-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MjFzD4/nkSn9S43FAXSiGtSA212xf5Kuzo/vEKc9oqI0k0U8+QpOO5NLCuZgiPSV mDM7whHefciIpoGGcqn6yw== 0000898430-96-004887.txt : 19961024 0000898430-96-004887.hdr.sgml : 19961024 ACCESSION NUMBER: 0000898430-96-004887 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19961023 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNBASE ASIA INC CENTRAL INDEX KEY: 0000095626 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 941612110 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-14665 FILM NUMBER: 96646757 BUSINESS ADDRESS: STREET 1: 19 F FIRST PACIFIC BANK CENTERE STREET 2: 51-57 GLOUCESTER ROAD CITY: WANCHAI HONG KONG STATE: K3 BUSINESS PHONE: 01185228651511 MAIL ADDRESS: STREET 1: P O BOX 2600 CITY: BAKERSFIELD STATE: CA ZIP: 93303 FORMER COMPANY: FORMER CONFORMED NAME: PAN AMERICAN INDUSTRIES INC DATE OF NAME CHANGE: 19941216 FORMER COMPANY: FORMER CONFORMED NAME: PAN AMERICAN ENERGY CORPORATION DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SUPREME OIL & GAS CORP DATE OF NAME CHANGE: 19901029 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on October 23, 1996 Registration No. 33- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________ FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 _________________________ SUNBASE ASIA, INC. (Exact Name of Registrant as specified in its charter) Nevada 3562 94-1612110 (State or Jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.) incorporation or organization) Classification Code Number)
____________________ 19/F, First Pacific Bank Centre William McKay 51-57 Gloucester Road 2240 Buena Vista Wanchai, Hong Kong Irwindale, California 91706 (852) 2877-3830 (818) 358-0181 (Address and telephone number, (Name, address and telephone including area code of Registrant's number of agent for service) principal executive offices) COPIES TO: David L. Ficksman, Esq. Loeb & Loeb LLP 1000 Wilshire Boulevard Los Angeles, California 90017 (213) 688-3698 Facsimile (213) 688-3460 _____________________ Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the effective date of this registration statement. If the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box: [X] CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum Title of Each Class of Amount to Offering Price Aggregate Amount of Securities to be Registered Be Registered Per Share/(1)/ Offering Price Registration Fee Common Stock, $.001 par value 1,000,000 $7 3/4 $7,750,000 $2,672
(1) Estimated solely for purpose of calculating the registration fee. Pursuant to Rule 457, the maximum offering price per share is based upon the average of the closing bid and asking prices of the Common Stock on the Nasdaq National Market on October 17, 1996, or $7 3/4. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ii PRELIMINARY PROSPECTUS ---------------------- SUNBASE ASIA, INC. 1,000,000 SHARES OF COMMON STOCK ($.001 PAR VALUE) This Prospectus relates to the sale of up to 1,000,000 shares (the "Shares") of Common Stock, par value $.001 per share (the "Common Stock"), of Sunbase Asia, Inc. (the "Company") which may be offered by certain Selling Shareholders. The Shares were acquired by the Selling Shareholders in a private placement as described under the caption "Selling Shareholders" herein. The Selling Shareholders may offer the Shares for sale as described under the caption "Plan of Distribution." The expenses of the offering, estimated at $102,672, will be paid by the Company. The Company will not receive any proceeds from the sale of the Shares by the Selling Shareholders. The Common Stock currently trades on the Nasdaq National Market ("Nasdaq") under the symbol "ASIA." On October 17, 1996, the closing sale price of the Common Stock as reported by Nasdaq was $7 3/4, per share. See "Price Range of Common Stock." Prospective investors should carefully consider the matters discussed under the caption "Risk Factors" on page 9. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
========================================================================================= Underwriting Discounts and Proceeds to Selling Common Stock Price to Public(1) Commissions(2) Shareholders ========================================================================================= Per Share $7 3/4 N/A $7 3/4 Maximum Total $7,750,000 N/A $7,750,000 =========================================================================================
(1) Based on the average of the high and low price of the Company's Common Stock as reported on the Nasdaq National Market as of October 17, 1996. (2) No underwriter will participate in any sales on behalf of the Selling Shareholders. See "PLAN OF DISTRIBUTION." All expenses of the offering, which are estimated to be $102,672, will be paid by the Company. THE DATE OF THIS PROSPECTUS IS OCTOBER __, 1996 1 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports and other information filed by the Company can be inspected and copied at the public reference facilities of the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Company has filed with the Commission a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the Shares offered hereby. This Prospectus which constitutes part of the Registration Statement does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Shares offered hereby, reference is made to the Registration Statement and to the financial statements, schedules and exhibits filed as a part thereof. Statements contained in this Prospectus as to the contents of any contract, agreement or any other document are not necessarily complete and, in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise with the Commission, each such statement being qualified in all respects by such reference, schedules and exhibits. The Registration Statement, including all exhibits thereto, may be inspected without charge at the Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from such office after payment of the fees prescribed by the Commission. CURRENCY OF PRESENTATION The Company publishes its financial statements in Renminbi yuan, the lawful currency of the People's Republic of China ("Renminbi or "Rmb"). In this Prospectus, references to "US$" or "US dollars" are to United States dollars. Translations of amounts from Renminbi to US dollars are for the convenience of the reader and for reference only. No representation is made that the Renminbi amounts could have been, or could be, converted into U.S. dollars at any certain rate. ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES Most of the Company's officers and directors and certain of the Selling Shareholders reside outside the United States and all of the assets of these persons and a substantial portion of the assets of the Company are located outside of the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons, or to enforce against the Company's assets or such persons judgments obtained in United States courts predicated upon the liability provisions of the United States securities laws. There is substantial doubt as to the enforceability against a substantial portion of the Company's assets or any of its directors and officers located outside the United States in original actions or in actions for enforcement of judgments of United States courts of liabilities predicated solely on the civil liability provisions of the Federal securities laws. The Company has been advised that no treaty exists between Hong Kong and the United States providing for the reciprocal enforcement of foreign judgments. However, the courts of Hong Kong are 2 generally prepared to accept a foreign judgment as evidence of a debt due. An action may then be commenced in Hong Kong for recovery of this debt. A Hong Kong court will only accept a foreign judgment as evidence of a debt due if: (i) the judgment is for a liquidated amount in a civil matter; (ii) the judgment is final and conclusive and has not been stayed or satisfied in full; (iii) the judgment is not directly or indirectly for the payment of foreign taxes, penalties, fines or charges of a like nature (in this regard, a Hong Kong court is unlikely to accept a judgment for an amount obtained by doubling, trebling or otherwise multiplying a sum assessed as compensation for the loss or damage sustained by the person in whose favor the judgment was given); (iv) the judgment was not obtained by actual or constructive fraud or duress; (v) the foreign court has taken jurisdiction on grounds that are recognized by the common law rules as to conflict of laws in Hong Kong (vi) the proceedings in which the judgment was obtained were not contrary to natural justice (i.e., the concept of fair adjudication); (vii) the proceedings in which the judgment was obtained, the judgment itself and the enforcement of the judgment are not contrary to the public policy of Hong Kong; (viii) the person against whom the judgment is given is subject to the jurisdiction of the Hong Kong court; and (ix) the judgment is not on a claim for contribution in respect of damages awarded by a judgment which does not satisfy the foregoing. Enforcement of a foreign judgment in Hong Kong may also be limited or affected by applicable bankruptcy, insolvency, liquidation, arrangement, moratorium or similar laws relating to or affecting creditors' rights generally and will be subject to a statutory limitation of time within which proceedings may be brought. 3 PROSPECTUS SUMMARY This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. Prospective investors are cautioned that such statements are only predictions and that actual events may differ materially. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth under the caption "Risk Factors," which would cause actual results to differ materially from those indicated by such forward-looking statements. The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and notes thereto, appearing elsewhere in this Prospectus. THE OFFERING
Securities........ 1,000,000 shares of Common Stock, $.001 par value per share, offered by the Selling Shareholders. Use of Proceeds... The Company will not receive any proceeds from this offering. Risk Factors...... Investment in the Company involves certain risks. See "Risk Factors." NASDAQ symbol..... Common Stock ASIA The Company's Common Stock is quoted on the NASDAQ National Market.
4 THE COMPANY Sunbase Asia, Inc., a Nevada corporation (the "Company," which term shall include, unless the context so requires, its subsidiaries and affiliates), is engaged in the design, manufacture and distribution of a broad range of bearing products in the People's Republic of China ("China" or the "PRC"), and the United States ("US"). The Company also distributes its bearing products in Europe, Asia, South America and Africa. The Company's subsidiary in China, Harbin Bearing Company, Ltd. ("Harbin Bearing"), employs approximately 13,000 employees. Harbin Bearing is the largest precision bearing manufacturer and the third largest bearing manufacturer overall in China. Harbin Bearing produces a wide variety of precision and commercial-grade rolling-element bearings in sizes ranging from 10mm to 1000mm (internal diameter). Rolling-element bearings use small metal balls or cylinders to facilitate rotation with minimal friction and are typically used in vehicles, aircraft, appliances, machine tools, general machinery and virtually any other product that contains rotating or revolving parts. Precision bearings are bearings that are produced to more exacting dimensional tolerances and to higher performance characteristics than standard commercial bearings. The manufacturing process for precision bearings generally requires the labor of highly-skilled machinists and the use of sophisticated machine tools. On January 16, 1996 (effective December 29, 1995), the Company acquired Smith Acquisition Company, Inc., d/b/a Southwest Products Company ("Southwest Products"), an engineering-intensive company located in Southern California, that produces precision spherical bearings for US, European and Asian aerospace and high tech commercial applications and the US military. Over 90% of Harbin Bearing's sales are made to the OEM and replacement markets in China. Based on low production costs in China and the on-going world-wide demand for bearings, management intends to create a substantial export business to complement the Company's strong domestic position in the Chinese markets. Historically, Harbin Bearing export sales have been made through trade intermediaries and by receiving customer orders that are placed directly to its offices in China. Southwest Products has commenced providing and will provide engineering and technical support, and has commenced to and will market and distribute Harbin Bearing products internationally, focusing on exports of the products to the US. In addition, Southwest Products has begun to and will assist Harbin Bearing in implementing US manufacturing methods, improving quality control procedures and in developing new products at Harbin Bearing's facilities in China. The Company's principal executive offices are located at 19/F First Pacific Bank Centre, 51-57 Gloucester Road, Wanchai, Hong Kong, telephone (852) 2865-1511. 5 The following is a chart of the Company's organizational structure. SUNBASE ASIA, INC. Common Stock trades-on NASDAQ NMS (Nevada Corporation) 100% 100% CHINA BEARING HOLDINGS LIMITED (Bermuda Holding Company) SOUTHWEST PRODUCTS COMPANY (California Corporation) 100% OPERATING COMPANY CHINA INTERNATIONAL BEARING HOLDINGS LIMITED (Hong Kong Holding Company) 99% 99.90% HARBIN SUNBASE HARBIN XINHENGLI DEVELOPMENT DEVELOPMENT COMPANY LIMITED COMPANY LIMITED (PRC JV Holding Co.) (PRC JV Holding Co.) 10% 41.57% HARBIN BEARING COMPANY, LTD (A) (PRC Joint Stock Company) OPERATING COMPANY (A) Sunbase Asia's effective ownership in Harbin Bearing is 51.4% 6 SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following summary financial data (expressed in thousands) have been derived from the audited financial statements of Harbin Bearing General Factory (the predecessor operating company to Harbin Bearing) for the year ended December 31, 1993 and the audited financial statements of the Company for the years ended December 31, 1994 and 1995, and the unaudited financial statements of the Company for the six month periods ended June 30, 1995 and 1996. All U.S. dollar amounts have been converted from Renminbi based on the exchange rate on June 30, 1996 of $1.00 US to each Rmb 8.32 as quoted at the People's Bank of China. Due to the reorganization of the Harbin Bearing General Factory on January 1, 1994, the 1993 financial information was prepared on a pro-forma basis as if the acquisition of China Bearing and Harbin Bearing had occurred on January 1, 1993. (See the discussion after the table under the caption "Selected Consolidated Financial Information").
OPERATIONS DATA Twelve Months Ended December 31 Six Months Ended June 30 --------------------------------------------------- --------------------------------- (UNAUDITED) 1993 1994 1995 1995 1995 1996 1996 RMB RMB RMB US$ RMB RMB US$ PROFORMA Net sales 687,064 719,842 672,359 80,812 434,833 465,689 55,972 Cost of sales (439,417) (441,854) (381,377) (45,838) (265,683) (285,917) (34,365) Gross profit 247,647 277,988 290,982 34,974 169,150 179,772 21,607 Selling, general and administrative expense (91,197) (95,218) (113,002) (13,582) (51,045) (62,359) (7,495) Interest expense, net (40,638) (43,446) (48,446) (5,822) (23,589) (30,421) (3,656) Foreign exchange gain/loss- - 725 - - - Reorganization expenses (7,307) (7,307) - - - - Income before income taxes 108,505 132,742 129,534 15,570 94,516 86,992 10,456 Provision for income taxes (16,700) (22,687) (20,472) (2,461) (14,499) (14,420) (1,733) Income before minority interests 91,805 110,055 109,062 13,109 80,017 72,572 8,723 Minority interests (50,495) (58,447) (54,967) (6,607) (39,907) (39,690) (4,771) Net income 41,310 51,608 54,095 6,502 40,110 32,882 3,952 BALANCE SHEET DATA AT JUNE 30, 1996 ---------------- RMB US$ Current Assets 1,188,986 142,908 Working Capital 331,729 39,871 Long-Term Debt 155,786 18,725 Minority Interests 382,831 46,013 Shareholders' Equity 398,927 47,948 Total Assets 1,794,801 215,723
7 RISK FACTORS The following risk factors should be carefully considered in addition to the other information contained in this prospectus: RISKS RELATING TO OPERATING IN CHINA. Because the production operations of the Company are based to a substantial extent in China, the Company (through Harbin Bearing) is subject to rules and restrictions governing China's legal and economic system as well as general economic and political conditions in that country. These include the following: POLITICAL AND ECONOMIC MATTERS. Under its current leadership, the Chinese government has been pursuing economic reform policies, which include the encouragement of private economic activity and greater economic decentralization. There can be no assurance, however, that the Chinese government will continue to pursue such policies, or that such policies will be successful if pursued. Changes in policies made by the Chinese government may result in new laws, regulations, or the interpretation thereof, confiscatory taxation, restrictions on imports, currency devaluations or the expropriation of private enterprise which may, in turn, adversely affect the Company. Furthermore, business operations in China can become subject to the risk of nationalization, which could result in the total loss of investments in China. Also, economic development may be limited by the imposition of austerity measures intended to reduce inflation, the inadequate development of an infrastructure, and the potential unavailability of adequate power and water, transportation, communication networks, raw materials and parts. LEGAL SYSTEM. The PRC's legal system is a civil law system based on written statutes. Unlike the common law system in the United States, decided legal cases in the PRC have little value as precedents. Furthermore, the PRC does not have a well-developed body of laws governing foreign investment enterprises. Definitive regulations and policies with respect to such matters as the permissible percentage of foreign investment and permissible rates of equity returns have not yet been published, statements regarding these evolving policies have been conflicting, and any such policies, as administered, are likely to be subject to broad interpretation and modification, perhaps on a case-by-case basis. As the legal system in the PRC develops with respect to such new forms of enterprise, foreign investors may be adversely affected by new laws, changes in existing laws (or interpretation thereof) and the preemption of provincial or local laws by national laws. Some of the Company's operations in China are subject to administrative review and approval by various national and local agencies of the PRC government. Although management believes that the Company's operations are currently in compliance with applicable administrative requirements, there is no assurance that administrative approvals, when necessary or advisable, will be forthcoming. In addition, although China has promulgated an administrative law permitting appeal to the courts with respect to certain administrative actions, this law appears largely untested in the context of administrative approvals. 8 INFLATION/ECONOMIC POLICIES. In recent years, the Chinese economy has experienced periods of rapid growth and high rates of inflation, which have, from time to time, led to the adoption by the PRC government of various corrective measures designed to regulate growth and contain inflation. In 1995, China's overall inflation rate was estimated to be 14.8%, compared to 21.4% in 1994 and 13.2% in 1993. High inflation has in the past and may in the future cause the PRC government to impose controls on prices, or to take other action which could inhibit economic activity in China, which in turn could affect demand for the Company's products. The Company carefully monitors the effects of inflation on its performance in China, and Harbin Bearing is usually able to increase its selling prices to shift a portion of its inflated costs to its customers. The price of bearing steel, the major raw material used by Harbin Bearing, remained fairly stable during 1994 and 1995 and the only major impact of inflation on Harbin Bearing's costs was on the cost of labor (due to the rising level of compensation of Harbin Bearing's employees). Due to economies of scale and improved control of Harbin Bearing's production costs, management believes that an increased inflation rate would have a favorable impact on its market position, as smaller bearing manufacturers in China would have greater difficulties in dealing with the effects of increasing inflation. FOREIGN CURRENCY EXCHANGE. The Renminbi, the currency of China, is not a freely convertible currency. Both conversion of Rmb into foreign currencies and the remittance of Rmb abroad are subject to PRC government approval. The Company earns the majority of its revenues, and incurs the majority of its costs, in Rmb. Prior to January 1, 1994, Rmb that were earned within the PRC were not freely convertible into foreign currencies except with government permission, at rates determined in place at swap centers, where the exchange rates often differed substantially from the official rates quoted by the People's Bank of China. On January 1, 1994, the People's Bank of China introduced a managed floating exchange rate system based on the market supply and demand and proposed to establish a unified foreign exchange inter-bank market among designated banks. In place of the official rate and the swap center rate, the People's Bank of China publishes a daily exchange rate for Rmb based on the previous day's dealings in the inter-bank market. It is expected that swap centers will be phased out in due course. However, the unification of exchange rates does not imply full convertibility of Rmb into US Dollars or other foreign currencies. Payment for imported materials and remittance of earnings outside of China are subject to the availability of foreign currency which is dependent on the foreign currency denominated earnings of the entity or allocated to the Company by the government at official exchange rates or otherwise arranged through a swap center with government approval. Approval for exchange at the exchange center is granted to enterprises in China for valid reasons such as purchases of imported goods and remittance of earnings. While conversion of Rmb into US Dollars or other foreign currencies can generally be effected at the exchange center, there is no guarantee that it can be effected at all times. There is still uncertainty as to how foreign investment enterprises will be treated under this new system or whether the system will be changed again in the future. In the event of shortages of foreign currency, Harbin Bearing may be unable to convert sufficient Renminbi into foreign currency to enable it to comply with foreign currency payment obligations it may have, including distributions to the Company. In the event of a depressed market in Renminbi, the cost of foreign currency 9 could be sufficiently great to preclude Harbin Bearing from meeting foreign financial obligations it might incur in the future or from paying distributions to the Company. RECENT TURBULENT RELATIONS WITH THE U.S.; ENTRY INTO THE WORLD TRADE ORGANIZATION. The United States has from time to time considered revocation of China's most favored nation ("MFN") trade status, which provides China with the trading privileges available generally to trading partners of the United States, and the United States and China have recently been involved in several controversies, including over the protection in China of intellectual property rights. While the United States and China have recently reached an agreement on the protection of intellectual property rights that averted a trade war, there can be no assurance that future controversies will not arise that again threaten the status quo involving trade between the United States and China, or that the United States will not revoke or refuse to extend China's MFN status. In either of such eventualities, the business of the Company could be adversely affected. In this regard, under MFN status, US bearing tariffs are between 3.5% - 10.2%. If MFN status is lost, US tariffs would increase to 35% - 67%. In addition, the United States has announced a change in policy that may make it easier for China to join the World Trade Organization (the "WTO"), the successor to the General Agreement on Tariffs and Trade. However, if China does not joint the WTO, the Company and its customers located in China may not benefit from the lower tariffs and other privileges enjoyed by competitors located in countries which are members of the world trade system and, as a result, the Company's business could be adversely affected. However, the admission of China as a member of the WTO could lead to increased foreign competition for Harbin Bearing. If China becomes a member of the WTO, the Chinese government will likely be required to reduce import restrictions and tariffs on bearing products. POLITICAL AND ECONOMIC DEVELOPMENTS AFFECTING HONG KONG. The Company's executive offices are located in Hong Kong. Accordingly the Company may be materially adversely affected by factors affecting Hong Kong's political situation and its economy or in its international political and economic relations. Hong Kong is currently a British Crown Colony, but sovereignty over Hong Kong will be transferred effective July 1, 1997 to China. As a result, there can be no assurance as to the continued stability of political, economic or commercial conditions in Hong Kong. COMPETITION RISKS RELATING TO THE COMPANY. Harbin Bearing's main competitors can be separated into three principal groups: (i) two nationwide domestic bearing manufacturers with wide product lines; (ii) small bearing production facilities which compete on a local basis by manufacturing small-sized, commodity-type bearings; and (iii) foreign bearing manufacturers. Competition is principally based on pricing and quality considerations. Chinese Competition Harbin Bearing, Wafangdian Bearing Factory and Luoyang Bearing Factory are the three largest bearing manufacturers in China, based on 1994 sales. The combined sales 10 revenues of these three manufacturers accounted for 30% of the US $1.09 billion in the total sales revenue of China's bearing industry (figures are approximate). By comparison, the aggregate sales revenue of the fourth, fifth and sixth largest Chinese bearing manufacturers only account for approximately 9.5% of the total sales revenue of China's bearing industry. Wafangdian Bearing Factory does not produce high-precision aerospace- quality rolling-element bearings, a market in which Harbin Bearing has a 70% domestic share (the remaining 30% market share is split among Luoyang Bearing Factory and Hongshan Bearing Factory). In addition to the manufacturers described above, there are approximately 270 other manufacturers of rolling element bearings in China, including a number of small bearing factories, located mainly in the coastal and southeastern provinces, that were established after 1988 when demand for small-sized bearings greatly exceeded the available supply. The bearings manufactured by these small factories are generally of lower quality commercial grade and are used mostly as replacement bearings in the electrical appliance and agricultural equipment industry. Harbin Bearing's other significant domestic competitors are mostly manufacturers that specialize in limited and specific types of bearings. Competition from Imports into China Bearing manufacturers outside of China are able to supply types and grades of bearings which are not available from Chinese domestic suppliers, particularly precision bearings of the highest durability and quality. Imported foreign bearings are generally higher in quality than Chinese-manufactured bearings, but are also priced higher due to China's low production costs and the assessment on imported bearings of a 15% or 20% import tariff. The 15% import tariff applies to bearings imported from countries that have established a tax treaty with China and the 20% import tariff applies to imports from other countries. Some foreign bearing manufacturers have established bearing manufacturing facilities in China, typically through joint ventures with local bearing manufacturers. Such ventures, if successful, would likely increase competition for Harbin Bearing in the higher-quality and precision-bearing market segments. Competition in International Markets In the international bearing markets, Harbin Bearing's main competitors are Eastern European manufacturers and manufacturers located in China. To a lesser extent, Harbin Bearing also competes with large international bearing manufacturers such as Svenska Kugellager Fabriken (SKF), Fisher Aktien Gesellschast (FAG), and New Technology Network (NTN). Management believes that with the assistance of Southwest Products in implementing US manufacturing methods and quality control procedures and in developing new products, Harbin Bearing's general competitive position will be substantially improved. In addition, Harbin Bearing will be able to compete in market segments that demand products with higher precision levels and will more effectively penetrate those market segments that utilize commodity-type bearings. 11 Leading industrial countries such as the US, Japan and countries in Europe impose import tariffs on bearings. For example, the US import tariff for bearings is 9% for ball bearings (a type of rolling element bearing) and 5% for cylindrical bearings. DEPENDENCE ON KEY EXECUTIVES The Company's success depends to a significant extent upon the contributions of its key management and technical personnel. The Company believes that its future success will depend on large part upon its ability to attract, retain and motivate highly skilled employees, who are in great demand, particularly as to its operations in China. CONTROL BY PRINCIPAL SHAREHOLDER Asean Capital Limited ("Asean Capital") beneficially owns 10,111,000 shares of the Company's Common Stock (representing approximately 80.75% of the outstanding Common Stock assuming conversion of all of the Company's Preferred Stock but before conversion of the Company's Convertible Debentures and exercise of outstanding warrants and options) and 36 shares of the Company's Series A Preferred Stock which in turn is convertible into 3,600,000 shares of Common Stock and has 18,000,000 voting rights (collectively, the "Asean Securities"). In turn, Sunbase International (Holdings) Limited owns 90% of the capital stock of Asean Capital. As a result, Sunbase International is in effective control of the Company and has the ability to elect all the members of the Board of Directors of the Company and influence significantly the approval of important corporate transactions in other matters requiring shareholder approval without the approval of the minority shareholders. See "Principal Shareholders." RELATED PARTY TRANSACTIONS In the past, the Company has entered into business transactions with certain affiliates and may continue to enter into such transactions in the future. The Company has no current plans to do so and its policy is not to enter into transactions with related persons unless the terms thereof are at least as favorable to the Company as those that could be obtained from unaffiliated third parties. See "Certain Relationships and Related Transactions." CERTAIN TAX CONSIDERATIONS The Company is predominantly invested in foreign subsidiaries. Those subsidiaries are subjected to taxes imposed on them in the foreign jurisdictions in which they operate and in which they are organized. Further, their income is subject to US federal and state income taxes when distributed, deemed distributed or otherwise attributed to, the Company, which is a US corporation. Complex US tax rules apply for purposes of determining the calculation of those US taxes, the availability of a credit for any foreign taxes imposed on the foreign subsidiaries or the Company and the timing of the imposition of US tax. 12 Normally, all foreign income earned by a US multinational eventually will be subject to US tax. Income earned by a foreign branch of a US company is taxable currently in the United States, and income earned by a foreign subsidiary will be subject to US tax either in the year distributed to the US as a dividend or in the year earned by means of Subpart F, foreign personal holding company or other federal tax rules requiring current recognition of certain income earned by foreign subsidiaries. All of the Company's direct and indirect foreign subsidiaries constitute "controlled foreign corporations" ("CFCs") for purposes of the Subpart F rules of the federal Internal Revenue Code. Among other consequences of CFC status, "Subpart F income," as defined, of the profitable foreign subsidiaries will be directly taxable to the Company, whether or not distributed to the Company. In general, Subpart F income is defined as the income and gains of the foreign subsidiary from its more passive investment-type activities. Subpart F income extends, in general, however, to include intercompany payments (e.g., payments of dividends, interest, royalties, etc.) between related foreign group members. Thus, for example, dividend distributions from the Company's indirect PRC and Hong Kong subsidiaries to the Company's Bermuda subsidiary (China Bearing Holdings Limited) would cause that dividend income of the Bermuda subsidiary to be directly taxable to the Company, notwithstanding that Bermuda does not tax such dividend income, and the Bermuda subsidiary does not distribute that dividend income to the Company, but retains it. Income earned in foreign countries often is subject to foreign income taxes. In order to relieve double taxation, the US federal tax law generally allows US corporations a credit against their US tax liability in the year the foreign earnings become subject to US tax in the amount of the foreign taxes paid on those earnings. The credit is limited, however, under complex limitation rules, to, in general, the US (pre-credit) tax imposed on the US corporation's foreign source income. Further, complex rules exist for allocating and apportioning interest, research and development expenses and certain other expense deductions between US and foreign sources. Limiting provisions of the source rules decrease the amount of foreign source income many US multinationals can generate. Reduced foreign source income results in a smaller foreign tax credit limitation, as the limitation is based on the ratio of foreign source net income to total net income. Further, separate income baskets exist for purposes of the foreign tax credit limitation, which makes it nearly impossible to reduce the effective foreign tax rate on higher-taxed foreign operating income by diluting income in the overall basket with relatively low-taxed foreign investment income. These rules can prevent US multinationals from crediting all of the foreign taxes they pay. To the extent that foreign taxes are not creditable, foreign source income bears a tax burden higher than the US tax rate. 13 SHARES ELIGIBLE FOR FUTURE SALE; OPTIONS AND WARRANTS The Asean Securities were issued effective December 22, 1994 and are deemed "restricted securities" under the Securities Act of 1933 (the "Securities Act") and, as such, are subject to restrictions on the timing, manner and volume of sales of such shares. On June 10, 1996, the Company issued 1,000,000 shares of the Company's Common Stock (the "Private Placement Shares") pursuant to a private placement. Under Registration Rights Agreements between the Company and each of the investors in such Private Placement, the Company has agreed to file a Registration Statement covering the Private Placement Shares. This Prospectus is a part of such Registration Statement. Upon and during the effectiveness of such Registration Statement, the Private Placement Shares would be freely tradable. In addition to the 3,600,000 shares of the Common Stock issuable upon conversion of the Series A Preferred Stock which are included within the Asean Securities, the Company has issued an aggregate of 6,800 shares of Series B Preferred Stock which are convertible under certain circumstances into an aggregate of 680,000 shares of Common Stock. The shares of the Common Stock issuable upon conversion of the Series B Preferred Stock will be deemed to be restricted shares, but, pursuant to Rule 144, as presently in effect, will become eligible for sale in the public market on or before January 16, 1998, subject to the volume and limitations imposed by Rule 144 with respect to shares owned by William McKay, the Company's President. Additionally, as of the date of this Prospectus, there are 10,392,167 warrants outstanding to purchase an aggregate of 148,459 shares of Common Stock at an exercise price of $175 per share, and an aggregate of 2,050,000 options to purchase Common Stock granted pursuant to the Company's 1995 Stock Option Plan at exercise prices ranging from $6.375 to $12.75 per share. On August 23, 1996, the Company issued an aggregate of $11,500,000 principal amount of Convertible Debentures (the "Convertible Debentures") to four institutional investors. The Convertible Debentures are convertible at any time at an initial exercise price of $5.00, which conversion price is subject to adjustment as set forth in the Debenture documents. See "Description of Securities." The holders of the Convertible Debentures have certain demand registration rights with respect to the shares issuable pursuant to the conversion of the Convertible Debentures. The Company also agreed to issue to an investment banking firm in connection with the placement of the Convertible Debentures warrants to purchase an aggregate of 240,000 shares at an exercise price of $6.375 per share, one third of which is to be exercisable on January 16, 1997, one third on January 16, 1998 and one third on January 16, 1999, with each such tranche to be available for exercise for a period of six years commencing with the date of the earliest exercise thereof. No prediction can be made as to the effect, if any, that sales of shares of Common Stock will have on the market prices prevailing from time to time. The possibility that substantial amounts of Common Stock may be sold in the public market may adversely affect prevailing market prices for the Common Stock and could impair the Company's ability to raise capital for the sale of its equity securities. To the extent that outstanding options and warrants are exercised or shares of Preferred Stock or the Convertible Debentures are converted, dilution of the percentage ownership of the Company's shareholders will occur, and any sales in the public market of the Common Stock underlying such options, warrants, Convertible 14 Debentures and Preferred Stock may adversely effect prevailing market prices for the Common Stock. PRICE RANGE OF COMMON STOCK Commencing on February 9, 1996, the Company's Common Stock began trading on the National Market of Nasdaq under the symbol ASIA. Prior thereto, the Common Stock was listed for trading on the Nasdaq's Electronic Bulletin Board (the "Bulletin Board") and on the Pink Sheets. The following tables set forth the high and low closing prices of the Company's Common Stock on Nasdaq or the Bulletin Board. Such prices reflect prices between dealers in securities and do not include any retail markup, markdown or commission and may not necessarily represent actual transactions. There was no established trading market for the Company's Common Stock during fiscal 1994.
High Low ----- ------ Fiscal 1995 ----------- Quarter Ended March 31, 1995 3 2 Quarter Ended June 30, 1995 5 1/2 2 Quarter Ended September 30, 1995 5 1/4 2 Quarter Ended December 31, 1995 6 4 1/2 Fiscal 1996 ----------- Quarter Ended March 31, 1996 7 7/8 6 1/32 Quarter Ended June 30, 1996 8 6 1/2
The approximate number of record security holders of the Common Stock at October 5, 1996 was 1,700. DIVIDEND POLICY The Company has paid no cash dividends on its Common Stock and has no present intention of paying cash dividends in the foreseeable future. It is the present policy of the Board of Directors to retain all earnings to provide for the growth of the Company. Payment of cash dividends in the future will depend upon, among other things, future cash flow, requirements for capital improvements and the ability to obtain distributions from the Company's Chinese operations. Applicable Chinese laws and regulations provide that a joint stock company (such as Harbin Bearing) cannot distribute its after-tax earnings and profits made in a fiscal year unless the losses of the previous years have been made up and certain funds retained. A 15 joint stock company is required by applicable Chinese Company Law to reserve 10% of its after-tax earnings and profits as the mandatory retained fund and 5 - 10% of its after-tax earnings and profits as the collective welfare fund. The collective welfare fund must be used to finance buildings and other capital expenditures for the collective staff benefits. The joint stock company does not have to reserve for the mandatory retained fund if the amount of such fund has reached 50% of a company's registered capital. For 1994 and 1995, Harbin Bearing contributed 10% and 5%, respectively, of after-tax profits as determined under Chinese accounting principles for such purposes. Distributions of dividends by Harbin Bearing to its shareholders are required to be in proportion to each shareholder's percentage interest in Harbin Bearing. All distributions by Harbin Bearing will be paid to its shareholders of record, which include the joint venture partners controlled by the Company (See, Chart of the organizational structure on page 7. Applicable Chinese laws and regulations require that, before a Sino-foreign equity joint venture (such as the joint venture partners) distributes dividends, it must: (1) satisfy all tax liabilities; (2) provide for losses in previous years; and (3) make allocations of capital to its official surplus accumulation fund and public welfare fund. The Company indirectly owns 99% and 99.9% of the two joint venture partners and, therefore, approximately 1.1% of distributions received by such partners will be paid to the Chinese parties of these joint ventures. Remittance of earnings outside of China is subject to certain factors outside of the control of the Company. See "Risk Factors - Risks Relating to Operating in China." SELECTED CONSOLIDATED FINANCIAL INFORMATION The following selected consolidated financial data (expressed in thousands) have been derived from the audited financial statements of Harbin Bearing General Factory (the predecessor operating company to Harbin Bearing) for the year ended December 31, 1991, 1992 and 1993 and the audited financial statements of the Company for the years ended December 31, 1994 and 1995, and the unaudited financial statements of the Company for the six month periods ended June 30, 1995 and 1996. All U.S. dollar amounts have been converted from Renminbi based on the exchange rate on June 30, 1996 of $1.00 US to each Rmb 8.32 as quoted at the People's Bank of China. Due to the reorganization of the Harbin Bearing General Factory on January 1, 1994, the 1993 financial information was prepared on a pro-forma basis as if the acquisition of Harbin Bearing had occurred on January 1, 1993. See "Organization of the Company" and "Certain Relationship and Related Transactions." The pro forma adjustments are described after the table. Due to the reorganization of the Harbin Bearing General Factory on January 1, 1994 and the ownership by the Company of only 51.4% of Harbin Bearing, period to period comparisons of the selected financial data are not meaningful. 16 OPERATIONS DATA
TWELVE MONTHS ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30 ------------------------- (UNAUDITED) 1991 1992 1993 1993 1994 1995 1995 1995 1996 RMB RMB RMB RMB RMB RMB US$ RMB RMB US$ ACTUAL ACTUAL ACTUAL PROFORMA Net sales 424,845 643,678 687,064 687,064 719,842 672,359 80,812 434,833 465,689 55,972 Cost of sales (335,882) (452,594) (441,467) (439,417) (441,854) (381,377) (45,838) (265,683) (285,917) (34,365) Gross profit 88,963 191,084 245,597 247,647 277,988 290,982 34,974 169,150 179,772 21,607 Selling, general and administrative expense (80,136) (100,142) (94,685) (91,197) (95,218) (113,002) (13,582) (51,045) (62,359) (7,495) Interest expense, net (24,404) (27,986) (40,723) (40,638) (43,446) (48,446) (5,822) (23,589) (30,421) (3,656) Foreign exchange gain/loss - (566) (3,446) - 725 - - - - Reorganization expenses - - - (7,307) (7,307) - - - - Income before income taxes (15,577) 62,390 106,743 108,505 132,742 129,534 15,570 94,516 86,992 10,456 Provision for income taxes (13,020) (11,123) (11,080) (16,700) (22,687) (20,472) (2,461) (14,499) (14,420) (1,733) Income before minority interests N/A N/A N/A 91,805 110,055 109,062 13,109 80,017 72,572 8,723 Minority interests N/A N/A N/A (50,495) (58,447) (54,967) (6,607) (39,907) (39,690) (4,771) Net income (28,579) (51,267) 95,663 41,310 51,608 54,095 6,502 40,110 32,882 3,952 BALANCE SHEET DATA DECEMBER 31 JUNE 30, 1996 1991 1992 1993 1993 1994 1995 1995 RMB RMB RMB RMB RMB RMB US$ RMB US$ Current Assets 411,380 494,177 933,639 576,812 893,994 1,032,600 124,110 1,188,986 142,908 Working Capital 17,932 64,143 398,994 252,404 247,990 306,288 36,812 331,729 39,871 Long-Term Debt 83,390 145,442 440,366 216,915 235,656 218,383 26,248 155,786 18,725 Minority Interests - - - 229,728 288,175 343,142 41,243 382,831 46,013 Shareholders' Equity 196,221 266,989 304,731 189,267 248,182 330,565 39,731 398,927 47,948 Total Assets 673,059 842,465 1,279,742 960,318 1,418,017 1,618,402 194,520 1,794,801 215,723
17 A description of the pro forma adjustments reflecting the effects of the acquisition of Harbin Bearing (See "Organization of the Company" and "Certain Relationships and Related Transactions") as follows: (a) To adjust cost of sales for land use fees for the year ended December 31, 1993; (b) (i) To adjust cost of sales for depreciation in respect of the assets owned by Harbin Bearing for the year ended December 31, 1993; (ii) To adjust cost of sales for depreciation in respect of the capital leases of fixed assets for the year ended December 31, 1993; (iii) To adjust cost of sales for the lease rental charges in respect of the lease of buildings for the year ended December 31, 1993; The actual depreciation charges expensed on the above assets previously owned by the Harbin Bearing General Factory have been reversed in the Pro Forma Consolidation Statement of Income; (c) To adjust cost of sales for the reduction in depreciation expenses as a result of the allocation of negative goodwill to non-current assets; (d) To adjust selling, general and administrative costs for the management fees payable to Harbin Holdings and Sunbase International (Holdings) Limited for the year ended December 31, 1993. The actual costs of the social support services previously paid by Harbin Bearing General Factory reflected in cost of sales, selling, general and administrative expenses, and other expenses have been reversed in the Pro Forma Consolidated Statement of Income; (e) To adjust selling, general and administrative costs in respect of trademark and administrative expenses incurred by China Bearing in relation to Harbin Bearing for the year ended December 31, 1993; (f) To adjust foreign exchange losses in respect of foreign currency loans retained by the Predecessor; (g) To adjust for interest expense in respect of the leases of fixed assets for the year ended December 31, 1993; (h) To adjust for interest expense in respect of the short term bank loans retained by Harbin Holdings for the year ended December 31, 1993; 18 (i) To adjust interest expense for the fair value effect of current assets and liabilities as a result of using the purchase method of accounting; (j) To adjust interest expense for the 8% US$5 million promissory note for the year ended December 31, 1993; (k) To adjust for reorganization expenses for the year ended December 31, 1993 as a result of the reverse acquisition; (l) To adjust the provision for income taxes to reflect the Chinese income taxes applicable to joint stock enterprises from January 1, 1993 for Harbin Bearing; and (m) To account for the effect of the minority interests. The following table sets certain information concerning exchange rates between Renminhi and US dollars for the periods indicated.
Noon Buying Rate (expressed in RMB per US$) Period Period End Average High Low ------ ---------- ------- ---- ---- 1991.............. 5.45 5.34 5.45 5.24 1992.............. 5.77 5.53 5.90 5.41 1993.............. 5.81 5.78 5.82 5.71 1994.............. 8.47 8.63 8.74 8.47 1995.............. 8.34 8.37 8.50 8.29 January 1996...... 8.33 8.34 8.34 8.33 February 1996..... 8.34 8.33 8.34 8.33 March 1996........ 8.35 8.34 8.35 8.33 April 1996........ 8.35 8.34 8.35 8.33 May 1996.......... 8.36 8.35 8.50 8.32 June 1996......... 8.32 8.32 8.33 8.31 July 1996......... 8.27 8.32 8.33 8.27 August 1996....... 8.27 8.28 8.30 8.26 September 1996.... 8.28 8.31 8.33 8.26
19 SUPPLEMENTARY FINANCIAL INFORMATION Certain unaudited quarterly financial information is set forth in the following table:
Net Net Gross Net Income Sales Profit Income Per Share (Thousands of Rmb, except per share data) (Exchange Rate at 6/30/96: 8.32 Rmb to $1) Rmb Rmb Rmb Rmb 1996 First Quarter 216,080 83,191 16,065 1.00 Second Quarter 249,609 96,581 16,817 1.04 1995 First Quarter 198,854 76,758 15,238 1.00 Second Quarter 235,979 92,392 24,872 1.62 Third Quarter 216,237 84,336 18,846 1.23 Fourth Quarter 21,289 37,496 (4,861) (0.31) 1994 First Quarter 182,677 66,312 12,360 0.81 Second Quarter 208,362 80,259 21,715 1.42 Third Quarter 198,321 81,158 15,925 1.04 Fourth Quarter 130,482 50,259 1,608 0.1
20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion of financial condition and results of operations of the Company should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto included elsewhere in this Prospectus. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors." OVERVIEW OF PRINCIPAL ACTIVITIES The Company owns, through various subsidiaries and joint venture interests, a 51.4% indirect ownership in Harbin Bearing, which designs, develops and manufactures a wide range of rolling element bearings in China and sells such bearings in China as well as western countries, including the United States. Effective December 29, 1995, the Company acquired Southwest Products which manufactures precision spherical bearings that are sold primarily to the aerospace and commercial aviation industries. See "Business - Southwest Products Company". The acquisition of Southwest Products has been treated as a business combination and is accounted for under the purchase method of accounting. However, since the acquisition was deemed to have been consummated on December 29, 1995, the results of Southwest Products were not consolidated into the Company for years prior to 1996 but are included in the Company's consolidated results of operations from January 1, 1996. The assets and liabilities of Southwest Products have been incorporated into the consolidated balance sheet of the Company at December 31, 1995. The Company has begun to utilize the resources of Southwest Products with the following objectives: 1. To increase export sales of Harbin Bearing's products in the US by selling its products through Southwest Products' distribution network, and by changing its export product mix to meet the demands of the international marketplace. 2. To transfer US manufacturing and product development expertise and technology from Southwest Products to Harbin Bearing to increase production, efficiency and product quality. 21 Unless specifically stated otherwise, all amounts in this Management's Discussion and Analysis are in thousands (Rmb000 or US$000). RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1995 AND 1996: The following table sets forth certain unaudited operating data (in Rmb and as a percentage of the Company's sales) for the six months ended June 30, 1995 and 1996.
Six Months Ended June 30, -------------------------- 1995 1996 ---------- --------- Rmb % Rmb % --- - --- - Sales 434,833 100.0 465,689 100.0 Cost of sales (265,683) (61.1) (285,917) (61.4) -------- --- -------- ----- Gross profit 169,150 38.9 179,772 38.6 -------- --- -------- ----- Selling expenses (9,753) (2.3) (12,371) (2.7) General and administrative expenses (41,292) (9.5) (49,988) (10.7) Interest expense (23,589) (5.4) (30,421) (6.5) -------- --- -------- ----- Income before income taxes 94,516 21.7 86,992 18.7 Provision for income taxes (14,499) (3.3) (14,420) (3.1) -------- --- -------- ----- Income before minority interests 80,017 18.4 72,572 15.6 Minority interests (39,907) (9.2) (39,690) (8.5) -------- --- -------- ----- Net income 40,110 9.2 32,882 7.1 ======== === ======== =====
Sales ----- Sales (including Rmb 16,073 from Southwest Products) for the six months ended June 30, 1996 increased by Rmb 30,856 or 7.1% as compared to the six months ended June 30, 1995. Excluding Southwest Products operations, sales increased by Rmb 14,783 or 3.4% for the six months ended June 30, 1996 as compared to the six months ended June 30, 1995. The rate at which sales had been growing has slowed in 1996 as compared to 1995 as a result of the Company's efforts beginning in the latter part of 1995 to consolidate the distribution of its products in China by shifting smaller OEM accounts to certain large distributors. See - "Liquidity and Capital Resources." 22 Cost of Sales/Gross Profit -------------------------- Cost of sales (including Rmb 12,550 from Southwest Products) for the six months ended June 30, 1996 increased to Rmb 285,917 as compared to Rmb 265,683 for the six months ended June 30, 1995. The cost of sales for Harbin Bearing for the six months ended June 30, 1996 and 1995 was calculated using the gross profit method by reference to average annual gross profit ratios. The cost of sales for Southwest Products for the six months ended June 30, 1996 was calculated based on actual cost. Gross profit increased by Rmb 10,662 or 6.3% for the six months ended June 30, 1996 as compared to the six months ended June 30, 1995. The increase in gross profit was attributable to the increase in sales. Gross profit as a percentage of sales decreased to 38.6% in 1996 from 38.9% in 1995 due to Southwest Products' lower gross margin of 21.9%. Selling Expenses ---------------- Selling expenses (including Rmb 2,501 from Southwest Products) for the six months ended June 30, 1996 increased by Rmb 2,618 or 26.8% to Rmb 12,371 as compared to Rmb 9,753 for the six months ended June 30, 1995. The increase in selling expenses was primarily attributable to the consolidation of Southwest Products' selling expenses in 1996. Selling expenses as a percentage of sales increased from 2.3% in 1995 to 2.7% in 1996. General and Administrative Expenses ----------------------------------- General and administrative expenses (including Rmb 4,370 from Southwest Products) for the six months ended June 30, 1996 increased by Rmb 8,696 or 21.1% to Rmb 49,988 as compared to Rmb 41,292 for the six months ended June 30, 1995. General and administrative expenses as a percentage of sales increased to 10.7% in 1996 from 9.5% in 1995. The increase in general and administrative expenses was mainly attributable to: a. The consolidation of Southwest Products' general and administrative expenses of Rmb 4,370. b. An increase in the management fee of Rmb 1,816 payable to Harbin Bearing Holdings Company as a result of a 10% inflation adjustment. c. An aggregate cash discount of Rmb 6,507 which was granted during the six months ended June 30, 1996 as incentives to customers for early settlement of debt in order to accelerate the cash collections. No such cash discount was granted during the six months ended June 30, 1995. d. A decrease in compensation expense of Rmb 3,939 related to the voluntary early retirement program at Harbin Bearing. 23 Interest Expense ---------------- Interest expense (including Rmb 1,380 from Southwest Products) for the six months ended June 30, 1996 increased by Rmb 6,832 or 29.0% to Rmb 30,421 as compared to Rmb 23,589 for the six months ended June 30, 1995. The increase in interest expense was attributable to an increase in principal amount of bank loans during the six months ended June 30, 1996 as compared to the six months ended June 30, 1995, and the 1.3% increase in the interest rate on new short term bank loans effective July 1, 1995. Net Income ---------- As a result of the aforementioned factors, including the consolidation of Southwest Products' operations effective January 1, 1996, net income decreased by Rmb 7,228 or 18.0% to Rmb 32,882 for the six months ended June 30, 1996 as compared to Rmb 40,110 for the six months ended June 30, 1995.
RESULTS FOR 1995 COMPARED TO 1994 Year ended Year ended December 31, December 31, 1995 1994 Rmb Rmb Net sales 672,359 719,842 Cost of sales (381,377) (441,854) -------- -------- Gross Profit 290,982 277,988 Gross Profit percentage 43.3% 38.6% Selling expenses (18,942) (20,471) General and Administrative expenses (94,060) (74,747) Interest Expense (48,446) (42,721) Reorganization Expenses - (7,307) -------- -------- Income Before Income Taxes 129,534 132,742 Provision for Income Taxes (20,472) (22,687) -------- -------- Income Before Minority Interests 109,062 110,055 Minority Interests (54,967) (58,447) -------- -------- Net Income 54,095 51,608 ======== ========
24 Net Sales --------- Net sales decreased by Rmb 47,483 or 6.6% in 1995 as compared to 1994. The decrease was mainly due to the change in the Company's marketing strategy in order to further enhance its credit control on sales in the last quarter of 1995 whereby a contracted sales order was entered into with a major distributor, which is a related party beneficially owned by the Harbin Municipal Government. Delivery was not made in respect of this transaction at December 31, 1995 and thus this sale was not recognized in the Financial Statements. However, in anticipation of this transaction, the Company reduced the delivery of its products to other customers. As a result of the aforementioned contracted sales order in the last quarter of 1995, the net reported sales in the last quarter of 1995 was Rmb 21,289. Throughout 1995, the Company continued to adjust its product mix by shifting from small and medium sized bearings to higher margin medium and large sized bearings in order to improve profitability and to cope with the growth in market demand on these new products. The Company raised the selling price of all bearing products effective July 1, 1995 by an average of 3-5% in order to cover increasing costs, as compared to July 1, 1994 when there was a sales price increase of 5-8%. In the last quarter of 1995, the Company changed its marketing strategy by shifting smaller OEM accounts to designated distributors in order to reduce marketing costs and credit risks. Gross Profit ------------ Gross profit increased by Rmb 12,994 or 4.7% in 1995 as compared to 1994. Gross profit as a percentage of revenue increased from 38.6% in 1994 to 43.3% in 1995. The increase in gross profit was mainly attributable to the effect of the sales mix change to higher-margin products, the improved operational efficiency and a reduction in purchase price of major raw materials. In previous quarters in 1995, cost of sales was calculated with reference to the average gross profit ratio for 1994, being 38.6% on revenue. The average gross profit ratio for 1995 of 43.3% on revenue was computed from actual results throughout the year after taking into account various year-end closing inventory adjustments such as a write-back of obsolete inventories sold during the year which amounted to Rmb 15,805 and an adjustment to reflect under absorption of labor and overhead of approximately Rmb 4,700. The gross profit margin for 1995 would have been only 39.2% on revenue if no account was taken of the year end adjustments on closing inventories. 25 Selling Expenses ---------------- Selling expenses decreased by Rmb 1,529 or 7.5% in 1995 as compared to 1994. The decrease was in line with the decrease in sales this year. Selling expenses as a percentage of revenue has remained constant at a rate of 2.8%. General and Administrative Expenses ----------------------------------- General and Administrative expenses increased by Rmb 19,313 or 25.8% in 1995 as compared to 1994. General and Administrative expenses as a percentage of revenues increased from 10.4% to 14.0%. The increase in General and Administrative expenses was mainly attributable to: a. An increase in staff wages and welfare costs at Harbin Bearing of Rmb 7,550 as a result of increments given to the staff this year. b. There was a loss of Rmb 4,829 on disposal of fixed assets as compared to a gain on disposal of fixed assets of Rmb 1,087 in 1994. c. A cash discount of Rmb 6,490 was granted in 1995 for incentives to customers for early settlement of debt in order to accelerate the cash collection. In 1995, an additional bad debt provision of Rmb 2,627 was provided (1994: Rmb 11,300) on certain aged debt. d. An increase in management fee of Rmb 1,716 payable to Harbin Bearing Holdings Company as a result of a 10% inflation adjustment. e. An increase in insurance premium paid of Rmb 1,979 on the increase in assets. Interest Expense ---------------- Interest Expense increased by Rmb 5,725 or 13.4% in 1995 as compared to 1994. The increase was attributable to interest expense of 8% related to a US$ 5,000 promissory note issued on December 30, 1994 and to a 1.3% increase in interest rate on increased amounts of short-term bank loans effective July 1, 1995. 26 Reorganization Expenses ----------------------- There was no similar charges in 1995 of the one time reorganization expenses in 1994 which were incurred in connection with the acquisition of China Bearing Holdings Limited See "Organization of the Company" and "Certain Relationships and Related Transactions." RESULTS FOR ACTUAL 1994 COMPARED TO PROFORMA 1993
Actual Proforma Year ended Year ended December 31, December 31, 1994 1993 Rmb Rmb Sales 719,842 711,420 Sales Tax - (24,356) -------- -------- Net sales 719,842 687,064 Cost of sales (441,854) (439,417) -------- -------- Gross Profit 277,988 247,647 Gross Profit percentage 38.6% 36.0% Selling Expenses (20,471) (14,765) General and Administrative expenses (74,747) (76,432) Interest Expense (42,721) (40,638) Reorganization Expenses (7,307) (7,307) -------- -------- Income Before Income Taxes and Minority Interests 132,742 108,505 ======== ========
The above pro forma results for the year ended December 31, 1993 were prepared on the basis as if the reorganization of Harbin Bearing General Factory and the acquisition of Harbin Bearing had occurred on January 1, 1993 and are extracted from the Unaudited Proforma Consolidated Statement of Income for the year ended December 31, 1993 after giving effect to the proforma adjustments described in further detail at the end of the table under the caption "Selected Consolidated Financial Information." The proforma results of operations have been prepared for comparative purposes only and do not purport to indicate the results of operation which would actually have incurred had the acquisition been in effect on January 1, 1993 or which may occur in the future. 27 SALES ----- Sales increased by Rmb 8,422 or 1.2% in 1994 compared to 1993. The increase in sales was mainly due to general sales price increases. Gross Profit ------------ Gross profit increased by 12.3% or Rmb 30,341 in 1994 compared to 1993. Gross profit as a percentage of revenue increased to 38.6% in 1994 from 36% in 1993, primarily due to the slight increase in general sales price, the effect of the sales mix change to higher margin products and the change in the VAT system in China effective January 1, 1994. Selling Expenses ---------------- Selling expenses increased by 38.6% or Rmb 5,706 in 1994 compared to 1993 which was mainly due to an increase in government taxes of Rmb 7,651. This was offset by a decrease in transportation expenses of Rmb 1,500 in 1994 compared to 1993 as a result of the passing of its transportation costs directly to certain customers arising from the introduction of the new VAT system in China. General and Administration Expenses ----------------------------------- General and Administrative expenses decreased by 2.2% or Rmb 1,685 in 1994 compared to 1993. General and Administrative expenses as a percentage of revenues decreased from 10.7% to 10.4%. Although there was a large decrease in the bad debt provision of Rmb 17,000, this decrease was however largely offset by a one-time formation expense of Rmb 2,637 and special compensation payments to workers for early retirement totalling Rmb 7,243 in 1994. This was offset by having no gain on disposal of fixed assets, whereas a gain was recorded in 1993 for Rmb 4,700. Interest Expense ---------------- Interest expense increased 5.1% or Rmb 2,083 in 1994 compared to 1993 which was mainly due to an increase in interest rates during 1994. 28 Reorganization Expenses ----------------------- On a proforma basis, the one time reorganization expenses in connection with the acquisition of China Bearing Holdings Limited were assumed to be incurred on January 1, 1993. Liquidity and Capital Resources ------------------------------- OPERATING ACTIVITIES For the six months ended June 30, 1996, the Company's operations utilized cash resources of Rmb 2,061, as compared to Rmb 5,174 for the six months ended June 30, 1995. The Company's net working capital increased by Rmb 25,441 at June 30, 1996, to Rmb 331,729, as compared to Rmb 306,288 at December 31, 1995, and the Company's current ratio at June 30, 1996 was 1.39:1, as compared to 1.42:1 at December 31, 1995 and 1.47:1 at June 30, 1995. During the latter part of 1995, the Company began to consolidate the distribution of its products in China by shifting smaller OEM accounts to designated large distributors. The Company has granted extended credit terms to such distributors to facilitate this transition, which the Company expects to continue at least through the remainder of 1996. This new marketing strategy is expected to reduce marketing costs and credit risk. The Company's accounts receivable increased by Rmb 247,618 or 93.7% to Rmb 511,804 at June 30, 1996, as compared to Rmb 264,186 at December 31, 1995. The increase in accounts receivable for the six months ended June 30, 1996 is consistent with the increase in accounts receivable of Rmb 189,291 or 63.5% for the six months ended June 30, 1995. Also contributing to the increase in accounts receivable during the six months ended June 30, 1996 was the granting of extended credit terms to designated large distributors and the slowdown in accounts receivable collections from the Company's previous smaller OEM accounts. Offsetting, in part, the effect of the increase in accounts receivable, accounts payable increased by Rmb 39,907 or 34.3% to Rmb 156,112 at June 30, 1996, as compared to Rmb 116,205 at December 31, 1995. In addition, due from related companies decreased by Rmb 47,609 or 34.7% to Rmb 89,470 at June 30, 1996, as compared to Rmb 137,079 at December 31, 1995, and prepaid VAT of Rmb 40,429 at December 31, 1995 was completely utilized during the six months ended June 30, 1996. 29 INVESTING ACTIVITIES Capital expenditures for the six months ended June 30, 1996 of Rmb 50,034 consisted of costs relating to the construction of new plant and buildings and the renovation of existing facilities and equipment, and were financed by bank loans and the sale of common stock. The Company anticipates that additional capital expenditures for the remainder of 1996 will not exceed Rmb 10,000. FINANCING ACTIVITIES The Company has historically relied on both long and short term bank loans from Chinese banks to support its operating and capital requirements. Short term bank loans have terms ranging from three months to six months, are utilized to finance both operating and capital requirements, and are reviewed on a revolving basis. Long term bank loans are utilized to fund capital expansion projects. During the six months ended June 30, 1996, the net increase in bank loans (after deducting repayments) was Rmb 63,356, which was utilized to fund the repayment of other loans of Rmb 33,810 and operations and capital expenditures. The Company believes that it will be able to continue to maintain and expand its bank borrowings under existing terms and conditions. In order to finance the Company's continuing operating and capital requirements, the Company has been evaluating both debt and equity financing opportunities. During June 1996, the Company sold in a private placement 1,000,000 shares of common stock at US $5.00 per share, generating net proceeds of US$ 4,265 (Rmb 35,480). In addition, in August 1996, the Company closed a private financing consisting of US$ 11,500 (Rmb 95,680) aggregate principal amount of convertible debentures. See "Description of Securities". The Company anticipates that its cash flows from operations, combined with cash and cash equivalents, bank lines of credit and other external sources of debt and equity financing, and the proceeds from the June 1996 sale of the 1,000,000 shares of common stock and the August sale of $11,500 principal amount of Convertible Debentures, are adequate to finance the Company's operating and debt service requirements for the foreseeable future. INFLATION AND CURRENCY MATTERS In recent years, the Chinese economy has experienced periods of rapid economic growth as well as high rates of inflation, which in turn has resulted in the periodic adoption by the Chinese government of various corrective measures designed to regulate growth and contain inflation. During the six months ended June 30, 1996, the general inflation rate in China was in excess of 10% on an annualized basis. Since 1993, the Chinese government has implemented and maintained an economic program designed to control inflation, which 30 has resulted in the tightening of working capital available to Chinese business enterprises. The success of the Company depends in substantial part on the continued growth and development of the Chinese economy. The Company continually monitors the effects of inflation. The Company is generally able to raise its prices to shift a portion of the inflated costs to its customers. The price of bearing steel, the major raw material used by the Company, remained fairly stable during 1995 and 1996. The major impact of inflation was on labor costs due to increases in employee wages. However, the Company has generally managed to offset the effects of inflation through improved operational efficiency. Foreign operations are subject to certain risks inherent in conduction business abroad, including price and currency exchange controls, and fluctuations in the relative value of currencies. Changes in the relative value of currencies occur periodically and may, in certain instances, materially affect the Company's results of operations. The Company conducts most of its business in China and, accordingly, the sale of its products are settled primarily in Rmb. As a result, continued devaluation of the Rmb against the USD will adversely affect its financial performance when measured in USD, and may have material adverse effects upon the results of operations and financial position of the Company. Although prior to 1994 the Rmb experienced significant devaluation against the USD, the Rmb has remained fairly stable from 1994 to present. The unified exchange rate was US$1.00 to Rmb 8.65 at December 31, 1993, Rmb 8.45 at December 31, 1994, Rmb 8.32 at December 31, 1995, and Rmb 8.32 at June 30, 1996. BUSINESS BUSINESS DEVELOPMENT The Company is engaged in the design, manufacture and distribution of a broad range of bearing products in the PRC and the US. The Company also distributes its bearing products in Europe, Asia, South America and Africa. The Company's subsidiary in China, Harbin Bearing, employs approximately 13,000 employees. Harbin Bearing is the largest precision bearing manufacturer and the third largest bearing manufacturer overall in China. Harbin Bearing produces a wide variety of precision and commercial-grade, rolling-element bearings in sizes ranging from 10mm to 1000mm (internal diameter). Rolling-element bearings use small metal balls or cylinders to facilitate rotation with minimal friction and are typically used in vehicles, aircraft, appliances, machine tools, general machinery and virtually any product that contains rotating or revolving parts. Precision bearings are bearings that are produced to more exacting dimensional tolerances and to higher performance characteristics than standard commercial bearings. The manufacturing process 31 for precision bearings generally requires the labor of highly-skilled machinists and the use of sophisticated machine tools. On January 16, 1996 (effective December 29, 1995), the Company acquired Southwest Products, which produces precision spherical bearings for US, European and Asian aerospace and high tech commercial applications and the US military. Over 90% of Harbin Bearing's sales are made to the OEM and replacement markets in China. Based on low production costs in China and the on-going world-wide demand for bearings, management has been increasing Harbin Bearing's efficiency and production output with the intent of creating a substantial export business to complement the Company's strong domestic position in the Chinese markets. Historically, Harbin Bearing export sales have been made through trade intermediaries and by receiving customer orders that are placed directly to its offices in China. Southwest Products has commenced providing and will provide engineering and technical support, and has commenced to and will market and distribute Harbin Bearing products internationally, focusing on exports of the products to the US. In addition, Southwest Products has begun to assist Harbin Bearing in implementing US manufacturing methods, improving quality control procedures and in developing new products at Harbin Bearing's facilities in China. The Company's overall plan is to combine the management style, technology, quality control and production methods found in the West with low-cost Chinese manufacturing capacity so as to become a major international designer, manufacturer and distributor of bearing products. 32 The following diagram shows the corporate structure of the Company and its affiliated entities. SUNBASE ASIA, INC. Common Stock trades-on NASDAQ NMS (Nevada Corporation) 100% 100% CHINA BEARING HOLDINGS LIMITED (Bermuda Holding Company) SOUTHWEST PRODUCTS COMPANY (California Corporation) 100% OPERATING COMPANY CHINA INTERNATIONAL BEARING HOLDINGS LIMITED (Hong Kong Holding Company) 99% 99.90% HARBIN SUNBASE HARBIN XINHENGLI DEVELOPMENT DEVELOPMENT COMPANY LIMITED COMPANY LIMITED (PRC JV Holding Co.) (PRC JV Holding Co.) 10% 41.57% HARBIN BEARING COMPANY, LTD (A) (PRC Joint Stock Company) OPERATING COMPANY (A) Sunbase Asia's effective ownership in Harbin Bearing is 51.4% 33 HARBIN BEARING Harbin Bearing presently produces a wide range of rolling element bearings, ranging from 10mm to 1000mm (internal diameter) including: deep- groove ball bearings, cylindrical rolling bearings, angular-contact ball bearings, and tapered rolling bearings. Each of such bearings are manufactured in micro, small, medium and large sizes. Harbin Bearing specializes in the manufacture of precision bearings. Based on increasing demand and profit opportunities, Harbin Bearing increased its production of all sizes and grades of cylindrical rolling bearings and angular-contact ball bearings. In order to enhance the profitability for deep-groove ball bearings, Harbin Bearing has shifted its production mix of such bearings by increasing its production of medium- sized deep-groove ball bearings (especially in precision grades). The shift in production to medium-sized and precision grade bearings has enabled Harbin Bearing to expand its customer base, improve its profit margins, and meet the demand of many of its existing PRC customers for a full line of bearings. Harbin Bearing has also recently expanded its product line to include railway freight car bearings (Harbin Bearing is currently the leading supplier of railway passenger car bearings in China). Management believes that demand for railway freight car bearings is growing rapidly and that demand for such bearings will remain strong. Harbin Bearing has installed certain equipment which has enabled Harbin Bearing to commence the production of railway freight car bearings and increase its production of railway passenger car bearings. Marketing --------- The major end-users of Harbin Bearing's products are manufacturers of electrical machinery, machine tools, mining and extraction machinery, automobiles, motorcycles, household appliances and aircraft and aerospace equipment. In 1995, approximately 32% of Harbin Bearing's sales were made to OEMs in the machinery, transportation and electrical equipment industries representing, respectively, approximately 28%, 30% and 35% of its total sales to OEMs. Approximately 68% of Harbin Bearing's sales in 1995 were made to distributors. Harbin Bearing has 18 sales offices in major cities in China, including Beijing, Shanghai and Guangzhou. All sales are coordinated through Harbin Bearing's headquarters in Harbin, including sales to local distributors and transportation industries, overseas agents, and domestic import and export companies. Harbin Bearing's sales force consists of 152 sales personnel and 288 support personnel who are responsible for product promotion, marketing, aftermarket services and technical support. Harbin Bearing sells its bearings in China and abroad under the "HRB" trademark. 34 Harbin Bearing's products are considered to be among the highest grades inside of China and medium-grade in world-wide markets. In 1994, the US was Harbin Bearing's largest export market, accounting for approximately 60% of total export sales. It is the Company's intention to increase Harbin Bearing's export sales to the US, Europe and certain developing countries in South America and Southeast Asia. Harbin Bearing delivers its bearings by rail (approximately 80% of Harbin Bearing's domestic deliveries are made by rail), truck, ocean freight and air freight. Harbin Bearing leases trucks from Harbin Precision Machinery Manufacturing Company which are used mostly for short- haul deliveries. See "Certain Relationships and Transactions." Bearings which are exported are generally shipped by ocean freight. Chinese Bearing Industry ------------------------ Based on the Ministry of Machinery & Industry's 1993 Annual Report, China's aggregate domestic demand for bearings in 1995 was expected to be approximately 900 million units, representing an average annual increase of approximately 17% based on China's aggregate demand of 560 million units in 1992. Prior to 1989, under China's planned economy, the production, pricing and sales of bearings were fixed by the Chinese government. Beginning in 1988, demand for bearings exceeded the available supply, particularly for small and medium-sized bearings. Beginning in 1989, in connection with the implementation of economic reform measures undertaken by the Chinese government, production quotas and raw material subsidies were abolished. By 1991, competition among manufacturers of low- quality, small and medium-sized bearings had increased. This competition created an excess supply of such bearings and resulted in a decrease of profit margins. In July 1992, all price controls on bearing prices were removed. Even though supply still generally exceeds demand for small and medium-sized bearings in the low end market, demand continues to be strong for higher-quality small and medium-sized bearings used in the automobile, motorcycle, agricultural, electrical appliance and machinery industries. Overall, demand for bearings used in large agricultural machinery, mineral and extraction machinery and electric generating equipment, and demand for precision, special-purpose, large and extra-large-sized bearings continued to grow through 1995. Competition ----------- Harbin Bearing's main competitors can be separated into three principal groups: (i) two nationwide domestic bearing manufacturers with wide product lines; (ii) small bearing production facilities which compete on a local basis by manufacturing small-sized, commodity-type bearings; and (iii) foreign bearing manufacturers. Competition is principally based on pricing and quality considerations. 35 Chinese Competition Harbin Bearing, Wafangdian Bearing Factory and Luoyang Bearing Factory are the three largest bearing manufacturers in China, based on 1994 sales. The combined sales revenues of these three manufacturers accounted for 30% of the US $1.09 billion in total sales revenue of China's bearing industry (figures are approximate). By comparison, the aggregate sales revenue of the fourth, fifth and sixth largest Chinese bearing manufacturers only account for approximately 9.5% of the total sales revenue of China's bearing industry. Wafangdian Bearing Factory does not produce high-precision aerospace-quality rolling-element bearings, a market in which Harbin Bearing has a 70% domestic share (the remaining 30% market share is split among Luoyang Bearing Factory and Hongshan Bearing Factory). In addition to the manufacturers described above, there are approximately 270 other manufacturers of rolling element ball bearings in China, including a number of small bearing factories that were established after 1988 when demand for small-sized bearings greatly exceeded the available supply. The bearings manufactured by these small factories are generally of lower quality and are used mostly as replacement bearings in the electrical appliance and agricultural equipment industry. Competition from Imports into China Bearing manufacturers outside of China are able to supply types and grades of bearings which are not available from Chinese domestic suppliers, particularly precision bearings of the highest durability and quality. Imported foreign bearings are generally higher in quality than Chinese-manufactured bearings, but are also priced higher due to China's low production costs and the assessment on imported bearings of a 15% or 20% import tariff. The 15% import tariff applies to bearings imported from countries that have established a tax treaty with China and the 20% import tariff applies to imports from other countries. Some foreign bearing manufacturers have established bearing manufacturing facilities in China, typically through joint ventures with local bearing manufacturers. Such ventures, if successful, would likely increase competition for Harbin Bearing in the higher-quality and precision-bearing market segments. Competition in International Markets In the international bearing markets, Harbin Bearing's main competitors are Eastern European manufacturers and manufacturers located in China. To a lesser extent, Harbin Bearing also competes with large international bearing manufacturers such as Svenska Kugellager Fabriken (SKF), Fisher Aktien Gesellschast (FAG) and New Technology Network (NTN). Management believes that with the assistance of Southwest Products in implementing US manufacturing methods and quality control procedures and in developing new products, Harbin Bearing's general competitive position will be substantially improved. In addition, management believes that Harbin Bearing will be able to compete in market segments that demand products with higher precision levels and will more effectively penetrate those market segments that utilize commodity-type bearings. 36 Leading industrial countries such as the US, Japan and countries in Europe impose import tariffs on bearings. For example, the US import tariff for bearings is 9% for ball bearings and 5% for cylindrical bearings. Raw Materials ------------- The principal raw materials used by Harbin Bearing to manufacture bearings are carbon steel and stainless steel rod, wire and tubing. These types of steel are specialized alloys designed for hardness, durability and resistance to rust. A small amount of copper and aluminum tubing and rods are also used to produce seals, cages and other ancillary bearing components. Harbin Bearing sources most of its bearing steel directly from four domestic mills located in Heilongjiang Province, Liaoning Province and Shanghai. Harbin Bearing imported less than 1% of its raw materials in 1995. In January 1993, the Chinese government lifted price controls on steel products and, as a result, the price of bearing steel in 1993 increased by more than 35.2% based on 1992 prices. The price of bearing steel in China is now approximately the same as the international price of bearing steel and has remained at approximately US $660.00 per ton since the end of 1993. Harbin Bearing believes that its sources of bearing steel are stable and, consistent with industry practice in China, has not entered into any long-term supply contracts for bearing steel. Harbin Bearing generally maintains a raw material inventory sufficient for approximately one-and-a-half months of production. Railroad tracks leading directly to two of Harbin Bearing's raw material warehouses are used exclusively to transport raw materials, such as bearing steel, to Harbin Bearing. In the future, Harbin Bearing intends to purchase bearing steel from South Korea and other countries. South Korean steel is price- competitive and is of a much higher quality than most Chinese steel. Accordingly, the use of South Korean steel will improve the quality of Harbin Bearing's products while reducing the amount of products that are scrapped due to the use of lower-quality steel. Workforce --------- As of January 16, 1996, Harbin Bearing employed approximately 13,000 full-time personnel in the following areas: executive and administrative (658), sales and service (507), manufacturing and production (11,492), and research and development (319). Management believes that in general, its employee relations are good. Harbin Bearing has begun to revise its compensation system to provide incentives to employees by linking productivity with compensation. Part of the revised compensation system was instituted in May 1994, and governs the wages of production employees. Depending on actual productivity, which is determined according to unit output and standard labor hours, a production employee may be paid more or less than the average wage. Harbin Bearing has also 37 revised its compensation system with respect to its sales personnel. Harbin Bearing sets a monthly sales target for each sales office and each salesman. If the target is reached, the sales personnel will receive a bonus in addition to basic wages and allowances. In 1995, the total labor cost of Harbin Bearing comprised approximately 15% of total production costs. The Harbin Municipal Government promulgated regulations that were effective January 1994, which provide for the establishment of a pension fund program to which both employer and employee must contribute. Harbin Bearing is required to contribute a monthly amount equivalent to 20% of its employees' aggregate monthly income, and each employee is required to contribute a monthly amount that is equivalent to 2% of such employees' monthly income. All of the employees of Harbin Bearing are members of a trade union. To date, Harbin Bearing has not been subject to any strikes or other significant labor disputes and is not a party to any collective bargaining agreements. Harbin Bearing presently recruits graduates of the Harbin Bearing Technical Institute and universities all over China and provides ongoing training for its management and production employees in the form of a series of training seminars. SOUTHWEST PRODUCTS COMPANY Southwest Products, located at a 55,000 square foot facility in Irwindale, California, designs, engineers and manufactures custom, spherical bearing products, such as high-precision spherical bearings, rod- end bearings, bushings and push-pull controls, for aerospace and high tech commercial applications. Southwest Products employs 58 full-time personnel in the following areas: executive and administrative (5); sales and service (5); manufacturing (35) and engineering, research and development (13). The average length of employee tenure at Southwest Products is in excess of eight years. Southwest Products specializes in the design and manufacture of spherical bearings for use in extremely demanding and flight-critical applications. Such bearings meet unique load and tolerance requirements and are known as "Specials." Southwest Products produces small orders of custom bearings, the sales price of which typically includes the cost of product design, engineering and development. Southwest Products is respected worldwide for its ability to engineer and produce precision bearings, which are used in the Space Shuttle, commercial jet aircraft (Boeing and McDonnell Douglas), military aircraft (including the B-2 Stealth Bomber, F-117 Stealthfighter, F-15, F-16, C-17 and F-18), submarines, (Los Angeles Class, Ohio Class, Seawolf and Centurion), and nuclear power plants. Southwest Products' bearings are used by Northrop Grumman, Lockheed Martin, NASA, all US military services, Mitsubishi Heavy Industries, Korea Heavy Industries (Hanjun), Fluor Daniel, General Electric, Westinghouse, General Dynamics, Textron Marine, Ingalls Shipbuilding and Newport News Shipbuilding. Southwest Products' bearings have been used by NASA in all manned space programs since the 38 launch of Mercury and are used in most NASA orbiters, including Viking, Magellan and Galileo. Southwest Products' Proprietary Technology ------------------------------------------ Southwest Products manufactures both metal-on-metal bearings and self-lubricating bearings, based on Southwest Products' design and on OEM specifications. Self-lubricating bearings are lined with either Dyflon or Kentlon, which are both proprietary liner systems of Southwest Products. Kentlon is qualified by the United States Navy to Mil-B-81820, Mil-B-81934 and Mil-B-81935. It is used in military aircraft, tanks, ground support equipment, commercial aircraft, space vehicles, launch and payload systems and in the oil refinery, automotive and heavy manufacturing industries. Dyflon is one of only two liner systems in existence that is moldable and machineable that also performs successfully when fully submersed in water. Accordingly, in addition to the uses described above for Kentlon, Dyflon- lined parts are used in submarines, surface ships and nuclear power plants. Although Southwest Products has federally registered its trademarks "Dyflon" and "Kentlon," Southwest Products has chosen not to patent its various technologies because the specific formulae and methods for manufacturing Dyflon and Kentlon would then become a matter of public record. PROPERTIES Harbin Bearing -------------- Harbin Bearing operates twelve finished product plants and seventeen auxiliary plants. With the exception of a finished product plant in Wucangzian, all of the Company's plants are located in four plant compounds in Harbin. Harbin Bearing plans to relocate the Wucangzian finished product plant, now located approximately 260 kilometers from the main site, to a new facility currently under construction approximately 17 kilometers from the main site. The Company believes the costs associated with the relocation to be approximately Rmb 27 million. The Harbin branch office of the State Asset Administration Bureau has granted Harbin Holdings the right to use the properties where Harbin Bearing's production and other facilities are located, which include the Wucangzian finished product plant and the four plant compounds. The site is approximately 540,000 square meters of which production facilities occupy approximately 290,000 square meters. Harbin Holdings has entered into a lease agreement with the Company for use of its buildings for five years. See "Certain Relationships and Related Transactions." 39 Southwest Products ------------------ Southwest Products leases a 55,000 square foot facility in Irwindale, California on a month to month basis at a monthly rent of $14,000. LEGAL PROCEEDINGS The Company is not a party to, nor is any of its property subject to, any pending legal proceedings. ORGANIZATION OF THE COMPANY Harbin Bearing was the successor to the manufacturing operations of Harbin Bearing General Factory (the "Bearing Factory"), a Chinese state- owned enterprise established in 1950. Harbin Bearing was established in 1993 as a joint stock limited company in China. Pursuant to an agreement between the Bearing Factory and Harbin Bearing, the bearing manufacturing and sales business together with certain assets and liabilities of the Bearing Factory were transferred to Harbin Bearing (the "Restructuring"). Certain other assets and liabilities were transferred to Harbin Precision Machinery Manufacturing Company ("Harbin Precision") and certain ancillary operations were transferred to Harbin Bearing Holdings Company ("Harbin Holdings"). Harbin Holdings and Harbin Precision were and are affiliates of the Harbin Municipal Government. As part of the Restructuring, Sunbase International (Holdings) Ltd. ("Sunbase International"), a Hong Kong corporation, through a series of affiliated entities, including China Bearing Holdings Limited, a Bermuda Corporation ("China Bearing"), acquired an effective ownership interest in Harbin Bearing of 51.4%. Substantially all of the remaining interests in Harbin Bearing were and continue to be owned by the employees of Harbin Bearing (approximately 15%) and Harbin Holdings. After the acquisition of the controlling interest in Harbin Bearing, Sunbase International implemented various programs to strengthen the business and operations of Harbin Bearing. These programs resulted in a shift in product mix to larger, higher margin bearings which, in turn, increased profitability. The work force was reduced approximately 25% with minimal negative effects on production. Incentive-based pay programs and western-style accounting and reporting systems were implemented to further strengthen and improve Harbin Bearing's business and operations. In December 1994, the Company (which was then called Pan American Industries, Inc.) acquired the 51.4% effective interest in Harbin Bearing by issuing to Asean Capital newly issued shares representing a controlling interest in the Company. Asean Capital was, and is, owned 90% by Sunbase International and 10% by an unrelated company, New China Hong Kong Capital Ltd. ("New China Hong Kong"). See "Certain Relationships and Related Transactions." 40 MANAGEMENT DIRECTORS - --------- The Board of Directors of the Company is comprised of only one class. The Company's current directors are listed below. The Directors are elected to serve until the following annual shareholders' meeting.
Name Age First Elected - ---------------------------- --- ------------- Gunter Gao 40 1994 Billy Kan 44 1996 William McKay 42 1996 (Roger) Li Yuen Fai 35 1994 (Franco) Ho Cho Hing 43 1994 Philip P.Y. Yuen 60 1996 George Raffini 40 1996
EXECUTIVE OFFICERS - ------------------ The Company's current executive officers are listed below. Executive officers are elected to serve until the following annual meeting of the Company's Board of Directors:
Name Age Office First Elected - ---------------------------- --- ------------- Gunter Gao 40 Chairman 1994 Billy Kan 44 Vice Chairman 1996 William McKay 42 Chief Executive 1996 Officer and President (Roger) Li Yuen Fai 35 Vice President and 1994 Chief Financial Officer (Dickens) Chang Shing Yam 29 Chief Accounting 1995 Officer (Davis) Lai Kwun Fai 33 Corporate Secretary 1996
GUNTER GAO, CHAIRMAN AND DIRECTOR. Mr. Gao, a Hong Kong businessman who has extensive business experience in China, is the Chairman of the Board and a principal of Sunbase International, which indirectly owns a controlling position in Sunbase Asia. Sunbase 41 International has various industrial holdings in China, in industries such as aviation, transportation, cement, steel and retail. Mr. Gao is responsible for the general strategy of the Company and maintains overall control of the Company's operations. Mr. Gao is actively and directly involved in all operational and strategic issues that require his experience and expertise in handling a wide variety of Chinese business transactions. During the 1980s, Mr. Gao engaged in trading and investment activities in industries such as food, timber, real estate, coal and textiles. Based on his success in these activities and with the support of several banks in China, Mr. Gao has turned Sunbase International into a leading China industrial company. Mr. Gao is currently a member of China's Congress, known as the People's Political Consultative Conference. Mr. Gao is the youngest member of the Congress and is widely respected for his contributions to the country's development. Mr. Gao's strong reputation in China has enabled Sunbase International to engage in and complete many difficult transactions, including acquiring a majority interest in Harbin Bearing and obtaining a license to create an airline in China. Now known as Northern Swan Airlines, this airline enjoys international prominence and the financial support of the Bank of China and the People's Construction Bank of China. Mr. Gao serves as a Senior Economic Advisor to several Chinese municipal and provincial governments, including the governments of Tianjin, Hebei, Xinjiang and Harbin. In addition, Mr. Gao is the deputy director of the Sino-Foreign Entrepreneurs Cooperative Committee. BILLY KAN, VICE CHAIRMAN AND DIRECTOR. Mr. Kan has been a director of Sunbase Asia since the beginning of 1996 and was elected Vice Chairman on June 1, 1996. In his capacity at Sunbase International, Mr. Kan reports directly to its Board of Directors and serves as the communications and support link in various parts of the world. Mr. Kan holds a Bachelor of Science Degree from the University of East Anglia, a United Kingdom university, and is a member of The Institute of Chartered Accountants in England & Wales as well as the Hong Kong Society of Accountants. Prior to joining Sunbase International, Mr. Kan held many directorships and senior management positions in a wide range of professions and industries including banking, retailing, manufacturing, property, investment and corporate consulting. WILLIAM MCKAY, CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR. Mr. McKay has recently been elected as the Chief Executive Officer, President and a Director of Sunbase Asia, and has been a Director and President of Southwest Products since 1991. Prior to becoming President of Southwest Products, he was Southwest Products' General Manager since 1986. Mr. McKay has substantial experience in conducting business with China, and is very familiar with Sino-American joint venture law and policies. Mr. McKay is responsible for the day-to-day operations of, and the long-term planning for, the Company in the areas of product development, marketing, financing and general operations. Prior to jointing Southwest Products, Mr. McKay practiced law, specializing in the areas of business and real estate. Mr. McKay holds a Juris Doctorate Degree, Masters in Business Administration and Bachelor of Arts degree with a major in History and minor in International Relations from the University of Southern California. 42 (ROGER) LI YUEN FAI, GROUP FINANCIAL CONTROLLER, CHIEF FINANCIAL OFFICER, VICE-PRESIDENT AND DIRECTOR. Mr. Li has been the Group Financial Controller of Sunbase International since 1994. He has been the Chief Financial Officer and a Director of Sunbase Asia since 1995 and has recently been elected as the Vice-President of Sunbase Asia. From 1990 to 1991 he was compliance manager of Hong Kong Securities Clearing Company Limited. Mr. Li was employed by Coopers & Lybrand in Hong Kong from 1980 to 1990 (his most recent position was audit manager) and was a partner in a Hong Kong accounting firm from 1992 to 1993. (FRANCO) HO CHO HING, DIRECTOR. Mr. Ho has been a Director of the New China Hong Kong Group since 1993, and a Director of Sunbase Asia since 1995. Mr. Ho is also a registered investment advisor with the Securities and Futures Commission in Hong Kong. Mr. Ho held executive positions with Trenomics Securities Limited (1981 to 1983), Shun Loong Bear Stearns Asia Limited (1985 to 1988) and Best Securities Company (1991 to 1993). PHILIP YUEN, DIRECTOR. Mr. Yuen is a solicitor of the Supreme Court of Hong Kong. He became a practicing solicitor in 1962 and founded the solicitors' firm Yung, Yu, Yuen & co. in 1965. He is currently the managing partner of his firm. He has over 30 years' experience in legal practice. Mr. Yuen has been a member of The National Committee of the Chinese People's Political Consultative Conference since 1983 and has been a member of the China International Economic and Trade Arbitration Commission for the past 15 years. Mr. Yuen has established extensive relationships with businesses in the PRC and is also a non-executive director of Tsingtao Brewery Company Limited, Henderson Development Company Limited, Henderson (China) Investment Company Limited and Melbourne Enterprises Limited, all of which are listed on the stock exchange of Hong Kong Limited. GEORGE RAFFINI, DIRECTOR. Mr. Raffini is currently the Deputy Managing Director of HSBC Private Equity Management Limited with responsibility for managing the investment process for projects and regional private equity investment funds with total capital under management of approximately $500,000,000. Mr. Raffini received his Bachelor of Science degree from The American University, a diploma in Political and Economic Affairs from the Institut D'etudes Politiques, Paris, France, a Master's degree in International Affairs from Columbia University and a MBA from Harvard University. Mr. Raffini is the nominee of certain of the investors of the Convertible Debentures. See "Description of Securities". KEY MANAGEMENT MA JI BO, GENERAL MANAGER - HARBIN BEARING. Mr. Ma is the General Manager of Harbin Bearing and is responsible for the day-to-day operations of Harbin Bearing as well as strategic planning in the areas of marketing, product development and general operations. Mr. Ma has made significant contributions relating to the design and manufacture of a broad range of Harbin Bearing's products. Mr. Ma has been awarded various provincial and national Chinese awards 43 for scientific and technological progress in the Chinese bearing industry and holds a degree in rocket science from Northwest China Engineering University. MEI HAI YOU, DEPUTY GENERAL MANAGER - HARBIN BEARING. Mr. Mei is the Deputy General Manager of Harbin Bearing where he has been employed for 35 years. Mr. Mei is the head of Harbin Bearing's manufacturing operations and has extensive experience in the fields of research and development, product development and manufacturing engineering. Mr. Mei is the author of a number of works on mechanical engineering and bearings and holds a degree in mechanical engineering from Harbin Polytechnic University. MR. ZHANG ZHENG BIN, DEPUTY GENERAL MANAGER - HARBIN BEARING. Mr. Zhang has been employed by Harbin Bearing as Deputy General Manager of Sales and Marketing for 10 years. Mr. Zhang has extensive contacts in the Chinese engineering community and has the responsibility of penetrating existing markets and developing new markets for Harbin Bearing. Mr. Zhang holds a degree in engineering from Harbin Polytechnic University. (DICKENS) CHANG SHING YAM, ASSISTANT FINANCIAL CONTROLLER AND CHIEF ACCOUNTING OFFICER. Mr. Chang is presently the Assistant Financial Controller of Sunbase International and has been the Chief Accounting Officer of Sunbase Asia since 1995. Mr. Chang was employed by the international accounting firm of Ernst & Young in Hong Kong from 1989 to 1994, most recently as audit manager. TODD STOCKBAUER, CHIEF FINANCIAL OFFICER - SOUTHWEST PRODUCTS. Mr. Stockbauer is the Chief Financial Officer of Southwest Products and has been employed by Southwest Products since 1991. He currently directs its financial and administrative operations. Prior to 1991, he was employed in the public accounting sector, specializing in bankruptcy, litigation support and business turnarounds. Mr. Stockbauer holds a Bachelor of Arts degree in business and economics with an emphasis in accounting from the University of California at Santa Barbara, and is a Certified Public Accountant in the State of California. ERNST RENEZEDER, DIRECTOR OF MANUFACTURING - SOUTHWEST PRODUCTS. Mr. Renezeder has been the Director of Manufacturing at Southwest Products since 1992. Mr. Renezeder has over 24 years experience in manufacturing, engineering, management, and product research and development. Mr. Renezeder holds a Bachelor of Science degree in Molding and Foundry, which is equivalent to a Bachelor of Science in manufacturing engineering with an emphasis in mechanical engineering. JOHN LEONIAK, CHIEF ENGINEER - SOUTHWEST PRODUCTS. Mr. Leoniak has been the Chief Engineer at Southwest Products since 1991. As Chief Engineer, Mr. Leoniak supervises Southwest Products' engineering and research and development. Prior to joining Southwest Products, Mr. Leoniak was employed by Grumman Aircraft Systems as the head of its Landing Gear, Armament, Carrier Suitability and Survivability Group. Mr. Leoniak has contributed to the writing of various US Navy manufacturing specifications, including MIL-B-8942, MIL-B-81820, 44 MIL-B-81819 and MIL-STD-1599. Mr. Leoniak holds a Bachelor of Science in mechanical engineering from the Polytechnic Institute of Brooklyn. PETER WANG, QUALITY CONTROL MANAGER - SOUTHWEST PRODUCTS. Mr. Wang has been the Quality Control Manager of Southwest Products since 1993 where he supervises the Quality Control and Inspection Departments. Prior to joining Southwest Products, Mr. Wang held positions as a mechanical engineer and a senior quality engineer. Mr. Wang has extensive experience in quality and statistical process control, is fluent in Mandarin and holds a Master of Science degree in mechanical engineering from North Carolina A&T State University and a Bachelor of Science degree in physics from Lenoir Rhyne College. (DAVIS) LAI KWUN FAI, SENIOR ASSISTANT MANAGER AND CORPORATE SECRETARY. Mr. Lai has been the Senior Assistant Manager of Sunbase International and the Corporate Secretary of Sunbase Asia since 1996. Mr. Lai holds a Masters of Arts degree in economics and finance from the University of Leeds in United Kingdom. MANAGEMENT COMPENSATION ----------------------- No compensation was earned by or awarded to any of the Company's officers or directors in 1995. In 1995, in connection with a Management and Services Agreement between China Bearing and Sunbase International, Sunbase International provided to the Company and its affiliates office space and equipment, administrative services and the services of Mr. Gao and other employees of Sunbase International (such as Mr. Li and Mr. Chang). In consideration of the provision of such services, in 1995, China Bearing Holdings Limited paid Sunbase International a total of US $30,000 plus certain out-of-pocket expenses such as travel and entertainment. See "Certain Relationships and Transactions." Based on the foregoing, no executive officer of the Company received compensation of US $100,000 or more from the Company. STOCK OPTION PLAN On January 2, 1996, the Company's Board of Directors adopted the 1995 Sunbase Asia, Inc. Stock Option Plan (the "Plan"). The Plan permits the grant of options to purchase an aggregate of up to 2,500,000 Shares of the Common Stock of the Company. Under the Plan, incentive stock options and non-qualified stock options may be issued. Eligible participants under the Plan are those individuals and entities that the stock option committee of the Company (the "Committee") in its discretion determines should be awarded such incentives given the best interests of the Company; provided, however, that incentive stock options may only be granted to employees of the Company and its affiliates. The Committee has the power to determine the price, terms and vesting schedule of the options granted, subject to the express provisions of the Plan. All incentive stock options will have option exercise prices per option share not less than the fair market value of a share of the Common Stock on the date the option is granted, except that in the case of incentive stock options granted to any person possessing more than 10% of 45 the total combined voting power of all classes of stock of the Company or any affiliate of the Company, the price shall not be less than 110% of such fair market value. The Plan terminates on the earlier of that date on which no additional shares of Common Stock are available for issuance under the Plan or January 2, 2006. In connection with an employment agreement entered into by and between the Company and William R. McKay on January 16, 1996, and pursuant to the Plan, the Company granted Mr. McKay the option to purchase an aggregate of up to 800,000 shares of Common Stock of the Company. The option is intended by the Company and Mr. McKay to be, and will be treated as, an incentive stock option. The options granted to Mr. McKay vest at the rate of 160,000 shares per each full year of Mr. McKay's employment under the Agreement. Mr. McKay may exercise the options that have vested and purchase shares of the Common Stock of the Company at the following prices:
Exercise Price of Full Years of Options that Vest Employment After Each Such Year ----------- -------------------- One $ 6.65 Two $ 7.75 Three $ 9.25 Four $10.75 Five $12.75
All unexercised options will expire on that date which is six years after the date on which such options have vested. On July 1, 1996, the Compensation Committee of the Company granted stock options to the following individuals on the following terms:
Number of Exercise Shares per Option Holder Vesting Schedule Price/share Option Rights - -------------------- ---------------- ----------- ------------- Billy Kan January 16, 1996 $6.375 200,000 January 16, 1997 $6.375 200,000 January 16, 1998 $6.375 200,000 -------- 600,000 ======== Roger Li January 16, 1996 $6.375 200,000 January 16, 1997 $6.375 200,000 January 16, 1998 $6.375 200,000 -------- 600,000 ========
46 Dickens Chang January 16, 1996 $6.375 15,000 January 16, 1997 $6.375 15,000 January 16, 1998 $6.375 20,000 ------- 50,000 =======
EMPLOYMENT AGREEMENTS On January 16, 1996, Sunbase Asia and Southwest Products entered into an employment agreement with William R. McKay (the "Agreement") pursuant to which Mr. McKay is employed to serve as President and Chief Executive Officer of Southwest Products and as President and Chief Executive Officer of Sunbase Asia. Under the terms of the Agreement, Mr. McKay will be paid an annual base salary of $285,000. The base salary may be increased or decreased (to a minimum of $225,000), based upon an annual review of Mr. McKay's performance. In addition to the base salary, the Board of Directors of Sunbase Asia may, at its sole discretion, pay Mr. McKay a bonus for any particular year of his employment. On January 16, 1996, in connection with the execution of the Agreement, Sunbase Asia, Southwest Products and Mr. McKay entered into a Confidentiality and Non-Competition Agreement pursuant to which Mr. McKay agrees to keep certain information of Sunbase Asia, Southwest Products and their affiliates confidential, and is prohibited from competing with Sunbase Asia, Southwest Products and their affiliates during the term of the Agreement. Pursuant to the terms of an Employment Agreement between the Company and Mr. Kan dated August 1, 1996, Mr. Kan is employed as the Vice Chairman of the Board of Directors or such other capacity of an equivalent status as the Company may reasonably require. The term of employment commenced on August 1, 1996 and continues until terminated by either party giving to the other not less than 12 months prior notice expiring on or at any time after the end of the specified period. Mr. Kan's duties include the development, marketing and promoting of the products of the Company as may be required by the Board of Directors. Mr. Kan is to exercise such powers and functions and perform such duties in relation to the business of the Company as may from time to time be assigned to him by the Board. Mr. Kan will be paid a salary of HK$1,625,000 per annum subject to review by the Board on an annual basis. Mr. Kan is also entitled to stock options. See "Management - Stock Options." CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. As discussed above (See "Organization of the Company"), an effective 51.4% in Harbin Bearing was acquired at the end of 1993 by then affiliates of Sunbase International. This was accomplished by the acquisition by China Bearing of China International Bearing (Holdings) Limited ("China International"). China International was incorporated to act as the holding company of two Sino-foreign joint venture companies which in turn were formed to acquire in the aggregate a 51.6% interest in Harbin Bearing. China International has a 99.9% equity interest in one of the joint venture companies and a 99% equity interest in the other, which in turn hold a 41.6% and 10% interest, respectively, in Harbin Bearing. Because of the minority 47 interests held in the two joint venture companies, the Company has an effective 51.4% ownership interest in Harbin Bearing. (See the Organizational Chart on page 6). The aggregate cash consideration contributed by the joint venture companies was Rmb 232.1 million which was principally financed by an interest free loan from Sunbase International to China International (the "Sunbase Loan"). China International in turn made equity contributions and loans to the two joint venture companies. In April 1994, New China Hong Kong acquired from Sunbase International 10% of the outstanding stock of China Bearing and 10% of the Sunbase Loan. The Sunbase Loan was later assigned to China Bearing, and China Bearing assumed the Sunbase Loan for a consideration of the same amount payable to it by China International. The obligations under the Sunbase Loan were extinguished by Sunbase International and New China Hong Kong, and the amount thereof was treated as a contribution of cash to China Bearing and credited to its contributed surplus account. Thereafter, the shares of China Bearing owned by Sunbase International and New China Hong Kong were transferred to Asean Capital, in which Sunbase International and New China Hong Kong own 90% and 10%, respectively. As set forth above, in December 1994, Asean Capital transferred all of its interest in China Bearing to the Company. Pursuant to a Management Services Agreement between Sunbase International and China Bearing dated January 1, 1994, Sunbase International agreed to provide China Bearing and its affiliates, including the Company, advice and consultation, including strategic management, business planning and development services, accounting and financial service, human resource service, sales and marketing service and such additional services as may be agreed upon for an annual fee of US $30,000. China Bearing is also obligated to reimburse Sunbase International for its direct out-of-pocket costs incurred in providing the management services. The Agreement's term was two years and it expired on December 31, 1995. China Bearing and Sunbase International are presently discussing an extension of the Agreement. Harbin Bearing and Harbin Precision have entered into leases (the "Ancillary Transport Equipment Lease" and the "Manufacturing Machinery Lease"), covering all equipment and assets of the Bearing Factory relating to the bearing operations which were not contributed to the Company in the Restructuring. The Leases cover cars, trucks, machinery and equipment used in manufacturing, office administration and power generation and provide for total annual payments of US $3,267,000. At the expiration of the two Leases in December 31, 1998 and December 31, 2001, respectively, Harbin Bearing has the right to either renew the Leases or acquire the equipment. Harbin Bearing and Harbin Holdings have entered into a lease covering plants and buildings used in Harbin Bearing business which were not contributed to Harbin Bearing in the Restructuring (the "Plant Lease"). The Plant Lease provides for annual rent payments of US $451,000. At the expiration of the lease on December 31, 1998, Harbin Bearing has the right to extend the lease at market rent for another five years. 48 As a result of the Restructuring, Harbin Holdings owns the rights to the trademark "HRB." Pursuant to an exclusive and perpetual trademark license agreement, Harbin Holdings has granted Harbin Bearing the exclusive and perpetual right to use the "HRB" trademark on its products and marketing materials. The royalty on the trademark license agreement is 0.5% of annual sales from 1994 to 2003 and 0.3% from 2004 to 2013. Pursuant to the Restructuring, Harbin Holdings assumed responsibilities of the pension payments of all employees of the Bearing Factory who retired or left the Bearing Factory prior to the Restructuring. Harbin Bearing and Harbin Holdings have entered into an agreement (the "Pension Agreement") relating to pension arrangements after the Restructuring. The Pension Agreement provides that Harbin Bearing may satisfy the statutory requirement to pay an amount equal to 20% of annual wages to the municipal government to fund future pension obligations of its existing employees, by making such payments to Harbin Holdings as representative of the municipal government of Harbin, and Harbin Holdings agrees to be responsible for all pension obligations to employees of Harbin Bearing who retire or leave after the Restructuring. Subsequent to December 31, 1993, Harbin Bearing and Harbin Holdings entered into a management and administrative services agreement. The agreement provides for the payment by Harbin Bearing of an annual fee of Rmb 17,160,000 (approximately US $2,049,000) in connection with services for medical, heating, education and other staff-related benefits provided by Harbin Holdings for a term of three years. The costs of these services were previously fully paid by the Bearing Factory and have now been superseded by the above agreement. The fees are subject to an annual 10% inflation adjustment. Agreements were also entered into by Harbin Bearing with the two joint venture holding companies of Harbin Bearing in respect of general management services to be provided by the joint venture companies from January 1, 1994 to December 31, 1995 at an annual fee of Rmb 150,000,000 (US $18,000) payable to each of the joint venture companies. Harbin Bearing made sales of Rmb 42,855,000 (1994: Rmb 46,578,000) and Rmb 40,257,000 (1994: Rmb 7,832,000) to Harbin Bearing Import & Export Company ("HBIE") and Xin Dadi Mechanical and Electrical Equipment Company ("Xin Dadi"), related companies owned by the Harbin Municipal Government, respectively, during the fiscal year ended December 31, 1995. As at December 31, 1995, the amounts of the trade receivables from HBIE and Xin Dadi included under due from related companies were Rmb 65,520,000 (1994: Rmb 54,496,000) and Rmb Nil (1994: Rmb 9,164,000), respectively. Amount due to Xin Dadi included in due to related companies as at December 31, 1995 was Rmb 105,171,000, representing advance payment received in respect of future sales. The municipal government of Harbin has allocated to Harbin Holdings the right to use the parcels of land on which Harbin Bearing's operations are conducted. Harbin Holdings has agreed to lease the land on which the main factory is situated to Harbin Bearing in return for an initial annual rental of Rmb 2,508,000 (US$301,000) effective from January 1, 1994 subject to future adjustments in accordance with changes in government fees. 49 PRINCIPAL SHAREHOLDERS The following table sets forth, as of September 5, 1996, the stock ownership of all persons known to own beneficially five percent (5%) or more of the equity securities of the Company, and all directors and officers of the Company and its affiliates, individually and as a group. Each person has sole voting and investment power over the shares indicated, except as noted.
Equity Ownership Voting Rights ---------------- ------------- Amount of Percent Amount of Name and Beneficial of Beneficial Address Ownership/(1)/ Class/(2)/ Ownership/(1)/ Percent - -------- --------------- ------------ --------------- ------- Asean Capital 13,711,000/(3)/ 80.75% 28,111,000/(4)/ 80.36% Gunter Gao 13,711,000/(3)(5)/ 80.75% 28,111,000/(4)/ 80.36% Chairman and Director Glory Mansion Limited ("GML") 1,200,000/(6)/ 6.6% 1,200,000/(6)/ 3.3% Wardley China Investment Trust 400,000/(7)/ 2.3% 400,000/(8)/ 1.1% ("Wardley") Private Equity 1,200,000/(8)/ 6.6% 1,200,000 3.3% Management BVI Limited ("PEM") William McKay/(9)/ 25,000 - 25,000 - Chief Executive Officer, President and Director Li Yuen Fai (Roger)/(10)/ - - - - Chief Financial Officer, Vice President and Director Dickens Chang/(11)/ - - - - Chief Accounting Officer Lai Kwan Fai (Davis) - - - - Corporate Secretary Billy Kan/(12)/ - - - - Vice Chairman and Director Ho Cho Hing (Franco) - - - - Director Philip Yuen - - - - Director George Raffini/(13)/ - - - - Director Sunbase International 13,711,000 80.75% 28,111,000 80.36% (Holdings) Limited/(14)/ All directors and officers 13,711,000 80.75% 28,111,000 80.36% of the Company as a Group/(15) _________________________ * less than 1 percent
50 (1) As used in this table, "beneficial ownership" means the sole or shared power to vote, or to direct the voting of, a security, or the sole or share investment power with respect to a security (i.e., the power to dispose of, or to direct the disposition of a security). (2) Based on 16,980,104 shares of Common Stock outstanding calculated as follows: (a) 12,700,104 shares outstanding; (b) 3,600,000 shares issuable upon conversion of the Series A Preferred Stock and (c) 680,000 shares issuable upon conversion of the Series B Preferred Stock. This amount excludes shares of Common Stock issuable pursuant to conversion of the Convertible Debentures, warrants and options. (3) Includes 10,111,000 outstanding shares of Common Stock and 3,600,000 shares of Common Stock issuable upon conversion of the Series A Preferred Stock. (4) Includes 10,111,000 voting rights held by way of Asean Capital's ownership of 10,111,000 shares of Common Stock and 18,000,000 voting rights held by way of Asean Capital's ownership of 36 shares of the Series A Preferred Stock. (5) Includes shares of Sunbase Common Stock and Preferred Stock beneficially owned by Gunter Gao and Linda Yang, husband and wife, by way of the ownership by each of Mr. Gao and Ms. Yang of 50% of the capital stock of Sunbase International, which in turn owns 90% of the capital stock of Asean Capital. Each of Ms. Yang and Mr. Gao disclaims beneficial ownership of the shares held by the other, although their ownership has been aggregated for purposes of this table. (6) Consists of shares issuable upon conversion of the Convertible Debentures at an initial exercise price of $5.00 per share. GML is the record owner of $6,000,000 in principal amount of Convertible Debentures. (7) Consists of shares issuable upon conversion of the Convertible Debentures at an initial exercise price of $5.00 per share. Wardley is the record owner of $2,000,000 in principal amount of Convertible Debentures. (8) PEM, as the general partner of the HSBC Private Equity Fund, L.P., the parent of GML, shares voting power and has sole investment power over shares of Common Stock issuable to GML upon conversion of the Convertible Debentures. (9) Does not include 800,000 shares of Common Stock issuable upon exercise of the stock options granted to Mr. McKay (See "Management Stock Option Plan.") or any shares issuable upon conversion of 18 shares of Series B Preferred Stock owned by Mr. McKay. (10) Does not include 600,000 shares of Common Stock issuable upon exercise of stock options granted to Mr. Li. See "Management Stock Option Plan." (11) Does not include 50,000 shares of Common Stock issuable upon exercise of stock options granted to Mr. Chang. See "Management Stock Option Plan". 51 (12) Does not include 600,000 shares of Common Stock issuable upon exercise of stock options granted to Mr. Kan. See "Management Stock Option Plan." (13) Does not include any shares issuable upon conversion of the Convertible Debentures owed by GML and Wardley. Mr. Raffini is an employee of HSBC and the nominee of GML and Wardley to the Board of Directors. (14) Consists of 10,111,000 outstanding shares of Common Stock and 3,600,000 shares of Common Stock issuable upon conversion of the Series A Preferred Stock owned by Asean Capital, of which Sunbase International owns 90%. (15) Consists of shares beneficially owned by Gunter Gao. See also (9), (10), (11) and (12) above. 52 DESCRIPTION OF SECURITIES Common Stock ------------ The Company is authorized to issue 50,000,000 shares, $.001 par value. All shares have equal voting rights and are fully paid and non-assessable. Voting rights are not cumulative, and, therefore, the holders of more than 50% of the Common Stock of the Company could, if they chose to do so, elect all the Directors. Holders of the Common Stock are entitled to share ratably in all of the assets of the Company available for distribution to the holders of shares of Common Stock upon the liquidation, dissolution or winding up of the Company. The holders of the Common Stock do not have preemptive rights to subscribe for any securities of the Company and have no right to require the Company to redeem or purchase their shares. Holders of Common Stock are entitled to share equally when, as and if declared by the Board of Directors of the Company, out of funds legally available thereafter. The Company has not paid any cash dividends on its Common Stock, and it is unlikely that any such dividends will be declared in the foreseeable future. See "Dividend Policy." Preferred Stock --------------- The Company is authorized to issue 25,000,000 shares of Preferred Stock, $.001 par value. The Preferred Stock may be issued in series from time to time with such designation, rights, preferences and limitations as the Board of Directors of the Company may determine by resolution. The rights, preferences and limitations of separate series of Preferred Stock may differ with respect to such matters as may be determined by the Board of Directors, including, without limitation, the rate of dividends, method and nature of payment of dividends, terms of redemption, amounts payable on liquidation, sinking fund provisions (if any), conversion rights (if any), and voting rights. Unless the nature of a particular transaction and applicable statutes require such approval, the Board of Directors has the authority to issue these shares without shareholders approval. The issuance of Preferred Stock may have the effect of delaying or preventing a change in control of the Company without any further action by shareholders. There are no present plans to issue any such shares. As of the date of this Prospectus, 36 shares of Series A Preferred Stock and 6,800 shares of Series B Preferred Stock are outstanding. The Series A Preferred Stock participates with the shares of Common Stock on an as converted basis with respect to any dividends declared by the Company. The holders of Series A Preferred Stock are entitled to share ratably with the holders of the Common Stock in all of the assets of the Company (on an as converted basis) upon the liquidation, dissolution or winding up of the Company. The Series A Preferred Stock has no liquidation preference. The holders of the Series A Preferred Stock have the right to convert each share of the Series A Preferred Stock into 100,000 shares of Common Stock. The holders 53 of the Series A Preferred Stock have a right to vote as a class with the holders of Common Stock on the basis of 500,000 votes per share of Series A Preferred Stock. The Series B Preferred Stock participates with the shares of Common Stock on an as converted basis with respect to any dividends paid by the Company. Upon any liquidation, dissolution or winding up, the holders of the Series B Preferred Stock are entitled, before any distribution to holders of Common Stock or any other shares of the Company ranking junior to the Series B Preferred Stock to receive an amount equal to $500 per share. Holders of the Series B Preferred Stock will be entitled to vote on matters submitted to the shareholders of the Company on an as converted basis (for such purposes, each share of Series B Preferred Stock being deemed convertible into 100 shares of Common Stock). At the individual option of a holder, the Company is required to redeem the number of shares of Series B Preferred Stock held by such holder that is specified in a request for redemption delivered to the Company by the holder on or prior to 15 days from the date the Company notifies such holder of its intent to file a Registration Statement with the Securities Exchange Commission for the public offering of the Common Stock of the Company with respect to which the applicable Registration Statement designates that a portion of the proceeds thereof will be used to redeem the Series B Preferred Stock. The Company is required to redeem such stock out of the proceeds of such public offering by paying $500 per share less the holder's pro rata share of the underwriter's commission for the sale in the public offering of that number of shares of Common Stock necessary to redeem the Series B Preferred Stock. The shares of the Series B Preferred Stock are convertible into Common Stock to the extent that a holder does not elect to redeem the shares of Series B Preferred Stock as provided above and on the basis of 100 shares of Common Stock for each share of Preferred Stock. If, by the date which is two years after the date on which the shares of Series B Preferred Stock are distributed to the holders, such holders have not been able to redeem their shares because the Company has not made a public offering as specified, the holder's shares are automatically converted into shares of Common Stock on the following basis: On the first business day following the expiration of the two year period, each share is to be automatically converted into that number of shares of Common Stock that equals $500 divided by the lesser of $5.00 or the average closing price of Common Stock computed by taking the then most recent 60 consecutive trading days when the Company's Common Stock is traded at a minimum volume of 2,000 shares per day for 45 of those 60 trading days. Series A Warrants ----------------- The Company has outstanding an aggregate of 10,392,167 Series A Warrants (the "Warrants") to acquire the Common Stock of the Company. The Warrants expire on June 30, 1998. For each share of Common Stock to be purchased, the holder is required to deliver 70 Warrants together with an exercise price per share of Common Stock of $175.00. Convertible Debentures ---------------------- Pursuant to a Subscription Agreement dated August 2, 1996 (the "Subscription Agreement"), among China Bearing, Asean Capital, China International Bearing Holdings Limited, the Company and Southwest Products (collectively, the "Sunbase Group"); Glory 54 Mansion Limited ("GML") and Wardley China Investment Trust (collectively, the "Funds"); MC Private Equity Partners Asia Limited ("MC Partners"); and Chine Investissement 2000 ("CI2000") (the Funds, MC Partners and CI2000 are hereinafter referred to as the "Investors"), on August 23, 1996, China Bearing issued an aggregate of $11,500,000 principal amount of Convertible Debentures (the "Convertible Debentures") to the Investors. Unless the Convertible Debentures have been converted, the Convertible Debentures are due and payable in August, 1999 (the "Maturity Date"). The Convertible Debentures bear interest at the rate of the higher of (i) 5% per annum (net of withholding tax, if applicable) and (ii) such percentage of the dividend yield calculated by reference to dividing the annual dividend declared per share of Common Stock of the Company by the Conversion Price (as hereinafter defined). Interest is payable quarterly. The Investors have the right to convert at any time the whole or any part of the principal amount of the Convertible Debentures into shares of the Common Stock of the Company. The Conversion Price (the "Conversion Price") is initially $5.00 per share, subject to adjustment for (a) change in par value of the Common Stock, (b) issuance of shares by way of capitalization of profits or reserves, (c) capital distributions, (d) rights offering at a price which is less than the lower of the then market price or Conversion Price, (e) issuance of derivative securities where the total consideration per share initially receivable is less than the lower of the then market price or Conversion Price, (f) issuance of shares at a price per share which is less than the lower of the then market price or the Conversion Price, and (g) if the cumulative audited earnings per share for any two consecutive fiscal years commencing with the fiscal year ending 1996 and ending with the fiscal year ending 1998 are less than the specified projection of cumulative earnings per share for such period. The Convertible Debentures are required to be redeemed on the Maturity Date at its principal amount outstanding together with any accrued but unpaid interest together with an amount that would enable the Investors to yield an aggregate internal rate of return of 12% per annum on the cost of their investment. In addition, if any of the events of default specified in the Convertible Debentures occurs, the Convertible Debentures are automatically due and payable at the principal amount outstanding together with accrued interest and an amount that would enable the Investors to yield an aggregate internal rate of return on their investment of 19.75% per annum. Events of default include the delisting of the shares on NASDAQ or its suspension thereof; default in performance after failure to cure after notice; failure to pay principal or interest; failure to pay indebtedness for borrowed money; bankruptcy, insolvency or unsatisfied judgments; failure to achieve earnings per share of at least $.55 for fiscal years commencing January 1, 1996; and accounts receivable reaching a certain level in relationship to net sales. The obligations of China Bearing under the Convertible Debentures are guaranteed by the other members of the Sunbase Group. Pursuant to the provisions of the Subscription Agreement, each member of the Sunbase Group undertakes to appoint a nominee of GML to each of its respective boards of directors and the Company is required to appoint a nominee of GML as a member of its audit committee. 55 Additionally, the Subscription Agreement contains various affirmative and negative covenants pertaining to such matters as corporate governance, conduct of board meetings, provision of financial statements and other information, delivery of budgets and business plans, inspection of property and books and records, use of the proceeds from the issuance of the Convertible Debentures (limited to working capital to expand the business of the Sunbase Group and to repay existing debt), and consultation rights. The Subscription Agreement requires that each member of the Sunbase Group receive the approval from each of the Funds prior to attempting to make certain fundamental changes such as a change to its capital structure; issuance of securities; amendment to its charter documents; effecting any merger; consolidation or subdivision of its shares; change in rights with respect to shares; and the redemption, purchase or cancellation of shares. Additionally, for so long as the Funds hold in the aggregate more than 50% of the total principal amount of the Convertible Debentures outstanding, the Funds have certain first refusal rights with respect the future issuance of securities by any member of the Sunbase Group. Also, there are restrictions on the ability of any member of the Sunbase Group to grant or permit to exist any security interest upon its assets or the provision of any guaranty or indemnity in respect of its securities. The Subscription Agreement further provides that unless the approval of the Funds have been obtained, no member of the Sunbase Group may acquire assets in excess of $3,000,000; borrow, lend or give any guaranty of any amount greater than $3,000,000; sell assets having a fair market value in excess of $3,000,000; make dividend payments in excess of 20% of the Company's audited earnings per share; grant liens in excess of $3,000,000; or enter into certain related party transactions. The Subscription Agreement also provides for certain demand registration rights in favor of the Investors in the event that any such Investor is deemed an affiliate of the Company. Limitations on Directors' Liabilities and Indemnification --------------------------------------------------------- The Company's Articles of Incorporation and Bylaws currently provide that the liability of the directors of Company for monetary damages shall be eliminated to the fullest extent permitted under Nevada Law. The Company's Bylaws provide that a director who performs the duties as described in the Bylaws shall not be liable or obligated to the shareholders or other directors for any mistake of fact or judgment made in carrying out the duties of the director, absent fraud, deceit or any wrongful taking. Transfer and Warrant Agent -------------------------- U.S. Stock Transfer Company, 1745 Gardena Avenue, 2nd Floor, Glendale, California 91204-2991, serves as transfer and warrant agent for the Company's Common Stock and Series A Warrants. 56 Reports to Shareholders ----------------------- The Company intends to furnish annual reports to shareholders which will include audited financial statements reported on by its certified public accountants. In addition, the Company may issue unaudited quarterly or other interim reports to shareholders as it deems appropriate. Shares Eligible for Future Sale ------------------------------- As of the date of this Prospectus, Asean Capital owned 10,111,000 shares of Common Stock and 36 shares of the Company's Series A Preferred Stock which is convertible into 3,600,000 of the Company's Common Stock at any time (collectively the Asean Securities). The Asean Securities were issued on December 22, 1994 and are deemed "restrictive securities" under the Securities Act and, as such, will be subject to restrictions on the timing, manner and volume of sales of such shares pursuant to Rule 144 of the Securities Act. On June 10, 1996, the Company issued 1,000,000 shares of the Company's Common Stock (the "Private Placement Shares") in a private placement. Pursuant to Registration Rights Agreements between the Company and each of such investors, the Company has agreed to file a Registration Statement covering the Private Placement Shares. This Prospectus is a part of such Registration Statement. Upon the effectiveness of such Registration Statement, the Private Placement Shares would be freely tradable. In addition to the 3,600,000 shares of the Common Stock issuable upon conversion of the Series A Preferred Stock, the Company has issued an aggregate of 6,800 shares of Series B Preferred Stock which are convertible under certain circumstances into an aggregate of 680,000 shares of Common Stock. The shares of the Common Stock issuable upon conversion of the Series B Preferred Stock will be deemed to be restricted shares, but, pursuant to Rule 144 as presently in effect, will become eligible for sale in the public market on or before January 16, 1998, subject to the volume and limitations imposed by Rule 144 with respect to shares owned by William McKay. Additionally, as of the date of this Prospectus, there are 10,392,167 warrants outstanding to purchase an aggregate of 148,459 shares of Common Stock at an exercise price of $175 per share, and an aggregate of 2,050,000 options to purchase Common Stock granted pursuant to the Company's 1995 Stock Option Plan at exercise prices ranging from $6.375 to $12.75 per share. On August 23, 1996, the Company issued an aggregate of $11,500,000 principal amount of Convertible Debentures to four institution investors. The Convertible Debentures are convertible at any time at an initial exercise price of $5.00, which conversion price is subject to adjustment as set forth in the Debenture documents. See "Description of Securities." The holders of the Convertible Debentures have certain demand registration rights with respect to the shares issuable pursuant to the conversion of the Convertible Debentures. The Company also agreed to issue to an investment banking firm in connection with the placement of the Convertible Debentures warrants to purchase an aggregate of 240,000 shares at an exercise price of $6.375 per share, one third of which is to be exercisable on January 16, 1997, one third on January 16, 1998 and one third on January 16, 1999, with each such tranche to be available for exercise six years commencing with the date of the earliest exercise. 57 In general, under Rule 144, as currently in effect, any holder of restricted shares, including an affiliate of the Company, as to which at least two years have elapsed since the later of the date of the acquisition of such restricted shares from the company or an affiliate, is entitled within any three-month period to sell a number of shares that does not exceed the greater of 1% of the then-outstanding shares of Common Stock or the average weekly trading volume of the Common Stock in the Nasdaq National Market during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. Affiliates of the Company must comply with the requirements of Rule 144 (except for the two-year holding period requirement) in order to sell shares of Common Stock which are not "restricted securities." Further, under Rule 144(k) a person who holds restricted shares as to which at least three years have elapsed since the date of their acquisition from the Company or an affiliate, and who is not deemed to have been an affiliate of the Company at any time during the three months preceding a sale, is entitled to sell such shares under Rule 144 without regard to volume limitations, manner of sale provisions, notice requirements or availability of current public information concerning the Company. SELLING SHAREHOLDERS The following table will provide certain information with respect to the persons offering the shares of the Common Stock pursuant to this Prospectus (the "Selling Shareholders") including their name and the number of shares to be offered. All of the shares were acquired by the Selling Shareholders pursuant to a Private Placement which was consummated on or about June 10, 1996. Pursuant to Registration Rights Agreements between the Company and the Selling Shareholders, the Company was required to file a Registration Statement covering the resale of the shares of Common Stock acquired. None of the Selling Shareholders personally owns in excess of 5% of the outstanding shares of Common Stock on a fully diluted basis (after taking into account the shares of Common Stock issuable upon conversion of the Series A Preferred Stock, the Series B Preferred Stock and the Convertible Debentures), except that affiliates of HSBC Asset Management Bahamas Ltd. beneficially own in excess of 5% as a result of their ownership of the Convertible Debentures.
NAME SHARES TO BE OFFERED Arnhold & S. Bleichroeder, Inc. 30,000 Asian Managed Volatility Fund LLC 25,000 Asia Commercial Bank (nominees) Ltd. 100,000
58 Vickers Ballas Holdings Ltd. 200,000 Clarex Ltd. 100,000 Clemente Global Growth Fund 100,000 Cosco Investment (Singapore) Ltd. 50,000 Roberto Fabros 3,000 Steven Gluckstein 3,000 Hamac & Company 68,000 Rick Howell 10,000 HSBC Asset Management Bahamas Ltd. 100,000 Plitt & Co. 32,000 Sterneck Aggressive Growth, LP 40,000 Sterneck Partners LP 60,000 William Storms 10,000 Todd Stockbauer 2,400 David Lutz 1,800 Cameron McKay 2,000 William McKay 25,000 Ernst Renezeder 3,000 Tim R. Wulfekuhle 3,000 Frank Brothers 1,800
59 AFAM Controlled Risk Asian Equity Fund Ltd. 25,000 TR Enterprises Defined Benefit Plan 5,000
PLAN OF DISTRIBUTION The Shares are being offered by the Selling Shareholders from time to time on the NASDAQ system, in privately negotiated transactions or on other markets. Any Shares sold in brokerage transactions will involve customary broker's commissions. No underwriter will participate in any sales on behalf of the Selling Stockholders. EXPERTS The consolidated financial statements of the Company at December 31, 1994 and 1995 and for each of the two years in the period ended December 31, 1995 and the financial statements of the Harbin Bearing General Factory at December 31, 1993 and 1992 and for each of the three years ended December 31, 1993 appearing in this Prospectus and the Registration Statement have been audited by Ernst & Young, independent auditors, as set forth in their report thereon and elsewhere herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. 60 INDEX TO FINANCIAL STATEMENTS FINANCIAL STATEMENTS OF HARBIN GENERAL FACTORY FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 and 1991 Report of Independent Auditors F-3 Balance Sheets as of December 31, 1992 and 1993 F4 Statements of Income for the years ended December 31, 1991, 1992 and 1993 F5 Statements of Cash Flows for the years ended December 31, 1992 and 1993 F6-F7 Statements of Changes in Equity for the years ended December 31, 1991, 1992 and 1993 F8 Notes to Financial Statements F9 - F16 FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 Report of Independent Auditors F17 Consolidated Balance Sheets as of December 31, 1994 and December 31, 1995 F18 - F19 Consolidated Statements of Income for the years ending December 31, 1994 and December 31, 1995 F20 Consolidated Statements of Cash Flows for the years ending December 31, 1994 and December 31, 1995 F21 - F22 F-1 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1994 and December 31, 1995 F23 Notes to Consolidated Financial Statements F24 - F43 UNAUDITED FINANCIAL STATEMENTS OF THE COMPANY FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 Consolidated Condensed Balance Sheet as of June 30, 1996 F44 - F45 Consolidated Condensed Statements of Income for the six months ended June 30, 1995 and 1996 F46 Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 1995 and 1996 F47 - F48 Notes to Consolidated Financial Statements F49 - F53 F-2 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders Sunbase Asia, Inc. We have audited the accompanying balance sheets of Harbin Bearing General Factory as predecessor of Harbin Bearing Company Limited (incorporated in the People's Republic of China ("China")) as of December 31, 1992 and 1993, and the related statements of income, cash flows and changes in equity for the years ended December 31, 1991, 1992 and 1993. These financial statements are the responsibility of Harbin Bearing General Factory's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Harbin Bearing General Factory as predecessor of Harbin Bearing Company Limited at December 31, 1992 and 1993, and the results of its operations and its cash flows for the years ended December 31, 1991, 1992 and 1993, in conformity with accounting principles generally accepted in the United States of America. ERNST & YOUNG Hong Kong February 20, 1995 F-3 HARBIN BEARING GENERAL FACTORY BALANCE SHEETS AS OF DECEMBER 31, 1992 AND 1993 (Amounts in thousands)
December 31, 1992 1993 Notes Rmb Rmb ASSETS Current assets Cash and bank balances 21,434 174,467 Accounts receivable, net 5 201,430 331,123 Inventories, net 6 211,619 319,859 other receivables 57,392 96,814 Due from related companies 2,302 11,376 ------- --------- Total current assets 494,177 933,639 Fixed assets, net 7 341,120 338,841 Long term investments 8 7,168 7,262 ------- --------- Total assets 842,465 1,279,742 ======= ========= LIABILITIES AND EQUITY Current liabilities Short term bank loans 9 277,156 298,752 Current portion of long term bank loans 11 25,390 36,700 Accounts payable 53,123 116,906 Other payables 40,135 58,482 Due to related companies 5,961 1,604 Debentures 10 10,000 10,000 Taxes other than income 18,269 12,201 ------- --------- Total current liabilities 430,034 534,645 Long term bank loans 11 112,830 106,556 Long term loans 12 32,612 33,810 Loans from prospective investors 13 - 300,000 ------- --------- 575,476 975,011 Obligations and commitments 14 Equity: Dedicated capital 16 261,297 203,376 Retained earnings 5,692 101,355 ------- --------- Total equity 266,989 304,731 ------- --------- Total liabilities and equity 842,465 1,279,742 ======= =========
The accompanying notes form an integral part of the financial statements. F-4 HARBIN BEARING GENERAL FACTORY STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993 (Amounts in thousands)
Year ended December 31, 1991 1992 1993 Notes Rmb Rmb Rmb Sales 457,857 680,724 711,420 Sales tax (33,012) (37,046) (24,356) -------- -------- -------- Net sales 424,845 643,678 687,064 Cost of sales (335,882) (452,594) (441,467) -------- -------- -------- Gross profit 88,963 191,084 245,597 Selling, general and administrative expenses (80,136) (100,142) (94,685) Interest expense, net 22 (24,404) (27,986) (40,723) Foreign exchange losses - (566) (3,446) -------- -------- -------- Income/(loss) before income taxes (15,577) 62,390 106,743 Provision for income taxes 4 (13,020) (11,123) (11,080) -------- -------- -------- Net income/(loss) (28,597) 51,267 95,663 ======== ======== ========
The accompanying notes form an integral part of the financial statements. F-5 HARBIN BEARING GENERAL FACTORY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993 (Amounts in thousands)
Year ended December 31, 1991 1992 1993 Rmb Rmb Rmb Cash flows from operating activities: Net income (28,597) 51,267 95,663 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 18,584 21,025 27,128 (Gain) loss on disposals of property, machinery & equipment (1,629) (540) 1,005 Foreign exchange losses - 566 3,446 (Increase) decrease in assets: Accounts receivable 3,967 (28,878) (129,693) Inventories (18,208) (13,225) (108,240) Other receivables (16,110) (23,154) (39,422) Due from related companies - (534) (9,074) Increase (decrease) in liabilities: Accounts payable 20,086 (12,926) 63,783 Other payables 7,661 3,765 18,347 Due to related companies 7,928 (5,491) (4,357) Taxes other than income 3,484 8,134 (6,068) ------- -------- -------- Net cash used in operating activities (2,834) 9 (87,482) Cash flows from investing activities: Acquisition of fixed assets (88,596) (107,868) (25,854) Purchase of long term investment (499) - (94) Proceeds from disposals of fixed assets 1,464 774 - ------- -------- -------- Net cash used in investing activities (87,631) (107,094) (25,948) ------- -------- --------
The accompanying notes form an integral part of the financial statements. F-6 HARBIN BEARING GENERAL FACTORY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993 (continued) (Amounts in thousands)
Year ended December 31, 1991 1992 1993 Rmb Rmb Rmb Cash flows from financing activities: Proceeds from short term bank loans 51,950 30,696 23,666 Repayment of short term bank loans - - (2,070) Issue (redemption) of debentures (12,082) 10,000 - Proceeds from long term bank loans 69,112 31,282 7,864 Repayment of long term bank loans (29,891) - (6,274) Proceeds from long term loans - 32,612 1,198 Proceeds of loan from prospective investors - - 300,000 Contribution from (Distribution to) State 8,555 19,501 (57,921) ------- ------- -------- Net cash provided by financing activities 87,644 124,091 266,463 ------- ------- -------- Net increase (decrease) in cash and cash equivalents (2,821) 17,006 153,033 Cash and cash equivalents, at beginning of period 7,249 4,428 21,434 ------- ------- -------- Cash and cash equivalents, at end of period 4,428 21,434 174,467 ======= ======= ========
The accompanying notes form an integral part of the financial statements. F-7 HARBIN BEARING GENERAL FACTORY STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993 (Amounts in thousands)
Dedicated Retained Capital Earnings Rmb Rmb Balance at December 31, 1990 224,606 (8,343) Net loss - (28,597) Transfer to dedicated capital 4,106 (4,106) Contribution from State 8,555 - -------- -------- Balance at December 31, 1991 237,267 (41,046) Net income - 51,267 Transfer to dedicated capital 4,529 (4,529) Contribution from State 19,501 - -------- -------- Balance at December 31, 1992 261,297 5,692 Net income - 95,663 Transfer to dedicated capital - - Distribution to State ( 57,921) - -------- -------- Balance at December 31, 1993 203,376 101,355 ======== ========
The accompanying notes form an integral part of the financial statements. F-8 HARBIN BEARING GENERAL FACTORY NOTES TO FINANCIAL STATEMENTS (Amounts expressed in thousands unless otherwise stated) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES Harbin Bearing Company Limited ("Harbin Bearing") was incorporated in the People's Republic of China ("China") as an equity joint stock enterprise limited by shares on December 28, 1993, under The Trial Measures on Share Companies and the Opinion on the Standardization of Joint Stock Companies promulgated by the State Council of China. Harbin Bearing is the successor to the manufacturing operations of Harbin Bearing General Factory (the "Company", the "Predecessor" or "Bearing Factory"), a Chinese state-owned enterprise established in 1950 managed by the municipal government of the City of Harbin of the Heilongjiang Province. Harbin Bearing commenced operations on January 1, 1994 and continued the ball bearing manufacturing and sales business of Bearing Factory. Pursuant to an agreement between the Predecessor and Harbin Bearing, the ball bearing manufacturing and sales business together with certain assets and liabilities were transferred to Harbin Bearing. Certain other assets and liabilities relating to the bearing business were transferred to Harbin Precision Machinery Manufacturing Company ("Harbin Precision"), and certain ancillary operations, businesses, facilities used to provide community services to employees of the factory and their families in Harbin were transferred to Harbin Bearing Holdings Company ("Harbin Holdings"). Harbin Holdings is a separate newly established enterprise under the supervision and control of the Machine Bureau and Harbin Precision is wholly-owned by Harbin Holdings. Harbin Holdings, in return, received 33.3% of the new shares of Harbin Bearing in consideration for the net assets transferred thereto from the Predecessor. The above has been disclosed as a subsequent event in note 23 to the financial statements. 2. BASIS OF PRESENTATION The accompanying financial statements of Bearing Factory present the financial position, results of operations and cash flows of Bearing Factory prior to January 1, 1994. The assets and liabilities of Bearing Factory have been stated at historical cost. The accompanying financial statements of Bearing Factory were prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). This basis of accounting differs from that used in the statutory accounts of Bearing Factory, which were prepared in accordance with the accounting principles and the relevant financial regulations applicable to state-owned industrial enterprises, where applicable, as established by the Ministry of Finance of China ("PRC GAAP"). The principal adjustments made to conform the statutory accounts of Bearing Factory to U.S. GAAP included the following: . Provision for doubtful accounts receivable; . Provision for inventory obsolescence; F-9 HARBIN BEARING GENERAL FACTORY NOTES TO FINANCIAL STATEMENTS (Amounts expressed in thousands unless otherwise stated) 2. BASIS OF PRESENTATION (continued) . Valuation of inventories; . Depreciation expense for property, machinery and equipment to more accurately reflect the economic useful life of these assets; . Reclassification of certain items, designated as "reserves appropriated from net income", as a charge to income; and . Recognition of sales and cost of sales upon delivery to the customers. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Sales Sales represent the invoiced value of goods, net of sales tax, recognized upon delivery to customers. (b) Cash and cash equivalents Cash and cash equivalents include cash on hand and demand deposits with banks with an original maturity of three months or less. (c) Inventories Inventories are stated at the lower of cost, on a first-in, first-out basis, or market. Work-in-progress and finished goods include direct materials, direct labor and an attributable proportion of production overheads. (d) Fixed assets and construction in progress Fixed assets are stated at cost less accumulated depreciation. Depreciation is computed using the straight line method over the assets' estimated useful lives. The estimated useful lives of property, machinery and equipment are as follows: Buildings 20 years Machinery and equipment 10 years Motor vehicles 5 years Furniture, fixtures and office equipment 5 years Construction-in-progress represents staff quarters, factories and other buildings under construction and plant and machinery pending installation. This includes the costs of construction, the costs of plant and machinery and interest charges to finance these assets during the period of construction or installation. (e) Income taxes The income taxes reflect the accounting standards in Statement of Financial Accounting Standards No.109, "Accounting for Income Taxes". F-10 HARBIN BEARING GENERAL FACTORY NOTES TO FINANCIAL STATEMENTS (Amounts expressed in thousands unless otherwise stated) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (f) Foreign currency translation Bearing Factory's financial records are maintained and the statutory financial statements are stated in Renminbi (Rmb). All foreign currency transactions and monetary assets and liabilities denominated in foreign currency are translated into Renminbi at the rates of exchange set by the government from time to time ("official exchange rate"). In preparing these financial statements, all foreign currency transactions during the year have been translated into Rmb using applicable rates of exchange quoted by the applicable foreign exchange adjustment center ("swap center") for the respective years. Monetary assets and liabilities denominated in foreign currencies are translated into Rmb using the applicable swap center exchange rates prevailing at the balance sheet date. The resulting exchange differences have been credited or charged to the statements of income. (g) Dedicated capital Bearing Factory maintains discretionary dedicated capital, which includes a general reserve fund, an enterprise expansion fund and a staff welfare and an incentive bonus fund. Bearing Factory determined on an annual basis the amount of the annual appropriations to dedicated capital. Such appropriations are reflected in the year end balance sheets under equity as dedicated capital; however, the appropriation for the staff welfare and incentive bonus fund is charged to income. 4. INCOME TAXES Deferred taxes have not been provided for in respect of Bearing Factory since the amount of income tax payable has been predetermined and agreed with the tax authority each year and accordingly income tax payable is not determined based on income. Bearing Factory, a state-owned enterprise, was subject to income taxes at the statutory tax rate of 55% on the taxable income as reported in the statutory accounts adjusted for taxation purposes in accordance with the relevant income tax laws in China. However, Bearing Factory had agreed with the Harbin Tax Bureau to pay a fixed amount of income tax each year, regardless of actual taxable income. A reconciliation of the effective income tax rate to the statutory income tax rate each year is summarized below:
1991 1992 1993 Statutory income tax rate 55.0% 55.0% 55.0% Effect of agreed tax rate (138.6%) (37.2%) (44.6%) ------- ------ ------ Effective income tax rate (83.6%) 17.8% 10.4% ======= ====== ======
F-11 HARBIN BEARING GENERAL FACTORY NOTES TO FINANCIAL STATEMENTS (Amounts expressed in thousands unless otherwise stated) 4. INCOME TAXES (continued) Further to the reorganization summarized in Note 1, Harbin Bearing, the successor to Bearing Factory, will be subject to an income tax rate of 15%. 5. ACCOUNTS RECEIVABLE Accounts receivable are comprised of:
December 31, 1992 1993 Rmb Rmb Accounts receivable - trade 328,238 473,055 Less: Allowance for doubtful debts (126,808) (141,932) -------- -------- Accounts receivable, net 201,430 331,123 ======== ========
6. INVENTORIES Inventories are comprised of:
December 31, 1992 1993 Rmb Rmb Raw materials 101,431 116,808 Work-in-progress 59,460 105,234 Finished goods 84,365 121,674 -------- -------- 245,256 343,716 Less: Allowance for obsolescence ( 33,637) ( 23,857) -------- -------- Inventories, net 211,619 319,859 ======== ========
7. FIXED ASSETS
December 31, 1992 1993 Rmb Rmb Buildings 197,847 201,616 Machinery and equipment 233,209 252,487 Motor vehicles 20,232 20,682 Furniture, fixtures and office equipment 3,897 6,451 Construction in progress 176,337 162,220 -------- -------- 631,522 643,456 Less: Accumulated depreciation (290,402) (304,615) -------- -------- Fixed assets, net 341,120 338,841 ======== ========
F-12 HARBIN BEARING GENERAL FACTORY NOTES TO FINANCIAL STATEMENTS (Amounts expressed in thousands unless otherwise stated) 7. FIXED ASSETS (continued) The Company's buildings are located in China and the land on which the Company's buildings is situated is State-owned. 8. LONG TERM INVESTMENTS Long term investments are stated at cost and represent investments in treasury bonds issued by the Chinese government. The investments bear interest ranging from 4% to 15% per annum and are redeemable on maturity or as advised by the government. 9. SHORT TERM BANK LOANS The short term bank loans bear interest at an average rate of 11% and are repayable within one year. 10. DEBENTURES Debentures are issued to the employees and bear interest at 12% per annum and are repayable within one year. 11. LONG TERM BANK LOANS Long term bank loans bear an average interest rate of approximately 8.64% per annum and are repayable as follows:
December 31, December 31, 1992 1993 Rmb Rmb 1993 25,390 - 1994 18,600 36,700 1995 78,230 64,356 1996 - 22,200 1997 16,000 20,000 1998 - - -------- -------- 138,220 143,256 Less: Portion repayable within one year (25,390) (36,700) -------- -------- 112,830 106,556 ======== ========
12. LONG TERM LOANS On December 10, 1992, the Company received Rmb33,810 from its employees to finance the operation's operating and capital commitments. The loans are unsecured and bear interest at 15% per annum. The funds are repayable together with the accumulated interest in December 1995. F-13 HARBIN BEARING GENERAL FACTORY NOTES TO FINANCIAL STATEMENTS (Amounts expressed in thousands unless otherwise stated) 13. LOANS FROM PROSPECTIVE INVESTORS During 1993, the Company received in advance Rmb 300 million from Harbin Xinhengli and Harbin Sunbase, the employees of the Company and other parties in consideration for 66.7% of the newly issued shares of Harbin Bearing. The funds represented the cash contribution to the equity of Harbin Bearing of Rmb 450 million, the balance being represented by the net assets contributed by Bearing Factory of Rmb 150 million (33.3%). The advances were unsecured and non-interest bearing. 14. OBLIGATIONS AND COMMITMENTS As of December 31, 1993, the Company had outstanding capital commitments for purchases of equipment of approximately Rmb 64,000 (US$7,503). 15. FOREIGN CURRENCY EXCHANGE The Chinese government imposes control over its foreign currency. Renminbi, the official currency of China, is not freely convertible. Prior to December 31, 1993, all foreign exchange transactions involving Renminbi had to be undertaken either through the Bank of China or other institutions authorized to buy and sell foreign exchange or at a swap center. The exchange rates used for transactions through the Bank of China and other authorized banks are set by the government from time to time whereas the exchange rates available at a swap center are determined largely by supply and demand. Payment for imported materials and remittance of earnings outside of China are subject to the availability of foreign currency which is dependent on the foreign currency denominated earnings of the entity or allocated to the Company by the government at official exchange rates or must be arranged through a swap center with government approval. On January 1, 1994, the People's Bank of China introduced a managed floating exchange rate system based on the market supply and, demand and established a unified foreign exchange inter-bank market amongst designated banks. In place of the official rate and the swap centre rate, the People's Bank of China publishes a daily exchange rate for Renminbi based on the previous day's dealings in the inter-bank market. The official exchange rate and Shanghai swap center rate as of December 31, 1993 together with the floating exchange rates at January 1, 1994, September 30, 1994 and March 31, 1995 were as follows:
December 31, January 1, December 31, March 31, 1993 1994 1994 1995 Rmb Rmb Rmb Rmb Rmb equivalent of U.S.$1 Official exchange rate 5.8 - - - Beijing swap center rate 8.7 - - - Floating exchange rate - 8.7 8.45 8.38
F-14 HARBIN BEARING GENERAL FACTORY NOTES TO FINANCIAL STATEMENTS (Amounts expressed in thousands unless otherwise stated) 16. DISTRIBUTION OF PROFIT As stipulated by the relevant laws and regulations for state-owned enterprises, Bearing Factory was required to maintain discretionary dedicated capital, which included a general reserve fund, an enterprise expansion fund and a staff welfare and incentive bonus fund. Bearing Factory determined on an annual basis the amount of the annual appropriations to dedicated capital. Dedicated capital is classified into contributory and discretionary dedicated capital. Contributory dedicated capital represents annual appropriations from net income after tax as presented in the statutory accounts, for which the levels of appropriation are governed by government regulations. Discretionary dedicated capital represents appropriations made at the sole discretion of the company's management. Both contributory and discretionary dedicated capital are not distributable in the form of dividends. In the accompanying statements of income, amounts designated for payments of staff welfare (to the extent that it is not related to capital expenditure) and incentive bonus to employees have been charged to income before arriving at net income and are reflected in the accompanying balance sheets in accordance with U.S. GAAP. The retained earnings balances in these financial statements reflect the effect of U.S. GAAP adjustments only and do not represent distributable reserves under Chinese regulations. 17. RETIREMENT PLAN As stipulated by the regulations of the Chinese government, Bearing Factory has a defined contribution plan for all staff. Staff are entitled to an annual pension from the State equal to their basic salary amount at their retirement date. Bearing Factory pays to the State 20% of the basic salary of its staff. The pension costs incurred by Harbin Bearing in 1991, 1992, and 1993 were Rmb 8,470, Rmb 10,108, and Rmb 22,773, respectively. 18. RELATED PARTY TRANSACTIONS A significant portion of the business undertaken by the Company during the relevant period has been effected with other State-owned enterprises in China and on such terms as determined by the relevant Chinese authorities. F-15 HARBIN BEARING GENERAL FACTORY NOTES TO FINANCIAL STATEMENTS (Amounts expressed in thousands unless otherwise stated) 19. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Year ended December 31, 1991 1992 1993 Rmb Rmb Rmb Cash paid for: Interest 30,193 44,460 47,481 Less: Interest capitalised (5,300) (8,562) (10,815) ------- ------- -------- 24,893 35,898 36,666 Income taxes 13,020 11,123 11,080
20. FINANCIAL INSTRUMENTS The carrying amounts of Harbin Bearing's cash and loans approximate their fair value because of the short maturity of those instruments. The carrying amounts of bank loans approximate their fair value based on the borrowing rates currently available for bank loans with similar terms and average maturities. 21. CONCENTRATION OF CREDIT RISK The Company manufactures and sells general and precision ball bearings in diversified industries in the PRC. The Company has long standing relationships with most of its customers and generally does not require collateral. There is no concentration of receivables in any specific industry. 22. OTHER SUPPLEMENTAL INFORMATION Interest expense, net of the amounts capitalised, is represented as follows:
Year ended December 31, 1991 1992 1993 Rmb Rmb Rmb Interest incurred 29,704 36,548 51,538 Interest capitalised (5,300) (8,562) (10,815) ------- ------- ------- Interest expense 24,404 27,986 40,723
23. SUBSEQUENT EVENT Subsequent to the year end date, on January 1, 1994, the Company transferred its ball bearing manufacturing and sales business together with certain assets and liabilities to Harbin Bearing pursuant to an agreement between the Company and Harbin Bearing (see Note 1). The assets acquired and the liabilities assumed by Harbin Bearing were revalued at the then respective fair values. The fair value of the net assets so transferred was Rmb 173,788. F-16 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders Sunbase Asia, Inc. We have audited the accompanying consolidated balance sheets of Sunbase Asia, Inc. and its subsidiaries as of December 31, 1995 and 1994 and the related statements of income, cash flows and changes in shareholders' equity for each of the years in the two-year period ended December 31, 1995. 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 audits. We conducted our audits in accordance with auditing standards generally accepted 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sunbase Asia, Inc. and its subsidiaries at December 31, 1995 and 1994, and the consolidated results of their operations and cash flows for each of the years in the two-year period ended December 31, 1995, in conformity with accounting principles generally accepted in the United States of America. ERNST & YOUNG Hong Kong April 5, 1996 F-17 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1994 AND DECEMBER 31, 1995 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTES 1994 1995 1995 RMB RMB US$ --------- --------- ------- ASSETS Current assets Cash and bank balances 65,646 30,944 3,719 Accounts receivable, net 5 261,184 264,186 31,753 Notes receivable -- 25,756 3,096 Inventories, net 6 361,455 476,997 57,331 Prepaid VAT -- 40,429 4,859 Other receivables 35,636 57,209 6,876 Due from related companies 23 170,073 137,079 16,476 --------- --------- ------- Total current assets 893,994 1,032,600 124,110 Fixed Assets 7 481,295 554,086 66,597 Deferred asset 8 35,729 18,134 2,180 Long term investments 9 6,999 1,438 173 Goodwill 10 -- 12,144 1,460 --------- --------- ------- Total assets 1,418,017 1,618,402 194,520 ========= ========= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short term bank loans 11 227,078 276,813 33,271 Accounts payable 151,853 116,205 13,967 Notes payable 12 -- 15,627 1,878 Accrued liabilities and other 44,761 90,108 10,831 payables Short term obligations under 13 15,873 17,269 2,075 capital leases Other loans 14 33,810 33,810 4,064 Secured promissory note 1,15 -- 41,600 5,000 Income tax payable 4 9,342 5,874 706 Taxes other than income 20,970 -- -- Due to related companies 130,635 111,654 13,420 Due to shareholders 11,682 17,352 2,086 --------- --------- ------- Total current liabilities 646,004 726,312 87,298 Long term bank loans 16 68,424 110,670 13,302 Long term obligations 13 124,982 107,713 12,946 under capital leases Secured promissory note 1,15 42,250 -- -- Minority interests 288,175 343,142 41,243 --------- --------- ------- 1,169,835 1,287,837 154,789
The accompanying notes form an integral part of these consolidated financial statements F-18 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1994 AND DECEMBER 31, 1995 (continued) (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTES 1994 1995 1995 RMB RMB US$ --------- --------- ------- Obligations and commitments 13 -- -- -- Shareholders' equity: Common Stock, par value US$0.001 each, 50,000,000 shares authorized; 11,700,063 issued, and fully paid up 19 99 99 12 Preferred Stock, par value US$0.001 each, 25,000,000 shares authorized, Convertible Preferred Stock - Series A; 36 shares issued and outstanding 1, 19 44,533 44,533 5,352 Convertible Preferred Stock - Series B; 6,800 shares issued and outstanding (1994: Nil issued) 1 -- 28,288 3,400 Contributed surplus 19 151,942 151,942 18,262 Reserves 20 13,011 25,266 3,037 Retained earnings 38,597 80,437 9,668 --------- --------- ------- Total shareholders' equity 248,182 330,565 39,731 --------- --------- ------- Total liabilities and shareholders' equity 1,418,017 1,618,402 194,520 ========= ========= =======
The accompanying notes form an integral part of these consolidated financial statements F-19 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDING DECEMBER 31, 1994 AND DECEMBER 31, 1995 (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTES 1994 1995 1995 RMB RMB US$ --- --- --- Net Sales - third parties 655,848 569,248 68,419 - related parties 23 63,994 103,111 12,393 ---------- ---------- ---------- 719,842 672,359 80,812 Cost of sales (441,854) (381,377) (45,838) ---------- ---------- ---------- Gross profit 277,988 290,982 34,974 Selling, general and administrative expenses - third parties (57,434) (71,820) (8,632) - related parties 23 (37,784) (41,182) (4,950) ---------- ---------- ---------- (95,218) (113,002) (13,582) Interest expense - third parties (30,128) (37,136) (4,463) - related parties 23 (12,593) (11,310) (1,359) ---------- ---------- ---------- (42,721) (48,446) (5,822) Reorganization expenses 21 (7,307) -- -- ---------- ---------- ---------- Income before income taxes 132,742 129,534 15,570 Provision for income taxes: 4 - Current (19,087) (20,472) (2,461) - Deferred (3,600) -- -- ---------- ---------- ---------- (22,687) (20,472) (2,461) ---------- ---------- ---------- Income before minority interests 110,055 109,062 13,109 Minority interests (58,447) (54,967) (6,607) ---------- ---------- ---------- Net income 51,608 54,095 6,502 ---------- ---------- ---------- Earnings per common share 17 3.37 3.54 0.42 ========== ========== ========== Numbers of shares outstanding 17 15,300,063 15,300,063 15,300,063 ========== ========== ==========
The accompanying notes form an integral part of these consolidated financial statements F-20 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDING DECEMBER 31, 1994 AND DECEMBER 31, 1995 (AMOUNTS IN THOUSANDS)
NOTES 1994 1995 1995 RMB RMB US$ --- --- --- Cash flows from operating activities: Net income 51,608 54,095 6,502 Adjustments to reconcile income to net cash provided by operating activities: Minority interests 58,447 54,967 6,606 Depreciation 44,562 44,447 5,342 Loss on disposal of fixed assets -- 4,829 580 Exchange difference on secured promissory note -- (650) (78) Reorganization expenses 7,307 Others 1,226 17,595 2,115 (Increase) decrease in assets: Accounts receivable (261,184) (1,312) (157) Inventories (80,457) (107,824) (12,960) Notes receivable -- (25,756) (3,096) Prepaid VAT -- (40,429) (4,859) Other receivables 32,372 (21,086) (2,534) Due from related companies (157,118) 32,994 3,965 Deferred tax asset 3,600 -- -- Increase (decrease) in liabilities: Accounts payable 34,947 (41,836) (5,028) Notes payable -- 4,000 481 Accrued liabilities and other payables 18,361 40,531 4,872 Income tax payable 9,342 (3,468) (417) Taxes other than income 20,970 (20,970) (2,520) Due to related companies 129,031 (34,854) (4,189) Due to shareholders 674 5,670 681 -------- -------- ------- Net cash used in operating activities (86,312) (39,057) (4,694) Cash flows from investing activities: Purchase of a subsidiary 22 -- (731) (88) Disposal of long term investments 263 5,561 668 Proceeds from disposal of fixed assets -- 115 14 Additions to fixed assets (153,213) (92,571) (11,126) -------- -------- ------- Net cash used in investing activities (152,950) (87,626) (10,532)
F-21 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDING DECEMBER 31, 1994 AND DECEMBER 31, 1995 (continued) (AMOUNTS IN THOUSANDS)
NOTES 1994 1995 1995 RMB RMB US$ --- --- --- Cash flows from financing activities: Proceeds from short term bank loans 440,213 518,573 62,328 Repayment of short term bank loans (360,344) (468,838) (56,351) Redemption of debentures (10,000) -- -- Proceeds from long term bank loans 68,424 54,289 6,525 Repayment of long term bank loans -- (12,043) (1,447) -------- -------- ------- Net cash provided by financing activities 138,293 91,981 11,055 -------- -------- ------- Net decrease in cash and cash equivalents (100,969) (34,702) (4,171) Cash and cash equivalents, at beginning of year 166,615 65,646 7,890 -------- -------- ------- Cash and cash equivalents, at end of year 65,646 30,944 3,719 ======== ======== ======= Income taxes paid 10,920 15,953 1,917 Interest paid (net of amount capitalized) 30,856 35,186 4,229 Non-cash transactions: Financing of lease arrangements 14,590 15,873 1,908 Purchase of a subsidiary by issue of convertible stock -- 28,288 3,400 -------- ======== =======
The accompanying notes form an integral part of these consolidated financial statements. F-22 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1995 (AMOUNTS IN THOUSANDS)
Common Preferred Contributed Retained Stock stock Surplus Reserves earnings Series A Series B Rmb Rmb Rmb Rmb Rmb Rmb Balance at December 31, 1993 (note 1) 99 44,533 -- 144,635 -- -- Reorganization expenses (note 21) -- -- -- 7,307 -- -- Net income -- -- -- -- -- 51,608 Appropriation to reserves (note 20) -- -- -- -- 13,011 (13,011) ------ ------ ------- ------ ------- Balance at December 31, 1994 99 44,533 -- 151,942 13,011 38,597 Now issue (note 1) -- -- 28,288 -- -- -- Net income -- -- -- -- -- 54,095 Appropriation to reserves -- -- -- -- 12,255 (12,255) (note 20) -- ------ ------ ------- ------ ------- Balance at 99 44,533 28,288 151,942 25,266 80,437 December 31, 1995 == ====== ====== ======= ====== =======
The accompanying notes form an integral part of these consolidated financial statements. F-23 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES Sunbase Asia, Inc. ("the Company") entered into a share exchange agreement ("Share Exchange Agreement") with Asean Capital Limited ("Asean Capital") on December 2, 1994. Pursuant to the agreement and certain subsequent changes thereto as agreed between the Company and Asean Capital, and further to a board resolution of the Company on March 31, 1995, the Company issued in effect 10,261,000 common stock, 36 shares of Series A convertible preferred stock and a US$5 million secured promissory note to Asean Capital in exchange for the entire issued share capital of China Bearing Holdings Limited ("China Bearing"). The Series A convertible preferred stock is convertible at the option of the holder at a conversion rate of 100,000 common stock per Series A share. As preferred shares, the shares carry 500,000 votes per share and are entitled to the same dividend as the common stock shareholders on the basis as if the preferred shares had been converted to common stock shares at the conversion rate as noted above. The total number of common stock outstanding subsequent to this arrangement was 11,700,063. For the purpose of these financial statements, the Share Exchange Agreement and all subsequent amendments thereto were deemed to be effected as of December 31, 1993. This transaction has been treated as a recapitalization of China Bearing with China Bearing as the acquirer (reverse acquisition). The historical financial statements prior to December 2, 1994 are those of China Bearing. China Bearing is a holding company which was establishing to acquire a 100% interest in China International Bearing (Holdings) Company Limited ("China International"), a company wholly-owned by Sunbase International (Holdings) Limited ("Sunbase International"), at a nominal consideration of HK$0.002 on March 8, 1994. China International was incorporated in Hong Kong on June 23, 1993 to act as the holding company of Harbin Xinhengli Development Co. Ltd. ("Harbin Xinhengli") and Harbin Sunbase Development Co. Ltd. ("Harbin Sunbase"), Sino-foreign equity joint ventures in the People's Republic of China ("China" or the "PRC") established on September 18, 1993 and January 28, 1993, respectively, and to acquire in aggregate a 51.6% interest in Harbin Bearing Company Limited ("Harbin Bearing"). China International has a 99.9% equity interest in Harbin Xinhengli and a 99.0% equity interest in Harbin Sunbase, which hold 41.6% and 10.0%, of the equity interests of Harbin Bearing. The aggregate cash consideration contributed by Harbin Xinhengli and Harbin Sunbase to Harbin Bearing was Rmb 232.1 million for the acquisitions of the 51.6% interest in Harbin Bearing. Harbin Bearing is the successor to the manufacturing operations of Harbin Bearing General Factory (the "Predecessor" or "Bearing Factory"), a Chinese state-owned enterprise established in 1950. In connection with the restructuring of the Predecessor, Harbin Bearing was established on December 28, 1993 as a joint stock limited company under the Trial Measures on Share Companies and the Opinion on the Standardization of Joint Stock Companies promulgated by the State Council of China. Pursuant to an agreement between the Predecessor and Harbin Bearing, the ball bearing manufacturing and sales businesses, together with certain assets and liabilities, were transferred to Harbin Bearing. Certain other assets and liabilities relating to the bearing business were transferred F-24 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued) to Harbin Precision Machinery Manufacturing Company ("Harbin Precision"), and certain ancillary operations, businesses, facilities used to provide community services to employees of the factory and their families in Harbin were transferred to Harbin Bearing Holdings Company ("Harbin Holdings"). However, certain assets such as accounts receivable and construction in progress and certain liabilities such as the long term bank loan were not transferred to Harbin Bearing. Harbin Bearing will account for all new sales and subsequent collections effective from January 1, 1994 and assist the Predecessor in the collection of its outstanding accounts receivable prior to the reorganization. This service will be provided at no cost. Harbin Holdings is a separately established enterprise controlled by and under the administration of the Harbin Municipal Government and the industrial oversight of the Machine Bureau. Harbin Precision is wholly-owned by Harbin Holdings. Harbin Holdings received 33.3% of the new shares of Harbin Bearing in consideration for the net assets transferred thereto from the Predecessor. Details of the equity capital of Harbin Bearing are as follows:
Contribution to Registered Ownership Capital Percentage Rmb' million Harbin Xinhengli and Harbin Sunbase 232.1 51.6% Harbin Holdings (in the form of assets) 150.0 33.3% Current employees of Harbin Bearing and other (in cash) 67.9 15.1% ----- ------ 450.0 100.0% ===== ======
The assets acquired and the liabilities assumed by Harbin Bearing from the Predecessor were revalued on December 31, 1993 at the then respective fair values which included certain fixed assets revalued by the State Administration of Assets Bureau. The book value of the net assets so transferred was Rmb 150,000. After giving effect to the principal adjustments in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") as explained in Note 2 below, the fair value of the net assets transferred to Harbin Bearing from the Predecessor was Rmb 173,118. The total fair value of the net assets of Harbin Bearing after taking into account the cash received from the other investors totalled Rmb 473,118. China International completed its acquisition of an effective interest of 51.4% interest in Harbin Bearing through Harbin Xinhengli and Harbin Sunbase on December 28, 1993. Harbin Holdings together with some individual investors retained 48.4% and the remaining 0.2% which was held by the joint venture partners of Harbin Xinhengli and Harbin Sunbase. The following unaudited pro forma information for the years ended December 31, 1994 and 1993 has been prepared on the basis as if the acquisition of China Bearing and Harbin Bearing had occurred on January 1, 1993. F-25 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued) The pro forma results for the year ended December 31, 1994 presented below are prepared after giving effect to the following pro forma adjustments: (a) Interest expense in respect of the US$5 million secured promissory note issued pursuant to the restructuring as detailed above; and (b) reversal of the reorganization expenses which had already been reflected in the pro forma results for the year ended December 31, 1993 on the basis as if the reorganization was completed on January 1, 1993. The pro forma results of operations have been prepared for comparative purposes only and do not purport to indicate the results of operations which would actually have occurred had the acquisitions been in effect on January 1, 1993 or which may occur in the future.
Year ended December 31, 1993 1994 Rmb Rmb (unaudited) Net sales 687,064 719,842 Net income 41,310 55,563 Earnings per common stock share 2.70 3.63
On December 29, 1995, the Company entered into a reorganization agreement ("Reorganization Agreement") with Southwest Products Company ("Southwest") and the shareholders of Southwest for the acquisition of 100% of the issued common stock of Southwest. Pursuant to the Reorganization Agreement, a wholly-owned subsidiary of the Company was incorporated for the purpose of merging with Southwest pursuant to a separate merger agreement. In connection with the merger, the Company issued an aggregate of 6,800 shares of Series B convertible preferred stock ("Series B stock") to the then shareholders of Southwest or their designates. At the option of the Series B stockholders, the stock may be redeemed at US$500 per Series B share by the Company from the proceeds of the next permanent equity offering, the net proceeds of which will be designated for such redemption. Any shares not so redeemed will automatically be converted into common stock shares at the rate of 100 common stock shares per Series B stock. If the aforesaid public offering or the redemption are not affected within two years from date of issue of the Series B stock, the stock will automatically be converted into common stock at the rate of 100 common stock shares per Series B stock. As preferred shares, the shares carry 100 votes per share and are entitled to the same dividend as the common shareholders on the basis as if the preferred shares had been converted to common stock shares at the conversion rate as noted above. This transaction has been treated as a business combination and is accounted for under the purchase method of accounting. However, since the acquisition was consummated on December 31, 1995, the results of Southwest for the year then ended have not been consolidated into the Company but will accrue to the Company from January 1, 1996. F-26 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued) Southwest is a manufacturer of spherical bearings which supplies its products to the aerospace, commercial aviation and other industries around the world. Its major customers are in the United States of America. Southwest also has an interest in a Shanghai Joint Venture. As a result of a lack of information available with respect to the financial condition of the Shanghai Joint Venture, management of the Company was unable to determine the fair value of the 28% equity interest in the Shanghai Joint Venture owned by Southwest. Accordingly, the Company did not allocate any portion of the Southwest purchase consideration to the investment in the Shanghai Joint Venture at December 31, 1995. The Company is attempting to obtain additional information, and to the extent that such additional information is obtained during 1996, the Company may subsequently determine to allocate a portion of the purchase consideration to the investment in the Shanghai Joint Venture, with a commensurate reduction to goodwill. Such allocation, if it occurs, would not have a material effect on the consolidated results of operations or financial position of the Company. The following unaudited pro forma information for the years ended December 31, 1995 and 1994 are prepared on the basis as if the acquisition of Southwest and China Bearing by the Company had occurred on January 1, 1994. The unaudited pro forma information for the year ended December 31, 1994 is presented after taking into account the effect of the following pro forma adjustments in respect of the acquisition of China Bearing by the Company: (a) interest expense in respect of the US$5 million secured promissory note issued pursuant to the restructuring of the Company for the acquisition of China Bearing; (b) reversal of the reorganization expenses incurred for the aforesaid restructuring as if the reorganization were completed on January 1, 1993; and (c) amortization of goodwill and the effect of the increment of fair values on assets arising from acquisition of Southwest. The following pro forma financial information has been prepared for comparative purposes only and do not purport to indicate the results of operations which would actually have occurred had the acquisitions and the reorganization been in effect on January 1, 1994 or which may occur in the future.
Year ended December 31, 1994 1995 Rmb Rmb (unaudited) Net sales 755,234 708,658 Net income 67,463 58,003 Pro forma earnings per common share 4.22 3.63
2. BASIS OF PRESENTATION The Company's first operating subsidiary, Harbin Bearing, was formed on December 28, 1993 and commenced operations on January 1, 1994. F-27 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 2. BASIS OF PRESENTATION (continued) Accordingly, no consolidated statements of income and cash flows were prepared for the year ended December 31, 1993. The consolidated financial statements incorporate the results of operations of the Company and its subsidiaries (hereinafter referred to as the "Group") on the basis that the Group with all its present components had been so constituted during the two-year period ended December 31, 1995, except for Southwest, the acquisition of which was completed on December 31, 1995. These financial statements include the fair value of the net assets of Southwest at December 31, 1995. All material intra group transactions and balances have been eliminated on consolidation. The consolidated financial statements were prepared in accordance with U.S. GAAP. This basis of accounting for the purpose of these financial statements differs from that used in the statutory and management accounts of Harbin Bearing which were prepared in accordance with the accounting principles and the relevant financial regulations applicable to joint stock enterprises as established by the Ministry of Finance of China ("PRC GAAP"). The principal adjustments made to conform the statutory accounts of Harbin Bearing to U.S. GAAP included the following: . Revenue recognition; . Provision for doubtful accounts receivable; . Provision for inventory obsolescence; . Valuation of inventories; . Accounting of assets financed under capital leases as assets of the Company together with the corresponding liabilities; and . Deferred taxation. The financial information has been prepared in Renminbi (Rmb), the national currency of China. Solely for the convenience of the reader, the financial statements have been translated into United States dollars prevailing at the People's Bank of China on June 30, 1996 which was US$1.00 = Rmb8.32. No representation is made that the Renminbi amounts could have been, or could be, converted into United States dollars at that rate or any other certain rate on December 31, 1995. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Cash and bank balances Cash and bank balances include cash on hand and demand deposits with banks with an original maturity of three months or less. None of the Group's cash is restricted as to withdrawal or use. (b) Inventories Inventories are stated at the lower of cost, on a first-in, first- out basis, or market. Work-in-progress and finished goods include direct F-28 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) materials, direct labor and an attributable proportion of production overheads. (c) Fixed assets and depreciation Property, machinery and equipment are stated at cost less accumulated depreciation. Depreciation of property, machinery and equipment is computed using the straight-line method over the assets' estimated useful lives. The estimated useful lives of property, machinery and equipment are as follows: Buildings 20 years Machinery and equipment 8-10 years Motor vehicles 3 years Furniture, fixtures and office equipment 5 years (d) Construction in progress Construction in progress represents factory buildings, plant and machinery and other fixed assets under construction and is stated at cost. Cost comprises direct costs of construction as well as interest charges on borrowed funds. Capitalization of interest charges ceases when an asset is ready for its intended use. Construction in progress is transferred to fixed assets upon commissioning when it is capable of producing saleable output on a commercial basis, notwithstanding any delays in the issue of the relevant commissioning certificates by the appropriate PRC authorities. No depreciation is provided on construction in progress until the asset is completed and put into productive use. (e) Income taxes The income taxes reflect the accounting standards in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". (f) Foreign currency translation Foreign currency transactions are translated into Renminbi at the applicable floating rates of exchange quoted by the People's Bank of China, prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into Renminbi using the applicable exchange rates prevailing at the balance sheet date. The Company's share capital is denominated in United States Dollars and the reporting currency is Renminbi. For financial reporting purposes the United States Dollars share capital amounts have been translated into Renminbi at the applicable rates prevailing on the dates of receipt. (g) Capital leases Leases that transfer substantially all the rewards and risks of ownership of assets to the Group, other than legal title, are accounted for as capital leases. At the inception of a capital lease, the cost of the leased asset is capitalized at the present value of the minimum lease payments and F-29 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) recorded together with the obligation, excluding the interest element, to reflect the purchase and financing. Assets held under capital leases are included in fixed assets and depreciated over the estimated useful lives of the assets. The finance costs of such leases are charged to the profit and loss account so as to provide a constant periodic rate over the lease terms. Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Rentals applicable to such operating leases are charged to the profit and loss account on the straight-line basis over the lease terms. (h) Goodwill Goodwill represents the excess of the consideration paid for the purchase of a subsidiary over the fair value of the net assets of businesses acquired and are being amortized over a 15-year period. The carrying value of goodwill is assessed on an ongoing basis. The measurement of possible impairment is based primarily on the ability to recover the balance of the goodwill from expected future operating cash flows on an undiscounted basis of the entity acquired. If the review indicates goodwill may be impaired, the carrying value of the goodwill is reduced. (i) Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 4. INCOME TAXES Sunbase Asia, Inc. was incorporated in the State of Nevada in the United States of America. The Company is subject to U.S. federal tax on its income. Nevada does not impose any tax on corporations organized under its laws. Southwest was incorporated in the State of California in the United States of America and is subject to U.S. federal tax on its income. China Bearing was incorporated under the laws of Bermuda and, under current Bermudan law, is not subject to tax on income or on capital gains. China Bearing has received an undertaking from the Ministry of Finance of Bermuda pursuant to the provisions of the Exempted Undertakings Tax Protection Act, 1966, as amended, that in the event that Bermuda enacts any legislation imposing tax computed on profits or income, including any dividend or capital gains withholding tax, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax shall not be applicable to China Bearing or to any of its operations or the shares, debentures or other obligations of China Bearing, until March 28, 2016. This undertaking is not to be construed so as to (i) prevent the application of any such tax or duty to such persons as are ordinarily resident in Bermuda; or (ii) prevent the application of any tax payable in accordance with the provision of the Land Tax Act, 1967 or otherwise payable in relation to any land leased to China Bearing in Bermuda. China International was incorporated under the Hong Kong Companies Ordinance and under the current Hong Kong tax law, any income arising in and F-30 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 4. INCOME TAXES (continued) deriving from businesses carried on in Hong Kong will be subject to tax. No tax will be charged on dividends received and capital gains earned. Harbin Xinhengli and Harbin Sunbase are subject to Chinese income taxes at the applicable tax rates of 30% for Sino-foreign equity joint venture enterprises. Dividend income received is exempt from any Chinese income taxes. The applicable tax rate for joint stock limited enterprises in China is 33% which is levied on the taxable income as reported in the statutory accounts adjusted for taxation in accordance with the relevant income tax laws applicable to joint stock limited enterprises. Harbin Bearing, being a joint stock limited company registered in the Special Economic and Technological Development Zone in the Municipal City of Harbin, will normally be subject to a maximum income tax rate of 20%. Pursuant to the same income tax basis applicable to the Special Economic and Technological Development Zone, Harbin Bearing has been designated a high technology production enterprise and is entitled to a special income tax rate of 15%. The Company has undertaken not to require China Bearing to make any distribution of dividends and the directors of Harbin Xinhengli and Harbin Sunbase have decided not to distribute any dividend income related to income earned for the year received from Harbin Bearing outside of China. As a result, deferred income taxes have not been accrued in the financial statements in respect of income distributions. The determination of the amount of the unrecognized deferred tax liability for temporary differences related to such investments in foreign subsidiaries and foreign corporate joint ventures is not practicable. The reconciliation of the effective income tax rates based on income before income taxes stated in the consolidated statement of income to the statutory income tax rate in China applicable to the Company's only operating subsidiary is as follows: Year ended December 31, 1994 1995 Effect of - Statutory tax rate 15.0% 15.0% Permanent difference 2.0% 0.8% ---- ---- 17.0% 15.8% ===== ===== The determination of the amount of the unrecognized deferred tax liability for temporary differences related to investments in foreign subsidiaries and corporate joint ventures is not practicable. 5. ACCOUNTS RECEIVABLE Accounts receivable comprise:
December 31, 1994 1995 Rmb Rmb Accounts receivable - trade 272,484 278,113 Less: Allowance for doubtful debts (11,300) (13,927) ------- --------
F-31 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 5. ACCOUNTS RECEIVABLE (continued) Accounts receivable, net 261,184 264,186 ======== ======= Movement of allowance for doubtful debts Balance as at January 1, - 11,300 Provided during the year 11,300 2,627 -------- ------- Balance as at December 31, 11,300 13,927 ======== =======
The accounts receivable of the Predecessor were not transferred to Harbin Bearing as part of the reorganization on formation of Harbin Bearing on December 28, 1993. However, Harbin Bearing will account for new sales and subsequent collections effective from January 1, 1994 and assist the Predecessor in the collection of its accounts receivable prior to the reorganization. 6. INVENTORIES
Inventories comprise: December 31, 1994 1995 Rmb Rmb Raw materials 122,684 105,132 Work-in-progress 87,839 104,697 Finished goods 169,948 271,477 -------- -------- 380,471 481,306 Less: Allowance for obsolescence (19,016) (4,309) -------- -------- Inventories, net 361,455 476,997 ======== ======== Movement of allowance for obsolescence Balance as at January 1, 23,857 19,016 Provided during the year - 1,098 Obsolete inventories sold during the year (4,841) (15,805) -------- -------- Balance as at December 31, 19,016 4,309 ======== ========
7. FIXED ASSETS
December 31, 1994 1995 Rmb Rmb Buildings 71,644 68,725 Machinery and equipment 283,748 402,390 Motor vehicles 16,970 16,712 Furniture fixtures and office equipment 4,240 5,110 Construction in progress 149,255 141,757 -------- -------- 525,857 634,694 Less: Accumulated depreciation (44,562) (80,608) -------- -------- 481,295 554,086 ======== ========
Total amount of interest capitalized during the year and included in the above fixed assets are Rmb 10,411 (1994: Rmb 1,334). F-32 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 7. FIXED ASSETS (continued) The Group's buildings are located in PRC and the land on which the Group's buildings are situated is State-owned. The gross amounts of assets recorded under capital leases and the accumulated depreciation thereon are analyzed as follows:
1994 1995 Rmb Rmb Machinery and equipment 150,337 150,337 Motor vehicles 4,181 4,181 Furniture, fixtures and office equipment 927 927 -------- -------- 155,445 155,445 Less: Accumulated depreciation (20,371) (40,742) -------- -------- 135,074 114,703 ======== ========
8. DEFERRED ASSET
December 31, 1994 1995 Rmb Rmb Deferred asset comprises: Deferred valued added tax ("VAT") receivable 38,860 20,482 Less: Present value discount (3,131) (2,348) -------- -------- 35,729 18,134 ======== ========
This represents the deemed VAT receivable arising from the introduction of the new PRC VAT system on January 1, 1994. This asset was calculated and accounted for in accordance with governmental directions by applying the 14% VAT rate to certain inventory values as at December 31, 1993, with the effect of reducing the value of certain opening inventory of Harbin Bearing as at January 1, 1994 by the same amount. A detailed directive regarding the utilization of the deferred VAT receivable was issued in May 1995 by the Ministry of Finance and the State General Tax Bureau pursuant to which the Group will be able to offset the balance of Rmb38,860 against its VAT payable within a period of five years starting from January 1, 1995. Accordingly, a discount has been applied using Harbin Bearing's average rate of borrowing over the estimated period of recovery. 9. LONG TERM INVESTMENTS Long term investments are stated at cost and represent investments in treasury bonds issued by the Chinese Government. The investments bear interest ranging from 3% to 8% per annum and are redeemable on maturity or otherwise prior thereto as advised by the government. The long term investments were pledged as one element of the security to the Group's bankers to secure a short term bank loan of Rmb 418.4 million which was utilized to the extent of Rmb 358 million. Other collateral includes the Group's fixed assets of Rmb 137,782 and a third party guarantee from Harbin Holdings. F-33 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 10. GOODWILL The goodwill arises as a result of the acquisition of Southwest on December 31, 1995. Nor amortization was provided during the year as the acquisition was completed on December 31, 1995. 11. SHORT TERM BANK LOANS The short term bank loans bear interest at a weighted average rate of 14% and 11% per annum for the years ended December 31, 1995 and 1994, respectively, and are repayable within one year. 12. NOTES PAYABLE Included in the total amount was an amount of Rmb 11,627 which represents a long term note payable to a bank. The Group is in the process of refinancing the note and accordingly the amount has been classified under current liabilities. 13. OBLIGATIONS AND COMMITMENTS (a) Obligations under capital leases Harbin Bearing leases machinery and equipment, furniture, fixtures and office equipment and motor vehicles from Harbin Precision, a company wholly-owned by Harbin Holdings, a separately established enterprise under the supervision and control of the Machine Bureau, which received 33.3% of the new shares of Harbin Bearing. These leases are accounted for as capital leases which have lease terms ranging from five years to eight years. The lease obligations for the machinery and equipment, furniture, fixtures and office equipment and motor vehicles have an implicit annual interest rate at 8.46%. The scheduled future minimum lease payments as of December 31, 1995 were as follows:
December 31, 1995 Rmb Year ending December 31, 1996 27,183 1997 27,183 1998 27,183 1999 25,927 2000 25,927 2001 25,927 -------- Total minimum lease payments 159,330 Less: Amount representing interest (34,348) -------- Present value of minimum lease payments 124,982 Less: Current portion (17,269) -------- 107,713 ========
F-34 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 13. OBLIGATIONS AND COMMITMENTS (continued) The lease rentals incurred during the year amounted to Rmb27,183 (1994: Rmb27,183), out of which Rmb 11,310 (1994: Rmb12,593) was the interest portion. (b) Other commitments As of December 31, 1995, the Group had outstanding commitments for capital expenditure of Rmb 46,027 (US$5,532) (1994: Rmb 91,500 (US$10,919)) and outstanding operating lease commitments expiring in 1998 in respect of buildings of approximately Rmb 11,254 (US$ 1,353) (1994: Rmb 15,004 (US$1,790)). 14. OTHER LOANS The loans are due to the employees of Harbin Bearing, are unsecured and bear interest at 15% per annum. The loans, together with the accumulated interest, were repaid in full subsequent to December 31, 1995. 15. SECURED PROMISSORY NOTE The secured promissory note (the "Note") was issued to Asean Capital Limited in connection with the Share Exchange Agreement as detailed in Note 1 and is secured by a continuing security interest in and to all of the Company's title and interest in the outstanding capital stock of China Bearing. The carrying value of the net assets of China Bearing represents all the consolidated net assets of the Company before taking into account the carrying value of the Note, the consolidated net assets of Southwest of Rmb 16,144 and the goodwill arising on acquisition of Southwest of Rmb 12,144. The Note is denominated in United States dollars, is repayable in full in United States dollars on December 31, 1996 and bears interest at 8% per annum. 16. LONG TERM BANK LOANS The long term bank loans are principally loans borrowed to finance the construction in progress. The loans bear interest ranging from 3.7% to 9.25% per annum and are not repayable within one year. During the year, total interest expenses incurred in respect of these loans amounted to Rmb 10,411 (1994: Rmb 1,334) and were capitalized as part of the cost of construction in progress. 17. NUMBER OF SHARES/EARNINGS PER SHARE As detailed in Note 1 to the financial statements, the Company issued new shares in consideration for the acquisition of its interest in Southwest. The earnings per common share for the years ended December 31, 1994 and 1995, which excludes the results of Southwest, is calculated using the common stock and common stock equivalents, after assuming that all convertible preferred stocks except those issued in connection with the acquisition of Southwest, have been converted into common stock, as if these shares had been outstanding throughout all periods presented. The pro forma earnings per common share for the years ended December 31, 1994 and 1995, F-35 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 17. NUMBER OF SHARES/EARNINGS PER SHARE (continued) which includes the results of Southwest, as stated in Note 1, is calculated by including all the convertible preferred stocks. 18. FOREIGN CURRENCY EXCHANGE The Chinese government imposes control over its foreign currency. Renminbi, the official currency in China, is not freely convertible. Prior to December 31, 1993, all foreign exchange transactions involving Renminbi had to be undertaken either through the Bank of China or other institutions authorized to buy and sell foreign exchange or at a swap center. The exchange rates used for transactions through the Bank of China and other authorized banks were set by the government from time to time whereas the exchange rates available at a swap center were determined largely by supply and demand. On January 1, 1994, the People's Bank of China introduced a managed floating exchange rate system based on the market supply and demand and proposed to establish a unified foreign exchange inter-bank market amongst designated banks. In place of the official rate and the swap centre rate, the People's Bank of China publishes a daily exchange rate for Renminbi based on the previous day's dealings in the inter-bank market. It is expected that swap centres will be phased out in due course. However, the unification of exchange rates does not imply full convertibility of Renminbi into United States dollars or other foreign currencies. Payment for imported materials and remittance of earnings outside of China were subject to the availability of foreign currency which is dependent on the foreign currency denominated earnings of the entity or allocated to the company by the government at official exchange rates or otherwise arranged through a swap center with government approval. Approval for exchange at the exchange centre is granted to enterprises in China for valid reasons such as purchases of imported goods and remittance of earnings. While conversion of Renminbi into United States dollars or other foreign currencies can generally be effected at the exchange centre, there is no guarantee that it can be effected at all times. 19. CONTRIBUTED SURPLUS As part of the reorganization of Sunbase Asia, Inc. on December 2, 1994 as detailed in Note 1 above, the entire share capital and contributed surplus of China Bearing were acquired by Sunbase Asia, Inc. The consideration for the shares in China Bearing on the basis that the reorganization took place on December 31, 1993 was as follows:
Rmb U.S.$ Common stock, paid up capital 99 12 Convertible preferred stock 44,533 5,314 Promissory note 42,250 5,042 Contributed surplus 144,635 17,260 ------- ------ Net asset value of China Bearing at December 31, 1993 231,517 27,628 ======= ======
The net assets of China Bearing were allocated first to the legal paid up capital at the par value of US$0.001 per share of 11,700,063 shares. The amount of net assets allocated to the convertible preferred stock was F-36 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 19. CONTRIBUTED SURPLUS (continued) based on the total equivalent common shares attributable to the preferred stock. The remaining net assets were allocated to the contributed surplus. As more fully explained in note 21, reorganization expenses of Rmb 7,307 were credited to contributed surplus pursuant to the Share Exchange Agreement in 1994. 20. DISTRIBUTION OF PROFIT AND APPROPRIATION TO RESERVES According to the relevant laws and regulations for joint stock limited enterprises and Harbin Bearing's articles of association, distribution of profit by Harbin Bearing is based on the profits as reported in the statutory accounts after the following allocations and appropriations: (a) making up any accumulated losses; (b) transferring 10% of its profit after taxation measured under PRC accounting standards to the statutory surplus reserve; (c) transferring 5% to 10% of its profit after taxation measured under PRC accounting standards to a collective welfare fund; and (d) transferring a certain amount of its profit after taxation measured under PRC accounting standards to a discretionary surplus reserve. The following appropriations were made and are further described below:
Year ended December 31, 1994 1995 Rmb Rmb Statutory surplus reserve 8,674 8,170 Collective welfare fund 4,337 4,085 ------ ------ 13,011 12,255 ====== ======
The collective welfare fund must be used for capital expenditure on staff welfare facilities and cannot be used to finance staff welfare expenses. Such facilities are for the staff and are owned by Harbin Bearing. The distributable retained earnings of the Group as of December 31, 1995, after taking into account of the above restrictions and appropriations and based on the Chinese statutory accounts of Harbin Bearing, amounted to Rmb 73,591. 21. REORGANIZATION EXPENSES The amount represents expenses related to the cost of the minority-owned 1,439,063 common stock (the "Shares") valued at the pro- rated net asset value of the Company on December 2, 1994, which approximated the fair value, pursuant to the Share Exchange Agreement detailed in Note 1, after accounting for relevant discounts relating to minority interest and the trading F-37 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 21. REORGANIZATION EXPENSES (continued) restrictions of the Shares. The value assigned to these shares is considered a cost of the restructuring of the Company and is charged to income and credited to contributed surplus. The proforma earnings per common stock for the year ended December 31, 1994 after excluding such non- recurring reorganization expenses is Rmb 3.85. 22. NOTE TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS Purchase of a subsidiary
December 31, 1995 Rmb Net assets acquired: Cash and bank balance 18 Accounts receivable 1,690 Inventories 7,718 Other receivables 487 Fixed assets 29,611 Accounts payable (6,188) Notes payable (11,627) Accrued liabilities (4,816) -------- 16,893 Goodwill 12,144 -------- 29,037 ======== Satisfied by: Shares issued 28,288 Current account 749 -------- 29,037 ========
F-38 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 23. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS During the year, the Group had transactions with several related parties. The major related party transactions are summarized as follows and described in further detail below:
Year ended December 31, Nature of transactions Notes 1994 1995 Rmb Rmb Revenue: Sales of products (a) 63,994 103,111 Leases of equipment Capital payments (b) 14,590 15,873 Expenses: Leases of equipment Finance charges (b) 12,593 11,310 Leases of buildings (c) 3,751 3,751 Land use rights (d) 2,508 2,508 Management and administrative services (e) 17,416 19,126 Trademark royalty fees (f) 3,599 3,362 Pension and retirement plan expenses (g) 16,769 18,394
(a) Significant sales to related companies Harbin Bearing made sales of Rmb 42,855 (1994: Rmb 46,578) and Rmb 40,257 (1994: Rmb 7,832) to Harbin Bearing Import & Export Company ("HBIE") and Xin Dadi Mechanical and Electrical Equipment Company ("Xin Dadi"), related companies owned by the Harbin Municipal Government, respectively, during the current year. As at December 31, 1995, the amounts of the trade receivables from HBIE and Xin Dadi included under due from related companies are Rmb 65,520 (1994: Rmb 54,496) and Rmb Nil (1994: Rmb 9,164), respectively. Amount due to Xin Dadi included in due to related companies as at December 31, 1995 is Rmb 105,171, representing advance payment received in respect of future sales. (b) Leases of equipment Harbin Bearing has entered into an eight year lease agreement with Harbin Precision to lease machinery and equipment and a five year lease agreement with Harbin Precision to lease motor vehicles, furniture, fixtures and equipment related to the business at an initial annual rental of Rmb 25,927 (US$3,116) and Rmb 1,256 (US$151), respectively, from January 1, 1994 to December 31, 2001 and from January 1, 1994 to December 31, 1998, respectively. F-39 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 23. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued) (c) Leases of Buildings Harbin Bearing has entered into a five year lease agreement with Harbin Precision to lease buildings related to the operation of Harbin Bearing with effect from January 1, 1994 at an initial annual rental of Rmb 3,751 (US$451). The initial lease will expire on December 31, 1998 and Harbin Bearing has been granted an option to extend the lease at market rent for another five years. This lease is treated as an operating lease. (d) Land use rights The municipal government has allocated to Harbin Holdings the right to use the parcels of land on which Harbin Bearing's operations are conducted. Harbin Holdings has agreed to lease the land on which the main factory is situated to Harbin Bearing in return for an initial annual rental of Rmb 2,508 (US$301) effective from January 1, 1994 subject to future adjustments in accordance with changes in government fees. (e) Management and administrative services agreements In 1994, Harbin Bearing and Harbin Holdings entered into a management and administrative services agreement. The agreement provides for the payment by Harbin Bearing of an annual fee of Rmb 18,876 (US$2,269) (1994: Rmb 17,160) in connection with services for medical, heating, education and other staff-related benefits provided by Harbin Holdings for a term of three years. The fees are subject to an annual 10% inflation adjustment. The costs of these services were previously fully paid by the Predecessor and have now been superseded by the above agreement. Agreements were also entered into by Harbin Bearing with Harbin Xinhengli and Harbin Sunbase, respectively, in respect of general management services to be provided by the joint ventures from January 1, 1994 to December 31, 1995 at an annual fee of Rmb 150 (US$18) payable to each of the joint ventures. An agreement was entered into between China Bearing and Sunbase International, a majority shareholder of the Company, in respect of general management and administrative services at an annual fee of Rmb 250 (US$30). In addition, China Bearing is to reimburse Sunbase International for administrative services rendered on behalf of China Bearing at cost. No additional administrative services were rendered by Sunbase International in the current year. (f) Trademark license Pursuant to a trademark license agreement, Harbin Holdings has granted Harbin Bearing the right to use the "HRB" trademark. Harbin Bearing is required to pay a royalty cost calculated on an annual basis at 0.5% of the net sales of Harbin Bearing effective from January 1, 1994 to December 31, 2003 and at 0.3% of the net sales from January 1, 2004 to December 31, 2013. The trademark license can be transferred to Harbin Bearing thereafter upon mutual F-40 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 23. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued) agreement between the two parties subject to the relevant laws in China. The trademark royalty paid by Harbin Bearing during the current year amounted to Rmb 3,362 (1994: Rmb 3,599). (g) Pension and retirement plan Pursuant to an agreement on December 31, 1993, Harbin Bearing will make an annual payment to Harbin Holdings as its contribution to the pension scheme for all staff retiring after December 28, 1993. Such annual payment should be made based on the standard contribution as required by government regulations calculated at 20% of salary. Harbin Holdings is then responsible for the entire pension payment to staff who have retired after December 28, 1993. Harbin Holdings has undertaken to bear all pension payments to staff who have retired before December 28, 1993. This agreement will only be effective on the condition that no compulsory rules and regulations are implemented in the future such that Harbin Bearing has to be directly responsible for any pension payments. The contribution to the pension scheme made by Harbin Bearing in the current year amounted to Rmb 18,394 (1994: Rmb 16,769). Management expects that the arrangements detailed in (b), (c) and (d) above will be renewed after the initial contract term. As described further in Note 1, the Company, in consideration for the purchase of its interest in China Bearing, exchanged common shares, preferred shares and assumed vendor financing from Asean Capital Limited. The vendor financing provided from Asean Capital is in the form of US$5,000 secured promissory notes secured on the shares of China Bearing (see Note 15). A significant portion of the business undertaken by Harbin Bearing during the year has been effected with State-owned enterprises in China and on such terms as determined by the relevant Chinese authorities. 24. FINANCIAL INSTRUMENTS The carrying amount of the Company's cash and bank balances approximate their fair value because of the short maturity of those instruments. The carrying amounts of the Company's borrowings approximate their fair value based on the borrowing rates currently available for borrowings with similar terms and average maturities. 25. SEGMENT DATA The Company operates mainly in the ball bearing industry in China, consequently, no segment reporting disclosures are required. 26. CONCENTRATION OF RISK Concentration of credit risk: F-41 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 26. CONCENTRATION OF RISK (continued) Financial instruments that potentially subject the Group to significant concentration of credit risk consist principally of cash deposits, trade receivables and amounts due from related companies. (a) Cash deposits The Group places its cash deposits with various PRC State-owned financial institutions. (b) Trade receivables The Company manufactures and sells general and precision ball bearings in diversified industries in China. The Company has long standing relationships with most of its customers and generally does not require collateral. There is no concentration of receivables in any one specific industry except for the outstanding receivable balance with a distributor, HBIE, which has a receivable balance of Rmb 65,520 as at December 31, 1995. Current vulnerability due to certain concentrations: The Group's operating assets and primary source of income and cash flow is its interest in its subsidiary in the PRC. The value of the Group's interest in this subsidiary may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for the past 17 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC's political, economic and social life. There is also no guarantee that the PRC government's pursuit of economic reforms will be consistent or effective. 27. SUBSEQUENT EVENT (a) On January 2, 1996, the Company's board of directors adopted a stock option plan (the "Plan"). The Plan permits the grant of options to purchase an aggregate of up to 2,500,000 shares of the common stock of the Company. All incentive stock options will have option exercise prices per option share not less than the fair market value of a share of the common stock on the date the option is granted, except that in the case of incentive stock options granted to any person possessing more than 10% of the total combined voting power of all classes of stock of the Company or any affiliate of the Company, the price shall not be less than 110% of such fair market value. The Plan terminates on the earlier of that date on which no additional shares of common stock are available for issuance under the Plan or January 2, 2006. (b) Unaudited On June 10, 1996, the Company sold 1,000,000 shares of common stock at US $5.00 per share, which generated net proceeds of US$ 4,265 (RMB 35,480). The Company has agreed to promptly file a registration statement with the U.S. Securities and Exchange Commission to register the shares of common stock. F-42 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, unless otherwise stated and except number of shares and per share data) 27. SUBSEQUENT EVENT (continued) (c) Unaudited On August 23, 1996, China Bearing issued an aggregate of US$11,500,000 Convertible Debentures to various institutional investors. The investors have the right to convert at any time the whole or any part of the principal amount of the Convertible Debentures into shares of the Common Stock of the Company at the conversion price agreed on the subscription agreement dated August 2, 1996. The Convertible Debentures bear interest at the rate of the higher of (1) 5% per annum (net of withholding tax) and (2) such percentage of the dividend yield calculated by reference to dividing the annual dividend declared per share of Common Stock of the Company by the conversion price. The Convertible Debentures are due and payable in August, 1999 and the obligations of China Bearing under the Convertible Debentures are guaranteed by the other members of the Sunbase Group. F-43 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) DECEMBER 31, 1995 AND JUNE 30, 1996 (Amounts in thousands, except number of shares and per share data)
December 31, 1995 June 30, 1996 ------------------- ----------------- Note RMB US$ RMB US$ ---- --- --- --- --- ASSETS Current assets Cash and bank balances 30,944 3,719 44,301 5,325 Accounts receivable, net 264,186 31,753 511,804 61,515 Notes receivable 25,756 3,096 28,701 3,450 Inventories, net 4 476,997 57,331 443,213 53,271 Prepaid VAT 40,429 4,859 - - Other receivables 57,209 6,876 71,497 8,593 Due from related companies 137,079 16,476 89,470 10,754 --------- ------- --------- -------- Total current assets 1,032,600 124,110 1,188,986 142,908 Fixed assets 554,086 66,597 575,969 69,227 Deferred asset 18,134 2,180 16,704 2,008 Long term investments 1,438 173 1,012 122 Goodwill 12,144 1,460 12,130 1,458 --------- ------- --------- -------- Total assets 1,618,402 194,520 1,794,801 215,723 ========= ======= ========= ========
(Continued) F-44 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (continued) DECEMBER 31, 1995 AND JUNE 30, 1996 (Amounts in thousands, except number of shares and per share data)
December 31, 1995 June 30, 1996 ------------------- -------------------- Notes RMB US $RMB US$ ----- --- -- ---- --- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short term bank loans 276,813 33,271 393,569 47,304 Accounts payable 116,205 13,967 156,112 18,764 Notes payable 15,627 1,878 18,597 2,235 Accrued liabilities and other payables 90,108 10,831 74,348 8,936 Short term obligations under capital leases 17,269 2,075 18,013 2,165 Other loans 33,810 4,064 - - Secured promissory note 5 41,600 5,000 41,600 5,000 Income tax payable 5,874 706 22,577 2,714 Tax other than income - - 2,793 336 Due to related companies 111,654 13,420 115,150 13,840 Due to shareholders 17,352 2,086 14,498 1,743 --------- ------- ---------- ------- Total current liabilities 726,312 87,298 857,257 103,037 Long term bank loans 110,670 13,302 57,270 6,884 Long term obligations under capital leases 107,713 12,946 98,516 11,841 Minority interests 343,142 41,243 382,831 46,013 --------- ------- ---------- ------- 1,287,837 154,789 1,395,874 167,775 --------- ------- ---------- ------- Shareholders' equity: Common Stock, par value US$0.001 each, 50,000,000 shares authorized; 12,700,104 shares (1995 - 11,700,104 shares) issued, and fully paid up 6 99 12 107 13 Preferred Stock, par value US$0.001 each, 25,000,000 shares authorized; Convertible Preferred Stock - Series A; 36 shares issued and outstanding 44,533 5,352 44,533 5,353 Convertible Preferred Stock - Series B; 6,800 shares issued and outstanding 28,288 3,400 28,288 3,400 Contributed surplus 151,942 18,262 187,414 22,525 Reserves 25,266 3,037 25,266 3,037 Retained earnings 80,437 9,668 113,319 13,620 --------- ------- ---------- ------- Total shareholders' equity 330,565 39,731 398,927 47,948 --------- ------- ---------- ------- Total liabilities and shareholders' equity 1,618,402 194,520 1,794,801 215,723 ========= ======= ========== =======
The accompanying notes form an integral part of these consolidated condensed financial statements. F-45 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (Amounts in thousands, except number of shares and per share data)
Six Months Ended June 30, -------------------------- 1995 1996 1996 Notes RMB RMB US$ ----- --- --- --- Net sales -third parties 371,921 436,073 52,412 -related parties 62,912 29,616 3,560 ---------- ---------- ---------- 434,833 465,689 55,972 Cost of sales (265,683) (285,917) (34,365) ---------- ---------- ---------- Gross profit 169,150 179,772 21,607 ---------- ---------- ---------- Selling, general and administrative expenses - third parties (31,224) (40,288) (4,842) - related parties (19,821) (22,071) (2,653) ---------- ---------- ---------- (51,045) (62,359) (7,495) ---------- ---------- ---------- Interest expense - third parties (17,767) (25,282) (3,038) - related parties (5,822) (5,139) (618) ---------- ---------- ---------- (23,589) (30,421) (3,656) ---------- ---------- ---------- Income before income taxes 94,516 86,992 10,456 Provision for income taxes - Current (14,499) (14,420) (1,733) ---------- ---------- ---------- Income before minority interests 80,017 72,572 8,723 Minority interests (39,907) (39,690) (4,771) ---------- ---------- ---------- Net income 40,110 32,882 3,952 ========== ========== ========== Earnings per common share 2 2.62 2.04 .25 ========== ========== ========== Number of shares outstanding 2 15,300,104 16,089,994 16,089,994 ========== ========== ==========
The accompanying notes form an integral part of these consolidated condensed financial statements. F-46 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (Amounts in thousands)
Six Months Ended June 30, -------------------------- 1995 1996 1996 RMB RMB US$ --- ---- --- Cash flows from operating activities: Net income 40,110 32,882 3,952 Adjustments to reconcile net income to net cash used in operating activities: Minority interests 39,907 39,690 4,771 Depreciation 22,220 28,151 3,383 Loss on disposal of fixed assets 969 - - Amortization of goodwill - 14 2 Others (463) 1,429 172 Changes in operating assets and liabilities - (Increase) decrease in assets: Accounts receivable (189,291) (247,618) (29,762) Notes receivable (26,744) (2,945) (354) Inventories 80,276 33,784 4,060 Prepaid VAT - 40,429 4,859 Other receivables (30,811) (14,288) (1,717) Due from related companies 38,925 47,609 5,722 Increase (decrease) in liabilities: Accounts payable (45,865) 39,907 4,797 Notes payable 15,225 2,970 357 Accrued liabilities and other payables 41,363 (15,760) (1,894) Income tax payable 6,737 16,703 2,008 Taxes other than income 22,855 2,793 336 Due to related companies (19,247) (4,957) (596) Due to shareholders (1,340) (2,854) (343) -------- -------- ------- Net cash used in operating activities (5,174) (2,061) (247) -------- -------- ------- Cash flows from investing activities: Disposal of long term investments - 426 51 Proceeds from disposal of fixed assets 274 - - Additions to fixed assets (35,966) (50,034) (6,014) -------- -------- ------- Net cash used in investing activities (35,692) (49,608) (5,963) -------- -------- -------
F-47 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (Amounts in thousands)
Six Months Ended June 30, -------------------------- 1995 1996 1996 Note RMB RMB US$ ---- --- ---- --- Cash flows from financing activities: Net increase in bank loans 21,471 63,356 7,615 Repayment of other loans - (33,810) (4,064) Proceeds from sale of common stock, net of 6 35,480 4,265 costs -------- -------- ------- Net cash provided by financing activities 21,471 65,026 7,816 -------- -------- ------- Net increase (decrease) in cash and (19,395) 13,357 1,606 cash equivalents 65,646 30,944 3,719 Cash and cash equivalents, at beginning of -------- -------- ------- period 46,251 44,301 5,325 ======== ======== ======= Cash and cash equivalents, at end of period Non-cash transaction: Financing of lease arrangements 7,769 8,453 1,016 ======== ======== =======
The accompanying notes form an integral part of these consolidated condensed financial statements. F-48 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (Amounts in thousands, except number of shares and per share data) 1. ORGANIZATION Sunbase Asia, Inc. (the "Company") acquired 100% of the issued share capital of China Bearing Holdings Limited ("China Bearing") on December 2, 1994 pursuant to a Share Exchange Agreement with Asean Capital Limited in exchange for 10,261,000 shares of common stock. The transaction has been treated as a recapitalization of China Bearing with China Bearing as the acquirer (reverse acquisition). The historical financial statements prior to December 2, 1994 are those of China Bearing. The Company is a Nevada corporation which owns, through various subsidiaries and joint venture interests, a 51.4% indirect ownership interest in Harbin Bearing Company Limited, a joint stock limited company organized under the law of the People's Republic of China ("Harbin Bearing"). Harbin Bearing manufactures a wide variety of bearings in China for use in commercial, industrial and aerospace applications that are sold primarily in China and certain western countries, including the United States. On January 16, 1996 (effective December 29, 1995), the Company acquired Smith Acquisition Company, Inc. dba Southwest Products Company ("Southwest") in exchange for 6,800 shares of Series B convertible preferred stock with a stated value of US$ 500 per share. The Series B convertible preferred stock is convertible into 680,000 shares of common stock. The acquisition of Southwest has been accounted for under the purchase method of accounting, and was recorded as of December 31, 1995. The results of operations of Southwest have been consolidated into the Company's consolidated results of operations commencing January 1, 1996. Southwest manufactures precision spherical bearings that are sold primarily to the aerospace and commercial aviation industries. Its major customers are located in the United States. The following unaudited pro forma financial information for the six months ended June 30, 1995 is prepared on the basis as if the acquisition of Southwest had occurred on January 1, 1995, and includes pro forma depreciation and amortization resulting from the increase to reflect the fair value of assets and the goodwill arising from the acquisition of Southwest. The unaudited pro forma financial information has been prepared for comparative purposes only and does not purport to represent the results of operations which would actually have occurred had the acquisition of Southwest been in effect on January 1, 1995, or which may occur in the future. F-51 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (Amounts in thousands, except number of shares and per share data) 1. ORGANIZATION (continued) Six Months Ended June 30, 1995 (RMB) Net sales 454,541 Net income 36,069 Earnings per common share 2.26
2. BASIS OF PRESENTATION The accompanying consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States. All material intercompany accounts and transactions were eliminated on consolidation. The accompanying consolidated condensed financial statements are unaudited but, in the opinion of the management of the Company, contain all adjustments necessary to present fairly the financial position at June 30, 1996, the results of operations for the three months and six months ended June 30, 1995 and 1996, and the changes in cash flows for the six months ended June 30, 1995 and 1996. These adjustments are of a normal recurring nature. The consolidated balance sheet as of December 31, 1995 is derived from the Company's audited financial statements. Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principals have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although management of the Company believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, as filed with the Securities and Exchange Commission. The earnings per common share for the six months ended June 30, 1995 and 1996 have been calculated using the weighted average number of shares of common stock and common stock equivalents outstanding during each respective period, and assumes that all outstanding shares of convertible preferred stock have been converted into common stock. Included in the calculation for 1996 are the preferred shares issued in conjunction with the Southwest acquisition, which was recorded as of December 31, 1995, and the 1,000,000 shares of common stock issued on June 10, 1996. The results of operations for the six months ended June 30, 1996 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 1996. F-52 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (Amounts in thousands, except number of shares and per share data) 3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE In preparing the consolidated financial statements, the financial statements of the Company are measured using Renminbi ("RMB") as the functional currency. All foreign currency transactions are translated into RMB using the applicable floating rates of exchange quoted by the People's Bank of China prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies have been translated into RMB using the applicable exchange rates prevailing at the balance sheet dates. The resulting exchange gains or losses have been credited or charged to the statements of income for the periods in which they occur. The Company's share capital is denominated in United States dollars (US$) and the reporting currency is the RMB. For financial reporting purposes, the US$ share capital amounts have been translated into RMB at the applicable rates prevailing on the transaction dates. For financial reporting purposes, translation of amounts from RMB into US$ for the convenience of the reader has been made at the exchange rate quoted by the People's Bank of China on June 30, 1996, of US$ 1.00 = RMB 8.32. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on June 30, 1996 or at any other certain rate on June 30, 1996. F-53 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (Amounts in thousands, except number of shares and per share data) 4. INVENTORIES Inventories consist of the following at December 31, 1995 and June 30, 1996:
December 31, 1995 June 30, 1996 ----------------- ------------- RMB US$ US$ RMB --- --- --- --- Raw materials 105,132 12,636 107,483 12,919 Work-in-progress 104,697 12,584 117,837 14,163 Finished goods 271,477 32,629 222,384 26,729 ------- ------ ------- ------ 481,306 57,849 447,704 53,811 Less: Allowance for obsolescence (4,309) (518) (4,491) (540) ------- ------ ------- ------ Inventories, net 476,997 57,331 443,213 53,271 ======= ====== ======= ======
5. SECURED PROMISSORY NOTE A promissory note (the "Note") was issued to Asean Capital Limited ("Asean") in connection with the Share Exchange Agreement and is secured by a continuing security interest in all of the Company's title and interest in the outstanding capital stock of its wholly- owned subsidiary, China Bearing. The Note is denominated in United States dollars, is repayable in full in United States dollars on December 31, 1996 and bears interest at 8% per annum. 6. SALE OF COMMON STOCK On June 10, 1996, the Company sold 1,000,000 shares of common stock at US$ 5.00 per share, which generated net proceeds of US$ 4,265 (RMB 35,480). The Company has agreed to promptly file a registration statement with the U.S. Securities and Exchange Commission to register the shares of common stock. 7. CONVERTIBLE DEBENTURES On August 23, 1996, China Bearing issued an aggregate of US$11,500,000 Convertible Debentures to various institutional investors. The investors have the right to convert at any time the whole or any part of the principal amount of the Convertible Debentures into shares of the Common Stock of the Company at the conversion price agreed on the subscription agreement dated August 2, 1996. The Convertible Debentures bear interest at the rate of the higher of (1) 5% per annum (net of withholding F-54 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (Amounts in thousands, except number of shares and per share data) 7. CONVERTIBLE DEBENTURES (continued) tax) and (2) such percentage of the dividend yield calculated by reference to dividing the annual dividend declared per share of Common Stock of the Company by the conversion price. The Convertible Debentures are due and payable in August, 1999 and the obligations of China Bearing under the Convertible Debentures are guaranteed by the other members of the Sunbase Group. F-55 No person has been authorized to give any information or to make any representations not contained in this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Company on the Selling Shareholders. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities covered by this Prospectus in any state or other jurisdiction to any person to whom it is unlawful to make such offer or solicitation in such state or jurisdiction. Neither the delivery of this Prospectus nor any sales made hereunder shall, under any circumstances, create an implication that there has been no change in the facts set forth in the Prospectus or in affairs of the Company since the date hereof. TABLE OF CONTENTS
Page ---- Available Information............................ 2 Currency of Presentation......................... 2 Enforceability of Certain Civil Liabilities...... 2 Prospectus Summary............................... 4 Risk Factors..................................... 8 Price Range of the Common Stock.................. 15 Dividend Policy.................................. 15 Selected Consolidated Financial Information...... 16 Supplementary Financial Information.............. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations............ 21 Business......................................... 31 Organization of the Company...................... 40 Management....................................... 41 Certain Relationships and Related Transactions... 47 Principal Shareholders........................... 50 Description of Securities........................ 53 Selling Shareholders............................. 58 Plan of Distribution............................. 60 Experts.......................................... 60 Index to Financial Statements.................... F-1 Financial Information............................ F-3
SUNBASE ASIA, INC. PART II Item 13. Other Expenses of Issuance and Distribution. -------------------------------------------
SEC Filing Fees $ 2,672 NASDAQ listing fees 17,500 Blue Sky qualification fees and expenses/1/ 15,000 Printing and engraving/1/ 5,000 Legal Fees/1/ 40,000 Accounting Fees/1/ 10,000 Miscellaneous/1/ 12,500 -------- TOTAL $102,672 ========
Item 14. Indemnification of Directors and Officers. ----------------------------------------- The only statute, charter provision, bylaw, contract, or other arrangement under which any controlling person, director or officer of the Company is insured or indemnified in any manner against any liability which he may incur in his capacity as such, is as follows: (a) The Company has the power under the Nevada Revised Statutes (the "Statute") to provide indemnification for expenses (including attorneys' fees), judgments, fines and amounts paid in settlement that are actually and reasonably incurred in connection with any threatened, pending or completed action, suit or proceeding other than an action by or in the right of the Company. The person seeking indemnification must have acted in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Company. In the case of a criminal action or proceeding, the person must also have had no reasonable cause to believe such person's conduct was unlawful. The Statute also authorizes indemnification by the Company in the case of actions or suits by or in the name of the Company. However, such indemnification is limited to expenses actually and reasonably incurred by the person indemnified in connection with the defense or settlement of the action or suit. Expenses include attorneys' fees and amounts paid in settlement. The person indemnified must have acted in good faith and in a manner which such person reasonably believed to be in, or not opposed to, the best interests of the Company. The Company may not indemnify a person for any claim, issue or matter as to which the person has been adjudged to be liable to the - ------------------------ /1/ Estimates === ========= II-1 Company or for amounts paid in settlement unless a court determines that in view of all the circumstances, the person is fairly and reasonably entitled to indemnification. The Company is authorized to indemnify, subject to the respective conditions described above, past or present directors, officers, employees or agents of the Company. The Statute also authorizes indemnification of persons who are or were serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. Pursuant to the Statute, the Company must indemnify a director, officer, employee or agent to the extent such individual is successful on the merits "or otherwise" in the defense of any action, suit or proceeding or in the defense of any claim, issue or matter therein. This mandatory indemnification is against expenses actually and reasonably incurred by the indemnitee in connection with a defense. Such indemnification is required even if the indemnitee is successful by reason of a defense that is not based on the merits, such as the statute of limitations. In addition, an indemnitee would be considered successful in the defense of an action, suit or proceeding if it is dismissed with prejudice pursuant to a negotiated settlement agreement which does not provide for any payment or assumption of liability. Indemnification is authorized only upon a determination that indemnification is proper under the circumstances. Unless ordered by a court, the determination must be made by the shareholders, the board of directors (by a majority vote of a quorum consisting of directors who are not parties to the action), or by independent legal counsel. The Statute provides that the Articles of Incorporation, Bylaws or an agreement may provide that the expenses incurred by an officer or director must be paid by the Company as they are incurred and in advance upon receipt of an undertaking to repay if it is ultimately determined by a court of competent jurisdiction that such person is not entitled to be indemnified by the corporation. (b) The Articles of Incorporation and Bylaws of Registrant generally require indemnification of officers and directors to the fullest extent allowed by law. II-2 Item 15. Recent Sales of Unregistered Securities --------------------------------------- During the past three years, the Company has sold its securities in the following transactions pursuant to the exemption from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act for transactions not involving a public offering and Regulation D promulgated thereunder or pursuant to Regulation S promulgated under the Securities Act for offers and sales made outside the United States. The share amounts set forth below have been adjusted to reflect the Company's one-for- seventy reverse split of the Common Stock effective October 5, 1994. 1. On November 23, 1993, the Company issued to The Questex Group Ltd. 900,000 shares in connection with a stock-swap for Questex stock. 2. On November 23, 1993, the Company issued to Alice Cutteridge 90,000 shares for payment on a note payable. 3. On November 23, 1993, the Company issued to Iverna Tompkins 2,000 shares for payment for investment banking services. 4. On November 23, 1993, the Company issued to Michelle Mcintosh 3,000 shares for payment for investment banking services. 5. On November 23, 1993, the Company issued to David Mcintosh 1,000 shares for payment for investment banking services. 6. On November 23, 1993, the Company issued to Casey Mcintosh 1,000 shares for payment for investment banking services. 7. On November 23, 1993, the Company issued to Daniel Mcintosh 1,000 shares for payment for investment banking services. 8. On November 23, 1993, the Company issued to Daniel L. Van Arsdall and Lanora S. Van Arsdall 1,000 shares for payment for investment banking services. 9. On November 23, 1993, the Company issued to SUCAP 11,000 shares for payment for investment banking services. 10. On November 23, 1993, the Company issued to Wayne A. Mcintosh and Dianne M. Mcintosh 10,000 shares for payment for investment banking services. 11. On December 30, 1993, the Company issued to Marshall Andrea Bouvier Jr. 375,000 shares for payment of debt. II-3 12. On December 30, 1993, the Company issued to Salad M. Janmohamed and Shenaaz Janmohamed 100,000 shares in a private placement. 13. On December 30, 1993, the Company issued to Cecil Engineering Inc. 16,900 shares in connection with a payment of an account payable. 14. On December 30, 1993, the Company issued to Melvin W. Ashland 3,000 shares in connection with a payment of an account payable. 15. On December 30, 1993, the Company issued to Malik Nasir Baz 2,000 shares in a private placement. 16. On December 30, 1993, the Company issued to Leland B. Cecil 3,000 shares in connection with a payment of an account payable. 17. On December 30, 1993, the Company issued to Wayne E. Crumpley 4,000 shares for expense reimbursement. 18. On December 30, 1993, the Company issued to Janes Neufield 10,000 shares in a private placement. 19. On December 30, 1993, the Company issued to Charles W. Richards 11,000 shares in connection with a payoff of a note payable. 20. On December 30, 1993, the Company issued to Doris Christine Scott 111,000 shares in connection with a payoff of a note payable. 21. On December 30, 1993, the Company issued to Ephraim J. Acuirre 5,000 shares in a private placement. 22. On March 31, 1993, the Company issued to Herald Investment Co., Ltd. 220,000 shares in connection with a payment of a note payable. 23. On March 31, 1993, the Company issued to Herald Investment Co., Ltd. 20,000 shares in connection with a payment of a note payable. 24. On March 31, 1993, the Company issued to Herald Investment Co., Ltd. 50,000 shares in connection with a payment of a note payable. 25. On March 31, 1993, the Company issued to Herald Investment Co., Ltd. 50,000 shares in connection with a payment of a note payable. 26. On March 31, 1993, the Company issued to Herald Investment Co., Ltd. 40,000 shares in connection with a payment of a note payable. II-4 27. On March 31, 1993, the Company issued to Herald Investment Co., Ltd. 20,000 shares in connection with a payment of a note payable. 28. On March 31, 1993, the Company issued to Armon K. Boyajian 100,000 shares in connection with a payment of a note payable. 29. On July 18, 1994, the Company issued to Raz Goen 20,000 shares in connection with a pay-off of an account payable. 30. On July 18, 1994, the Company issued to Sayad M. Janmohamed 150,000 shares in connection with a payment on a note payable. 31. On July 18, 1994, the Company issued to Alice Cutteridge 40,000 shares in connection with a payment on a note payable. 32. On July 18, 1994, the Company issued to Kent R. Spigute 20,000 shares in connection with an account payable/legal services. 33. On July 18, 1994, the Company issued to Herold Investment Company 200,000 shares in connection with a payment on a note payable. 34. On July 18, 1994, the Company issued to Cecil Engineering 27,200 shares in connection with a pay-off of an account payable. 35. On July 18, 1994, the Company issued to Tom Dooley 40,000 shares in connection with a pay-off of an account payable. 36. On July 18, 1994, the Company issued to Floyd and Judy Cannon 10,000 shares in connection with a pay-off of an account payable. 37. On September 22, 1994, the Company issued to California Quality Printer/Jeffrey M. Lawton 2,857 shares in connection with an account payable/printing. 38. On September 22, 1994, the Company issued to Sayad M. Janmohamed 5,000 shares in connection with a payment on a note payable. 39. On September 22, 1994, the Company issued to Armon Boyajian c/o Herold Investment Company 2,857 shares in connection with a payment on a note payable. 40. On September 22, 1994, the Company issued to Herold Investment Company 16,429 shares in connection with a payment on a note payable. II-5 41. On September 22, 1994, the Company issued to Lloyd Freltas 1,429 shares in a private placement. 42. On September 22, 1994, the Company issued to Western Technology Marketing 714 shares in connection with a pay-off of a note payable. 43. On September 22, 1994, the Company issued to Mark Dillon 7,143 shares for a finder's fee. 44. On September 22, 1994, the Company issued to Whitehall Montague & Cie 107,142 shares for a finder's fee. 45. On September 22, 1994, the Company issued to Jehu Hand 14,286 shares for legal services. 46. On December 22, 1994, the Company issued an aggregate of 12,960,000 shares of Common Stock (of which 2,699,000 shares were subsequently cancelled) and 36 shares of Series B Preferred Stock to Asean Capital in connection with the acquisition by the Company of an effective 51.4% interest in Harbin Bearing. 47. On January 14, 1996, the Company issued an aggregate of 6,800 shares of its Series B Convertible Preferred Stock to the shareholders of Southwest Products and a third party who provided a temporary loan to the Company, all in connection with the acquisition by the Company of Southwest Products. 48. On June 10, 1996, the Company issued 1,000,000 shares of its Common Stock to the Selling Shareholders, which shares are covered by the prospectus included within the Registration Statement. 49. On August 23, 1996, the Company's subsidiary, China Bearing, issued to four institutional investors an aggregate of $11,500,000 in principal amount of debentures convertible into the Common Stock of the Company. Item 16. Exhibits and Financial Statement Schedules. ------------------------------------------ (a) The following Exhibits are filed as part of this Registration Statement pursuant to Item 601 of Regulation S-K: II-6
Exhibit No. Description of Document Page No.(s) - ----------- ----------------------- ---------- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession. 2.1 Share Exchange Agreement, dated December 2, 1994, between the Company, Valley Financial, Inc., Wayne Crumpley and China Bearing Holdings, Ltd. and Asean Capital Limited, a subsidiary of Sunbase Intentional./(1)/ 2.2 Asset Transfer and Assumption Agreement dated December 16, 1994, between the Company and Valley Financial Corporation./(1)/ (3) Certificates of Incorporation and Bylaws 3.1 Nevada Articles of Incorporation./(1)/ 3.2 Articles of Merger./(1)/ 3.3 Amended and Restated Certificate of Designation for Series A Convertible Preferred Stock./(1)/ 3.4 Secured Promissory Note in favor of Asean Capital Limited./(2)/ 3.5 Third Amended and Restated Certificate of Designation for Series B Preferred Stock/(4)/ (10) Material contracts 10.1 Agreement between the Company and New China Hong Kong with respect to the Sale and Purchase of shares of China Bearing, together with the Deed of Novation./(3)/ 10.2 Memorandum and Articles of Association of China International./(3)/ 10.3 Joint Venture Contract between China
II-7 International and Harbin Hazhou Bearing Distributing Company with respect to Harbin Sunbase./(3)/ 10.4 Joint Venture Contract between China Intentional and Harbin Bearing Everising Construction and Development Ltd. with respect to Harbin Xinhengli./(3)/ 10.5 Amended Articles of Association of Harbin Sunbase./(3)/ 10.6 Articles of Association of Harbin Xinhengli./(3)/ 10.7 Articles of Association of Harbin Bearing./(3)/ 10.8 Agreement between Harbin Sunbase and Harbin Bearing with respect to the provision of financial management services to Harbin Bearing./(3)/ 10.9 Agreement between Harbin Xinhengli and Harbin Bearing with respect to the provisions of sales and marketing services to Harbin Bearing./(3)/ 10.10 Pension Fund Aggregation Agreement Harbin Bearing and Harbin Holdings with respect to pension payments for existing employees./(3)/ 10.11 Trademark Licensing Agreement between Harbin Bearing and Harbin Holdings with respect to the "HRB" trademark./(3)/ 10.12 Service Agreement between Harbin Holdings and Harbin Bearing./(3)/ 10.13 Land Use Right Lease Agreement between Harbin Holdings and Harbin Bearing./(3)/
II-8 10.14 Power Supply and Manufacturing Equipment Lease Agreement between Harbin Precision and Harbin Bearing./(3)/ 10.15 Plant Buildings Lease Agreement between Harbin Precision and Harbin Bearing./(3)/ 10.16 Ancillary and Transport Equipment Lease Agreement between Harbin Precision and Harbin Bearing./(3)/ 10.17 Agreement and Plan of Reorganization and Merger dated as of December 29, 1995 among the Company, Southwest Products and the shareholders of Southwest Products./(4)/ 10.18 Employment Agreement dated as of January 16, 1996 between the Company, Southwest Products and William McKay./(4)/ 10.19 1995 Stock Option Plan. 133 10.20 Form of Registration Rights Agreement 144 relating to the Private Placement Shares. 10.21 Employment Agreement dated as of 154 August 1, 1996 between the Company and Billy Kan. 10.22 Subscription Agreement (together with 165 Form of Debentures and Guaranty) dated August 2, 1996 among China Bearing, Asean Capital, China International Bearing Holdings Limited, the Company, Southwest Products, Glory Mansion Limited, Wardley China Investment Trust, MC Private Equity Partners Asia Limited and Chine Investissement 2000.
II-9 22 The Company's subsidiaries are:
Effective Percentage Place of Name of Subsidiary Ownership Incorporation - ------------------ ---------- ------------- China Bearing 100% Bermuda Holdings Limited China International 100% Hong Kong Bearing Holdings Limited Harbin Sunbase 99% People's Republic of Development Company Limited China JV Holding Company Harbin Xinhengli 99.90% People's Republic of Development China JV Holding Company Limited Company Harbin Bearing 51.4% People's Republic of Company, Ltd. China Joint Stock Company Smith Acquisition Company, Inc., 100% California dba Southwest Products Company 23.1 Consent of Ernst & Young.
_____________ (1) Filed with the Company's Form 8-K, dated December 22, 1994 and incorporated herein. (2) Filed with the Company's Form 8-K/A, dated December 22, 1994 and incorporated by reference herein. (3) Filed with the Company's Form 10-K dated March 3, 1995 and incorporated by reference herein. (4) Filed with the Company's Form 10-K dated May 3, 1996 and incorporated by reference herein. II-10 ______________ (b) FINANCIAL STATEMENT SCHEDULES Consolidated Financial Statements for the years ended December 31, 1995 and 1994 and for the six months ended June 30, 1996. II-11 Item 17. Undertakings. ------------ (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement, including (but not limited to any addition or election of a managing underwriter. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities offered at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (g) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel that matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (h) The undersigned registrant hereby undertakes that: II-12 (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-13 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Los Angeles, State of California, on October 21, 1996. SUNBASE ASIA, INC. By: /s/ William McKay -------------------------------------- William McKay, President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on October 21, 1996. Date: October 21, 1996 By: /s/ Gunter Gao -------------------------------------- Gunter Gao, Chairman and Director Date: October 21, 1996 By: /s/ Billy Kan -------------------------------------- Billy Kan, Vice Chairman and Director Date: October 21, 1996 By: /s/ William McKay -------------------------------------- William McKay, Chief Executive Officer, President and Director Date: October 21, 1996 By: /s/ (Roger) Li Yuen Fai -------------------------------------- (Roger) Li Yuen Fai, Vice President and Chief Financial Officer and Director Date: October 21, 1996 By: /s/ (Franco) Ho Cho Hing -------------------------------------- (Franco) Ho Cho Hing, Director II-14 Date: October 21, 1996 By: /s/ (Dickens) Chang Shing Yam -------------------------------------- (Dickens) Chang Shing Yam, Chief Accounting Officer Date: October 21, 1996 By: /s/Philip P.Y. Yuen -------------------------------------- Philip P.Y. Yuen, Director Date: October 21, 1996 By: /s/ George Raffini -------------------------------------- George Raffini, Director II-15 EX-10.19 2 SUNBASE ASIA, INC. 1995 STOCK OPTION PLAN SUNBASE ASIA, INC. ------------------ 1995 STOCK OPTION PLAN ---------------------- 1. ESTABLISHMENT, PURPOSE AND DEFINITIONS. --------------------------------------- (a) The 1995 Stock Option Plan (the "1995 Option Plan") of Sunbase Asia, Inc., a Nevada corporation (the "Company"), is hereby adopted. The 1995 Option Plan shall provide for the issuance of incentive stock options ("ISOs") and nonqualified stock options ("NSOs"). (b) The purpose of this 1995 Option Plan is to promote the long- term success of the Company by attracting, motivating and retaining key executives, consultants and directors (the "Participants") through the use of competitive long-term incentives which are tied to stockholder value. The 1995 Option Plan seeks to balance Participants' and stockholder interests by providing incentives to the Participants in the form of stock options which offer rewards for achieving the long- term strategic and financial objectives of the Company. (c) The 1995 Option Plan is intended to provide a means whereby Participants may be given an opportunity to purchase shares of Stock of the Company pursuant to (i) options which may qualify as ISOs under Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), or (ii) NSOs which may not so qualify. (d) The term "Affiliates" as used in this 1995 Option Plan means parent or subsidiary corporations, as defined in Section 424(e) and (f) of the Code (but substituting "the Company" for "employer corporation"), including parents or subsidiaries which become such after adoption of the 1995 Option Plan. 2. ADMINISTRATION OF THE PLAN. --------------------------- (a) The 1995 Option Plan shall be administered by the Compensation Committee (the "Committee") appointed by the Board of Directors of the Company from time to time (the "Board"). (b) The Committee shall consist entirely of directors qualifying as "disinterested persons" as such term is defined in Rule 16b-3 promulgated by the Securities and Exchange Commission (the "Committee"). The Committee shall consist of at least two Disinterested Directors. Members of the Committee shall serve at the pleasure of the Board. None of the members of the Committee shall receive, while serving on the Committee, a grant or award of equity securities under (i) the 1995 Option Plan or (ii) any other plan of the Company or its Affiliates under which the participants are entitled to acquire Stock (including restricted Stock), stock Exhibit 10.1 options, stock bonuses, related rights or stock appreciation rights of the Company or any of its Affiliates, other than pursuant to transactions in any such other plan which do not disqualify a director from being a disinterested person under Rule 16b-3. (c) The Committee may from time to time determine which employees of the Company or its Affiliates or other individuals or entities (each an "option holder") shall be granted options under the 1995 Option Plan, the terms thereof (including without limitation determining whether the option is an incentive stock option and the times at which the options shall become exercisable), and the number of shares of Stock for which an option or options may be granted. (d) If rights of the Company to repurchase Stock are imposed, the Board or the Committee may, in its sole discretion, accelerate, in whole or in part, the time for lapsing of any rights of the Company to repurchase shares of such Stock or forfeiture restrictions. (e) If rights of the Company to repurchase Stock are imposed, the certificates evidencing such shares of Stock awarded hereunder, although issued in the name of the option holder concerned, shall be held by the Company or a third party designated by the Committee in escrow subject to delivery to the option holder or to the Company at such times and in such amounts as shall be directed by the Board under the terms of this 1995 Option Plan. Share certificates representing Stock which is subject to repurchase rights shall have imprinted or typed thereon a legend or legends summarizing or referring to the repurchase rights. (f) The Board or the Committee shall have the sole authority, in its absolute discretion, to adopt, amend and rescind such rules and regulations, consistent with the provisions of the 1995 Option Plan, as, in its opinion, may be advisable in the administration of the 1995 Option Plan, to construe and interpret the 1995 Option Plan, the rules and regulations, and the instruments evidencing options granted under the 1995 Option Plan and to make all other determinations deemed necessary or advisable for the administration of the 1995 Option Plan. All decisions, determinations and interpretations of the Committee shall be binding on all option holders under the 1995 Option Plan. 3. STOCK SUBJECT TO THE PLAN. -------------------------- (a) "Stock" shall mean Common Stock of the Company or such stock as may be changed as contemplated by Section 3(c) below. Stock shall include shares drawn from either the Company's authorized but unissued shares of Common Stock or from reacquired shares of Common Stock, including without limitation shares repurchased by the Company in the open market. (b) Options may be granted under the 1995 Option Plan from time to time to eligible persons to purchase an aggregate of up to 2.5 million shares of 2 Stock. Stock options awarded pursuant to the 1995 Option Plan which are forfeited, terminated, surrendered or cancelled for any reason prior to exercise shall again become available for grants under the 1995 Option Plan (including any option cancelled in accordance with the cancellation regrant provisions of Section 6(f) herein). (c) If there shall be any change in the Stock subject to the 1995 Option Plan, including Stock subject to any option granted hereunder, through merger, consolidation, recapitalization, reorganization, reincorporation, stock split, reverse stock split, stock dividend, combination or reclassification of the Company's Stock or other similar events, an appropriate adjustment shall be made by the Committee in the number of shares and/or the option price with respect to any unexercised shares of Stock. Consistent with the foregoing, in the event that the outstanding Stock is changed into another class or series of capital stock of the Company, outstanding options to purchase Stock granted under the 1995 Option Plan shall become options to purchase such other class or series and the provisions of this Section 3(c) shall apply to such new class or series. (d) The Company may grant options under the 1995 Option Plan in substitution for options held by employees of another company who become employees of the Company as a result of merger or consolidation. The Company may direct that substitute options be granted on such terms and conditions as deemed appropriate by the Board or the Committee. (e) The aggregate number of shares of Stock approved by the 1995 Option Plan may not be exceeded without amending the 1995 Option Plan and obtaining stockholder approval within twelve months of such amendment. 4. ELIGIBILITY. ------------ Persons who shall be eligible to receive stock options granted under the 1995 Option Plan shall be those individuals and entities as the Committee in its discretion determines should be awarded such incentives given the best interests of the Company; provided, however, that (i) ISOs may only be granted to employees of the Company and its Affiliates and (ii) any person holding capital stock possessing more than 10% of the total combined voting power of all classes of Stock of the Company or any Affiliate shall not be eligible to receive ISOs unless the exercise price per share of Stock is at least 110% of the fair market value of the Stock on the date the option is granted. 5. EXERCISE PRICE FOR OPTIONS GRANTED UNDER THE PLAN. -------------------------------------------------- (a) All ISOs will have option exercise prices per option share not less than the fair market value of a share of the Stock on the date the option is granted, except that in the case of ISOs granted to any person possessing more than 3 10% of the total combined voting power of all classes of stock of the Company or any Affiliate the price shall be not less than 110% of such fair market value. The price of ISOs or NSOs granted under the 1995 Option Plan shall be subject to adjustment to the extent provided in Section 3(c) above. (b) The fair market value on the date of grant shall be determined based upon the closing price on an exchange on that day or, if the Stock is not listed on an exchange, on the average of the closing bid and asked prices in the Over the Counter Market on that day. 6. TERMS AND CONDITIONS OF OPTIONS. ------------------------------- (a) Each option granted pursuant to the 1995 Option Plan shall be evidenced by a written stock option agreement (the "Option Agreement") executed by the Company and the person to whom such option is granted. The Option Agreement shall designate whether the option is an ISO or an NSO. (b) The term of each ISO and NSO shall be no more than 10 years, except that the term of each ISO issued to any person possessing more than 10% of the voting power of all classes of stock of the Company or any Affiliate shall be no more than 5 years. Subsequently issued options, if Stock becomes available because of further allocations or the lapse of previously outstanding options, will extend for terms determined by the Board or the Committee but in no event shall an ISO be exercised after the expiration of 10 years from the date of its grant. (c) In the case of ISOs, the aggregate fair market value (determined as of the time such option is granted) of the Stock to which ISOs are exercisable for the first time by such individual during any calendar year (under this 1995 Option Plan and any other plans of the Company or its Affiliates if any) shall not exceed the amount specified in Section 422(d) of the Internal Revenue Code, or any successor provision in effect at the time an ISO becomes exercisable. (d) The Option Agreement may contain such other terms, provisions and conditions regarding vesting, repurchase or other provisions as may be determined by the Committee. To the extent such terms, provisions and conditions are inconsistent with this 1995 Option Plan, the specific provisions of the Option Agreement shall prevail. If an option, or any part thereof, is intended to qualify as an ISO, the Option Agreement shall contain those terms and conditions which the Committee determine are necessary to so qualify under Section 422 of the Internal Revenue Code. (e) The Committee shall have full power and authority to extend the period of time for which any option granted under the 1995 Option Plan is to remain exercisable following the option holder's cessation of service as an employee, director or consultant, including without limitation cessation as a result of death or disability; 4 provided, however, that in no event shall such option be exercisable after the specified expiration date of the option term. (f) The Committee shall have full power and authority to effect at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the 1995 Option Plan and to grant in substitution new options under the 1995 Option Plan covering the same or different numbers of shares of Stock with the same or different exercise prices. (g) As a condition to option grants under the 1995 Option Plan, the option holder agrees to grant the Company the repurchase rights as Company may at its option require and as may be set forth in a separate repurchase agreement. (h) Any option granted under the 1995 Option Plan may be subject to a vesting schedule as provided in the Option Agreement and, except as provided in this Section 6 herein, only the vested portion of such option may be exercised at any time during the Option Period. All rights to exercise any option shall lapse and be of no further effect whatsoever immediately if the option holder's service as an employee is terminated for "Cause" (as hereinafter defined) or if the option holder voluntarily terminates the option holder's service as an employee. The unvested portion of the option will lapse and be of no further effect immediately upon any termination of employment of the option holder for any reason. In the remaining cases where the option holder's service as an employee is terminated by the employee voluntarily or due to death, permanent disability, or is terminated by the Company (or its affiliates) without Cause at any time, the vested portion of the option will extend for a period of three (3) months following the termination of employment and shall lapse and be of no further force or effect whatsoever only if it is not exercised before the end of such three (3) month period. "Cause" shall be defined in an Employment Agreement between Company and option holder and if none there shall be "Cause" for termination if (i) the option holder is convicted of a felony, (ii) the option holder engages in any fraudulent or other dishonest act to the detriment of the Company, (iii) the option holder fails to report for work on a regular basis, except for periods of authorized absence or bona fide illness, (iv) the option holder misappropriates trade secrets, customer lists or other proprietary information belonging to the Company for the option holder's own benefit or for the benefit of a competitor, (v) the option holder engages in any willful misconduct designed to harm the Company or its stockholders, or (vi) the option holder fails to perform properly assigned duties. (i) No fractional shares of Stock shall be issued under the 1995 Option Plan, whether by initial grants or any adjustments to the 1995 Option Plan. 5 7. USE OF PROCEEDS. --------------- Cash proceeds realized from the sale of Stock under the 1995 Option Plan shall constitute general funds of the Company. 8. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN. ------------------------------------------------- (a) The Board may at any time suspend or terminate the 1995 Option Plan, and may amend it from time to time in such respects as the Board may deem advisable provided that (i) such amendment, suspension or termination complies with all applicable state and federal requirements and requirements of any stock exchange on which the Stock is then listed, including any applicable requirement that the 1995 Option Plan or an amendment to the 1995 Option Plan be approved by the stockholders, and (ii) the Board shall not amend the 1995 Option Plan to increase the maximum number of shares of Stock subject to ISOs under the 1995 Option Plan or to change the description or class of persons eligible to receive ISOs under the 1995 Option Plan without the consent of the stockholders of the Company sufficient to approve the 1995 Option Plan in the first instance. The 1995 Option Plan shall terminate on the earlier of (i) January 2, 2006 or (ii) the date on which no additional shares of Stock are available for issuance under the 1995 Option Plan. (b) No option may be granted during any suspension or after the termination of the 1995 Option Plan, and no amendment, suspension or termination of the 1995 Option Plan shall, without the option holder's consent, alter or impair any rights or obligations under any option granted under the 1995 Option Plan. (c) The Committee, with the consent of affected option holders, shall have the authority to cancel any or all outstanding options under the 1995 Option Plan and grant new options having an exercise price which may be higher or lower than the exercise price of cancelled options. (d) Nothing contained herein shall be construed to permit a termination, modification or amendment adversely affecting the rights of any option holder under an existing option theretofore granted without the consent of the option holder. 9. ASSIGNABILITY OF OPTIONS AND RIGHTS. ------------------------------------ Each option granted pursuant to this 1995 Option Plan shall, during the option holder's lifetime, be exercisable only by the option holder, and neither the option nor any right to purchase Stock shall be transferred, assigned or pledged by the option holder, by operation of law or otherwise, other than by will upon a beneficiary designation executed by the option holder and delivered to the Company or the laws of descent and distribution. 6 10. PAYMENT UPON EXERCISE. ---------------------- Payment of the purchase price upon exercise of any option or right to purchase Stock granted under this 1995 Option Plan shall be made by giving the Company written notice of such exercise, specifying the number of such shares of Stock as to which the option is exercised. Such notice shall be accompanied by payment of an amount equal to the Option Price of such shares of Stock. Such payment may be (i) cash, (ii) by check drawn against sufficient funds, (iii) by delivery to the Company of the option holder's promissory note, (iv) such other consideration as the Committee, in its sole discretion, determines and is consistent with the 1995 Option Plan's purpose and applicable law, or (v) any combination of the foregoing. Any Stock used to exercise options to purchase Stock (including Stock withheld upon the exercise of an option to pay the purchase price of the shares of Stock as to which the option is exercised) shall be valued in accordance with procedures established by the Committee. Any promissory note used to exercise options to purchase Stock shall be a full recourse, interest-bearing obligation secured by Stock in the Company being purchased and containing such terms as the Committee shall determine. If a promissory note is used to exercise options the option holder agrees to execute such further documents as the Company may deem necessary or appropriate in connection with issuing the promissory note, perfecting a security interest in the stock purchased with the promissory note and any related terms the Company may propose. Such further documents may include, without limitation, a security agreement and an assignment separate from certificate. If accepted by the Committee in its discretion, such consideration also may be paid through a broker-dealer sale and remittance procedure pursuant to which the option holder (I) shall provide irrevocable written instructions to a designated brokerage firm to effect the immediate sale of the purchased Stock and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate option price payable for the purchased Stock plus all applicable Federal and State income and employment taxes required to be withheld by the Company in connection with such purchase and (II) shall provide written directives to the Company to deliver the certificates for the purchased Stock directly to such brokerage firm in order to complete the sale transaction. 11. WITHHOLDING TAXES. ------------------ (a) Shares of Stock issued hereunder shall be delivered to an option holder only upon payment by such person to the Company of the amount of any withholding tax required by applicable federal, state, local or foreign law. The Company shall not be required to issue any Stock to an option holder until such obligations are satisfied. (b) The Committee may, under such terms and conditions as it deems appropriate, authorize an option holder to satisfy withholding tax obligations under this Section 11 by surrendering a portion of any Stock previously issued to the 7 option holder or by electing to have the Company withhold shares of Stock from the Stock to be issued to the option holder, in each case having a fair market value equal to the amount of the withholding tax required to be withheld. 12. RATIFICATION. ------------- This 1995 Option Plan and all options issued under this 1995 Option Plan shall be void unless this 1995 Option Plan is or was approved or ratified by (i) the Board; and (ii) a majority of the votes cast at a stockholder meeting at which a quorum representing at least a majority of the outstanding shares of Stock is (either in person or by proxy) present and voting on the 1995 Option Plan within twelve months of the date this 1995 Option Plan is adopted by the Board. No ISOs shall be exercisable prior to the date such stockholder approval is obtained. 13. CORPORATE TRANSACTIONS. ----------------------- (a) For the purpose of this Section 13, a "Corporate Transaction" shall include any of the following stockholder-approved transactions to which the Company is a party: (i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the State of the Company's incorporation; (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company in liquidation or dissolution of the Company; or (iii) any reverse merger in which the Company is the surviving entity but in which beneficial ownership of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to holders different from those who held such securities immediately prior to such merger. (b) Upon the occurrence of a Corporate Transaction, if the surviving corporation or the purchaser, as the case may be, does not assume the obligations of the Company under the 1995 Option Plan, then irrespective of the vesting provisions contained in individual option agreements, all outstanding options shall become immediately exercisable in full and each option holder will be afforded an opportunity to exercise their options prior to the consummation of the merger or sale transaction so that they can participate on a pro rata basis in the transaction based upon the number of shares of Stock purchased by them on exercise of options if they so desire. To the extent that the 1995 Option Plan is unaffected and assumed by the successor corporation or its parent company a Corporate Transaction will have no 8 effect on outstanding options and the options shall continue in effect according to their terms. (c) Each outstanding option under this 1995 Option Plan which is assumed in connection with the Corporate Transaction or is otherwise to continue in effect shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would have been issued to the option holder in connection with the consummation of such Corporate Transaction had such person exercised the option immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the option price payable per share, provided the aggregate option price payable for such securities shall remain the same. In addition, the class and number of securities available for issuance under this 1995 Option Plan following the consummation of the Corporate Transaction shall be appropriately adjusted. (d) The grant of options under this 1995 Option Plan shall in no way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 14. LOANS OR GUARANTEE OF LOANS. ---------------------------- (a) The Committee may, in its discretion, assist any option holder in the exercise of options granted under this 1995 Option Plan, including the satisfaction of any Federal and State income and employment tax obligations arising therefrom by (i) authorizing the extension of a loan from the Company to such option holder, (ii) permitting the option holder to pay the exercise price for the Stock in installments over a period of years or (iii) authorizing a guarantee by the Company of a third party loan to the option holder. The terms of any loan, installment method of payment or guarantee (including the interest rate and terms of repayment) will be upon such terms as the Committee specifies in the applicable option or issuance agreement or otherwise deems appropriate under the circumstances. Loans, installment payments and guarantees may be granted with or without security or collateral (other than to option holders who are not employees, in which event the loan must be adequately secured by collateral other than the purchased Stock). However, the maximum credit available to the option holder may not exceed the exercise or purchase price of the acquired shares of Stock plus any Federal and State income and employment tax liability incurred by the option holder in connection with the acquisition of such shares of Stock. (b) The Committee may, in its absolute discretion, determine that one or more loans extended under this financial assistance program shall be subject to forgiveness by the Company in whole or in part upon such terms and conditions as the Committee may deem appropriate. 9 15. REGULATORY APPROVALS. --------------------- The obligation of the Company with respect to Stock issued under the Plan shall be subject to all applicable laws, rules and regulations and such approvals by any governmental agencies or stock exchanges as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Stock under the Plan until such time as any legal requirements or regulations have been met relating to the issuance of Stock, to their registration or qualification under the Securities Exchange Act of 1934, if applicable, or any applicable state securities laws, or to their listing on any stock exchange at which time such listing may be applicable. 16. NO EMPLOYMENT/SERVICE RIGHTS. ----------------------------- Neither the action of the Company in establishing this 1995 Option Plan, nor any action taken by the Board or the Committee hereunder, nor any provision of this 1995 Option Plan shall be construed so as to grant any individual the right to remain in the employ or service of the Company (or any parent, subsidiary or affiliated corporation) for any period of specific duration, and the Company (or any parent, subsidiary or affiliated corporation retaining the services of such individual) may terminate or change the terms of such individual's employment or service at any time and for any reason, with or without cause. 17. MISCELLANEOUS PROVISIONS. ------------------------- (a) The provisions of this 1995 Option Plan shall be governed by the laws of the State of Nevada, as such laws are applied to contracts entered into and performed in such State, without regard to its rules concerning conflicts of law. (b) The provisions of this 1995 Option Plan shall inure to the benefit of, and be binding upon, the Company and its successors or assigns, whether by Corporate Transaction or otherwise, and the option holders, the legal representatives of their respective estates, their respective heirs or legatees and their permitted assignees. (c) The option holders shall have no divided rights, voting rights or any other rights as a stockholder with respect to any options under the 1995 Option Plan prior to the issuance of a stock certificate for such Stock. (d) If there is a conflict between the terms of any employment agreement pursuant to which options under this Plan are to be granted and the provisions of this Plan, the terms of the employment agreement shall prevail. 10 EX-10.20 3 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT ----------------------------- This Registration Rights Agreement (this "Agreement") is made and entered into as of May 28, 1996, by and among Sunbase Asia, Inc., a Nevada corporation (the "Company"), and the person or entity set forth on the signature page of this Agreement (the "Investor"). RECITALS -------- Pursuant to a confidential private placement memorandum dated February 1, 1996 (the "Private Placement Memorandum"), the Investor has subscribed for and has purchased shares of the Company's common stock, $.001 par value (the "Shares"). The Company and the Investor desire to enter into a specific agreement setting forth the terms and conditions upon which the Shares may be registered under certain applicable law. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties hereto agree as follows: 1. REGISTRATION RIGHTS 1.1 CERTAIN DEFINITIONS. As used in this Agreement, the ------------------- following terms shall have the meanings set forth below: (a) "Closing" means the date when all the Shares have been delivered to the Investor. (b) "Commission" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. (c) "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. (d) "Holder" means any Investor who holds Registrable Securities and any holder of Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with Section 1.8 hereof (e) "Other Shareholders" means persons other than Holders who, by virtue of agreements with the Company, are entitled or permitted to include their securities in a registration hereunder. (f) "Registrable Securities" means (i) the Shares and (ii) any common stock issued as a dividend or other distribution with respect to or in exchange for or in replacement of the Shares. However, Registrable Securities shall not include any shares Exhibit 10.20 of common stock of the Company for which a registration statement with the Commission has become effective for the period set forth in Section 1.2, which have been transferred to any person that is not an "Affiliate" (as defined in the Exchange Act) of the Investor pursuant to Rule 144, or which ceases to be outstanding. (g) The terms "register," "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering by the Commission of the effectiveness of such registration statement. (h) "Registration Expenses" means all expenses incurred in effecting any registration pursuant to this Agreement, including, without limitation, all registration, qualification, and filing fees, printing expenses, escrow fees, listing and NASD fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, and expenses of any regular or special audits or "cold comfort" letters incident to or required by any such registration, but shall not include Selling Expenses. (i) "Rule 144" means Rule 144 as promulgated by the Commission under the Securities Act as such rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission. (j) "Rule 415" means Rule 415 as promulgated by the Commission under the Securities Act, as such rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission. (k) "Securities Act" means the Securities Act of 1933, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. (l) "Selling Expenses" means all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and fees and disbursements of counsel for any Holder. 1.2 REGISTRATION. The Company shall use its best efforts ------------ to file a registration statement within 30 days from Closing (and will, in no event, file such statement later than 60 days from Closing) with respect to the Registrable Securities under the Securities Act (including, without limitation, filing post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws, and appropriate compliance with the Securities Act), and to thereafter cause such registration statement to become effective for a period (the "Registration Period") that ends on the earlier to occur of that date which is: two years after the date of the Closing, the date of the expiration of the holding period as described in Rule 144(d)(1), or that date on which the Holders have completed the distribution described in the registration statement relating thereto. 2 The Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 1.2 in any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification, or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act. The registration statement filed may include other securities of the Company designated by the Company, and may include securities of the Company being sold for the account of the Company. 1.3 EXPENSES OF REGISTRATION. All Registration Expenses ------------------------ incurred in connection with any registration, qualification or compliance pursuant to Section 1.2 hereof shall be borne by the Company. All Selling Expenses relating to securities registered shall be borne by the Holders of such securities. 1.4 REGISTRATION PROCEDURES. With respect to a ----------------------- registration effected by the Company pursuant to Section 1.2 hereof, the Company shall use its best efforts to: (a) Keep such registration effective for the Registration Period; (b) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (c) Furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request. (d) Notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, include an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing, and at the request of any such seller, prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing; (e) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed; 3 (f) Register or qualify all Registrable Securities covered by such registration statement under such other United States state securities or blue sky laws of such jurisdictions as each Holder shall reasonably request, to keep such registration statement qualification in effect for the period referred to in Section 1.2 hereof, and take any other action which may be reasonably necessary or advisable to enable each Holder to consummate the disposition in such jurisdictions of the securities owned by each Holder, except that the Company shall not for any such purpose be required to (i) qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not, but for the requirements of this Section 1.4(f), be obligated to be so qualified, (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction; and (g) Otherwise comply with all applicable rules and regulations of the Commission and not file any amendment or supplement to such registration statement or prospectus to which a majority of the Holder shall have reasonably objected in writing on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or of the rules or regulations thereunder, having been furnished with a copy thereof (other than with respect to pricing amendment or a prospectus filed pursuant to Rule 424(b)(1) under the Securities Act) at least two business days prior to the filing thereof. 1.5 INDEMNIFICATION. --------------- (a) The Company will indemnify each Holder, each of its officers, directors and partners, legal counsel, and accountants and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages and liabilities (or actions, proceedings or settlements in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular, or other document (including any related registration statement, notification, or the like) incident to any such registration, qualification, or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification, or compliance, and will reimburse each such Holder, each of its officers, directors, partners, legal counsel, and accountants and each person controlling such Holder, for any legal and any other expenses reasonably incurred in connection with investigating and defending or settling any such claim, loss, damage, liability, or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability, or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Holder and stated to be specifically for use therein. It is agreed that the indemnity agreement contained in this Section 1.5(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent has not been unreasonably withheld). 4 (b) Each Holder will, if Registrable Securities held by him are included in the securities as to which such registration, qualification, or compliance is being effected, indemnify the Company, each of its directors, officers, partners, legal counsel, and accountants, each other, such Holder and Other Shareholder, and each of their officers, directors and partners, and each person controlling such Holder or Other Shareholder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular, or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and such Holders, Other Shareholders, directors, officers, partners, legal counsel, and accountants, persons, underwriters, or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular, or other document in reliance upon and in conformity with written information furnished to the Company by such Holder and stated to be specifically for use therein; provided, however, that the obligations of such Holder hereunder shall not apply to amounts paid in settlement of any such claims, losses, damages, or liabilities (or actions in respect thereof) if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld). (c) Each party entitled to indemnification under this Section 1.5 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 1, except to the extent that the Indemnifying Party is actually prejudiced by such failure to give notice. Notwithstanding the foregoing, the Indemnified Party or Parties shall have the right to employ its or their own counsel in any such case but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless (i) the employment of such counsel shall have been authorized in writing by the Indemnifying Parties in connection with the defense of such action at the expense of the Indemnifying Party or Parties, (ii) the Indemnifying Party or Parties shall not have employed counsel reasonably satisfactory to such Indemnified Party or Parties to have charge of the defense of such action within a reasonable time after notice of the commencement of the action or (iii) such Indemnified Party or Parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the Indemnifying Parties (in which case the Indemnifying Parties shall not have the right to direct the defense of such action on behalf of the Indemnified Party or Parties), 5 in any of which events such fees and expenses of one additional counsel shall be borne by Indemnifying Party or Parties. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. (d) If the indemnification provided for in this Section 1.5 is unavailable to an Indemnified Party with respect to any loss, liability, claim, damage, or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the action in question, including any untrue or alleged, untrue statement of a material fact or omission or alleged omission to state a material fact, relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such actions, statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 1.5(d) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in this paragraph. No person guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Securities Act) shall be entitled to contribution from any person. If indemnification is available under this Section 1.5, the Indemnifying Party or Parties shall indemnify each Indemnified Party or Parties to the full extent provided herein without regard to the relative fault of said Indemnifying Parties or Indemnified Parties or any other equitable consideration provided for in this Section 1.5(d). 1.6 INFORMATION BY HOLDER. Each Holder of Registrable --------------------- Securities shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification, or compliance referred to in this Section 1. 6 1.7 RULE 144 REPORTING. With a view to making available ------------------ the benefits of certain rules and regulations of the Commission that may permit the sale of the Restricted Securities to the public without registration, the Company agrees to use its best efforts to: (a) Make and keep public information regarding the Company available as those terms are understood and defined in Rule 144 under the Securities Act; (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements; (c) So long as a Holder owns any Restricted Securities, furnish to Holder forthwith upon written request a written statement by the Company as to its compliance with the reporting requirements of Rule 144, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration. 1.8 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The --------------------------------------------- rights to cause the Company to register securities granted to a Holder by the Company under this Section 1 may be transferred or assigned by a Holder, provided that the Company is given written notice at the time of or within a reasonable time after said transfer or assignment, stating the name and address of the transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned, and, provided further, that the transferee or assignee of such rights assumes the obligations of such Holder under this Agreement by a written agreement reasonably acceptable to the Company. 1.9 "MARKET STAND-OFF" AGREEMENT. If requested by the ---------------------------- Company and an underwriter of common stock (or other securities) of the Company, a Holder shall not sell or otherwise transfer or dispose of any Registrable Securities held by such Holder during such period, not exceeding 90 days, following the effective date of the registration statement of the Company covering such underwritten offering filed under the Securities Act specified by the Company; provided that foregoing restriction shall apply only if (a) each director and executive officer of the Company agrees to a similar restriction on the sale of his or her shares, and (b) there are no shareholders selling shares in the underwritten public offering unless the Holders are also offered the opportunity to sell their Registrable Securities in the underwritten public offering. The Registration Period shall not include the period during which foregoing stand-off obligations are in effect. The obligations described in this Section 1.9 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. 7 1.10 DELAY OF REGISTRATION. No Holder shall have any right --------------------- to take any action to restrain, enjoin, or otherwise delay any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Agreement. 2. MISCELLANEOUS 2.1 GOVERNING LAW. This Agreement shall be governed in ------------- all respects by the laws of the state of California, as if entered into by and between California residents exclusively for performance entirely within California. 2.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly ---------------------- provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 2.3 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement ----------------------------------- constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated, except by a written instrument signed by the Company and the Investor. 2.4 NOTICES, ETC. All notices and other communications ------------- required or permitted hereunder shall be in writing and shall be mailed by United States first-class mail, postage prepaid, or delivered personally by hand or nationally recognized courier addressed (a) if to Investor, as indicated on the signature page of this Agreement, or at such other address as such Investor or permitted assignee shall have furnished to the Company in writing, or (b) if to the Company, Sunbase Asia, Inc., 19/F First Pacific Centre, 51-57 Gloucester Road, Wanchai, Hong Kong, or at such other address as the Company shall have furnished to Investor in writing. All such notices and other written communications shall be effective on the date of mailing or delivery. 2.5 RIGHTS; SEVERABILITY. Unless otherwise expressly -------------------- provided herein, a Holder's rights hereunder are several rights, not rights jointly held with any of the other Holders. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 2.6 INFORMATION CONFIDENTIAL. Each Holder acknowledges ------------------------ that the information received by them pursuant hereto may be confidential and for its use only, and it will not use such confidential information in violation of the Exchange Act or reproduce, disclose or disseminate such information to any other person (other than its employees or agents having a need to know the contents of such information, and its attorneys), except in connection with the exercise of rights under this Agreement, unless the Company has made such information available to the public generally or such Holder is required to disclose such information by a governmental body. 8 2.7 TITLES AND SUBTITLES. The titles of the paragraphs -------------------- and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 2.8 COUNTERPARTS. This Agreement may be executed in any ------------ number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have executed this registration rights agreement effective as of the day and year first above written. COMPANY: SUNBASE ASIA, INC. By: ________________________________ Name: ______________________________ Title: ___________________ INVESTOR: By: ________________________________ Name:_______________________________ Title:____________________ Address:____________________________ ____________________________________ ____________________________________ By:_________________________________ Name:_______________________________ Title:____________________ Address:____________________________ ____________________________________ ____________________________________ 9 EX-10.21 4 EMPLOYMENT CONTRACT DATED: 1 AUGUST 1996 SUNBASE ASIA, INC. (1) KAN CHE KIN, BILLY ALBERT (2) --- ________________________________ EMPLOYMENT CONTRACT ________________________________ TABLE OF CONTENTS CLAUSE HEADINGS ------ -------- 1 DEFINITIONS AND INTERPRETATION 2 TERM OF EMPLOYMENT 3 DUTIES AND WORKING HOURS 4 SALARY 5 STOCK OPTIONS 6 EXPENSES 7 INSURANCE 8 SICKNESS OR DISABILITY 9 HOLIDAYS 10 CONFIDENTIAL INFORMATION 11 TERMINATION 12 SUSPENSION 13 OBLIGATIONS UPON TERMINATION OF EMPLOYMENT 14 RESTRICTIONS AFTER TERMINATION 15 GRIEVANCE AND DISCIPLINARY PROCEDURE 16 NOTICES 17 CANCELLATION OF PREVIOUS AGREEMENTS 18 GOVERNING LAW, JURISDICTION 19 CONTINUANCE OF TERMS EXECUTION DATED: 1 AUGUST 1996 ----- PARTIES: ------- (1) Sunbase Asia, Inc., a Nevada corporation whose registered office is at 1280 Terminal Way, Suite 3, Reno, Nevada 89502, United States of America and whose Hong Kong office is at 19/F First Pacific Bank Centre, 51-57 Gloucester Road, Wanchai, Hong Kong (the "Company"); and (2) KAN CHE KIN, BILLY ALBERT of D6, Dragon Garden, 1-4 Chun Fai Terrace, --- Tai Hong Road, Hong Kong (the "Director"). OPERATIVE PROVISIONS: -------------------- 1. DEFINITIONS AND INTERPRETATION ------------------------------ 1.1 In this Agreement, unless the context otherwise requires, the following words and expressions shall have the following meanings: "Associated Company" any company which is (a) a subsidiary company, or (b) a company having an ordinary share capital of which not less than 25% is owned directly or indirectly by the Company, or (c) a company to which the Company or any of its Associated Companies renders managerial, administrative or technical services in the ordinary course of its business; "Board" the board of directors from time to time of the Company and any duly appointed committee thereof; "Business of the Company" the business of trading, marketing, manufacturing or otherwise dealing in bearing components or products; "Commencement Date" 1 August 1996; "subsidiary" the same meanings as attributed to it by section 2 of the Companies Ordinance (Cap.32) Laws of Hong Kong; and "Option" an option to subscribe for Shares in Sunbase Asia, Inc.; "Option Period" the term of each Option shall be no more than ten years from the Year(s) of Exercise; "Share" an ordinary share in the capital of the Company to be issued fully paid; "Shareholder" the holder of a Share; "$" and "cents" Hong Kong dollars and cents; "US$ and cents" United States dollars and cents. 1.2 Words denoting the singular shall include the plural and vice versa and words denoting any gender shall include all genders. 1.3 Headings used in this Agreement are for convenience only and shall not affect its interpretation. 2. TERM OF EMPLOYMENT ------------------ 2.1 The Director shall serve the Company as Vice Chairman and Managing Director or in such other capacity of an equivalent status as the Company may reasonably require. The director accepts that the Company may require him to perform other duties or tasks not within the scope of his normal duties and the Director agrees to perform those duties or undertake those tasks as if they were specifically required under this Agreement. 2.2 The Director's employment shall commence on the Commencement Date and shall continue (subject to earlier termination as provided in this Agreement) until terminated by either party giving to the other not less than 12 months' prior notice expiring on or at any time after the end of the specified period. 2.3 The Company is entitled at any time to appoint another person or persons to act jointly with the Director. 3. DUTIES AND WORKING HOURS ------------------------ 3.1 During the continuance of his employment hereunder the Director shall: (a) develop, market and promote such products of the Company or any Associated Company as may be required by the Board; (b) exercise such powers and functions and perform such duties in relation to the Business of the Company or any Associated Company as may from time to time be vested in or assigned to him by the Board and shall comply with all directions from time to time given to him by the Board (or by anyone authorized by the Board) and with all rules and regulations from time to time laid down by the Company concerning its employees; (c) (unless prevented by ill health or accident and except during holidays permitted by this Agreement) devote not less than 100 hours each month of his time, attention and abilities to carrying out his duties hereunder; 2 (d) carry out his duties in a proper loyal and efficient manner and shall use his best endeavours to promote the interests and reputation of the Company and its Associated Companies and not do anything which is to their detriment; (e) work at and/or travel to such places in such manner and on such occasions as the Company may from time to time require; (f) keep the Board promptly and fully informed (in writing if so requested) of his conduct of the business or affairs of the Company and its Associated Companies and provide such explanations as the Board may require. 4. SALARY ------ 4.1 The Director shall be paid by way of remuneration for his services during his employment hereunder a salary at the rate of HK$1,625,000.00 per annum. Such salary shall be paid by twelve monthly instalments in arrear on the last day of every month and one instalment on the last day before Chinese New Year Day. 4.2 The salary payable hereunder shall be reviewed annually by the Board and the rate thereof may be increased with effect from any such review date. 4.3 If Director dies or, as defined in Section 11.1(e) below, becomes totally disabled, the Company shall continue to pay Director or Director's heirs, successors or assigns the Salary for a period of six months, commencing on the date that Director dies or becomes totally disabled. 5. STOCK OPTIONS ------------- 5.1 The Company shall grant the following Stock Options to the Director under the terms and conditions as approved by the Company's Compensation Committee on 1 July 1996: Exercise Price Number of Shares Years of Exercise per Share per Option Rights ----------------- --------- ----------------- one year from 16 Jan 1996 US$6.375 200,000 one year from 16 Jan 1997 US$6.375 200,000 one year from 16 Jan 1998 US$6.375 200,000 ------- 600,000 5.2 If Director dies or as defined in Section 11.1(e) below becomes totally disabled, then in addition to any Options that have vested in any previous year(s) of employment hereunder, the amount of One Hundred Thousand (100,000) Options will be deemed vested in Director if Director has completed less than one hundred eighty-three (183) calendar days of employment for the relevant year and the amount of Two Hundred Thousand (200,000) Options will be deemed vested in Director if Director has completed more than one hundred eighty-three (183) calendar days of employment for the relevant year. Any Options that have 3 vested as of the date that Director dies or becomes totally disabled may be exercise by Director's estate, heirs, successors or assigns, prior to such Option's expiration as described in Section 1.1 above. 5.3 If Director's employment with the Company is terminated, then in addition to any Options that have vested in any previous year(s) of employment hereunder, the amount of Options accrue from day to day will also be deemed vested in Director up to the last day of employment for the relevant year. Any Options that have vested in Director during his employment may be exercise by him or his estate, heirs, successors or assigns at any time prior to such Option's expiration as described in Section 1.1 above notwithstanding that he no larger works for the Company. 5.4 Upon the written request of the Director or his estate, heirs, successors, or assigns, at any time during the ten (10) year period that commences after 16 Jan 1997, the Company shall file with the Securities and Exchange Commission all necessary Forms and Registration Statements covering that amount of shares of the common stock of Sunbase Asia, Inc. which are issued to the Director hereunder. 6. EXPENSES -------- The Company shall reimburse to the Director all reasonable travel, accommodation, entertainment and other out-of-pocket expenses which he may from time to time properly incur in the exercise of his duties hereunder PROVIDED THAT the Company shall be entitled to require such expenses to be duly vouched by written evidence. 7. INSURANCE --------- 7.1 The Company shall take out such liability insurance coverage as approved by the Board to protect the Director of his position of being a Director and Officer of the Company. In the event that no sufficient liability coverage is arranged by the Company, any losses of the Director's personal assets not covered by insurance shall be indemnifiable by the Company. 8. SICKNESS OR DISABILITY ---------------------- 8.1 First class Medical benefits are to be provided to the Director, his spouse and unmarried children under the age of 18. The Board may determine whether it wish to take out a comprehensive healthcare coverage such as the BUPA Gold medical scheme or such other less comprehensive medical care and hospitalization schemes but to reimburse the Director of any excess not covered. 8.2 The Company shall continue to pay the Director his full remuneration if the Director is absent from work on medical grounds for a consecutive period of 90 working days or for any aggregate period of 120 working days in any period of 6 months provided that the 4 Director shall, if required, supply the Company with medical certificates covering his period or periods of absence. 8.3 In the event of the Director being prevented by illness or incapacity from performing his duties hereunder for a consecutive period of 90 working days or for any aggregate period of 120 working days in any period of 6 months the Company may terminate this Agreement in accordance with the provisions of Clause 11. 9. HOLIDAYS -------- 9.1 The holiday year is from 1st January to 31st December. 9.2 The Director will be entitled during every holiday year to the following holidays, during which his salary will continue to be paid: (a) statutory holidays in Hong Kong; and (b) 28 working days' holiday (exclusive of statutory holidays). 9.3 The overriding decision as to when holiday entitlement may be taken lies with the Board. 9.4 Any holiday not taken by the end of the relevant holiday may be carried forward or be paid in lieu provided agreed in writing by the Board. 9.5 For the calendar year during which the employment commences the Director shall be entitled to such proportion of his annual holiday entitlement as the period of his employment for such year shall bear to one calendar year. 10. CONFIDENTIAL INFORMATION ------------------------ 10.1 The Director shall not either during his appointment or at any time after its termination: (a) disclose to any person or persons (except to those authorized by the Company to know); (b) use for his own purposes or for any purposes other than those of the Company; and (c) through any failure to exercise all due care and diligence cause any unauthorized disclosure of any private, confidential or secret information of the Company (including, without limitation, lists or details of customers of the Company or relating to the working of any process or intervention carried on or used by the Company) which he has obtained by virtue of his appointment 5 or in respect of which the Company is bound by an obligation of confidence to a third party. These restrictions shall cease to apply to information or knowledge which may (otherwise than through the default of the Director) become available to the public generally. 10.2 The provisions of clause 10.1 shall apply mutatis mutandis in relation to the private, confidential or secret information of each Associated Company which the Director may have received or obtained during his appointment and the Director shall upon request enter into an enforceable agreement with any such company to the like effect. 10.3 All notes, memoranda, records and writing made by the Director relating to the Business of the Company or its Associated Company shall be and remain the property of the Company or Associated Company to whose business they relate and shall be delivered by him to the company to which they belong forthwith upon request. 10.4 Without prejudice to the generality of this clause all notes, memoranda, records or other written information which are marked as being private, confidential or secret shall be treated as private, confidential or secret (as the case may be) for the purposes of this clause. 11. TERMINATION ----------- 11.1 The Company may without prejudice to any remedy which it may have against the Director for the breach or non-performance of any of the provisions of this Agreement, by notice in writing to him forthwith terminate the employment of the Director if he: (a) is guilty of misconduct or conduct likely to be prejudicial to the Company or if he commits any act of dishonesty or serious breach of his obligations hereunder or repeated or continued (after warning) breaches of his obligations hereunder or he becomes bankrupt or makes any composition or enters into any deed of arrangement with his creditors; (b) becomes a patient as defined in the Mental Health Ordinance (Cap. 136) of the Laws of Hong Kong; (c) is convicted of any criminal offence (other than an offence under road traffic legislation in Hong Kong or elsewhere); or (d) is prevented by illness or otherwise from performing his duties hereunder for a consecutive period of 90 working days or for any aggregate period of 120 working days in any period of 6 months. 11.2 If before the expiration of this Agreement the employment of the Director hereunder shall be terminated by reason of the liquidation of the company for the purposes of the amalgamation or reconstruction or as part of any arrangement for the amalgamation of the undertaking of the Company not involving liquidation and the Director shall be offered 6 employment with the amalgamated or reconstructed company on terms generally not less favourable than the terms of this Agreement the Director shall have no claim against the Company in respect of the termination of his employment by the Company. 11.3 If during his employment hereunder the Director shall (otherwise than by reason of death or resignation) cease to be a director of the Company his employment hereunder shall continue as if it had been to the office of a manager of the Company. 11.4 The Company reserves the right to pay to the Director his basic salary (at the rate then current) for the unexpired portion of the duration of his appointment or in lieu of his entitlement to notice as provided for in Clause 2.2 (as the case may be). 11.5 If either party to this Agreement shall terminate the Director's employment on notice in accordance with Clause 2.2 then the Company hereby reserve the right to require the Director and the Director agrees not to work at his place of work during any such notice period. During any period in which the Director is required not to work at his place of work in accordance with this clause the Company shall continue to comply with its obligations under the terms of this Agreement and in particular, but without limitation, shall continue to remunerate the Director throughout the notice period in the normal manner. The Director shall throughout any such period in which he is not required to work at his place of work continue to be an employee of the Company and shall not, without limitation, seek any alternative employment of whatsoever nature or howsoever arising with any other company, firm or person during such period without the express consent in writing of the Board. 12. SUSPENSION ---------- Notwithstanding the provisions of Clause 3 of this Agreement the Company shall be under no obligation to vest in or assign to the Director any powers or duties or to provide any work for the Director and the Company may at any time or from time to time suspend the Director from the performance of his duties or exclude him from any premises of the Company, but salary shall not cease to be payable by reason only of that suspension or exclusion of the Director unless and until his employment under this Agreement shall be terminated under any provision of this Agreement. 13. OBLIGATIONS UPON TERMINATION OF EMPLOYMENT ------------------------------------------ Upon the termination of his employment hereunder for any cause whatsoever the Director shall: (a) immediately delivery top the Company all documents, accounts, records, programs and other items of whatsoever nature or description which may be in his possession or under his control which relate in any way to the Business of the company or of any Associated Company and no copies of any such documents as aforesaid or any part thereof shall be retained by him; 7 (b) if so requested send to the Company Secretary a signed statement confirming that he has complied with Clause 14.1; (c) at any time at the request of the Board: (i) resign without compensation from office as a director of the Company or any Associated Company as the Director may hold at the time of such request; and (ii) transfer any shares in the Company or any Associated Company which the Director holds as nominee to such other person as the Board may direct and should the Director fail so to do the Company is HEREBY IRREVOCABLY ------------------ APPOINTED by way of security for the performance of the --------- Director's obligations hereunder as the Director's attorney to sign any documents and perform any other acts as are required to give effect hereto; and (d) not at any time represent himself as being employed by or connected with the Company or any Associated Company. 14. RESTRICTIONS AFTER TERMINATION ------------------------------ 14.1 The Director agrees that for a period of 2 years after termination of his employment hereunder (howsoever caused) he shall not within the Prohibited Area (as hereinafter defined): (a) be directly or indirectly engaged, concerned or interested whether as director, principal, agent, partner, consultant, shareholder, employee or otherwise in any other business of whatever kind which is wholly or partly in competition with the Business of the Company. (b) accept employment in any executive with any business concern which is wholly or partly in competition with the Business of the Company; (c) provide advice to any business concern which is wholly or partly in competition with the Business of the Company; or 14.2 The Director shall not within the Prohibited Area for a period of 12 months after the termination of his period of his employment hereunder (howsoever that comes about and whether lawfully or not) directly or indirectly and whether on his own behalf or on behalf of any other business concern, person, partnership, firm, company or other body which is wholly or party in competition with the Business of the Company: (a) canvass, solicit or approach or caused to be canvassed or solicited or approached for business any person or persons who at the date of the 8 termination of the Directors' appointment is or was a client or customer of the Company or was in the habit of dealing with the Company; (b) solicit or entice or endeavour to solicit or entice away from the Company any person employed by the Company at the date of such termination; or (c) employ any person who was employed by the Company during the last 12 months of the Director's employment hereunder. 14.3 The Director hereby convenants with the Company (acting on its own behalf and as trustee for each Associated Company) that he will perform and observe in relation to each such Associated Company the several convenants set out in the subclause and this convenant shall be construed and enforceable as a separate convenant in relation to each such Associated Company. 14.4 It is agreed that the restrictions contained in this clause are considered reasonable by the parties but in the event that any such restrictions shall be found to be void but would be valid if some part thereof were deleted or the period or area of application reduced such restrictions shall apply with such modification as may be necessary to make them valid and effective. 14.5 In this clause "the Prohibited Areas" means Hong Kong. 14.6 It is hereby agreed and declared that each of the convenants contained in the preceding sub-clauses on the part of the Director shall be a separate convenant and shall be construed and enforceable as a separate convenant. 15. GRIEVANCE AND DISCIPLINARY PROCEDURE ------------------------------------ In the event of the Director wishing to seek redress for any grievance relating to his employment or if he is dissatisfied with any disciplinary decision relating to him he should first apply in person to the Chairman of the Company. The Director must then promptly answer (in writing if required) such questions (if any) as the Chairman or the Board wishes to put to him on the matter before the Board comes to a decision. The decision of the Board on such matter shall be final. 16. NOTICES ------- Any notice to be given hereunder must be in writing. Notice to the Director will be sufficiently served by being delivered personally to him or by being sent by registered post addressed to him at his usual or last known place of abode. Notice to the Company shall be sufficiently served by being delivered to the Company Secretary or by being sent by registered post to the registered office of the Company. Any notice is so posted shall be deemed served upon the second day following that on which it was posted if not actually received sooner. 9 17. CANCELLATION OF PREVIOUS AGREEMENTS ----------------------------------- As from the Commencement Date all previous agreements or arrangements (whether written or oral, express or implied) between the Company and the Director relating to the employment of the Director by the Company shall be deemed to have been cancelled. 18. GOVERNING LAW, JURISDICTION --------------------------- This Agreement is governed by and is to be construed in accordance with the laws of Hong Kong and the parties hereby agree to submit to the non-exclusive jurisdiction of the courts of Hong Kong. 19. CONTINUANCE OF TERMS -------------------- The expiration or determination of this Agreement howsoever arising shall not affect such of the provisions hereof as are expressed to operate or have effect after the termination of this Agreement. IN WITNESS whereof the Director has been signed by or on behalf of the parties hereto the day and year first before written. For and on behalf of SUNBASE ASIA, INC. _______________________________________ Authorized Signature(s) SIGNED by ) on behalf of the Company ) in the presence of: ) SIGNED, SEALED AND DELIVERED ) by the Director in the ) presence of: ) 10 EX-10.22 5 SUBSCRIPTION AGREEMENT EXHIBIT 10.22 ===================================================================== DATED THE 2ND DAY OF AUGUST, 1996 (1) CHINA BEARING HOLDINGS LIMITED AND (2) ASEAN CAPITAL LIMITED AND (3) CHINA INTERNATIONAL BEARING HOLDINGS LIMITED AND (4) SUNBASE ASIA, INC. AND (5) SMITH ACQUISITION COMPANY, INC. AND (6) GLORY MANSION LIMITED AND (7) WARDLEY CHINA INVESTMENT TRUST AND (8) MC PRIVATE EQUITY PARTNERS ASIA LIMITED AND (9) CHINE INVESTISSEMENT 2000 _________________________________ SUBSCRIPTION AGREEMENT IN RESPECT OF CERTAIN CONVERTIBLE DEBENTURES TO BE ISSUED BY\ CHINA BEARING HOLDINGS LIMITED _________________________________ CHAO AND CHUNG ===================================================================== Exhibit 10.22 TABLE OF CONTENTS -----------------
DESCRIPTION PAGE NO. -------------------------------------------------------------------------------- 1. Purpose and Definition 2 2. Issue and subscription of the Debenture 5 3. Conditions Precedent 6 4. Completion 7 5. Representations and Warranties 9 6. Representations by each of the Investors 10 7. Specific Undertakings by ACL 11 8. Further Covenants 12 9. Specific Undertakings by SAI 18 10. Specific Undertaking by SPC 18 11. Corporate Governance 19 12. Notices 20 13. Costs and Expenses 21 14. Governing Law and Jurisdiction 22 15. Announcements and Confidentiality 24 16. General Provisions 25 17. Counterparts 26 SCHEDULE 1 Part I Corporate Chart 27 Part II Other Corporate details 28 Part III Status and Characteristics of the securities issued by SAI 36 SCHEDULE 2 Form of Certificate 37 Terms and Conditions of the Debentures 38 SCHEDULE 3 Representations and Warranties 61 SCHEDULE 4 Form of Guarantee 68 SCHEDULE 5 Employees / Directors' Options 77 SCHEDULE 6 Certification on Conversion Notice 78 SCHEDULE 7 Undertaking by ACL 79 SIGNATURE PAGE 87
THIS AGREEMENT is made on the 2nd day of August, 1996. (1) CHINA BEARING HOLDINGS LIMITED, the registered office of which is at Cedar House, 41 Cedar Avenue Hamilton HM12, Bermuda (the "COMPANY"); (2) ASEAN CAPITAL LIMITED, the registered office of which is at Omar Hodge Building, Wickhams Cay I, P.O. Box 362, Road Town, Tortola, British Virgin Islands ("ACL"); (3) CHINA INTERNATIONAL BEARING HOLDINGS LIMITED, the registered office of which is at 19th Floor, 51-57 Gloucester Road, Wanchai, Hong Kong ("CIBHL"); (4) SUNBASE ASIA, INC., the registered office of which is at 1280 Terminal Way, Suite 3, Reno Nevada 89502, United States of America ("SAI"); (5) SMITH ACQUISITION COMPANY, INC., a California corporation doing business as Southwest Products Company, the registered office of which is at 2240 Buena Vista, Irwindale, CA 91706, United States of America ("SPC"); (6) GLORY MANSION LIMITED, the registered office of which is at Craigmuir Chambers, P.O. Box 71, Road Town, Tortola, British Virgin Islands ("GML"); (7) WARDLEY CHINA INVESTMENT TRUST, the registered office of which is at c/o Suite 1610, P.O. Box 1016, 885 West Georgia Street, Vancouver B.C., V6C 3E8, Canada ("WCIT"); (the parties at (6) and (7) hereinafter collectively referred to us the "FUNDS" and each a "FUND"); (8) MC PRIVATE EQUITY PARTNERS ASIA LIMITED the registered office of which is at P.O. Box 309, Ugland House, South Church Street, Grand Cayman, Cayman Islands, British West Indies ("MC PARTNERS"); and (9) CHINE INVESTISSEMENT 2000, a Luxembourg-registered Unit Trust, the registered office of which is at L1118 Luxembourg, 14 Rue Aldringen ("CI 2000"); (the parties at (6), (7), (8) and (9) hereinafter collectively referred to as the "INVESTORS" and each an "INVESTOR") WHEREAS:- (A) The Company was incorporated in Bermuda under the Companies Act 1981 Bermuda and presently has such authorised and issued share capital as set out in Schedule 1 hereof. SAI is the holding company of the Company and was incorporated under the laws of Nevada and presently has a share capital as set out in Schedule 1 hereof. (B) The Company intends to issue certain convertible debentures of an aggregate principal value of US$11,500,000, and has agreed with the Investors to issue and each of the Investors has agreed to subscribe such number of Debentures (as hereafter defined) convertible into Shares (as hereinafter defined) upon and subject to such terms and conditions set out in this Agreement. (C) Each of the Funds is an investment fund (or a wholly- owned subsidiary of such Fund) managed by HSBC Private Equity Management Limited ("HPEM"). (D) SAI, CIBHL and SPC has each agreed to guarantee the obligations of the Company and of each other arising under this Agreement, the Debentures and the Guarantee. (E) ACL has agreed to guarantee, inter alia, the payment obligations of the Company under this Agreement and the Debentures. NOW IT IS HEREBY AGREED as follows: 1. PURPOSE AND DEFINITION ---------------------- 1.1 The Schedules form an integral part of this Agreement and shall be construed and have the same full force and effect as if expressly set out in the main body of this Agreement. 1.2 The words and expressions set out below shall have the meanings attributed to them below unless the context otherwise requires:- "ACCOUNTS" the latest published audited consolidated accounts or financial statements of SAI Group comprising their consolidated balance sheet as at 31st December, 1995 and their consolidated profit and loss account or income statement in respect of the financial year ended 31st December, 1995; 2 "ACL PROMISSORY NOTES" promissory notes issued by SAI in favour of ACL in the aggregate principal amount of UNITED STATES FIVE MILLION DOLLARS (US$5,000,000); "ACL UNDERTAKING" an undertaking or guarantee to be given by ACL in favour of the Investors in the form or substantially the same form as set out in Schedule 7 hereof; "AGREEMENT" this Subscription Agreement; "BUSINESS DAY" a day (excluding Saturday) on which banks in Hong Kong and New York are generally open for business; "BOARD" board of directors; "CERTIFICATE" the certificate to be issued in respect of the Debenture substantially in the form set out in Schedule 2 hereof; "COMPLETION" completion of the subscription contemplated herein pursuant to Clause 4; "COMPLETION DATE" (a) the fifteenth (15th) Business Day following the date hereof or if on such date the Conditions Precedent shall not have been fulfilled (or waived by the Majority Investors) the seventh (7th) Business Day following the date on which the Conditions Precedent are fulfilled (or waived by the Majority Investors); or (b) such other date as may be agreed between the Majority Investors and the Company provided that such date shall not be any later than the Long Stop Date; "CONDITIONS" the terms and conditions to be attached to the Certificate substantially in the form set out in Schedule 2 hereof; "CONDITIONS PRECEDENT" the conditions precedent set out in Clause 3.1 hereof; "CONVERSION DATE" the date on which the Conversion Rights are exercised in accordance with the Conditions; "CONVERSION RIGHTS" the rights attached to the Debentures to convert the principal amount or any part thereof into Shares; "CONVERSION SHARES" "the Shares to be issued by SAI under the Debentures upon conversion; "DEBENTURE" or the convertible debentures issued in "DEBENTURES" denominations of US$250,000 each by the Company in the form or substantially in the form set out in the Schedule 2 hereof; "DEBENTUREHOLDER" or the person or persons who is or are "DEBENTUREHOLDERS" for the time being the holder of the Debentures; "EVENT OF DEFAULT" an event of default as described in Condition 11 of the Conditions; "GUARANTEE" the guarantee to be given by the Guarantors in the form or substantially the same form as set out in Schedule 4 hereof; "GUARANTORS" or "GUARANTOR" SAI, CIBHL and SPC; "LONG STOP DATE" Forty-five (45) days from the date of this Agreement; "MAJORITY INVESTORS" the majority of the Investors in value holding more than 50% of the total principal amount of the Debentures outstanding; "PAYMENT BUSINESS DAY" a day (excluding Saturday) on which banks in Hong Kong and New York are generally open for business; "SAI GROUP" SAI and those companies appearing in the corporate chart of SAI as set out in Part I of Schedule 1 hereof (including those companies that shall from time to time become subsidiaries (as defined by the Companies Ordinance (Cap. 4 32 of the Laws of Hong Kong) of SAI after the date of this Agreement; "SHARES" the shares in the common stock of SAI existing at the date of this Agreement and all other (if any) stock or shares from time to time and for the time being to be issued ranking pari passu therewith and all other (if any) shares or stock resulting from any sub- division, consolidation or re- classification of the Shares; "SUPER-VOTING RIGHTS" such weighted voting rights of 500,000 votes per Series A Preferred Stock issued by the Company; "WARRANTIES" the representations and warranties contained in Clause 5 and Schedule 3 hereof; "HK"$ Hong Kong dollars; and "US"$ United States dollars. 1.3 Except as otherwise expressly provided, expressions defined in the Companies Ordinance (Cap. 32 of the Laws of Hong Kong) have the same meaning in this Agreement. 1.4 A reference to a statute or statutory provision includes a reference: (a) to that statute or provision as from time to time modified or re-enacted; (b) to any repealed statute or statutory provision which it re- enacts (with or without modification); and (c) to any orders, regulations, instruments or other subordinate legislation made under the relevant statute or statutory provision. 1.5 Unless the context otherwise requires:- (a) words in the singular include the plural, and vice versa; (b) words importing any gender include all genders; and (c) a reference to a person includes a reference to a body corporate and to an unincorporated body of persons. 5 1.6 A reference to a Clause, sub-Clause or Schedule is to a clause, sub-Clause or schedule (as the case may be) of or to this Agreement. 1.7 The headings are for convenience only and do not affect interpretation. 2. ISSUE AND SUBSCRIPTION OF THE DEBENTURE --------------------------------------- 2.1 Subject to fulfilment of the Conditions Precedent, at Completion, each of the Investors shall subscribe for Debentures of such aggregate principal value as set out against its name hereunder and shall pay or procure that there shall be paid to the Company (or any company or person as shall be directed by the Company) the amount of the subscription moneys for the Debentures:
Aggregate Principal US$ value of the Name of Investor Subscription Monies Debenture(s) to be issued ---------------- ------------------- ------------------------- GML 6,000,000 6,000,000 WCIT 2,000,000 2,000,000 MC Partners 2,000,000 2,000,000 CI 2000 1,500,000 1,500,000 ------------------- ------------------------- Total: US$11,500,000 US$11,500,000
2.2 Subject to fulfilment of the Conditions Precedent and at Completion, the Company shall, upon receipt of the subscription moneys referred to in Clause 2.1, issue the Debenture(s) at its full principal value to the respective Investors. 2.3 (a) None of the Funds shall be obliged to subscribe for any of the Debentures if the subscription for the Debentures is not completed simultaneously by the other two Investors in which case subscription hereunder shall be at the Funds' absolute discretion and the Company is obliged to complete the issue of such Debentures to the Funds pursuant to the terms and provisions of this Agreement if the Funds so elect notwithstanding the default by the other Investors but no default by only one of the Investors (not being a Fund) shall excuse the Funds from the performance of the Funds' and the non-defaulting Investor's (not being a Fund) obligations hereunder and Completion so effected shall, for the avoidance of doubt, in no way affect the obligations and the undertakings of the parties contained herein. (b) MC Partners shall not be obliged to subscribe for such Debentures as set out against its name in sub-Clause 2.1 if the subscription by the Funds for the Debentures against the Funds' names is not completed simultaneously. 6 If the Funds shall fail to complete the subscription of the Debentures pursuant to sub-Clause 2.1, MC Partners shall be entitled, at its absolute discretion, to subscribe for the Debentures that would have been subscribed by the Funds pursuant to sub-Clause 2.1 but for the Funds' default and the Company shall be obliged to complete the issue of such Debentures to MC Partners pursuant to the terms and provisions of this Agreement if MC Partners so elect. 3. CONDITIONS PRECEDENT -------------------- 3.1 The following are conditions precedent to Completion:- (a) a legal opinion shall have been obtained from the US lawyers, Messrs. Loeb & Loeb, to the satisfaction of the Majority Investors confirming (i) that no approvals or consents need to be applied for from any US authorities, bodies, governmental agencies or institutions in relation to the issue of the Debentures; (ii) that each of SAI and SPC has the power, capacity and authority to issue the Conversion Shares, to enter into this Agreement and the Guarantee and that in doing so it shall not have breached any laws (federal or state), regulations or contractual obligations; (iii) that (subject to approval being obtained on the listing of the Conversion Shares) the issue and allotment of the Conversion Shares will not be in breach of any regulations, codes or laws (federal or state); (iv) that save as mentioned there are no other approvals or consents that need to be applied for or obtained from any US authorities (federal or state) in connection with the transactions or matters contemplated hereunder; (v) that the share structure and other corporate details as contained in Schedule 1 hereof are accurate and correct and not in any way misleading; and (vi) that there are nothing the Majority Investors ought to be aware of or ought to be brought to their attention in relation thereto in order to effect the issue of the Conversion Shares or to maintain or effect the legality, validity and enforceability of this Agreement, the Debenture and the Guarantee against SAI or SPC; (b) (if applicable) relevant approval from the Bermuda Monetary Authority shall have been obtained; (c) (if applicable) such employment contracts with the key management of the SAI Group shall have been entered upon such terms to the satisfaction of the Funds; and (d) (if applicable) such management agreements or other agreements as shall be required by the Funds shall have been entered into or such acts or 7 deeds as shall be required by the Funds shall have been performed to the Funds' satisfaction in order to enable the subscription hereunder to qualify as a VCOC qualifying investment; 3.2 If the Conditions Precedent are not fulfilled on or before the Long Stop Date, this Agreement (save for Clauses 1, 12 to 17 and this Clause 3) will lapse and become null and void and the parties will be released from all obligations hereunder (save for Clauses 1, 12 to 17 and this Clause 3), save for any liabilities for any antecedent breaches hereof. 4. COMPLETION ---------- Subject to fulfilment of the Conditions Precedent, Completion shall take place on the Completion Date and each party referred to below shall perform its respective obligations as follows:- 4.1 The Company shall: (a) (if required by the Investors) deliver evidence in a form reasonably satisfactory to the Majority Investors that the Conditions Precedent referred to in Clause 3 hereof have been duly satisfied and fully complied with (unless otherwise waived by the Majority Investors); (b) deliver to the Investors a certified copy of the Board resolution of the Company approving and authorising execution and completion of this Agreement and the issue of the Debenture and the Certificate upon the terms and subject to the Conditions contained herein; (c) deliver to the Investors a certified copy of the Board resolution of SAI (i) approving and authorising execution and completion of this Agreement; (ii) the issue of the Debenture and Certificate by the Company upon the terms and subject to the conditions; (iii) approving and authorising the execution of the Guarantee; (iv) approving the issuance of the Conversion Shares upon conversion of the Debenture; and (v) resolving to effect and do all that is necessary to give effect to the Agreement, the Debenture, the Guarantee and the conversion under the Debentures; (d) deliver to the Investors a certified copy of Board resolution from each of CIBHL and SPC in each case approving and authorising the execution and completion of this Agreement and the Guarantee and resolving to effect and do all that is necessary to give effect to the Agreement, the Debenture, the Guarantee and the conversion under the Debentures; 8 (e) deliver to the Investors, a certified copy of Board resolution from ACL approving and authorising the execution and completion of this Agreement and the ACL Undertaking and resolving to effect and do all that is necessary to give effect to the Agreement, the Debenture and the ACL Undertaking; and (f) (against reasonable evidence that the monies referred in 4.2 below having been received from the Investors by the Company) deliver to each of the Investors (or to such persons at such place as the relevant Investor may direct) a Certificate or Certificates duly issued for the amount representing the subscription in favour of the relevant Investor (or its nominee). 4.2 At Completion, each of the Investors shall: (a) deliver to the Company evidence in a form reasonably satisfactory to the Company of its authority for the execution of this Agreement and the subscription of the Debentures thereunder; and (b) pay to the Company or as the Company may direct such amount of relevant subscription monies. 4.3 SAI and CIBHL shall enter into the Guarantee in the form or substantially the same form as set out in Schedule 4 hereof. 4.4 ACL shall enter into the ACL Undertaking in the form or substantially the same form as set out in Schedule 7 hereof. 4.5 All the obligations described herein are inter- conditional and none of the transactions shall be completed unless all of them are completed at Completion. Subject to Clause 2.3, none of the parties shall be obliged to complete this Agreement unless the other parties complies fully with their obligations hereunder. Without Prejudice to Clause 2.3, to the extent that the obligations of any parties hereto are not fully complied with at Completion, the other parties not in default may defer Completion to another day or proceed to Completion as far as practicable (without limiting its rights under this Agreement) or treat this Agreement as terminated for breach of a condition. 5. REPRESENTATIONS AND WARRANTIES 5.1 Each of the Company, the Guarantors and ACL (collectively the "WARRANTORS") hereby jointly and severally, represents, warrants and undertakes to each of the Investors that each of the Warranties is true and accurate in all material respects and not misleading as at the date hereof and shall continue to be true and accurate 9 in all material respects and not misleading on each day hereafter up to and including the Completion Date as if repeated on each such day. 5.2 Each of the Warranties shall be construed as a separate and independent warranty and (save where expressly provided to the contrary) shall not be limited or restricted by reference to or influence from any other term of this Agreement or any other warranty. 5.3 If any party hereto fails to perform its obligations hereunder or if any of the Warranties shall have been breached prior to Completion then without prejudice to all and any rights or remedies available to the non-defaulting party, it may by notice either require the defaulting party to perform any of its obligation on or prior to Completion or treat the defaulting party as having repudiated this Agreement and rescind the same. 5.4 Each of the Warrantors represents and warrants that no offer to sell the Securities (as defined in Clause 6) was made in the United States nor did any member of the SAI Group or any of their affiliates or any person acting on its or their behalf engage in any directed selling efforts (as defined in Regulation S of the Securities Act (as defined in Clause 6 below)) in the United States of America with respect to the offer or sale of the Securities (as defined in Clause 6). 6. REPRESENTATIONS BY EACH OF THE INVESTORS ---------------------------------------- Each of the Investors hereby represents and warrants that: (a) it has full power and authority to enter into this Agreement. This Agreement to which the Investor is a party constitutes the Investor's valid and legally binding obligation, enforceable in accordance with its terms except as may be limited by (i) applicable bankruptcy, insolvency, reorganisation or other laws of general application relating to or affecting the enforcement of creditors' rights generally and (ii) the effect of rules of law governing the availability of equitable remedies; (b) it is not a U.S. person (as defined in Regulation S under the Securities Act of 1933, as amended (the "SECURITIES ACT")), was not organised under the laws of any United States jurisdiction and was not formed for the purpose of investing in securities not registered under the Securities Act; (c) at the time of execution of this Agreement, it was outside the United States and the sale of the Debentures and the Conversion Shares (collectively the "SECURITIES") has not been prearranged with a buyer in the United States; 10 (d) it is purchasing the Securities for its own account for investment purposes and not for distribution; (e) all subsequent offers and sales of the Securities (i) (if to be made outside the United States) will be made in compliance with Rule 903 or Rule 904 of Regulation S or (ii) will be made pursuant to registration of the Securities under the Securities Act, or (iii) will be made pursuant to an exemption from registration and that there can be no assurance that it will be able to rely on any such exemption; (f) it understands that the Securities are being offered and sold to it in reliance on specific provisions of federal and state laws and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgements and understandings of the Investor set forth herein in order to determine the applicability of such provisions; and (g) it acknowledges that the Securities have not been registered under the Securities Act as at the date of this Agreement and for a period of 40 days after Completion it will not offer, sell, or deliver the Securities, directly or indirectly, in the United States or to, or for the benefit or account of, U.S. persons except pursuant to registration under the Securities Act or an exemption from such registration. Terms used herein have the meanings specified in Regulation S under the Securities Act. 7. SPECIFIC UNDERTAKINGS BY ACL ---------------------------- 7.1 ACL hereby irrevocably and unconditionally undertakes that for so long as any of the Debentures are outstanding, no amounts are to be repaid in respect of the ACL Promissory Notes unless: (a) there is sufficient positive operating cash flow for working capital, debt repayment and capital expenditure for the ensuing twelve- month period, such sufficiency to be determined by the Majority Investors on the basis of the cash flow forecast presented to it by ACL and/or SAI in the format and substance satisfactory to the Majority Investors; and (b) the repayment is made in accordance with the following schedule: Payment Period Amount -------------- ------ 1st August, 1996 - 31st July, 1997 up to US$2,000,000 plus accrued interest 1st August, 1997 - 31st July, 1998 up to US$1,500,000 plus accrued interest 11 1st August, 1998 - 31st July, 1999up to US$1,500,000 plus accrued interest ---------------------------------- Total: US$5,000,000 plus accrued interest In the event of dispute as to the sufficiency of the operating cash flow in (a) above, an independent merchant bank of repute or an independent firm of international accountants mutually agreed between ACL and the Majority Investors shall be appointed to determine the sufficiency of such operating cash flow whose decision shall be final and binding on the parties. 7.2 Each of ACL and SAI hereby undertakes that to the extent that any terms contained in Clause 7.1 above should conflict with any terms of the ACL Promissory Notes, the terms hereunder shall prevail and the ACL Promissory Notes shall be deemed to have been varied or modified to such extent so as to give effect to the provisions hereunder. ACL and SAI shall do and perform all that is necessary to give effect to this provision including the execution of any deeds, document and supplemental agreements. 7.3 ACL hereby irrevocably and unconditionally undertakes to each of the Investors that for so long as the Debenture is outstanding, ACL shall not without the prior written approval of the Majority Investors, exercise any Super-voting Rights attached to the Series A Preferred Stock to which ACL is entitled. 7.4 ACL hereby unconditionally and irrevocably undertakes to each of the Investors that for so long as any of the Debentures are outstanding, ACL shall, directly or indirectly, remain the legal and beneficial owner of not less than 51% of the Deemed Total Issued Share Capital of SAI (as defined in sub- Clause 8.5(c)) and retain control over not less than 51% of the voting rights of SAI (which for this purpose shall exclude Super-voting Rights but shall include a substitution of 100,000 votes per Series A Preferred Stock held for the purposes of calculation hereunder). ACL further undertakes that (subject to sub-Clause 8.5 hereof) it shall not sell, mortgage, pledge, charge, assign or otherwise purport to deal with the beneficial interest therein or any right in relation thereto (including voting rights) or create any lien or encumbrance over the Shares and/or the voting rights attached thereto. 8. FURTHER COVENANTS ----------------- 8.1 Representation -------------- (a) Each of the Company and the Guarantors hereby undertakes to appoint such person as shall be nominated by GML to each of its respective Boards as a director. 12 (b) SAI shall appoint such person as shall be nominated by GML as a member of the audit committee of SAI. (c) Each of the Company, the Guarantors and ACL shall procure that such appointments referred to in (a) and (b) shall continue for so long as any of the Debentures which are held by GML remains outstanding. 8.2 Continuing obligations ---------------------- Each of the Company, the Guarantors and ACL hereby undertakes that for so long as any of the Debentures remains outstanding: (a) SAI shall and ACL shall procure that SAI shall convene a meeting of its Board at least once every 3 months; (b) SAI shall and ACL shall procure that SAI shall deliver to each of the Investors a written agenda for each meeting of the Board, specifying in reasonable detail the matters to be raised at the meeting (together with a copy of the notice for convening the meeting) not less than two (2) working days before the date of the proposed meeting of the Board and each of the Investors shall be entitled to attend, but not to vote (unless if it is a director) at such meeting; (c) the Company shall bear all costs and expenses associated with or incurred in connection with attendances at such meetings referred to at (a) above by any of the Investors; (d) it shall prepare and provide or procure the preparation or provision of annual audited financial statements of the SAI Group to each of the Investors as soon as practicable after the end of the relevant financial year but in any event no later than 7 days after the filing of such audited financial statements with the U.S. Securities and Exchange Commission, such statements to be prepared in accordance with generally accepted accounting principal and practices and audited by internationally recognised independent firm of accountants acceptable to the Majority Investors; (e) it shall prepare and provide to each of the Investors or procure such preparation or provision of quarterly consolidated unaudited management accounts including variance analysis of key financial data showing the financial position and affairs of the SAI Group as soon as practicable after the end of each quarter but in any event no later than 7 days after the filing of such quarterly accounts with the U.S. Securities and Exchange Commission or in the case of the fourth (4th) quarter accounts no later 13 than 60 days after the end of such quarter, such management accounts to be in the same format as a Form 10-Q to be filed with the U.S. Securities and Exchange Commission; (f) it shall prepare and provide to each of the Investors or procure such preparation or provision of monthly consolidated management information of the SAI Group including but not limited to critical financial data as soon as practicable after the end of each month but in any event no later than 30 days; (g) it shall prepare and deliver or procure such preparation or provision of to each of the Investors no later than the day before the beginning of each financial year a proposed annual operating business plan and budget in the form and substance mutually agreed between SAI and the Majority Investors for the forthcoming financial year; (h) it shall allow any of the Investors, at the Investor's expense, to visit and inspect the property and premises of any member of the SAI Group at such reasonable time as may be requested by the relevant Investors; (i) it shall prepare and provide to each of the Investors or procure such preparation or provision of copies of all available financial statements, forecast and projection approved by the Board of SAI and all notices, minutes, proxy material, consents and other material provided to the Board of SAI, copies of all filings made with the US Securities and Exchange Commission and any other information relating to the business or financial data of SAI and/or the Company as the Investors may reasonably request; (j) it shall procure and ensure that the subscription moneys obtained by the Company from the subscription hereunder shall only be used as working capital to expand the business of the SAI Group and to repay existing debts and for no other purposes; (k) it shall ensure that all capital expenditure and related party transactions concerning SAI and/or the Company which require approvals from the respective Boards must first be submitted to the Funds for consultation and discussion before submission to the relevant Board for determination; (l) it shall ensure that each of the Funds shall enjoy the following management rights: (i) the rights to be consulted and to give advice to the management in respect of any relevant material development affecting any business 14 of any member of the SAI Group; to discuss the business operations, property and financial or other conditions of any member of the SAI Group with its respective officers, employees and directors; the rights to be consulted with or to give advice to the management on significant business issues or meet regularly with management during each year for such consultation and advice; (ii) the rights to inspect the books and records of SAI and appoint a qualified accountant to inspect SAI's accounting records at such reasonable time and as often as the Funds may reasonably request. (m) it shall notify each of the Investors promptly and without any delay after the happening of any events or changes that has a material adverse impact on the business, affairs, prospects, operations, properties, assets or condition of any member of the SAI Group or on ACL as the case may be; (n) it shall maintain the authorisation of the quotation of the Shares on NASDAQ and ensure that Conversion Shares to be issued will be authorised for quotation on NASDAQ. 8.3 Undertakings ------------ Each of the Company, the Guarantors and ACL hereby further undertakes and agrees that it shall procure that no member of the SAI Group shall at any time and for so long as any of the Debentures remains outstanding (including the exercise of all such voting powers and control it has, directly or indirectly over the members of the SAI Group), save with the prior written approval from each of the Funds: (a) make any changes to its capital structure or make any issues, sell or offer any Securities (as defined below) or any rights to subscribe for Securities whatsoever (except options or warrants already issued prior to the date of this Agreement as set out in Part III of Schedule I and Schedule 5 hereof); or (b) make any amendment to its memorandum and articles of association or equivalent constitutive documents; or (c) effect any merger, reconstruction or amalgamation with any other entity or undertaking; or 15 (d) effect any consolidation of all or any of its shares into shares of larger amount or sub-divide all or any of the shares into smaller amounts; or (e) vary, modify or abrogate any of the rights attaching to any of the Shares or redeem, purchase or cancel all or any of such Shares. For purpose of this sub-Clause, "SECURITIES" means any shares, stocks, debentures, loan stocks, funds, bonds or notes (excluding bank borrowings in the ordinary course of conducting the bearing business) of or issued by any of member of the SAI Group and includes (i) all rights, options or interest in or in respect of the foregoing (ii) certificate of interest or participation in or temporary or interim certificate for, receipt for, or warrants (including covered warrants) to subscribe to or purchase any of the foregoing, and (iii) index-linked instruments, future contracts or any other instruments commonly known as securities. 8.4 Right of First Refusal ---------------------- (a) Each of the Company, the Guarantors and ACL hereby agrees that it shall exercise all such voting powers and control it has, directly or indirectly over the members of the SAI Group to procure that for so long as the Funds shall hold in aggregate more than 50% of the total principal amount of the Debentures outstanding if any of the Securities were offered with the approval from the Funds pursuant to Clause 8.3 hereof, such Securities (as defined in sub- Clause 8.3) shall first be offered to each of the Funds by the relevant company in the SAI Group prior to the offer of any of such Securities to any other persons ("FIRST REFUSAL RIGHT") and if such offer is proposed for the first time since the date of this Agreement, in such manner as specified in sub-Clause 8.4(b) hereof. (b) The Securities shall first be offered to MC Partners who shall promptly notify the Funds of the terms of such offer and the details in relation thereto. MC Partners shall discuss with the Funds as to the level of their respective participations, it being understood that each of the Funds shall be entitled to participate in full or in such proportions it shall determine by virtue of the First Refusal Right granted to it under sub-Clause 8.4(a) hereof. 8.5 Negative Pledge --------------- (a) Without prejudice to sub-Clause 8.3 and Clause 11, for so long as any Debentures remains outstanding SAI, CIBHL, SPC and the Company hereby jointly and severally undertakes :- 16 (i) that none of the members of the SAI Group will create or permit to subsist any Security Interest (as defined below) for the benefit of the holders of any Securities (as defined in sub-Clause 8.3) upon the whole or any part of its property or assets, present or future, including for the purposes of securing (i) payment of any sum due (ii) any payment under any guarantee or (iii) any indemnity or other like obligation; (ii) that no other person (and it shall procure that no other person shall) create or permit to exist any Security Interest upon the whole or any part of the property or assets, present or future, of that other person to secure (i) any Securities (as defined in sub-Clause 8.3) of any member of the SAI Group or (ii) any guarantee of or indemnity in respect of any member of the SAI Group; and (iii) to procure that no person, other than SAI, CIBHL, SPC or the Company, gives any guarantee of or indemnity in respect of the Securities of any member of the SAI Group. (b) Without prejudice to sub-Clause 8.3 or of any of the foregoing, for so long as any of the Debentures remains outstanding, ACL undertakes that it shall not create or permit to subsist any Securities Interest (as defined below) upon the whole or any part of its property or assets, present or future, including for the purposes of securing (i) payment of any sum due (ii) any payment under any guarantee or (iii) any indemnity or other like obligation unless: (i) such Securities Interest is created in favour of a financial institution independent of and not connected with ACL or any member of the SAI Group on the one hand and any of the Majority Investors on the other hand; (ii) subject always to Clause 7.4 hereof, in relation to the creation of Securities Interest over any of the Shares held by ACL directly or indirectly, such Securities Interest created shall not result in ACL holding less than 35 per cent. of the Deemed Total Issued Share Capital of SAI (as defined below) free from all Securities Interest; and (iii) ACL shall notify promptly the Majority Investors thereafter of such creation. (c) For the purpose of this sub-Clause 8.5, the following words shall have the following meanings: 17 "SECURITY INTEREST" means any pledge, mortgage, lien, charge, hypothecation, encumbrance or other security interest. "DEEMED TOTAL ISSUED SHARE CAPITAL OF SAI" means the total Share capital of SAI deemed to be in issue which for this purpose, shall be the then actual existing total issued Share capital of SAI and (if any Series A Preferred Stock or Series B Preferred Stock is left outstanding) that number of Shares that would have been issued in respect of Series A Preferred Stock and Series B Preferred Stock had the same been all converted immediately prior to the relevant date under consideration as if such Shares form part of the enlarged issued Share capital of SAI in aggregate. 8.6 Registration ------------ Each of SAI and the Company hereby covenants, undertakes and agrees with the Investors that each Investor shall, if it is deemed to be an "AFFILIATE" under the U.S. Securities Act of 1933 of SAI (which interpretation shall be determined by a U.S. law firm to be agreed between the Funds and SAI or the Securities and Exchange Commission as the case may be), have the right to require SAI and/or the Company to file a registration statement under the Securities Act for a public offering / resale of all or any number of Conversion Shares held by the Investor upon conversion of any of the Debentures, such rights to be exercisable by the delivery of a written notice to SAI and/or the Company (the "NOTICE") specifying in detail the number of Conversion Shares required to be made the subject of the registration, the identity of the Investor and the intended method of resale of the Conversion Shares and SAI and/or the Company shall take all reasonable steps to commence the procedure for such filing within five (5) Business Days of receipt of the Notice. 8.7 Schedule 13D filing ------------------- Each of ACL, SAI and the Company hereby jointly and severally agrees to assist HPEM, GML and (if required) WCIT in filing Schedule 13D as soon as practicable after Completion and in any event no later than seven (7) days after the Completion Date. 9. SPECIFIC UNDERTAKINGS BY SAI ---------------------------- 9.1 SAI shall issue the Shares upon conversion by the Debentureholders pursuant to the terms of this Agreement and that of the Debentures and shall further keep available for issue, free from pre- emptive rights, out of its authorised but unissued capital sufficient Shares to satisfy in full the Conversion Rights and all 18 other rights for the time being outstanding of subscription for and conversion into Shares. 9.2 SAI shall not in any way modify the rights attached to the Shares as a class or attach any special restrictions thereto except with the prior written consent from the Funds. 9.3 SAI shall procure that at no time shall there be an issue of Shares of differing nominal value except with the prior written consent from the Funds. 9.4 SAI shall use its best endeavours (i) to maintain the authorisation of the quotation of all the issued Shares on NASDAQ; (ii) to obtain and maintain the authorisation of the quotation on NASDAQ (or a listing on an alternative stock exchange approved by the Funds) for all the Shares issued on the exercise of the Conversion Rights attaching to the Debenture. 9.5 SAI shall provide the Debentureholder with a copy of its annual reports, annual financial statements, interim reports and all other statements and circulars sent by SAI to its shareholders within fourteen days after SAI sends the same to its shareholders. 9.6 SAI shall ensure that all Shares issued upon conversion of the Debenture will be duly and validly issued, fully paid and non- assessable and will not be subject to pre-emptive rights. 10. SPECIFIC UNDERTAKING BY SPC --------------------------- SPC hereby undertakes that it shall and SAI hereby undertakes that it shall procure SPC shall within 10 Business Days following the first to occur of (a) the repayment in full of all sums due and owing to Foothill Capital Corporation under a Security Agreement dated as 17 March, 1995 between SPC and Foothill Capital Corporation and (b) 31 December 1996 (or such other date as shall be determined by the Majority Investors provided that all the Investors shall first have given their prior written consent to the alteration of this date), execute and deliver to the Investors the Guarantee in substantially the form attached hereto as Schedule 4 (to apply mutatis mutandis). For the avoidance of doubt failure by SPC to sign the Guarantee pursuant to this Clause shall constitute an Event of Default. 11. CORPORATE GOVERNANCE -------------------- Unless the prior written approval from the Funds have been obtained, each of the Company, the Guarantors and ACL undertakes that it shall and shall procure that 19 each of them shall exercise all such voting rights and other powers of control as is or shall be available to them to procure that no member in the SAI Group shall:- (a) acquire assets in excess of US$3,000,000; (b) borrow, lend or give any guarantee of any amount greater than US$3,000,000; (c) sell assets having a fair market value in excess of US$3,000,000; (d) make dividend payments in excess of twenty percent (20%) of SAI's Audited Earnings per Share ("EPS") for the relevant financial year. For this purpose, EPS shall mean audited earnings for the year minus or add back extraordinary items as defined under International Accounting Standard IAS8 and adding back interest expenses on the Debenture divided by the total weighted average number of Shares outstanding on a fully diluted basis (including the number of Shares that would have been issued had all the Debentures then outstanding been converted); (e) give any charge, mortgage, pledge or other security interest in excess of US$3,000,000; (f) enter into any related party transaction which itself exceeds or enter into any related party transactions in any 12-month period which when taken together exceeds US$1,000,000 except where such transaction is a normal commercial arms length transaction entered into in the ordinary course of the SAI Group's business of the manufacturing and sales of bearing products; (g) allow any of the events referred to in this Clause (a) to (e) above to occur if such event will involve such an amount or value (notwithstanding such amount may or may not exceed the relevant limit specified for that event under this Clause (a) to (e) hereof) when added to the existing cumulative total of the value of that event occurring in the preceding 12 months will take the overall cumulative total over 15% of the net asset value of SAI as shown in the latest audited consolidated accounts of SAI. 12. NOTICES ------- Any notice required or permitted to be given by or under this Agreement shall be in writing and shall be given by delivering it to the address or facsimile number of the relevant party connected shown below:- 20 THE COMPANY : c/o China International Bearing Holdings Limited 19th Floor, First Pacific Bank Centre, 51-57 Gloucester Road, Hong Kong Tel: (852) 2865 1511 Fax: (852) 2865 4293 ATTN.: MR. BILLY KAN / MR. ROGER LI SAI : c/o China International Bearing Holdings Limited 19th Floor, First Pacific Bank Centre, 51-57 Gloucester Road, Hong Kong Tel: (852) 2865 1511 Fax: (852) 2865 4293 ATTN.: MR. BILLY KAN / MR. ROGER LI SPC : c/o China International Bearing Holdings Limited 19th Floor, First Pacific Bank Centre, 51-57 Gloucester Road, Hong Kong Tel: (852) 2865 1511 Fax: (852) 2865 4293 ATTN.: Mr. Billy Kan / Mr. Roger Li ACL : c/o China International Bearing Holdings Limited 19th Floor, First Pacific Bank Centre, 51-57 Gloucester Road, Hong Kong Tel: (852) 2865 1511 Fax: (852) 2865 4293 ATTN.: MR. BILLY KAN / MR. ROGER LI CIBHL : 19th Floor, First Pacific Bank Centre, 51-57 Gloucester Road, Hong Kong Tel: (852) 2865 1511 Fax: (852) 2865 4293 ATTN.: MR. BILLY KAN / MR. ROGER LI GML : c/o HPEM, 10th Floor, Citibank Tower, 3 Garden Road, Hong Kong Tel: (852) 2845 7688 Fax: (852) 2845 9992 ATTN.: MR. GEORGE RAFFINI / MR. BRIAN LAW WCIT : c/o HPEM, 10th Floor, Citibank Tower, 3 Garden Road, Hong Kong Tel: (852) 2845 7688 Fax: (852) 2845 9992 21 ATTN.: MR. GEORGE RAFFINI / MR. BRIAN LAW MC PARTNERS : c/o MC Capital Asia Pte Limited Unit No. 1002 C/D 10th Floor, Tower 1, Admiralty Centre, 10 Harcourt Road, Hong Kong Tel: (852) 2866 3393 Fax: (852) 2866 2693 ATTN.: MR. YUJI KOMIYA/MR. TATSUYA KUROYANAGI CI 2000 : c/o Banque Worms, Hong Kong Branch 39th Floor, Central Plaza 18 Harbour Road, Hong Kong Tel: (852) 2802 8382 Fax: (852) 2802 8065 ATTN.: MR. FABRICE JACOB/MR. ANTOINE FOSSORIER or to such other address or facsimile number at the party concerned may have been notified to the other party pursuant to this Clause and may be given by sending it by hand to such address or by facsimile transmission to such facsimile number, or to such other address or facsimile number as the party concerned may have notified to the other party in accordance with this Clause. Such notice shall be deemed to be served on the day of delivery or facsimile transmission (or, if the day of delivery or transmission is not a Business Day or if the delivery or transmission is made after 5:00 p.m. Hong Kong time, deemed to be served on the immediately following Business Day), or if sooner upon acknowledgement of receipt by or on behalf of the party to which it is addressed. 13. COSTS AND EXPENSES ------------------ The legal costs incurred by the Funds in connection with the preparation and negotiation of this Agreement shall be borne by the Company. 14. GOVERNING LAW AND JURISDICTION ------------------------------ 14.1 This Agreement shall be governed by and construed in accordance with the laws of Hong Kong and each party hereby submits to the non-exclusive jurisdiction of the courts of Hong Kong as regards any claim or matter arising under this Agreement. 14.2 Each of the parties hereto irrevocably agrees for the benefit of each of the Investors that the courts of Hong Kong shall have jurisdiction to hear and 22 determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with this Agreement and, for such purposes, irrevocably submits to the jurisdiction of such courts. 14.3 Each of the parties hereto irrevocably waives any objection it might now or hereinafter have to the courts referred to in sub- Clause 14.1 above nominated as the forum to hear and determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with this Agreement and agrees not to claim that any such courts is not a convenient or appropriate forum. 14.4 Each of the Company, SAI, ACL and SPC hereby irrevocably appoints CIBHL (details of which are set out below) and CIBHL hereby accepts such appointment as each of their process agent to receive and acknowledge on its behalf service of any writ, summons, order, judgement or other notice of legal process in Hong Kong. Each of GML, WCIT, MC Partners and CI 2000 also hereby irrevocably appoints the persons set out against its name below to be its process agent:- Company : China International Bearing Holdings Limited ------- 19th Floor, First Pacific Bank Centre, 1-57 Gloucester Road, Hong Kong Tel: (852) 2865 1511 Fax: (852) 2865 4293 ATTN.: MR. BILLY KAN / MR. ROGER LI SAI : China International Bearing Holdings Limited --- 19th Floor, First Pacific Bank Centre, 51-57 Gloucester Road, Hong Kong Tel: (852) 2865 1511 Fax: (852) 2865 4293 ATTN.: MR. BILLY KAN / MR. ROGER LI ACL : China International Bearing Holdings Limited --- 19th Floor, First Pacific Bank Centre, 51-57 Gloucester Road, Hong Kong Tel: (852) 2865 1511 Fax: (852) 2865 4293 ATTN.: MR. BILLY KAN / MR. ROGER LI SPC : China International Bearing Holdings Limited --- 19th Floor, First Pacific Bank Centre, 51-57 Gloucester Road, Hong Kong Tel: (852) 2865 1511 Fax: (852) 2865 4293 ATTN.: MR. BILLY KAN / MR. ROGER LI 23 GML : HPEM, 10th Floor, Citibank Tower, --- 3 Garden Road, Hong Kong Tel: (852) 2845 7688 Fax: (852) 2845 9992 ATTN.: MR. GEORGE RAFFINI / MR. BRIAN LAW WCIT : HPEM, 10th Floor, Citibank Tower, ---- 3 Garden Road, Hong Kong Tel: (852) 2845 7688 Fax: (852) 2845 9992 ATTN.: MR. GEORGE RAFFINI / MR. BRIAN LAW MC Partners : MC Capital Asia Pte Limited ----------- Unit No. 1002 C/D 10th Floor, Tower 1, Admiralty Centre, 10 Harcourt Road, Hong Kong Tel: (852) 2866 3393 Fax: (852) 2866 2693 ATTN.: MR. YUJI KOMIYA/MR. TATSUYA KUROYANAGI CI 2000 : Banque Worms, Hong Kong Branch ------- 39th Floor, Central Plaza 18 Harbour Road, Hong Kong Tel: (852) 2802 8382 Fax: (852) 2802 8065 ATTN.: MR. FABRICE JACOB/MR. ANTOINE FOSSORIE 14.5 Each of the parties hereby consent generally in respect of any legal action or proceeding arise out of or in connection with this Agreement to the giving of any relief or any issue of any process in connection with such action or proceeding including, without limitation, the making, enforcement or execution against any property whatsoever (irrespective of its use or intended use) of any order or judgement which may be made or given in such action or proceeding. 15. ANNOUNCEMENTS AND CONFIDENTIALITY --------------------------------- 15.1 Subject to sub-Clause 15.2 below, no announcement or disclosure concerning the Agreement or any ancillary matter nor concerning any information of a confidential or proprietary nature of ACL or any member of the SAI Group shall be made by any parties hereto without the prior written approval of the other parties, any such approval not to be unreasonably withheld or delayed. 24 15.2 Either party may disclose information concerning this Agreement or any ancillary matter which would otherwise be confidential if and to the extent: (i) required by the law of any relevant jurisdiction; (ii) required by existing contractual obligations; (iii) required by any securities exchange or regulatory or governmental body to which either party is subject or submits, wherever situated, whether or not the requirement for information has the force of law; (iv) required to vest the full benefit of the Agreement in the other either parties; (v) disclosed to the professional advisors, auditors and bankers of each party; (vi) the information has come into the public domain through no fault of that party; or (vii) the other party has given prior written approval to the disclosure, such approval not to be unreasonably withheld or delayed in which case the party concerned shall take all such steps as may be reasonable and practicable in the circumstances to agree the contents of such announcement with the other parties before making such announcement PROVIDED THAT any such announcement shall be made only after consultation with or notice to the other party. 15.3 Subject to sub-Clause 15.2, each party shall treat as strictly confidential all information received or obtained as a result of entering into or performing the Agreement which relates to the provisions of the Agreement, the negotiations relating to the Agreement, the subject matter of the Agreement or the other parties. 15.4 Notwithstanding any termination of this Agreement, the restrictions contained in this Clause shall continue to apply after such termination for a period of five years thereafter. 16. GENERAL PROVISIONS ------------------ 16.1 As regards any date or period time shall be of the essence of this Agreement. 25 16.2 This Agreement shall be binding on and enure for the benefit of the successors of each of the parties and shall not be assignable. 16.3 The exercise of or failure to exercise any right to remedy in respect of any breach of this Agreement shall not, save as provided herein, constitute a waiver by such party of any other right or remedy it may have in respect of that breach. 16.4 Any right or remedy conferred by this Agreement on any party for breach of this Agreement (including without limitation the breach of any representations and warranties) shall be in addition and without prejudice to all other rights and remedies available to it in respect of that breach. 16.5 This Agreement constitutes the entire agreement between the parties with respect to its subject matter (neither party having relied on any representation or warranty made by the other party which is not contained in this Agreement) and no variation of this Agreement shall be effective unless made in writing and signed by all of the parties. 16.6 This Agreement supersedes all and any previous agreements, arrangement or understanding between the parties relating to the matters referred to in this Agreement and all such previous agreements, understanding or arrangements (if any) shall cease and determine with effect from this date hereof. 16.7 If at any time any provision of this Agreement is or becomes illegal, void or unenforceable in any respect, the remaining provisions hereof shall in no way be affected or impaired thereby. 17. COUNTERPARTS ------------ This Agreement may be executed by the parties hereto in any number of counterparts and on separate counterparts, each of which when so executed shall be deemed an original but all of which shall constitute one and the same instrument and is binding on all parties. AS WITNESS whereof this Agreement has been duly executed on the date first above written. 26 SCHEDULE 1 ---------------------------------- PART I -------------------------------- I. CORPORATE CHART --------------- [CORPORATE CHART APPEARS HERE] * Subject to qualification contained in Clause 4.2 of Schedule 3 27 II. OTHER CORPORATE DETAILS SUNBASE ASIA, INC. ------------------ Date of Incorporation : 21st September, 1994 Place of Incorporation : State of Nevada, United States Registered Office : 1280 Terminal Way, Suite 3, Reno, Nevada 89502, United States Registered Number : 14740-94 Authorised Share Capital : COMMON: ------- 50,000,000 shares of US$0.001 each PREFERRED: ---------- 25,000,000 shares of US$0.001 each Issued Share Capital : COMMON: ------- 12,711,104 shares of US$0.001 each PREFERRED: ---------- Series A Preferred Stock ------------------------ 36 shares Series B Preferred Stock ------------------------ 6,800 shares Shareholders : Asean Capital Ltd. : 80.69% Public: 19.31% Directors : Gunter Gao Billy Kan William Mckay Roger Li Yuen Fai Linda Yang Franco Ho Cho Hing Philip Yuen Secretary : Davis Lai Kwun Fai 28 CHINA BEARING HOLDINGS LIMITED ------------------------------ Date of Incorporation : 10th January, 1994 Place of Incorporation : Bermuda Registered Office : Cedar House, 41 Cedar Avenue, Hamilton HM 12, Bermuda Registered Number : N/A Authorised Share Capital : 1,200,000 shares of US$0.01 each Issued Share Capital : 1,200,000 shares of US$0.01 each Shareholders : 100% held by Sunbase Asia Directors : Gunter Gao Linda Yang Peter Bubenzer Judith Collis Billy Kan Roger Li Secretary : Linda Yang 29 CHINA INTERNATIONAL BEARING (HOLDINGS) LIMITED ---------------------------------------------- Date of Incorporation : 23rd June, 1993 Place of Incorporation : Hong Kong Registered Office : 19th Floor, First Pacific Bank Centre 51-57 Gloucester Road Wanchai, Hong Kong Registered Number : 429038 Authorised Share Capital : HK$10,000 Issued Share Capital : 2 shares of HK$1.00 each Shareholders : 100% held by China Bearing Holdings Limited Directors : Gunter Gao Linda Yang Billy Kan Roger Li Secretary : Astrine Limited 30 HARBIN SUNBASE DEVELOPMENT COMPANY LIMITED ------------------------------------------ Date of Incorporation : 28th January, 1993 Place of Incorporation : China Registered Office : 158 Zhong Shan Road, Harbin, China Registered Number : (1993) 539 Authorised Capital : RMB50,000,000 Capital Contribution : RMB50,000,000 Shareholders : China International Bearing (Holdings) Limited: 99% Harbin Hazhou Bearing Distributing Company : 1% Directors : Gunter Gao Linda Yang Roger Li Yuen Fai Peter Lam Chi Keong Davis Lai Kwun Fai Bi Qiu-Yuan Mok Chei Wai Secretary : N/A 31 HARBIN XINHENGLI DEVELOPMENT CO. LTD. ------------------------------------- Date of Incorporation : 18th September, 1993 Place of Incorporation : China Registered Office : 160 Zhong Shan Road, Harbin, China Registered Number : Harbin BR711 Authorised Capital : RMB50,000,000 Capital Contribution : RMB50,000,000 Shareholders : China International Bearing (Holdings) Limited: 99.9% Harbin Everising Construction and Development Co. Ltd.: 1% Directors : Gunter Gao Linda Yang Davis Lai Kwun Fai Liu Guang Zhi Mok Chei Wai Secretary : N/A 32 HARBIN BEARING COMPANY LIMITED -------------------------------------------- Date of Incorporation : 28th December, 1993 Place of Incorporation : China Registered Office : 14 Hongqi Street, Harbin, China Registered Number : 12802473-0 Authorised Capital : RMB300,000,000 Capital Contribution : RMB300,000,000 Shareholders : Harbin Xinhengli Development Co. Ltd. 41.57% Harbin Sunbase Development Co. Ltd. 10% Harbin Bearing Holdings Company: 33.33% Employees: 15% Harbin Xin Da Di Electrical Machinery Equipment Company: 0.1% Directors : Gunter Gao Linda Yang Lai Kwun Fai Ma Ji Bo Shun Hong Bin Zhang Zheng Bin An Fong Ming Ye Ruan Mok Chei Wai Secretary : N/A 33 SMITH ACQUISITION COMPANY, INC. DBA ----------------------------------- SOUTHWEST PRODUCTS COMPANY --------------------------
Date of Incorporation : 20th March, 1990 Place of Incorporation : State of California, United States Registered Office : 2240 Buena Vista, Irwindale, CA 91706, United States Registered Number : 3855488-7 Authorised Capital : Share Common: 10,000,000 shares of US$0.01 each Preferred : 4,000,000 shares with no par value Issued Share Capital : Common: US$3,400,000 Shareholders : 100% held by Sunbase Asia Directors : Billy Kan Roger Li William R. Mckay Dickens Chang Peter Lam Chi Keong Secretary : William R. Mckay
34 SHANGHAI SOUTHWEST BEARING COMPANY ----------------------------------
Date of Incorporation : 2nd August, 1994 Place of Incorporation : China Registered Office : 937 Zhongshan Nan Yi Road Shanghai, China Registered Number : Shanghai BR5202 Authorised Capital : US$3,600,000 Capital Contribution : US$3,600,000 Shareholders Factory: : Shanghai Hongxing Bearing 72.22% Southwest Products Company: 27.78% Directors : Yang Shu Jie : (others to be appointed later) (Note: according to Joint Venture agreement, 4 directors are nominated from Shanghai Hongxing and 2 directors are nominated from Southwest Products) Secretary : N/A
35 PART III -------- STATUS AND CHARACTERISTICS OF THE SECURITIES ISSUED BY SAI ---------------------------------------------------------- 1. SERIES A WARRANTS ----------------- SAI has outstanding an aggregate of 10,392,167 Series A Warrants (the "WARRANTS") to acquire an aggregate of 148,459.52 shares of SAI Common Stock. The Warrants expire on June 30, 1998. For each share of Common Stock to be purchased, the holder is required to deliver 70 Warrants together with an exercise price per share of Common Stock of $175.00. 2 SERIES A PREFERRED STOCK ------------------------ The holders of the Series A Preferred Stock have the right to convert each share of the Series A Preferred Stock into 100,000 shares of Common Stock. 3. SERIES B PREFERRED STOCK ------------------------ To the extent that the holders do not elect to redeem the shares of Series B Preferred Stock in connection with a public offering of SAI Common Stock, the Series B Preferred Stock is convertible into Common Stock on the basis of 100 shares of Common Stock for each share of Series B Preferred Stock. If, by the date which is two years after the date on which the shares of Series B Preferred Stock are distributed to the holders, such holders have not been able to redeem their shares because SAI has not made a public offering as specified, the Series B Preferred Stock will be automatically converted into shares of Common Stock on the following basis: On the first business day following the expiration of the two year period, each share is to be automatically converted into that number of shares of Common Stock that equals $500.00 divided by the lesser of $5.00 or the average closing price of SAI Common Stock computed by taking the then most recent 60 consecutive trading days when SAI Common Stock is traded at a minimum volume of 2,000 shares per day for 45 of those 60 consecutive trading days. 36 SCHEDULE 2 ---------- FORM OF CERTIFICATE ------------------- [ ] HOLDINGS LIMITED (INCORPORATED IN BERMUDA WITH LIMITED LIABILITY) [US$ ] CONVERTIBLE DEBENTURE Issued pursuant to the Memorandum of Association and Bye-laws of [_] Holdings Limited and a resolution of its Board of Directors passed on [_], 199[_]. THIS IS TO CERTIFY that [_] whose registered office is situate at [_] is the registered holder (the "DEBENTUREHOLDER") of the above- mentioned Convertible Debenture (the "DEBENTURE"). The Debenture is issued with the benefit of and subject to the terms and conditions attached hereto which shall form an integral part of this Certificate. GIVEN under the Seal of [_] Holdings Limited this day of _____________, 199[_]. __________________________________________ Director __________________________________________ Secretary / Director The Debenture cannot be transferred to bearer on delivery and is only transferable to the extent permitted by Condition 4 of the terms and conditions thereof. This Certificate must be delivered to the secretary of [_] Holdings Limited for cancellation and reissue of an appropriate certificate in the event of any such transfer. The Debenture has not been registered under the U.S. Securities Act of 1933, as amended (the "SECURITIES ACT"), and may not be exercised by or on behalf of U.S. persons unless registered or an exemption from registration is available. 37 TERMS AND CONDITIONS OF THE DEBENTURES -------------------------------------- The Debenture shall be held subject to and with the benefit of the terms and conditions set out below. Expressions defined in the Subscription Agreement dated [ ], 199[6] (the "SUBSCRIPTION AGREEMENT") between Asean Capital Limited, China International Bearing Holdings Limited, Sunbase Asia, Inc., Smith Acquisition Company, Inc., Glory Mansion Limited, Wardley China Investment Trust, MC Partners Asia Limited, Chine Investissement 2000 and China Bearing Holdings Limited (the "COMPANY") relating to the Debenture shall bear the same meaning in this Certificate. 1. PERIOD ------ Subject as provided herein, the outstanding principal amount of the Debentures shall be converted into Shares and/or shall be repaid subject to and in accordance with the terms of the Debentures on the third anniversary of the date of issue of the Debentures (the "MATURITY DATE"). 2. STATUS, FORM, DENOMINATION AND TITLE ------------------------------------ (A) STATUS The obligations of the Company arising under the Debentures constitute general, unsecured obligations of the Company and rank, and will rank equally among themselves and pari passu with all other present and future unsecured and unsubordinated obligations of the Company except for obligations accorded preference by mandatory provisions of applicable law. No application will be made for a listing of the Debentures. (B) FORM AND DENOMINATION The Debentures are issued in registered form in the denomination of US$250,000 each. Debenture certificate(s) (each a "CERTIFICATE") will be issued to each Debentureholder in respect of its registered holding(s) of Debenture(s). Each Debenture and each Certificate will be numbered serially with an identifying number which will be recorded on the relevant Certificate and in the register of Debentureholder kept by the Company. (C) TITLE Title to the Debentures passes only by registration in the register of Debentureholders. The holder of any Debenture will (except as otherwise required by law) be treated as its absolute owner for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any interest in it or 38 any writing on, or the theft or loss of, the Certificate issued in respect of it) and no person will be liable for so treating the holder. 3. NEGATIVE PLEDGE --------------- The Company, SAI, CIBHL, SPC and ACL have given in the Subscription Agreement certain negative pledges over creation of Securities Interest (as defined in the Subscription Agreement) for so long as any of the Debentures remains outstanding. 4. TRANSFERS OF DEBENTURES; ISSUE OF CERTIFICATES ---------------------------------------------- (A) TRANSFER (i) No Debentures may be transferred by any Debentureholders unless such transfer is in accordance with the provisions of (A)(ii) below. (ii) Debentures held by any of the Investors may be transferred at any time provided that: (a) such proposed transfer is in respect of half of or the entire amount of the principal amount of the Debentures then outstanding and held by that Investor or in the case of the Investor being a Fund, the Funds taken together in aggregate. No other transfer of any other amounts shall be allowed unless with the approval of the Company; (b) the Certificate(s) evidencing the Debenture(s) with the form of transfer duly completed and signed shall have been lodged with the specified office of the Company in accordance with the provisions at (iii) below; and (c) (in the event of a transfer by any of the Funds only) if the proposed transfer is to a transferee outside the HSBC Group (as defined below) such transfer must specify that the transferee shall not have assigned to it nor in any way enjoy or benefit from the various rights relating to management hitherto enjoyed by and granted to the Funds pursuant to the Subscription agreement. (iii) (a) the form of transfer shall be in a form previously agreed between the Company and the Debentureholders and shall be executed under the hand of the transferor and the transferee (or their duly authorised representatives) or, where either the transferor or 39 transferee is a corporation, under its common seal (if any) and under the hand of one of its officers duly authorised in writing or otherwise executed by a duly authorised officer thereof. In this Condition "transferor" shall, where the context permits or requires, include joint transferors or can be construed accordingly. (b) the Certificate of the Debenture must be delivered for registration to the Company accompanied by (i) a duly executed form of transfer; (ii) in the case of the execution of a form of transfer on behalf of a corporation by its officers, the authority of that person or those persons to do so; (iii) such other evidence as the Company may reasonably require if the form of transfer is executed by some other person on behalf of the Debentureholder; and (iv) such other evidence as the Company may reasonably require to support that the conditions and requirements of this Condition are satisfied. (iv) For so long as neither the Debentures nor the Conversion Shares have been registered under The Securities Act of 1933 or under the securities laws of any other jurisdiction, the Debentures and the Conversion Shares must not be sold unless such securities are registered under the Securities Act of 1933, or an exemption from the registration requirements of the Securities Act of 1933 is available. SAI may cause the certificate or certificates evidencing all or any of the Conversion Shares to bear a legend to that effect. (v) For the purposes of this Condition 4(A), "HSBC GROUP" shall mean any company or entity which is at any time a member of the Hongkong Bank Group or which (or the holding company of which) has its operation managed by a member of the Hongkong Bank Group and "HONGKONG BANK GROUP" means HSBC Holdings PLC and its subsidiaries. (B) DELIVERY OF NEW CERTIFICATES Subject to compliance with applicable securities laws and regulations, the Company shall, within 7 Business Days of receipt of such documents from the Debentureholder, cancel the existing Certificate and issue a new certificate under the seal of the Company, in favour of the transferee or assignee as applicable. Where only part of a principal amount (being that of one or more Debentures) of the Debentures in respect of which a Certificate is issued is to be transferred, converted or redeemed, a new Certificate in respect of the Debenture not so transferred, converted or redeemed will, within three (3) Business Days of delivery of the original Certificate to the Company be available for collection by the Debentureholders. 40 (C) FORMALITIES FREE OF CHARGE Registration of transfer of Debentures will be effected without charge by or on behalf of the Company, but upon payment (or the giving of such indemnity as the Company may require) in respect of any tax or other governmental charges which may be imposed in relation to such transfer. (D) For the purpose of this Condition, any change in: (i) the beneficial ownership of the Debentureholder (whether or not the registered holder of the Debenture is changed); or (ii) the ultimate control of the Debentureholder shall be regarded as a transfer of the Debentures, and the Debentureholder shall procure that the conditions, requirements and other provisions regarding transfer under this Condition shall be followed and complied with by the beneficial owner of the Debentures and by its ultimate controller and ultimate beneficial shareholder accordingly. 5. INTEREST -------- (A) Subject to Condition 5(B) below, the Debentures will bear interest from the date of issue on the principal amount of the Debentures outstanding from time to time at the rate of the higher of (i) 5 per cent. per annum (net of withholding tax, if applicable) and (ii) such percentage of the dividend yield calculated by reference to dividing the annual dividend declared per Share by the Conversion Price. The interest will, subject as provided herein, be payable by the Company quarterly in arrears on dates falling three months, six months, nine months, one year, one year and three months, one year and six months, one year and nine months and two years, two years and three months, two years and six months, two years and nine months after the date of issue of the Debenture. (B) In the event that the Debentureholder has converted part or whole of the principal amount of the Debentures into Shares, the Debentureholder shall be entitled to interest in respect of such part or whole of the principal amount for the period from the last preceding interest payment date (or the date of issue of the Debenture, as the case may be) up to the Conversion Date concerned. 41 6. PAYMENTS -------- (A) Payment of the interest and principal (if any) in respect of the Debentures shall be made on the due dates into such bank account as the Debentureholder may notify the Company in writing from time to time. All payments by the Company shall be made in United States dollars. (B) If the due date for payment of any amount in respect of the Debentures is not a Payment Business Day, the Debentureholder will be entitled to payment on the next following Payment Business Day in the same manner together with interest accrued in respect of any such delay. 7. CONVERSION ---------- (A) CONVERSION RIGHT (a) The Conversion Right: Subject as hereinafter provided, the Debentureholders have the right to convert the whole or part of the principal amount of the Debentures into Shares at any time and from time to time, from the date of issue of the Debenture up to the close of business on the Maturity Date in amounts of not less than US$250,000 (and in integral multiples thereof) on each conversion. The Company shall procure that such Shares be issued by SAI upon the exercise of such right hereunder. (b) Number of Shares: The number of Shares to be issued on conversion of a Debenture will be determined by dividing the principal amount of the Debenture to be converted by the Conversion Price in effect at the Conversion Date (both as hereinafter defined). On conversion the right of the converting Debentureholder to repayment of the principal amount of the Debentures being converted shall be extinguished and released, and in consideration and in exchange therefor SAI shall allot and issue Shares credited as paid up in full as provided in this Condition. A Conversion Right may be exercised in respect of one or more Debentures. If more than one Debenture held by the same holder is converted at any one time by the same holder, the number of Shares to be issued upon such conversion will be calculated on the basis of the aggregate principal amount of the Debentures to be converted. (c) Fractions of Shares: Fractions of Shares will not be issued on conversion. Notwithstanding the foregoing, SAI will upon conversion of Debenture pay in cash in United States dollars a sum equal to such portion of the principal amount of the Debenture or Debentures evidenced by the Certificate deposited in connection with the exercise of Conversion Rights as corresponds to any fraction of a Share not issued as a result if such sum exceeds US$10. 42 (d) Conversion Price: The price at which Shares will be issued upon conversion (the "CONVERSION PRICE") will initially be US$5.00 per Share but will be subject to adjustment in the manner provided in this Condition. (e) Meaning of "Shares": As used in these Conditions, the expression "SHARES" means shares of SAI listed and traded on NASDAQ or shares of any class or classes resulting from any subdivision, consolidation or re-classification of those shares, which as between themselves have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation or dissolution of SAI. (f) Conversion Date: The conversion date in respect of a Debenture must fall at a time when the Conversion Right attaching to the Debenture is expressed in these Conditions to be exercisable and will be deemed to be the Business Day immediately following the date of the surrender of the Certificate in respect of such Debenture and the delivery of such Conversion Notice (as defined below). (g) Status of Conversion Shares: The Shares issued upon conversion of the Debenture will in all respects rank pari passu with the Shares in issue on the relevant Registration Date (as defined below). Save as set out in these Conditions, a holder of Shares issued on conversion of Debenture shall not be entitled to any rights the record date for which precedes the relevant Registration Date. (B) CONVERSION PROCEDURE (a) Conversion Notice: To exercise the Conversion Right attaching to any Debenture, the holder thereof must complete, execute and deposit during normal business hours at the specified office of the Company a notice of conversion (a "CONVERSION NOTICE"). The Conversion Notice must state a certification as contained in Schedule 6 of the Subscription Agreement. (b) Registration: As soon as practicable, and in any event not later than 7 days after the Conversion Date, SAI will, in the case of Debentures converted on exercise of the Conversion Right and in respect of which a duly completed Conversion Notice has been delivered and the relevant Certificate and amounts payable by the relevant Debentureholder deposited as required, register the person or persons designated for the purpose in the Conversion Notice as holder(s) of the relevant number of Shares in its Share register and will cause its share registrar to mail, such certificate or certificates to the person and at the place specified in the Conversion Notice, together with any other securities, property or cash required to be delivered upon conversion and such assignments and other documents (if any) as may be required by law to effect the transfer thereof. The person or persons will become the holder of record of the number of Shares issuable upon 43 conversion with effect from the date he is or they are registered as such in the SAI's register of members (the "REGISTRATION DATE"). (c) Subsequent Adjustments: Debentures which are converted will be cancelled by removal of the Debentureholder's name from the register of Debentureholders on the relevant Registration Date. If the Conversion Price is adjusted with effect (retroactively or otherwise) from a date falling on or before the Registration Date of any Shares issued on conversion of a Debenture the Debentureholder's entitlement to which was arrived at on the basis of the unadjusted Conversion Price, SAI will procure that the provisions of this sub-paragraph shall be applied, mutatis mutandis, to the number of additional Shares which would have been required to be issued on conversion of such Debenture if the relevant adjustment had been given effect to as at the Conversion Date. (C) ADJUSTMENTS IN CONVERSION PRICE The Conversion Price shall from time to time be adjusted in accordance with the following relevant provisions and if the event giving rise to any such adjustment shall be such as would be capable of falling within more than one of the following sub- paragraphs, it shall fall within the first of the applicable paragraphs to the exclusion of the remaining paragraphs: (a) If and whenever the SAI Shares by reason of any consolidation or sub- division become of a different nominal amount (par value), the Conversion Price in force immediately prior thereto shall be adjusted by multiplying it by the revised nominal amount (par value) and dividing the result by the former nominal amount(par value). Each such adjustment shall be effective from the close of business in Hong Kong on the day immediately preceding the date on which the consolidation or sub-division becomes effective. (b) If and whenever SAI shall issue any SAI Shares (except if such issue is made as a result of an election to receive scrip instead of cash dividend provided that if such scrip is valued at the closing market price of the SAI Share on the date the dividend is declared) credited as fully paid by way of capitalisation of profits or reserves (including any share premium account and capital redemption reserve fund), the Conversion Price in force immediately prior to such issue shall be adjusted by multiplying it by the aggregate nominal amount of the issued and paid up SAI Shares immediately before such issue and dividing the result by the sum of such aggregate nominal amount and the aggregate nominal amount of the SAI Shares issued in such capitalisation. Each such adjustment shall be effective (if appropriate retroactively) from the commencement of the day next following the record date for such issue. 44 (c) If and whenever SAI shall make any Capital Distribution (as defined below) to holders of SAI Shares (in their capacity as such) (whether on a reduction of capital or otherwise) the Conversion Price in force immediately prior to such distribution shall be adjusted by multiplying it by the following fraction:- A - B ----- A where: A = the closing market price (as defined below) per SAI Share on the dealing date immediately preceding the date on which the Capital Distribution is publicly announced or (failing any such announcement) the day preceding the date of the Capital Distribution; and B = the fair market value on the day of such announcement or if no such announcement was made (as the case may require) the day before the date of the Capital Distribution, as determined by an independent merchant bank or such professional adviser jointly approved by SAI and the Majority Investors of that portion of the Capital Distribution or of such rights which is attributable to one Share, such adjustment shall be effective (if appropriate retroactively) from the commencement of the day next following the record date for the Capital Distribution. (d) If and whenever SAI shall offer to holders of SAI Shares new Shares for subscription by way of rights, or shall grant to holders of Shares any options or warrants to subscribe for new SAI Shares, at a price which is less than the lower of the market price and the Conversion Price at the date of the announcement of the terms of the offer or grant, the Conversion Price shall be adjusted by multiplying the Conversion Price in force immediately before the date of the announcement of such offer or grant by the following fraction:- C + D ----- C + E where: 45 C = the number of SAI Shares in issue immediately before the date of such announcement; D = the number of SAI Shares which the aggregate of the two following amounts would purchase at the lower of such market price and the Conversion Price: (a) the total amount (if any) payable for the rights, options or warrants being offered or granted; and (b) the total amount payable for all of the new SAI Shares being offered for subscription or comprised in the options or warrants being granted; and E = the aggregate number of SAI Shares offered for subscription or comprised in the options or warrants being granted. Such adjustment shall become effective (if appropriate retroactively) from the commencement of the day next following the record date for the relevant offer or grant. (e) (aa) If and whenever SAI shall issue wholly for cash any securities which by their terms are convertible into or exchangeable for or carry rights of subscription for new SAI Shares, and the total Effective Consideration per SAI Share (as defined below) initially receivable for such securities is less than the lower of the market price and the Conversion Price at the date of the announcement of the terms of issue of such securities, the Conversion Price shall be adjusted by multiplying the Conversion Price in force immediately prior to the issue by the following fraction: F + G ----- F + H where: F = the number of SAI Shares in issue immediately before the date of the issue; G = the number of SAI Shares which the total Effective Consideration receivable for the securities issued would purchase at the lower 46 of such market price and the Conversion Price; and H = the number of SAI Shares to be issued upon conversion or exchange of, or the exercise of the subscription rights conferred by, such securities at the initial conversion or exchange rate or subscription price. Such adjustment shall become effective (if appropriate retrospectively) from the close of business in Hong Kong on the Business Day next preceding whichever is the earlier of the date on which the issue is announced and the date on which the issuer determines the conversion or exchange rate or subscription price. (bb) If and whenever the rights of conversion or exchange or subscription attached to any such securities as are mentioned in section (aa) of this sub- paragraph (e) are modified so that the total Effective Consideration per SAI Share initially receivable for such securities shall be less than the lower of the market price and the Conversion Price at the date of announcement of the proposal to modify such rights of conversion or exchange or subscription, the Conversion Price shall be adjusted by multiplying the Conversion Price in force immediately prior to such modification the following fraction: I + J I + K where: I = the number of SAI Shares in issue immediately before the date of such modification; J = the number of SAI Shares which the total Effective Consideration receivable for the securities issued at the modified conversion or exchange price would purchase at the lower of such market price and Conversion Price; and K = is the number of SAI Shares in issue immediately before such date of modification plus the number of SAI Shares to be issued 47 upon conversion or exchange of or the exercise of the subscription rights conferred by such securities at the modified conversion or exchange rate or subscription price. Such adjustment shall become effective as at the date upon which such modification shall take effect. A right of conversion or exchange or subscription shall not be treated as modified for the foregoing purposes where it is adjusted to take account of rights or capitalisation issues and other events nominally giving rise to adjustment of conversion or exchange terms. For the purposes of this sub-paragraph (e), the "TOTAL EFFECTIVE CONSIDERATION" receivable for the securities issued shall be deemed to be the consideration receivable by SAI for any such securities plus the additional minimum consideration (if any) to be received by SAI upon (and assuming) the conversion or exchange thereof or the exercise of such subscription rights, and the total Effective Consideration per SAI Share initially receivable for such securities shall be such aggregate consideration divided by the number of SAI Shares to be issued upon (and assuming) such conversion or exchange at the initial conversion or exchange rate or the exercise of such subscription rights at the initial subscription price, in each case without any deduction for any commissions, discounts or expenses paid, allowed or incurred in connection with the issue. (f) If and whenever SAI shall issue wholly for cash any SAI Shares at a price per SAI Share which is less than the lower of the market price and the Conversion Price at the date of the announcement of the terms of such issue, the Conversion Price shall be adjusted by multiplying the Conversion Price in force immediately before the date of such announcement by the following fraction:- L + M ----- L + N where: L = the number of SAI Shares in issue immediately before the date of such announcement; M = the number of SAI Shares which the aggregate amount payable for the issue would purchase at the 48 lower of such market price and the Conversion Price; and N = the number of SAI Shares in issue immediately before the date of such announcement plus the number of SAI Shares so issued. Such adjustment shall become effective on the date of the issue. (g) If and whenever the cumulative Audited Earnings Per Share ("EPS") for any two consecutive financial years commencing with the financial year ending 1996 and ending with the financial year ending 1998 are less than the corresponding management's projection of cumulative EPS for such years as stated below ("MP"), the Conversion Price shall be adjusted in accordance with the following formula:- MP - EPS Adjusted Conversion Price=US$5.00* [1 ] MP *(Subject to adjustment pursuant to this Condition 7(C)(a) to (f) inclusive) where: MP : MP\\1\\ + MP\\2\\ OR MP\\2\\ + MP\\3\\ MP\\1\\ : 1996 = US$0.72 MP\\2\\ : 1997 = US$1.07 MP\\3\\ : 1998 = US$1.61 and EPS shall be the EPS for the corresponding financial years. Provided Always: (i) the Company shall present a certificate showing the calculation and the adjustment to be effected within 7 Business Days from the date the audited accounts of SAI for the relevant financial year first becomes available; (ii) the adjustment occurring in this Condition 7(C)(g) shall become effective on the 14th Business Day following the day the audited accounts of SAI for the relevant financial year first becomes available; 49 (iii) for the avoidance of doubt, if the Conversion Price has already been adjusted in 1998 in respect of the two financial years ending 1996 and 1997 (the "FIRST ADJUSTED PRICE") and the Conversion Price falls to be further adjusted in 1999 in respect of the two financial years ending 1997 and 1998 (the "SECOND ADJUSTED PRICE"), the second adjustment mentioned hereunder shall also be made on the basis of US$5.00 (as adjusted, if relevant, by any of the Condition 7(C)(a) to (f) inclusive); and (iv) if two adjustments fall to be made by virtue of the provisions of this Condition 7(C)(g), the Second Adjusted Price shall prevail over the First Adjusted Price whereupon the First Adjusted Price shall lapse and be of no effect. (D) DEFINITIONS AND EXCEPTIONS (a) For the purpose of this Condition:- "announcement" shall include the release of an announcement to the press or the delivery or transmission by telephone, telex or otherwise of an announcement to NASDAQ or the relevant stock exchange and "date of announcement" shall mean the date on which the announcement is first so released, delivered or transmitted; "Audited Earning per share or EPS" is defined as audited earnings for the year minus or add back extraordinary items as defined under International Accounting Standard, IAS8, and adding back interest expenses on the Debenture divided by the total weighted average number of Shares outstanding on a fully diluted basis (including the number of Shares that would have been issued had all the Debentures then outstanding been converted); "Capital Distribution" means non-cash dividend or other distribution (other than any distribution in winding-up) in cash or in specie; "issue" shall include allot; "market price" means the closing price of one SAI Share as shown by the official list (or the equivalent thereof) of NASDAQ for one or more board lots of SAI Shares on the day on which the market price is to be ascertained; "SAI Shares" means Shares and includes, for the purposes of SAI Shares comprised in any issue or, distribution or grant pursuant to this provision 50 of any such Shares of the Company as, when fully paid, will be SAI Shares; "reserves" includes unappropriated profits; and "rights" includes rights in whatsoever form issued. (b) (i) Subject to (b)(ii) below, the provisions of Condition 7(C) shall not apply to an issue of SAI Shares or other securities of SAI wholly or partly convertible into, or carrying rights to acquire, SAI Shares to officers or employees of SAI Group pursuant to an employee or executive share option scheme for an aggregate of 2,500,000 SAI Shares as set out in Schedule 5 of the Subscription Agreement. (ii) 2,050,000 SAI Shares out of 2,500,000 SAI Shares must be issued and allotted to those persons and upon such terms as set out in Schedule 5 hereof and the balance of 450,000 SAI Shares must also be granted by SAI's Compensation Committee and issued and allotted pursuant to SAI's 1995 Option Plan at a value not being less than the fair market value of the SAI Shares on the date the options are granted. (iii) The provisions of Condition 7(C) shall also not apply to the issue of Shares in connection with the conversion of the Series B Preferred Stock as described in Part III of Schedule 1 hereof. (E) ADJUSTMENTS DETERMINATION (a) On any adjustment if the relevant Conversion Price is not an integral multiple of one US cent, such shall be rounded down to the nearest US cent. (b) No adjustment shall be made to the Conversion Price where such adjustment (rounded down if applicable) would be less than one per cent. of the Conversion Price then in effect. Any adjustment not required to be made, and any amount by which the Conversion Price has been rounded down, shall be carried forward and taken into account in any subsequent adjustments. Notice of any adjustment shall be given to Debentureholders as soon as practicable after the determination thereof. The Conversion Price may not be reduced so that, on conversion of Debentures, Shares would fall to be issued at a discount to their par value. (c) Where more than one event which gives or may give rise to an adjustment to the Conversion Price occurs within such a short period of time that in 51 the opinion of the Majority Investors the provisions at Condition 7(C) would need to be operated subject to some modification in order to give the intended result, such modification shall be made to the operation of the provisions at Condition 7(C) as may be advised by the Majority Investors to be in their opinion appropriate in order to give such intended result. (d) No adjustment involving an increase in the Conversion Price will be made, except in the case of a consolidation of the Shares as referred to above or in the case of adjustment under Condition 7(C)(g) above or in the case to correct an error in a previous calculation of the Conversion Price. (e) In any circumstances where any of the Debentureholders shall not agree with the adjustment to the Conversion Price whether as regards to the basis upon which adjustment has made or as regards the effective date, the Majority Investors may appoint an independent merchant bank or such professional adviser jointly approved by SAI and the Majority Investors to consider how the adjustment should be appropriately done to reflect the relative interest of the persons affected thereby and such determination shall modify or nullify the adjustment accordingly. (f) Whenever the Conversion Price falls to be adjusted, the Company shall prepare such adjustments as soon as practicable but in any event no later than 7 days after the occurrence of the relevant adjustment event (except in relation to an event occurring under Condition 7(C)(g) hereunder in which case the provisions thereunder shall apply) and give notice to the Debentureholders that the Conversion Price has been adjusted and shall at all times thereafter for so long as the Debentures remains outstanding make available for inspection at the principal place of business of the Company a copy of the certificate signed by an independent director of SAI setting forth details of the event giving rise to the adjustment. 8. PROCEDURE FOR CONVERSION The Conversion Rights pursuant to Condition 7(A) may, subject as provided herein, be exercised on any Business Day prior to maturity of the Debenture by the Debentureholder delivering to the principal place of business of the Company in Hong Kong a written notice stating the intention of the Debentureholder to convert and the address for the delivery of the share certificates of the Conversion Shares pursuant to 7(B) together with the Certificate. The Company shall be responsible for payment of all taxes and stamp duty, issue and registration duties (if any) and levies and charges (if any) arising on any such conversion. 52 9. REDEMPTION 10. UPON MATURITY Unless previously redeemed or converted or purchased and cancelled as provided herein, the Company will redeem each Debenture on the Maturity Date at its principal amount outstanding together with any accrued but unpaid interest calculated up to and including the date of payment together with an amount that would enable the Debentureholder to yield in aggregate an internal rate of return ("IRR") of 12% per annum on the costs of its investment. For this purpose, the internal rate of return shall bear the same meaning as defined in Condition 11(C). Redemption upon maturity is mandatory and automatic without service of any notice. The Company can not redeem the Debentures in whole or in part at its option prior to the Maturity Date. (A) Upon the occurrence of an Event of Default Upon the occurrence of an Event of Default, the Company shall redeem the whole of or part of the Debentures as shall be required by virtue by the Debentureholders in such manner as specified in Condition 11 below. (B) Upon the occurrence of certain event of adjustment (a) In the event that an adjustment arising by virtue of an event described in Condition 7(C)(g) occurs and such adjustment would result in (i) the number of Shares that would have been issued to the Funds in aggregate had Conversion immediately taken place or (ii) the number of Shares that would have been issued to any one of the Investors had Conversion immediately taken place to exceed 20% of the Deemed Total Issued Share Capital of SAI (including also for this purpose such number of Shares that would have been issued upon Conversion of all of the Debentures), that portion of the Debenture(s) representing the excess of such Shares over such 20% ("THE EXCESS") (as defined below) shall, at the option of the relevant Debentureholder, be redeemed by the Company at its principal amount outstanding together with any accrued but unpaid interest calculated up to and including the date of payment together with an amount that would enable the Debentureholder to yield in aggregate an IRR (as defined below) of 19.75% per annum. The Debentureholders shall exercise this right by service of a notice on the Company and the Company shall promptly make payment within 45 days after receipt of such notice. (b) For the purpose of this Condition, Excess shall be calculated as follows: 53 Q (PIE) (R(PIE) S) where: Q = principal amount of the Debentures outstanding held by the Funds or the Investor (not being a Fund) as the case may be R = Conversion Price, as adjusted by virtue of Condition 7(C)(g) S = the number of Shares that need to be issued upon conversion of the Debentures in order to give a twenty percent (20%) holding by the Funds in aggregate or the Investor (not being a Fund) as the case may be of the Deemed Total Issued Share Capital of SAI (including also for this purpose such number of Shares that would have been issued upon Conversion of all of the Debentures) (D) All Debentures which are redeemed, converted or purchased by the Company will forthwith be cancelled. 11. Protection of the Debentureholder The Guarantors and ACL have undertaken certain matters in the Subscription Agreement for the protection of the Debentureholders for so long as any of the Debentures remains outstanding. 12. Events of default (A) If any of the following events ("EVENT OF DEFAULTS") occurs each of the Debentures shall automatically become immediately due and payable in full by the Company at its principal amount outstanding together with any accrued but unpaid interest calculated up to and including the date of payment together with an amount that would enable the Debentureholder to yield in aggregate IRR on its cost of investment of 19.75% per annum unless the Company shall have received a notice from any of the Debentureholders to the effect that such redemption shall only be in respect of part of the Debentures held by that Debentureholder in which case the amount payable hereunder shall only be in relation to that part of the Debentures that Debentureholder wishes to redeem. 54 (B) An Event of Default occurs when:- (a) the listing of the Shares (as a class) on NASDAQ:- (i) ceases; (ii) is suspended for a continuous period of 90 days on each of which NASDAQ is generally open for trading, such suspension having occurred by any reason whatsoever; or (b) SAI or the Company fails to obtain a listing or authorisation for quotation of the Conversion Shares on NASDAQ; or (c) the Company or any of the Guarantors or ACL defaults in performance of any of its obligations contained in the terms and conditions of the Debenture or the Subscription Agreement or the ACL Undertaking, and such event to the extent it can be remedied continues to subsist for a continuous period of 30 days after notice of such event is given from the Majority Debentureholders to the Company; or (d) there is default in the payment of principal or the premium (if any) or interest on any of the Debenture within seven (7) days in the case of principal or premium of fourteen (14) days in the case of interest from the due date for payment; or (e) any Indebtedness of a material nature for borrowed money of any member of the SAI Group becomes due and repayable prematurely by reason of an event of default (however described) or any member of the SAI Group fails to make any payment in respect of any Indebtedness for borrowed money of the due date for payment as extended by any originally applicable grace period or any security given by any of them for any Indebtedness for borrowed money becomes enforceable or if any default is made by any of them in making any payment due under any guarantee and/or indemnity given by it in relation to any Indebtedness for borrowed money of any other person and such occurrence has or will have in the opinion of the Majority Debentureholders a materially adverse impact on any member of the SAI Group; or (f) any legal process is levied or enforced or sued out upon or against any part of the property, assets or revenues of any member of the SAI Group which in the opinion of the Majority Debentureholders has a materially adverse effect upon any of them, and is not discharged or stayed within 60 days (or such longer period as the Majority Debentureholders may consider appropriate in relation to the jurisdiction concerned) of having 55 been so levied, enforced or sued out unless and for so long as the Majority Debentureholders is satisfied that it is being contested in good faith, diligently and with a reasonable prospect of success by legal action; or (g) an encumbrancer takes possession or a receiver, manager or other similar officer is appointed of, or an attachment order is issued in respect of, the whole or any part of the undertaking, property, assets or revenues of any member of the SAI Group or of ACL which in the opinion of the Majority Debentureholders has a materially adverse effect upon any of them; or (h) any member of the SAI Group is unable to pay its debts as they mature or takes any proceeding under any law for a readjustment or deferment of its obligations or any part of them or makes or enters into a general assignment or an arrangement or composition with or for the benefit of its creditors which in the opinion of the Majority Debentureholders has a materially adverse effect upon any of them; or (i) an order of a court of competent jurisdiction is made or an resolution passed for the winding up or dissolution or administration of any member of the SAI Group or of ACL, ceases or threatens to cease to carry on all or substantially all of its business or any of them stops or threatens to stop payment (within, if applicable, the meaning of the bankruptcy law of any appropriate jurisdiction) or applies for or consents to or suffers the appointment of an administrator, liquidator or receiver over the whole or any material part of the undertaking, property, assets or revenues of or any of them; or (j) proceedings shall have been initiated against ACL or any member of the SAI Group under any applicable bankruptcy, insolvency or reorganisation law and such proceedings shall not have been discharged or stayed within a period of 60 days (or such longer period as the Funds may consider appropriate in relation to the jurisdiction concerned) unless and for so long as the Majority Debentureholders is satisfied that it is being contested in good faith, diligently and with a reasonable prospect of success by legal action; or (k) any event occurs which under the laws of any relevant jurisdiction and in the opinion of Majority Debentureholders has an analogous effect to any of the event referred to in any of the foregoing paragraphs; or (l) the EPS (as defined in the Condition 7(D)) of SAI for any of the financial years falling between the financial year ended 31st December, 1995 and the Maturity Date is less than US$0.55; or 56 (m) if: (i) at the end of each quarter of a financial year ("QUARTER DATE"), the trade debts (after provisions) left outstanding relating to the sales achieved in a period occurring immediately before the 12- month period preceding the relevant Quarter Date is or exceeds 10 percent of net sales achieved by SAI in the 12 months immediately preceding the relevant Quarter Date; or (ii) at the end of each Quarter Date, the trade debts (after provisions) left outstanding relating to the sales achieved in a 12-month period immediately preceding the Quarter Date is or exceeds 40 per cent of the net sales achieved by SAI in the same period of time and such outstanding debts are not accordingly repaid or remedied to fall below the 10 per cent or 40 per cent level as the case may be within 30 days after the elease of the 10-Q Quarterly Report or the 10-K Annual Report. The first of the Quarter Dates shall commence on 31st December, 1996. (C) For the purpose of this Debenture, IRR is the annual internal rate of return compounded on a quarterly basis, which is the discount rate at which the present value of future cash flows, including proceeds from interest, dividends and transfer / sale of the Debentures and any repayment of the principal amount of the Debentures outstanding is equal to the initial subscription amount of all the Debentures subscribed and is calculated in accordance with the following formula:- OI = (D1 + C1) + (D2 + C2) + (D3 + C3) + ... +(Dn + Cn)+ --------- --------- --------- --------- Pn -- 1 + R (1 + R)/2/ (1 + R)/3/ (1 + R)/n/ (1 + R)/n/ Where: Pn = the amount to be paid by the Company to the Debentureholder on the day of payment for redemption, provided always that Pn shall not be less than zero; OI = the price of the Debenture paid by the Debentureholder for the Debenture pursuant to the Subscription Agreement; Cn = (if applicable) the amount of any capital repayment or reduction made during the quarter denoted by "n"; 57 Dn = the amount or value of any interest or other money paid with respect to the outstanding Debentures during the quarter denoted by "n"; n = the number of complete quarters from the issue date of the Debentures to the date of redemption; and R = the quarterly internal rate of return in the event of redemption of the Debentures which shall be 4.61% (given an annual internal rate of return of 19.75% per annum) and shall be 2.87% (given an annual internal rate of return of 12% per annum) and for the purposes of this calculation only, all cashflows (denoted by Pn, Dn or Cn) shall be deemed to arise on the last day of the quarter in which they occur or are paid. (D) In this Condition 11: (a) the determination of "materiality", "material" or "materially" shall be by the Majority Debentureholders and in the event of disagreement of or any disputes over the applicability or the interpretation of the occurrence of any such events as described in Condition 11(B)(e), (f), (g), (h), (i), (j) or (k), an independent professional adviser (including a merchant bank of repute, an international firm of accountants or legal adviser) shall be appointed by the Company from a selection of three (3) names given by the Majority Debentureholders to the Company who shall determine the same and whose decision shall be final and binding; (b) "Majority Debentureholders" shall mean the majority of the Debentureholders in value holding more than 50% of the total principal amount of the Debentures outstanding. 12. VOTING The Debentureholder will not be entitled to receive notices of, attend or vote at any meetings of the Company by reason only of it being the Debentureholder. 13. REGISTER The Company shall maintain a register in Bermuda or in Hong Kong of the particulars of the Debenture and the Debentureholder. 58 14. REPLACEMENT NOTE If any of the Debentures is lost or mutilated the Debentureholder shall forthwith notify the Company and a replacement Debenture shall be issued if the Debentureholder provides the Company with: (1) the mutilated Debenture; (ii) a declaration by the Debentureholder or its officer that the Debenture had been lost or mutilated (as the case may be) or other evidence that the Debenture had been lost or mutilated; and (iii) an appropriate indemnity in such form and content as the Company may reasonably require. Any Debenture replaced in accordance with this Condition shall forthwith be cancelled. 15. NOTICES Any notice required or permitted to be given shall be given by delivering it to the party: (a) in the case of the Debentureholder: being GML : c/o HPEM 10th Floor, Citibank Tower Citibank Plaza, 3 Garden Road, Central, Hong Kong Tel: (852) 2845 7685 Fax: (852) 2845 9992 ATTN.: MR. GEORGE RAFFINI / MR. BRIAN LAW being WCIT : c/o HPEM, 10th Floor, Citibank Tower, 3 Garden Road, Hong Kong Tel: (852) 2845 7688 Fax: (852) 2845 9992 ATTN.: MR. GEORGE RAFFINI / MR. BRIAN LAW being MC Partners : c/o MC Capital Asia Pte Limited Unit No. 1002 C/D 10th Floor, Tower 1, Admiralty Centre, 10 Harcourt Road, Hong Kong Tel: (852) 2866 3393 Fax: (852) 2866 2693 ATTN.: MR. YUJI KOMIYA/MR. TATSUYA KUROYANAGI 59 being CI 2000 : c/o Banque Worms, Hong Kong Branch 39th Floor, Central Plaza 18 Harbour Road, Hong Kong Tel: (852) 2802 8382 Fax: (852) 2802 8065 ATTN.: MR. FABRICE JACOB/MR. ANTOINE FOSSORIER (b) in the case of the Company c/o China International Bearing Holdings Limited, 19th Floor, First Pacific Centre, 51-57 Gloucester Road, Hong Kong Tel: (852) 2865 1511 Fax: (852) 2865 4293 Attn.: Mr. Billy Kan / Mr. Roger Li ----------------------------------- (c) in the case of SAI:- c/o China International Bearing Holdings Limited, 19th Floor, First Pacific Centre, 51-57 Gloucester Road, Hong Kong Tel: (852) 2865 1511 Fax: (852) 2865 4293 Attn.: Mr. Billy Kan / Mr. Roger Li ----------------------------------- or to such other Hong Kong address as the party concerned may have notified to the other party pursuant to this Condition and may be given by sending it by hand to such address or to such other address as the party concerned may have notified to the other parties in accordance with this Condition and such notice shall be deemed to be served on the day of delivery (or on the immediately following Business Day, if the day of delivery is not a Business Day), or if sooner upon acknowledgement or receipt by or on behalf of the party to which it is addressed. 16. ENFORCEMENT At any time after the Debentures have become due and repayable, any of the Funds may, at its discretion and not necessarily with any further notice, take such proceedings against the Company and/or the Guarantors as it may think fit to enforce repayment of the Debenture together with accrued interest and to enforce the provisions of the Subscription Agreement, but it will not be bound to take any such proceedings unless (a) it shall have been so requested in writing by the 60 holders of not less than one-third in principal amount of the Debentures then outstanding or shall have been so directed by resolution of the Debentureholders and (b) it shall have been indemnified to its satisfaction. No Debentureholder will be entitled to proceed directly against the Company or the Guarantors or ACL unless the Funds, having become bound to do so, fails to do so within a reasonable period and such failure shall be continuing. 17. AMENDMENT The terms and conditions of the Debentures may only be varied, expanded or amended by agreement in writing between the Company and all of the Debentureholders. 18. GOVERNING LAW AND JURISDICTION The Debenture and the terms of the Debenture are governed by and shall be construed in accordance with Hong Kong law and the parties agree to submit to the non-exclusive jurisdiction of the courts of Hong Kong. In relation to any legal actions or proceedings arising out of or in connection with the Subscription Agreement and/or the Debentures, each of the Company and the Guarantors has in the Subscription Agreement irrevocably submitted to the courts of Hong Kong and has in relation thereto appointed an agent for service of process in Hong Kong. 61 SCHEDULE 3 ---------- REPRESENTATIONS AND WARRANTIES ------------------------------ 1. INFORMATION ----------- 1.1 All information relating to the SAI Group and ACL set out herein is true and accurate in all material respects and nothing has been omitted which would make any of the information set out therein misleading. 1.2 No circumstances have occurred and none of the Warrantors is aware of any circumstances which may or are likely to occur which in either event would result in any information relating to any member of the SAI Group or ACL which has been given to the Majority Investors in the course of the negotiations leading up to this Agreement to be untrue, inaccurate or misleading in any material respect. 1.3 There is no fact or circumstance relating to the affairs of any member of the SAI Group or of ACL which has not been disclosed to the Investors and which if disclosed will, to the actual knowledge of the Investors, influence the decision of the Investors to buy the Debentures on the terms contained in this Agreement. 1.4 No member of the SAI Group nor has ACL omitted to state a material fact necessary to make the statements herein contained or any information made to the Investors not misleading. 1.5 No Warrantor is an "INVESTMENT COMPANY" within the meaning of the U.S. Investment Company Act 1942, as amended. 2. GROUP STRUCTURE ETC. -------------------- 2.1 SAI will at Completion have sufficient authorised but unissued share capital free of pre-emptive rights in order to enable it to perform its obligations under the Debentures upon conversion and the directors of SAI are authorised to issue the Conversion Shares upon conversion of the Debentures. 2.2 Except as set forth in Part III of Schedule 1 and Schedule 5, there are no agreements or commitments, securities or obligations outstanding which calls for the allotment, issue or transfer of, or accords to any person the right to call for the allotment or issue of or conversion into, any common stock or debentures in or securities of any member of the SAI Group. No person has any rights of any nature whatsoever on, over or affecting any unissued shares or loan capital in any member of the SAI Group and no person has the right to call for the transfer of 62 any issued shares under any option or other agreement or to convert any shares or securities into share capital or share capital of a different class. 2.3 SAI does not hold any ownership or other interests (whether by way of shareholding or otherwise) in any other Company or undertaking except those otherwise disclosed. 2.4 None of the members in SAI Group nor ACL has taken any action nor (to the actual knowledge of the Warrantors) has any steps been taken or legal, legislative, or administrative proceedings been started or threatened (i) to wind up, dissolve, or eliminate itself, or (ii) to withdraw, revoke or cancel its business licence. 3. CAPACITY AND AUTHORITY ---------------------- 3.1 Each of the Warrantors is a legal person, duly organised, validly existing, and in good standing under the laws of the respective jurisdiction of its incorporation. 3.2 Each of the Warrantors has full power and authority to carry on its business to own its property and other assets and to enter into and perform this Agreement and to exercise its rights and perform its obligations hereunder. 3.3 Each of the Warrantors represents that the execution, delivery and performance of this Agreement including, but without limitation, the issuance of the Debenture and the Shares, none of the Warrantors has been in breach of any applicable laws or any order or judgement of any court applicable to it or any of its assets and will not result in any breach of the terms if any agreement or obligation applicable to it or any of its assets and that all corporate and other action required to authorise its execution of this Agreement and its performance of its obligations hereunder has been duly taken. 4. SHARES AND SUBSIDIARIES ----------------------- 4.1 Save as disclosed in 4.2 below, the particulars relating to the share capital and corporate structure of the SAI Group referred to in Recital (A) and Parts I, II and III of Schedule 1 of this Agreement are correct and accurate. 4.2 The investment by SPC in Shanghai Southwest Bearing Company ("SBB") of an aggregate of US$1 million has not been completed. As at the date of this Agreement, SAI had only invested US$150,000 in SBB, representing only 4.167% of the aggregate issued capital if the whole of the contributions were made to SBB by the joint venture parties. Upon completion of the contribution of 63 the balance of US$850,000 by SPC, SPC will have an aggregate of 27.78% interest in SBB. 4.3 No mortgage, pledge, lien or other security interest exists on or over any of the shares in the SAI Group. 4.4 The execution and delivery of, and the performance by each of the Company and the Guarantors of its obligations under this Agreement the Guarantee or the Debenture will not:- (i) result in a breach of any provision of its memorandum and articles of association or equivalent constitutional documents; (ii) result in a breach or constitute a default under any instrument to which any of the Company, ACL and the Guarantors is a party or by which it or any of its assets is bound; or (iii) result in a breach of any order, judgement in decree of any court or governmental agency to which any of the Company, ACL and the Guarantors is a party or by which it is bound. 4.5 The entire existing issued shares in the common stock capital of SAI is authorised for quotation on NASDAQ and none of the Warrantors is aware of any circumstance whereby such authorisation will be suspended, cancelled or revoked before Completion as a result of this Agreement or the transactions contemplated hereunder. 5. FINANCIAL INFORMATION --------------------- 5.1 The Accounts have been prepared in accordance with the disclosed accounting policies of and is in accordance with generally accepted accounting principles and practices in its place of incorporation. Except as stated such Accounts have not been affected by any extraordinary or exceptional or non-recurring item or by any other circumstances rendering the profits or losses for the period covered by the financial statements unusually high or low. 5.2 The Accounts (i) show a true and fair view of the assets, liabilities, capital commitments and the state of affairs of the SAI Group as at the relevant financial year end date and of the profits and losses of the SAI Group for the period concerned; (ii) reserve or provide in full for depreciation and all bad and doubtful debts and all other liabilities, actual, contingent or otherwise and for all financial commitments in existence at the relevant financial year end date; (iii) reserve or provide in full for all taxation including any contingent or deferred liability 64 therefor for which the SAI Group was at the relevant financial year end date liable and whether or not any member of the SAI Group has or may have any right of reimbursement against any other person. 5.3 Since the relevant financial year end date the business of the SAI Group has been carried on in the ordinary course and so as to maintain the same as a going concern and no member of the SAI Group has entered into any transaction or circumstances outside the ordinary course of business or of an unusual or onerous nature and there has been no reduction in the value of the net tangible assets of the SAI Group on the basis of the valuation adopted in the financial statements and there has been no material adverse change in the financial position or trading prospects of the SAI Group. 6. CHANGES ------- Since 31st December, 1995, (a) the business of each of the members of the SAI Group has been carried on in the ordinary course so as to maintain the same as a going concern and none of the members of the SAI Group has entered into any transaction or circumstances outside the ordinary course of business or which is of an unusual or onerous nature; (b) no material adverse changes have occurred in the conditions, financial or otherwise or the earnings, business affairs, position, prospects, assets and liabilities (whether actual or contingent) of any member of the SAI Group as shown in the Accounts and there has been no reduction in the value of the net tangible assets of each of the members of the SAI Group on the basis of the valuation adopted in the Accounts; (c) the business of each of the members of the SAI Group has not been materially adversely affected by the loss of any important contract or customer or source of supply or by any other material factor; (d) no dividends, bonuses or distributions have been declared, paid or made in the case of any member of the SAI Group except as provided for in the Accounts; and (e) none of the member of the SAI Group has to any material extent acquired, sold, transferred or otherwise disposed of any assets of whatsoever nature or cancel or waive or release or discount in whole or in part any debts or claims, except in each case in the ordinary course of business. 65 7. TAXATION -------- There is no dispute or disagreement outstanding nor is any contemplated with any revenue authority regarding liability or potential liability to any tax or duty (including in each case penalties or interest) recoverable from any member of the SAI Group regarding the availability of any relief from tax or duty to any member of the SAI Group and there are no circumstances which make it likely that any such dispute or disagreement will commence. 8. CONTRACTS --------- 8.1 None of the members of the SAI Group is a party to any contract which may be affected by reason of Completion, nor has it entered into any material, long-term, onerous or unusual contract or commitment binding upon it nor has any contract been entered into otherwise than on an arm's length basis or otherwise than in the ordinary course of business nor is it under any obligation, nor is it a party to any contract, which cannot readily be fulfilled or performed by it on time and without undue or unusual expenditure of money or effort nor is it aware of any breach of, or any invalidity, or grounds for determination, rescission, avoidance or repudiation of, any contract to which any member of the SAI Group is a party. 8.2 There is no contract or arrangement in respect of which obligations are still outstanding to which any member of the SAI Group or ACL is, or was, a party and in which any member of the SAI Group or ACL, or any director of the SAI Group or of ACL is beneficially interested or any person connected with indirectly, which is not of an arm's length nature for this Agreement. 9. APPROVALS AND VALIDITY ---------------------- 9.1 Subject to the fulfilment of the Conditions Precedent, all necessary consents, authorisations and approvals of any governmental agencies or bodies or any other consents, authorisation or approvals as shall be required for or in connection with this Agreement the issuance of the Debenture hereunder the performance of the obligations thereof have been obtained or made or will have been obtained or made by Completion. 9.2 Subject to the fulfilment of the Conditions Precedent, the issue of the Debenture and the Certificate and the Conversion Shares upon conversion thereunder will not infringe and will not be contrary to any applicable laws and will not result in any breach of the terms of the Memorandum of Association and Bye-laws of the Company or the respective constitutive documents of each of the Warrantors nor 66 would it breach the terms of any agreement or obligation applicable to any of the Warrantors. 9.3 Upon the issue of the Debentures and the execution of the Certificates by the Company and delivery of the same, the Debentures and the Certificates will constitute valid and binding obligations of the Company and of SAI enforceable against the Company and SAI as the case may be. 10. BUSINESS -------- All the members of the SAI Group have obtained, maintained in force and complied with all necessary licences and consents required for the proper carrying on of its business and to the actual knowledge of the Warrantors there are no circumstances which indicate that any such licences or consents shall have revoked or not renewed. 11. LITIGATION AND UNLAWFUL ACTS ---------------------------- None of the Warrantors is involved in any litigation, arbitration or administrative proceeding which materially and adversely affects the business or financial condition of any of them and no such proceedings is currently taking place or pending or threatened against any member of the SAI Group or of ACL or its respective assets. 12. LIABILITIES ----------- 12.1 No member of the SAI Group is nor is ACL in default under any law, regulation, judgement, order, authorisation, agreement or obligation applicable to it or its assets or revenues the consequences of which default could materially and adversely affect its business or financial condition or the ability of any of them to perform its obligation under this Agreement or the Debentures and no Event of Default has occurred. 12.2 None of the members of the SAI Group has nor has ACL entered into or is bound by any guarantee, indemnity or other agreement to secure an obligation of a third party other than another member of the SAI Group, under which any liability or contingent liability is outstanding. 12.3 None of the members of the SAI Group has nor has ACL committed or is liable for any criminal, illegal or unlawful action or breach of any obligation or duty whether imposed by or pursuant to statute, contract or otherwise. 67 12.4 None of the members of the SAI Group has nor has ACL received notification that any investigation is being or has been conducted by any governmental body in respect of the affairs of any such member and no member is aware of any circumstances which would give rise to such investigations. 13. WORKING CAPITAL --------------- Each member of the SAI Group has and ACL has adequate working capital for its current requirements, taking into account its current and projected financial commitments and the proceeds of the Debentures. 14. INSURANCE --------- 14.1 All the assets of the SAI Group and ACL of an insurable nature have at all material times been and are insured in amounts to the full replacement value thereof against fire and other risks normally or prudently insured against by persons carrying on the same classes of business as those carried on by the SAI Group and by ACL, and each member of the SAI Group and ACL has at all material times been and is adequately covered against accident, third party and other risks normally or prudently covered by insurance. 14.2 No claim is outstanding or may be made under any insurance policies taken out and no event has occurred or circumstances exist which are likely to give rise to any material claim; nothing has been done or omitted to be done which is likely to result in an increase in premium; and nothing has been done or omitted to be done which would make any such policy of insurance void or voidable. 15. ENVIRONMENTAL ------------- None of the members in the SAI Group has nor has ACL been in breach of any laws, regulations, judgements, orders or agreements, or codes of conducts in respect of or in connection with any environmental issues and protection. 68 SCHEDULE 4 FORM OF GUARANTEE 69 THIS GUARANTEE dated the day of , 1996 is made between:- (1) SUNBASE ASIA, INC., of 1280 Terminal Way, Suite 3, Reno Nevada 89502, United States of America ("SAI"); (2) CHINA INTERNATIONAL BEARING HOLDINGS LIMITED, of Cedar House, 41 Cedar Avenue, Hamilton HM12, Bermuda ("CIBHL"); [(3) SMITH ACQUISITION COMPANY, INC. of 2240 Buena Vista, Irwindale, CA 91706 ("SPC");] (The parties referred to at (1), (2) [and (3)] hereinafter referred to as the "GUARANTORS" and each a "GUARANTOR".) (4) GLORY MANSION LIMITED, of Craigmuir Chambers, P.O. Box 71, Road Town, Tortola, British Virgin Islands ("GML"); (5) WARDLEY CHINA INVESTMENT TRUST, of c/o Suite 1610, P.O. Box 1016, 885 West Georgia Street, Vancouver B.C., V6C 3E8, Canada ("WCIT"); (6) MC PRIVATE EQUITY PARTNERS ASIA LIMITED of P.O. Box 309, Ugland House, South Church Street, Grand Cayman, Cayman Islands, British West Indies ("MC PARTNERS"); and (7) CHINE INVESTISSEMENT 2000, of L1118 Luxembourg, 14 Rue Aldringen ("CI 2000"); (The parties referred to at [(4), (5), (6) and (7)] hereinafter collectively referred to as "INVESTORS" and each an "INVESTOR"). WHEREAS:- (A) By a subscription agreement dated [ ] , 1996 (the "SUBSCRIPTION AGREEMENT") which expression shall include such Debenture (as made from time to time the supplemented or amended) and made between (1) China Bearing Holdings Limited (the "COMPANY"); (2) Asean Capital Limited ("ACL"); (3) China International Bearing Holdings Limited ("CIBHL"); (4) Sunbase Asia, Inc. ("SAI"); (5) Smith Acquisition Company Inc. ("SPC"); (6) GML; (7) WCIT; (8) MC Partners and (9) CI 2000 under which the Investors have agreed to subscribe for and the Company to issue Convertible Debentures up to an aggregate principal value of US$11,500,000 upon such terms and conditions as described therein. (B) It is the condition of the Subscription Agreement that the Guarantors shall execute the Guarantee in respect of the obligations of the Company and the other parties 70 (not being the Investors) under the Subscription Agreement and the Debentures. Accordingly, this Guarantee supplements the Subscription Agreement and the Debentures. (on SPC's Guarantee) [(B) SAI and CIBHL ("OTHER GUARANTORS") have already given a Guarantee dated [ ] in similar form at Completion ("SAME GUARANTEE"). SPC has given an undertaking in the Subscription Agreement to also execute the Guarantee in respect of the Company's and the other parties (not being an Investor) obligations under the Subscription Agreement and the Debentures. Accordingly, this Guarantee supplements the Subscription Agreement, the Debentures and the Same Guarantee.] (C) Expressions defined in the Subscription Agreement shall, unless specifically defined or re-defined herein or the context otherwise requires, bear the same meanings when used herein. NOW THIS GUARANTEE WITNESSETH AND IT IS HEREBY AGREED as follows:- 1. GUARANTEE --------- (A) In consideration of the subscription of the Debentures pursuant to the Subscription Agreement by the Investors, each of the Guarantors hereby as primary obligor, irrevocably and unconditionally and together with each of the other Guarantors (the "OTHER GUARANTORS") jointly and severally, guarantees to each of the Investors:- (i) the full due and punctual observance and performance of all the terms, conditions and covenants on the part of the Company contained in the Subscription Agreement and the Debentures including the due and punctual payment of all sums now or subsequently payable under the Subscription Agreement or the Debentures and agrees to perform or procure the performance of such obligations of the Company from time to time and on demand by any of the Investors pay any and every sum or sums of money which the Company shall at any time be liable to pay to the Investors under or pursuant to the Subscription Agreement or the Debentures as the case may be; (ii) the full due and punctual observance and performance of all the terms, conditions and covenants on the part of each Other Guarantor to which such Other Guarantor is a party to the Subscription Agreement and this 71 Guarantee including the due and punctual payment of all sums now or subsequently payable under the Subscription Agreement or this Guarantee and agrees to perform or procure the performance of such obligations of the Other Guarantors from time to time and on demand by any of the Investors pay any and every sum or sums of money which the Other Guarantors shall at any time be liable to pay to the Investors under or pursuant to the Subscription Agreement or this Guarantee as the case may be; and (iii) to indemnify the Investors from time to time on demand by any of the Investors from and against any loss incurred by the Investors or any of them as a result of any of the obligations of the Company under the Subscription Agreement or the Debenture or of any of the obligations of the Other Guarantors under or pursuant to the Subscription Agreement or this Guarantee not being fulfilled or performed or being or becoming void, voidable, unenforceable or ineffective as against the Company or any of the Other Guarantors as the case may be for any reason whatsoever, whether or not known to the Investors or any of them or any other person. The Guarantors' obligations hereunder is as if it is a principal debtor in respect of any amount and liability and obligation and not merely a surety, and without any requirement for the Investors first to have recourse against the Company or any of the Other Guarantors as the case may be and such liability shall not be impaired or reduced by any undertaking granted. [(B) SPC has undertaken in the Subscription Agreement to execute this Guarantee at a later date than the date of this Guarantee pursuant to Clause 10 of the Subscription Agreement. For the purpose of this Guarantee, "OTHER GUARANTORS" shall therefore be construed to include SPC notwithstanding that SPC is not giving the Guarantee simultaneously as the Guarantors hereunder.] 2. PRESERVATION OF RIGHTS ---------------------- (A) The obligations of the Guarantors herein contained shall be in addition to and independent of every other security which the Investors or any of them may at any time hold in respect of any of the Company or the Guarantors' obligations hereunder. (B) The obligations of each of the Guarantors herein contained shall constitute and be continuing obligations notwithstanding any settlement of account or other matter or thing whatsoever, and in particular but without limitation, shall not be considered satisfied by any intermediate payment or satisfaction of all or any of 72 the obligations of the Company or any of the Other Guarantors and shall continue in full force and effect until final payment in full of all amounts owing by the Company or any of the Other Guarantors hereunder and total satisfaction of all the Company's or any of the Other Guarantors actual and contingent obligations hereunder. (C) None of the obligations of any of the Guarantors herein contained nor the rights, powers and remedies conferred upon the Investors by the Subscription Agreement or the Debenture or this Guarantee or by law shall be discharged, impaired or otherwise affected by:- (i) the winding-up, dissolution, administration or re- organisation of the Company or any of the Guarantors or any other person or any change in its status, function, control or ownership; (ii) any of the obligations of the Company or any of the Guarantors or any other person hereunder or under any other security taken in respect of any of its obligations hereunder being or becoming illegal, invalid, unenforceable or ineffective in any respect; (iii) time or other indulgence being granted or agreed to be granted to the Company or any of the Guarantors or any other person in respect of its obligations hereunder or under any such other security; (iv) any amendment to, or any variation, waiver or release of, any obligation of the Company or any of the Guarantors or any other person hereunder or under any such other security; (v) any failure to take, or fully to take, any security contemplated hereby or otherwise agreed to be taken in respect of the Company, any of the Guarantor's or any other person's obligations hereunder; (vi) any failure to realise or fully to realise the value of, or any release, discharge, exchange or substitution of, any security taken in respect of the Company, any of the Guarantor's or any other person's obligations hereunder; or (vii) any other act, event or omission which, might operate to discharge, impair or otherwise affect any of the obligations of any of the Guarantors herein contained or any of the rights, powers or remedies conferred upon the Investors or any of them by the Subscription Agreement or the Debentures or by law. 73 (D) None of the Investors shall be obliged before exercising any of the rights, powers or remedies conferred upon each of them hereunder or by law:- (i) to make any demand of the Company or any of the Guarantors; (ii) to take any action or obtain judgement in any court against the Company or any of the Guarantors; (iii) to make or file any claim or proof in a winding-up or dissolution of the Company or any of the Guarantors; or (iv) to enforce or seek to enforce any other security taken in respect of any of the obligations of the Company or any of the Guarantors hereunder. (E) Each Guarantor agrees that, so long as any amounts are or may be owed by the Company or the Other Guarantors hereunder or when any of the Company or the Other Guarantors is under any actual or contingent obligations hereunder, it shall not exercise any rights which it may at any time have by reason of performance by it of its obligations hereunder:- (i) to be indemnified by the Company or any of the Guarantors; and/or (ii) to claim any contribution from the Other Guarantors; and/or (iii) to take the benefit (in whole or in part and whether by way of subrogation or otherwise) of any rights of the Investors hereunder or of any other security taken pursuant to, or in connection with, the Subscription Agreement or the Debenture by all or any of the Investors. 3. REPRESENTATIONS AND WARRANTIES ------------------------------ Each of the Guarantors hereby represents and warrants to each of the Investors that:- (a) it is a company validly incorporated, duly organised and subsisting and of good standing under the law of the jurisdiction under which it was incorporated; (b) it has the necessary capacity to give this Guarantee and to perform and observe the obligations contained herein. The execution, delivery and performance of this Guarantee have been duly authorised by all necessary corporation action of the Guarantor and do not contravene the constitution of the Guarantor under any applicable laws or regulations. This 74 Guarantee, as executed and delivered constitutes legal valid and binding obligations of the Guarantor and also bought in accordance with its terms; (c) the execution and delivery of, and the performance of the provisions of, this Guarantee does not and will not during the continuance of this Guarantee (i) contravene any existing applicable laws, ordinance, regulation, decree, instrument, franchise, concession, licence or permit, or any order, judgement, decree or award, administrative or governmental authority, department or agency presently in effect an applicable, or (ii) contravene any contractual restrictions binding on the Guarantors or any of its assets, or (iii) cause any limit on any of the borrowing, guaranteeing, charging or other powers of the Guarantor, or (iv) create or result in or obliged the Guarantor to create any lien, charge, security interest or encumbrance on the whole or any part of the corporate Guarantor's property; (d) all necessary governmental and other consents, authorities and approvals to execute this Guarantee has been obtained and are in full force, validity and effect; (e) no litigation, attribution, administrative or other proceedings pending before the court, tribunal, arbitrator or governmental agency has been threatened against any of the Guarantor; and (f) the obligations of each of the Guarantors under this Guarantee are direct, general, and unconditional obligations and rank at least pari passu with all such Guarantor's other present and future unsecured and unsubordinated and other obligations. 4. FURTHER PRESERVATION OF RIGHTS ------------------------------ Should any purported obligation of the Company or any of the Guarantors being the subject of this Guarantee be or become wholly or in part invalid or unenforceable on any grounds whatsoever, the Guarantor shall nevertheless be liable to the Investors in respect of such purported obligation or liability as if the same were wholly valid and enforceable in each of the Guarantors as the principal debtor in respect thereof. Each of the Guarantors hereby agrees to keep each of the Investors fully indemnified against all damages, loss, costs and expenses arising from any failure of the Company or any of the Guarantors to carry out any of such purported obligations. 75 5. MISCELLANEOUS ------------- (A) This Guarantee shall be binding on and each of which for the benefit of each of the parties' successor and assign and personal representatives (as the case may be) but no assignment may be made of any of the rights obligations hereunder of any party without the prior written consent of the other parties. (B) This Guarantee may be signed in any number of counterparts, each of which shall be binding on the party who shall have executed it in which together shall constitutes but one Agreement. (C) The Guarantors shall bear the legal and professional fees, costs and expenses incurred in relation to the negotiation, preparation and execution of this Guarantee. (D) Any notice required to be sent must be in writing and shall be given by delivering it to the address or facsimile number as shown in Clause 12 of the Subscription Agreement. (E) This Agreement shall be governed by and construed in accordance with the laws of Hong Kong and the parties hereby submitted the non-exclusive jurisdiction of the Supreme Court of Hong Kong. In relation to any legal action or proceedings arising out of or in connection with this Guarantee, each of the Guarantors have irrevocably submitted in the Subscription Agreement to the courts of Hong Kong and in relation thereto has appointed an agent for service of process. IN WITNESS WHEREOF the Guarantors have duly executed this Guarantee the date and year first above written. The Common Seal of ) SUNBASE ASIA, INC. ) was hereunto affixed ) in the presence of:- ) The Common Seal of ) SMITH ACQUISITION ) COMPANY INC. ) was hereunto affixed ) in the presence of:-] ) 76 The Common Seal of ) CHINA INTERNATIONAL ) BEARING HOLDINGS LIMITED ) was hereunto affixed ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of GLORY MANSION LIMITED ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of WARDLEY CHINA ) INVESTMENT TRUST ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of MC PRIVATE EQUITY PARTNERS ) ASIA LIMITED ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of CHINE INVESTISSEMENT 2000 ) in the presence of:- ) 77 SCHEDULE 5 ---------- EMPLOYEES / DIRECTORS' OPTIONS ------------------------------
Exercise Price Number of Shares Option Holder Years of Exercise Per Share per Option Rights William Mckay one year from 16 Jan, 1996 $6.65 160,000 one year from 16 Jan, 1997 $7.75 160,000 one year from 16 Jan, 1998 $9.25 160,000 one year from 16 Jan, 1999 $10.75 160,000 one year from 16 Jan, 2000 $12.75 160,000 ------------- 800,000 ------------- Billy Kan one year from 16 Jan, 1996 $6.375 200,000 one year from 16 Jan, 1997 $6.375 200,000 one year from 16 Jan, 1998 $6.375 200,000 ------------- 600,000 ------------- Roger Li one year from 16 Jan, 1996 $6.375 200,000 one year from 16 Jan, 1997 $6.375 200,000 one year from 16 Jan, 1997 $6.375 200,000 ------------- 600,000 ------------- Dickens Chang one year from 16 Jan, 1996 $6.375 15,000 one year from 16 Jan, 1997 $6.375 15,000 one year from 16 Jan, 1998 $6.375 20,000 ------------- 50,000 ------------- Total 2,050,000 =============
The remaining 450,000 Shares may be granted by SAI's Compensation Committee under SAI's 1995 Option Plan provided that the exercise price per Share in relation to the grant of such option over the 450,000 Shares shall not be less than the fair market value of each Share on the date such options are granted. 78 SCHEDULE 6 ---------- CERTIFICATION ON CONVERSION NOTICE [CERTIFICATION ON CONVERSION -- TO APPEAR ON THE CONVERSION NOTICE] In connection with our exercise this day of [describe debenture and amount to be exercised -- provide for defined terms, such as the Company, the Debenture and the Common Stock], we hereby certify as follows (check one box):- [_] We are a non-U.S. person located outside the United States that is acquiring the Common Stock for the account of a non-U.S. person and not for distribution. [_] We are a U.S. institutional investor that is acquiring the Common Stock for our own account or accounts for which we exercise sole investment discretion and not with a view to or for sale in connection with any distribution thereof, and we have received such information concerning the Company and the Common Stock as we have deemed relevant to our decision to purchase the Common Stock. We agree that we will not resell the Common Stock except pursuant to an exemption from the registration requirements of the U.S. securities laws and any state "blue sky" or securities laws. 79 SCHEDULE 7 ---------- UNDERTAKING BY ACL ------------------ 80 THIS UNDERTAKING dated the _______ day of ________________, 1996 is made between:- (1) ASEAN CAPITAL LIMITED, of Omar Hodge Building, Wickhams Cay I, P.O. Box 362, Road Town, Tortola, British Virgin Islands ("ACL"); (2) WARDLEY CHINA INVESTMENT TRUST, of c/o Suite 1610, P.O. Box 1016, 885 West Georgia Street, Vancouver B.C., V6C 3E8, Canada ("WCIT"); (3) GLORY MANSION LIMITED, of Craigmuir Chambers, P.O. Box 71, Road Town, Tortola, British Virgin Islands ("GML"); (4) MC PRIVATE EQUITY PARTNERS ASIA LIMITED, of P.O. Box 309, Ugland House, South Church Street, Grand Cayman, Cayman Islands, British West Indies ("MC PARTNERS"); and (5) CHINE INVESTISSEMENT 2000, of L1118 Luxembourg, 14 Rue Aldringen ("CI 2000"). (The parties referred to at (2), (3), (4) and (5) hereinafter collectively referred to as "INVESTORS" and each an "INVESTOR"). WHEREAS:- (A) By a subscription agreement dated [ ] , 1996 (the "SUBSCRIPTION AGREEMENT") which expression shall include such Debenture (as made from time to time the supplemented or amended) and made between (1) China Bearing Holdings Limited (the "COMPANY"); (2) ACL; (3) China International Bearing Holdings Limited ("CIBHL"); (4) Sunbase Asia, Inc. ("SAI"); (5) Smith Acquisition Company Inc. ("SPC"); (6) GML; (7) WCIT; (8) MC Partners and (9) CI 2000 under which, inter alia, the Investors have agreed to subscribe for and the Company has agreed to issue Convertible Debentures up to an aggregate principal value of US$11,500,000 upon such terms and conditions as described therein. (B) It is the condition of the Subscription Agreement that ACL shall execute the ACL Undertaking in respect of the payment obligations of the Company under the Subscription Agreement and the Debentures and accordingly, this Undertaking supplements the Subscription Agreement and the Debentures. (C) Expressions defined in the Subscription Agreement shall, unless specifically defined or re-defined herein or the context otherwise requires, bear the same meanings when used herein. 81 NOW THIS UNDERTAKING WITNESSETH AND IT IS HEREBY AGREED as follows:- 1. GUARANTEE --------- In consideration of the subscription of the Debentures pursuant to the Subscription Agreement by the Investors, ACL hereby as primary obligor, irrevocably and unconditionally guarantees and undertakes to each of the Investors:- (i) the full due and punctual payment of all sums now or subsequently payable under the Subscription Agreement or the Debentures by the Company and agrees to perform or procure the performance of such payment obligations of the Company from time to time and on demand by any of the Investors pay any and every sum or sums of money which the Company shall at any time be liable to pay to the Investors under or pursuant to the Subscription Agreement or the Debentures as the case may be; and (ii) to indemnify the Investors from time to time on demand by any of the Investors from and against any losses or costs incurred by the Investors or any of them as a result of any of the payment obligations of the Company under the Subscription Agreement or the Debentures or any payment obligations thereunder not being fulfilled or performed or being or becoming void, voidable, unenforceable or ineffective as against the Company or any of the Guarantors as the case may be for any reason whatsoever, whether or not known to the Investors or any of them or any other person. ACL's obligations hereunder is as if it is a principal debtor in respect of any amount and liability and obligation and not merely a surety, and without any requirement for the Investors first to have recourse against the Company or any of the Guarantors as the case may be and such liability shall not be impaired or reduced by any undertaking granted. 2. UNDERTAKING ----------- ACL hereby further undertakes to use its best endeavours (including the exercise of any voting rights and control it has) to ensure that the obligations of SAI, CBHL, CIBHL and SPC under the Subscription Agreement, the Debentures and the Guarantee (including but without limitation to the specific undertakings under Clauses 8, 9 and 10 of the Subscription Agreement) will be observed, fulfilled and performed and shall do all that is necessary so as to give effect to, render possible or assist in the fulfilment or compliance with such provisions. 82 3. PRESERVATION OF RIGHTS ---------------------- (A) The obligations of ACL herein contained shall be in addition to and independent of every other security which the Investors or any of them may at any time hold in respect of any of the Company's or the Guarantors' obligations under the Guarantee. (B) The obligations of ACL herein contained shall constitute and be continuing obligations notwithstanding any settlement of account or other matter or thing whatsoever, and in particular but without limitation, shall not be considered satisfied by any intermediate payment or satisfaction of all or any of the obligations of the Company or any of the Guarantors and shall continue in full force and effect until final payment in full of all amounts owing by the Company. (C) None of the obligations of ACL herein contained nor the rights, powers and remedies conferred upon the Investors by the Subscription Agreement or the Debenture or this Undertaking or by law shall be discharged, impaired or otherwise affected by:- (i) the winding-up, dissolution, administration or re- organisation of the Company or any of the Guarantors or any other person or any change in its status, function, control or ownership; (ii) any of the obligations of the Company or any of the Guarantors or any other person hereunder or under any other security taken in respect of any of its obligations hereunder being or becoming illegal, invalid, unenforceable or ineffective in any respect; (iii) time or other indulgence being granted or agreed to be granted to the Company or any of the Guarantors or any other person in respect of its obligations hereunder or under any such other security; (iv) any amendment to, or any variation, waiver or release of, any obligation of the Company or any of the Guarantors or any other person hereunder or under any such other security; (v) any failure to take, or fully to take, any security contemplated hereby or otherwise agreed to be taken in respect of the Company, any of the Guarantor's or any other person's obligations hereunder; (vi) any failure to realise or fully to realise the value of, or any release, discharge, exchange or substitution of, any security taken in respect of the 83 Company, any of the Guarantor's or any other person's obligations hereunder; or (vii) any other act, event or omission which, might operate to discharge, impair or otherwise affect any of the obligations of any of the Guarantors contained in the Guarantee or any of the rights, powers or remedies conferred upon the Investors or any of them by the Subscription Agreement or the Debentures or by law. (D) None of the Investors shall be obliged before exercising any of the rights, powers or remedies conferred upon each of them hereunder or by law:- (i) to make any demand of the Company or any of the Guarantors; (ii)to take any action or obtain judgement in any court against the Company or any of the Guarantors; (iii) to make or file any claim or proof in a winding-up or dissolution of the Company or any of the Guarantors; or (iv)to enforce or seek to enforce any other security taken in respect of any of the obligations of the Company or any of the Guarantors. (E) ACL agrees that, so long as any amounts are or may be owed by the Company or the Guarantors or when any of the Company or the Guarantors is under any actual or contingent obligations to any of the Investors, it shall not exercise any rights which it may at any time have by reason of performance by it of its obligations hereunder:- (i) to be indemnified by the Company or the Guarantors; and/or (ii)to claim any contribution from the Company or the Guarantors; and/or (iii) to take the benefit (in whole or in part and whether by way of subrogation or otherwise) of any rights of the Investors hereunder or of any other security taken pursuant to, or in connection with, the Subscription Agreement or the Debenture by all or any of the Investors. 4. REPRESENTATIONS AND WARRANTIES ------------------------------ ACL hereby represents and warrants to each of the Investors that:- 84 (a) it is a company validly incorporated, duly organised and subsisting and of good standing under the law of the jurisdiction under which it was incorporated; (b) it has the necessary capacity to give this Undertaking and to perform and observe the obligations contained herein. The execution, delivery and performance of this Undertaking have been duly authorised by all necessary corporation action and do not contravene the constitution of ACL under any applicable laws or regulations. This Undertaking, as executed and delivered constitutes legal valid and binding obligations of ACL and also bought in accordance with its terms; (c) the execution and delivery of, and the performance of the provisions of, this Undertaking does not and will not during the continuance of this Undertaking (i) contravene any existing applicable laws, ordinance, regulation, decree, instrument, franchise, concession, licence or permit, or any order, judgement, decree or award, administrative or governmental authority, department or agency presently in effect an applicable, or (ii) contravene any contractual restrictions binding on ACL or any of its assets, or (iii) cause any limit on any of the borrowing, guaranteeing, charging or other powers of ACL, or (iv) create or result in or obliged ACL to create any lien, charge, security interest or encumbrance on the whole or any part of the ACL's property; (d) all necessary governmental and other consents, authorities and approvals to execute this Undertaking has been obtained and are in full force, validity and effect; (e) no litigation, attribution, administrative or other proceedings pending before the court, tribunal, arbitrator or governmental agency has been threatened against ACL; and (f) the obligations of ACL under this Undertaking are direct, general, and unconditional obligations and rank at least pari passu with all ACL's other present and future unsecured and unsubordinated and other obligations. 5. FURTHER PRESERVATION OF RIGHTS ------------------------------ Should any purported payment obligation of the Company being the subject of this Undertaking be or become wholly or in part invalid or unenforceable on any grounds whatsoever, ACL shall nevertheless be liable to the Investors in respect of such purported payment obligation or liability as if the same were wholly valid and enforceable as the principal debtor in respect thereof. ACL hereby agrees to 85 keep each of the Investors fully indemnified against all damages, loss, costs and expenses arising from any failure of the Company to carry out any of such purported payment obligations. 6. MISCELLANEOUS ------------- (A) This Undertaking shall be binding on and each of which for the benefit of each of the parties' successor and assign and personal representatives (as the case may be) but no assignment may be made of any of the rights obligations hereunder of any party without the prior written consent of the other parties. (B) This Undertaking may be signed in any number of counterparts, each of which shall be binding on the party who shall have executed it in which together shall constitutes but one Agreement. (C) ACL shall bear the legal and professional fees, costs and expenses incurred in relation to the negotiation, preparation and execution of this Undertaking. (D) Notices required to be sent pursuant to this Undertaking must be sent in writing to the addresses or facsimile number of the parties contained in Clause 12 of the Subscription Agreement. (E) This Agreement shall be governed by and construed in accordance with the laws of Hong Kong and the parties hereby submitted the non-exclusive jurisdiction of the Supreme Court of Hong Kong. In relation to any legal action or proceedings arising out of or in connection with this Undertaking, ACL has irrevocably submitted in the Subscription Agreement to the courts of Hong Kong and in relation thereto has appointed an agent for service of process. IN WITNESS WHEREOF ACL have duly executed this Undertaking the date and year first above written. The Common Seal of ) ASEAN CAPITAL LIMITED ) was hereunto affixed ) in the presence of:- ) 86 SIGNED by ) duly authorised for and on behalf ) of GLORY MANSION LIMITED ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of WARDLEY CHINA ) INVESTMENT TRUST ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of MC PRIVATE EQUITY PARTNERS ) ASIA LIMITED ) in the presence of:- ) SIGNED by ) duly authorised for and on behalf ) of CHINE INVESTISSEMENT 2000 ) in the presence of:- ) SIGNATURE PAGE SIGNED by Dr. Gunter Gao ) duly authorised for and on behalf ) of CHINA BEARING ) HOLDINGS LIMITED ) in the presence of:- ) 87 SIGNED by Dr. Gunter Gao ) duly authorised for and on behalf ) of ASEAN CAPITAL LIMITED ) in the presence of:- ) SIGNED by Dr. Gunter Gao ) duly authorised for and on behalf ) of ) CHINA INTERNATIONAL ) BEARING HOLDINGS LIMITED ) in the presence of:- ) SIGNED by Dr. Gunter Gao ) duly authorised for and on behalf ) of SUNBASE ASIA, INC. ) in the presence of:- ) SIGNED by Mr. Billy Kan ) duly authorised for and on behalf ) of SMITH ACQUISITION ) COMPANY INC. ) in the presence of:- ) SIGNED by Ms. Jessie Fok as attorney ) duly authorised for and on behalf ) of GLORY MANSION LIMITED ) in the presence of:- ) 88 SIGNED by Mr. George Raffini ) duly authorised for and on behalf ) of WARDLEY CHINA ) INVESTMENT TRUST ) in the presence of:- ) SIGNED by Mr. Yiji Komiya ) duly authorised for and on behalf ) of MC PRIVATE EQUITY PARTNERS ) ASIA LIMITED ) in the presence of:- ) SIGNED by Mr. Fabrice Jacob ) duly authorised for and on behalf ) of CHINE INVESTISSEMENT 2000 ) in the presence of:- ) 89 EX-23.1 6 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts", "Summary Consolidated Financial Information", "Selected Consolidated Financial Information" and to the use of our report dated February 20, 1995, on the financial statements of Harbin Bearing General Factory, and our report dated April 5, 1996, on the consolidated financial statements of Sunbase Asia, Inc. in the Registration Statement (From S-1) and related Prospectus of Sunbase Asia, Inc. for the registration of 1,000,000 shares of its common stock. Ernst & Young Hong Kong October 22, 1996 -----END PRIVACY-ENHANCED MESSAGE-----