As filed with the Securities and Exchange Commission on August 18, 1997
Registration No. 333-30743
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 1 to
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>
3679 13-3932739
British Virgin Islands
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)
c/o Harney Westwood
</TABLE>
<TABLE>
<S> <C>
& Riegels CT Corporation System
Craigmuir Chambers
P.O. Box 71
Road Town, Tortola 1633 Broadway
British Virgin Islands New York, New York 10019
(809) 494-2233 (212) 315-7890
(Address, including zip code, and telephone number,
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:
<TABLE>
<S> <C>
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
</TABLE>
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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: -
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
================================================================================
<TABLE>
<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
- --------------------------------------------------- ---------- -------- --------------- -----------
Representatives' Options (3) 330,000 $ 0.001 $ 330.00 $ 0.09
- --------------------------------------------------- ---------- -------- --------------- -----------
Shares underlying the Representatives' Options (4) 330,000 $10.20 $ 3,366,000.00 $ 1,019.99
- --------------------------------------------------- ---------- -------- --------------- -----------
Advisor Options (5) 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." The 4,600,000 shares of Common Stock are being offered on
an underwritten basis by the Company.
(3) Represents five-year options to purchase 330,000 shares of Common Stock at
an exercise price equal to 165% of the initial public offering price of
the Common Stock to be issued to the Representatives of the Underwriters
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 Representatives' Options and Advisor Options, as described in the
Prospectus.
(5) Represents five-year options to purchase (i) 20,000 shares of Common Stock
at an exercise price equal to 165% of the initial public offering price of
the Common Stock and (ii) 50,000 shares of Common Stock at an exercise
price equal to 120% of the initial public offering price of the Common
Stock, to be issued to certain advisors to the Company upon completion of
this Offering.
---------------
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 AUGUST 18, 1997
PROSPECTUS
4,000,000 Shares
[LOGO] ASIA ELECTRONICS HOLDING CO. INC.
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 has applied to have the Common Stock quoted on The
NASDAQ National Market under the symbol "AEHCF."
The Common Stock involves a high degree of risk and immediate substantial
dilution. See "Risk Factors" beginning on page 8 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
- --------------------------------------------------------------------------------
Per Share ...... $ $ $
- --------------------------------------------------------------------------------
Total(2) ...... $ $ $
================================================================================
</TABLE>
(1) Excludes a non-accountable expense allowance payable by the Company to
Barington Capital Group, L.P. and Value Investing Partners, Inc., the
representatives of the Underwriters (the "Representatives"), in an amount
equal to 3% of the gross proceeds of this Offering, and the value of
five-year options (the "Representatives' Options") to purchase 330,000
shares of Common Stock at an exercise price equal to 165% of the initial
public offering price being issued to the Representatives. 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 Representatives' 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 Barington Capital Group, L.P., 888 Seventh
Avenue, New York, New York 10019 or through the facilities of The Depository
Trust Company, on or about September , 1997.
-----------
Barington Capital Group, L.P. Value Investing Partners, Inc.
The date of this Prospectus is September , 1997.
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.
<PAGE>
[PICTURES]
These photographs show various deflection yoke models manufactured by the
Company for use in color picture tubes (CPTs) for television sets and for use
in color display tubes (CDTs) for computer monitors
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 IN ACCORDANCE WITH RULE 103 OF REGULATION M. 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
Representatives 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>
These photographs show various stages of the manufacturing process at the
Company's facilities
<PAGE>
Unless otherwise indicated, all information in this Prospectus (i) assumes
no exercise of the Underwriters' over-allotment option, the Representatives'
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, incorporated in January 1996, 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 one of the largest independent manufacturers of deflection yokes
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").
The Company, with its predecessors, 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 and its predecessors has increased from
approximately 1.6 million units in 1994 to approximately 3.0 million units in
1995 to approximately 5.6 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 $27.4 million in 1996. This represents a compounded annual
growth rate in excess of 80.0% both in unit sales and in net sales. Such strong
growth has continued into the first half of 1997, with unit sales of
approximately 3.0 million units for the six months ended June 30, 1997,
compared to approximately 2.0 million units for the six months ended June 30,
1996, and net sales of approximately $18.6 million for the six months ended
June 30, 1997, compared to approximately $10.5 million for the six months ended
June 30, 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 recent report by a specialty glass manufacturer
(the "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 Report, the People's Republic of
China's ("China") share of world CPT and CDT production is projected to
increase from 16.1 million units in 1996 to 39.9 million units
3
<PAGE>
in 2000, which represents a compounded annual growth rate of approximately 26%.
See "Business--Industry Overview" with respect to the Report. If the Company
retains its current presence in China as a manufacturer of deflection yokes, it
would expect to participate in China's overall growth in deflection yoke
production.
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 such as deflection yoke production. 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 June
30, 1997 of approximately $35.0 million, compared to backlog at June 30,
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"
CPT 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").
o 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, which is wholly owned by a state-owned
asset management council ("Pianzhuan Group"). Pianzhuan Group 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 Electro Technique 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) 332-0891. The Company's principal executive office
is located at c/o Harney Westwood & Riegels, Craigmuir Chambers, P.O. Box 71,
Road Town, Tortola, British Virgin Islands; its telephone number at that
address is (809) 494-2233.
5
<PAGE>
This Offering
<TABLE>
<S> <C>
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
Risk Factors ................................. The shares of Common Stock offered hereby involve
a high degree of risk. Before investing in the Common
Stock offered hereby, prospective investors should
carefully consider the risks relating to China; the
Company's dependence on major customers; dependence on
key personnel; and the other risks described in "Risk
Factors." See "Risk Factors."
Use of Proceeds .............................. To expand manufacturing facilities; to acquire Yantai
and Dnon Tech; to expand research and product
development activities; to 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 ...... AEHCF
</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 Representatives' Options, or 70,000 shares of Common Stock
reserved for issuance upon exercise of the Advisor Options.
6
<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 Consolidated Financial Data of the Company," "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:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1996 June 30,
------------------------ --------------------------------------------------
1996 1997
------------------------ -----------------------
(Amounts in thousands, except per share data)
(Unaudited)
RMB US$ RMB US$ RMB US$
<S> <C> <C> <C> <C> <C> <C>
Net sales ............ 226,612 27,336 87,400 10,543 154,043 18,582
Gross profit ......... 58,710 7,082 18,620 2,246 46,194 5,572
Operating income ...... 50,705 6,116 15,090 1,820 40,482 4,883
Net income ............ 35,176 4,243 10,197 1,229 26,891 3,244
Pro forma net income per
common share ......... 6.18 $0.75 1.79 $0.22 4.72 $0.57
Pro forma weighted
average number of
common shares
outstanding(1) ...... 5,693,000 5,693,000 5,693,000 5,693,000 5,693,000 5,693,000
</TABLE>
Unaudited Pro Forma Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
As of June 30, 1997
------------------------------------
(Amounts in thousands)
(Unaudited)
Pro Forma
Pro Forma Consolidated As
Consolidated Adjusted(2)
-------------- -------------------
RMB RMB US$
<S> <C> <C> <C>
Working capital(3) ......... 21,402 237,771 28,682
Total assets ............... 155,932 372,301 44,910
Short-term bank loans ...... 19,686 19,686 2,375
Total liabilities(4) ...... 68,418 68,418 8,253
Investors' equity ............ 43,840 260,209 31,389
</TABLE>
- --------------
(1) The weighted average number of shares outstanding has been adjusted for the
issuance in this Offering of 843,000 shares for the year ended December
31, 1996 and the six months ended June 30, 1996 and 1997, which represents
the number of shares at an assumed initial public offering price of $7.50
per share that would be required to generate the net proceeds of
$5,500,000 to be used for the acquisitions of Yantai and Dnon Tech.
(2) 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."
(3) Represents current assets less current liabilities.
(4) Excludes negative goodwill of RMB17,450,000 ($2,105,000) resulting from the
acquisitions of Yongxin and Daming, which became effective December 31,
1996.
7
<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, in
evaluating the Company and its business, before purchasing the Common Stock
offered by this Prospectus.
Risks Relating to China
Risks Relating to the Economy of China
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.
The Chinese economy has experienced rapid growth in recent years, with GNP
increasing at an average annual rate of 12.0% between 1991 and 1996. 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, 6.1% in 1996 and 1.8% in the first
six months of 1997.
Risk of Loss of Benefits Provided by 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.
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
8
<PAGE>
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. If a subsidiary requires foreign currency in excess of amounts retained,
such subsidiary must, subject to applicable regulations, purchase foreign
currency from the designated banks. In the event such purchases were not
permitted or were limited, the subsidiary would not have sufficient foreign
currencies to satisfy its obligations.
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
9
<PAGE>
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.
Possible Deterioration of 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, including issues with respect to North Korea. Relations between
North Korea and South Korea, which had been stable since an armed conflict in
the early 1950s, have recently worsened. 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 or the
resumption of an armed conflict between North Korea 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 50% of the Company's total
pro forma consolidated net sales, approximately 50% of which was sold by
Daewoo, as a sales representative of the Company, to additional customers. In
the six months ended June 30, 1997, Daewoo accounted for approximately 35% of
the Company's total pro forma consolidated net sales, approximately 40% of
which was re-sold by Daewoo, as a sales representative of the Company, to
additional customers. In addition, in 1996 and the six months ended June 30,
1997, 40% and 38.8%, 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, 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. 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
in the amount of $2 million.
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
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<PAGE>
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
sales in China are from customer orders placed directly with Pianzhuan Group,
which then fills such orders through the Company's manufacturing facilities. In
1996 and the six months ended June 30, 1997, approximately 49% and 65%,
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." There can be no assurance that such agreements will
be enforced by a Chinese court. See "Risk Factors--Risks Relating to China;"
and "Enforceability of Civil Liabilities and Certain Foreign Issuer
Considerations."
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."
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."
Risks of 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.
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<PAGE>
Risk of Obsolescence
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.
The Company 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 its 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.
Potential Difficulty in Effecting Service of Legal Process and Enforcing
Judgments Against the Company and its Management
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 not be
possible to effect service of process within the United States upon such
persons, including with respect to matters arising under the Securities Act of
1933, as amended (the "Securities Act"). Moreover, 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."
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
materials 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
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<PAGE>
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 shareholder
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. 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; 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
Representatives. 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.
The Company has applied 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.
Immediate Dilution
Purchasers of the Common Stock offered by this Prospectus will experience
immediate and substantial dilution in pro forma consolidated net tangible book
value per share of Common Stock of $3.87 from the initial public offering
price. The initial public offering price is substantially greater than the
effective price at which the Company's existing shareholders purchased their
shares of Common Stock.
Possible Depression of the Market Price for the Common Stock
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 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
13
<PAGE>
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 date of such sale, and such sale is
completed 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 Representatives. 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 Representatives, subject to limited
exceptions. The Company has been advised by the Representatives that they have
no general policy with respect to granting releases from such lock-up
agreements. The Representatives may, in their 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."
Risks Related to Unavailability of Information due to Exemptions under the
Exchange Act for 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: (i) 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; (ii) 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 (iii) 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 Representatives 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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<PAGE>
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 has
designated 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 be commenced in China or the British Virgin Islands for recovery of
this debt. However, a Chinese 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 Chinese 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 Chinese 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
15
<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 of a
fiduciary duty 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 June
30, 1997 of US$1.00 = RMB8.2900.
The following table sets forth certain information concerning exchange
rates between Renminbi and U.S. dollars for the periods indicated:
<TABLE>
<CAPTION>
Noon Buying Rate(1)
------------------------------------------------
Period Period End Average(2) High Low
- ---------------- ------------ ------------ -------- -------
(RMB per US$)
<S> <C> <C> <C> <C>
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
</TABLE>
- --------------
(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.
16
<PAGE>
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:
<TABLE>
<CAPTION>
Approximate
Amount Percent
------------- --------
<S> <C> <C>
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
General corporate purposes and working capital ...... 2,100,000 8.0
------------ ------
Total ............................................. $26,100,000 100.0%
============ ======
</TABLE>
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 that 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. Approximately $4,100,000, or
15.7%, of the net proceeds of this Offering ($8,100,000, or 26.9%, if the
Underwriters' over-allotment option is exercised in full) are for research and
product development and general corporate purposes and working capital. Such
amounts are subject to reapportionment among the other categories listed above
or among additional categories in response to, among other things, changes in
the Company's plans, regulations and economic and industry conditions.
17
<PAGE>
DILUTION
The consolidated net tangible book value of the Company as of June 30,
1997 was approximately RMB61,290,000 ($7,393,000), or approximately RMB12.64
($1.52) 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 June 30, 1997 would have been approximately RMB266,128,000
($32,103,000) or RMB30.07 ($3.63) per share. This represents an immediate
increase in consolidated net tangible book value of approximately RMB17.43
($2.11) per share to existing shareholders and an immediate dilution in
consolidated net tangible book value of RMB32.11 ($3.87) 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
June 30, 1997 ................................................... $1.52
Increase per share attributable to new investors and Acquisitions $2.11
------
Consolidated net tangible book value per share after this Offering 3.63
------
Dilution per share to new investors .............................. $3.87
======
</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."
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 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 $3.9
million, and the receipt and application of the net proceeds received
therefrom, including the consummation of the Acquisitions. See "Unaudited Pro
Forma Consolidated Financial Information."
<TABLE>
<CAPTION>
June 30, 1997
---------------------------------------
Pro Forma, Pro Forma,
Actual As Adjusted As Adjusted
-------- ------------- ------------
(Amounts in thousands)
RMB RMB US$
<S> <C> <C> <C>
Short-term bank loans .............................. 12,436 19,686 2,375
====== ======= ======
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 ........................... 402 734 89
Additional paid-in capital ........................ 27,170 243,207 29,337
Retained earnings ................................. 16,268 16,268 1,963
------ ------- ------
Total investors' equity ........................ 43,840 260,209 31,389
------ ------- ------
Total capitalization ........................... 43,840 260,209 31,389
====== ======= ======
</TABLE>
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.
19
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated statement of income for the
year ended December 31, 1996 represents 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
six months ended June 30, 1996 represents 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 six months ended June 30, 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 six months ended June 30,
1996.
The following unaudited pro forma consolidated statement of income for the
six months ended June 30, 1997 represents 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
six months ended June 30, 1997, as if the operations of the Company had been
consolidated with the operations of Yantai and Dnon Tech at the beginning of
the six months ended June 30, 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 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.
20
<PAGE>
Unaudited Pro Forma Consolidated Statement Of Income
<TABLE>
<CAPTION>
Year Ended December 31, 1996
-----------------------------------------------------------------------------------------
Yantai
Asia Yongxin and
Electronics and Dnon Pro
Holding 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 (3,434) (1) 226,612 27,336
Cost of goods sold ............... -- (96,350) (74,737) 3,185 (1) (167,902) (20,254)
Selling and administrative
expenses ........................ -- (4,511) (3,494) (8,005) (966)
Interest expense, net ............ -- (1,037) (2,117) (3,154) (380)
Other (expenses) income, net ...... -- (114) 653 4,216 (2) 3,602 434
(1,153) (3)
-----------
Total costs and expenses ......... -- (102,012) (79,695) 6,248 (175,459) (21,166)
-------- --------- --------- ----------- ---------- ---------
Income before income taxes ......... -- 41,672 6,667 2,814 51,153 6,170
Provision for income taxes ......... -- (7,411) 205 (7,206) (869)
-------- --------- --------- ---------- ---------
Income after income taxes ......... -- 34,261 6,872 2,814 43,947 5,301
Minority interest .................. -- -- -- (8,771) (4) (8,771) (1,058)
-------- --------- --------- ----------- ---------- ---------
Net income ........................ 34,261 6,872 (5,957) 35,176 4,243
======== ========= ========= =========== ========== =========
Pro forma net income per common
share .............................. 6.18 0.75
Pro forma weighted average
number of common shares
outstanding(5) .................. 5,693,000 5,693,000
</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%).
(5) The weighted average number of shares outstanding has been adjusted for the
issuance in this Offering of 843,000 shares for the year ended December
31, 1996, which represents the number of shares at an assumed initial
public offering price of $7.50 per share that would be required to
generate the net proceeds of $5,500,000 to be used for the acquisitions of
Yantai and Dnon Tech.
21
<PAGE>
Unaudited Pro Forma Consolidated Statement of Income
<TABLE>
<CAPTION>
Six Months Ended June 30, 1996
----------------------------------------------------------------------------------------
Yantai
Asia Yongxin and
Electronics and Dnon Pro
Holding Daming Tech Forma Pro Forma
Co. Inc. (combined) (combined) Adjustments Consolidated
------------- ------------ ------------ --------------------- --------------------------
(Amounts in thousands, except per share data)
RMB RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C> <C>
Sales ................................. -- 53,755 34,828 (1,183) 87,400 10,543
Cost of goods sold ..................... -- (39,052) (30,911) 1,183 (1) (68,780) (8,297)
Selling and administrative expenses . -- (2,013) (1,517) (3,530) (426)
Interest expense, net .................. -- (1,211) (728) (1,939) (234)
Other (expenses) income, net ......... -- (44) 350 2,128 (21,858 224
(576) (3)
-----------------
Total costs and expenses ............... -- (42,320) (32,806) 2,735 (72,391) (8,733)
-------- --------- --------- ------------- --------- ---------
Income before income taxes ............ -- 11,435 2,022 1,552 15,009 1,810
Provision for income taxes ............ -- (2,538) 87 (2,451) (296)
-------- --------- --------- --------- ---------
Income after income taxes ............ -- 8,897 2,109 1,552 12,558 1,514
Minority interest ..................... -- -- -- (2,361) (2,361) (285)
-------- --------- --------- ----------------- --------- ---------
Net income ........................... -- 8,897 2,109 (809) 10,197 1,229
======== ========= ========= ============= ========= =========
Pro forma net income per common
share ................................. 1.79 0.22
Pro forma weighted average number
of common shares outstanding(5) ...... 5,693,000 5,693,000
</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) The weighted average number of shares outstanding has been adjusted for the
issuance in this Offering of 843,000 shares for the six months ended June
30, 1996, which represents the number of shares at an assumed initial
public offering price of $7.50 per share that would be required to
generate the net proceeds of $5,500,000 to be used for the acquisitions of
Yantai and Dnon Tech.
22
<PAGE>
Unaudited Pro Forma Consolidated Statement Of Income
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
-----------------------------------------------------------------------------
Asia
Electronics Yantai and
Holding Co. Dnon
Inc. & Tech Pro Forma Pro Forma
Subsidiaries (combined) Adjustments Consolidated
-------------- ------------ -------------------- ----------------------------
(Amounts in thousands, except per share data)
RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C>
Sales ................................. 111,443 49,439 (6,839) (1) 154,043 18,582
Cost of goods sold ..................... (80,775) (41,063) 6,839 (1) (107,849) (13,010)
7,150 (2)
Selling and administrative expenses . (3,356) (2,356) (5,712) (689)
Interest expense, net .................. (2,363) (1,307) (3,670) (443)
Other income, net ..................... 2,102 314 (577) (3) 1,839 222
--------- --------- ----------- ---------- ---------
Total costs and expenses ............... (84,392) (44,412) 13,412 (115,392) (13,920)
--------- --------- ----------- ---------- ---------
Income before income taxes ............ 27,051 5,027 6,573 38,651 4,662
Provision for income taxes ............ (5,434) 79 (5,355) (646)
--------- --------- ---------- ---------
Income after income taxes ............ 21,617 5,106 6,573 33,296 4,016
Minority interest ..................... (5,333) -- (1,072) (4) (6,405) (772)
--------- --------- ----------- ---------- ---------
Net income ........................... 16,284 5,106 5,501 26,891 3,244
========= ========= =========== ========== =========
Pro forma net income per common
share ................................. 4.72 0.57
Pro forma weighted average number
of common shares outstanding(5) ...... 5,693,000 5,693,000
</TABLE>
- --------------
(1) Adjusted to eliminate inter-company sales and purchases of enameled copper
wire.
(2) This represents the reversal of a revaluation of inventory to fair value in
connection with the acquisition, which was included in the results of
operations in the first quarter 1997.
(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 Yantai (30%) and Dnon
Tech (10%).
(5) The weighted average number of shares outstanding has been adjusted for the
issuance in this Offering of 843,000 shares for the six months ended June
30, 1997, which represents the number of shares at an assumed initial
public offering price of $7.50 per share that would be required to
generate the net proceeds of $5,500,000 to be used for the acquisitions of
Yantai and Dnon Tech.
23
<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 June 30, 1997 and the
unaudited combined balance sheet of Yantai and Dnon Tech at June 30, 1997, and
assumes the Company acquired each of Yantai and Dnon Tech as of June 30, 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 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>
June 30, 1997
------------------------------
Asia
Electronics Yantai
Holding Co. and Dnon Tech
Subsidiaries (combined)
-------------- ---------------
(Amounts in thousands)
RMB RMB
<S> <C> <C>
ASSETS:
Current assets
Cash ........................ 9,758 6,223
Accounts receivable ......... 15,752 186
Due from joint venture
partners .................. -- 8,336
Due from related
companies .................. 71,502 --
Inventories .................. 6,036 14,939
Prepayments and other
current assets ............ 1,746 1,534
Value-added tax credit ...... 4,575 --
-------- -------
Total current assets ...... 109,369 31,218
Property, plant and
equipment, net ............ 5,901 48,087
Other assets ............... -- 1,373
Deferred tax assets ......... -- 449
Goodwill ..................... -- --
-------- -------
Total assets ............... 115,270 81,127
======== =======
<CAPTION>
Pro Forma Pro Forma
Pro Forma Pro Forma Consolidated Consolidated As
Adjustments Consolidated Adjustments Adjusted(1)
------------------ -------------- -------------- ------------------
RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets
Cash ........................ (45,595)(2) (29,614) 216,369(1) 186,755 22,528
Accounts receivable ......... 15,938 15,938 1,923
Due from joint venture
partners .................. 8,336 8,336 1,005
Due from related
companies .................. (1,696)(3) 65,550 65,550 7,907
(4,256)(4)
Inventories .................. 20,975 20,975 2,530
Prepayments and other
current assets ............ 3,280 3,280 396
Value-added tax credit ...... 4,575 4,575 552
--------- -------- -------
Total current assets ...... (51,547) 89,040 216,369 305,409 36,841
Property, plant and
equipment, net ............ 53,988 53,988 6,512
Other assets ............... 1,373 1,373 166
Deferred tax assets ......... (449)(5) -- -- --
Goodwill ..................... 11,531(2) 11,531 11,531 1,391
----------- --------- -------- -------
Total assets ............... (40,465) 155,932 216,369 372,301 44,910
=========== ========= ============ ======== =======
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
June 30, 1997
------------------------------
Asia
Electronics
Holding Co. Yantai
Subsidiaries (combined)
-------------- ---------------
(Amounts in thousands)
RMB RMB
<S> <C> <C>
LIABILITIES &
INVESTORS' EQUITY:
Current liabilities
Short-term bank loans ......... 12,436 7,250
Accounts payable ............... -- 4,656
Due to related companies . -- 9,382
Due to a joint venture
partner ........................ -- 9,395
Accrued expenses ............... 8,292 1,402
Value-added tax payable ......... 8,801 639
Income taxes payable ............ 6,924 --
Deferred taxation ............... 669 --
Dividend Payable ............... -- 3,744
-------- -------
Total current
liabilities .................. 37,122 36,468
-------- -------
Negative goodwill ............... 17,450 --
Deferred taxation ............... 1,229 --
-------- -------
Total liabilities ............ 55,801 36,468
-------- -------
Minority interests ............... 15,629 --
-------- -------
Investors' equity
Common stock .................. 402 39,062
Additional paid-in capital . 27,170 610
Retained earnings ............ 16,268 4,987
-------- -------
Total investors'
equity ..................... 43,840 44,659
-------- -------
Total liabilities and
investors' equity ............ 115,270 81,127
======== =======
<CAPTION>
Pro Forma Pro Forma
Pro Forma Pro Forma Consolidated Consolidated As
Adjustments Consolidated Adjustments Adjusted(1)
------------------ -------------- -------------- -----------------
RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C>
LIABILITIES &
INVESTORS' EQUITY:
Current liabilities
Short-term bank loans ......... 19,686 19,686 2,375
Accounts payable ............... 4,656 4,656 561
Due to related companies . (1,696)(2) 3,430 3,430 414
(4,256)(3) --
Due to a joint venture
partner ........................ 9,395 9,395 1,133
Accrued expenses ............... 9,694 9,694 1,169
Value-added tax payable ......... 9,440 9,440 1,139
Income taxes payable ............ 6,924 6,924 835
Deferred taxation ............... 669 669 81
Dividend Payable ............... 3,744 3,744 452
-------- -------- -------
Total current
liabilities .................. (5,952) 67,638 67,638 8,159
----------- -------- -------- -------
Negative goodwill ............... 17,450 17,450 2,105
Deferred taxation ............... (449)(4) 780 780 94
----------- -------- -------- -------
Total liabilities ............ (6,401) 85,868 85,868 10,358
----------- -------- -------- -------
Minority interests ............... 10,595(5) 26,224 26,224 3,163
----------- -------- -------- -------
Investors' equity
Common stock .................. (39,062)(5) 402 332(1) 734 89
Additional paid-in capital . (610)(5) 27,170 216,037(1) 243,207 29,337
Retained earnings ............ (4,987)(5) 16,268 16,268 1,963
----------- -------- -------- -------
Total investors'
equity ..................... (44,659) 43,840 216,369 260,209 31,389
----------- -------- ----------- -------- -------
Total liabilities and
investors' equity ............ (40,465) 155,932 216,369 372,301 44,910
=========== ======== =========== ======== =======
</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 eliminate inter-company balances.
(3) Adjusted to offset outstanding balances with related companies.
(4) Adjusted to offset deferred tax assets and liabilities.
(5) 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 RMB11,531,000 ($1,391,000).
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
(HISTORICAL)
The Company was incorporated on January 3, 1996, but did not conduct any
operations during 1996. The balance sheet data as of December 31, 1996 have
been derived from the Company's audited consolidated financial statements
appearing elsewhere in this Prospectus. The statement of income and balance
sheet data for the six months ended June 30, 1997 have been derived from the
Company's unaudited consolidated financial statements. In the opinion of
management, the data for the interim period presented below include all
adjustments (consisting only of normal, recurring accruals) necessary to
present fairly the financial position and results of operations of the Company
as of the date and for the period indicated on a basis consistent with the
audited financial statements. The results for any interim period are not
necessarily indicative of the results for a full year. The following table does
not reflect the operations of Yantai and Dnon Tech, and reflect the activities
of Yongxin and Daming only from January 1, 1997. The following data are
qualified by reference to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and to the more detailed financial
statements and notes to the financial statements appearing elsewhere in this
Prospectus.
Statement of Income Data:
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997
----------------------------
(Amounts in thousands,
except
per share data)
RMB US$
(Unaudited)
<S> <C> <C>
Sales ...................................................... 111,443 13,443
Cost of goods sold ....................................... (80,775) (9,744)
Selling and administrative expenses ........................ (3,356) (405)
Interest expense, net .................................... (2,363) (285)
Other income, net .......................................... 2,102 254
--------- ---------
Total costs and expenses ................................. (84,392) (10,180)
--------- ---------
Income before income taxes ................................. 27,051 3,263
Provision for income taxes ................................. (5,434) (655)
--------- ---------
Income after income taxes ................................. 21,617 2,608
Minority interest .......................................... (5,333) (643)
--------- ---------
Net income ................................................ 16,284 1,965
========= =========
Net income per common share .............................. 3.36 0.41
Weighted average number of common shares outstanding ...... 4,850,000 4,850,000
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1997
------------------- -------------------
(Amounts in thousands)
RMB US$ RMB US$
(Unaudited)
<S> <C> <C> <C> <C>
Working capital(1) ......... 56,287 6,789 72,247 8,715
Total assets ............... 90,143 10,873 115,270 13,905
Short-term bank loans ...... 14,749 1,779 12,436 1,500
Total liabilities(2) ...... 28,500 3,438 38,351 4,626
Investors' equity ......... 27,556 3,324 43,840 5,289
</TABLE>
- --------------
(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.
26
<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, 1994, 1995 and 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 sheet 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 the 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 17,332
Cost of goods sold .................. (15,767) (51,798) (69,977) (96,350) (11,622)
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) (12,305)
Income before income
taxes .............................. 9,965 14,449 20,871 41,672 5,027
Provision for income taxes ............ -- -- (2,077) (7,411) (894)
--------- --------- --------- --------- ----------
Net income ........................... 9,965 14,449 18,794 34,261 4,133
========= ========= ========= ========= ==========
Balance Sheet Data:
December 31,
-----------------------------------------------------------------------------
1993(1) 1994 1995 1996 1996
--------- --------- --------- --------- ---------
(Amounts in thousands)
RMB RMB RMB RMB US$
Working capital(2) .................. 12,041 1,873 4,098 47,476 5,726
Total assets ........................ 35,083 86,098 88,775 106,678 12,868
Short-term bank loans ............... 9,670 14,060 15,135 14,749 1,779
Total liabilities ..................... 15,956 56,557 44,858 28,500 3,438
Investors' equity ..................... 19,128 29,541 43,917 78,178 9,430
</TABLE>
- --------------
(1) The companies commenced operations during the year ended December 31, 1993.
(2) Represents current assets minus current liabilities.
27
<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 six months ended June 30, 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>
Six Months Ended
June 30,
Year Ended December 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 10,417 34,828 49,439 5,964
Cost of goods sold ............... -- (39,230) (74,737) (9,015) (30,911) (41,063) (4,953)
Selling and administrative
expenses ........................ -- (1,788) (3,494) (422) (1,517) (2,356) (284)
Interest expenses, net ......... -- (812) (2,117) (255) (728) (1,307) (158)
Other income, net ............... -- 381 653 79 350 314 37
-- --------- --------- -------- --------- --------- --------
Total costs and expenses ......... -- (41,449) (79,695) (9,613) (32,806) (44,412) (5,358)
(Loss) income before income
taxes ........................... -- (1,452) 6,667 804 2,022 5,027 606
Provision for income taxes ...... -- 165 205 25 87 79 10
-- --------- --------- -------- --------- --------- --------
Net (loss) income ............... -- (1,287) 6,872 829 2,109 5,106 616
== ========= ========= ======== ========= ========= ========
Balance Sheet Data:
December 31,
--------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1994(1) 1995 1996 1996 June 30, 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 (5,250) (633)
Total assets ............... 32,001 60,658 78,783 9,504 81,127 9,787
Short-term bank loans ...... 1,000 5,664 13,560 1,636 7,250 875
Total liabilities ......... 6,697 25,243 34,136 4,118 36,468 4,400
Investors' equity ......... 25,304 35,415 44,647 5,386 44,659 5,387
</TABLE>
- --------------
(1) The companies established manufacturing operations during the year ended
December 31, 1994 but did not commence production or conduct any business
until the year ended December 31, 1995.
(2) Represents current assets minus current liabilities.
28
<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 June 30, 1997 was 8.2900 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.
Pianzhuan Group has performed most of the selling, administrative,
research and development and marketing services for Yongxin, Daming and Dnon
Tech, at cost. Pianzhuan Group allocated the costs incurred in connection with
providing such services to Yongxin, Daming, Dnon Tech and other related
companies based on the amount of sales of each such company relative to the
aggregate sales of all such companies. Total fees paid to Pianzhuan Group by
Yongxin, Daming and Dnon Tech for the year ended December 31, 1996 were
approximately RMB3,663,000 ($442,000). After this Offering, the Company expects
to expand its own efforts in sales, administrative, research and development
and marketing services and to rely less on Pianzhuan Group. The Company does
not anticipate any significant increase in costs as a result of such efforts.
The Company's subsidiaries are subject to Chinese Enterprise Income Tax
("EIT"), but have not paid any taxes prior to 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 six months ended June 30, 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." The Company is an
investment holding company with no other business activities. The consolidated
results of operations of the Company and its subsidiaries, Yongxin and Daming,
would be the same as the combined results of operations of Yongxin and Daming,
discussed below, except with respect to the effects of acquisition accounting
in the results for the six months ended June 30, 1997.
Year Ended December 31, 1996
For the year ended December 31, 1996, pro forma consolidated net sales
were RMB226,729,000 ($27,350,000), which reflects the sale of 5,573,857 units
of deflection yokes (comprised of 2,007,880 units for 14" CPTs, 1,957,800 units
for 20" CPTs, 521,998 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 ($7,082,000), or a gross profit margin of 25.9%. Pro forma
consolidated selling and administrative expenses for the period were
29
<PAGE>
RMB8,005,000 ($966,000), or 3.5% of consolidated net sales. As a consequence,
pro forma consolidated income before income taxes for the period was
RMB51,153,000 ($6,170,000), or 22.6% of consolidated net sales, and pro forma
consolidated net income for the period was RMB35,176,000 ($4,243,000), or 15.5%
of consolidated net sales.
Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------
1997 1996
----------------------------- ---------------------------
Amount Percentage Amount Percentage
---------------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
Net sales .............................. RMB154,043,000 100.0% RMB87,400,000 100.0%
Gross profit ........................... 46,194,000 30.0 18,620,000 21.3
Selling and administrative expenses ... 5,712,000 3.7 3,530,000 4.0
Income before income taxes ............ 38,651,000 25.1 15,009,000 17.2
Net income .............................. 26,891,000 17.5 10,197,000 11.7
</TABLE>
Net Sales. Pro forma consolidated net sales increased by RMB66,643,000
($8,039,000), or approximately 76.3%, from RMB87,400,000 ($10,543,000) in the
six months ended June 30, 1996 to RMB154,043,000 ($18,582,000) in the six
months ended June 30, 1997. Total units sold increased by 1,038,969 units, or
approximately 52.0%, from 1,981,941 units in the 1996 period to 3,020,910 units
in the 1997 period, which reflects increases in unit sales by product as
follows:
Unit Sales
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------------------------------------
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 ............ 1,061,125 35.1% 705,343 35.6%
20" CPTs ............ 797,410 26.4 917,458 46.3
21" CPTs (wide) ...... 151,233 5.0 99,610 5.0
25" CPTs ............ 1,000,642 33.1 256,340 12.9
14" CDTs ............ 10,500 0.4 3,190 0.2
---------- ------ ---------- ------
3,020,910 100.0% 1,981,941 100.0%
========== ====== ========== ======
</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 six months ended June 30, 1996 to the six months
ended June 30, 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 six months ended June 30, 1997 reflects a temporary reduction in
CDT sales. The Company is 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 RMB27,574,000 ($3,326,000), or
approximately 148.1%, from RMB18,620,000 ($2,246,000), or a gross profit margin
of 21.3%, in the six months ended June 30, 1996 to RMB46,194,000 ($5,572,000),
or a gross profit margin of 30.0%, in the six months ended June 30, 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 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 RMB2,182,000 ($263,000), or approximately 61.8%, from RMB3,530,000
($426,000), or 4.0% of net sales, in the six months ended June 30, 1996 to
RMB5,712,000 ($689,000), or 3.7% of net sales, in the six months ended June 30,
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
RMB23,642,000 ($2,852,000), or approximately 157.5%, from RMB15,009,000
($1,810,000), or 17.2% of net sales, in the six months ended June
30
<PAGE>
30, 1996 to RMB38,651,000 ($4,662,000), or 25.1% of net sales, in the six
months ended June 30, 1997. This change reflects the changes described above,
as well as an increase in net interest expense from RMB1,939,000 ($234,000) in
the 1996 period to RMB3,670,000 ($443,000) 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 RMB16,694,000 ($2,014,000), or
approximately 163.7%, from RMB10,197,000 ($1,229,000), or 11.7% of net sales,
in the six months ended June 30, 1996 to RMB26,891,000 ($3,244,000), or 17.5%
of net sales, in the six months ended June 30, 1997. This change reflects the
changes described above, as well as an increase in income taxes from
RMB2,451,000 ($296,000) in the 1996 period to RMB5,355,000 ($646,000) in the
1997 period (which resulted from the partial expiration of tax holiday
benefits).
Combined Results of Operations for Yongxin and Daming
The following analysis of the combined results of operations for Yongxin
and Daming for the six months ended June 30, 1997 is the same as the
consolidated results of operations, except with respect to the effects of the
acquisition, which are reported in the consolidated results only. The
consolidated amount of gross profit, income before income taxes and net income
for the six months ended June 30, 1997 is approximately RMB30.7 million,
RMB21.6 million and RMB16.3 million, respectively.
Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------
1997 1996
----------------------------- ---------------------------
Amount Percentage Amount Percentage
---------------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
Net sales .............................. RMB111,442,938 100.0% RMB53,755,649 100.0%
Gross profit ........................ 37,818,417 33.9 14,840,439 27.6
Selling and administrative expenses ... 3,356,003 3.0 2,013,406 3.7
Income before income taxes ............ 32,098,819 28.8 11,435,138 21.3
Net income ........................... 26,665,094 23.9 8,897,454 16.6
</TABLE>
Net Sales. Net sales increased by RMB57,687,289 ($6,958,659), or
approximately 107.3%, from RMB53,755,649 ($6,484,397) in the six months ended
June 30, 1996 to RMB111,442,938 ($13,443,056) in the six months ended June 30,
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 RMB22,977,978 ($2,771,771), or
approximately 154.8%, from RMB14,840,439 ($1,790,162) in the six months ended
June 30, 1996, or a gross profit margin of 27.6%, to RMB37,818,417 ($4,561,932)
in the six months ended June 30, 1997, or a gross profit margin of 33.9%. 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 RMB1,342,597 ($161,954), or approximately 66.7%, from RMB2,013,406
($242,872), or 3.7% of net sales, in the six months ended June 30, 1996 to
RMB3,356,003 ($404,825), or 3.0% of net sales, in the six months ended June 30,
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
RMB20,663,681 ($2,492,603), or approximately 181.7%, from RMB11,435,138
($1,379,389) in the six months ended June 30, 1996, or, 21.3% of net sales, to
RMB32,098,819 ($3,871,993) in the six months ended June 30, 1997, or 28.8% of
net sales. This change reflects the changes described above, as well as an
increase in net interest expense from RMB1,210,906 ($146,068) in the 1996
period to RMB2,363,029 ($285,046) 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 RMB17,767,640 ($2,143,262), or
approximately 199.7%, from RMB8,897,454 ($1,073,276) in the six months ended
June 30, 1996, or 16.6% of net sales, to RMB26,665,094 ($3,216,537) in the six
months ended June 30, 1997, or 23.9% of net sales. This change reflects the
changes described above, as well as an increase in the provision for taxes by
RMB2,896,041 ($349,341) from RMB2,537,684
31
<PAGE>
($306,114) in the 1996 period to RMB5,433,725 ($655,455) in the 1997 period
(which resulted from the expiration of certain tax benefits at Yongxin).
Year Ended December 31, 1996 Compared with the Year Ended December 31, 1995
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
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 ($5,665,961), or 48.6%,
from RMB96,712,985 ($11,666,223) in 1995 to RMB143,683,800 ($17,332,183) 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 ($2,484,661), or
77.0%, from RMB26,735,777 ($3,225,064), or a gross profit margin of 27.6%, in
1995 to RMB47,333,623 ($5,709,725), 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 ($228,735), or 72.5%, from RMB2,614,942 ($315,433),
or 2.7% of net sales, in 1995 to RMB4,511,155 ($544,168), 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 ($2,509,191), or 99.7%, from RMB20,870,460 ($2,517,546), or 21.6%
of net sales, in 1995 to RMB41,671,652 ($5,026,737), 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 ($387,705) to 1,036,500 ($125,030)
(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 ($1,865,677), or 82.3%,
from net income of RMB18,794,452 ($2,267,123), or 19.4% of net sales, in 1995
to RMB34,260,912 ($4,132,800), 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 RMB5,333,740 ($643,394), or approximately 257%, from RMB2,077,000
($250,543) in 1995 to RMB7,410,740 ($893,937) 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>
December 31,
--------------------------------------------------------
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>
32
<PAGE>
Net Sales. Net sales increased by RMB27,924,000 ($3,368,396), or 40.6%,
from RMB68,789,000 ($8,297,829) in 1994 to RMB96,713,000 ($11,666,224) 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 ($1,175,513), or
57.4%, from RMB16,991,000 ($2,049,578), or a gross profit margin of 24.7%, in
1994 to RMB26,736,000 ($3,225,090), 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 ($238,963), or approximately 312%, from RMB634,000
($76,478), or 0.9% of net sales, in 1994 to RMB2,615,000 ($315,440), 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 ($774,668), or 44.4%, from RMB14,449,000 ($1,742,943), or 21.0% of
net sales, in 1994 to RMB20,871,000 ($2,517,612), or 21.6% of net sales, in
1995. This change reflects the changes described above, as well as an increase
in net interest expense from RMB1,689,000 ($203,739) to RMB3,214,000 ($387,696)
(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 ($524,125), or 30.1%,
from net income of RMB14,449,000 ($1,742,943), or 21.0% of net sales, in 1994
to RMB18,794,000 ($2,267,069), 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 ($250,543) from zero to RMB2,077,000 ($250,543) due
to the beginning of the expiration of tax holidays.
Combined Results of Operations for Yantai and Dnon Tech
Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------------------------------------
1997 1996
------------------------------------- --------------------------------
Amount Percentage Amount Percentage
------------------------ ------------ -------------------- -----------
<S> <C> <C> <C> <C>
Net sales--Yantai .................. RMB34,569,623 RMB31,828,418
Net sales--Dnon Tech ............... 14,869,076 ------- 2,999,122 -------
Total net sales ..................... 49,438,999 100.0% 34,827,540 100.%
Gross profit ........................ 8,375,977 16.9 3,917,384 11.2
Selling and administrative expenses 2,356,386 4.8 1,516,690 4.4
Income before income taxes ......... 5,027,440 10.2 2,021,505 5.8
Net income ........................... 5,105,740 10.3 2,108,805 6.1
</TABLE>
Net Sales. Net sales increased by RMB14,611,459 ($1,762,540), or 42.0%,
from RMB34,827,540 ($4,201,151) in the six months ended June 30, 1996 to
RMB49,438,999 ($5,963,691) in the six months ended June 30, 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 RMB4,458,593 ($537,828), or
113.8%, from RMB3,917,384 ($472,543), or a gross profit margin of 11.2%, in the
six months ended June 30, 1996 to RMB8,375,977 ($1,010,371), or a gross profit
margin of 16.9%, in the six months ended June 30, 1997. The increase in gross
profit margin was attributable to the improvement in productivity and the
decrease in fixed manufacturing overhead per unit as a result of the expansion
in production volume.
Selling and Administrative Expenses. Selling and administrative expenses
increased by RMB839,696 ($101,290), or 55.4%, from RMB1,516,690 ($182,954), or
4.4% of net sales, in the six months ended June 30, 1996
33
<PAGE>
to RMB2,356,386 ($284,244), or 4.8% of net sales, in the six months ended June
30, 1997. The increase 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 increased by
RMB3,005,935 ($362,598), or 148.7%, from RMB2,021,505 ($243,849), or 5.8% of
net sales, in the six months ended June 30, 1996 to RMB5,027,440 ($606,326), or
10.2% of net sales, in the six months ended June 30, 1997. This change reflects
the changes described above, as well as an increase in net interest expense by
RMB579,345 ($69,885) from RMB727,556 ($87,884) to RMB1,306,901 ($157,648)
(which resulted from an increase in short-term borrowings to fund operations
and higher interest rates).
Net Income. Net income increased by RMB2,996,935 ($361,512), or 142.1%,
from RMB2,108,805 ($254,379) in the six months ended June 30, 1996 to
RMB5,105,740 ($615,891) in the six months ended June 30, 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>
December 31,
-------------------------------------------------------------------
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 ($5,592,855), or
approximately 115.9%, from RMB39,997,168 ($4,824,749) in 1995 to RMB86,361,938
($10,417,604) 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 ($1,309,643) from
RMB767,443 ($92,575), or a gross profit margin of 1.9%, in 1995 to
RMB11,624,384 ($1,402,218), 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 ($205,773), or 95.4%, from RMB1,787,889 ($215,668),
or 4.5% of net sales, in 1995 to RMB3,493,746 ($421,441), 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 ($979,319), from a loss of RMB(1,452,048) ($(175,157)) in 1995 to
a gain of RMB6,666,505 ($804,162) in 1996. This change reflects the changes
described above, as well as an increase in net interest expense from RMB812,146
($97,967) to RMB2,116,853 ($255,350) (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 ($984,180), from a net
loss of RMB1,287,048 ($155,253) in 1995 to net income of RMB6,871,505
($828,891) in 1996. This change reflects the changes described above, as well
as an increase in deferred tax benefits of RMB40,000 ($4,825), from RMB165,000
($19,903) in 1995 to RMB205,000 ($24,729) in 1996.
34
<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 June 30, 1997, the Company had working capital of RMB72,247,000
($8,715,000), compared to RMB56,287,000 ($6,790,000) at December 31, 1996.
Changes in working capital included an increase in accounts receivable of
RMB39,000 ($4,704), a decrease in inventories of RMB15,029,000 ($1,813,000) and
an increase in payables of RMB11,916,000 ($1,437,000). At June 30, 1997, the
Company had pro forma as adjusted working capital of RMB237,771,000
($28,682,000).
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
($2,578,408), RMB17,425,000 ($2,101,930) and RMB (570,000) ($(68,758)),
respectively, and Yantai and Dnon Tech had combined net cash flow from
operating activities of RMB3,986,000 ($480,820), RMB1,562,000 ($188,400) and
RMB (2,701,000) ($(325,814)), 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 RMB3,271,000 ($395,000) for the
year ended December 31, 1996 and RMB25,871,000 ($3,121,000) for the six months
ended June 30, 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 ($1,779,131) 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. Daming's credit
facility is secured by certain machinery and equipment, which has an
approximate net book value of RMB1,544,000 ($196,000).
Yantai has a credit facility at The Bank of China of RMB2,500,000
($301,568). 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 ($1,635,706) 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 ($3,532,207),
RMB12,114,000 ($1,461,279) and RMB691,000 ($83,353), respectively, and Yantai
and Dnon Tech had combined capital expenditures for the same periods of
RMB27,881,000 ($3,363,209), RMB13,392,000 ($1,615,440) and RMB7,366,000
($888,540), respectively. The Company's consolidated pro forma capital
expenditures were RMB8,057,000 ($971,893) for the year ended December 31, 1996
and RMB8,197,000 ($989,000) for the six months ended June 30, 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.
35
<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 one of the largest
independent manufacturers of deflection yokes 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, which is based upon information compiled in a recent
report by a specialty glass manufacturer (the "Report"), provides information
about the total world-wide demand for television sets and computer monitors and
the total world-wide production of CPTs and CDTs in 1996. The Company is not
relying upon the compiler of the Report as an "expert" (within the meaning of
sections 7 and 11 of the Securities Act), but the Company believes that the
information compiled in the Report is accurate.
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>
According to forecasts in the Report, which the Company believes are
reasonable, 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 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%. If the Company retains its current presence in China as a
manufacturer of deflection yokes, it would expect to participate in China's
overall growth in deflection yoke production. The following table, which is
based upon
36
<PAGE>
forecasts in the Report that the Company believes are reasonable, shows
expected total world-wide demand for television sets and monitors and
world-wide production of CPTs and CDTs in 2000:
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>
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 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.
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 June 30, 1997 of
approximately $35.0 million, compared to backlog at June 30, 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"
CPT 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
37
<PAGE>
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.
38
<PAGE>
Backlog
At June 30, 1996 and 1997, the amounts of backlog of firm orders were
approximately $20.0 million and $35.0 million, respectively. Substantially all
the backlog at June 30, 1996 was filled by June 30, 1997, and the Company
expects to fill substantially all the backlog at June 30, 1997 by June 30,
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 36.0% 1,225,217 41.1%
Deflection yoke for 20" CPT ...... 1,957,800 35.1 1,238,362 41.6
Deflection yoke for 21" CPT:
(narrow) ........................ -- -- 102,708 3.4
(wide) ........................... 521,998 9.4 -- --
Deflection yoke for 25" CPT ...... 1,018,811 18.3 412,686 13.9
Deflection yoke for 14" CDT ...... 67,368 1.2 -- --
---------- ------ ---------- ------
Total ........................... 5,573,857 100.0% 2,978,973 100.0%
========== ====== ========== ======
</TABLE>
Historically, the Company's marketing and sales have been implemented
primarily through Pianzhuan Group. Deflection yokes sold in China 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 personnel, which, at June
30, 1997, numbered 12, compared to two at June 30, 1996, are generally made
under the Company's brand name. In the past, the Company conducted
41
<PAGE>
its sales primarily in conjunction with Daewoo; the Company's sales personnel
operated out of Daewoo's offices in Seoul, Korea and Daewoo resold the products
purchased from the Company throughout 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, such
as 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."
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
42
<PAGE>
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.
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
43
<PAGE>
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 for the Company. 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 by the Company 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.
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
44
<PAGE>
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-- Risk of
Obsolescence."
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 June 30, 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.
45
<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 Lianjie 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 63 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 Lianjie 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 was the head of research and development of Pianzhuan Group from
1989 until January 1996. 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. Mr. Li devotes all his business time
to the Company.
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.
Ms. Fan devotes approximately 75% of her business time to the Company.
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. Professor Hou devotes approximately 40%
of his business time to the Company.
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 Xian Jiaotong
University, People's Republic of China
46
<PAGE>
in 1970, a M.A. in Engineering from Xian Jiaotong University in 1981 and a M.A.
in Business from the University of Alberta, Canada. Mr. Li devotes
approximately 70% of his business time to the Company.
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. Since 1992, Ms. Xia has been a director and 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 West Trading Limited, a Hong Kong-based
trading company. From 1993 to 1995, Mr. To was with the Hong Kong trading
concern, Benforce International Limited. Mr. To is Mr. Du's son.
Li Wenya has been the Secretary of the Company since its inception in
January 1996. Ms. Li was the Director of the General Manager's Office of
Pianzhuan Group from July 1993 until January 1996. Ms. Li received a B.S. in
shipping technology from Harbin Ship Building Engineering Institute in 1993.
Ms. Li devotes all her business time to the Company.
Robert Adler has been nominated as a Director of the Company, and is
expected to become a director following the consummation of this 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 this 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 has an Audit Committee and a Compensation
Committee. The Audit Committee, the members of which will be independent
directors, oversees 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, reviews and approves the compensation of executives of
the Company and makes 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. In addition, the Company set aside
$1,737 for pension and other similar benefits for its directors and executive
officers during 1996.
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.
47
<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, which is controlled by Ming Cui and
Mary Xia; Ming Cui and Mary Xia disclaim 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
this Offering. See "Certain Relationships and Related Transactions."
48
<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. 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 sales in China and its marketing
activities. In 1996 and the six months ended June 30, 1997, the Company
effected $13,451,068 and $12,089,672 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.
49
<PAGE>
The subsidiaries of the Company and the members of Pianzhuan Group 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
arrangements, 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. There can be no assurance that such
agreements will be enforced by a Chinese court. See "Risk Factors--Risks
Relating to China."
During 1996 and the six months ended June 30, 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.
<TABLE>
<CAPTION>
Six Months Ended
1996 June 30, 1997
---------- -----------------
<S> <C> <C>
Yongxin and Daming ......... $428,107 $277,026
Yantai and Dnon Tech ...... $ 13,524 $ 35,911
</TABLE>
The Company believes that the terms of such services were at least as
favorable to Yongxin, Daming, Yantai and Dnon Tech as could have been obtained
from unaffiliated third parties.
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 six months ended June 30, 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 $11,472,742 and $701,982, respectively, and Pianzhuan Group paid
the Company and its subsidiaries $13,965,285 and $231,420, respectively.
Amounts paid by the Company and its subsidiaries to Pianzhuan Group primarily
reflect purchases of enameled copper wire and, to a lesser extent, machinery
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 and, to a lesser extent, machinery sold by Daming. The Company believes
that the terms of such transactions were at least as favorable to the Company
as could have been obtained from unaffiliated third parties.
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 June 30, 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 six months
ended June 30, 1997, the Company's sales to Daewoo were $13,633,307 and
$6,542,456, 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 purchases from Yantai, Daewoo provides on-the-job training at
its facilities in Korea to certain employees of Yantai
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to ensure that the quality of the products manufactured by Yantai will meet
Daewoo's specifications and requirements. Yantai does not charge Daewoo for the
work performed by Yantai employees and Daewoo does not charge Yantai for
training Yantai's employees.
During 1996 and the six months ended June 30, 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:
<TABLE>
<CAPTION>
Six Months Ended
1996 June 30, 1997
------------ -----------------
<S> <C> <C>
Amounts paid by the Company and its subsidiaries to:
Gold ............................................. $ 629,106 $ 205,433
Amounts paid to the Company and its subsidiaries by:
Daewoo ............................................. 9,526,000 4,116,584
</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. The Company believes that the terms of these transactions were at least
as favorable to the Company as could have been obtained from unaffiliated third
parties.
In 1996 and 1997, Mr. To purchased 4,559,000 shares of Common Stock for
$3,321,000, and 288,000 shares of Common Stock were issued to FPRI at par
value, for financial advisory services to the Company in connection with this
Offering.
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 165% of the initial public offering price in
consideration for financial advisory services to the Company in connection with
this Offering.
In connection with this Offering, Mr. 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 165% of the initial public offering price in consideration for
financial advisory services to the Company in connection with this Offering.
In connection with this Offering, Mr. Fred Shinagel will receive options
to purchase 50,000 shares of Common Stock for a purchase price equal to 120% of
the initial public offering price, and Mr. Peter Coker and Mr. Michael Stein
each will receive options to purchase 2,500 shares of Common Stock for a
purchase price equal to 165% of the initial public offering price. Each of Mr.
Shinagel, Mr. Coker and Mr. Stein will receive such options in consideration
for financial advisory services to the Company in connection with this
Offering. Neither Mr. Shinagel, Mr. Coker nor Mr. Stein has any other
relationship or affiliation with the Company or its management.
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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 & 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
Representatives 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 in China on the repatriation of
dividends by the Company's subsidiaries. In addition, 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.
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 depends on the receipt of dividends or other payments from its
52
<PAGE>
subsidiaries and its 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 currency and other regulatory
restrictions.
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 Representatives' 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 Representatives. 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 Representatives,
subject to limited exceptions. The Company has been advised by the
Representatives that they have no general policy with respect to granting
releases from such lockup agreements. The Representatives may, in their
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 Representatives' 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.
53
<PAGE>
TAXATION
The following is a summary of certain anticipated material U.S. federal
income, British Virgin Islands and China tax consequences of an investment in
the Common Stock. The summary represents the opinion of Proskauer Rose LLP,
insofar as it relates to U.S. federal income tax law, Harney Westwood &
Riegels, insofar as it relates to British Virgin Islands tax law and Jun He Law
Office, insofar as it relates to China tax law. The summary 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, or an estate or trust subject to U.S. federal income tax on all of
its income regardless of source) making an investment in the Common Stock (a
"U.S. Investor"). For taxable years beginning after December 31, 1996, a trust
will be a U.S. person only if (i) a court within the United States is able to
exercise primary supervision over its administration and (ii) one or more
United States persons have the authority to control all of its substantial
decisions. 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, and will be taxed at the lowest rates applicable
to capital gains if the U.S. Investor has held the Common Stock for more than
eighteen months at such time.
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
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<PAGE>
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.- related
gross income subject to the PHC tax.
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 in its first taxable year 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 ("CFCs") 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 applies
only 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). 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. Even if the
Company or any of its subsidiaries were ever to become a CFC, however, the
rules referred to above would apply only with respect to such 10% Shareholders
who are U.S. persons.
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
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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.
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 U.S.
Investor'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.
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.
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.
Backup withholding may be avoided by the holder of 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 to 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.
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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 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
57
<PAGE>
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.
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.
58
<PAGE>
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. and Value Investing Partners, Inc. are acting as representatives
(the "Representatives"), have severally agreed to purchase from the Company the
aggregate number of shares of Common Stock set forth opposite their names
below:
<TABLE>
<CAPTION>
Underwriters Number of Shares
- -------------------------------------- -----------------
<S> <C>
Barington Capital Group, L.P. ......
Value Investing Partners, Inc. ......
Total ........................... 4,000,000
==========
</TABLE>
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 Representatives have informed the Company that they do not expect to sell
any Common Stock to any account over which they have discretionary authority.
The Representatives have 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 Representatives 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 Representatives 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
Representatives' 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 Representatives. In
addition,
59
<PAGE>
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 Representatives. Notwithstanding the foregoing,
any shareholder may sell shares of Common Stock commencing (i) 12 months after
the effective date of this Offering in the event that 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 date of such sale, and such sale is
completed 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. The Representatives may, in their 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 Representatives (or their designated
affiliates) the Representatives' Options to purchase up to 330,000 shares of
Common Stock at a price equal to $.001 per Option. The Representatives' 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 165% of
the initial public offering price. The Representatives' Options are not
redeemable by the Company under any circumstances. Neither the Representatives'
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 Representatives' Options, except that they may be assigned, in
whole or in part, to any successor, officer or partner of the Representatives
(or to officers or partners of any such successor or partner). The
Representatives' 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 Representatives' 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
Representatives' Options, except that Advisor Options to purchase 50,000 shares
of Common Stock will have an initial per share exercise price equal to 120% of
the initial public offering price. In addition to the 4,000,000 shares of
Common Stock offered by this Prospectus, the Registration Statement of which
this Prospectus is a part also covers the Representatives' Options and the
Advisor Options, and the shares of Common Stock underlying such 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 among the Representatives and the Company. 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.
60
<PAGE>
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. Although all
material terms of the respective contracts or other documents are set forth
with such statements, each statement is qualified in its entirety by reference
to the relevant exhibit.
Upon the effectiveness of the Registration Statement with the Commission,
the Company will become subject to the informational requirements of the
Exchange Act as they apply to a foreign private issuer, and in accordance
therewith will be required to file reports and other information with the
Commission. As a foreign private issuer, the Company is exempt under the
Exchange Act from, among other things, the rules prescribing the furnishing and
content of proxy statements and annual reports to shareholders and the
short-swing profit recovery provisions set forth in section 16 of the Exchange
Act. 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 Citicorp 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 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.
61
<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 in 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 Six Months Ended June 30, 1997 ............... F-45
Consolidated Balance Sheets as of December 31, 1996 and June 30, 1997 .................. F-46
Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1997 ............ F-47
Consolidated Statements of Changes in Investors' Equity for the Period from January 3,
1996 (Date
of Incorporation) to December 31, 1996 and for the Six Months Ended June 30, 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 Six Months Ended June 30, 1996 and 1997 ......... F-52
Combined Balance Sheets as of December 31, 1996 and June 30, 1997 ..................... F-53
Combined Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1997 ...... F-54
Combined Statements of Changes in Investors' Equity for the Year Ended December 31, 1996
and for the Six Months Ended June 30, 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>
ARTHUR ANDERSEN
-----------------------
Arthur Andersen & Co
Certified Public
Accountants
-----------------------
25/F Wing On Centre
111 Connaught Road
Central
Hong Kong
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.
/S/ ARTHUR ANDERSEN & CO.
Hong Kong,
August 15, 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 1,078
Accounts receivable ................................. 15,713 1,895
Due from related companies ........................... 31,926 3,851
Inventories .......................................... 21,065 2,541
Prepayments and other current assets ............... 1,592 192
Value-added tax credit .............................. 4,575 552
------- -------
Total current assets .............................. 83,806 10,109
Property, plant and equipment, net ..................... 6,337 764
------- -------
Total assets .................................... 90,143 10,873
======= =======
LIABILITIES AND INVESTORS' EQUITY
Current liabilities:
Short-term bank loans .............................. 14,749 1,779
Accrued expenses .................................... 6,072 732
Value-added tax payable .............................. 2,401 290
Income taxes payable ................................. 3,628 438
Deferred taxation .................................... 669 81
------- -------
Total current liabilities ........................ 27,519 3,320
Negative goodwill ....................................... 18,369 2,215
Deferred taxation ....................................... 981 118
------- -------
Total liabilities ................................. 46,869 5,653
------- -------
Minority interest ....................................... 15,718 1,896
------- -------
Investors' equity:
Common stock, par value US$0.01 each, 30,000,000 shares
authorized; 4,850,000 shares outstanding ............ 398 48
Additional paid-in capital ........................... 27,158 3,276
------- -------
Total investors' equity ........................... 27,556 3,324
------- -------
Total liabilities and investors' equity ......... 90,143 10,873
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on June 30, 1997 of US$1.00 = RMB8.2900. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 30, 1997 or at any other certain
rate.
F-4
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 3, 1996 (DATE OF INCORPORATION) TO
DECEMBER 31, 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1996
---------- --------
RMB US$
<S> <C> <C>
Cash flows from investing activities:
Acquisition of subsidiaries, net of cash acquired ...... (18,621) (2,246)
Cash flows from financing activities:
Contributions from investors ........................... 27,556 3,324
--------- --------
Net change in cash .................................... 8,935 1,078
--------- --------
Cash, beginning of period .............................. -- --
--------- --------
Cash, end of period .................................... 8,935 1,078
========= ========
</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 June 30, 1997 of US$1.00 = RMB8.2900. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 30, 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 events, the Company had 4,850,000 shares of common stock
issued and outstanding as of July 2, 1997. Out of the total, 291,000 shares of
common stock issued to First Pacific Rim (B.V.I.) Inc. were for financial
advisory services performed in connection with the Company's planned initial
public offering (the "Offering") (see Note 17).
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 RMB11,937,600). 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$1,499,000) with
unpaid capital of RMB473,000 (equivalent to approximately US$57,000).
Subsequent to December 31, 1996, all unpaid capital had been contributed by the
joint venture partners.
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 RMB17,409,000); 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:
<TABLE>
<CAPTION>
Building ........................ 25 years
<S> <C>
Machinery and equipment ...... 10 years
Motor vehicles ............... 5 years
</TABLE>
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 RMB43,716,000. 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 RMB18,369,000 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, 1996:
Unaudited
<TABLE>
<CAPTION>
1996 1996
RMB'000 US$'000
<S> <C> <C>
Net sales ....................................... 143,684 17,332
Net income .................................... 31,625 3,815
Net income per share ........................... 6.52 0.79
Weighted average number of shares ('000s) ...... 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$'000
<S> <C> <C>
Finished goods ...... 21,065 2,541
====== =====
</TABLE>
F-10
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1996
--------- --------
RMB'000 US$'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.
As of December 31, 1996, certain machinery and equipment with a net book
value of approximately RMB1,544,000 were pledged to secure a short-term bank
loan of the Joint Ventures.
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 and certain
machinery and equipment of the Joint Ventures. 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$1.00. During the period, the Company issued 48,000 shares of
US$1.00 each which were fully paid up for cash.
During the period, other than the capital contribution by investors as of
the inception of the Company, there were no transactions impacting investors'
equity between the date of incorporation and December 31, 1996.
11. DEDICATED CAPITAL OF JOINT VENTURES
According to the rules and regulations for Sino-foreign equity joint
venture enterprises, when distributing net income of each year, the Joint
Ventures shall set aside a portion of their net income as reported in their
statutory accounts for the statutory general reserve fund and enterprise
expansion fund, such portion being determined at the discretion of the Boards
of Directors. These reserves cannot be used for purposes other than those for
which they are created and are not distributable as cash dividends.
F-11
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. DISTRIBUTION OF NET INCOME OF JOINT VENTURES
According to the Articles of Association of the Joint Ventures, the Joint
Ventures may distribute their net income as reported in the statutory accounts,
after providing for discretionary dedicated capital (see Note 9), to their
investors according to their respective equity interest. The net income of the
Joint Ventures reported in the statutory accounts, however, differs from the
corresponding amounts reported under US GAAP.
13. RELATED PARTY TRANSACTIONS
Summary of the related party transactions of the Joint Ventures for the
year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
RMB'000 US$'000
<S> <C> <C>
Sales to a related company .......................................... 125,770 15,171
Purchase from a related company .................................... 84,993 10,252
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.
Xianyang Pianzhuan provided sales, administrative, and research and
development services to the Joint Ventures and paid the remuneration and
compensation of the Joint Ventures' directors and officers. Xianyang Pianzhuan
allocated all the costs incurred for the Joint Ventures and other related
companies in the form of management fees based on the sales amount of the
respective companies relative to the total sales amounts of all such companies.
The Company's directors are of the opinion that the above method of allocation
is reasonable and that the costs that would have been incurred if the Joint
Ventures were operated as an unaffiliated entity would approximate the
management fees charged by Xianyang Pianzhuan.
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 joined 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 to a state- sponsored retirement plan at
approximately 18% of the basic salaries of the staff through a related company.
The Joint Ventures have no future obligations for the pensions or any
post-retirement benefits beyond the annual contributions made. The PRC
government 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 RMB405,000 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 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>
ARTHUR ANDERSEN
-----------------------
Arthur Andersen & Co
Certified Public
Accountants
-----------------------
25/F Wing On Centre
111 Connaught Road
Central
Hong Kong
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.
/S/ ARTHUR ANDERSEN & CO.
Hong Kong,
August 15, 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 17,332
--------- --------- --------- ---------
Cost of goods sold ........................ (51,798) (69,977) (96,350) (11,622)
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) (12,305)
--------- --------- --------- ---------
Income before income taxes ............... 14,449 20,871 41,672 5,027
Provision for income taxes ............... -- (2,077) (7,411) (894)
--------- --------- --------- ---------
Net income .............................. 14,449 18,794 34,261 4,133
========= ========= ========= =========
</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 June 30, 1997 of US$1.00 = RMB8.2900. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 30, 1997 or at any other certain
rate.
F-16
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1996 1996
-------- --------- -------
RMB RMB US$
<S> <C> <C> <C>
ASSETS
Current assets: .................................
Cash .......................................... 16,898 7,274 877
Accounts receivable ........................... 4,504 15,713 1,895
Due from a joint venture partner ............... 14,928 -- --
Due from related companies ..................... -- 31,926 3,851
Inventories .................................... 11,886 13,915 1,679
Prepayments and other current assets ......... 125 1,592 192
Value-added tax credit ........................ -- 4,575 552
------- -------- -------
Total current assets ........................ 48,341 74,995 9,046
Property, plant and equipment, net ............... 34,199 31,683 3,822
Value-added tax credit ........................... 6,235 -- --
------- -------- -------
Total assets ................................. 88,775 106,678 12,868
======= ======== =======
LIABILITIES AND INVESTORS' EQUITY
Current liabilities:
Short-term bank loans ........................ 15,135 14,749 1,779
Due to related companies ..................... 17,111 -- --
Accrued expenses .............................. 2,826 6,072 732
Income taxes payable ........................... 961 3,628 438
Value-added tax payable ........................ -- 2,401 290
Deferred taxation .............................. -- 669 81
Dividend payable .............................. 8,210 -- --
------- -------- -------
Total current liabilities ..................... 44,243 27,519 3,320
Deferred taxation .............................. 615 981 118
------- -------- -------
Total liabilities ........................... 44,858 28,500 3,438
------- -------- -------
Investors' equity: ..............................
Capital ....................................... 30,335 30,335 3,659
Dedicated capital .............................. 7,900 15,020 1,812
Retained earnings .............................. 5,682 32,823 3,959
------- -------- -------
Total investors' equity ..................... 43,917 78,178 9,430
------- -------- -------
Total liabilities and investors' equity ...... 88,775 106,678 12,868
======= ======== =======
</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 June 30, 1997 of US$1.00 = RMB8.2900. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 30, 1997 or at any other certain
rate.
F-17
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------------------------------
1994 1995 1996 1996
------------- ------------ ------------- ------------
RMB RMB RMB US$
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................... 14,449 18,794 34,261 4,133
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) (1,352)
Due from a joint venture partner .................. (1,435) (8,281) 14,928 1,800
Due from related companies ........................ 5,692 -- (31,926) (3,851)
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) (2,064)
Accrued expenses .................................... 1,951 385 3,246 391
Income taxes payable .............................. (255) 961 2,667 322
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) (990)
--------- -------- --------- --------
Net cash provided by (used in) financing
activities ....................................... 7,683 (8,000) (8,596) (1,037)
--------- -------- --------- --------
Net increase (decrease) in cash ..................... 6,374 (159) (9,624) (1,161)
Cash, beginning of year .............................. 10,683 17,057 16,898 2,038
--------- -------- --------- --------
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 June 30, 1997 of US$1.00 = RMB8.2900. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 30, 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
RMB473,000. Subsequent to December 31, 1996, all unpaid capital had been
contributed by the joint venture partners.
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
RMB17,409,000); 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
[bullet] Xianyang Pianzhuan will lease certain factory premises to Daming
for a monthly rental payment of RMB10,368.
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)
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:
<TABLE>
<CAPTION>
Building ........................ 25 years
<S> <C>
Machinery and equipment ...... 10 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.
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 6,376 769
Deferred ........................ -- 615 1,035 125
-- ------ ------ ---
Provision for income taxes ...... -- 2,077 7,411 894
== ====== ====== ===
</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$'000
<S> <C> <C> <C>
Raw materials ......... 913 -- --
Work-in-progress ...... 1,528 -- --
Finished goods ......... 9,445 13,915 1,679
------- ------- ------
Total .................. 11,886 13,915 1,679
======= ======= ======
</TABLE>
F-24
<PAGE>
XIANYANG DAMING ELECTRONIC CO., LIMITED AND
XIANYANG YONGXIN ELECTRONIC CO., LIMITED
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1995 1996 1996
------------ ------------ --------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C>
Building ........................... 9,430 9,430 1,138
Machinery and equipment ............ 29,203 28,625 3,453
Motor vehicles ..................... 194 194 23
-------- -------- ------
38,827 38,249 4,614
Less: Accumulated depreciation ...... (4,628) (6,566) (792)
-------- -------- ------
Net book value ..................... 34,199 31,683 3,822
======== ======== ======
</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 annual rental of RMB124,000. The Companies'
directors believe that the rental costs approximate fair market rental.
As of December 31, 1996, certain machinery and equipment with a net book
value of approximately RMB1,544,000 were pledged to secure a short-term bank
loan of the Companies.
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 and 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 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 64,930 106,604 12,859
-- a joint venture partner ......... 30,276 8,451 -- --
Purchase from a related company ...... 45,242 56,821 84,993 10,252
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 US$129,800).
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)
Xianyang Pianzhuan provided sales, administrative, and research and
development services to the Companies and paid the remuneration and
compensation of the Companies' directors and officers. Xianyang Pianzhuan
allocated all the costs incurred for the Companies and other related companies
in the form of management fees based on the sales amount of the respective
companies relative to the total sales amounts of all such companies. The
Companies' directors are of the opinion that the above method of allocation is
reasonable and that the costs that would have been incurred if the Companies
were operated as an unaffiliated entity would approximate the management fees
charged by Xianyang Pianzhuan.
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
joined 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 to a state-sponsored retirement plan at approximately
18% of the basic salaries of the staff through a related company. The Companies
have no future obligations for pensions or any post-retirement benefits beyond
the annual contributions made. The PRC government 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 13,091
Overseas ............
-- Korea ............ 54,336 57,014 35,085 4,232
-- Japan ............ -- -- -- --
-- Singapore ...... -- -- 73 9
------- ------- -------- -------
Total overseas ...... 54,336 57,014 35,158 4,241
------- ------- -------- -------
Total ............... 68,789 96,713 143,684 17,332
======= ======= ======== =======
</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$'000
<S> <C> <C> <C> <C>
Deflection yokes ...... 68,789 96,713 124,518 15,020
Machines ............... -- -- 19,166 2,312
------- ------- -------- -------
Total .................. 68,789 96,713 143,684 17,332
======= ======= ======== =======
</TABLE>
Analysis of operating income by products is as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------------------
1994 1995 1996 1996
--------- --------- --------- --------
RMB'000 RMB'000 RMB'000 US$'000
<S> <C> <C> <C> <C>
Deflection yokes ...... 16,138 24,085 37,584 4,534
Machines ............... -- -- 5,125 618
------- ------- ------- ------
Total .................. 16,138 24,085 42,709 5,152
======= ======= ======= ======
</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 12,868
Machines ............... -- -- --
------- -------- -------
Total .................. 88,775 106,678 12,868
======= ======== =======
</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>
ARTHUR ANDERSEN
-----------------------
Arthur Andersen & Co
Certified Public
Accountants
-----------------------
25/F Wing On Centre
111 Connaught Road
Central
Hong Kong
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.
/S/ ARTHUR ANDERSEN & CO.
Hong Kong,
August 15, 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 10,417
-- --------- --------- --------
Cost of goods sold ........................ -- (39,230) (74,737) (9,015)
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) (9,613)
-- --------- --------- --------
(Loss) Income before income taxes ......... -- (1,452) 6,667 804
Provision for income taxes
-- deferred tax ........................ -- 165 205 25
-- --------- --------- --------
Net (loss) income ........................ -- (1,287) 6,872 829
== ========= ========= ========
</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 June 30, 1997 of US$1.00 = RMB8.2900. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 30, 1997 or at any other certain
rate.
F-31
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------------
1995 1996 1996
------------ -------- ------
RMB RMB US$
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ............................................. 4,863 4,946 597
Accounts receivable .............................. -- 127 15
Due from joint venture partners .................. 4,318 8,255 996
Inventories .................................... 9,766 15,450 1,864
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 4,197
Property, plant and equipment, net ............ 38,913 42,210 5,092
Other assets .................................... 1,620 1,408 170
Deferred tax assets ........................... 165 370 45
-------- ------- ------
Total assets ................................. 60,658 78,783 9,504
======== ======= ======
LIABILITIES AND INVESTORS' EQUITY
Current liabilities:
Short-term bank loans ........................... 5,664 13,560 1,636
Accounts payable ................................. 670 2,190 264
Due to a joint venture partner .................. 14,846 8,884 1,072
Due to related companies ........................ 3,361 8,446 1,019
Accrued expenses .............................. 702 1,056 127
-------- ------- ------
Total liabilities .............................. 25,243 34,136 4,118
-------- ------- ------
Investors' equity: ..............................
Capital .......................................... 36,702 39,062 4,712
Dedicated capital .............................. -- 610 74
(Accumulated deficit) Retained earnings ......... (1,287) 4,975 600
-------- ------- ------
Total investors' equity ........................ 35,415 44,647 5,386
-------- ------- ------
Total liabilities and investors' equity ...... 60,658 78,783 9,504
======== ======= ======
</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 June 30, 1997 of US$1.00 = RMB8.2900. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 30, 1997 or at any other certain
rate.
F-32
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------------------------
1994 1995 1996 1996
------------- ------------ ---------- ---------
RMB RMB RMB US$
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income .................................... -- (1,287) 6,872 829
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) (686)
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) (719)
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) (326)
--------- -------- ------- -----
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 2,360 285
--------- -------- ------- -----
Net cash provided by financing activities ......... 26,304 16,062 10,256 1,237
--------- -------- ------- -----
Net increase in cash ................................. 1,997 2,866 83 10
Cash, beginning of year .............................. -- 1,997 4,863 587
--------- -------- ------- -----
Cash, end of year .................................... 1,997 4,863 4,946 597
========= ======== ======= =====
Supplementary information
Interest received ................................. -- 53 42 5
Interest paid ....................................... -- 581 1,646 199
</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 June 30, 1997 of US$1.00 = RMB8.2900. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 30, 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 RMB
<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 accompanying 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 ......... 5,514 9,128 1,101
Work-in-progress ...... 1,028 561 68
Finished goods ......... 3,162 5,479 661
Consumable ............ 62 282 34
------ ------- ------
Total .................. 9,766 15,450 1,864
====== ======= ======
</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 4,511
Office equipment ..................... 12 260 31
Furniture and fixtures ............... 340 372 45
Motor vehicles ..................... 756 1,306 158
-------- -------- ------
41,185 47,219 5,696
Less: Accumulated depreciation ...... (2,370) (6,439) (777)
-------- -------- ------
38,815 40,780 4,919
Add: Construction-in-progress ...... 98 1,430 173
-------- -------- ------
Net book value ..................... 38,913 42,210 5,092
======== ======== ======
</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 9,392
-- a related company ................................. 1,207 8,223 992
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 ................................. 16 359 43
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>
Xianyang Pianzhuan provided sales, administrative, and research and
development services to the Companies and paid the remuneration and
compensation of the Companies' directors and officers. Xianyang Pianzhuan
allocated all the costs incurred for the Companies and other related companies
in the form of management fees based on the sales amount of the respective
companies relative to the total sales amounts of all such companies. The
Companies' directors are of the opinion that the above method of allocation is
reasonable and that the costs that would have been incurred if the Companies
were operated as an unaffiliated entity would approximate the management fees
charged by Xianyang Pianzhuan.
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
joined 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. The Companies are required to make
specific contributions to a state-sponsored retirement plan at approximately
18% of the basic salaries of the staff through a related party. The Companies
have no future obligations for pensions or any post-retirement benefits beyond
the annual contributions made. The PRC government is 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.
F-41
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS -- (Continued)
14. OBLIGATION AND COMMITMENTS (Continued)
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.
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 9,392
The PRC ...... 1,209 8,499 1,025
------- ------- -------
Total ......... 39,997 86,362 10,417
======= ======= =======
</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$'000
<S> <C> <C> <C>
Korea Daewoo ............ 38,788 77,863 9,392
A related company ...... 1,207 8,223 992
Others .................. 2 276 33
------- ------- -------
Total .................. 39,997 86,362 10,417
======= ======= =======
</TABLE>
Analysis of sales by products is as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------
1995 1996 1996
--------- --------- --------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C>
Deflection yokes ......... 38,788 77,863 9,392
Enameled copper wire ...... 1,209 8,499 1,025
------- ------- -------
Total ..................... 39,997 86,362 10,417
======= ======= =======
</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$'000
<S> <C> <C> <C>
Deflection yokes ......... 800 7,642 922
Enameled copper wire ...... (160) 1,142 137
------ ----- ------
Total ..................... 640 8,784 1,059
====== ===== ======
</TABLE>
F-42
<PAGE>
Analysis of depreciation expenses by products is as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
--------------------------------
1995 1996 1996
--------- --------- --------
RMB'000 RMB'000 US$'000
<S> <C> <C> <C>
Deflection yokes ............ 1,913 3,308 399
Enameled copper wire ...... 448 761 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 7,528
Enameled copper wire ...... 13,956 16,377 1,975
------ ------ -----
Total ..................... 60,658 78,783 9,503
====== ====== =====
</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 RMB22,383,000) and
US$2,800,000 (equivalent to approximately RMB23,212,000), respectively.
F-43
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
(FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY LIMITED")
INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF
JUNE 30, 1997
F-44
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC. (FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY
LIMITED")
CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(Amounts in thousands except per share and share data)
(Unaudited)
<TABLE>
<CAPTION>
RMB US$
<S> <C> <C>
Sales ............................................................... 111,443 13,443
--------- ---------
Cost of goods sold ................................................ (80,775) (9,744)
Selling and administrative expenses ................................. (3,356) (405)
Interest expenses, net ............................................. (2,363) (285)
Other income, net ................................................... 2,102 254
--------- ---------
Total costs and expenses .......................................... (84,392) (10,180)
--------- ---------
Income before income taxes .......................................... 27,051 3,263
Provision for income taxes .......................................... (5,434) (655)
--------- ---------
Income after income taxes .......................................... 21,617 2,608
Minority interest ................................................... (5,333) (643)
--------- ---------
Net income ......................................................... 16,284 1,965
========= =========
Pro forma net income per common share .............................. 3.36 0.41
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 June 30, 1997 of US$1.00 = RMB8.2900. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on June 30, 1997 or at any
other certain rate.
F-45
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC. (FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY
LIMITED")
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND JUNE 30, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
------------------- -------------------
1996 1996 1997 1997
-------- -------- --------- -------
RMB US$ RMB US$
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash ................................................... 8,935 1,078 9,758 1,177
Accounts receivable .................................... 15,713 1,895 15,752 1,900
Due from related companies ........................... 31,926 3,851 71,502 8,625
Inventories .......................................... 21,065 2,541 6,036 728
Prepayments and other current assets .................. 1,592 192 1,746 211
Value-added tax credit ................................. 4,575 552 4,575 552
------- ------- -------- -------
Total current assets ................................. 83,806 10,109 109,369 13,193
Property, plant and equipment, net ..................... 6,337 764 5,901 712
------- ------- -------- -------
Total assets ....................................... 90,143 10,873 115,270 13,905
======= ======= ======== =======
LIABILITIES AND INVESTORS' EQUITY
Current liabilities:
Short-term bank loans ................................. 14,749 1,779 12,436 1,500
Accrued expenses ....................................... 6,072 732 8,292 1,000
Value-added tax payable .............................. 2,401 290 8,801 1,062
Income taxes payable ................................. 3,628 438 6,924 835
Deferred taxation .................................... 669 81 669 81
------- ------- -------- -------
Total current liabilities ........................... 27,519 3,320 37,122 4,478
Negative goodwill ....................................... 18,369 2,215 17,450 2,105
Deferred taxation ....................................... 981 118 1,229 148
------- ------- -------- -------
Total liabilities .................................... 46,869 5,653 55,801 6,731
------- ------- -------- -------
Minority interest ....................................... 15,718 1,896 15,629 1,885
------- ------- -------- -------
Investors' equity:
Common stock, par value US$0.01 each, 30,000,000
shares authorized; 4,850,000 shares outstanding ...... 398 48 402 49
Additional paid-in capital ........................... 27,158 3,276 27,170 3,277
Retained earnings .................................... -- -- 16,268 1,963
------- ------- -------- -------
Total investors' equity .............................. 27,556 3,324 43,840 5,289
------- ------- -------- -------
Total liabilities and investors' equity ............ 90,143 10,873 115,270 13,905
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (RMB) into United States dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on June 30, 1997 of US$1.00 = RMB8.2900. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 30, 1997 or at any other certain
rate.
F-46
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC. (FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY
LIMITED")
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
RMB US$
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ 16,284 1,965
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of property, plant and equipment ......... 436 52
Amortization of negative goodwill ..................... (919) (110)
Provision for deferred taxation ........................ 248 30
Minority interest ....................................... 5,333 643
(Increase) decrease in assets:
Accounts receivable .................................... (39) (5)
Due from related companies .............................. (39,576) (4,774)
Inventories ............................................. 15,029 1,813
Prepayments and other current assets .................. (154) (19)
Increase (decrease) in liabilities:
Accrued expenses ....................................... 2,220 268
Value-added tax payable ................................. 6,400 772
Income taxes payable .................................... 3,296 397
-------- --------
Net cash provided by operating activities ............... 8,558 1,032
-------- --------
Cash flows from financing activities:
Repayment of short-term bank loans ..................... (2,313) (279)
Dividend paid to minority shareholders .................. (5,422) (654)
-------- --------
Net cash used in financing activities .................. (7,735) (933)
-------- --------
Net increase in cash .................................... 823 99
Cash beginning of period ................................. 8,935 1,078
-------- --------
Cash, end of period .................................... 9,758 1,177
======== ========
</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 June 30, 1997 of US$1.00 = RMB8.2900. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 30, 1997 or at any other certain
rate.
F-47
<PAGE>
ASIA ELECTRONICS HOLDING CO. LTD. (FORMERLY KNOWN AS "ASIA ELECTRIC COMPANY
LIMITED")
CONSOLIDATED STATEMENTS OF CHANGES IN INVESTORS' EQUITY
FOR THE PERIOD FROM JANUARY 3, 1996
(DATE OF INCORPORATION) TO DECEMBER 31, 1996 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Additional
paid-in Retained
Capital capital earnings Total
--------- ------------ ---------- -------
RMB RMB RMB RMB
<S> <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 ........................... -- -- 16,284 16,284
Capitalization issue of dividend ...... 16 -- (16) --
Repurchase of common stock ............ (12) 12 -- --
----- ------- ------- -------
Balance as of June 30, 1997 ............ 402 27,170 16,268 43,840
===== ======= ======= =======
</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 June 30, 1997 and the related interim consolidated
statements of income, cash flows and changes in investors' equity for the six
months ended June 30, 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 Xianyang Daming Electronic Co.,
Limited ("Daming") and Xianyang Yongxin Electronic Co., Limited ("Yongxin"),
both incorporated in the People's Republic of China, 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 RMB43,716,000. 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 RMB18,369,000 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 for the six months ended
June 30, 1996, as if the acquisition had occurred on January 1, 1996.
<TABLE>
<CAPTION>
For the six months
ended June 30, 1996
--------------------
RMB'000 US$'000
<S> <C> <C>
Net sales .................................... 53,756 6,484
Net income .................................... 9,246 1,115
Net income per share ........................... 1.91 0.23
Weighted average number of shares ('000s) ...... 4,850 4,850
</TABLE>
3. INVENTORIES
Inventories comprised:
<TABLE>
<CAPTION>
December 31, June 30,
--------------------- --------------------
1996 1996 1997 1997
--------- --------- --------- --------
RMB'000 US$'000 RMB'000 US$'000
<S> <C> <C> <C> <C>
Finished goods ...... 21,065 2,541 6,036 728
------ ----- ----- ---
Total ............... 21,065 2,541 6,036 728
====== ===== ===== ===
</TABLE>
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 income 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 net income per common share for
the period ended June 30, 1997.
F-50
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD.
AND YANTAI DAEWOO ELECTRONIC COMPONENTS CO., LTD.
INTERIM UNAUDITED COMBINED FINANCIAL STATEMENTS AS OF
JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30,
--------------------------------------------
1996 1997 1997
------------- ------------- ------------
<S> <C> <C> <C>
RMB RMB $
Sales .................................... 34,828 49,439 5,964
--------- --------- ---------
Cost of goods sold ........................ (30,911) (41,063) (4,953)
Selling and administrative expenses ...... (1,517) (2,356) (284)
Interest expenses, net .................. (728) (1,307) (158)
Other income, net ........................ 350 314 37
--------- --------- ---------
Total costs and expenses .................. (32,806) (44,412) (5,358)
--------- --------- ---------
Income before income taxes ............... 2,022 5,027 606
Provision for income taxes ............... 87 79 10
--------- --------- ---------
Net income .............................. 2,109 5,106 616
========= ========= =========
</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 June 30, 1997 of US$1.00 = RMB8.2900. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 30, 1997 or at any other certain
rate.
F-52
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD. AND YANTAI DAEWOO
ELECTRONIC COMPONENTS CO., LTD.
COMBINED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND JUNE 30, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
------------------ -----------------
1996 1996 1997 1997
-------- ------- -------- ------
RMB US$ RMB US$
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash .......................................... 4,946 597 6,223 751
Accounts receivable ........................... 127 15 186 22
Due from joint venture partners ............... 8,255 996 8,336 1,006
Inventories .................................... 15,450 1,864 14,939 1,802
Deposits ....................................... 4,033 486 -- --
Prepayments and other assets .................. 1,717 207 1,534 185
Prepaid value-added tax ........................ 267 32 -- --
------- ------ ------- ------
Total current assets ........................ 34,795 4,197 31,218 3,766
Property, plant and equipment, net ............ 42,210 5,092 48,087 5,801
Other assets .................................... 1,408 170 1,373 166
Deferred tax assets ........................... 370 45 449 54
------- ------ ------- ------
Total assets ................................. 78,783 9,504 81,127 9,787
======= ====== ======= ======
LIABILITIES AND INVESTORS' EQUITY
Current liabilities:
Short-term bank loans ........................ 13,560 1,636 7,250 875
Accounts payable .............................. 2,190 264 4,656 562
Due to joint venture partners .................. 8,884 1,072 9,395 1,133
Due to related companies ..................... 8,446 1,019 9,382 1,132
Accrued expenses .............................. 1,056 127 1,402 169
Value-added tax payable ........................ -- -- 639 77
Dividend payable .............................. -- -- 3,744 452
------- ------ ------- ------
Total liabilities ........................... 34,136 4,118 36,468 4,400
------- ------ ------- ------
Investors' equity:
Capital ....................................... 39,062 4,712 39,062 4,712
Dedicated capital .............................. 610 74 610 74
Retained earnings .............................. 4,975 600 4,987 601
------- ------ ------- ------
Total investors' equity ..................... 44,647 5,386 44,659 5,387
------- ------ ------- ------
Total liabilities and investors' equity ...... 78,783 9,504 81,127 9,787
======= ====== ======= ======
</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 June 30, 1997 of US$1.00 = RMB8.2900. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 30, 1997 or at any other certain
rate.
F-53
<PAGE>
XIANYANG DNON TECH SPECIAL ELECTRO TECHNIQUE CO., LTD. AND YANTAI DAEWOO
ELECTRONIC COMPONENTS CO., LTD.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended June 30,
------------------------------------------
1996 1997 1997
------------- ---------- -------------
RMB RMB US$
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................ 2,109 5,106 616
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation of property, plant and equipment ............ 1,929 2,320 280
Amortization of other assets ........................... 159 214 26
Deferred tax assets .................................... (87) (79) (10)
(Increase) decrease in assets:
Accounts receivable .................................... (112) (59) (7)
Due from joint venture partners ........................ (475) (81) (10)
Inventories ............................................. (5,730) 511 62
Deposits ................................................ -- 4,033 486
Prepayments and other assets ........................... (1,075) 183 22
Prepaid value-added tax ................................. (55) 267 32
Increase (decrease) in liabilities:
Accounts payable ....................................... 2,950 2,466 298
Due to joint venture partners ........................... (3,662) 511 61
Due to related companies ................................. 2,735 936 113
Accrued expenses ....................................... (100) 346 42
Value-added tax payable ................................. -- 639 77
-------- ------- --------
Net cash (used in) provided by operating activities (1,414) 17,313 2,088
-------- ------- --------
Cash flows from investing activities:
Acquisition of property, plant and equipment ............ (3,648) (8,197) (989)
Additions of other assets ................................. (9) (179) (22)
-------- ------- --------
Net cash used in investing activities .................. (3,657) (8,376) (1,011)
-------- ------- --------
Cash flows from financing activities:
Repayment of short-term bank loans ........................ 2,360 (6,310) (761)
Contributions from investors .............................. 600 -- --
Dividend paid ............................................. -- (1,350) (162)
-------- ------- --------
Net cash provided by (used in) financing activities ...... 2,960 (7,660) (923)
-------- ------- --------
Net (decrease) increase in cash ........................... (2,111) 1,277 154
Cash, beginning of period ................................. 4,863 4,946 597
-------- ------- --------
Cash, end of period ....................................... 2,752 6,223 751
======== ======= ========
</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 June 30, 1997 of US$1.00 = RMB8.2900. No representation
is made that the Renminbi amounts could have been, or could be, converted into
United States dollars at that rate on June 30, 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 SIX MONTHS ENDED JUNE 30, 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) ........................ -- -- 5,106 5,106
------- ---- -------- --------
Balance as of June 30, 1997 (unaudited) ...... 39,062 610 4,987 44,659
======= ==== ======== ========
</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 interim combined balance sheet of Xianyang Dnon Tech
Special Electro Technique Co., Ltd. and Yantai Daewoo Electronic Components
Co., Ltd., both incorporated in the People's Republic of China, as of June 30,
1997 and the related interim combined statements of income, cash flows and
changes in investors' equity for the six months ended June 30, 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:
<TABLE>
<CAPTION>
December 31, June 30,
--------------------- --------------------
1996 1996 1997 1997
--------- --------- --------- --------
RMB'000 US$'000 RMB'000 US$'000
<S> <C> <C> <C> <C>
Raw materials ......... 9,128 1,101 10,222 1,233
Work-in-progress ...... 561 68 277 33
Finished goods ......... 5,479 661 4,440 536
Consumables ............ 282 34 -- --
------- ------ ------- ------
Total .................. 15,450 1,864 14,939 1,802
======= ====== ======= ======
</TABLE>
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
<TABLE>
<CAPTION>
Page
-----------
<S> <C>
Prospectus Summary ................................. 3
Risk Factors ....................................... 8
Enforceability of Civil Liabilities and Certain
Foreign Issuer Considerations .................. 15
Financial Statements and Currency Presentation . 16
Use of Proceeds .................................... 17
Dilution .......................................... 18
Capitalization .................................... 19
Dividend Policy .................................... 19
Unaudited Pro Forma Consolidated
Financial Information ........................... 20
Selected Consolidated Financial Data of the
Company (Historical) ........................... 26
Selected Combined Financial Data of Yongxin
and Daming ....................................... 27
Selected Combined Financial Data of Yantai
and Dnon Tech ................................. 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ....................................... 29
Business .......................................... 36
Management .......................................... 44
Principal Shareholders .............................. 46
Certain Relationships and Related
Transactions .................................... 47
Capital Stock ....................................... 50
Shares Eligible for Future Sale ..................... 51
Taxation .......................................... 52
Underwriting ....................................... 57
Legal Matters ....................................... 59
Experts ............................................. 59
Additional Information .............................. 59
Index to Financial Statements ..................... F-1
</TABLE>
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.
VALUE INVESTING PARTNERS, INC.
September , 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.
<TABLE>
<S> <C>
SEC registration fee .................................... 13,085
NASD and NASDAQ fees .................................... 29,819
Accounting fees and expenses .............................. 300,000
Legal fees and expenses ................................. 300,000
Blue sky fees and expenses (including counsel fees) ...... 20,000
Printing and engraving expenses ........................... 100,000
Transfer agent's fees .................................... 1,500
Miscellaneous expenses .................................... 135,596
Total ................................................... 900,000
=========
</TABLE>
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 $3,321,000 and FPRI purchased 288,000 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 referrred to in the
Prospectus.
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
(a) Exhibits: Page
<S> <C>
-1.1 Form of Underwriting Agreement
-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 Pianzhuan Group, 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 Form of Employment Agreement 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 Form of Agreement of Extension of Loan Repayment among Daming,
Pianzhuan Group and the Construction Bank of China
10.13 License 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 Representatives' Options
10.16 Form of Advisor Options
10.17 Form of Agreement among the Company and the Members of Pianzhuan
Group
-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-5)
99.1 Representation of the Company concerning Foreign Language Documents
</TABLE>
- --------------
- - Previously filed.
* 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 deemed 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. Financial statements and information otherwise required by
Section 10(a)(3) of the Act need not be furnished, provided, that the
registrant includes in the prospectus, by means of a post-effective amendment,
financial statements required pursuant to this paragraph (4) and other
information necessary to ensure that all other information in the prospectus is
at least as current as the date of these financial statements.
(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.
II-3
<PAGE>
(6)(i) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus 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 deemed to be the initial bona fide offering thereof.
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 has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-1 and has duly caused this Amendment No. 1
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Xianyang, People's Republic of China, on this
15th day of August, 1997.
ASIA ELECTRONICS HOLDING CO. INC.
By: /s/ Du Qingsong*
----------------------------------
Du Qingsong
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment No.
1 Registration Statement has been signed by the following persons in their
capacities on August 15, 1997.
<TABLE>
<S> <C>
/s/ Du Qingsong* Chairman of the Board and Chief Executive
- ------------------------------------- Officer (Principal Executive Officer)
Du Qingsong
/s/ Li Lianjie* Vice Chairman of the Board and Chief
- ------------------------------------- Operating Officer
Li Lianjie
/s/ Mary Xia Authorized Representative in the United States,
- ------------------------------------- Director
Mary Xia
/s/ To Shing Hoi* Director
- -------------------------------------
To Shing Hoi
/s/ Fan Baiyan* Chief Financial Officer (Principal Accounting and
- ------------------------------------- Financial Officer)
Fan Baiyan
/s/ Hou Yibin* Director
- -------------------------------------
Hou Yibin
</TABLE>
* By Mary Xia, as Attorney-in-Fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------------- --------------------------------------------------------------------------- -----
<S> <C> <C>
-1.1 Form of Underwriting Agreement
-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 Pianzhuan Group, 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 Form of Employment Agreement 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------- -------------------------------------------------------------------- -----
<S> <C> <C>
10.12 Form of Agreement of Extension of Loan Repayment among Daming,
Pianzhuan Group and the Construction Bank of China
10.13 License 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 Representatives' Options
10.16 Form of Advisor Options
10.17 Form of Agreement among the Company and the Members of Pianzhuan
Group
-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-5)
99.1 Representation of the Company concerning Foreign Language Documents
</TABLE>
- --------------
- - Previously filed.
* To be filed by amendment.
The Contract for XIANYANG DNON TECH
SPECIAL ELECTRO TECHNIQUE CO., LTD. USING
CHINESE AND ITALIAN INVESTMENT.
1994 . 1 . 14
<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 quingsong
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:___________ ITALIAN ________.
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-
1
<PAGE>
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
5,000,000.
Article 10
Investment contributed by the parties is USD 2,500,000 which will be the
registered capital of the joint venture company.
Of which: Party A shall pay USD 112,500 accounting for 45%, Party B shall
pay USD 250,000 accounting for 10%, Party C shall pay USD 500,000 accounting for
20%, Party D shall pay USD 625,000, 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
2
<PAGE>
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.
Article 13
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 14
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 15
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 16
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 17
The trade mark of the joint venture's products is decided by the board of
directors.
Chapter 8 The Board of Directors
Article 18
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 19
The board of directors are composed of 10 directors, of which 4 shall be
appointed by Party A, 3 by Party B, 1 by Party C, 2 by Party D.
3
<PAGE>
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 20
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 21
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 22
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 23
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 24
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 25
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 26
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 27
The technical data, specification and properties of the equipment provided
by Party C are of advanced international technical level. The final products of
the
4
<PAGE>
equipment should be up to the JIS and DIN.
Article 28
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 29
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 30
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 31
The joint venture company shall pay taxes in accordance with the
stipulations of Chinese laws and other relative regulations.
Article 32
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 33
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 34
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 35
Financial auditing 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 36
5
<PAGE>
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 37
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 38
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 39
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 40
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 41
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 42
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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 43
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 44
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 45
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 46
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.
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Chapter 19 Applicable Law
Article 47
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 48
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 49
During the arbitration, the contract shall be executed continuously by both
parties except for matters in dispute.
Chapter 21 Language
Article 50
The contract shall be written in Chinese version and in English
version. The Chinese version shall prevail.
Chapter 22 Effectiveness of the Contract and Miscellany
Article 51
The appendices drawn upon in accordance with the principles of this
contract are integral part of this contract, including: Rules of The Joint
Venture Company
Article 52
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 53
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 54
The contract is signed in XianYang, of China by the authorized
representatives of four parties on January 14, 1994.
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Party A: Party B:
Party C: Party D.
ASIA ELECTRONICS HOLDING CO. INC.
1997 Stock Option Plan
ARTICLE I.
PURPOSE
The purpose of this 1997 Stock Option Plan (the "Plan"), is to enhance
the profitability and value of Asia Electronics Holding Co. Inc. (the "Company")
for the benefit of its shareholders by enabling the Company to offer certain
employees and Consultants (as defined herein) of the Company and its
Subsidiaries (as defined herein) and non-employee directors of the Company stock
based incentives in the Company, thereby creating a means to raise the level of
stock ownership by employees, Consultants and non-employee directors in order to
attract, retain and reward such individuals and strengthen the mutuality of
interests between such individuals and the Company's shareholders.
ARTICLE II.
DEFINITIONS
For purposes of this Plan, the following terms shall have the following
meanings:
2.1. "Board" shall mean the Board of Directors of the Company.
2.2. "Cause" shall mean, with respect to a Participant's
Termination of Relationship, unless otherwise determined by the
Committee at grant, willful misconduct in connection with the
Participant's employment or consultancy or willful failure to perform
his or her employment or consultancy responsibilities in the best
interests of the Company (including, without limitation, breach by the
Participant of any provision of any employment, nondisclosure,
non-competition or other similar agreement between the Participant and
the Company), as determined by the Committee, which determination shall
be final, conclusive and binding. With respect to a Participant's
Termination of Directorship, Cause shall mean an act or failure to act
that constitutes "cause" for removal of a director under applicable
British Virgin Islands law.
2.3. "Change in Control" shall have the meaning set forth in
Article VIII.
2.4. "Committee" shall mean a committee or sub-committee of
the Board appointed from time to time by the Board or such committee,
as the case may be, which
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Committee shall include two or more directors who are non-employee
directors. Notwithstanding the foregoing, with respect to grants of
Options to non-employee directors and any action hereunder relating to
Options held by non-employee directors, the Committee shall mean the
Board. If and to the extent that no Committee exists which has the
authority to administer the Plan, the functions of the Committee shall
be exercised by the Board.
2.5. "Common Stock" means the Common Stock, $.01 par value per
share, of the Company.
2.6. "Consultant" means any advisor or consultant to the
Company or its Subsidiaries who is eligible pursuant to Article V to be
granted Options under this Plan.
2.7. "Disability" shall mean total and permanent disability,
as defined in Section 22(e)(3) of the Code.
2.8. "Effective Date" shall mean the effective date of the
Plan as defined in Article XI.
2.9. "Eligible Employee" shall mean the employees of the
Company and its Subsidiaries who are eligible pursuant to Article V to
be granted Options under this Plan.
2.10. "Exchange Act" shall mean the Securities Exchange Act of
1934.
2.11. "Fair Market Value" for purposes of this Plan, unless
otherwise required by any applicable provision of the Code or any
regulations issued thereunder, shall mean, as of any date, the last
sales price reported for the Common Stock on the applicable date (i) as
reported by the principal national securities exchange in the United
States on which it is then traded, or (ii) if not traded on any such
national securities exchange, as quoted on an automated quotation
system sponsored by the National Association of Securities Dealers. If
the Common Stock is not readily tradable on a national securities
exchange or any system sponsored by the National Association of
Securities Dealers, its Fair Market Value shall be set in good faith by
the Committee. For purposes of the grant of any Option, the applicable
date shall be the date for which the last sales price is available at
the time of grant.
2.12. "Good Reason" shall mean, with respect to a
Participant's Termination of Relationship, (i) if there is an
employment agreement between the Company or a Subsidiary and the
Participant in effect at the time of grant that defines "good reason"
(or words of like import) a termination that is or would be deemed for
"good reason" (or words of like import) as defined under such
employment agreement at the time of grant, (ii) if there is an
employment agreement between the Company or a Subsidiary and the
Participant in effect at the time of grant that does not define "good
reason" (or words of like import), a voluntary termination which is
permitted under the terms of such
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employment agreement and which is at least ninety (90) days after the
occurrence of an event which would be grounds for a termination by the
Company that is or would be deemed for "cause" (or words of like
import) as defined under such employment agreement at the time of
grant, or (iii) if there is no employment agreement between the Company
or a Subsidiary and the Participant in effect at the time of grant, a
voluntary termination for any reason upon two (2) weeks' prior written
notice to the Company, which is at least ninety (90) days after the
occurrence of an event which would be grounds for a Termination of
Relationship by the Company for Cause (without regard to any notice or
cure period requirement).
2.13. "Participant" shall mean the following persons to whom
an Option has been granted pursuant to this Plan: Eligible Employees
and Consultants of the Company or its Subsidiaries and non-employee
directors of the Company.
2.14. "Retirement" with respect to a Participant's Termination
of Relationship shall mean a Termination of Relationship without Cause
from the Company and/or a Subsidiary by a Participant who has attained
(i) at least age sixty-five (65); or (ii) such earlier date after age
fifty-five (55) as approved by the Committee with regard to such
Participant. With respect to a Participant's Termination of
Directorship, Retirement shall mean the failure to stand for reelection
or the failure to be reelected after a Participant has attained age
sixty-five (65).
2.15. "Stock Option" or "Option" shall mean any option to
purchase shares of Common Stock granted to Eligible Employees,
Consultants or non-employee directors pursuant to Article VI.
2.16. "Subsidiary" shall mean any entity in which the Company
holds in excess of 50% of the equity.
2.17. "Termination of Consultancy" shall mean (i) an
individual is no longer acting as a Consultant to the Company or a
Subsidiary; or (ii) when an entity which is retaining a Participant as
a Consultant ceases to be a Subsidiary, unless the Participant
thereupon is retained as a Consultant by the Company or another
Subsidiary.
2.18. "Termination of Directorship" shall mean, with respect
to a non-employee director, that the non-employee director has ceased
to be a director of the Company for any reason.
2.19. "Termination of Employment" shall mean (i) a termination
of service (for reasons other than a military or personal leave of
absence granted by the Company) of a Participant from the Company and
its Subsidiaries; or (ii) when an entity which is employing a
Participant ceases to be a Subsidiary, unless the Participant thereupon
becomes employed by the Company or another Subsidiary.
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2.20. "Termination of Relationship" shall mean a Termination
of Employment or a Termination of Consultancy, as applicable.
2.21. "Transfer" or "Transferred" shall mean anticipate,
alienate, attach, sell, assign, pledge, encumber, charge or otherwise
transfer.
ARTICLE III.
ADMINISTRATION
3.1. The Committee. The Plan shall be administered and interpreted by
the Committee.
3.2. Awards. The Committee shall have full authority to grant Stock
Options, pursuant to the terms of this Plan. In particular, the Committee shall
have the authority:
(a) to select the Eligible Employees, Consultants and
non-employee directors to whom Stock Options may from time to time be
granted hereunder;
(b) to determine whether and to what extent Stock Options are
to be granted hereunder to one or more Eligible Employees, Consultants
or non-employee directors;
(c) to determine, in accordance with the terms of this Plan,
the number of shares of Common Stock to be covered by each Stock Option
granted to an Eligible Employee, Consultant or non-employee director;
(d) to determine the terms and conditions, not inconsistent
with the terms of this Plan, of any Stock Option granted hereunder to
an Eligible Employee, Consultant or non-employee director (including,
but not limited to, the share price, any restriction or limitation, any
vesting schedule or acceleration thereof, or any forfeiture
restrictions or waiver thereof, and the shares of Common Stock relating
thereto, based on such factors, if any, as the Committee shall
determine, in its sole discretion);
(e) to determine whether and under what circumstances a Stock
Option may be settled in cash and/or Common Stock under Subsection
6.2(d);
(f) to determine whether, to what extent and under what
circumstances to provide loans (which shall be on a recourse basis and
shall bear a reasonable rate of interest) to Eligible Employees,
Consultants or non-employee directors in order to exercise Options
under the Plan; and
(g) to determine whether to require Eligible Employees,
Consultants or non-employee directors, as a condition of the granting
of any Option, to not sell or otherwise dispose of shares acquired
pursuant to the exercise of an Option for a period of time as
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determined by the Committee, in its sole discretion, following the date
of the acquisition of such Option.
3.3. Guidelines. Subject to Article IX hereof, the Committee shall have
the authority to adopt, alter and repeal such administrative rules, guidelines
and practices governing this Plan and perform all acts, including the delegation
of its administrative responsibilities, as it shall, from time to time, deem
advisable; to construe and interpret the terms and provisions of this Plan and
any Option granted under this Plan (and any agreements relating thereto); and to
otherwise supervise the administration of this Plan. The Committee may correct
any defect, supply any omission or reconcile any inconsistency in this Plan or
in any agreement relating thereto in the manner and to the extent it shall deem
necessary to carry this Plan into effect. The Committee may adopt special
guidelines and provisions for persons who are residing in, or subject to, the
taxes of, countries other than the United States to comply with applicable tax
and securities laws.
3.4. Decisions Final. Any decision, interpretation or other action made
or taken in good faith by or at the direction of the Company, the Board, or the
Committee (or any of its members) arising out of or in connection with the Plan
shall be within the absolute discretion of all and each of them, as the case may
be, and shall be final, conclusive and binding on the Company and all employees,
directors, consultants and Participants and their respective heirs, executors,
administrators, successors and assigns.
3.5. Reliance on Counsel. The Company, the Board or the Committee may
consult with legal counsel, who may be counsel for the Company or other counsel,
with respect to its obligations or duties hereunder, or with respect to any
action or proceeding or any question of law, and shall not be liable with
respect to any action taken or omitted by it in good faith pursuant to the
advice of such counsel.
3.6. Procedures. If the Committee is appointed, the Board shall
designate one of the members of the Committee as chairman and the Committee
shall hold meetings, subject to the By-Laws of the Company, at such times and
places as it shall deem advisable. A majority of the Committee members shall
constitute a quorum. All determinations of the Committee shall be made by a
majority of its members. Any decision or determination reduced to writing and
signed by all Committee members in accordance with the By-Laws of the Company
shall be fully effective as if it had been made by a vote at a meeting duly
called and held. The Committee shall keep minutes of its meetings and shall make
such rules and regulations for the conduct of its business as it shall deem
advisable.
3.7. Designation of Advisors -- Liability.
(a) The Committee may designate employees of the Company and
professional advisors to assist the Committee in the administration of
the Plan and may grant authority to employees to execute agreements or
other documents on behalf of the Committee.
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(b) The Committee may employ such legal counsel, consultants
and agents as it may deem desirable for the administration of the Plan
and may rely upon any opinion received from any such counsel or
consultant and any computation received from any such consultant or
agent. Expenses incurred by the Committee or Board in the engagement of
any such counsel, consultant or agent shall be paid by the Company. The
Committee, its members and any person designated pursuant to paragraph
(a) above shall not be liable for any action or determination made in
good faith with respect to the Plan. To the maximum extent permitted by
applicable law, no officer or former officer of the Company or member
or former member of the Committee or of the Board shall be liable for
any action or determination made in good faith with respect to the Plan
or any Stock Option granted under it. To the maximum extent permitted
by applicable law and the Memorandum of Association and Articles of
Association of the Company and to the extent not covered by insurance,
each officer or former officer and member or former member of the
Committee or of the Board shall be indemnified and held harmless by the
Company against any cost or expense (including reasonable fees of
counsel reasonably acceptable to the Company) or liability (including
any sum paid in settlement of a claim with the approval of the
Company), and advanced amounts necessary to pay the foregoing at the
earliest time and to the fullest extent permitted, arising out of any
act or omission to act in connection with the Plan, except to the
extent arising out of such officer's or former officer's, member's or
former member's own fraud or bad faith. Such indemnification shall be
in addition to any rights of indemnification the officers, directors or
members or former officers, directors or members may have under
applicable law or under the Memorandum of Association or Articles of
Association of the Company or Subsidiary. Notwithstanding anything else
herein, this indemnification will not apply to the actions or
determinations made by an individual with regard to Stock Options
granted to him or her under this Plan.
ARTICLE IV.
SHARE AND OTHER LIMITATIONS
4.1. Shares. The aggregate number of shares of Common Stock which may
be issued under this Plan with respect to which Stock Options may be granted
shall not exceed 300,000 shares (subject to any increase or decrease pursuant to
Section 4.2) which may be either authorized and unissued Common Stock or Common
Stock held in or acquired for the treasury of the Company. If any Stock Option
granted under this Plan expires, terminates or is canceled for any reason
without having been exercised in full or the Company repurchases any Stock
Option pursuant to Section 6.2(e), the number of shares of Common Stock
underlying the repurchased Option, and/or the number of shares of Common Stock
underlying any unexercised Option shall again be available for the purposes of
Options under the Plan.
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4.2. Changes.
(a) The existence of the Plan and the Options granted
hereunder shall not affect in any way the right or power of the Board
or the shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's
capital structure or its business, any merger or consolidation of the
Company or Subsidiary, any issue of bonds, debentures, preferred or
prior preference stock ahead of or affecting Common Stock, the
dissolution or liquidation of the Company or Subsidiary, any sale or
transfer of all or part of its assets or business or any other
corporate act or proceeding.
(b) In the event of any such change in the capital structure
or business of the Company by reason of any stock dividend or
distribution, stock split or reverse stock split, recapitalization,
reorganization, merger, consolidation, split-up, combination or
exchange of shares, distribution with respect to its outstanding Common
Stock or capital stock other than Common Stock, sale or transfer of all
or part of its assets or business, reclassification of its capital
stock, or any similar change affecting the Company's capital structure
or business and the Committee determines an adjustment is appropriate
under the Plan, the number and kind of shares or other property
(including cash) to be issued upon exercise of an outstanding Option
and the purchase price thereof shall be appropriately adjusted
consistent with such change in such manner as the Committee may deem
equitable to prevent substantial dilution or enlargement of the rights
granted to, or available for, Participants under this Plan or as
otherwise necessary to reflect the change, and any such adjustment
determined by the Committee shall be final, conclusive and binding on
the Company and all Participants and employees and their respective
heirs, executors, administrators, successors and assigns.
(c) Fractional shares of Common Stock resulting from any
adjustment in Options pursuant to this Section 4 shall be aggregated
until, and eliminated at, the time of exercise by rounding-down for
fractions less than one-half (1/2) and rounding-up for fractions equal
to or greater than one-half (1/2). No cash settlements shall be made
with respect to fractional shares eliminated by rounding. Notice of any
adjustment shall be given by the Committee to each Participant whose
Option has been adjusted and such adjustment (whether or not such
notice is given) shall be effective and binding for all purposes of the
Plan.
(d) In the event of a merger or consolidation in which the
Company is not the surviving entity or in the event of any transaction
that results in the acquisition of all or substantially all of the
Company's outstanding Common Stock by a single person or entity or by a
group of persons and/or entities acting in concert, or in the event of
the sale or transfer of all or substantially all of the Company's
assets (all of the foregoing being referred to as "Acquisition
Events"), then the Committee may, in its sole discretion, terminate all
outstanding Options of Eligible Employees, Consultants and non-employee
directors, effective as of the date of the Acquisition Event, by
delivering notice
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of termination to each such Participant at least twenty (20) days prior
to the date of consummation of the Acquisition Event; provided, that
during the period from the date on which such notice of termination is
delivered to the consummation of the Acquisition Event, each such
Participant shall have the right to exercise in full all of his or her
Options that are then outstanding (without regard to any limitations on
exercisability otherwise contained in the Option Agreement) but
contingent on occurrence of the Acquisition Event, and, provided that,
if the Acquisition Event does not take place within a specified period
after giving such notice for any reason whatsoever, the notice and
exercise shall be null and void.
If an Acquisition Event occurs, to the extent the Committee
does not terminate the outstanding Options pursuant to this Section
4.2(d), then the provisions of Section 4.2(b) shall apply.
ARTICLE V.
ELIGIBILITY
All employees and Consultants of the Company and its Subsidiaries and
all non-employee directors of the Company are eligible to be granted Stock
Options under this Plan. Eligibility under this Plan shall be determined by the
Committee in its sole discretion.
ARTICLE VI.
STOCK OPTION GRANTS
6.1. Grants. The Committee shall have the authority to grant to any
Eligible Employee, any Consultant or any non-employee director one or more Stock
Options.
6.2. Terms of Options. Options granted under this Plan shall be subject
to the following terms and conditions, and shall be in such form and contain
such additional terms and conditions, not inconsistent with the terms of this
Plan, as the Committee shall deem desirable:
(a) Option Price. The option price per share of Common Stock
purchasable under a Stock Option shall be determined by the Committee
at the time of grant but shall not be less than 100% of the Fair Market
Value of the share of Common Stock at the time of grant.
(b) Option Term. The term of each Stock Option shall be fixed
by the Committee, but no Stock Option shall be exercisable more than
ten (10) years after the date the Option is granted.
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(c) Exercisability. Stock Options shall be exercisable at such
time or times and subject to such terms and conditions as shall be
determined by the Committee at grant. If the Committee provides, in its
discretion, that any Stock Option is exercisable subject to certain
limitations (including, without limitation, that it is exercisable only
in installments or within certain time periods), the Committee may
waive such limitations on the exercisability at any time at or after
grant in whole or in part (including, without limitation, that the
Committee may waive the installment exercise provisions or accelerate
the time at which Options may be exercised), based on such factors, if
any, as the Committee shall determine, in its sole discretion.
(d) Method of Exercise. Subject to whatever installment
exercise and waiting period provisions apply under subsection (c)
above, Stock Options may be exercised in whole or in part at any time
during the Option term, by giving written notice of exercise to the
Company specifying the number of shares to be purchased. Such notice
shall be accompanied by payment in full of the purchase price in such
form, or such other arrangement for the satisfaction of the purchase
price, as the Committee may accept. If and to the extent determined by
the Committee in its sole discretion at or after grant, payment in full
or in part may also be made in the form of Common Stock withheld from
the shares to be received on the exercise of a Stock Option hereunder
or Common Stock owned by the Participant for at least six months (and
for which the Participant has good title free and clear of any liens
and encumbrances and has represented that he has owned the shares of
Common Stock for at least six months) based on the Fair Market Value of
the Common Stock on the payment date as determined by the Committee. No
shares of Common Stock shall be issued until payment, as provided
herein, therefor has been made or provided for and the Participant
shall have none of the rights of a holder of shares of Common Stock
until such shares of Common Stock have been issued.
(e) Buy Out and Settlement Provisions. The Committee may at
any time on behalf of the Company offer to buy out an Option previously
granted, based on such terms and conditions as the Committee shall
establish and communicate to the Participant at the time that such
offer is made.
(f) Form, Modification, Extension and Renewal of Options.
Subject to the terms and conditions and within the limitations of the
Plan, an Option shall be evidenced by such form of agreement or grant
as is approved by the Committee, and the Committee may modify, extend
or renew outstanding Options granted under the Plan (provided that the
rights of a Participant are not reduced without his consent), or accept
the surrender of outstanding Options (up to the extent not theretofore
exercised) and authorize the granting of new Options in substitution
therefor (to the extent not theretofore exercised).
(g) Other Terms and Conditions. Options may contain such other
provisions, which shall not be inconsistent with any of the foregoing
terms of the Plan, as the Committee shall deem appropriate including,
without limitation, permitting "reloads" such that the same number of
Options are granted as the number of Options exercised,
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shares used to pay for the exercise price of Options or shares used to
pay withholding taxes ("Reloads"). With respect to Reloads, the
exercise price of the new Stock Option shall be the Fair Market Value
on the date of the Reload and the term of the Stock Option shall be the
same as the remaining term of the Options that are exercised, if
applicable, or such other exercise price and term as determined by the
Committee; provided, however that the price of the new Stock Option
shall not be less than 100% of the Fair Market Value on the date of the
Reload.
6.3. Termination of Relationship. The following rules apply with regard
to Options upon the Termination of Relationship of a Participant:
(a) Termination by Reason of Death. If a Participant's
Termination of Relationship is by reason of death, any Stock Option
held by such Participant, unless otherwise determined by the Committee
at grant or, if no rights of the Participant's estate are reduced,
thereafter, may be exercised, to the extent exercisable at the
Participant's death, by the legal representative of the estate, at any
time within a period of one (1) year from the date of such death, but
in no event beyond the expiration of the stated term of such Stock
Option.
(b) Termination by Reason of Disability. If a Participant's
Termination of Relationship is by reason of Disability, any Stock
Option held by such Participant, unless otherwise determined by the
Committee at grant or, if no rights of the Participant are reduced,
thereafter, may be exercised, to the extent exercisable at the
Participant's termination, by the Participant (or the legal
representative of the Participant's estate if the Participant dies
after termination) at any time within a period of one (1) year from the
date of such termination, but in no event beyond the expiration of the
stated term of such Stock Option.
(c) Termination by Reason of Retirement. If a Participant's
Termination of Relationship is by reason of Retirement, any Stock
Option held by such Participant, unless otherwise determined by the
Committee at grant, or, if no rights of the Participant are reduced,
thereafter, shall be fully vested and may thereafter be exercised by
the Participant at any time within a period of one (1) year from the
date of such termination, but in no event beyond the expiration of the
stated term of such Stock Option; provided, however, that, if the
Participant dies within such exercise period, any unexercised Stock
Option held by such Participant shall thereafter be exercisable, to the
extent to which it was exercisable at the time of death, for a period
of one (1) year (or such other period as the Committee may specify at
grant or, if no rights of the Participant's estate are reduced,
thereafter) from the date of such death, but in no event beyond the
expiration of the stated term of such Stock Option.
(d) Involuntary Termination Without Cause or Termination for
Good Reason. If a Participant's Termination of Relationship is by
involuntary termination without Cause or for Good Reason, any Stock
Option held by such Participant, unless otherwise
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determined by the Committee at grant or, if no rights of the
Participant are reduced, thereafter, may be exercised, to the extent
exercisable at termination, by the Participant at any time within a
period of ninety (90) days from the date of such termination, but in no
event beyond the expiration of the stated term of such Stock Option.
(e) Termination Without Good Reason. If a Participant's
Termination of Relationship is voluntary but without Good Reason and
such Termination of Relationship occurs prior to, or more than ninety
(90) days after, the occurrence of an event which would be grounds for
Termination of Relationship by the Company for Cause (without regard to
any notice or cure period requirements), any Stock Option held by such
Participant, unless otherwise determined by the Committee at grant or,
if no rights of the Participant are reduced, thereafter, may be
exercised, to the extent exercisable at termination, by the Participant
at any time within a period of thirty (30) days from the date of such
Termination of Relationship, but in no event beyond the expiration of
the stated term of such Stock Option.
(f) Other Termination. Unless otherwise determined by the
Committee at grant or, if no rights of the Participant are reduced,
thereafter, if a Participant's Termination of Relationship is for any
reason other than death, Disability, Retirement, Good Reason
involuntary termination without Cause or voluntary termination as
provided in subsection (e) above, any Stock Option held by such
Participant shall thereupon terminate and expire as of the date of
termination, provided that (unless the Committee determines a different
period upon grant or, if, no rights of the Participant are reduced,
thereafter) in the event such termination is for Cause or is a
voluntary termination without Good Reason or voluntary resignation
within ninety (90) days after occurrence of an event which would be
grounds for Termination of Relationship by the Company for Cause
(without regard to any notice or cure period requirement), any Stock
Option held by the Participant at the time of occurrence of the event
which would be grounds for Termination of Relationship for Cause shall
be deemed to have terminated and expired upon occurrence of the event
which would be grounds for Termination of Relationship by the Company
for Cause.
6.4. Termination of Directorship. The following rules apply with regard
to Options upon the Termination of Directorship:
(a) Death, Disability or Otherwise Ceasing to be a Director
Other than for Cause. Except as otherwise determined by the Committee
at grant or, if no rights of the Participant are reduced, thereafter,
upon the Termination of Directorship, on account of Disability, death,
Retirement, resignation, failure to stand for reelection or failure to
be reelected or otherwise other than as set forth in (b) below, all
outstanding Options then exercisable and not exercised by the
Participant prior to such Termination of Directorship shall remain
exercisable, to the extent exercisable at the Termination of
Directorship, by the Participant or, in the case of death, by the
Participant's estate or by the person given authority to exercise such
Options by his or her will or by operation of law, for a one (1)
11
<PAGE>
year period commencing on the date of the Termination of Directorship,
provided that such one (1) year period shall not extend beyond the
stated term of such Options.
(b) Cause. Upon removal, failure to stand for reelection or
failure to be renominated for Cause, or if the Company obtains or
discovers information after Termination of Directorship that such
Participant had engaged in conduct that would have justified a removal
for Cause during such directorship, all outstanding Options of such
Participant shall immediately terminate and shall be null and void.
(c) Cancellation of Options. No Options that were not
exercisable during the period such person serves as a director shall
thereafter become exercisable upon a Termination of Directorship for
any reason or no reason whatsoever, and such Options shall terminate
and become null and void upon a Termination of Directorship.
ARTICLE VII.
NON-TRANSFERABILITY
No Stock Option shall be Transferable by the Participant otherwise than
by will or by the laws of descent and distribution. All Stock Options shall be
exercisable, during the Participant's lifetime, only by the Participant. No
Stock Option shall, except as otherwise specifically provided by law or herein,
be Transferable in any manner, and any attempt to Transfer any such Option shall
be void, and no such Option shall in any manner be liable for or subject to the
debts, contracts, liabilities, engagements or torts of any person who shall be
entitled to such Option, nor shall it be subject to attachment or legal process
for or against such person.
ARTICLE VIII.
CHANGE IN CONTROL PROVISIONS
8.1. Benefits. In the event of a Change in Control of the Company (as
defined below), except as otherwise provided by the Committee upon the grant of
an Option, the Participant shall be entitled to the following benefits:
(a) Subject to paragraph (b) below, all outstanding Options of
Participants granted prior to the Change in Control shall be fully
vested and immediately exercisable in their entirety. The Committee, in
its sole discretion, may provide for the purchase of any such Stock
Options by the Company for an amount of cash equal to the excess of the
Change in Control price (as defined below) of the shares of Common
Stock covered by such Stock Options, over the aggregate exercise price
of such Stock Options. For purposes of this Section 8.1, Change in
Control price shall mean the higher of (i) the highest price per share
of Common Stock paid in any transaction related to a Change in
12
<PAGE>
Control of the Company, or (ii) the highest Fair Market Value per share
of Common Stock at any time during the sixty (60) day period preceding
a Change in Control.
(b) Notwithstanding anything to the contrary herein, unless
the Committee provides otherwise at the time an Option is granted to an
Eligible Employee or Consultant hereunder or thereafter, no
acceleration of exercisability shall occur with respect to such Option
if the Committee reasonably determines in good faith, prior to the
occurrence of the Change in Control, that the Options shall be honored
or assumed, or new rights substituted therefor (each such honored,
assumed or substituted option hereinafter called an "Alternative
Option"), by such Participant's employer (or the parent or a subsidiary
of such employer), or in the case of a Consultant, by the entity (or
its parent or subsidiary) which retains the Consultant, immediately
following the Change in Control, provided that any such Alternative
Option must meet the following criteria:
(i) the Alternative Option must be based on stock
which is traded on an established securities market, or which will be
so traded within thirty (30) days of the Change in Control;
(ii) the Alternative Option must provide such
Participant with rights and entitlements substantially equivalent to or
better than the rights, terms and conditions applicable under such
Option, including, but not limited to, an identical or better exercise
schedule; and
(iii) the Alternative Option must have economic value
substantially equivalent to the value of such Option (determined at the
time of the Change in Control).
8.2. Change in Control. A "Change in Control" shall be deemed
to have occurred:
(a) upon any "person" as such term is used in Sections 13(d)
and 14(d) of the Exchange Act (other than the Company, any trustee or
other fiduciary holding securities under any employee benefit plan of
the Company, any company owned, directly or indirectly, by the
shareholders of the Company in substantially the same proportions as
their ownership of Common Stock of the Company), becoming the owner (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Company representing fifty percent (50%) or more
of the combined voting power of the Company's then outstanding
securities (including, without limitation, securities owned at the time
of any increase in ownership);
(b) during any period of two consecutive years, a change in
the composition of the Board of Directors of the Company such that the
individuals who, as of the date hereof, comprise the Board (the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, for purposes of this
subsection that any individual who becomes a member of an Incumbent
Board subsequent to the date hereof
13
<PAGE>
whose election, or nomination for election by the Company's
shareholders, was approved in advance or contemporaneously with such
election by a vote of at least a majority of those individuals who are
members of the Incumbent Board (or deemed to be such pursuant to this
proviso) shall be considered as though such individual were a member of
the Incumbent Board; but, provided further, that any such individual
whose initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act) or other
actual or threatened solicitation of proxies or consents by or on
behalf of a person other than the Board of Directors of the Company or
actual or threatened tender offer for shares of the Company or similar
transaction or other contest for corporate control (other than a tender
offer by the Company) shall not be so considered as a member of the
Incumbent Board;
(c) upon the merger or consolidation of the Company with any
other corporation (other than a parent or subsidiary corporation),
other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than
fifty percent (50%) of the combined voting power of the voting
securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; or
(d) upon the approval of the shareholders of the Company of a
plan of complete liquidation of the Company or an agreement for the
sale or disposition by the Company of all or substantially all of the
Company's assets other than the sale of all or substantially all of the
assets of the Company to a person or persons who beneficially own,
directly or indirectly, at least fifty percent (50%) or more of the
combined voting power of the outstanding voting securities of the
Company at the time of the sale.
ARTICLE IX.
TERMINATION OR AMENDMENT OF THE PLAN
9.1. Termination or Amendment. Notwithstanding any other provision of
this Plan, the Board may at any time, and from time to time, amend, in whole or
in part, any or all of the provisions of the Plan, or suspend or terminate it
entirely, retroactively or otherwise; provided, however, that, unless otherwise
required by law or specifically provided herein, the rights of a Participant
with respect to Options granted prior to such amendment, suspension or
termination, may not be impaired without the consent of such Participant and,
provided further, without the approval of the shareholders of the Company, no
amendment may be made which would (i) change the classification of employees
eligible to receive Options under this Plan; or (ii) extend the maximum option
period under Section 6.2. In no event may the Plan be amended without the
approval of the shareholders of the Company in accordance with the applicable
laws or other requirements to increase the aggregate number of shares of Common
Stock that may be
14
<PAGE>
issued under the Plan or to make any other amendment that would require
shareholder approval under the rules of any exchange or system on which the
Company's securities are listed or traded at the request of the Company.
The Committee may amend the terms of any Option theretofore granted,
prospectively or retroactively, but, subject to Article IV above or as otherwise
specifically provided herein, no such amendment or other action by the Committee
shall impair the rights of any holder without the holder's consent.
ARTICLE X.
GENERAL PROVISIONS
10.1. Legend. The Committee may require each person receiving shares of
Common Stock pursuant to the exercise of a Stock Option under the Plan to
represent to and agree with the Company in writing that the Participant is
acquiring the shares without a view to distribution thereof. In addition to any
legend required by this Plan, the certificates for such shares may include any
legend which the Committee deems appropriate to reflect any restrictions on
Transfer.
All certificates for shares of Common Stock delivered under the Plan
shall be subject to such stock transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations and other requirements
of the Securities and Exchange Commission, any stock exchange upon which the
Common Stock is then listed or any national securities association system upon
whose system the Common Stock is then quoted, any applicable Federal or state
securities law, and any applicable corporate law, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
10.2. Other Plans. Nothing contained in this Plan shall prevent the
Board from adopting other or additional compensation arrangements, subject to
shareholder approval if such approval is required; and such arrangements may be
either generally applicable or applicable only in specific cases.
10.3. No Right to Employment/Consultancy/Directorship. Neither this
Plan nor the grant of any Option hereunder shall give any Participant or other
individual any right with respect to continuance of employment or consultancy by
the Company or any Subsidiary, nor shall there be a limitation in any way on the
right of the Company or any Subsidiary by which an employee is employed or if a
consultant, retained, to terminate his employment or consultancy at any time.
Neither this Plan nor the grant of any Option hereunder shall impose any
obligation on the Company to retain any Participant as a director, nor shall it
impose on the part of any Participant any obligation to remain as a director of
the Company.
15
<PAGE>
10.4. Withholding of Taxes. The Company shall have the right, if
necessary or desirable (as determined by the Company), to deduct from any
payment to be made to a Participant, or to otherwise require, prior to the
issuance or delivery of any shares of Common Stock or the payment of any cash
hereunder, payment by the Participant of, any taxes required by law to be
withheld.
The Committee may permit any such withholding obligation with regard to
any Participant to be satisfied by reducing the number of shares of Common Stock
otherwise deliverable or by delivering shares of Common Stock already owned. Any
fraction of a share of Common Stock required to satisfy such tax obligations
shall be disregarded and the amount due shall be paid instead in cash by the
Participant.
10.5. Listing and Other Conditions.
(a) As long as the Common Stock is listed on a national
securities exchange or system sponsored by a national securities
association, the issue of any shares of Common Stock pursuant to the
exercise of an Option shall be conditioned upon such shares being
listed on such exchange or system. The Company shall have no obligation
to issue such shares unless and until such shares are so listed, and
the right to exercise any Option with respect to such shares shall be
suspended until such listing has been effected.
(b) If at any time counsel to the Company shall be of the
opinion that any sale or delivery of shares of Common Stock pursuant to
the exercise of an Option is or may in the circumstances be unlawful or
result in the imposition of excise taxes on the Company under the
statutes, rules or regulations of any applicable jurisdiction, the
Company shall have no obligation to make such sale or delivery, or to
make any application or to effect or to maintain any qualification or
registration under the Securities Act of 1933 or otherwise with respect
to shares of Common Stock, and the right to exercise any Option shall
be suspended until, in the opinion of said counsel, such sale or
delivery shall be lawful or will not result in the imposition of excise
taxes on the Company.
(c) Upon termination of any period of suspension under this
Section 10.5, any Option affected by such suspension which shall not
then have expired or terminated shall be reinstated as to all shares
available before such suspension and as to shares which would otherwise
have become available during the period of such suspension, but no such
suspension shall extend the term of any Option.
10.6. Governing Law. This Plan shall be governed and construed in
accordance with the laws of the British Virgin Islands (regardless of the law
that might otherwise govern under applicable New York principles of conflict of
laws).
10.7. Construction. Wherever any words are used in this Plan in the
masculine gender they shall be construed as though they were also used in the
feminine gender in all cases where they would so apply, and wherever any words
are used herein in the singular form they shall be
16
<PAGE>
construed as though they were also used in the plural form in all cases where
they would so apply.
10.8. Other Benefits. No Stock Option granted under this Plan shall be
deemed compensation for purposes of computing benefits under any retirement plan
of the Company or its Subsidiaries nor affect any benefits under any other
benefit plan now or subsequently in effect under which the availability or
amount of benefits is related to the level of compensation.
10.9. Costs. The Company shall bear all expenses included in
administering this Plan, including expenses of issuing Common Stock pursuant to
the exercise of any Options hereunder.
10.10. No Right to Same Benefits. The provisions of Options need not be
the same with respect to each Participant, and such Options to individual
Participants need not be the same in subsequent years.
10.11. Death/Disability. The Committee may in its discretion require
the transferee of a Participant to supply it with written notice of the
Participant's death or Disability and to supply it with a copy of the will (in
the case of the Participant's death) or such other evidence as the Committee
deems necessary to establish the validity of the transfer of an Option. The
Committee may also require that the agreement of the transferee to be bound by
all of the terms and conditions of the Plan.
10.12. Severability of Provisions. If any provision of the Plan shall
be held invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provisions hereof, and the Plan shall be construed and enforced
as if such provisions had not been included.
10.13. Headings and Captions. The headings and captions herein are
provided for reference and convenience only, shall not be considered part of the
Plan, and shall not be employed in the construction of the Plan.
ARTICLE XI.
EFFECTIVE DATE OF PLAN
The Plan shall take effect upon adoption by the Board and the holders
of the Company's Common Stock.
ARTICLE XII.
TERM OF PLAN
17
<PAGE>
No Stock Option shall be granted pursuant to the Plan on or after the
tenth anniversary of the date the Plan is adopted, but Options granted prior to
such tenth anniversary may extend beyond that date.
ARTICLE XIII.
NAME OF PLAN
This Plan shall be known as the Asia Electronics Holding Co. Inc. 1997
Employee Stock Option Plan.
18
<PAGE>
Asia Electronics Holding Co. Inc.
1997 EMPLOYEE STOCK OPTION PLAN
19
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I. PURPOSE...................................................1
ARTICLE II. DEFINITIONS...............................................1
ARTICLE III. ADMINISTRATION............................................4
ARTICLE IV. SHARE AND OTHER LIMITATIONS...............................6
ARTICLE V. ELIGIBILITY...............................................8
ARTICLE VI. STOCK OPTION GRANTS.......................................8
ARTICLE VII. NON-TRANSFERABILITY......................................12
ARTICLE VIII. CHANGE IN CONTROL PROVISIONS.............................12
ARTICLE IX. TERMINATION OR AMENDMENT OF THE PLAN.....................14
ARTICLE X. GENERAL PROVISIONS.......................................15
ARTICLE XI. EFFECTIVE DATE OF PLAN...................................17
ARTICLE XII. TERM OF PLAN.............................................17
ARTICLE XIII. NAME OF PLAN.............................................17
i
AGREEMENT
Dated September , 1997
The parties to this agreement are Xianyang Yongxin Electronics Co.,
Ltd. ("Yongxin"), Xianyang Daming Electronics Co., Ltd. ("Daming"), Yantai
Daewoo Electronics Components Co., Ltd. ("Yantai") and Xianyang Dnon Tech
Special Electro Technique Co., Ltd. ("Dnon Tech" and together with Yongxin,
Daming, Yantai, the "Asia Electronic Subsidiaries") and each of the entities
listed on schedule A (each, a "Pianzhuan Group Member").
The parties agree as follows:
1. Business Opportunities; Competition. No Pianzhuan Group Member
may manufacture, market, sell or otherwise dispose of, for its own account or
for the account of others, deflection yokes for CPTs or CDTs. Notwithstanding
the foregoing, however, Xianyang Pianzhuan Co., Ltd. ("Xianyang"), a Pianzhuan
Group Member, may continue to design, manufacture, market and sell 18" and 21"
(narrow) deflection yokes in the People's Republic of China.
2. Certain Payments. The Asia Electronic Subsidiaries shall pay
all currently outstanding liabilities and obligations to each Pianzhuan Group
Member as promptly as practicable (and, in any event, prior to October 1, 1997),
and thereafter shall pay all liabilities and obligations to each Pianzhuan Group
Member during the term of this agreement, within 30 days after receiving an
invoice therefor.
Each Pianzhuan Group Member shall pay all its currently outstanding
liabilities and obligations to the Asia Electronic Subsidiaries as promptly as
practicable (and, in any event, prior
<PAGE>
to October 1, 1997), and thereafter shall pay all liabilities and obligations to
the Asia Electronic Subsidiaries during the term of this agreement, within 30
days after receiving an invoice therefor.
3. Services. Each Pianzhuan Group Member that has provided sales
and marketing, research and development or administration or other services to
the Asia Electronic Subsidiaries shall, from time to time, at the request of
Yongxin, Daming, Yantai or Dnon Tech, continue to provide such services at cost,
as determined in accordance with past practice.
4. Acknowledgment. Each Pianzhuan Group Member hereby
acknowledges and agrees that it does not have any right, under any agreement in
effect on the date of this agreement or otherwise, to cause either Yongxin,
Daming, Yantai or Dnon Tech to take, or refrain from taking, any action, other
than as expressly provided in this agreement.
5. Term. The provisions of sections 1, 2 and 3 shall terminate on
the tenth anniversary of this agreement.
6. Miscellaneous
(a) 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. Yongxin, Daming, Yantai and
Dnon Tech and each Pianzhuan Group Member agrees that any suit, action or
proceeding (a "Proceeding") brought against it arising out of or based upon this
Agreement may be instituted in any state or federal court in the Borough of
Manhattan, The City of New York, and waives any objection which it may now or
hereafter have to the laying of venue
2
<PAGE>
of any such Proceeding, and irrevocably submits to the non-exclusive
jurisdiction of such courts in any such Proceeding.
(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 address or
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 6(b)):
if to Yongxin, Daming, Yantai or Dnon Tech, to it at:
70 West Weiyang Road
Xianyang, Shaanxi Province
People's Republic of China
Telephone: (+86) 9103320881
Facsimile: (+86) 9103320808
if to a Pianzhuan Group Member, to it at:
18 West Weiyang Road
Xianyang, Shaanxi Province
People's Republic of China
Telephone: (+86) 9103320891
Facsimile: (+86) 9103320666
3
<PAGE>
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 may be executed in counterparts, each of which
shall be considered an original, and all of which together shall constitute the
same instrument.
(d) 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 6(d) is in addition to, and not in lieu of, any other rights or
remedies a party may have.
(e) 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
<PAGE>
(f) This agreement contains a complete statement of all the
arrangements among the parties with respect to its subject matter, supersedes
all existing agreements among 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.
XIANYANG DAMING ELECTRONICS CO., LTD.
By:______________________________
XIANYANG YONGXIN ELECTRONICS CO.,
LTD.
By:______________________________
XIANYANG DNON TECH SPECIAL ELECTRO
TECHNIQUE CO., LTD.
By:______________________________
YANTAI DAEWOO ELECTRONIC COMPONENTS
CO., LTD.
By:______________________________
XIANYANG PIANZHUAN CO., LTD.
By:______________________________
XIANYANG AODAI ELECTRONIC CO., LTD.
By:______________________________
SHAANXI HUAYU ELECTRONIC TECHNICAL
CO., LTD.
5
<PAGE>
By:______________________________
XIANYANG PIANZHUAN DEVELOPMENT
CO., LTD.
By:______________________________
XIANYANG CHEMICAL NEW MATERIAL PLANT
By:______________________________
NORTH-WEST MDICAL EQUIPMENT
GENERAL-PLANT
By:______________________________
XIAN MEDICAL EQUIPMENT PLANT
By:______________________________
SHAANXI BAXING MOTO CO., LTD.
By:______________________________
SHANDONG ISV ELECTRONIC MATERIAL
CO., LTD.
By:______________________________
RONGCHENG BAOTONG ELECTRONIC
CO., LTD.
By:______________________________
YANTAI DONGMIN PLASTICSOL CO., LTD.
6
<PAGE>
By:______________________________
WEIHAI DAEWOO ELECTRONIC CO., LTD.
By:______________________________
WEIHAI XINHAN ELECTRONIC CO., LTD.
By:______________________________
SHANDONG DAEWOO ELECTRONIC DEVICES
CO., LTD.
By:______________________________
WEIHAI CAIT HI-TECH CORP.
By:______________________________
WEIHAI SPEAKER ELECTRONIC CO., LTD.
By:______________________________
7
<PAGE>
SCHEDULE A
----------
XIANYANG PIANZHUAN CO., LTD.
XIANYANG AODAI ELECTRONIC CO., LTD.
SHAANXI HUAYU ELECTRONIC TECHNICAL CO., LTD.
XIANYANG PIANZHUAN DEVELOPMENT CO., LTD.
XIANYANG CHEMICAL NEW MATERIAL PLANT
NORTH-WEST MEDICAL EQUIPMENT GENERAL - PLANT
XIAN MDICAL EQUIPMENT PLANT
SHAANXI BAXING MOTO CO., LTD.
SHANDONG ISV ELECTRONIC MATERIAL CO., LTD.
RONGCHENG BAOTONG ELECTRONIC CO., LTD.
YANTAI DONGMIN PLASTICSOL CO., LTD.
WEIHAI DAEWOO ELECTRONIC CO., LTD.
WEIHAI XINHAN ELECTRONIC CO., LTD.
SHANDONG DAEWOO ELECTRONIC DEVICES CO., LTD.
WEIHAI CAIT HI-TECH CORP.
WEIHAI SPEAKER ELECTRONIC CO., LTD.
8
AGREEMENT OF LEASE
Landlord: Xianyang Pianzhuan Group Corp. (Pianzhuan)
Tenant: 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 the manufacturing
plant on the Building No. 2 with a 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 and external construction structure without
the consent of Pianzhuan.
5. Yongxin should guarantee to maintain the building and facilities in good
condition. Any repair, if necessary, should be consented by Pianzhuan.
6. The terms of the agreement is 5 years. The agreement is effective on the date
of the signing by both 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 both parties
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) is 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 the next year,
15 days before year end.
4. Daming cannot alter the internal and external 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 have the consent of
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), is 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 the
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 for next year, 15 days
before year end.
4. Dnon Tech cannot alter the internal and external 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 have the consent of 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
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 it 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 from Party A's bank account.
9. Modification or dismiss of the agreement:
(1). After this agreement enters into force, neither Party A or Party B is
allowed to make modifications nor cancel the agreement without the consent of
the other party.
<PAGE>
(2). In case Party A is not able to pay off the loan at maturity due to
situations out of its control, Party A may apply for extension of the loan which
can only be allowed one time only. 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 Party A wishes to transfer the right and obligation under this agreement
to any other Party, it should inform Party B beforehand. This transfer 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. In respect of the principle, interest and other costs, Xianyang Pianzhuan
Group Corp will be the guarantor for Party A, and 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, Party A can not change its status
without the written approval of Party B (e.g. Contractual term, joint venture,
merge, etc.).
12. The right and obligation of Party A and Party B:
(1) Party A has the right to ask for release of the loan from Party B as agreed.
(2) Party A will return the principle and the interest at maturity.
(3) Party A must use the loan for the purpose as agreed in the agreement.
Without the written approval of Party B, Party A is not allowed to appropriate
the loan for any other purpose.
(4) Party A will provide all the relevant financial statements for the
reference of the Party B.
(5) Party B has the right to supervise the use of the loan by Party A.
(6) Party B has the right to supervise the financial processing of Party A.
(7) Party B will release the loan as the scheduled date under the agreement.
13. Events of Default:
(1) If Party A does not use the loan for purposes other than stipulated in the
agreement, Party B may charge extra interest rate for the amount which is
misused.
(2) If Party A does not return the loan as the scheduled date or as the planned
amount each time, Party B may charge extra interest rate--.
(3) Upon default of No.11 of the agreement, causing Party A to lose the whole
amount of the loan thereafter, Party B may declare the entire unpaid principle
balance and accrued unpaid interest immediately due.
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(4) If Party A is in default of No.15 of the agreement, Party B may charge
penalty fee ________ from Party A.
(5) Under the following situations, Party B may stop releasing the rest of the
loan, declare the unpaid principle and the accrued interest due, or dispose the
Collateral and also has the right to deduct that amount directly from Party A's
account.
a. Party A uses the loan for purposes other than stipulated in the agreement and
insists on doing so in spite of Party B's notice.
b. Party A provides false financial statements to the Party B.
c. The guarantor is in default or the collateral is accidentally damaged, and
Party A cannot find a new qualified guarantor or another collateral.
d. Party A gets involved in serious lawsuit or arbitration.
e. Any events that make Party A unable to pay the loan or if Party A is found no
longer a bonafide debtor.
14. Any dispute between the two parties which failed to be settled through
negotiation should be settled in a court in the area where Party B is located.
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 Party A pays off the loan, it is not allowed to use this loan to any
third party as the collateral.
(2) Before Party A pays off the loan, it is not allowed to act as anyone's
guarantor.
(3)
(4) ___________________________________________
16. Anything beyond the contract is abided by the related law and regulations.
17. The contract came into force after authorized Representative's signature and
seal, it will terminate when the principal and interests under the agreement are
paid off.
18. The contract is in triplicate, one 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: (Party A) 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 guarantee the performance of the obligation under Loan Agreement No. 96(w)004
Party A hereby gives Party B its warranty on the basis of applicable law and
regulations.
Both parties agree as follows:
1. Party A grants its guarantee 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,
Party A has to fulfill the obligation within __ days after receiving the notice
from Party B.
3. In addition to the principle, Party A is also responsible for the interest,
default fee, compensatory fee and any other costs if occur.
4. This agreement will come into force 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 extension for the loan, this agreement will terminate
on the final mature date of that agreement.
6. Without the written approval of Party A, the Debtor and the Bank cannot
make any modification to the Loan Agreement.
7. Party A will give written notice to Party B, if Party A changes its status
during the period of the agreement. The reorganized party (or some other
relevant parties) will continue to fulfill this guarantee obligation. If Party B
thinks the new organization is not qualified for the warranty obligation, this
organization has to find a new one for Party B.
8. Party B will have the right to ask for financial statements and audit the
internal accounting system of Party A.
9. During the period of the agreement, Party A cannot grant warranty to a third
party if it exceeds its ability.
10. Party B has the right to ask Party A to fulfill the warranty obligation
in advance.
(1) If Party A does anything against articles 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 Party B
involved into serious lawsuit (or arbitration), or anything happen that
enable the Debtor to pay off the loan or Party B finds out that it is no longer
a bonafide Debtor any more.
11. If Party A refuses to fulfill the warranty obligation or the relevant
obligation, Party B will charge a default fee of _____% of the loan. If
it cannot cover the actual loss sustained by Party B, Party A will have
to pay the rest of it. Meanwhile, Party B may, at any time, with or without the
notice to Party A, to appropriate money in from Party A's Account under
such situation.
12. Other agreed provisions.
13. Any dispute between the two parties which failed to be settled through
negotiation should be settled in a court in the area where Party B is located.
14. The contract is taking effective by signature and sealing.
15. The contract is in duplicate, one for each party.
<PAGE>
Xianyang Pianzhuan Group Corp. 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 guarantee 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 USD 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 kept by Party B.
5. The collateral assets include the Principle of USD 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 condition. 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
kept by Party B.
10. During the period of the contract, if a loss occurs within the insurance
policy or if there is devaluation on collateral goods due to a third party's
fault, the 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 devaluation on collateral goods, Party A will be asked to
provide a warranty equivalent to the value of the loss.
12. During the period of the contract , Party A will be solely 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
written 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 the expiration date of the contract, Party B will be entitled to dispose
the collateral goods and receive the payment at first priority, if Party A fails
to pay off the loan.
16. Under the following situations, Party B may dispose 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 declared bankruptcy, be dismissed, or
change the status, fails to use the loan as its report in the agreement and
therefore get Party B involved into serious lawsuit (or arbitration), or
anything happen that enable the Debtor to pay off the loan or the Bank finds out
that it 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 a default fee of % of the loan. If it cannot 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. Any dispute arise concerning the collateral goods, should be settled in a
local court where Party B is located, 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 is in duplicate, 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 ON 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 is not able to pay back loan
NO.(95)W014, and requested for an extension of the repayment to Party B. Through
investigation, Party B agrees to the extension of repayment by Party A, and
Party C agrees to provide the guarantee. Thus the three parties agree as
follows:
1. Party A borrowed short-term loan designated in US dollar at the amount of
Four Hundred Thousand dollars only, is due on December 14, 1996, Party A agrees
to extend its repayment for half year, as the result of the extension, the
repayment period will be extended 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. During the extended period, all three parties should comply with the
provision of loan agreement (95)W014.
5. Other provision agreed among the parties.
6. The agreement will be in force after authorized signature and seal. The
agreement will be terminated when the loan is paid off.
7. The agreement is in triplicate, one for each party.
Party A (seal) Party B (seal)
Legal Representative Legal Representative
Party C (seal)
Legal Representative
Date: December 14, 1996
The Licensing Contract
Licensor (Party A): Xianyang Pianzhuan Group Corp.
Licensee (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 the Licensing Bureau;
2). Party A confirmed itself the sole legal owner of PIANZHUAN with no
negatives, which shall be approved by the Licensing bureau.
1. Conception
The terms below contain the meaning as follows unless being specific in the
contract:
1.1. The License: the License 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 shown in the contract as Enclosure 2.
2. Party A agrees that Party B and Party C as well as their subsidiaries may use
the License for their goods without any payment.
3. Party A is authorized to supervise the quality under the License being used
by Party B and Party C who guarantee the goods quality under the License 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 Party A without delay upon
recognition with the License being illegally used and try best to assist Party A
in maintain its legal rights for the License.
5. Party A promises and guarantees as follows:
5.1. Party A guarantees its legal ownership of the License and the registration
approval as soon as possible, the License and its use being valid and
effective without violating the third party's rights within the registration
area as well as free from any lawsuits, argument and law procedure;
5.2. Party A shall extend registration in The Licensing Bureau before the
expiration pursuant to 24th
<PAGE>
provision of The Licensing Law and maintain the permanent legal registration
with effort.
6. Party B and Party C 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 Licensing in production.
6.2. Party B or C shall never affect or let others affect the royalty
registration or Party A's rights for the royalty;
6.3. Party B or C shall never act as owner of the License or mislead others into
believing so;
6.4. Party B or C shall never permit any third party except its subsidiaries to
acquire for the use of the License allowed by the contract unless provided in
other specific agreement;
6.5. Party B or C shall inform Party A upon recognition with the License being
violated without delay as well as assist Party A in maintaining the rights of
the License.
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 of
the License except the right of using the License authorized by Party A
stipulated in the contract.
9. Party B or C may inform Party A in writing to terminate the contract without
permission of Party A because of development. The contract and its effectiveness
shall expire one month after the date of informing, whereas the other two
Parties still apply to the contract.
10. Party A, B or C may inform the other two Parties to terminate the contract
in the condition of any one of the following:
10.1. If any Party who abides by its duty is involved in a loss because of any
other Party's breaking the stipulations of the contract without any compensation
within 14 days after being notified by the abiding Party;
10.2. If any party fails to pay for its debts or is declared to settle the
assets and liabilities.
11. The contract is formulated, interpreted and implemented in accordance with
The Licensing Law.
<PAGE>
12. The contract is valid for 10 years after the signing by respective
legal representative of 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, until any Party notifying the 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,
unless otherwise stipulated by the Court.
14. The contract shall be in quadruplicate with the same legal effect, one for
each Party and one for The Licensing Bureau for reference.
15. The contract is signed on Sep 1st, 1996 in Xianyang, Shaanxi, 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:
Form of Option for Purchase
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. ___ __________ Shares
THIS CERTIFIES that, for receipt in hand of $_____ and other
value received, __________________________________________ (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 __________ shares (the "Option Shares") of the Company's common stock, par
value $.01 per share ("Common Stock") at a price of $__________ (___% of the
public offering price) per Option Share (the "Exercise Price"). 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 date hereof (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) a successor to the Holder, or the officers or partners of such
successor; (iii) a purchaser of substantially all of the assets of the Holder;
or (iv)
<PAGE>
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 Holder
elects to purchase pursuant to such exercise. The number of shares of Common
Stock the Holder 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 and payment of the Exercise Price 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 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
-2-
<PAGE>
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 Exercise Price therefor, shall 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 then $.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.
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(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, it 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 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 reclassification 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 deliverable 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) 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
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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 Options, at their addresses listed
on the register maintained for the purpose by the Company.
(f) 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 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.
(g) Irrespective of any adjustments pursuant to this Section
5, Options theretofore or thereafter issued need not be amended or replaced, but
Options thereafter issued shall bear an appropriate legend or other notice of
any adjustments.
(h) 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,
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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 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
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(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 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 he 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 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
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<PAGE>
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 Underwriter'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. The
Company shall not be obligated to effect any registration of its securities
pursuant to this Section 9(b) within six months after the effective date of a
previous registration statement prepared and filed in accordance with Sections
9(a) or 9(b). 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 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
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<PAGE>
Company shall not be required to qualify to do business in any state by reason
of this Section 9(c) in which it is not otherwise 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 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
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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 Underwriter'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 in connection with any untrue statement or alleged untrue
statement of a material fact contained (i) 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 (ii) 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. 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. The Company shall not be liable for losses based on
untrue statements or omissions contained in Preliminary Prospectuses if an
Underwriter failed to
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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 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
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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 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 (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
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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 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
-13-
<PAGE>
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.
-14-
<PAGE>
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
-15-
<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 Conpany, with full power of substitution.
Dated: _________________
Signature _____________________
-16-
<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
-17-
<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)
AGREEMENT
Dated September , 1997
------------------------
The parties to this agreement are Asia Electronics Holding Co. Inc.
(the "Company"), a British Virgin Islands company, and Xianyang Pianzhuan Group
Corporation ("Pianzhuan Group"). Unless the context otherwise requires, all
references to the Company shall be deemed to include the Company and its
subsidiaries, including, for these purposes, Yantai Daewoo Electronic Components
Co., Ltd. and Xianyang Dnon Tech Special Electro Technique Co., Ltd.
The parties agree as follows:
1. Exclusive Sales and Marketing Agent
Pianzhuan Group shall act as the Company's exclusive sales and
marketing agent for deflection yokes manufactured by the Company for sale in the
People's Republic of China. Pianzhuan Group shall not sell or otherwise dispose
of, for its own account or for the account of others, deflection yokes for CPTs
or CDTs other than deflection yokes manufactured by the Company; provided,
however, that Pianzhuan Group may sell 18" and 21" (narrow) deflection yokes
manufactured by Xianyang Pianzhuan Co., Ltd.
2. Certain Payments. The Company shall, and shall cause each of
its subsidiaries to, pay all its currently outstanding liabilities and
obligations to Pianzhuan Group as promptly as practicable (and, in any event,
prior to October 1, 1997), and thereafter shall, and shall cause each of its
subsidiaries to, pay all liabilities and obligations to Pianzhuan Group during
the term of this agreement, within 30 days after receiving an invoice therefor.
<PAGE>
Pianzhuan Group shall pay all its currently outstanding liabilities
and obligations to the Company as promptly as practicable (and, in any event,
prior to September 1, 1997), and thereafter shall pay all liabilities and
obligations to the Company during the term of this agreement, within 30 days
after receiving an invoice therefor.
3. Services. Pianzhuan Group has provided sales and marketing,
research and development, administration and other services to the Company. At
the Company's request, Pianzhuan Group shall continue to provide such services
at cost, as determined in accordance with past practice.
4. Acknowledgment. Pianzhuan Group hereby acknowledges and agrees
it does not have any right, under any agreement in effect on the date of this
Agreement or otherwise, to cause the Company to take, or refrain from taking,
any action, other than as expressly provided in this agreement.
5. Term. The provisions of Sections 1, 2 and 3 shall terminate on
the tenth anniversary of this agreement; provided, however, that the Company may
terminate this agreement at any time upon 60 days notice to Pianzhuan Group.
6. Miscellaneous
(a) 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. Each of the Company and
Pianzhuan agrees that any suit, action or proceeding (a "Proceeding") brought
against it arising out of or based upon this agreement may be instituted in any
2
<PAGE>
state or federal court in the Borough of Manhattan, The City of New York, and
waives any objection it may now or hereafter have to the laying of venue of any
such Proceeding, and irrevocably submit to the non-exclusive jurisdiction of
such courts in any such Proceeding.
(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 address or
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 (b)):
if to the Company, to it at:
70 West Weiyang Road
Xianyang, Shaanxi Province
People's Republic of China
Telephone: (+86) 9103320881
Facsimile: (+86) 9103320808
if to Pianzhuan Group, to it at:
18 West Weiyang Road
Xianyang, Shaanxi Province
People's Republic of China
Telephone: (+86) 9103320891
Facsimile: (+86) 9103320666
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
3
<PAGE>
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 may be executed in counterparts, each of which
shall be considered an original, and both of which together shall constitute the
same instrument.
(d) 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 6(d) is in addition to, and not in lieu of, any other rights or
remedies a party may have.
(e) 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.
(f) 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.
4
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
By:______________________________
XIANYANG PIANZHUAN GROUP CORPORATION
By:______________________________
5
Exhibit 23.2
ARTHUR
ANDERSEN
--------------------------
Arthur Andersen & Co
Certified Public
Accountants
--------------------------
25/F Wing On Centre
111 Connaught Road Central
Hong Kong
August 15, 1997
The Directors
Asia Electronic Holdings 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 August 15, 1997 included in Asia Electronics Holdings Co.
Inc.'s Form F-1 dated August 15, 1997 and to all the references to our Firm
included in this registration statement.
Very truly yours,
/s/ ARTHUR ANDERSEN & CO.
Exhibit 23.5
Consent of Jun He Law Office
We hereby consent to the reference to our firm under the captions
"Enforceability of Civil Liabilities and Certain Foreign Issuer
Considerations," "Taxation," and "Legal Matters" in the Prospectus contained in
the Registration Statement on Form F-1 of Asia Electronics Holding Co. Inc. In
so doing, we do not admit that we are in the category of persons whose consent
is required under Section 7 of the Securities Act of 1933 and the rules and
regulations of the Securities and Exchange Commission thereunder.
/s/ Jun He Law Office
August 15, 1997
Exhibit 23.6
Consent of Proskauer Rose LLP
We hereby consent to the reference to our firm under the captions "Taxation,"
and "Legal Matters" in the Prospectus contained in the Registration Statement
on Form F-1 of Asia Electronics Holding Co. Inc. In so doing, we do not admit
that we are in the category of persons whose consent is required under Section
7 of the Securities Act of 1933 and the rules and regulations of the Securities
and Exchange Commission thereunder.
/s/ Proskauer Rose LLP
August 15, 1997
Exhibit 99.1
I hereby represent that the following documents constitute fair and
accurate English translations of the respective Chinese documents to which they
correspond.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------
<S> <C>
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 Pianzhuan Group, Hong Kong Weilin Industrial Co., Ltd.,
and Xian Jiao Tong University Electrical Engineering Co., Ltd.
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)
10.10 Agreement of Lease between Pianzhuan Group and Yongxin
10.11 Agreement of Lease between Pianzhuan Group and Daming
10.12 Agreement of Lease between Pianzhuan Group and Dnon Tech
10.13 Agreement of Lease between Weihai Electronic Industrial Park Weishi Corp.
and Daming
10.14 Term Loan Agreement between Daming and the Construction Bank of China
10.15 Loan Guarantee of Pianzhuan Group
10.16 Loan Collateral Agreement between Daming and the Construction Bank of
China
10.17 Form of Agreement of Extension of Loan Repayment among Daming,
Pianzhuan Group and the Construction Bank of China
10.18 License Agreement among Daming, Yongxin and Pianzhuan Group
10.19 License Agreement of Color Display Tube Equipment and Technology
between Yongxin and Nichimen Corporation
</TABLE>
By: /s/ Du Qingsong*
---------------------------
Du Qingsong, Chairman of
the Board and Chief
Executive Officer
* By Mary Xia, as Attorney-in-Fact
