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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______ to ______
Commission file number: 0-29424
ASIA ELECTRONICS HOLDING CO. INC.
(Exact name of registrant as specified in its charter)
N/A British Virgin Islands
(Translation of registrant's (Jurisdiction of incorporation
name into English) or organization)
Harney, Westwood & Riegels
Craigmuir Chambers
P.O. Box 71
Road Town
Tortola
British Virgin Islands
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange
on which registered
None N/A
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Common Shares, par value $.01 per share
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report.
10,091,500 Shares, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17 [ ] Item 18 [X]
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TABLE OF CONTENTS
FINANCIAL STATEMENTS AND CURRENCY PRESENTATION
<TABLE>
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Page
PART I
<S> <C> <C>
Item 1. Description of Business................................................................ 1
Item 2. Description of Property................................................................ 15
Item 3. Legal Proceedings...................................................................... 15
Item 4. Control of Registrant.................................................................. 15
Item 5. Nature of Trading Market............................................................... 16
Item 6. Exchange Controls and Other Limitations Affecting Security Holders..................... 16
Item 7. Taxation............................................................................... 17
Item 8. Selected Financial Data................................................................ 22
Item 9. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................. 23
Item 9A Quantitative and Qualitative Disclosures about Market Risk............................. 28
Item 10. Directors and Officers of Registrant................................................... 28
Item 11. Compensation of Directors and Officers................................................. 30
Item 12. Options to Purchase Securities from Registrant or Subsidiaries......................... 30
Item 13. Interest of Management in Certain Transactions......................................... 30
PART II
Item 14. Description of Securities to be Registered............................................. 34
PART III
Item 15. Defaults Upon Senior Securities........................................................ 35
Item 16. Changes in Securities and Changes in Security for Registered Securities................ 35
PART IV
Item 17. Financial Statements................................................................... 36
Item 18. Financial Statements................................................................... 36
Item 19. Financial Statements and Exhibits...................................................... 36
</TABLE>
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FINANCIAL STATEMENTS AND CURRENCY PRESENTATION
Asia Electronics Holding Co. Inc. 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 People's Bank of China (the "PBOC Rate") on December 31, 1997 of US$1.00 =
RMB8.2796.
The following table sets forth certain information concerning exchange
rates between Renminbi and U.S. dollars for the periods indicated:
<TABLE>
<CAPTION>
Noon Buying Rate(1)
-----------------------------------------------------
Period Period End Average (2) High Low
------ ---------- ----------- ---- ---
(RMB per US$)
<S> <C> <C> <C> <C>
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
1997................... 8.3100 8.3193 8.3283 8.2911
</TABLE>
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(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.
PART I
Item 1. Description of Business.
Company Overview
Asia Electronics Holding Co. Inc. (the "Company") is a British Virgin
Islands company, incorporated in January 1996, that primarily 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 of deflection yokes are to original equipment
manufacturers ("OEMs"), which integrate the Company's deflection yokes into
finished goods or re-sell 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").
<PAGE>
History
The Company was incorporated in the British Virgin Islands on January 3,
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 a
family of companies affiliated with Xianyang Pianzhuan Group Corporation, which
is wholly owned by a state-owned asset management council ("Pianzhuan Group").
In December 1996, the Company also entered into agreements 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.
On October 1, 1997, the Company successfully completed its initial public
offering of an aggregate of 5,290,000 shares, par value $.01 per share (the
"Common Stock") at $8.00 per share (the "Offering"). The Common Stock is listed
on The NASDAQ National Market under the symbol "AEHCF." As of December 31, 1997,
the Company had 10,091,500 shares of Common Stock outstanding.
Immediately after the closing of the Offering, the Company applied
approximately $5.5 million of the net proceeds of the Offering to consummate the
acquisitions of Yantai and Dnon Tech. Yantai, like Yongxin and Daming, develops
and manufactures deflection yokes. Dnon Tech manufactures, in part for Yongxin
and Daming, high quality enameled copper wire, which is the principal raw
material used in deflection yokes. Each of Yongxin, Daming, Yantai and Dnon Tech
has all its manufacturing facilities in China.
In order to accommodate its recent and anticipated growth, the Company has
embarked on a number of construction and expansion projects, including the
installation of a new deflection yoke manufacturing facility in Weihai, China,
and the installation of a research and development department in Xianyang. The
expansion efforts are expected to increase the Company's annual manufacturing
capacity from approximately 5.2 million units to approximately 12.8 million
units. The Weihai facility commenced nominal operations in March 1998, and is
expected to achieve full capacity by October 1998. In late 1997, the Company
formed a joint venture, Weihai Gaoxin Daewoo Electronic Components Co., Ltd.
("Weihai"), to own and operate the new Weihai facility. The Company owns 80% of
the equity in Weihai. See "Item 1--Expansion Plans."
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 discussion is based upon, among other sources, information compiled in
a recent report by a specialty glass manufacturer (the "Report"), which provides
information about the total worldwide demand for television sets and computer
monitors and the total worldwide production of CPTs and CDTs. 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.
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 "Item
1--Products." World production of CDTs is expected to increase from the present
world 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 is 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 forecasts in the Report that the Company
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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 the Year 2000
(in millions of units)
<TABLE>
<CAPTION>
Rest Rest
of Total 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 Electric Industrial Co., Ltd.
("Matsushita"), Sony Corporation ("Sony"), Sanyo, Philips Electronics N.V.
("Philips") and Samsung Group ("Samsung") continue to manufacture deflection
yokes to some extent, the Company believes there is a trend among OEMs to
outsource the more labor-intensive segments of their manufacturing operations.
The Company believes the relatively low labor cost in China and the difficulty
in 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 "Item 1--Sales and Marketing."
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 1996 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 Electric Co. Ltd.
("Totoku"), a Japanese electronics company that manufacturers CRTs. The Company
believes that Murata intends to exit the deflection yoke business. The Company
believes Murata's deflection toke 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:
o Expand its production capacity to meet existing and expected demand.
The Company is using approximately $14.3 million of the net proceeds
of the Offering to expand capacity. 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, and to accommodate its recent and anticipated growth. 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 million units in 1997.
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o Focus production expansion on higher margin products, such as
deflection yokes for larger screen televisions. Most of the Company's
current output is deflection yokes for 14 ", 20" and 25" CPT models.
The Company's planned expansion is 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%. In 1997, the Company sold
nearly 1.7 million deflection yokes for 25" CPTs, an increase of
nearly 65% from 1996 and, upon completion of the expansion, will have
the capacity to produce 2.5 million.
o Expand penetration of CDT market. The Company recently entered the
market for deflection yokes for computer monitors (CDTs). 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 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.
o 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 develop 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 Electronics Co., Ltd., ("LG Shuguang"), Fujian Hitachi
Television Co. ("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
existing manufacturing expertise and capacity.
Products
CPT Products
The Company produced 5,816,182 deflection yokes for CPTs in 1997. The
Company currently offers deflection yokes for 14", 20", 21", 25" and 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,
Matsushita, 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 recently began producing a nominal amount of 16" deflection yokes
for the replacement parts market.
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
"Item 1 -- 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.
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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 is prepared to enter 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 10,500 deflection yokes for
CDTs in 1997. 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.
Other Products
Since 1996, the Company has designed and built certain equipment for its
own use and for use by related companies. See "Item 9 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Item 13 --
Interest of Management in Certain Transactions."
Sales and Marketing
The Company sold 5,826,682 deflection yokes in 1997, approximately 50% of
which were sold to Daewoo, a vertically integrated producer of television sets
that in 1997 ranked number 24 among the world's Fortune 500 companies. The
Company believes that Daewoo redistributes a portion of the deflection yokes it
purchases from the Company to major customers, such as Sharp, Toshiba, Fujian
Hitachi, Sony and Matsushita. The Company sold approximately 25% of the total
number of deflection yokes sold in 1997 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:
5
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<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 Year Over Year Change
-------------------------- ------------------------- ---------------------
nits Percent
Product Units Percent of Total Units Percent of Total Change Change
------- --------- ---------------- --------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Older Products
14" CPT 2,109,750 36.2% 2,007,880 36.0% 101,870
20" CPT 1,831,639 31.4% 1,957,800 35.1% (126,161)
21" CPT 143,016 2.5% 521,998 9.4% (378,982)
--------- --------- -------
4,084,405 4,487,678 (403,273) -8.99%
Newer Products
16" CPT 12,438 0.2% -- -- 12,438
25" CPT 1,677,638 28.8% 1,018,111 18.3% 658,827
29" CPT 41,701 0.7% -- -- 41,701
14" CDT 10,500 0.2% 67,368 1.2% (56,868)
--------- --------- -------
1,742,277 1,086,179 656,098 60.40%
--------- --------- -------
TOTAL 5,826,682 100.0% 5,573,857 100.0% 252,825 4.54%
========= ========= =======
</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
14 sales personnel for domestic business and 13 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 "Item 1 -- Risk Factors -- Potential Conflicts of
Interest."
In addition to sales conducted through Pianzhuan Group, the Company has
also conducted sales 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. In that connection, the Company has begun arrangements to share, with
affiliates, sales offices and personnel in New York City and Minneapolis,
Minnesota, in order to service American and other Western customers, as well as
offices in Seoul, Korea and in Nagano, Japan, to service customers in Asia and
the Pacific Rim.
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 "Item 1 -- Sales and Marketing" and "Item 1 -- 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, Fujian Hitachi, Samsung and LG Shuguang. Within the last six months of
1997, the Company began selling products to LG Shuguang, Fujian Hitachi and
Foshan Thompson. The Company has had preliminary discussions with several
domestic Chinese
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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., regarding the sales of the Company's deflection yokes for
29" CPTs. Additionally, Toshiba, Samsung and several other OEMs are currently in
the process of testing and evaluating for potential purchase deflection yokes
for 14" and 15" CDTs.
Manufacturing
General
The Company's manufacturing operations are located in the cities of
Xianyang and Yantai. In October 1997, the Company began installation of a
deflection yoke manufacturing operation in a newly constructed building in the
city of Weihai. Upon completion of the installation, the Company will purchase
the land and the building from their current owner. See "Item 2 -- Description
of Properties." The new facility commenced operations in March 1998. Capacity
has steadily increased, and the facility is expected to be producing at full
capacity by October 1998. The Company will operate the facility through its new
Weihai subsidiary. The Company owns 80% of the equity in Weihai. See "Item 1 --
Expansion Plans." The Company currently produces deflection yokes for 14", 20",
21", 25" and 29" CPTs, and also for 14" CDTs. The Company began producing
deflection yokes for 29" CPTs in March 1997. The Company also recently began
producing a nominal amount of 16" deflection yokes for the replacement parts
market. The following table sets forth the Company's annual production capacity
as of December 31, 1997 and annual production capacity as of October 31, 1998
(upon completion of the Company's expansion project):
Annual Production Capacity(1)
<TABLE>
<CAPTION>
Anticipated Production
Capacity-as-of-July-31,-1998
Production Capacity (Upon Completion of
as of December 31, 1997 Expansion Projects)(2)
----------------------- ----------------------
<S> <C> <C>
Production(3):
Deflection yoke for 14" CPT................ 1,500,000 2,000,000
Deflection yoke for 20" CPT................ 2,000,000 2,100,000
Deflection yoke for 21" CPT (wide)......... 1,000,000 2,200,000
Deflection yoke for 25" CPT................ 1,200,000 2,500,000
Deflection yoke for 29" CPT................ 150,000 1,800,000
Deflection yoke for 14" CDT................. 150,000 2,200,000
--------- ----------
Total.................................... 6,000,000 12,800,000
</TABLE>
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(1) Based upon two production shifts operating 5 days per week.
(2) See "Item 1 -- Expansion Plans."
(3) Production can be redirected among certain models through the adjustment of
machines and the changing of dies and molds.
Each 14", 20" and 21" deflection yoke for a CPT consists of two coils of
enameled copper wire, plastic structures, ferrite metal cores and electronic
controllers. The two coils, one for horizontal and the other for vertical
alignment of the light beams, are separated by plastic structures shaped to fit
in the neck of the CRT. The horizontal coil is inside the separator and the
vertical coil is wrapped around a ferrite core, which straddles the exterior of
the separator. The electronic controllers regulate communication between the
coils and the CRT. Deflection yokes for 25" and larger CPTs
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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.
Backlog
At December 31, 1996 and 1997, the amounts of backlog of firm orders were
approximately $30 million and $40 million, respectively. Substantially all the
backlog at December 31, 1996 was filled by December 31, 1997, and the Company
expects to fill substantially all the backlog at December 31, 1997 by December
31, 1998.
Expansion Plans
The Company is in the process of installing a new production facility in a
newly constructed building in Weihai. Upon completion of the installation, the
facility will contain 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. The Company may in
the future add production of new deflection yoke models to existing production
lines or add more production lines. The Company will operate the facility
through its new Weihai subsidiary. The Company owns 80% of the equity in Weihai.
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 facility is expected to reach full capacity by October 1998.
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 "Item 13 -- Interest of Management in Certain
Transactions." This department recently developed two adaptable deflection yokes
for 25" CPTs for the Company. See "Item 1 -- 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 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 is establishing its own research and development department in
Xianyang and, in the future, 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 Dogu Electronics Co. Ltd., both Korean companies. The
Company also may face competition from emerging technologies,
8
<PAGE>
such as "flat-panel displays," which could reduce the use of CRTs in the future.
See "Item 1 -- 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.
Employees
At December 31, 1997, the Company had approximately 1,255 employees,
including approximately 1,089 production personnel. None of the Company's
employees is covered by a collective bargaining agreement. The Company believes
its employee relations are good.
Risk Factors
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 1992 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 2.0% in 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.
9
<PAGE>
Risks Related to the Legal System of China
The Chinese legal system is based on written statutes and, unlike common
law systems, decided legal cases in China have little precedential value. In
1979, China began the process of developing its legal system by undertaking to
promulgate a comprehensive system of laws. On December 29, 1993, the National
People's Congress promulgated the Company Law of The People's Republic of China
(the "Company Law"), which became effective on July 1, 1994. In August 1994,
pursuant to the Company Law, the State Council issued the "PRC Special
Regulations on Overseas Offering and Listing of Shares by Joint Stock Limited
Companies" to regulate joint stock limited companies that offer and list their
shares overseas. The Company Law, the rules and regulations promulgated under it
and legal prescriptions relating to Chinese companies provide the core of the
legal framework governing the corporate behavior of companies, such as the
Company's subsidiaries, and their directors and shareholders. Because these
laws, regulations and legal requirements are relatively recent, their
interpretation and enforcement involve significant uncertainty.
Risks Related to Expansion
The Company is currently engaged in 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 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.
The Company's four operating subsidiaries, Yongxin, Daming, Yantai and Dnon
Tech, each have 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
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<PAGE>
experienced a devaluation against most major currencies, and a significant
devaluation of the Renminbi occurred on January 1, 1994 in connection with the
adoption of the new unitary exchange rate. On that date, the official exchange
rate for conversion of Renminbi to U.S. dollars changed from approximately
RMB5.8000 to $1.00 to approximately RMB8.7000 to $1.00, representing a
devaluation of approximately 50%. Since 1994, the official exchange rate for the
conversion of Renminbi to U.S. dollars has been stable, and the Renminbi has
appreciated slightly against the U.S. dollar. However, there can be no assurance
that such rate will not become volatile again or that there will be no further
devaluation of the Renminbi. Because the Company is not able to hedge
effectively against Renminbi devaluations other than by retaining its foreign
exchange earnings to the extent permitted by the SAEC, any future movements in
the Renminbi could have a material adverse effect on the Company's results of
operations. The Company's results of operations also may be affected by changes
in the value of currencies other than the Renminbi, depending upon the
currencies in which the Company's earnings and obligations are denominated.
Dependence on China Factories
The Company's products are currently manufactured at factories located in
Xianyang and Yantai in China. Firefighting and disaster relief or assistance in
China are primitive by Western standards. The Company currently maintains fire,
casualty and theft insurance aggregating approximately $17 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 in 1997 ranked number
24 among the world's Fortune 500 companies, and IRICO, the third 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 1997, Daewoo accounted for approximately 33% of the
Company's total pro forma consolidated net sales, approximately 60% of which was
re-sold to additional customers. In addition, in 1996 and 1997, 40% and 35%,
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 "Item 1 -- Sales and
Marketing."
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Deterioration of Economic Conditions in the Asia Pacific Region
A significant amount of the Company's sales are made in South Korea, Japan,
Singapore and other countries in East and Southeast Asia (the "Asia Pacific
Region"). Additionally, many of the Company's customers (most notably Daewoo)
resell the Company's products to other OEM's throughout the Asia Pacific Region.
Accordingly, the Company's financial condition, business and prospects may be
affected by changes in governmental policies, inflation, increasing interest
rates, social instability and other political, economic, diplomatic or social
developments in or affecting the Asia Pacific Region, which are not within the
control of the Company. In recent months, many countries in the Asia Pacific
Region have experienced considerable currency volatility and devaluation, high
interest rates, stock market volatility and declining asset values which have
contributed to net foreign capital outflows, an increase in the number of
insolvencies and a decline in business and consumer spending.
Recent economic developments in the Asia Pacific Region could have a
material adverse effect on the Asia Pacific Region's business and consumer
demand for televisions and other display products. Such demand generally rises
as the overall level of economic activity increases and falls as such activity
decreases. In addition, the recent currency devaluations in the Asia Pacific
Region could result in price erosion of display products as products
manufactured in countries whose currencies have devalued significantly against
the U.S. dollar become less expensive in U.S. dollar terms. Any adverse effect
on the deflection yoke industry as a result of a slower demand for display
products in the Asia Pacific Region or product price erosion arising from
currency devaluations in countries such as South Korea, where two of the
Company's competitors are located, could have a material adverse effect on the
Company's financial condition, business and prospects, especially if current
business and economic conditions in the Asia Pacific Region continue or
deteriorate further.
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
To Shing Hoi, Mr. Du's son, owns approximately 45.2% 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 October 1, 2007, (i) he will not
sell or otherwise dispose of any of his shares of Common Stock without Mr. Du's
prior written consent, and (ii) he will vote his shares as Mr. Du directs. As a
consequence, Mr. Du will be able to control virtually all matters requiring
approval by the shareholders of the Company.
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 1997, approximately 49% and 34%, respectively, of the Company's pro
forma consolidated net sales of deflection yokes 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
"Item 1 -- Sales and Marketing" and "Item 13 -- Interest of Management in
Certain Transactions."
Potential Conflicts of Interest
Pianzhuan Group 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
12
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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 "Item 13 -- Interest
of Management in Certain 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 the
family of companies affiliated with Pianzhuan Group (the "Members") have agreed
that 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 it will sell or market in
China only the Company's deflection yokes. Subject to certain conditions, these
agreements will terminate on October 1, 2007, unless sooner terminated by the
Company. See "Item 13 -- Interest of Management in Certain Transactions" and
"Item 4 -- Control of Registrant." There can be no assurance that such
agreements will be enforced by a Chinese court. See "Item 1 -- Risk Factors --
Risks Relating to China."
Mr. Du has agreed with the Company that, until at least October 1, 2002, 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 "Item 13 -- Interests of Management in Certain Transactions."
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.
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 the intellectual property rights of a third
party. A finding that the Company has infringed the intellectual property rights
of a third party could have a material adverse effect on the Company.
13
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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 laws.
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.
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 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 consist of Robert
Adler and Hans Decker. See "Item 10 -- Directors and Officers of Registrant."
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.
14
<PAGE>
Item 2. Description of Property.
The Company leases space from Pianzhuan Group in three adjacent buildings
in the city of Xianyang. In October 1997, the Company began construction of a
deflection yoke manufacturing operation in a newly constructed building located
in the city of Weihai. The Company's Weihai subsidiary, which will carry out its
operations in Weihai, has agreed to purchase both the land and the building for
RMB28.4 million, or approximately $3.4 million, upon completion of the
installation, from Weihai Electronic Industrial Park Weishi Corp., the current
owner. See "Item 1 -- Expansion Plans" and "Item 13 -- Interest of Management in
Certain 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 commenced installation of the Weihai facility in October 1997
and intends to complete it in October 1998. Upon completion, the annual
production capacity for deflection yokes for 25" CPTs will be increased by
approximately 1.3 million units, for 29" CPTs by approximately 1.8 million units
and for CDTs by approximately 2.2 million units.
The Company believes that, upon completion of the expansion program
currently in progress, its facilities will be adequate to meet its currently
foreseeable needs. See "Item 1 -- Expansion" and "Item 1 -- Risk Factors --
Risks Related to Expansion."
Item 3. Legal Proceedings.
The Company is not party to any legal proceedings other than routine
litigation incidental to its business and there are no material legal
proceedings pending with respect to the property of the Company.
Item 4. Control of Registrant.
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 December 31, 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>
Person or Group Amount(1) Percent of Class(2)
- --------------- --------- -------------------
<S> <C> <C>
To Shing Hoi(3).................................... 4,559,000(4) 45.2%
Du Qingsong(5)..................................... 4,559,000(4) 45.2%
All directors, nominees for directors 4,801,500(4)(6) 47.6%
and officers as a group (8 persons)..............
</TABLE>
- ------------
(1) Beneficial ownership is determined pursuant to Rule 13d-3 of the Securities
Exchange Act of 1934.
(2) Based on 10,091,500 shares of Common Stock outstanding as of December 31,
1997.
(3) Mr. To's address is RM1, 11th Floor, Ocean View Court, 27 Chatham Road,
Tsim Sha Tsui, Kowloon, Hong Kong.
(4) Mr. To and Mr. Du have entered into an agreement, pursuant to which Mr. To
has agreed that, until October 1, 2007, (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 "Item 13 --
Interest of Management in Certain Transactions."
(5) Mr. Du's address is c/o Asia Electronics Holding Co. Inc., 70 West Weiyang
Road, Xianyang, Shaanxi Province, People's Republic of China.
(6) Includes 242,500 shares owned by First Pacific Rim (BVI) Inc. ("FPRI"),
which is controlled by Ming Cui and Mary Xia; Ming Cui and Mary Xia
disclaim beneficial ownership of these shares. Excludes the 29,500 shares
issuable upon exercise of options issued to FPRI, and the 10,000 shares
issuable upon exercise of options issued to Robert Adler, upon the closing
of this Offering. See "Item 13 -- Interest of Management in Certain
Transactions."
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Item 5. Nature of Trading Market.
The Company's Common Stock is traded on The NASDAQ National Market under
the symbol "AEHCF." The high and low closing sale prices as reported by The
NASDAQ National Market during the last quarter of 1997 were 14 1/8 and 6 7/32,
respectively.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders.
The Company, as an international business company incorporated under the
International Business Companies Act of the British Virgin Islands, is governed
by and subject to British Virgin Islands law. 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 Common Stock. British Virgin Islands law and the
Company's Memorandum and Articles of Association impose no limitations on the
right of nonresident or foreign owners to hold or vote such securities of the
Company.
However, because the Company's subsidiaries are organized as
Chinese-foreign joint ventures, the Company is subject to certain exchange
controls on the conversion of Renminbi. The Renminbi currently is not a freely
convertible currency. The State Administration for Exchange Control ("SAEC"),
under the authority of 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 investment 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.
The Company's four operating subsidiaries, Yongxin, Daming, Yantai and Dnon
Tech, each have 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
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<PAGE>
operations also may be affected by changes in the value of currencies other than
the Renminbi, depending upon the currencies in which the Company's earnings and
obligations are denominated.
Item 7. 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 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. The following discussion is
based upon laws and relevant interpretations thereof in effect as of the date of
this Annual Report, 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, in the case of an individual, 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 (including pursuant to certain constructive ownership
rules), 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
17
<PAGE>
this purpose, "U.S.-related gross income" means the corporation's U.S. source
income and certain types of its foreign source income that is effectively
connected with the conduct of a U.S. trade or business. If the Company is
classified as a PHC, a tax will be levied at the rate of 39.6% on the Company's
undistributed PHC income. 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 currently
satisfy the shareholder test so as to be classified as a FPHC. It is possible
that subsequent events could cause the Company 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).
Currently, neither the Company nor any of its subsidiaries are CFCs. 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 1298 relate to the tax treatment of U.S. shareholders
of a passive foreign investment company ("PFIC"). The Company will be a PFIC if
75% or more of its gross income (including the pro rata share of the gross
income of any corporation (U.S. or foreign) in which the Company is considered
to own 25% or more of the shares by value) in a taxable year is passive income.
Alternatively, the Company will be considered to be a PFIC if at least 50% of
the assets (averaged over the year and generally determined based on value) of
the Company (including the pro rata share of the assets of any corporation of
which the Company is considered to own 25% or more of the shares by value) in a
taxable year are held for the production of, or produce, passive income. If the
Company becomes a PFIC, each U.S. Investor would (regardless of whether the
Company remains a PFIC), in the absence of an election by such
18
<PAGE>
U.S. Investor to treat the Company as a "qualified electing fund" (the "QEF
election"), or a mark-to-market 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.
If the Company becomes a PFIC, if the Common Stock is marketable at that
time (within the meaning of Section 1296(e) of the Code), a U.S. Investor may
make a mark-to-market election with respect to the Common Stock. Under the
election, any excess of the fair market value of the Common Stock at the close
of any tax year over the U.S. Investor's adjusted basis in the Common Stock is
included in the U.S. Investor's income as ordinary income. In addition, the
excess of the adjusted basis at the close of any taxable year over the fair
market value of the Common Stock is deductible against ordinary income in an
amount equal to the lesser of the amount of such excess or the net
mark-to-market gains on the Common Stock that the U.S. Investor included in
income in previous years. If a U.S. Investor makes a mark-to-market election
after the beginning of its holding period, the U.S. Investor does not avoid the
interest charge rule discussed above with respect to the inclusion of ordinary
income attributable to periods before the election.
The Company is currently not a PFIC, and does not expect to be a PFIC 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
19
<PAGE>
the Common Stock and all holders of Common Stock are not liable to BVI income
tax on gains realized during that year on sale or disposal of such shares; the
BVI does not impose a withholding tax on dividends paid by the Company
incorporated under the International Business Companies Act.
There are no capital gains, gift or inheritance taxes levied by the BVI on
companies incorporated under the International Business Companies Act. In
addition, the Common Stock is not subject to transfer taxes, stamp duties or
similar charges.
There is no income tax treaty or convention currently in effect between the
United States and the BVI, nor, as far as counsel is aware, is any such treaty
or convention currently being negotiated.
China Taxation
Taxation of the Sino-Foreign Joint Venture Enterprises
Under the Income Tax Law of the People's Republic of China concerning
Foreign Investment Enterprises and Foreign Enterprises (the "Tax Law"), a
Sino-foreign joint venture is subject to a national tax on worldwide income at
the rate of 30%. In addition, a local surtax of 3% is levied by the local
government, resulting in a combined tax rate of 33%. In order to simplify tax
administration, national and local income taxes are assessed and collected
concurrently. Pursuant to the Tax Law, the national tax rate is reduced to 15%
for joint ventures established in the 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
20
<PAGE>
entertainment services. The Consumption Tax rate schedule groups taxable
products into 25 categories and imposes the tax at 14 rates ranging from 3% to
45%.
An FIE is exempt from the Value Added Tax on raw material imported for
production for exports, if the FIE is registered before January 1, 1994. In
addition to the Value Added Tax, the Consumption Tax and the Business Tax,
customs duties are levied on most goods imported into China. In general, items
imported by joint ventures that are exempt from the Value Added Tax also are
exempt from customs duties, except imports of certain office equipment and
production equipment, even if the importation is within the limitation of an
FIE's total investment. Joint ventures also may be liable for Land Appreciation
Tax, which ranges from 30 to 60% on the gain on sale of land use rights,
buildings and their attached facilities. Finally, joint ventures may be subject
to Resources Tax on exploitation and production of selected natural resources.
The Company's PRC joint ventures are subject to the Tax Law. Pursuant to
the Tax Law, Sino-foreign equity joint venture enterprises generally are subject
to an enterprises income tax at an effective rate of 33%, which is comprised of
a state tax of 30% and a local tax of 3%. As the Company's PRC joint ventures
are qualified as production oriented enterprises for an operating period of ten
years or more, the joint ventures are eligible for two years of full exemption
and a 50% reduction on enterprises income tax starting from the first
profit-making year.
Yantai is a joint venture established in Yantai, an ETDZ. Because Yantai
qualifies as an FIE, its income tax rate is reduced to 24% 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.
21
<PAGE>
Item 8. Selected Financial Data.
The Company was incorporated on January 3, 1996, but did not conduct any
operations during 1996. The following table, which sets forth selected financial
data of the Company, reflects the operations of Yantai and Dnon Tech only from
October 1, 1997, and 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
consolidated financial statements, which begin on page F-3.
<TABLE>
<CAPTION>
1993(1) 1994(1) 1995(1) 1996(2) 1997 1997
(Amounts in thousands, except per share data)
RMB RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C> <C>
For the year:
Sales 23,444 68,789 96,713 143,684 239,429 28,918
Cost of goods sold (15,767) (51,798) (69,977) (96,350) (151,539) (18,303)
Selling and administrative expenses (60) (634) (2,615) (4,511) (13,784) (1,665)
Interest income (expenses), net 2,348 (1,689) (3,214) (1,037) 6,274 758
Other (expenses) income, net - (219) (36) (114) 2,852 345
---- ----- ---- ----- ----- ---
Total costs and expenses (13,479) (54,340) (75,842) (102,012) (156,197) (18,865)
-------- -------- -------- --------- --------- --------
Income before income taxes 9,965 14,449 20,871 41,672 83,232 10,053
Provision for income taxes - - (2,077) (7,411) (15,059) (1,819)
---- ---- ------- ------- -------- -------
Income before minority interest 9,965 14,449 18,794 34,261 68,173 8,234
Minority interest - - - - (15,738) (1,901)
---- ---- ----- ----- -------- -------
Net income 9,965 14,449 18,794 34,261 52,435 6,333
===== ====== ====== ====== ====== =====
Earnings per common share - - - - 8.55 1.03
At year end:
Working capital (3) 12,041 1,873 4,098 56,287 378,572 45,723
Total assets 35,083 86,098 88,775 90,143 515,737 62,289
Short-term bank loans 9,670 14,060 15,135 14,749 19,333 2,335
Total liabilities (4) 15,956 56,557 44,858 28,500 71,603 8,648
Investors' equity 19,128 29,541 43,917 27,556 379,840 45,876
</TABLE>
- --------------------
(1) The Company acquired an 80% equity interest in Yongxin and Daming,
effective as of December 31, 1996 (the "Acquisition"). Because the Company
is an investment holding company with no other business activities, the
combined results of Yongxin and Daming (predecessor companies) as of and
for the years ended December 31, 1993, 1994 and 1995 are presented.
(2) As the Acquisition was effective as of December 31, 1996, and no
significant transactions took place on December 31, 1996, the income
statement of Yongxin and Daming (predecessor companies) for the year ended
December 31, 1996 has been presented in place of the period ended December
30, 1996, and the balance sheet of the Company as of December 31, 1996 has
also been presented.
(3) Represents current assets minus current liabilities.
(4) Excludes negative goodwill resulting from the acquisition of Yongxin and
Daming, which became effective December 31, 1997, and from the acquisitions
of Yantai and Dnon Tech, which became effective October 1, 1997.
22
<PAGE>
Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with
the selected financial information set forth in Item 8 hereof and the financial
statements and notes to the financial statements appearing elsewhere herein.
Overview
The Company was formed in 1996 and, at present, owns 80% of the equity of
each of Yongxin and Daming, 70% of the equity of Yantai and 90% of the equity of
Dnon Tech.
On September 25, 1997, the Company commenced the Offering of the Company's
Common Stock. Concurrent with the Offering, the Company acquired the controlling
interest in Yantai, an existing Chinese company involved in the production of
deflection yokes, and Dnon Tech, an existing Chinese company involved in the
production of enameled copper wire used in the manufacture of deflection yokes.
In late 1997, the Company formed the Weihai joint venture to own and
operate the new Weihai facility. The Company owns 80% of the equity in Weihai.
Results of Operations
Pro Forma: Year Ended December 31, 1997 Compared with 1996
Although the functional currency of the Company's subsidiaries and the
legal tender currency of China is the Renminbi ("RMB"), in order to facilitate
understanding by U.S. Investors, the amounts reflected in the following
discussion are in U.S. Dollars ("US$"). The effective exchange rate at December
31, 1997 was 8.2796 RMB per U.S. Dollar. No representation is made that RMB
could have been or could be converted to U.S. Dollars at that rate on December
31, 1997 or at any other time.
The following discussion is based upon the unaudited pro forma consolidated
statement of income of the Company for the years ended December 31, 1996 and
1997, as if the Company had acquired Yongxin, Daming, Yantai and Dnon Tech at
January 1, 1996 and 1997. The Company acquired an 80% interest in each of
Yongxin and Daming effective December 31, 1996, and a 70% interest in Yantai and
a 90% interest in Dnon Tech during the fourth quarter of 1997.
<TABLE>
<CAPTION>
Pro forma consolidated results Pro forma consolidated results Year over Year
of operations for 1996 of operations for 1997 Increase
Percent of Percent of
Amount Net Sales Amount Net Sales Percent
------ --------- ------ --------- -------
(US$ '000) (US$ '000)
<S> <C> <C> <C> <C> <C>
Net sales 27,336 100.00% 36,585 100.00% 33.83%
Gross profit 7,082 25.91% 13,060 35.70% 84.41%
Selling and 966 3.53% 2,119 5.79% 119.36%
administrative
expenses
Income before 6,310 23.08% 11,870 32.44% 88.11%
income taxes
Net income 4,383 16.03% 7,967 21.78% 81.77%
</TABLE>
23
<PAGE>
General. Although results of operations for 1997 reflect increased net
sales, gross profit and net income on a pro forma basis, late in the year, the
Company's business began to be affected by the deterioration of economic
conditions in the Asia Pacific Region. Many countries in the region began in
late 1997 to experience considerable currency volatility and devaluation, high
interest rates, stock market volatility and declining asset values, which
contributed to net foreign capital outflows, an increase in the number of
insolvencies and a marked decline in business and consumer spending. As a
consequence, the Company's results of operations began to be adversely affected
late in the year and are expected, at least through the first half of 1998, to
continue to reflect the adverse effect of the deterioration of economic
conditions in the Asia Pacific Region.
Net Sales. Net sales for 1997 increased by $9,249,000, or approximately
33.8%, from $27,336,000 in 1996 to $36,585,000 in 1997, primarily due to
increased volume in certain products resulting from improvements in production
capacity, changes in the product mix to emphasize higher value-added units that
command higher unit prices and margins and increased sales of manufacturing
equipment to related companies from $2,315,000 in 1996 to $4,151,000 in 1997.
Although net sales (of products other than manufacturing equipment) to customers
other than Daewoo increased by $8,996,000, or approximately 78.8%, from
$11,414,000 in 1996 to $20,410,000 in 1997, net sales to Daewoo decreased by
$1,618,000, or approximately 11.9%, from $13,642,000 in 1996 to $12,024,000 in
1997, primarily due to the deterioration of economic conditions in the Asia
Pacific Region, which, beginning in late 1997, caused the devaluation of the
Korean Won, thereby reducing the purchasing power of Korean companies and
customers. Total units sold increased by 282,825 units, or approximately 4.5%,
from 5,573,857 units in 1996 to 5,826,682 units in 1997, which reflects
increases in unit sales by product as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 Year Over Year Change
---------------------------- --------------------------- -----------------------
Units Percent
Product Units Percent of Total Units Percent of Total Change Change
--------- ---------------- ---------- ---------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Older Products
14" CPT 2,109,750 36.2% 2,007,880 36.0% 101,870
20" CPT 1,831,639 31.4% 1,957,800 35.1% (126,161)
21" CPT 143,016 2.5% 521,998 9.4% (378,982)
--------- ---- --------- ---- -------- -----
4,084,405 70.1% 4,487,678 80.5% (403,273) -8.99%
Newer Products
16" CPT 12,438 0.2% -- -- 12,438
25" CPT 1,677,638 28.8% 1,018,111 18.3% 658,827
29" CPT 41,701 0.7% -- -- 41,701
14" CDT 10,500 0.2% 67,368 1.2% (56,868)
--------- ---- --------- ---- -------- ------
1,742,277 29.9% 1,086,179 19.5% 656,098 60.40%
--------- ---- --------- ---- -------- ------
TOTAL 5,826,682 100.0% 5,573,857 100.0% 252,825 4.54%
========= ===== ========= ===== ======= ======
</TABLE>
Gross Profit. Production capacity increases, increased sales of higher
margin products and increased sales of manufacturing equipment to related
companies resulted in improved gross profit margins. A 33.8% increase in net
sales yielded an improvement in gross profit margin by nearly 10%, from
$7,082,000, or 25.9%, in 1996, to $13,060,000, or 35.7%, in 1997. The
improvement in such margins reflects better utilization of facilities, relative
improvements in production efficiency and the spread of corporate overhead
expense over a larger base.
Selling and Administrative Expenses. Selling and administrative expenses
increased by $1,153,000, or approximately 119.4%, from $966,000, or 3.5% of net
sales, in 1996, to $2,119,000, or 5.8% of net sales, in 1997. The increase in
selling and administrative expenses represents an investment in organization to
accommodate significant capacity increases.
Income Before Income Taxes. Income before income taxes increased by
$5,560,000, or approximately 88.1%, from $6,310,000, or 23.1% of net sales, in
1996 to $11,870,000, or 32.4% of net sales, in 1997. This change reflects the
24
<PAGE>
changes described above, as well as a decrease in net interest expense from
$380,000 in 1996 to net interest income of $569,000 in 1997 (which resulted
primarily from interest earned on the net proceeds of the Offering).
Net Income. As a result of the foregoing, on a 33.8% increase in sales, net
income increased by $3,584,000, or 81.8%, from $4,383,000, or 16.0% of net
sales, in 1996, to $7,967,000, or 21.8% of net sales, in 1997.
Combined Results of Operations for Yongxin and Daming: Year ended
December 31,1996 Compared with 1995
The amounts reflected in the following analysis of the combined results of
operations for Yongxin and Daming are in RMB.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1996 1995
----------------------------- ------------------------------
Amount Percentages Amount Percentages
-------------- ------------ ---------------- -----------
<S> <C> <C> <C> <C>
Net Sales.................. RMB143,683,800 100.0% RMB96,712,985 100.0%
Gross Margin............... 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, or 48.6%, from
RMB96,712,985 in 1995 to RMB143,683,800 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 14% for
deflection yokes for 25" CPTs.
Gross Profit. Gross profit increased by RMB20,597,846, or 77.0%, from
RMB26,735,777, or a gross profit margin of 27.6%, in 1995 to RMB47,333,623, 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, or 72.5%, from RMB2,614,942, or 2.7% of net sales, in
1995 to RMB4,511,155, 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, or 99.7%, from RMB20,870,460, or 21.6% of net sales, in 1995 to
RMB41,671,652, 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
to 1,036,500 (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, or 82.3%, from net
income of RMB18,794,452, or 19.4% of net sales, in 1995 to RMB34,260,912, 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, or 257%, from
RMB2,077,000 in 1995 to RMB7,410,740 in 1996 due to higher taxable income and a
partial expiration of tax holiday benefits.
25
<PAGE>
Combined Results of Operations for Yantai and Dnon Tech: Year ended December 31,
1996 Compared with 1995
The amounts reflected in the following analysis of the combined results of
operations for Yantai and Dnon Tech are in RMB.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1996 1995
----------------------------- -------------------------------
Amount 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%
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, or approximately 115.9%,
from RMB39,997,168 in 1995 to RMB86,361,938 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, from RMB767,443 or a
gross profit margin of 1.9%, in 1995 to RMB11,624,384, 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, or 95.4%, from RMB1,787,889, or 4.5% of net sales, in
1995 to RMB3,493,746, 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 from a loss of RMB(1,452,048) in 1995 to a gain of RMB6,666,505 in
1996. This change reflects the changes described above, as well as an increase
in net interest expense from RMB812,146 to RMB2,116,853 (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 from a net loss of
RMB(1,287,048) in 1995 to net income of RMB6,871,505 in 1996. This change
reflects the changes described above, as well as an increase in deferred tax
benefits of RMB40,000, from RMB165,000 in 1995 to RMB205,000 in 1996.
Liquidity and Capital Resources
The Company increased its capital in October 1997 through an initial public
offering with net proceeds to the Company of approximately $36.2 million.
Immediately following the Offering, the Company applied approximately $5.5
million of the net proceeds of the Offering to consummate the acquisitions of
Yantai and Dnon Tech.
Approximately $13.1 million of the net proceeds of the Offering is being
used for general corporate purposes and working capital, contributing to
improved liquidity. The Company also relies on cash flow from operations and
short-term borrowings from banks to meet its financial obligations. The Company
uses such funds to finance working capital, capital expenditures for expansion
of production facilities and payments of dividends. Subject to the availability
of foreign currency, there are no restrictions on the ability of the
subsidiaries to pay dividends to the Company and the
26
<PAGE>
other joint venture partners in the Company's subsidiaries. However, in certain
circumstances, such as repayment of capital, approval is required by the State
Administration of Foreign Exchange in order for a subsidiary to repay dividends.
On a pro forma basis, at December 31, 1997, the Company had working capital
of $45,723,000, compared to $6,868,000 at December 31, 1996. Changes in working
capital included proceeds from the Offering in the amount of $36,241,000, a
decrease in accounts receivable of $1,428,000, a decrease in inventories of
$1,134,000 and an increase in payables of $1,346,000. Working capital includes
approximately $18,200,000 maintained in a bank account of a related company in
order to secure financing for the construction of the Company's Weihai facility.
Pursuant to an agreement with the related company, the $18,200,000, plus
interest in the amount of $489,000, or 5.375% per year, was paid to the Company
in April 1998. Working capital also includes approximately $14,220,000, which is
an amount due from related companies. See "Item 13 -- Interest of Management in
Certain Transactions."
In 1997, the Company had consolidated net cash flow from operating
activities of $18,673,000, and Yantai and Dnon Tech had combined net cash flow
from operating activities from January 1, 1997 to October 1, 1997 (the date of
acquisition by the Company) of $2,393,000. The Company's pro forma net cash flow
from operating activities for 1997, assuming the acquisitions of Yantai and Dnon
Tech had been effective on January 1, 1997, was $21,066,000.
At December 31, 1997, the Company had short-term borrowings outstanding of
$2,335,000, with a weighted average interest rate of 8.5%. During 1997,
short-term borrowings decreased by approximately $1,084,000, from $3,419,000 to
$2,335,000.
The Company's consolidated pro forma capital expenditures for 1997
(including the acquisition of Yantai and Dnon Tech as of October 1, 1997) were
$6,119,000. At December 31, 1997, the Company had a total outstanding capital
commitments for construction of factory facilities and purchase of machinery and
equipment of approximately $3,147,000. The Company expects that capital
expenditures during 1998 will be approximately $11,000,000. See "Item 1 --
Expansion Plans."
The Company anticipates that it will be able to meet its ongoing cash
requirements with cash generated from operations, proceeds from the Offering and
borrowings, as needed, from existing banking relationships.
Impact of Inflation
The rate of inflation in China has declined steadily from 21.7% in 1994 to
2.0% in 1997. During the past several years, the cost of labor and other
expenses have been stable. Employees at Company facilities are paid at a higher
wage rate than the average wages in the area and have not demanded wage
increases in order to maintain real incomes. Raw material costs have declined,
consistent with world-wide commodity prices. Additionally, most raw materials
used by the Company are now sourced domestically at competitive prices
denominated in Renminbi. Thus, the net effect of inflation on the Company's 1997
operations was insignificant.
Impact of the Year 2000
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to
"00." The issue is whether the computer system will properly recognize
date-sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
The Company has assessed its data-processing systems and believes them to
be year 2000 compliant, with the exception of certain financial systems which
will be either replaced or upgraded by August 1998.
27
<PAGE>
Item 9A. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 10. Directors and Officers of Registrant.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position(s) with Company
- ---------------------- ----- -------------------------------------------------
<S> <C> <C>
Du Qingsong (1) 51 Chairman of the Board and Chief Executive Officer
Li Lianjie 59 Vice Chairman of the Board and Chief Operating Officer
Li Lei 27 Chief Financial Officer
Yu Yan Qiang 28 Director and Senior Technology Advisor
Aaron Y.P. Li 51 Executive Vice President of Sales and Marketing
Mary Xia (1) 46 Director
To Shing Hoi 24 Director
Li Wenya 26 Secretary
Robert Adler (2)(3) 63 Director
Hans Decker (2)(3) 68 Director
</TABLE>
(1) Member of Compliance Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
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. Mr. Du was also Chairman of Pianzhuan Group, a diversified group
of companies, consumer and industrial electronics, transportation and chemicals
businesses until June 1997. 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.A. in Engineering from
Xian Jiaotong University. Mr. Li devotes all of his business time to the
Company.
Li Lei has been the Chief Financial Officer of the Company since December
1997. Mr. Li had been Director of Financial Department of Xianyang Pianzhuan
Group Corp. since July 1996. From November 1994 to July 1996, Mr. Li was manager
of Xianyang Pianzhuan Development Co., Ltd. From July 1993 to November 1994, Mr.
Li was a Deputy- Director of the International Marketing Department of Xianyang
Pianzhuan Group Corp. Mr. Li received a B.S. in business from Harbin Ship
Building Engineering Institute in 1993.
Yu Yan Qiang has been a Director of the Company since December 1997.
Previously, Mr. Yu had been President of Xi'an Penpal Electronics Co., Ltd.
since January 1997. From February 1996 to January 1997, Mr. Yu was President of
Weihai Xinhan Electronics Co., Ltd. From August 1995 to February 1996, Mr. Yu
was Marketing Manager of Weihai Daewoo Electronics Co., Ltd. From July 1992 to
August 1995, Mr. Yu was a Deputy-Director of the
28
<PAGE>
International Marketing Department of Xianyang Pianzhuan Group Co. Mr. Yu
received a B.A. in engineering from Xi'an Jiaotong University in 1992.
Aaron Y.P. Li has been Executive Vice President of Sales and Marketing
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.S. from
Xian Jiaotong University, People's Republic of China in 1970, a M.S. in
Engineering from Xian Jiaotong University in 1981 and a M.B.A. in Business from
the University of Alberta, Canada. Mr. Li devotes all 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 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 Billion West Trading Limited, a Hong Kong-based
trading company. From 1993 to 1995, Mr. To was with the Hong Kong trading
concern, Ben Force 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 a Director of the Company since October 1997. 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 a Director of the Company since October 1997. 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., USA, an electronics corporation. From 1971 to 1990,
Mr. Decker was President of Siemens Corp.
Board Committees
The Board of Directors has an Audit Committee, a Compensation Committee and
a Compliance Committee. The Audit Committee, the members of which are the
Company's independent directors, Robert Adler and Hans Decker, 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 are the Company's independent directors, Robert Adler and Hans
Decker, 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. The Compliance Committee, the members of which are
Du Qingsong and Mary Xia, oversees compliance with securities laws governing
insider trading and tipping.
Item 11. Compensation of Directors and Officers.
The aggregate amount of compensation paid by the Company and its
consolidated subsidiaries to all the Company's directors and executive officers
during 1997 was approximately $82,732. In addition, the Company set aside $3,172
for pension and other similar benefits for its directors and executive officers
during 1997.
29
<PAGE>
Item 12. Options to Purchase Securities from Registrant or Subsidiaries.
In October 1997, the Company granted Barington Capital Group, L.P. and
Value Investing Partners, Inc., the representatives of the Underwriters, an
option to purchase 365,500 shares of Common Stock at $13.20 per share. Also, the
Company granted FPRI and several other advisors to the Company options to
purchase an aggregate of 94,500 shares of Common Stock at $13.20 per share.
These options are exercisable until October 1, 2002. As of December 31, 1997,
none of these options had been exercised. See "Item 13 -- Interest of Management
in Certain Transactions."
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. As of December 31, 1997, no options had been granted
under the Option Plan.
Item 13. Interest of Management in Certain 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 Co. Ltd. (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 $525,000,
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. At present, the Company owns 80% of Yongxin, and the Key Employees
Company owns 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. At present, the Company owns 80% of
Daming, and the Key Employees Company owns 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 Daewoo Electronic Components Co., Ltd., an affiliate
of Daewoo ("Daewoo Electronics"). 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,
30
<PAGE>
the closing of which occurred contemporaneously with the closing of the
Offering. As a consequence, the Company owns 70% of Yantai, Gold owns 20% of
Yantai and Daewoo Electronics owns 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 occurred contemporaneously with the closing of the
Offering. As a consequence, the Company owns 90% of Dnon Tech and Dea Tech owns
10% of Dnon Tech.
Formation and Financing of Weihai
In late 1997, the Company formed a new joint venture subsidiary, Weihai
Gaoxin Daewoo Electronic Components Co., Ltd., to own and operate its newly
constructed deflection yoke manufacturing facility in Weihai. The Company
contributed $2.8 million for an 80% interest in Weihai, the Key Employees
Company contributed $350,000 for a 10% interest and Daewoo Electronics has
agreed to contribute $350,000 for a 10% interest.
Approximately $14.3 million of the net proceeds of the Offering is being
used for the installation of the Weihai facility. However, in order to conserve
its U.S. currency and to avail itself of certain tax and customs benefits, the
Company did not pay such proceeds directly to contractors and vendors of
machinery and equipment for installation of the facility. See "Item 1 -- Risk
Factors -- Risks Relating to China -- Government Control of Currency Conversion
and Exchange Rate Risks." Instead, in late 1997, the Company transferred $18.2
million in cash to the Key Employees Company, which used it as security to
obtain loans denominated in RMB to finance the installation of the Weihai
facility. (The $18.2 million, plus interest equal to approximately $489,000, or
5.375% per year, was transferred back to the Company in April 1998, with the
remainder of the construction loans secured by the fixed assets of the Key
Employees Company.) In the first quarter of 1998, the Company incurred RMB44.3
million, or approximately $5.4 million, for costs relating to the installation
of the Weihai facility. The Company expects to incur additional costs in the
second and third quarter, relating to such installation. The Company is
currently negotiating an agreement with the Key Employees Company for the
transfer of the completed facility to Weihai. The facility is expected to be
completed by October 1998.
Relationship With Pianzhuan Group
Historically, Pianzhuan Group conducted a substantial portion of the
Company's sales in China and its marketing activities. In 1996 and 1997, the
Company effected $13,451,068 and $19,131,000 of sales, respectively, through
Pianzhuan Group. In addition, Pianzhuan Group has conducted sales and marketing
activities for other members of the family of companies affiliated with
Pianzhuan Group.
The subsidiaries of the Company and these members of the Pianzhuan Group
family of companies have agreed that 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 it will sell or market in China only the Company's deflection
yokes. Subject to certain conditions, these agreements will terminate on October
1, 2007, unless sooner terminated by the Company. There can be no assurance that
such agreements will be enforced by a Chinese court. See "Item 1 -- Risk Factors
- -- Risks Relating to China."
During 1996 and 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, on a proforma consolidated basis, $441,631 in
1996 and $783,250 in 1997. 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.
31
<PAGE>
The Company intends to rely increasingly on its own personnel and resources
in these areas. See "Item 1 -- Sales and Marketing." However, the agreement with
Pianzhuan Group 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 space in the city of Xianyang from Pianzhuan Group. The
Company believes that the terms of its leases are at least as favorable as could
be obtained from unaffiliated third parties and its Members.
In addition, during 1996 and 1997, the Company and its subsidiaries and
Pianzhuan Group and its Members engaged in various other transactions, for which
the Company and its subsidiaries paid Pianzhuan Group and the various Members
approximately $11,472,742 and $14,243,321, respectively, and Pianzhuan Group and
various Members paid the Company and its subsidiaries $13,965,285 and
$26,754,433, respectively. As of December 31, 1997, Pianzhuan Group and its
Members owed the Company approximately $14,221,000. Amounts paid by the Company
and its subsidiaries to Pianzhuan Group and various Members primarily reflect
purchases of enameled copper wire and, to a lesser extent, machinery that were
ordered through Pianzhuan Group. Having completed the acquisition of Dnon Tech,
the Company owns its own source of enameled wire, thereby eliminating a
substantial portion of these intercompany transactions. Amounts paid by
Pianzhuan Group and various Members 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 December 31, 1997.
Mr. Du entered into an employment agreement with the Company, pursuant to
which Mr. Du agreed that, until at least October 1, 2002, 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 Electronics owns 10% of the equity of Yantai. During 1996 and 1997,
the Company's sales to Daewoo were $13,633,307 and $12,711,000 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 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 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:
32
<PAGE>
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Amounts paid by the Company and its $629,106 $3,668
subsidiaries to:
Gold.......................................
Amounts paid to the Company and its
subsidiaries by
Daewoo..................................... 9,526,000 $12,801,000
</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 291,000 shares of Common Stock were issued to FPRI at par value,
for financial advisory services to the Company. In September 1997, FPRI
transferred 48,500 shares to the Company.
In connection with the Offering, Mr. Du and his son, Mr. To, have entered
into an agreement, pursuant to which Mr. To has agreed that, until October 1,
2007, (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 the Offering, FPRI received from the Company options
entitling it to purchase 29,500 shares of Common Stock for a purchase price
equal to $13.20 per share in consideration for financial advisory services to
the Company in connection with this Offering.
In connection with the Offering, Mr. Robert Adler, a director of the
Company, received from the Company options entitling him to purchase 10,000
shares of Common Stock for a purchase price equal to $13.20 per share in
consideration for financial advisory services to the Company in connection with
this Offering.
In connection with the Offering, other advisors received options to
purchase, in the aggregate, 55,000 shares of Common Stock for a purchase price
equal to $13.20 per share. Each of the advisors received such options in
consideration for financial advisory services to the Company in connection with
this Offering. None of them has any other relationship or affiliation with the
Company or its management.
33
<PAGE>
PART II
Item 14. Description of Securities to be Registered.
Not Applicable.
II-1
<PAGE>
PART III
Item 15. Defaults Upon Senior Securities.
None.
Item 16. Changes in Securities, Changes in Security for Registered Securities.
None.
III-1
<PAGE>
PART IV
Item 17. Financial Statements.
Not Applicable.
Item 18. Financial Statements.
Index to Consolidated Financial Statements of Asia Electronics Holding Co. Inc.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.............................................. F-1
Consolidated Statement of Income for the Year Ended December 31, 1997................. F-2
Consolidated Balance Sheets as of December 31, 1996 and December 31, 1997............. F-3
Consolidated Statements of Cash Flows for the Period from January 3, 1996
(Date of Incorporation) to December 31, 1996
and for the year ended December 31, 1997............................................ F-4
Consolidated Statements of Changes in Stockholders' Equity for the Period from
January 3, 1996 (Date of Incorporation) to December 31, 1996 and for the
year ended December 31, 1997........................................................ F-7
Notes to the Consolidated Financial Statements........................................ F-8
</TABLE>
IV-1
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
---------------------------------
CONSOLIDATED FINANCIAL STATEMENTS AS OF
---------------------------------------
DECEMBER 31, 1996 AND 1997
--------------------------
AND FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------
TOGETHER WITH AUDITORS' REPORT
------------------------------
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: ASIA ELECTRONICS HOLDING CO. INC.
We have audited the accompanying consolidated balance sheets of Asia Electronics
Holding Co. Inc. (the "Company"), incorporated in the British Virgin Islands,
and its subsidiaries as of December 31, 1996 and 1997, the related consolidated
statement of income for the year ended December 31, 1997 and the related
consolidated cash flows and changes in stockholders' equity for the period from
January 3, 1996 (date of incorporation) to December 31, 1996 and for the year
ended December 31, 1997, 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 its subsidiaries as of December 31, 1996 and 1997, the results of
their operations for the year ended December 31, 1997 and their cash flows for
the period from January 3, 1996 (date of incorporation) to December 31, 1996 and
for the year ended December 31, 1997 in conformity with generally accepted
accounting principles in the United States of America.
/s/ ARTHUR ANDERSEN & CO.
Hong Kong,
June 23, 1998.
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
---------------------------------
CONSOLIDATED STATEMENT OF INCOME
--------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Notes
Rmb US$
<S> <C> <C> <C>
Sales to
- a related company 14 192,769 23,282
- a joint venture partner 14 16,651 2,011
- others 30,009 3,625
--------- -------
18 239,429 28,918
--------- -------
Cost of goods sold 14 (151,539) (18,303)
Selling and administrative expenses 14 (13,784) (1,665)
Interest income, net 14 6,274 758
Other income, net 5 2,852 345
--------- -------
Total costs and expenses (156,197) (18,865)
--------- -------
Income before income taxes 18 83,232 10,053
Provision for income taxes 6 (15,059) (1,819)
--------- -------
Income before minority interest 68,173 8,234
Minority interest (15,738) (1,901)
--------- -------
Net income 52,435 6,333
========= ========
Earnings per common share 8.55 1.03
========= ========
Weighted average number of common shares
outstanding (000's) 6,132 6,132
========= ========
</TABLE>
The accompanying notes are an integral part of this inancial statement.
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 December 31, 1997 of US$1.00 = Rmb8.2796. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on December 31, 1997 or at any
other certain rate.
F-2
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
---------------------------------
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996 AND 1997
------------------------------------------------------------
(Amounts in thousands)
<TABLE>
<CAPTION>
Note 1996 1997 1997
------ ------ ----- ------
Rmb Rmb US$
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 8,935 118,987 14,372
Accounts receivable 15,713 4,014 485
Due from joint venture partners 14 - 6,947 839
Due from related companies 14 31,926 268,430 32,420
Inventories 7 21,065 27,128 3,276
Prepayments and deposits - 12,336 1,490
Other receivables - 2,031 245
Other current assets 1,592 1,261 152
Value-added tax credit 4,575 8,064 974
------ ------- ------
Total current assets 83,806 449,198 54,253
Property, plant and equipment, net 8 6,337 66,539 8,036
------ ------- ------
Total assets 18 90,143 515,737 62,289
====== ======= ======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Short-term bank loans 9 14,749 19,333 2,335
Accounts payable - 1,610 194
Due to related companies 14 - 4,738 572
Accrued expenses 6,072 11,726 1,416
Value-added tax payable 2,401 17,018 2,056
Income taxes payable 3,628 13,329 1,610
Deferred taxation 10 669 2,872 347
------ ------- ------
Total current liabilities 27,519 70,626 8,530
Negative goodwill 18,369 22,368 2,702
Deferred taxation 10 981 977 118
------ ------- ------
Total liabilities 46,869 93,971 11,350
------ ------- ------
Minority interest 15,718 41,926 5,063
------ ------- ------
Stockholders' equity:
Common stock, par value US$0.01 each, 30,000,00
shares authorized; 10,091,500 shares issued
and outstanding 398 837 101
Additional paid-in capital 27,158 326,800 39,471
Dedicated capital 12 - 15,482 1,870
Cumulative translation adjustment - (206) (25)
Retained earnings - 36,927 4,459
------ ------- ------
Total stockholders' equity 27,556 379,840 45,876
------ ------- ------
Total liabilities and stockholders' equity 90,143 515,737 62,289
====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Translation of amounts from Renminbi (Rmb) into United States dollars (US$) for
the convenience of the reader has been made at the unified exchange rate quoted
by the Bank of China on December 31, 1997 of US$1.00 = Rmb8.2796. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on December 31, 1997 or at any
other certain rate.
F-3
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
---------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE PERIOD FROM JANUARY 3, 1996 (DATE OF INCORPORATION) TO
--------------------------------------------------------------
DECEMBER 31, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1997 1997
------ ------ ------
Rmb Rmb US$
<S> <C> <C> <C>
Cash flows from operating activities:
Net income - 52,435 6,333
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of property, plant and equipment - 3,053 369
Gain on disposal of property, plant and equipment - (232) (28)
Amortization of negative goodwill - (2,485) (300)
Minority interest - 15,738 1,901
Provision for deferred taxation - 2,634 318
(Increase) decrease in assets, net of effects from purchase of
subsidiaries:
Accounts receivable - 10,589 1,279
Due from joint venture partners - 2,458 297
Due from related companies - (244,334) (29,510)
Inventories - 10,122 1,223
Prepayments and deposits - (10,260) (1,239)
Other receivables - (691) (83)
Other current assets 20 2
Value-added tax credit - (3,489) (421)
Increase (decrease) in liabilities, net of effects from purchase of
subsidiaries:
Accounts payable - (3,791) (458)
Due to related companies - (15,158) (1,831)
Accrued expenses - 4,185 505
Value-added tax payable - 14,888 1,798
Income taxes payable - 9,701 1,172
------- ------- ------
Net cash used in operating activities - (154,617) (18,673)
------- ------- ------
Cash flows from investing activities:
Acquisition of subsidiaries, net of cash acquired (18,621) (22,195) (2,680)
Acquisition of property, plant and equipment - (28,470) (3,439)
Proceeds from disposals of property, plant and equipment - 14,990 1,810
------- ------- ------
Net cash used in investing activities (18,621) (35,675) (4,309)
------- ------- ------
</TABLE>
(Continued)
F-4
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
---------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
----------------------------------------------
FOR THE PERIOD FROM JANUARY 3, 1996 (DATE OF INCORPORATION) TO
--------------------------------------------------------------
DECEMBER 31, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1997 1997
------ ------ ------
Rmb Rmb US$
<S> <C> <C> <C>
Cash flows from financing activities:
Repayment of short-term bank loans - (2,473) (298)
Issuance of common stock 27,556 300,065 36,241
Contributions from minority stockholders - 2,968 358
Others - (10) (1)
------- ------- -------
Net cash provided by financing activities 27,556 300,550 36,300
------- ------- -------
Effect of exchange rate changes - (206) (25)
Net increase in cash and cash equivalents 8,935 110,052 13,293
Cash and cash equivalents, beginning of year - 8,935 1,079
------- ------- -------
Cash and cash equivalents, end of year 8,935 118,987 14,372
======= ======= =======
Supplementary information
Interest received - 1,551 187
Interest paid - 867 105
Income taxes paid - 2,723 329
</TABLE>
(Continued)
F-5
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
---------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd)
----------------------------------------------
FOR THE PERIOD FROM JANUARY 3, 1996 (DATE OF INCORPORATION) TO
--------------------------------------------------------------
DECEMBER 31, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------
(Amounts in thousands)
Supplemental schedule of non-cash investing activities
In October 1997, the Company purchased 90% equity interest in Dnon Tech Special
Electro Technique Co., Ltd and 70% equity interest in Yantai Daewoo Electronic
Components Co., Ltd. for a total consideration of approximately Rmb45,569,000.
In conjunction with the acquisitions, liabilities assumed were as follows:
<TABLE>
<CAPTION>
Rmb US$
<S> <C> <C>
Fair value of assets acquired 76,664 9,259
Less:
Cash paid for the equity interest, net of cash acquired (22,195) (2,680)
Negative goodwill (4,203) (508)
Minority interest (12,924) (1,561)
------- ------
Liabilities assumed 37,342 4,510
======= ======
</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 December 31, 1997 of US$1.00 = Rmb8.2796. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate on December 31, 1997 or at any
other certain rate.
F-6
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
---------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE PERIOD FROM JANUARY 3, 1996 (DATE OF INCORPORATION) TO
--------------------------------------------------------------
DECEMBER 31, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------
(Amounts in thousands)
<TABLE>
<CAPTION>
Additional Cumulative
paid-in Dedicated translation Retained
Common stock capital capital adjustment earnings Total
------------ ---------- ---------- ----------- --------- -------
Rmb Rmb Rmb Rmb Rmb Rmb
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock 398 27,158 - - - 27,556
--- ------- ------ ---- ------ -------
Balance as of December 31,
1996 398 27,158 - - - 27,556
Net income - - - - 52,435 52,435
Issuance of common stock 435 299,630 - - - 300,065
Foreign exchange -
translation adjustments - - (206) - (206)
Transfer to dedicated capital
(Note 12) - - 15,492 - (15,492) -
Others 4 12 (10) - (16) (10)
--- ------- ------ ---- ------ -------
Balance as of December 31, 837 326,800 15,482 (206) 36,927 379,840
1997 === ======= ====== ==== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
ASIA ELECTRONICS HOLDING CO. INC.
---------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
-------------------------------------
Asia Electronics Holding Co. Inc. (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"), 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, and each outstanding share was split into 100
shares with par value of US$0.01 each.
On October 1, 1997, the Company completed the offering of 5,290,000 shares
of common stock at an initial public offering price of US$8.00 per share
(the "Offering"). The net proceeds from this Offering, after underwriters
discounts and commissions and other expenses, was approximately
Rmb300,065,000. The Company also issued 242,500 shares to First Pacific Rim
(B.V.I.) Inc., a stockholder, for financial advisory services performed in
connection with the public offering.
The Company is an investment holding company. During the years ended
December 31, 1996 and 1997, the Company completed the following
acquisitions:
a. As discussed above, the Company acquired an 80% interest in Daming and
Yongxin, effective as of December 31, 1996. Pursuant to an outstanding
informal agreement, the purchase prices were based upon the
proportionate amounts of the paid-in capital of both companies at the
acquisition date of approximately Rmb25,895,000. The acquisitions were
accounted for as purchases. The purchase prices were allocated to the
acquired assets and assumed liabilities and resulted in an excess of
the total net fair value over the purchase prices of approximately
Rmb43,716,000. Such excess was applied, first to reduce the
proportionate value of the acquired long-term assets (principally
property, plant and equipment) to zero, and the remainder
(approximately Rmb18,369,000) was classified as negative goodwill.
Such negative goodwill is being amortized over a period of ten years.
During the year, the Company disposed of certain equipment acquired as
a result of the above acquisitions which resulted in an increase in
the negative goodwill of approximately Rmb6,483,000. The operating
results of Daming and Yongxin have been included in the consolidated
statement of income effective January 1, 1997. Inventory was
transferred and recorded at fair market value upon the acquisition.
The revalued inventory was sold in the first quarter of 1997 and
resulted in an increase in cost of goods sold by approximately
Rmb7,150,000.
F-8
<PAGE>
b. In October 1997, the Company acquired a 90% interest in Xianyang Dnon
Tech Special Electro Technique Co., Ltd. ("Dnon Tech") and a 70%
interest in Yantai Daewoo Electronic Components Co., Ltd ("Yantai"),
two Sino-foreign joint ventures incorporated in the PRC, for
approximately Rmb45,569,000. The acquisitions were accounted for as
purchases. The purchase prices were allocated to the acquired assets
and assumed liabilities and resulted in an excess of the total net
fair value over the purchase prices of approximately Rmb4,203,000.
Such excess amount was applied to reduce the proportionate value of
the acquired long-term assets (principally property, plant and
equipment). The operating results of Dnon Tech and Yantai have been
included in the consolidated statement of income effective October 1,
1997. Inventory was transferred and recorded at fair market value upon
the acquisition. The revalued inventory was sold in the fourth quarter
of 1997 and resulted in an increase in cost of goods sold by
approximately Rmb1,096,000.
The following represents the unaudited pro forma effect of the acquisitions
on the results of operations of the Company and its subsidiaries (the
"Group") for the years ended December 31, 1996 and 1997, as if all the
acquisitions had occurred on January 1, 1996 and 1997. Please see Note 21
for details of pro forma consolidated statement of income for 1997.
<TABLE>
<CAPTION>
Unaudited
---------
1996 1997
------------------- -------------------
Rmb US$ Rmb US$
--------- ------- ------- --------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Sales 226,612 27,336 302,910 36,585
Net income 36,329 4,383 65,965 7,967
Earnings per common share 6.44 0.78 9.53 1.15
Pro forma weighted average number of
common shares outstanding 5,638 5,638 6,920 6,920
</TABLE>
During the year, the Company entered into a joint venture and established
an 80% owned subsidiary named Weihai Gaoxin Daewoo Electronic Components
Co., Ltd. ("Weihai") in the PRC. Weihai is to be engaged principally in the
manufacturing of deflection yokes and was dormant from the date of
incorporation to December 31, 1997.
The Company's subsidiaries (the "Subsidiaries") are principally engaged in
the manufacturing of deflection yokes for sale to customers in the PRC and
overseas. They are also engaged in the manufacturing of deflection yoke
production machines for sale to related companies, and enameled copper wire
for sale to related companies and other customers in the PRC.
F-9
<PAGE>
Details of the Subsidiaries are summarized as follows:
<TABLE>
<CAPTION>
Percentage
of equity Place of
Name ownership incorporation Principal activities
----------------------------------- -------------- ------------------ ---------------------------
<S> <C> <C> <C>
Manufacturing of
Xianyang Daming Electronics Co., deflection yokes and
Limited 80% PRC machines
Xianyang Yongxin Electronics Co., Manufacturing of
Limited 80% PRC deflection yokes
Xianyang Dnon Tech Special Electro Manufacturing of copper
Technique Co., Ltd. 90% PRC wires
Yantai Daewoo Electronics Manufacturing of
Components Co., Ltd. 70% PRC deflection yokes
Weihai Gaoxin Daewoo Electronic 80% PRC Manufacturing of
Components Co. Ltd. deflection yokes
</TABLE>
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"), and include the results of operations of
Daming and Yongxin for the entire year of 1997 and the results of
operations of Dnon Tech and Yantai from the date of acquisition on October
1, 1997.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
a. Basis of Consolidation
----------------------
The consolidated financial statements include the financial statements
of the Group. All material intercompany balances and transactions have
been eliminated on consolidation.
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
------------
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
Subsidiaries 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 Subsidiaries are also
exempt from the PRC local income tax. The current Chinese State
income tax rate is 30% and the Chinese local income tax rate is
3%.
F-10
<PAGE>
<TABLE>
<CAPTION>
Chinese Chinese Exemption from Exemption from Year of
State income local income Chinese State income Chinese local commencement
tax rate (%) tax rate (%) tax income tax of tax holiday
----------- ----------- ------------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Daming 30 3 Full exemption for Full exemption 1993
2 years starting from
the first profit-making
year followed by a
50% reduction for the
next 3 years thereafter.
Yongxin 30 3 Full exemption for Full exemption 1994
2 years starting from
the first profit-making
year followed by a
50% reduction for the
next 3 years thereafter.
Dnon Tech 30 3 Full exemption for Full exemption 1996
2 years starting from
the first profit-making
year. As Dnon Tech
has been approved to
be a company engaged
in the high-technology
industry, it is eligible
for a 50% reduction
thereafter.
Yantai 30 3 As Yantai is located Full exemption 1996
in an industrial
development zone, it is
eligible for an
additional 6% tax
reduction (to 24%).
In addition, full
exemption for 2 years
starting from the first
profit-making year
followed by a 50%
reduction (to 12%) for
the next 3 years
thereafter.
</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 expected to occur in subsequent
years are classified as an asset or a liability.
ii. Value-added Tax ("VAT")
-----------------------
Prior to December 31, 1993, the Subsidiaries 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
Subsidiaries are subject to VAT which replaced ICCT and is
currently the principal
F-11
<PAGE>
indirect tax on the sales of tangible goods and the provision of
certain specified services. The general VAT rate applicable to
the Subsidiaries 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, beginning in 1994 and ending in 1998.
d. Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include 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>
Buildings 10 to 25 years
Machinery and equipment 5 to 10 years
Furniture and fixtures 5 years
Motor vehicles 5 years
</TABLE>
g. Negative Goodwill
-----------------
Negative goodwill represents the excess of the fair value of the net
assets of the business or company acquired over the acquisition cost.
The excess is firstly applied to reduce the proportionate value of the
acquired long-term assets and the remainder of the excess is
classified as negative goodwill. Such negative goodwill is being
amortized on a straight-line basis over the estimated benefit period.
h. Foreign Currency Translation
----------------------------
The Company and the Subsidiaries maintain their books and records in
United States dollars and Renminbi (the "functional currency"),
respectively. Foreign currency transactions are translated into the
functional currency at the applicable rates of exchange at the dates
of the transactions. Monetary assets and liabilities denominated in
foreign currencies are translated into the functional currency using
the exchange rates prevailing at the balance sheet date. Gain or
losses from foreign currency transactions are recognized in the
statement of income during the period in which they occur. Adjustments
from translation of the financial statements are included as a
component of stockholders' equity.
F-12
<PAGE>
i. Related Company
---------------
A related company is a company in which one or more of the directors
or the principal stockholders of the Company have direct or indirect
beneficial interests, or a company which is under common management
control.
j. Earnings Per Common Share
--------------------------
Earnings per common share ("EPS") is computed on the basis of the
average number of common shares outstanding. No dilutive EPS is
calculated as the stock options' exercise price was greater than the
average market price of the common shares.
k. 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. RISK FACTORS
------------
The Group conducts its operations in the PRC and accordingly is 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 and legal environments and foreign currency exchange.
These risks are described further in the following paragraphs:
a. Political Environment
----------------------
The Group's 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
F-13
<PAGE>
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 Group are denominated in Renminbi or United States
dollars. A portion of the profit of the Group 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.
5. OTHER INCOME
------------
Other income comprised:
<TABLE>
<CAPTION>
1997 1997
------- -------
Rmb'000 US$'000
<S> <C> <C>
Amortization of negative goodwill 2,485 300
Gain on disposal of property, plant and equipment 232 28
Exchange gain, net 483 58
Bank charges (240) (29)
Others (108) (12)
------ ------
2,852 345
====== ======
</TABLE>
6. PROVISION FOR INCOME TAXES
--------------------------
Provision for income taxes comprised:
<TABLE>
<CAPTION>
1997 1997
------- -------
Rmb'000 US$'000
<S> <C> <C>
Current 12,425 1,501
Deferred 2,634 318
------ ------
Provision for income taxes 15,059 1,819
====== ======
</TABLE>
The reconciliation of the statutory income tax rate in the PRC to the
effective income tax rate as stated in the consolidated statement of income
is as follows:
F-14
<PAGE>
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Statutory tax rate 30%
Reduction in income taxes due to tax holidays (15%)
Others 3%
-----
Effective tax rate 18%
=====
</TABLE>
7. INVENTORIES
-----------
Inventories comprised:
<TABLE>
<CAPTION>
1996 1997 1997
------- -------- -------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Raw materials - 8,066 974
Work-in-progress - 350 42
Finished goods 21,065 18,469 2,231
Consumables - 243 29
------ ------ -----
Total 21,065 27,128 3,276
====== ====== =====
</TABLE>
8. PROPERTY, PLANT AND EQUIPMENT
-----------------------------
Property, plant and equipment comprised:
<TABLE>
<CAPTION>
1996 1997 1997
------- -------- -------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Buildings 1,779 8,273 999
Machinery and equipment 4,524 52,081 6,290
Furniture and fixtures - 257 31
Motor vehicles 34 778 94
Construction-in-progress - 7,828 945
----- ------- -----
6,337 69,217 8,359
Less: Accumulated depreciation - (2,678) (323)
----- ------- -----
Net book value 6,337 66,539 8,036
===== ======= =====
</TABLE>
A related company possesses the land use right of the piece of land on
which the Group's buildings are located. During the year ended December 31,
1997, the land was rented to the Group for an annual rental of Rmb149,000.
The Company's directors believe that the rental costs approximate fair
market value.
F-15
<PAGE>
9. SHORT-TERM BANK LOANS
---------------------
Short-term bank loans are mainly denominated in Renminbi or United States
dollars, and are secured by corporate guarantees given by a related
company. Short-term bank loans are repayable within six months and are
renewable with the consent of the relevant banks.
10. DEFERRED TAXATION
-----------------
Deferred taxation mainly represented the taxation effect of the adjustments
made to the financial statements of the Group to conform to US GAAP and
other adjustments made to the statutory financial statements of the Group,
based on applicable Chinese income tax rates.
As of December 31, 1996 and 1997, the components of total deferred taxation
were as follows:
<TABLE>
<CAPTION>
1996 1997 1997
-------- -------- --------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Unrecorded interest income - 1,008 122
Adjustment for under-statements of
value-added tax credit 686 2,419 292
Others, not individually significant 964 422 51
----- ----- ----
1,650 3,849 465
===== ===== ====
</TABLE>
11. STOCK OPTIONS
-------------
During the year, the Company granted Barington Capital Group, L.P. and
Value Investing Partners, Inc., representatives of the underwriters, an
option to purchase 365,500 shares of common stock. Also, the Company
granted First Pacific Rim (B.V.I.) Inc. an option to purchase 94,500 share
of common stock. The above options are exercisable for a period of five
years, commencing from the effective date of Offering at an initial per
share exercise price equal to US$13.20 per share. No options were exercised
during the year.
A total of 300,000 shares of common stock have been reserved for issuance
under the Company's 1997 employee stock option plan (the "Option Plan").
The Option Plan provides for the grant of options to employees, officers,
directors and consultants of the Company. The Option Plan is administered
by the Board of Directors or a committee appointed by the Board, which
determines the terms of options granted, including the exercise price, the
number of shares subject to the option and the option's exercisability. The
exercise price of all options granted under the Option Plan must be at
least equal to the fair market value of such shares on the date of grant.
The maximum term of options granted under the Option Plan is ten years.
During the year, no options were granted under the Option Plan.
F-16
<PAGE>
12. DEDICATED CAPITAL
-----------------
According to the rules and regulations for Sino-foreign equity joint
venture enterprises, when distributing net income of each year, the
Subsidiaries shall set aside a portion of their net income as reported in
their statutory accounts for the statutory general reserve fund and
enterprise expansion fund, such portion being determined at the discretion
of the Boards of Directors. These reserves cannot be used for purposes
other than those for which they are created and are not distributable as
cash dividends.
For the year ended December 31, 1997, the directors of the Subsidiaries
proposed the following appropriations to statutory reserves:
<TABLE>
<CAPTION>
Statutory reserves Rmb'000 US$'000
----------------------------- ------- -------
<S> <C> <C>
General reserve fund 7,746 936
Enterprise expansion fund 7,746 936
------ -----
Total 15,492 1,872
====== =====
</TABLE>
13. DISTRIBUTION OF NET INCOME OF SUBSIDIARIES
-------------------------------------------
According to their Articles of Association, the Subsidiaries may distribute
their net income as reported in the statutory accounts, after providing for
discretionary dedicated capital (see Note 12), to their investors according
to their respective equity interest. The Subsidiaries' net income reported
in the statutory accounts, however, differs from the corresponding amounts
reported under US GAAP. During the year, the Subsidiaries declared a total
dividend of approximately Rmb26,699,000 (equivalent to US$3,225,000), of
which approximately Rmb 21,277,00 (equivalent to US$2,570,000) was paid to
the Company.
14. RELATED PARTY TRANSACTIONS
--------------------------
a. Summary of related party transactions
-------------------------------------
<TABLE>
<CAPTION>
1997 1997
------- ---------
Rmb'000 US$'000
<S> <C> <C>
Sales to
- a related company 192,769 23,282
- a joint venture partner 16,651 2,011
Purchases from a related company 100,720 12,165
Rental expenses paid to a related company 149 18
Management fees paid to a related company 5,774 697
Fixed assets sold to related companies 14,162 1,710
Fixed assets purchased from related companies 32,477 3,923
Interest income received from related companies 10,999 1,328
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
1997 1997
------- ---------
Rmb'000 US$'000
<S> <C> <C>
Interest expenses paid to related companies 4,394 531
Financial advisory fee paid to a stockholder 290 35
Expenses in connection with the Offering paid to a 12,419 1,500
related company
</TABLE>
During the year, Daming manufactured and sold fifty sets of deflection
yoke production machines to a related company, Xianyang Pianzhuan Co.
Ltd ("XPCL"), a company incorporated in the PRC. The total sales
amount was approximately Rmb34,365,000(equivalent to US$4,151,000) and
the related gross profit was approximately Rmb21,712,000 (equivalent
to US$2,622,000).
According to the Company's management, all of the sales made to a
related company were for resale to third party customers.
Xianyang Pianzhuan Group Corporation ("XPGC"), a company incorporated
in the PRC, provided sales, administrative, and research and
development services to the Group and paid the remuneration and
compensation of the directors and officers of the Subsidiaries. XPGC
allocated all the costs incurred for the Subsidiaries 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 Subsidiaries were operated as
unaffiliated entities would approximate the management fees charged by
XPGC.
XPCL and XPGC are considered to be related companies because these
companies and the Group have common directors during the year and they
continuously shared some common facilities with the Subsidiaries and
provided sales, administrative, and research and development services
to the Group as discussed above.
The Company has entered into an agreement with First Pacific Rim
(B.V.I.) Inc., a stockholder, under which the latter agreed to provide
financial advisory services to the Group for a period of two years
commencing on November 21, 1997 for a total service charge of
approximately Rmb5,299,000 (equivalent to US$640,000).
b. Related company balances
------------------------
The amounts due from joint venture partners are unsecured,
non-interest bearing and have no fixed repayment terms.
The Group placed a portion of the proceeds from the Offering
(approximately Rmb150,689,000) into a bank account of a related
company, which is recorded as due from related companies in the
accompanying balance sheet. According to an agreement between the
Group and the related company, the latter agreed to pay the Group all
bank interest received in connection with the above offering proceeds.
Except for the receivables from related companies of approximately
Rmb109,102,000 and payable to a related company of approximately
Rmb44,000 which bear interest at 10.98% per annum, and the offering
F-18
<PAGE>
proceeds as discussed above, the remaining balances with related
companies are non-interest bearing. All the balances with related
companies are unsecured and have no fixed repayment terms.
15. RETIREMENT PLAN
---------------
As stipulated by the regulations of the PRC government, the Subsidiaries
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 Subsidiaries 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 Subsidiaries 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. In the current year, the Subsidiaries made total pension
contributions of approximately Rmb850,000 (equivalent to US$103,000).
16. COMMITMENTS
------------
a. As of December 31, 1997, the Group had total outstanding capital
commitments for construction of factory premises and purchase of
machinery and equipment of approximately Rmb26,052,000 (1996 -
Rmb405,000).
b. As of December 31, 1997, the Group had outstanding commitments under
operating leases with a related company for the rental of land and
building of approximately Rmb1,184,000. Future minimum lease payments
are as follows:
<TABLE>
<CAPTION>
Rmb'000 US$'000
------- --------
<S> <C> <C>
1998 149 18
1999 149 18
2000 140 17
2001 124 15
2002 124 15
Thereafter 498 60
----- ---
1,184 143
===== ===
</TABLE>
17. FINANCIAL INSTRUMENTS
---------------------
The carrying amounts of the Group's cash and cash equivalents, receivables
and payables approximate their fair values because of the short maturity of
those instruments. The carrying amounts of the short-term bank loans
approximate their fair values based on borrowing rates currently available
for bank loans with similar terms and maturities.
F-19
<PAGE>
18. SEGMENT INFORMATION
-------------------
The following segment information has been prepared in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 131, which was
issued in 1997:
The Group's operations are divided into three segments: deflection yokes
and machines, enameled copper wire and corporate. The deflection yokes and
machines segment manufactures deflection yokes for sale to customers in the
PRC and overseas and deflection yoke production machines for sale to
related companies. The enameled copper wire segment produces enameled
copper wire for sale to related companies and other customers in the PRC.
The corporate segment is responsible for the administrative, research and
development functions of the Group.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Group's reporting
segments are strategic business units that offer different products and
services. They are managed separately because each business requires
different technology, marketing strategies and administrative capabilities.
Most of the businesses were acquired as a unit, and the management at the
time of acquisition was retained.
Analysis of sales by geographical locations is as follows:
<TABLE>
<CAPTION>
1997 1997
------- --------
Rmb'000 US$'000
<S> <C> <C>
The PRC 193,781 23,405
Overseas
- Korea 45,648 5,513
------- ------
Total 239,429 28,918
======= ======
</TABLE>
Analysis of sales by customers is as follows:
<TABLE>
<CAPTION>
1997 1997
------- --------
Rmb'000 US$'000
<S> <C> <C>
Xianyang Pianzhuan Co. Ltd. 192,769 23,282
Daewoo Electronic Components Co. Ltd. 45,648 5,513
Others 1,012 123
------- -------
Total 239,429 28,918
======= =======
</TABLE>
F-20
<PAGE>
Analysis of sales by reporting segments is as follows:
<TABLE>
<CAPTION>
1997 1997
------- --------
Rmb'000 US$'000
<S> <C> <C>
Deflection yokes and machines 235,394 28,431
Enameled copper wire 5,979 722
------- -------
Total 241,373 29,153
Elimination of intersegment sale of enameled copper wire (1,944) (235)
------- -------
Total sales after elimination 239,429 28,918
======= =======
</TABLE>
Analysis of interest income by reporting segments is as follows:
<TABLE>
<CAPTION>
1997 1997
------- -------
Rmb'000 US$'000
<S> <C> <C>
Deflection yokes and machines 9,603 1,160
Corporate 2,585 312
------- -------
Total 12,188 1,472
======= =======
</TABLE>
Analysis of interest expenses by reporting segments is as follows:
<TABLE>
<CAPTION>
1997 1997
------- -------
Rmb'000 US$'000
<S> <C> <C>
Deflection yokes and machines 5,711 690
Enameled copper wire 203 24
------- -------
Total 5,914 714
======= =======
</TABLE>
Analysis of income before income taxes by reporting segments is as follows:
<TABLE>
<CAPTION>
1997 1997
-------- --------
Rmb'000 US$'000
<S> <C> <C>
Deflection yokes and machines 84,818 10,244
Enameled copper wire 132 16
Corporate (1,718) (207)
-------- --------
Income before income taxes 83,232 10,053
======== ========
</TABLE>
F-21
<PAGE>
Analysis of depreciation and amortization expenses by reporting segments is
as follows:
<TABLE>
<CAPTION>
1997 1997
------- -------
Rmb'000 US$'000
<S> <C> <C>
Deflection yokes and machines 2,856 345
Enameled copper wire 197 24
Amortization of negative goodwill (2,485) (300)
-------- --------
Total 568 69
======== ========
</TABLE>
Analysis of total assets attributed to each reporting segment is as
follows:
<TABLE>
<CAPTION>
1996 1997 1997
------- ------- --------
Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C>
Deflection yokes and machines 88,482 249,627 30,149
Enameled copper wire - 32,802 3,962
Corporate 1,661 233,308 28,178
------ ------- -------
Total 90,143 515,737 62,289
====== ======= =======
</TABLE>
During the year, all the expenditures on assets are related to the
deflection yokes segment.
19. SUBSEQUENT EVENT
----------------
Subsequent to December 31, 1997, the Group has started the process of
negotiation for the acquisition of the deflection yoke manufacturing
business presently conducted by XPCL.
20. NEW ACCOUNTING STANDARDS
------------------------
a. In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "comprehensive income" which is effective for both interim and
annual periods beginning after December 15, 1997. SFAS No. 130
specifies the computation, presentation and disclosure requirement for
comprehensive income. Effective January 1, 1998, the Company will
adopt this statement in its consolidated financial statements. Had the
Company adopted the provision of SFAS 130 for 1997, comprehensive
income would have been approximately Rmb52,229,000 (equivalent to
US$6,308,000).
b. In February 1998, the Financial Accounting Standards Board issued SFAS
No. 132, "Employer's Disclosures about Pensions and Other
Post-retirement Benefits" which is effective for both interim and
annual periods beginning after December 15, 1997. SFAS No. 132 revises
employers' disclosure about pensions and other postretirement benefit
plans. As the Group has no future obligations for pensions or other
post-retirement benefits beyond the annual contributions made, this
statement will not change the Company's disclosures related to its
retirement plans.
F-22
<PAGE>
21. QUARTERLY FINANCIAL DATA (Unaudited)
------------------------
For the year ended December 31, 1997, quarterly financial information is
summarized as follows:
<TABLE>
<CAPTION>
First quarter Second Third Fourth
quarter quarter quarter Total Total
------------ -------- ------- ------- -------- -------
Rmb'000 Rmb'000 Rmb'000 Rmb'000 Rmb'000 US$'000
<S> <C> <C> <C> <C> <C> <C>
Sales 53,905 57,538 32,568 95,218 239,429 28,918
Gross profit 14,079 16,589 10,100 47,122 87,890 10,615
Net income 8,874 7,410 10,673 25,478 52,435 6,333
Earnings per
common share 1.83 1.53 2.2 2.99 8.55 1.03
</TABLE>
22. PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (Unaudited)
--------------------------------------------
The following unaudited pro forma consolidated statement of income for the
year ended December 31, 1997 represents a consolidation, adjusted as
described in the accompanying notes, of the audited consolidated statement
of income of the Group for the year ended December 31, 1997 and the
unaudited combined statement of income of Dnon Tech and Yantai for the nine
months ended September 30, 1997, as if the operations of Dnon Tech and
Yantai had been consolidated with the operations of the Company at the
beginning of the year ended December 31, 1997.
The pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable under the
circumstances. The pro forma adjustments include the effects of the
accounting for the acquisitions under the purchase method.
The following pro forma consolidated statements of income are provided for
informational and comparative purposes only and do not purport to be
indicative of the results that would have been achieved, if the
acquisitions of Dnon Tech and Yantai had in fact occurred on January 1,
1997, or of the results that may be achieved in the future. The following
unaudited pro forma consolidated financial statements should be read in
conjunction with, and are qualified in their entirety by reference to the
audited consolidated financial statements of the Group.
F-23
<PAGE>
Unaudited Pro Forma Consolidated Statement of Income
For the year ended December 31, 1997.
<TABLE>
<CAPTION>
Dnon Tech and
Asia Electronics Yantai
Holding Co. Inc. (combined) for
& subsidiaries the nine months
for the year ended
ended December September 30, Pro Forma
31, 1997 1997 Adjustments Pro Forma Consolidated
--------------- --------------- --------------- -----------------------
(Amounts in thousands, except per share data)
Rmb Rmb Rmb Rmb US$
<S> <C> <C> <C> <C> <C>
Sales 239,429 72,477 (8,996) (1) 302,910 36,585
---------- -------- ------- --------- --------
Cost of goods sold (151,539) (60,482) 8,996 (1) (194,779) (23,525)
7,150 (2)
1,096 (3)
Selling and administrative
expenses (13,784) (3,762) (17,546) (2,119)
Interest income (expenses), net 6,274 (1,563) 4,711 569
Other income (expenses), net 2,852 134 2,986 360
---------- -------- ------- --------- --------
Total cost and expenses (156,197) (65,673) 17,242 (204,628) (24,715)
---------- -------- ------- --------- --------
Income before income taxes 83,232 6,804 8,246 98,282 11,870
Provision for income taxes (15,059) 65 - (14,994) (1,811)
---------- -------- ------- --------- --------
Income before minority interest 68,173 6,869 8,246 83,288 10,059
Minority interest (15,738) - (1,585)(4) (17,323) (2,092)
---------- -------- ------- --------- --------
Net income 52,435 6,869 6,661 65,965 7,967
========== ======== ======= ========= ========
Pro forma earnings per common
share 9.53 1.15
Pro forma weighted average
number of common shares
outstanding (5) 6,920 6,920
</TABLE>
Notes to unaudited pro forma consolidated statement of income
(1) Adjusted to eliminate inter-company sales and purchases of enameled
copper wire for the nine months period ended September 30, 1997.
(2) This represents the reversal of a revaluation of inventory to fair
value in connection with the acquisitions of Daming and Yongxin which
was included in the results of operations in the first quarter of
1997.
(3) This represented the reversal of a revaluation of inventory to fair
value in connection with the acquisitions of Dnon Tech and Yantai,
which was included in the results of operations in the fourth quarter
of 1997.
(4) Adjusted to account for the minority interests of Dnon Tech (10%) and
Yantai (30%) for the nine months ended September 30, 1997.
(5) The weighted average number of shares outstanding has been adjusted
for the issuance in the Offering of approximately 788,000 shares for
the nine months ended September 30, 1997, which represents the number
of shares at the initial public offering price of US$8.00 per share
that would be required to generate the net proceeds of US$5,500,000 to
be used for the acquisitions of Dnon Tech and Yantai.
F-24
<PAGE>
Item 19. Financial Statements and Exhibits.
(a) See Item 18 for a list of the financial statements filed as part of
this Annual Report.
(b) Exhibits to this Annual Report:
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1 Agreement among the Company, Xianyang Pianzhuan Development Co., Ltd.
and Daewoo Electronic Components Co., regarding formation of
Weihai Joint Venture
*3.1 Memorandum of Association of the Company
*3.2 Articles of Association of the Company
3.3 Approval of Feasibility Study Report of Weihai Joint Venture
3.4 Advice of Issuing Approval Certificate of Weihai Joint Venture
3.5 Approval Certificate of Weihai Joint Venture
3.6 Business License of Weihai Joint Venture
10.1 Loan Agreement with Xianyang Pianzhuan Development Co., Ltd.
99.1 Representation of the Company Concerning Translated Documents
</TABLE>
- ----------------
* Incorporated by reference to the Company's Registration Statement on
Form F-1 (Registration No. 333-30743).
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ASIA ELECTRONICS HOLDING CO., INC.
By: /s/ Du Qingsong
-----------------------------------------
Du Qingsong
Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
By: /s/ Li Lei
-----------------------------------------
Li Lei
Chief Financial Officer (Principal Accounting
and Financial Officer)
Dated: June 30, 1998
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1 Agreement among the Company, Xianyang Pianzhuan Development Co., Ltd.
and Daewoo Electronic Components Co., regarding formation of
Weihai Joint Venture
*3.1 Memorandum of Association of the Company
*3.2 Articles of Association of the Company
3.3 Approval of Feasibility Study Report of Weihai Joint Venture
3.4 Advice of Issuing Approval Certificate of Weihai Joint Venture
3.5 Approval Certificate of Weihai Joint Venture
3.6 Business License of Weihai Joint Venture
10.1 Loan Agreement with Xianyang Pianzhuan Development Co., Ltd.
99.1 Representation of the Company Concerning Translated Documents
</TABLE>
- ----------------
* Incorporated by reference to the Company's Registration Statement on
Form F-1 (Registration No. 333-30743).
Exhibit 2.1
Joint Venture Agreement Confidential
Joint Venture Agreement
for the Establishment of
Weihai Gaoxin Daewoo Electronic Components Co. Ltd.
Table of Contents
<TABLE>
<S> <C>
Chapter 1 General Provisions
Chapter 2 Parties of the Joint Venture
Chapter 3 Establishment of the Joint Venture Company
Chapter 4 Purpose, Scope and Scale of Production and Business
Chapter 5 Total Amount of Investment and Registered Capital
Chapter 6 Responsibilities of Each Party
Chapter 7 Technology Transfer
Chapter 8 Selling of Products
Chapter 9 The Board of Directors
Chapter 10 Business Management Office
Chapter 11 Purchase of Equipment
Chapter 12 Labor Management
Chapter 13 Taxes, Finance and Auditing
Chapter 14 Duration of the Joint Venture
Chapter 15 Disposal of Assets after the Expiration of Joint
Venture
Chapter 16 Insurance
Chapter 17 Amendment, Alteration and Discharge of the Contract
Chapter 18 Liabilities for Breach of Contract
Chapter 19 Force Majeure
Chapter 20 Applicable Law
Chapter 21 Settlement of Dispute
Chapter 22 Language
Chapter 23 Effectiveness of the Contract, etc.
</TABLE>
<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, Xianyang Pianzhuan Development Company Ltd., Asia Electronics
Holding Co., and Daewoo Electronic Components Co. 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 Weihai, People's Republic of
China. The contract thereunder is worked out.
Chapter 2 - Parties of the Joint Venture
Article I
Parties of this contract are as follows: Xianyang Pianzhuan Development Co. Ltd.
(hereinafter referred to as Party A), registered in Xianyang City, Shaanxi
Province of China, and its legal address is at 70 Weiyang Xi Road of Xianyang
City, Shaanxi Province, PRC.
Legal Representative:
Name: Du, Qing Song
Position: Chairman & CEO
Nationality: P.R. China
Asia Electronics Holding Co. (hereinafter referred to as Party B), registered in
British Virgin Island. Its legal address is at One World Trade Center, Suite
4629, New York, NY 10048, USA.
Legal Representative:
Name: Du, Qing Song
Position: Chairman & CEO
Nationality: China
Daewoo Electronics Co. (hereinafter referred to as Party C), registered in
Korea. Its legal address is at 543 Tangjing Dong, Junpu City, Jingji Dao, Korea.
Legal Representative: Wang, Tong Yi
Position: Director Representative
Nationality: Korea
Chapter 3 -Establishment 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, all three parties of the joint venture agree to set up a joint
venture limited liability
<PAGE>
company (hereinafter referred to as the joint venture company).
Article 3
The name of the joint venture company is Weihai Gaoxin Daewoo Electronic
Components Co. Ltd.
The Legal address of the joint venture company is at High Technology Industries
Development Area, Weihai
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 form of the joint venture company is a limited liability
company. Each party to the joint venture company is liable to the joint venture
company within the limit of the capital subscribed by it. The profits, risks and
losses of the joint venture company shall be shared by the parties in proportion
to their contributions of the registered capital.
Chapter 4 - The 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 corporation and technical exchanges, to improve the
product quality, develop new products, and gain a competitive position in the
world market in quality and price by adopting advanced and appropriate
technology and scientific management methods, 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 produce
deflection yoke products; provide maintenance service after the sales of the
products; and study and develop new electronic products.
Article 8
After putting into production the capacity of the Joint Venture Company is 2.4
million deflection yokes of various types every year.
<PAGE>
Chapter 5 - Total Amount of Investment, and Registered Capital
Article 9
The total amount of investment of the joint venture company is US$5,730,000.
Article 10
Investment capital contributed by the parties is US$3,500,000, which will be the
registered capital of the joint venture company, all three parties will invest
in the form of cash:
Party A contributes US$350,000, 10% of total capital;
Party B contributes US$2,800,000, 80% of total capital;
Party C contributes US$350,000, 10% of total capital;
Article 11
Parties A, B and C will contribute the following as their investment:
Party A contributes US$350,000
Party B contributes US$2,800,000
Party C contributes US$350,000
Article 12
Parties A, B and C will pay the joint venture company's registered capital in
installments in proportion to their percentage of contributions. Each
installment is settled as follows: amount payment for first installment: Party A
US$350,000, Party B US$2,800,000, Party C US$350,000, sign contract,
installments to be paid in full within one month after approvals from
governments in respective countries.
Article 13
(1) In case any party to the joint venture intends to assign all or part of its
investment subscribed to a fourth party, consent should be obtained from
the other Parties to the joint venture, and approval must be obtained from
the examination and approval authority.
(2) When one party to the joint venture intends to assign all or part of its
investment, the other two parties have preemptive right. If any one of the
two parties relinquishes the preemptive right, the other party will have
the preemptive right.
<PAGE>
Chapter 6 - Responsibilities of Each Party
Article 14
Party A, Party B and Party C shall be respectively responsible for the following
matters:
Responsibilities of Party A:
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 in purchasing or leasing equipment, materials, raw
materials, articles for office use, means of transportation and communication
facilities, etc.;
Assisting the joint venture in contacting and selling 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 workers 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.
Responsibilities of Party B and Party C:
Handling the matters entrusted by the joint venture company, such as selecting
and purchasing machinery and equipment outside China, etc.;
Responsible for assuring the joint venture meets production quota within the
limited production period.
Responsible for other matters entrusted by the joint venture.
Chapter 7 - Technology Transfer
Article 15
Parties A, B, and C agree that the joint venture will sign Technology Transfer
Agreement with Party C or a third party, in order to meet the production goals
listed in Chapter 4 of this agreement, which includes product design,
craftsmanship, testing
<PAGE>
methods, materials, quality control, staff training, etc.
Article 16 Party C guarantees the following regarding technological transfer:
1. Party C guarantees that the DY provided to the joint venture (note: must
specify product name) should have reliable and correct technology on
design, production, craftsmanship, quality, that it meets the company's
standard, and production quota.
2. Party C guarantees to transfer all the technology listed in this agreement
and in the Technology Transfer Agreement to the joint venture, that it is
the latest technology, all equipment are in excellent condition, and the
quality is good.
3. Party C should attach an appendix on which it lists specifications and
details of all technologies and technological services provided to the
joint venture.
4. Blueprint, technological conditions and other detailed information are all
part of the technology transfer, they are guaranteed to be handed over
promptly.
5. During the technology transfer agreement period, Party C should provide
joint venture company with any upgrades and changes in the technology, the
fee will be calculated separately.
6. Party C will make sure that joint venture's technical staff fully adapt to
the transferred technology during the period of technology transfer
agreement.
Article 17
If Party C fail to provide technology according to this agreement and the
Technological Transaction Agreement, or if any deceptive actions are discovered,
Party C is responsible for compensating any of the joint venture's direct
losses.
Article 18
Technology transfer fee is part of the whole project, and will be paid in full
promptly.
Chapter 8 - Selling of Products
Article 19
The joint venture's product will be sold both in domestic and foreign markets,
the export part should at least satisfy the joint venture's expense in foreign
currency.
<PAGE>
Article 20 The product can be sold to foreign markets through the following
channels:
The joint venture directly sells to foreign markets. The joint venture signs
selling contract with Chinese trading companies, who act as the distributor, or
take full responsibility of selling the product. The joint venture entrusts
Party B and Part C to market its product.
Article 21
The joint venture's products can be sold by China's other selling agencies, or
can be sold by the joint venture directly.
Article 22
In order to provide maintenance service to the products sold both in China or
abroad, the joint venture company may set up sales branches for maintenance
service both in China or abroad subject to the approval of relevant Chinese
department.
Article 23
The trademark of the joint venture's products is "Weihai Daewoo".
Chapter 9 - The Board of Directors
Article 24
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 25
The Board of Directors is composed of five directors, of which one shall be
appointed by Party A, three shall be appointed by Party B, and one shall be
appointed by Party C. When any one Party purchases stocks sold by other Parties,
the number of directors should be reassigned according to the ratio of amount of
capital. Chairman of the Board shall be appointed by Party B, and Deputy
Chairman shall be appointed by Party A and Party C. The term of office for the
directors and chairman is 4 years. Their term of office may be renewed if
continuously appointed by the relevant Party.
Article 26
The highest authority of the joint venture company shall be the Board of
Directors. It shall decide all major issues concerning the joint venture
company. Unanimous approval shall be required
<PAGE>
before any decisions are made concerning major issues. As for other matters,
approval by majority or a simple majority.
Article 27
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 28
The board of directors shall convene at least once per annum. Temporary meetings
shall be called by consent of over half of the total number of directors.
Chapter 10 - Business Management Office
Article 29
The joint venture company shall establish a management office which shall be
responsible for its daily management. The management office shall have one
general manager appointed by Party B; two assistant managers, one appointed by
Party A and one by Party C. The general manager and the assistant managers,
whose terms of office are 4 years, should be hired by the board of directors.
The controller, deputy controller and chief engineer will be hired by the
general manager.
Article 30
The responsibility of the general manager is to carry out the decisions of the
Board meeting and organize and conduct the daily management of the joint venture
company. The assistant managers shall assist the general manger in his/her daily
work.
Several department managers may be appointed by the management office,
respectively, handle the matters handed over by the general manager, and shall
be responsible to them.
Article 31
In case of graft or serious dereliction of duty on the part of the general
manager and assistant manager, the Board of Directors shall have the power to
dismiss them at any time.
Chapter 11 - Purchase of Equipment
Article 32
In purchase of raw materials, fuel, parts, means of
<PAGE>
transportation and articles for office use, etc., if conditions are comparable,
the joint venture company shall give first priority to purchase in China.
Article 33
In case of the joint venture company entrusts Party C to purchase equipment in
overseas markets, Party B shall be invited to send its people to take part in
the purchasing.
Chapter 12 - Labor Management
Article 34
The labor contracts shall, after being signed, be filed with the local labor
management department.
Article 35
The appointment, salaries, social insurance, welfare and the standard of
traveling expenses, etc. of high-ranking administrative personnel recommended by
Party A, B, C, shall be decided at the meeting of the Board of Directors.
Chapter 13 - Taxes, Finance and Audit
Article 36
The joint venture company shall pay taxes in accordance with the stipulations of
Chinese laws and relevant regulations.
Article 37
Staff members and workers of the joint venture company shall pay personal income
tax according to the "Individual Income Tax Law of the People's Republic of
China."
Article 38
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 39
The first fiscal year of the joint venture shall start from the day of its
establishment and end on Dec. 31 of the same year. In later years, the fiscal
year shall be from January 1 to December
<PAGE>
31. All vouchers, receipts, statistical statements and reports, account books
shall be written in Chinese.
Article 40
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 CEO. If Party B or Party C deem it necessary to hire an auditor to examine
the annual financial situation, Party A should agree. The expenses should be
paid by Party B or Party C.
Article 41
In the first three months of each fiscal year, the general manager shall prepare
the 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 14 - Duration of the Joint Venture
Article 42
The duration of the Joint Venture Company is twenty 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 six months prior to the
expiration date of the joint venture.
Chapter 15 - Disposal of Assets After the Expiration of the
Duration
Article 43
Upon the expiration of the duration or termination before the date of expiration
of the joint venture, liquidation shall be carried out according to the relevant
law. The liquidated assets shall be distributed in accordance with the
proportion of investment contributed by Party A, Party B and Party C.
Chapter 16 - Insurance
Article 44
Insurance policies of the joint venture company on various kinds of risks shall
be underwritten with the Chinese People's
<PAGE>
Insurance Company. The types, the value and duration of these insurance shall be
decided by the board of directors in accordance with the stipulations of the
People's Insurance Company of China.
Chapter 17 - Amendment, Alteration and Discharge of the Contract
Article 45
The amendment of the contract or other appendices shall come into force only
after a written agreement signed by Party A, Party B and Party C, approved by
the original authority of approval.
Article 46
In case of inability to fulfill the 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 unanimously agreed upon by the board of directors and approved
by the original authority of approval.
Article 47
Should the joint venture company be unable to continue its operations or achieve
the business purpose stipulated in the contract due to the fact that one of the
contracting parties fails to fulfill the obligations prescribed by the contract
and articles of association, or seriously violates the stipulations of the
contract and articles of association, that party shall be deemed as unilaterally
terminating the contract. The other parties shall have the right to terminate
the contract in accordance with the provisions of the contract after approval by
the original examination and approval authority as well as to claim damages. In
case Party A, Party B and Party C of the joint venture company agree to continue
the operation, the party who fails to fulfill the obligations shall be liable to
the economic losses thus caused to the joint venture company.
Chapter 18 - Liabilities for Breach of Contract
Article 48
Should either Party A, Party B or Party C fail to pay on schedule the
contributions in accordance with the provisions defined in Chapter 5 of this
contract, the breaching party shall pay to the other parties 2% of the
contribution starting from the first month after exceeding the time limit.
Should the breaching party fail to pay after three months, 6% of the
contribution shall be paid to the other parties, which shall have the right to
terminate the contract and to claim damages to the breaching party in accordance
with the stipulations in article 47 of the
<PAGE>
contract.
Article 49
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 or parties shall bear the
responsibilities thus caused. Should it be the fault of all three parties, they
shall bear their respective responsibilities according to actual situations.
Article 50
In order to assure the execution of this agreement and its attachment, Parties
A, B, and C should all provide guarantee notes from the bank.
Chapter 19 - Force Majeure
Article 51
Should either of the parties to the contract be prevented from executing the
contract by force majeure, such as earthquake, typhoon, flood, fire, war or
other unforeseen events, and their happening and consequences are inevitable and
unavoidable, the affected party shall notify the other parties by cable without
delay, and within 15 days thereafter provide the detailed information of the
events and a valid document for evidence issued by the relevant public notary
organization for explaining of the reason of its inability to execute or delay
the execution of all or part of the contract. All parties shall, through
consultation, decide whether to terminate the contract or to exempt the party 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.
Chapter 20 - Applicable Law
Article 52
The formation of this contract, its validity, interpretation, execution shall be
governed by the related laws of the People's Republic of China.
Chapter 21 - Settlement of Dispute
Article 53
Any disputes arising from the execution of, or in connection with the contract
shall be settled through friendly consultations between all three parties. In
case no settlement can be reached through consultations, the disputes shall be
submitted to the
<PAGE>
Foreign Economic and Trade Arbitration Commission of the China Council for the
Promotion of International Trade for arbitration in accordance with its rules of
procedures. The arbitrary award is final and binding upon all three parties.
Article 54
During the arbitration, the contract shall be executed in continuance by all
parties except for matters in dispute.
Chapter 22 - Language
Article 55
The contract shall be written in Chinese.
Chapter 23 - Effectiveness of the Contract Etc.
Article 56
This Contract and its appendixes are to be ratified by the Ministry of Foreign
Economic Relations and Trade (or institute entrusted by it), and shall come into
force from the day of ratification.
Article 57
Should notices in connection with any party's rights and obligations be sent by
either Party A, Party B or Party C by telegram or telex, etc., the written
letter notices shall also be required afterwards. The legal addresses of Party
A, Party B and Party C listed in this contract shall be the mailing addresses.
Article 58
The contract is signed in Beijing, China by the authorized representatives of
all three parties on August 29, 1998.
Xianyang Pianzhuan Development Co., Ltd. Representative:
Asia Electronics Holding Co. Representative:
Daewoo Electronic Components Co., Ltd. Representative:
August 29, 1997
Exhibit 3.1
TRANSLATION DOCUMENT
ECONOMY DEVELOPING BUREAU OF
WEIHAI HUOJU HI-TECH DEVELOPING AREA
(OFFICIAL DOCUMENT NUMBER: 1997 212)
RIE: THE FEASIBILITY STUDY REPORT OF WEFRAI GAOXIN
DAEWOO ELECTRONIC COMPONENTS CO., LTD
Xianyang Pianzhuan Development Co., Ltd:
Your feasibility study report of establishing a Joint- Venture has been
reviewed.
The reply is as follows:
1. The feasibility study report establishing a Joint-Venture "Weihai Gaoxin
Daewoo Electronic Components Co., Ltd." (the company) managed by Xianyang
Pianzhuan Development Co., Ltd. (Party A), Asia Electronics Holding Co.
Inc.(Party B) and Korean Daewoo Electronic Components Co., Ltd.(Party C) is
approved.
2. It is approved that the total investments is USD5,730,000 and the
registration capital is USD3,500,000. Party A shall invest USD350,000 in
cash, Party B shall invest USD 2,800,000 in cash and Party C shall invest
USD350,000 in cash and as a result, Party A will own 10% interest, Party B
will own 80% interest and Party C will own 10% interest of the company.
3. Field and capacity of operation: Developing, manufacturing and sales of
deflection yokes of CPT and CDT. Annual capacity is 2.4 million units of
deflection yokes, annual sales revenue is RMB99,696,000 and annual net
income and tax is RMB24,580,000 after the company goes into production.
4. The term of operation is 20 years.
5. The foreign currency of the company is balanced on its own. 6. The
manufacturing location of the company is in Weihai Hi- Tech Developing
area.
Please go through the procedure according to this document.
ECONOMY DEVELOPING BUREAU OF WEIHAI HUOJU HI-TECH DEVELOPING AREA
(seal)
September 15, 1997
CC Copies to ...
Exhibit 3.2
TRANSLATION DOCUMENT
MANAGEMENT COMMISSION OF WEIHAI
HUOJU HI-TECH DEVELOPING AREA
(OFFICIAL DOCUMENT NUMBER: 1997 64)
THE ADVICE OF ISSUING THE APPROVAL CERTIFICATE OF
WEIHAI GAOXIN DAEWOO ELECTRONIC COMPONENTS CO., LTD.
Xianyang Pianzhuan Development Co., Ltd.:
Your application documents about establishing a Joint-Venture has been received
and reviewed. The Joint-Venture Contract(Charter) and Article of
Association(By-laws) of Weihai Gaoxin Daewoo Electronic Components Co., Ltd.(the
company) established by Xianyang Pianzhuan Development Co., Ltd. (Party A), Asia
Electronics Holding Co. Inc.(Party B) and Korean Daewoo Electronic Components
Co., Ltd.(Party C) conform to "The Law of People's Republic of China on Joint
Ventures Using Chinese and Foreign Investment" and are approved to be effective.
The reply is as follow:
1. It is approved that the total investments is USD5,730,000 and the
registration capital is USD3,500,000. Party A invests USD350,000 in cash,
Party B invests USD2,800,000 in cash and Party C invests USD350,000 in cash
and as a result, Party A will own 10% interest, Party B will own 80%
interest and Party C will own 10% interest of the company.
2. Field of operation: Developing, manufacturing and sales of deflection yokes
of CPT and CDT.
3. The term of operation is 20 years.
4. The Board of Directors is composed of 5 persons. The Chairman of the Board
is Mr. Du, Qing Song; The directors are Ms. Li, Hai Ying; Mr. Zhen, Yi
Yong; Mr. Hu, Jian An and Ms. Li, Wen Ya.
5. The foreign currency of the company is balanced on its own.
6. The manufacturing location of the company is in Weihai Hi-Tech Developing
area.
The approval certificate (Shandong No. [1997] 0634) will be issued to you with
this document. Please register in The Commerce Administration Bureau within 30
days after this documents' issuing date.
MANAGEMENT COMMISSION OF WEIHAI HUOJU HI-TECH DEVELOPING AREA
(Seal)
September 15, 1997
CC Copies to...
Exhibit 3.3
APPROVAL CERTIFICATE
OF
SINO-FOREIGN JOINT VENTURE IN PRC
(Left Side)
Approval No.: Shandong Weihai Joint Venture [1997]
No.0634
Approval Date: September 15, 1997
(Seal on date)
Issuing Date: September 15, 1997
(Right Side) No.0367919
Name of Joint Venture:
In Chinese:
In English Weihai Gaoxin Daewoo Electronic
Components Co., Ltd.
Address: Weihai Hi-Tech developing area
Type of company: Joint Venture
Term of the Joint Venture: 20 years
Total Investment USD5,730,000
Total Registration
Capital: USD3,500,000
Investors:
Name: Registration Place Contributions
Xianyang Pianzhuan Developing
Co., Ltd. China USD350,000
Asia Electronics Holding
Co. Inc. British Virgin Island USD2,800,000
Daewoo Electronic Components
Co. Ltd. Korea USD350,000
Field of Operation:
Developing, manufacturing and sales of deflection yokes for CPT
and CDT
Exhibit 3.4
TRANSLATION DOCUMENT
PEOPLE'S REPUBLIC OF CHINA
LEGAL ENTITY
BUSINESS LICENSE
(Left Side)
Registration No: Shandong Weihai Joint Venture
No.002021
This enterprise has registered to be a business legal entity and is approved to
do business.
Annual Validation Check by every March 1
(Right Side)
Name of the enterprise:
In Chinese:
In English: WEIHAI GAOXIN DAEWOO ELECTRONIC
COMPONENTS CO., LTD.
Address: 219 Huoju Road, Hi-Tech developing area, Weihai,
Shandong
Type of the enterprise: Joint Venture
Field of operation: Developing, manufacturing and sales of
deflection yokes for CDT and CPT.
Registration Capital: USD3,500,000
Chairman of Board: Du, Qing Song
Vice Chairman of Board:
General Manager: Du, Qing Song
Deputy General Manager:
Branch of Organization:
Term of operation: From September 26, 1997 to September 25, 2017
The license valid date: From January 8, 1998 to July 27, 1999
The Commerce Administration Bureau of PRC Director (Signature)
Seal Date: January 8, 1998
NOTES ON THE USE OF THE RMB LOAN CONTRACT OF THE
CONSTRUCTION BANK OF CHINA
I. Field of Application: The Contract applies to current-capital and
fixed-assets loans executed between branches of the Construction Bank
branches at all levels and the borrowing entities or individuals.
II. The blank spaces in Article 1, Article 2, Article 3 and Article 4 of the
Contract are to be filled out on the basis of actual facts/figures agreed
to by both parties.
III. The disbursement schedule in Article 5 of the Contract refers to the
schedule of installments of loan payments by the lender to the borrower.
In the case of one-time disbursements, no disbursement schedule is needed.
The extra lines in the Contract should be deleted at the time of the
signing of the Contract.
IV. The repayment schedule in Article 6 of the Contract refers to the schedule
of repayment installments by the borrower to the lender. In the case of
one-time repayment, no repayment schedule is needed. The extra lines in
the Contract should be deleted at the time of the signing of the Contract.
V. Both parties should fill out the blanks in item 2 of Article 6, item 1 of
Article 7, item 2 of Article 9, after consultation.
VI. The blanks in Article 11 should be filled out according to the actual
form of guarantee used. In the event that the third-party guarantee
form is used, the name of the guarantee party(s) should be filled out
in the blank, and the relevant content in the second blank be deleted;
whereas in the event that the collateral and/or pledge guarantee form
is used, the name of the collateral and/or pledge party(s) shall be
filled out in the second blank, and the relevant content in the first
blank be deleted; In the event that both guarantee party(s) and
collateral and/or pledge party(s) forms are used, both blanks shall be
filled out. The third blank shall be filled out based on the guarantee
contract executed therewith.
VII. The blanks in items 1 and 2 of Article 13 shall be filled out by the
processing bank in accordance with the rules and regulations of the
Chinese People's Bank.
1
<PAGE>
The blanks in items 3 and 4 of Article 13 shall be filled out with a penal
sum percentage agreed on by Party A and Party B through negotiation.
VIII. Miscellaneous items not stipulated in the Contract but deemed necessary by
the parties to the Contract should be defined in Article 15 with the
agreement of both parties.
IX. Article 17 defines the Contract's signatories and its effective date.
The Contract shall come into force only when undersigned by the
respective legal representatives or the authorized deputies of Party A
and Party B, and bearing the parties' official seals. Any other
signatures and any seals other than the official ones shall be
considered null and void. In the event that the parties to the
Contract do not possess the qualification of a legal entity, the
contract shall be signed by their chief executive officers or their
authorized deputies.
2
<PAGE>
CONTRACT OF THE CHINA CONSTRUCTION BANK CAPITAL
LOAN
Loan Type: (?) [handwritten text illegible]
Contract Serial No.: (1997) 026
Borrower: Xianyang Pianzhuan Development Co., Ltd.
Domicile: 70 West Weiyang Road, Xianyang City Tel.: 3320891-3288
Legal Representative: DU, Qingsong
Financial Institution with existing account and account number: 26339476
Fax: 3320567 Postal Code: 712021
Lender: China Construction Bank, Shaanxi Branch
Domicile: Jianyuan Hotel, Zhuque Avenue, Xi'an City Tel.: 7614814
Legal Representative: WANG, Weiqiang
Fax: 7614810 Postal Code: 710002
Borrower (hereinafter Party A): Xianyang Pianzhuan Development Co., Ltd.
Lender (hereinafter Party B): China Construction Bank, Shaanxi Branch.
Whereas, Party A desires a loan from Party B;
Whereas, Party B, upon careful review and pursuant to Document #580 issued by
its provincial Bank, agrees to release the loan; Therefore, for the purpose of
defining each party's rights and obligations, Party A and Party B, pursuant to
the relevant legal regulations and through mutual agreement, do hereby execute
the Contract herein for the benefit of mutual adherence and implementation.
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Article 1: Loan Amount
Party A shall borrow from Party B the amount of Fifty million RMB yuan.
Article 2: Purpose of loan
Party A shall use the loan for the Company's current capital turnover.
Article 3: Term of Loan
The term of loan by Party A commences on November 20, 1997 and terminates
on May 20, 1998.
Article 4: Interest Rate and Interest of Loan
The monthly interest rate of the loan shall be .792%, and the interest is
settled quarterly.
The loan interest starts to accrue on the date when the loan monies are
deposited into the bank account of Party A. If, during the effective term of the
Contract, the general interest rate should change, the interest rate of the loan
shall be adjusted according to the regulations of the Chinese People's Bank.
Article 5: Disbursement Schedule
Party A's disbursement schedule is as follows:
November, 1997: 50 million RMB Yuan
Article 6: Repayment schedule
Party A's repayment schedule is as follows:
May, 1998: 50 million RMB yuan
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In the event that Party A wishes to make prepayment, it shall notify Party B at
least three (3) business days prior to the prepayment with the consent of
Party B.
Article 7: Method of Interest Payment
Party A promises to make timely interest payments in the following method:
Deduction by account transfers.
If, for any reason, Party defaults, Party B shall have the right to deduct the
amount from Party A's account or suspend loan payments.
Article 8: Loan Deduction Method
Party A promises to observe the loan repayments schedule. If, for any reason,
Party A defaults, Party B shall have the right to deduct the amount of the
principal, interest and relevant fees of the loan from Party A's account, either
by itself or through an authorized third party.
Article 9: Alteration and Termination of Contract
1. After the Contract comes into force, neither Party A nor Party B shall be
able to unilaterally alter or terminate the Contract.
2. If Party A, due to change of circumstances, despite its efforts, still fails
to settle the loan at maturity, a written petition for extension should be
submitted by Party A to Party B. Only one extension shall be granted for each
loan. The petition must be submitted at least fifteen (15) business days
prior to the maturity of the loan. The petition should also be accompanied by
a written guarantee by the third party guarantor or pledger for the extension
of loan repayment. With the approval of Party B, an agreement of the
extension of loan repayment shall be executed as an appendix to the Contract
herein.
3. Should Party A assign the rights and obligations under the Contract to a
third party, a written consent from Party B should be obtained prior to the
assignment; the act of assignment will not be valid until the assignee and
Party B have executed another loan contract.
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4. If either Party A or Party B undergoes changes in its structure, such as
merge, split-up, sub-contraction, or restructuring into a shareholders
corporation, the obligations and rights in implementing the loan contract
shall be transferred to the new authorities.
Article 10: If, during the life of the loan, Party A undergoes changes in its
operation methods, such as sub-contraction, leasing-out, merge and acquisition,
joint venture, split-up, joint management or restructuring into a shareholders
corporation, notification should be served to Party B at least thirty (30) days
prior to the change. Only with the written approval of Party B at the relevant
contracts (documents) pertaining to such structural changes, shall Party A be
permitted to carry out its structural change action.
Article 11: Loan Guarantee
In regard to the principal and interest of the loan hereunder and the relevant
fees, ( entity name) shall act as Party A's guarantor and/or shall provide
necessary guarantee; a separate guarantee contract shall be attached to the
Contract herein.
Article 12: The Principal Rights and Obligations of Party A and Party B.
1. Party A shall have the right to ask Party B to release the loan as agreed
upon in the Contract.
2. Party A shall repay the entire loan, principal and interest, within the term
defined in the Contract.
3. Party A must use the loan for the purpose defined hereunder; it shall not use
the loan for any other purpose without the written consent of Party B.
4. Upon the request of Party B, Party A shall provide such information as
schedules, statistics, financial and accounting statements, etc.
5. Party B shall have the right to review the use of loan.
6. Party B shall have the right to monitor Party A's capital assets and business
operations.
7. Party B shall promptly disburse loan payments within the term defined by the
Contract.
Article 13: Liabilities for Breach of Contract.
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1. In the event that Party A uses the loan for purpose other than defined in
the Contract, Party B shall have the right to collect interest, at the
daily rate of 0.06%, on the misused portion of loan for the breach period.
2. In the event that Party A fails to make loan repayments or fails to
observe the loan repayment schedule as defined in the Contract, the
overdue amount shall be treated as overdue loan; Party B shall have the
right to collect interest, at the daily rate of 0,04%, on the overdue loan
for the overdue period.
In the event that Party A intentionally chooses to transfer its capital in
order to dodge loan repayment in spite of its repayment ability, Party B
shall have the right to impose joint credit sanction on Party A, and shall
have the right to collect interest, at the daily rate of 0.06%, on the
overdue loan for the overdue period.
3. In the event that Party A violates the stipulation in Article 10, by
changing its business structure without the consent of the other party,
thus forfeiting the creditor's right and inflicting a loss in the loan
capital, Party B shall have the right to retrieve part or all of the loan,
and shall have the right to collect the penal sum of 10% of the entire
loan from Party A.
4. In the event that Party A violates the stipulation in Article 15, Party B
shall have the right to collect the penal sum of 10% of the entire loan
from Party A.
5. In the event of any of the following incidents occurred to Party A during
the effective term of the Contract, Party B shall have the right to stop
the releasing of any undisbursed loan payments, retrieve the principal and
interest of the released loan payments ahead of schedule, or forfeit the
items of security or deposit, and shall have the right to deduct the
amount directly from Party A's account:
5.1 Failure to use the loan for the purpose defined in the Contract, and
refusal to rectify the situation despite Party B's demand for such action
within a given time;
5.2 False information of schedules, statistics, financial and accounting
statements, etc. provided by Party A;
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5.3 In the case when a third party's guarantee and/or collateral/pledged is
involved, either the guarantor of the loan violates the guarantee contract
or lose the ability of collateral power, or the collateral/pledging party
violates the collateral/pledge contract or when the collateral/pledged
items are destroyed or damaged in accidents, thus becoming insufficient to
repay the principal and interest of the loan hereunder, and failure by
Party A to find new guarantee and/or collateral/pledge which can meet the
standards of Party B's requirements;
5.4 Defaults on interest payments according to schedule.
5.5 Party A's involvement or pending cases in major litigation(s) or
arbitration proceedings, or some other legal disputes.
5.6 Other action(s) that could impair Party A's repayment ability or that
reveals Party A's lack of sincerity in repaying the loan.
Article 14: Methods of settling disputes over the Contract
Should any disputes arise during the course of implementing the Contract, Party
A and Party B shall endeavor to resolve them by way of consultation. In the
event consultation fails, litigation can be filed to the People's Court where
the lending bank (Party B) is domiciled. In the process of consultation and
litigation, both parties shall still honor the articles in Contract not under
the disputes.
Article 15: Other Miscellaneous items hereunder in the Contract agreed to by
Party A and Party B.
1. Prior to the full repayment to Party B's loan, Party A shall not pledge
its fixed asset constituted by Party B's loan to a third party.
2. Prior to a full payment of Party B's loan, Party A shall not offer to a
third party any guarantee that exceeds its debt liabilities.
3. Party A promises to reserve enough funds for its payment of interest.
4. Party A is willing to accept compulsory execution, should it fails to
repay the loan on time.
Article 16: In respect to the areas unspecified in the Contract, Party A and
Party B shall both act in accordance with the relevant national laws,
conventions and financial regulations.
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Article 17: This Contract shall come into force when signed by the legal
representatives of respective parties, or their authorized deputies, and bearing
their respective official stamp, and shall be terminated upon the full repayment
of the principal and interest of the loan hereunder in Contract.
Article 18: This Contract is in four original copies. Party A and Party B each
retains one copy, and the guarantors, if any, shall each retain one copy.
Party A Party B
Legal Representative Legal representative
or(authorized deputy): or(authorized deputy): YANG, Junhua-
LI, Haiying [signed]
Date: Date: November 20, 1997
[Official Stamp of [Official Stamp of
Xianyang Pianzhuan
Development Co. Ltd.] China Construction Bank, Shaanxi Branch]
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Exhibit 99.1
ASIA ELECTRONICS HOLDING CO. INC.
c/o Harney, Westwood & Riegels
Craigmuir Chambers
P.O. Box 71
Road Town, Tortola
British Virgin Islands
I hereby represent that the following documents constitute fair and
accurate translations of the respective Chinese documents to which they
correspond:
Exhibit
No. Description
- ---------- ---------------------------------------------------------------
2.1 Agreement among the Company, Xianyang Pianzhuan Development
Co., Ltd. and Daewoo Electronic Components Co., regarding
formation of Weihai Joint Venture
3.1 Approval of Feasibility Study Report of Weihai Joint Venture
3.2 Advice of Issuing Approval Certificate of Weihai Joint Venture
3.3 Approval Certificate of Weihai Joint Venture
3.4 Business License of Weihai Joint Venture
10.1 Loan Agreement between Xianyang Pianzhuan Development Co., Ltd.
and the Constructionn Bank of China
By:
----------------------------
Du Qingsong, Chairman of
the Board and Chief
Executive Officer
