income tax return must generally file a claim for
refund (or, in the case of non-U.S. holders, an income tax return) in order to
claim refunds of withheld amounts.
British Virgin Islands Taxation
Under the International Business Companies Act of the British Virgin
Islands ("BVI") as currently in effect, a holder of Common Stock who is not a
resident of the BVI is exempt from BVI income tax on dividends paid with
respect to the Common Stock and all holders of Common Stock are not liable to
BVI income tax on gains realized during that year on sale or disposal of such
shares; the BVI does not impose a withholding tax on dividends paid by the
Company incorporated under the International Business Companies Act.
There are no capital gains, gift or inheritance taxes levied by the BVI on
companies incorporated under the International Business Companies Act. In
addition, the Common Stock is not subject to transfer taxes, stamp duties or
similar charges.
There is no income tax treaty or convention currently in effect between
the United States and the BVI, nor, as far as counsel is aware, is any such
treaty or convention currently being negotiated.
China Taxation
Taxation of the Sino-Foreign Joint Venture Enterprises
Under the Income Tax Law of the People's Republic of China concerning
Foreign Investment Enterprises and Foreign Enterprises (the "Tax Law"), a
Sino-foreign joint venture is subject to a national tax on worldwide income at
the rate of 30%. In addition, a local surtax of 3% is levied by the local
government, resulting in a combined tax rate of 33%. In order to simplify tax
administration, national and local income taxes are assessed and collected
concurrently. Pursuant to the Tax Law, the national tax rate is reduced to 15%
for joint ventures established in the
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Special Economic Zones of Hainan, Shantou, Shenzhen, Xiamen and Zhuhai that are
engaged in production or business operations and in the ETDZs set up in China's
open coastal cities that are production-oriented. Joint venture companies
established in coastal economic open zones or in the old urban districts of
cities where the Special Economic Zones or the ETDZs are located are subject to
the national tax rate of 24%, if they are production-oriented, or the rate of
15%, if they are considered within the scope of projects encouraged by the
state, such as energy and communications. The Tax Law does not impose
withholding taxes on dividends distributed by a joint venture company.
The Tax Law and related regulations provide a number of tax holidays and
other preferential treatment for production-oriented enterprises with foreign
investment scheduled to operate for a period of ten years or more. Such
enterprises are eligible for a total exemption for taxation for two years
commencing from the first profit-making year, and a 50% reduction in the
subsequent three years. Longer tax reduction periods are available for "export-
oriented enterprises" (50% reduction in income tax but not less than 10% for
each year the venture exports 70% by value of its production) and
"technologically advanced enterprises" (50% reduction in income tax but not
less than 10% for an additional three years after the expiration of the normal
tax holiday period). In addition, some local governments offer tax holidays and
reductions with respect to local income surtax. The Tax Law also provides that
if a foreign party reinvests its share of the profits in the joint venture or
in another joint venture project in China with a term of operation of more than
five years, it may be eligible, on application, for a refund of 40% of the
income tax paid on the reinvested amount. A full refund may be applied for and
granted if an existing investor invests or reinvests its share of profits in a
"technologically advanced enterprise" or an "export oriented enterprise" with a
term of operation of more than five years.
Joint ventures also are required to pay a Value Added Tax if they are
engaged in sales or provide processing, repair or installation services within,
or import goods into, China; a Business Tax if they are engaged in service
businesses or if they transfer intangible assets or sell immovable properties
within China; and a Consumption Tax if they manufacture, subcontract for
processing work or import certain enumerated consumer goods (such as tobacco,
liquor, cosmetics, jewelry, fireworks and small motor vehicles). The Value
Added Tax, Business Tax and Consumption Tax are essentially a turnover tax on
imports, sales receipts and service income.
The Value Added Tax has a general rate of 17% for most goods and services
and a special rate of 13% for certain enumerated goods, including foodstuffs,
printed matter, agricultural supplies, and certain public utilities for
civilian uses. Certain items such as farm produce, contraceptive products,
equipment used in science and research, compensatory trade manufacturing
equipment and charitable items are exempt from the Value Added Tax. The
Business Tax rate schedule groups taxable service into nine categories and
imposes the tax at 3% to 5% for most services and 5% to 20% for entertainment
services. The Consumption Tax rate schedule groups taxable products into 25
categories and imposes the tax at 14 rates ranging from 3% to 45%.
An FIE is exempt from the Value Added Tax on raw material imported for
production for exports, if the FIE is registered before January 1, 1994. In
addition to the Value Added Tax, the Consumption Tax and the Business Tax,
customs duties are levied on most goods imported into China. In general, items
imported by joint ventures that are exempt from the Value Added Tax also are
exempt from customs duties, except imports of certain office equipment and
production equipment, even if the importation is within the limitation of an
FIE's total investment. Joint ventures also may be liable for Land Appreciation
Tax, which ranges from 30 to 60% on the gain on sale of land use rights,
buildings and their attached facilities. Finally, joint ventures may be subject
to Resources Tax on exploitation and production of selected natural resources.
The Company's PRC joint ventures are subject to the Tax Law. Pursuant to
the Tax Law, Sino-foreign equity joint venture enterprises generally are
subject to an enterprises income tax at an effective rate of 33%, which is
comprised of a state tax of 30% and a local tax of 3%. As the Company's PRC
joint ventures are qualified as production oriented enterprises for an
operating period of ten years or more, the joint ventures are eligible for two
years of full exemption and a 50% reduction on enterprises income tax starting
from the first profit-making year.
Yantai is a joint venture established in Yantai, an ETDZ. Because Yantai
qualifies as an FIE, its income tax rate is reduced to 15% and it is exempt
from the local tax of 3%. Yantai also will be eligible for two years of full
exemption and a 50% reduction on enterprises income tax starting from the first
profit-making year based on the reduced tax rate.
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Most of the products of the Company's joint ventures are for overseas
distribution. Accordingly, raw materials imported by the joint ventures related
to their exported products should be exempt from the Value Added Tax and the
Customs Duties.
Generally, a joint venture will qualify as an FIE if the foreign
investor's investment in the registered capital of the joint venture, either
alone or together with other foreign investors, constitutes at least 25% of the
total registered capital of the joint venture. Because the Company's Chinese
joint ventures qualify or will qualify under the Tax Law, dividends and profit
distributions received by the Company from its joint ventures will be exempt
from any income tax, including any withholding tax.
Income received by the Company from sources in China, such as dividends
(other than dividends from FIEs), interest, rent and royalties, will be subject
to a withholding tax of 20%. The 20% withholding tax rate will be reduced to
10% if the income is received from sources in the Special Economic Zones, the
Coastal Open cities, the Pudong New Area in Shanghai and the Coastal Open
Economic Zones.
In the event the Company transfers its interest in its Chinese joint
ventures, the amount received in excess of its original capital contribution
would be subject to withholding tax at the rate of 20%. The disposition may be
subject to certain taxes, including, but not limited to, the Business Tax of 5%
of the Company's interest and a stamp duty of 0.05% on the transfer value.
In the event the Company's joint ventures are liquidated, the portion of
the balance of their assets or remaining property, after deducting
undistributed profits, various funds and liquidation expenses, that exceeds the
Company's paid-in capital would be income from liquidation, which would be
subject to income tax at the rate the Company would be subject to under the Tax
Law and related regulations.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company and each of the Underwriters, for whom Barington Capital
Group, L.P. is acting as representative (the "Representative"), have severally
agreed to purchase from the Company the aggregate number of shares of Common
Stock set forth opposite their names below:
Underwriters Number of Shares
- -------------------------------------- -----------------
Barington Capital Group, L.P. ......
----------
Total ........................... 4,000,000
==========
The Common Stock is being sold on a firm commitment basis. The
Underwriting Agreement provides, however, that the obligations of the several
Underwriters are subject to certain conditions precedent. The Underwriters are
committed to purchase all the Common Stock offered hereby if any is purchased.
The Representative has informed the Company that it does not expect to sell any
Common Stock to any account over which it has discretionary authority.
The Representative has advised the Company that the Underwriters propose
to offer the Common Stock directly to the public at the initial public offering
price set forth on the cover page of this Prospectus, and to selected dealers
at that price, less a concession of not more than $ per share. The
Underwriters may allow, and such dealers may re-allow, a discount of not more
than $ per share on sales to certain other dealers. After the initial
public offering, the price to the public of the Common Stock and the other
terms may be changed.
The Company has granted the Underwriters an option, exercisable during the
45-day period following the date of this Prospectus, to purchase up to 600,000
additional shares of Common Stock at the initial public offering price, less
the underwriting discount. The Underwriters may exercise such option only for
the purpose of covering any over-allotments in the sale of shares of Common
Stock offered by this Prospectus.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to make
in respect thereof.
The Company has agreed to pay the Representative a non-accountable expense
allowance of 3% of the gross proceeds from the sale of the Common Stock
(including the proceeds of the sale of any shares of Common Stock to cover
over-allotments), of which $25,000 has been paid to date.
The Company has agreed for three years following the completion of this
Offering to permit a designee of the Representative to be present at all
meetings of the Company's board of directors and to provide such designee with
all written notices and other materials provided to directors of the Company no
later than it gives such notice and provides such material to the directors of
the Company.
Except in connection with acquisitions or the exercise of the
Representative's Options, the Advisor Options or options to purchase up to
300,000 shares of Common Stock that may be reserved or granted under the
Company's Stock Option Plan at an exercise price at least equal to the initial
public offering price of the Common Stock, the Company has agreed, for a period
of one year from the effective date of this Offering, that it will not offer,
issue, sell, contract to sell, grant any option for the sale of or otherwise
dispose of, or purchase any shares of Common Stock or other equity securities
of the Company without the prior written consent of the Representative. In
addition,
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the officers, directors and shareholders of the Company have agreed that they
will not offer, sell or otherwise dispose of any shares of Common Stock or
other equity securities of the Company owned by them to the public for a period
of at least 24 months from the effective date of this Offering, without the
prior written consent of the Representative. Notwithstanding the foregoing, any
shareholder may sell shares of Common Stock commencing 12 months after the
effective date of this Offering in the event that the last sales price for the
Common Stock on its principal exchange has been at least 250% of the initial
public offering price for a period of 20 consecutive trading days ending within
five days of the date of such sale, and such sale is completed at a price in
excess of 250% of the initial public offering price. The Representative may in
its discretion and without notice to the public waive these lock up agreements
and permit holders otherwise agreeing to lock up their shares to sell any or
all of their shares.
The Company has agreed to sell to the Representative (or its designated
affiliates) the Representative's Options to purchase up to 330,000 shares of
Common Stock at a price equal to $.001 per Option. The Representative's Options
will be exercisable for a period of five years, commencing on the effective
date of this Offering, at an initial per share exercise price equal to 120% of
the initial public offering price. The Representative's Options are not
redeemable by the Company under any circumstances. Neither the Representative's
Options nor the shares of Common Stock issuable upon the exercise thereof may
be transferred, assigned or hypothecated until one year from the date of the
issuance of the Representative's Options, except that they may be assigned, in
whole or in part, to any successor, officer or partner of the Representative
(or to officers or partners of any such successor or partner). The
Representative's Options will contain anti-dilution provisions for adjustment
of the exercise price and number of shares that may be purchased upon exercise
to prevent dilution. The Representative's Options may be exercised as to all or
a lesser number of shares of Common Stock and will contain provisions for one
demand registration of the sale of the underlying shares of Common Stock at the
Company's expense and an additional demand registration at the Optionholder's
expense for a period of five years after the effective date of this Offering,
and "piggyback" registration rights for a period of seven years after the
closing of this Offering. The Advisor Options to purchase 70,000 shares of
Common Stock will be issued at the same time and on the same terms as the
Representative's Options.
Prior to this Offering, there has been no public market for the Common
Stock and there can be no assurance that a market will develop or be sustained
following this Offering. The initial public offering price of the Common Stock
was determined by negotiations between the Representative and the Company.
Among the factors considered in determining the initial public offering price
were an assessment of the prospects for the Company, an assessment of the
industry in which the Company operates, an assessment of management, the number
of shares of Common Stock offered and the price that purchasers of such shares
might be expected to pay, given the nature of the Company and the general
condition of the securities markets at the time of this Offering. Accordingly,
the offering price set forth on the cover page of this Prospectus should not
necessarily be considered an indication of the actual value of the Company or
the Common Stock.
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LEGAL MATTERS
Certain legal matters will be passed upon for the Company as to U.S. law
by Proskauer Rose LLP, New York, New York and as to China law by Jun He Law
Office, Beijing, People's Republic of China. The validity of the shares of
Common Stock offered by this Prospectus and certain other legal matters are
being passed on for the Company by Harney Westwood & Riegels as to British
Virgin Islands law. Certain legal matters will be passed upon for the
Underwriters by Kramer, Levin, Naftalis & Frankel, New York, New York and, with
respect to matters of Chinese law, by the Great Wall Law Offices, Shanghai,
People's Republic of China.
EXPERTS
The audited consolidated financial statements of the Company and its
subsidiaries as of and for the period ended December 31, 1996, and the audited
combined financial statements of Yongxin and Daming and of Yantai and Dnon Tech
as of December 31, 1995 and 1996 and for each of the three years ended December
31, 1996 included in this Prospectus have been audited by Arthur Andersen &
Co., independent public accountants, as indicated in their reports with respect
thereto, and are included in reliance upon the authority of said firm as
experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission, in Washington, D.C., a
Registration Statement on Form F-1 (together with all amendments and exhibits
thereto, the "Registration Statement") under the Securities Act with respect to
the shares of Common Stock being offered in this Offering. This Prospectus does
not contain all the information set forth in the Registration Statement,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. Statements in this Prospectus as to the contents
of any contract or other document are not necessarily complete, and in each
instance where such contract or other document is an exhibit to the
Registration Statement, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each statement
being qualified in all respects by such reference.
Copies of the Registration Statement, including all exhibits thereto, may
be inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60601 upon payment of prescribed rates. The
Commission also maintains a web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants. The Company has applied for quotation of the Common Stock on
NASDAQ. Reports, proxy and information statements and other information
regarding the Company will be available for inspection at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
57
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Asia Electronics Holding Co. Inc.
Report of Independent Public Accountants ................................................ F-3
Consolidated Balance Sheet as of December 31, 1996 .................................... F-4
Consolidated Statement of Cash Flows for the Period from
January 3, 1996 (Date of Incorporation) to December 31, 1996 ........................... F-5
Notes to the Consolidated Financial Statements .......................................... F-6
Xianyang Daming Electronic Co., Limited and Xianyang Yongxin Electronic Co., Limited
Report of Independent Public Accountants ................................................ F-15
Combined Statements of Income for the Years Ended December 31, 1994, 1995 and 1996 ...... F-16
Combined Balance Sheets as of December 31, 1995 and 1996 .............................. F-17
Combined Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996 ...................................................... F-18
Combined Statements of Changes in Investors' Equity for the Years Ended
December 31, 1994, 1995 and 1996 ...................................................... F-19
Notes to the Combined Financial Statements ............................................. F-20
Xianyang Dnon Tech Special Electro Technique Co., Ltd. and
Yantai Daewoo Electronic Components Co., Ltd.
Report of Independent Public Accountants ................................................ F-30
Combined Statements of Income for the Years Ended December 31, 1994, 1995 and 1996 ...... F-31
Combined Balance Sheets as of December 31, 1995 and 1996 .............................. F-32
Combined Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996 ...................................................... F-33
Combined Statements of Changes of Investors' Equity for the Years Ended
December 31, 1994, 1995 and 1996 ...................................................... F-34
Notes to the Combined Financial Statements ............................................. F-35
Unaudited Interim Financial Data
Asia Electronics Holding Co. Inc.
Consolidated Statement of Income for the Three Months Ended March 31, 1997 ............ F-45
Consolidated Balance Sheet as of March 31, 1997 ....................................... F-46
Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1997 ......... F-47
Consolidated Statement of Changes in Investors' Equity for the Period from
January 3, 1996 (Date of Incorporation) to December 31, 1996 and for the Three Months
Ended March 31, 1997 .................................................................. F-48
Notes to Consolidated Financial Statements ............................................. F-49
Xianyang Dnon Tech Special Electro Technique Co., Ltd. and
Yantai Daewoo Electronic Components Co., Ltd.
Combined Statements of Income for the Three Months Ended March 31, 1996 and 1997 ...... F-52
Combined Balance Sheets as of December 31, 1996 and March 31, 1997 ..................... F-53
Combined Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1997 ... F-54
Combined Statements of Changes in Investors' Equity for the Year Ended December 31, 1996
and for the Three Months Ended March 31, 1997 ......................................... F-55
Notes to Combined Financial Statements ................................................ F-56
</TABLE>
F-1
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
CONSOLIDATED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1996
TOGETHER WITH AUDITORS' REPORT
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: ASIA ELECTRONICS HOLDING CO. INC.
(formerly known as "Asia Electric Company Limited")
We have audited the accompanying consolidated balance sheet of Asia Electronics
Holding Co. Inc. (formerly known as "Asia Electric Company Limited",
hereinafter referred to as the "Company"), incorporated in the British Virgin
Islands, and subsidiaries as of December 31, 1996 and the related consolidated
statement of cash flows for the period from January 3, 1996 (date of
incorporation) to December 31, 1996, expressed in Renminbi. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and subsidiaries as of December 31, 1996, and the related consolidated
cash flows for the period from January 3, 1996 (date of incorporation) to
December 31, 1996 in conformity with generally accepted accounting principles
in the United States of America.
Hong Kong,
July 2, 1997.
F-3
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
------------------
1996 1996
-------- -------
RMB US$
<S> <C> <C>
ASSETS
Current assets:
Cash ................................................ 8,935 1,077
Accounts receivable ................................. 15,713 1,894
Due from related companies ........................... 31,926 3,849
Inventories .......................................... 13,915 1,677
Prepayments and other current assets ............... 1,592 192
Value-added tax credit .............................. 4,575 552
------- -------
Total current assets .............................. 76,656 9,241
Property, plant and equipment, net ..................... 6,337 764
------- -------
Total assets .................................... 82,993 10,005
======= =======
LIABILITIES AND INVESTORS' EQUITY
Current liabilities:
Short-term bank loans .............................. 14,749 1,778
Accrued expenses .................................... 6,072 732
Value-added tax payable .............................. 2,401 289
Income taxes payable ................................. 3,628 437
Deferred taxation .................................... 669 81
------- -------
Total current liabilities ........................ 27,519 3,317
Negative goodwill .................................... 11,219 1,352
------- -------
Deferred taxation .................................... 981 118
Total liabilities ................................. 39,719 4,787
------- -------
Minority interests .................................... 15,718 1,896
------- -------
Investors' equity:
Common stock, par value US$0.01 each, 30,000,000 shares
authorized; 4,850,000 shares outstanding ......... 398 48
Additional paid-in capital ........................... 27,158 3,274
------- -------
Total investors' equity ........................... 27,556 3,322
------- -------
Total liabilities and investors' equity ......... 82,993 10,005
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on March 31, 1997 of US$1.00 = RMB8.2955. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on March 31, 1997 or at any
other certain rate.
F-4
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 3, 1996 (DATE OF INCORPORATION) TO
DECEMBER 31, 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1996
---------- --------
RMB US$
<S> <C> <C>
Cash flows from investing activities:
Acquisition of subsidiaries, net of cash acquired ...... (18,621) (2,245)
Cash flows from financing activities:
Contributions from investors ........................... 27,556 3,322
--------- ---------
Net change in cash .................................... 8,935 1,077
--------- ---------
Cash, beginning of period .............................. -- --
--------- ---------
Cash, end of period .................................... 8,935 1.077
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on March 31, 1997 of US$1.00 = RMB8.2955. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on March 31, 1997 or at any
other certain rate.
F-5
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Asia Electric Company Limited (the "Company") was incorporated in the
British Virgin Islands on January 3, 1996 as a holding company to acquire,
effective December 31, 1996, 80% equity interests in Xianyang Daming Electronic
Co., Limited ("Daming") and Xianyang Yongxin Electronic Co., Limited
("Yongxin") (the "Joint Ventures"), two Sino-foreign equity joint venture
enterprises incorporated in the People's Republic of China (the "PRC"). Upon
incorporation, the authorized common stock of the Company was US$50,000 divided
into 50,000 shares of US$1.00 each. Pursuant to a directors' resolution passed
on June 24, 1997, the total authorized capital of the Company was increased
from US$50,000 to US$300,000 divided into 30,000,000 shares of US$0.01 each. On
December 31, 1996, the Company issued 45,120 and 2,880 shares of US$1.00 each
of common stock to Mr. To Shinghoi, and First Pacific Rim (B.V.I.) Inc.,
respectively. As of December 31, 1996, the Company is owned by Mr. To Shinghoi
(94%) and First Pacific Rim (B.V.I.) Inc. (6%). On June 24, 1997, the Company
declared dividends of US$2,000 from its capitalization through the issuance of
2,000 shares of common stock of US$1.00 each to the existing stockholders of
the Company in proportion to their shareholdings. Pursuant to the directors'
resolution passed on June 24, 1997, each share of common stock of the Company
was split into 100 shares and the par value was changed from US$1.00 to US$0.01
per share. In addition, the Company reacquired from its shareholders by way of
a gift from the shareholders, a total of 150,000 shares of US$0.01 each. As a
result of the above changes in the shares, the Company had 4,850,000 shares of
common stock issued and outstanding as of July 2, 1997.
The Joint Ventures are principally engaged in the manufacturing of
deflection yokes for sale to customers in the PRC and overseas. Daming is also
engaged in the trading of machines for sale to related companies.
Upon incorporation, Daming was owned by Xianyang & Pianzhuan Group
Corporation ("Xianyang Pianzhuan", previously named Xianyang Deflection Group
Corporation), a company incorporated in the PRC, (holding 75% interest) and
Tomei Trading Company Limited ("Tomei"), a company incorporated in Japan
(holding 25% interest). In December 1995, Xianyang Pianzhuan transferred its
entire interests in Daming to a related company, Xianyang Pianzhuan Development
Co., Ltd. ("Xianyang Development", previously named Xianyang Deflection Yoke
Investment Co., Ltd.), a company incorporated in the PRC. In the same month,
Xianyang Development sold a 55% interest in Daming to Tomei. Effective December
31, 1996, Tomei sold its entire interests in Daming to the Company for
US$1,440,000 (equivalent to RMB11,946,000). As a result of the above
transactions, Daming is presently owned by the Company (holding 80% interest )
and Xianyang Development (holding 20% interest). Pursuant to the original joint
venture agreement between Xianyang Pianzhuan and Tomei, the authorized capital
of Daming is US$1,800,000. As of December 31, 1996, the joint venture partners
had contributed RMB12,423,000 (equivalent to approximately US$1,743,000) with
unpaid capital of RMB476,000 (equivalent to approximately US$57,000).
As of December 31, 1996, the joint venture partners had delayed the
payment of a portion of the authorized capital to Daming. Such delay in the
contribution of capital is in contravention of the terms of the joint venture
agreements and the legal requirements for Laws on Sino-foreign Co-operative
Joint Ventures in the PRC, which could lead to the dissolution of Daming.
However, the joint venture partners have agreed to the delay in the capital
contribution and the directors consider the possibility of dissolution of
Daming to be remote.
Upon incorporation, Yongxin was owned by Xianyang Pianzhuan (holding 45%
interest) and Hong Kong Yongxin Technology Development Co., Ltd. ("Hong Kong
Yongxin"), a company incorporated in Hong Kong (holding 55% interest). In
September 1993, Hong Kong Yongxin sold its entire interests in Yongxin to Hong
Kong Cao Trading Company Limited ("Hong Kong Cao"), a company incorporated in
Hong Kong. In August 1994, Hong Kong Cao resold its entire interests in Yongxin
to Tomei for US$1,680,000 (equivalent to RMB13,936,000). In December 1995,
Xianyang Pianzhuan transferred its entire interests in Yongxin to Xianyang
Development. In the same month, Xianyang Development sold a 25% interest in
Yongxin to Tomei. Effective December 31, 1996, Tomei resold its entire
interests in Yongxin to the Company. As a result of the above transactions,
Yongxin is presently owned by the Company (holding 80% interest) and Xianyang
Development (holding 20% interest). Pursuant to the original joint venture
agreement between Xianyang Pianzhuan and Hong Kong Yongxin, the authorized
capital of Yongxin was US$2,100,000 (equivalent to RMB17,912,100); all of which
had been contributed by the joint venture partners as of December 31, 1996.
F-6
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)
Other key provisions of the joint venture agreements and related
supplementary agreements between Xianyang Pianzhuan, Daming and Yongxin include
the following:
[bullet] Daming and Yongxin have pre-determined joint venture periods of 30
years extending to October 2022 and February 2023 respectively;
[bullet] the profit and loss sharing ratio of the Joint Ventures is the
same as the respective equity interests held by the investors;
[bullet] each Board of Directors of the Joint Ventures consists of five
members; four designated by the Company and one designated by
Xianyang Development.
[bullet] Xianyang Pianzhuan will continue to provide management and
administrative services to Daming and Yongxin for management fees;
and
[bullet] Xianyang Pianzhuan will lease certain factory premises to Daming
for a monthly rental payment of RMB10,368.
The Joint Ventures conduct their operations in the PRC and accordingly are
subject to special considerations and significant risks not typically
associated with investments in equity securities of United States and Western
European companies. These include risks associated with, among others, the
political, economic, legal environments and foreign currency exchange. These
risks are described further in the following paragraphs:
a. Political Environment
The Joint Ventures' results may be adversely affected by changes in the
political and social conditions in the PRC and by, among other things, changes
in governmental policies with respect to laws and regulations, inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation. While the PRC government is expected to continue its economic reform
policies, many of the reforms are new or experimental and may be refined or
changed. It is also possible that a change in the PRC leadership could lead to
changes in economic policy.
b. Economic Environment
The economy of the PRC differs significantly from the United States
economy in many respects, including its structure, levels of development and
capital reinvestment, growth rate, government involvement, resource allocation,
self-sufficiency, rate of inflation and balance of payments position. The
adoption of economic reform policies since 1978 has resulted in a gradual
reduction in the role of state economic plans in the allocation of resources,
pricing and management of such assets, an increased emphasis on the utilization
of market forces, and rapid growth in the PRC economy. However, such growth has
been uneven among various regions of the country and among various sectors of
the economy.
c. Legal Environment
The PRC's legal system is based on written statutes under which prior
court decisions may be cited as authority but do not have binding precedence.
The PRC's legal system is relatively new, and the government is still in the
process of developing a comprehensive system of laws, a process that has been
ongoing since 1979. Considerable progress has been made in the promulgation of
laws and regulations dealing with economic matters such as corporate
organization and governance, foreign investment, commerce, taxation and trade.
Such legislation has significantly enhanced the protection afforded to foreign
investors. However, experience with respect to the implementation,
interpretation and enforcement of such laws is limited.
d. Foreign Currency Exchange
The revenues of the Joint Ventures are denominated in Renminbi. A portion
of the profit of the Joint Venture, needs to be converted to other currencies
to meet foreign currency obligations such as the purchase of imported
F-7
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)
materials and payment of dividends. Renminbi is not freely convertible into
foreign currencies. All foreign exchange transactions involving Renminbi must
take place either through the Bank of China or other institutions authorized to
buy and sell foreign currencies, or at a swap center. Sino-foreign equity joint
venture enterprises may also maintain foreign currency accounts. Payment for
imported materials and remittance of earnings outside the PRC are permitted but
are subject to the availability of foreign currencies. For capital transactions
in foreign currencies, approval is required from the State Administration of
Foreign Exchange.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United States
of America ("US GAAP"). This basis of accounting differs from that used in the
statutory accounts of the Joint Ventures, which are prepared in accordance with
the accounting principles and other relevant financial regulations applicable
to joint venture enterprises as established by the Ministry of Finance of the
PRC.
The major adjustment typically made to conform to US GAAP is the
adjustment for depreciation of fixed assets to reflect the useful economic
lives of fixed assets.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Consolidation
The consolidated financial statements include the financial statements of
the Company and the Joint Ventures, Daming and Yongxin, which are controlled by
the Company effective December 31, 1996. All material intercompany balances
have been eliminated on consolidation.
b. Taxation
i. Income Taxes
The Company is exempt from taxation in the British Virgin Islands.
Pursuant to the relevant income tax laws applicable to Sino-foreign equity
joint venture enterprises in the PRC, the Joint Ventures are fully exempt from
the Chinese State unified income tax ("income tax") for two years starting from
the first profit-making year followed by a 50% reduction of the income tax for
the next three years thereafter ("tax holiday"). In accordance with the same
tax laws, the Joint Ventures are also exempt from the PRC local income tax. A
summary of the tax exemptions available to the Joint Ventures is as follows:
<TABLE>
<CAPTION>
Chinese State Chinese local Exemption from Exemption from Year of
income tax income tax Chinese State income Chinese local commencement
rate (%) rate (%) tax income tax of tax holiday
--------------- --------------- ------------------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Daming 30 3 Full exemption for 2 Full exemption 1993
years starting from
the first profit-
making year
followed by a 50%
reduction for the next
3 years thereafter
Yongxin 30 3 Same as Daming Same as Daming 1994
</TABLE>
Deferred income taxes are provided using the liability method. Under the
liability method, deferred income taxes are recognized for all significant
temporary differences between the tax and financial statement bases of assets
and liabilities. The tax consequences of those differences are classified as an
asset or a liability.
F-8
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ii. Value-added Tax ("VAT")
Prior to December 31, 1993, the Joint Ventures were subject to Industrial
and Commercial Consolidated Tax ("ICCT") at an effective tax rate of 5% plus a
local surcharge of 0.5% on the sales amount.
In December 1993, the PRC government promulgated several major new tax
regulations which came into effect on January 1, 1994. These new tax
regulations replaced a number of former tax laws and regulations, and
represented significant changes to the PRC taxation system. Under these new tax
regulations, the Joint Ventures are subject
to VAT which replaced ICCT and is currently the principal indirect tax on the
sales of tangible goods and the provision of certain specified services. The
general VAT rate applicable to the Joint Ventures is 17%.
Under a supplementary notice issued by the National People's Congress in
December 1993, a "grandfather" provision was granted whereby any additional tax
burden of a foreign invested enterprise established before December 31, 1993
due to the introduction of VAT may, upon application to and with the approval
of the tax authorities, obtain a refund ("VAT credit") of any tax paid in
excess of the amount it would have paid under the previous ICCT. The maximum
time limit for application of this provision is five years.
c. Cash
Cash includes cash on hand and demand deposits with banks.
d. Inventories
Inventories are stated at the lower of cost, on a weighted-average basis,
or net realizable value. Costs of work-in-progress and finished goods include
direct materials, direct labor and an attributable portion of production
overheads. Net realizable value is calculated based on the estimated normal
selling price less all further costs of production and the related costs of
marketing, selling and distribution. Provision is made for obsolete, slow
moving or defective items, where appropriate.
e. Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation of property, plant and equipment is computed using
the straight- line method over the assets' estimated useful lives, after taking
into account an estimated residual value of 10% of the costs of the fixed
assets. The estimated useful lives are as follows:
Building ........................ 25 years
Machinery and equipment ........ 10 years
Motor vehicles ................. 5 years
f. Foreign Currency Translation
The Company and the Joint Ventures maintain their books and records in
Renminbi. Foreign currency transactions are translated into Renminbi at the
applicable rates of exchange at the dates of the transactions. Monetary assets
and liabilities denominated in foreign currencies are translated into Renminbi
using the exchange rates prevailing at the balance sheet date. Gains or losses
from foreign currency transactions are recognized in the statement of income
during the period in which they occur.
g. Related Company
A related company is a company in which one or more of the directors or
the investors of the Company and Joint Ventures have direct or indirect
beneficial interests.
h. Use of Estimates
The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could differ from
those estimates.
F-9
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
i. New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", which is effective for both interim and annual periods ending after
December 15, 1997. SFAS No. 128 specifies the computation, presentation and
disclosure requirement for basic and diluted earnings per share. This statement
will be adopted by the Company in connection with its consolidated financial
statements for the year ending December 31, 1997.
4. BUSINESS COMBINATION
As discussed in Note 1, the Company acquired an 80% interest in each of
Daming and Yongxin, effective as of December 31, 1996. Pursuant to an
outstanding informal agreement, the purchase price was based upon the
proportionate amount of the paid-in capital of both companies at the
acquisition date or approximately RMB25,895,000. Each acquisition has been
accounted for as a purchase, with the purchase price allocated to the
proportionate estimated fair values of the acquired assets and assumed
liabilities and resulted in an excess of the net fair value of the acquired
companies over the purchase price of approximately RMB36,566,000. Such excess
amount has been applied, first to reduce the proportionate value of the
acquired long-term assets to zero (principally property, plant and equipment),
with the remainder of approximately RMB11,219,000 classified as negative
goodwill in the accompanying balance sheet. Such negative goodwill is being
amortized over a period of ten years. The operating results of Daming and
Yongxin will be included in the consolidated statement of income effective as
of January 1, 1997. The following presents the unaudited pro forma effects of
the acquisitions on the Company's results of operations, as if the acquisitions
had occurred on January 1, 1995:
Unaudited
<TABLE>
<CAPTION>
1995 1996 1996
--------- --------- --------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C>
Net sales .................................... 96,713 143,684 17,321
Net income .................................... 18,599 30,910 3,726
Net income per share ........................... 3.83 6.37 0.77
Weighted average number of shares (000s) ...... 4,850 4,850 4,850
</TABLE>
5. RESULT OF OPERATIONS
During the period, the Company had no revenue and did not earn any profit
or incur any loss.
6. INVENTORIES
Inventories comprised:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1996
--------- --------
RMB'000 US$'000
<S> <C> <C>
Finished goods ...... 13,915 1,677
====== =====
</TABLE>
F-10
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1996
--------- --------
RMB'000 US$'000
<S> <C> <C>
Building ..................... 1,779 214
Machinery and equipment ...... 4,524 546
Motor vehicles ............... 34 4
------ ----
Net book value ............... 6,337 764
====== ====
</TABLE>
As discussed in Note 4, the book value of property, plant and equipment
has been reduced by approximately RMB25,347,000 in connection with the
accounting for the acquisitions of Daming and Yongxin.
Xianyang Pianzhuan possesses the land use right of the piece of land on
which the Joint Ventures' buildings are located. During the years ended
December 31, 1994, 1995 and 1996, the land was rented by Xianyang Pianzhuan to
the Joint Ventures for annual rental of RMB124,000. The Company's directors
believe that the rental costs approximate fair market value.
8. SHORT-TERM BANK LOANS
Short-term bank loans are mainly denominated in United States dollars, and
are secured by corporate guarantees given by Xianyang Pianzhuan. Short-term
bank loans are repayable within three to six months and are renewable with the
consent of the relevant banks.
Weighted average interest rates with respective to the short-term bank
loans as of December 31, 1996 was 7.49%.
9. DEFERRED TAXATION
Deferred taxation mainly represented the taxation effect of the
adjustments made to the financial statements of the Joint Ventures to conform
to US GAAP and other adjustments made to the statutory financial statements of
the Joint Ventures. Such amounts of deferred taxes, individually and in the
aggregate, were not material to the accompanying consolidated balance sheet.
10. INVESTOR'S EQUITY
Upon incorporation, the authorized capital of the Company was 50,000
shares of US$1. During the period, the Company issued 48,000 shares of US$1
each which were fully paid up for cash.
During the period, other than the capital contribution by investors as of
the inception of the Company, there were no transactions impacting investors'
equity between the date of incorporation and December 31, 1996.
11. DEDICATED CAPITAL OF JOINT VENTURES
According to the rules and regulations for Sino-foreign equity joint
venture enterprises, when distributing net income of each year, the Joint
Ventures shall set aside a portion of their net income as reported in their
statutory accounts for the statutory general reserve fund and enterprise
expansion fund, such portion being determined at the discretion of the Boards
of Directors. These reserves cannot be used for purposes other than those for
which they are created and are not distributable as cash dividends.
F-11
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. DISTRIBUTION OF NET INCOME OF JOINT VENTURES
According to the Articles of Association of the Joint Ventures, the Joint
Ventures may distribute their net income as reported in the statutory accounts,
after providing for discretionary dedicated capital (see Note 9), to their
investors according to their respective equity interest. The net income of the
Joint Ventures reported in the statutory accounts, however, differs from the
corresponding amounts reported under US GAAP.
13. RELATED PARTY TRANSACTIONS
Summary of the related party transactions of the Joint Ventures for the
year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
RMB'000 US$'000
<S> <C> <C>
Sales to a related company ........................................ 125,770 15,161
Purchase from a related company .................................... 84,993 10,246
Rental expenses paid to a related company ........................... 124 15
Management fees paid to a related company ........................... 3,551 428
Fixed assets sold at net book value to related companies ............ 201 24
Fixed assets purchased at net book value from related companies ... 546 66
Interest income received from related companies ..................... 4,053 489
Interest expenses paid to related companies ........................ 4,560 550
Interest rates charged on inter-company balances (per annum) ...... 10.98% 10.98%
</TABLE>
A substantial portion of the Joint Ventures' fixed assets were purchased
from related companies and their investors.
Certain machinery and equipment used by the Joint Ventures were provided
by a related company without charge.
Balances with related companies are unsecured, bear interest at 10.98% per
annum and have no fixed repayment terms.
14. RETIREMENT PLAN
As stipulated by the regulations of the PRC government, the Joint Ventures
have established a defined contribution retirement plan for all of their staff.
Under this plan, all staff are entitled to a fixed life-long pension equal to
their basic salaries at their retirement dates. The Joint Ventures are required
to make specific contributions at approximately 18% of the basic salaries of
the staff to a related company. The Joint Ventures have no future obligations
for the pensions or any post-retirement benefits beyond the annual
contributions made. The related company is responsible for the ultimate pension
liabilities to those retired employees.
15. COMMITMENTS
As of December 31, 1996, the Company had an outstanding capital
contribution commitment of RMB381,000 under the joint venture agreements.
As of December 31, 1996, the Joint Ventures had outstanding commitments
under an operating lease with a related company for the rental of land and
building of approximately RMB124,000, RMB124,000 and RMB47,000 for the years
ending December 31, 1997, 1998 and 1999 respectively.
F-12
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. FINANCIAL INSTRUMENTS
The carrying amounts of the Company's and Joint Ventures' cash, accounts
receivable and due from related companies approximate their fair values because
of the short maturity of those instruments. The carrying amounts of the bank
loans approximate their fair values based on borrowing rates currently
available for bank loans with similar terms and maturities.
17. PLANNED INITIAL PUBLIC OFFERING
The Company is planning for an initial public offering (the "offering") of
4,000,000 shares of the common stock of the Company of par value US$0.01 at a
proposed offering price of US$7.50 each. Pursuant to agreements executed in
December 1996, the Company will acquire a 90% equity interest in Xianyang Dnon
Tech Special Electro Technique Co., Ltd. ("Dnon Tech") and a 70% equity
interest in Yantai Daewoo Electronic Components Co., Ltd. ("Yantai"), two
Sino-foreign equity ventures incorporated in the PRC, for an estimated total
consideration of US$5,500,000. These acquisitions will be consummated upon the
closing of the offering and each will be accounted for as a purchase. Dnon Tech
and Yantai are both related companies and are principally engaged in the
manufacturing of enameled copper wires and deflection yokes, respectively.
F-13
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
COMBINED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1995 AND 1996 AND FOR THE YEARS ENDED
DECEMBER 31, 1994, 1995 AND 1996
TOGETHER WITH AUDITORS' REPORT
F-14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: XIANYANG DAMING ELECTRONIC CO., LIMITED AND XIANYANG
YONGXIN ELECTRONIC CO., LIMITED
We have audited the accompanying combined balance sheets of Xianyang Daming
Electronic Co., Limited and Xianyang Yongxin Electronic Co., Limited (the
"Companies"), both incorporated in the People's Republic of China, as of
December 31, 1995 and 1996, and the related combined statements of income, cash
flows and changes in investors' equity for the years ended December 31, 1994,
1995 and 1996, expressed in Renminbi. These financial statements are the
responsibility of the management of the Companies. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Companies as of December 31, 1995 and 1996, and the combined results of their
operations and their cash flows for each of the years ended December 31, 1994,
1995 and 1996 in conformity with generally accepted accounting principles in
the United States of America.
Hong Kong,
July 2, 1997.
F-15
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------------------------------
1994 1995 1996 1996
------------- ------------- ------------- -------------
RMB RMB RMB US$
<S> <C> <C> <C> <C>
Sales .................................... 68,789 96,713 143,684 17,321
--------- --------- --------- ---------
Cost of goods sold ........................ (51,798) (69,977) (96,350) (11,615)
Selling and administrative expenses ...... (634) (2,615) (4,511) (544)
Interest expenses, net .................. (1,689) (3,214) (1,037) (125)
Other expenses, net ..................... (219) (36) (114) (14)
--------- --------- --------- ---------
Total costs and expenses .................. (54,340) (75,842) (102,012) (12,298)
--------- --------- --------- ---------
Income before income taxes ............... 14,449 20,871 41,672 5,023
Provision for income taxes ............... -- (2,077) (7,411) (893)
--------- --------- --------- ---------
Net income .............................. 14,449 18,794 34,261 4,130
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on March 31, 1997 of US$1.00 = RMB8.2955. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on March 31, 1997 or at any
other certain rate.
F-16
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1996 1996
-------- --------- -------
RMB RMB US$
<S> <C> <C> <C>
ASSETS
Current assets: ..............................
Cash .......................................... 16,898 7,274 877
Accounts receivable ........................... 4,504 15,713 1,894
Due from a joint venture partner ............... 14,928 -- --
Due from related companies ..................... -- 31,926 3,849
Inventories .................................... 11,886 13,915 1,677
Prepayments and other current assets ......... 125 1,592 192
Value-added tax credit ........................ -- 4,575 552
------- -------- -------
Total current assets ........................ 48,341 74,995 9,041
Property, plant and equipment, net ............ 34,199 31,683 3,819
Value-added tax credit ........................ 6,235 -- --
------- -------- -------
Total assets ................................. 88,775 106,678 12,860
======= ======== =======
LIABILITIES AND INVESTORS' EQUITY
Current liabilities:
Short-term bank loans ........................ 15,135 14,749 1,778
Due to related companies ..................... 17,111 -- --
Accrued expenses .............................. 2,826 6,072 732
Income taxes payable ........................... 961 3,628 437
Value-added tax payable ........................ -- 2,401 289
Deferred taxation .............................. -- 669 81
Dividend payable .............................. 8,210 -- --
------- -------- -------
Total current liabilities ..................... 44,243 27,519 3,317
Deferred taxation .............................. 615 981 118
------- -------- -------
Total liabilities ........................... 44,858 28,500 3,435
------- -------- -------
Investors' equity: ...........................
Capital ....................................... 30,335 30,335 3,657
Dedicated capital .............................. 7,900 15,020 1,811
Retained earnings .............................. 5,682 32,823 3,957
------- -------- -------
Total investors' equity ..................... 43,917 78,178 9,425
------- -------- -------
Total liabilities and investors' equity ...... 88,775 106,678 12,860
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on March 31, 1997 of US$1.00 = RMB8.2955. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on March 31, 1997 or at any
other certain rate.
F-17
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
For the year ended December 31,
----------------------------------------------------------------
1994 1995 1996 1996
------------- ------------ ------------- -----------------
RMB RMB RMB US$
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................... 14,449 18,794 34,261 4,130
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property, plant and equipment ...... 2,101 3,052 2,974 359
Provision for deferred taxation ..................... -- 615 1,035 125
(Increase) decrease in assets:
Accounts receivable ................................. (10,455) 6,343 (11,209) (1,351)
Due from a joint venture partner .................. (1,435) (8,281) 14,928 1,800
Due from related companies ........................ 5,692 -- (31,926) (3,849)
Inventories ....................................... (13,311) 2,829 (2,029) (245)
Prepayments and other current assets ............... 42 42 (1,467) (177)
Value-added tax credit .............................. (4,593) (1,642) 1,660 200
Increase (decrease) in liabilities:
Due to a joint venture partner ..................... 1,570 -- -- --
Due to related companies ........................... 25,619 (5,673) (17,111) (2,063)
Accrued expenses .................................... 1,951 385 3,246 391
Income taxes payable .............................. (255) 961 2,667 321
Value-added tax payable ........................... -- -- 2,401 290
--------- -------- --------- --------
Net cash provided by (used in) operating
activities ....................................... 21,375 17,425 (570) (69)
--------- -------- --------- --------
Cash flows from investing activities:
Acquisition of property, plant and equipment ......... (29,282) (12,114) (691) (83)
Proceeds from disposals of property, plant and
equipment .......................................... 6,598 2,530 233 28
--------- -------- --------- --------
Net cash used in investing activities ............ (22,684) (9,584) (458) (55)
--------- -------- --------- --------
Cash flows from financing activities:
Net proceeds from (repayment of) short-term
bank loans .......................................... 4,390 1,075 (386) (47)
Contribution from investors ........................ 7,962 7,670 -- --
Dividend paid ....................................... (4,669) (16,745) (8,210) (989)
--------- -------- --------- ---------------
Net cash provided by (used in) financing
activities ....................................... 7,683 (8,000) (8,596) (1,036)
--------- -------- --------- --------
Net increase (decrease) in cash ..................... 6,374 (159) (9,624) (1,160)
Cash, beginning of year .............................. 10,683 17,057 16,898 2,037
--------- -------- --------- --------
Cash, end of year .................................... 17,057 16,898 7,274 877
========= ======== ========= ========
Supplementary information
Interest received ................................. 154 2,278 4,444 536
Interest paid ....................................... 1,155 5,389 5,715 689
Income taxes paid ................................. -- 500 3,709 447
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on March 31, 1997 of US$1.00 = RMB8.2955. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on March 31, 1997 or at any
other certain rate.
F-18
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
COMBINED STATEMENTS OF CHANGES IN INVESTORS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
Dedicated Retained
Capital capital earnings Total
--------- ----------- ---------- -------------
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Balance as of January 1, 1994 ......... 14,703 1,478 2,946 19,127
Net income ........................... -- -- 14,449 14,449
Contribution from investors ......... 7,962 -- -- 7,962
Transfer to dedicated capital ......... -- 3,199 (3,199) --
Dividend declared ..................... -- -- (11,998) (11,998)
------- ------- -------- ---------
Balance as of December 31, 1994 ...... 22,665 4,677 2,198 29,540
Net income ........................... -- -- 18,794 18,794
Contribution from investors ......... 7,670 -- -- 7,670
Transfer to dedicated capital ......... -- 3,223 (3,223) --
Dividend declared ..................... -- -- (12,087) (12,087)
------- ------- -------- ---------
Balance as of December 31, 1995 ...... 30,335 7,900 5,682 43,917
Net income ........................... -- -- 34,261 34,261
Transfer to dedicated capital ......... -- 7,120 (7,120) --
------- ------- -------- ---------
Balance as of December 31, 1996 ...... 30,335 15,020 32,823 78,178
======= ======= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Xianyang Daming Electronic Co., Limited ("Daming") and Xianyang Yongxin
Electronic Co., Limited ("Yongxin"), (the "Companies") are Sino-foreign equity
joint venture enterprises incorporated in the People's Republic of China (the
"PRC") in October 1992 and February 1993, respectively.
The Companies are principally engaged in the manufacturing of deflection
yokes for sale to customers in the PRC and overseas. Daming is also engaged in
the trading of machines for sale to related companies.
Upon incorporation, Daming was owned by Xianyang & Pianzhuan Group
Corporation ("Xianyang Pianzhuan", and previously named Xianyang Deflection
Group Corporation), a company incorporated in the PRC, (holding 75% interest)
and Tomei Trading Company Limited ("Tomei"), a company incorporated in Japan
(holding 25% interest). In December 1995, Xianyang Pianzhuan transferred its
entire interests in Daming to a related company, Xianyang Pianzhuan Development
Co. Ltd. ("Xianyang Development", previously named Xianyang Deflection Yoke
Investment Co., Ltd.), a company incorporated in the PRC. In the same month,
Xianyang Development sold a 55% interest in Daming to Tomei. Effective December
31, 1996, Tomei sold its entire interests in Daming to Asia Electronics Holding
Co. Inc. ("Asia Electronics" and previously named as Asia Electric Company
Limited), a company incorporated in the British Virgin Islands. As a result of
the above transactions, Daming is presently owned by Asia Electronics (holding
80% interest) and Xianyang Development (holding 20% interest). Pursuant to the
original joint venture agreement between Xianyang Pianzhuan and Tomei, the
authorized capital of Daming is US$1,800,000. As of December 31, 1996, the
joint venture partners had contributed RMB12,423,000 with unpaid capital of
RMB476,000.
As of December 31, 1996, the joint venture partners had delayed the
payment of a portion of the authorized capital to Daming. Such delay in the
contribution of capital is in contravention of the terms of the joint venture
agreements and the legal requirements for Laws on Sino-foreign Co-operative
Joint Ventures in the PRC, which could lead to the dissolution of Daming.
However, the joint venture partners have agreed to the delay in the capital
contribution and the directors consider the possibility of dissolution of
Daming to be remote.
Upon incorporation, Yongxin was owned by Xianyang Pianzhuan (holding 45%
interest) and Hong Kong Yongxin Technology Development Co., Ltd. ("Hong Kong
Yongxin"), a company incorporated in Hong Kong (holding 55% interest). In
September 1993, Hong Kong Yongxin sold its entire interests in Yongxin to Hong
Kong Cao Trading Company Limited ("Hong Kong Cao"), a company incorporated in
Hong Kong. In August 1994, Hong Kong Cao resold its entire interests in Yongxin
to Tomei. In December 1995, Xianyang Pianzhuan transferred its entire interests
in Yongxin to Xianyang Development. In the same month, Xianyang Development
sold a 25% interest in Yongxin to Tomei. Effective December 31, 1996, Tomei
resold its entire interests in Yongxin to Asia Electronics. As a result of the
above transactions, Yongxin is presently owned by Asia Electronics (holding 80%
interest) and Xianyang Development (holding 20% interest). Pursuant to the
original joint venture agreement between Xianyang Pianzhuan and Hong Kong
Yongxin, the authorized capital of Yongxin is US$2,100,000 (equivalent to
RMB17,912,000); all of which had been contributed by the joint venture partners
as of December 31, 1996.
Other key provisions of the joint venture agreements and related
supplementary agreements between Xianyang Pianzhuan, Daming and Yongxin
included the following:
[bullet] Daming and Yongxin have pre-determined joint venture periods of 30
years extending to October 2022 and February 2023 respectively;
[bullet] the profit and loss sharing ratio of the Companies is the same as
the respective equity interests held by the investors;
[bullet] each Board of Directors consists of five members; four designated
by Asia Electronics and one designated by Xianyang Development.
[bullet] Xianyang Pianzhuan will continue to provide management and
administrative services to Daming and Yongxin for management fees;
and
F-20
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)
[bullet] Xianyang Pianzhuan will lease certain factory premises to Daming
for a monthly rental payment of RMB10,368.
The Companies conduct their operations in the PRC and accordingly are
subject to special considerations and significant risks not typically
associated with investments in equity securities of United States and Western
European companies. These include risks associated with, among others, the
political, economic, legal environments and foreign currency exchange. These
risks are described further in the following paragraphs:
a. Political Environment
The Companies' results may be adversely affected by changes in the
political and social conditions in the PRC and by, among other things, changes
in governmental policies with respect to laws and regulations, inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation. While the PRC government is expected to continue its economic reform
policies, many of the reforms are new or experimental and may be refined or
changed. It is also possible that a change in the PRC leadership could lead to
changes in economic policy.
b. Economic Environment
The economy of the PRC differs significantly from the United States
economy in many respects, including its structure, levels of development and
capital reinvestment, growth rate, government involvement, resource allocation,
self-sufficiency, rate of inflation and balance of payments position. The
adoption of economic reform policies since 1978 has resulted in a gradual
reduction in the role of state economic plans in the allocation of resources,
pricing and management of such assets, an increased emphasis on the utilization
of market forces, and rapid growth in the PRC economy. However, such growth has
been uneven among various regions of the country and among various sectors of
the economy.
c. Legal Environment
The PRC's legal system is based on written statutes under which prior
court decisions may be cited as authority but do not have binding precedence.
The PRC's legal system is relatively new, and the government is still in the
process of developing a comprehensive system of laws, a process that has been
ongoing since 1979. Considerable progress has been made in the promulgation of
laws and regulations dealing with economic matters such as corporate
organization and governance, foreign investment, commerce, taxation and trade.
Such legislation has significantly enhanced the protection afforded to foreign
investors. However, experience with respect to the implementation,
interpretation and enforcement of such laws is limited.
d. Foreign Currency Exchange
The revenues of the Companies are denominated in Renminbi. A portion of
the profit of the Companies needs to be converted to other currencies to meet
foreign currency obligations such as the purchase of imported materials and
payment of dividend. Renminbi is not freely convertible into foreign
currencies. All foreign exchange transactions involving Renminbi must take
place either through the Bank of China or other institutions authorized to buy
and sell foreign currencies, or at a swap center. Sino-foreign equity joint
venture enterprises may also maintain foreign currency accounts. Payment for
imported materials and remittance of earnings outside the PRC are permitted but
are subject to the availability of foreign currencies. For capital transactions
in foreign currencies, approval is required from the State Administration of
Foreign Exchange.
F-21
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
2. BASIS OF PRESENTATION
The accompanying combined financial statements are prepared in accordance
with generally accepted accounting principles in the United States of America
("US GAAP"). This basis of accounting differs from that used in the statutory
accounts of the Companies, which are prepared in accordance with the accounting
principles and other relevant financial regulations applicable to joint venture
enterprises as established by the Ministry of Finance of the PRC.
Major adjustments made to conform to US GAAP included the following:
[bullet] adjustment for depreciation of fixed assets to reflect the useful
economic lives of fixed assets; and
[bullet] adjustment of certain items, designated as "specific reserves
appropriated from net income", as charges to income.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Combination
The combined financial statements include the financial statements of the
Companies, as they were under common control for all years presented. All
material intercompany balances and transactions have been eliminated on
combination.
b. Sales
Sales represent the invoiced value of goods, net of value-added tax,
supplied to customers. Sales are recognized when goods are delivered and title
has passed to customers.
c. Taxation
i. Income Taxes
Pursuant to the relevant income tax laws applicable to Sino-foreign equity
joint venture enterprises in the PRC, the Companies are fully exempt from the
Chinese State unified income tax ("income tax") for two years starting from the
first profit-making year followed by a 50% reduction of the income tax for the
next three years thereafter ("tax holiday"). In accordance with the same tax
laws, the Companies are also exempt from the PRC local income tax. A summary of
the tax exemptions available to the Companies is as follows:
<TABLE>
<CAPTION>
Chinese State Chinese local Exemption from Exemption from Year of
Income tax Income tax Chinese State Income Chinese local commencement
rate (%) rate (%) tax income tax of tax holiday
--------------- --------------- ------------------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Daming 30 3 Full exemption for 2 Full exemption 1993
years starting from
the first profit-
making year
followed by a 50%
reduction for the next
3 years thereafter
Yongxin 30 3 Same as Daming Same as Daming 1994
</TABLE>
Deferred income taxes are provided using the liability method. Under the
liability method, deferred income taxes are recognized for all significant
temporary differences between the tax and financial statement bases of assets
and liabilities. The tax consequences of those differences are classified as an
asset or a liability.
F-22
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ii. Value-added Tax ("VAT")
Prior to December 31, 1993, the Companies were subject to Industrial and
Commercial Consolidated Tax ("ICCT") at an effective tax rate of 5% plus a
local surcharge of 0.5% on the sales amount.
In December 1993, the PRC government promulgated several major new tax
regulations which came into effect on January 1, 1994. These new tax
regulations replaced a number of former tax laws and regulations, and
represented significant changes to the PRC taxation system. Under these new tax
regulations, the Companies are subject to VAT which replaced ICCT and is
currently the principal indirect tax on the sales of tangible goods and the
provision of certain specified services. The general VAT rate applicable to the
Companies is 17%.
Under a supplementary notice issued by the National People's Congress in
December 1993, a "grandfather" provision was granted whereby any additional tax
burden of a foreign invested enterprise established before December 31, 1993
due to the introduction of VAT may, upon application to and with the approval
of the tax authorities, obtain a refund ("VAT credit") of any tax paid in
excess of the amount it would have paid under the previous ICCT. The maximum
time limit for application of this provision is five years.
d. Cash
Cash includes cash on hand and demand deposits with banks.
e. Inventories
Inventories are stated at the lower of cost, on a weighted-average basis,
or net realizable value. Costs of work-in-progress and finished goods include
direct materials, direct labor and an attributable portion of production
overheads. Net realizable value is calculated based on the estimated normal
selling price less all further costs of production and the related costs of
marketing, selling and distribution. Provision is made for obsolete, slow
moving or defective items, where appropriate.
f. Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation of property, plant and equipment is computed using
the straight-line method over the assets' estimated useful lives, after taking
into account an estimated residual value of 10% of the costs of the fixed
assets. The estimated useful lives are as follows:
Building ......................... 25 years
Machinery and equipment .......... 10 years
Motor vehicles .................. 5 years
g. Foreign Currency Translation
The Companies maintain their books and records in Renminbi. Foreign
currency transactions are translated into Renminbi at the applicable rates of
exchange at the dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies are translated into Renminbi using the
exchange rates prevailing at the balance sheet dates. The resulting exchange
differences are recorded in the combined statements of income.
h. Related Company
A related company is a company in which one or more of the directors or
the investors of the Companies have direct or indirect beneficial interests.
F-23
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
i. Use of Estimates
The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could differ from
those estimates.
4. PROVISION FOR INCOME TAXES
Provision for income taxes comprised:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------
1994 1995 1996 1996
--------- --------- --------- --------
RMB'000 RMB'000 RMB'000 US$'000
<S> <C> <C> <C> <C>
Current ........................ -- 1,462 6,376 768
Deferred ........................ -- 615 1,035 125
-- ------ ------ ---
Provision for income taxes ...... -- 2,077 7,411 893
== ====== ====== ===
</TABLE>
The reconciliation of the statutory income tax rate in the PRC to the
effective income tax rate as stated in the combined statements of income are as
follows:
<TABLE>
<CAPTION>
For the year ended December 31,
----------------------------------
1994 1995 1996
---------- ---------- --------
<S> <C> <C> <C>
Statutory tax rate .............................. 30% 30% 30%
Exemption of income taxes (tax holiday) ......... (30%) (12%) --
Reduction in tax rate for Sino-foreign equity joint
venture enterprises (tax holiday) ............ -- (9%) (15%)
Permanent difference ........................... -- 1% 1%
Other .......................................... -- -- 2%
------- ------- -------
Effective tax rate .............................. -- 10% 18%
======= ======= =======
</TABLE>
5. INVENTORIES
Inventories comprised:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1995 1996 1996
--------- --------- --------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C>
Raw materials ......... 913 -- --
Work-in-progress ...... 1,528 -- --
Finished goods ......... 9,445 13,915 1,677
------- ------- ------
Total .................. 11,886 13,915 1,677
======= ======= ======
</TABLE>
F-24
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1995 1996 1996
---------- --------- --------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C>
Building ........................... 9,430 9,430 1,137
Machinery and equipment ............ 29,203 28,625 3,451
Motor vehicles ..................... 194 194 23
-------- -------- ------
38,827 38,249 4,611
Less: Accumulated depreciation ...... (4,628) (6,566) (792)
-------- -------- ------
Net book value ..................... 34,199 31,683 3,819
======== ======== ======
</TABLE>
Xianyang Pianzhuan possesses the land use right of the piece of land on
which the Companies' building is located. During the years ended December 31,
1994, 1995 and 1996, certain land and building were rented by Xianyang
Pianzhuan to the Companies for RMB annual rental of 124,000. The Companies'
directors believe that the rental costs approximate fair market rental.
7. SHORT-TERM BANK LOANS
Short-term bank loans are mainly denominated in United States dollars, and
are secured by corporate guarantees given by Xianyang Pianzhuan. Short-term
bank loans are repayable within three to six months and are renewable with the
consent of the relevant banks. Weighted average interest rate with respective
to the short-term bank loans as of December 31, 1995 and 1996 was 7.78% and
7.49%, respectively.
8. DEFERRED TAXATION
Deferred taxation mainly represented the taxation effect of the
adjustments made to the financial statements of the Companies to conform to US
GAAP and other adjustments made to the statutory financial statements of the
Companies. Such amounts of deferred taxes, individually and in the aggregate,
were not material to the accompanying combined balance sheets.
9. DEDICATED CAPITAL
According to the rules and regulations for Sino-foreign equity joint
venture enterprises, when distributing net income of each year, the Companies
shall set aside a portion of their net income as reported in their statutory
accounts for the statutory general reserve fund and enterprise expansion fund,
such portion being determined at the discretion of the Boards of Directors.
These reserves cannot be used for purposes other than those for which they are
created and are not distributable as cash dividends.
F-25
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
9. DEDICATED CAPITAL (Continued)
For the years ended December 31, 1994, 1995 and 1996, the directors
proposed the following appropriations to statutory reserves:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------
Statutory reserves Percentage 1994 1995 1996 1996
- ------------------------------------ ------------ --------- --------- --------- --------
RMB'000 RMB'000 RMB'000 US$'000
<S> <C> <C> <C> <C> <C>
General reserve fund ............ 10% 1,599 1,612 3,560 429
Enterprise expansion fund ...... 10% 1,600 1,611 3,560 429
----- ------ ----- ---
Total ........................... 3,199 3,223 7,120 858
===== ====== ===== ===
</TABLE>
10. DISTRIBUTION OF NET INCOME
According to the Articles of Association of the Companies, the Companies
may distribute their net income as reported in the statutory accounts, after
providing for discretionary dedicated capital (see Note 9), to their investors
according to their respective equity interests. The net income reported in the
statutory accounts, however, differs from the corresponding amounts reported
under US GAAP. During the years ended December 31, 1994 and 1995, the Companies
declared dividends of approximately RMB11,998,000 and RMB12,087,000,
respectively. No dividend was declared for the year ended December 31, 1996. In
February 1997, the Companies declared dividends of approximately RMB26,699,000.
11. RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
1994 1995 1996 1996
------- ------- ------- --------
RMB'000 RMB'000 RMB'000 US$'000
<S> <C> <C> <C> <C>
Sales to
-- a related company ............... 22,669 64,930 125,770 15,161
-- a joint venture partner ......... 30,276 8,451 -- --
Purchase from a related company ...... 45,242 56,821 84,993 10,246
Rental expenses paid to a related
company ........................... 124 124 124 15
Management fees paid to a related
company ........................... -- 1,306 3,551 428
Fixed assets sold at net book value to
-- related companies ............... 5,461 365 201 24
-- joint venture partners ............ 786 2,165 -- --
Fixed assets purchased at net book
value from
-- related companies ............... 2,256 268 546 66
-- joint venture partners ............ 19,064 11,745 -- --
Interest income received from related
companies ........................... -- 1,487 4,053 489
Interest expenses paid to related
companies ........................... -- 3,889 4,560 550
Interest income charged on unpaid
capital ........................... 348 -- -- --
Interest rates charged on inter-
company balances (per annum) ......... -- 10.98% 10.98% 10.98%
</TABLE>
Certain machinery and equipment used by the Companies were provided by a
related company without charge. The Companies' directors are of the opinion
that the annual fair market lease value of such machinery and equipment was
approximately RMB1,076,000 (equivalent to $129,700).
F-26
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
11. RELATED PARTY TRANSACTIONS (Continued)
b. Related company balances
Balances with related companies are unsecured, bear interest at 10.98% per
annum and have no fixed repayment terms.
12. RETIREMENT PLAN
As stipulated by the regulations of the PRC government, the Companies have
established a defined contribution retirement plan for all of their staff.
Under this plan, all staff are entitled to a fixed life-long pension equal to
their basic salaries at their retirement dates. The Companies are required to
make specific contributions at approximately 18% of the basic salaries of the
staff to a related company. The Companies have no future obligations for
pensions or any post-retirement benefits beyond the annual contributions made.
The related company is responsible for the ultimate pension liabilities to
those retired employees. During the years ended December 31, 1994, 1995 and
1996, the Companies made total pension contributions of approximately
RMB241,000, RMB542,000 and RMB662,000, respectively.
13. COMMITMENTS
As of December 31, 1996, the Companies had outstanding commitments under
an operating lease with a related company for the rental of land and building
of approximately RMB124,000, RMB124,000 and RMB47,000 for the years ending
December 31, 1997, 1998 and 1999, respectively. The Company believes that the
operating lease should be renewable at comparable rates to the expiring lease.
14. FINANCIAL INSTRUMENTS
The carrying amounts of the Companies' cash, accounts receivable and due
from (to) related parties approximate their fair values because of the short
maturity of those instruments. The carrying amounts of the bank loans
approximate their fair values based on borrowing rates currently available for
bank loans with similar terms and maturities.
15. SEGMENT INFORMATION
Analysis of sales by geographical locations is as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------
1994 1995 1996 1996
--------- --------- --------- --------
RMB'000 RMB'000 RMB'000 US$'000
<S> <C> <C> <C> <C>
The PRC ............ 14,453 39,699 108,526 13,083
Overseas ............
-- Korea ............ 54,336 57,014 28,660 3,455
-- Japan ............ -- -- 6,498 783
------- ------- -------- -------
Total overseas ...... 54,336 57,014 35,158 4,328
------- ------- -------- -------
Total ............... 68,789 96,713 143,684 17,321
======= ======= ======== =======
</TABLE>
F-27
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
15. SEGMENT INFORMATION (Continued)
Analysis of sales by products is as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------
1994 1995 1996 1996
--------- --------- --------- --------
RMB'000 RMB'000 RMB'000 US$'000
<S> <C> <C> <C> <C>
Deflection yokes ...... 68,789 96,713 124,518 15,011
Machines ............... -- -- 19,166 2,310
------- ------- -------- -------
Total .................. 68,789 96,713 143,684 17,321
======= ======= ======== =======
</TABLE>
Analysis of operating income by products is as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------
1994 1995 1996 1996
--------- --------- --------- --------
RMB'000 RMB'000 RMB'000 US$'000
<S> <C> <C> <C> <C>
Deflection yokes ...... 16,138 24,085 37,584 4,531
Machines ............... -- -- 5,125 617
------- ------- ------- ------
Total .................. 16,138 24,085 42,709 5,148
======= ======= ======= ======
</TABLE>
Analysis of depreciation expense by products is as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------
1994 1995 1996 1996
--------- --------- --------- --------
RMB'000 RMB'000 RMB'000 US$'000
<S> <C> <C> <C> <C>
Deflection yokes ...... 2,101 3,052 2,974 359
Machines ............... -- -- -- --
----- ----- ----- ---
Total ............... 2,101 3,052 2,974 359
===== ===== ===== ===
</TABLE>
Analysis of total assets attributed to each product is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1995 1996 1996
--------- --------- --------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C>
Deflection yokes ...... 88,775 106,678 12,860
Machines ............... -- -- --
------- ------- -------
Total .................. 88,775 106,678 12,860
======= ======= =======
</TABLE>
F-28
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
COMBINED FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1995 AND 1996, AND FOR THE YEARS ENDED
DECEMBER 31, 1994, 1995 AND 1996
TOGETHER WITH AUDITORS' REPORT
F-29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
We have audited the accompanying combined balance sheets of Xianyang Dnon Tech
Special Electro Technique Co., Ltd. and Yantai Daewoo Electronic Components
Co., Ltd. (the "Companies"), both incorporated in the People's Republic of
China, as of December 31, 1995 and 1996, and the related combined statements of
income, cash flows and changes in investors' equity for the years ended
December 31, 1994, 1995 and 1996, expressed in Renminbi. These financial
statements are the responsibility of the management of the Companies. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial positions of the
Companies as of December 31, 1995 and 1996, and the combined results of their
operations and their cash flows for each of the years ended December 31, 1994,
1995 and 1996 in conformity with generally accepted accounting principles in
the United States of America.
Hong Kong,
July 2, 1997.
F-30
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------------------------
1994 1995 1996 1996
------ ------------- ------------- ------------
RMB RMB RMB US$
<S> <C> <C> <C> <C>
Sales .................................... -- 39,997 86,362 10,411
-- --------- --------- --------
Cost of goods sold ........................ -- (39,230) (74,737) (9,010)
Selling and administrative expenses ...... -- (1,788) (3,494) (422)
Interest expenses, net ..................... -- (812) (2,117) (255)
Other income, net ........................ -- 381 653 79
-- --------- --------- --------
Total costs and expenses .................. -- (41,449) (79,695) (9,608)
-- --------- --------- --------
(Loss) Income before income taxes ......... -- (1,452) 6,667 803
Provision for income taxes
-- deferred tax ........................ -- 165 205 25
-- --------- --------- --------
Net (loss) income ........................ -- (1,287) 6,872 828
== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on March 31, 1997 of US$1.00 = RMB8.2955. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on March 31, 1997 or at any
other certain rate.
F-31
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1995 1996 1996
------------ -------- ------
RMB RMB US$
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ............................................. 4,863 4,946 596
Accounts receivable .............................. -- 127 15
Due from joint venture partners .................. 4,318 8,255 995
Inventories .................................... 9,766 15,450 1,862
Deposits ....................................... -- 4,033 486
Prepayments and other assets .................. 569 1,717 207
Prepaid value-added tax ........................ 444 267 32
-------- ------- ------
Total current assets ........................... 19,960 34,795 4,193
Property, plant and equipment, net ............ 38,913 42,210 5,088
Other assets .................................... 1,620 1,408 170
Deferred tax assets ........................... 165 370 45
-------- ------- ------
Total assets ................................. 60,658 78,783 9,497
======== ======= ======
LIABILITIES AND INVESTORS' EQUITY
Current liabilities:
Short-term bank loans ........................... 5,664 13,560 1,635
Accounts payable ................................. 670 2,190 264
Due to a joint venture partner .................. 14,846 8,884 1,071
Due to related companies ........................ 3,361 8,446 1,018
Accrued expenses .............................. 702 1,056 126
-------- ------- ------
Total liabilities .............................. 25,243 34,136 4,114
======== ======= ======
Investors' equity: ..............................
Capital .......................................... 36,702 39,062 4,709
Dedicated capital .............................. -- 610 74
(Accumulated deficit) Retained earnings ......... (1,287) 4,975 600
-------- ------- ------
Total investors' equity ........................ 35,415 44,647 5,383
-------- ------- ------
Total liabilities and investors' equity ...... 60,658 78,783 9,497
======== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on March 31, 1997 of US$1.00 = RMB8.2955. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on March 31, 1997 or at any
other certain rate.
F-32
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------------------------
1994 1995 1996 1996
------------- ------------ ---------- ---------
RMB RMB RMB US$
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income .................................... -- (1,287) 6,872 828
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation of property, plant and equipment ...... -- 2,361 4,069 491
Amortization of other assets ........................ -- 157 318 38
Deferred tax assets ................................. -- (165) (205) (25)
(Increase) decrease in assets:
Accounts receivable ................................. -- -- (127) (15)
Due from joint venture partners ..................... -- (4,318) (3,937) (475)
Deposits .......................................... -- -- (4,033) (486)
Prepayments and other assets ..................... (576) 7 (1,148) (138)
Inventories ....................................... (1,126) (8,640) (5,684) (685)
Prepaid value-added tax ........................... (9) (435) 177 21
Increase (decrease) in liabilities:
Accounts payable .................................... 26 644 1,520 183
Due to joint venture partners ..................... 1,346 13,500 (5,962) (718)
Due to related companies ........................... 4,325 (964) 5,085 613
Accrued expenses .................................... -- 702 354 43
--------- -------- ------- -----
Net cash provided by (used in) operating
activities ....................................... 3,986 1,562 (2,701) (325)
--------- -------- ------- -----
Cash flows from investing activities:
Acquisition of property, plant and equipment ......... (27,881) (13,392) (7,366) (888)
Additions of other assets ........................... (412) (1,366) (106) (13)
--------- -------- ------- -----
Net cash used in investing activities ............ (28,293) (14,758) (7,472) (901)
--------- -------- ------- -----
Cash flows from financing activities:
Net proceeds from short-term bank loans ............ 1,000 4,664 7,896 952
Contributions from investors ........................ 25,304 11,398 2,360 284
--------- -------- ------- -----
Net cash provided by financing activities ......... 26,304 16,062 10,256 1,236
--------- -------- ------- -----
Net increase in cash ................................. 1,997 2,866 83 10
Cash, beginning of year .............................. -- 1,997 4,863 586
--------- -------- ------- -----
Cash, end of year .................................... 1,997 4,863 4,946 596
========= ======== ======= =====
Supplementary information
Interest received ................................. -- 53 42 5
Interest paid ....................................... -- 581 1,646 198
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on March 31, 1997 of US$1.00 = RMB8.2955. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on March 31, 1997 or at any
other certain rate.
F-33
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
COMBINED STATEMENTS OF CHANGES IN INVESTORS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
Retained
earnings
Dedicated (Accumulated
Capital capital deficit) Total
--------- ----------- ------------- ------------
RMB RMB RMB US$
<S> <C> <C> <C> <C>
Balance as of January 1, 1994 ....... -- -- -- --
Contribution from investors ............ 25,304 -- -- 25,304
------- ---- -------- --------
Balance as of December 31, 1994 ...... 25,304 -- -- 25,304
Net loss .............................. -- -- (1,287) (1,287)
Contribution from investors ............ 11,398 -- -- 11,398
------- ---- -------- --------
Balance as of December 31, 1995 ...... 36,702 -- (1,287) 35,415
Net income ........................... -- -- 6,872 6,872
Contribution from investors ............ 2,360 -- -- 2,360
Transfer to dedicated capital ......... -- 610 (610) --
------- ---- -------- --------
Balance as of December 31, 1996 ...... 39,062 610 4,975 44,647
======= ==== ======== ========
</TABLE>
The aaccompanying notes are an integral part of these financial statements.
F-34
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Xianyang Dnon Tech Special Electro Technique Co., Limited ("Dnon Tech")
and Yantai Daewoo Electronic Components Co., Limited ("Yantai Daewoo") (the
"Companies") are Sino-foreign equity joint venture enterprises incorporated in
the People's Republic of China (the "PRC") in May 1993 and December 1993,
respectively.
Dnon Tech is owned by Xianyang & Pianzhuan Group Corp. ("Xianyang
Pianzhuan"), a company incorporated in the PRC (holding 45% interest), Xian
Jiao Tong University Electrical Technical Engineering Limited, a company
incorporated in the PRC (holding 10% interest), Dae Tech Machinery S.P.A., a
company incorporated in Italy (holding 20% interest) and Wainlink Enterprises
Limited, a company incorporated in Hong Kong (holding 25% interest). As of
December 31, 1996, the joint venture partners had contributed RMB11,398,000
with unpaid capital of RMB9,545,000. Subsequent to December 31, 1996, Xianyang
Pianzhuan contributed an additional capital of approximately RMB12,449,000 in
the form of cash.
Dnon Tech is principally engaged in the manufacturing of enameled copper
wire for sale to customers in the PRC.
Upon incorporation, Yantai Daewoo was owned by Gold Industry General
Company ("Gold Industry"), a company incorporated in the PRC (holding 30%
interest), Xianyang Pianzhuan (holding 45% interest) and Tomei Trading Company
Limited ("Tomei"), a company incorporated in Japan (holding 25% interest). In
October 1994, Gold Industry sold a 10% interest in Yantai Daewoo to Daewoo
Electronic Components Co. Ltd. ("Korea Daewoo"), a company incorporated in
Korea. As of December 31, 1996, the joint venture partners had contributed
RMB27,664,000 with unpaid capital of RMB1,030,000.
Yantai Daewoo is principally engaged in the manufacturing of deflection
yokes.
As of December 31, 1996, the joint venture partners had delayed the
payment of a portion of the authorized capital to Dnon Tech and Yantai Daewoo.
Such delay in the contribution of capital is in contravention of the terms of
the joint venture agreements and the legal requirements for Sino-foreign
Co-operative Joint Ventures in the PRC, which could lead to the dissolution of
Dnon Tech and Yantai Daewoo. However, the joint venture partners have agreed to
the delay in the capital contributions and the directors consider the
possibility of dissolution to be remote.
Other key provisions of the joint venture agreements and related
supplementary agreements between Xianyang Pianzhuan, Gold Industry, Korea
Daewoo, Dnon Tech and Yantai Daewoo include the following:
[bullet] Dnon Tech and Yantai Daewoo have pre-determined joint venture
periods of 12 years extending to May 2005 and December 2005,
respectively;
[bullet] the profit and loss sharing ratio of the Companies is the same as
the respective equity interests held by the investors;
[bullet] Xianyang Pianzhuan will continue to provide management and
administrative services to Dnon Tech for management fees; and
[bullet] Xianyang Pianzhuan will lease certain factory premises to Dnon
Tech for a monthly rental payment of RMB3,600.
The Companies conduct their operations in the PRC and accordingly are
subject to special considerations and significant risks not typically
associated with investments in equity securities of United States and Western
European companies. These include risks associated with, among others, the
political, economic, legal environments and foreign currency exchange. These
risks are described further in the following paragraphs:
a. Political Environment
The Companies' results may be adversely affected by changes in the
political and social conditions in the PRC and by, among other things, changes
in governmental policies with respect to laws and regulations, inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation. While the PRC
F-35
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)
government is expected to continue its economic reform policies, many of the
reforms are new or experimental and may be refined or changed. It is also
possible that a change in the PRC leadership could lead to changes in economic
policy.
b. Economic Environment
The economy of the PRC differs significantly from the United States
economy in many respects, including its structure, levels of development and
capital reinvestment, growth rate, government involvement, resource allocation,
self-sufficiency, rate of inflation and balance of payments position. The
adoption of economic reform policies since 1978 has resulted in a gradual
reduction in the role of government in the allocation of resources, pricing and
management of such assets, an increased emphasis on the utilization of market
forces, and rapid growth in the PRC economy. However, such growth has been
uneven among various regions of the country and among various sectors of the
economy.
c. Legal Environment
The PRC's legal system is based on written statutes under which prior
court decisions may be cited as authority but do not have binding precedence.
The PRC's legal system is relatively new, and the government is still in the
process of developing a comprehensive system of laws, a process that has been
ongoing since 1979. Considerable progress has been made in the promulgation of
laws and regulations dealing with economic matters such as corporate
organization and governance, foreign investment, commerce, taxation and trade.
Such legislation has significantly enhanced the protection afforded to foreign
investors. However, experience with respect to the implementation,
interpretation and enforcement of such laws is limited.
d. Foreign Currency Exchange
The revenues of the Companies are denominated in Renminbi. A portion of
the profit of the Companies needs to be converted to other currencies to meet
foreign currency obligations such as the purchase of imported materials and
payment of dividends. Renminbi is not freely convertible into foreign
currencies. All foreign exchange transactions involving Renminbi must take
place either through the Bank of China or other institutions authorized to buy
and sell foreign currencies, or at a swap center. Sino-foreign equity joint
venture enterprises may also maintain foreign currency accounts. Payment for
imported materials and remittance of earnings outside the PRC are permitted but
are subject to the availability of foreign currencies. For capital transactions
in foreign currencies, approval is required from the State Administration of
Foreign Exchange.
2. BASIS OF PRESENTATION
The accompanying combined financial statements are prepared in accordance
with generally accepted accounting principles in the United States of America
("US GAAP"). This basis of accounting differs from that used in the statutory
accounts of the Companies, which are prepared in accordance with the accounting
principles and other relevant financial regulations applicable to joint venture
enterprises as established by the Ministry of Finance of the PRC.
The major adjustment made to conform to US GAAP is an adjustment for
depreciation of fixed assets to reflect the useful economic lives of fixed
assets.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Combination
The combined financial statements include the financial statements of the
Companies, as they were under common control for all years presented. All
material intercompany balances and transactions have been eliminated on
combination.
F-36
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b. Sales
Sales represent the invoiced value of goods, net of value-added tax,
supplied to customers. Sales are recognized when goods are delivered and title
has passed to customers.
c. Taxation
i. Income Taxes
Pursuant to the relevant income tax laws applicable to Sino-foreign equity
joint venture enterprises in the PRC, the Companies are fully exempt from the
Chinese State unified income tax ("income tax") for two years starting from the
first profit-making year followed by a 50% reduction of the income tax for the
next three years thereafter ("tax holiday"). In accordance with the same tax
laws, the Companies are also exempt from the PRC local income tax. A summary of
the tax exemptions available to the Companies is as follows:
<TABLE>
<CAPTION>
Exemption Year of
Chinese State Chinese local from Chinese commence-
income tax income tax Exemption from Chinese local income ment of tax
rate (%) rate (%) State income tax tax holiday
--------------- --------------- --------------------------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Dnon 30 3 Full exemption for 2 years Full 1996
Tech starting from the first profit- exemption
making year. As Dnon Tech
has been approved to be a
company engaged in the
high-technology industry, it
can enjoy a 50% reduction
for the years thereafter.
Yantai 30 3 Full exemption for 2 years Same as 1996
Daewoo starting from the first profit- Dnon Tech
making year followed by a
50% reduction for the years
thereafter. In addition, as
Yantai Daewoo is located in
the industrial development
zone, it can enjoy an
additional 6% tax reduction.
</TABLE>
Deferred income taxes are provided using the liability method. Under the
liability method, deferred income taxes are recognized for all significant
temporary differences between the tax and financial statement bases of assets
and liabilities. The tax consequences of those differences are classified as an
asset or a liability.
ii. Value-added Tax ("VAT")
The Companies are subject to VAT which is currently the principal indirect
tax on the sales of tangible goods and the provision of certain specified
services. The general VAT rate applicable to the Companies is 17%.
All of the sales of Yantai Daewoo are made to Korea Daewoo. Under the
prevailing tax law, raw materials imported and finished goods exported for
Yantai Daewoo are not subject to VAT.
F-37
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
d. Cash
Cash includes cash on hand and demand deposits with banks.
e. Inventories
Inventories are stated at the lower of cost, on a weighted-average basis,
or net realizable value. Costs of work-in-progress and finished goods include
direct materials, direct labor and an attributable portion of production
overheads. Net realizable value is calculated based on the estimated normal
selling price less all further costs of production and the related costs of
marketing, selling and distribution. Provision is made for obsolete, slow
moving or defective items, where appropriate.
f. Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation of property, plant and equipment is computed using
the straight- line method over the assets' estimated useful lives, after taking
into account an estimated residual value of 10% of the costs of the fixed
assets. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Building ..................... 10 years
Machinery and equipment ...... 10 years
Office equipment ............ 5 years
Furniture and fixtures ...... 5 years
Motor vehicles ............... 5 years
</TABLE>
g. Foreign Currency Translation
The Companies maintain their books and records in Renminbi. Foreign
currency transactions are translated into Renminbi at the applicable rates of
exchange at the dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies are translated into Renminbi using the
exchange rates prevailing at the balance sheet dates. The resulting exchange
differences are recorded in the combined statements of income.
h. Related Company
A related company is a company in which one or more of the directors or
the investors of the Companies have direct or indirect beneficial interests.
i. Use of Estimates
The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could differ from
those estimates.
4. RESULT OF OPERATIONS
The Companies had no revenue and did not earn any profit or incur any loss
for the year ended December 31, 1994.
F-38
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
5. PROVISION FOR INCOME TAXES
The reconciliation of the statutory income tax rate in the PRC to the
effective income tax rate as stated in the combined statements of income are as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1996
---------- --------
<S> <C> <C>
Statutory tax rate ........................... 30% 30%
Exemption of income taxes (tax holiday) ...... (30%) (30%)
Temporary differences from differences between
US GAAP and PRC GAAP ..................... 11% (3%)
------- -------
Effective tax rate ........................... 11% (3%)
======= =======
</TABLE>
6. INVENTORIES
Inventories comprised:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1995 1996 1996
--------- --------- --------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C>
Raw materials ......... 4,600 9,128 1,100
Work-in-progress ...... 1,028 561 68
Finished goods ......... 4,076 5,479 660
Consumable ............ 62 282 34
------ ------- ------
Total .................. 9,766 15,450 1,862
====== ======= ======
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1995 1996 1996
------------ ------------ --------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C>
Building ........................... 5,624 7,886 951
Machinery and equipment ............ 34,453 37,395 4,508
Office equipment ..................... 12 260 31
Furniture and fixtures ............... 340 372 45
Motor vehicles ..................... 756 1,306 157
-------- -------- ------
41,185 47,219 5,692
Less: Accumulated depreciation ...... (2,370) (6,439) (776)
-------- -------- ------
38,815 40,780 4,916
Add: Construction-in-progress ...... 98 1,430 172
-------- -------- ------
Net book value ..................... 38,913 42,210 5,088
======== ======== ======
</TABLE>
A related company possesses the land use right of the piece of land on
which Dnon Tech's building is located. During the years ended December 31, 1995
and 1996, the land was provided by the related company to Dnon Tech for rental
charges of approximately RMB36,000 and RMB43,200 respectively. The Companies'
directors believe that the rental costs approximate fair market rental.
F-39
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
7. PROPERTY, PLANT AND EQUIPMENT (Continued)
A joint venture partner possesses the land use right of the piece of land
on which Yantai Daewoo's building is located.
As of December 31, 1996, certain machinery and equipment with a total net
book value of approximately RMB6,274,000 were pledged to a bank as security for
the Companies' short-term bank loans.
8. DEFERRED TAX ASSETS
Deferred tax assets mainly represented the taxation effect of the
adjustments made to the financial statements of the Companies to conform to US
GAAP and other adjustments made to the statutory financial statements of the
Companies. Such amounts, individually and in the aggregate, were not material
to the accompanying combined balance sheets.
9. SHORT-TERM BANK LOANS
Short-term bank loans are denominated in Renminbi or United States
dollars, and are secured by corporate guarantees given by a related company and
pledges of certain machinery and equipment of the Companies. Short-term bank
loans are repayable within three to six months and are renewable with the
consent of the relevant banks. Weighted average interest rates with respective
to the short-term bank loans as of December 31, 1995 and 1996 were 9.9% and
8.9%, respectively.
10. DEDICATED CAPITAL
According to the rules and regulations for Sino-foreign equity joint
venture enterprises, when distributing net income of each year, the Companies
shall set aside a portion of their net income as reported in their statutory
accounts for the statutory general reserve fund and enterprise expansion fund,
such portion being determined at the discretion of the Boards of Directors.
These reserves cannot be used for purposes other than those for which they are
created and are not distributable as cash dividends.
For the years ended December 31, 1994, 1995 and 1996, the directors
proposed the following appropriations to statutory reserves:
<TABLE>
<CAPTION>
December 31,
--------------------------------
Statutory reserves Percentage 1995 1996 1996
- ----------------------------- ------------------- --------- --------- --------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C> <C>
General reserve fund 10% for Dnon Tech
and 5% for Yantai
Daewoo -- 305 37
Enterprise expansion fund Same as above -- 305 37
-- --- --
Total -- 610 74
== === ==
</TABLE>
11. DISTRIBUTION OF NET INCOME
According to the Articles of Association of the Companies, the Companies
may distribute their net income as reported in the statutory accounts, after
providing for discretionary dedicated capital (see Note 10), to their investors
according to their respective equity interests. The net income reported in the
statutory accounts, however, differs from the corresponding amounts reported
under US GAAP. There was no dividend declared for the years ended December 31,
1994, 1995 and 1996. In February 1997, the Companies declared dividends of
approximately RMB5,094,000.
F-40
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
12. RELATED PARTY TRANSACTIONS
a. Summary of related party transactions
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------
1995 1996 1996
--------- --------- -----------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C>
Sales to
-- a joint venture partner ........................... 38,788 77,863 9,386
-- a related company ................................. 1,207 8,223 991
Raw materials purchased from
-- a joint venture partner ........................... 3,965 124 15
-- a related company ................................. 3,011 464 56
Fixed assets purchased from
-- joint venture partners ........................... 910 -- --
-- a related company ................................. 16 -- --
Rental expenses paid to a related company ............ 36 43 5
Management fees paid to a related company ............ -- 112 14
Interest income received from a related company ...... 16 10 1
Interest expenses paid to
-- a joint venture partner ........................... -- 307 37
-- related companies ................................. 151 409 49
Interest rates charged on inter-company balances
(per annum) .......................................... 10.98% 10.98% 10.98%
</TABLE>
b. Related company balances
As of December 31, 1996, except for an amount due to a joint venture
partner of approximately RMB8,884,000 and the amounts due to related companies
of approximately RMB5,128,000 which bore interest at 10.98% per annum, all
outstanding balances with joint venture partners and related companies were
unsecured, non-interest bearing and had no fixed repayment terms.
13. RETIREMENT PLAN
As stipulated by the regulations of the PRC government, the Companies have
established defined contribution retirement plans for all of their staff. Under
these plans, all staff are entitled to a fixed life-long pension equal to their
basic salaries at their retirement dates. Dnon Tech and Yantai Daewoo are
required to make specific contributions to a related company and a
state-sponsored retirement plan, respectively at approximately 18% of the basic
salaries of the staff. The Companies have no future obligations for pensions or
any post-retirement benefits beyond the annual contributions made. The related
company and the PRC government are responsible for the ultimate pension
liabilities to those retired employees. During the years ended December 31,
1995 and 1996, the Companies made total pension contributions of approximately
RMB84,000 and RMB87,000, respectively.
14. OBLIGATION AND COMMITMENTS
As of December 31, 1996, the Companies had total outstanding capital
commitments for construction of factory premises and purchases of machinery and
equipment of approximately RMB7,202,000.
As of December 31, 1996, the Companies had outstanding commitments under
an operating lease with a related company for the rental of a building of
approximately RMB43,000 for the years ending December 31, 1997 to 2001 and of
approximately RMB140,000 for the subsequent years to 2005.
F-41
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
15. FINANCIAL INSTRUMENTS
The carrying amounts of the Companies' cash, accounts receivable and due
from (to) related parties approximate their fair values because of the short
maturity of those instruments. The carrying amounts of the bank loans
approximate their fair values based on borrowing rates currently available for
bank loans with similar terms and maturities.
16. SEGMENT INFORMATION
Analysis of sales by geographical location is as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------
1995 1996 1996
--------- --------- --------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C>
Korea ......... 38,788 77,863 9,386
The PRC ...... 1,209 8,499 1,025
------- ------- -------
Total ......... 39,997 86,362 10,411
======= ======= =======
</TABLE>
Analysis of sales by customers is as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------
1995 1996 1996
--------- --------- --------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C>
Korea Daewoo ............ 38,788 77,863 9,386
A related company ...... 1,207 8,223 992
Others .................. 2 276 33
------- ------- -------
Total .................. 39,997 86,362 10,411
======= ======= =======
</TABLE>
Analysis of sales by products is as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------
1995 1996 1996
--------- --------- --------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C>
Deflection yokes ............ 38,788 77,863 9,386
Enameled copper coils ...... 1,209 8,499 1,025
------- ------- -------
Total ..................... 39,997 86,362 10,411
======= ======= =======
</TABLE>
Analysis of operating income by products is as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------
1995 1996 1996
--------- --------- --------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C>
Deflection yokes ............ 800 7,642 920
Enameled copper coils ...... (160) 1,142 138
------ ----- ------
Total ..................... 640 8,784 1,058
====== ===== ======
</TABLE>
F-42
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
16. SEGMENT INFORMATION (Continued)
Analysis of depreciation expenses by products is as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------
1995 1996 1996
--------- --------- --------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C>
Deflection yokes ............ 2,108 3,308 399
Enameled copper coils ...... 253 761 92
------ ------ ----
Total ..................... 2,361 4,069 491
====== ====== ====
</TABLE>
Analysis of total assets attributed to each products is as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------
1995 1996 1996
--------- --------- --------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C>
Deflection yokes ............ 46,702 62,406 7,523
Enameled copper coils ...... 13,956 16,377 1,974
------ ------ -----
Total ..................... 60,658 78,783 9,497
====== ====== =====
</TABLE>
17. MERGER AGREEMENTS
During December 1996, the shareholders of the Companies entered into two
separate definitive agreements with Asia Electronics Holding Co. Inc. ("Asia
Electronics"), a related company, under which Asia Electronics agreed to
acquire 90% equity interest in Dnon Tech and 70% equity interest in Yantai
Daewoo for US$2,700,000 (equivalent to approximately RMB22,398,000) and
US$2,800,000 (equivalent to approximately RMB23,227,000), respectively.
F-43
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
INTERIM CONSOLIDATED FINANCIAL STATEMENTS AS OF
MARCH 31, 1997
F-44
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(Amounts in thousands except per share and share data)
(Unaudited)
<TABLE>
<CAPTION>
RMB US$
<S> <C> <C>
Sales ............................................................... 53,905 6,498
--------- ----------
Cost of goods sold ................................................ (39,826) (4,801)
Selling and administrative expenses ................................. (1,890) (228)
Interest expenses, net ............................................. (848) (102)
Other income, net ................................................... 1,211 146
--------- ----------
Total costs and expenses .......................................... (41,353) (4,985)
--------- ----------
Income before income taxes .......................................... 12,552 1,513
Provision for income taxes .......................................... (1,762) (212)
--------- ----------
Income after income taxes .......................................... 10,790 1,301
Minority interest ................................................... (1,916) (231)
--------- ----------
Net income ......................................................... 8,874 1,070
========= ==========
Pro forma net income per common share .............................. 1.83 0.22
Pro forma weighted average number of common shares outstanding ...... 4,850,000 4,850,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (RMB) into United States dollars
(US$) for the convenience of the reader has been made at the unified exchange
rate quoted by the Bank of China on March 31, 1997 of US$1.00 = RMB8.2955. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on March 31, 1997 or at any
other certain rate.
F-45
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND MARCH 31, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
------------------- ------------------
1996 1996 1997 1997
-------- -------- -------- -------
RMB US$ RMB US$
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash .......................................... 8,935 1,077 12,065 1,454
Accounts receivable ........................... 15,713 1,894 12,958 1,562
Due from related companies ..................... 31,926 3,849 43,273 5,216
Inventories .................................... 13,915 1,677 11,776 1,420
Prepayments and other current assets ............ 1,592 192 1,982 239
Value-added tax credit ........................ 4,575 552 4,575 552
------- ------- ------- -------
Total current assets ........................ 76,656 9,241 86,629 10,443
Property, plant and equipment, net ............ 6,337 764 5,932 715
------- ------- ------- -------
Total assets ................................. 82,993 10,005 92,561 11,158
======= ======= ======= =======
LIABILITIES AND INVESTORS' EQUITY
Current liabilities:
Short-term bank loans ........................... 14,749 1,778 13,421 1,618
Accrued expenses .............................. 6,072 732 7,065 852
Value-added tax payable ........................ 2,401 289 5,501 663
Income taxes payable ........................... 3,628 437 5,343 644
Deferred taxation .............................. 669 81 545 66
------- ------- ------- -------
Total current liabilities ..................... 27,519 3,317 31,875 3,843
Negative goodwill .............................. 11,219 1,352 10,939 1,319
Deferred taxation .............................. 981 118 1,105 133
------- ------- ------- -------
Total liabilities ........................... 39,719 4,787 43,919 5,295
======= ======= ======= =======
Minority interests .............................. 15,718 1,896 12,554 1,513
------- ------- ------- -------
Investors' equity
Common stocks, par value US$0.01 each,
30,000,000 shares authorized; 4,850,000 shares
outstanding .................................... 398 48 414 50
Additional paid-in capital ..................... 27,158 3,274 27,158 3,274
Dedicated capital .............................. -- -- 1,372 165
Retained earnings .............................. -- -- 7,144 861
------- ------- ------- -------
Total investors' equity ..................... 27,556 3,322 36,088 4,350
------- ------- ------- -------
Total liabilities and investors' equity ...... 82,993 10,005 92,561 11,158
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on March 31, 1997 of US$1.00 = RMB8.2955. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on March 31, 1997 or at any
other certain rate.
F-46
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
RMB US$
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ 8,874 1,070
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of property, plant and equipment ......... 405 49
Amortization of negative goodwill ..................... (280) (34)
Minority interest ....................................... 1,916 231
(Increase) decrease in assets:
Accounts receivable .................................... 2,755 332
Due from related companies .............................. (11,347) (1,368)
Inventories ............................................. 2,139 258
Prepayments and other current assets .................. (390) (47)
Increase (decrease) in liabilities:
Accrued expenses ....................................... 993 120|
Value-added tax payable ................................. 3,100 373
-------- -------
Income taxes payable .................................... 1,715 206
Net cash provided by operating activities ............... 9,880 1,190
-------- -------
Cash flows from financing activities:
Repayment of short-term bank loans ..................... (1,328) (160)
-------- -------
Dividend paid to minority shareholders .................. (5,422) (653)
-------- -------
Net cash used in financing activities ..................... (6,750) (813)
-------- -------
Net increase in cash .................................... 3,130 377
Cash beginning of period ................................. 8,935 1,077
-------- -------
Cash, end of period ....................................... 12,065 1,454
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on March 31, 1997 of US$1.00 = RMB8.2955. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on March 31, 1997 or at any
other certain rate.
F-47
<PAGE>
ASIA ELECTRONICS HOLDING CO. LTD.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
CONSOLIDATED STATEMENT OF CHANGES IN INVESTORS' EQUITY
FOR THE PERIOD FROM JANUARY 3, 1996
(DATE OF INCORPORATION) TO DECEMBER 31, 1996 AND
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Additional
paid-in Dedicated Retained
Capital capital capital earnings Total
--------- ------------ ----------- ---------- -------
RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C>
Contribution from investors .............................. 398 27,158 -- -- 27,556
---- ------- ------ -------- ------
Balance as of December 31, 1996 ........................... 398 27,158 -- -- 27,556
Net income ................................................ -- -- -- 8,874 8,874
Transfer to dedicated capital ........................... -- -- 1,714 (1,714) --
Share of dedicated capital by minority shareholders ...... -- -- (342) -- (342)
Capitalization issue of dividend ........................ 16 -- -- (16) --
---- ------- ------ -------- ------
Balance as of March 31, 1997 .............................. 414 27,158 1,372 7,144 36,088
==== ======= ====== ======== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying interim consolidated balance sheet of Asia Electronics
Holding Co. Inc. ("the Company"), incorporated in the British Virgin Islands,
and subsidiaries as of March 31, 1997 and the related interim consolidated
statements of income, cash flows and changes in investors' equity for the three
months ended March 31, 1997 are unaudited. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of these interim financial statements have been included
therein. Interim results are not necessarily indicative of results for the
entire year.
The interim consolidated financial statements included herein have been
prepared on a basis consistent with that of the audited consolidated financial
statements presented elsewhere in this document, in accordance with generally
accepted accounting principles in the United States of America ("US GAAP").
For the purposes of these interim consolidated financial statements,
certain information and disclosures normally included in financial statements
prepared in accordance with US GAAP have been condensed or omitted. These
unaudited interim financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included elsewhere
in this document.
2. BUSINESS COMBINATION
The Company acquired an 80% interest in Daming and Yongxin, effective as
of December 31, 1996. Pursuant to an outstanding informal agreement, the
purchase price was based upon the proportionate amount of the paid-in capital
of both companies at the acquisition date or approximately RMB25,895,000. The
acquisition has been accounted for as a purchase, with the purchase price
allocated to the proportionate fair values of the acquired assets and assumed
liabilities and resulted in an excess of the net fair value of the acquired
companies over the purchase price of approximately RMB36,566,000. Such excess
amount has been applied, first to reduce the proportionate value of the
acquired long-term assets to zero (principally property, plant and equipment),
with the remainder of approximately RMB11,219,000 classified as negative
goodwill in the accompanying balance sheet. The operating results of Daming and
Yongxin have been included in the consolidated statement of income effective as
of January 1, 1997. The following presents the unaudited pro forma effects of
the acquisition on the Company's results of operations, as if the acquisition
had occurred on January 1, 1996.
For the three months ended March 31, 1996
-----------------------------------------
RMB'000 US$'000
Net sales .................. 13,114 1,581
Net income ............... 2,542 306
Net income per share ...... 0.51 0.06
3. INVENTORIES
Inventories comprised:
December 31, March 31,
--------------------- --------------------
1996 1996 1997 1997
--------- --------- --------- --------
RMB'000 US$'000 RMB'000 US$'000
Finished goods ...... 13,915 1,677 11,776 1,420
------ ----- ------ -----
Total ............... 13,915 1,677 11,776 1,420
====== ===== ====== =====
F-49
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. NET INCOME PER COMMON SHARE
Net income per common share has been computed based upon the weighted
average number of shares outstanding for the applicable period. The Company has
no dilutive securities or common stock equivalents.
5. NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "net income per
common share", which is effective for both interim and annual periods ending
after December 15, 1997. SFAS No. 128 specifies the computation, presentation
and disclosure requirement for basic and diluted earnings per share. This
statement will be adopted by the Company in connection with its consolidated
financial statements for the year ending December 31, 1997. The adoption of
this new standard will have no effect on the earnings per share for the period
ended March 31, 1997.
F-50
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
INTERIM COMBINED FINANCIAL STATEMENTS AS OF
MARCH 31, 1997
F-51
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
COMBINED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the three months ended
March 31, 1996 March 31, 1997
-------------------------- --------------------------
RMB US$ RMB US$
<S> <C> <C> <C> <C>
Sales .................................... 16,845 2,031 20,904 2,520
--------- -------- --------- --------
Cost of goods sold ........................ (14,080) (1,697) (17,598) (2,121)
Selling and administrative expenses ...... (713) (86) (1,176) (142)
Interest expenses, net .................. (322) (39) (687) (83)
Other income, net ........................ 92 11 169 20
--------- -------- --------- --------
Total costs and expenses .................. (15,023) (1,811) (19,292) (2,326)
--------- -------- --------- --------
Income before income taxes ............... 1,822 220 1,612 194
Provision for income taxes ............... 75 9 62 7
--------- -------- --------- --------
Net income .............................. 1,897 229 1,674 201
========= ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on March 31, 1997 of US$1.00 = RMB8.2955. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on March 31, 1997 or at any
other certain rate.
F-52
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
COMBINED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND MARCH 31, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31, March 31
------------------ ------------------
1996 1996 1997 1997
-------- ------- -------- -------
RMB US$ RMB US$
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash .......................................... 4,946 596 5,934 715
Accounts receivable ........................... 127 16 75 9
Due from joint venture partners ............... 8,255 995 7,930 956
Inventories .................................... 15,450 1,862 16,722 2,016
Deposits ....................................... 4,033 486 1,575 190
Prepayments and other assets .................. 1,717 207 650 78
Prepaid value-added tax ........................ 267 32 201 24
------- ------ ------- -------
Total current assets ........................ 34,795 4,194 33,087 3,988
Property, plant and equipment, net ............ 42,210 5,088 48,757 5,878
Other assets .................................... 1,408 170 1,460 176
Deferred tax assets ........................... 370 45 432 52
------- ------ ------- -------
Total assets ................................. 78,783 9,497 83,736 10,094
------- ------ ------- -------
LIABILITIES AND INVESTORS' EQUITY
Current liabilities:
Short-term bank loans ........................ 13,560 1,635 13,589 1,638
Accounts payable .............................. 2,190 264 2,025 244
Due to joint venture partners .................. 8,884 1,071 10,327 1,245
Due to related companies ..................... 8,446 1,018 12,620 1,521
Accrued expenses .............................. 1,056 126 1,263 152
Dividend payable .............................. -- -- 2,685 324
------- ------ ------- -------
Total liabilities ........................... 34,136 4,114 42,509 5,124
------- ------ ------- -------
Investors' equity:
Capital ....................................... 39,062 4,709 39,062 4,709
Dedicated capital .............................. 610 74 610 74
Retained earnings .............................. 4,975 600 1,555 187
------- ------ ------- -------
Total investors' equity ..................... 44,647 5,383 41,227 4,970
------- ------ ------- -------
Total liabilities and investors' equity ...... 78,783 9,497 83,736 10,094
======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on March 31, 1997 of US$1.00 = RMB8.2955. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on March 31, 1997 or at any
other certain rate.
F-53
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the three months For the three months
ended ended
March 31, March 31,
--------------------- ---------------------
1996 1996 1997 1997
---------- ---------- ---------- ----------
RMB US$ RMB US$
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................... 1,897 229 1,674 201
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property, plant and equipment ...... 783 94 1,092 132
Amortization of other assets ........................ 71 9 187 23
Deferred tax assets ................................. (75) (9) (62) (7)
(Increase) decrease in assets:
Accounts receivable ................................. -- -- 52 6
Due from joint venture partners ..................... 200 24 (2,084) (251)
Inventories .......................................... 1,282 154 (1,272) (154)
Deposits ............................................. (2,559) (308) 2,458 296
Prepayments and other assets ........................ (1,308) (158) 1,067 129
Prepaid value-added tax .............................. 30 3 66 8
Increase (decrease) in liabilities:
Accounts payable .................................... (88) (10) (165) (20)
Due to joint venture partners ........................ (150) (18) 1,443 174
Due to related companies ........................... (219) (26) 4,174 505
Accrued expenses .................................... 11 1 207 25
------- ------ ------- ------
Net cash (used in) provided by operating activities (125) (15) 8,837 1,067
------- ------ ------- ------
Cash flows from investing activities:
Acquisition of property, plant and equipment ......... (2,298) (277) (7,639) (922)
Additions of other assets ........................... -- -- (239) (29)
------- ------ ------- ------
Net cash used in investing activities ............... (2,298) (277) (7,878) (951)
------- ------ ------- ------
Cash flows from financing activities:
Net proceeds from short-term bank loans ............... 503 61 29 3
------- ------ ------- ------
Net (decrease) increase in cash ..................... (1,920) (231) 988 119
Cash, beginning of period ........................... 4,863 586 4,946 596
------- ------ ------- ------
Cash, end of period ................................. 2,943 355 5,934 715
======= ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on March 31, 1997 of US$1.00 = RMB8.2955. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on March 31, 1997 or at any
other certain rate.
F-54
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOOD ELECTRONIC COMPONENTS CO., LTD.
COMBINED STATEMENTS OF CHANGES IN INVESTORS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE THREE MONTHS ENDED MARCH 31, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
(Accumulated
deficit)
Dedicated Retained
Capital capital earnings Total
--------- ----------- -------------- ------------
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Balance as of December 31, 1995 ............... 36,702 -- (1,287) 35,415
Net income .................................... -- -- 6,872 6,872
Contribution from investors .................. 2,360 -- -- 2,360
Transfer to dedicated capital ............... -- 610 (610) --
------- ---- -------- --------
Balance as of December 31, 1996 ............... 39,062 610 4,975 44,647
Dividends (unaudited) ........................ -- -- (5,094) (5,094)
Net income (unaudited) ........................ -- -- 1,674 1,674
------- ---- -------- --------
Balance as of March 31, 1997 (unaudited) ...... 39,062 610 1,555 41,227
======= ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
NOTES TO THE COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying combined balance sheet as of March 31, 1997 and the
related interim combined statements of income, cash flows and changes in
investors' equity for the three months ended March 31, 1997 are unaudited. In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of these interim financial
statements have been included therein. Interim results are not necessarily
indicative of results for the entire year.
The interim combined financial statements included herein have been
prepared on a basis consistent with that of the audited combined financial
statements presented elsewhere in this document, in accordance with generally
accepted accounting principles in the United States of America ("US GAAP").
For the purposes of these interim combined financial statements, certain
information and disclosures normally included in financial statements prepared
in accordance with US GAAP have been condensed or omitted. These unaudited
interim financial statements should be read in conjunction with the audited
combined financial statements and notes thereto included elsewhere in this
document.
2. INVENTORIES
Inventories comprised:
December 31, March 31,
--------------------- --------------------
1996 1996 1997 1997
--------- --------- --------- --------
RMB'000 US$'000 RMB'000 US$'000
Raw materials ......... 9,128 1,100 9,245 1,114
Work-in-progress ...... 561 68 488 59
Finished goods ...... 5,479 660 6,989 843
Consumables ......... 282 34 -- --
------- ------ ------- ------
Total ............... 15,450 1,862 16,722 2,016
======= ====== ======= ======
F-56
<PAGE>
================================================================================
No dealer, salesperson, or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Company or by any of the Underwriters. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances create any implication that there has been no change in the
affairs of the Company since the date hereof. This Prospectus does not
constitute an offer or solicitation by anyone in any jurisdiction in which such
an offer or solicitation is not authorized or in which the person making such
offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer or solicitation.
--------------------------------
TABLE OF CONTENTS
Page
-----------
Prospectus Summary ................................. 3
Risk Factors ....................................... 7
Enforceability of Civil Liabilities and Certain
Foreign Issuer Considerations ..................... 14
Financial Statements and Currency Presentation . 15
Use of Proceeds .................................... 16
Dividend Policy .................................... 16
Dilution .......................................... 17
Capitalization .................................... 18
Unaudited Pro Forma Consolidated
Financial Information ............................. 19
Selected Consolidated Financial Data of the
Company (Historical) .............................. 24
Selected Combined Financial Data of Yongxin
and Daming ....................................... 25
Selected Combined Financial Data of Yantai
and Dnon Tech .................................... 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ....................................... 27
Business .......................................... 34
Management .......................................... 42
Principal Shareholders .............................. 44
Certain Relationships and Related
Transactions .................................... 45
Capital Stock ....................................... 48
Shares Eligible for Future Sale ..................... 49
Taxation .......................................... 50
Underwriting ....................................... 55
Legal Matters ....................................... 57
Experts ............................................. 57
Additional Information .............................. 57
Index to Financial Statements ..................... F-1
Until , 1997 (25 days after the date of this Prospectus) all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
================================================================================
4,000,000 Shares
ASIA ELECTRONICS HOLDING CO. INC.
Common Stock
--------------------------------
PROSPECTUS
--------------------------------
BARINGTON CAPITAL GROUP, L.P.
August , 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth an itemized statement of all estimated
expenses in connection with the registration, offering and sale of the
securities being registered hereby other than underwriting discounts and
commissions.
SEC registration fee .................................... $13,085
NASD and NASDAQ fees ....................................
Accounting fees and expenses ..............................
Legal fees and expenses .................................
Blue sky fees and expenses (including counsel fees) ......
Printing and engraving expenses ...........................
Transfer agent's fees .................................... 1,500
Miscellaneous expenses ....................................
Total ...................................................
Item 14. Indemnification of Directors and Officers
As in most United States jurisdictions, the board of directors of a
British Virgin Islands company is charged with the management and affairs of
the company and, subject to any limitations to the contrary in the Memorandum
of Association of the Company, the Board of Directors is entrusted with the
power to manage the business and affairs of the Company. In most United States
jurisdictions, directors owe a fiduciary duty to the company and its
shareholders, including a duty of care, pursuant to which directors must
properly apprise themselves of all reasonably available information, and a duty
of loyalty, pursuant to which they must protect the interests of the company
and refrain from conduct that injures the company or its shareholders or that
deprives the company or its shareholders of any profit or advantage. Many
United States jurisdictions have enacted various statutory provisions which
permit the monetary liability of directors to be eliminated or limited. Under
British Virgin Islands law, liability of a director to the company is basically
limited to cases of wilful malfeasance in the performance of his duties or to
cases where the director has not acted honestly and in good faith and with a
view to the best interests of the company. However, under its Memorandum of
Association, the Company is authorized to indemnify any person who is made or
threatened to be made a party to a legal or administrative proceeding by virtue
of being a director, officer or liquidator of the Company, provided such person
acted honestly and in good faith and with a view to the best interests of the
Company and, in the case of a criminal proceeding, such person had no
reasonable cause to believe that his conduct was unlawful. The Company's
Memorandum of Association also permits the Company to indemnify any director,
officer or liquidator of the Company who was successful in any proceeding
against expenses and judgments, fines and amounts paid in settlement and
reasonably incurred in connection with the proceeding, where such person met
the standard of conduct described in the preceding sentence.
The Company has provisions in its Memorandum of Association that insure or
indemnify, to the full extent allowed by the laws of the Territory of the
British Virgin Islands, directors, officers, employees, agents or persons
serving in similar capacities in other enterprises at the request of the
Company.
The Company intends to obtain a directors' and officers' insurance policy.
Item 15. Recent Sales of Unregistered Securities.
On December 31, 1996, Mr. To purchased 4,559,000 shares of Common Stock for
$3,122,680 and FPRI purchased 291,000 shares of Common Stock in consideration
for services rendered to the Company valued at $199,200. These sales were exempt
from registration pursuant to, inter alia, Section 4(2) of the Securities Act of
1933 as not involving any public offering. The number of shares set forth in
this Item 15 reflect the stock split referred to in the Prospectus.
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<S> <C> <S>
Page
1.1 Form of Underwriting Agreement relating to the Common Stock
2.1 Agreement between the Company and Xianyang Pianzhuan Development Co., Inc. (Yongxin)
2.2 Agreement between the Company and Xianyang Pianzhuan Development Co., Inc. (Daming)
2.3 Agreement among Pianzhuan Group, Tomei and Muping Gold Industry Company (Yantai)
2.4 Agreement of Acquisition among the Company, Pianzhuan Group and Tomei (Yantai)
2.5 Agreement among Xianyang Deflection Group Corp., Xian Jiao Tong University Electrical Engineering Co., Hong Kong
Wainlink Enterprises Limited and Dea Tech
2.6 Agreement among Xianyang Pianzhuan Group Corp., Hong Kong Weilin Industrial Co., Ltd., and Xian Jiao Tong
University Electrical Engineering Co., Ltd.
3.1 Memorandum of Association of the Company
3.2 Articles of Association of the Company
3.3 Articles of Association of Yongxin
3.4 Approval Certificate of Yongxin Joint Venture
3.5 Business License of Yongxin
3.6 Approval of Application dated September 11, 1993 (Yongxin)
3.7 Approval of Application No. 1994, 081 (Yongxin)
3.8 Approval of Application No. 1996, 062 (Yongxin)
3.9 Approval of Application No. 1996, 084 (Yongxin)
3.10 Articles of Association of Daming
3.11 Approval Certificate of Daming Joint Venture
3.12 Business License of Daming
3.13 Approval of Application No. 1996, 052 (Daming)
3.14 Approval of Application No. 1996, 088 (Daming)
3.15 Articles of Association of Yantai
3.16 Business License of Yantai
3.17 Approval Certificate of Yantai Joint Venture (1995)
3.18 Articles of Association of Dnon Tech
3.19 Business License of Dnon Tech
3.20 Approval of Application No. 1994, 20 (Dnon Tech)
5.1 Opinion of Harney, Westwood & Riegels
10.1 Employment Agreement dated , 1997 among the Company and Du Qingsong
*10.2 1997 Employee Stock Option Plan
10.3 Shareholders' Agreement
*10.4 Agreement among the Company and Pianzhuan Group
10.5 Agreement of Lease between Pianzhuan Group and Yongxin
10.6 Agreement of Lease between Pianzhuan Group and Daming
10.7 Agreement of Lease between Pianzhuan Group and Dnon Tech
10.8 Agreement of Lease between Weihai Electronic Industrial Park Weishi Corp. and Daming
10.9 Term Loan Agreement between Daming and the Construction Bank of China
10.10 Loan Guarantee of Pianzhuan Group
10.11 Loan Collateral Agreement between Daming and the Construction Bank of China
10.12 Agreement of Extension of Loan Repayment among Daming, Pianzhuan Group and the Construction Bank of China
10.13 Royalty Agreement among Daming, Yongxin and Pianzhuan Group
10.14 License Agreement of Color Display Tube Equipment and Technology between Yongxin and Nichimen Corporation
10.15 Form of Representative's Options
*10.16 Form of Advisor Options
II-2
<PAGE>
21.1 Subsidiaries
23.1 Consent of Harney, Westwood & Riegels (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Robert Adler
23.4 Consent of Hans Decker
24 Power of Attorney (see page II-4)
</TABLE>
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules:
Financial statement schedules are omitted because the information required
is not applicable or is included in the financial statements or notes thereto.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
the securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be determined to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) To file a post-effective amendment to the registration statement to
include any financial statements required by Regulation 210.3-19 under the
Securities Act of 1933 at the start of a delayed offering or throughout a
continuous offering.
(5) To provide the underwriter at the closing specified in the underwriting
agreements, certificates in such denominations and registered in such names as
required by the underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company
II-3
4,000,000 Shares of Common Stock
ASIA ELECTRONICS HOLDING CO., INC.
UNDERWRITING AGREEMENT
________ __, 1997
Barington Capital Group, L.P.
888 Seventh Avenue
New York, New York 10019
Dear Sirs:
The undersigneds, Asia Electronics Holding Co. Inc., a British
Virgin Islands corporation (the "Company"), and Quingsong Du ("Mr. Du") hereby
confirm their agreement with you (the "Underwriter") in connection with the
proposed offering of certain of the Company's securities to the public (the
"Offering") as follows:
1. Introductory. The Company proposes to issue and sell to the
Underwriter 4,000,000 shares of Common Stock par value $.01 per share, of the
Company (the "Common Stock"). In addition, solely for the purpose of covering
over-allotments, the Company proposes to grant the Underwriter the option to
purchase from the Company up to an additional 600,000 shares of Common Stock
(the "Additional Stock") identical to the Common Stock. The Common Stock is more
fully described in the Prospectus referred to below.
2. Representations and Warranties of the Company, the Subsidiaries and
Mr. Du. The Company, each of the Subsidiaries (as defined below) and Mr. Du,
jointly and severally, represent and warrant to, as of the date hereof, the
Closing Date and the Additional Closing Date (as defined below in Section 3),
and agree with, the Underwriter that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), a registration statement, and may have filed one
or more amendments thereto, on Form F-1 (Registration No. _________),
including in such registration statement and each such amendment and
related preliminary prospectus (a "Preliminary Prospectus"), the
registration of (i) the 4,000,000 shares of Common Stock
<PAGE>
(the "Firm Stock"), (ii) the Additional Stock, (iii) the Common Stock
purchase options referred to in Section 5(u) (the "Underwriter's
Options"), (iv) the shares of Common Stock (the "Underwriter's Stock")
issuable upon exercise of the Underwriter's Options, (v) the options to
purchase Common Stock referred to in Section 5(v) (the "Advisor's
Options") and the shares of Common Stock (the "Advisor's Stock")
issuable upon exercise of the Advisor's Options (the Firm Stock, the
Additional Stock, the Underwriter's Options, the Underwriter's Stock,
the Advisor's Options and the Advisor's Stock are collectively referred
to as the "Securities"). The Company may also file a related
registration statement with the Commission pursuant to Rule 462(b)
under the Act for the purpose of registering certain additional shares
of Common Stock, which Rule 462(b) Registration Statement (as
hereinafter defined) shall be effective upon filing with the
Commission. As used in this Agreement, the term "Original Registration
Statement" means the registration statement referred to in the first
sentence of this paragraph 2(a), as amended, on file with the
Commission at the time such registration statement becomes effective
(including the prospectus, financial statements, exhibits, and all
other documents filed as a part thereof), provided that such Original
Registration Statement, at the time it becomes effective, may omit such
information as is permitted to be omitted from the Original
Registration Statement when it becomes effective pursuant to Rule 430A
of the General Rules and Regulations promulgated under the Act (the
"Regulations"), which information ("Rule 430A Information") shall be
deemed to be included in such Original Registration Statement when a
final prospectus is filed with the Commission in accordance with Rules
430A and 424(b)(1) or (4) of the Regulations; the term "Rule 462(b)
Registration Statement" means any registration statement filed with the
Commission pursuant to Rule 462(b) under the Act (including the
Preliminary Prospectus or Prospectus included therein at the time the
Original Registration Statement becomes effective); the term
"Registration Statement" includes both the Original Registration
Statement and any Rule 462(b) Registration Statement; the term
"Preliminary Prospectus" means each prospectus included in the
Registration Statement, or any amendments thereto, before it becomes
effective under the Act, the form of prospectus omitting Rule 430A
Information included in the Registration Statement when it becomes
effective, if applicable (the "Rule 430A Prospectus"), and any
prospectus filed by the Company with your consent pursuant to Rule
424(a) of the Regulations; and the term "Prospectus" means the final
prospectus included as part of the Registration Statement, except that
if the prospectus relating to the securities covered by the
Registration Statement in the form first filed on behalf of the Company
with the Commission pursuant to Rule 424(b) of the Regulations shall
differ from such final prospectus, the term "Prospectus" shall mean the
2
<PAGE>
prospectus as filed pursuant to Rule 424(b) from and after the date on
which it shall have first been used.
(b) When the Registration Statement becomes effective, and at
all times subsequent thereto and including the Closing Date (as defined
in Section 3) and each Additional Closing Date (as defined in Section
3), and during such longer period as the Prospectus may be required to
be delivered in connection with sales by the Underwriter or a dealer,
and during such longer period until any post-effective amendment
thereto shall become effective, the Registration Statement (and any
post-effective amendment thereto) and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any
amendment or supplement to the Registration Statement or the
Prospectus) will contain all statements which are required to be stated
therein in accordance with the Act and the Regulations, will comply
with the Act and the Regulations, and will not contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and no event will have occurred which should
have been set forth in an amendment or supplement to the Registration
Statement or the Prospectus which has not then been set forth in such
an amendment or supplement; if a Rule 430A Prospectus is included in
the Registration Statement at the time it becomes effective, the
Prospectus filed pursuant to Rules 430A and 424 (b) (1) or (4) will
contain all Rule 430A Information and all statements which are required
to be stated therein in accordance with the Act or the Regulations,
will comply with the Act and the Regulations, and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading; and each Preliminary Prospectus, as of the date
filed with the Commission, did not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading;
except that no representation or warranty is made in this Section 2(b)
with respect to statements or omissions made in reliance upon and in
conformity with written information furnished to the Company as stated
in Section 8(b) with respect to the Underwriter by the Underwriter
expressly for inclusion in any Preliminary Prospectus, the Registration
Statement, or the Prospectus, or any amendment or supplement thereto.
(c) Neither the Commission nor any "blue sky" or securities
authority of any jurisdiction has issued an order (a "Stop Order")
suspending the effectiveness of the Registration Statement, preventing
or suspending the use of any Preliminary Prospectus, the Prospectus,
the Registration Statement, or any amendment or supplement thereto,
refusing to permit the effectiveness of the Registration Statement,
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or suspending the registration or qualification of any of the
Securities, nor has any of such authorities instituted or threatened to
institute any proceedings with respect to a Stop Order.
(d) Any contract, agreement, instrument, lease, or license
required to be described in the Registration Statement or the
Prospectus has been properly described therein. Any contract,
agreement, instrument, lease, or license required to be filed as an
exhibit to the Registration Statement has been filed with the
Commission as an exhibit to the Registration Statement.
(e) The Company has no subsidiaries (as defined in the
Regulations) other than Xianyang Daming Electronics Co. Ltd.
("Daming"), Xianyang Yongxin Electronics Co. Ltd. ("Yongxin"), and as
of the Closing Date, Yantai Daewoo Electronics Components Co., Ltd.
("Yantai") and Dnon Tech Special Electronic Technical Co., Ltd. ("Dnon
Tech") (each individually, a "Subsidiary", and collectively, the
"Subsidiaries"). The Company is a corporation duly organized, validly
existing, and in good standing under the laws of its jurisdiction of
incorporation. Each of the Subsidiaries is a joint venture duly
organized, validly existing and in good standing in its jurisdiction of
organization. Each of the Subsidiaries is a legal person with limited
liability and the liability of the Company in respect of such person is
limited to its investment therein. The Company and each Subsidiary has
full corporate power and authority, and all necessary consents,
authorizations, approvals, orders, licenses, certificates, and permits
of and from, and declarations and filings with, all national,
provincial, municipal, local, foreign and other governmental
authorities, all self-regulatory organizations and all courts and other
tribunals (including, without limitation, the State Land Administration
Bureau, the Trademark Administration Bureau, the Patent Bureau, the
State Administration of Taxation and the ________), to own, lease,
license, and use their respective properties and assets and to carry on
their respective business in the manner described in the Prospectus and
such consents, authorizations, approvals, orders, licenses,
certificates and permits contain no materially burdensome restrictions
not described in the Prospectus. Neither the Company nor any Subsidiary
has any reason to believe that any regulatory body is considering
modifying, suspending or revoking any such licenses, consents,
authorizations, approvals, orders, certificates or permits, and the
Company and each Subsidiary is in compliance with the provisions of all
such licenses, consents, authorizations, approvals, orders,
certificates or permits and the Company and each Subsidiary has paid
all relevant taxes and fees required to be paid by the Company and such
Subsidiary by the relevant taxing or other governmental authority. The
Company and each Subsidiary is
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duly qualified to do business and is in good standing in every
jurisdiction in which its ownership, leasing, licensing, or use of
property and assets or the conduct of its business makes such
qualification necessary.
(f) As of the Closing Date, the authorized capital stock of
the Company consists of 30,000,000 shares of Common Stock, of which
4,850,000 shares are outstanding. The ownership of each Subsidiary is
as set forth in the Registration Statement. Each outstanding share of
Common Stock and each outstanding share of capital stock or equity
interest of each Subsidiary is duly authorized, validly issued, fully
paid, and nonassessable, without any personal liability attaching to
the ownership thereof, and has not been issued and is not owned or held
in violation of any preemptive rights of stockholders, or in the case
of each of the Subsidiaries, any joint venture partner. There is no
commitment, plan, or arrangement to issue, and no outstanding option,
warrant, or other right calling for the issuance of, any share of
capital stock of the Company or any equity interest in any Subsidiary,
any security or other instrument which by its terms is convertible
into, exercisable for, or exchangeable for, capital stock of the
Company or any equity interest in any Subsidiary except as may be
properly described in the Prospectus. There is outstanding no security
or other instrument which by its terms is convertible into or
exchangeable for capital stock of the Company or any equity interest in
any Subsidiary, except as may have been properly described in the
Prospectus. There is outstanding no indebtedness owed by either the
Company or any Subsidiary other than (i) trade payables incurred in the
ordinary course of business, (ii) certain capital lease obligations and
(iii) an aggregate principal amount of $_________ currently outstanding
on _________ entered into as of ___________, all as properly described
in the Prospectus.
(g) The financial statements of the Company and each
Subsidiary included in the Registration Statement and the Prospectus
fairly present the financial position, the results of operations, and
the other information purported to be shown therein at the respective
dates and for the respective periods to which they apply. Such
financial statements have been prepared in accordance with United
States generally accepted accounting principles ("U.S. GAAP") (except
to the extent that certain footnote disclosures regarding any period
may have been omitted in accordance with the applicable rules of the
Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) consistently applied throughout the periods involved,
and are in accordance with the books and records of the Company and
each Subsidiary, respectively. The accountants whose report on the
audited financial statements is filed with the Commission as a part of
the Registration
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Statement are, and during the periods covered by their report(s)
included in the Registration Statement and the Prospectus were,
independent certified public accountants within the meaning of the Act
and the Regulations. No other financial statements are required by Form
F-1 or otherwise to be included in the Registration Statement or the
Prospectus. There has at no time been a material adverse change in the
financial condition, results of operations, business, properties,
assets, liabilities, or future prospects of the Company or any
Subsidiary from the latest information set forth in the Registration
Statement or the Prospectus, except as may be properly described in the
Prospectus.
(h) There is no litigation, arbitration, claim, governmental
or other proceeding (formal or informal), or investigation pending,
threatened or in prospect (or any basis therefor) with respect to the
Company or any Subsidiary, or any of their respective operations,
businesses, properties, assets, liabilities or future prospects.
Neither the Company nor any Subsidiary is or is expected to be in
violation of, or in default with respect to, any law, rule, regulation,
order, judgment, or decree except as may be properly described in the
Prospectus or such as in the aggregate do not now have and will not in
the future have, individually or in the aggregate, a material adverse
effect upon the operations, business, properties, assets, liabilities
or future prospects, of the Company or any Subsidiary; nor is the
Company or any Subsidiary required to take any action in order to avoid
any such violation or default.
(i) The Company and each Subsidiary has good and marketable
title in fee simple to all real properties and good title to all other
properties and assets which the Prospectus indicates are owned by it,
free and clear of all liens, security interests, pledges, charges,
encumbrances, and mortgages (except as may be properly described in the
Prospectus). The Company and each Subsidiary has valid leases for all
real property which it leases and such leases are adequately and
accurately described in the Prospectus. No real property owned, leased,
licensed, or used by the Company or any Subsidiary lies in an area
which is, or to the knowledge of the Company, any Subsidiary or Mr. Du,
will be, subject to zoning, use, or building code restrictions which
would prohibit, and no state of facts relating to the actions or
inaction of another person or entity or his or its ownership, leasing,
licensing, or use of any real or personal property exists or will exist
which would prevent, the continued effective ownership, leasing,
licensing, or use of such real property in the business of the Company
or any Subsidiary as presently conducted or as the Prospectus indicates
it contemplates conducting (except as may be properly described in the
Prospectus).
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(j) Neither the Company nor any Subsidiary is, nor to the
knowledge of the Company or any Subsidiary is, any other party, now or
expected by the Company or any Subsidiary to be in violation or breach
of, or in default with respect to, complying with any material
provision of any contract, agreement, instrument, lease, license,
arrangement, or understanding which is material to the Company or any
Subsidiary, and each such contract, agreement, instrument, lease,
license, arrangement, and understanding is in full force and is the
legal, valid, and binding obligation of the parties thereto and is
enforceable as to them in accordance with its terms. The Company and
each Subsidiary enjoys peaceful and undisturbed possession under all
leases and licenses under which it is operating. Neither the Company
nor any Subsidiary is a party to or bound by any contract, agreement,
instrument, lease, license, arrangement, or understanding, or subject
to any charter or other restriction, which has had or may in the future
have, individually or in the aggregate, a material adverse effect on
the financial condition, results of operations, business, properties,
assets, liabilities, or future prospects of the Company or any
Subsidiary. Neither the Company nor any Subsidiary is in violation or
breach of, or in default with respect to, any term of its articles of
incorporation (or other charter document), by-laws, similar
constitutive document, as amended, or any required governmental
licenses or required governmental approvals.
(k) All patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, franchises, and
other intangible properties and assets (all of the foregoing being
herein called "Intangibles") that the Company or any Subsidiary owns or
has pending, or under which it is licensed, are in good standing and
uncontested. The "______________" and "______________", names and their
related logos are trademarks and service marks used by the Company to
identify its products, and such trademarks and service marks are
protected by registration in the name of the Company on the principal
register in ______________. There is no right under any Intangible
necessary to the business of the Company or any Subsidiary as presently
conducted or as the Prospectus indicates it contemplates conducting
except as may be so described in the Prospectus. Neither the Company
nor any Subsidiary has infringed, is infringing, or has received notice
of infringement with respect to asserted Intangibles of others. To the
knowledge of the Company, any subsidiary of Mr. Du, there is no
infringement by others of Intangibles of the Company. To the knowledge
of the Company, any Subsidiary or Mr. Du, there is no Intangible of
others which has had or may in the future have, individually or in the
aggregate, a materially adverse effect on the financial condition,
results of operations, business,
7
<PAGE>
properties, assets, liabilities, or future prospects of the Company or
any Subsidiary.
(l) Neither the Company, any Subsidiary or any director,
officer, agent, employee, or other person associated with or acting on
behalf of the Company or any Subsidiary has, directly or indirectly,
used any corporate funds for unlawful contributions, gifts,
entertainment, or other unlawful expenses relating to political
activity; made any direct or indirect unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds; violated or is in
violation of any provision of the Foreign Corrupt Practices Act of
1977, as amended; or made any bribe, rebate, payoff, influence payment,
kickback, or other unlawful payment.
(m) The Company and each Subsidiary has all requisite
corporate power and authority to execute, deliver, and perform its
obligations under each of (i) this Agreement; (ii) the certificate
evidencing the Underwriter's Options (the "Underwriter's Option
Agreement"); (iii) the Employment Agreement between the Company and Mr.
Du (the "Employment Agreement"); (iv) the Shareholder Agreement between
Mr. Du and To Shing Hoi (the "Shareholder Agreement"); and (v) the
Agreement between the members of the Pianzhuan Group and the Company
(the "Pianzhuan Group Agreement") (this Agreement together with the
Underwriter's Option Agreement, the Employment Agreement, the
Shareholder Agreement and the Pianzhuan Group Agreement, the "Company
Documents"). All necessary corporate proceedings of the Company and
each Subsidiary have been duly taken to authorize the execution,
delivery and performance of each of the Company Documents by the
Company and each Subsidiary party thereto; all necessary corporate
proceedings of the Company and each Subsidiary have been duly taken to
authorize the execution of all the documents necessary and to take all
action necessary for the consummation of the acquisitions of Yantai and
Dnon Tech as contemplated in the Prospectus (together, the
"Acquisitions"). This Agreement has been duly authorized, executed, and
delivered by the Company, each Subsidiary and Mr. Du, is the legal,
valid and binding obligation of the Company, each Subsidiary and Mr.
Du, and is enforceable as to the Company, each Subsidiary and Mr. Du in
accordance with its terms. Each of the other Company Documents and each
Acquisition Agreement has been duly authorized by the Company, each
Subsidiary and each other party thereto, and is or, when executed and
delivered by the Company, each such Subsidiary and each other party
thereto, will be the legal, valid, and binding obligation of the
Company, each such Subsidiary and each other party thereto, enforceable
against the Company, each such Subsidiary and each other party thereto
in accordance with its terms. No consent, authorization, approval,
order, license, certificate, or
8
<PAGE>
permit of or from, or declaration or filing with, any national,
provincial, municipal, local, foreign or other governmental authority,
any self-regulatory organization or any court or other tribunal is
required by the Company, any Subsidiary or Mr. Du for the execution,
delivery, or performance by the Company, any such Subsidiary or Mr. Du
of any of the Company Documents (except filings under the Act which
have been or will be made before the Closing Date and such consents
consisting only of consents under "blue sky" or state securities laws)
or for the consummation by the Company of the Acquisitions. No consent
of any party to any contract, agreement, instrument, lease, license,
arrangement, or understanding to which the Company or any Subsidiary is
a party, or to which any of their respective properties or assets are
subject, is required for the execution, delivery, or performance of the
Company Documents or for the consummation of the Acquisitions; and the
execution, delivery, and performance of any of the Company Documents
and the consummation of the Acquisitions will not violate, result in a
breach of, conflict with, or (with or without the giving of notice or
the passage of time or both) entitle any party to terminate or call a
default under any such contract, agreement, instrument, lease, license,
arrangement, or understanding, or violate or result in a breach of any
term of the articles of incorporation (or other charter document) or
by-laws or similar constitutive document or business license of the
Company or any Subsidiary, as amended, or violate, result in a breach
of, or conflict with any law, rule, regulation, order, approval,
judgment, or decree binding on the Company or any Subsidiary or to
which any of their respective operations, businesses, properties, or
assets are subject.
(n) The Firm Stock and the Additional Stock are validly
authorized and, when issued and delivered in accordance with this
Agreement, will be validly issued, fully paid, and nonassessable,
without any personal liability attaching to the ownership thereof, and
will not be issued in violation of any preemptive rights of
stockholders. The Underwriter will receive good title to the Firm Stock
and Additional Stock purchased by it free and clear of all liens,
security interests, pledges, charges, encumbrances, stockholders'
agreements and voting trusts.
(o) The Underwriter's Stock is validly authorized and reserved
for issuance and, when issued and delivered upon exercise of the
Underwriter's Options in accordance with the Underwriter's Option
Agreement will be validly issued, fully paid and nonassessable, without
any personal liability attaching to the ownership thereof, and will not
be issued in violation of any preemptive rights of stockholders; and
the holders of the Underwriter's Options will receive good title to the
securities purchased by them, respectively, free and clear of all
liens, security interests, pledges,
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<PAGE>
charges, encumbrances, stockholders' agreements, and voting trusts.
(p) The Securities conform to all statements relating thereto
contained in the Registration Statement or the Prospectus.
(q) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, and except
as may otherwise be properly described in the Prospectus, neither the
Company nor any Subsidiary has (i) issued any securities or incurred
any liability or obligation, primary or contingent, for borrowed money,
(ii) entered into any transaction not in the ordinary course of
business, or (iii) declared or paid any dividend on its capital stock.
(r) Neither the Company, any Subsidiary or any of their
respective officers, directors, or affiliates (as defined in the
Regulations), has taken or will take, directly or indirectly, prior to
the termination of the underwriting syndicate contemplated by this
Agreement, any action designed to stabilize or manipulate the price of
any security of the Company, or which has caused or resulted in, or
which could in the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any security of the
Company, to facilitate the sale or resale of any of the Firm Stock or
Additional Stock.
(s) The Company has obtained from each of its directors,
officers and affiliates (as defined in the Regulations), and from each
other person or entity who beneficially owned as of the effective date
of the Registration Statement, any unregistered shares of Common Stock
(an "Original Stockholder") an enforceable written agreement, in form
and substance satisfactory to counsel for the Underwriter, that for a
period of 24 months from the effective date of the Offering he will
not, without your prior written consent, offer, issue, sell, contract
to sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any shares of Common Stock or any security of
the Company or other instrument which by its terms is convertible into,
exercisable for, or exchangeable for shares of Common Stock or other
securities of the Company, including, without limitation, any shares of
Common Stock issuable under any outstanding stock options. Such
agreements may provide that commencing 12 months after the offering is
completed, any stockholder may sell their shares of Common Stock in the
event that the last sales price for the Common Stock on _______, its
principal exchange, has been at least 250% of the initial public
offering price per share hereunder for a period of 20 consecutive
trading days ending within 5 days of the date of such sale, and such
sale
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<PAGE>
is completed at a price in excess of 250% of such initial public
offering price.
(t) Except as may have been registered in the Registration
Statement or already been exercised or waived, no person or entity has
the right to require registration of shares of Common Stock or other
securities of the Company because of the filing or effectiveness of the
Registration Statement.
(u) Except as may be set forth in the Prospectus, neither the
Company nor any Subsidiary has incurred any liability for a fee,
commission, or other compensation on account of the employment of a
broker or finder in connection with the transactions contemplated by
this Agreement.
(v) Neither the Company nor any Subsidiary nor any of their
affiliates is presently doing business with the government of Cuba or
with any person or entity located in Cuba. If, at any time after the
date that the Registration Statement is declared effective with the
Commission or with the Florida Department of Banking and Finance (the
"Florida Department"), whichever date is later, and prior to the end of
the period referred to in the first clause of Section 2(b), the Company
or any Subsidiary commences engaging in business with the government of
Cuba or with any person or affiliate located in Cuba, the Company or
such Subsidiary will so inform the Florida Department within ninety
days after such commencement of business in Cuba, and during the period
referred to in Section 2(b) will inform the Florida Department within
ninety days after any change occurs with respect to previously reported
information.
(w) The Securities have been approved for quotation on the
Nasdaq National Market ("NASDAQ"), subject to official notice of
issuance.
(x) Except as contemplated herein or therein or as may have
been waived, no person or entity has any right of first refusal,
preemptive right, right to any compensation, or other similar right or
option, in connection with the Offering, this Agreement, the
Underwriter's Options, or any of the transactions contemplated hereby
or thereby.
(y) The application of the net proceeds from the Offering, as
set forth in and contemplated by the Prospectus and the Registration
Statement, will not contravene any provision of applicable law,
governmental approval, rule or regulation or the articles of
association, other constitutive documents or the business license of
the Company or any Subsidiary or contravene the terms or provisions of,
or constitute a default under, any indenture, mortgage, deed of trust,
loan agreement, note, lease,
11
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agreements governing the acquisitions of Yantai and Dnon Tech (the
"Acquisition Agreements") or other agreement or instrument binding upon
the Company or any Subsidiary or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company
or any Subsidiary.
(z) No stamp or other issuance or transfer taxes or duties and
no capital gains, income, withholding or other taxes are payable to the
People's Republic of China ("China"), the government of the British
Virgin Islands (the "BVI") or any political subdivision or taxing
authority thereof or therein by or on behalf of the Underwriter in
connection with the issuance of the Securities, and the Underwriter
will not be deemed resident, domiciled, carrying on business or subject
to taxation in the BVI or China by reason of the execution, delivery,
performance or enforcement of this Agreement.
(aa) There is no requirement under the laws of the BVI for the
Company or any Subsidiary to obtain any license, consent or approval in
connection with any payment of cash dividends, in connection with any
conversion of foreign currency required to make such payment to remit
such foreign currency to holders of the Securities, or to trade the
Securities. Except as disclosed in the Registration Statement and the
Prospectus, under the existing laws of the BVI, holders of the
Securities are not subject to withholding tax, income tax or any other
taxes or duties imposed by any governmental authority in respect of:
(i) any payments, dividends or other distributions made on the
Securities; or (ii) gains made on sales of the Securities between
non-residents of the BVI consummated outside the BVI, unless the holder
thereof is subject to such taxes in respect of such Securities by
reason of his being connected with the BVI otherwise than by reason
only of the holding of the Securities or receiving payments thereon.
(bb) The Company and each Subsidiary (i) is in compliance with
any and all published applicable national, provincial, municipal, local
and foreign laws and regulations relating to the protection of human
health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"), (ii) have
obtained all permits, licenses or other approvals required of them
under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions of
any such permit, license or approval.
(cc) The Company has reasonably concluded that the costs and
liabilities associated with Environmental Laws (including, without
limitation, any capital or operating expenditures required for
clean-up, closure of properties or
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<PAGE>
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) would not, individually or in the
aggregate, have a material adverse effect on the Company or any
Subsidiary.
(dd) The description of the capital contributions made to each
of the Subsidiaries, respectively, and the dates of each of such
contributions, in the Prospectus, Registration Statement and the
financial statements and notes relating thereto is true and correct and
each of such contributions were effected in compliance with all
applicable national, provincial, municipal and local laws and all
necessary governmental or other approvals and licenses relating thereto
have been obtained.
(ee) The description of the Acquisitions in the Prospectus
and the Registration Statement is true and correct in all material
respects.
(ff) The Acquisitions and any related transactions were
effected in compliance and do not contravene, in any material respect,
any provision of applicable law (national, provincial, municipal and
local), rule or regulation and do not contravene the articles of
association, other constitutive documents or the business license of
the Company or any Subsidiary or contravene the terms or provisions of,
or constitute a default under, any indenture, mortgage, deed of trust,
loan agreement, note, lease or other agreement or instrument binding
upon the Company or any Subsidiary that, individually or in the
aggregate, is material to the Company or any Subsidiary or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any Subsidiary and will not
result in the creation or imposition of any lien, charge, encumbrance
or other restriction upon any assets of the Company or any Subsidiary.
(gg) All consents, approvals, authorizations, orders,
registrations and qualifications required in China in connection with
the Acquisitions have been made or obtained in writing (including,
without limitation, all actions necessary for the approval of the
Acquisitions by the State Assets Administration Bureau, the State
Restructuring Commission, the Land Administration Bureau and
__________) and no such consent, approval, authorization, order,
registration or qualification is subject to any condition precedent
which has not been fulfilled or performed.
(hh) There are no legal or governmental proceedings pending in
China challenging the effectiveness or validity of the Acquisitions
and, to the Company's, each Subsidiary's or Mr. Du's knowledge, no such
proceedings are threatened or
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contemplated by any governmental authorities in China or elsewhere.
(ii) The Company and each Subsidiary maintains insurance of
the types and in the amounts that the Company and such Subsidiary
reasonably believes to be adequate for their respective businesses and
consistent with insurance coverages maintained by Chinese or BVI
companies in similar businesses. Neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage from similar insurers as may be
necessary to continue its business at a cost that would not,
individually or in the aggregate, materially and adversely affect the
condition, financial or otherwise, or the earnings, business or
operations of the Company or any Subsidiary, except as described in or
contemplated by the Prospectus. The description of the Company's and
any Subsidiary's insurance coverages contained in the Prospectus is
true and correct in all material respects.
(jj) The Company is not, and upon consummation of the
transactions contemplated by this Agreement and the Prospectus, will
not be treated for U.S. tax purposes as a "passive foreign investment
company" as defined in the U.S. Internal Revenue Code of 1986, as
amended, and the regulations promulgated thereunder.
(kk) The Company and each Subsidiary has devised and maintains
a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions
are recorded as necessary to permit preparation of financial statements
in conformity with U.S. GAAP and to maintain accountability for assets,
(iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences; each of the Company and each Subsidiary has made and
keeps books, records and accounts, which, in reasonable detail
accurately and fairly reflect the transactions and dispositions of
assets of such entity.
(ll) Under the laws of China, neither the Company, any
Subsidiary nor any of their respective properties, assets or revenues
are entitled to any right of immunity on the grounds of sovereignty
from any legal action, suit or proceeding, from set-off or
counterclaim, from the
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jurisdiction of any court, from services of process, from attachment
prior to or in aid of execution and judgment, or from other legal
process or proceeding for the giving of any relief or for the
enforcement of any judgment. The irrevocable and unconditional waiver
and agreement of the Company and each Subsidiary in Article 15 hereof
not to plead or claim any such immunity in any legal action, suit or
proceeding based on the Underwriting Agreement is valid and binding
under the laws of China.
(mm) Under the laws of China, the courts of China recognize
and give effect to the choice of law provisions set forth in Article 15
hereof and enforce judgments of U.S. courts obtained against the
Company or any Subsidiary to enforce this Agreement, provided that the
judgment: (i) was not obtained by fraud; (ii) was final and conclusive;
(iii) in the opinion of the relevant Chinese court after its review of
such judgment pursuant to international treaties concluded or acceded
to by China or in accordance with the principle of reciprocity, did not
contradict the basic principles of Chinese law; (iv) in the opinion of
the relevant Chinese court after its review of such judgment pursuant
to international treaties concluded or acceded to by China or in
accordance with the principle of reciprocity, did not violate state
sovereignty, security or public interest; and (v) was for a definite
sum of money.
(nn) There are no relationships or transactions between the
Company or any Subsidiary, on the one hand and Mr. Du (or any member of
his immediate family), their respective affiliates, officers and
directors or their shareholders, customers or suppliers on the other
hand which, although required to be so disclosed, are not disclosed or
reflected in the Prospectus or which have not been disclosed in writing
to the Underwriter.
(oo) Each document provided by the Company, the Subsidiaries
or Mr. Du to the Underwriter and/or counsel to the Underwriter that has
been translated into english, is an accurate and complete translation
of the original version of such document.
3. Purchase, Sale, and Delivery of the Firm Stock and the
Additional Stock. On the basis of the representations, warranties,
covenants, and agreements of the Company herein contained, but subject
to the terms and conditions herein set forth, the Company agrees to sell
to the Underwriter, and the Underwriter agrees to purchase from the
Company all of the shares of Firm Stock.
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The purchase price per share of Firm Stock to be paid by the
Underwriter shall be $____. The initial public offering price per share of Firm
Stock shall be $____.
Payment for the Firm Stock by the Underwriter shall be made by
certified or official bank check in New York Clearing House funds payable to the
order of the Company at the offices of Barington Capital Group, L.P., 888
Seventh Avenue, New York, New York 10019, or at such other place in New York
City as you shall determine and advise the Company by at least two full days'
notice in writing, upon delivery of the Firm Stock to you for the account of the
Underwriter. Such delivery and payment shall be made at 10:00 A.M., New York
City Time, on the third business day following the commencement of the initial
public offering, as defined in Section 11(a), or at such other time as shall be
agreed upon between you and the Company. The time and date of such delivery and
payment are herein called the "Closing Date."
Certificates for the Firm Stock shall be registered in such name or
names and in such authorized denominations as you may request in writing at
least two full business days prior to the Closing Date. The Company shall permit
you to examine and package such certificates for delivery at least one full
business day prior to the Closing Date.
In addition, the Company hereby grants to the Underwriter the option to
purchase all or a portion of the Additional Stock as may be necessary to cover
over-allotments, at the same purchase price per share to be paid by the
Underwriter to the Company for the Firm Stock as provided for in this Section 3.
This option may be exercised only to cover over-allotments in the sale of shares
of Common Stock by the Underwriter. This option may be exercised by you on the
basis of the representations, warranties, covenants, and agreements of the
Company herein contained, but subject to the terms and conditions herein set
forth, at any time and from time to time on or before the forty-fifth day
following the effective date of the Registration Statement, by written notice by
you to the Company. Such notice shall set forth the aggregate number of
Additional Stock as to which the option is being exercised and the time and
date, as determined by you, when such Additional Stock is to be delivered (such
time and date are herein called an "Additional Closing Date"); provided,
however, that no Additional Closing Date shall be earlier than the Closing Date
nor earlier than the second business day after the date on which the notice of
the exercise of the option shall have been given nor later than the eighth
business day after the date on which such notice shall have been given.
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<PAGE>
Payment for the Additional Stock by the Underwriter shall be made by
certified or official bank check in New York Clearing House funds payable to the
order of the Company at the offices of Barington Capital Group, L.P., 888
Seventh Avenue, New York, New York 10019, or at such other place in New York
City as you shall determine and advise the Company by at least two full days'
notice in writing, upon delivery of the Additional Stock to you for the account
of the Underwriter.
Certificates for the Additional Stock shall be registered in such name
or names and in such authorized denominations as you may request in writing at
least two full business days prior to the Additional Closing Date with respect
thereto. The Company shall permit you to examine and package such certificates
for delivery at least one full business day prior to the Additional Closing Date
with respect thereto.
4. Offering. The Underwriter is to make a public offering of the Firm
Stock as soon, on or after the effective date of the Registration Statement, as
you deem it advisable so to do. The Firm Stock is to be initially offered to the
public at the initial public offering price as provided for in Section 3 (such
price being herein called the "public offering price"). After the initial public
offering, you may from time to time increase or decrease the public offering
price, in your sole discretion, by reason of changes in general market
conditions or otherwise.
5. Covenants of the Company each Subsidiary and Mr. Du. Each of the
Company, each Subsidiary and Mr. Du covenants that it will:
(a) Use its or their best efforts to cause the Registration
Statement to become effective as promptly as possible. If the
Registration Statement has become or becomes effective with a form of
prospectus omitting Rule 430A Information, or filing of the Prospectus
is otherwise required under Rule 424(b), the Company will file the
Prospectus, properly completed, pursuant to Rule 424(b) within the time
period prescribed and will provide evidence satisfactory to you of such
timely filing.
(b) Notify you immediately, and confirm such notice in
writing, (i) when the Registration Statement and any post-effective
amendment thereto become effective, (ii) of the receipt of any comments
from the Commission or the "blue sky" or securities authority of any
jurisdiction regarding the Registration Statement, any post-effective
amendment thereto, the Prospectus, or any amendment or supplement
thereto, and (iii) of the receipt of any notification with respect to a
Stop Order or the initiation or threatening of any proceeding with
respect to a Stop Order. The Company will use its best efforts to
prevent the issuance of any Stop Order and, if any Stop Order is
issued, to obtain the lifting thereof as promptly as possible.
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<PAGE>
(c) During the time when a prospectus relating to the Firm
Stock and the Additional Stock is required to be delivered hereunder or
under the Act or the Regulations, comply so far as it is able with all
requirements imposed upon it by the Act, as now existing and as
hereafter amended, and by the Regulations, as from time to time in
force, so far as necessary to permit the continuance of sales of or
dealings in the Firm Stock or the Additional Stock, as the case may be,
in accordance with the provisions hereof and the Prospectus. If, at any
time when a prospectus relating to the Firm Stock and the Additional
Stock is required to be delivered hereunder or under the Act or the
Regulations, any event shall have occurred as a result of which, in the
reasonable opinion of counsel for the Company or counsel for the
Underwriter, the Registration Statement or the Prospectus as then
amended or supplemented contains any untrue statement of a material
fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, or if, in
the opinion of either of such counsel, it is necessary at any time to
amend or supplement the Registration Statement or the Prospectus to
comply with the Act or the Regulations, the Company will immediately
notify you and promptly prepare and file with the Commission an
appropriate amendment or supplement (in form and substance satisfactory
to you) which will correct such statement or omission or which will
effect such compliance and will use its best efforts to have any such
amendment declared effective as soon as possible.
(d) Deliver without charge to the Underwriter such number of
copies of each Preliminary Prospectus as may reasonably be requested by
the Underwriter and, as soon as the Registration Statement, or any
amendment thereto, becomes effective or a supplement is filed, deliver
without charge to you two signed copies of the Registration Statement,
including exhibits, or such amendment thereto, as the case may be, and
two copies of any supplement thereto, and deliver without charge to the
Underwriter such number of copies of the Prospectus, the Registration
Statement, and amendments and supplements thereto, if any, without
exhibits, as you may request for the purposes contemplated by the Act.
(e) Endeavor in good faith, in cooperation with you, at or
prior to the time the Registration Statement becomes effective, to
qualify the Firm Stock and the Additional Stock for offering and sale
under the "blue sky" or securities laws of such jurisdictions as you
may designate; provided, however, that no such qualification shall be
required in any jurisdiction where, as a result thereof, the Company
would be subject to service of general process or to taxation as a
foreign corporation doing business in such jurisdiction to which it is
not then subject. In each
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jurisdiction where such qualification shall be effected, the Company
will, unless you agree in writing that such action is not at the time
necessary or advisable, file and make such statements or reports at
such times as are or may be required by the laws of such jurisdiction.
(f) Use its best efforts to keep the Prospectus and the
Registration Statement current and effective by filing post-effective
amendments, as necessary.
(g) Make generally available (within the meaning of Section
11(a) of the Act and the Regulations) to its security holders as soon
as practicable, but not later than _______________, an earnings
statement (which need not be certified by independent certified public
accountants unless required by the Act or the Regulations, but which
shall satisfy the provisions of Section 11(a) of the Act and the
Regulations) covering a period of at least twelve months beginning
after the effective date of the Registration Statement.
(h) For a period of twelve months after the effective date of
the Offering, the Company and each of the Subsidiaries shall, not,
without your prior written consent, offer, issue, sell, contract to
sell, grant any option for the sale of, or otherwise dispose of,
directly or indirectly, any shares of Common Stock or other securities
of the Company or any Subsidiary (or any security or other instrument
which by its terms is convertible into, exercisable for, or
exchangeable for shares of Common Stock or other securities of the
Company or any Subsidiary) except as provided in Section 3 and except
for (i) the grant of options to purchase no more than 300,000 shares of
Common Stock pursuant to the 1997 employee stock option plan (the
"Plan"), which is properly described in the Prospectus, (ii) the
issuance of Common Stock issuable upon the exercise of stock options
and warrants outstanding on the date hereof and fully and properly
described in the Prospectus and pursuant to the Plan described in
clause (i) hereof, (iii) the issuance of the Securities and (iv) the
issuance of any shares in connection with any acquisition provided such
acquisition is approved by the independent directors of the Company's
Board of Directors.
(i) For a period of five years after the effective date of the
Registration Statement, furnish you, without charge, the following:
(i) within 90 days after the end of each fiscal year,
three copies of financial statements certified by independent
certified public accountants, including a balance sheet,
statement of income, and statement of cash flows of the
Company and its then existing subsidiaries, with supporting
schedules, prepared in
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accordance with generally accepted accounting principles, as
at the end of such fiscal year and for the 12 months then
ended, which may be on a consolidated basis;
(ii) as soon as practicable after they have been sent
to stockholders of the Company or filed with the Commission,
three copies of each annual and interim financial and other
report or communication sent by the Company to its
stockholders or filed with the Commission;
(iii) as soon as practicable, two copies of every
press release and every material news item and article in
respect of the Company or its affairs which was released by
the Company; and
(iv) such additional documents and information with
respect to the Company and its affairs and the affairs of any
of its subsidiaries as you may from time to time reasonably
request.
(j) Files its annual reports with the Commission and publicly
release quarterly financial reports within the same time periods as
United States companies are required to file such reports with the
Commission or publicly release quarterly financial reports.
(k) Apply the net proceeds received by it from the offering
in the manner set forth under "Use of Proceeds" in the Prospectus.
(l) Furnish to you as early as practicable prior to the
Closing Date and any Additional Closing Date, as the case may be, but
no less than two full business days prior thereto, a copy of the latest
available unaudited financial statements of the Company and the
Subsidiaries which have been read by the Company's independent
certified public accountants, as stated in their letters to be
furnished pursuant to Section 7(e).
(m) File no amendment or supplement to the Registration
Statement or Prospectus at any time, whether before or after the
effective date of the Registration Statement, unless such filing shall
comply with the Act and the Regulations and unless you shall previously
have been advised of such filing and furnished with a copy thereof, and
you and counsel for the Underwriter shall have approved such filing in
writing.
(n) Comply with all registration, filing, and reporting
requirements of the Exchange Act which may from time to time be
applicable to the Company.
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(o) Comply with all provisions of all undertakings contained
in the Registration Statement.
(p) Prior to the Closing Date or any Additional Closing Date,
as the case may be, issue no press release or other communication,
directly or indirectly, and hold no press conference with respect to
the Company, the financial conditions, results of operations, business,
properties, assets, liabilities of the Company, or this offering,
without your prior written consent.
(q) File timely with the Commission an appropriate form to
register the Common Stock pursuant to Section 12(b) under the Exchange
Act.
(r) File timely and accurate reports on Form SR with the
Commission in accordance with Rule 463 of the Regulations or any
successor provision.
(s) Use its best efforts to cause the application for
quotation of the Firm Stock and any Additional Stock on NASDAQ to be
approved as soon as possible.
(t) [Reserved]. [Other exchanges]
(u) On or prior to the Closing Date, sell to the Underwriter
(or its designees) the Underwriter's Options to purchase an aggregate
of 330,000 shares of Common Stock, which Underwriter's Options shall be
evidenced by the Underwriter's Option Agreement in the form set forth
as an exhibit to the Registration Statement.
(v) On or prior to the Closing Date, sell to First Pacific
Rim, Inc. (the "Advisor") (or its designees) the Advisor's Options to
purchase an aggregate of 70,000 shares of Common Stock, which Advisor's
Options shall be evidenced by the Advisor's Option Agreement in the
form set forth as an exhibit to the Registration Statement.
(w) Until expiration of the Underwriter's Options and the
Advisor's Options, keep reserved sufficient shares of Common Stock for
issuance upon exercise of the Underwriter's Options and the Advisor's
Options.
(x) Until the expiration of three years from the Closing Date,
the Company shall permit one representative selected from time to time
by Barington Capital Group, L.P. to be present at and observe all Board
of Directors meetings of the Company, which representative shall be
entitled to receive reimbursement for all reasonable costs incurred in
attending such meetings, and which representative shall receive all
written notices and other materials provided to directors of the
Company no later than it gives such notice and provides such material
to other directors.
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<PAGE>
(y) Deliver to you, without charge, within a reasonable period
after the last Additional Closing Date or the expiration of the period
in which the Underwriter may exercise the over-allotment option, three
bound volumes of the Registration Statement and all related materials.
(z) For a period of five years after the Closing Date, supply
to the appropriate parties such information as may be necessary or
desirable, and otherwise use its best efforts, so that the Company will
be registered and will maintain its registration in one or more of the
securities manuals publishes by Standard & Poor's Corporation and
Moody's Investor Service, Inc. and that at all times during such period
such listing will, at a minimum, contain the names of the Company's
officers and directors, a balance sheet as of a date not more than 18
months prior to such time, and a statement of operations for either the
fiscal year preceding such date or the most recent fiscal year of
operations.
(aa) Use its best efforts to maintain the quotation on NASDAQ
of price information for the Common Stock issued hereunder.
(bb) Procure prior to, and make effective as of the effective
date of this Offering, and maintain Director and Officer liability
insurance with a reputable insurance carrier acceptable to the
Underwriter.
(cc) From the Closing Date, retain a transfer agent acceptable
to the Underwriter. Upon reasonable notice from the Underwriter, the
Company shall provide the Underwriter with copies of the Company's
daily stock transfer sheets and lists of the beneficial and record
holders of the Company's securities, from such transfer agent and from
the Depository Trust Company, at the Company's sole cost and expense.
The Underwriter acknowledges hereby that the Continental Stock Transfer
and Trust Company shall be acceptable as such transfer agent.
(dd) From the date the Registration Statement becomes
effective, the Company shall retain an investor relations firm or
engage an in-house investor relations officer, in either case
reasonably acceptable to the Underwriter.
6. Payment of Expenses. The Company hereby agrees to pay all expenses
(other than fees of counsel for the Underwriter, except as provided in Sections
6(c) and 6(e)) in connection with (a) the preparation, printing, filing,
distribution, and mailing of the Registration Statement and the Prospectus and
the printing, filing, distribution, and mailing of this Agreement, any Blue Sky
Surveys, and if appropriate, any Underwriter's Questionnaire and Power of
Attorney, and related documents, including the cost of all copies thereof and of
the Preliminary Prospectuses and of the Prospectus and any amendments or
22
<PAGE>
supplements thereto supplied to the Underwriter in quantities as hereinabove
stated, (b) the issuance, sale, transfer, and delivery of the Firm Stock and the
Additional Stock, including any transfer or other taxes payable thereon, (c) the
qualification of the Firm Stock and the Additional Stock under state or foreign
"blue sky" or securities laws, including the costs of printing and mailing the
preliminary and final "Blue Sky Survey" and the fees of counsel for the
Underwriter and the disbursements in connection therewith, (d) the filing fees
payable to the Commission, the National Association of Securities Dealers (the
"NASD"), and the jurisdictions in which such qualification is sought, (e) the
reasonable fees and disbursements of the Underwriter relating to all filings
with the NASD, (f) the quotation of the Common Stock on NASDAQ, (g) the fees and
expenses of the Company's transfer agent and registrar, (h) the fees and
expenses of the Company's legal counsel and accountants, (i) the fees of an
investigative search firm designated by the Underwriter to conduct a background
check of the principals of the Company, (j) the costs of placing "tombstone"
advertisements in the national edition of The Wall Street Journal and other
publications selected by the Underwriter, and (k) the costs of preparing a
reasonable number of transaction "bibles" or "mementos." In addition, the
Company hereby agrees to pay to the Underwriter a non-accountable expense
allowance equal to 3% of the aggregate gross proceeds received by the Company
from the sale of the Firm Stock and any Additional Stock which amounts (less
$50,000 previously paid to you in respect of such non-accountable expense
allowance) shall be paid to you on the Closing Date (with respect to Common
Stock sold by the Company on the Closing Date) and, if applicable, on the
Closing Date and any Additional Closing Date (with respect to Additional Stock
sold by the Company on the Closing Date or such Additional Closing Date).
7. Conditions of Underwriter's Obligations. The obligations of the
Underwriter to purchase and pay for the Firm Stock and the Additional Stock, as
provided herein, shall be subject, in its discretion, to the continuing accuracy
of the representations and warranties of the Company, each Subsidiary and Mr. Du
contained herein and in each certificate and document contemplated under this
Agreement to be delivered to you, as of the date hereof and as of the Closing
Date (or the Additional Closing Date, as the case may be), to the performance by
the Company of its obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective not
later than 6:00 P.M., New York City Time, on the date of this Agreement
or such later date and time as shall be consented to in writing by you.
(b) At the Closing Date and any Additional Closing Date, as
the case may be, you shall have received the favorable opinion of
Proskauer Rose LLP, counsel for the Company, dated the date of
delivery, addressed to the
23
<PAGE>
Underwriter, and in form and scope satisfactory to counsel for the
Underwriter, with such number of reproduced copies or signed
counterparts thereof for the Underwriter as shall be reasonably
requested by the Underwriter, to the effect that:
(i) The Company is a corporation duly organized,
validly existing, and in good standing under the laws of its
jurisdiction of incorporation. Each of the Subsidiaries is a
joint venture duly organized, validly existing and in good
standing in its jurisdiction of organization. Each of the
Subsidiaries is a legal person with limited liability and the
liability of the Company in respect of such person is limited
to its investment therein. The Company and each Subsidiary has
full corporate power and authority, and all necessary
consents, authorizations, approvals, orders, licenses,
certificates, and permits of and from, and declarations and
filings with, all national, provincial, municipal, local,
foreign and other governmental authorities, all
self-regulatory organizations and all courts and other
tribunals (including, without limitation, the State Land
Administration Bureau, the Trademark Administration Bureau,
the Patent Bureau, the State Administration of Taxation and
the ________), to own, lease, license, and use their
respective properties and assets and to carry on their
respective business in the manner described in the Prospectus
and such consents, authorizations, approvals, orders,
licenses, certificates and permits contain no materially
burdensome restrictions not described in the Prospectus. To
the best of such counsels' knowledge, neither the Company, any
Subsidiary nor Mr. Du, has any reason to believe that any
regulatory body is considering modifying, suspending or
revoking any such licenses, consents, authorizations,
approvals, orders, certificates or permits and the Company and
each Subsidiary is in compliance with the provisions of all
such licenses, consents, authorizations, approvals, orders,
certificates or permits, and the Company and each Subsidiary
has paid all relevant taxes and fees required to be paid by
the Company and such Subsidiary by the relevant taxing or
other governmental authority. The Company and each Subsidiary
is duly qualified to do business and is in good standing in
every jurisdiction in which its ownership, leasing, licensing,
or use of property and assets or the conduct of its business
makes such qualification necessary;
(ii) the authorized capital stock of the Company
consists of 30,000,000 shares of Common Stock, of which
4,850,000 shares are outstanding. Each outstanding share of
Common Stock and each outstanding share of
24
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capital stock of each Subsidiary is duly authorized, validly
issued, fully paid, and nonassessable, without any personal
liability attaching to the ownership thereof, and has not been
issued and is not owned or held in violation of any preemptive
rights of stockholders. There is no commitment, plan, or
arrangement to issue, and no outstanding option, warrant, or
other right calling for the issuance of, any share of capital
stock of the Company or any Subsidiary or any security or
other instrument which by its terms is convertible into,
exercisable for, or exchangeable for, capital stock of the
Company or any Subsidiary except as may be properly described
in the Prospectus;
(iii) to the knowledge of such counsel, there is no
litigation, arbitration, claim, governmental or other
proceeding (formal or informal), or investigation pending,
threatened or in prospect (or any basis therefor) with respect
to the Company or any Subsidiary, or any of their respective
operations, businesses, properties, assets, liabilities or
future prospects such as individually or in the aggregate do
not now have and cannot be expected in the future to have,
individually or in the aggregate, a material adverse effect
upon the operations, business, properties, or assets of the
Company or any Subsidiary. [To the knowledge of such counsel,]
Neither the Company nor any Subsidiary is or is expected to be
in violation of, or in default with respect to, any law, rule,
regulation, order, judgment, or decree except as may be
properly described in the Prospectus or such as in the
aggregate do not now have and will not in the future have,
individually or in the aggregate, a material adverse effect
upon the operations, business, properties, assets, liabilities
or future prospects, of the Company or any Subsidiary; nor is
the Company or any Subsidiary required to take any action in
order to avoid any such violation or default;
(iv) Neither the Company nor any Subsidiary is in
violation or breach of, or in default with respect to,
complying with any material provision of any contract,
agreement, instrument, lease, license, arrangement, or
understanding which is filed as an exhibit to the Registration
Statement or is otherwise material to the Company or any
Subsidiary, and each such contract, agreement, instrument,
lease, license, arrangement, and understanding is in full
force and is the legal, valid, and binding obligation of the
parties thereto and is enforceable as to them in accordance
with its terms;
(v) neither the Company nor any Subsidiary is in
violation or breach of, or in default with respect to,
25
<PAGE>
any term of its articles of incorporation (or other charter
document), by-laws, similar constitutive document, as
amended[, or business license];
(vi) the Company and each Subsidiary party thereto
has all requisite corporate power and authority to execute,
deliver and perform each of the Company Documents and the
Acquisition Agreement. All necessary corporate proceedings of
the Company and each Subsidiary have been duly taken to
authorize the execution, delivery and performance of each of
the Company Documents by the Company and each Subsidiary party
thereto and the consummation of the Acquisitions. Each Company
Document and each Acquisition Agreement has been duly executed
and delivered by the Company and each Subsidiary and each
other party thereto. Each Company Document and each
Acquisition Agreement has been duly authorized by the Company,
each Subsidiary and each other party thereto, and is or, when
executed and delivered by the Company, each such Subsidiary
and each such other party, will be the legal, valid, and
binding obligation of the Company, each such Subsidiary and
each such other party, enforceable against the Company, each
such Subsidiary and each such other party, in accordance with
its terms. No consent, authorization, approval, order,
license, certificate, or permit of or from, or declaration or
filing with, any national, provincial, municipal, local,
foreign or other governmental authority, any self-regulatory
organization or any court or other tribunal is required by the
Company or any Subsidiary party thereto for the execution,
delivery, or performance by the Company or any such Subsidiary
of any of the Company Documents (except filings under the Act
which have been or will be made before the Closing Date and
such consents consisting only of consents under "blue sky" or
state securities laws) or for the consummation of the
Acquisitions. No consent of any party (governmental or
otherwise) to any contract, agreement, instrument, lease,
license, arrangement, or understanding to which the Company or
any Subsidiary is a party, or to which any of their respective
properties or assets are subject, is required for the
execution, delivery, or performance of the Company Documents
or for the consummation of the Acquisitions; and the
execution, delivery, and performance of any of the Company
Documents and the consummation of the Acquisitions will not
violate, result in a breach of, conflict with, or (with or
without the giving of notice or the passage of time or both)
entitle any party to terminate or call a default under any
such contract, agreement, instrument, lease, license,
arrangement, or understanding, or violate or result in a
breach of any term of the articles of incorporation (or other
charter document),
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<PAGE>
by-laws or similar constitutive document, as amended, or
governmental approval or business license of the Company or
any Subsidiary, or violate, result in a breach of, or conflict
with any law, rule, regulation, order, judgment, or decree
binding on the Company or any Subsidiary or to which any of
their respective operations, businesses, properties, or assets
are subject;
(vii) the Firm Stock and the Additional Stock are
validly authorized. Such opinion delivered at the Closing Date
or any Additional Closing Date shall state that each share of
Firm Stock or Additional Stock, as the case may be, to be
delivered against payment therefore in accordance with this
Agreement, on that date is validly issued, fully paid, and
nonassessable, with no personal liability attaching to the
ownership thereof, and is not issued in violation of any
preemptive rights of stockholders, and the Underwriter has
received good title to the Firm Stock and Additional Stock
purchased by it, from the Company, free and clear of all
liens, security interests, pledges, charges, encumbrances,
stockholders' agreements, and voting trusts;
(viii) the Underwriter's Stock has been duly and
validly reserved for issuance. Such opinion delivered at the
Closing Date shall state that the Underwriter's Options have
been duly and validly issued and delivered. The Underwriter's
Stock, when issued and delivered in accordance with the terms
of the Underwriter's Option Agreement will be validly
authorized, validly issued, fully paid, and nonassessable,
with no personal liability attaching to the ownership thereof,
and will not have been issued in violation of any preemptive
rights of stockholders; and such holders will receive good
title to the securities purchased by them, respectively, free
and clear of all liens, security interests, pledges, charges,
encumbrances, stockholders' agreements, and voting trusts;
(ix) the Securities conform to all statements
relating thereto contained in the Registration Statement or
the Prospectus;
(x) the application of the net proceeds from the
Offering, as set forth in and contemplated by the Prospectus
or the Registration Statement, will not contravene any
provision of applicable law, rule or regulation or the
articles of association, other constitutive documents,
governmental approval or the business license of the Company
or any Subsidiary or contravene the terms or provisions of, or
constitute a
27
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default under, any indenture, mortgage, deed of trust, loan
agreement, note, lease, Acquisition Agreement or other
agreement or instrument binding upon the Company or any
Subsidiary that, individually or in the aggregate, is material
to the Company or any Subsidiary, or any judgment, order or
decree of any governmental body, agency or court having
jurisdiction over the Company or any Subsidiary.
(xi) no stamp or other issuance or transfer taxes or
duties and no capital gains, income, withholding or other
taxes are payable to the BVI or any political subdivision or
taxing authority thereof or therein by or on behalf of the
Underwriter in connection with the issuance of the Securities,
and the Underwriter will not be deemed resident, domiciled,
carrying on business or subject to taxation in the BVI by
reason of the execution, delivery, performance or enforcement
of this Agreement.
(xii) there is no requirement under the laws of the
BVI for the Company or any Subsidiary to obtain any license,
consent or approval in connection with any payment of cash
dividends, in connection with any conversion of foreign
currency required to make such payment to remit such foreign
currency to holders of the Securities, or to trade the
Securities. Except as disclosed in the Registration Statement
and the Prospectus, under the existing laws of the BVI,
holders of the Securities are not subject to withholding tax,
income tax or any other taxes or duties imposed by any
governmental authority in the BVI in respect of: (i) any
payments, dividends or other distributions made on the
Securities; or (ii) gains made on sales of the Securities
between non-residents of the BVI consummated outside the BVI,
unless the holder thereof is subject to such taxes in respect
of such Securities by reason of his being connected with the
BVI otherwise than by reason only of the holding of the
Securities or receiving payments thereon.
(xiii) the Company and each Subsidiary (i) is in
compliance with any and all Environmental Laws, (ii) has
obtained all permits, licenses or other approvals required of
them under applicable Environmental Laws to conduct their
respective businesses and (iii) is in compliance with all
terms and conditions of any such permit, license or approval,
except where, in respect of (i), (ii) and (iii), such
noncompliance with Environmental Laws, failure to obtain
required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses
or approvals would not, individually or in the aggregate,
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have a material adverse effect on the Company or any
Subsidiary.
(xiv) the Company has reasonably concluded that the
costs and liabilities associated with Environmental Laws
(including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and
any potential liabilities to third parties) would not,
individually or in the aggregate, have a material adverse
effect on the Company or any Subsidiary.
(xv) the descriptions of the capital contributions
made to each of the Subsidiaries respectively, and the dates
of each of such contributions, in the Prospectus, Registration
Statement and the financial statements and notes relating
thereto is true and correct and each of such contributions
were effected in compliance with all applicable national,
provincial,
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municipal and local laws and all necessary governmental or
other approvals and licenses relating thereto have been
obtained.
(xvi) the descriptions of the Acquisitions in the
Prospectus and the Registration Statement are true and correct
in all material respects. The Acquisitions and any related
transactions have been effected in compliance with all
applicable national, provincial, municipal and local laws.
(xvii) the Acquisitions and any related transactions
do not contravene, in any material respect, any provision of
applicable law, rule or regulation and do not contravene the
articles of association, other constitutive documents or the
business license of the Company or any Subsidiary or
contravene the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement,
note, lease or other agreement or instrument binding upon the
Company or any Subsidiary that, individually or in the
aggregate, is material to the Company or any Subsidiary or any
judgment, order or decree of any governmental body, agency or
court having jurisdiction over the Company or any Subsidiary
and will not result in the creation or imposition of any lien,
charge, encumbrance or other restriction upon any assets of
the Company or any Subsidiary.
(xviii) all consents, approvals, authorizations,
orders, registrations and qualifications required in China in
connection with the Acquisitions have been made or obtained in
writing (including, without limitation, all actions necessary
for the approval of the Acquisitions by the State Assets
Administration Bureau, the State Restructuring Commission, the
Land Administration Bureau and _______) no such consent,
approval, authorization, order, registration or qualification
is subject to any condition precedent which has not been
fulfilled or performed.
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(xix) there are no legal or governmental proceedings
pending in China challenging the effectiveness or validity of
the Acquisitions and, to such counsel's knowledge, no such
proceedings are threatened or contemplated by any governmental
authorities in China or elsewhere.
(xx) the Company and each Subsidiary maintains
insurance of the types and in the amounts that the Company and
such Subsidiary reasonably believes to be adequate for their
respective businesses and consistent with insurance coverages
maintained by Chinese or BVI companies in similar businesses.
Neither the Company nor any such Subsidiary has any reason to
believe that it will not be able to renew its existing
insurance coverage from similar insurers as may be necessary
to continue its business at a cost that would not,
individually or in the aggregate, materially and adversely
affect the condition, financial or otherwise, or the earnings,
business or operations of the Company or any Subsidiary,
except as described in or contemplated by the Prospectus. The
descriptions of the Company's and any Subsidiary's insurance
coverages contained in the Prospectus are true and correct in
all material respects.
(xxi) the Company is not, and upon consummation of
the transactions contemplated by this Agreement and the
Prospectus, will not be treated for U.S. tax purposes as a
"passive foreign investment company" as defined in the U.S.
Internal Revenue Code of 1986, as amended, and the regulations
promulgated thereunder.
(xxii) the Company and each Subsidiary has devised
and maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial
statements in conformity with U.S. GAAP and to maintain
accountability for assets, (iii) access to assets is permitted
only in accordance with management's general or specific
authorization and (iv) the recorded accountability for assets
is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences;
each of the Company and each Subsidiary has made and keeps
books, records and accounts, which, in reasonable detail
accurately and fairly reflect the transactions and
dispositions of assets of such entity.
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(xxiii) under the laws of China, neither the Company,
any Subsidiary nor any of their respective properties, assets
or revenues are entitled to any right of immunity on the
grounds of sovereignty from any legal action, suit or
proceeding, from set-off or counterclaim, from the
jurisdiction of any court, from services of process, from
attachment prior to or in aid of execution and judgment, or
from other legal process or proceeding for the giving of any
relief or for the enforcement of any judgment. The irrevocable
and unconditional waiver and agreement of the Company and each
Subsidiary in Article 15 hereof not to plead or claim any such
immunity in any legal action, suit or proceeding based on the
Underwriting Agreement is valid and binding under the laws of
China.
(xxiv) under the laws of China, the courts of China
recognize and give effect to the choice of law provisions set
forth in Article 15 hereof and enforce judgments of U.S.
courts obtained against the Company or any Subsidiary to
enforce this Agreement, provided that the judgment: (i) was
not obtained by fraud; (ii) was final and conclusive; (iii) in
the opinion of the relevant Chinese court after its review of
such judgment pursuant to international treaties concluded or
acceded to by China or in accordance with the principle of
reciprocity, did not contradict the basic principles of
Chinese law; (iv) in the opinion of the relevant Chinese court
after its review of such judgment pursuant to international
treaties concluded or acceded to by China or in accordance
with the principle of reciprocity, did not violate state
sovereignty, security or public interest; and (v) was for a
definite sum of money.
(xxv) there are no relationships or transactions
between the Company or any Subsidiary on the one hand and Mr.
Du (and any members of his immediate family), their respective
affiliates, officers and directors or their shareholders,
customers or suppliers on the other hand which, although
required to be so disclosed, are not disclosed or reflected in
the Prospectus or which have not been disclosed in writing to
the Underwriter.
(xxvi) each document provided by the Company, the
Subsidiaries or Mr. Du to the Underwriter and/or counsel to
the Underwriter that has been translated into english, is an
accurate and complete translation of the original version of
such document.
(xxvii) the statements in the Prospectus and the
Registration Statement under the captions [ ] in each
case insofar as such statements constitute summaries of
Chinese legal matters,
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documents or proceedings referred to therein, fairly and
adequately present the information called for with respect to
such legal matters, documents and proceedings and fairly and
accurately summarize the matters referred to therein. In
addition, the descriptions in the Prospectus and the
Registration Statement of relevant Chinese laws, the Company's
and each Subsidiary's articles of association or other
constitutive document, relevant governmental approvals,
authorizations, consents, legal and governmental proceedings,
descriptions of [ ] and the establishment of the Company
and each Subsidiary, are accurate in all material respects and
fairly present in all respects all information disclosed
therein.
(xxviii) the choice of law provisions set forth in
the Company Documents (except for the Shareholder Agreement
which is to be governed by BVI law) will be recognized by
China courts; the Company can sue and be sued in its owns
name; under the laws of China, the irrevocable submission of
the Company to the nonexclusive jurisdiction of the State of
New York and of any federal court located in such State (each
a "New York court"), the waiver of the Company of any
objection to the venue of a proceeding in a New York court,
the waiver and agreement not to plead an inconvenient forum,
the waiver of sovereign immunity and the agreement of the
Company and each Subsidiary that the Company Documents (except
for the Shareholder Agreement which is to be governed by BVI
Law)shall be construed in accordance with and governed by the
laws of the State of New York are legal, valid and binding
under the laws of China and will be respected by the courts in
China; service of process effected in the manner set forth in
the Company Documents (except for the Shareholder Agreement
which is to be governed by BVI Law), provided it is delivered
by a court-appointed officer and assuming its validity under
New York law, will be effective, insofar as Chinese law is
concerned, to confer valid personal jurisdiction over the
Company; and any judgment obtained in a New York court arising
out of or in relation to the obligations of the Company under
this Agreement will be recognized by China;
(xxix) insofar as matters of Chinese law are
concerned, the indemnification and contribution provisions set
forth in Article 8 of this Agreement constitute the legal,
valid and binding obligations of the Company enforceable in
accordance with the terms therein, subject, as to enforcement,
to bankruptcy,
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insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights;
(xxx) each of the Company Documents and the
Acquisition Agreements is in proper legal form under the laws
of China or the BVI for the enforcement thereof against the
Company in China or the BVI without further action on the part
of the Underwriters and to ensure the legality, validity,
enforceability or admissibility in evidence of any of such
agreements, it is not necessary that any such document be
filed or recorded with any court or other authority in China
or the BVI or that any stamp or similar tax be paid on or in
respect of any such document or the Securities;
(xxxi) the Company is subject to Chinese income tax
at the rate of ____ percent, in accordance with the
[Provisional Rules of China on Enterprise Income Tax]
specifying for such income tax rate of ____ percent with
effect from ____________ the Company is not aware of any event
or circumstance which may result in such order being invalid
or ineffective or capable of being revoked. The Company is not
otherwise subject to Chinese tax on its income;
(xxxii) the entry into, and performance or
enforcement of this Agreement in accordance with its
respective terms will not subject the Underwriter to a
requirement to be licensed or otherwise qualified to do
business in China, nor will the Underwriter be deemed to be
resident, domiciled, carrying on business through an
establishment or place in China or the BVI or in breach of any
laws or regulations in China or the BVI by reason of entry
into, performance or enforcement of this Agreement;
(xxxiii) to the knowledge of such counsel, any
contract, agreement, instrument, lease, or license required to
be described in the Registration Statement or the Prospectus
are correct and complete in all material respects. To the
knowledge of such counsel, upon due inquiry, any contract,
agreement, instrument, lease, or license required to be filed
as an exhibit to the Registration Statement has been filed
with the Commission as an exhibit to the Registration
Statement;
(xxxiv) insofar as statements in the Prospectus
purport to summarize the status of litigation or the
provisions of laws, rules, regulations, orders, judgments,
decrees, contracts, agreements, instruments, leases, or
licenses, such statements have been prepared or reviewed by
such counsel and accurately reflect the
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<PAGE>
status of such litigation and provisions purported to be
summarized and are correct in all material respects;
(xxxv) the conditions for use of Form F-1 have been
satisfied with respect to the Registration Statement;
(xxxvi) the Common Stock has been approved for
quotation on NASDAQ, subject to official notice of issuance;
(xxxvii) [Reserved];
(xxxviii) to the knowledge of such counsel, no person
or entity has the right to require registration of shares of
Common Stock or other securities of the Company because of the
filing or effectiveness of the Registration Statement;
(xxxix) the Registration Statement has become
effective under the Act. To the knowledge of such counsel, no
Stop Order has been issued and no proceedings for that purpose
have been instituted or threatened;
(xl) the Registration Statement, any Rule 430A
Prospectus, and the Prospectus, and any amendment or
supplement thereto (other than financial statements and other
financial data and schedules contained therein, as to which
such counsel need express no opinion), comply as to form in
all material respects with the requirements of the Act and the
Regulations;
(xli) such counsel has no reason to believe that any
of the Registration Statement, any Rule 430A Prospectus, or
the Prospectus, or any amendment or supplement thereto (other
than financial statements and other financial data and
schedules which are or should be contained therein, as to
which such counsel need express no opinion), contains any
untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading;
(xlii) to the knowledge of such counsel, upon due
inquiry, since the effective date of the Registration
Statement, no event has occurred which was required by the Act
and the Regulations to be set forth in an amendment or
supplement to the Registration Statement or the Prospectus
which was not set forth in such an amendment or supplement;
and
(xliii) nothing has come to the attention of such
counsel that would lead them to believe that the Registration
Statement or any amendment or supplement
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<PAGE>
thereto, at the time it became effective or at the Closing
Date or Additional Closing Date, as the case may be, contained
an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading or that the
Prospectus or any amendment or supplement thereto, or the Rule
430A Prospectus or any amendment or supplement thereto, at the
Closing Date or Additional Closing Date, as the case may be
(unless the term "Prospectus" refers to a Prospectus which has
been provided to the Underwriter by the Company for use in
connection with the offering of the Securities which differs
from the Prospectus on file at the Commission at the Closing
Date or Additional Closing Date, as the case may be, in which
case at the time it is first provided to the Underwriter for
such use), included or includes an untrue statement of a
material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading (in each case other than the financial statements
and supporting schedules and notes thereto and other financial
or statistical information included therein, as to which no
opinion need be rendered).
In rendering such opinion, counsel for the Company may rely (A) as to matters
involving the application of laws other than the laws of the United States, the
laws of the State of Delaware and the laws of the State of New York, to the
extent counsel for the Company deems proper and to the extent specified in such
opinion, upon an opinion or opinions (in form and substance satisfactory to
counsel for the Underwriter) of other counsel, acceptable to counsel for the
Underwriter, familiar with the applicable laws, in which case the opinion of
counsel for the Company shall state that the opinion or opinions of such other
counsel are satisfactory in scope, form, and substance to counsel for the
Company and that reliance thereon by counsel for the Company and the Underwriter
is reasonable; (B) may rely as to matters of fact, to the extent they deem
proper, on certificates of Mr. Du, responsible officers of the Company or any
Subsidiary; and (C) may rely to the extent they deem proper, upon written
statements or certificates of officers of departments of various jurisdictions
having custody of documents respecting the corporate existence or good standing
of the Company or any Subsidiary, provided that copies of any such statements or
certificates shall be delivered to counsel for the Underwriter.
(c) On or prior to the Closing Date and any Additional Closing
Date, as the case may be, the Underwriter shall have been furnished
such information, documents, certificates, and opinions as it may
reasonably require for the purpose of enabling it to review the matters
referred to in Section
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<PAGE>
7(b), and in order to evidence the accuracy, completeness, or
satisfaction of any of the representations, warranties, covenants,
agreements, or conditions herein contained, or as you may reasonably
request.
(d) At the Closing Date and any Additional Closing Date, as
the case may be, you shall have received certificates of the chief
executive officer and of the chief financial officer of the Company,
the Chief Executive Officer and Chief Financial Officer of each
Subsidiary and Mr. Du and , dated the Closing Date or such Additional
Closing Date, as the case may be, to the effect that the condition set
forth in Section 7(a) has been satisfied, that as of the date of this
Agreement and as of the Closing Date or such Additional Closing Date,
as the case may be, the representations and warranties of the Company,
each Subsidiary and Mr. Du contained herein were and are accurate, and
that as of the Closing Date or such Additional Closing Date, as the
case may be, the obligations to be performed by the Company, each
Subsidiary and Mr. Du hereunder on or prior thereto have been fully
performed.
(e) At the time this Agreement is executed and at the Closing
Date and any Additional Closing Date, as the case may be, you shall
have received a comfort letter from Arthur Andersen & Co., certified
public accountants, dated the date of delivery, and addressed to the
Underwriter, and in form and substance satisfactory to you, with
reproduced copies or signed counterparts thereof for the Underwriter.
(f) There shall not have occurred any change, or any
development involving a prospective change in the condition, financial,
economic or political, that, in your judgment, is material and adverse
and that makes it, in your judgement, impracticable to market the
securities on the terms and in the manner contemplated in the
Prospectus and the Registration Statement.
(g) All proceedings taken in connection with the issuance,
sale, transfer, and delivery of the Firm Stock and the Additional Stock
shall be reasonably satisfactory in form and substance to you and to
counsel for the Underwriter, and the Underwriter shall have received
from such counsel for the Underwriter a favorable opinion, dated as of
the Closing Date and the Additional Closing Date, as the case may be,
with respect to such of the matters set forth under Section 7(b), and
with respect to such other related matters, as you may reasonably
request.
(h) The NASD, upon review of the terms of the public offering
of the Firm Stock and any Additional Stock, shall not have objected to
the Underwriter's participation in such offering.
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(i) Prior to or on the Closing Date, the Company shall have
entered into the Underwriter's Option Agreement.
(j) Prior to or on the Closing Date, the Acquisitions shall be
or have been consummated.
(k) Prior to or on the Closing Date, the Company shall have
provided to you copies of the agreements referred to in Section 2(s).
Any certificate or other document signed by any officer of the Company
or any Subsidiary and delivered to you or to counsel for the Underwriter shall
be deemed a representation and warranty by such officer individually and by the
Company or such Subsidiary hereunder to the Underwriter as to the statements
made therein. If any condition to the Underwriter's obligations hereunder to be
fulfilled prior to or at the Closing Date or any Additional Closing Date, as the
case may be, is not so fulfilled, you may terminate this Agreement or, if you so
elect, in writing waive any such conditions which have not been fulfilled or
extend the time for their fulfillment.
8. Indemnification and Contribution. (a) Subject to the conditions set
forth below, the Company agrees to indemnify and hold harmless the
Underwriter, its officers, directors, partners, employees, agents, and
counsel, and each person, if any, who controls the Underwriter within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against any and all loss, liability, claim, damage, and expense
whatsoever (which shall include, for all purposes of this Section 8,
but not be limited to, attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing, or defending against
any litigation, commenced or threatened, or any claim whatsoever and
any and all amounts paid in settlement of any claim or litigation) as
and when incurred arising out of, based upon, or in connection with (i)
any untrue statement or alleged untrue statement of a material fact
contained (A) in any Preliminary Prospectus, any Rule 430A Prospectus,
the Registration Statement, or the Prospectus (as from time to time
amended and supplemented), or any amendment or supplement thereto or
(B) in any application or other document or communication (in this
Section 8 collectively called an "application") executed behalf of the
Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify any of the
Securities under the "blue sky" or securities laws thereof or filed
with the Commission or any securities exchange; or any omission or
alleged omission to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, unless such
statement or omission was made in reliance upon and in conformity with
written information furnished to the Company as stated in Section 8(b)
with respect to any Underwriter by or on behalf
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of such Underwriter through the Underwriter expressly for inclusion in
any Preliminary Prospectus, any Rule 430A Prospectus, the Registration
Statement, or the Prospectus, or any amendment or supplement thereto,
or in any application, as the case may be, or (ii) any breach of any
representation, warranty, covenant, or agreement of the Company
contained in this Agreement. In no event shall the indemnification
agreement contained in this Section 8 inure to the benefit of the
Underwriter on account of any losses, claims, damages, liabilities or
actions arising from the sale by the Underwriter of the Firm Stock or
Additional Stock upon the public offering to any person if such losses,
claims, damages, liabilities or actions arise out of, or are based
upon, a statement or omission or alleged omission in a Preliminary
Prospectus and if, in respect to such statement, omission or alleged
omission, the Prospectus differs in a material respect from such
Preliminary Prospectus and a copy of the Prospectus was not sent or
given to such person at or prior to the confirmation of such sale to
such person as required by law. The foregoing agreement to indemnify
shall be in addition to any liability the Company may otherwise have,
including liabilities arising under this Agreement.
If any action is brought against the Underwriter or any of its
officers, directors, partners, employees, agents, or counsel, or any controlling
persons of the Underwriter (an "indemnified party") in respect of which
indemnity may be sought against the Company pursuant to the foregoing paragraph,
such indemnified party or parties shall promptly notify the Company in writing
of the institution of such action (but the failure so to notify shall not
relieve the Company from any liability it may have other than pursuant to this
Section 8(a), except to the extent it may have been prejudiced in any material
respect by such failure) and the Company shall promptly assume the defense of
such action, including the employment of counsel (satisfactory to such
indemnified party or parties) and payment of expenses. Such indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless the employment of such counsel shall have
been authorized in writing by the Company in connection with the defense of such
action or the Company shall not have promptly employed counsel satisfactory to
such indemnified party or parties to have charge of the defense of such action
or such indemnified party or parties shall have reasonably concluded that there
may be one or more legal defenses available to it or them or to other
indemnified parties which are different from or additional to those available to
the Company, in any of which events such fees and expenses shall be borne by the
Company and the Company shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties. Anything in this paragraph
to the contrary notwithstanding, the Company shall not be liable for any
settlement of any such claim or action effected without its written consent,
which shall not
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be unreasonably withheld. The Company shall not, without the prior written
consent of each indemnified party that is not released as described in this
sentence, settle or compromise any action, or permit a default or consent to the
entry of judgment in or otherwise seek to terminate any pending or threatened
action, in respect of which indemnity may be sought hereunder (whether or not
any indemnified party is a party thereto), unless such settlement, compromise,
consent, or termination includes an unconditional release of each indemnified
party from all liability in respect of such action. The Company agrees promptly
to notify the Underwriter of the commencement of any litigation or proceedings
against the Company or any of its officers or directors in connection with the
sale of the Firm Stock or the Additional Stock, any Preliminary Prospectus, any
Rule 430A Prospectus, the Registration Statement, or the Prospectus, or any
amendment or supplement thereto, or any application.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each director of the Company, each officer of the Company who
shall have signed the Registration Statement, and each other person, if
any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, to the same extent as the
foregoing indemnity from the Company to the Underwriter in Section
8(a), but only with respect to statements or omissions, if any, made in
any Preliminary Prospectus, any Rule 430A Prospectus, the Registration
Statement, or the Prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, or in any
application in reliance upon and in conformity with written information
furnished to the Company as stated in this Section 8(b) with respect to
any Underwriter by or on behalf of such Underwriter through the
Underwriter expressly for inclusion in any Preliminary Prospectus, any
Rule 430A Prospectus, the Registration Statement, or the Prospectus, or
any amendment or supplement thereto, or in any application, as the case
may be; provided, however, that the obligation of the Underwriter to
provide indemnity under the provisions of this Section 8(b) shall be
limited to the amount which represents the underwriting discounts
received by the Underwriter hereunder. For all purposes of this
Agreement, the amounts of the selling concession and reallowance and
the name of the Underwriter set forth in the Prospectus constitute the
only information furnished in writing by or on behalf of the
Underwriter expressly for inclusion in any Preliminary Prospectus, any
Rule 430A Prospectus, the Registration Statement, or the Prospectus (as
from time to time amended or supplemented), or any amendment or
supplement thereto, or in any application, as the case may be. If any
action shall be brought against the Company or any other person so
indemnified based on any Preliminary Prospectus, any Rule 430A
Prospectus, the Registration Statement, or the Prospectus, or any
amendment or supplement thereto, or in any application, and in respect
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of which indemnity may be sought against the Underwriter pursuant to
this Section 8(b), the Underwriter shall have the rights and duties
given to the Company, and the Company and each other person so
indemnified shall have the rights and duties given to the indemnified
parties, by the provisions of Section 8(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section
8(a) or 8(b) (subject to the limitations thereof) but it is found in a
final judicial determination, not subject to further appeal, that such
indemnification may not be enforced in such case, even though this
Agreement expressly provides for indemnification in such case or (ii)
any indemnified or indemnifying party seeks contribution under the Act,
the Exchange Act, or otherwise, then the Company (including for this
purpose any contribution made by or on behalf of any director of the
Company, any officer of the Company who signed the Registration
Statement, and any controlling person of the Company), as one entity,
and the Underwriter (including for this purpose any contribution by or
on behalf of an indemnified party), as a second entity, shall
contribute to the losses, liabilities, claims, damages, and expenses
whatsoever to which any of them may be subject, so that the Underwriter
is responsible for the proportion thereof equal to the percentage which
the underwriting discount per share of Firm Stock set forth on the
cover page of the Prospectus represents of the initial public offering
price per share set forth on the cover page of the Prospectus and the
Company is responsible for the remaining portion; provided, however,
that if applicable law does not permit such allocation, then other
relevant equitable considerations such as the relative fault of the
Company and the Underwriter in connection with the facts which resulted
in such losses, liabilities, claims, damages, and expenses shall also
be considered. The relative fault, in the case of an untrue statement,
alleged untrue statement, omission, or alleged omission, shall be
determined by, among other things, whether such statement, alleged
statement, omission, or alleged omission relates to information
supplied by the Company or by the Underwriter, and the parties'
relative intent, knowledge, access to information, and opportunity to
correct or prevent such statement, alleged statement, omission, or
alleged omission. The Company and the Underwriter agree that it would
be unjust and inequitable if the respective obligations of the Company
and the Underwriter for contribution were determined by pro rata or per
capita allocation of the aggregate losses, liabilities, claims,
damages, and expenses (even if the Underwriter and the other
indemnified parties were treated as one entity for such purpose) or by
any other method of allocation that does not reflect the equitable
considerations referred to in this Section 8(c). No person guilty of a
fraudulent
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misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of
such fraudulent misrepresentation. For purposes of this Section 8(c),
each person, if any, who controls the Underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act and each
officer, director, partner, employee, agent, and counsel of the
Underwriter shall have the same rights to contribution as the
Underwriter and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, each officer of the Company who shall have signed the Registration
Statement, and each director of the Company shall have the same rights
to contribution as the Company, subject in each case to the provisions
of this Section 8(c). In no case shall the Underwriter be liable or
responsible for any amount in excess of the Underwriting discount
applicable to the Firm Stock and Additional Stock purchased by such
Underwriter hereunder. Anything in this Section 8(c) to the contrary
notwithstanding, no party shall be liable for contribution with respect
to the settlement of any claim or action effected without its written
consent. This Section 8(c) is intended to supersede any right to
contribution under the Act, the Exchange Act, or otherwise.
9. [Reserved]
10. Representations and Agreements to Survive Delivery. All
representations, warranties, covenants, and agreements contained in this
Agreement shall be deemed to be representations, warranties, covenants, and
agreements at the Closing Date and any Additional Closing Date, and such
representations, warranties, covenants, and agreements of the Underwriter, the
Company, each Subsidiary and Mr. Du, including the indemnity and contribution
agreements contained in Section 8, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any indemnified person, or by or on behalf of the Company or any person or
entity which is entitled to be indemnified under Section 8(b), and shall survive
termination of this Agreement or the delivery of the Firm Stock and the
Additional Stock to the Underwriter. In addition, the provisions of Sections 6,
8, 10, 11, and 13 shall survive termination of this Agreement, whether such
termination occurs before or after the Closing Date or any Additional Closing
Date.
11. Effective Date of This Agreement and Termination Thereof.
(a) This Agreement shall become effective at 9:30 A.M., New
York City Time, on the first full business day following the day on
which the Registration Statement becomes effective or at the time of
the initial public offering by the Underwriter of the Firm Stock,
whichever is
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earlier. The time of the initial public offering shall mean the time,
after the Registration Statement becomes effective, of the release by
you for publication of the first newspaper advertisement which is
subsequently published relating to the Firm Stock or the time, after
the Registration Statement becomes effective, when the Firm Stock are
first released by you for offering by the Underwriter or dealers by
letter or telegram, whichever shall first occur. You or the Company may
prevent this Agreement from becoming effective without liability of any
party to any other party, except as noted below in this Section 11, by
giving the notice indicated in Section 11(c) before the time this
Agreement becomes effective.
(b) In addition to the right to terminate this Agreement
pursuant to Section 7 hereof, you shall have the right to terminate
this Agreement at any time prior to the Closing Date or any Additional
Closing Date, as the case may be, by giving notice to the Company if
any domestic or international event, act, or occurrence has materially
disrupted, or in your opinion will in the immediate future materially
disrupt, the securities markets; or if there shall have been a general
suspension of, or a general limitation on prices for, trading in
securities on the New York Stock Exchange, NASDAQ, the American Stock
Exchange or in the over-the-counter market; or if there shall have been
an outbreak of major hostilities or other national or international
calamity; or if a banking moratorium has been declared by a state or
federal authority; or if a moratorium in foreign exchange trading by
major international banks or persons has been declared; or if there
shall have been a material interruption in the mail service or other
means of communication within the United States; or if the Company
shall have sustained a material or substantial loss by fire, flood,
accident, hurricane, earthquake, theft, sabotage, or other calamity or
malicious act which, whether or not such loss shall have been insured,
will, in your opinion, make it inadvisable to proceed with the
offering, sale, or delivery of the Firm Stock or the Additional Stock,
as the case may be; or if there shall have been such change in the
market for securities in general or in political, financial, or
economic conditions as in your judgment makes it inadvisable to proceed
with the offering, sale, and delivery of the Firm Stock or the
Additional Stock, as the case may be, on the terms contemplated by the
Prospectus.
(c) If you elect to prevent this Agreement from becoming
effective, as provided in this Section 11, or to terminate this
Agreement pursuant to Section 7, or this Section 11, you shall notify
the Company promptly by telephone, telex, facsimile or telegram,
confirmed by letter. If the Company elects to prevent this Agreement
from becoming effective, as provided in this Section 11, the
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Company shall notify you promptly by telephone, telex, facsimile, or
telegram, confirmed by letter.
(d) Anything in this Agreement to the contrary notwithstanding
other than Section 11(e), if this Agreement shall not become effective
by reason of an election pursuant to this Section 11 or if this
Agreement shall terminate or shall otherwise not be carried out within
the time specified herein by reason of any failure on the part of the
Company to perform any covenant or agreement or satisfy any condition
of this Agreement by it to be performed or satisfied, the sole
liability of the Company to the Underwriter, in addition to the
obligations the Company assumed pursuant to Section 6, will be to (i)
reimburse the Underwriter for such out-of-pocket expenses (including
the fees and disbursements of its counsel) as shall have been incurred
by them in connection with this Agreement or the proposed offer, sale,
and delivery of the Firm Stock and any Additional Stock, and the
Company agrees to pay promptly upon demand the full amount thereof to
you, up to an aggregate of $125,000, less amounts previously paid to
you in reimbursement of such expenses, and (ii) if the Company has
elected to prevent this Agreement from becoming effective or if you
terminate this Agreement pursuant to Section 7, for a period of one
year subsequent to such termination, if the Company or any Subsidiary
is involved in any public offering, private placement, merger,
acquisition or sale of securities, joint venture or other similar
transaction (any of the foregoing, a "Subsequent Transaction"), the
Company shall pay to the Underwriter an investment banking fee in
connection therewith equal to 5% of any consideration received by the
Company or any of its subsidiaries, affiliates or shareholders;
provided, however, that the foregoing sentence shall not apply (i) to
any Subsequent Transaction consummated between the Company and any
company or entity affiliated with the Company as of the date hereof or
(ii) in the event that the Underwriter has not been able to bring the
deal to market within three months after the Preliminary Prospectus is
ready for circulation, provided there have been no material adverse
changes to the Company or its business.
(e) Notwithstanding any election hereunder or any termination
of this Agreement, and whether or not this Agreement is otherwise
carried out, the provisions of Sections 6, 8, 10, 13 and 15 shall not
be in any way affected by such election or termination or failure to
carry out the terms of this Agreement or any part hereof.
12. Notices. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to the
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
by letter, to Barington Capital Group, L.P., 888 Seventh Avenue, New York, New
York
44
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10019, Attention: Marc Cooper; or if sent to the Company, shall be mailed,
delivered, or telexed or telegraphed and confirmed by letter, to the Company,
One World Trade Center, Suite 4629, New York, NY 10048, Attention: Qingsong Du.
All notices hereunder shall be effective upon receipt by the party to which it
is addressed.
13. Parties. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Underwriter, the Company, each Subsidiary, Mr. Du and
the persons and entities referred to in Section 8 who are entitled to
indemnification or contribution, and their respective successors, legal
representatives, and assigns (which shall not include any buyer, as such, of the
Firm Stock or any Additional Stock), and no other person shall have or be
construed to have any legal or equitable right, remedy, or claim under or in
respect of or by virtue of this Agreement or any provision herein contained.
14. Construction. This Agreement shall be construed in accordance with
the laws of the State of New York, without giving effect to conflict of laws.
TIME IS OF THE ESSENCE IN THIS AGREEMENT.
15. Consent to Jurisdiction. The Company, each Subsidiary and Mr. Du,
hereby irrevocably consent to the jurisdiction of the courts of the State of New
York and of any federal court located in such State in connection with any
action or proceeding arising out of or relating to this Agreement, any document
or instrument delivered pursuant to, in connection with or simultaneously with
this Agreement, or a breach of this Agreement or any such document or
instrument, and irrevocably waive, to the fullest extent permitted by law, any
objection which it or they may now or hereafter have to the laying of the venue
of any such suit, action or proceeding and any claim that any such proceeding
brought in such a court has been brought in an inconvenient forum, and
irrevocably submits to the non-exclusive jurisdiction of any such court in any
such suit, action or proceeding. The Company, each Subsidiary and Mr. Du agree
that a final judgment in any such suit, action or proceeding shall be conclusive
and may be enforced in other jurisdictions by suit on the judgment or in any
other manner provided by law in accordance with applicable law. The Company,
each Subsidiary and Mr. Du hereby irrevocably waive any right to invoke
jurisdiction it may have to any court by virtue of the laws of China or the BVI.
In any such action or proceeding, the Company waives personal service or any
summons, complaint or other process and agrees that service thereof may be made
in accordance with Section 12. Within 30 days after such service, or such other
time as may be mutually agreed upon in writing by the attorneys for the parties
to such action or proceeding, the Company shall appear or answer such summons,
complaint or other process.
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The Company has appointed ___________ (the "Process Agent") for a
period of ______ years from the date hereof, as its agent to receive on its
behalf service of copies of the summons and complaints and any other process
which may be served in any suit, action or proceeding arising out of or relating
to this Agreement or the transactions contemplated hereby brought in such New
York State or federal court sitting in The City of New York. Such service may be
made by delivering a copy of such process to the Company in care of the Process
Agent as the address specified above for the Process Agent and obtaining a
receipt therefor, and the Company hereby irrevocably authorizes and directs such
Process Agent to accept such service on its behalf. The Company represents and
warrants that the Process Agent has agreed to act as said agent for service of
process, and agrees that service of process in such manner upon the Process
Agent shall be deemed in every respect effective service of process upon the
Company in any such suit, action or proceeding.
The Company, in respect to itself and its properties and revenues,
expressly and irrevocably waives, to the fullest extent permitted by law, any
right of immunity on the grounds of sovereignty (including any immunity from the
jurisdiction of any court or from service of process or from any execution of
judgment or from attachment prior to judgment or in aid of execution or
otherwise) or claim thereto which may now or hereafter exist, and agrees not to
assert any such right or claim in any such action or proceeding, whether in the
United States or otherwise.
If for the purposes of obtaining judgment in any court it is necessary
to convert a sum due hereunder into any currency other than United States
dollars, the parties hereto agree, to the fullest extent that they may
effectively do so, that the rate of exchange used shall be the rate at which in
accordance with normal banking procedures [ ] could purchase United States
dollars with such other currency in The City of New York on the business day
preceding that on which final judgment is given. The obligation of the Company
in respect of any sum due from it to any Underwriter shall, notwithstanding any
judgment in a currency other than United States dollars, not be discharged until
the first business day, following receipt by such Underwriter of any sum
adjudged to be so due in such other currency, on which (and only to the extent
that) such Underwriter may in accordance with normal banking procedures purchase
United States dollars with such other currency; if the United States dollars to
purchased are less than the sum originally due to such Underwriter hereunder,
the Company agrees, as a separate obligation and notwithstanding any such
judgment, to indemnify such Underwriter against such loss. If the United States
dollars so purchased are greater than the sum originally due to such Underwriter
hereunder, such Underwriter agrees to pay to the Company an amount equal to the
excess of the dollars so purchased over the sum originally due to such
Underwriter hereunder.
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47
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If the foregoing correctly sets forth the understanding between you and
the Company, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement between us.
Very truly yours,
ASIA ELECTRONICS HOLDING CO., INC.
By:____________________________________
Name: Qingsong Du
Title: Chairman and Chief
Executive Officer
XIANYANG DAMING ELECTRONICS CO. LTD.
By:____________________________________
Name:
Title
XIANYANG YONGXIN ELECTRONICS CO. LTD.
By:____________________________________
Name:
Title:
YANTAI DAEWOO ELECTRONICS
COMPONENTS CO., LTD.
By:____________________________________
Name:
Title:
DNON TECH SPECIAL ELECTRONICS
TECHNICAL CO., LTD.
By:____________________________________
Name:
Title:
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QINGSONG DU
---------------------------------------
Accepted as of the date first above written.
New York, New York
BARINGTON CAPITAL GROUP, L.P.
By: LNA CAPITAL CORP.,
General Partner
By:_____________________________
Marc Cooper,
Executive Vice President
49
Contract
for the Joint Venture of
Xianyang Yongxin Electronics Co., Ltd.
May 8, 1996
Xianyang, Shaanxi, China
Total Pages: 18
<PAGE>
Contents
Chapter 1 General Provisions
Chapter 2 Parties to the Joint Venture
Chapter 3 Establishment of the Joint Venture Company
Chapter 4 Purpose, Scope and Scale of Production and Business
Chapter 5 Total Amount of Investment and Registered Capital
Chapter 6 Responsibilities of Each Party to the Joint Venture
Chapter 7 Selling of Products
Chapter 8 The Board of Directors
Chapter 9 Business Management Office
Chapter 10 Equipment
Chapter 11 Labor management
Chapter 12 Taxes, Finance and Audit
Chapter 13 Duration of the Joint Venture
Chapter 14 The Disposal of Assets after Expiration of the
Duration
Chapter 15 Insurance
Chapter 16 The Amendment, Alteration and Discharge of the
Contract
Chapter 17 Liabilities for Breach of Contract
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Chapter 18 Force Majeure
Chapter 19 Applicable Law
Chapter 20 Settlement of Disputes
Chapter 21 Language
Chapter 22 Effectiveness of the Contract and Miscellany
2
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Chapter 1 General Provisions
In accordance with "The Law of People's Republic of China on Joint Ventures
Using Chinese and Foreign Investment" and other relevant Chinese laws and
regulations, Xianyang Pianzhuan Development Co., Ltd. and Asia Electronics
Holding Co., Ltd. adhering to the principle of equality and mutual benefit and
through friendly consultations, agree to jointly invest to set up a joint
venture enterprise in Xianyang City, Shaanxi Province, the People's Republic of
China. The contract is worked out thereunder.
Chapter 2 Parties to the Joint Venture
Article One
Parties of this Contract are as follows:
Xianyang Pianzhuan Development Co., Ltd. (herein after referred to as Party A)
registered with Xianyang in China and its legal address is at Xianyang City,
China.
Legal Representative: Name: Du, Qing Song
Position: Chairman & CEO
Nationality: P.R. China
Asia Electronics Holding Co., Ltd. (herein after referred to as Party B)
registered in British Virgin Island. Its legal address is at One World Centre,
Suite 4629, New York, NY 10048, USA.
Legal Representative: Name: To, Shing Hoi
Position: President
Nationality: Hong Kong
3
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Chapter 3 Establishment of the Joint Venture Company
Article Two
In accordance with "the Law of the People's Republic of China on Joint Ventures
Using Chinese and Foreign Investment" and other relevant Chinese Laws and
regulations, both Parties to the joint venture agree to joint venture limit
liability company. (herein after referred to as the Joint Venture Company.)
Article Three
The name of the joint venture company is Xianyang Yongxin Electronics Co., Ltd.
The legal address of the joint venture company is No. 70 West Weiyang Road.,
Xianyang, Shaanxi, China.
Article Four
All activities of the joint venture company shall be governed by the laws,
decrees and pertinent rules and regulations of the People's Republic of China.
Article Five
The organization of the joint venture company is a limited liability company.
Each party to the joint venture company is liable to the joint venture company
within the limit of the capital subscribed by it. The profits, risks and losses
of the joint venture company shall be shared by the parties in proportion to
their contribution to the registered capital.
Chapter 4 Purpose, Scope and Scale of Production and Business
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Article Six
The purpose of the parties to the joint venture is in conformity with wish of
enhancing the economic cooperation and technical exchange to improve the product
quality, develop new products and gain competitive position in the world market
in quality and price by adopting advanced and appropriate managing methods, and
ensure satisfactory economic benefits for each investor.
Article Seven
The productive and business scope of the joint venture company is to produce
deflection yoke products; provide maintenance service after the sales of the
products; and study and develop new electronic products.
Article Eight
The production scale of the joint venture company put into operation is 730,000
25" deflection yokes per year.
Chapter 5 Total Amount of Investment and Registered Capital
Article Nine
The total amount of investment of the joint venture company is US$4,200,000.
Article Ten
The contribution to the joint venture by the Parties is US$2,100,000, which will
be the registered capital of the joint venture company, of which each party
shall respectively contribute:
Party A: US$420,000, accounting for twenty percent;
Party B: US$l,680,000,
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accounting for eighty percent.
Article Eleven
Party A and Party B will contribute their investment to the joint venture
company according to their share proportion.
Both Party A and Party B will contribute no less than 25% of their respective
interest cash to the joint venture company for the initialization. The remaining
part should be contributed within half an year since the registration of the
joint venture company as agreed by both Parties.
After investment are paid to the joint venture, a State registered accountant
shall be invited to issue a certificate of verification, according to which the
joint venture will issue the Investment Certificate.
The Investment Certificate is the document certifying the completion of the
contribution of each respective Party, which should not be regarded as the
stocks or other securities with value or to be transferred to others, and should
be considered invalid when used for any collateral.
Article Twelve
1. In case either Party to the joint venture assigns his investment subscribed
to a third party, consent shall be obtained from the other party to the joint
venture in advance, approval from the examination and approval authority is
required.
2. When one party to the joint venture assigns his investment, the other party
has preemptive right on it.
3. Subject to any transfer of interest, the acquisition party should be the
seccessor of the party which assigned his investment.
4. Any transfer deferred from any above stipulations should be considered
invalid.
5. Both Parties are prohibited from using all or part of the contribution as
collateral to a third party.
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6. Parties concerned to the Board of Directors are allowed to accept increasing
the registered capital subject to approval from the Board of Directors of the
joint venture company.
7. Parties concerned to the Board of Directors shall not transfer to a third
party the right to accept increasing the capital otherwise it will be considered
invalid.
Chapter 6 Responsibilities of Each Party to the Joint Venture
Article Thirteen
Party A and Party B shall be respectively responsible for the following matters:
Responsibilities of Party A:
1. Handling of applications as per agreed by both Parties for approval,
registration, business license and other matters concerning the establishment of
the joint venture company from relevant departments in charge in China;
2. Providing cash, machinery and equipment and premises in accordance with the
stipulations in article 9, 10 and 11;
3. Assisting the joint-venture company in purchasing or leasing equipment,
materials, raw materials, articles for office use, means of transportation and
communication facilities, etc.;
4. Assisting the joint venture company in technical and commercial discussion
for importing equipment by providing with necessary technical data and premises,
and in settling the domestic transportation and custom formalities;
5. Marketing of the product of the joint venture company;
6. Assisting the joint venture company in contacting and settling the
fundamental facilities such as water, electricity, transportation, etc.;
7
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7. Assisting the joint venture in recruiting Chinese management, personnel,
technical personnel, workers, and other personnel needed;
8. Assisting the company in obtaining the favorable policies.
9. Assisting the company for approval from the State to remit foreign exchanges
from China to abroad.
10. Handling other matters entrusted by the joint venture company.
Responsibilities of Party B:
1. Providing cash with the stipulations in article 9, 10 and 11;
2. Assisting the joint venture company in selecting and purchasing equipment,
parts, transportation means, office facilities and materials outside China;
3. Assisting in selling the deflection yoke products and other products of the
joint venture company to foreign market and providing with information form
foreign market.
4. Handling other matters entrusted by the joint venture company.
Chapter 7 Selling of products
Article Fourteen
The product of the joint venture company will be sold both on domestic market
and overseas markets, the export part should account for 60% at least.
Article Fifteen
The price of the products to be sold is to be agreed by Party A and Party B,
which should accord with the market price. The joint venture has the right to
choose proper channels for selling at better prices, Party B has preemptive
right on agent the selling at the same price.
Article Sixteen
The quality of the exporting product should accord to the samples which are made
up to the standard and samples provided by Party B
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and approved by Party B to be the standard sample.
Article Seventeen
In order to provide maintenance service to the products sold both in China or
abroad, the joint venture company may set up sales branches for maintenance
service both in China or abroad subject to the approval of relative Chinese
department.
Article Eighteen
The trade mark of the joint venture's products is decided by the board of
directors.
Chapter 8 The Board of Directors
Article Nineteen
The date of registration of the joint venture company shall be the date of the
establishment of the board of the joint venture company.
Article Twenty
The Board of Directors are composed of 5 directors, of which 1 shall be
appointed by Party A and 4 shall be appointed by Party B. The chairman of the
Board shall be appointed by Party B, and its vice-chairman by Party A. The term
of office for the directors, chairman and vice-chairman is 4 years. Their term
of office may be renewed if continuously appointed by the relevant Party. The
Board of Directors should be composed according to the contribution proportion
subject to any change.
Article Twenty-one
The highest authority of the joint venture company shall be its Board of
Directors. It shall decide all major issues concerning the joint venture
company. Unanimous approval shall be required before any decisions are made
concerning major issues. As for other matters approval by majority or a simple
majority shall be required.
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Article Twenty-two
The chairman of the board is the legal representative of the joint venture
company. Should the chairman be unable to exercise his responsibilities for some
reasons, he shall authorize the vice-chairman or any other director to represent
the joint venture company temporarily.
Article Twenty-three
The board of directors shall convene at least one meeting every year. The
meeting shall be called and presided over by the chairman of the board. The
chairman may convene an interim meeting based on a proposal made by more than
one-third of the total number of directors. Minutes of the meetings written in
Chinese shall be placed on file.
Chapter 9 Business Management Office
Article Twenty-four
The joint venture company shall establish a management office which shall be
responsible for its daily management. The management office shall have a general
manager, appointed by Party A ; The general manager, whose term of office is 4
years, shall be invited by the board of directors. The general accountant and
engineer will be invited by the general manager.
Article Twenty-five
The responsibility of the general manager is to carry out the decisions of the
board meeting and to organize and conduct the daily management of the joint
venture company. The deputy general managers shall assist the general manager in
his work. Several department managers may be appointed by the management office,
who shall be responsible for the works in various department respectively,
handle the matters handed over by the general manager, and shall be responsible
to them.
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Article Twenty-six
In case of graft or serious dereliction of duty on the part of the general
manager and deputy general managers, the board of directors shall have the power
to dismiss them at any time.
Chapter 10 Purchasing of Equipment
Article Twenty-seven
In its purchase of required raw materials, fuel, parts, means of transportation
and articles for office use, etc., the joint venture company shall give first
priority to purchase in China if quality and price are suitable.
Article Twenty-eight
In case of the joint venture company entrusts Party B to purchase equipment in
overseas markets, the price should not exceed the market price, otherwise the
Chairman of the Board has the right to choose other purchasing channels.
Chapter 11 Labor Management
Article Twenty-nine
Labor contract covering the recruitment, employment, dismissal and resignation,
wages, labor insurance, welfare, rewards of the joint venture company shall be
drawn up between the joint venture company as a whole or individual employees
accordance with the "Regulations of the People's Republic of China on Labor
Management in Joint Ventures Using Chinese and Foreign Investment" and its
implementation rules.
The labor contracts shall, after being signed, be filed with the local labor
management department.
Article Thirty
11
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The appointment of high ranking administrative personnel recommended by all
parties, their salaries, social insurance, welfare and the standard of traveling
expenses, etc. shall be decided by the meeting of the board of directors.
Article Thirty-one
The salaries, social insurance, welfare standard shall be decided by the Board
of Directors according to the relevant laws of the People's Republic of China
and subject to the economic situation of the joint venture company.
Chapter 12 Taxes, Finance and Audit
Article Thirty-two
The joint venture company shall pay taxes in accordance with the stipulations of
Chinese laws and other relevant regulations.
Article Thirty-three
Staff members and workers of the joint venture company shall pay individual
income tax according to the "Individual Income Tax Law of the People's Republic
of China"
Article Thirty-four
Allocations for reserve funds, expansion funds of the joint venture company and
welfare funds and bonuses for staff and workers shall be set aside in accordance
with the stipulations in "The Law of People's Republic of China on Joint
Ventures Using Chinese and Foreign Investment". The annual proportion of
allocations shall be decided by the board of directors according to the business
situations of the joint venture company.
Article Thirty-five
The fiscal year of the joint venture company shall be from January 1 to December
31. All vouchers, receipts, statistic statements and reports, account books
shall be written in Chinese. (English language will be
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used concurrently for main documents.)
Article Thirty-six
Financial checking and examination of the joint venture company shall be
conducted by an auditor registered in China and reports shall be submitted to
the board of directors and the general manager.
In case Party C considers it necessary to employ a foreign auditor registered in
another country to undertake annual financial checking and examination, Party A
and Party B shall give his consent. All the expenses thereof shall be borne by
Party C.
Article Thirty-seven
In the first three months of each fiscal year, the manager shall prepare
previous year's balance sheet, profit and loss statement and proposal regarding
the proposal of profits, and submit them to the board of directors for
examination and approval.
Chapter 13 Duration of the Joint Venture
Article Thirty-eight
The duration of the joint venture company is 25 years. The establishment of the
joint venture company shall start from the date on which the business license of
the joint venture company is issued.
An application for the extension of the duration, proposed by one party and
unanimously approved by the board of directors, shall be submitted to the
Ministry of Foreign trade and Economic Cooperation of the People's Republic of
China ( or the examination and approval authority entrusted by it) six months
prior to the expiry date of the joint venture.
Chapter 14 The Disposal of Assets After Expiration of the Duration
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Article Thirty-nine
Upon the expiration of the duration termination before the date of expiration of
the joint venture, liquidation shall be carried out in accordance with the
proportion of investment contributed by Party A and Party B.
Chapter 15 Insurance
Article Forty
Insurance policies of the joint venture company on various kinds of risks shall
be under written with the insurance company of China. Types, value and duration
of insurance shall be decided by the board of directors in accordance with the
stipulations of the People's Republic of China.
Chapter 16 The Amendment, Alteration and Discharge of the Contract
Article Forty-one
The amendment of the contract or other appendixes shall come into force only
after the written agreement is signed by Party A and Party B and approved by the
original examination and approval authority.
Article Forty-two
In case of inability to fulfill contract or to continue operation due to heavy
losses in successive years as a result of force majeure, the duration of the
joint venture company and the contract shall be terminated before the time of
expiration after being unanimously agreed upon by the board of directors and
approved by the original examination and approval authority.
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Article Forty-three
Should the joint venture company be unable to continue its operations or achieve
the business purpose stipulated in the contract due to the fact that one of the
contracting parties fails to fulfill the obligations prescribed by the contract
and articles of association, that party shall be deemed as unilaterally
terminating the contract. The other party shall have the right to terminate the
contract in accordance with the provisions of the contract after being approved
by the original examination and approval authority as well as to claim damages.
In case Party A and Party B agree to continue the operation, the party who fails
to fulfill the obligations shall cover the losses thus caused to the joint
venture company.
Chapter 17 Liabilities for Breach of Contract
Article Forty-four
Should either Party A or Party B fail to pay on schedule the contributions in
accordance with the provisions defined in Chapter 5 of this contract, the
breaching party shall pay to the other party 2% of the contribution starting
from the first month after exceeding the time limit. Should the breaching party
fail to pay after 3 months, 6% of the contribution shall be paid to the other
party, who shall have the right to terminate the contract and to claim damages
to the breaching party in accordance with the stipulations in Article
Forty-seven of the contract.
Article Forty-five
Should all or part of the contract and its appendixes be unable to be fulfilled
owing to the fault of one party, the breaching party shall bear the
responsibilities thus caused. Should it be the fault of both parties, they shall
bear their respective responsibilities according to actual situations.
Article Forty-six
In order to guarantee the performance of the contract and its
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appendixes, both Party A and Party B shall provide each other the bank
guarantees for the performance of the contract.
Chapter 18 Force Majeure
Article Forty-seven
Should either of the parties to the contract be prevented from executing the
contract by force majeure, such as earthquake, typhoon, flood, fire and war and
other unforeseen events, and their happening and consequences are unpreventable
and unavoidable, the prevented party shall notify the other party by cable
without any delay, and within 15 days thereafter provide the detailed
information of the events and a valid document for evidence issued by the
relevant public notary organization for explaining the reason of its inability
to execute or delay the execution of all or part of the contract. Both parties
shall, through consultations, decide whether to terminate the contract or
whether to delay the execution of the contract according to the effects of the
events on the performance of the contract.
Chapter 19 Applicable Law
Article Forty-eight
The formation of this contract, its validity, interpretation, execution and
settlement of the disputes shall be governed by the related laws of the People's
Republic of China.
Chapter 20 Settlement of Disputes
Article Forty-nine
Any disputes arising from the execution of, or in connection with the
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contract shall be settled amicably through negotiation. In case no settlement
can be reached through negotiation, the case shall be submitted to the China
International Economic and Trade Arbitration Commission, Beijing, China, for
arbitration in accordance with its rules of procedure. The arbitral award is
final and binding on both parties.
Article Fifty
During the arbitration, the contract shall be executed continuously by both
parties except for matters in dispute.
Chapter 21 Language
Article Fifty-one
The contract shall be written in Chinese version and in English version. Both
languages are equally authentic. In the event of any discrepancy between the two
afore-mentioned versions, the Chinese version shall prevail.
Chapter 22 Effectiveness of the Contract and Miscellany
Article Fifty-two
The appendixes drawn up in accordance with the principles of this contract are
integral part of this contract, including the Articles of Association.
Article Fifty-three
The contract and its appendixes shall be approved by the legal person
representative of both parties and come into force beginning from the date of
approval by the Ministry of Foreign Trade and Economic Cooperation of the
People's Republic of China ( or its entrusted examination and approval
authority).
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Article Fifty-four
Should notices in connection with any party's rights and obligations be sent by
either Party A or Party B by telegram or telex, etc., the written letter notices
shall be also required afterwards. The legal addresses of Party A and Party B
listed in this contract shall be the posting addresses.
Article Fifty-five
The contract is signed in Xianyang, Shaanxi, China by the authorized
representatives of the two parties on May. 8, 1996.
Party A: Xianyang Pianzhuan Development Co., Ltd.
(Signature): /s/
Party B: Asia Electronics Holding Co. Inc.
(Signature): /s/
18
Contract
for the Joint Venture of
Xianyang Daming Electronics Co., Ltd.
May 8, 1996
Xianyang, Shaanxi, China
-----------------------
Total Pages: 17
<PAGE>
Contents
Chapter 1 General Provisions
Chapter 2 Parties to the Joint Venture
Chapter 3 Establishment of the Joint Venture Company
Chapter 4 Purpose, Scope and Scale of Production and Business
Chapter 5 Total Amount of Investment and
Registered Capital
Chapter 6 Responsibilities of Each Party to the Joint Venture
Chapter 7 Selling of Products
Chapter 8 The Board of Directors
Chapter 9 Business Management Office
Chapter 10 Equipment
Chapter 11 Labor management
Chapter 12 Taxes, Finance and Audit
Chapter 13 Duration of the Joint Venture
Chapter 14 The Disposal of Assets after Expiration of the
Duration
Chapter 15 Insurance
Chapter 16 The Amendment, Alteration and Discharge of the
Contract
Chapter 17 Liabilities for Breach of Contract
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Chapter 18 Force Majeure
Chapter 19 Applicable Law
Chapter 20 Settlement of Disputes
Chapter 21 Language
Chapter 22 Effectiveness of the Contract and Miscellany
2
<PAGE>
Chapter 1 General Provisions
In accordance with "The Law of People's Republic of China on Joint Ventures
Using Chinese and Foreign Investment" and other relevant Chinese laws and
regulations, Xianyang Pianzhuan Development Co., Ltd. and Asia Electronics
Holding Co., Ltd. adhering to the principle of equality and mutual benefit and
through friendly consultations, agree to jointly invest to set up a joint
venture enterprise in Xianyang City, Shaanxi Province, the People's Republic of
China. The contract is worked out thereunder.
Chapter 2 Parties to the Joint Venture
Article one
Parties of this Contract are as follows:
Xianyang Pianzhuan Development Co., Ltd. (herein after referred to as Party A)
registered with Xianyang in China and its legal address is at Xianyang City,
China.
Legal Representative: Name: Du, Qing Song
Position: Chairman & CEO
Nationality: P.R. China
Asia Electronics Holding Co., Ltd. (herein after referred to as Party B)
registered in British Virgin Island. Its legal address is at One World Centre,
Suite 4629, New York, NY 10048, USA.
Legal Representative: Name: To, Shing Hoi
Position: President
Nationality: Hong Kong
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Chapter 3 Establishment of the Joint Venture Company
Article Two
In accordance with "the Law of the People's Republic of China on Joint Ventures
Using Chinese and Foreign Investment" and other relevant Chinese Laws and
regulations, both Parties to the joint venture agree to joint venture limit
liability company. (herein after referred to as the Joint Venture Company.)
Article Three
The name of the joint venture company is Xianyang Daming Electronics Co., Ltd.
The legal address of the joint venture company is No. 70 West Weiyang Road.,
Xianyang, Shaanxi, China.
Article Four
All activities of the joint venture company shall be governed by the laws,
decrees and pertinent rules and regulations of the People's Republic of China.
Article Five
The organization of the joint venture company is a limited liability company.
Each party to the joint venture company is liable to the joint venture company
within the limit of the capital subscribed by it. The profits, risks and losses
of the joint venture company shall be shared by the parties in proportion to
their contribution to the registered capital.
Chapter 4 Purpose, Scope and Scale of Production and Business
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Article Six
The purpose of the parties to the joint venture is in conformity with wish of
enhancing the economic cooperation and technical exchange to improve the product
quality, develop new products and gain competitive position in the world market
in quality and price by adopting advanced and appropriate managing methods, and
ensure satisfactory economic benefits for each investor.
Article Seven
The productive and business scope of the joint venture company is to produce
deflection yoke products; provide maintenance service after the sales of the
products; and study and develop new electronic products.
Article Eight
The production scale of the joint venture company put into operation is one
million deflection yokes per year.
Chapter 5 Total Amount of Investment and Registered Capital
Article Nine
The total amount of investment of the joint venture company is US$2,560,000. The
contribution to the joint venture by the Parties is US$ 1,800,000, which will be
the registered capital of the joint venture company, of which each party shall
respectively contribute:
Party A: US$360,000,
accounting for twenty percent;
Party B: US$l,440,000,
accounting for eighty percent.
Article Ten
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Both Party A and Party B will contribute the following as their investment:
Party A: Ground and factory building.
Party B: Imported equipment and moulds.
Article Eleven
Party A and Party B will contribute their investment to the joint venture
company according to their share proportion.
Article Twelve
In case either Party to the joint venture intends to sell all or part of his
investment subscribed to a third party, consent shall be obtained from the other
party to the joint venture in advance, approval from the examination and
approval authority is required.
When one party to the joint venture assigns his investment, the other party has
preemptive right on it.
Chapter 6 Responsibilities of Each Party to the Joint Venture
Article Thirteen
Party A and Party B shall be respectively responsible for the following matters:
Responsibilities of Party A:
1. Handling of applications as per agreed by both Parties for approval,
registration, business license and other matters concerning the establishment of
the joint venture company from relevant departments in charge in China;
2. Providing cash, machinery and equipment and premises in accordance with the
stipulations in article 9, 10 and 11;
3. Assisting the joint-venture company in purchasing or leasing
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equipment, materials, raw materials, articles for office use, means of
transportation and communication facilities, etc.;
4. Assisting the joint venture company in technical and commercial discussion
for importing equipment by providing with necessary technical datas and
premises, and in settling the domestic transportation and custom formalities;
5. Marketing of the product of the joint venture company;
6. Assisting the joint venture company in contacting and settling the
fundamental facilities such as water, electricity, transportation, etc.;
7. Assisting the joint venture in recruiting Chinese management, personnel,
technical personnel, workers, and other personnel needed;
8. Assisting the company in obtaining the favourable policies.
9. Assisting the company for approval from the State to remit foreign exchanges
from China to abroad.
10. Handling other matters entrusted by the joint venture company.
Responsibilities of Party B:
1. Providing cash with the stipulations in article 9, 10 and 11;
2. Assisting the joint venture company in selecting and purchasing equipment,
parts, transportation means, office facilities and materials outside China;
3. Assisting in selling the deflection yoke products and other products of the
joint venture company to foreign market and providing with informations form
foreign market.
4. Handling other matters entrusted by the joint venture company.
Chapter 7 Selling of products
Article Fourteen
The product of the joint venture company will be sold both on domestic market
and overseas markets, the export part should account
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for 60% at least.
Article Fifteen
The price of the products to be sold is to be agreed by Party A and Party B,
which should accord with the market price. The joint venture has the right to
choose proper channels for selling at better prices, Party B has preemptive
right on agent the selling at the same price.
Article Sixteen
The quality of the exporting product should accord to the samples which are made
up to the standard and samples provided by Party B and approved by Party B to be
the standard sample.
Article Seventeen
In order to provide maintenance service to the products sold both in China or
abroad, the joint venture company may set up sales branches for maintenance
service both in China or abroad subject to the approval of relative Chinese
department.
Article Eighteen
The trade mark of the joint venture's products is decided by the board of
directors.
Chapter 8 The Board of Directors
Article Nineteen
The date of registration of the joint venture company shall be the date of the
establishment of the board of the joint venture company.
Article Twenty
The Board of Directors are composed of 5 directors, of which 1 shall be
appointed by Party A and 4 shall be appointed by Party B. The chairman of the
Board shall be appointed by Party B, and its vice-chairman by Party A. The term
of office for the directors, chairman and vice-chairman is 4 years. Their term
of office may be renewed if
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continuously appointed by the relevant Party. The Board of Directors should be
composed according to the contribution proportion subject to any change.
Article Twenty-one
The highest authority of the joint venture company shall be its board of
directors. It shall decide all major issues concerning the joint venture
company. Unanimous approval shall be required before any decisions are made
concerning major issues. As for other matters approval by majority or a simple
majority shall be required.
Article Twenty-two
The chairman of the board is the legal representative of the joint venture
company. Should the chairman be unable to exercise his responsibilities for some
reasons, he shall authorize the vice-chairman or any other director to represent
the joint venture company temporarily.
Article Twenty-three
The board of directors shall convene at least one meeting every year. The
meeting shall be called and presided over by the chairman of the board. The
chairman may convene an interim meeting based on a proposal made by more than
one-third of the total number of directors. Minutes of the meetings written in
Chinese shall be placed on file.
Chapter 9 Business Management Office
Article Twenty-four
The joint venture company shall establish a management office which shall be
responsible for its daily management. The management office shall have a general
manager, appointed by Party A ; The general manager, whose term of office is 4
years, shall be invited by the board of directors. The general accountant and
engineer will be invited by the general manager.
9
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Article Twenty-five
The responsibility of the general manager is to carry out the decisions of the
board meeting and to organize and conduct the daily management of the joint
venture company. The deputy general managers shall assist the general manager in
his work.. Several department managers may be appointed by the management
office, who shall be responsible for the works in various department
respectively, handle the matters handed over by the general manager, and shall
be responsible to them.
Article Twenty-six
In case of graft or serious dereliction of duty on the part of the general
manager and deputy general managers, the board of directors shall have the power
to dismiss them at any time.
Chapter 10 Purchasing of Equipment
Article Twenty-seven
In its purchase of required raw materials, fuel, parts, means of transportation
and articles for office use, etc., the joint venture company shall give first
priority to purchase in China if quality and price are suitable.
Article Twenty-eight
In case of the joint venture company entrusts Party B to purchase equipment in
overseas markets, the price should not exceed the market price, otherwise the
Chairman of the Board has the right to choose other purchasing channels.
Chapter 11 Labor Management
Article Twenty-nine
Labor contract covering the recruitment, employment, dismissal and
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<PAGE>
resignation, wages, labor insurance, welfare, rewards of the joint venture
company shall be drawn up between the joint venture company as a whole or
individual employees accordance with the "Regulations of the People's Republic
of China on Labor Management in Joint Ventures Using Chinese and Foreign
Investment" and its implementation rules.
The labor contracts shall, after being signed, be filed with the local labor
management department.
Article Thirty
The appointment of high ranking administrative personnel recommended by all
parties, their salaries, social insurance, welfare and the standard of traveling
expenses, etc. shall be decided by the meeting of the board of directors.
Article Thirty-one
The salaries, social insurance, welfare standard shall be decided by the Board
of Directors according to the relative laws of the People's Republic of China
and subject to the economic situation of the joint venture company.
Chapter 12 Taxes, Finance and Audit
Article Thirty-two
The joint venture company shall pay taxes in accordance with the stipulations of
Chinese laws and other relative regulations.
Article Thirty-three
Staff members and workers of the joint venture company shall pay individual
income tax according to the "Individual Income Tax Law of the People's Republic
of China"
Article Thirty-four
Allocations for reserve funds, expansion funds of the joint venture
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<PAGE>
company and welfare funds and bonuses for staff and workers shall be set aside
in accordance with the stipulations in "The Law of People's Republic of China on
Joint Ventures Using Chinese and Foreign Investment". The annual proportion of
allocations shall be decided by the board of directors according to the business
situations of the joint venture company.
Article Thirty-five
The fiscal year of the joint venture company shall be from January 1 to December
31. All vouchers, receipts, statistic statements and reports, account books
shall be written in Chinese.
(English language will be used concurrently for main documents.)
Article Thirty-six
Financial checking and examination of the joint venture company shall be
conducted by an auditor registered in China and reports shall be submitted to
the board of directors and the general manager.
In case Party B considers it necessary to employ a foreign auditor registered in
another country to undertake annual financial checking and examination, Party A
shall give his consent. All the expenses thereof shall be borne by Party B.
Article Thirty-seven
In the first three months of each fiscal year, the manager shall prepare
previous year's balance sheet, profit and loss statement and proposal regarding
the proposal of profits, and submit them to the board of directors for
examination and approval.
Chapter 13 Duration of the Joint Venture
Article Thirty-eight
The duration of the joint venture company is 50 years. The establishment of the
joint venture company shall start from the date on which the business license of
the joint venture company is issued.
12
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An application for the extension of the duration, proposed by one party and
unanimously approved by the board of directors, shall be submitted to the
Ministry of Foreign trade and Economic Cooperation of the People's Republic of
China ( or the examination and approval authority entrusted by it) six months
prior to the expiry date of the joint venture.
Chapter 14 The Disposal of Assets After Expiration of the Duration
Article Thirty-nine
Upon the expiration of the duration termination before the date of expiration of
the joint venture, liquidation shall be carried out in accordance with the
proportion of investment contributed by Party A and Party B.
Chapter 15 Insurance
Article Forty
Insurance policies of the joint venture company on various kinds of risks shall
be under written with the insurance company of China. Types, value and duration
of insurance shall be decided by the board of directors in accordance with the
stipulations of the People's Republic of China.
Chapter 16 The Amendment, Alteration and Discharge of the Contract
Article Forty-one
13
<PAGE>
The amendment of the contract or other appendixes shall come into force only
after the written agreement is signed by Party A and Party B and approved by the
original examination and approval authority.
Article Forty-two
In case of inability to fulfill contract or to continue operation due to heavy
losses in successive years as a result of force majeure, the duration of the
joint venture company and the contract shall be terminated before the time of
expiration after being unanimously agreed upon by the board of directors and
approved by the original examination and approval authority.
Article Forty-three
Should the joint venture company be unable to continue its operations or achieve
the business purpose stipulated in the contract due to the fact that one of the
contracting parties fails to fulfill the obligations prescribed by the contract
and articles of association, that party shall be deemed as unilaterally
terminating the contract. The other party shall have the right to terminate the
contract in accordance with the provisions of the contract after being approved
by the original examination and approval authority as well as to claim damages.
In case Party A and Party B agree to continue the operation, the party who fails
to fulfill the obligations shall cover the losses thus caused to the joint
venture company.
Chapter 17 Liabilities for Breach of Contract
Article Forty-four
Should either Party A or Party B fail to pay on schedule the contributions in
accordance with the provisions defined in Chapter 5 of this contract, the
breaching party shall pay to the other party 0.5% of the contribution starting
from the first month after exceeding the time limit. Should the breaching party
fail to pay after 3 months, 0.5% of the contribution shall be paid to the other
party, who shall have the
14
<PAGE>
right to terminate the contract and to claim damages
to the breaching party in accordance with the stipulations in Article Forty-one
of the contract.
Article Forty-two
Should all or part of the contract and its appendixes be unable to be fulfilled
owing to the fault of one party, the breaching party shall bear the
responsibilities thus caused. Should it be the fault of both parties, they shall
bear their respective responsibilities according to actual situations.
Article Forty-three
In order to guarantee the performance of the contract and its appendixes, both
Party A and Party B shall provide each other the bank guarantees for the
performance of the contract.
Chapter 18 Force Majeure
Article Forty-four
Should either of the parties to the contract be prevented from executing the
contract by force majeure, such as earthquake, typhoon, flood, fire and war and
other unforeseen events, and their happening and consequences are unpreventable
and unavoidable, the prevented party shall notify the other party by cable
without any delay, and within 15 days thereafter provide the detailed
information of the events and a valid document for evidence issued by the
relevant public notary organization for explaining the reason of its inability
to execute or delay the execution of all or part of the contract. Both parties
shall, through consultations, decide whether to terminate the contract or
whether to delay the execution of the contract according to the effects of the
events on the performance of the contract.
Chapter 19 Applicable Law
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Article Forty-five
The formation of this contract, its validity, interpretation, execution and
settlement of the disputes shall be governed by the related laws of the People's
Republic of China.
Chapter 20 Settlement of Disputes
Article Forty-six
Any disputes arising from the execution of, or in connection with the contract
shall be settled amicably through negotiation. In case no settlement can be
reached through negotiation, the case shall be submitted to the China
International Economic and Trade Arbitration Commission, Beijing, China, for
arbitration in accordance with its rules of procedure. The arbitral award is
final and binding on both parties.
Article Forty-seven
During the arbitration, the contract shall be executed continuously by both
parties except for matters in dispute.
Chapter 21 Language
Article Forty-eight
The contract shall be written in Chinese version and in English version. Both
languages are equally authentic. In the event of any discrepancy between the two
afore-mentioned versions, the Chinese version shall prevail.
Chapter 22 Effectiveness of the Contract and Miscellany
16
<PAGE>
Article Forty-nine
The appendixes drawn up in accordance with the principles of the contract are
integral part of this contract, including the Articles of Association.
Article Fifty
The contract and its appendixes shall be approved by the legal person
representative of both parties and come into force beginning from the date of
approval by the Ministry of Foreign Trade and Economic Cooperation of the
People's Republic of China (or its entrusted examination and examination and
approval authority.)
Article Fifty-one
Should notices in connection with any party's rights and obligations be sent by
either Party A or Party B by telegram or telex, etc., the written letter notices
shall be also required afterwards. The legal addresses of Party A and Party B
listed in this contract shall be the posting addresses.
Article Fifty-two
The contract is signed in Xianyang, Shaanxi, China by the authorized
representatives of the two parties on May 8, 1996.
Party A: Xianyang Pianzhuan Development Co., Ltd.
(Signature) /s/
Party B: Asia Electronics Holding Co. Inc.
(Signature) /s/
17
Contract
for the Joint Venture of
Yantai Gold Electronic Co., Ltd.
Sept. 10, 1993
Muping, Shandong, China
--------------------------------------------
Total Pages: 20
<PAGE>
Contents
Chapter 1 General Provisions
Chapter 2 Parties to the Joint Venture
Chapter 3 Establishment of the Joint Venture Company
Chapter 4 Purpose, Scope and Scale of Production and Business
Chapter 5 Total Amount of Investment and
Registered Capital
Chapter 6 Responsibilities of Each Party to the Joint Venture
Chapter 7 Selling of Products
Chapter 8 The Board of Directors
Chapter 9 Business Management Office
Chapter 10 Purchasing of Equipment
Chapter 11 Technology
Chapter 12 Labor management
Chapter 13 Taxes, Finance and Audit
Chapter 14 Force Majeure
Chapter 15 Duration of the Joint Venture
Chapter 16 The Disposal of Assets after Expiration of the
Duration
Chapter 17 Insurance
Chapter 18 The Amendment, Alteration and Discharge
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of the Contract
Chapter 19 Liabilities for Breach of Contract
Chapter 20 Applicable Law
Chapter 21 Language
Chapter 22 Settlement of Disputes
Chapter 23 Effectiveness of the Contract and Miscellany
2
<PAGE>
Chapter 1 General Provisions
In accordance with "The Law of People's Republic of China on Joint Ventures
Using Chinese and Foreign Investment" and other relevant Chinese laws and
regulations, Muping Gold Industry Company, Xianyang Pianzhuan Group Corp. and
Tomei Trading Co., Ltd. adhering to the principle of equality and mutual benefit
and through friendly consultations, agree to jointly invest to set up a joint
venture enterprise in Muping County, Shandong Province, the People's Republic of
China. The contract is worked out thereunder.
Chapter 2 Parties to the Joint Venture
Article one
Parties of this Contract are as follows:
Muping Gold Industry Company (herein after referred to as Party A) registered
with Muping County of Yantai City in Shandong Province in China and its legal
address is at No 32 Government Avenue, Muping County, Shandong Province, China.
Legal Representative: Name: Lin, Le Ting
Position: General Manager
Nationality: P.R. China
Xianyang Pianzhuan Group Corp. (herein after referred to as Party B) registered
with Yantai in China and its legal address is at )Xianyang City, China.
Legal Representative: Name: Du, Qing Song
Position: President
Nationality: P.R. China
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Tomei Trading Co., Ltd. (herein after referred to as Party C) registered in
Japan. Its legal address is at 1-7-4 Irakiku Bldg., Daimeiseki Avenne, Akaishi
City, Japan.
Legal Representative: Name: Jin, Cheng Hu
Position: President
Nationality: Japan
Chapter 3 Establishment of the Joint Venture Company
Article Two
In accordance with "the Law of the People's Republic of China on Joint Ventures
Using Chinese and Foreign Investment" and other relevant Chinese Laws and
regulations, the Parties to the joint venture agree to joint venture limit
liability company. (herein after referred to as the Joint Venture Company.)
Article Three
The name of the joint venture company is Yantai Gold Electronic Co., Ltd.
The legal address of the joint venture company is at West Street of Beiguan,
Muping, Shandong, China.
Article Four
All activities of the joint venture company shall be governed by the laws,
decrees and pertinent rules and regulations of the People's Republic of China.
Article Five
The organization of the joint venture company is a limited liability company.
Each party to the joint venture company is liable to the joint venture company
within the limit of the capital subscribed by it. The profits, risks and losses
of the joint venture company shall be shared by the parties in proportion to
their contribution to the registered
4
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capital.
Chapter 4 Purpose, Scope and Scale of Production and Business
Article Six
The purpose of the parties to the joint venture is in conformity with wish of
enhancing the economic cooperation and technical exchange to improve the product
quality, develop new products and gain competitive position in the world market
in quality and price by adopting advanced and appropriate managing methods, and
ensure satisfactory economic benefits for each investor.
Article Seven
The productive and business scope of the joint venture company is to produce and
sell deflection yokes and other electronic products; provide maintenance service
after the sales of the products; and study and develop new electronic products.
The production scale of the joint venture company put into operation is one
million deflection yokes per year, including 400,000 pieces of 14", 400,000
pieces of 20" and 200,000 pieces of 21" deflection yokes. The capacity should be
increased to 2,600,000 pieces from the year of 1995.
Article Eight
Quality of the products of the joint venture should accord with the standard
provided by Party B as attached for the exporting deflection yokes to Korea.
Chapter 5 Total Amount of Investment and Registered Capital
Article Nine
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The total amount of investment of the joint venture company is RMB28,528,000
(equals US$4,961,400). The contribution to the joint venture by the Parties is
RMB21,860,000 (equals US$3,801,700), which will be the registered capital of the
joint venture company, of which each party shall respectively contribute:
Party A: RMB6,550,000 (equals US$1,139,100), accounting for thirty
percent;
Party B: RMB9,850,000 (equals US$1,713,000), accounting for forty-five
percent;
Party C: US$949,600, accounting for twenty-five percent.
Article Ten
Both Party B and Party C will contribute the following as their investment:
The cash RMB6,550,000 contributed by Party A will be used on purchasing and
leasing land, working place, power facilities, assistant apparatus and as part
of the working capital.
The total contribution of Party B will be RMB9,850,000 composed of technical
know-how and RMB9,170,000 cash which will be used on purchasing equipment.
Party C will contribute the imported equipment and cash, which altogether
amounts to US$949,600.
Article Eleven
Each Party will contribute its complete investment to the joint venture company
according to their share proportion within 3 months since the date of issuing of
the Business License of the joint venture company. An accountancy registered in
China shall be invited by the joint venture to verify the contribution and issue
a capital verification report, according to which the joint venture company will
provide each party with the Investment Certificate with the signature of both
the chairman and vice-chairman of the Board of the Directors.
Article Twelve
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The registered capital of the joint venture company shall not be reduced within
the term of the joint venture.
In case either Party to the joint venture intends to increase or assign his
investment subscribed to a third party, consent shall be obtained from the other
party to the joint venture in advance, approval from the examination and
approval authority is required.
Article Thirteen
When one party to the joint venture assigns his investment, the other party has
preemptive right on it. If the other parties presents no written reply within 30
days, the right will be automatically abolished and the Party will have the
right to transfer its interests without giving any more favorable conditions to
the forth party, otherwise, the transfer will be regarded invalid.
Chapter 6 Responsibilities of Each Party to the Joint Venture
Article Fourteen
Each Party shall be respectively responsible for the following matters:
Responsibilities of Party A:
1. Handling of applications as per agreed by the Parties for approval,
registration, business license and other matters concerning the establishment of
the joint venture company from relevant departments in charge in China;
2. Handling of applications to the land administration authorities for the right
to use the land.
3. Assisting the joint venture company in contacting and settling the
fundamental facilities such as water, electricity, transportation, etc.;
4. Assisting the joint venture company in importing equipment, transportation
means and office facilities;
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<PAGE>
5. Handling the application and construction of the utilities including water,
power, fuel and communication devices;
6. Assisting the joint venture in recruiting local personnel, technical
personnel, workers, and other personnel needed;
7. Handling other affairs entrusted by the joint venture company.
Party B:
1. Contributing cash cash as agreed in article 9, 10 and 11.
2. Handling installation and technical commissioning of equipment and technical
training in production to guarantee the quality of the product of the joint
venture company as stipulated in article 8;
3. Providing the joint venture company with the market and technical information
in domestic and abroad and assisting the Company in product design, development
and sale.
4. Training the technicians and operators of the Company;
5. Other affairs entrusted by the joint venture company.
Party C:
1. Providing cash with the stipulations in article 9, 10 and 11;
2. Providing with market and technical information from abroad;
3. Assisting the joint-venture company in importing equipment, materials and
spare parts and other affairs entrusted by the Company;
4. Exporting 80% of the total production of the joint venture company.
5. Handling other matters entrusted by the joint venture company.
Chapter 7 Selling of products
Article Fifteen
The product of the joint venture company will be sold both on domestic market
and overseas markets, among which the types of 14"
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and 20" accounting for 80% of the total will be sold only to foreign market and
the type of 21" will be partially supplied to domestic market.
Article Sixteen
The export of the joint venture will be conducted by Party C and Party B will
aid the joint venture company in domestic sales. The type of 21" can be supplied
to foreign market subject to the benefit of the joint venture company. In order
to guarantee the export of its product, the joint venture company will commit
with Party C an Agreement each year defining the types, specifications,
quantity, price, quality, property, package, transportation and means of
delivery, etc. The agreement will become effective upon notary by the Chinese
notarying office.
The price of the products to be sold is to be decided by the general manager and
deputy general manager within the limit settled by the Board of Directors
according to the market price and the quality of the product. The joint venture
as well as Party A and Party B has the right to agent the selling of the product
in case the above parties offer better prices than Party C.
Article Seventeen
If the Price Administration Bureau of China has not settled the price for the
products of the joint venture company for domestic sales, the joint venture has
the right to decide the price by its self and present to the Bureau for
registration, otherwise the provisions shall be followed without any breach.
Article Eighteen
The trade mark of the joint venture's products is decided by the board of
directors.
Chapter 8 The Board of Directors
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Article Nineteen
The date of registration of the joint venture company shall be the date of the
establishment of the board of the joint venture company.
Article Twenty
The Board of Directors are composed of 5 directors, of which 2 shall be
appointed by Party A, 2 shall be appointed by Party B and 1 shall be appointed
by Party C. The chairman of the Board shall be appointed by Party B, and its
vice-chairman of 2 will be appointed by Party B and Party C respectively. The
term of office for the directors, chairman and vice-chairman is 4 years. Their
term of office may be renewed if continuously appointed by the relevant Party.
Article Twenty-one
The highest authority of the joint venture company shall be its board of
directors. It shall decide all major issues concerning the joint venture
company. Unanimous approval shall be required before any decisions are made
concerning major issues, in details: 1. Amendment to the Contract and Articles
of Association of the joint venture company; 2. Termination of the joint
venture; 3. Increase or transfer of capital; 4. Merge of the joint venture to
other economic organizations; 5. Import of equipment of the joint venture
company; 6. Price policy of the product of the joint venture; 7. Other matters
requiring unanimous approval according to the Board of Directors.
As for other matters approval by majority or a simple majority shall be
required.
Article Twenty-two
The chairman of the board is the legal representative of the joint venture
company. Should the chairman be unable to exercise his responsibilities for some
reasons, he shall authorize the vice-chairman or any other director to represent
the joint venture company temporarily.
Article Twenty-three
The board of directors shall convene at least one meeting every year.
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The meeting shall be called and presided over by the chairman of the board. The
chairman may convene an interim meeting based on a proposal made by more than
one-third of the total number of directors. Minutes of the meetings written in
Chinese shall be placed on file.
Chapter 9 Business Management Office
Article Twenty-four
The joint venture company shall establish a management office which shall be
responsible for its daily management. The management office shall have a general
manager, appointed by Party A and a deputy manager recommended by party B. The
general manager and his deputy general manager, whose term of office is 4 years,
shall be invited by the board of directors.
Article Twenty-five
The responsibility of the general manager is to carry out the decisions of the
board meeting and to organize and conduct the daily management of the joint
venture company. The deputy general managers shall assist the general manager in
his work. Several department managers may be appointed by the management office,
who shall be responsible for the works in various department respectively,
handle the matters handed over by the general manager, and shall be responsible
to them.
Article Twenty-six
The general manager and deputy general manager shall not participate in any
activities of other economic organizations concerning commercial competition to
the joint venture company.
Article Twenty-seven
In case of graft or serious dereliction of duty on the part of the general
manager and deputy general managers, the board of directors shall have the power
to dismiss them at any time.
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Chapter 10 Purchasing of Equipment
Article Twenty-eight
In its purchase of required raw materials, fuel, parts, means of transportation
and articles for office use, etc., the joint venture company shall give first
priority to purchase in China if quality and price are suitable.
Article Twenty-nine
Each Party shall provide the joint venture company with the equipment required
as in the appendix. The premises invested by Party C shall be new and
practicable for the joint venture company and will be valued according to the
estimation of the Commodity Inspection Bureau of China.
Article Thirty
In case of the required goods for the joint venture company are not available in
China on time, the joint venture company may entrust Party C to purchase
equipment in overseas markets, but the model, price and quality of the goods to
be purchased shall gain approval from Party A and Party B in advance.
Chapter 11 Technology
Article Thirty-one
In order to obtain the advanced technology to achieve the goal and scale of the
joint venture company as stipulated in article 4, the parties agreed agreed as
follows concerning the design, production process, testing method, quality
standard and training of personnel of the joint venture company:
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1. Party B shall guarantee the technology including process, testing method,
inspection and sales system provided by it is complete, accurate and reliable,
which can realize the production capacity and quality of the product required in
the Contract to achieve the goal of the joint venture.
2. Party B shall guarantee that the technology provided was the advanced one
introduced from Toshiba and improved, the choice of equipment will match the
requirement of the operating process.
3. Party B shall guarantee to send its technicians, engineers, skillful
operators and management officers as well as the technical data and other
detailed information to the joint venture company in the agreed period.
4. In the term of the Contract, Party B shall keep the joint venture company
informed of every improvement and change of its technology and have the
operators and engineers of the joint venture company master the technology.
5. Party B shall guarantee the technology provided is in his legally possession
to offer with the price without offending any right of the others.
Chapter 12 Labor Management
Article Thirty-two
Labor contract covering the recruitment, employment, dismissal and resignation,
wages, labor insurance, welfare, rewards of the joint venture company shall be
drawn up between the joint venture company as a whole or individual employees
accordance with the "Regulations of the People's Republic of China on Labor
Management in Joint Ventures Using Chinese and Foreign Investment" and its
implementation rules.
The labor contracts shall, after being signed, be filed with the local labor
management department.
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Article Thirty-three
The appointment of high ranking administrative personnel recommended by all
parties, their salaries, social insurance, welfare and the standard of traveling
expenses, etc. shall be decided by the meeting of the Board of Directors.
Article Thirty-four
The salaries, social insurance, welfare standard shall be decided by the Board
of Directors according to the relevant laws of the People's Republic of China
and subject to the economic situation of the joint venture company.
Chapter 13 Taxes, Finance and Audit
Article Thirty-five
The joint venture company shall pay taxes in accordance with the stipulations of
Chinese laws and other relevant regulations.
Article Thirty-six
Staff members and workers of the joint venture company shall pay individual
income tax according to the "Individual Income Tax Law of the People's Republic
of China"
Article Thirty-seven
Allocations for reserve funds, expansion funds of the joint venture company and
welfare funds and bonuses for staff and workers shall be set aside in accordance
with the stipulations in "The Law of People's Republic of China on Joint
Ventures Using Chinese and Foreign Investment". The annual proportion of
allocations shall be decided by the board of directors according to the business
situations of the joint venture company.
Article Thirty-eight
In the first three months of each fiscal year, the manager shall prepare
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previous year's balance sheet, profit and loss statement and proposal regarding
the share of profits, and submit them to the board of directors for examination
and approval.
Article Thirty-nine
The fiscal year of the joint venture company shall be from January 1 to December
31. All vouchers, receipts, statistic statements and reports, account books
shall be written in Chinese. (English language will be used concurrently for
main documents.)
Article Forty
The joint venture company will use RMB Yuan as the basic accounting unit. The
exchange rate of RMB to other monetary units will accord with the exchange rate
promulgated on the day of actual conversion by the State Foreign Exchange
Administration Bureau.
Article Forty-one
Financial checking and examination of the joint venture company shall be
conducted by an auditor registered in China and reports shall be submitted to
the board of directors and the general manager.
In case any Party considers it necessary to employ a foreign auditor registered
in another country to undertake annual financial checking and examination, the
other parties shall give their consent. All the expenses thereof shall be borne
by the Requesting Party.
Chapter 14 Force Majeure
Article Forty-two
Should either of the parties to the contract be prevented from executing the
contract by force majeure, such as earthquake, typhoon, flood, fire and war and
other unforeseen events, and their happening and consequences are unpreventable
and unavoidable, the prevented party shall notify the other party by cable
without any delay, and within 15 days thereafter provide the detailed
information of the
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events and a valid document for evidence issued by the relevant public notary
organization for explaining the reason of its inability to execute or delay the
execution of all or part of the contract. Both parties shall, through
consultations, decide whether to terminate the contract or whether to delay the
execution of the contract according to the effects of the events on the
performance of the contract.
Chapter 15 Duration of the Joint Venture
Article Forty-three
The duration of the joint venture company is 10 years. The establishment of the
joint venture company shall start from the date on which the business license of
the joint venture company is issued.
Article Forty-four
An application for the extension of the duration, proposed by all three parties
and unanimously approved by the board of directors, shall be submitted to the
Ministry of Foreign trade and Economic Cooperation of the People's Republic of
China (or the examination and approval authority entrusted by it) six months
prior to the expiry date of the joint venture.
Chapter 16 The Disposal of Assets After Expiration of the Duration
Article Forty-five
Upon the expiration of the duration termination before the date of expiration of
the joint venture, liquidation shall be carried out in accordance with the
proportion of investment contributed by Party B and Party C.
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Chapter 17 Insurance
Article Forty-six
Insurance policies of the joint venture company on various kinds of risks shall
be under written with the insurance company of China. Types, value and duration
of insurance shall be decided by the board of directors in accordance with the
stipulations of the People's Republic of China.
Chapter 18 The Amendment, Alteration and Discharge of the Contract
Article Forty-seven
The amendment of the contract or other appendixes shall come into force only
after the written agreement is signed by Party A, Party B and Party C and
approved by the original examination and approval authority.
Article Forty-eight
In case of inability to fulfill contract or to continue operation due to heavy
losses in successive years as a result of force majeure, the duration of the
joint venture company and the contract shall be terminated before the time of
expiration after being unanimously agreed upon by the board of directors and
approved by the original examination and approval authority.
Article Forty-nine
Should the joint venture company be unable to continue its operations or achieve
the business purpose stipulated in the contract due to the fact that one of the
contracting parties fails to fulfill the obligations prescribed by the contract
and articles of association, that party shall be deemed as unilaterally
terminating the contract. The other party shall have the right to terminate the
contract in accordance with the provisions of the contract after being approved
by the original
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examination and approval authority as well as to claim damages. In case Party B
and Party C agree to continue the operation, the party who fails to fulfill the
obligations shall cover the losses thus caused to the joint venture company.
Chapter 19 Liabilities for Breach of Contract
Article Fifty
Should either Party A, Party B or Party C fail to pay on schedule the
contributions in accordance with the provisions defined in Chapter 5 of this
contract, the breaching party shall pay to the other party 5% of the
contribution starting from the first month after exceeding the time limit.
Should the breaching party fail to pay after 3 months, 5% of the contribution
shall be paid to the other party, who shall have the right to terminate the
contract and to claim damages to the breaching party.
Article Fifty-one
Should all or part of the contract and its appendixes be unable to be fulfilled
owing to the fault of one party, the breaching party shall bear the
responsibilities thus caused. Should it be the fault of the parties, they shall
bear their respective responsibilities according to actual situations.
Chapter 20 Applicable Law
Article Fifty-two
The formation of this contract, its validity, interpretation, execution and
settlement of the disputes shall be governed by the related laws of the People's
Republic of China.
Chapter 21 Language
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Article Fifty-three
The contract shall be written in Chinese version and in English version. Both
languages are equally authentic. In the event of any discrepancy between the two
afore-mentioned versions, the Chinese version shall prevail.
Chapter 22 Settlement of Disputes
Article Fifty-four
Any disputes arising from the execution of, or in connection with the contract
shall be settled amicably through negotiation. In case no settlement can be
reached through negotiation, the case shall be submitted to the China
International Economic and Trade Arbitration Commission, Beijing, China, for
arbitration in accordance with its rules of procedure. The arbitral award is
final and binding on the parties.
Article Fifty-five
During the arbitration, the contract shall be executed
continuously by the parties except for matters in dispute.
Chapter 23 Effectiveness of the Contract and Miscellany
Article Fifty-six
The appendixes drawn up in accordance with the principles of this contract are
integral part of this contract, including the Articles of Association.
Article Fifty-seven
The contract and its appendixes shall be approved by the legal person
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representative of the parties and come into force beginning from the date of
approval by the Ministry of Foreign Trade and Economic Cooperation of the
People's Republic of China ( or its entrusted examination and approval
authority).
Article Fifty-eight
Should notices in connection with any party's rights and obligations be sent by
either Party B or Party C by telegram or telex, etc., the written letter notices
shall be also required afterwards. The legal addresses of Party B and Party C
listed in this contract shall be the posting addresses.
Article Fifty-nine
The contract is signed in Muping County, Shandong Province, P. R. China by the
authorized representatives of the parties on Sept. 10, 1993.
Party A: Muping Gold Industry Company
(Signature): ...........................................................
Party B: Xianyang Pianzhuan Group Corp.
(Signature): ...........................................................
Party C: Tomei Trading Co., Ltd.
(Signature): ...........................................................
20
AGREEMENT OF ACQUISITION
---------------
This agreement among Asia Electronics Holding Co. Inc., Xianyang Pianzhuan
Group, and Tomei Trading Co. Ltd., based on mutual trust and mutual benefit. The
content of this agreement is described below:
1. Intent.
(1). Xianyang Pianzhuan Group agrees to sell 45% of its interest in Yantai
Daewoo Electronics Co. Ltd. to Asia Electronics Holding Co. Inc. at the price of
US$2,232,630.
(2). Tomei Trading Co. Ltd. agrees to sell 25% interest of Yantai Daewoo
Electronics Co. Ltd. to Asia Electronics Holding Co. Inc. at the price of
US$1,240,350.
(3). Asia Electronics Holding Co. Ltd. obliged itself to pay to Xianyang
Pianzhuan Group and Tomei Trading Co. Ltd. the amount agreed above respectively
within one year from the effectiveness of the Agreement.
(4). As a result of the acquisition, Asia Electronics Holding Co. Inc. will own
70% interest of Yantai Daewoo Electronics Co. Ltd., Gold Industrial Co. Ltd.
owns 20% interest and Daewoo owns 10%.
2. Effective Date. This agreement is effective on December 28, 1996. The
parties will complete the transfer process within one month since the
effectiveness of the agreement.
3. Termination. This agreement may be terminated with 60-day written notice
and based on mutual consent by both parties. If any transaction that was started
prior to termination occurs within 24 months after termination then the
Agreement remains in effect for that transaction. In the event that the nature
of this Agreement needs substantial changes, the Agreement, upon the request of
either party, can be modified.
<PAGE>
If the above conform with your understanding, kindly confirm your acceptance and
agreement by signing and returning the enclosed copy of this letter of agreement
to the undersigned, whereupon this letter agreement and each counterpart hereof
will constitute a binding agreement between the parties hereto.
XIANYANG PIANZHUANG GROUP CO.
By: __________________________________
ASIA ELECTRONICS HOLDING CO. INC.
By: ___________________________________
TOMEI TRADING CO. LTD.
By: ___________________________________
December 28, 1995
The Contract for XIANYANG DNON TECH
SPECIAL ELECTRO TECHNIQUE CO., LTD. USING
CHINESE AND ITALIAN INVESTMENT.
1993 . 11 . 20
<PAGE>
Chapter 1 General Provisions
In accordance with "The law of the People's Republic of China on Joint Ventures
Using Chinese and Foreign Investment" and other relevant Chinese laws and
regulations, XIANJIAOTONG UNIVERSITY ELECTRICAL TECHNICAL ENGINEERING CO.,
XIANYANG DEFLECTION GROUP CORP. HONGKONG WAINLINK ENTERPRISES LIMITED.and DEA
TECH MACHINERY S.P.A., adhering to the principle of equality and mutual benefit
and through friendly consultations, agree to jointly invest to set up a joint
venture enterprise in XIANYANG city ShaanXi Province the People's Republic of
China. The contract is worked out hereunder.
Chapter 2 Parties to the Joint Venture
Article 1
Parties of this contract are as follows:
XIANYANG DEFLECTION GROUP CORP. (herein after referred to as Party A)
registered with XIANYANG in China and its legal address is at XIANYANG CITY
China.
Legal representative: Name: Du quingshong
Position: The chairman of the board.
Nationality: China.
XI'AN JIAO TONG UNIVERSITY ELECTRICAL TECHNICAL ENGINEERING CO.
(herein after referred to as Party B), registered with Xi'an. Its legal address
is at XianNing Xi Road Xi'an city.
Legal representative: Name: XueJuYi.
Position: The chairman of the board.
Nationality: China.
HONGKONG WAINLINK ENTERPRISES LIMITED (herein after referred to as Party D)
registered with HONGKONG. Its legal address is at RM. 1105. HUA.QIN.
INTERNATIONAL BLDG. 340 QUEEN'S ROAD CENTRAL HONGKONG.
Legal Representative: Name: Mr. Tang Xiang Qian
Position: Chairman
Nationality: Hong Kong
DEA TECH MACHINERY S.P.A. (hereinafter referred to as Party C). registered with
Italy. Its legal address is at CAMERI-C So Sempione 39.
Legal representative: Name: FROSSARD
Position: MANAGING DIRECTOR OF DEA TECH EUROPE
Nationality:___________ FRENCH ________.
Chapter 3 Establish of the Joint Venture Company
Article 2
In accordance with "The law of the People's Republic of China on Joint
Ventures Using Chinese and Foreign Investment" and other relevant Chinese laws
and regulations, both Parties to the joint venture agree joint venture limited
liability company (herein after referred to as the joint venture company).
Article 3
The name of the joint venture company is XianYang DNON TECH SPECIAL
ELEC-
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TRO TECHNIQUE CO., LTD. The name in foreign language is XianYang DNON TECH
SPECIAL ELECTRO TECHNIQUE CO. LTD.
The legal address of the joint venture company is at No. 70 WeiYang Xi Road
XianYang City Shaan Xi Province.
Article 4
All activities of the joint venture company shall be governed by the laws,
decrees and pertinent rules and regulations of the People's Republic of China.
Article 5
The organization of the join venture company is a limited liability
company. Each party to the joint venture company is liability to the joint
venture company within the limit of the capital subscribed by it. The profits,
risks and losses of the joint venture company shall be shared by the parties in
proportion to their contribution of the registered capital.
Chapter 4 Purpose, Scope and Scale of Production and Business
Article 6
The purpose of the parties to the joint venture is in conformity with the
wish of enhancing the economic cooperation and technical exchange to improve the
product quality, develop new products, and gain competitive position in the
world market in quality and price by adopting advanced and appropriate
technology and scientific management method, so as to raise economic results and
ensure satisfactory economic benefits for each investor.
Article 7
The productive and business scope of the joint venture company is to study,
develop and produce and business special enamelwire, enamel of special enamel
wire, high and new technical products of electrical technique.
Article 8
The production scale of the joint venture company are as follows:
1. The production capacity of the joint venture put into operation is
special enamel wire 550 T/Y at first step.
2. The production scale may be increased up with the development of the
production and operation. The production varieties may be developed.
Chapter 5 Total Amount of Investment and Registered Capital
Article 9
The total amount of investment of the joint venture company is USD 1500000.
Article 10
Investment contributed by the parties is USD 1,500,000 which will be the
registered capital of the joint venture company.
Of which: Party A shall pay USD 675,000 accounting for 45%, Party B shall
pay USD 150,000 accounting for 10%, Party C shall pay USD 300,000 accounting for
20%, Party D shall pay USD 375,000, accounting for 25%.
Article 11
The registered capital of the joint venture company shall be paid by Party
A, Party B, Party C and Party D according to their investment proportion. Party
A, Party B, Party C and Party D will contribute their investment cash to the
Joint Venture company according with the times in which capitals will be
necessary. In accordance with "machine purchasing contract" Party C will
arrange production of the machinery and to deliver on time.
Article 12
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In case either Party to the joint venture intends to sell all or part of
his investment subscribed to a third Party, consent shall be obtained from the
other party to the joint venture, and approval from the examination and approval
authority is required.
When one party to the joint venture sell all or part of his investment, the
other party has preemptive right.
Chapter 6 Responsibilities of Each Party to the Joint Venture
Article 13
Party A, Party B, Party C and Party D shall be respectively responsible for
the following matters:
Responsibilities of Party A and Party B: Handling of applications for
approval, registration, business license and other matters concerning the
establishment of the joint venture company from relevant departments in charge
in China;
Assisting the joint venture company in purchasing or leasing equipment,
materials, raw materials, articles for office use, means of transportation and
communication facilities, etc.; Assisting the joint venture company in
contacting and setting the fundamental facilities such as water, electricity,
transportation, etc.;
Assisting the joint venture in recruiting Chinese management, personnel,
technical personnel, workers, and other personnel needed. Assisting foreign
worker and staff in applying for the entry visa, work license and processing
their traveling matters. Responsible for handling other matters entrusted by the
joint venture company, such as selecting and purchasing machinery and equipment
outside China. Responsible for other matters entrusted by the joint venture
company.
Chapter 7 Selling of Products
Article 14
In China, the joint venture's products can be handled by the Chinese
materials and commercial departments by means of agency or exclusive sales, or
be sold by the joint venture company directly.
Article 15
In order to provide after sell service to the sold products, with the
approval of the relevant Chinese department, the joint venture company may set
up sales branches for after sell service both in China and abroad.
Article 16
The trade mark of the joint venture's products is decided by the board of
directors.
Chapter 8 The Board of Directors
Article 17
The date of registration of the joint venture company shall be the date of
the establishment of the board of directors of the joint venture company.
Article 18
The board of directors are composed of 10 directors, of which 1 shall be
appointed by Party A, 3 by Party B, 1 by Party C, 1 by Party D. The chairman of
the board shall be appointed by Party A, and its vice
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chairman by Party A, Party C, Party D. The term of office for the directors,
chairman and vice-chairman is four years. Their term of office may be
renewed if continuously appointed by the relevant Party.
Article 19
The highest authority of the joint venture company shall be its board of
directors. It shall decide all major issues concerning the joint venture
company. Unanimous approval shall be required before any decisions are made
concerning major issues. As for other matters, approval by majority or a simple
majority or a simple majority shall be required.
Article 20
The chairman of the board is the legal representative of the joint venture
company. Should the chairman be unable to exercise his responsibilities for some
reasons, he shall authorize the vice-chairman or any other director to represent
the joint venture company temporarily.
Article 21
The board of directors shall convene at least one meeting every year. The
meeting shall be called and presided over by the chairman of the board. The
chairman may convene an interim meeting based on a proposal made by more than
one-third of the total number of directors. Minutes of he meetings shall be
placed on file.
Chapter 9 Business Management Office
Article 22
The joint venture company shall establish a management office which shall
be responsible for its daily management. The management office shall have a
general manager, appointed by Party A; Three deputy general managers appointed
by Party B, Party C, and Party D. The general manager and deputy general
managers shall be invited by the board of directors whose term of office is 4
years.
Article 23
The responsibility of the general manger is to carry out the decisions of
the board meeting and organize and conduct the daily management of the joint
venture company. The deputy general managers shall assist the general manager in
his work. Several department managers may be appointed by the management office,
who shall be responsible for the works in various department respectively,
handle the matters handed over by the general manager and deputy general
managers, and shall be responsible for them.
Article 24
In case of graft or serious derelication of duty on the part of the general
manger and deputy general managers, the board of directors shall have the power
to dismiss them at any time.
Chapter 10 Equipment
Article 25
In its purchase of required raw materials, fuel, parts, means of
transportation and articles for office use, etc., the joint venture company
shall give first priority to purchase in China if quality and price are
suitable.
Article 26
The technical data, specification and properties of the equipment provided
by Party C are of advanced international technical level. The final products of
the
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equipment should be up to the JIS and DIN.
Article 27
The delivery of equipment should be within 8 monthes after Party C received
the down- payment. For details refer to attachment 1 (The purchasing contract of
equipment).
Chapter 11 Labour Management
Article 28
Labour contract covering the recruitment, employment, dismissal and
resignation, wages, Labour insurance, welfare, rewards of the joint venture
company shall be drawn up between the joint venture company as a whole or
individual employess in accordance with the "Regulations of the People's
Republic of China on Labour Management in Join Ventures Using Chinese and
Foreign Investment" and its implementation rules:
The labour contracts shall, after being signed, be filed with the local
labour management department.
Article 29
The appointment of high-ranking administrative personnel recommended by all
parties, their salaries, social insurance, welfare and the standard of traveling
expenses, etc. shall be decided by the meeting of the board of directors.
Chapter 12 Taxes, Finance and Audit
Article 30
The joint venture company shall pay taxes in accordance with the
stipulations of Chinese laws and other relative regulations.
Article 31
Staff members and workers of the joint venture company shall pay individual
income tax according to the "Individual Income Tax law of the People's Republic
of China."
Article 32
Allocations for reserve funds, expansion funds of the joint venture company
and welfare funds and bonuses for staff and workers shall be set aside in
accordance with the stipulations in "The Law of the People's Republic of China
on Joint Ventures Using Chinese and Foreign Investment." The annual proportion
of allocations shall be decided by the board of directors according to the
business situations of the joint venture company.
Article 33
The fiscal year of the joint venture company shall be from January 1 to
December 31. All vouchers, receipts, statistic statements and reports, account
books shall be written in Chinese. (English language will be used concurrently
for main documents.)
Article 34
Financial checking and examination of the joint venture company shall be
conducted by an auditor registered in China and reports shall be submitted to
the board of directors and the general manager.
In case Party C considers it is necessary to employ a foreign auditor
registered in another country to undertake annual financial checking and
examination, Party A, Party B and Party D shall give their consent. All expenses
thereof shall be borne by Party C.
Article 35
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In the first three months of each fiscal year, the manager shall prepare
previous year's balance sheet, profit and loss statement and proposal regarding
the disposal of profits, and submit them to the board of directors for
examination and approval.
Chapter 13 Duration of the Joint Venture
Article 36
The duration of the joint venture company is 12 years. The establishment of
the joint venture company shall start from the date on which the business
license of the joint venture company is issued.
An application for the extension of the duration, proposed by one party and
unanimously approved by the board of directors, shall be submitted to the
Ministry of Foreign Economic Relations and Trade (or the examination and
approval authority entrusted by it) six months prior to the expiry date of the
joint venture.
Chapter 14 The Diposal of Assets after Expiration of the Duration
Article 37
Upon the expiration of the duration or termination before the date of
expiration of the joint venture, liquidation shall be carried out according in
accordance with the proportion of investment contributed by Party A, Party B,
Party C, Party D.
Chapter 15 Insurance
Article 38
Insurance policies of the joint venture company on various kinds of risks
shall be under written with People's Republic of China. Types, value and
duration of insurance shall be decided by the board of directors in accordance
with the stipulations of the People's Insurance Company of China.
Chapter 16 The Amendment, Alteration and Discharge of the Contract
Article 39
The amendment of the contract or other appendices shall come into force
only after the written agreement is signed by Party A, Party B, Party C and
Party D and approved by the original examination and approval authority.
Article 40
In case of inability to fulfil contract or to continue operation due to
heavy losses in successive years as a result of force majeure, the duration of
the joint venture and the contract shall be terminated before the time of
expiration after being unanimously agreed upon by the board of directors and
approved by the original examination and approval authority.
Article 41
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Should the joint venture company be unable to continue its operations or
achieve the business purpose stipulated in the contract due to the fact that one
of the contracting partied fails to fulfil the obligations prescribed by the
contract and articles of association, or seriously violates the stipylations of
the contract and articles of association, that party shall be deemed as
unilaterally terminating the contract. The other party shall have the right to
terminate the contract in accordance with the provisions of the contract after
being approved by the original examination and approval authority as well as to
claim damages. In case Party A, Party B, Party C and Party D of the joint
venture company agree to continue the operation, the party who fails to fulfil
the obligations shall be liable to the economic losses thus caused to the joint
venture company.
Chapter 17 Liabilities for Breach of Contract
Article 42
Should either Party A, Party B, Party C or Party D fail to pay on schedule
the contributions in accordance with the provisions defined in Chapter 5 of this
contract, the breaching party shall pay to the other party 0.5% of the
contribution starting from the first month after exceeding the time limit.
Should the breaching party fail to pay after 3 monthes, 0.5% of the contribution
shall be paid to the other party, who shall have the right to terminate the
contract and to claim damages to the breaching party in accordance with the
stipulations in Article 43 of this contract.
Article 43
Should all or part of the contract and its appendices be unable to be
fulfilled owing to the fault of one party, the breaching party shall bear the
responsibilities thus caused. Should it be the fault of both parties, they shall
bear their respective responsibilities according to actual situations.
Article 44
In order to guarantee the performance of the contract and its appendices
both Party A, Party B, Party C and Party D shall provide each other the bank
guarantees for the performance of the contract.
Chapter 18 Force Majeure
Article 45
Should either of the parties to the contract be prevented from executing
the contract by force majeure, such as earthquake, typhoon, flood, fire and war
and other unforeseen events, and their happening and consequences are
unpreverntable and unavoidable, the prevented party shall notify the other party
by cable without any delay, and within 15 days thereafter provide the detailed
information of the events and a valid document for evidence issued by the
relvant public notary organization for explaining the reason of its inability to
execute or delay the execution of all or part of the contract. Both parties
shall, through consultations, decide whether to terminate the contract or to
exempt the part of obligations for implementation of the contract or whether to
delay the execution of the contract according to the effects of the events on
the performance of the contract.
7
<PAGE>
Chapter 19 Applicable Law
Article 46
The formation of this contract, its validity, interpretation, execution and
settlement of the disputes shall be governed by the related laws of the People's
Republic of China.
Chapter 20 Settlement of Disputes
Article 47
Any disputes arising from the execution of, or in connection with, the
contract shall be settled through friendly consultations between both parties.
In case no settlement can be reached through consultations, the disputes shall
be submitted to the Foreign economic and Trade Arbitration Commission of the
China Council for the Promotion of International Trade for arbitration in
accordance with its rules of procedure. The arbitral award is final and binding
upon both parties.
Article 48
During the arbitration, the contract shall be executed continuously by both
parties except for matters in dispute.
Chapter 21 Language
Article 49
The contract shall be written in Chinese version and in English
version. Both languages are equally authentic. In the event of any discrepancy
between the two aforementioned versions, the English version shall prevail.
Chapter 22 Effectiveness of the Contract and Miscellany
Article 50
The appendices drawn upon in accordance with the principles of this
contract are integral part of this contract, including:
Article 51
The contract and its appendices shall come into force beginning from the
date of approval by the Ministry of Foreign Economic Relation and Trade of the
People's Republic of China (or its entrusted examination and approval
authority).
Article 52
Should notices in connection with any party's rights and obligations be
sent by either Party A, Party B, Party C, Party D by telegram or telex, etc.,
the written letter notices shall be also required afterwards. The legal
addresses of Party A, Party B, Party C, Party D listed in this contract shall be
the posting addresses.
Article 53
The contract is signed in XianYang, of China by the authorized
representatives of four parties on ________________, 19___.
8
<PAGE>
Party A: Party B:
Party C: Party D.
AGREEMENT
This agreement is made between Xianyang Pianzhuan Group Corp., Hong Kong
Weilin Industrial Co., Ltd., Xi'an Jiao Tong University Electric Engineering
Co., Ltd. and Asia Electronics Holding Co., Ltd., based on mutual trust and
benefit. The content of the agreement is described below:
1. Intent.
(1) Xianyang Pianzhuan Group Corp. agrees to sell its holding interests of 72.5%
in Xianyang Dnon Tech Special Electronic Technical Co., Ltd. to Asia Electronics
Holding Co., Ltd. at the price of USD2,175,000.
(2) Hong Kong Weilin Industrial Co., Ltd. agrees to sell 12.5% of interests in
Dnon Tech to Asia Electronics Holding Co., Ltd. at the price of USD375,000.
(3) Xi'an Jiao Tong University Electric Engineering Co., Ltd. agrees to sell 5%
of interests in Dnon Tech to Asia Electronics Holding Co., Ltd.
(4) Asia Elelctronics Holding Co., Ltd. obliged itself to pay respectively to
Xianyang Pianzhuan Group Corp. the amount of USD2,175,000, to Hong Kong Weilin
Industrial Co., Ltd. USD375,000 and to Xian Jiao Tong University Electric
Engineering Co., Ltd. USD150,000 within three months from the effectiveness of
the Acquisition Agreement.
(5) As a result of the acquisition, Xianyang Dnon Tech Special Electronic
Technical Co., Ltd. will be shared by Asia Electronics Holding Co., Ltd. by 90%
of the interests, of USD 2,700,000 and Dea Tech Machinery S.p.A. by 10% of
USD300,000.
2. Effective Date.
This agreement comes to be effective on Dec. 26, 1996. The parties will
complete the transfer process within three months since the effectiveness of the
agreement.
3. Termination.
This agreement may be terminated with 60-day written notice and based on
<PAGE>
consent by the four parties. If any transaction that was started prior to
termination occurs within 24 months after termination then the Agreement remains
in effect for that transaction. In the event that the nature of this Agreement
needs substantial changes, the Agreement, upon the request of any party, can be
modified.
If the above conform with your understanding, kindly confirm your
acceptance and agreement by signing and returning the enclosed copy of this
letter of agreement t the undersigned, whereupon this letter agreement and each
counterpart hereof will constitute a binding agreement between the parties
hereto.
XIANYANG PIANZHUAN GROUP CORP.
By: /s/
HONG KONG WEILIN INDUSTRIAL CO., LTD.
By: /s/
XI'AN JIAO TONG UNIVERSITY ELECTRIC ENGINEERING CO., LTD.
By: /s/
ASIA ELECTRONICS HOLDING CO., LTD.
By: /s/
INTERNATIONAL BUSINESS COMPANIES ORDINANCE, CAP 291
---------------------------------------------------
SECTION 16(2)
NOTICE OF AMENDMENT OF THE MEMORANDUM OF ASSOCIATION
TO: REGISTRAR OF COMPANIES
RE: ASIA ELECTRONICS HOLDING CO. INC.
IBC NO 171330
- -------------------------------------------------------------------------------
We, HWR SERVICES LIMITED of Craigmuir Chambers, Road Town, Tortola, British
Virgin Islands, Registered Agent of the above Company, hereby certify that the
document annexed hereto is a true copy of the Resolution of the Directors
adopted on 24th June, 1997 increasing the authorized share capital of the
Company and amending the Memorandum of Association accordingly.
Dated this 24th day of June, 1997
/s/
- --------------------------
HWR SERVICES LIMITED
Registered Agent
- --------------------------------------------------------------------------------
For official use only
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
("the Company")
(An International Business Company)
TRUE COPY OF A RESOLUTION OF THE DIRECTORS OF THE COMPANY ADOPTED ON 24TH JUNE,
1997
RESOLVED, that Clause 7 of the Company's Memorandum of Association be deleted in
its entirety and that the following clause 7 be substituted therefor:
7. The authorized capital of the Company is $300,000.00 divided into 30,000,000
shares with a par value of $0.01 each.
Dated this 24th day of June, 1997
/s/
- ---------------------
HWR SERVICES LIMITED
Registered Agent
<PAGE>
INTERNATIONAL BUSINESS COMPANIES ORDINANCE, Cap. 291
(as amended)
Section 16(2)
Notice of amendment of
Memorandum of Association
To: The Registrar of Companies
ASIA ELECTRIC COMPANY LIMITED
IBC No. 171330
We, HWR SERVICES LIMITED of Craigmuir Chambers, Road Town, Tortola, Registered
Agent of the above Company, hereby certify that the document annexed hereto is a
certified copy of a Resolution of the Directors adopted on 30th January, 1997,
amending the Memorandum of Association of the above Company.
Dated the 12th day of February, 1997.
- -------------------------------
HWR Services Limited
Registered Agent
- -------------------------------------------------------------------
For official use only
<PAGE>
ASIA ELECTRIC COMPANY LIMITED
("the Company")
(IBC No. 171330)
CERTIFIED COPY OF A RESOLUTION OF THE DIRECTORS
ADOPTED ON 30TH JANUARY, 1997
AMENDMENT TO THE MEMORANDUM OF ASSOCIATION
"CHANGE IN THE MEMORANDUM OF ASSOCIATION
IT WAS RESOLVED that the Memorandum of Association be amended as appropriate to
evidence the change in Registered Office and Registered Agent of the Company as
follows:
The registered office of the Company will be situated at Craigmuir Chambers,
P.O. Box 71, Road Town, Tortola, British Virgin Islands.
The registered agent of the Company will be HWR Services Limited, P.O. Box 71,
Road Town, Tortola, British Virgin Islands."
Dated the 12th day of February, 1997
-------------------------
HWR Services Limited
Registered Agent
<PAGE>
I.B.C. No.: 171330
TERRITORY OF THE BRITISH VIRGIN ISLANDS
The International Business Companies Act
(Cap. 291)
Memorandum of Association
and
Articles of Association
of
ASIA ELECTRIC COMPANY LIMITED
Incorporated the 3rd Day of January, 1996
COMMONWEALTH MANAGEMENT LIMITED
Drake Chambers
Tortola
British Virgin Islands
<PAGE>
TERRITORY OF THE BRITISH VIRGIN ISLANDS
THE INTERNATIONAL BUSINESS COMPANIES ACT
(Cap. 291)
MEMORANDUM OF ASSOCIATION
OF
ASIA ELECTRIC COMPANY LIMITED
1. The name of the company is Asia Electric Company Limited.
2. The registered office of the company will be situate at the premises of
Commonwealth Management Limited, Drake Chambers, Tortola, British
Virgin Islands or such other place in the British Virgin Islands as the
directors may from time to time determine.
3. The registered agent of the Company will be Commonwealth Management
Limited of P.O. Box 3321, Road Town, Tortola, British Virgin Islands or
such other person or company, being a person or company entitled to act
as a registered agent, as the directors may from time to time
determine.
4. The Objects for which the Company is established are:
(1) To buy, sell, mortgage, lease, manage, build, develop, possess
and generally deal in real properties; to buy, sell,
underwrite, invest in, exchange or otherwise acquire, and to
hold, manage, develop, deal with and turn to account any
bonds, debentures, shares (whether fully paid or not), stocks,
options, commodities, futures, forward contracts, notes, or
securities of all types, precious metals, gems, works of art,
and other articles of value;
(2) To borrow or raise money by the issue debentures, debenture
stock (perpetual or terminable), bonds, mortgages, or any
other securities founded or based upon all or any of the
assets or property of the Company or without any such security
and upon such terms as to priority or otherwise that the
Company shall think fit;
(3) To guarantee loans and to lend money with or without
guarantee or security to any persons, firms or corporations;
(4) To engage in any other business or businesses whatsoever, or
in any acts or activities, which are not prohibited under any
law for the time being in force in the British Virgin Islands;
(5) To do all such other things as are incidental to, or the
Company may think conducive to, the attainment of all or any
of the above objects.
And it is hereby declared that the intention is that each of the
objects specified in each paragraph of this clause shall, except where
otherwise expressed in such paragraph, be an independent main object
and be in _____ wise limited or restricted by reference to or inference
from the terms of any other paragraph or the name of the Company.
5. The Company has no power to:
1
<PAGE>
(1) carry on business with persons resident in the British Virgin Islands;
(2) own an interest in real property situate in the British Virgin Islands,
other than a lease of property for use as an office from which to
communicate with members or where books and records of the Company are
prepared or maintained;
(3) carry on banking or trust business, unless it is licensed under the
Banks and Trust Companies Act, 1990;
(4) carry on business as an insurance or re-insurance company, insurance
agent or insurance broker, unless it is licensed under an enactment
authorising it to carry on that business;
(5) carry on the business of company management, unless it is licensed
under the Company Management Act, 1990, or
(6) carry on the business of providing the registered office or the
registered agent for companies incorporated in the British Virgin
Islands.
6. The shares in the Company shall be issued in the currency of the United
States of America.
7. The authorized capital of the Company is $50,000.00 divided into 50,000
shares with a par value of $1.00 each.
8. The shares shall be divided into such number of classes and series as
the directors shall by resolution to amend this Memorandum of
Association from time to time determine and until so divided shall
comprise one class and series.
9. The directors shall by resolution have the power to issue any class or
series of shares that the Company is authorised to issue in its
capital, original and increased, with or subject to any designation,
powers, preferences, limitations and restrictions.
10. The directors may issue shares as registered or as shares issued to
bearer as they may determine by resolution of the directors.
11. Shares issued as registered shares may be exchanged for shares issued
to bearer, and shares issued to bearer may be exchanged for registered
shares.
12. Where shares are issued to bearer, the bearer, identified for this
purpose by the number of the share certificate, shall be requested to
give to the Company the name and address of an agent or attorney for
service of any notice, information or written statement required to be
given to members, and service upon such agent or attorney shall
constitute service upon the bearer of such shares. In the absence of
such name and address being given, it shall be sufficient for purpose
of service for the Company to publish the notice, information or
written statement in one or more newspapers published or circulated in
the British Virgin Islands and in a newspaper in the place where the
Company has its principal office.
13. The Company shall by resolution of the directors have the power to
amend or modify any of the conditions contained in this Memorandum of
Association.
The undersigned Subscriber, for the purpose of incorporating an International
Business Company under the laws of the British Virgin Islands, hereby subscribes
its name to this Memorandum of Association.
2
<PAGE>
- --------------------------------------------------------------------------
NAME, ADDRESS AND DESCRIPTION OF SUBSCRIBER
- --------------------------------------------------------------------------
Scott F. Wilson
COMMONWEALTH MANAGEMENT LIMITED
P.O. Box 3321
Road Town, Tortola
British Virgin Islands
Company Management Company
- -------------------------------------------------------
For, and on behalf of, Commonwealth Management Limited,
Registered Agent
- -------------------------------------------------------
Dated this 3rd Day of January, 1996.
Witness to the above signature:
Thomas J. Ward
P.O. Box 3321
Road Town, Tortola
British Virgin Islands
3
TERRITORY OF THE BRITISH VIRGIN ISLANDS
THE INTERNATIONAL BUSINESS COMPANIES ACT
(Cap. 291)
ARTICLES OF ASSOCIATION
OF
ASIA ELECTRIC COMPANY LIMITED
PRELIMINARY
1. References in these Regulations to the Ordinance shall mean The
International Business Companies Ordinance, 1984. The following
Regulations shall constitute the Regulations of the Company. In these
Regulations, words and expressions defined in the Ordinance shall have
the same meaning and, unless otherwise required by the context, the
singular shall include the plural and vice versa, the masculine shall
include the feminine and neuter, and references to persons shall
include corporations and all legal entities capable of having a legal
existence.
SHARE CERTIFICATES
2. Every person whose name is entered as a member in the share register
being the holder of registered shares, and every person who subscribes
for shares issued to bearer, shall without payment be entitled to a
certificate signed by two directors or by two officers or by one
director and one officer of the Company or under the common seal of the
Company with or without the signature of any director or officer of the
Company specifying the share or shares held and the par value thereof,
provided that in respect of a registered share or shares held jointly
by several persons, the Company shall not be bound to issue more than
one certificate, and delivery of a certificate for a share to one of
several joint holders shall be sufficient delivery to all.
3. In the case of bearer shares, each certificate for shares issued to
bearer shall carry an identifying number, and the Company shall
maintain a register of the name and address of an agent or attorney
which may be given to the Company by the bearer, identified for this
purpose by such identifying number, for service of any notice,
information or written statement required to be given to members.
4. If a certificate is worn out or lost, it may be renewed on production
of the worn out certificate, or on satisfactory proof of its loss,
together with such indemnity as the directors may reasonably require.
Any member receiving a share certificate shall indemnify and hold the
Company and its officers harmless from any loss or liability which it
or they may incur by reason of wrongful or fraudulent use or
representation made by any person by virtue of the possession of such
certificate.
SHARE CAPITAL AND VARIATION OF RIGHTS
5. Subject to the provisions of these Regulations, the unissued and
treasury shares of the Company shall be at the disposal of the
directors who may, without limiting or affecting any originals
previously conferred on the holders of any existing shares or class or
series of shares, offer, allot, grant options even or
1
<PAGE>
otherwise dispose of such unissued and treasury shares to such persons
at such times and upon such terms and conditions as the Company may, by
resolution of directors, determine.
6. Without prejudice to any special rights previously conferred on the
holders of any existing shares or class of shares, any class of shares
that the Company is authorised to issue in its capital may be issued
with such preferred, deferred or other special rights or such
restrictions, whether in regard to dividend, voting, return of capital
or otherwise, as the directors by resolution may from time to time
determine.
7. Subject to the provisions of the Ordinance in this regard, shares may
be redeemed without the consent of the member or members concerned on
such terms and in such manner as the directors before or at the time of
the issue of the shares may determine.
8. The directors may redeem any such share at a premium subject to the
provisions of the Ordinance.
9. If at any time the share capital is divided into different classes of
shares, the rights attached to any class (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 the
holders of not less than three-fourth 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.
10. The rights conferred upon the holders of shares of any class issued
with preferred or other rights shall not, unless otherwise expressly
provided by the terms of issue of the shares of that class, be deemed
to be varied by the creation or issue of further shares ranking pari
passu therewith.
11. The Company shall not be bound by or be compelled in any way to
recognize (even when having notice thereof) any equitable, contingent,
future or partial interest in any share or any interest in any
fractional part of a share or (except only as by these Regulations or
by law otherwise provided) any other rights in respect of any share or
fractional share except an absolute right thereto by the registered
holder or holders.
TRANSFER OF SHARES
12. Registered shares in the Company may be transferred by a written
instrument signed by the transferor and containing the name and address
of the transferee or in such other manner or form and subject to such
evidence as the directors shall consider appropriate. Shares issued to
bearer shall be transferred by delivery of the certificates evidencing
same.
13. The holder of registered shares may request that such shares be
exchanged for shares issued to bearer and the directors shall cancel
the certificate evidencing registered shares and the entry in the share
register and shall instead issue a certificate evidencing shares issued
to bearer with and subject to such evidence of intent as the director
may consider appropriate.
14. The holder of a certificate evidencing shares issued to bearer may
request that such shares be exchanged for registered shares and the
directors shall cancel the certificate evidencing shares issued to
bearer and instead issue a certificate evidencing registered shares and
enter the name and address of the holder thereof in the share register
with and subject to such evidence of intent as the directors may
consider appropriate.
2
<PAGE>
15. Upon receipt of notification of any change of name and address of any
agent or attorney given to the Company for the purpose of service of
any notice, information or written statement required to be given to
members, identified by reference to the number of the certificate to
bearer, the directors shall forthwith amend the register maintained for
this purpose.
TRANSMISSION OF SHARES
16. The personal representatives, guardian, or trustee, as the case may be,
of a deceased, incompetent or bankrupt sole holder of a registered
share shall be the only persons recognised by the Company as having any
title to the share. In the case of a share registered in the names of
two or more holders, the survivor or survivors, and the personal
representatives, guardian or trustee as the case may be, of the
deceased, incompetent or bankrupt, shall be the only persons recognized
by the Company as having any title to the share but they shall not be
entitled to exercise any rights as a member of the Company until they
have proceeded as set forth in the following two Regulations.
17. Any person becoming entitled by operation of law or otherwise to a
share or shares in consequence of the death, incompetence or bankruptcy
of any member may be registered as a member upon such evidence being
produced as may reasonably be required by the directors. An application
by any such person to be registered as a member for all purposes shall
be deemed to be a transfer of shares of the deceased, incompetent or
bankrupt member and the directors shall treat it as such.
18. Any person who has become entitled to a share or shares in consequence
of the death, incompetence or bankruptcy of any member may, instead of
being registered himself, request in writing that some person to be
named by him be registered as a transferee of such share or shares and
such request shall likewise be treated as if it were a transfer.
ACQUISITION OF OWN SHARES
19. Subject to the provisions of the Ordinance in this regard, the
directors may, on behalf of the Company, purchase, redeem or otherwise
acquire any of the Company's own shares for such consideration as they
consider fit, and either cancel or hold such shares as treasury shares.
Shares may be purchased or otherwise acquired in exchange for newly
issued shares in the Company.
FORFEITURE OF SHARES
20. Subject to the provisions of the Ordinance in this regard, the
directors may, on behalf of the Company, at any time forfeit and cancel
any share for which payment has not been made pursuant to a promissory
note or other written binding obligation for payment of a debt,
provided that written notice specifying a date for payment to be made
is served on the member who defaults in making payment pursuant to the
promissory note or other written binding obligation to pay a debt,
naming a further date not earlier than fourteen (14) days from the date
of service of the notice, on or before which the payment required by
the notice is to be made, and containing a statement that in the event
of non-payment at or before the time named in the notice, the shares,
or any of them, in respect of which the payment has not been made will
be liable to forfeiture, and provided that the requirements of the
notice have not been complied with.
3
<PAGE>
ALTERATION IN CAPITAL
21. Subject to the terms of any resolution to amend the Memorandum of
Association passed by the members or directors for the purpose of
increasing the authorised capital of the Company, such increased
capital may be divided into the shares or classes of shares of such
respective amounts, and with such rights or privileges (if any) as the
members or directors think expedient.
22. Any capital raised by the creation of new shares shall be considered as
part of the original capital, and shall be subject to the same
provisions as if it had been part of the original capital.
23. The members or directors may by resolution to amend the Memorandum of
Association:
(a) consolidate and divide all or any of its share capital into
shares of larger amounts than its existing shares;
(b) cancel any shares which, at the date of passing of the
resolution, have not been taken or agreed to be taken by any
person and diminish the amount of its authorised share capital
by the amount of the shares cancelled;
(c) sub-divide its hares or any of them into shares of smaller
amounts than is fixed by the Memorandum of Association so
that, subject to the provisions of Regulation 9, the
resolution whereby any share is sub-divided may determine
that, as between the holders of the different classes of
shares (if any) resulting from such sub- division, one or more
of the classes of shares may have such preferred or other
special rights over, or may have such qualified or deferred
rights or be subject to any such restrictions as compared
with, the other class or classes as the Company has power to
attach to unissued or new shares;
(d) subject to any determination required by law, reduce its
authorised and issued share capital.
24. Where any difficulty arises in regard to any consolidation and division
under these Regulations, the members or directors may settle the same
as they think expedient.
MEETING OF MEMBERS
25. The directors may convene meetings of the members of the Company at
such times and in such manner and places as the directors consider
necessary or desirable and they shall convene such a meeting upon the
written request of members holding more than 50 percent of the votes of
the outstanding voting shares in the Company.
26. At least seven days notice shall be given of any meeting of members,
with such notice specifying the place, the day and the hour of such
meeting and the general nature of the business to be conducted, in the
manner hereinafter mentioned, to such persons whose names on the date
the notice is given appear as members in the share register of the
Company and to the agent or attorney of record of the holders of bearer
shares.
27. A meeting of members shall be deemed to have been validly held,
notwithstanding that it is held in contravention of the requirement to
give notice in Regulation 26, if notice of the meeting is waived by an
absolute majority in number of the members or holders of bearer shares
having a right to attend and vote at the meeting.
4
<PAGE>
28. The inadvertent failure of the directors to give notice of a meeting to
a member or to the agent or attorney of record of the holder of bearer
shares as the case may be, or the fact that a member or such agent or
attorney has not received the notice, does not invalidate the meeting.
PROCEEDINGS AT MEETINGS OF MEMBERS
29. No business shall be transacted at any meeting unless a quorum of
members is present at the time when the meeting proceeds to business. A
quorum shall consist of the holder or holders present in person or by
proxy of not less than one-third 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.
30. If within an hour from the time appointed for the meeting a quorum is
not present, the meeting shall be dissolved.
31. At every meeting the members present shall choose some one of their
number to be the Chairman. If the members are unable to choose a
Chairman for any reason, then the person representing the greatest
number of voting shares present at the meeting shall preside as
Chairman, failing which the oldest individual person shall take the
chair.
32. The Chairman may, with the consent of the meeting, adjourn any meeting
from time to time, and from place to place, but no business shall be
transacted at any adjourned meeting other than the business left
unfinished at the meeting from which the adjournment took place.
33. At any meeting a resolution put to the vote of the meeting shall be
decided on a show of hands by simple majority unless a poll is (before
or on the declaration of the result of the show of hands) demanded:
(a) by the Chairman; or
(b) by any member or members present in person or by proxy and
representing not less than one-tenth of the total voting
rights of all the members having the right to vote at the
meeting.
34. Unless a poll be so demanded, a declaration by the Chairman that a
resolution has, on a show of hands, been carried, and an entry to that
effect in the book containing the minutes of the proceedings of the
Company, shall be sufficient evidence of the fact, without proof of the
number or proportion of the votes recorded in favour of or against such
resolution.
35. If a poll is duly demanded, it shall be taken in such a manner as the
Chairman dictates, and the result of the poll shall be deemed to be the
resolution of the meeting at which the poll was demanded. The demand
for a poll may be withdrawn.
36. In the case of an equality of votes, whether on a show of hands or on a
poll, the Chairman of the meeting at which the show of hands takes
place, or at which the poll is demanded, shall be entitled to a second
or casting vote.
5
<PAGE>
VOTES OF MEMBERS
37. At any meeting of members, whether on a show of hands or on a poll,
every holder of a voting share present in person or by proxy shall have
one vote for every voting share of which he is the holder.
38. A resolution of which prior written notice has been given to all
members for the time being entitled to vote and which has been
consented to in writing by a majority of the votes of those members in
the form of one or more documents in writing or by telex, telegram,
cable, facsimile (FAX) or other written electronic communication shall
forthwith become effectual as a resolution of the members.
39. If a committee be appointed for any member who is of unsound mind he
may vote by his committee.
40. If two or more persons are jointly entitled to a registered share or
shares:
(a) each of them may be present in person or by proxy at a meeting
of members and may speak as a member;
(b) if only one of them is present in person or by proxy, he may
vote on behalf of all of them; and
(c) if two or more are present in person or by proxy, they must
vote as one.
41. Votes may be given either personally or by proxy.
42. The instrument appointing a proxy shall be produced at the place
appointed for the meeting before the time for holding the meeting at
which the person named in such instrument proposes to vote.
43. The instrument appointing a proxy shall be in such form as the Chairman
of the meeting shall accept as properly evidencing the wishes of the
member appointing the proxy.
44. The instrument appointing a proxy shall be in writing under the hand of
the appointer, unless the appointer is a corporation or other form of
legal entity other than one or more individuals holding as joint
owners, in which case the instrument appointing a proxy shall be in
writing under the hand of an individual duly authorised by such
corporation or legal entity to execute the same. The Chairman of any
meeting at which a vote is cast by proxy so authorised may call for a
notarially certified copy of such authority, which shall be produced
within seven days of being so requested or the vote or votes cast by
such proxy shall be disregarded. In the case of a proxy being given by
the holder of a share issued to bearer, it shall be sufficient for the
appointer to identify himself by writing the identifying number of the
certificate evidencing the shares issued to bearer.
CORPORATION ACTING BY REPRESENTATIVES AT MEETINGS
Any corporation or other form of corporate legal entity which is a member of the
Company may by resolution of its directors or other governing body authorise
such person as it thinks fit to act as its representative at any meeting of the
members or of any class of members of the Company, and the person so authorised
shall be entitled to exercise the same powers on behalf of the corporation which
he represents as that corporation could exercise if it were an individual member
of the Company.
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DIRECTORS
46. Subject to any subsequent amendment to change the number of directors,
the number of directors shall not be less than one nor more than seven.
47. The first director or directors shall be elected by the subscriber(s)
to the Memorandum. Thereafter, the directors shall be elected by the
members or directors for such term as the members or directors may
determine and may be removed by the members or directors.
48. Each director holds office until his successor takes office or until
his earlier death, resignation or removal.
49. A vacancy in the board of directors may be filled by a resolution of
members or of a majority of the remaining directors.
50. Until directors are appointed, the subscribers to the Memorandum of
Association shall have the power to act as directors.
51. A director shall not require a share qualification, but nevertheless
shall be entitled to attend and speak at any meeting of the members and
at any separate meeting of the holders of any class of shares in the
Company.
52. A director, by writing under his hand deposited at the Registered
Office of the Company, may from time to time appoint another director
or any other person to be his alternate. Every such alternate shall be
entitled to be given notice of meetings of the directors and to attend
and vote as a director at any such meeting at which the director
appointing him is not personally present and generally at such meeting
to have and exercise all the powers, rights, duties and authorities of
the director appointing him. Every such alternate shall be deemed an
officer of the Company and shall not be deemed to be an agent of the
director appointing him. If undue delay or difficulty would be
occasioned by giving notice to a director of a resolution of which his
approval is sought in accordance with Regulation 77, his alternate (if
any) shall be entitled to signify approval of the same on behalf of
that director. The remuneration of an alternate shall be payable out of
the remuneration payable to the director appointing him, and shall
consist of such portion of the last-mentioned remuneration as shall be
agreed between such alternate and the director appointing him. A
director, by writing under his hand deposited at the Registered Office
of the Company, may at any time revoke the appointment of an alternate
appointed by him. If a director shall die or cease to hold the office
of director, the appointment of his alternate shall thereupon cease and
terminate.
53. The directors may, by resolution, fix the emoluments of directors in
respect of services rendered or to be rendered in any capacity to the
Company. The directors may also be paid such traveling, hotel and other
expenses properly incurred by them in attending and returning from
meeting of the directors, or any committee of the directors or meetings
of the members, or in connection with the business of the Company as
shall be approved by resolution of the directors.
54. Any director who, by request, goes or resides abroad for any purposes
of the Company or who performs services which in the opinion of the
Board go beyond the ordinary duties of a director, may be paid on such
extra remuneration (whether by way of salary, commission, participation
in profits or otherwise) as shall be approved by resolution of the
directors.
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55. The Company may pay to a director who at the request of the Company
holds any office (including a directorship) in, or renders services to
any company in which the Company may be interested, such remuneration
(whether by way of salary, commission, participation in profits or
otherwise) in respect of such office or services as shall be approved
by resolution of the directors.
56. The office of director shall be vacated if the director:
(a) is removed from office by a resolution of members or by a
resolution of directors, or
(b) becomes bankrupt or makes any arrangement or composition with
is creditors generally, or
(c) becomes of unsound mind, or of such infirm health as to be
incapable of managing his affairs, or
(d) resigns his office by notice in writing to the Company.
57. (a) A director may hold any other office or position of profit
under the Company (except that of auditor) in conjunction with
his office of director and may act in a professional capacity
to the Company on such terms as to remuneration and otherwise
as the directors shall arrange.
(b) A director may be or become a director or other officer of, or
otherwise interested in, any company promoted by the Company,
or in which the Company may be interested, as a member or
otherwise, and no such director shall be accountable for any
remuneration or other benefits received by him as director or
officer or from his interest in such company. The directors
may also exercise the voting powers conferred by the shares in
any other company held or owned by the Company in such manner
in all respects as they think fit, including the exercise
thereof in favor of any resolution appointing them, or any of
their number, directors or officers of such other company, or
voting or providing for the payment of remuneration to the
directors or officers of such other company. A director may
vote in favour of the exercise of such voting rights in manner
aforesaid, notwithstanding that he may be, or be about to
become, a director or officer of such other company, and as
such, or in any other manner, is, or may be, interested in the
exercise of such voting rights in the manner aforesaid.
(c) No director shall be disqualified by his office from
contracting with the Company, either as vendor, purchaser or
otherwise, nor shall any such contact or arrangement entered
into by or on behalf of the Company in which any director
shall be in any way interested be voided, nor shall any
director so contracting or being so interested be liable to
account to the Company for any profit realised by any such
contract or arrangement, by reason of such director holding
that office or of the fiduciary relationship thereby
established. The nature of a director's interest must be
declared by him at the meeting of the directors at which the
question of entering into the contract or arrangement is first
taken into consideration, and if the director was not at the
date of that meeting interested in the proposed contract or
arrangement, or shall become interested in a contract or
arrangement after it is made, he shall forthwith after
becoming so interested advise the Company in writing of the
fact and nature of his interest. A general notice to the
directors by a director that he is a member of a specified
firm or company, and is to be regarded as interested in any
contract or transaction which may, after the date of notice,
be made with such firm or company shall (if such director
shall give the same at a meeting of the directors, or shall
take reasonable steps to secure that the same is brought up
and read at the next meeting of directors after it is given)
be a sufficient declaration of interest in relation to such
contract of transaction with such firm or company. A director
may be counted as one of a quorum upon a motion in respect of
any contract or arrangement which he shall make with the
Company, or in which he is so interested as aforesaid and may
vote on such motion.
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OFFICERS
58. The directors of the Company may, by a resolution of directors, appoint
officers of the Company at such times as shall be considered necessary
or expedient, and such officers may consist of a President, one or more
Vice-Presidents, a Secretary and a Treasurer and such other officers as
may from time to time be deemed desirable. The officers shall perform
such duties as shall be prescribed at the time of their appointment
subject to any modification in such duties as may be prescribed by the
directors thereafter, but in the absence of any specific allocation of
duties it shall be the responsibility of the President to manage the
day to day affairs of the Company, the Vice-Presidents to act in order
of seniority in the absence of the President but otherwise to perform
such duties as may be delegated to them by the President, the Secretary
to maintain the registers, minute books and records (other than
financial records) of the Company and to ensure compliance with all
procedural requirements imposed on the Company by applicable law, and
the Treasurer to be responsible for the financial affairs of the
Company.
59. Any person may hold more than one office and no officer need be a
director or member of the Company. The officers shall remain in office
until removed from office by the directors whether or not a successor
is appointed.
60. Any officer who is a body corporate may appoint any person its duly
authorised representative for the purpose of representing it and of
transacting any of the business of the officers.
POWER OF DIRECTORS
61. The business of the Company shall be managed by the directors, who may
pay all expenses incurred preliminary to and in connection with the
formation and registration of the Company and may exercise all such
powers of the Company as are not by the Ordinance or by these
Regulations required to be exercised by the members, subject to any
delegation of such powers as may be prescribed by resolution of the
members, but no requirement made by resolution of the members shall
prevail if it be inconsistent with these Regulations nor shall such
requirement invalidate any prior act of the directors which would have
been valid if such requirement had not been made.
62. The Board may entrust to and confer upon any director or officer any of
the powers exercisable by it, upon such terms and conditions and with
such restrictions as it thinks fit, and either collaterally with, or to
the exclusion of, its own powers, and may from time to time revoke,
withdraw, alter or vary all or any of such powers. The directors may
delegate any of their power to committees consisting of such member or
members of their body as they think fit; any committee so formed shall
in the exercise of the powers so delegated conform to any regulations
that may be imposed on it by the directors.
63. The directors may from time to time and at any time by power of
attorney appoint any company, firm or person or body of persons,
whether nominated directly or indirectly by the directors, to be the
attorney or attorneys of the Company for such purposes and with such
powers, authorities and discretions (not excluding those vested in or
exercisable by the directors under these Regulations) and for such
period and subject to such conditions as they may think fit, and any
such powers of attorney may contain such provisions for the protection
and convenience of persons dealing with any such attorney as the
directors may think fit and may also authorise any such attorney to
delegate all or any of the powers, authorities and discretions vested
in him.
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64. Any director who is a body corporate may appoint any person as its duly
authorized representative for the purpose of representing it at Board
Meetings and of transacting any of the business of the directors.
65. All cheques, promissory notes, drafts, bills of exchange and other
negotiable instruments and all receipts for monies paid to the Company
shall be signed, drawn, accepted, endorsed, or otherwise executed, as
the case may be, in such manner as the directors shall from time to
time by resolution determine.
66. The directors may exercise all the powers of the Company to borrow
money and to mortgage or charge its undertakings, property and uncalled
capital or any part thereof, to issue debentures, debenture stock and
other securities whenever money is borrowed or as security for any
debt, liability or obligation of the Company or of any third party.
67. The continuing directors may act notwithstanding any vacancy in their
body, save that if the number of directors shall have been fixed at two
or more persons and by reason of vacancies having occurred in the Board
there shall be only one continuing director he shall be authorised to
act alone only for the purpose of appointing another director.
PROCEEDING OF DIRECTORS
68. The meeting of the Board of Directors and any committee thereof shall
be held at such place or places as the directors shall decide.
69. The directors may elect a chairman of their meetings and determine the
period for which he is to hold office, but if no such chairman is
elected, or if at any meeting the chairman is not present at the time
appointed for holding the same, the directors present may choose one of
their number to be chairman of the meeting.
70. The directors may meet together for the dispatch of business, adjourn
and otherwise regulate their meetings as they think fit. Questions
arising at any meeting shall be decide by a majority of votes; in case
of any equality of votes the chairman shall have a second or casting
vote. A director may at any time summon a meeting of the directors. If
the Company shall have only one director the provisions hereinafter
contained for meetings of the directors shall not apply but such sole
director shall have full power to represent and act for the Company in
all matters and in lieu of minutes of a meeting shall record in writing
and sign a note or memorandum of all matters requiring a resolution of
the directors. Such note or memorandum shall constitute sufficient
evidence of such resolution for all purposes.
71. A director shall be given not less than three days notice of a meeting
of the directors.
72. Notwithstanding Regulation 71 above, a meeting of directors held in
contravention of that regulation shall be valid if all the directors
entitled to vote at the meeting have waived the notice of the meeting.
73. The inadvertent failure to give notice of a meeting to a director, or
the fact that a director has not received the notice does not
invalidate the meeting.
74. A meeting of directors is duly constituted for all purposes if at the
commencement of the meeting there are present in person or by alternate
not less than one-third of the total number of directors with a minimum
of two.
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75. If within thirty minutes from the time appointed for a meeting the
quorum is not present, the meeting shall be dissolved.
76. Any one or more members of the Board of Directors or any committee
thereof may participate in a meeting of such Board or committee by
means of a conference telephone or similar communications equipment
allowing all persons participating in the meeting to hear each other at
the same time. Participation by such means shall constitute presence in
person at a meeting.
77. A resolution approved by a majority of the directors for the time being
entitled to receive notice of a meeting of the directors, or of a
committee of the directors, and taking the form of one or more
documents in writing or by telex, telegram, cable, facsimile (FAX) or
other written electronic communication shall be as valid and effectual
as if it had been passed at a meeting of directors, or of such
committee duly convened and held, without the need for any notice.
INDEMNITY
78. Subject to the provisions of the Ordinance and of any other statute for
the time being in force, every director or other officer of the Company
shall be entitled to be indemnified out of the assets of the Company
against all losses or liabilities which he may sustain or incur in or
about the execution of the duties of his office or otherwise in
relation thereto, and no director or other officer shall be liable for
any loss, damage or misfortune which may happen to, or be incurred by
the Company in the execution of the duties of his office, or in
relation thereto.
SEAL
79. The directors shall provide for the safe custody of the common seal of
the Company. The common seal when affixed to any instrument, except as
provided in Regulation 2, shall be witnessed by a director or any other
person so authorised from time to time by the directors. The directors
may provide for a facsimile of the common seal and approve the
signature of any director or authorised person which may be reproduced
by printing or other means on any instrument and it shall have the same
force and validity as if the seal had been affixed to such instrument
and the same had been signed as hereinbefore described.
DIVIDENDS AND RESERVES
80. The directors may by resolution declare a dividend but no dividend
shall be declared and paid except out of surplus and unless the
directors determine that immediately after the payment of the dividend:
(a) the Company will be able to satisfy its liabilities as they
become due in the ordinary course of its business; and
(b) the realisable value of the assets of the Company will not be
less than the sum of its total liabilities, other than
deferred taxes, as shown in the books of account, and its
capital.
81. Dividends when and if declared may be paid to one class of holder to
the exclusion of the holders of other classes, or in unequal amounts to
holders of the various classes of shares.
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82. Dividends may be declared and paid in money, shares or other property.
83. In computing the surplus for the purpose of resolving to declare and
pay a dividend, the directors may include in their computation the net
unrealised appreciation of the assets of the Company.
84. The directors may from time to time pay to the members such interim
dividends as appear to the directors to be justified by the surplus of
the Company.
85. Subject to the rights of holders of shares entitled to special rights
as to dividends, all dividends shall be declared and paid according to
the par value of the shares in issue, excluding those shares which are
held by the Company as treasury shares at the date of declaration of
the dividend.
86. The directors may, before recommending any dividend, set aside out of
the profits of the Company such sums as they think proper as a reserve
or reserves which shall, at the discretion of the directors, be
applicable for meeting contingencies, or for any other purpose to which
the profits of the Company may be properly applied, and pending such
application may, at the like discretion, either be employed in the
business of the Company or be invested in such investments as the
directors may from time to time think fit.
87. If several persons are registered as joint holders of any share, any of
them may give an effectual receipt for any dividend or other monies
payable on or in respect of the shares.
88. In the case of shares issued to bearer, the directors may provide for
the payment of a dividend by reference to counterfoils or warrants
issued with the certificate for such shares, and the production of such
dividend counterfoil or warrant shall evidence entitlement to receipt
of such dividend in the same way and to the same extent as production
of the certificate itself. At the time of presentation of the
counterfoil or warrant, the director may issue such further
counterfoils or warrants as may be required to permit receipt by the
holder thereof of subsequent dividends.
89. Notice of any dividend that may have been declared shall be given to
such members in the manner hereinafter prescribed and all dividends
unclaimed for three years after having been declared may be forfeited
by the directors for the benefit of the Company.
90. No dividend shall bear interest against the Company.
BOOKS AND RECORDS
91. The Company shall keep such accounts and records as the directors
consider necessary or desirable in order reflect the financial position
of the Company.
92. The Company shall keep minutes of all meetings of directors, members,
committees of directors, committees of officers and committees of
members, and copies of all resolutions consented to by directors,
members, committees of members, committees of officers and committees
of members.
93. The books, records and minutes required by Regulations 91 and 92 shall
be kept at the registered office of the Company or at such other place
as the directors determine, and shall be open to the inspection of the
directors at all times.
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94. The directors shall from time to time determine whether and to what
extent and at what times and places and under what conditions or
regulations the books, records and minutes of the Company or any of
them shall be open to the inspection of members not being directors,
and no members (not being a director) shall have any right of
inspecting any book, record, minute or document of the Company except
as conferred by law or authorised by resolution of the directors.
AUDIT
95. The directors may by resolution call for the accounts of the Company to
be examined by an auditor or auditors to be appointed by them at such
remuneration as may from time to time be agreed.
96. The auditor may be a member of the Company but no director or officer
shall be eligible during his continuance in office.
97. Every auditor of the Company shall have a right of access at all times
to the books of account and vouchers of the Company, and shall be
entitled to require from the officers of the Company such information
and explanations as he thinks necessary for the performance of this
duties.
98. The report of the auditor shall be annexed to the account upon which he
reports, and the auditor shall be entitled to receive notice of, and to
attend, any meeting at which the Company's audited profit and loss
account and balance sheet is to be presented.
NOTICES
99. Any notice, information or written statement required to be given to
members shall be served:
(a) in the case of members holding registered shares, by mail
(airmail service if available) addressed to each member at the
address shown in the share register; and
(b) in the case of members holding shares issued to bearer:
(i) by mail (airmail service if available) addressed to
the agent or attorney whose name and address has been
given for service of notice by the bearer of the
share (identified for this purpose by the number of
the share certificate); or
(ii) in the absence of an address for service being given,
or if the notice, information or written statement
cannot be served for any other reason, by publishing
the notice, information or written statement in one
or more newspapers published or circulated in the
British Virgin Islands and in a newspaper in the
place where the Company has its principal office.
100. All notices directed to be given to the members shall, with respect to
any registered shares to which persons are jointly entitled, be given
to whichever of such persons is named first in the share register and
notice so given shall be sufficient notice to all holders of such
share.
101. Any notice, if served by post, shall be deemed to have been served
within ten days of posting and approving such service it shall be
sufficient to prove that the letter containing the notice was properly
addressed and put into the post office.
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PENSION AND SUPERANNUATION FUNDS
102. The directors may establish and maintain or produce the establishment
and maintenance of any non-contributory or contributory pension or
superannuation funds for the benefit of, and give or procure the giving
of donations, gratuities, pensions, allowances or emoluments to, any
persons who are or were at any time in the employment or service of the
Company or any company which is a subsidiary of the Company or is
allied or associated with the Company or with any such subsidiary, or
who are or were at any time directors or officers of the Company or of
any other company as aforesaid, or who hold or held any salaried
employment or office in the Company or such other company, or any
persons in whose welfare the Company or any such other company as
aforesaid is or has been at any time interested, and to the spouses,
surviving spouses, families and dependents of any such person, and may
make payments for or toward the insurance of any such persons as
aforesaid, and may do any of the matters aforesaid either alone or in
conjunction with any such other company as such employment or office
shall be entitled to participate in, and may retain for his own benefit
any such donation, gratuity, pension, allowance or emolument.
WINDING UP
103. If the Company shall be wound up, the liquidator may, in accordance
with a resolution of members, divide amongst the members in specie or
in kind the whole or any part of the assets of the Company (whether
they shall consist of property of the same kind or not) and may for
such purpose set such value as he deems fair upon any property to be
divided as aforesaid and may determine how such division shall be
carried out as between the members or different classes of members. The
Liquidator may vest the whole or any part of such assets in trustees
upon such trusts for the benefit of the contributories as the
Liquidator shall think fit, but so that no member shall be compelled to
accept any shares or other securities whereon there is any liability.
ARBITRATION
104. Whenever any difference arises between the Company on the one hand and
any of the members, their executors, administrators or assigns on the
other hand touching the true intent and construction or the incidence
or consequences of these presents or of the Ordinance, touching
anything done or executed, omitted or suffered in pursuance of the
Ordinance, or touching any breach or alleged breach or otherwise
relating to the premises or to these presents or to any Ordinance
affecting the Company or to any of the affairs of the Company, such
difference shall, unless the parties agree to refer the same to a
single arbitrator, be referred to two arbitrators, one to be chosen by
each of the parties to the difference and the arbitrators shall before
entering on the reference appoint an umpire.
105. If either party to the reference make default in appointing an
arbitrator either originally or by way of substitution (in the event
that an appointed arbitrator shall die, be incapable of acting or
refuse to act) for ten days after the other party has given him notice
to appoint the same, such other party may appoint an arbitrator to act
in the place of the arbitrator of the defaulting party.
AMENDMENT TO ARTICLES
106. The Company may alter or modify the conditions contained in these
Regulations as originally drafted or as amended from time to time by
resolution of the members or by resolution of the directors.
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The undersigned Subscriber, for the purpose of incorporating an International
Business Company under the laws of the British Virgin Islands, hereby subscribes
its name to these Articles of Association.
NAME, ADDRESS AND DESCRIPTION OF SUBSCRIBER
Scott F. Wilson
COMMONWEALTH MANAGEMENT LIMITED
P.O. Box 3321
Road Town, Tortola
British Virgin Islands
Company Management Company
/s/
---------------------------------------------------
For, and on behalf of, Commonwealth Management Limited,
Registered Agent
- -----------------------------------------------------------------------------
Dated this 3rd Day of January, 1996
Witness to the above signature:
/s/
Thomas J. Ward
P.O. Box 3321
Road Town, Tortola
British Virgin Islands
15
The Articles of Association
for the Joint Venture of
Xianyang Yongxin Electronics Co., Ltd.
May. 8, 1996
Xianyang, Shaanxi, China
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Total Pages: 15
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Contents
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Chapter 1 General Provisions
Chapter 2 Purpose and Scope of Business
Chapter 3 The Total Amount of Investment and
Registered Capital
Chapter 4 The Board of Directors
Chapter 5 Business Management Organization
Chapter 6 Finance and Accounting
Chapter 7 Profits Sharing
Chapter 8 Staff and Workers
Chapter 9 Duration, Termination and Liquidation
Chapter 10 The Trade Union Organization
Chapter 11 Rules and Regulations
Chapter 12 Supplementary Articles
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Chapter 1 General Provisions
Article one
In accordance with "The Law of People's Republic of China on Joint Ventures
Using Chinese and Foreign Investment" and the contract signed between Xianyang
Pianzhuan Development Co., Ltd. (Party A) and Asia Electronics Holding Co., Ltd.
(Party B), the articles of association for the Chinese and (British) joint
venture Xianyang Yongxin Electronics Co., Ltd., hereby is formulated at Xianyang
City on May 8, 1996.
Article Two
The name of the joint venture company shall be Xianyang Yongxin Electronics Co.,
Ltd. Its legal address is at No. 70 West Weiyang Road, Xianyang City, Shaanxi
Province, China.
Article Three
The names and legal addresses of the Parties to the joint venture are as
follows:
Party A:
Xianyang Pianzhuan Development Co., Ltd., at No. 70 West Weiyang Road, Xianyang,
Shaanxi, China.
Legal Representative:
Name: Du, Qing Song
Position: Chairman & CEO
Nationality: P.R. China
Party B:
Asia Electronics Holding Co., Ltd., registered in British Virgin Island. (Its
legal address is at one world Trade Center, Suite 4629, New York, NY 10048,
USA.)
Legal Representative:
Name: To, Shing Hoi
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Article Four
The joint venture company is a limited liability company.
Article Five
The joint venture company as a Chinese legal entity is subject to the
jurisdiction and protection of China's laws concerned. All its activities shall
be governed by Chinese laws, decrees and other pertinent rules and regulations.
Chapter 2 Purpose and Scope of Business
Article Six
The purpose of the joint venture company is to enhance economic cooperation and
technical exchange to improve the product quality, develop new products and gain
competitive position in the world market in quality and price by adopting
advanced and appropriate managing methods to ensure satisfactory economic
benefits for all Parties to the joint venture company.
Article Seven
The production and sales scope of the joint venture company is to produce
deflection yoke products and to study and develop other electronic products and
provide with after-sale service.
Article Eight
The production scale of the joint venture company are as follows:
The production scale of the joint venture company put into operation is an
annual output of 730,000 sets of 25" deflection yokes and components. (The
product varieties may be developed.)
Article Nine
Products of the joint venture company are in accordance with provisions in
Chapter 7 of the contract. The joint venture company may sell its products in
domestic and international market, and the export should at least count for 60%.
3
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Chapter 3 Total Amount of Investment and Registered Capital
Article Ten
The total amount of investment of the joint venture company is US$4,200,000
Investment contributed by the Parties is US$ 2,100,000, which will be the
registered capital of the joint venture company.
Article Eleven
The investment contributed by each Party is as follows:
Party A: US$ 420,000
accounting for twenty percent;
Party B: US$ 1,680,000
accounting for eighty percent.
The registered capital of the joint venture company shall be paid by Party A and
Party B according to their investment proportion.
Article Twelve
Party A and Party B will contribute their investment to the joint venture
company according to Articles Ten and Eleven. The first contribution by each
Party should be no less than 25% of its total contribution.
Article Thirteen
After the investment is paid by the Parties to the joint venture, a Chinese
registered accountant hired by the joint venture company shall after
investigation provide a certificate of verification, according to which the
joint venture shall issue an Investment Certificate including the following
items:
1. Name of the joint venture;
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2. Date of establishment of the joint venture;
3. Names of the Parties and the investment contributed;
4. Date of the contribution of the investment; and
5. Date of issue of the Investment Certificate.
Article Fourteen
Within the duration of the joint venture, its registered capital shall not be
reduced.
Article Fifteen
In case either Party to the joint venture assigns his investment subscribed to a
third party, consent shall be obtained from the other party to the joint venture
in advance and the other party has preemptive right on it.
Article Sixteen
Any increase on assignment of the registered capital of the joint venture
company shall gain consent from the Board of Directors and the case shall be
submitted to the original examination and approval authority for approval. The
registration procedures for the change shall be dealt with at the original
registration and administration office.
Chapter 4 The Board of Directors
Article Seventeen
The Board of Directors shall be established as the highest authority of the
joint venture company.
Article Eighteen
The Board of Directors shall decide all major issues concerning the joint
venture company. It has the functions and power as follows:
* Approve the important reports presented by the general manager on
production scale, schedule and proposal for profit etc.
* Adopting major rules and regulations of the company
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* Making decisions to set up branches
* Amending the articles of association of the company
* Discussing and making decisions on the termination of production,
termination of the company or merging with another economic
organization
* Making decisions on appointments of the general manager, the vice
general manager, etc.
* Being in charge of expiration of the company and the liquidation
matters upon the expiration of the joint venture company
* Other major issues which shall be decided by the Board of Directors
Article Nineteen
The Board of Directors shall consist of 5 Directors, of which 1 shall be
appointed by Party A, 4 by Party B. The term of office for the Directors is four
years and may be renewed.
Article Twenty
Chairman of the Board shall be appointed by Party B , vice-chairman shall be
appointed by Party A.
Article Twenty-one
When either party to the joint venture intends to appoint or replace Directors,
a written notice shall be submitted to the Board.
Article Twenty-two
The Board of Directors shall at least convene on meeting every year. An interim
meeting of the Board of Directors may be held based on a proposal made by more
than one-third of the total number of Directors.
Article Twenty-three
The location of the Board meeting shall be decided by Party A and Party B,
either to be on the location of Party A in China, or on the location of Party B
abroad.
Article Twenty-four
6
<PAGE>
The Board meeting shall be called and presided over by the chairman. Should the
chairman be absent, the vice chairman shall call and preside over the Board
meeting.
Article Twenty-five
The chairman shall file each director a written notice 30 days before the date
of the Board meeting. The notice shall cover the agenda, time and place of the
meeting.
Article Twenty-six
Should a director be unable to attend the Board meeting, he may present a proxy
in written form to the Board. In case the director neither attends nor entrusts
others to attend the meeting, he will be regarded as abstention.
Article Twenty-seven
The Board meeting requires a quorum of over two-thirds of the total number of
the Directors. Otherwise, the decisions adopted by the Board meeting are
considered invalid.
Article Twenty-eight
Detailed written minutes shall be made for each Board meeting and signed by all
the attending Directors or by the attending proxy. The record shall be made in
Chinese (and English) and be filed with the company.
Article Twenty-nine
Issues which have been unanimously or mostly agreed upon by the Board of
Directors shall be carried out according to Article 22 in Chapter 8 of the
Contract, other issues shall be passed by over half of the total number.
Chapter 5 Business Management Office
Article Thirty
The joint venture company shall establish a management office which
7
<PAGE>
shall be responsible for its daily management. The management office shall have
a general manager, appointed by Party A.
Article Thirty-one
The general manager is directly responsible to the Board of Directors. He shall
carry out the decisions of the Board meeting and organize and conduct the daily
management of the joint venture company.
Article Thirty-two
The term of office for the general manager shall be 4 years, and may be renewed
if continuously appointed by the Board of Directors.
Article Thirty-three
At the invitation of the Board of Directors, the chairman, vice-chairman or
Directors of the Board may concurrently be the general manager, or other
high-ranking personnel of the joint venture company.
Article Thirty-four
The general manager, deputy general managers who ask for resignation shall
submit their written reports to the Board of Directors in advance.
Article Thirty-five
The high ranking personnel who are hired and work in the company shall not hold
positions in other economic organizations in commercial competition with their
own joint venture company.
Article Thirty-six
In case of graft or serious dereliction of duty on any above-mentioned persons,
the Board of Directors shall have the power to dismiss them at any time. Those
who violate the criminal law shall be under criminal sanction. If the Board
cannot be called in time, the chairman of the Board may ask in written notes for
the opinions of the members of the Board.
Chapter 6 Finance and Accounting
Article Thirty-seven
8
<PAGE>
The finance and accounting of the joint venture company shall be handled in
accordance with the "Stipulations of the Finance and Accounting System of the
Joint Ventures Using Chinese and Foreign Investment" formulated by the Ministry
of Finance of the People's Republic of China.
Article Thirty-eight
The fiscal year of the joint venture company shall coincide with the calendar
year, i.e., from January 1 to December 31 on the Gregorian Calendar.
Article Thirty-nine
All vouchers, account books, statistic statements and reports of the joint
venture company shall be written in Chinese (English will be currently used for
Main documents).
Article Forty
The joint venture company adopts RMB as its accounts keeping unit. The
conversion of RMB into other currency shall be in accordance with the exchange
rate of the converting day published by the State Administration of Exchange
Control of the people's Republic of China.
Article Forty-one
The joint venture company shall open accounts in RMB and foreign currency with
the Bank of China or other banks agreed by the Bank of China.
Article Forty-two
The accounting of the joint venture company shall adopt the internationally used
accrual basis and debit and credit accounting system in their work.
Article Forty-three
The following items shall be covered in the financial accounts books:
* The amount of overall cash income and expense of the joint venture
company
* All material purchasing and selling of the joint venture company
* The registered capital and debts of the joint venture
9
<PAGE>
company
* The time of payment, increase and assignment of the registered
capital of the joint venture company
Article Forty-four
The joint venture company shall work out the statement of assets, liabilities,
losses and gains accounts of the past year in the first three months of each
fiscal year, and submit to the Board meeting for approval after being examined
and signed by the auditor.
Article Forty-five
Each party to the joint venture has the right to hire an auditor to undertake
annual financial check and examination at their own expense. The joint venture
company shall provide convenience for the checking and examination.
Article Forty-six
The depreciation period for the fixed assets of the joint venture company shall
be decided by the Board of Directors in accordance with the "Rules for the
Implementation of the Income Tax Law of the People's Republic of China
Concerning Joint Ventures with Chinese and Foreign Investment."
Article Forty-seven
All matters concerning foreign exchange shall be handled in accordance with the
"Provisional Regulations for Exchange Control of the People's Republic of
China", and other pertaining regulations as well as the stipulations of the
joint venture contract.
Chapter 7 Profits Sharing
Article Forty-eight
The joint venture company shall draw reserve funds, development funds and
bonuses and welfare funds for staff and workers after payment of taxes. The
proportion of allocation is decided by the Board of Directors.
10
<PAGE>
Article Forty-nine
The joint venture company shall not distribute profits until the losses of
previous fiscal year have been made up. Remaining profit from the previous year
can be distributed together with that of the current year.
Article Fifty
After paying the taxes in accordance with law and drawing the various funds, the
remaining profits will be distributed according to the proportion of each
party's investment in the registered capital.
Chapter 8 Staff and Workers
Article Fifty-one
The employment, recruitment, dismissal and resignation of the staff and workers
of the joint venture company and their salary, welfare benefits, labor
insurance, labor protection, labor discipline and other matters shall be handled
according to the "Regulations of the People's Republic of China on Labor
Management in Joint Ventures Using Chinese and Foreign Investment" and its
implementation rules.
Article Fifty-two
The joint venture company has the right to take disciplinary actions, such as
warning, suspending the salary while keeping the post, reducing salary and
dismissing from the post, against those staff members and workers who violate
the rules and regulations of the joint venture company and labor disciplines.
Dismissal of workers shall be filed with the local labor and personnel
department.
Article Fifty-three
The salary of the staff and workers shall be set by the Board of Directors
according to the specific situation of the joint venture, with reference to
pertaining stipulations of China.
Chapter 9 Duration, Termination and Liquidation
11
<PAGE>
Article Fifty-four
The duration of the joint venture company shall be 50 years, starting from the
date of issue of the Business License.
Article Fifty-five
An application for the extension of duration shall, proposed by two Parties and
approved at the Board meeting, be submitted to the original examination and
approval authority six months prior to the expiry date of the joint venture.
Only upon its approval may the duration be extended after the joint venture
company goes through the registration formalities for the alteration at the
original registration office.
Article Fifty-six
The joint venture company may be terminated before its expiration in case the
Parties to the joint venture agree unanimously that the termination of the joint
venture is for the best interest of the Parties. To terminate the joint venture
before the term expires shall be decided by the Board of Directors through a
plenary meeting, and it shall be submitted to the original examination and
approval authority for approval.
Article Fifty-seven
Upon the expiration or termination of the joint venture before its term ends,
the Board of Directors shall work out procedures and principles for the
liquidation, nominate personnel for the liquidation committee, and set up the
liquidation committee for liquidating the joint venture company's assets.
Article Fifty-eight
The tasks of the liquidation committee are:
* To conduct thorough check of the property of the joint venture
company, its claim and indebtedness;
* To work out the statement of assets and liabilities and list of
property;
* To formulate a liquidation plan, which will be carried out upon
approval of the Board of Directors.
12
<PAGE>
Article Fifty-nine
During the process of liquidation, the liquidation committee shall represent the
company to sue and be sued.
Article Sixty
The remaining property after the clearance of debts of the joint venture company
shall be distributed among the Parties to the joint venture according to the
proportion of each party's investment in the registered capital.
Article Sixty-one
The liquidation expenses and remuneration to the members of the liquidation
committee shall be paid in priority from the existing assets of the joint
venture.
Article Sixty-two
After the termination of the joint venture company, its account books shall be
left in the care of the Party A.
Chapter 10 The Trade Union Organization
Article Sixty-three
The staff and workers of the joint venture company have the right to establish
the trade union organization and carry out activities in accordance with the
stipulations of the "Trade Union Law of the People's Republic of China".
Article Sixty-four
The trade union in the joint venture company represents the interests of the
staff and workers. The tasks of the trade union are:
* To protect the democratic rights and the material interests of the
staff and workers pursuant to the law;
13
<PAGE>
* To assist the joint venture company to arrange and make rational use
of welfare funds and bonuses;
* To organize political, professional, scientific and technical
studies, carry out literary, art and sports activities; and
* To educate staff and workers to observe labor discipline and strive
to fulfill the economic tasks of the joint venture company.
Article Sixty-five
Persons in charge of the trade union of the joint venture company have the right
to attend as non-voting members and to report the opinions and demands of staff
and workers to meetings of the managers held to discuss issues such as
production and operational activities, bonuses and welfare, etc.
Chapter 11 Rules and Regulations
Article Sixty-six
Following are the rules and regulations to be formulated by the joint venture
and approved by the Board of Directors:
* Managing regulations, including the function and power of the
managerial branches and its working rules and procedures;
* Rules for the staff and workers;
* System of labor and salary;
* System of work attendance record, promotion, awards and penalty for
staff members and workers;
* Detailed rules of staff and workers' welfare;
* Financial system;
* Other necessary rules and regulations.
Chapter 12 Supplementary Articles
14
<PAGE>
Article Sixty-seven
The amendments to the Articles of Association shall be unanimously agreed on and
decided by the Board of Directors and submitted to the original examination and
approval authority for approval.
Article Sixty-eight
The Articles for Association is written in Chinese language and English
language, the Chinese version shall prevail.
Article Sixty-nine
The Articles of Association shall come into effect upon the approval by the
Ministry of Foreign Trade and Economic Cooperation of the People's Republic of
China (or its entrusted examination and approval authority).
Article Seventy
The Article of Association is signed in Xianyang, Shaanxi, China by the
authorized representatives of the two Parties on Dec. 8, 1996.
Party A: Xianyang Pianzhuan Development Co., Ltd.
(Signature): ..........................................................
Party B: Asia Electronics Holding Co. Inc.
(Signature): ..........................................................
15
APPROVAL CERTIFICATE
OF
SINO-FOREIGN JOINT VENTURE IN PRC
(Left Side)
Approval No.: Xianyang Joint Venture [1994]No. 014
Approval Date: August 13, 1994
(Seal on date) - February 24, 1997
(Right Side)
Name of Joint Venture:
In Chinese:
In English: XIANYANG YONGXIN ELECTRONICS CO., LTD.
Address: 70 West Weiyang Road, Xianyang, Shannxi Province
Type of company: Joint Venture Term of the Joint Venture: 30 years
Total Investment: USD4,200,000
Registered Capital: USD2,100,000
Investors:
Name:
Party A: Xianyang Pianzhuan Development Co. Ltd.
Party B: Asia Electronics Holding Co. Ltd.
Registration Place:
Party A: PRC
Party B: British Virgin Island
Contributions:
Party A: US$420,000
Party B: US$1,680,000
Field of Operation:
Manufacturing of deflection yokes and other electronic products.
PEOPLE'S REPUBLIC OF CHINA
LEGAL ENTITY
BUSINESS LICENSE
(Left Side)
Registration No.: Xianyang Joint Venture No.000146 1/2
This enterprise has registered to be business legal entity and is approved to do
business.
Annual Validation Check by every March 1(Seal)
(Right Side)
Name of the enterprise:
In Chinese:
In English: XIANYANG YONGXIN ELECTRONICS CO., LTD.
Address: 70 Weiyang West Road, Xianyang, Shaanxi
Province
Type of the enterprise: Joint Venture
Field of Operation: Manufacturing and sales of deflection yokes.
Registration Capital: USD2,100,000
Chairman of Board Du, Qing Song
Vice Chairman of Board To, Shing Hoi
General Manager Du, Qing Song
Deputy General Manager Cheng, Kaihua
Term of Operation: From February 9, 1993 to February 8, 2023
The License valid date: From February 9, 1993 to February 8, 1996
The Commerce Administration Bureau of PRC Director (Signature)
Seal Date: March 12, 1997
FOREIGN TRADE AND ECONOMIC COOPERATION BUREAU OF XIANYANG
(OFFICIAL DOCUMENT NUMBER 1993 185)
- --------------------------------------------------------------------------
RE: CHANGE OF PARTNER OF XIANYANG YONGXIN ELECTRONICS CO.
Xianyang Yongxin Electronics Co. Ltd.:
Your reporting document on September 11, 1993 has been reviewed. The
reply is as follows:
1. It is to approve that Hong Kong Yongxin Technology Development Co. Ltd.
("Hong Kong Yongxin") withdraw all its shares in the joint venture -
Xianyang Yongxin Electronics Co. Ltd. ("Yongxin")
2. It is to approve that Hong Kong Cao Trading Co. Ltd. replaces Hong Kong
Yongxin's whole shares in Yongxin and assume all the rights and
liabilities that the withdrawing party had in the joint venture.
3. The total investments, registered capital and range of operation will not
change after the transfer.
4. There will be a seven-people Board of Directors in Xianyang Electronics
Co. Ltd., with three Chinese Directors and four Hong Kong Directors. The
Chairman of Board will be a person from the Hong Kong partner, and Vice
Chairman will be a person from Chinese partner.
Please apply for new business license at Commerce Administration Bureau.
FOREIGN TRADE AND ECONOMIC COOPERATION BUREAU OF XIANYANG
(seal)
September 10, 1993
CC Copies to.....
FOREIGN TRADE AND ECONOMIC COOPERATION BUREAU OF XIANYANG
(OFFICIAL DOCUMENT NUMBER: 1994 06)
- --------------------------------------------------------------------------------
RE: CHANGE OF PARTNER OF XIANYANG YONGXIN ELECTRONICS CO.
Xianyang Yongxin Electronics Co. Ltd.:
Your reporting document (No. 1994, 081) has been reviewed. The reply is
as follows:
1. It is to approve that Hong Kong Cao Trading Ltd. transfers all its shares
in the joint venture - Xianyang Yongxin Electronics Co. Ltd. to Tomei
Trading Co. Ltd., a company incorporated in Japan, who, after the
transfer, will assume all the rights and liabilities that the withdrawing
party had in the joint venture.
2. Xianyang Pianzhuan Group and Tomei Trading Co. Ltd. will form a new Board
of Directors after the transfer.
Please apply for new business license at Commerce Administration Bureau.
FOREIGN TRADE AND ECONOMIC COOPERATION BUREAU OF XIANYANG
(seal)
August 18, 1994
CC Copies to.....
FOREIGN TRADE AND ECONOMIC COOPERATION BUREAU OF XIANYANG
(OFFICIAL DOCUMENT NUMBER)
- --------------------------------------------------------------------------------
RE: CHANGE OF PARTNER OF XIANYANG YONGXIN ELECTRONICS CO.
Xianyang Yongxin Electronics Co. Ltd.:
Your reporting document (No. 1996, 062) has been reviewed. The reply is as
follows:
1. It is to approve that Xianyang Pianzhuan Group transfers all its interests
of the joint venture - Xianyang Yongxin Electronics Co. Ltd. to Xianyang
Pianzhuan Development Co. Ltd., who will assume all the rights and
liabilities that the withdrawing party had in the joint venture after the
transfer.
2. The total investments and registered capital will not change after the
transfer. It is to approve that Xianyang Pianzhuan Development Co. Ltd.
transfer its 25% interests of Xianyang Yongxin Electronics Co. Ltd. to
Tomei Trading Co., Ltd., a Japanese company, immediate after the transfer
stated above. As a result, Xianyang Pianzhuan Development Co. Ltd. will
own 20% interest of Yongxin from 45%, and the Tomei Trading Co. Ltd.'s
holding interest in Yongxin will increase to 80% from 55%.
3. All other terms of Joint Venture Contract and By-Law will remain valid as
before.
Please apply for new business license at Commerce Administration Bureau.
FOREIGN TRADE AND ECONOMIC COOPERATION BUREAU OF XIANYANG
(seal)
April 25, 1996
- --------------------------------------------------------------------------------
CC Copies to.....
FOREIGN TRADE AND ECONOMIC COOPERATION BUREAU OF XIANYANG
(OFFICIAL DOCUMENT NUMBER: 1996 79)
- --------------------------------------------------------------------------
RE: CHANGE OF PARTNER OF XIANYANG YONGXIN ELECTRONICS CO.
Xianyang Yongxin Electronics Co. Ltd.:
Your reporting document (No. 1996, 084) has been reviewed. The reply is as
follows:
1. It is to approve that Tomei Trading Co. Ltd. transfers all its 80% shares
in the joint venture - Xianyang Yongxin Electronics Co. Ltd. to Asia
Electronics Holding Co. Ltd., a British Virgin Island company, who, after
the transfer, will assume all the rights and liabilities that the
withdrawing party had in the joint venture.
2. The total investments and registered capital will not change after the
transfer. The term of the joint venture is 30 years from the date of
the original Business License issuance.
3. There will be a five-people Board of Directors in Xianyang Electronics Co.
Ltd. with four Chinese Directors and one foreign Director. The Chairman of
Board will be a person from the Chinese partner, and Vice Chairman will be
a person from foreign partner.
4. All other terms of Joint Venture Contract and By-Law will remain valid as
before.
Please apply for new business license at Commerce Administration Bureau.
FOREIGN TRADE AND ECONOMIC COOPERATION BUREAU OF XIANYANG
(seal)
September 6, 1996
- --------------------------------------------------------------------------------
CC Copies to.....
The Articles of Association
for the Joint Venture of
Xianyang Daming Electronics Co., Ltd.
May 8, 1996
Xianyang, Shaanxi, China
Total Pages:
<PAGE>
Contents
Chapter 1 General Provisions
Chapter 2 Purpose and Scope of Business
Chapter 3 The Total Amount of Investment and Registered Capital
Chapter 4 The Board of Directors
Chapter 5 Business Management Organization
Chapter 6 Finance and Accounting
Chapter 7 Profits Sharing
Chapter 8 Staff and Workers
Chapter 9 Duration, Termination and Liquidation
Chapter 10 The Trade Union Organization
Chapter 11 Rules and Regulations
Chapter 12 Supplementary Articles
1
<PAGE>
Chapter 1 General Provisions
Article one
In accordance with "The Law of People's Republic of China on Joint Ventures
Using Chinese and Foreign Investment" and the contract signed between Xianyang
Pianzhuan Development Co., Ltd. (Party A) and Asia Electronics Holding Co., Ltd.
(Party B), the articles of association for the Chinese and Italian joint venture
Xianyang Daming Electronics Co., Ltd., hereby is formulated at Xianyang City on
May 8, 1996.
Article Two
The name of the joint venture company shall be Xianyang Daming Electronics Co.,
Ltd. Its legal address is at Xianyang City, Shaanxi Province, China.
Article Three
The names and legal addresses of the Parties to the joint venture are as
follows:
Party A:
Xianyang Pianzhuan Development Co., Ltd., at No. 70 West Weiyang Road, Xianyang,
Shaanxi, China.
Legal Representative:
Name: Du, Qing Song
Position: Chairman & CEO
Nationality: P.R. China
Party B:
Asia Electronics Holding Co., Ltd., registered in British Virgin Island.
Legal Representative:
Name: To, Shing Hoi
Position: President
Nationality: Hong Kong
2
<PAGE>
Article Four
The joint venture company is a limited liability company.
Article Five
The joint venture company as a Chinese legal person is subject to the
jurisdiction and protection of China's laws concerned. All its activities shall
be governed by Chinese laws, decrees and other pertinent rules and regulations.
Chapter 2 Purpose and Scope of Business
Article Six
The purpose of the joint venture company is to enhance economic cooperation and
technical exchange to improve the product quality, develop new products and gain
competitive position in the world market in quality and price by adopting
advanced and appropriate managing methods to ensure satisfactory economic
benefits for the Parties to the joint venture company.
Article Seven
The productive and business scope of the joint venture company is to produce
deflection yoke products and to study and develop other electronic products and
provide with after-sale service.
Article Eight
The production scale of the joint venture company are as follows:
The production scale of the joint venture company put into operation is to
product 1.0 million sets of deflection yokes and components. The product
varieties may be developed.
Article Nine
Products of the joint venture company are in accordance with that in Chapter 7
of the contract. The joint venture company may do business on
3
<PAGE>
its products in domestic and international market, the export should at least
count for 60%.
Chapter 3 Total Amount of Investment and Registered Capital
Article Ten
The total amount of investment of the joint venture company is US$2,560,000.
Investment contributed by the Parties is US$ 1,800,000, which will be the
registered capital of the joint venture company.
Article Eleven
The investment contributed by each Party is as follows:
Party A: US$ 360,000
accounting for twenty percent;
Party B: US$ 1,440,000
accounting for eighty percent.
The registered capital of the joint venture company shall be paid by Party A and
Party B according to their investment proportion.
Article Twelve
Party A and Party B will contribute their investment cash to the joint venture
company according to Article Ten and Eleven.
Article Thirteen
After the investment is paid by the Parties to the joint venture, a Chinese
registered accountant invited by the joint venture company shall after
investigation provide a certificate of verification, according to which the
joint venture shall issue an Investment Certificate including the following
items:
1. Names of the joint venture;
4
<PAGE>
2. Date of establishment of the joint venture;
3. Names of the Parties and the investment contributed;
4. Date of the contribution of the investment; and
5. Date of issue of the Investment Certificate.
Article Fourteen
Within the duration of the joint venture, its registered capital shall not be
reduced.
Article Fifteen
In case either Party to the joint venture assigns his investment subscribed to a
third party, consent shall be obtained from the other party to the joint venture
in advance and the other party has preemptive right on it.
Article Sixteen
Any increase on assignment of the registered capital of the joint venture
company shall gain consent from the Board of Directors and the case shall be
submitted to the original examination and approval authority for approval. The
registration procedures for the change shall be dealt with at the original
registration and administration office.
Chapter 4 The Board of Directors
Article Seventeen
The Board of Directors shall be established as the highest authority of the
joint venture company.
Article Eighteen
The Board of Directors shall decide all major issues concerning the joint
venture company. It has the functions and power as follows:
* Approve the important reports presented by the general manager
on production scale, schedule and proposal for profit etc.
* Adopting major rules and regulations of the company
5
<PAGE>
* Making decision to set up branches
* Amending the articles of association of the company
* Discussing and making decision on the termination of
production, termination of the company or merging with another
economic organization
* Making Decision on engagement of the general manager, the vice
general manager, etc.
* Being in charge of expiration of the company and the
liquidation matters upon the expiration of the joint
venture company
* Other major issues which shall be decided by the Board of
Directors
Article Nineteen
The Board of Directors shall consist of 5 Directors, of which 1 shall be
appointed by Party A, 4 by Party B. The term of office for the Directors is four
years and may be renewed.
Article Twenty
Chairman of the Board shall be appointed by Party B , vice-chairman shall be
appointed by Party A.
Article Twenty-one
When either party to the joint venture intends to appoint or replace Directors,
a written notice shall be submitted to the Board.
Article Twenty-two
The Board of Directors shall at least convene on meeting every year. An interim
meeting of the Board of Directors may be held based on a proposal made by more
than one-third of the total number of Directors.
Article Twenty-three
The location of the Board meeting shall be decided by Party A and Party B,
either to be on the location of Party A in China, or on the location of Party B
abroad.
Article Twenty-four
6
<PAGE>
The Board meeting shall be called and presided over by the chairman. Should the
chairman be absent, the vice chairman shall call and preside over the Board
meeting.
Article Twenty-five
The chairman shall give each director a written notice 30 days before the date
of the Board meeting. The notice shall cover the agenda, time and place of the
meeting.
Article Twenty-six
Should a director be unable to attend the Board meeting, he may present a proxy
in written form to the Board. In case the director neither attends nor entrusts
others to attend the meeting, he will be regarded as abstention.
Article Twenty-seven
The Board meeting requires a quorum of over two-thirds of the total number of
the Directors. Otherwise, the decisions adopted by the Board meeting are
considered invalid.
Article Twenty-eight
Detailed written minutes shall be made for each Board meeting and signed by all
the attending Directors or by the attending proxy. The record shall be made in
Chinese and English and be filed with the company.
Article Twenty-nine
Issues which have been unanimously or mostly agreed upon by the Board of
Directors shall be carried out according to Article 22 in Chapter 8 of the
Contract, other issues shall be passed by over half of the total number.
Chapter 5 Business Management Office
Article Thirty
The joint venture company shall establish a management office which
7
<PAGE>
shall be responsible for its daily management. The management office shall have
a general manager, appointed by Party A.
Article Thirty-one
The general manager is directly responsible to the Board of Directors. He shall
carry out the decisions of the Board meeting and organize and conduct the daily
management of the joint venture company.
Article Thirty-two
The term of office for the general manager shall be 4 years, and may be renewed
if continuously appointed by the Board of Directors.
Article Thirty-three
At the invitation of the Board of Directors, the chairman, vice-chairman or
Directors of the Board may concurrently be the general manager, or other
high-ranking personnel of the joint venture company.
Article Thirty-four
The general manager, deputy general managers who ask for resignation shall
submit their written reports to the Board of Directors in advance.
Article Thirty-five
The high ranking personnel who are invited and work in the company shall not
hold posts of other economic organizations in commercial competition with their
own joint venture company.
Article Thirty-six
In case of graft or serious dereliction of duty on any above-mentioned persons,
the Board of Directors shall have the power to dismiss them at any time. Those
who violate the criminal law shall be under criminal sanction. If the Board
cannot be called in time, the chairman of the Board may ask in written notes for
the opinions of the Directors of the Board.
Chapter 6 Finance and Accounting
Article Thirty-seven
8
<PAGE>
The finance and accounting of the joint venture company shall be handled in
accordance with the "Stipulations of the Finance and Accounting System of the
Joint Ventures Using Chinese and Foreign Investment" formulated by the Ministry
of Finance of the People's Republic of China.
Article Thirty-eight
The fiscal year of the joint venture company shall coincide with the calendar
year, i.e., from January 1 to December 31 on the Gregorian Calendar.
Article Thirty-nine
All vouchers, account books, statistic statements and reports of the joint
venture company shall be written in Chinese (English will be currently used for
Main documents).
Article Forty
The joint venture company adopts RMB as its accounts keeping unit. The
conversion of RMB into other currency shall be in accordance with the exchange
rate of the converting day published by the State Administration of Exchange
Control of the People's Republic of China.
Article Forty-one
The joint venture company shall open accounts in RMB and foreign currency with
the Bank of China or other banks agreed by the Bank of China.
Article Forty-two
The accounting of the joint venture company shall adopt the internationally used
accrual basis and debit and credit accounting system in their work.
Article Forty-three
The following items shall be covered in the financial accounts books:
* The amount of overall cash receipts and expense of the joint
venture company
* All material purchasing and selling of the joint venture
company
* The registered capital and debts situation of the joint
venture company
9
<PAGE>
* The time of payment, increase and assignment of the
registered capital of the joint venture company
Article Forty-four
The joint venture company shall work out the statement of assets, liabilities,
losses and gains accounts of the past year in the first three months of each
fiscal year, and submit to the Board meeting for approval after being examined
and signed by the auditor.
Article Forty-five
Parties to the joint venture have the right to invite an auditor to undertake
annual financial check and examination at their own expense. The joint venture
company shall provide convenience for the checking and examination.
Article Forty-six
The depreciation period for the fixed assets of the joint venture company shall
be decided by the Board of Directors in accordance with the "Rules for the
Implementation of the Income Tax Law of the People's Republic of China
Concerning Joint Ventures with Chinese and Foreign Investment."
Article Forty-seven
All matters concerning foreign exchange shall be handled in accordance with the
"Provisional Regulations for Exchange Control of the People's Republic of
China", and other pertaining regulations as well as the stipulations of the
joint venture contract.
Chapter 7 Profits Sharing
Article Forty-eight
The joint venture company shall draw reserve funds, expansion funds and bonuses
and welfare funds for staff and workers after payment of taxes. The proportion
of allocation is decided by the Board of Directors.
10
<PAGE>
Article Forty-nine
The joint venture company shall not distribute profits unless the losses of
previous fiscal year have been made up. Remaining profit from previous year can
be distributed together with that of the current year.
Article Fifty
After paying the taxes in accordance with law and drawing the various funds, the
remaining profits will be distributed according to the proportion of each
party's investment in the registered capital.
Chapter 8 Staff and Workers
Article Fifty-one
The employment, recruitment, dismissal and resignation of the staff and workers
of the joint venture company and their salary, welfare benefits, labor
insurance, labor protection, labor discipline and other matters shall be handled
according to the "Regulations of the People's Republic of China on Labor
Management in Joint Ventures Using Chinese and Foreign Investment" and its
implementation rules.
Article Fifty-two
The joint venture company has the right to take disciplinary actions, such as
suspend his/her salary and reduce salary and dismiss against those staff members
and workers who violate the rules and regulations of the joint venture company
and labor discipline. Dismissal of workers shall be filed with the labor and
personnel department in the locality.
Article Fifty-three
The salary treatment of the staff and workers shall be set by the Board of
Directors according to the specific situation of the joint venture, with
reference to pertaining stipulations of China.
Chapter 9 Duration, Termination and Liquidation
11
<PAGE>
Article Fifty-four
The duration of the joint venture company shall be 50 years, starting from the
date of issue of the Business License.
Article Fifty-five
An application for the extension of duration shall, proposed by two Parties and
approved at the Board meeting, be submitted to the original examination and
approval authority six months prior to the expiry date of the joint venture.
Only upon its approval may the duration be extended after the joint venture
company goes through the registration formalities for the alteration at the
original registration office.
Article Fifty-six
The joint venture company may be terminated before its expiration in case the
Parties to the joint venture agree unanimously that the termination of the joint
venture is for the best interest of the Parties. To terminate the joint venture
before the term expires shall be decided by the Board of Directors through a
plenary meeting, and it shall be submitted to the original examination and
approval authority for approval.
Article Fifty-seven
Upon the expiration or termination of the joint venture before its term ends,
the Board of Directors shall work our procedures and principles for the
liquidation, nominate candidates for the liquidation committee, and set up the
liquidation committee for liquidating the joint venture company's assets.
Article Fifty-eight
The tasks of the liquidation committee are:
* To conduct through check of the property of the joint venture
company, its claim and indebtedness;
* To work out the statement of assets and liabilities and list
of property;
* To formulate a liquidation plan.
12
<PAGE>
Article Sixty
The remaining property after the clearance of debts of the joint venture company
shall be distributed among the Parties to the joint venture according to the
proportion of each party's investment in the registered capital.
Article Sixty-one
The liquidation expenses and remuneration to the members of the liquidation
committee shall be paid in priority from the existing assets of the joint
venture.
Article Sixty-two
After winding up of the joint venture company, its account books shall be left
in the care of the Party A.
Chapter 10 The Trade Union Organization
Article Sixty-three
The staff and workers of the joint venture company have the right to establish
the trade union organization and carry out activities in accordance with the
stipulations of the "Trade Union Law of the People's Republic of China".
Article Sixty-four
The trade union in the joint venture company is representative of the interests
of the staff and workers. The tasks of the trade union are:
* To protect the democratic rights and the material interests
of the staff and workers pursuant to the law;
* To assist the joint venture company to arrange and make
rational use of welfare funds and bonuses;
* To organize political, professional, scientific and technical
studies, carry out literary, art and sports activities; and
13
<PAGE>
* To assist the joint venture company to arrange and make
rational use of welfare funds and bonuses;
* To organize political, professional, scientific and
technical studies, carry out literary, art and sports
activities; and
* To educate staff and workers to observe labor discipline and
strive to fulfill the economic tasks of the joint venture
company.
Article Sixty-five
Persons in charge of the trade union of the joint venture company have the right
to attend as non-voting members and to report the opinions and demands of staff
and workers to meetings of the books of Directors hold to discuss issues such as
production and operational activities, to treat bonuses and welfare, etc.
Chapter 11 Rules and Regulations
Article Sixty-six
Following are the rules and regulations to be formulated and approved by the
Board of Directors:
* Managing regulations, including the function and power of
the managerial branches and its working rules and procedures;
* Rules for the staff and workers;
System of labor and salary;
* System of work attendance record, promotion, awards and
penalty for staff members and workers;
* Detailed rules of staff and worker's welfare;
* Financial system;
* Other necessary rules and regulations.
Chapter 12 Supplementary Articles
14
<PAGE>
Article Sixty-seven
The amendments to the Articles of Association shall be unanimously agreed on and
decided by the Board of Directors and submitted to the original examination and
approval authority for approval.
Article Sixty-eight
The Articles for Association is written in Chinese language and English
language, the Chinese version shall prevail.
Article Sixty-nine
The Articles of Association shall gain approval from the legal person
representative of both Parties and come into effect upon the approval by the
Ministry of Foreign Trade and Economic Cooperation of the People's Republic of
China (or its entrusted examination and approval authority).
Article Seventy
The Article of Association is signed in Xianyang, Shaanxi, China by the
authorized representatives of the two Parties on Dec. 8, 1996.
Party A: Xianyang Pianzhuan Development Co., Ltd.
(Signature): ________________________
Party B: Asia Electronics Holding Co., Ltd.
(Signature): ________________________
15
APPROVAL CERTIFICATE
OF
SINO-FOREIGN JOINT VENTURE IN PRC
(Left Side)
Approval No.: Xianyang Joint Venture [1992] No. 006
Approval Date: October 29, 1992
(Seal on date)
(Right Sight)
Name of Joint Venture:
In Chinese:
In English: XIANYANG DAMING ELECTRONICS CO., LTD.
Address: 70 West Weiyang Road, Xianyang, Shaanxi Province
Type of company: Joint Venture Term of the Joint Venture: 30
Total Investment: USD2,560,000
Registration Capital: USD1,800,000
Investors:
Name:
Party A: Xianyang Pianzhuan Development Co. Ltd.
Party B: Asia Electronics Holding Co. Ltd.
Registration Place:
Party A: PRC
Party B: British Virgin Island
Contributions:
Party A: US$360,000
Party B: US$1,440,000
Field of Operation:
Manufacturing of deflection yokes.
PEOPLE'S REPUBLIC OF CHINA
LEGAL ENTITY
BUSINESS LICENSE
(Left Side)
Registration No.: Xianyang Joint Venture No. 000170 1/2
This enterprise has registered to be business legal entity and is approved to do
business.
Annual Validation Check by every March 1
(Right Side)
Name of enterprise:
In Chinese:
In English: XIANYANG DAMING ELECTRONICS CO., LTD.
Address: 70 Weiyang West Road, Xianyang, Shaanxi
Province
Type of the enterprise: Joint Venture
Field of Operation: Manufacturing and sales of deflection yokes.
Registration Capital: USD1,800,000
Chairman of Board: Du, Qing Song
Vice Chairman of Board: To, Shing Hoi
General Manager: Du, Qing Song
Deputy General Manager: Cheng, Kaihua
Term of Operation: From October 16, 1992 to October 15, 2022
The License valid date: From October 16, 1992 to October 15, 2022
The Commerce Administration Bureau of PRC Director (Signature)
Seal Date: March 12, 1997
FOREIGN TRADE AND ECONOMIC COOPERATION BUREAU OF XIANYANG
(OFFICIAL DOCUMENT NUMBER: 1996 35)
- ----------------------------------------------------------------------------
RE: CHANGE OF PARTNER OF XIANYANG DAMING ELECTRONICS CO.
Xianyang Daming Electronics Co. Ltd.:
Your reporting document (No. 1996, 052) has been reviewed. The reply
is as follows:
1. It is to approve that Xianyang Pianzhuan Group transfers all its interests
of the joint venture - Xianyang Daming Electronics Co. Ltd. to Xianyang
Pianzhuan Development Co. Ltd., who will assume all the rights and
liabilities of the joint venture after the transfer.
2. The total investments and registration capital will not change after the
transfer. It is to approve that Xianyang Pianzhuan Development Co. Ltd.
transfer 55% interests of Xianyang Daming Electronics Co. Ltd. to Tomei
Trading Co., Ltd., a Japanese company immediate after the transfer stated
above. As the result, Xianyang Pianzhuan Development Co. Ltd. will own 20%
interest of Daming from 75%, and the Tomei Trading Co. Ltd's holding
interest in Daming will increase to 80% from 25%. The Board of Directors
remains unchanged.
All other terms of Joint Venture Contract and By-Law will remain valid as
before.
FOREIGN TRADE AND ECONOMIC COOPERATION BUREAU OF XIANYANG
(seal)
April 25, 1996
- ---------------------------------------------------------------------------
CC Copies to.....
FOREIGN TRADE AND ECONOMIC COOPERATION BUREAU OF
XIANYANG
(OFFICIAL DOCUMENT NUMBER 1996 78)
- ----------------------------------------------------------------------------
RE: CHANGE OF PARTNER OF XIANYANG DAMING ELECTRONICS CO.
Xianyang Daming Electronics Co. Ltd.:
Your reporting document (No. 1996, 088) has been reviewed.
The reply is as follows:
1. It is to approve that Tomei Trading Co. Ltd. transfers all its 80%
interests in the joint venture -- Xianyang Daming Electronics Co. Ltd. to
Asia Electronics Holding Co. Ltd., a British Virgin Island company, who
will assume all the rights and liabilities of the joint venture after the
transfer.
2. The total investments and registration capital and range of operation will
not change after the transfer. The term of the joint venture is 30 years
from the date of Business License issuance.
3. There will be a five-people Board of Directors in Daming Electronics Co.
Ltd. in which four Chinese Directors and one foreign Director. The
Chairman of Board will be a person from the Chinese partner, and Vice
Chairman will be a person from foreign partner.
4. All other terms of Joint Venture Contract and By-Law will remain valid as
before.
FOREIGN TRADE AND ECONOMIC COOPERATION BUREAU OF XIANYANG
(seal)
September 6, 1996
- ----------------------------------------------------------------------------
CC Copies to .....
The Articles of Association
for the Joint Venture of
Yantai Gold Electronic Co., Ltd.
Sept. 10, 1993
Muping, Shandong, China
Total Pages: 17
<PAGE>
Contents
Chapter 1 General Provisions
Chapter 2 Purposes and Scope of Business
Chapter 3 The Total Amount of Investment and Registered Capital
Chapter 4 The Board of Directors
Chapter 5 Businesses Management Organization
Chapter 6 Finances and Accounting
Chapter 7 Profits Sharing
Chapter 8 Staff and Workers
Chapter 9 Duration, Termination and Liquidation
Chapter 10 The Trade Union Organization
Chapter 11 Rules and Regulations
Chapter 12 Supplementary Articles
1
<PAGE>
Chapter 1 General Provisions
Article one
In accordance with "The Law of People's Republic of China on Joint Ventures
Using Chinese and Foreign Investment" and the contract signed among Muping Gold
Industry Company ( herein after referred to as Party A), Xianyang Pianzhuan
Group Corp. (Party B) and Tomei Trading Co., Ltd. (Party C), the articles of
association for the Chinese and British joint venture Yantai Gold Electronic
Co., Ltd., hereby is formulated at Muping County of Shandong Province on Sept.
10, 1993.
Article Two
The name of the joint venture company shall be Yantai Gold Electronic Co., Ltd.
Its legal address is at West End of Beiguan Street, Muping, Shandong, China.
Article Three
The names and legal addresses of the Parties to the joint venture are as
follows:
Party A: Muping Gold Industry Company, at No. 32 Government Avenue, Muping
County, Shandong, P.R. China.
Party B: Xianyang Pianzhuan Group Corp., at No. 70 West Weiyang Road, Xianyang,
Shaanxi, China.
Party C: Tomei Trading Co., Ltd., registered in Akaishi City, Japan. Its legal
address is at 1-7-4 Irakiku Bldg., Daimeiseki Avenue, Akaishi City, Japan.
Article Four
The joint venture company is a limited liability company.
Article Five
The joint venture company as a Chinese legal person is subject to the
jurisdiction and protection of China's laws concerned. All its activities shall
be governed by Chinese laws, decrees and other pertinent rules and regulations.
2
<PAGE>
Chapter 2 Purpose and Scope of Business
Article Six
The purpose of the joint venture company is to enhance economic cooperation and
technical exchange to improve the product quality, develop new products and gain
competitive position in the world market in quality and price by adopting
advanced and appropriate managing methods to ensure satisfactory economic
benefits for all three parties to the joint venture company.
Article Seven
The production and sales scope of the joint venture company is to produce
deflection yoke products and to study and develop other electronic products.
Article Eight
The production scale of the joint venture company are as follows:
The production scale of the joint venture company put into operation is an
annual output of 1.0 million deflection yokes, including 400,000 of 14", 400,000
of 20", and 200,000 of 21". The output will be increased to 2.6 million in 1995.
Article Nine
The joint venture company may sell its products in domestic and
international market, the export of 14" and 20" deflection yokes shall count for
no less than 80%, the remaining 20% of 21" may be sold in domestic market.
Chapter 3 Total Amount of Investment and Registered Capital
Article Ten
The total amount of investment of the joint venture company is RMB28,528,000.
3
<PAGE>
Investment contributed by the Parties is RMB21,860,000, which will be the
registered capital of the joint venture company.
Article Eleven
The investment contributed by each Party is as follows:
Party A: RMB6,550,000, accounting for thirty percent;
Party B: RMB9,850,000, accounting for forty-five percent;
Party C: US$949,600(equals RMB5,460,00), accounting for twenty-five percent.
Article Twelve
Each Party will contribute their investment cash to the joint venture company
within the limit of date stipulated in the Contract.
Article Thirteen
After the investment is paid by the Parties to the joint venture, a Chinese
registered accountant hired by the joint venture company shall after
investigation provide a certificate of verification, according to which the
joint venture shall issue an Investment Certificate including the following
items:
1. Name of the joint venture;
2. Date of establishment of the joint venture;
3. Names of the Parties and the investment contributed;
4. Date of the contribution of the investment; and
5. Date of issue of the Investment Certificate.
Article Fourteen
Within the duration of the joint venture, its registered capital shall not be
reduced.
Article Fifteen
Any increase on assignment of the registered capital of the joint venture
company shall gain consent from the Board of Directors and the case shall be
submitted to the original examination and approval authority for approval. The
registration procedures for the change shall be dealt with
4
<PAGE>
at the original registration and administration office.
Article Sixteen
The investment to the joint venture company may be increased upon agreement
among the Parties by investing the profit gained from the joint venture company
or according to the proportion agreed at.
Article Seventeen
In case either Party to the joint venture assigns his investment subscribed to a
third party, consent shall be obtained from the other two parties to the joint
venture in advance and the other two parties has preemptive right on it.
In case either Party to the joint venture assigns his investment, a written
notice shall be provided to the other two Parties annoucing the conditions and
terms of the transfer. The other two Parties have preemptive right on it. When
the Party transfers his interest to a forth Party, the terms shall not be more
favorable than those to the other two Parties and the normal operating of the
joint venture company shall be guaranteed.
Chapter 4 The Board of Directors
Article Eighteen
The joint venture company shall establish its Board of Directors on the date of
registration.
Article Ninteen
The Board of Directors shall be established as the highest authority of the
joint venture company to decide all major issues concerning the joint venture
company. It has the functions and power as follows:
* Approve the important reports presented by the general manager on
production scale, schedule and proposal for profit etc.
* Adopting major rules and regulations of the company
* Making decisions to set up branches
* Amending the articles of association of the company
5
<PAGE>
* Discussing and making decisions on the termination of production,
termination of the company or merging with another economic organization
* Making decisions on appointments of the general manager, the vice
general manager, etc.
* Being in charge of expiration of the company and the liquidation matters
upon the expiration of the joint venture company
* Other major issues which shall be decided by the Board of Directors
Article Twenty
The Board of Directors shall consist of 5 Directors, of which 2 shall be
appointed by Party A, 2 by Party B and 1 by Party C. The term of office for the
Directors is four years and may be renewed upon written appointment.
Article Twenty-one
Chairman of the Board shall be appointed by Party B and its 2 vice-chairmen
shall be appointed by Party A and Party C.
Article Twenty-two
When either party to the joint venture intends to appoint or replace Directors,
a written notice shall be submitted to the Board.
Article Twenty-three
The Board of Directors shall at least convene on meeting every year. An interim
meeting of the Board of Directors may be held based on a proposal made by all
Directors from one Party or more than one-third of the total number of
Directors.
Article Twenty-four
The location of the Board meeting shall be on the location of the joint venture
company.
Article Twenty-five
The Board meeting shall be called and presided over by the chairman. Should the
chairman be absent, the vice chairman shall call and preside over the Board
meeting.
6
<PAGE>
Article Twenty-six
The chairman shall give each director a written notice 20 days before the date
of the Board meeting. The notice shall cover the agenda, time and place of the
meeting.
Article Twenty-seven
Should a director be unable to attend the Board meeting, he may present a proxy
in written form to the Board. In case the director neither attends nor entrusts
others to attend the meeting, he will be regarded as abstention.
Article Twenty-eight
The Board meeting requires a quorum of over two-thirds of the total number of
the Directors. Otherwise, the decisions adopted by the Board meeting are
considered invalid.
Article Twenty-nine
The detailed written minutes with the signature of each Director shall be
considered valid as the decisions made at the Board meeting.
Article Thirty
Detailed written minutes shall be made for each Board meeting and signed by all
the attending Directors or by the attending proxy. The record shall be made in
Chinese (and English) and be filed with the company.
Article Thirty-one
Issues which must be unanimously agreed upon by the Board of Directors
includes follows:
* Amendment to the Articles of Association of the joint venture company;
* Termination and dismiss of the joint venture;
* Increase and transfer of registered capital of the joint venture
company.
* Merge of the joint venture company to other economic organizations;
* Import of equipment for the joint venture company;
7
<PAGE>
* Price policy of the products of the joint venture company;
* Any other major issues which require the unanimous approval according
to the Board of Directors.
Article Thirty-two
Other issues excluded from those indicated in article thirty-one shall be
considered as valid decision upon approval by two-thirds of the total members.
Article Thirty-three
Chairman of the Board of Directors is the legal representative of the joint
venture company. In case the chairman cannot fulfill his responsibility for a
period of time, the vice-chairman shall be appointed automatically to undertake
the task until the chairman or the new selected chairman could fulfill his task,
and if the vice-chairman is absent, other directors may be authorized.
Article Thirty-four
All the costs and expenses generated in the board meeting shall be on account of
the joint venture.
Chapter 5 Business Management Office
Article Thirty-five
The joint venture company shall establish a management office which shall be
responsible for its daily management.
Article Thirty-six
The management office shall have a general manager, appointed by Party A and a
deputy general manager appointed by Party B for the first management office.
Article Thirty-seven
The general manager is directly responsible to the Board of Directors. He shall
carry out the decisions of the Board meeting and organize and
8
<PAGE>
conduct the daily management of the joint venture company.
Article Thirty-eight
In case the general manager or deputy general manager is not the member of the
Board, they have the right to attend the meeting of the Board of Directors
without voting.
Article Thirty-nine
Chairman, vice-chairman and the Directors may be hired as the general manager,
deputy general manager or other high-ranking staff.
Article Forty
At the invitation of the Board of Directors, the chairman, vice-chairman or
Directors of the Board may concurrently be the general manager, or other
high-ranking personnel of the joint venture company.
Article Forty-one
The general manager shall submit to the Board of Directors the arrangement of
the managing system and staff for approval according to the situation of the
joint venture company.
Article Forty-two
The Board of Directors will hire one chief engineer, one CFO, and one person
as chief auditor for the joint venture company.
Article Forty-three
The Chief engineer, CFO and Chief auditor shall be under the leadership of the
general manager.
The chief engineer will be in charge of the technical management affairs to
guarantee the quality of product and develop new models.
CFO shall be in charge of the accounting system of the joint venture company for
economic evaluations and execution of independent accounting system.
The chief auditor is responsible for controlling the financial auditing of the
income and expenses and accounts of the joint venture company and submit his
auditing report to the Board of Directors.
Article Forty-four
9
<PAGE>
The general manager, deputy general managers and all the high-ranking personnels
of the joint venture who ask for resignation shall submit their written reports
to the Board of Directors in advance of 3 months of the resignation.
Article Forty-five
The high ranking personnel who are invited and word in the company shall not
hold posts of other economic organizations in commercial competition with their
own joint venture company.
Article Forty-six
In case of graft or serious dereliction of duty on any above-mentioned persons,
the Board of Directors shall have the power to dismiss them at any time. Those
who violate the criminal law shall be under criminal sanction. If the Board
cannot be called in time, the chairman of the Board may ask in written notes for
the opinions of the Directors of the Board.
Chapter 6 Finance and Accounting
Article Forty-seven
The finance and accounting of the joint venture company shall be handled in
accordance with the "Stipulations of the Finance and Accounting System of the
Joint Ventures Using Chinese and Foreign Investment" formulated by the Ministry
of Finance of the People's Republic of China.
Article Forty-eight
The fiscal year of the joint venture company shall coincide with the calendar
year, i.e., from January I to December 31 on the Gregorian Calendar.
Article Forty-nine
All vouchers, account books, statistic statements and reports of the joint
venture company shall be written in Chinese (English will be currently used for
main documents).
Article Fifty
10
<PAGE>
The joint venture company adopts RMB as its accounts keeping unit. The
conversion of RMB into other currency shall be in accordance with the exchange
rate of the converting day published by the State Administration of Exchange
Control of the People's Republic of China.
Article Fifty-one
The joint venture company shall open accounts in RMB and foreign currency with
the Bank of China or other banks agreed by the foreign currency control
departments of China.
Article Fifty-two
The accounting of the joint venture company shall adopt the internationally used
accrual basis and debit and credit accounting system in their work.
Article Fifty-three
The following items shall be covered in the financial accounts books:
* The amount of overall cash receipts and expense of the joint venture
company
* All material purchasing and selling of the joint venture company
* The registered capital and debts situation of the joint venture
company
* The time of payment, increase and assignment of the registered capital
of the joint venture company
Article Fifty-four
The joint venture company shall work out the statement of assets, liabilities,
losses and gains accounts of the past year in the first three months of each
fiscal year, and submit to the Board meeting for approval after being examined
and signed by the auditor.
Article Fifty-five
Each party to the joint venture have the right to hire an auditor to undertake
annual financial check and examination at their own expense. The joint venture
company shall provide convenience for the checking and examination.
11
<PAGE>
Article Fifty-six
The depreciation period for the fixed assets of the joint venture company shall
be decided by the Board of Directors in accordance with the "Rules for the
Implementation of the Income Tax Law of the People's Republic of China
Concerning Joint Ventures with Chinese and Foreign Investment."
Article Fifty-seven
All matters concerning foreign exchange shall be handled in accordance with the
"Provisional Regulations for Exchange Control of the People's Republic of
China", and other pertaining regulations as well as the stipulations of the
joint venture contract.
Chapter 7 Profits Sharing
Article Fifty-eight
The joint venture company shall draw reserve funds, development funds and
bonuses and welfare funds for staff and workers after payment of taxes. The
proportion of allocation is decided by the Board of Directors.
Article Fifty-nine
The joint venture company shall not distribute profits unless the losses of
previous fiscal year have been made up. Remaining profit from previous year can
be distributed together with that of the current year.
Article Sixty
After paying the taxes in accordance with law and drawing the various funds, the
remaining profits will be distributed according to the proportion of each
party's investment in the registered capital.
Chapter 8 Staff and Workers
Article Sixty-one
12
<PAGE>
The employment, recruitment, dismissal and resignation of the staff and workers
of the joint venture company and their salary, welfare benefits, labor
insurance, labor protection, labor discipline and other matters shall be handled
according to the "Regulations of the People's Republic of China on Labor
Management in Joint Venture Using Chinese and Foreign Investment" and its
implementation rules.
Article Sixty-two
The joint venture company has the right to take disciplinary actions, such as
warning, suspending the salary and dismissing from the post, reduce salary and
dismiss against those staff members and workers who violate the rules and
regulations of the joint venture company and labor discipline. Dismissal of
workers shall be filed with the labor and personnel department in the locality.
Article Sixty-three
The salary treatment of the staff and workers shall be set by the Board of
Directors according to the specific situation of the joint venture, with
reference to pertaining stipulations of China.
Chapter 9 Duration, Termination and Liquidation
Article Sixty-four
The duration of the joint venture company shall be 10 years, starting from the
date of issue of the Business License.
Article Sixty-five
An application for the extension of duration shall, proposed by two Parties and
approved at the Board meeting, be submitted to the original examination and
approval authority six months prior to the expiry date of the joint venture.
Only upon its approval may the duration be extended after the joint venture
company goes through the registration formalities for the alteration at the
original registration office.
Article Sixty-six
13
<PAGE>
The joint venture company may be terminated before its expiration in case the
Parties to the joint venture agree unanimously that the termination of the joint
venture is for the best interests of the Parties. To terminate the joint venture
before the term expires shall be decided by the Board of Directors through a
plenary meeting, and it shall be submitted to the original examination and
approval authority for approval.
Article Sixty-seven
Upon the expiration or termination of the joint venture before its term ends,
the Board of Directors shall work our procedures and principles for the
liquidation, nominate candidates for the liquidation committee, and set up the
liquidation committee for liquidating the joint venture company's assets.
Article Sixty-eight
The tasks of the liquidation committee are:
* To conduct through check of the property of the joint venture company,
its claim and indebtedness;
* To work out the statement of assets and liabilities and list of
property;
* To formulate a liquidation plan.
All these shall be carried out upon the approval the Board of Directors.
Article Sixty-nine
During the process of liquidation, the liquidation committee shall represent the
company to sue and be sued.
Article Seventy
The remaining property after the clearance of debts of the joint venture company
shall be distributed among the Parties to the joint venture according to the
proportion of each party's investment in the registered capital.
Article Seventy-one
The liquidation expenses and remuneration to the members of the liquidation
committee shall be paid in priority from the existing assets of
14
<PAGE>
the joint venture.
Article Seven-two
After the termination of the joint venture company, its account books shall be
left in the care of the Party B.
Chapter 10 The Trade Union Organization
Article Seventy-three
The staff and workers of the joint venture company have the right to establish
the trade union organization and carry out activities in accordance with the
stipulations of the "Trade Union Law of the People's Republic of China".
Article Seventy-four
The trade union in the joint venture company is representative of the interests
of the staff and workers. The tasks of the trade union are:
* To protect the democratic rights and the material interests of the
staff and workers pursuant to the law;
* To assist the joint venture company to arrange and make rational use
of welfare funds and bonuses;
* To organize political, professional, scientific and technical studies,
carry out literary, art and sports activities; and
* To educate staff and workers to observe labor discipline and strive to
fulfill the economic tasks of the joint venture company.
Article Seventy-five
Persons in charge of the trade union of the joint venture company have the right
to attend as non-voting members and to report the opinions and demands of staff
and workers to meetings of the Board of Directors held to discuss issues such as
production and operational activities, to treat bonuses and welfare, etc.
15
<PAGE>
Chapter 11 Rules and Regulations
Article Seventy-six
Following are the rules and regulations to be formulated by the joint venture
and approved by the Board of Directors:
* Managing regulations, including the function and power of the
managerial branches and its working rules and
procedures;
* Rules for the staff and workers;
* System of labor and salary;
* System of work attendance record, promotion, awards and penalty for
staff members and workers;
* Detailed rules of staff and worker's welfare;
* Financial system;
* Other necessary rules and regulations.
Chapter 12 Supplementary Articles
Article Seventy-seven
The amendments to the Articles of Association shall be unanimously agreed on and
decided by the Board of Directors and submitted to the original examination and
approval authority for approval.
Article Seventy-eight
The Articles for Association is written in Chinese language and English
language, the Chinese version shall prevail.
Article Seventy-nine
The Articles of Association shall gain appoval from the legal person
representative of both Parties and come into effect upon the approval by the
Ministry of Foreign Trade and Economic Cooperation of the People's
16
<PAGE>
Republic of China (or its entrusted examination and approval authority).
Article Eighty
The Article of Association is signed in Muping, Shandong, China by the
authorized representatives of the two Parties on Sept. 10, 1993.
Party A: Muping Gold Industry Company
(Signature):...............................................................
Party B: Xianyang Pianzhuan Group Corp.
(Signature):...............................................................
Party C: Tomei Trading Co., Ltd.
(Signature):...............................................................
17
PEOPLE'S REPUBLIC OF CHINA
LEGAL ENTITY
BUSINESS LICENSE
(Left Side)
Registration No.: Shandong Joint Venture No. 2215 1/2
This enterprise has registered to be business legal entity and is approved to
conduct business.
(Right Side) license No. 0248955
Name of the enterprise:
In Chinese
In English: YANTAI DAEWOO ELECTRONIC COMPONENTS CO. LTD.
Address: West End of Beiguan Street, Muping, Yantai, Shandong Province
Type of the enterprise: Joint Venture
Field of Operation: Manufacturing and sales of deflection yokes and
other electronic products.
Registered Capital: USD3,801,700
Chairman of Board Du, Qing Song
Vice Chairman of Board Lin, Leting: Jin, Hefen
General Manager Lin, Leting
Deputy General Manager Jin, Weiming
Term of Operation: From December 9, 1993 to December 8, 2005
The License valid date: From December 9, 1993 to December 8, 2005
The Commerce Administration Bureau of PRC Director (Signature)
Seal on Date: May 7, 1996
APPROVAL CERTIFICATE
OF
SINO-FOREIGN JOINT VENTURE IN PRC
(Left Side)
Approval No.: Xianyang Joint Venture [1993]No. 4737
Approval Date: September 25, 1995
(Seal on date)
Issuing Date: May 13, 1996
(Right Sight) No.0361764
Name of Joint Venture:
In Chinese
In English: Yantai Daewoo Electronic Components Co. Ltd.
Address: West Street Guanbei, Muping, Shandong Province
Type of company: Joint Venture Term of the Joint Venture: 12
Total Investment: USD4,961,400
Total Registration Capital: USD3,801,7000
Investors:
Name: Registration Place
Party A: Muping Golden Industry Co. Ltd. PRC
Party B: Xianyang Pianzhuan Group Co. Ltd. PRC
Party C: Tomei Trading Co. Ltd. Japan
Party D: Deawoo Electronics Components Co. Ltd Korea
Contributions:
Party A: RMB4,367,000 accounting for 20%
Party B: RMB9,850,000 accounting for 45 %
Party C: RMB948,600 accounting for 25 %
Party D: RMB380,170 accounting for 10%
Field of Operation:
Manufacturing and sales of deflection yokes and other electronic products.
The Articles of Association
For setting up XIANYANG DNON TECH
SPECIAL ELECTRO TECHNIQUE CO., LTD. USING
CHINESE AND ITALIAN INVESTMENT.
1993 . 11 . 20
<PAGE>
CATALOGUE
Chapter 1 General Provisions
Chapter 2 Purpose and Scope of Business
Chapter 3 The Total Amount of Investment and Registered Capital
Chapter 4 The Board of Directors
Chapter 5 Business Management Organization
Chapter 6 Finance and Accounting
Chapter 7 Profits Sharing
Chapter 8 Staff and Workers
Chapter 9 Duration, Termination and liquidation
Chapter 10 The Trade Union Organization
Chapter 11 Rules and Regulations
Chapter 12 Supplementary Articles
1
<PAGE>
Chapter 1 General Provisions
Article 1
In accordance with "The Law of the People's Republic of China on Joint
Ventures Using Chinese and Foreign Investment" and the contract signed by
XianYang DEFLECTION GROUP CORP. (Party A) Xi'an JiaoTong University Electro
Technique Co. LTD (Paryt B), Italy Dea Tech Machinery Spa (Party C), HONGKONG
WAINLINK ENTERPRISES LIMITED (Party D), the articles of association for the
Chinese and Italian Joint Venliner XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE
CO. LTD. hereby is formulated at XianYang city on 93.11.20.
Article 2
The name of the joint venture company shall be XIANYANG DNON TECH
SPECIAL ELECTRO TECHNIQUE CO. LTD . The legal address of the joint venture
company is at XianYang city.
Article 3
The names and legal addresses of the parties to the joint venture are
as follows:
Party A: XianYang Deflection Group Corp. at WeiYan Xi Lu No. 70
XianYang Shaanxi China.
Party B: Xi'an Jiao Tong University Electrical Technical
Engineering Company at XianNing Xi Lu No. 28, Xi'an,
China.
Party C: Dea Tech machinery S.p.a at CAMERI-C. So Sempione 39
Italy.
Party D: HongKong WainLink Enterprises Limited at RM. 1105,
HUA QIN.INTERNATIONAL BLDG., 340 QUEEN'S ROAD CENTRAL,
HONG KONG.
Article 4
The joint venture company is a Limited Liability company.
Article 5
The jiont venture company has the Chinese legal person and is subject to
the jurisdiction and protection of China's laws concerned. All its activities
shall be governed by Chinese Laws, decrees and other pertinent rules and
regulations.
Chapter 2 Purpose and Scope of Business
Article 6
The purpose of the joint venture company is to produce economic
cooperation and exchange information of the markets and absorb foreign funds, to
purchase advanced equipment from aboard, to use scientific method of business
and management and develop new technology and products into the Chinese domestic
markets and the international market to increase export and foreign exchange
earnings for obtaining satisfactory economic benefits for the parties to the
2
<PAGE>
joint venture company.
Article 7
The business scope of the joint venture company is to design,
manufacture, produce and sell special enamelling wires and varnish, high and new
electrical technical products.
Article 8
The scale of production of the joint venture company is 550 T each year.
Article 9
Products of the joint venture company are in accordance with the chapter
7 of the contract. The joint venture company may sell its products on the
Chinese domestic market and on the international market.
Chapter 3 The Total Amount of investment and Registered Capital
Article 10
The total amount of investment of the joint venture company is USD
1,500,000. Its registered capital is USD 1,500,000.
Article 11
The investment contributed by each party is as follows:
Party A: XianYang DY Group. Co. is USD 675,000
Party B: Xi'an JiaoTong University Electrical Technical Engineering
Co. is USD 150,000 (including testing instrument and
Cash).
Party C: Italy DEA TECH machinery Co. is USD 300,000, all of that
are for buying the enamalling wire machinery.
Party D: HongKong WainLink Enterprises Limited is USD 375,000,
all of that are for buying equipment.
Article 12
The parties to the joint venture shall pay in all the investment
subscribed according to the item 10, 11 in the contract.
Article 13
After the investment is paid by the parties to the joint venture, a
Chinese registered accountant invited by the joint venture company shall verify
it and provides a certificate of verification. According to this certificate,
the joint venture shall issue an investment certificate which includes the
following items: names of the joint venture; date of the establishment of the
joint venture; names of the parties and the investment contributed; date of the
contribution of the investment; and the date of issuance of the investment
certificate.
Article 14
Within the term of the joint venture, the joint verture company shall
not reduce its registered capital.
Article 15
Should one party assign all or part of its investment subscribed,
consent shall
3
<PAGE>
be obtained from the other party of the joint venture. When one party assign its
investment, the other party has preemptive right.
Article 16
Any increase on assignment of the registered capital of the joint
venture company shall be approved by the board of directors and submitted to the
original examination and approval authority for approval. The registration
procedures for changes shall be dealt with at the original registration and
administration office.
Chapter 4 The Board of Directors
Article 17
The joint venture shall establish the board of directors which is the
highest authority of the joint venture company.
Article 18
The board of directors shall decide all major issues concerning the
joint venture company. Its functions and powers are as follows:
- -- adopting major rules and regulations of the company.
- -- deciding to set up branches.
- -- amending the articles of association of the company.
- -- discussing and deciding the termination of production, termination of
the company or merging with another economic organization.
- -- deciding the engagement of the general manager, the vice general
manager, etc.
- -- being in charge of expiration of the company and the liquidation
matters upon the expiration of the joint venture company.
- -- other major issues which shalt be decided by the board of directors.
Article 19
The board of directors shall consist of 10 directors, of which 4 shall be
appointed by Party A, 3 by Party B, 1 by Party C and 2 by Party D. The term of
office for the directors is four years and may be renewed.
Article 20
Chairman of the board shall be appointed by Party A, vice chairman are 2
members, one shall be appointed by Party C, one by Party B and one by Party D.
Article 21
When appointing and replacing directors, a written notice shall be
submitted to the board.
Article 22
The board of directors shalt convene one meeting every year. An interim
meeting of the board of directors may be held based on a proposal made by more
than one third of the total number of directors.
Article 23
The location of the board meeting shalt be decided by Party A, B, C and
D. It may be on the location of Party A or B in China, also on the location of
Party C or D, abroad.
4
<PAGE>
Article 24
The board meeting shall be called and presided over by the chairman.
Should the chairman be absent, the vice chairman shall call and preside over
board meeting.
Article 25
The chairman shall give each director a written notice 30 days before
the date of the board meeting. The notice shall cover the agenda, time and place
of the meeting.
Article 26
Should a director be unable to attend the board meeting, he may present
a proxy in written form to the board. In case the director neither attends nor
entrusts others to attend the meeting, he will be regarded as abstention.
Article 27
The board meeting requires a quorum of over two-thirds of the total
number of the directors. When the quorum is less than than two-thirds, the
decisions adopted by the board meeting are invalid.
Article 28
Detailed written records shall be made for each board meeting and signed
by all directors or by the attending proxy. The record shall be made in Chinese
and in English, and shall be filed with the company.
Article 29
The issues which have been unanimously or mostly agreed upon by the
board of directors shall be carried out according to the Article 23 in the
chapter 9 of the contract, other issues shall be passed by over half of the
total number.
Chapter 5 Business Management Organization
Article 30
The joint venture company shall have one general manager and two vice
general managers who engaged by the board of dircctors. The general manager
shall be recommended by Party A.
Article 31
The general manager is direct responsible to the board of directors. He
shall carry out the decisions of the board of directors, organize and conduct
the daily production, technology and operation and management of the joint
venture company. The vice general managers shall assist the general manamger in
his work and act the agent of the general manager or during his absence and
exercise the functions of the general manager.
Article 32
The term of office for the general manager and vice general managers
shall be 4 years, and may be renewed at the invitation of the board of
directors.
Article 33
At the invitation of the board of directors, the chairman, vice-chairman
or
5
<PAGE>
directors of the board may concurrently be the general managers, vice general
managers or other highranking personnel of the joint venture company.
Article 34
The general manager, vice genernal managers who ask for resignation
shall submit their written reports to the board of directors in advance.
Article 35
The high ranking personnel who are invited and work in the company shall
not hold posts of other economic organizations in commercial competition with
their own joint venture company.
Article 36
In case any one of the above-mentioned persons conduct graft or serious
dereliction of duty, they may be dismissed at any time upon the decision of the
board. Those who violate the criminal law shall be under criminal sanction. If
the Board can not be called in time, the chairman of the board may ask in
written notes for the opinions of the directors of the board.
Chapter 6 Finance and Accounting
Article 37
The finance and accounting of the joint venture company shall be handled
in accordance with the "Stipulations of the Finance and Accounting System of the
Joint Ventures Using Chinese and Foreign Investment" formulated by the Ministry
of Finance of the People's Republic of China.
Article 38
The fiscal year of the joint venture company shall coincide with the
calendar year, i.e. from Jaunary 1 to December 31 on the Gregorian calendar.
Article 39
All vouchers, account books, statistic statements and reports of the
joint venture company shall be written in Chinese and in English.
Article 40
The joint venture company adopts RMB as its accounts keeping unit. The
conversion of RMB into other currency shall be in accordance with the exchange
rate of the converting day published by the State Administration of Exchange
Control of the People's Republic of China.
Article 41
The joint venture company shalt open accounts in RMB and foreign
currency with the Bank of China or other bank agreed by the Bank of China.
Article 42
The accounting of the joint venture company shalt adopt the internationally
used accrual basis and debit and credit accounting system in their work.
Article 43
The following items shalt be covered in the financial accounts books:
1. The amount of overall cash receipts and expense of the joint venture
company;
6
<PAGE>
2. All material purchasing and selling of the joint venture company;
3. The registered capital and debts situation of the joint venture company;
4. The time of payment, increase and assignment of the registered
capital of the joint venture company.
Article 44
The joint venture company shall work out the statement of assets and
liabilities and losses and gains accounts of the past year in the first three
monthes of each fiscal year, and submit to the board meeting for approval after
being examined and signed by the auditor.
Article 45
Parties to the joint venture have the right to invite an auditor to
undertake annual financial check and examination at their own expense. The joint
venture company shall provide convenience for the checking and examination.
Article 46
The depreciation period for the fixed assets of the joint venture
company shall be decided by the board of directors in accordance with the "Rules
for the Implementation of the Income Tax Law of the People's Republic of China
Concerning Joint Ventures with Chinese and Foreign Investment."
Article 47
All matters concerning foreign exchange shall be handled in accordance
with the "Provisional Regulations for Exchange Control of the People's Republic
of China", and other pertaining regulations as well as the stipulations of the
joint venture contract.
Chapter 7 Profits Sharing
Article 48
The joint venture company shall draw reserve funds, expansion funds and
bonuses and welfare funds for staff and workers after payment of taxes. The
proportion of allocation is decided by the board of directors.
Article 49
The joint venture company shall not distribute profits unless the tosses
of previous fiscal year have been made up. Remaining profit from previous year
can be distributed together with that of the current year.
Article 50
After paying the taxes in accordance with law and drawing the various
funds, the remaining profits will be distributed according to the proportion of
each party's investment in the registered capital.
Chapter 8 Staff and Workers
7
<PAGE>
Article 51
The employment, recruitment, dismissal and resignation of the staff and
workers of the joint venture company and their salary, welfare benefits, labour
insurance, labour protection, labour discipline and other matters shalt be
handled according to the "Regulations of the People's Republic of China on
Labour Management in Joint Venture Using Chinese and Foreign Investment" and its
implementation rules.
Article 52
The joint venture company his the right to take disciplinary actions,
criticize oneself under stopping the salary and leaving the post, reduce salary
and dismiss against those staff members and workers who violate the rules and
regulations of the joint venture company and labour discipline. Discharging of
workers shall be filed with the labour and personnel department in the locality.
Article 53
The salary treatment of the staff and workers shall be set by the board
of directors according to the specific situation of the joint venture, with
reference to pertaining stipulations of China.
Chapter 9 Duration, Termination and Liquidation
Article 54
The duration of the joint venture company shall be 12 years, beginning
from the day when business license is issued.
Article 55
An application for the extention of duration shall, proposed by 4
parties and approved at the board meeting, be submitted to the original
examination and approval authority six months prior to the expiry date of the
joint venture. Only upon its approval may the duration be extended, and the
joint venture company shall go through registreation formalities for the
alteration at the original registreation office.
Article 56
The joint venture may be terminated before its expiration in case the
parties to the joint venture agree unanimously that the termination of the joint
venture is for the best interests of the parties. To terminate the joint venture
before the term expires shalt be decided by the board of directors through a
plenary meeting, and it shall be submitted to the original examination and
approval authority for approval.
Article 57
Upon the expiration or termination of the joint venture before its term
ends, the board of directors shall work out procedures and principles for the
liquidation, nominate candidates for the liquidation committee, and set up the
liquidation committee for liquidating the joint venture company's assets.
Article 58
The tasks of the Liquidation committee are: to conduct through check of
the
8
<PAGE>
property of the joint venture company its claim and indebtedness; to work out
the statement of assets and liabilities and list of property; to formulate a
liquidation plan. All these shall be carried out upon the approval of the board
of directors.
Article 59
During the process of liquidation, the liquidation committee shall
represent the company to sue and be sued.
Article 60
The remaining property after the clearance of debts of the joint venture
company shall be distributed among the parties to the joint venture according to
the proportion of each party's investment in the registered capital.
Article 61
The Liquidation expenses and remuneration to the members of the
liquidation committee shall be paid in priority from the existing assets of the
joint venture company.
Article 62
After winding up of the joint venture company, its venture company, its
account books shall be left in the care of the Party A.
Chapter 10 The Trade Union Organization
Article 63
The staff and workers of the joint venture company have the right to
establish trade union organization and carry out activities in accordance with
the stipulations of the "Trade union Law of the People's Republic of China".
Article 64
The trade union in the joint venture company is representative of the
interests of the staff and workes. The tasks of the trade union are: to protect
the democratic rights and material interests of the staff and workers pursuant
to the law; to assist the joint venture company to arrange and make rational use
of welfare funds and bonuses; to organize political, professional, scientific
and technical studies, carry out literary, art and sports activities; and to
enducate staff and workers to obseive labour discipline and strive to fulfil the
economic tasks of the joint venture company.
Article 65
Persons in charge of the trade union of the joint venture company have the right
to atten as nonvoting members and to report the opinions and demands of staff
and workers to meetings of the books of directors hold to discuss issues such as
production and operational activities, to treat bonuses and welfare, etc..
Chapter 11 Rules and Regulations
9
<PAGE>
Article 66
Following are the rules and regulations formulated by the board of
directors of the joint venture company:
1. Management regulations, including the powers and functions of the
managerial branches and its working rules and procedures;
2. Rules for the staff and workers;
3. System of labour and salary;
4. System of work attendance record, promotion and awards and penalty for
staff members and workers;
5. Detailed rules of staff and worker's welfare;
6. Financial system;
7. Other necessary rules and regulations.
Chapter 12 Supplementary Articles
Article 67
The amendments to the Articles of Association shall be unanimously
agreed on and decided by the board of directors and submitted to the original
examination and approval authority for approval.
Article 68
The Articles of Association are written in Chinese Language and English
language, the Chinese version shall prevail.
Article 69
The Articles of Association shall come into effect upon the approval by
the Minstry of Foreign Economic Relations and Trade of the People's Republic of
China or its entrusted examination and approval authority.
For Party A: For Party B:
For Party C: For Party D:
PEOPLE'S REPUBLIC OF CHINA
LEGAL ENTITY
BUSINESS LICENSE
(Left Side)
Registration No.: Xianyang Joint Venture No.000390 1/2
This enterprise has registered to be business legal entity and is approved to do
business.
Annual Validation Check by every March 31
(Right Sight) license No. 0157253
Name of the enterprise:
In Chinese
In English: XIANYANG DNON TECH SPECIAL ELECTRICAL
TECHNICAL CO. LTD.
Address: 70 Weiyang West Road, Xianyang, Shaanxi Province
Type of the enterprise: Joint Venture
Field of Operation: Manufacturing and sales of enameled wire.
Registration Capital: USD2,500,000
Chairman of Board Du, Qing Song
Vice Chairman of Board Ma, Decai, Tang, Jiaqiang, Frossard
General Manager Du, Qing Song
Deputy General Manager Wang, Jianxuan, Yang, Zhiyong, Jin, Chuan
Term of Operation: From May 31, 1993 to May 31, 2005
The License valid date: From May 31, 1993 to May 31, 2005
The Commerce Administration Bureau of PRC Director (Signature)
Seal Date: March 26, 1996
FOREIGN TRADE AND ECONOMIC COOPERATION BUREAU
OF
XIANYANG
(1994)-20#
- --------------------------------------------------------------------------------
RE: Your Application for approval of ammendment to the Contract and Articles of
Association to incorporate the Sino-Hong Kong joint-venture of Xianyang Dnon
Tech Special Electronic Technical Co., Ltd.
Xianyang Dnon Tech Special Electronic Technical Co. Ltd.:
Your application dated Jan. 20, 1994 has been reviewed. The reply is as follows:
1. It is to approve Italian Dea Tech Machinery S.p.A. to invest to the
joint venture of Xianyang Dnon Tech Special Electronic Technical Company Limited
formerly incorporated by the three parties of Xian Jiaotong University Electric
Engineering Co., Ltd., Xianyang Pianzhuan Group Corp. and Hong Kong Weilin
Industrial Co., Ltd.
2. The total investment to Xianyang Dnon Tech Special Electronic Technical Co.,
Ltd. is US$5,000,000 with the registered capital of US$2,500,000, among which
Xianyang Pianzhuan Group Corp. will contribute US$1,125,000 accounting for 45%,
Xian Jiaotong University Electric Engineering Co., Ltd will contribute
US$250,000 accounting for 10%, Hong Kong Weilin Industrial Co., Ltd. will
contribute US$625,000 accounting for 25% and Italian Dea Tech Machinery S.p.A
will hold the remaining 20% with US$500,000. Each party shall contribute its
capital to the joint venture company according to the articles agreed in
Appendix I of Contract.
3. The Board of Directors of the Company is composed of 9 persons, among
whom 2 should be appointed by Xian Jiaotong University Electric Engineering Co.,
Ltd., 4 by Xianyang Pianzhuan Group Corp., 2 by Hong Kong Weilin Industrial Co.,
Ltd. and 1 by Dea Tech Machinery S.p.A. The chairman of the Board will be
appointed by Xianyang Pianzhuan Group Corp. and vice-chairmen should be 3
appointed by the other three parties respectively.
- --------------------------------------------------------------------------------
<PAGE>
4. All the articles in the former Contract and By-law of the joint venture
company exluded from the above reply should be followed without breach.
5. Please register at the Industrial and Commerce Administration Bureau
and the authorized Government for the formalities of the ammendment.
FOREIGN ECONOMIC AND TRADING BUREAU OF XIANYANG
(seal)
March 23, 1994
- --------------------------------------------------------------------------------
CC Copies to . . . . .
EMPLOYMENT AGREEMENT
Dated August , 1997
The parties to this agreement are Asia Electronics Holding Co. Inc., a
British Virgin Islands company (the "Company"), and Du Qingsong (the
"Executive"). The Company and the Executive agree as follows:
1. Employment and Duties
(a) The Company shall employ the Executive, and the Executive shall
serve the Company, as the Chairman of the Board of Directors and Chief Executive
Officer of the Company. The Executive shall use his best efforts to promote the
interests of the Company, and shall perform his duties faithfully and
diligently, consistent with sound business practices.
(b) The parties acknowledge that the Executive has business
responsibilities in addition to his responsibilities to the Company and serves
as chairman of Pianzhuan Group. Accordingly, it is understood and agreed that
Mr. Du may continue to discharge such other responsibilities, as long as he
devotes at least 75% of his full business time to the performance of his duties
for the Company, provided, however, if there exists any dispute between
Pianzhuan Group and its affiliates and the Company, the Executive shall promote
the interests of the Company to the best of his ability.
2. Term of Employment. The Executive shall be employed by the Company
under this agreement for a period commencing as of the date of this agreement
and expiring at the close of business on August 31, 2002.
<PAGE>
3. Compensation. As compensation for all services to be rendered by the
Executive during his employment under this agreement, the Executive shall be
entitled to receive a salary at the rate of Renminbi ________ a year, payable at
least monthly, provided, however, such amount shall not be increased by more
than ___% during the term of this Agreement.
4. Termination. (a) The Company may terminate the Executive's employment
and all the Company's obligations hereunder for "Cause." "Cause" shall mean (i)
the Executive's conviction (treating a nolo contendere plea as a conviction) of
a felony (whether or not any right of appeal has been or may be exercised); or
(ii) failure to perform his obligations under this agreement, which is not
remedied promptly after receipt by the Executive of written notice from the
Company specifying the details thereof.
(b) In the event of termination by the Company for Cause, without
prejudice to any other rights or remedies that the Company may have at law or in
equity, the Company shall have no further obligations to the Executive other
than to pay (i) base salary accrued through the effective date of termination;
and (ii) all other benefits and amounts that may be then due the Executive under
the general provisions then in effect of any employee benefit program or payroll
practice (e.g., vacation) of the Company in which he is then a participant.
(c) This agreement shall terminate upon the Executive's death and the
Company shall not have any further obligations hereunder.
(d) The Company may terminate the Executive's employment if the
Executive becomes physically or mentally disabled, if, in the good faith
determination of the Company's board of directors, such disability shall prevent
the Executive from substantially performing his duties and obligations under
this agreement during any period
2
<PAGE>
of nine calendar months and the Company shall have given notice to the Executive
not earlier than 30 days and not later than 90 days after the expiration of the
nine months (in which case the employment under this agreement shall terminate
when such notice is given).
5. Expenses; Fringe Benefits. During the employment of the Executive under
this agreement:
(a) The Company shall reimburse the Executive, on presentation of
vouchers or other evidence of such expenses in accordance with the policies of
the Company, for all reasonable business expenses incurred by him in the
performance of his duties for the Company.
(b) The Company shall have the right to obtain key-man term life
insurance on the life of the Executive, at its sole cost and expense, and the
Company shall be the sole beneficiary under such policy.
(c) The Executive shall be entitled to five weeks paid vacation each
year.
6. Non-Competition; Confidentiality
(a) The Executive may not at any time during his employment under this
agreement, and within one year after the termination of his employment for any
reason, engage or become interested in (as owner, lender, shareholder, partner,
director, officer, employee, consultant or otherwise) any business that is in
competition with the business conducted by the Company anywhere the Company
sells its products during the term hereof. Notwithstanding the foregoing, Mr. Du
may be a passive investor in any business in which he owns less than 5% of the
equity.
(b) During the term of the Executive's employment under this agreement,
and within one year after the termination of his employment for any reason, the
Executive shall not
3
<PAGE>
on his own behalf, or on behalf of any other person or enterprise, hire, solicit
or encourage to leave the employment of the Company any individual who was an
employee of the Company or its subsidiaries during the Executive's employment by
the Company.
(c) The Executive shall not, at any time during or after his employment
under this agreement, disclose to any third party, except in the performance of
his duties under this agreement, any confidential information regarding the
Company's customers, suppliers, trade secrets or business. The Executive shall
return all tangible evidence of such confidential information to the Company
prior to or at the termination of his employment.
7. Equitable
The Executive acknowledges that the remedy at law for breach of the
provisions of this agreement would be inadequate and that, in addition to any
other remedy the Company may have for breach of this agreement, the Company
shall be entitled to an injunction restraining any such breach or threatened
breach.
8. Miscellaneous
(a) The failure of a party to this agreement to insist on any occasion
upon strict adherence to any term of this agreement shall not be considered a
waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this agreement. Any waiver must be
in writing.
(b) All notices and other communications under this agreement shall be
in writing and may be given by any of the following methods: (i) personal
delivery; (ii) facsimile transmission; (iii) registered or certified mail,
postage prepaid, return receipt requested; or (iv) overnight delivery service.
Notices shall be sent to the appropriate party at its or his address or
4
<PAGE>
facsimile number given below (or at such other address or facsimile number for
that party as shall be specified by notice given under this section 7(b)):
If to the Executive, to him at:
c/o Asia Electronics Holding Co. Inc.
70 West Weiyang Road
Xianyang, Shannxi Province
People's Republic of China
Facsimile: (+86) 9103320808
If to the Company, to it at:
70 West Weiyang Road
Xianyang, Shannxi Province
People's Republic of China
Facsimile: (+86) 9103320808
All such notices and communications shall be deemed received upon (i) actual
receipt by the addressee, (ii) actual delivery to the appropriate address or
(iii) in the case of a facsimile transmission, upon transmission by the sender
and issuance by the transmitting machine of a confirmation slip confirming the
number of pages constituting the notice have been transmitted without error. In
the case of notices sent by facsimile transmission, the sender shall
contemporaneously mail a copy of the notice to the addressee at the address
provided for above. However, such mailing shall in no way alter the time at
which the facsimile notice is deemed received.
(c) This agreement shall be assigned to and shall inure to the benefit
of any successor to substantially all the assets and business of the Company as
a going concern, whether by merger, consolidation, liquidation or sale of
substantially all the assets of the Company or otherwise, and the Company shall
cause any such successor to assume the Company's
5
<PAGE>
obligations under this agreement (but no such assignment shall relieve the
Company of its obligations under this agreement).
(d) This agreement contains a complete statement of all the
arrangements between the parties with respect to its subject matter, supersedes
all existing agreements between them with respect to that subject matter, may
not be changed or terminated orally and any amendment or modification must be in
writing and signed by the party to be charged.
(e) This agreement may be executed in counterparts, each of which shall
be considered an original, and both of which together shall constitute the same
instrument.
(f) This agreement shall be governed by and construed in accordance
with the law of the State of New York applicable to agreements made and to be
performed wholly in the state of New York.
ASIA ELECTRONICS HOLDING CO. INC.
By:__________________________________
-------------------------------------
Du Qingsong
6
SHAREHOLDERS AGREEMENT
Dated August , 1997
The parties to this agreement are Du Qingsong ("Mr. Du") and To Shing
Hoi ("Mr. To"). The parties agree as follows:
1. Restrictions on Transfer
1.1 Transfers to be Made Only as Permitted or Required by This
Agreement. Mr. To may not, directly or indirectly, sell, assign, transfer,
pledge or otherwise encumber or dispose of (collectively, "transfer") any shares
of common stock par value $.01 per share ("Shares") of Asia Electronics Holding
Co. Inc., a British Virgin Islands company (the "Company"), except as
specifically permitted by this agreement; any other purported transfer shall be
void and of no effect.
1.2 Permitted Transfers. Mr. To may transfer any Shares he owns to his
spouse or descendants or any executor, guardian, committee, trustee or other
fiduciary acting as such on behalf or for the benefit of any such spouse or
descendant. No transfer pursuant to the immediately preceding sentence may be
effected, unless, at or prior to the transfer, the transferee executes and
delivers to Mr. Du a written agreement by the
<PAGE>
transferee (in form and substance satisfactory to Mr. Du) to be bound by this
agreement as if the transferee were Mr. To. In addition, Mr. To may transfer any
Shares, if Mr. Du shall have consented in writing to the transfer, which consent
may be withheld by Mr. Du in his sole and absolute discretion.
2. Voting. Mr. To shall vote his Shares at any meeting or by written
consent during the term hereof as Mr. Du directs him to vote by written notice
given at least two business days before the vote is required by Mr. Du to be
cast. During the term hereof, promptly upon the written request of Mr. Du, Mr.
To shall execute and deliver to Mr. Du or Mr. Du's designee(s) an irrevocable
proxy or irrevocable proxies appointing Mr. Du or Mr. Du's designee(s) as his
irrevocable proxy or proxies to vote all his Shares on any or all matters
thereafter as Mr. Du or Mr. Du's designee(s) determine in his or their sole and
absolute discretion, which irrevocable proxy or irrevocable proxies shall
continue in effect until the earlier of the termination of this section 2 or the
proxy's rescission by Mr. Du or Mr. Du's designee(s). Except as provided in the
first two sentences of this section 2, Mr. To shall not vote or agree to vote
his Shares, or grant a proxy or proxies to vote his Shares, to any person or
entity.
2
<PAGE>
3. Term. Sections 1 and 2 shall terminate and be of no further force or
effect after the tenth anniversary of the closing of the Company's initial
public offering.
4. Miscellaneous
4.1 Legend. As long as any provision of this agreement remains in
effect, each certificate representing Shares shall bear a legend substantially
as follows:
"The shares represented by this certificate are
subject to a shareholders agreement dated August
__, 1997, which, among other things, restricts the
transfer and voting of the shares; a copy of that
agreement is on file at the office of the Company."
4.2 Governing Law. This agreement shall be governed by and construed in
accordance with the law of the British Virgin Islands applicable to agreements
made and to be performed wholly in the British Virgin Islands.
4.3 Notices. All notices and other communications under this agreement
shall be in writing and may be given by any of the following methods: (a)
personal delivery; (b) facsimile transmission; (c) registered or certified mail,
postage prepaid, return receipt requested; or (d) overnight delivery service.
Notices shall be sent to the appropriate party at his address or facsimile
number given below (or at such other address or
3
<PAGE>
facsimile number for that party as shall be specified by notice given under this
section 4.3):
if to Mr. Du, to him at:
c/o Asia Electronics Holding Co., Inc.
70 West Weiyang Road
Xianyang, Shannxi Province
People's Republic of China
Facsimile: (+86) 910332088
if to Mr. To, to him at:
RM1, 11th Floor Ocean View Court
27 Chatham Road
Tsim Sha Tsui, Kowloon, Hong Kong
Facsimile: (212) 938-5581
All such notices and communications shall be deemed received upon (a) actual
receipt by the addressee, (b) actual delivery to the appropriate address or (c)
in the case of a facsimile transmission, upon transmission by the sender and
issuance by the transmitting machine of a confirmation slip confirming the
number of pages constituting the notice have been transmitted without error. In
the case of notices sent by facsimile transmission, the sender shall
contemporaneously mail a copy of the notice to the addressee at the address
provided for above. However, such mailing shall in no way alter the time at
which the facsimile notice is deemed received.
4
<PAGE>
4.4 Counterparts. This agreement may be executed in counterparts, each
of which shall be considered an original, and both of which together shall
constitute the same instrument.
4.5 Equitable Relief. The parties acknowledge that the remedy at law
for breach of this agreement may be inadequate and that, in addition to any
other remedy a party may have for a breach of this agreement, that party may be
entitled to an injunction restraining any such breach or threatened breach, or a
decree of specific performance, without posting any bond or security. The remedy
provided in this section 4.5 is in addition to, and not in lieu of, any other
rights or remedies a party may have.
4.6 Separability. If any provision of this agreement is invalid or
unenforceable, the balance of this agreement shall remain in effect, and, if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.
4.7 Entire Agreement. This agreement contains a complete statement of
all the arrangements between the parties with respect to its subject matter,
supersedes all existing agreements between them with respect to that subject
matter, may
5
<PAGE>
not be changed or terminated orally and any amendment or modification must be in
writing and signed by the party to be charged.
---------------------------------
Du Qingsong
---------------------------------
To Shing Hoi
6
AGREEMENT OF LEASE
Landlord: Xianyang Pianzhuan Group Corp. (Pianzhuan)
Leasee: Xianyang Yongxin Electronics Co., Ltd. (Yongxin)
This lease agreement between Xianyang Pianzhuan Group Corp.
(Pianzhuan),70 West Weiyang Road, Xianyang, Shaanxi province and Xianyang
Yongxin Electronics Co., Ltd. (Yongxin), based on mutual trust and mutual
benefit. The content of this agreement is described below:
1. Pianzhuan agrees to rent the first and second floor of manufacturing plant on
the Building No. 2 with size of 6,036 square meters to Yongxin for manufacturing
purpose.
2. Yongxin agrees to pay RMB 848,743.10 for rent of next year, 15 days before
year end.
3. Pianzhuan guarantees the plant facilities including electric power, water,
heat and road condition according to the requirement of Yongxin.
4. Yongxin cannot alter the internal construction structure without the consent
of Pianzhuan.
5. Yongxin should guarantee to good condition of the building and facilities.
Any repair, if it is necessary, should be consent by Pianzhuan.
6. The terms of the agreement is 5 years. The agreement is effective on the
date of the agreement signed by each parties.
7. The agreement is signed in Xianyang, Shaanxi province.
8. The agreement has two copies each held by each party.
9. Any dispute related to this Agreement will be negotiated by each party based
on mutual trust and good faith.
10. The agreement will be subjected to and in accordance with the Contract Law.
Xianyang-Yongxin Electronics Co., Ltd. Xianyang Pianzhuan Group Corp.
By By
April 20, 1995
AGREEMENT OF LEASE
Landlord: Xianyang Pianzhuan Group Corp. (Pianzhuan)
Leasee: Xianyang Daming Electronics Co., Ltd. (Daming)
This lease agreement between Xianyang Pianzhuan Group Corp. (Pianzhuan), 70
West Weiyang Road, Xianyang, Shaanxi province and Xianyang Daming Electronics
Co., Ltd (Daming), based on mutual trust and mutual benefit. The content of this
agreement is described below:
1. Pianzhuan agrees to rent the third floor of manufacturing plant on the
Building No. 1 with size of 1,296 square meters to Daming for manufacturing
purpose.
2. Pianzhuan guarantees the plant facilities including electric power,
water, heat and road condition according to the requirement of Daming.
3. Daming agrees to pay RMB96 per square meter for rent of next year, 15
days before year end.
4. Daming cannot alter the internal construction structure without the
consent of Pianzhuan.
5. Daming should guarantee to good condition of the building and
facilities. Any repair, if it is necessary, should be consent by Pianzhuan.
6. The terms of the agreement is 10 years. The agreement is effective on
the date of the agreement signed by each parties.
7. The agreement is signed in Xianyang, Shaanxi province.
8. The agreement has two copies each held by each party.
9. Any dispute related to this Agreement will be negotiated by each party
based on mutual trust and good faith.
10. The agreement will be subjected to and in accordance with the Contract
Law.
Xianyang Daming Electronics Co., Ltd. Xianyang Pianzhuan Group Corp.
By By
January 10, 1993
AGREEMENT OF LEASE
Landlord: Xianyang Pianzhuan Group Corp. (Pianzhuan)
Leasee: Xianyang Dnon Tech Special Electrical Technical Co., Ltd.(Dnon
Tech)
This lease agreement between Xianyang Pianzhuan Group Corp.(Pianzhuan),70
West Weiyang Road, Xianyang, Shaanxi province and Xianyang Dnon Tech Special
Electrical Technical Co., Ltd (Dnon Tech), based on mutual trust and mutual
benefit. The content of this agreement is described below:
1. Pianzhuan agrees to rent a manufacturing plant on the Building No.5 with size
of 720 square meters to Dnon Tech for manufacturing purpose.
2. Pianzhuan guarantees the plant facilities including electric power, water,
heat and road condition according to the requirement of Dnon Tech.
3. Dnon Tech agrees to pay RMB24,613.37 annually for rent, 15 days before year
end.
4. Dnon Tech cannot alter the internal construction structure without the
consent of Pianzhuan.
5. Dnon Tech should guarantee to good condition of the building and facilities.
Any repair, if it is necessary, should be consent by Pianzhuan.
6. The terms of the agreement is 5 years. The agreement is effective on the date
of the agreement signed by each parties.
7. The agreement is signed in Xianyang, Shaanxi province.
8. The agreement has two copies each held by each party.
9. Any dispute related to this Agreement will be negotiated by each party based
on mutual trust and good faith.
10. The agreement will be subjected to and in accordance with the Contract
Law.
Xianyang Dnon Tech Special Electrical Co., Ltd. Xianyang Pianzhuan Group Corp.
By By
August 20, 1995
AGREEMENT OF LEASE
---------------
Landlord: Weihai Electronic Industrial Park Weishi Corp.
Lease: Xianyang Daming Electronics Co. Ltd.
This lease agreement between Weihai Electronic Industrial Park Weishi
Corp. ("Weihai"), located in Weihai City of Shangdong Province and Xianyang
Daming Electronics Co. Ltd. ("Daming"), based on mutual trust and mutual
benefit. The content of this agreement is described below:
1. Weihai agrees to rent a manufacturing plant on the Building No. 1 in
Electronic Industria Park, total four floors, with size of 11,200
square meters to Daming for manufacturing purpose.
2. Weihai guarantees the plant facilities including electric power,
water, heat and road condition according to the requirement of Daming.
3. Daming agrees to pay RMB15 per square meters monthly for next month
rental within 5 days before month end.
4. Daming can not alter the internal construction structure without the
consent of Weihai.
5. Weihai should guarantee to good condition of the building and
facilities. Any repair, if it is necessary, should be consent by
Weihai.
6. The terms of the agreement is 10 years. The agreement is effective on
the date of the agreement signed by each parties.
7. The agreement is signed in Weihai City, Shangdong province.
8. The agreement has two copies each held by each party.
9. Any dispute related to this Agreement will be negotiated by each
party based on mutual trust and good faith.
10. The agreement will be subjected to and in accordance with the
Contract Law.
Xianyang Daming Electronics Co. Ltd. Weihai Electronic Industrial Park Weishi
Corp.
By_____________________________ By_____________________________________
Du, Qingsong Xong, Guangqian
May 7, 1997
The Construction Bank of China
LOAN AGREEMENT
Type of the Loan: Foreign Currency Short-term Loan for Working Capital
No. of Contract: 96(W)004
Debtor: Xianyang Daming Electronics Co. Ltd.
Address: 70 West Weiyang Road, Xianyang Telephone:
Legal Representative: Mr. Du, Qingsong
Bank Account:
Fax: Post code:
Creditor: Construction Bank of China, Xianyang Branch
Address: Telephone:
Legal Representative:
Fax: Post code:
<PAGE>
Debtor (Party A): Xianyang Daming Electronics Co., Ltd
Creditor (Party B): Construction Bank of China, Xianyang Branch
The parties agree as follows:
1. Total amount of the Loan Facility US$1,100,000.
2. The party A will use the loan for importing raw materials.
3. The term of the Loan Facility will be scheduled from Sept. 16, 1996 to mature
and expire on March 15, 1997.
4. The loan's prime rate per annum is 7.4375%, and is computed on the basis of
every three months. The interest of the loan is calculated from the date when
the loan is transferred to the Party A's account. During the period of the
agreement, the interest rate is subject to any change by the Bank of China.
5. The Party A plans to spend the loan as following:
1996 year 9 month US$1,100,000 amount
__year_month_____amount
__year_month_____amount
__year_month_____amount
6. The Schedule for the Party A to return the loan will be as following:
1997 year 3 month US$1,100,000 amount
__year_month_____amount
__year_month_____amount
__year_month_____amount
The Party A should notice the Party B __ business days in advance when he plans
to return the loan before the scheduled date.
7. The interest will be deducted directly from the Party A's Foreign Currency
account on the scheduled interest-pay-day. If the Party A fails to do so, the
Party B may stop releasing the loan.
8. If the Party A fails to return the loan as the scheduled date, the Bank or
other authorized party has the right to deduct the principle, interest and other
costs.
9. Modification or dismiss of the agreement:
(1). After this agreement comes to be effective , neither of the Party A or
Party B is allowed to make a modification or cancel the agreement without the
consent of the other party.
<PAGE>
(2). In case the Party A will not be able to pay off the loan on the mature
date due to any situation out of his control, the Party A may apply for
extension of the loan which can only be allowed to extend for one time.
The Party A is supposed to submit the application form __business days before
the mature date and prepare the third Party's warranty agreement, then sign
the Loan Facility Extension Agreement in face of the Party B.
(3). If the Party A would like to transfer the right and obligation under
this agreement to any of the Party, he should let the Party B know beforehand
.This transformation will not come to be effective until the Third Party sign
another Loan Facility Agreement with the Party B.
(4). In case any of the Parties change their status during the period of the
agreement, the reorganized party will continue to fulfill the obligation and
enjoy the right under the agreement.
10. To the respect of the principle, interest and other costs, Xianyang
Pianzhuan Group Corp will be the guarantor for the Party A, and the Party A will
supply the collateral to secure the full payment. Two agreements will be signed
respectively thereafter.
11. During the period of the agreement, the Party A can not change his status
without the writing the approval of the Party B (e.g. Contractual term, joint
venture, merge, etc.).
12. The right and obligation between the Party A and the Party B:
(1) The Party A has the right to ask for release of the loan from the Party B as
the agreement.
(2) The Party A will return the principle and the interest on the
mature date.
(3) The Party A must use the loan for the purpose as he reports in
the agreement. Without the writing approval of the Party B ,the Party A is not
allowed to appropriate the loan for any other purpose.
(4) The Party A will provide all the relevant financial statements for the
reference of the Party B.
(5) The Party B has the right to supervise the use of the loan by the Party A.
(6) The Party B has the right to supervise the financial processing of the Party
A.
(7) The Party B will release the loan as the scheduled date under the agreement.
13. Events of Default:
(1) If the Party A does not use the loan as his report in
the agreement ,the Party B may charge him extra interest rate, for the amount
which is misplaced.
(2) If the Party A does not return the loan as the scheduled
date of as the planned amount each time , the Party B may charge him extra
interest rate--.
(3) Upon default of No.11 of the agreement, and Party A lose
the whole amount of the loan thereafter, Party B may declare the entire unpaid
principle balance and accrued unpaid interest immediately due, and then the
Party A will pay that amount.
<PAGE>
(4) If the Party A is in default of No.15 of the
agreement, the Party B may charge the default fee ________ from the Party A.
(5) Under the following situation, the Party B may stop releasing the rest of
the loan, declare the unpaid principle and the accrued interest due, or disposal
the Collateral and also has the right to deduct that amount directly from the
Party A's account.
a. The Party A does not use the loan as his report in the agreement and does not
correct his mistake after he gets the Party B's notice.
b. The Party A provides the false financial statements to the Party B.
c. In case the guarantor is in default or the collateral is accidentally
damaged, and the Party A can not fine a new qualified guarantor or another
collateral.
d. The Party A gets involved in serious lawsuit or arbitration.
e. Anything happens that make the Party A unable to pay the loan or the Party A
is found no longer a bonafide debtor.
14. Any dispute may arise between the two parties, it should be settled in court
located at the area near to the Party B. Before the court makes the decision,
the two parties will continue to fulfill their obligations which are not under
the dispute.
15. Miscellaneous.
(1) Before the Party A pay off the loan, he is not allowed to supply this loan
to any third party as the collateral.
(2) Before the Party A pay off the loan,
he is not allowed to be anyone's guarantor.
(3)
(4) ___________________________________________
16. Anything beyond the contract is abided by the related law and regulations.
17. The contract is taking effective by authorized signature and seal and
terminates when principal and interests under the agreement are paid off.
18. The contract has three copies , two for each party and one for guarantor.
Xianyang Daming Electronics Co.,Ltd International Division of Construction
Bank, Xianyang Branch
seal seal
Legal representative: Legal representative:
Sep. 16, 1996 Sep. 16, 1996
The Construction Bank of China
LOAN GUARANTEE AGREEMENT
No. of Contract: 96(W)004
Loan Guarantor: Xianyang Pianzhuan Group Corp.
Address: 70 West Weiyang Road, Xianyang
Legal Representative: Mr. Du, Qingsong
Bank Account: Construction Bank of China, Xianyang Branch
Creditor: Construction Bank of China, Xianyang Branch
Address:
Legal Representative:
<PAGE>
To secure the performance of the obligation under Loan Agreement No. 96(w)004
Party A (Xianyang Daming Electronics Co., Ltd) grants to the Bank his warranty
on the basis of applicable law and regulations.)
The parties here to agree as follows:
1. Party A grants the Bank his warranty for the amount of US$1,100,000. (Term of
the loan: from Sept. 16, 1996 till March, 15, 1997)
2. If the Debtor fails to perform any of the obligation in the loan agreement,
the Party has to fulfill the obligation within days after he receive the notice
from the Bank.
3. In addition to the principle, the Party A is also responsible for the
interest, default fee, compensatory fee and any other costs if occur.
4. This agreement will come to be effective on the same date of the loan
agreement, and will terminate two years after the end of the Loan Agreement. If
the Debtor needs further extenuation for the loan, this agreement will terminate
on the final mature date of that agreement.
6. Without the writing approval of the Party A, the Debtor and the Bank can not
make any modification in the Loan Agreement.
7. Party A will give a writing notice to the Bank, if the Party A change his
status during the period of the agreement. The reorganized party (or some other
relevant parties) will continue to fulfill this warranty obligation. If the Bank
thinks the new organization is not qualified for the warranty obligation, this
organization have to find a new one for the Bank.
8. The Bank will have the right to ask for the copy of the financial statements
and audit the internal accounting system of the Party A.
9. During the period of the agreement, the Party A can not grant more warranty
to the third party if it exceeds his ability.
10. The Bank has the right to ask the Party A to fulfill the warranty obligation
in advance.
(1) If the Party A does anything against 7, 8, 9 of this agreement or seriously
commits default of the agreement.
(2) During the period of the Loan Agreement, if the Debtor is forced to go
bankruptcy, be dismissed, or change the status and therefore get the Bank
involved into the serious lawsuit (or arbitration), or anything happen that
enable the Debtor to pay off the loan or the Bank finds out that he is no longer
a bonafide Debtor any more.
11. If the Party A refuses to fulfill the warranty obligation or the relevant
obligation, the Bank will charge him the default fee of _____% of the loan. If
it can not cover the actual loss sustained by the Bank, the Party A would have
to pay the rest of it. Meanwhile, the Bank may, at any time, with or without the
notice to the Party A, to appropriate the money in the Party A's Account under
such situation.
12. Other agreed provision
13. Any dispute may arise between the two parties should be settled in court
located at the area near to the Bank.
14. The contract is taking effective by signature and sealing.
15. The contract has two copies for each party.
<PAGE>
Xianyang Daming Electronics Co., Ltd. China Construction Bank
Xianyang Branch
(seal) (seal)
Legal Representative Legal Representative
Sepr. 16, 1996 Sept. 16, 1996
The Construction Bank of China
LOAN COLLATERAL AGREEMENT
No. of Contract: 96(W)004
Pledger (Party A): Xianyang Daming Electronics Co. Ltd.
Address: 70 West Weiyang Road, Xianyang
Legal Representative: Mr. Du, Qingsong
Bank Account: Construction Bank of China, Xianyang Branch
Mortgagee: Construction Bank of China, Xianyang Branch
Address:
Legal Representative:
<PAGE>
To secure the fulfillment of Loan Agreement No.96(w)004, Party A will pledge its
property to Party B, under Party B's agreement. It is agreed as follows on the
basis of applicable law and regulation.
1. Party A will provide collateral goods under the attached appendix as
security.
2. Party A will get a loan of RMB 1,100,000 from the bank. Term of the loan is
from Sep.16,1996 till Mar.15, 1997.
3 . Party A guarantees its ownership of the underlying collateral goods.
4. Party A will submit the title of pledged property to Party B during the
period of collateral contract, which will be preserved by Party B.
5. The collateral assets include the Principle of RMB 1,100,000, interest,
default fee, compensatory fee, and other costs occurred.
6. The enforcement of the collateral contract is not affected by the loan
agreement.
7. Party A will be responsible for any expenses on appraisal, insurance,
verification, registration and preservation.
8. During the period of the contract, Party A is obliged to maintain the good
condition of underlying collateral goods, keep them in good shape. Party B may
inspect the collateral goods at any time.
9. During the period of the contract, Party A should insure collateral goods.
Party B should be the first beneficiary. The insurance certificate will be
preserved by Party B.
10. During the period of the contract, if a loss occurred beyond the insurance
policy or if there is devalue on collateral goods due to the third party's
fault, compensatory fee will be deposited into Party B's account by Party A.
Party A will have no right to use the fee.
11. If there is a devalue on collateral goods, Party A will be asked to provide
a warranty in connection with the loss.
12. During the period of the contract , Party A will be responsible for any
environmental pollution or other damages caused by underlying collateral goods.
13. During the period of contract, Party A is not permitted to grant, move,
transfer, lease and pledge the underlying collateral goods without Party B's
consent.
14. During the period of the contract, the income from collateral goods will be
first used to pay off Party B's loan.
<PAGE>
15. On expiration date of the contract, Party B will entitle to disposal the
collateral goods and receive the payment at first priority, if Party A fail to
pay off the loan.
16. Under following situation, Party B may disposal the collateral goods, stop
releasing the loan under the Loan Agreement or declare the unpaid principle and
the accrued interest due.
1. Party A is bankrupt or dismissed.
2. If Party A does anything against No.4, No.9, No.10, No.11, No.13 of the
agreement or seriously commits default of the agreement. 3. During the period of
the Loan Agreement, if the debtor is forced to go bankruptcy, be dismissed, or
change the status, fail to use the loan as his report in the agreement and
therefore get the Bank involved into the serious lawsuit (or arbitration), or
anything happen that enable the Debtor to pay off the loan or the Bank finds out
that he is no longer a bonafide Debtor any more.
17. If any economical loss occurred is due to co-own, dispute, detain or other
pledge under the same collateral goods, which facts is hidden by Party A, Party
A will be fined the default fee of % the loan. If it can not cover the actual
loss sustained by Party B, Party A would have to pay the rest of it.
18. Any income received by Party A from disposing the collateral goods will be
distributed as follows:
1. For payment of the expenses in connection with the
collateral goods;
2. Paying off the accrued interest due
3. Paying off the principle, default fee and compensatory fee;
4. Paying off other expenses.
19. Miscellaneous:
20. Should any dispute arise due to the collateral goods, it will be settled in
local court, if there is no agreement reached by two parties.
21. The collateral contract will take effective on the date of registration.
22. The collateral contract is taking effective by authorized signature and
seal.
23. The contract has two copies, one for each party.
Xianyang Daming Electronics Co., Ltd. (Seal) Construction Bank, Xianyang Branch
(seal) (seal)
Legal Representative Legal Representative
Sep. 16, 1996 Sep. 16, 1996
I. Appendix of Collateral Contract Contract No. 96(w)004
Collateral Goods List
Name of collateral: Horiz. Yoke Winder
Type: 181-III
Unit: Set
Quality: 7
Muniments of title and number:
Address: Workshop in Daming Electronics
Co., Ltd.
Collateral assets: RMB 11.32 million
The other collateral asset by same pledge:
Remarks: Original value RMB14 million
Pledger: Xianyang Daming Electronics Co.,
Ltd. (seal)
Legal representative:
Pledgee: Construction of China Xianyang
Branch (seal)
Legal representative:
AGREEMENT OF EXTENSION OF LOAN REPAYMENT
Borrower (Party A): Xianyang Daming Electronics Co. Ltd.
Creditor (Party B): Construction Bank of China, Xianyang Branch
Guarantor (Party C): Xianyang Pianzhuan Group, Corp.
Due to the expansion of production, Party A was not able to pay back the loan
NO.(95)W014, and requested for extension the repayment to Party B. Through the
investigation, Party B agreed the extension of repayment by Party A, and Party
agreed to provide the guarantee. Thus three parties agreed as follows:
1. Party A borrowed short-term loan designated in US dollar at the amount of
Four Hundred Thousand dollars only, should have been paid off by December 14,
1996, Party A now agreed to extend such repayment for half year, as the result
of the extension, the repayment period will be from December 14, 1996 to June
14, 1997.
2. The floating annual interest rate according to the rate announced by People's
Bank of China will be adjusted to 7.5625%.
3. According to this agreement, Party A's repayment schedule will be as follow:
June 14, 1997 US$400,000
4. In addition to the agreement, three parties should comply with the provision
of loan agreement (95)W014.
5. Other provision agreed among the parties.
6. The agreement is taking effective by authorized signature and seal. The
agreement will be terminated when the loan is paid off.
7. The agreement has three copies for each parties.
Party A (seal) Party B (seal)
Legal Representative Legal Representative
Party C (seal)
Legal Representative
Date: December 14, 1996
The Royalty Contract
Royalty ( Party A): Xianyang Pianzhuan Group Corp.
Rolyaltee (Party B): Xianyang Daming Electronics Co. Ltd
(Party C): Xiangyang Yongxin Electronics Co. Ltd.
Party A and Party B, Party C signed the contract based on:
1). Party A applied for the registration of PIANZHUAN brand in National
Industrial and Commercial Regulatory Bureau on Aug 23rd, 1996, which has been
accepted formally by Royalty Bureau;
2). Party A confirmed itself the sole legal owner of PIANZHUAN with no
negatives, which shall be approved by Royalty bureau.
1. Conception
The terms below contain the meaning as follows unless being specific in the
contract:
1.1. The Royalty: the royalty being applied for registration attached in the
contract as Enclosure 1;
1.2. Subsidiary: the company being 100% owned, its shares being hold and shared
or other economic entity;
1.3. The Goods: the goods being showed in the contract as Enclosure 2.
2. Party A agrees that Party B and Party C as well as their subsidiaries may use
the royalty for their goods without any payment.
3. Party A is authorized to supervise the quality under the royalty being used
by Party B and Party C who guarantee the goods quality under the royalty shall
never be worse than the existing standard.
4. Party A has the obligation in extending registration as well as pay for the
related fee.
Party B and C have the obligation in informing the Party A without delay upon
recognition with the royalty being unlegally used and try best to assist Party A
in maintain its legal rights for the royalty.
5. Party A promises and guarantees as follows:
5.1. Party A guarantees its legal ownership of the royalty and the registration
approval as soon as possible, the royalty and its use being valid and effective
without violating the third party's rights within the registration area
limitation as well as any lawsuits, argument and law procedure;
5.2. Party A shall extend registration in The Royalty Bureau before the
expiration pursuant to 24th
<PAGE>
provision of The Royalty Law and maintain the permanent legal registration
with effort.
6. Party A and Party B promise and guarantee as follows:
6.1 Party B or C shall pay for Party A's loss ( includes but not less than loss
in profit or operation or reputation) caused directly or in directly by using
Party A's royalty in production.
6.2. Party B or C shall never or let others affect the royalty registration or
Party A's rights for the royalty;
6.3. Party B or C shall never behave like an owner of the royalty in case being
misunderstood by others;
6.4. Party B or C shall never permit any third party except its subsidiaries to
acquire for the use of the royalty allowed by the contract provided other
specific agreement;
6.5. Party B or C shall inform Party A upon recognition with the royalty being
violated without delay as well as assist Party A in maintaining the rights of
the royalty.
7. Party A, B or C shall pay for the total loss caused by the argument, lawsuits
and legal obligation because of the guarantee's promised in 5th and 6th clauses
being incorrect, untrue or misunderstood.
8. Party A, B or C confirms that Party B or C shall never enjoy other rights for
the royalty except the using right of the royalty authorized by Party A
stipulated in the contract.
9. Party B or C may inform Party A in writing with terminating the contract
without permission of Party A because of development. The contract and its
effective shall expire one month later since the date of informing, whereas the
other two Parties still apply to the contract.
10. The Party A, B or C may inform other two Parties to terminate the contract
in the condition of any one of the following:
10.1. Any Party who abides the duty has involved in a loss because of any other
Party breaks the stipulations of the contract without any compensation within 14
days after being noticed by the abiding Party;
10.2. Any party cannot afford to pay for the debts of has been declared to
settle the assets and liabilities.
11. The contract is formulated, explained and implemented in accordance with The
Royalty Law.
<PAGE>
12. The contract is valid for 10 years since the signature by the respective
legal representative of the Party A, Party B and Party C. The contract shall
keep valid automatically upon the expiration pursuant to the related laws and
regulations of PRC provided any Party notice any other two Parties 3 months
prior to the termination.
13.14. Any Party may claim lawsuits for Chinese People's Court in case any
argument occurred on the contract or its implementation, the Party who looses
the lawsuits shall pay for the lawsuits expense and other related expenses
provided other specific provisions by law.
14. The contract shall be in quadruplicate with the same legal effect, one for
each Party and one for The Royalty Bureau for reference.
15. The contract is signed on Sep 1st, 1996 in Xianyang, Shannxi, China.
Party A:
The legal representative or authorized representative:
Party B:
The legal representative or authorized representative:
Party C:
The legal representative or authorized representative:
CONTRACT
OF
XIANGYANG COLOR DISPLAY TUBE EQIPMENT AND TECHNOLOGY
Contract No: 92PZl1-0001XY
Date: January 16, 1993
China Xianyang Yongxin Electronics Co. Ltd. (Buyer), as one party. Japan,
Nichimen Corporation(Seller), as the other party. Two parties agree with the
following items:
Chapter one Definition
"Buyer" indicates China Xianyang Yongxin Electronics Co. Ltd.
"Seller" indicates Japan Nichimen Corporation
"Contract product" indicates the product and the catalogue attached thereafter.
"Technique document" indicates all attached documents of technique data, drawing
draft, design, calculation, implementation, maintenance, and products
inspection.
"Contract plant" indicates the buyer Xianyang Yongxin Electronic Co. Ltd.
establishing the 25" color display tube production line which has the capacity
of 7,350,000pcs output each year.
"Technology service" indicates all services including designing, manufacturing,
installing, inspecting, converting implementing of the contract manufacture
imported.
"Contract effective date" indicates the date that both of the parties get the
approval of its government authorization department.
"Special technique" indicates that the technology belonging to the seller that
relates with assembling, manufacturing, quality control, technical designing of
the contract product, and the technology relating to equipment installing,
converting, testing, implementing and maintaining.
Chapter Two Contract
Buyer agrees to purchase from Seller the whole production line with the capacity
of 735,000 pcs of 25" color display tube. Seller agrees to sell to the above
mentioned to Buyers.
The specification and standard of the Contract Product can be found in the
attached document no.l. The content of the goods supplied by Seller can be found
in attached document no.2. The "Technical document" supplied by seller can be
found in attached document no.3.
The technique of the supplied product, warranty, time and method of inspection
can be found in the attached document no.6
Seller will send experienced, qualified technical personnel (technique advisor)
to help in installing, testing, manufacturing and maintaining. Details about the
personnel, technical scope, etc. can be found in attached document no.5.
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Seller will provide a training program for the technical people from Buyer.
Details about the training program can be found in attached document no.4.
Under Buyer's requirement, within eight years after the contract is signed,
Seller has the obligation to supply all the necessary parts, equipment of the
Contract Plant at a favorable price. Buyer and Seller will sign a separate
agreement about this.
Under Buyer's requirement, within the time limit of warranty, Seller has the
obligation to supply all the necessary production material for the Contract
Plant at a favorable price. Buyer has the preemptive right to purchase from
Seller. Buyer and Seller will sign a separate agreement about this.
Chapter Four Payment
Both Buyer and Seller will make contract payment through Construction Bank of
China Shaanxi Branch and San He Bank in US Dollar by the way of T/T. Buyer will
pay Seller for the total amounts of the Contract Plant under the following
method:
85% of the total amount of the Contract Plant is equivalent to USD2,470,809.42
(U.S DOLLAR TWO MILLION FOUR HUNDRED SEVENTY THOUSAND EIGHT HUNDRED NINE AND
42/00)
Buyer will pay through Construction Bank of China Shaanxi Branch, within 30
days, after receiving the following documents submitted by Sellers when
delivery is made under Chapter Five of this Contract,
Commercial Invoice Six copies
Draft at sight Two copies
Whole set of clean boarding pay to the order and indicating "notifying China
foreign trade transportation corp." and "Freight Prepaid" shipping document
original and copy in quadruplicate.
Packing List Six copies
Certificate of Quality Inspection Six copies
15% of the total amounts of the Contract Plant is equivalent to USD436,025.19
(U.S DOLLAR FOUR HUNDRED THIRTY SIX THOUSAND TWENTY FIVE AND 19/00)
Buyer will pay Seller, within 30 days, after receiving the following documents
submitted by Seller through Bank of China Shaanxi Branch, when the inspection of
the Contract Plant is completed and the delivery is made.
Commercial Invoice Six copies
D/P at sight Two Copies
(3)Certificate of inspection signed by Buyer and Seller in duplicate.
4.3 Buyer will pay Seller for technique transferring fee in 3.2 of the Contract
under the following method:
60% of the technique transferring fee is equivalent to USD402,504.00
(U.S DOLLAR FOUR HUNDRED TWO THOUSAND FIVE HUNDRED AND FOUR 00/00)
According to Chapter Nine of the contract, Buyer will pay Seller, within 30
days, after receiving the documents required in 4.2.2 submitted by Seller
through Bank of China Shaanxi Branch, when inspection of the Contract Plant is
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completed and delivery is made.
Buyer will pay for the technical service fee to Seller under the following
method: 30% of the technical service fee is equivalent to USD48,862.80(US DOLLAR
FORTY EIGHT THOUSAND EIGHT HUNDRED SIXTY TWO AND 80/00)
Buyer will pay to Seller, within 30 days, after receiving five copies of payment
notification submitted by Seller through Construction Bank of China Shaanxi
Branch, when equipment installation is started.
40% of the technical service fee is equivalent to USD65,150.40 (US DOLLAR SIXTY
FIVE THOUSAND ONE HUNDRED FIFTY AND 40/00) According to Chapter Nine of the
Contract, Buyer will pay Seller, within 30 days, after receiving five copies of
payment notification submitted by Seller through Construction Bank of China
Shaanxi Branch, when Certificate of Testing is signed.
30% of the technical service fee is equivalent to USD48,862.80(US
DOLLAR FORTY EIGHT THOUSAND EIGHT HUNDRED SIXTY TWO AND 80/00) Buyer will pay
Seller, within 30 days, after receiving five copies of payment notification
submitted by Seller through Construction Bank Of China Shaanxi Branch, when the
Contract Plant Inspection Certificate is signed. Adjustment is allowed when
payment in 4.4.3 is made if actual amount of technical service fee paid to
technical advisors is different from the amount indicated in 3.3 of the
contract.
4.5 According to the contract, Seller will pay any compensation or
penalty if he is liable to, within 14 days after receiving the notification from
Buyer. Failure to do that will entitle Buyer to deduct that amount from any of
above mentioned payment. This will not be applied to the situation when dispute
between Buyer and Seller relating to the default fee or compensation exists.
Buyer will submit one copy of irreversible certificate of guarantee within 30
days, provided by Construction Bank Of China Shaanxi Branch with Seller as the
beneficiary of the full amount indicated in 3.1 and the full amount of technical
transferring fee indicated in 3.2. (Format of the Certificate of Guarantee can
be found in the attached document no.9)
Seller will submit one copy of irreversible certificate of guarantee, before
receiving the payment indicated in 4.2.2 and 4.3.2, provided by Sanhe Bank with
Buyer as the beneficiary of 5%of the amount indicated in 3.1 and 5% of the
technical transferring fee indicated in 3.2.(Format of the Certificate of
Guarantee can be found in the attached document no.8)
Any bank fee caused by executing the contract will be paid by Buyer if it
incurred in China, otherwise by Seller.
Chapter Five Delivery
Seller will make delivery of the goods indicated in attached documents no. 1 and
no. 3, within 11 months after this contract comes into effect. Total weight of
the goods is 50 tons or so and total volume 250 M3. Yokohama or Kobe will be
port of dispatch and Tianjing New Port will be port of destination.
Seller will submit six copies of Delivery Plan to Buyer within 6 months after
this contract comes into effect.(It should include Contract No., Item No., Name
of the
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equipment, specification, quantity, unit price, total price, total weight, total
volume, delivery schedule, name of dispatching port, name of goods, and UN
number). Also include special requirements for taking care of the delicate
goods, notification of any over size and over weight goods. The maximum weight
allowed for unassembled unit equipment is 20 tons, and the maximum volume
allowed is 15M in length, 3M in width, and 3M in height. Any equipment exceeds
this limit, Seller should submit a draft in six copies to Buyer within two
months after the contract comes into effect. Such equipment should not be
manufactured until Buyer's approval is acquired. Buyer should give a reply by
fax or mail within one month after he receives the draft, otherwise Seller will
put such equipment into production.
At least three months six copies, including Contract No., partial shipment no.,
item no., name, specification, quantity, unit price, total amount, equipment,
testing material and delicate goods' approximate weight, equipment's dimension
(length, width, height),volume, name of dispatching port, schedule for each
partial shipment, draft for oversize and over weight equipment and special
requirement for delicate goods during transportation.
The effective delivery date is date on Bill of lading.
Each partial shipment should be made at the agreed dispatching
port by Seller. The risk will be transferred from Seller to Buyer when the goods
have effectively passed the ship's rail at the port of shipment.
At least 60 days before each partial shipment is ready, Seller should notify
Buyer by cable or fax for the following content:
One week before the technical documents are sent to Buyer, Seller will ??. The
date on the Air way Bill will be regarded as the actual delivery date of the
technical documents.
Technical documents the Seller supplied will be on base of CIF Xian Airport
Risk will be transferred from Seller to Buyer at Xian Airport when the documents
are delivered to Buyer. In case any loss or damage incurs, Seller should, within
21 days after receiving Buyer's notification, recover the loss or damaged part
of the documents without any additional charge.
5.16 Every two working days after delivery of the technical documents, Seller
should send the following documents to Buyer by mail:
A. Airway Bill one copy
B. List of the technical documents. three copies
C. Commercial invoice three copies
Contract No.
Scheduled date for shipment
Total volume of the goods
Total weight of the goods
Total packages
Name of the dispatching port
Name, total volume and approximate weight of equipment which
exceeds 20
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<PAGE>
tons or dimension of 15X3X3M.
Name, weight, and UN no, of the delicate goods.
Partial shipment no.
Meanwhile, Seller should mail the following documents to Buyer in six copies.
(1)Packing list. including Contract No., Item no., specification, quantity, unit
price, total price, unit weight, unit volume and total volume, dimension of each
package (length, width, height), total package, and name of port of shipment.
(2)Draft of goods which exceeds 20 tons or volume of 15X3X3M.
(3)Instruction for how to handle with the delicate goods, and the name
specification of such goods.
(4)Instruction for goods which has special requirements for temperature,
vibration during transportation.
The above mentioned documents should be sent by air to China Foreign
Transportation Corp. at the destination port for the arrangement of unloading
and transportation.
The delivery of the equipment should be in a whole set, the special tool,
material for installation should be delivered together with the equipment. If
there are any equipment or material which need to be put on the board of the
ship, Seller will be responsible for appropriate packing, special care. For the
Buyer's convenience during transportation, as specified in contract, name and
no. of the equipment should be indicated at the two side of each package. Seller
will be held liable for any delay or loss of the goods due to improper packing.
Buyer should be notified by Seller the name of the vessel, estimated time of
arrival at least 15 days before the arrival date.
Chapter Six Packing and delivery
6.1 Buyers expects that his goods will reach him in perfect condition,
therefore, it should go without saying that Seller must try to pack the goods in
such a way that they will go through the ordeal of transport unscathed.(damp
resisting, rust resisting, anti-seismic, antiseptic, etc.). Seller will submit
to Buyer, in complied with Chinese Law, Packing material(wood) Fumigating
Certificate, issued by government or public organization in Japan.
6.2 Seller should put label on all the parts in the package, indicating Contract
NO., name of the equipment, and the position no. of each parts in the assembling
draft, any accessories or tools, should label indicating "accessory" or "tool".
6.3 Seller should print the following marks on two sides of the package by
unfading paint.
(1) Contract No: 92PZl1-0001XY
92PZ11-0001XY
(2) Marks -----------------
(3) Destination: XINGANG CHINA
(4) Consignee: Xianyang Yongxing Electronic Co., Ltd.
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(5) Name the equipment and item no.
(6) Case no.
(7) Gross/net weight (kgs)
(8) Dimension (length, width, height) (mm)
(9) Any package which is 2 tons or exceeds 2 tons should have mark in any two
sides of the package in English or special marks used in international trade,
indicating weights and hooking position for easy loading and unloading.
(10) For the convenience of loading and unloading, and special requirements for
transportation, each package should carry marks used in international trade for
"handle with care", "arrows up for no up-side-down", "caution with rain"
6.4 Nude cargo should have metal label indicating the name and the content.
Sufficient skids should be prepared for large cargo on board.
6.5 The packing of the technical documents supplied by Seller should be able to
go through the ordeal of transportation unscathed. Each package should indicate
the following content:
(1) Contract No. 92-PZl1-0001XY
(2) Consignee: Xianyang Yongxing Electronics Co., Ltd.
(3) Destination: Xianyang, China
(4) Marks: ---------------
XIAN CHINA
(5) Gross weight (kgs)
(6) Case No.
Each package of the technical documents should have two copies of the list in
detail.
6.6 Any damage or loss occurs due to improper packing or maintaining
before delivery, Seller should be responsible, as Chapter 10 of this contract,
for repairing, exchanging or compensating.
Chapter Seven Design and Communication
7.1 Buyer and Seller will start technical designing and
communication according to the attached document 10 for the construction of the
contract plant. Meeting schedule, location, attendants can be found in attached
document 10. The meeting of technical designing can be in Japan or China, each
party will be responsible for their own traveling and transportation fee.
7.2 Seller will be responsible for the designing indicated in attached document
3.Seller will submit the technical documents to Buyer indicated in document 3.
7.3 With valid of this contract, Seller should promptly reply any questions
Buyer may put forward relating to designing and other technical problems of the
contract plant, Seller will also supply relevant material if necessary.
Chapter Eight Quality Standard and Inspection
The manufacturing, material choosing, inspecting, and testing of the goods
supplied by Seller to contract plant should meet the current standard of
Seller's country. Eight months after this contract is effective, Seller will
send six copies of the company standard or 2 copies of the country standard to
Buyer. After bilateral agreement is reached, this standard will be used to
inspected or tested execution of this contract.
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<PAGE>
Seller will check or test all supplied goods and send Quality Certificate and
Inspection Record issued by manufactures as the Quality Certificate required by
this contract. Seller will be responsible for all the cost and charge occur
during the inspection and test.
Buyer has the right to send personnel in Buyer's cost to Seller's factory to
have a quality inspection and test together with Seller. Seller will notify
Buyer three months before the installation and inspection. Buyer should, within
one month, let Seller know how many people it will send to participate the
inspection. If Buyer fails to attend the inspection for the reason that has
nothing to do with the Seller, Buyer will be regarded to discard the right of
inspection in Seller's country, therefore Seller will inspect and test the goods
by themselves on the scheduled date.
In 8.3, If personnel from Buyer find any problem of the goods, Seller should
take Buyer's suggestion into consideration and Solve the problem. After the
problem is solved, second inspection should be made. Any cost thus accur will be
covered by Seller.
The quality inspection by Buyer's personnel in Seller's factory can not replace
the inspection after the goods arrive the Contract Plant, Seller can not be
exempted from his responsibility stipulated in Chapter 10 either.
<PAGE>
Seller will assist Buyer's personnel to get visa, arrange hotel, transportation,
provide necessary technical document, draft, inspection tools and equipment etc.
Inspection will be made in the Contract Plant. Seller has the right to
participate the inspection. Buyer will notify Seller one month before the
inspection, and will provide assistance for Seller's personnel. Any deficiency,
damage, or any packing or quality problems according to 8.1 and 10.1 of the
contract, record should be made and signed by two parties. This record will be
used as a proof for Buyer to ask for repair, exchange, or compensate from
Seller.
If Seller fails to attend in the inspection for the reason that has nothing to
do with Buyer, Buyer will have the inspection by themselves. In case any
problems found by Buyer, China Commodity Inspection Bureau will issue a
Certificate by the request of Buyer. Buyer will use this as a proof to claim
compensation, repair, exchange from Seller. Right after Seller receives the
claim from Buyer. he should make such repair, exchange, compensate under Buyer's
request, and will be responsible for the additional freight and inspection cost.
If Seller does not agree to the claim, he may notify Buyer within two weeks for
further discussion, otherwise, the claim will be effective after two weeks. All
the repair, exchange and compensation should be made within two months after
Seller receives notification from Buyer. If Seller can not make it within two
months, he may let Buyer know and set a new expiration date.
If any damage found during the inspection due to Buyer's mistake, Seller will
make repair or exchange after receiving the Buyer's notification. All cost will
be covered by Buyer.
The above mentioned inspection will not discharge Seller's responsibility
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<PAGE>
stipulated in Chapter 9 and Chapter 10.
If Buyer find the quality standard supplied by Seller is incomplete or not to be
supplied on time, Buyer will inspect the goods under the quality standard of
Buyer's country, after discussing it with Seller.
Chapter Nine Installing, Testing and Inspection
9.1 Buyer will start installing, testing, and inspecting the Contract
plant equipment according to the technical documents supplied by
Seller with the cooperation of the technical advisors from Seller.
9.2 The representatives of the two parties will sign on the Confirmation
of the Testing result after the installation has been finished, and
the testing result is found to be totally complied with the technical
documents. Then two parties will arrange time to inspect the products
of the Contract Plant to make sure that the quality of the products
comply with the requirements set forth in the attached document no.1 &
no.2. The method of the inspection will be according to attached
document no.6. Two parties will sign the Certificate of Contract Plant
Products Inspection, each party will have one copy.
9.3 If the inspection result of the Contract Plant Products does not
comply with the quality requirement of the attached document no.1,
no.2 and no.6, two parties should have further discussion over it.
1) If the unexpected result of the inspection is caused by Seller, the second
inspection should be within one month after the first one. Two parties will sign
the Certificate of Contract Plant Products Inspection in two copies,
Each party will keep one copy.
2) If the unexpected inspection result is due to the buyer's negligence The
second inspection can be considered to take or not to take or any remedy to be
considered. After two parties have a discussion over the problem. Such decision
has to be made and actually executed within one month after first inspection.
After the second inspection, or confirmation of the alternative remedy(method),
two parties will sign two copies of Certificate of Contract Plant Products
Inspection each party will keep one copy, Extra cost for technical advisors can
be calculated and adjusted according to attached document 5.
9.4 If the result of the second inspection still can not meet the quality
requirement of the technical document no. 1,2 & 6, two parties have to
meet to discuss the problem.
1) If such result is caused by Seller, solution can be found in Chapter 10.7.
2) If such result is caused by Buyer, the contract Plant will be accepted
by Buyer. But Seller should still be ready to help Buyer to deal with
the problem.
9.5 The warranty period indicated in Chapter 10 will be counted after the
inspection date indicated in 9.2,9.3,or 9.4.
9.6 If Seller fail to send his representatives to take part in the
inspection, Buyer will, after notifying Seller, take the inspection of
the Contract Plant by itself. Under this situation, Buyer will issued
the Certificate of Inspection.
Chapter Ten Warranty and Remedy
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10.1 Seller should guarantee that the technique supplied is advanced, goods
absolutely new, quality excellent, specification of the goods matches
technical designing and meets the requirement of the transportation,
and long term use, also comply with the stipulation set forth in
attached documents no. 1,2.
10.2 Seller should guarantee that the technical documents supplied to be
clear, complete, and accurate, and will meet the requirements of the
Contract Plant designing, installing, manufacturing, testing, and
maintaining, and also comply with the attached document no.3.
10.3 Buyer has the right to claim for compensation from Buyer in writing,
during Contract Plant installing and testing period, if any damage
occurs due to deficiency of the goods or any misleading by Seller's
technical personnel, or any mistake in Seller's technical documents.
Seller should immediately repair or exchange or compensate the
equivalent value of the loss without extra charge and will be
responsible for any transportation fee and exchange fee occur. Buyer
bears the risk after the goods arrive the destination port. In case
any dispute on this claim arises, Seller should response within two
weeks after he receives Buyer's claim, otherwise the claim will be
valid after two weeks. Exchange should be made within two months. If
same goods are available in inventory, the exchange should be made
within one month. If there are any difficulties on Seller's side, two
parties should set another exchange date which will not seriously
effect the whole project.
10.4 The underlined equipment supplied by Seller...
10.5 During the warranty period, If any deficiency or problem found about
the equipment due
to the Seller's mistake, Buyer should have the right to claim for
compensation from Seller's by submitting the Inspection Certificate
from China Commodity Bureau. Seller should response within two weeks
after he receives the notification. If Seller accepts this claim,
exchange, remedy should be made within two months without any extra
charge. If there are any difficulties on Seller's side, two parties may
set another date. New warranty period of the exchange or repaired
equipment will count from the date of exchange or repair to 12 months
thereafter. If only minor deficiency is found, Buyer may repair by
himself but extra cost thus occur will be paid by Seller.
10.6 Any claim put forward by Buyer during the period the warranty remains
valid during two weeks after the warranty expires. Seller should Make
the compensation according to this chapter.
10.7 If the result of the second inspection still can not meet the
requirement of the contract, Seller will pay the penalty. The amount
will be decided by two parties upon agreement, which should not exceed
10% of the total value of
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the goods and technique transfer fee.
10.8 If shipment can not be made F.O.B Japan on time due to Seller's
mistake, two parties will decide whether or not to pay compensation
according to the loss Buyer sustains. The total amount should exceed
5% of the total value.
Chapter Eleven Permit, Patent & Confidential
11.1 Buyer will have exclusive, untransferable right and will be allowed to
use the seller's technique on the "Contract Plant" in his country, and
design, manufacture, sell and export the Contract Products, 735,000 PCs
output each year. The detail of the technical design and specification
can be found in attached document no. l. The technique used in Contract
Plant and Patent can be found in attached document no.3.
11.2 30 days after this contract comes into effect. Seller will provide to
Buyer two copies of Patent Certificate indicated in 11.1 of the
contract, issued by Seller's government.
11.3 Buyer will guarantee that Seller is the legal poser of the patent, and
has the right to transfer it to Buyer. Also, Buyer will not be sued by
the third party like China, Slilanka, Pakistan, which was on the
Seller's list that these countries do not have the patent. If any of
the above countries commend an action. Seller should be responsible for
it.
11.4 Eight years after the contract comes to effect, if Seller makes any
improvement in the technique indicated in 11.1 of this contract, he
should provide the detail of this improvement to Buyer, even if this
improvement has not got the patent yet. And the Buyer have the right to
use the improved technique into the Contract Plant.
11.5 During eight years after the contract comes to effect, Buyer should
keep confidential for the patent special technique indicated in 11.1
During this period, Buyer will not be responsible for the part of the
technique which has been disclosed by Seller himself.
11.6 The confidential time limit will not be used on the fundamental design
technique and current condition data provided by Seller.
11.7 After the termination of this contract, Buyer will still have the right
to continue to use the patent and special technique provided by Seller-
to design, manufacture, sell and export the contract products. However,
Buyer should notify Seller in writing before he exports the Contract
Products at that time.
Chapter Twelve Extraordinary Items
12.1 Anyone of the contract parties fail to execute the contract due to war,
serious fire, flood, Taifoon, earthquake, strike, change of government
regulation or other unforeseeable accident, the contract party will not
be responsible for default to the other contract party.
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12.2 The Party who sustains the unforeseeable, beyond control accident
should notify the other party by telex or fax as soon as possible and
will, in 14 days, send the document issued by government organization
to the other party to further confirmation.
12.3 When the unexpected accident terminates, the party should notify the
other by telex or fax, and send certified mail to further confirmation.
12.4 Two parties may be discharged from part or all of this contract if the
contract remains impossible to be executed for more than six months due
to the accident which is unforeseeable and beyond anybody's control.
Chapter Thirteen Taxation
13.1 Buyer will pay all the tax relating to this contract charged by
Chinese Government.
13.2 Chinese government will charge Seller tax according to the Agreement
between Chinese & Japanese Government of Avoiding Double Taxation and
Taxation Fraud.
***
Chapter Fourteen Arbitration
14.1 Any dispute relating to this contract should be settled by Buyer and
Seller through further discussion. If it still can not be solved, the
dispute will be subject to final arbitration.
14.2 The location of the arbitration will be in defendant's country. If it
is in China, China International Trade Arbitration Committee Shaanxi
Branch will execute the arbitration according to the committee's
Arbitration Article, If it is in Japan, Japan International Commercial
Arbitration Committee will execute the arbitration according to the
Committee's Arbitration Article.
14.3 The judgment through arbitration is final, and will bind each of the
contract Party.
14.4 Cost of the arbitration will be covered by the party who loses expect
the Arbitration Committee has stipulation otherwise.
14.5 Except the part of contract which is under arbitration, the rest of
the contract should continue to be executed during the period of
arbitration.
Chapter Fifteen Contract's Validity, Termination & Others
15.1 This contract is signed by representatives from two parties at
Xianyang on _______, 1993. Then each party should get this contract
approved from his government. The date that the last party gets his
contract approved is the date the contract comes into effective. Both
parties will try to get it done with in 60 days after they sign the
contract, and notify the party by telex or fax, and send mail to
further confirmation. If the contract doesn't come into effect with in
six months after it is signed, the contract maybe canceled.
11
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15.2 The contract will be valid for eight years. After it reaches the
expiration date, the contract will automatically be terminated.
15.3 The Creditor of the contract will still have the right against the
debtor even if the contract has reached its expiration date, the
debtor is still liable to his creditor.
15.4 The contract will be written in Chinese and Japanese in four copies,
each party will have two copies. Contract in either language has the
same power.
15.5 The attached documents 110 are regarded as part of this contract and
have same power as the contract.
15.6 Any alternation after agreement by two parties will be regarded as
part of the contract, and will have same power as the contract.
15.7 During the valid time of the contract, two parties will communicate in
Chinese, Japanese and English. Formal notification should be in
writing, and sent by certified mail in two copies.
15.8 Neither of the two parties can transfer his obligation under this
contract to any third party without approved from the other party.
15.9 Neither of the two parities should assume other rights and liabilities
beyond the Contract specified.
Chapter 16 Legal Address
Buyer: Xianyang Yongxin Electronics Co, Ltd.
Address: 70 West Weiyang Road, Xianyang, Shaanxi, P.R. China
Telephone: 313906
Telex: 2322
Fax: 313606
Zip Code: 712021
Seller: Nichimen Corporation
Address: 1-13-1 Jinjiao center areas, Tokyo, Japan
Telex: NICHIMENCO TOKYO
FAX: 03-3277058 70
BUYER SELLER
Xianyang Yongxin Electronics Co. Ltd. Nichimen Corp.
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Witness: THOSHIBA CORP. ( Manufacturer)
- ---------------------------
THE SHARES ISSUABLE UPON EXERCISE
OF THE OPTION REPRESENTED BY THIS
CERTIFICATE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, PURSUANT TO A
REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE
COMMISSION (THE "REGISTRATION
STATEMENT"). HOWEVER, NEITHER THIS
OPTION NOR SUCH SHARES MAY BE
OFFERED OR SOLD EXCEPT PURSUANT TO
(i) A POST-EFFECTIVE AMENDMENT TO
SUCH REGISTRATION STATEMENT, (ii) A
SEPARATE REGISTRATION STATEMENT
UNDER SUCH ACT, OR (iii) AN
EXEMPTION FROM REGISTRATION UNDER
SUCH ACT.
THE TRANSFER OF THIS
OPTION IS RESTRICTED AS
DESCRIBED HEREIN.
ASIA ELECTRONICS HOLDING CO. INC.
Option for the Purchase of
Common Stock
No. 1 330,000 Shares
THIS CERTIFIES that, for receipt in hand of $330 and other value
received, BARINGTON CAPITAL GROUP, L.P., 888 Seventh Avenue, New York, New York
10019 (the "Holder"), is entitled to subscribe for and purchase from Asia
Electronics Holding Co. Inc., a British Virgin Islands company (the "Company"),
upon the terms and conditions set forth herein, at any time or from time to time
after the date hereof, and before 5:00 P.M. on _______, 2002, New York time (the
"Exercise Period"), up to 330,000 shares (the "Option Shares") of the Company's
common stock, par value $.01 per share ("Common Stock") at a price of $___ (120%
of the public offering price) per Option Share (the "Exercise Price"). This
Option is the option or one of the options (collectively,
<PAGE>
including any options issued upon the exercise or transfer of any such options
in whole or in part, the "Options") issued pursuant to the Underwriting
Agreement, dated _____, 1997, between the Company, each of its subsidiaries,
Du Qingsong and Barington Capital Group, L.P. as representative (the
"Underwriting Agreement"). As used herein the term "this Option" shall mean and
include this Option and any Option or Options hereafter issued as a consequence
of the exercise or transfer of this Option in whole or in part. This Option may
not be sold, transferred, assigned or hypothecated until one year after the
effective date of the Registration Statement (the "Effective Date") except that
it may be transferred, in whole or in part, to (i) one or more officers or
partners of the Holder (or the officers or partners of any such partner); (ii)
any other member of the selling group which participated in the public offering
of 4,000,000 shares of the Company's Common Stock which commenced on ______,
1997 (or the officers or partners of any such firm); (iii) a successor to the
Holder, or the officers or partners of such successor; (iv) a purchaser of
substantially all of the assets of the Holder; or (v) by operation of law; and
the term the "Holder" as used herein shall include any transferee to whom this
Option has been transferred in accordance with the above.
1. (a) This Option may be exercised during the Exercise Period, as to
the whole or any lesser number of whole Option Shares, by the surrender of this
Option (with the election at the end hereof duly executed) to the Company at its
office at c/o Harney, Westwood & Riegels, Craigmuir Chambers, P.O. Box 71, Road
Town, Tortola, British Virgin Islands (Attention: Du Qingsong), or at such other
place as is designated in writing by the Company, together with a certified or
bank cashier's check payable to the order of the Company in an amount equal to
the Exercise Price multiplied by the number of Option Shares for which this
Option is being exercised.
(b) All or any part of this Option may be exercised on a "cashless"
basis, by stating in the exercise notice such intention, and the maximum number
(the "Maximum Number") of shares of Common Stock the optionee elects to purchase
pursuant to such exercise. The number of shares of Common Stock the optionee
shall receive (the "Cashless Exercise Number") shall equal the Maximum Number
minus the quotient that is obtained when the product of the Maximum Number and
the then current Exercise Price is divided by the then Current Market Price per
share (as hereinafter defined).
2. Upon each exercise of the Holder's rights to purchase Option Shares
in accordance with the terms of this Option, the Holder shall be deemed to be
the holder of record of the Option Shares issuable upon such exercise,
notwithstanding that the transfer books of the Company shall then be closed or
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<PAGE>
certificates representing such Option Shares shall not then have been actually
delivered to the Holder. As soon as practicable after each such exercise of this
Option, the Company shall issue and deliver to the Holder a certificate or
certificates for the Option Shares issuable upon such exercise, registered in
the name of the Holder or its designee. If this Option should be exercised in
part only, the Company shall, upon surrender of this Option for cancellation,
execute and deliver a new Option evidencing the right of the Holder to purchase
the balance of the Option Shares (or portions thereof) subject to purchase
hereunder.
3. Any Options issued upon the transfer or exercise in part of this
Option shall be numbered and shall be registered in an Option Register as they
are issued. The Company shall be entitled to treat the registered holder of any
Option on the Option Register as the owner in fact thereof for all purposes and
shall not be bound to recognize any equitable or other claim to or interest in
such Option on the part of any other person, and shall not be liable for any
registration or transfer of Options which are registered or to be registered in
the name of a fiduciary or the nominee of a fiduciary unless made with the
actual knowledge that a fiduciary or nominee is committing a breach of trust in
requesting such registration or transfer, or with the knowledge of such facts
that its participation therein amounts to bad faith. This Option shall be
transferable only on the books of the Company upon delivery thereof duly
endorsed by the Holder or by his duly authorized attorney or representative, or
accompanied by proper evidence of succession, assignment, or authority to
transfer. In all cases of transfer by an attorney, executor, administrator,
guardian, or other legal representative, duly authenticated evidence of his or
its authority shall be produced. Upon any registration of transfer, the Company
shall deliver a new Option or Options to the person entitled thereto. This
Option may be exchanged, at the option of the Holder thereof, for another
Option, or other Options of different denominations, of like tenor and
representing in the aggregate the right to purchase a like number of Option
Shares (or portions thereof), upon surrender to the Company or its duly
authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Options to be transferred on its books to any person if, in
the opinion of counsel to the Company, such transfer does not comply with the
provisions of the Securities Act of 1933, as amended (the "Act"), and the rules
and regulations thereunder.
4. The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of the Options, such number of shares of Common Stock as shall,
from time to time, be sufficient therefor. The Company covenants that all shares
of Common Stock issuable upon exercise of this Option, upon receipt by the
Company of the full payment therefor, shall
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<PAGE>
be validly issued, fully paid, nonassessable, and free of preemptive rights.
5. (a) Subject to the provisions of this Section 5, the Exercise Price
in effect from time to time shall be subject to adjustment, as follows:
(i) In case the Company shall at any time after the date hereof (A)
declare a dividend on the outstanding Common Stock payable in shares of its
capital stock, (B) subdivide the outstanding Common Stock, (C) combine the
outstanding Common Stock into a smaller number of shares, or (D) issue any
shares of its capital stock by reclassification of the Common Stock (including
any such reclassification in connection with a consolidation or merger in which
the Company is the continuing corporation), then, in each case, the Exercise
Price, and the number of shares of Common Stock issuable upon exercise of the
Options in effect at the time of the record date for such dividend or of the
effective date of such subdivision, combination, or reclassification, shall be
proportionately adjusted so that the Exercise Price shall equal the price
determined by multiplying the Exercise Price by a fraction, the denominator of
which shall be the number of shares of Common Stock outstanding after giving
effect to such action, and the numerator of which shall be the number of shares
of Common Stock outstanding immediately prior to such action. Such adjustment
shall be made successively whenever any event listed above shall occur. Whenever
the Exercise Price is adjusted as set forth above, the number of shares of
Common Stock issuable upon exercise of the Options in effect at such time shall
simultaneously be adjusted by multiplying the number of shares of Common Stock
initially issuable upon exercise of the Options by the Exercise Price in effect
on the date hereof and dividing the product so obtained by the Exercise Price,
as adjusted.
(b) No adjustment in the Exercise Price shall be required if such
adjustment is less than $.05; provided, however, that any adjustments which by
reason of this Section 5 are not required to be made shall be carried forward
and taken into account in any subsequent adjustment. All calculations under this
Section 5 shall be made to the nearest cent or to the nearest one thousandth of
a share, as the case may be.
(c) In any case in which this Section 5 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer, until the occurrence of such
event, issuing to the holders of the Option, if any holder has exercised an
Option after such record date, the shares of Common Stock, if any, issuable upon
such exercise over and above the shares of Common Stock, if any, issuable upon
such exercise on the basis of the Exercise Price in effect prior to such
adjustment; provided, however, that the Company shall deliver to such exercising
holder a due bill or
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<PAGE>
other appropriate instrument evidencing such holder's right to receive such
additional shares upon the occurrence of the event requiring such adjustment.
(d) In case of any capital reorganization, other than in the cases
referred to in Section 5(a) hereof, or the consolidation or merger of the
Company with or into another corporation (other than a merger or consolidation
in which the Company is the continuing corporation and which does not result in
any reclas- sification of the outstanding shares of Common Stock or the
conversion of such outstanding shares of Common Stock into shares of other stock
or other securities or property), or the sale of the property of the Company as
an entirety or substantially as an entirety (collectively such actions being
hereinafter referred to as "Reorganizations"), there shall thereafter be
deliverable upon exercise of any Option (in lieu of the number of shares of
Common Stock theretofore deliverable) the number of shares of stock or other
securities or property to which a holder of the number of shares of Common Stock
which would otherwise have been deliver- able upon the exercise of such Option
would have been entitled upon such Reorganization if such Option had been
exercised in full immediately prior to such Reorganization. In case of any
Reorganization, appropriate adjustment, as determined in good faith by the board
of directors of the Company, shall be made in the application of the provisions
herein set forth with respect to the rights and interests of Option holders so
that the provisions set forth herein shall thereafter be applicable, as nearly
as possible, in relation to any shares or other property thereafter deliverable
upon exercise of Options. Any such adjustment shall be made by and set forth in
a supplemental agreement between the Company, or any successor thereto, and
Continental Stock Transfer & Trust Company and shall for all purposes hereof
conclusively be deemed to be an appropriate adjustment. The Company shall not
effect any such Reorganization, unless upon or prior to the consummation thereof
the successor corporation, or if the Company shall be the surviving corporation
in any such Reorganization and is not the issuer of the shares of stock or other
securities or property to be delivered to holders of shares of the Common Stock
outstanding at the effective time thereof, then such issuer, shall assume by
written instrument the obligation to deliver to the registered holder of the
Options such shares of stock, securities, cash or other property as such holder
shall be entitled to purchase in accordance with the foregoing provisions. In
the event of sale or conveyance or other transfer of all or substantially all of
the assets of the Company as a part of a plan for liquidation of the Company,
all rights to exercise any Option shall terminate 30 days after the Company
gives written notice to each registered holder of a Option Certificate that such
sale or conveyance of other transfer has been consummated.
(e) In case of any reclassification or change of the shares of
Common Stock issuable upon exercise of the Options (other than a change in par
value or from no par value to a
- 5 -
<PAGE>
specified par value, or as a result of a subdivision or combination, but
including any change in the shares into two or more classes or series of
shares), the holders of the Options shall have the right thereafter to receive
upon exercise of the Options solely the kind and amount of shares of stock and
other securities, property, cash, or any combination thereof receivable upon
such reclassification or change by a holder of the number of shares of Common
Stock for which the Options might have been exercised immediately prior to such
reclassification or change. Thereafter, appropriate provision shall be as nearly
equivalent as practicable to the adjustments in Section 5. The above provisions
of this subsection 5(e) shall similarly apply to successive reclassifications
and changes of shares of Common Stock.
(f) Whenever the Exercise Price is adjusted as provided in this
Section 5, the Company will promptly obtain a certificate of a firm of
independent public accountants of recognized standing selected by the board of
directors (who may be the regular auditors of the Corporation) setting forth the
exercise price as so adjusted and a brief statement of the facts accounting for
such adjustment, and will make available a brief summary thereof to the holders
of the Option Certificates, at their addresses listed on the register maintained
for the purpose by the Company.
(g) Whenever any adjustment is made pursuant to this Section 5, the
Company shall cause notice of such adjustment to be mailed to each registered
holder of an Option Certificate within 15 Business Days (as hereinafter defined)
thereafter, such notice to include in reasonable detail (i) the events
precipitating the adjustment, (ii) the computation of any adjustments, and (iii)
the Exercise Price, the number of shares or the securities or other property
purchasable upon exercise of each Option after giving effect to such adjustment.
For purposes hereof, "Business Day" shall mean any day other than a Saturday, a
Sunday, or a day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
(h) Irrespective of any adjustments pursuant to this Section 5,
Option Certificates theretofore or thereafter issued need not be amended or
replaced, but certificates thereafter issued shall bear an appropriate legend or
other notice of any adjustments.
(i) The Company shall not be required upon the exercise of any
Option to issue fractional shares of Common Stock which may result from
adjustments in accordance with this Section 5 to the Exercise Price or number of
shares of Common Stock purchasable under each Option. If more than one Option is
exercised at one time by the same registered holder, the number of full shares
of Common Stock which shall be deliverable shall be computed based on the number
of shares deliverable in exchange for the aggregate number of Options exercised.
With respect to
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<PAGE>
any final fraction of a share called for upon the exercise of any Option or
Options, the Company shall pay a cash adjustment in respect of such final
fraction in an amount equal to the same fraction of the Current Market Price of
a share of Common Stock calculated in accordance with Subsection 5(b).
(j) For the purpose of any computation under this Section 5 the
Current Market Price per share of Common Stock on any date shall be deemed to be
the average of the daily closing prices for the 30 consecutive trading days
immediately preceding the date in question. The closing price for each day shall
be the last reported sales price regular way or, in case no such reported sale
takes place on such day, the closing bid price regular way, in either case on
the principal national securities exchange (including, for purposes hereof, the
NASDAQ National Market ("NASDAQ")) on which the Common Stock is listed or
admitted to trading or, if the Common Stock is not listed or admitted to trading
on any national securities exchange, the highest reported bid price for the
Common Stock as furnished by the National Association of Securities Dealers,
Inc. through NASDAQ or a similar organization if NASDAQ is no longer reporting
such information. If on any such date the Common Stock is not listed or admitted
to trading on any national securities exchange and is not quoted by NASDAQ or
any similar organization, the fair value of a share of Common Stock on such date
as determined in good faith by the board of directors of the Company, whose
determination shall be conclusive absent manifest error shall be used.
6. (a) In case of any consolidation with or merger of the Company with
or into another corporation (other than a merger or consolidation in which the
Company is the surviving or continuing corporation), or in case of any sale,
lease, or conveyance to another corporation of the property and assets of any
nature of the Company as an entirety or substantially as an entirety, such
successor, leasing, or purchasing corporation, as the case may be, shall (i)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter to receive upon exercise of this Option solely the kind and
amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such consolidation, merger, sale, lease, or
conveyance by a holder of the number of shares of Common Stock for which this
Option might have been exercised immediately prior to such consolidation,
merger, sale, lease, or conveyance and (ii) make effective provision in its
certificate of incorporation or otherwise, if necessary, to effect such
agreement. Such agreement shall provide for adjustments which shall be as nearly
equivalent as practicable to the adjustments provided for in Section 5.
(b) In case of any reclassification or change of the shares of
Common Stock issuable upon exercise of this Option (other than a change in par
value or from no par value to a specified par value, or as a result of a
subdivision or
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<PAGE>
combination, but including any change in the shares into two or more classes or
series of shares), or in case of any consolidation or merger of another
corporation into the Company in which the Company is the continuing corporation
and in which there is a reclassification or change (including a change to the
right to receive cash or other property) of the shares of Common Stock (other
than a change in par value, or from no par value to a specified par value, or as
a result of a subdivision or combination, but including any change in the shares
into two or more classes or series of shares), the Holder shall have the right
thereafter to receive upon exercise of this Option solely the kind and amount of
shares of stock and other securities, property, cash, or any combination thereof
receivable upon such reclassification, change, consolidation, or merger by a
holder of the number of shares of Common Stock for which this Option might have
been exercised immediately prior to such reclassification, change,
consolidation, or merger. Thereafter, appropriate provision shall be made for
adjustments which shall be as nearly equivalent as practicable to the
adjustments in Section 5.
(c) The above provisions of this Section 6 shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose:
(a) to pay any dividend or make any distribution on shares of Common
Stock in shares of Common Stock or make any other distribution (other than
regularly scheduled cash dividends which are not in a greater amount per share
than the most recent such cash dividend) to all holders of Common Stock; or
(b) to issue any rights, warrants, or other securities to all
holders of Common Stock entitling them to purchase any additional shares of
Common Stock or any other rights, warrants, or other securities; or
(c) to effect any reclassification or change of outstanding shares
of Common Stock, or any consolidation, merger, sale, lease, or conveyance of
property, described in Section 6; or
(d) to effect any liquidation, dissolution, or winding-up of the
Company; or
(e) to take any other action which would cause an adjustment to the
Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Option Register, mailed at least 15
days prior to (i) the date as of which the holders of record of shares of Common
Stock to be
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<PAGE>
entitled to receive any such dividend, distribution, rights, warrants, or other
securities are to be determined, (ii) the date on which any such
reclassification, change of outstanding shares of Common Stock, consolidation,
merger, sale, lease, conveyance of property, liquidation, dissolution, or
winding-up is expected to become effective, and the date as of which it is
expected that holders of record of shares of Common Stock shall be entitled to
exchange their shares for securities or other property, if any, deliverable upon
such reclassification, change of outstanding shares, consolidation, merger,
sale, lease, conveyance of property, liquidation, dissolution, or winding-up, or
(iii) the date of such action which would require an adjustment to the Exercise
Price pursuant to Section 5 hereof.
8. The issuance of any shares or other securities upon the exercise of
this Option, and the delivery of certificates or other instruments representing
such shares or other securities, shall be made without charge to the Holder for
any tax or other charge in respect of such issuance. The Company shall not,
however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue and delivery of any certificate in a name other
than that of the Holder and the Company shall not be required to issue or
deliver any such certificate unless and until the person or persons requesting
the issue thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
9. (a) If, at any time prior to _____, 2004 (seven years from the
Effective Date), the Company shall file a registration statement (other than on
Form S-4, Form S-8, or any successor form) with the Securities and Exchange
Commission (the "Commission") while this Option or any Underwriter's Securities
(as hereinafter defined) are outstanding, the Company shall give all the then
holders of this Option or any Underwriter's Securities (collectively, the
"Eligible Holders") at least 45 days prior written notice of the filing of such
registration statement. If requested by any Eligible Holder in writing within 30
days after receipt of any such notice, the Company shall, at the Company's sole
expense (other than the fees and disbursements of counsel for the Eligible
Holders and the underwriting discounts, if any, payable in respect of the
Underwriter's Securities sold by any Eligible Holder), register or qualify all
or, at each Eligible Holder's option, any portion of the Underwriter's
Securities of any Eligible Holders who shall have made such request,
concurrently with the registration of such other securities, all to the extent
requisite to permit the public offering and sale of the Underwriter's Securities
through the facilities of all appropriate securities exchanges and the
over-the-counter market, and will use its best efforts through its officers,
directors, auditors, and counsel to cause such registration statement to become
effective as promptly as practicable. Notwithstanding the foregoing, if the
managing underwriter of any such offering shall advise the Company in
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<PAGE>
writing that, in its opinion, the distribution of all or a portion of the
Underwriter's Securities requested to be included in the registration
concurrently with the securities being registered by the Company would
materially adversely affect the distribution of such securities by the Company
for its own account, then any Eligible Holder who shall have requested
registration of his or its Underwriter's Securities shall delay the offering and
sale of such Underwriter's Securities (or the portions thereof so designated by
such managing underwriter) for such period, not to exceed 90 days (the "Delay
Period"), as the managing underwriter shall request, provided that no such delay
shall be required as to any Underwriter's Securities if any securities of the
Company are included in such registration statement and eligible for sale during
the Delay Period for the account of any person other than the Company and any
Eligible Holder unless the securities included in such registration statement
and eligible for sale during the Delay Period for such other person shall have
been reduced pro rata to the reduction of the Underwriter's Securities which
were requested to be included and eligible for sale during the Delay Period in
such registration. As used herein, "Underwriter's Securities" shall mean the
Option Shares issued upon exercise of the Underwriter's Options, which have not
been previously sold pursuant to a registration statement or Rule 144
promulgated under the Act.
(b) If, at any time during the four-year period commencing one year
after the Effective Date, the Company shall receive a written request, from
Eligible Holders who in the aggregate own (or upon exercise of all Options then
outstanding would own) a majority of the total number of shares of Common Stock
then included (or upon such exercises that would be included) in the
Underwriter's Securities (the "Majority Holders"), to register the sale of all
or part of such Underwriter's Securities, the Company shall, as promptly as
practicable, prepare and file with the Commission a registration statement
sufficient to permit the public offering and sale of the Underwriter's
Securities through the facilities of all appropriate securities exchanges and
the over-the-counter market, and will use its best efforts through its officers,
directors, auditors, and counsel to cause such registration statement to become
effective as promptly as practicable; provided, however, that the Company shall
only be obligated to file one such registration statement for which all expenses
incurred in connection with such registration (other than the fees and
disbursements of counsel for the Eligible Holders and underwriting discounts, if
any, payable in respect of the Under- writer's Securities sold by the Eligible
Holders) shall be borne by the Company and one additional such registration
statement for which all such expenses shall be paid by the Eligible Holders.
Within three business days after receiving any request contemplated by this
Section 9(b), the Company shall give written notice to all the other Eligible
Holders, advising each of them that the Company is proceeding with such
registration and offering to include therein all or any portion of any such
other
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<PAGE>
Eligible Holder's Underwriter's Securities, provided that the Company receives a
written request to do so from such Eligible Holder within 15 days after receipt
by him or it of the Company's notice.
(c) In the event of a registration pursuant to the provisions of
this Section 9, the Company shall use its best efforts to cause the
Underwriter's Securities so registered to be registered or qualified for sale
under the securities or blue sky laws of such jurisdictions as the Holder or
such holders may reasonably request; provided, however, that the Company shall
not be required to qualify to do business.
(d) The Company shall keep effective any registration or
qualification contemplated by this Section 9 and shall from time to time amend
or supplement each applicable registration statement, preliminary prospectus,
final prospectus, application, document, and communication for such period of
time as shall be required to permit the Eligible Holders to complete the offer
and sale of the Underwriter's Securities covered thereby. The Company shall in
no event be required to keep any such registration or qualification in effect
for a period in excess of nine months from the date on which the Eligible
Holders are first free to sell such Underwriter's Securities; provided, however,
that, if the Company is required to keep any such registration or qualification
in effect with respect to securities other than the Underwriter's Securities
beyond such period, the Company shall keep such registration or qualification in
effect as it relates to the Underwriter's Securities for so long as such
registration or qualification remains or is required to remain in effect in
respect of such other securities.
(e) In the event of a registration pursuant to the provisions of
this Section 9, the Company shall furnish to each Eligible Holder such number of
copies of the registration statement and of each amendment and supplement
thereto (in each case, including all exhibits), such reasonable number of copies
of each prospectus contained in such registration statement and each supplement
or amendment thereto (including each preliminary prospectus), all of which shall
conform to the requirements of the Act and the rules and regulations thereunder,
and such other documents, as any Eligible Holder may reasonably request to
facilitate the disposition of the Underwriter's Securities included in such
registration.
(f) In the event of a registration pursuant to the provisions of
this Section 9, the Company shall furnish each Eligible Holder of any
Underwriter's Securities so registered with an opinion of its counsel
(reasonably acceptable to the Eligible Holders) dated the effective date of such
registration statement to the effect that (i) the registration statement has
become effective under the Act and no order suspending the effectiveness of the
registration statement, preventing or suspending the use of the registration
statement, any preliminary
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<PAGE>
prospectus, any final prospectus, or any amendment or supplement thereto has
been issued, nor has the Commission or any securities or blue sky authority of
any jurisdiction instituted or threatened to institute any proceedings with
respect to such an order, (ii) the registration statement and each prospectus
forming a part thereof (including each preliminary prospectus), and any
amendment or supplement thereto, complies as to form with the Act and the rules
and regulations thereunder, and (iii) such counsel has no knowledge of any
material misstatement or omission in such registration statement or any
prospectus, as amended or supplemented. Such opinion shall also state the
jurisdictions in which the Underwriter's Securities have been registered or
qualified for sale pursuant to the provisions of Section 9(f).
(g) In the event of a registration pursuant to the provision of this
Section 9, the Company shall enter into a cross-indemnity agreement and a
contribution agreement, each in customary form, with each underwriter, if any,
and, if requested, enter into an underwriting agreement containing conventional
representations, warranties, allocation of expenses, and customary closing
conditions, including, but not limited to, opinions of counsel and accountants'
cold comfort letters, with any underwriter who acquires any Underwriter's
Securities.
(h) The Company agrees that until all the Under- writer's Securities
have been sold under a registration statement or pursuant to Rule 144 under the
Act, it shall keep current in filing all reports, statements and other materials
required to be filed with the Commission to permit holders of the Underwriter's
Securities to sell such securities under Rule 144.
(i) Except for rights granted to holders of the Options and rights
existing prior to the issuance of the Options, the Company will not, without the
written consent of the Majority Holders, grant to any persons the right to
request the Company to register any securities of the Company, provided that the
Company may grant such registration rights to other persons so long as such
rights are subordinate to the rights of the Eligible Holders.
10. (a) Subject to the conditions set forth below, the Company agrees
to indemnify and hold harmless each Eligible Holder, its officers, directors,
partners, employees, agents, and counsel, and each person, if any, who controls
any such person within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all loss, liability, charge, claim, damage, and expense
whatsoever (which shall include, for all purposes of this Section 10, but not be
limited to, attorneys' fees and any and all reasonable expense whatsoever
incurred in investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts paid
in settlement of any claim or litigation), as and when incurred, arising out of,
based upon, or
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<PAGE>
in connection with (i) any untrue statement or alleged untrue statement of a
material fact contained (A) in any registration statement, preliminary
prospectus, or final prospectus (as from time to time amended and supplemented),
or any amendment or supplement thereto, relating to the sale of any of the
Underwriter's Securities or (B) in any application or other document or
communication (in this Section 10 collectively called an "application") executed
by or on behalf of the Company or based upon written information furnished by or
on behalf of the Company filed in any jurisdiction in order to register or
qualify any of the Underwriter's Securities under the securities or blue sky
laws thereof or filed with the Commission or any securities exchange; or any
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, unless such
statement or omission was made in reliance upon and in conformity with written
information furnished to the Company with respect to such Eligible Holder by or
on behalf of such person expressly for inclusion in any registration statement,
preliminary prospectus, or final prospectus, or any amendment or supplement
thereto, or in any application, as the case may be, or (ii) any breach of any
representation, warranty, covenant, or agreement of the Company contained in
this Option. The foregoing agreement to indemnify shall be in addition to any
liability the Company may otherwise have, including liabilities arising under
this Option. The Company shall not be liable for losses based on untrue
statements incorporated in a Preliminary Prospectus or Prospectus, if such
information was provided in writing to the Company by the Holder for inclusion
in such Preliminary Prospectus or Prospectus at the written request of the
Company. The Company shall not be liable for losses based on untrue statements
or omissions contained in Preliminary Prospectuses if an Underwriter failed to
deliver a final Prospectus prior to or simultaneously with the delivery of
written confirmation of any public sale of the Underwriter's Securities and a
court of competent jurisdiction in a judgment not subject to appeal or final
review shall have determined that such final Prospectus would have corrected
such untrue statement or omission.
If any action is brought against any Eligible Holder or any of its
officers, directors, partners, employees, agents, or counsel, or any controlling
persons of such person (an "indemnified party") in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
indemnified party or parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not relieve the
Company from any liability other than pursuant to this Section 10(a)) and the
Company shall promptly assume the defense of such action, including the
employment of counsel (reasonably satisfactory to such indemnified party or
parties) and payment of expenses. Such indemnified party or parties shall have
the right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
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<PAGE>
or parties unless the employment of such counsel shall have been authorized in
writing by the Company in connection with the defense of such action or the
Company shall not have promptly employed counsel reasonably satisfactory to such
indemnified party or parties to have charge of the defense of such action or
such indemnified party or parties shall have reasonably concluded that there may
be one or more legal defenses available to it or them or to other indemnified
parties which are different from or additional to those available to the
Company, in any of which events such fees and expenses shall be borne by the
Company and the Company shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties. Anything in this Section
10 to the contrary notwithstanding, the Company shall not be liable for any
settlement of any such claim or action effected without its written consent,
which shall not be unreasonably withheld. The Company shall not, without the
prior written consent of each indemnified party that is not released as
described in this sentence, settle or compromise any action, or permit a default
or consent to the entry of judgment in or otherwise seek to terminate any
pending or threatened action, in respect of which indemnity may be sought
hereunder (whether or not any indemnified party is a party thereto), unless such
settlement, compromise, consent, or termination includes an unconditional
release of each indemnified party from all liability in respect of such action.
The Company agrees promptly to notify the Eligible Holders of the commencement
of any litigation or proceedings against the Company or any of its officers or
directors in connection with the sale of any Underwriter's Securities or any
preliminary prospectus, prospectus, registration statement, or amendment or
supplement thereto, or any application relating to any sale of any Underwriter's
Securities.
(b) The Holder agrees to indemnify and hold harmless the Company,
each director of the Company, each officer of the Company who shall have signed
any registration statement covering Underwriter's Securities held by the Holder,
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, and its or their
respective counsel, to the same extent as the foregoing indemnity from the
Company to the Holder in Section 10(a), but only with respect to statements or
omissions, if any, made in any registration statement, preliminary prospectus,
or final prospectus (as from time to time amended and supplemented), or any
amendment or supplement thereto, or in any application, in reliance upon and in
conformity with written information furnished to the Company with respect to the
Holder by or on behalf of the Holder expressly for inclusion in any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be. If
any action shall be brought against the Company or any other person so
indemnified based on any such registration statement, preliminary prospectus, or
final prospectus, or any amendment or supplement thereto, or in any
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<PAGE>
application, and in respect of which indemnity may be sought against the Holder
pursuant to this Section 10(b), the Holder shall have the rights and duties
given to the Company, and the Company and each other person so indemnified shall
have the rights and duties given to the indemnified parties, by the provisions
of Section 10(a).
(c) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 10(a) or
10(b) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company, and its or their
respective counsel), as one entity, and the Eligible Holders of the
Underwriter's Securities included in such registration in the aggregate
(including for this purpose any contribution by or on behalf of an indemnified
party), as a second entity, shall contribute to the losses, liabilities, claims,
damages, and expenses whatsoever to which any of them may be subject, on the
basis of relevant equitable considerations such as the relative fault of the
Company and such Eligible Holders in connection with the facts which resulted in
such losses, liabilities, claims, damages, and expenses. The relative fault, in
the case of an untrue statement, alleged untrue statement, omission, or alleged
omission, shall be determined by, among other things, whether such statement,
alleged statement, omission, or alleged omission relates to information supplied
by the Company or by such Eligible Holders, and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement, alleged statement, omission, or alleged omission. The Company and the
Holder agree that it would be unjust and inequitable if the respective
obligations of the Company and the Eligible Holders for contribution were
determined by pro rata or per capita allocation of the aggregate losses,
liabilities, claims, damages, and expenses (even if the Holder and the other
indemnified parties were treated as one entity for such purpose) or by any other
method of allocation that does not reflect the equitable considerations referred
to in this Section 10(c). In no case shall any Eligible Holder be responsible
for a portion of the contribution obligation imposed on all Eligible Holders in
excess of its pro rata share based on the number of shares of Common Stock owned
(or which would be owned upon exercise of all Underwriter's Securities) by it
and included in such registration as compared to the number of shares of Common
Stock owned (or which would be owned upon exercise of all Underwriter's
Securities) by all Eligible Holders and included in such registration. No person
guilty of a fraudulent misrepresentation
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<PAGE>
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this Section 10(c), each person, if any, who
controls any Eligible Holder within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner, employee,
agent, and counsel of each such Eligible Holder or control person shall have the
same rights to contribution as such Eligible Holder or control person and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, each officer of the Company who shall
have signed any such registration statement, each director of the Company, and
its or their respective counsel shall have the same rights to contribution as
the Company, subject in each case to the provisions of this Section 10(c).
Anything in this Section 10(c) to the contrary notwithstanding, no party shall
be liable for contribution with respect to the settlement of any claim or action
effected without its written consent. This Section 10(c) is intended to
supersede any right to contribution under the Act, the Exchange Act or
otherwise.
11. Unless registered pursuant to the provisions of Section 9 hereof,
the Option Shares issued upon exercise of the Options shall be subject to a stop
transfer order and the certificate or certificates evidencing such securities
shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION. HOWEVER, SUCH SHARES MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) A POST-EFFECTIVE
AMENDMENT TO SUCH REGISTRATION STATEMENT, (ii) A SEPARATE
REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN EXEMPTION
FROM REGISTRATION UNDER SUCH ACT."
12. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of any Option (and upon surrender of any
Option if mutilated), and upon
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<PAGE>
reimbursement of the Company's reasonable incidental expenses, the Company shall
execute and deliver to the Holder thereof a new Option of like date, tenor, and
denomination.
13. The Holder of any Option shall not have, solely on account of such
status, any rights of a stockholder of the Company, either at law or in equity,
or to any notice of meetings of stockholders or of any other proceedings of the
Company, except as provided in this Option.
14. This Option shall be construed in accordance with the laws of the
State of New York applicable to contracts made and performed within such State,
without regard to principles of conflicts of law.
15. The Company irrevocably consents to the jurisdiction of the courts
of the State of New York and of any federal court located in such State in
connection with any action or proceeding arising out of or relating to this
Option, any document or instrument delivered pursuant to, in connection with or
simultaneously with this Option, or a breach of this Option or any such document
or instrument. In any such action or proceeding, the Company waives personal
service of any summons, complaint or other process and agrees that service
thereof may be made in accordance with Section 12 of the Underwriting Agreement.
Within 30 days after such service, or such other time as may be
mutually agreed upon in writing by the attorneys for the parties to such action
or proceeding, the Company shall appear to answer such summons, complaint or
other process.
Dated: ______, 1997
ASIA ELECTRONICS HOLDING CO. INC.
By: _______________________________
Du Qingsong
Chief Executive Officer
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<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Option.)
FOR VALUE RECEIVED, ______________________ hereby sells, assigns, and
transfers unto _________________ an Option to purchase __________ shares of
common stock of the Company, par value $0.01 per share, together with all right,
title, and interest therein, and does hereby irrevocably constitute and appoint
___________ attorney to transfer such Option on the books of the Company, with
full power of substitution.
Dated: _________________
Signature______________________
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<PAGE>
NOTICE
The signature on the foregoing Assignment must correspond to the name
as written upon the face of this Option in every particular, without alteration
or enlargement or any change whatsoever.
To: Asia Electronics Holding Co. Inc.
c/o Harney, Westwood & Riegels
Craigmuir Chambers
P.O. Box 71
Road Town, Tortola
British Virgin Islands
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<PAGE>
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase
_______ Option Shares covered by the within Option and tenders payment herewith
in the aggregate amount of $_________ including (i) $_________ by certified or
bank cashier's check, and (ii) cancellation of Options to purchase Option
Shares, based upon a Maximum Number (as therein defined) of ________, in
accordance with the terms thereof, and requests that certificates for such
securities be issued in the name of, and delivered to:
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Option Shares shall not be all the Option Shares covered
by the within Option, that a new Option for the balance of the Option Shares
covered by the within Option be registered in the name of, and delivered to, the
undersigned at the address stated below.
Dated: __________________
Name________________________ (Print)
Address:
(Signature)
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Exhibit 21.1
SUBSIDIARIES
Xianyang Yongxin Electronics Co., Ltd.
Xianyang Daming Electronics Co., Ltd.
[ARTHUR ANDERSEN LETTERHEAD]
----------------------------
Arthur Andersen & Co
Certified Public Accountants
----------------------------
25/F Wing On Centre
111 Connaught Road Central
Hong Kong
852 2852 0222
852 2815 0548 Fax
Direct Fax:
July 2, 1997
The Directors
Asia Electronics Holding Co. Inc.
Xianyang Daming Electronic Co., Ltd.
Xianyang Yongxin Electronic Co., Ltd.
Xianyang Dnon Tech Special Electro Technique Co., Ltd.
Yantai Daewoo Electronic Components Co., Ltd.
70 Weiyang Road West
Xianyang
The People's Republic of China
Dear Sirs,
As independent public accountants, we hereby consent to the incorporation
of our reports dated July 2, 1997 included in Asia Electronics Holdings Co.
Inc.'s Form F-1 dated July 2, 1997 and to all the references to our Firm
included in this registration statement.
Very truly yours,
/s/ Arthur Andersen & Co.
Exhibit 23.3
CONSENT
I, Robert Adler, consent in this Registration Statement on Form F-1 of
Asia Electronics Holding Co. Inc. to the inclusion of my name as a nominee for
director of Asia Electronics Holding Co. Inc.
/s/ Robert Adler
Robert Adler
Exhibit 23.4
CONSENT
I, Hans Decker, consent in this Registration Statement on Form F-1 of Asia
Electronics Holding Co. Inc. to the inclusion of my name as a nominee for
director of Asia Electronics Holding Co. Inc.
/s/ Hans Decker
Hans Decker
