-----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, SYWtRgjgT3s/lZkL/wpjAqCllhmekgQ+dL4L8/6vP5vDenA356OFn8Ytz3wdsX2O 0/YkG0k2hYTsTE5JAtgc5w== 0001021408-00-001728.txt : 20000516 0001021408-00-001728.hdr.sgml : 20000516 ACCESSION NUMBER: 0001021408-00-001728 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000515 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: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-03132 FILM NUMBER: 633013 BUSINESS ADDRESS: STREET 1: 19/F FIRST PACIFIC BANK CENTRE STREET 2: 51-57 GLOUCESTER ROAD CITY: WANCHAI HONG KONG STATE: K3 ZIP: 91017-1028 BUSINESS PHONE: 8183580181 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 10-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number: 03132 SUNBASE ASIA, INC. (Exact name of registrant as specified in its charter) Nevada 94-1612110 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 19/F., First Pacific Bank Centre 51-57 Gloucester Road Wanchai, Hong Kong (Address of principal executive offices) Registrant's telephone number, including area code: (852) 2865 1511 Securities Registered under Section 12(b) of the Act: None Securities Registered under Section 12(g) of the Act: Common Stock Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [_] No [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Common Stock held by non-affiliates of the registrant computed by reference to the closing sales price as reported on the OTC Electronic Bulletin Board on April 28, 2000 was approximately $882,422. As of April 28, 2000, there were outstanding 14,118,751 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE: None. PART I ITEM 1. BUSINESS This Annual Report on Form 10K of Sunbase Asia, Inc. (the "Company" which term shall include, when the context so requires, its subsidiaries and affiliates) contains "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward looking statements are typically identified by words such as "believe," "expect," "anticipate," "intend," "estimate" and similar expressions, and include, among others, statements concerning the Company's strategy, its liquidity and capital resources, its debt levels, its ability to obtain financing and service debt, competitive pressures and trends in the bearing industry in the People's Republic of China ("PRC" or "China"), prevailing levels of interest and foreign exchange rates, legal proceedings and regulatory matters, general economic conditions in the PRC and elsewhere, and costs. Forward-looking statements involve a number of risks and uncertainties, many of which are beyond our control. Actual results of the Company could differ materially from those statements. Factors ("cautionary statements") that could cause or contribute to such differences include, but are not limited to, those factors discussed under the heading "FACTORS THAT MAY AFFECT FUTURE RESULTS" in ITEM 7 and elsewhere in this Annual Report. In light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward looking information contained in this Annual Report will in fact transpire and therefore undue reliance should not be placed on these forward looking statements. All subsequent written or oral forward looking statements attributed to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. The Company publishes its financial statements in both PRC Renminbi ("RMB") and U.S. dollars. For convenience, this Annual Report contains translations of certain RMB amounts into U.S. dollars. You should not construe any such translations as representations that the RMB amounts actually represent U.S. dollar amounts or could be converted into U.S. dollars at the exchange rates assumed. The financial statements have been prepared in accordance with generally accepted accounting principles in the United States. THE COMPANY The Company is engaged in the design, manufacture and distribution of a broad range of bearing products. Through various subsidiaries and joint venture interests, the Company owns 51.43% of Harbin Bearing Company Ltd. ("Harbin Bearing"), which is located in China. Harbin Bearing manufactures and distributes a wide variety of precision and commercial grade rolling element bearings in sizes ranging from 10 mm to 1,000 mm (internal diameter) primarily for use in commercial, industrial and aerospace applications. 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, 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 for precision bearings generally requires the labor of highly skilled mechanics and the use of sophisticated machine tools. Harbin Bearing sells its bearings primarily in China and in certain western countries, including the United States. Harbin 2 Bearing has been in business since 1950, has approximately 11,432 full time employees and operates out of facilities occupying in excess of two million square feet. Until April 28, 2000, the Company also owned Smith Acquisition Company, Inc. d/b/a Southwest Products Company ("Southwest Products"), a bearing manufacturing company located in Los Angeles, California, that has been in business since 1945. Southwest Products is an engineering intensive company that designs and manufactures high precision plain spherical bearings, rod end bearings, bushings and push pull controls for U.S., European and Asian aerospace and high technology commercial applications and the U.S. military. Spherical bearings are "ball and socket" mechanisms that allow for motion in three dimensions and which move loads from one plane to another. For flight critical applications, a spherical bearing must have extremely precise tolerances and it must be able to endure heavy loads without failure. In January 1996, the Company acquired Southwest Products. As a result of the acquisition of Southwest Products, the Committee on Foreign Investment in the United States ("CFIUS"), an inter-agency committee of the United States Government, began an investigation of the Company to determine if the ownership of Southwest Products by the Company would pose any threat to the national security interests of the United States. In December 1998, the Company voluntarily agreed to divest Southwest Products and, pending such disposition, placed its ownership interest in Southwest Products into an irrevocable trust. An independent trustee acceptable to the U.S. Department of Defense was appointed to oversee the operations of Southwest Products to insure Southwest Product's compliance with all U.S. laws and regulations and to work with the Company's Board of Directors to actively pursue the sale of Southwest Products. In light of the Company's decision to appoint a trustee pending the sale of Southwest Products, the CFIUS investigation was terminated. The Company entered into a Stock Purchase Agreement with William McKay on January 31, 2000. On March 24, 2000, Mr. Mckay assigned his rights under the Stock Purchase Agreement to Mckay, Brothers & Horany Acquisition Corp. Pursuant to the Stock Purchase Agreement on April 28, 2000, the Company sold its entire interest in Southwest Products to McKay, Brothers & Horany Acquisition Corp. for cash consideration of US$3,500,000 and the release of debt obligations in the amount of $3,952,000 owed by Southwest Products to the Company. The sale of Southwest Products result in net proceeds of US$3,335,000 (net of the professional fees US$165,000) of which US$2,600,000 was paid to the holders of the Convertible Debentures. See ITEM 7, "LIQUIDITY AND CAPITAL RESOURCES". The remaining proceeds US$735,000 has been retained by the Company as additional working capital. Upon the sale of Southwest Products, the Company terminated the trust arrangement with the independent trustee for Southwest Products. 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 formed in 1993 as a joint stock limited company. 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 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, acquired a 51.43% ownership interest in 3 Harbin Bearing. Substantially all of the remaining interests in Harbin Bearing were and continue to be owned by employees of Harbin Bearing (approximately 15%) and by Harbin Holdings (approximately 33.43%). In December 1994, the Company (which was then called Pan American Industries, Inc.) acquired a 51.43% effective interest in Harbin Bearing by issuing to Asean Capital Limited ("Asean Capital"), a wholly owned subsidiary of Sunbase International, newly issued shares representing a controlling interest in the Company. See ITEM 13, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." The following diagram shows the corporate structure of the Company and its affiliated companies as of December 31, 1999: --------------------------------------- SUNBASE ASIA, INC. Common Stock has been quoted on OTC Bulletin Board (Nevada Corporation) --------------------------------------- 100% 100% -------------------------- -------------------------- CHINA BEARING SOUTHWEST HOLDINGS LIMITED PRODUCTS COMPANY (Bermuda Holdings (California corporation (Company) (1) (2) -------------------------- -------------------------- OPERATING COMPANY 100% -------------------------- CHINA INTERNATIONAL BEARING HOLDINGS LIMITED (Hong Kong Holding (Company) -------------------------- 99% 99.9% - ------------------------------- ------------------------------- HARBIN SUNBASE HARBIN XINHENGLI DEVELOPMENT COMPANY LIMITED DEVELOPMENT COMPANY LIMITED (PRC JV Holdings Co.) (PRC JV Holdings Co.) (3) - ------------------------------- ------------------------------- 10% 41.57% ------------------------------- HARBIN BEARING COMPANY LTD (PRC Joint Stock Company) (4) ------------------------------- OPERATING COMPANY 4 (1) In August 1996, China Bearing Holdings Limited ("China Bearings") issued U.S. $11.5 million aggregate principal amount of convertible debentures (the "Convertible Debentures"), which were convertible at the option of the holder into shares of Common Stock of the Company. As described in more detail under "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES" in Item 7, in October 1998, the Convertible Debentures were restructured as a loan with an aggregate principal amount of U.S.$13.2 million bearing interest at a rate of 10% per annum and maturing over a period of three years ending in July 2000. As part of the Restructuring, the Company also issued 466,667 shares of its Common Stock to the holders of the Convertible Debentures. (2) In response to the CFIUS investigation, the Company transferred its interest in Southwest Products to a trust administered by an independent trustee and sold that interest on April 28, 2000. Upon the sale of Southwest Products, the Company terminated the trust arrangement with the independent trustee. (3) 0.1% of Harbin Xinhengli Development Company Limited is held by Harbin Everising Construction and Development Limited, which is related to Sunbase International. 1.0% of Harbin Sunbase Development Company Limited is held by a local PRC partner. (4) Sunbase Asia's ownership in Harbin Bearing is 51.57% whereas the effective ownership is 51.43%. The remaining 48.43% of this company is owned by its employees and by Harbin Holdings. 5 HARBIN BEARING Harbin Bearing specializes in the manufacture of precision bearings and can manufacture more than 5,000 of the approximately 6,000 different specifications of bearings that are available in China. Harbin Bearing produces seven major types of bearings: deep groove ball bearings, self aligning ball bearings, cylindrical rolling bearings, angular contact ball bearings, tapered rolling bearings, thrust ball bearings and linear motion ball bearings. Each of such bearings is manufactured in micro, small, medium and large sizes. Sales and Marketing Harbin Bearing primarily sells its products in China and to a lesser extent, in western countries such as the U.S. 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. However, because of stringent qualifications such as ISO 9000 certification required by many end users outside of the PRC, Harbin Bearing's access to these markets has been impeded. The Company had hoped that its acquisition of Southwest Products would enhance Harbin Bearing's ability to access these markets. However, with the Company's decision to sell its interest in Southwest Products, the Company has to consider alternative restructuring strategies for its business. SEE ITEM 7, "FACTORS THAT MAY AFFECT FUTURE RESULTS." Sales to related parties accounted for RMB 22,283,000 (or 4.8%) in 1999 and RMB 38,886,000 (or 8.1%) in 1998. These sales were made to Harbin Bearings Import and Export Company and Xin Dadi Mechanical and Electrical Equipment Company, both of which are owned by the Harbin Municipal Government. Harbin Bearing has 13 sales offices in major cities in China, including Beijing, Shanghai and Guangzhou all of which were strategically located to increase market share and widen the channel of sales. All sales are coordinated through Harbin Bearing's headquarters in Harbin, including sales to local distributors, overseas agents, and PRC import and export companies. As of December 31, 1999, Harbin Bearing had 158 sales personnel and 187 support personnel who are responsible for product promotion, marketing, after sales services and technical support. Harbin Bearing sells its bearings in China and abroad under the "HRB" trademark. Harbin Bearing delivers its bearings by rail, truck, ocean freight and air freight. Deliveries by truck have been increasing due to improved highway networks and conditions in the PRC. This substantially shortens delivery time over delivery by rail. Harbin Bearing leases its trucks from its affiliate, Harbin Precision, which are used mostly for short haul deliveries. See ITEM 13, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." In addition, railroad tracks leading directly to two of Harbin Bearing's raw material warehouses are used exclusively to transport raw materials, such as bearing steel, reducing raw material freight costs. Due to the adverse market conditions in the PRC which resulted from the general financial turmoil in Asia since 1997, Harbin Bearing has further enhanced its credit review procedures and has been more conservative in extending credit to customers in an effort to mitigate against difficulties in collecting receivables. See ITEM 7, "FACTORS THAT MAY AFFECT FUTURE RESULTS." 6 Manufacturing/Engineering/New Product Development In the face of greater competition in the bearing industry, Harbin Bearing has been endeavoring to improve productivity and quality so as to control and reduce manufacturing cost in order to become more competitive. However, the original schedule to implement system improvements designed to meet various worldwide recognizable manufacturing standards such as ISO 9000 has been indefinitely extended due to the Company's divestiture of Southwest Products. See ITEM 7, "FACTORS THAT MAY AFFECT FUTURE RESULTS." Workforce As of December 31, 1999, Harbin Bearing employed approximately 11,432 full time personnel in the following areas: executive and administrative (455), sales and service (502), manufacturing and production (10,361), and research and development (114). Management believes that, in general, its relationship with the employees is good. The Harbin Municipal Government has promulgated regulations which provide for the establishment of a pension fund program to which both employer and employees must contribute. Under these regulations, Harbin Bearing is required to contribute monthly to this fund an amount equivalent to 22% of its employees' aggregate 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. SALE OF SOUTHWEST PRODUCTS Pursuant to a resolution dated December 16, 1998, the board of directors decided to dispose Southwest Products and subsequently on January 31, 2000, the Company entered into a Stock Purchase Agreement with William McKay. On March 24, 2000, Mr. Mckay assigned his rights under the Stock Purchase Agreement to McKay, Brothers & Horany Acquisition Corp. Pursuant to the Stock Purchase Agreement on April 28, 2000, the Company sold its entire interest in Southwest Products to McKay, Brothers & Horany Acquisition Corp. for cash consideration of US$3,500,000 and the release of debt obligations in the amount of $3,952,000 owed by Southwest Products to the Company. The sale of Southwest Products result in net proceeds of US$3,335,000 (net of the professional fees US$165,000) of which US$2,600,000 was paid to the holders of the Convertible Debentures. See ITEM 7, "LIQUIDITY AND CAPITAL RESOURCES". The remaining proceeds US$735,000 has been retained by the Company as additional working capital. Upon the sale of Southwest Products, the Company terminated the trust arrangement with the independent trustee for Southwest Products. Such sale was completed on April 28, 2000. See ITEM 7, "LIQUIDITY AND CAPITAL RESOURCES" for a description of the use of the net proceeds on sale of Southwest Products. 7 RAW MATERIALS The principal raw materials used to manufacture bearings are carbon steel and stainless steel rod, wire and tubing. These steels 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. The Company sources most of the bearing steel required for Harbin Bearing directly from four domestic mills located in Heilongjiang Province, Liaoning Province and Shanghai. The Company 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 more than 43 days of production. In addition, railroad tracks leading directly to two of Harbin Bearing's raw material warehouses are used exclusively to transport raw materials, such as bearing steel, reducing raw material freight costs. COMPETITION The Company's main competitors can be categorized into three principal groups: (i) a few very large national PRC bearing manufacturers offering a wide range of products; (ii) small local Chinese bearing production facilities that compete on a local basis by manufacturing small sized, commodity type bearings; and (iii) non-Chinese bearing manufacturers. Competition is principally based upon pricing considerations. Competition in the PRC The Company believes that there are five major PRC bearing manufacturers: Wafangdian Bearing Company Limited, Luoyang Bearing Group, Northwest Bearing Joint Stock Company, Xiangyang Bearing Joint Stock Company and the Company's majority owned subsidiary, Harbin Bearing. The balance of the PRC bearing industry is fragmented, comprised of a larger number of smaller bearing companies producing mostly lower grade bearings often on a local basis for use mostly as replacement bearings in the electrical appliance and agricultural equipment industries. 8 Due to lower levels of capital expenditures, greater labor intensive production processes and the relative lack of operational skills and training, PRC bearing manufacturers are often unable to produce bearings of as high precision, consistency and durability as those produced by the leading multinational manufacturers. As a result, companies in China import precision bearings and other special bearings with high technical contents and high added value. This has led the PRC authorities to encourage foreign investment in higher grade bearing manufacturers and to demand a halt to approvals of foreign investment supporting the production of lower grade bearings. Bearings imported into the PRC are currently subject to import tariffs ranging from 10% to 17%. If, however, the PRC becomes a part of the World Trade Organization, the import tariff could be phased out, potentially increasing competition from foreign manufacturers. The potential for growth in the PRC bearing industry is substantially dependent upon the performance of the PRC industrial sector and the economy in general. Since 1978, China has been pursuing economic reform policies in an effort to improve its industrial sector and revitalize its economy. The central PRC government has implemented various policies to minimize the adverse effects upon the PRC economy of the financial crisis in Asia that began in 1997. Such policies include closer supervision of the PRC banking system and tighter control over capital expenditures by PRC enterprises. Such policies also include resistance to devaluation of the RMB, leading to less competitive export pricing and thus an oversupply of bearings in the PRC domestic market (although similar effects on products, equipment and machinery produced in the PRC requiring bearings may act to increase domestic demand for bearings). These policies have indirectly resulted in greater competition due to this oversupply and are expected to continue to have a significant adverse impact on the performance of PRC bearing manufacturers, including the Company. Competition in International Markets The international bearing industry is extremely competitive. Although the Company's main competitors are Eastern European manufacturers and manufacturers located in China, to a lesser extent, the Company also competes with companies such as Svenska Kugellager Fabriken, Fisher Aktien Gesellschast, New Technology Network, NSK, Timken, Torrington Fafnir and Nippon Miniature Bearing, which dominate this market. The Company had hoped that its acquisition of Southwest Products in 1996 would not only allow it to access the U.S. bearing market, but also allow it to implement U.S. manufacturing methods and quality control procedures at Harbin Bearing to develop new products and meet the stringent requirements of many non-Chinese OEMs. By doing so, the Company expected to increase its penetration of the international bearing market. As a result of the Company's sale of Southwest Products in response to the CFIUS investigation, however, the Company is currently reevaluating its business strategy, which may involve restructuring to reduce operating expenses, seeking an alliance with a strategic partner, reorganizing the Company's operations and/or divesting its bearing manufacturing assets in China to diversify into other lines of business. See ITEM 7, "FACTORS THAT MAY AFFECT FUTURE RESULTS." OPERATING IN CHINA Because the production operations of the Company are based to a substantial extent in China, the Company is subject to rules and restrictions governing China's legal and economic system as well as 9 general economic and political conditions in the 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 that such policies will be successful. Changes in policies made by the Chinese government may result in new laws, regulations, or the interpretation thereof, confiscatory taxation, currency devaluation or the expropriation of private enterprises which may, in turn, adversely affect the Company. Chinese economic development may be limited by the imposition of austerity measures intended to reduce inflation, the inadequate development of infrastructure, and the potential unavailability of adequate power and water, transportation, communication networks, raw materials and parts. Legal System China'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 law 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. 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 control inflation. In 1995, China's overall inflation rate (retail price index) was approximately 15%, compared to approximately 21% in 1994 and 13% in 1993. However, after the implementation of strict monetary policies, the inflation rates were approximately 6%, 8%, minus 2.6% and minus 3% in 1996, 1997, 1998 and 1999, respectively. High inflation has in the past and may in the future cause the PRC government to impose controls on prices, or to take other actions which could inhibit economic activity in China, which in turn could affect demand for the Company's products. In view of the change in market conditions and greater competition, Harbin Bearing may be unable 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 the Company, remained fairly stable from 1994 to 1999 in China and the only major impact of inflation on the Company's costs in its Chinese operations was on the cost of labor (due to the rising level of 10 compensation of Harbin Bearing's employees). Foreign Exchange Control and Exchange Rate Risks Prior to January 1, 1994 the PRC had two exchange rates: the Official Rate and the Swap Center Rate. On January 1, 1994 this dual foreign exchange system was abolished. Controls on the purchase of foreign exchange are being relaxed. Pursuant to the PRC Foreign Exchange Control Regulations which came into effect on April 1, 1996, enterprises which require foreign exchange for current account transactions (such as trading activities) may purchase foreign exchange from designated banks subject to production of relevant supporting documents. The Administrative Regulations on the Settlement, Sale and Payment of Foreign Exchange, which came into force on July 1, 1996, set out the procedures for the purchase, sale and settlement of foreign exchange for current account transactions. In addition, these Regulations provide that foreign exchange required for the payment of dividends that are payable in foreign currencies under applicable regulations may be purchased from designated foreign exchange banks subject to the payment of taxes on such dividends and upon presentation of board resolutions authorizing the distribution of profits or dividends of the company concerned. Despite the relaxation of foreign exchange control over current account transactions, the approval of the State Administration for Foreign Exchange ("SAFE") is still required before a PRC enterprise may borrow in a foreign currency, provide any foreign exchange guarantee, make any investment outside the PRC or enter into any other capital account transaction which involves the purchase of foreign exchange. In general, all organizations and individuals within the PRC, including foreign investment enterprises ("FIEs"), are required to sell their foreign exchange earnings to designated banks in the PRC. FIEs, however, are permitted to retain a certain percentage of their foreign exchange earnings and the sums retained may be deposited into foreign exchange bank accounts maintained with designated banks. Despite the relaxation of foreign exchange control over current account transactions, RMB remains a currency which is not freely convertible into other currencies. There can be no assurance that shortages of foreign currency at the swap centers or designated banks will not restrict the Company's ability to obtain sufficient foreign currency to pay dividends to the shareholders of the Company or to meet other foreign currency requirements or that the RMB will not be subject to further devaluation were the Company otherwise able to pay such dividends. Currently, the Company is unable to hedge its U.S. Dollar/RMB exchange rate exposure in China because no financial institutions are authorized to engage in foreign currency transactions offering forward exchange contracts with respect to the RMB. 11 ITEM 2. PROPERTIES The Company leases the office space for its Hong Kong headquarters from Sunbase International. HARBIN BEARING Harbin Bearing operates twelve finished product plants and thirteen auxiliary plants. With the exception of a newly relocated finished product plant in Daowaiqu of Limin Trade Development Zone, all of the Company's plants are located in four plant compounds in Harbin. The Harbin branch of the 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. 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 commencing January 1, 1994. Although this lease expired on December 31, 1998, Harbin Bearing is currently still using the premises without renewal of the lease. See ITEM 13, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." 12 ITEM 3. LEGAL PROCEEDINGS Internal Revenue Service Dispute The U.S. Internal Revenue Service ("IRS") has asserted that the Company improperly failed to withhold U.S. taxes on a payment of $730,776 to Asean Capital Limited in 1996 with respect to a promissory note of the Company and that the Company is liable for such taxes in the amount of $219,233, plus penalties of $43,837, plus interest. The Company has controverted that assertion in administrative procedures with the IRS, but the matter has not been resolved. The Company believes the IRS will serve a notice of deficiency as to the taxes the IRS asserts are due. The Company intends to contest vigorously any IRS action. The Company is unable to state what the outcome of this dispute will be. Other In addition to those matters disclosed above, the Company may from time to time be party to various litigation matters which are incidental to its business. The Company's management does not expect the outcome of any such proceedings to have a material adverse effect on its financial condition, results of operations or cash flows. 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted during the fourth quarter of 1999 to a vote of security holders nor was there any solicitation of proxies. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock began trading on the Nasdaq National Market ("Nasdaq") under the symbol "ASIA" on February 9, 1996. The Common Stock ceased trading on Nasdaq on February 10, 1999. Subsequently, the Common Stock began being quoted on the OTC Bulletin Board (The "Bulletin Board") on February 11, 1999. As a result, the Company changed its symbol to "SNBSE." The following tables set forth the high and low sales prices of the Company's Common Stock on Nasdaq and 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. Fiscal 1998 High Low - ----------- ---- --- Quarter Ended March 31, 1998 4-3/8 2 Quarter Ended June 30, 1998 2-7/8 0-3/8 Quarter Ended September 30, 1998 1-1/8 0-1/4 Quarter Ended December 31, 1998 1-1/4 0-1/4 Fiscal 1999 High Low - ----------- ---- --- Quarter Ended March 31, 1999 0-7/8 0-7/8 Quarter Ended June 30, 1999 0-3/4 0-3/4 Quarter Ended September 30, 1999 Trading Suspended Quarter Ended December 31, 1999 0-1/4 0-1/4 From January 1, 1999 through February 10, 1999, the high and low sales prices of the Company's Common Stock as reported by Nasdaq were 13/32 and 1/8, respectively. From February 11, 1999 through May 19, 1999, the high and the low closing prices of the Company's Common Stock as quoted on the Bulletin Board were 1/4 and 1/32, respectively. Between May 20, 1999 and October 26, 1999 the Company's Common Stock did not trade on the Bulletin Board because there were no market makers making a market in the Common Stock and the Company was not current with its public information requirements. As of April 28, 2000, there were 136 holders of record of the Common Stock. The Company has paid no cash dividends on its Common Stock and has no present intention of paying cash dividends in the foreseeable future. Pursuant to the Settlement Agreement with respect to the Company's Convertible Debenture, no dividend payments can be made on any Common Stock 15 without the prior written consent of the holders of the Convertible Debentures. 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 and requirements for capital improvements. Applicable Chinese laws and regulations provide that a joint stock company (such as Harbin Bearing) can not 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 joint stock company is required by applicable Company Law to reserve 10% of its after tax earnings and profits as the mandatory retained fund and 5% of its after tax earnings and profits as the public welfare fund. The joint stock company does not have to reserve for the mandatory retained fund if the amount of such fund has reached 50% of the company's registered capital. For 1998, Harbin Bearing contributed 10% and 5%, respectively, of after tax profits as determined under Chinese accounting principles for such purposes. Distribution of dividends by Harbin Bearing to its shareholders are required to be in proportion to each shareholder's percentage interest in Harbin Bearing. In addition, distribution of dividends by Harbin Bearing will be paid to its shareholders of record, which include the joint venture partners. 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. 16 ITEM 6. SELECTED FINANCIAL DATA The following tables set forth selected historical financial data (expressed in thousands) derived from and should be read in conjunction with the audited financial statements of the Company as of December 31, 1998 and 1999 and for the years ended December 31, 1997, 1998 and 1999 included elsewhere in this Annual Report on Form 10 K and the Company's audited financial statements as of December 31, 1995, 1996 and 1997 and for the years ended December 1995 and 1996 which are not included in this Annual Report on Form 10 K. All U.S. dollar amounts have been converted from RMB based on the exchange rate on December 31, 1999 of U.S. $1.00 to each RMB 8.275 as quoted at the People's Bank of China. The report of Ernst & Young contains an explanatory paragraph relating to the Company's ability to continue as a going concern as described in Note 2 to such financial statements. OPERATING DATA
1995 1996 1997 1998 1999 1999 ---------- ---------- ---------- ---------- ---------- ---------- RMB RMB RMB RMB RMB US$ Net sales .......................... 672,359 854,066 697,175 475,310 468,087 56,567 Cost of sales ...................... (380,279) (520,804) (479,089) (362,925) (462,930) (55,943) Provisions on inventories .......... (1,098) (1,000) (30,600) (100,600) (79,000) (9,547) Gross profit/(loss) ................ 290,982 332,262 187,486 11,785 (73,843) (8,923) Selling, general and administrative expense ........................ (110,375) (99,829) (76,901) (82,533) (120,943) (14,615) Interest expense, net .............. (48,446) (54,134) (67,195) (66,644) (61,993) (7,492) Provisions on accounts receivable .. (2,627) (3,998) (16,262) (31,961) (136,170) (16,456) Provisions on other receivables .... - - - (12,404) (3,729) (450) Provisions on balance due from related companies ................ - - - (49,000) (79,000) (9,547) Write-off of the deposit with a financial institution ............ - - - (23,750) - - Provision on impairment of fixed assets ........................... - - - - (15,000) (1,813) Other income ....................... - 16,640 - - - - Income/(loss) before income taxes .. 129,534 190,941 27,128 (254,507) (490,678) (59,296) Provision for income taxes ......... (20,472) (27,792) (7,584) - - - Income before minority interests ... 109,062 163,149 19,544 (254,507) (490,678) (59,296) Minority interests ................. (54,967) (77,342) (21,006) 111,081 232,813 28,315 Net income/(loss) from continuing operations ....................... 54,095 85,807 (1,462) (143,426) (257,865) (31,161) Net income/(loss) from discontinued operations .......... - (9,273) (2,722) (2,958) (18,674) (2,257) Net income/(loss) .................. 54,095 76,534 (4,184) (146,384) (276,539) (33,418)
17
Net income/(loss) per common share: Basic ............................ 4.62 6.24 (0.33) (10.67) (19.58) (2.37) Diluted .......................... 3.54 4.62 (0.33) (10.67) (19.58) (2.37) Net income/(loss) per common share from continuing operations: Basic ............................ 4.62 7.00 (0.12) (10.46) (18.26) (2.20) Diluted .......................... 3.54 5.15 (0.12) (10.46) (18.26) (2.20) Net income/(loss) per common share from discontinued operations Basic and diluted................ _ (0.73) (0.21) (0.21) (1.32) (0.17)
BALANCE SHEET
1995 1996 1997 1998 1999 1999 ---------- ---------- ---------- ---------- ---------- ---------- RMB RMB RMB RMB RMB US$ Current assets ........ 1,032,600 1,181,609 1,368,266 1,293,702 1,058,112 127,866 Working capital ....... 306,288 404,618 308,473 61,884 (371,373) (44,881) Long-term debts ....... 218,383 231,824 84,938 47,550 24,777 2,994 Minority interests .... 343,142 420,484 441,490 330,409 97,596 11,794 Shareholders' equity .. 330,565 443,184 439,000 295,521 19,112 2,307 Total assets .......... 1,618,402 1,872,483 2,025,220 1,905,298 1,570,970 189,842
18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW 1999 was an exceptionally tough year for the Company as the major operation of the Company in the PRC, Harbin Bearing, continued to suffer serious setbacks. Several factors collectively contributed to these setbacks. First, the PRC economy continued to be in a state of deflation in 1999. Demand for products continued to decline and seriously dempen the demand for bearings in the PRC. As a result, Harbin Bearing had to make large provisions for its products inventories. Also, this suppressed market condition forced Harbin Bearing to leave much of its manufacturing capacity idle, thus further aggravating its financial results. Second, state owned enterprises, which form the majority of the customer base of Harbin Bearing, continued to experience serious difficulties in 1999. Their inability to make payments required that Harbin Bearing had to make exceptionally large provisions for its accounts receivables. The combination of these factors seriously affected the financial results of the Company in 1999. The management of the Company does not expect this adverse market situation will improve significantly in the year 2000. The sale of Southwest Products was completed on April 28, 2000. As the Company retained a share of Southwest Products net assets amounting to RMB 26,193 (US$3,163) in 1999, which did not exceed the net proceeds of US$3,335, and consequently no anticipated loss on sale of Southwest Products was noted. Upon the sale of Southwest Products, the Company did not derive any capital gain tax liability. See Note 8 to the Company's 1999 consolidated financial statements for a description of the loss on sale of Southwest Products. Unless otherwise indicated in this ITEM 7, all RMB and U.S. Dollar amounts except per share information are expressed in thousands ( '000). RESULTS OF OPERATIONS 1999 COMPARED TO 1998 Net Sales Net sales for the Company from continuing operations for 1999 decreased by RMB 7,223 or 1.5%, to RMB 468,087 as compared to RMB 475,310 in 1998. The decrease in net sales was due to persisting adverse market conditions in the PRC. Cost of Sales Cost of sales for the Company from continuing operations for 1999 increased by RMB 100,005 or 27.5% to RMB 462,930 from RMB 362,925 for 1998. Prevailing adverse market conditions forced the Company to gear sales towards those customers which could afford to make timely payments. Thus, the Company accepted some very low-priced orders, which though reflecting market prices in the PRC, generated revenue that may be lower than related total production costs. However, the Company accepted these orders to maintain its production in order to cover some of its fixed cost as well as to maintain some of its market share. Continuous late payments by customers have significantly tightened the liquidity of the Company. In turn, this liquidity problem had seriously affected the planning of production and worsened the Company's operating efficiency, causing a substantial 19 increase on the cost of sales. Gross Loss The Company's gross profit from continuing operations of RMB 11,785 in 1998 turned into a gross loss of RMB 73,843 in 1999. This loss was mainly due to the continuous adverse market conditions and the tight liquidity condition of the Company, which in turn elevated the cost of sales significantly. Another cause was the large provision made by the Company on product inventories. Selling, General and Administrative Expenses Selling, general and administrative expenses from continuing operations for 1999 increased by RMB 38,410 or 46.5% to RMB 120,943 from RMB 82,533 in 1998. As a percentage of revenues, these expenses increased from 17.4% for 1998 to 25.8% for 1999. The increase was mainly due to the exceptionally large write-off of idling capacity on plant, machinery and equipment. Interest Expense Interest expense for the Company from continuing operations for 1999 remained essentially unchanged from 1998. Provision on Accounts Receivable and Other Receivables The provision for accounts receivables from continuing operations increased by RMB 104,209, or 326%, to RMB 136,170 in 1999 from RMB 31,961 in 1998. This large provision was mainly attributable to the financial reforms and state owned enterprises reforms in the PRC. As a result of the implementation of reforms by the PRC Government, many of our state owned enterprises customers were deprived of financing from banks which in the past would lend money to them as directed by the local governments irrespective of their financial health. Also, these customers were unable to recover receivables from their state owned enterprise customers which were also affected by these reforms. The combined effects of these reforms forced the Company to make large provisions for accounts receivables accumulated from business done with these customers in previous years. In addition, the Company recorded provisions for other receivables due from third parties and balances due from related companies, amounting to RMB 82,729, in aggregate, due to uncertainty regarding their collectability because of the age of the receivables and the continued adverse economic situation in the PRC. The Company believes that this adverse economic situation in the PRC will continue into the immediate future and the Company expects to continue to encounter difficulties in receivables collections. Provision on impairment of Fixed Assets A provision on impairment of fixed assets from continuing operations of RMB 15,000 was made in 1999 as a result of adverse market condition in the PRC which led the Company to have excess production capacity which the Company expects to persist into the foreseeable future. Loss From Continuing Operations 20 As a result of the aforementioned economic and business factors, the Company generated a net loss from continuing operations of RMB 257,865 in 1999 as compared to a net loss from continuing operations of RMB 143,426 in 1998, an increase of RMB 114,439. Net Loss from Discontinued Operations The Company's net loss from discontinued operations was RMB 18,674 in 1999 as compared to RMB 2,958 in 1998. The increase in net loss was due to a write- off of the Goodwill of Southwest Products in order to write-down the carrying value to the approximate realizable value. 1998 COMPARED TO 1997 Net Sales Net sales for the Company from continuing operations for 1998 decreased by RMB 221,865, or 31.8%, to RMB 475,310 as compared to RMB 697,175 in 1997. This decrease in net sales was primarily due to the adverse market conditions which persisted in the PRC in 1998 and in Asia generally. Stringent controls on capital expenditure of PRC enterprises by the Chinese government decreased demand for the Company's products, which are components of machinery and equipment. As a result, competition within the PRC bearing industry increased in 1998 for the fewer sales orders being placed for bearings. The Company responded to the continuing adverse market conditions in China by increasing its marketing efforts, enhancing its credit review procedures, and restricting sales marketing to customers where collectability of payment for purchased product is uncertain. Cost of Sales Cost of sales for the Company from continuing operations for 1998 decreased by RMB 116,164 or 24.2%, to RMB 362,925 from RMB 479,089 for 1997. This decrease in cost of sales was primarily due to the decrease in volume of production as a result of contraction in sales in the Company's continuing operations. Gross Profit The Company's gross profit from continuing operations for 1998 decreased from RMB 187,486 in 1997 to RMB 11,785, a decrease of RMB 175,701, or 93.7%. Gross Profit as a percentage of revenue also decreased from 26.9% for 1997 to 2.5% for 1998. The significant decrease in gross profit was mainly attributable to the decrease in sales caused by the adverse market conditions in the PRC, which led to a plunge in units of bearings produced in 1998. In addition, in response to the continuous drop in the market selling price of bearings due to keen competition, the provision on inventories for 1998 was increased to RMB 100,600 as compared to RMB 30,600 for 1997, which resulted in a 93.7% decrease in gross profit in 1998. Due to prolonged adverse market conditions, the Company was forced to lower its selling price for certain bearing below its cost of production. Selling, General and Administrative Expenses Selling, general and administrative expenses from continuing operations for 1998 increased by 21 RMB 5,632, or 7.3%, to RMB 82,533 from 76,901 in 1997. Selling, general and administrative expenses as a percentage of revenues increased from 11.0% for 1997 to 17.36% for 1998. Selling, general and administrative expenses for the Company's continuing operations increased mainly as a result of increased transportation costs and travel expenses for sales personnel, which were partially offset by a decrease in royalties paid in 1998. During 1998, the Company adopted stronger controls on its overhead and implemented certain cost- cutting measures in order to improve its profitability and competitiveness. However, this cost saving effort was mitigated by the adverse impact of the Asian financial turmoil and the continued adverse economic situation in the PRC. Interest Expense Interest expense for the Company from continuing operations for 1998 remained essentially flat from 1997 and did not have significant fluctuation in that year. Provision on Accounts Receivable and Other Receivables The provision for accounts receivable from continuing operations increased by RMB 15,699, or 96.5% to RMB 31,961 in 1998 from RMB 16,262 in 1997 to provide for the slower recovery of accounts receivable due mainly to the turmoil in the PRC and Asia in 1998, and the decrease funds which had been previously made available by the Chinese government to state-owned enterprises, including customers of Harbin Bearing. In addition, the Company recorded provisions for other receivables due from third parties and balances due from related companies, amounting to RMB 61,404, in aggregate, due to uncertainty regarding their collectability based on the length of time that the receivables were outstanding and the continued adverse economic situation in the PRC and Asia. There was also a specific provision made for deposits with a Chinese financial institution in the amount of RMB 23,750 for 1998 in view of the current economic situation and the liquidity problems experienced by the financial institution in the PRC. The Company responded to these adverse economic conditions by tightening credit controls and enhancing its credit review procedures for new sales orders. Loss From Continuing Operations As a result of the aforementioned factors, the Company generated a net loss from continuing operations of RMB 143,426 in 1998 as compared to a net loss from continuing operations of RMB 1,462 in 1997. Net Loss From Discontinued Operations The Company's net loss from discontinued operations was RMB 2,958 in 1998 as compared to RMB 2,722 in 1997. The increase in the Company's net loss from discontinued operations is mainly due to a decrease in gross profit despite a slight increase in revenues as a result of the hiring of a new manufacturing consultant and an increase in labor costs. The decrease in gross profit, however, was partially offset by reduced selling, general and administrative expenses from a reduction in salaries and travel expenses paid to sales personnel, partially offset by increased legal fees associated with CFIUS and U.S. export control issues, and a decrease in interest expense due to the repayment of third party loans. 22 LIQUIDITY AND CAPITAL RESOURCES Operating Activities Net cash used in operating activities from continuing operations was RMB 60,444 in 1999, as compared to net cash used in operating activities from continuing operations of RMB 137,655 in 1998 and net cash used in operating activities from continuing operations of RMB 39,593 in 1997. The increased use of cash in operating activities from continuing operations is primarily due to the unsatisfactory market conditions in the PRC and Asia generally which has continued since 1997. These adverse market conditions led to a decrease in sales and the slower recovery of trade receivables from customers. As of December 31, 1999, the Company's negative working capital was RMB 371,373 as compared to the working capital of RMB 61,844 at December 31, 1998 and RMB 308,473 at December 31, 1997. The Company's current ratio was 0.74:1 as of December 31, 1999, 1.05:1 at December 31, 1998 and 1.29:1 at December 31, 1997. Investing Activities Net cash used in investing activities was RMB 25,207 in 1999 as compared to net cash provided by investing activities of RMB 21,233 in 1998 and net cash used in investing activities of RMB 57,245 in 1997, mainly due to increases in capital expenditures and decreases in amounts due from related companies in 1999 as compared to 1998. Capital expenditures of RMB 24,744 in 1999 (RMB 16,586 in 1998 and RMB 48,287 in 1997) consisted of costs related to completion of construction in progress of new plant and machinery as well as the renovation of existing facilities and equipment. These capital expenditures were financed primarily through short-term and long-term bank loans. The Company does not expect to spend more than the minimum required to maintain its equipment and facilities in 2000. As of December 31, 1999, the Company had no outstanding capital expenditure commitments. Financing Activities Net cash provided by financing activities was RMB 74,941 in 1999 as compared to net cash provided by financing activities of RMB 96,824 in 1998 and RMB 87,682 in 1997. The Company has historically relied on both short-term and long-term bank loans from Chinese banks to support its operating and capital requirements. Short-term bank loans, which have terms ranging from three months to six months, are utilized to finance both operating and capital requirements and are renewed on a revolving basis. Long-term bank loans are utilized to fund capital expansion projects. Since 1997, principally all net cash provided by financing activities has come from short- term and long-term bank loans. The Company believes that it will be able to continue to maintain its bank borrowings under its current lending arrangements. After the completion of the sale of Southwest Products and the execution of the Supplemental Agreement referred to below, the Company has retained US$735 of the proceeds as additional working capital. There can be no assurance that the Company's business will generate cash flow that, together with additional financing, to the extent available, will be sufficient to allow the Company to meet its requirements for working capital, capital expenditures and debt payments. In August 1996, China Bearings issued U.S.$11.5 million aggregate principal amount of Convertible Debentures to three investors. The Convertible Debentures were convertible, at the option of the holders, in whole or in part, at any time into shares of Common Stock of the Company. The conversion price (the "Conversion Price") was initially U.S. $5.00 per share, subject to adjustment for (a) a change in par value of the Common Stock, (b) the issuance of shares by way of capitalization of profits or reserves, (c) capital distributions, (d) a rights offering at a price which is less than the lower of the then market price of the Common Stock or the Conversion Price, (e) the issuance of derivative 23 securities where the total consideration per share initially received is less than the lower of the then market price of the Common Stock or the Conversion Price, (f) the issuance of shares at a price per share which is less than the lower of the then market price of the Common Stock or the Conversion Price and (g) if the cumulative audited earnings per common share for any two consecutive fiscal years commencing with the fiscal year ended December 31, 1996 and ending with the fiscal year ending December 31, 1998 are less than the specified projection of cumulative earnings per common share for such period. Due the Company's failure to achieve the projected cumulative audited earnings per common share of U.S.$1.79 for the two years ended December 31, 1997, the Conversion Price was adjusted to U.S.$1.84 per share pursuant to the terms of the Subscription Agreement. Unless earlier converted, the Convertible Debentures matured in August 1999. Interest accrued at a rate equal to the higher of (i) 5% per annum (net of withholding tax, if applicable) and (ii) the percentage of the dividend yield calculated by dividing the annual dividend declared per share of Common Stock of the Company by the Conversion Price. Interest on the Convertible Debentures was payable quarterly. At maturity, the Convertible Debentures were required to be redeemed at a redemption price equal to the principal amount then outstanding plus any accrued but unpaid interest, together with an amount sufficient to enable the holders to receive 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 Subscription Agreement occurs, the Convertible Debentures become automatically due and payable at the principal amount outstanding together with accrued and unpaid 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 included breach of covenants after failure to cure after notice, failure to pay principal or interest, failure to pay indebtedness for borrowed money, certain events of bankruptcy or insolvency, judgement defaults, failure to achieve earnings per common share of at least U.S. $0.55 for each fiscal year commencing January 1, 1996, accounts receivable reaching a certain level in relationship to net sales and delisting or suspension of trading of the Company's Common Stock from Nasdaq. Due to the failure of the Company to achieve the required minimum earnings per common share of U.S.$0.55 in 1997, an event of default occurred. As a result, interest accrued at the default rate of 19.75% per annum. Pursuant to a Settlement Agreement reached in October 1998 with the investors, the investors agreed not to demand the immediate repayment of the Convertible Debentures. In addition, the aggregate principal amount of the Convertible Debentures (plus simple interest at a rate of 12.375% per annum until July 22, 1998 less interest paid) was restructured as a loan in an aggregate principal amount of U.S. $13,173. The debt, which carries a simple interest rate of 10% per annum, is required to be repaid over a period of three years ending on July 23, 2001. As part of the settlement, the Company also issued 466,667 shares of Common Stock to the investors, which are not transferable for a period of three years. The members of the Sunbase International agreed that 50% of any public market funds raised by the Company or its subsidiaries would be applied immediately towards discharging the then outstanding debt and interest accrued thereon. The obligations of China Bearing under the Settlement Agreement are guaranteed by other members of the Sunbase International on an at least pari passu basis with the guarantors' other present and future unsecured and unsubordinated obligations. On March 1, 2000, the Company entered into a supplemental agreement to the Settlement Agreement ("Supplemental Agreement") with the holders of the Convertible Debentures. Pursuant to the Supplemental Agreement, the Company promised, upon the receipt of the consideration from the sale of Southwest Products, to pay US$2,600 as partial settlement of the overdue portion of the Convertible Debentures and the holders of the Convertible Debentures agreed that the remaining undue portion of the Convertible Debentures is repayable on the schedule originally set out in the Settlement Agreement. China Bearing has failed to make the scheduled monthly payments under the Settlement Agreement since March 23, 1999. The total amount of principal and interest due as of December 31, 1999 are $2,608 and $582 respectively. Upon the completion of Southwest Products's sale on April 28, 2000, a payment of $2,600 was made as partial settlement of outstanding debt under the Settlement 24 Agreement. After the payment, the total amount of principal and interest past due as of April 23, 2000 are $1,402 and $198 respectively. Thus, the Company, China Bearing and the other members of the Sunbase International will continue to seek further equitable resolution with the investors regarding these amounts. While the Company believes that a workable solution can be reached with investors in due course, no assurance can be given as to when or if such negotiations will result in a resolution that is favorable to the Company. In connection with the acquisition by the Company of its interest in Harbin Bearing from Asean Capital, in addition to shares of Common Stock issued by the Company to Asean Capital, the Company issued a promissory note for U.S. $5,000 (RMB 41,600) (the "Promissory Note"). The Promissory Note is secured by a continuing security interest in all of the Company's right, title and interest in the outstanding capital stock of its wholly-owned subsidiary, China Bearing. The Promissory Note is denominated and repayable in full in U.S. dollars, and bears interest at a rate of 8% per annum. In connection with the issuance of the Convertible Debentures, Asean Capital agreed that for so long as any of the Convertible Debentures are outstanding, no amounts may be repaid by the Company on the Promissory Note unless there is sufficient working capital and the repayment is made in accordance with the following schedule:
Payment Period Amount - -------------- ------ August 1, 1996 to July 31, 1997 up to U.S.$2,000 plus accrued interest August 1, 1997 to July 31, 1998 up to U.S.$1,500 plus accrued interest August 1, 1998 to July 31, 1999 up to U.S.$1,500 plus accrued interest
In accordance with this schedule, a principal payment of U.S.$2,000 (RMB 16,700) was made in September 1996. As a result of the Company's current financial position, the directors do not expect to make any other payments in the foreseeable future. The financial condition of the Company raises substantial doubt about the Company's ability to continue as an independent going concern. The description of the business, financial condition and results of operations of the Company contained in this Annual Report and in the financial statements included herein, however, have been prepared on a going concern basis. They do not include any adjustments that might result from the outcome of the uncertainty relating to the Company's ability to continue as a going concern, including, without limitation, adjustments to the carrying value of assets and liabilities or the classification of liabilities that would be necessary if the Company were not considered to be a going concern. Such adjustments would have a material adverse effect on the Company's financing condition. See "FACTORS THAT MAY AFFECT FUTURE RESULTS" below and the financial statements of the Company and the Independent Auditor's Report thereon, included elsewhere herein. See Note 2 to the Company's 1999 consolidated financial statements for a description of the Company's plans to maintain liquidity and obtain financing. Inflation and Currency Matters 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 control inflation. In 1995, China's overall 25 inflation rate (retail price index) was approximately 15%, compared to approximately 21% in 1994 and 13% in 1993. However, after the implementation of strict monetary policies, the inflation rates were approximately 6%, 8%, minus 2.6% and minus 3% in 1996, 1997, 1998 and 1999, respectively. High inflation has in the past and may in the future cause the PRC government to impose controls on prices, or to take other actions which could inhibit economic activity in China, which in turn could affect demand for the Company's products. In view of the change in market conditions and greater competition, Harbin Bearing may be unable 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 the Company, remained fairly stable from 1994 to 1999 in China and the only major impact of inflation on the Company's costs in its Chinese operations was on the cost of labor (due to the rising level of compensation of Harbin Bearing's employees). The Company continually monitors the effects of inflation and deflation. In view of the change in market conditions and increased competition, the Company in an inflationary market may be unable to raise its prices to shift a portion of the inflated costs to customers, and the Company in a deflationary market may be forced to lower its prices to maintain competitive prices. The price of bearing steel, the major raw material used by the Company, remained fairly stable during 1997, 1998 and 1999. Foreign operations are subject to certain risks inherent in conducting 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. Although the Company has export ambitions, historically, substantially all of the Company's sales from businesses that continues to own and operate have been domestic and settled in RMB. Moreover, historically, substantially all of the Company's costs from businesses that it continues to own and operate have been incurred in RMB. It is possible, however, that the revenue/cost profile of the Company could change in the future, and if it does, then it is possible that a devaluation of the RMB against the U.S. Dollar could have a material adverse effect upon the results of operations. Currently, all of the Company's bank debts are denominated in RMB. However, the Company has indebtedness in respect of the Convertible Debentures that is denominated in U.S. dollars, so that a devaluation of the RMB against the U.S. Dollar could have a material adverse effect upon the Company's financial position. Although prior to 1994 the RMB experienced significant devaluation against the U.S. Dollar, the RMB has remained fairly stable from 1994 to present. The unified exchange rate was U.S.$1.00 to RMB 8.32 at December 31, 1995, RMB 8.3 at December 31, 1996, RMB 8.3 at December 31, 1997, RMB 8.3 at December 31, 1998 and RMB 8.275 at December 31, 1999. The People's Bank of China has declared its intention not to devalue the RMB. However, it is possible that competitive pressures resulting from the significant devaluation of other Asian currencies will ultimately force the Government of China to reconsider its position on devaluation of the RMB. FACTORS THAT MAY AFFECT FUTURE RESULTS Nasdaq De-Listing In February 1999, the Company's Common Stock was delisted from Nasdaq. After its delisting from Nasdaq, the Common Stock traded on the Bulletin Board. Between May 20, 1999 and October 26, 1999 the Company's Common Stock did not trade on the Bulletin Board because there were no market 26 makers making a market in the Common Stock and the Company was not current with its public information requirements. Potential Acceleration of Amounts due under the Settlement Agreement As a result of the failure by China Bearing to make the scheduled monthly payments due under the installment provisions of the Settlement Agreement, the holders of the Convertible Debentures have the right to accelerate the payment of all amounts due under the Settlement Agreement, as well as the right to exercise all other remedies available to them under the subscription agreement pursuant to which the Convertible Debentures were purchased. While the Company believes that an equitable resolution may be reached with the holders of this indebtedness no assurances can be given in this regard and any acceleration would have a severe negative effect on the liquidity of the Company and on its ability to continue its business. Substantial Leverage; Inadequacy of Earnings to Cover Fixed Charges The Company has, on a consolidated basis, total indebtedness of approximately RMB 864,525 (US$104,474) in 1999, resulting in a ratio of debt to total capitalization of 55:1 at that date. Substantially all of such indebtedness is denominated in RMB. The Company will require substantial cash flow to meet its repayment obligations on its indebtedness, as well as on any future additional indebtedness it may incur. For 1999, the Company's earnings were inadequate to cover fixed charges by approximately RMB 393,828 (US $47,592) (Note: For purposes of this calculation, the term "fixed charges" means the total amount of debt service (principal and interest) due under the Convertible Debentures, as modified by the Settlement Agreement, during 1999. The Promissory Note issued to Asean Capital also did not appear to be meaningful for purposes of this calculation because the Promissory Note is subordinated to the Convertible Debentures and was issued to a related party. The term "earnings" means net loss from continued operations during fiscal year 1999. Thus, for this calculation, 1999 net loss was simply added to 1999 debt service under the Convertible Debentures, as modified by the Settlement Agreement.) The ability of the Company to make scheduled interest payments on, and retire at maturity the principal of, its indebtedness is dependent on the Company's future performance. However, the Company experienced operating losses and negative cash flow from operations of RMB 276,539 and RMB 60,444 respectively, in 1999. The Company expects that net losses may continue for the foreseeable future in view of the current economic situation in China and many other factors beyond its control. In addition, the Convertible Debentures and the Settlement Agreement impose significant operating and financial restrictions on the Company. Such restrictions limit the Company's ability to create liens and its use of the proceeds from certain asset sales. These factors may make the Company more vulnerable to economic and industry downturns, limit its ability to obtain additional financing to fund future working capital requirements, capital expenditures or other general corporate purposes, and reduce its flexibility in responding to changing business or economic conditions or to a substantial decline in operating results. The Company may require substantial additional funds in the event it fails to meet its projected operating results or its needs exceed its projected capital requirements. The Company's future sources 27 of financing may include equity and debt financings. Accordingly, the Company may be required to refinance a substantial portion of its indebtedness since cash flow from operations may be inadequate to meet payment obligations arising from its long term indebtedness. There can be no assurance that the Company will be able to raise necessary debt and/or equity proceeds to meet these debt obligations or that the Company will have requisite access to capital markets on acceptable terms. Ability of the Company to Continue as a Going Concern The financial condition of the Company raises substantial doubt about the Company's ability to continue as an independent going concern. The description of the business, financial condition and results of operations of the Company set forth herein, and in the Company's financial statements included herein, however, have been prepared on a going concern basis. They do not include any adjustments that might result from the outcome of the uncertainty relating to the Company's ability to continue as a going concern, including, without limitation, adjustments to the carrying value of assets and liabilities or the classification of liabilities that would be necessary if the Company were not considered to be a going concern. Such adjustments would have a material adverse effect on the Company's reported financial condition. Potential Changes in the Economy of China The economy of the PRC has experienced significant growth in the past decade. Much of this growth has been a result of governmental policies which have encouraged substantial private economic activity. The continuation of growth in China is now subject to a number of uncertainties including, without limitation, a continuation of governmental policies favoring private enterprise, continued success in maintaining a moderate rate of inflation, the ability of China to remain competitive with other Asian countries that have experienced significant devaluation of their currencies during the past two years, resolution of liquidity problems affecting the Chinese banking system and economy as a whole and the maintenance of uninterrupted trading relationships with the United States and other major trading partners. In the event that negative developments in these or other areas result in a slowdown or decline in the economy of China, it is likely that the future results of operations of the Company will be adversely effected. Political and Regulatory Considerations in China Although the government of China has been pursuing economic reform policies for over a decade, there can be no assurances that such policies will continue. Any change in such policies could have a substantial adverse effect on the economic growth of China which would likely diminish the market for the Company's products in China. Moreover, changes in the laws or regulations governing business operations, restrictions on foreign ownership of Chinese companies, exchange controls, changes in the tax laws or restrictions on the repatriation of profits could be imposed in a manner which would result in negative consequences to the Company and its interest in Harbin. Failure to Qualify Harbin Bearings to Automotive and Aerospace Quality Standards; Ability to Remain Competitive with Multinational Manufacturers. To date Harbin Bearing has been unable to establish procedures that would enable it to qualify to international quality standards, generally accepted automotive quality standards or aerospace quality standards. Such failure has resulted in Harbin Bearing's inability to capture orders from the U.S. 28 automotive and aerospace industries. The international bearing industry is extremely competitive. Although the Company's main competitors are Eastern European manufacturers and manufacturers located in China, to a lesser extent, the Company also competes with companies such as Svenska Kugellager Fabriken, Fisher Aktien Gesellschast, New Technology Network, NSK, Timken, Torrington- Fafnir and Nippon Miniature Bearing, who dominate this market. The Company had hoped that its acquisition of Southwest Products would not only allow it to access the U.S. bearing market, but also allow it to implement U.S. manufacturing methods and quality control procedures at Harbin Bearing to develop new products and meet the stringent requirements of many non-PRC OEMs. By doing so, the Company expected to increase its penetration of the international bearing market. As a result of the Company's decision to dispose of Southwest Products in response to the CFIUS investigation, however, the Company has suspended indefinitely its plan to enable Harbin Bearing to meet these international standards. Failure to qualify Harbin Bearing to these standards is expected to constrain the Company's future growth. The Company's products may become obsolete as a result of new technologies or new developments affecting the bearing industry. The Company's ability to remain competitive depends in significant part on its ability to anticipate and stay abreast of new technological developments, fund research and development, introduce new products and retain key personnel for these functions. Some of the Company's competitors have substantially greater resources available for these purposes. To the extent that the Company does not generate adequate cash flow or obtain other financing to fund product development, the Company's competitive position will probably be adversely affected, which may result in a loss of sales or lower productivity. Impact of the Turmoil in Asian Markets The turmoil in Asian markets may affect the political and economic policies in China and the continued deterioration of the Asian market coupled with the liquidity restraints imposed in China could adversely affect the Company's operations and the collectability of its accounts receivable. Continuation of these trends could also impair the Company's liquidity. 29 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates and foreign currency exchange rates, which could affect its future results of operations and financial condition. The Company manages its exposure to these risks through its regular operating and financing activities. Currently, the Company is unable to hedge its RMB-hard currency exchange risks due to restrictions imposed by the government of the PRC which prevent financial institutions that engage in foreign currency transactions from offering forward exchange contracts with respect to the RMB. Foreign Currency Risk Although the Company has export ambitions, historically, substantially all of the Company's sales from businesses that it continues to own and operate have been made in China and settled in RMB. Moreover, historically, substantially all of the Company's costs from businesses that it continues to own and operate have been incurred in RMB. Thus, the functional currency of Harbin Bearing and the Company's other PRC subsidiaries is the RMB. It is possible, however, that the revenue/cost profile of the Company could change in the future, and if it does, then it is possible that a devaluation of the RMB against the U.S. Dollar could have a material adverse effect upon the results of operations. Currently, all of the Company's bank debts are denominated in RMB. However, the Company has indebtedness under the Settlement Agreement (and under the Convertible Debentures and Subscription Agreement in the event a satisfactory settlement can not be made pursuant to default under the Settlement Agreement) that is denominated in U.S. dollars, so that a devaluation of the RMB against the U.S. Dollar could have a material adverse effect upon the Company's financial position. As a result of the foregoing factors, the Company is subject to risk from fluctuations in the value of the RMB relative to the U.S. dollar. The RMB is translated into U.S. dollars in consolidation, and will result in cumulative translation adjustments which are included in other comprehensive income (loss). The potential effect on other comprehensive income (loss) resulting from a hypothetical 5%, 10% and 20% weakening in the quoted RMB rate against the U.S. dollar would have resulted in a $110, $210 and $385 decrease in consolidated stockholders' equity and an $1,592, $3,039 and $5,571 decrease in net loss in 1999. The same hypothetical movements would have resulted in an RMB 5,790, RMB 11,580 and RMB 23,159 increase in the amount of debt service payable by the Company under the Settlement Agreement in 1999 on an annualized basis. Actual results may differ. Interest Rate Risk The Company's bank loans are all fixed rate and denominated in RMB. Fixed rates range between 6.435% per annum and 9.24% per annum for short-term loans, and between 3.7% per annum and 15.12% per annum for long-term loans. The total amount of short-term bank loans outstanding as of December 31, 1999 was RMB 575,562, with an effective interest rate of 8.085% per annum The total amount of long-term bank loans outstanding as of December 31, 1999 was RMB 168,974, with an effective interest rate of 8.4% per annum. In addition, the Company has indebtedness of RMB 115,797 and accrued interest payable of RMB 4,102 under the Settlement Agreement (and under the Convertible Debentures and Subscription Agreement in the event a satisfactory settlement can not be made pursuant to default under the Settlement Agreement) at 30 fixed rates of interest (see ITEM 7-"LIQUIDITY AND CAPITAL RESOURCES"). As such, the Company is exposed to interest rate risk on its long-term bank loans and in respect of its indebtedness under the Settlement Agreement (or Convertible Debentures and Subscription Agreement). Given banking practices in the PRC, the Company believes that it will be able to refinance its long-term bank loans at market rates whenever they drop significantly below the fixed rates specified on its long-term bank loans. At present, the Company believes that the risk of a significant drop in relevant market interest rates during the term of the debt under the Settlement Agreement is remote; however, the Company may consider entering into hedge transactions if such a risk is perceived to increase. 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's audited financial statements as of December 31, 1998 and 1999 and for the years ended December 31, 1997, 1998 and 1999 are set forth beginning on page F-1. 32 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 33 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE REGISTRANT The Company's directors, executive officers and significant employees are listed below. The Board of Directors of the Company is comprised of only one class. Directors serve until their successors are elected or appointed.
Name Age Office - ---- --- ------ Gunter Gao 44 Chairman, Chief Executive Officer and President (Roger) Li Yuen Fai 39 Director, Vice President and Chief Financial Officer Hongfei Chen 37 Director (Davis) Lai Kwan Fai 36 Corporate Secretary Liu En Shi 52 General Manager, Harbin Bearing
GUNTER GAO, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND DIRECTOR, 44. Mr. Gao, a Hong Kong businessman who has extensive business experience in China, has been the Chairman of the Board and a principal of Sunbase International since its incorporation in 1991, which indirectly owns a controlling position in the Company. Sunbase International has various industrial holdings in China, in industries such as aviation, transportation, cement, steel and retail. Mr. Gao is also the Chairman of the Board of the Company. Mr. Gao is responsible for the overall strategy of the Company. Mr. Gao is actively and directly involved in all operational and strategic transactions. During the 1980's, 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 the Chinese 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, Shaanxi, Xinjiang and Harbin. In addition, Mr. Gao is the deputy director of the Sino-Foreign Entrepreneurs Cooperative Committee. (ROGER) LI YUEN FAI, CHIEF FINANCIAL OFFICER, VICE-PRESIDENT AND DIRECTOR, 39. Mr. Li has been the Chief Financial Officer and a Director of the Company since 1994. 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 34 recent position was audit manager) and was a partner in a Hong Kong accounting firm from 1992 to 1993. HONGFEI CHEN, DIRECTOR, 37. Mr. Chen was appointed as a director by the Board in December 22, 1999. He is a lawyer admitted to practice law both in Australia and in China. Mr. Chen obtained his law degrees from a leading Chinese university and the University of Melbourne. Prior to joining the Sunbase Group, Mr. Chen worked with one of the leading Australian law firms in Melbourne. He was engaged to provide advice on establishing investment projects both in Australia and in China. He assisted a number of Australian corporations to develop and manage joint venture projects in China. Mr. Chen has considerable experience in international investment projects and has a good understanding of business practice in Australia and in China. (DAVIS) LAI KWAN FAI, CORPORATE SECRETARY, 36. Mr. Lai has been the Corporate Secretary of the Company since 1996. Mr. Lai holds a Master of Arts Degree in Economics and Finance from the University of Leeds in the United Kingdom. Prior to joining Company, he was employed in the commercial sector with over six years of experience in enterprise management and business development in China. LIU EN SHI, GENERAL MANAGER, 52. Mr. Liu was appointed the General Manager of Harbin Bearing in April 1999 and is responsible for the day-to-day operations as well as sales and marketing of Harbin Bearing. Mr. Liu has been a high ranking executive for a number of machinery manufactures in the City of Harbin for over 15 years. In 1994 to 1995, Mr. Liu was sent to Singapore University by Harbin authorities to attend a business management course. Mr. Liu has considerable experience in business management. 35 ITEM 11. EXECUTIVE COMPENSATION The following tables set forth information regarding compensation for services in all capacities paid or accrued for the fiscal years indicated by the Company to its Chief Executive Officer and the only other executive officer whose compensation exceeded U.S. $100,000 in 1999: SUMMARY COMPENSATION TABLE
Long Term Compensation ---------------------- Annual Compensation Awards Payouts ------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) (h) (i) - ---------------------------------------------------------------------------------------------------------------------------- Other Name Annual Restricted Securities All Other and Compen- Stock Underlying LTIP Compen- Principal Year Salary Bonus Sation Awards Options Payouts sation Position (US$) (US$) (US$) (US$) (#) (US$) (US$) - ---------------------------------------------------------------------------------------------------------------------------- Gunter Gao 1999 - - - - - - - - - - - - - - --------------------------------------------------------------------------------------------------- CEO, President, Director - ---------------------------------------------------------------------------------------------------------------------------- William McKay (1) 1999 118,750 - - 6,250 (2) - - - - - - - - --------------------------------------------------------------------------------------------------- Ex-CEO, Vice 1998 285,000 - - 15,000 - - - - - - 9,037 President, --------------------------------------------------------------------------------------------------- Director 1997 285,000 - - - - - - - - - - - - --------------------------------------------------------------------------------------------------- 1996 284,327 - - - - - - 800,000 - - - - - ----------------------------------------------------------------------------------------------------------------------------
(1) As part of the arrangements with CFIUS, William McKay was removed as Chief Executive Officer, Vice President and Director of the Company effective as of May 6, 1999. Accordingly, the salary and with annual compensation was calculated on a time-apportionment basis up to April 30, 1999. (2) Consists of US$6,250 car allowance. 36 OPTIONS GRANTS IN 1999 No stock options were granted in 1999. AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
- ----------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) - ----------------------------------------------------------------------------------------------------------------- Value of Number of Securities Unexercised Underlying In-the-Money Unexercised Options Options at FY-End (#) at FY-End ($) /(1)/ Shares Acquired on Exercise Value Realized Exercisable/ Exercisable/ Name (#) ($) Unexercisable Unexercisable - ----------------------------------------------------------------------------------------------------------------- William McKay - - - - - - 320,000/480,000 - - - / - - - - -----------------------------------------------------------------------------------------------------------------
1. The value of unexercised in-the-money options is determined by using the difference between the exercise price and the average bid price at December 31, 1999. As of December 31, 1999, no options granted were in the money. 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 that the compensation committee of the board of directors of the Company (the "Committee") in its discretion determines should be awarded such incentives in 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. 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. Under the employment agreement dated January 16, 1996 between the Company and William R. 37 McKay, and pursuant to the Plan, the Company granted Mr. McKay options to purchase an aggregate of up to 800,000 shares of Common Stock of the Company. The options granted to Mr. McKay vested at the rate of 160,000 shares per each full year of Mr. McKay's employment under the Agreement. All unexercised options expire six years after the date on which such options vested, unless Mr. McKay first resigns or is terminated for cause as defined in his employment agreement. On May 6, 1999, as required by the CFIUS, Mr. McKay was removed as a director and executive officer of the Company. As of such date, Mr. McKay had vested options exercisable for 480,000 shares of Common Stock. He also had unexercisable options for an additional 320,000 shares. By the terms of his employment agreement, the options for the 320,000 shares which had not yet vested became null and void. Of the 480,000 options which had vested at the time of Mr. McKay's departure from the Company, 160,000 are exercisable at U.S. $6.65 per share, 160,000 are exercisable at U.S. $7.75 per share and the remaining 160,000 are exercisable at U.S. $9.25 per share. 38 On July 1, 1996, the Compensation Committee of the Company also granted stock options to the following individuals on the following terms:
Vesting Exercise Schedule - Price/Share Number Option Holder One year from: (U.S.) Option - ------------- -------------- ----------- ------- 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 =======
As of December 31, 1999, no options were exercised or granted. EMPLOYMENT AGREEMENTS On January 16, 1996, the Company and Southwest Products entered into an employment agreement with William R. McKay (the "Agreement") pursuant to which Mr. McKay was employed to serve as President and Chief Executive Officer of Southwest Products and as President and Chief Executive Officer of the Company for a term of five years. Under the terms of the Agreement, Mr. McKay was paid an annual base salary of $285,000. The base salary was to 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 the Company had sole discretion to pay Mr. McKay a bonus for any particular year of his employment. Mr. McKay was also entitled to stock options as described under "Stock Option Plan." As part of the conclusion of the CFIUS investigation, Mr. McKay was removed from his positions as President and Chief Executive Officer effective May 6, 1999. On January 16, 1996, the Company, Southwest Products and Mr. McKay also entered into a Confidentiality and Non-Competition Agreement pursuant to which Mr. McKay agreed to keep certain information of the Company, Southwest Products and their affiliates confidential, and was prohibited from competing with the Company, Southwest Products and their affiliates during the term of that agreement. DIRECTOR COMPENSATION In 1999, no director is entitled to receive compensation in respect of his or her services as a director of the Company. 39 The Company currently does not have a compensation committee because none of its executive officers now in office receive compensation from the Company. 40 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of April 28, 2000, the stock ownership of all persons known to own beneficially five percent (5%) or more of the voting securities of the Company, and all directors and executive officers of the Company, individually and as a group. Unless otherwise indicated in these footnotes, each stockholder has sole voting and investment power with respect to shares beneficially owned and all addresses are in care of the Company. Beneficial ownership has been determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934 (the "Exchange Act"). All information with respect to beneficial ownership has been furnished by the respective director, executive officer or stockholder, as the case may be.
Common Stock Series A Preferred Stock Amount of Beneficial Percent Amount of Beneficial Percent -------------------- -------- -------------------- ------- Ownership of Class Ownership of Class --------- -------- --------- -------- Name (Position) (# shares) % (# shares) % - --------------- ---------- - ---------- - Directors & Officers: - --------------------- Gunter Gao 12,339,900 (1) 46.6% 36 (2) 100% (3) Roger Li Yuen Fai 600,000 (4) 4.1% -- -- Directors & Executive Officers 12,939,900 47.8% 36 (2) 100% As A Group (3) (4 persons) 5% Stockholders: - ---------------- Sunbase International (Holdings) Limited 12,339,900 (1) 46.6% 36 (2) 100% Asean Capital Limited 12,339,900 (1) 46.6% 36 (2) 100%
41 The New China Hong Kong Limited 1,311,100 7.4% -- --
Notes: (1) Consists of 8,739,900 outstanding shares of Common Stock owned by Asean Capital and 3,600,000 shares of Common Stock issuable upon the conversion of the 36 shares of Series A Preferred Stock owned by Asean Capital. Sunbase International owns 100% of Asean Capital, and Gunter Gao and his spouse, Linda Yang, together own 100% of Sunbase International. (2) All of these shares are owned by Asean Capital and may be deemed to be beneficially owned by Sunbase International and Mr. Gao. Each share entitles the holder thereof to 500,000 voting rights. However, pursuant to the terms of the Settlement Agreement (and the terms of the Subscription Agreement and Convertible Debentures), Asean Capital is prohibited from exercising these voting rights. (3) Includes shares of the Company's Common Stock and Series A Preferred Stock beneficially owned by Gunter Gao and his spouse, Linda Yang, due to each of them owning 50% of the capital stock of Sunbase International, which in turn owns all of the capital stock of Asean Capital. Each of Ms. Yang and Mr. Gao disclaims beneficial ownership of the shares held by the other. (4) Consists of 600,000 shares of Common Stock issuable upon exercise of currently exercisable stock options granted to Mr. Li. See "Stock Option Plan." The address of Mr. Gao and Messrs. Li, Chen and Lai is 19/F., First Pacific Bank Centre, 51-57 Gloucester Road, Wanchai, Hong Kong. The address of New China Hong Kong is 25/F., Bank of China Tower, 1 Garden Road, Hong Kong. 42 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (all figures expressed in thousands) In December 1994, Asean Capital transferred all of its interest in China Bearing to the Company in exchange for shares of the Company's common stock and the Promissory Note (in an aggregate principal amount of U.S.$5,000) which is secured by a continuing security interest in all of the Company's right, title and interest in the outstanding capital stock of its wholly-owned subsidiary, China Bearing. The Promissory Note is denominated and repayable in full in U.S. dollars, and bears interest at a rate of 8% per annum. In connection with the issuance of the Convertible Debentures, Asean Capital agreed that for so long as any of the Convertible Debentures are outstanding, no amounts may be repaid by the Company on the Promissory Note unless there is sufficient working capital and the repayment is made in accordance with the following schedule: Payment Period Amount - -------------- ------ August 1, 1996 to July 31, 1997 up to U.S.$2,000 plus accrued interest August 1, 1997 to July 31, 1998 up to U.S.$1,500 plus accrued interest August 1, 1998 to July 31, 1999 up to U.S.$1,500 plus accrued interest 43 In accordance with this schedule, a principal payment of U.S.$2,000 (RMB 16,700) was made in September 1996. The directors do not envisage any other repayments being made in the foreseeable future. Harbin Bearing and Harbin Precision have entered into leases (the "Ancillary Transport Equipment Lease" and the "Manufacturing Machinery Lease" together the "Leases"), covering all equipment and assets of the Bearing Factory relating to the bearing operations which were not contributed to the Company in the Restructuring. The Leases cover cars, trucks, machinery and equipment used in manufacturing, office administration and power generation and provide for total annual payments of RMB 25,530 (U.S.$ 3,076). Although the lease expired on December 31, 1998, Harbin Bearing is currently using the premises without renewal of the lease. At the expiration of the Manufacturing Machinery Lease in December 31, 2001, Harbin Precision has the right to either renew the lease or acquire the equipment. Harbin Bearing and Harbin Holdings have entered into a lease covering plants and buildings used in Harbin Bearing's business which were not contributed to Harbin Bearing in the restructuring (the "Plant Lease"). The Plant Lease provides for annual rent payments of RMB 3,751 (U.S.$ 452). Although the Plant Lease expired on December 31, 1998, Harbin Bearing is still currently using the premises under the same terms and conditions as the previous lease without renewal of the lease. Harbin Holdings and Harbin Bearing entered into a lease on January 1, 1994 providing for the use of land by Harbin Bearing at the rate of RMB 2,508 (U.S.$ 302) per annum, subject to future adjustments in accordance with changes in government fees. 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 for 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 22% 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. See Note 20 of the Company's 1999 consolidated financial statements for more detailed information. 44 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following are filed as part of this Form 10-K:
INDEX TO FINANCIAL STATEMENTS SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED Report of Independent Auditor............................................................................. Consolidated Balance Sheets as of December 31, 1998 and December 31, 1999................................. Consolidated Statements of Income for the years ended December 31, 1997, December 31, 1998 and December 31, 1999................................................................................... Consolidated Statements of Cash Flows for the years ended December 31, 1997, December 31, 1998 and December 31, 1999............................................................................... Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, December 31, 1998 and December 31, 1999........................................................... Notes to Consolidated Financial Statements................................................................
INDEX TO EXHIBITS: Exhibit No. - ----------- 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 International. (1) 2.2 Asset Transfer and Assumption Agreement dated December 16, 1994, between the Company and Valley Financial Corporation. (1) Certificates of Incorporation and Bylaws 3.1 Nevada Articles of Incorporation. (1) 3.2 Articles of Merger (1) 45 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) Voting trust agreement 9.1 Voting Trust Agreement dated December 31, 1998, between the Company, Southwest Products and Samuel T. Mok. 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 International and Harbin Hazhou Bearing Distributing Company with respect to Harbin Sunbase. (3) 10.4 Joint Venture Contract between China International 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 between 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) 46 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 Transportation 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. (5) 10.20 Form of Registration Rights Agreement relating to the Private Placement Shares. (5) 10.21 Employment Agreement dated as of August 1, 1996 between the Company and Billy Kan. (5) 10.22 Subscription Agreement (together with 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, Wardley China Investment Trust, MC Private Equity Partners Asia Limited and Chine Investissement 2000. (5) 10.23 Settlement Agreement dated October 16, 1998, among China Bearing, Asean Capital, China International Bearing Holdings Limited, the Company, Southwest Products, Sunbase International, Extensive Resources, Glory Mansion, Wardley China Investment Trust, MC Private Equity Partners Asia Limited and Chine Investissement 2000. (8) 10.24 Letter of O'Melveny & Myers to U.S. Department of the Treasury dated December 16, 1998, and reply letter of U.S. Department of the Treasury to O'Melveny & Myers dated December 17, 1998. (8) 10.25 Stock Purchase Agreement dated January 31, 2000, among William McKay, Southwest Products, the Company and Samuel T.Mok. 10.26 Supplemental Agreement (together with Settlement Agreement dated October 16, 1998) dated March 1, 2000 among China Bearing Holdings Limited, Asean Capital Limited, China International Bearing Holdings Limited, the Company, Southwest Products, Sunbase International (Holdings) Limited, Extensive Resources Limited, Glory Mansion Limited, Wardley China Investment Trust, MC Private Equity Partners Asia Limited and Chine Investissement 2000. 10.27 First Amendment (together with Stock Purchase Agreement dated January 31, 2000) dated February 10, 2000 among William McKay, Southwest Products, the Company and Samuel T.Mok. 47 10.28 Assignment of Rights (together with Stock Purchase Agreement dated January 31, 2000) dated March 24, 2000 among William McKay, Southwest Products, the Company and Samuel T. Mok. 10.29 Second Amendment (together with Stock Purchase Agreement dated January 31, 2000) dated April 10, 2000 among William McKay, Southwest Products, the Company and Samuel T.Mok. 10.30 Modification Agreement (together with Supplemental Agreement dated March 1, 2000) dated April 15, 2000 among China Bearing Holdings Limited, Asean Capital Limited, China International Bearing Holdings Limited, the Company, Southwest Products, Sunbase International (Holdings) Limited, Extensive Resources Limited, Glory Mansion Limited, Wardley China Investment Trust, MC Private Equity Partners Asia Limited and Chine Investissement 2000. Statement re computation of per share earnings 11.1 See Note 15 to the Company's consolidated financial statements. Statement re computation of ratios 12.1 Statement re computation of ratios. Annual report to security holders, Form 10-Q or quarterly report to security holders 13.1 None. Letter re change in certifying accountant 16.1 None. Letter re change in accounting principles 18.1 None. Subsidiaries of the Company 21.1 Subsidiaries of the Company (7) Published report regarding matters submitted to vote of security holders 22.1 None. 48 Consents of experts and counsel 23.1 None. Power of attorney 24.1 None. Financial Data Schedule 27.1 Financial Data Schedule for FY 1999. 27.2 Restated Financial Data Schedule for FY 1998. 27.3 Restated Financial Data Schedule for FY 1997. Notes: (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. 49 (4) Filed with the Company's Form 10-K, dated May 3, 1996 and incorporated by reference herein. (5) Filed with the Company's Form S-1, dated October 23, 1996 and incorporated by reference herein. (6) Filed with the Company's Form 10-K, dated April 4, 1997 and incorporated by reference herein. (7) Filed with the Company's Form 10-K, dated March 15, 1998 and incorporated by reference herein. (8) Filed with the Company' Form 10-K, dated June 10, 1999 and incorporated by reference herein. (b) Reports on Form 8-K: None. (c) Reference is made to the list of Exhibits and the Exhibits filed as a part of this Form 10-K. (d) Reference is made to the financial statement schedules filed as part of this Form 10-K. 50 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SUNBASE ASIA, INC. Date: May 15 , 2000 By: /s/ Gunter Gao ----------------------------------- Gunter Gao, Chairman, President, Chief Executive Officer, and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURES Date: May 15, 2000 By: /s/ Gunter Gao ------------------------------------------ Gunter Gao, Chairman, President, Chief Executive Officer, and Director Date: May 15, 2000 By: /s/ (Roger) Li Yuen Fai ------------------------------------------ (Roger) Li Yuen Fai, Vice President Chief Financial Officer and Director Date: May 15, 2000 By: /s/ HongFei Chen ------------------------------------------ HongFei Chen, Director 51 INDEX TO FINANCIAL STATEMENTS
Pages ----- SUNBASE ASIA, INC. AND SUBSIDIARIES: Report of the Independent Auditors 2 Consolidated Balance Sheets as at December 31, 1998 3-4 and December 31, 1999 Consolidated Statements of Operations for the years ended December 31, 1997, December 31, 1998 and December 31, 1999 5-6 Consolidated Statements of Cash Flows for the years ended December 31, 1997, December 31, 1998 and December 31, 1999 7-9 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, December 31, 1998 and December 31, 1999 10 Notes to Consolidated Financial Statements 11-44
1 REPORT OF THE 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, 1999 and 1998 and the related statements of operations, cash flows and changes in shareholders' equity for each of the three years in the period ended December 31, 1999. 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 present fairly, in all material respects, the consolidated financial position of Sunbase Asia, Inc. and its subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that Sunbase Asia, Inc. and its subsidiaries (hereafter referred to as the "Group") will continue to operate as a going concern. As more fully described in note 2, the Group incurred a substantial consolidated net loss for the year ended December 31, 1999 which resulted in a negative cash flow position and a default in repayment of an installment loan during the year. These conditions raise substantial doubt about the Group's ability to continue as a going concern. Management's plans in regard to these matters are described in note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the outcome of this uncertainty. ERNST & YOUNG Hong Kong May 12, 2000 2 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 1998 AND DECEMBER 31, 1999 (Amounts in thousands, except number of shares and per share data)
Notes 1998 1999 1999 RMB RMB US$ --------- --------- ------- ASSETS Current assets Unrestricted cash and bank balances 19,075 8,420 1,018 Accounts receivable, net 5 418,261 380,986 46,040 Notes receivable 2,440 2,148 259 Inventories, net 6 572,176 448,121 54,153 Other receivables 26,720 25,848 3,123 Due from related companies 20 283,538 192,589 23,273 --------- --------- ------- Total current assets 1,322,210 1,058,112 127,866 Fixed assets 7 559,245 486,665 58,811 Net assets of discontinued operations 8 42,798 26,193 3,165 Deferred assets 9 9,553 - - --------- --------- ------- Total assets 1,933,806 1,570,970 189,842 ========= ========= =======
continued/... The accompanying notes form an integral part of these consolidated financial statements. 3 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 1998, AND DECEMBER 31, 1999 (continued) (Amounts in thousands, except number of shares and per share data)
Notes 1998 1999 1999 RMB RMB US$ --------- ------------ --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short term bank loans 10 516,232 575,652 69,565 Long term installment loan, current portion 13 117,239 115,797 13,993 Interest payable on installment loan 13 - 4,102 496 Long term bank loans, current portion 14 156,113 168,974 20,420 Accounts payable 141,616 138,840 16,778 Accrued liabilities and other payables 150,939 178,916 21,621 Short term obligations under capital leases 11 20,933 22,774 2,752 Secured promissory note 1,12 24,900 24,825 3,000 Income tax payable 4 50,358 40,703 4,918 Taxes other than income 30,417 75,140 9,081 Due to related companies 20 51,579 83,762 10,123 --------- --------- -------- Total current liabilities 1,260,326 1,429,485 172,747 Long term obligations under capital leases 11 47,550 24,777 2,994 Minority interests 330,409 97,596 11,794 --------- --------- -------- 1,638,285 1,551,858 187,535 Shareholders' equity: Common Stock, par value US$0.001 each, 50,000,000 shares authorized; 14,118,751 (1998: 13,652,084) issued, and fully paid-up 1,17 115 119 14 Nil (1998: 466,667) shares issuable on debt restructuring 1,17 2,905 - - Preferred Stock, par value US$0.001 each, 25,000,000 shares authorized; Convertible Preferred Stock - Series A; 36 shares issued and outstanding 1,17 44,533 44,533 5,381 Contributed surplus 17 215,052 217,953 26,338 Reserves 18 28,002 28,052 3,389 Accumulated other comprehensive income 19 1,247 1,377 166 Retained earnings/(accumulated losses) 3,667 (272,922) (32,981) --------- --------- -------- Total shareholders' equity 295,521 19,112 2,307 --------- --------- -------- Total liabilities and shareholders' equity 1,933,806 1,570,970 189,842 ========= ========= ========
The accompanying notes form an integral part of these consolidated financial statements. 4 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, DECEMBER 31, 1998 AND DECEMBER 31, 1999 (Amounts in thousands, except number of shares and per share data)
Notes 1997 1998 1999 1999 RMB RMB RMB US$ --- --- --- ---- Continuing operations Net sales to - third parties 525,802 436,424 445,804 53,874 - related parties 20 171,373 38,886 22,283 2,693 --------- --------- --------- --------- 697,175 475,310 468,087 56,567 Cost of sales - third parties (463,296) (344,456) (440,638) (53,249) - related parties 20 (15,793) (18,469) (22,292) (2,694) --------- --------- --------- --------- (479,089) (362,925) (462,930) (55,943) Provisions on inventories 6 (30,600) (100,600) (79,000) (9,547) --------- --------- --------- --------- Gross profit/(loss) 187,486 11,785 (73,843) (8,923) --------- --------- --------- --------- Selling, general and administrative expenses - third parties (67,478) (67,761) (118,117) (14,274) - related parties 20 (9,423) (14,772) (2,826) (341) --------- --------- --------- --------- (76,901) (82,533) (120,943) (14,615) Interest expense, net - third parties (59,472) (64,389) (61,524) (7,435) - related parties 20 (7,723) (2,255) (469) (57) --------- --------- --------- --------- (67,195) (66,644) (61,993) (7,492) Provisions on accounts receivable 5 (16,262) (31,961) (136,170) (16,456) Provisions on other receivables - (12,404) (3,729) (450) Provisions on balances due from related companies 20 - (49,000) (79,000) (9,547) Provision on impairment of fixed assets - - (15,000) (1,813) Write-off of the deposit with a financial institution - (23,750) - - --------- --------- --------- --------- Income/(loss) before income taxes 27,128 (254,507) (490,678) (59,296) --------- --------- --------- ---------
continued/... The accompanying notes form an integral part of these consolidated financial statements 5 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997, DECEMBER 31, 1998 AND DECEMBER 31, 1999 (continued) (Amounts in thousands, except number of shares and per share data)
Notes 1997 1998 1999 1999 RMB RMB RMB US$ --- --- --- --- Income/(loss) before income taxes 27,128 (254,507) (490,678) (59,296) Provision for income taxes 4 (7,584) - - - ---------- ---------- ---------- ---------- Income/(loss) before minority interests 19,544 (254,507) (490,678) (59,296) Minority interests (21,006) 111,081 232,813 28,135 ---------- ---------- ---------- ---------- Loss from continuing operations (1,462) (143,426) (257,865) (31,161) Net loss from discontinued operations, net of income taxes of RMB7, RMB215 and RMB7 for the years ended December 31, 1997, 1998 and 1999, respectively 8 (2,722) (2,958) (18,674) (2,257) ---------- ---------- ---------- ---------- (4,184) (146,384) (276,539) (33,418) ========== ========== ========== ========== Net loss per common share: Basic and diluted loss from continuing operations 15 (0.12) (10.46) (18.26) (2.20) Basic and diluted loss from discontinued operations 15 (0.21) (0.21) (1.32) (0.17) ---------- ---------- ---------- ---------- Basic and diluted net loss 15 (0.33) (10.67) (19.18) (2.37) ========== ========== ========== ==========
The accompanying notes form an integral part of these consolidated financial statements. 6 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, DECEMBER 31, 1998 AND DECEMBER 31, 1999
(Amounts in thousands) 1997 1998 1999 1999 RMB RMB RMB US$ Cash flows from operating activities: Net loss (4,184) (146,384) (276,539) (33,418) Adjustments to reconcile income to net cash provided by operating activities from continuing operations: Minority interests 21,006 (111,081) (232,813) (28,135) Share of net losses from discontinued operations, net of income tax - 2,958 18,674 2,257 Depreciation 70,738 75,040 78,737 9,515 Provision for impairment losses on fixed assets - - 15,000 1,812 Loss/(gain) on disposal of fixed assets 1,283 (1,349) 3,066 370 Write-off of deferred VAT receivable - - 5,911 714 Amortization of goodwill 827 - - - Amortization of present value discount on deferred asset (783) (782) - - Amortization of deferred debenture issue expenses 1,318 1,969 - - Decrease/(increase) in assets: Accounts receivable (166,609) 55,873 37,275 4,505 Notes receivable 9,022 3,750 292 35 Inventories (808) (105,262) 124,055 14,992 Other receivables 29,745 13,125 872 105 Due from related companies (56,657) (23,039) 89,864 10,859 Deferred assets - 3,643 - - Increase/(decrease) in liabilities: Accounts payable (36,325) 26,907 (2,776) (335) Notes payable (2,800) - - - Interest payable on convertible debentures 17,153 - - - Accrued liabilities and other payables 58,839 42,635 7,045 851 Income tax payable 12,024 (34) (9,655) (1,167) Taxes other than income 21,033 (8,474) 48,365 5,846 Due to related companies (14,415) 32,850 32,183 3,890 -------- -------- -------- ------- Net cash used in operating activities from continuing operations (39,593) (137,655) (60,444) (7,304)
continued/... 7 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, DECEMBER 31, 1998 AND DECEMBER 31, 1999
(Amounts in thousands) 1997 1998 1999 1999 RMB RMB RMB US$ Cash flows from investing activities: Increase in restricted bank deposit 15,189 - - - Proceeds from disposal of fixed assets 525 2,196 521 63 Additions to fixed assets (48,287) (16,586) (24,744) (2,990) Receivable from disposal of an investment 13,419 - - - Decrease/(increase) in due from related companies (38,091) 39,524 1,085 132 Advances to subsidiary proposed for disposal - (3,901) (2,069) (250) -------- -------- -------- ------- Net cash provided by/(used in) investing activities (57,245) 21,233 (25,207) (3,045) -------- -------- -------- ------- Cash flows from financing activities: Proceeds from short term bank loans 665,373 630,477 684,280 82,692 Repayment of short term bank loans (588,817) (549,648) (624,860) (75,512) Repayment of installment loans - 4,659 (1,442) (174) Interest payable or installment loan - - 4,102 495 Proceeds from long term bank loans 11,136 11,336 12,861 1,555 -------- -------- -------- ------- Net cash provided by financing activities 87,692 96,824 74,941 9,056 -------- -------- -------- ------- Net decrease in cash and cash equivalents (9,146) (19,598) (10,710) (1,293) Translation differences - - 55 6 Cash and cash equivalents, at beginning of year 48,489 39,343 19,075 2,305 Cash and cash equivalents from subsidiary proposed for disposal, at beginning of year - (670) - - -------- -------- -------- ------- 48,489 38,673 19,075 2,305 -------- -------- -------- ------- Cash and cash equivalents, at end of year 39,343 19,075 8,420 1,018 ======== ======== ======== =======
8 continued/... SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, DECEMBER 31, 1998 AND DECEMBER 31, 1999 (continued) (Amounts in thousands)
1997 1998 1999 1999 RMB RMB RMB US$ --- --- --- --- Income taxes paid - 1,737 9,655 1,167 Interest paid (net of amounts capitalized in the fixed assets) 64,748 52,628 65,128 7,870 Non-cash transactions: Financing lease arrangements 18,788 18,788 17,587 2,125 ====== ====== ====== =====
The accompanying notes form an integral part of these consolidated financial statements. 9 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, DECEMBER 31, 1998 AND DECEMBER 31, 1999 (Amounts in thousands, except number of shares)
Accumu- Shares lated Retained Number issuable other earnings/ of issued Issued on debt Preferred Contri compre- (accumu- common common re- stock -buted hensive lated stock stock structuring Series A Series B surplus Reserves income losses) Total RMB RMB RMB RMB RMB RMB RMB RMB RMB Balance at January 1, 1997 12,700,109 107 - 44,533 28,288 186,772 27,866 1,247 154,371 443,184 Reverse stock split (note 1) 33 - - - - - - - - - Net comprehensive loss - - - - - - - - (4,184) (4,184) Appropriation to reserves (note 18) - - - - - - 105 - (105) - ---------- ------ ----------- ------ --------- ------- -------- ------- --------- -------- Balance at December 31, 1997 12,700,142 107 - 44,533 28,288 186,772 27,971 1,247 150,082 439,000 Net comprehensive loss - - - - - - - (146,384) (146,384) Conversion from Series B shares (note 1, 17) 987,004 8 - - (28,288) 28,280 - - - - Reverse stock split (note 1) 4 - - - - - - - - - Reversal of common stocks in respect of Series A Warrants (note 1) (35,066) - - - - - - - - - Shares issuable on debt restructuring (note1) - - 2,905 - - - - - - 2,905 Appropriation to reserves (note 18) - - - - - - 31 - (31) - ---------- ------ ----------- ------ --------- ------- -------- ------- --------- -------- Balance at December 31, 1998 13,652,084 115 2,905 44,533 - 215,052 28,002 1,247 3,667 295,521 Shares issued on debt restructuring (note 1) 466,667 4 (2,905) - - 2,901 - - - - Net comprehensive income/(loss) - - - - - - - 130 (276,539) (276,409) Appropriation to reserves (note 18) - - - - - - 50 - (50) - ---------- ------ ----------- ------ --------- ------- -------- ------- --------- -------- Balance at December 31, 1999 14,118,751 119 - 44,533 - 217,953 28,052 1,377 (272,922) 19,112 ========== ====== =========== ====== ========= ======= ======== ======= ========= ========
The accompanying notes form an integral part of these consolidated financial statements. 10 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 Share Exchange 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 10,261,000 common stock shares, 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"). This transaction has been treated as a recapitalization of China Bearing with China Bearing as the acquirer (reverse acquisition). The total number of common stock shares outstanding subsequent to this arrangement was 11,700,063. Included in the new issued common stocks were 35,066 shares which were deemed to be converted by the Series A Warrants (the "Warrants") issued to the warrant holders without consideration. As the Warrants expired on June 30, 1998, and no such Warrants were exercised during the years ended December 31, 1998, such shares of common stock were reversed during the year ended 31 December 1998. China Bearing is a holding company which was established to acquire a 100% interest in China International Bearing (Holdings) Company Limited ("China International"). China International was incorporated in Hong Kong 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 to acquire, in aggregate, a 51.6% interest in Harbin Bearing Company Limited ("Harbin Bearing"), which is a joint stock limited company established in China under the Trial Measures on Share Companies and the Opinion on the Standardization of Joint Stock Companies promulgated by the State Council of China and the successor to the manufacturing operations of Harbin Bearing General Factory, a Chinese state-owned enterprise established in 1950. The Series A convertible preferred stock is convertible at the option of the holder at a conversion rate of 100,000 common stock shares per Series A share. As preferred shares, they also 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. On June 10, 1996, the Company issued an additional 1,000,000 shares of common stock with a par value of US$0.001 (RMB0.0083) at US$5.00 (RMB8.3) per share. The respective share premium of RMB36,077 had been included in the contributed surplus for the year ended December 31, 1996. 11 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) On December 29, 1995, the Company entered into a reorganization agreement ("Reorganization Agreement") with Southwest Products Company ("Southwest"), a company incorporated in the United States of America, and the shareholders of Southwest for the acquisition of 100% of the issued common stock of Southwest. The above transaction has been treated as a business combination and is accounted for under the purchase method of accounting. Southwest is a manufacturer of spherical bearings and supplies its products to the aerospace, commercial aviation and other industries around the world. Its major customers are in the United States of America. 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. 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. 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 on the date and in accordance with the formula set forth below. If the aforesaid public offering or the redemption are not effected within two years from the date of issue of the Series B stock, the stock will automatically be converted into common stock on the first business day after the expiry of the two-year period of the Reorganisation Agreement, which was on January 19, 1998. Pursuant to the Reorganization Agreement, the number of shares of common stock converted from the Series B shares are based on US$500 per Series B shares divided by the lesser of (a) US$5.00 or (b) the "Average Closing Price" of the common stock of the Company. Average Closing Price is defined as the closing market prices of the most recent 60 trading days, with 45 of which traded at a minimum of 2,000 shares. As at January 19, 1998, the entire 6,800 shares of Series B stocks were automatically converted into 987,004 shares of common stock according to the conditions as set out above. Thereafter, no preferred Series B shares were outstanding at December 31, 1998. 12 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) On October 16, 1998, the Company, certain of its subsidiaries and Asean Capital entered into a settlement agreement ("Settlement Agreement") with the investors of the convertible debentures ("Debenture Holders"). This Settlement Agreement was entered into connection with the replacement of the US$11,500 convertible debentures ("Convertible Debentures") issued by China Bearing to the Debenture Holders on August 23, 1996, by an installment loan ("Installment Loan") as further explained in Note 13 to the financial statements. Pursuant to one of the conditions set out in the Settlement Agreement, the Company agreed to issue an additional 466,667 shares of common stock with par value of US$0.001 (RMB0.083) per share in favour of the Debenture Holders, within 90 days. Such common stocks were issued on January 14, 1999. The fair value of these additional shares, being the market price of Company's common stock at the date of the Settlement Agreement, was accounted for as the issuable shares on debt restructuring in the balance sheet at December 31, 1998. Such shares were issued during the year, the respective share premium of RMB2,901 had been credited to the reserves. During the year ended December 31, 1998, a review was undertaken by the Committee on Foreign Investment in the United States (CFIUS) which is more fully explained in note 8. On December 26, 1998, the Company informed CFIUS that it intended to divest Southwest. The Company has appointed a US citizen, as trustee (the "Trustee"), pursuant to a Voting Trust Agreement dated December 31, 1998 (the "Voting Trust Agreement") between the Company, Southwest and the Trustee to act as the director of Southwest to manage and operate Southwest. Subsequent to the balance sheet date on January 31, 2000, the Company entered into a Stock Purchase Agreement with a former director, William McKay ("Stock Purchase Agreement"). On March 24, 2000, Mr McKay assigned his rights under the Stock Purchase Agreement to McKay, Brothers & Horany Acquisition Corp. Pursuant to the Stock Purchase Agreement, on April 28, 2000, the Company sold its entire interest in Southwest to McKay, Brothers & Horany Acquisition Corp. for cash consideration of US$3,500. Upon the sale Southwest, the Company terminated the trust arrangement with the Trustee for Southwest. Accordingly, the results of Southwest for the years ended December 31, 1998 and 1999 have been accounted for as a discontinued operation. In addition, 46, 33, 4 and nil shares of common stock were issued from a reverse stock split for the years ended December 31, 1996, 1997, 1998 and 1999, respectively. 13 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 Fundamental uncertainty ----------------------- The Company and its subsidiaries (hereafter referred to as the "Group") sustained a consolidated net loss after minority interests of RMB276,539 for the year ended December 31, 1999 (1998: loss of RMB146,384; 1997: loss of RMB4,184). As a result, the Company had sustained a substantial increase in accumulated losses to RMB272,922 (1998: retained earnings of RMB3,677; 1997: retained earnings of RMB150,082) as at that date. In the light of the substantial losses incurred, the Company experienced negative cash flows during the year in sustaining its existing operations as well as repaying its existing bank and installment loans which amounted to an aggregate balances of RMB864,525 as at December 31, 1999. This has resulted in a default in repayment of the Installment Loan since March 1999. Accordingly, the board of directors of the Company recognized that immediate remedial actions should be taken in order to enable the Group to continue its operations as a going concern. In this regard, the directors have adopted the following measures to improve the financial position, cash flows, profitability and operations of the Group: (a) Disposal of Southwest Pursuant to a resolution dated December 16, 1998, the board of directors decided to dispose of Southwest and subsequently on January 31, 2000, the Company entered into a Stock Purchase Agreement, as mentioned above, with McKay, Brothers & Horany Acquisition Corp., a company which is beneficially owned by a former director of the Company, Mr. William McKay. Pursuant to the Stock Purchase Agreement, the Company agreed to sell the entire beneficial interest in Southwest to Mr. William McKay with a consideration of US$3,500, of which US$165 was incurred as expenditure of all relating professional fees. Accordingly, the net proceeds received by the Company was US$3,335 which was used to repay certain debt of the Group, as detailed in note (b) below. Such sale was completed on April 28, 2000. (b) Negotiation on the revision of the terms of the Installment Loan The Group has been conducting negotiations with the creditors of the Installment Loan (the "Creditors") in relation to the event of default in repayment of the Installment Loan since March 1999. On March 1, 2000, the Company entered into a supplemental agreement to the Settlement Agreement ("Supplemental Agreement") with the Creditors. Pursuant to the Supplemental Agreement, the Group promised, upon the receipt of the consideration from the disposal of Southwest as mentioned in (a) above, to pay US$2,600 for the partial settlement of the overdue portion of the Installment Loan and the Creditors agreed that the remaining undue portion of the Installment Loan is repayable on schedule as originally set out in the Settlement Agreement (details of Settlement Agreement refer to note 13 to the financial statements). The repayment of US$2,600 was made on April 28, 2000. The Group is conducting further negotiations with the Creditors as to the possible restructuring of the Installment Loan. (c) Renewal of PRC bank loans In the past the Group has been allowed by the PRC bankers to roll over the loans due for repayment. Accordingly, consistent with previous years, the directors believe that the existing bank loans will be renewed in the forthcoming year. 14 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) Fundamental uncertainty (continued) ----------------------- (c) Renewal of PRC bank loans In the past the Group has been allowed by the PRC bankers to roll over the loans due for repayment. Accordingly, consistent with previous years, the directors believe that the existing bank loans will be renewed in the forthcoming year. (d) Operational and improved profitability measures The directors have been implementing certain measures designed to further restore the Group's financial strength. Such measures include, inter-alia: i) the rationalization of overheads which comprises certain cost cutting measures; ii) the revision of its pricing policy to boost sales; iii) active negotiations with existing and new bankers for new banking facilities; iv) tighter credit controls over debts collections; v) active negotiations with existing raw material suppliers to obtain longer credit terms; and vi) the exploration of new clientele in other provinces in the PRC. (e) Restructuring of the Group The directors are evaluating the Group's business strategy which may involve an alliance with a strategic partner, reorganization of the Group's operations and/or divestiture of its bearing manufacturing assets and to diversify into other lines of business in the PRC. 15 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) Fundamental uncertainty (continued) ----------------------- Upon the completion of the disposal of Southwest as mentioned in (a) and the execution of the Supplemental Agreement as mentioned in (b), above, the Group could retained a net receipt of US$735 as additional working capital of the Group, to ease out the negative cash flows. After taking into account the existing banking facilities, and subject to the successful negotiation with the creditors of the Installment Loan to reach a workable solution, the directors believe that the Group will have sufficient working capital for its current requirements for a period of one year after the balance sheet date. Accordingly, the financial statements have been prepared on a going concern basis. Basis of consolidation ---------------------- These consolidated financial statements incorporate the results of operations of the Group for the three-year period ended December 31, 1999. 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 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 tax. 16 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 The financial information has been prepared in Renminbi (RMB), the national currency of China. Solely for the convenience of the readers, certain elements of these financial statements have been translated into United States dollars prevailing at the People's Bank of China on December 31, 1999 which was US$1.00 = RMB8.275. 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, 1999. (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. (b) Inventories Inventories are stated at the lower of cost, on a first-in, first-out basis, or market value. Work in progress and finished goods include direct 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 3-5 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. 17 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (d) Construction in progress (continued) 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 standard 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 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 lessor 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 is being amortized over a fifteen-year period. The carrying value of goodwill is assessed on an ongoing basis and provision is made to the extent that there is permanent diminution in value. 18 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (i) Stock options As the Company has elected to follow the accounting method under APB25, accounting for stock based compensation is based on the intrinsic value method. The compensation cost to record is based on the difference between the fair value of the share and the exercise price at the time both the number of options the employee is entitled to receive and the exercise price is known. This compensation cost is recognized over the period the employee performs the related services. (j) 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. (k) Comprehensive income The Group adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") in 1999, which established standards for the report and display of comprehensive income/loss and its components. SFAS 130 requires foreign currency translation adjustments to be included in other comprehensive income/loss. Comprehensive income/loss is reported in the consolidated statements of shareholders' equity. (l) Segment and related information In 1998, the Group adopted Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information"("SFAS 131"), which established standards for the way that information about operating segments is reported. SFAS 131 also established standards for related disclosures about products and services, geographical areas and major customers. The information for 1997 has been revised to conform to SFAS 131. (m) Long-lived assets Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121") requires impairment losses be recognized for long-lived assets, whether these assets are held for disposal or continue to be used in operations, when indicators of impairment are present and the fair values of these assets are estimated to be less than their carrying amounts. (n) Comparative amounts Certain comparative amounts have been reclassified to conform with the current year presentation. 19 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 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. 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 International was incorporated under the Hong Kong Companies Ordinance and under the current Hong Kong tax law, therefore any income arising in and 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. Dividends received from the joint venture enterprises by China Bearing are 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. The income of Harbin Bearing, being a joint stock limited company registered in the Special Economic and Technological Development Zone in the Municipal City of Harbin, is normally 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. At December 31, 1998 and 1999, no undistributable earnings of the Chinese subsidiaries of the Group as accumulated losses were carried forward. 20 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 4. INCOME TAXES (continued) The reconciliation of provision/(benefit) for income tax computed at the PRC statutory tax rate applicable to the Group to income tax expense is as follows:
Year ended December 31, 1997 1998 1999 RMB RMB RMB PRC statutory tax rate 15% 15% 15% Computed expected tax/(benefit) 4,069 (38,171) (73,595) Net increase of valuation allowance - 34,004 73,085 Non-deductible losses 3,515 4,167 510 ------- ------- ------- Income tax expense for the year 7,584 - - ======= ======= =======
The deferred tax asset of the Group at December 31, 1998 and 1999 is comprised of the following:
December 31, December 31, 1998 1999 RMB RMB Deferred tax asset: Net operating loss carry-forwards 34,004 107,089 Less: Valuation allowance for deferred tax asset (34,004) (107,089) -------- -------- -- -- ======== ========
Net operating losses were carried forward from Harbin Bearing. As Harbin Bearing had substantial losses during the years ended December 31, 1999, utilization of deferred tax benefits will depend on the profitability of these operations in future years. The Company believes that a valuation allowance covering 100% of its deferred tax assets is appropriate in the circumstances. 21 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 5. ACCOUNTS RECEIVABLE Accounts receivable comprise:
December 31, 1998 1999 RMB RMB Accounts receivable - trade 485,104 583,999 Less: Allowance for doubtful debts (66,843) (203,013) -------- -------- Accounts receivable, net 418,261 380,986 ======== ========
December 31, 1997 1998 1999 RMB RMB RMB Movement of allowance for doubtful debts: Balance as at January 1, 17,925 34,882 66,843 Provided during the year 17,040 31,961 136,170 -------- -------- --------- Balance as at December 31, 34,965 66,843 203,013 ======== ======== =========
6. INVENTORIES Inventories comprise:
December 31, 1998 1999 RMB RMB Raw materials 148,470 120,515 Work in progress 140,238 126,888 Finished goods 419,668 412,018 -------- -------- 708,376 659,421 Less: Provision (136,200) (211,300) -------- -------- Inventories, net 572,176 448,121 ======== ========
22 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 6. INVENTORIES (continued)
December 31, 1997 1998 1999 RMB RMB RMB Movement of inventory provision: Balance as at January 1, 5,415 35,600 136,200 Provided during the year 33,255 100,600 79,000 Obsolete inventories sold during the year - - (3,900) ------ ------- ------- Balance as at December 31, 38,670 136,200 211,300 ====== ======= =======
7. FIXED ASSETS
December 31, 1998 1999 RMB RMB Buildings 83,790 94,964 Machinery and equipment 572,396 594,835 Motor vehicles 22,065 20,276 Furniture, fixtures and office equipment 6,611 8,254 Construction in progress 141,766 114,456 -------- -------- 826,628 832,785 Less: Accumulated depreciation (267,383) (331,120) -------- -------- 559,245 501,665 Less: Provision for impairment - (15,000) -------- -------- 559,245 486,665 ======== ========
The total amount of interest capitalized during the year and included in the above fixed assets is RMB7,248 (1998: RMB3,892 and 1997: RMB18,207). During the year, the Group made a provision for impairment amounting to RMB15,000 to write down the Group's long lived assets, fixed assets, to their fair value at December 31, 1999. The fair value of the fixed assets is determined by the Company's directors based on the future usage of the fixed assets and the possible disposal value of such assets. 23 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 7. FIXED ASSETS (continued) The Group's buildings are located in the 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 are analyzed as follows:
1998 1999 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 (99,069) (117,861) -------- -------- 56,376 37,584 ======== ========
8. DISCONTINUED OPERATIONS
1998 1999 RMB RMB Cost of investment 28,288 28,288 Share of accumulated losses of the unconsolidated subsidiary (15,160) (33,834) ------- ------- Net carrying value 13,128 (5,546) Due from the unconsolidated subsidiary 29,670 31,739 ------- ------- 42,798 26,193 ======= =======
As stated in Note 1, pursuant to a directors' resolution on December 31, 1998, the Company appointed a U.S. citizen as the trustee of the Company to manage Southwest, pursuant to a Voting Trust Agreement. The Voting Trust Agreement also provides that the Trustee will not accept direction from the Company and will not permit the Company to exercise any control or influence over the business or management of Southwest. All visits or requests for information to Southwest by the Company must be submitted to the Trustee in advance and receive the Trustee's approval. In addition, all "foreign persons" within the meaning of 31 C.F.R. (S)800.213 serving as officers and/or directors of Southwest tendered their resignations pursuant to the terms of the Voting Trust Agreement. 24 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 8. DISCONTINUED OPERATIONS (continued) The entering of the Stock Purchase Agreement by the Company for the sale of Southwest gave rise to the disposal of a segment of a business in accordance with the APB 30. The segment that was held for disposal was all identified as the net assets of Southwest. Pursuant to the Stock Purchase Agreement, the disposal of Southwest was completed in April 2000. The net assets of Southwest at December 31, 1998 and 1999 were as follows:
1998 1999 RMB RMB Cash and bank balances 3,724 1,248 Inventories 11,208 16,819 Accounts receivable 8,061 3,413 Prepayment, deposit and other receivable 301 199 ------- ------- Current assets 23,294 21,679 Property, plant and equipment, net 13,150 11,849 Goodwill * 9,928 - Long term investment 428 151 ------- ------- Total assets 46,800 33,679 ------- ------- Accounts payable (7,117) (2,225) Other payable (2,730) (5,178) Taxes other than income (56) (76) Income taxes (488) (7) Due to holding company (29,670) (31,739) ------- ------- Current liabilities (33,672) (39,225) ------- ------- Net assets/(deficiency in assets) at December 31, 1998 and 1999 13,128 (5,546) ======= ======= * Goodwill of Southwest comprised: Cost 10,760 10,760 Less : Amortisation (832) (832) Less: Write off - (9,928) ------- ------- 9,928 - ======= =======
The net sales of Southwest for the three years ended December 31, 1997, 1998 and 1999 were RMB44,521, RMB44,595 and RMB37,613 respectively. In 1998, the directors estimated that the net proceeds from the disposal of Southwest would cover the net assets and future operating losses of Southwest. However, due to the final consideration of this disposal as referred to the Stock Purchase Agreement was lower than that previously predicted by the directors, consequently, a write off of the goodwill of Southwest was resulted in order to write down the carrying value of Southwest to the approximate realizable value. The operating loss of Southwest for the year ended December 31, 1999 was RMB8,746. 25 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 8. DISCONTINUED OPERATIONS (continued) Pursuant to the Stock Purchase Agreement, the Company received net proceeds of approximately US$3,335, being the gross consideration of US$3,500 less US$165 of relating to professional fees incurred for the sale transaction, upon the completion subsequent to the balance sheet date in April 2000. The Group retained a share of Southwest's net assets amounting to RMB26,193 (US$3,165) at the balance sheet date, which did not exceed the net proceeds of US$3,335, and consequently no anticipated loss on disposal of Southwest was noted. Accordingly, no provision for loss on this disposal was made during the year ended December 31, 1999. 9. DEFERRED ASSETS
December 31, 1998 1999 RMB RMB Deferred valued-added tax ("VAT") receivable 38,860 38,860 Less: Offset against VAT payable (29,307) (32,949) ------- ------- 9,553 5,911 Less: Write off - (5,911) ------- ------- 9,553 - ------- ------- Deferred debenture issue expenses 3,733 3,733 Less: Amortization (3,733) (3,733) ------- ------- - - ------- ------- 9,553 - ======= =======
The deferred VAT receivable arose from the introduction of the new PRC VAT system on January 1, 1994. This asset was calculated and accounted for in accordance with a governmental directive 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 inventories 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 was permitted 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 borrowing rate over the estimated period of recovery. The provision for the net present value discount was fully amortized for the four years ended December 31, 1998. Because there is no offsetting allowable from January 1, 2000, the net balance of RMB5,911 at December 31, 1999 not yet offset against the VAT payable has been fully written off to income statement for the year ended December 31, 1999. 26 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 9. DEFERRED ASSETS (continued) Deferred debenture issue expenses represented costs incurred for the issue of convertible debentures on August 23, 1996. The total amount of deferred expenses incurred of RMB3,733 were amortized over the terms of the debentures of three years. On October 16, 1998, pursuant to the Settlement Agreement entered into between the Group and the Debenture Holders, the Debenture Holders agreed not to exercise their rights in accordance with the terms and conditions of the Subscription Agreement and to replace the convertible debentures by the Installment Loan. Accordingly, all of the remaining unamortized deferred debenture issue expenses were written off during the year ended December 31, 1998. 10. SHORT TERM BANK LOANS The short term bank loans bore interest at a weighted average rate of 8.588% and 8.085% per annum as at December 31, 1998 and 1999 respectively, and were repayable within one year. 11. 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 Machinery Manufacturing Company ("Harbin Precision"), a company wholly-owned by Harbin Bearing Holdings Company ("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 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 of 8.46%. The scheduled non-cancellable future minimum lease payments as at December 31, 1999 were as follows:
December 31, 1999 RMB Year ending December 31, 2000 25,927 2001 25,927 ------- Total minimum lease payments 51,854 Less: Amount representing interest (4,303) ------- Present value of minimum lease payments 47,551 Less: Current portion (22,774) ------- 24,777 =======
27 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 11. OBLIGATIONS AND COMMITMENTS (continued) (b) Obligations under operating leases Non-cancellable operating lease commitments payable in the next five years are as follows:
December 31, 1999 RMB Year ending December 31, 2000 2,508 2001 2,508 2002 2,508 2003 2,508 2004 2,508 ------ 12,540 ======
The lease rentals recorded as expenses in respect of operating leases during the year amounted to RMB6,259 (1998:RMB6,259 and 1997: RMB6,259). The terms of the current operating lease in respect of the buildings expired on December 31, 1998. Up to the date of these financial statements, no renewed agreement had been signed. The current annual rental of the building is RMB3,751 (US$452) (1998: RMB3,751 (US$452)). As at December 31, 1999, the Group had no outstanding commitments for capital expenditure. 12. SECURED PROMISSORY NOTE The secured promissory note (the "Note") was issued in 1995 to Asean Capital in connection with the Share Exchange Agreement as detailed in Note 1. It was 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 Note is denominated in United States dollars and bears interest at 8% per annum. 28 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 12. SECURED PROMISSORY NOTE (continued) Pursuant to a subscription agreement dated August 2, 1996 entered into between the Company, certain of its subsidiaries, the convertible debentures holders and Asean Capital (the "Subscription Agreement") as more fully described in Note 13 below, Asean Capital made an irrevocable and unconditional undertaking that it will not demand repayment of the Promissory Note unless the Company has sufficient cash flow for working capital, debt repayment and capital expenditure for the ensuing twelve- month period and the repayment will only be made according to the repayment schedule defined in the Subscription Agreement. According to the repayment schedule as set out in the Subscription Agreement, RMB24,900 (US$3,000) is repayable in two Installments during the twelve-month periods ended July 31, 1998 and July 31, 1999. This repayment schedule was further governed by the condition as set out in the Settlement Agreement entered into between the Company, certain of its subsidiaries, Asean Capital and the Debentures Holders, as detailed in Note 13 below, that Asean Capital agreed not to demand for the repayment of the outstanding Promissory Notes within the period of the Installment Loan being executed unless it has prior approval by the Debenture Holders. 13. CONVERTIBLE DEBENTURES AND INSTALLMENT LOAN Pursuant to the subscription agreement entered into between the Company, certain of its subsidiaries, Asean Capital and certain institutional inventors, dated August 2, 1996 (the "Subscription Agreement"), China Bearing issued US$11,500 convertible debentures ("Convertible Debentures") to certain institutional investors on August 23, 1996. Unless the Convertible Debentures were converted, they were due and were payable in August 1999 (the "Maturity Date"). The obligations of China Bearing under the Convertible Debentures were guaranteed by the Company, Asean Capital Limited, China International Bearing Holding Limited and Southwest Products Company (hereinafter collectively referred to as the "Guarantors"). The Guarantors have given certain negative pledges over the creation of securities interest for as long as any of the Convertible Debentures remain outstanding. The Convertible Debentures bear interest at the rate of the higher of (i) 5% per annum (net of withholding tax, if applicable) and (ii) the 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 required to be redeemed on the Maturity Date at their principal amount then 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 ("IRR") of 12% per annum on the cost of their investment. 29 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 13. CONVERTIBLE DEBENTURES AND INSTALLMENT LOAN (continued) However, due to the occurrence of certain events of default, as defined in the Subscription Agreement during the year ended December 31, 1997, the Convertible Debentures shall automatically become immediately due and payable in full by the Company at the principal amount outstanding together with the accrued but unpaid interest together with an amount that would enable the investors to yield an aggregate IRR on their investment of 19.75% per annum. As a result, interest has been accrued in the financial statements for the year ended December 31, 1997 at the rate of 19.755 per annum. On October 16, 1998, the same parties who entered into the Subscription Agreement further entered into a settlement agreement ("Settlement Agreement") of which the Debenture Holders agreed to replace the Convertible Debentures by an Installment Loan under the conditions that (i) China Bearing shall repay by Installments to the Debenture Holders the principal amounting to US$13,173 (equivalent to RMB109,340) at date of the Settlement Agreement and (ii) the Company shall issue in favour of the Debenture Holders 466,667 shares of common stocks with zero consideration. The principal balance as set out above was determined by the outstanding balance of the Convertible Debentures amounting to US$11,500 (equivalent to RMB95,450) plus the unpaid interest expenses of US$1,673 up to the date of the Settlement Agreement. The unpaid interest expenses were calculated at the rate of 12.375% on the principal amount of the Convertible Debentures, net of the payment made to the Debenture Holders during the year. The interest rate of 12.375% was derived from a wavier of 7.375% from the 19.75% noted above, as mutually agreed between the Debenture Holders and the Group pursuant to the Settlement Agreement. This modification of terms of the debts thus constitutes troubled debt restructuring under Statement of Financial Accounting Standard No. 15 "Accounting by Debtors and Creditors for Troubled Debt Restructurings" ("FAS 15"). Under FAS15 a debtor shall account for troubled debt restructuring, when there is modification of terms of the debts, at the carrying amount of the payable at the time of the restructuring unless the carrying amount exceeds the total future cash payments specified by the new terms. The principal balance of the Installment Loan was restated to the face value of the Convertible Debenture together with any unpaid interest expenses calculated at the rate of 19.75% as entitled in the Subscription Agreement, after adjusting the fair value of the common stocks issuable on debt restructuring. The fair value of the common stocks issuable on debt restructuring was RMB2,905, being the market value of the Company's trading stocks at October 16, 1998. Thereafter, the interest expenses of the Installment Loan were charged to the profit and loss account on a discounted basis. This Installment Loan bears an effective interest rate of 5.6% per annum and is repayable with a repayment schedule as set out in the Settlement Agreement. 30 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 13. CONVERTIBLE DEBENTURES AND INSTALLMENT LOAN (continued) Pursuant to an undertaking as a supplement to the Settlement Agreement, Asean Capital unconditionally and irrevocably guarantees to each of the Debenture Holders that for so long as any of the obligations of the Group under the Settlement Agreement remain outstanding, it will undertake the full amount due and ensure the punctual payment of all sums now or subsequently payable under the Settlement Agreement by China Bearing. Asean Capital also agrees to perform or procure such payment obligations of China Bearing. Pursuant to the Settlement Agreement, the holding company of Asean Capital, Sunbase International Holdings Limited ("Sunbase International") undertakes to each of the Debenture Holders that Sunbase International shall not reduce its current issued beneficial shareholdings (being 100%) in the share capital of Asean Capital. In addition, one of the subsidiaries of Sunbase International, Extensive Resources Limited ("ERL") further granted a charge over 1,000,000 issued shares in the capital of Tianjin Development Holdings Limited held by ERL in favour of the trustee for and on behalf of the Debenture Holders. Tianjin Development Holdings Limited is a company listed on the Hong Kong Stock Exchange. The market value of the pledged shares was RMB4,334 at December 31, 1999. The maturity of the Installment Loan based on the original repayment schedule as set out in the Settlement Agreement is as follows:
RMB Payable for year ended/ending December 31, 1999 21,579 2000 35,450 2001 58,768 ------- 115,797 =======
Since March 1999, default in repayment has been noted and, in accordance with the Settlement Agreement, the creditors of the Installment Loan are entitled to accelerate repayment of the principal amount outstanding together with the unpaid interest. Accordingly, the unpaid balance of the Installment Loan was classified as a current liability as at December 31, 1999. However, subsequent to the balance sheet date, on March 1, 2000, the same parties of the Settlement Agreement further entered into a supplemental agreement (the "Supplemental Agreement") stating that (i) the Group shall, upon the receipt of the proceeds from the disposal of Southwest pursuant to the Stock Purchase Agreement as mentioned in note 2 above, repay US$2,600 for the partial settlement of the overdue portion of the Installment Loan; (ii) the creditors requested that the remaining portion of the overdue Installments shall be immediately due but agreed not to demand immediate settlement of the undue portion which shall remain at the original repayment schedule, as set out in the Settlement Agreement; (iii) one of the guarantors, ERL agreed to grant a new charge on certain pledged listed shares, as mentioned above, in favor of the trustee of the Creditors; and (iv) the guarantee from Southwest shall be released upon the settlement of US$2,600, as mentioned above. 31 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 14. LONG TERM BANK LOANS Long term bank loans are principally loans borrowed to finance the construction in progress. The loans are unsecured, and bear fixed interest rates ranging from 3.7% to 15.22% per annum. The current portion of the loans together with the overdue portion of the current portion of the long term loans carried forward from last year, are included in current liabilities. 15. NUMBER OF SHARES/EARNINGS PER SHARE In 1998, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. The exercise of outstanding warrants is not included as part of the assumption in the calculation of diluted earnings per share as the share prices of the Company for the years ended December 31, 1997, 1998 and 1999 were lower than the exercise prices. The computations of basic and diluted earnings/loss per shares are as follows:
Year ended December 31, 1997 1998 1999 RMB RMB RMB Basic and diluted Net loss - continuing operations (1,462) (143,426) (257,865) - discontinued operations (2,722) (2,958) (18,674) ---------- ---------- ------------ (4,184) (146,384) (276,539) ========== ========== ============ Weighted average number of common shares outstanding: Share of common shares outstanding on January 1, 12,700,109 12,700,142 13,652,084 Shares issued as a result of reverse stock split 33 4 - Conversion from Series B preferred shares - 935,626 - Reversal of common shares in respect of Series A Warrants expired on June 30, 1998 - (17,533) - 466,667 shares of common stock issuable on debt restructuring on October 16, 1998 - 97,169 466,667 ---------- ---------- ------------ Total weighted average number of common shares outstanding 12,700,142 13,715,408 14,118,751 ========== ========== ============
32 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 15. NUMBER OF SHARES/EARNINGS PER SHARE (continued)
Year ended December 31, 1997 1998 1999 RMB RMB RMB Loss per share -continuing operations (0.12) (10.46) (18.26) -discontinued operations (0.21) (0.21) (1.32) --------- --------- --------- (0.33) (10.67) (19.58) ========= ========= =========
The diluted loss per share for 1997, 1998 and 1999 was the same as the basic loss per share because there was an antidilution effect which reduced the loss per share. For the years ended December 31, 1998 and 1999, antidilution resulted from the substantial losses incurred by the Group during the years. For the year ended December 31, 1997, the calculation which resulted in such an anti-dilution was based on the assumption that the conversion rights under the Convertible Debentures were fully exercised, at the adjusted exercise price, as stated in note 13, and the redemption of preferred shares, both on January 1, 1998. 16. FOREIGN CURRENCY EXCHANGE The RMB is not freely convertible into foreign currencies. Since January 1, 1994, a single rate of exchange has been quoted daily by the People's Bank of China (the "Unified Exchange Rate"). However, the unification of the exchange rates does not imply convertibility of RMB into US$ or other foreign currencies. All foreign exchange transactions continue to take place either through the People's Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People's Bank of China. 17. CONTRIBUTED SURPLUS The respective features of common stock and convertible preferred stock are detailed in Note 1 to the financial statements. On June 10, 1996, the Company issued an additional 1,000,000 shares of common stock with a par value of RMB 0.0083 (US$0.001) at RMB 41.5 (US$5.00) per share. The total share premium on the issue of new shares amounted to RMB36,077 after deducting the direct expenses arising on the issue of these shares of RMB5,415 from the gross premium of RMB41,492. 33 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 17. CONTRIBUTED SURPLUS (continued) During the year ended December 31, 1998, 987,004 shares of common stock were converted from the Preferred Series B shares pursuant to the conditions as set out in the Reorganization Agreement as detailed in Note 1 to the financial statements. The total share premium arising from this conversion was RMB28,280. With regards to the additional 466,667 shares of common stock issuable on debt restructuring, no such shares were issued until January 14, 1999 and consequently, the contributed surplus of RMB2,was recognized for the year ended December 31, 1999. 18. DISTRIBUTION OF PROFITS AND APPROPRIATIONS TO RESERVES According to the relevant laws and regulations for joint stock limited enterprises and Harbin Bearing's articles of association, the distribution of profits by Harbin Bearing is based on the profits as reported in its statutory accounts prepared under PRC GAAP after the following allocations and appropriations: (a) making up any accumulated losses; (b) transferring 10% of its profit after tax to the statutory surplus reserve; (c) transferring 5% to 10% of its profit after tax to a collective welfare fund; and (d) transferring a certain amount of its profit after tax to a discretionary surplus reserve. The following appropriations were made and are further described below: Year ended December 31, 1997 1998 1999 RMB RMB RMB Statutory surplus reserve 70 21 33 Collective welfare fund 35 10 17 ---- ---- ---- 105 31 50 ==== ==== ==== The collective welfare fund must be used for capital expenditure on staff welfare facilities. Such facilities are for staff use, but are owned by Harbin Bearing. The distributable retained earnings of the Group as at December 31, 1999, after taking into account the above restrictions and appropriations and based on the PRC statutory accounts of Harbin Bearing, amounted to RMB81,534 (1998: RMB81,427). The reserves retained by the Chinese subsidiaries of the Group amounted to RMB28,052 (1998: RMB28,002). 34 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 19. ACCUMULATED OTHER COMPREHENSIVE INCOME Accumulated other comprehensive income at December 31, 1997, 1998 and 1999 represented cumulative foreign translation adjustment. 20. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS During the year, the Group had transactions with a number of related parties. The major related party transactions are summarized as follows and are described in further detail below:
Year ended December 31, Nature of transactions Notes 1997 1998 1999 RMB RMB RMB Revenue: Sales of products (a) 171,373 38,886 22,283 Interest income (b) 2,547 6,362 6,401 ======= ====== ====== Capital expenditure: Leases of equipment capital payments (c) 18,788 18,788 17,587 Operating leases of motor vehicles, furniture, fixtures and equipment (c) - - 1,256 Lease of buildings (d) 3,751 3,751 3,751 Land use rights (e) 2,508 2,508 2,508 ======= ====== ====== Expenses: Management and administrative services (f) 2,550 7,486 4,868 Trademark royalty fees (g) 2,924 2,669 2,346 Pension and retirement plan expenses (h) 19,742 23,086 17,904 Finance charges on leases of equipment (c) 8,395 6,742 4,995 Interest on promissory note (i) 1,875 1,875 1,875 ======= ====== ======
35 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 20. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued) (a) Balances with related companies
1998 1999 Notes RMB RMB Balances due from related companies ----------------------------------- Trade receivables ----------------- Harbin Bearing Import & Export Company ("HBIE") (i) 100,742 106,834 Xin Dadi Mechanical and Electrical Equipment Company ("Xin Dadi") (i) 135,165 128,689 -------- -------- 235,907 235,523 -------- -------- Advances to related companies ----------------------------- Sunbase Resources Limited ("Sunbase Resources") (ii) 47,621 42,577 Harbin Everising Construction & Development Limited ("Harbin Everising") (ii) 45,450 - Harbin Precision (ii) 1,150 2,407 HBIE (ii) 719 (11,775) Xin Dadi (ii) 692 1,295 Other related companies (ii) 999 1,562 -------- -------- 96,631 36,066 -------- -------- Total balances 332,538 271,589 Provision (49,000) (79,000) -------- -------- 283,538 192,589 ======== ========
Movement of the provision for balances due from related companies is analyzed as follows:
1998 1999 RMB RMB Balance at beginning of year - 49,000 Provided for the year 49,000 79,000 Write-off against provision - (49,000) -------- -------- Balance at end of year 49,000 79,000 ======== ========
36 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 20. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued) (a) Balances with related companies (continued) Balances due to related companies --------------------------------- 1998 1999 RMB RMB Harbin Bearing (Holding) Company (iii) 49,078 80,192 Other related companies 2,501 3,570 -------- -------- 51,579 83,762 ======== ======== Notes: (i) Significant sales to related companies Harbin Bearing made sales of RMB7,711 (1998: RMB9,566; 1997: RMB91,287) and RMB14,572 (1998: RMB 29,320; 1997: RMB80,086) to HBIE and Xin Dadi, related companies owned by the Harbin Municipal Government, respectively, during the current year. As at December 31, 1999, the amounts of trade receivables from HBIE and Xin Dadi included in the amounts due from related companies were as above. (ii) Advances to related companies Sunbase Resources is a related company of the Group in which the directors and/or shareholders have a beneficial interest. Harbin Everising Construction and Development Limited (formerly known as Sunbase Construction and Development) is a joint venture established in the PRC of which Sunbase International (Holdings) Limited, another related company of the Group, has equity interests. Other related companies are owned by the Harbin Municipal Government. The above balances are unsecured, repayable within one year and are interest-free except for the balance due from Sunbase Resources. Pursuant to an agreement dated 1 January, 1997 between the Company and Sunbase Resources, interest was charged on the average balance at a rate of 8% (1998: 10%) per annum. Total interest earned in respect of such balances was RMB3,371 (1998: RMB3,280; 1997: RMB2,547) for the year ended December 31, 1999. Asean Capital has undertaken not to demand repayment of the principal and interest of the Note, as set out in note 12, until the amount due from Sunbase Resources has been repaid to the Company. (iii) Harbin Bearing (Holding) Company ("Harbin Holdings") is a minority shareholders of Harbin Bearing. The balance due to it represented cash received by Harbin Bearing on behalf of Harbin Holdings in connection with the accounts receivable balances owed by Harbin Holdings. 37 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 20. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued) Notes: (b) Interest income Notes 1997 1998 1999 RMB RMB RMB Sunbase Resources Limited ("Sunbase Resources") (i) 2,547 3,280 3,371 Southwest (ii) - 3,082 3,030 ------- ------- ------- 2,547 6,362 6,401 ======= ======= ======= Notes: (i) Interest was charged on the average balance due from Sunbase Resources at a rate of 8% (1998: 10%) per annum. (ii) Interest was charged on the average balance due from Southwest at a rate of 10% (1998: 10%) per annum. (c) Leases of equipment Harbin Bearing has entered into an eight year lease agreement with Harbin Precision to lease machinery and equipment. Harbin Bearing has also entered into a five year lease agreement with Harbin Precision to lease motor vehicles, furniture, fixtures and equipment related to the business. The initial annual rental is RMB25,927 (US$3,124) and RMB1,256 (US$151), from January 1, 1994 to December 31, 2001 and from January 1, 1994 to December 31, 1998, respectively. Options to extend the leases and to purchase the leased assets have been granted to Harbin Bearing upon expiry of the initial leases. All of these leases are treated as capital leases. The renewal of the leases was yet to be finalised at the date of approval of these financial statements by the directors of the Company. Harbin Bearing continued to make the lease payment of RMB1,256 during the year ended December 31, 1999 and this has been treated as an operating lease. (d) Lease of buildings Harbin Bearing entered into a five year lease agreement with Harbin Precision to lease buildings related to the operation of Harbin Bearing from January 1, 1994 at an initial annual rental of RMB3,751 (US$452) (1998: RMB3,751 (US$452); 1997: RMB3,751 (US$452)). The initial lease expired on December 31, 1998 and Harbin Bearing was granted an option to extend the lease at market rental for another five years. This lease is an operating lease. The renewal of the leases was yet to be finalised at the date of approval of these financial statements by the directors of the Company. However, Harbin Bearing continued to pay the rental expenses for the year ended December 31, 1999. 38 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 20. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued) (e) 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 agreed to lease the land on which the main factory is situated to Harbin Bearing in return for an initial annual rental of RMB2,508 (US$302) (1998: RMB2,508 (US$302)) effective from January 1, 1994 subject to future adjustments in accordance with changes in the government fees. (f) Management and administrative services agreements China Bearing is to reimburse Sunbase International for administrative services rendered on behalf of China Bearing, at cost. The Company paid a total amount of RMB4,868 (1998: RMB7,486; 1997: RMB2,550) to Sunbase International for the reimbursement of expenses incurred on the Company's behalf. (g) Trademark license Pursuant to a trademark license agreement, Harbin Holdings 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 agreement between the two parties and subject to the relevant laws in China. The trademark royalty paid by Harbin Bearing during 1997, 1998 and 1999 amounted to RMB2,924 RMB2,669 and RMB2,346, respectively. (h) Pension and retirement plan Pursuant to an agreement on December 31, 1993, Harbin Bearing is required to make an annual payment to Harbin Holdings as its contribution to the pension scheme for all staff retiring after December 28, 1993. This annual payment is based on the standard contribution as required by government regulations calculated at 20% of salaries up to the period ended June 30, 1996 and at 22%, effective from July 1, 1996. Harbin Holdings is then responsible for the entire pension payments to staff who have retired after December 28, 1993. Harbin Holdings has undertaken to bear all pension payments to staff who retired before December 28, 1993. This agreement was entered into on the condition that no compulsory rules and regulations are implemented by the government such that Harbin Bearing has to be directly responsible for any pension payments. The contributions to the pension scheme made by Harbin Bearing in 1997, 1998 and 1999 amounted to RMB19,742, RMB23,086 and RMB17,904, respectively. 39 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 20. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued) (i) Interest on promissory note As described further in Note 1, in consideration for the purchase of its interest in China Bearing, the Company issued common shares and preferred shares to, and assumed vendor financing from, Asean Capital Limited. The vendor financing provided by Asean Capital was in the form of a US$5,000 secured promissory note which is secured on the shares of China Bearing (See Note 12). US$2,000 was repaid in 1996 and no repayment was made thereafter. Interest was payable on the remaining balance of US$3,000. The promissory note was issued to Asean Capital in connection with the Share Exchange Agreement as detailed in Note 1 and bears interest at 8% per annum. 21. OPERATIONS WITH STATE-OWNED ENTERPRISES Harbin Bearing is owned as to 33% by Harbin Holdings, which is a separately established enterprise controlled by and under the administration of the Harbin Municipal Government. Substantially all of the business undertaken by Harbin Bearing during the year was with State-owned enterprises in China and on such terms as determined by the relevant Chinese authorities. 22. FINANCIAL INSTRUMENTS The carrying amount of the Company's cash and bank balances approximates their fair value because of the short maturity of those instruments. The fair value of the Group's borrowings from banks and other third parties based on the interest rates currently available for borrowings with similar terms and average maturities approximates the carrying amount of these borrowings. The fair value of the secured promissory note, Convertible Debenture and the Installment Loan are not determinable. 40 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 23. SEGMENT DATA The Group principally operates in the ball bearing industry in China through Harbin Bearing, its 51% subsidiary, which generated 100% of the Group's net sales from continuing operations for the three years ended December 31, 1999. 24. CONCENTRATION OF RISK Concentration of credit risk: Financial instruments that potentially subject the Group to a significant concentration of credit risk consist principally of cash deposits, trade receivables and the 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 to 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 balances with two related companies, HBIE and Xin Dadi which were of RMB106,834 (1998: RMB100,742) and RMB128,689(1998: RMB135,165), respectively, as at December 31, 1999. (c) Current vulnerability due to certain concentrations: The Group's operating assets and primary source of income and cash flow are its interest in its subsidiaries in the PRC. The value of the Group's interest in these subsidiaries 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 several 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. 41 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 25. STOCK OPTION PLAN On January 2, 1996, the Company's board of directors adopted a stock option plan (the "Plan"). The Plan permits the directors to grant options to purchase an aggregate of up to 2,500,000 shares of the common stock of the Company. All incentive stock options 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 the exercise price of 160,000 options granted to an executive, was lower than the market value of the common stock on the date the option was granted. If incentive stock options are 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 may not be less than 110% of the fair market value of the shares. The Plan terminates on the earlier of either the date on which no additional shares of common stock are available for issuance under the Plan, or January 2, 2006. On July 1, 1996, the Compensation Committee of the Company granted 1,250,000 stock options to three executives, including two directors of the Company, on the following terms:
Exercise price/Share Number of Shares Vesting schedule US$ per option rights January 16, 1996 6.375 415,000 January 16, 1997 6.375 415,000 January 16, 1998 6.375 420,000 --------- 1,250,000 =========
Pursuant to the Plan and in accordance with the provisions of an employment agreement entered into between the Company and a director, the Company granted, on January 16, 1996, 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 the beneficiary to be an incentive stock option and will be treated as such. The beneficiary may exercise the options that have vested and purchase shares of the common stock as follows:
Exercise price of the option vested Number of after each year shares Vesting schedule US$ exercisable January 16, 1997 6.65 160,000 January 16, 1998 7.75 160,000 January 16, 1999 9.25 160,000 January 16, 2000 10.75 160,000 January 16, 2001 12.45 160,000 -------- 800,000 ========
42 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 25. STOCK OPTION PLAN (continued) As at December 31, 1999, none of the vested options had been exercised and during 1998, the options granted to two of the Company's executives were withdrawn because these employees terminated their employment with the Company at that date. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its stock options under the fair value method. The fair value for these options was estimated at the date of grant using a Black- Scholes option pricing model with the following weighted-average assumptions for the date of grant in 1997: Interest rate on United States treasury bonds; no dividend yield; volatility factors of the expected market price of the Company's common stock of 87%; and a weighted-average expected life of the options of 3 to 5 years. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For the purposes of pro forma disclosures, the estimated fair value of the options is amortized to write off the amount over the options' vesting period. The Company's pro forma information is as follows: Year ended December 31, 1997 1998 1999 RMB RMB RMB Pro forma net loss (69,270) (216,507) (331,416) ======= ======== ========= Pro forma loss per share: Basic (5.45) (15.77) (23.47) ======= ======== ========= Diluted (5.45) (15.77) (23.47) ======= ======== ========= 43 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except number of shares and per share data) 25. STOCK OPTION PLAN (continued) The Company's stock option activities and related information for the years ended December 31, 1998 and 1999 are summarized as follows:
1997 1998 1999 Exercise Exercise Exercise Options price Options price Options price US$ US$ Outstanding at beginning of year 2,050,000 6,967 2,050,000 6.967 1,400,000 7.24 Forfeited - - (650,000) 6.375 - - --------- ----- --------- ----- --------- -------- Outstanding at end of year 2,050,000 6,967 1,400,000 7.24 * 1,400,000 7.24 ========= ===== ========= ====== ========= ========
* Exercise price was presented at the weighted average basis after discounting such future price. 26. WARRANTS The Company agreed to grant warrants to Arnhold and S. Bleichroeder, Inc., ("ASB") pursuant to an agreement ("ASB Agreement") dated September 30, 1997, entered into between the Company and ASB. ASB was engaged in connection with the private placement of securities of the Company. Pursuant to the ASB Agreement, the Company shall issue to ASB warrants ("ASB Warrants") to purchase common stock of the company on the following basis, without consideration: Date of Exercise Number of earliest price per shares Per ASB exercise share Warrant Rights January 16, 1997 US$6.375 80,000 January 16, 1998 US$6.375 80,000 January 16, 1999 US$6.375 80,000 Each tranche of Warrants will be for a term of six years commencing with the date of earliest exercise. As at December 31, 1999 no such warrants were granted or issued to ASB. 44 EX-10.25 2 STOCK PURCHASE AGREEMENT EXHIBIT 10.25 ---------------------------- STOCK PURCHASE AGREEMENT ---------------------------- dated as of January 31, 2000 by and among WILLIAM MCKAY as Buyer and SMITH ACQUISITION COMPANY, INC., d/b/a SOUTHWEST PRODUCTS COMPANY, INC. as Company and SUNBASE ASIA, INC. as Parent and SAMUEL T. MOK as Voting Trustee TABLE OF CONTENTS Page ARTICLE I...................................................................................................... 1 PURCHASE AND SALE OF COMPANY SHARES................................................................... 1 1.1 Sale of Company Shares by Seller.................................................... 1 1.2 Time and Place of Closing........................................................... 1 1.3 No Implied Representations or Warranties............................................ 2 ARTICLE II..................................................................................................... 2 PURCHASE PRICE........................................................................................ 2 2.1 Purchase Price...................................................................... 2 ARTICLE III.................................................................................................... 2 SELLER REPRESENTATIONS AND WARRANTIES................................................................. 2 3.1 Organization; Title to Company Shares............................................... 2 3.2 Certificate of Incorporation and Bylaws............................................. 3 3.3 Authority........................................................................... 3 3.4 No Conflict; Required Filings and Consents.......................................... 3 3.5 Absence of Litigation............................................................... 3 3.6 Brokers............................................................................. 4 ARTICLE IV..................................................................................................... 4 COMPANY REPRESENTATIONS AND WARRANTIES................................................................ 4 4.1 Organization........................................................................ 4 4.2 Capital Stock....................................................................... 4 4.3 Certificate of Incorporation and Bylaws............................................. 4 4.4 No Conflict; Required Filings and Consents.......................................... 4 4.5 Absence of Litigation............................................................... 4 4.6 Absence of Obligation............................................................... 4 ARTICLE V...................................................................................................... 5 BUYER REPRESENTATIONS AND WARRANTIES.................................................................. 5 5.1 Organization; Approvals............................................................. 5 5.2 Authority........................................................................... 5 5.3 No Conflict; Required Filings and Consents.......................................... 5 5.4 Absence of Litigation............................................................... 5 5.5 Brokers............................................................................. 6 5.6 Status of Buyer..................................................................... 6 ARTICLE VI..................................................................................................... 6 CERTAIN COVENANTS..................................................................................... 6.1 Expenses............................................................................ 6 6.2 Retention of Records................................................................ 6
i ARTICLE VII.................................................................................................... 6 ADDITIONAL AGREEMENTS................................................................................. 6 7.1 Notification of Certain Matters..................................................... 6 7.2 Public Announcements................................................................ 6 7.3 Indemnification by Buyer............................................................ 7 7.4 Mutual Release between Buyer, Seller and the Company................................ 7 7.5 Release of Service Providers........................................................ 7 7.6 Consent and Release of Corporate Guarantee from Seller's Debenture Holders ......... 7 7.7 Liquidated Damages.................................................................. 7 7.8 Cooperation......................................................................... 7 ARTICLE VIII CONDITIONS OF CLOSING............................................................................. 8 8.1 Conditions to Obligations of Each Party............................................. 8 8.2 Additional Conditions to Obligations of Buyer....................................... 8 8.3 Additional Conditions to Obligations of the Seller.................................. 9 ARTICLE IX..................................................................................................... 10 GENERAL PROVISIONS.................................................................................... 10 9.1 No Survival of Representations, Warranties, Covenants and Agreements................ 10 9.2 Notices............................................................................. 10 9.3 Certain Definitions................................................................. 11 9.4 Headings............................................................................ 11 9.5 Severability........................................................................ 12 9.6 Entire Agreement.................................................................... 12 9.7 Assignment.......................................................................... 12 9.8 Parties In Interest................................................................. 12 9.9 Governing Law....................................................................... 12 9.10 Counterparts........................................................................ 12 9.11 Amendment........................................................................... 12 9.12 Waiver of Jury Trial................................................................ 12
ii STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT dated as of January 31, 2000 (the "Agreement") between William McKay ("Buyer") and SMITH ACQUISITION COMPANY, INC., D/B/A SOUTHWEST PRODUCTS COMPANY, INC., a California corporation (the "Company"), SUNBASE ASIA, INC., a Nevada corporation (the "Seller"), and SAMUEL T. MOK, as voting trustee for all of the issued and outstanding shares of capital stock of the Company (the "Trustee"). RECITALS: WHEREAS, Buyer desires to acquire all of the issued and outstanding shares (the "Company Shares") of capital stock of the Company upon the terms and conditions set forth herein; and WHEREAS, the Company is a wholly-owned subsidiary of Seller; and WHEREAS, voting rights with respect to all of the Company Shares have been transferred to a trust administered by the Trustee pursuant to that certain Voting Trust Agreement (the "Trust Agreement") dated as of December 31, 1998 by and between the Company, Seller and Trustee; and WHEREAS, the Seller and Trustee desire to sell the Company Shares upon the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth in this Agreement, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF COMPANY SHARES 1.1 Sale of Company Shares by Seller. Subject to the satisfaction or waiver of the conditions set forth in this Agreement, at the Closing (as defined in Section 1.2), Seller shall sell, assign, transfer, convey and deliver to Buyer, and Buyer shall purchase and accept from Seller, all of the Company Shares, free and clear of all restrictions on transfer (subject, however, to restrictions on the transferability thereof under all applicable securities laws and regulations thereunder), liens, options, warrants, purchase rights, contracts, commitments, equities, claims and demands (other than the rights of Buyer under this Agreement). 1.2 Time and Place of Closing. (a) The closing of the transactions contemplated hereby (the "Closing") will take place on April 10, 2000, or as such other time as the parties agree at or prior to 60 days after the date of execution of the Agreement. (the "Closing Date"). The Closing shall be held at the offices of Jenkens & Gilchrist, 1919 Pennsylvania Ave., N.W., Suite 600, Washington, D.C. 20006, or such location as may be agreed upon by the parties. 1 (b) At the Closing: (i) Buyer shall deliver Seller (A) immediately available funds by wire transfer to an account specified by Seller in an amount equal to the Purchase Price (as defined in Section 2.1), offset as provided in Section 2.1, and (B) the certificates and other agreements and documents set forth in Article VIII; and (ii) Seller shall deliver to Buyer (A) the certificate or certificates representing all of the Company Shares, either duly endorsed for transfer to Buyer or accompanied by appropriate duly executed stock powers and with all requisite stock transfer stamps and taxes attached or provided for, (B) the certificates and other documents set forth in Article VIII, and (C) resignations from each member of the Company's Board of Directors. 1.3 No Implied Representations or Warranties. William McKay, the Buyer, has been the chief executive officer of the Company since 1991. It is the intention of the parties that the sole representations and warranties of Seller and/or the Company are set forth in Article III and Article IV hereof and that except as specifically provided in Article III or Article IV, the Company Shares and the Company are being purchased "WHERE IS, AS IS." ARTICLE II PURCHASE PRICE 2.1 Purchase Price. The aggregate purchase price for the Company Shares shall be Three Million Five Hundred Thousand United States Dollars (US $3,500,000) (the "Purchase Price"). On the date of this Agreement, Buyer shall deliver to the Voting Trustee the amount of One Hundred Thousand United States Dollars (US $100,000) as earnest money. At Closing, the earnest money shall be offset against the Purchase Price, the balance of which shall be delivered by Buyer to Seller at Closing by wire transfer in immediately available federal funds to an account designated by Seller by written notice to Buyer given at least two days prior to the Closing Date. ARTICLE III SELLER REPRESENTATIONS AND WARRANTIES Seller represents and warrants to Buyer as follows: 3.1 Organization; Title to Company Shares. Seller is a corporation validly existing and in good standing under the laws of the State of Nevada. Seller is, and on the Closing Date will be, the record and beneficial owner of the Company Shares, and Seller owns, and on the Closing Date will own, the Company Shares free and clear of all restrictions on transfer, liens, options, warrants, purchase rights, contracts, commitments, equities, claims and demands (other than restrictions on transferability under applicable securities laws and regulations thereunder and the rights of Buyer under this Agreement). The delivery on the Closing Date of the certificates representing the Company Shares purchased hereunder to Buyer will transfer to Buyer good, valid and marketable title to the Company 2 Shares, free and clear of all restrictions on transfer (other than restrictions on transferability under applicable securities laws and regulations thereunder), liens, options, warrants, purchase rights, contracts, commitments, equities, claims and demands. 3.2 Certificate of Incorporation and Bylaws. Seller has made available to Buyer a true, complete and accurate copy of its Certificate of Incorporation and Bylaws, as amended or restated (the "Seller Certificate and ---------------------- Bylaws"). Such Seller Certificate and Bylaws are in full force and effect. - ------ Seller is not in violation of any of the provisions of the Seller Certificate and Bylaws. 3.3 Authority. Each of Seller and Trustee has the requisite power and authority to execute and deliver this Agreement, to perform its obligations under this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Seller and the consummation by Seller of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of Seller are necessary to authorize this Agreement or to consummate the transactions contemplated hereby (other than applicable stockholder approvals). This Agreement has been duly executed and delivered by, and constitutes a valid and binding obligation of, Seller and, assuming due authorization, execution and delivery by Buyer, is enforceable against Seller in accordance with its terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors' rights and remedies generally. 3.4 No Conflict; Required Filings and Consents. The execution and delivery of this Agreement by Seller does not, and the performance of this Agreement and the transactions contemplated hereby by Seller shall not, (i) conflict with or violate the Seller Certificate and Bylaws (ii) conflict with or violate any federal or state law, statute, ordinance, rule, regulation, order, judgment or decree (collectively, "Laws") applicable to Seller or by which it or any of its properties are bound or affected, or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration, cancellation of, or result in the creation of a lien on Seller or any of its assets pursuant to any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Seller is a party, except for any such conflicts, violations, breaches, defaults or other occurrences that have been waived or that individually or in the aggregate, would not, or be reasonably likely to have, have a Material Adverse Effect with respect to Seller. 3.5 Absence of Litigation. Seller is not a party to any, and there are no pending or, to the knowledge of Seller, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Seller challenging the validity or propriety of the transactions contemplated by this Agreement which if unfavorably determined would prevent the consummation of the transactions contemplated hereby, except where such events would not have, or be reasonably likely to have, a Material Adverse Effect with respect to Seller or the Company. 3 3.6 Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Seller, except as provided in that certain agreement between Seller and Trustee and that certain agreement between Seller and Friedman, Billings, Ramsey & Co., Inc. regarding such fees, which fees are the sole responsibility of, and are to be paid by, Seller. ARTICLE IV COMPANY REPRESENTATIONS AND WARRANTIES Seller represents and warrants to Buyer with respect to both Seller and the Company, as follows: 4.1 Organization. The Company is a corporation validly existing and in good standing under the laws of the State of California. 4.2 Capital Stock. As of the Closing Date, the authorized capital stock of the Company consists of 10,000,000 shares of common stock, no par value, and 4,000,000 shares of preferred stock, no par value. As of the Closing Date, the only issued and outstanding shares of common stock are the Company Shares, all of which are, duly authorized, validly issued, fully paid and nonassessable, and the issuance thereof was in compliance with all applicable Laws. 4.3 Certificate of Incorporation and Bylaws. The Company has made available to Buyer a true, complete and accurate copy of its Certificate of Incorporation and Bylaws, as amended or restated (the "Company Certificate and ----------------------- Bylaws"). Such Company Certificate and Bylaws are in full force and effect. - ------ 4.4 No Conflict; Required Filings and Consents. The transactions contemplated hereby by the Company shall not, (i) conflict with or violate the Company Certificate and Bylaws or (ii) conflict with or violate any Laws applicable to the Company or by which it or any of its properties are bound or affected, except for any such conflicts, violations, breaches, defaults or other occurrences that individually or in the aggregate, would not have a Material Adverse Effect with respect to the Company. 4.5 Absence of Litigation. To the knowledge of Seller, the Company is not a party to any, and there are no pending or, to the knowledge of the Company, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against the Company challenging the validity or propriety of the transactions contemplated by this Agreement which if unfavorably determined would prevent the consummation of the transactions contemplated hereby. This representation does not purport to apply to the pending ITAR investigation. 4.6 Absence of Obligations. Except as set forth on Schedule 4.6 hereto, Seller has not executed any agreement creating any obligation for the Company (other than in connection with those obligations set forth in Section 8.2(f), which obligations will be discharged on the Closing Date). 4 ARTICLE V BUYER REPRESENTATIONS AND WARRANTIES Buyer represents and warrants to the Company and Seller as follows: 5.1 Organization; Approvals. Buyer has the requisite power and authority and is in possession of all franchises, grants, authorizations, licenses, permits, easements, consents, certificates, approvals and orders ("Buyer Approvals") necessary to own, lease and operate its properties and to --------------- carry on its business as it is now being conducted, and Buyer has not received any notice of proceedings relating to the revocation or modification of any Buyer Approvals, except where the failure to be so organized, existing and in good standing or to have such power, authority, Buyer Approvals and revocations or modifications would not, individually or in the aggregate, have a Material Adverse Effect with respect to Buyer. 5.2 Authority. Buyer has the requisite power and authority to execute and deliver this Agreement, to perform its obligations under this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Buyer and the consummation by Buyer of the transaction contemplated hereby have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of Buyer are necessary to authorize this Agreement or to consummate the transaction contemplated hereby. This Agreement has been duly executed and delivered by, and constitutes a valid and binding obligation of, Buyer and, assuming due authorization, execution and delivery by the Company and Seller, is enforceable against Buyer in accordance with its terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors' rights and remedies generally. 5.3 No Conflict; Required Filings and Consents. The execution and delivery of this Agreement by Buyer does not, and the performance of this Agreement and the transaction contemplated hereby by Buyer shall not, (i) conflict with or violate any Laws applicable to Buyer or by which it or any of its properties are bound or affected, or (ii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a Lien on any of the properties or assets of Buyer pursuant to any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Buyer is a party or by which it or any of its properties is bound or affected, except in the case of clauses (ii) and (iii) for any such conflicts, violations, breaches, defaults or other occurrences that individually or in the aggregate, would not have a Material Adverse Effect with respect to Buyer. 5.4 Absence of Litigation. Buyer is not a party to any, and there are no pending or, to the knowledge of Buyer, threatened, legal, administrative, arbitral or other proceedings, claims, actions or governmental or regulatory investigations of any nature against Buyer challenging the validity or propriety of the transactions contemplated by this Agreement which if unfavorably determined would prevent the consummation of the transaction contemplated hereby. 5 5.5 Brokers. There is no broker, finder or investment banker who is entitled to any brokerage, finder's or other fee or commission from Seller or any of its affiliates in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Buyer. 5.6 Status of Buyer. Buyer is knowledgeable and experienced in making business investments, and able to bear the economic risk of loss of its investment in the Company Shares. ARTICLE VI CERTAIN COVENANTS 6.1 Expenses. All Expenses (as defined below) incurred by Buyer, on the one hand, and Seller, on the other hand, shall be borne solely and entirely by Buyer, on the one hand, and Seller, on the other hand. "Expenses" as used in -------- this Agreement shall include all reasonable fees and out-of-pocket expenses (including without limitation all fees and expenses of counsel, accountants, investment bankers, experts and consultants to the party and its affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation and execution of this Agreement, the solicitation of stockholder approvals and all other matters related to the closing of the transactions contemplated hereby. Seller shall be liable for and assume and pay the broker's fees owed to Friedman, Billings, Ramsey & Co., Inc. 6.2 Retention of Records. Buyer shall retain all books and records of the Company that Buyer receives from the Company for a period of six years following the Closing Date. After the Closing, Seller and its representatives shall have reasonable access to all such books and records during normal business hours. In addition, Buyer shall upon reasonable request furnish to Seller, at Seller's expense, copies of any such books or records. ARTICLE VII ADDITIONAL AGREEMENTS 7.1 Notification of Certain Matters. Seller and the Company shall give prompt notice to Buyer, and Buyer shall give prompt notice to Seller and the Company, of (i) the occurrence or non-occurrence of any event, the occurrence or nonoccurrence of which would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate and (ii) any failure of Seller or the Company or Buyer, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. 7.2 Public Announcements. Buyer and Seller shall consult with each other before issuing any press release or otherwise making any public statements with respect to the transaction contemplated hereby and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by Law. 6 7.3 Indemnification by Buyer. Buyer and the Company shall indemnify and hold harmless Seller, its affiliates and the officers, directors and shareholders of Seller and its affiliates, from any and all claims, losses, damages or other amounts (including reasonable attorneys fees and expenses) relating to any claims by any party relating to or arising out of the Seller's purchase of the Company from its former shareholders, including without limitation Seller's alleged failure to issue certain capital stock in a timely fashion. 7.4 Mutual Release between Buyer, Seller and the Company. At Closing, Buyer and Seller shall execute a mutual release pursuant to which each party shall release the other (together with its affiliates, agents, officers, directors and shareholders) from any and all claims and causes of action, whether now existing or hereafter arising, relating to any event or matter, including, without limitation, the employment agreement between the Company, Seller and Buyer. The mutual release shall exclude obligations under this Agreement and shall be in a form mutually acceptable to Buyer and Seller. 7.5 Release of Service Providers. At Closing, the Company shall execute a release pursuant to which it releases the Voting Trustee, Friedman, Billings, Ramsey & Co., Inc., Jenkens & Gilchrist and Oppenheimer, Wolff, Donnelly and Bayh (together with their affiliates, officers, directors and shareholders) from any and all claims and causes of action, whether now existing or hereafter arising, relating to any event or matter. The release shall be in a form mutually acceptable to the Company and the person being released. 7.6 Consent and Release of Corporate Guarantee from Seller's Debenture Holders. Prior to Closing, Seller shall use its best efforts to obtain the written consent of its debenture holders to the transactions contemplated hereby and a release by its debenture holders of the Company, which release shall be effective upon the debenture holders' receipt of immediately available funds in the amount of U.S. $2.6 million at Closing. 7.7 Liquidated Damages. In the event that Buyer shall fail to close the purchase of the Company for any reason other than a breach of this Agreement by Seller or the fact that a condition to Buyer's obligations to close set forth in Section 8.1 or Section 8.2 shall not have been satisfied, Seller shall be entitled to keep the $100,000 earnest money and Buyer shall promptly pay Seller the additional amount of $900,000. Such amounts shall constitute liquidated damages and not a penalty. Buyer's obligations under this Section shall be personally guaranteed by William McKay pursuant to a guaranty executed on the date hereof in form acceptable to Seller. 7.8 Cooperation. No party to this Agreement shall take any action that materially impairs the ability of such party or the ability of the parties to consummate the transactions contemplated hereby. 7 ARTICLE VIII CONDITIONS OF CLOSING 8.1 Conditions to Obligations of Each Party. The respective obligations of each party to effect the transactions contemplated hereby shall be subject to the satisfaction at or prior to the Closing Date of the following condition: (a) No Order. No federal or state governmental or regulatory -------- authority or other agency or commission, or federal or state court of competent jurisdiction, shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which restricts, prevents or prohibits consummation of the transactions contemplated by this Agreement. 8.2 Additional Conditions to Obligations of Buyer. The obligations of Buyer to effect the transactions contemplated hereby are also subject to the following conditions: (a) Representations and Warranties. Each of the representations ------------------------------ and warranties of the Company and Seller contained in this Agreement shall be true and correct in all material respects (except that where any statement in a representation or warranty expressly includes a standard of materiality, such statement shall be true and correct in all respects). (b) Trust Agreement. The Trustee shall have provided Buyer --------------- evidence as to the termination of the Trust Agreement upon the Closing. (c) Agreements and Covenants. The Company shall have performed ------------------------ or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date. (d) Consents Obtained. All consents, waivers, approvals, ----------------- authorizations or orders required to be obtained and all filings required to be made by Seller or the Company for the authorization, execution and delivery of this Agreement and the consummation by it of the transactions contemplated hereby shall have been obtained and made by Seller and the Company, except those for which failure to obtain such approvals or make such filings would not individually or in the aggregate, have a Material Adverse Effect with respect to the Company. (e) No Challenge. There shall not be pending any action, ------------ proceeding or investigation before any court or administrative agency or by a government agency (i) challenging or seeking material damages in connection with, the transactions hereby contemplated or (ii) seeking to restrain, prohibit or limit the exercise of full rights of ownership or operation by Buyer of all or any portion of the Company. (f) Certain Obligations. Any obligations of the Company to the ------------------- Voting Trustee, Friedman, Billings, Ramsey & Co., Jenkens & Gilchrist and Oppenheimer, Wolff, Donnelly and Bayh 8 shall have been paid and discharged by the Company. The Company shall have been released from any obligations to Seller (including any amounts owing as intercompany loans or capital investment) and to Seller's debenture holders, such release is to be effective upon the debenture holders' receipt of immediately available funds in the amount of U.S. $2.6 million at Closing. (g) Material Adverse Effect. Neither the Seller or the Voting ----------------------- Trustee shall have executed a contract or agreement dated after the date hereof that has a Material Adverse Effect on the Company. 8.3 Additional Conditions to Obligations of the Seller. The obligations of Seller to effect the transactions contemplated hereby are also subject to the following conditions: (a) Representations and Warranties. Each of the representations ------------------------------ and warranties of Buyer set forth in this Agreement shall be true and correct in all material respects (except that where any statement in a representation or warranty expressly includes a standard of materiality, such statement shall have been true and correct in all respects). (b) Agreements and Covenants. Buyer shall have performed or ------------------------ complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date. (c) Consents Under Agreements. All consents, waivers, approvals, ------------------------- authorizations or orders required to be obtained, and all filings required to be made by Buyer for the authorization, execution and delivery of this Agreement and the consummation by it of the transactions contemplated hereby shall have been obtained and made by Buyer, except where failure to obtain any consents, waivers, approvals, authorizations or orders required to be obtained or any filings required to be made would not have a Material Adverse Effect with respect to Buyer. (d) No Challenge. There shall not be pending any action, ------------ proceeding or investigation before any court or administrative agency or by a government agency (i) challenging or seeking material damages in connection with, transactions hereby contemplated or (ii) seeking to restrain, prohibit or limit the exercise of full rights of ownership or operation by Buyer of all or any portion of the Company, which in either case would have a Material Adverse Effect with respect to the Company. (e) Required Consents. At or prior to Closing, Seller shall have received all material governmental approvals and governmental consents contemplated by this transaction and the written consent of Seller's debenture holders to this transaction. 9 ARTICLE IX GENERAL PROVISIONS 9.1 No Survival of Representations, Warranties, Covenants and Agreements. The representations and warranties of the parties shall expire at Closing. 9.2 Notices. All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed given if delivered personally, telecopied (with confirmation), mailed by certified mail (postage prepaid, return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice) and shall be effective upon receipt: (a) If to Seller or the Trustee: Samuel T. Mok, Voting Trustee 1001 Connecticut Avenue, N.W. Suite 1035 Washington, D.C. 20036 Attention: Samuel T. Mok With copies to: Jenkens & Gilchrist, a Professional Corporation 1445 Ross Ave., Suite 3200 Dallas, Texas 75202 1919 Pennsylvania Avenue, NW Suite 600 Washington, D.C. 20006-3404 Telecopier: (202) 326-1555 Attention: Andrew Lynch (b) If to Buyer: William McKay Southwest Products 2240 Buena Vista Irwindale, CA 91706 Telecopier: (626) 303-6141 Attention: William McKay 10 With a copy to: ______________________________ ______________________________ ______________________________ Telecopier: _________________ Attention: __________________ 9.3 Certain Definitions. For purposes of this Agreement, the term: (a) "Law" shall have the meaning set forth in Section 3.4. --- (b) "Lien" shall mean any conditional sale agreement, default of ---- title, easement, encroachment, encumbrance, hypothecation, infringement, lien, mortgage, pledge, reservation, restriction, security interest, title retention or other security arrangement, or any adverse right or interest, charge, or claim of any nature whatsoever of, on, or with respect to any property or property interest, other than (i) liens for current property taxes not yet due and payable, and (ii) liens which do not materially impair the use of, or title to, or value of the assets subject to such lien. (c) "Material Adverse Effect" means, with respect to Buyer, ----------------------- Seller, the Company or Company, (i) any adverse effect on the assets, properties, liabilities, results of operations or financial condition of, and which is material with respect to, such party (or the Company), or (ii) any effect that materially impairs the ability of such party to consummate the transactions contemplated hereby; provided, however, that Material Adverse Effect shall not be deemed to include the impact of (A) actions contemplated by this Agreement, (B) changes in laws and regulations or interpretations thereof that are generally applicable to the manufacturing industry and (C) changes in generally accepted accounting principles that are generally applicable to the manufacturing industry. (d) "person" means an individual, corporation, partnership, ------ association, trust, unincorporated organization, other entity or group (as defined in Section 13(d) of the Exchange Act); and (e) "subsidiary" or "subsidiaries" of the Company, Seller, Buyer ---------- ------------ or any other person, means any corporation, partnership, joint venture or other legal entity of which either the Company, Seller, Buyer, or such other person, as the case may be (either alone or through or together with any other subsidiary), owns, directly or indirectly, 50% or more of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity. 9.4 Headings. The headings contained in this Agreement are for -------- reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 11 9.5 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. 9.6 Entire Agreement. This Agreement constitutes the entire agreement of the parties and supersedes all prior agreements and undertakings, both written and oral, between the parties, or any of them, with respect to the subject matter hereof and, except as otherwise expressly provided herein, are not intended to confer upon any other person any rights or remedies hereunder. 9.7 Assignment. This Agreement shall not be assigned by operation of law or otherwise, without the prior written consent of each of Buyer, Seller and Trustee. 9.8 Parties In Interest. This Agreement shall be binding upon and inure solely to the benefit of each party and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. 9.9 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, regardless of the laws that might otherwise govern under applicable principles of conflict of laws. 9.10 Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 9.11 Amendment. This Agreement may be amended by the agreement in writing of all of the parties and in accordance with their applicable charter documents and applicable Law. 9.12 Waiver of Jury Trial. Each of Seller and Buyer waives rights to a trial by jury of any claim or cause of action based upon or arising out of or related to this Agreement, any assignment or the transactions contemplated hereby, in any action, proceeding or other litigation of any type brought by any party against the other parties, whether with respect to contract claims, tort claims or otherwise. Each of Seller and Buyer agrees that any such claim or cause of action shall be tried without a jury. Without limiting the foregoing, the parties further agree that their respective rights to a trial by jury is waived by operation of this Section as to any action, counterclaim or other proceeding which seeks, in whole or in part, to challenge the validity or enforceability of this Agreement, any assignment or any provision hereof or thereof. This waiver shall apply to any subsequent amendments, renewals, supplements or modifications to this Agreement or any assignment. 12 [Signature page follows.] 13 IN WITNESS WHEREOF, the Company, Buyer and Trustee have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. SMITH ACQUISITION COMPANY INC., d/b/a SOUTHWEST PRODUCTS COMPANY, INC. ("Company") By: /s/ Samuel T. Mok ---------------------------------- Name: SAMUEL T. MOK -------------------------------- Title: CHAIRMAN ------------------------------- /S/ William McKay ------------------------------------- WILLIAM MCKAY SUNBASE ASIA, INC. ("Seller") By: /S/ Li Yuen Fai (Roger) ---------------------------------- Name: LI YUEN FAI -------------------------------- Title: CHIEF FINANCIAL OFFICER ------------------------------- /s/ Samuel T. Mok ---------------------------------- SAMUEL T. MOK, AS TRUSTEE ACTIONS BY UNANIMOUS WRITTEN CONSENT OF THE BOARD OF DIRECTORS OF SUNBASE ASIA INC. ---------------------------------------------------------------- The undersigned, being all the directors of Sunbase Asia Inc., a Nevada Corporation (the "Corporation"), in accordance with Section 78.315 (2) of the Nevada General Corporation Law and Article III, Section 15 of the By-laws of the Corporation, hereby consent to the adoption of the following resolution without a meeting. RESOLVED to dispose the equity interest of Southwest Products Company to William Mckay at a consideration of US$3,500,000. It was further resolved that the attached stock purchase agreement in relation to the disposal of the equity increase of Southwest Products Company was approved. RESOLVED to authorize Mr. Roger Li to sign on the stock purchase agreement in regarding to the disposal of Southwest Products Company on behalf of the company. - -------------------------------------------------------------------------------- Dated : 2 FEB 2000 /s/ Gunter Gao --------------------------- --------------------------- Gunter Gao Dated : 2 FEB 2000 /s/ Li Yuen Fai (Roger) --------------------------- --------------------------- Li Yuen Fai (Roger) Dated : 2 Feb 2000 /s/ Hongfei Chen --------------------------- --------------------------- Hongfei Chen EX-10.26 3 SUPPLEMENTAL AGREEMENT EXHIBIT 10.26 Dated 1st March, 2000 --------------------- (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) SUNBASE INTERNATIONAL (HOLDINGS) LIMITED and (7) EXTENSIVE RESOURCES LIMITED and (8) GLORY MANSION LIMITED and (9) WARDLEY CHINA INVESTMENT TRUST and (10) MC PRIVATE EQUITY PARTNERS ASIA LIMITED and (11) CHINE INVESTISSEMENT 2000 ________________________________________________ SUPPLEMENTAL AGREEMENT in respect of certain arrangements relating to CHINA BEARING HOLDINGS LIMITED ________________________________________________ Chao and Chung Table of Contents -----------------
Description Page No. ----------- -------- 1. INTERPRETATION 2 2. CONDITION 3 3. AGREEMENT 4 4. COMPLETION 4 5. EFFECT OF THIS AGREEMENT 6 6. COSTS AND EXPENSES 6 7. GOVERNING LAW AND JURISDICTION 6 8. GENERAL PROVISIONS 6 9. COUNTERPARTS 7 SCHEDULE 1 8 Form of the New Share Mortgage 8 SCHEDULE 2 19 Form of the Release 19 SIGNATURE PAGES 24 ANNEXURE 1 FORM OF THE ESCROW LETTER ANNEXURE 2 FORM OF THE CONSENT
THIS AGREEMENT is made on the 1/st/ day of March, 2000. (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) SUNBASE INTERNATIONAL (HOLDINGS) LIMITED the registered office of which is at 19th Floor, 51-57 Gloucester Road, Wanchai, Hong Kong ("SIHL"); (7) EXTENSIVE RESOURCES LIMITED, the registered office of which is at P.O. Box 71, Craigmuir Chambers, Road Town, Tortola, British Virgin Islands ("ERL"); (the parties at (1), (2), (3), (4), (5), (6) and (7) hereinafter collectively referred to as "Sunbase Parties"); (8) GLORY MANSION LIMITED, the registered office of which is at Craigmuir Chambers, P.O. Box 71, Road Town, Tortola, British Virgin Islands ("GML"); (9) 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"); (10) 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 (11) 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 (8), (9), (10) and (11) hereinafter collectively referred to as the "Investors" and each an "Investor") WHEREAS:- (A) The parties hereto (except SIHL and ERL) entered into the Subscription Agreement (as defined below) under which the Investors subscribed for Debentures of an aggregate principal value of $11,500,000. (B) The Sunbase Parties (except SIHL and ERL) breached certain of their obligations under the Subscription Agreement and the Investors agreed not to exercise their rights under the Subscription Agreement in relation thereto subject to and upon the terms and conditions set out in the Settlement Agreement (as defined below). (C) Certain obligations of the Sunbase Parties under the Settlement Agreement have not been complied with. (D) SAI and SPC have entered into an agreement with William McKay as purchaser and with Samuel T. Mok as voting trustee for all of the issued and outstanding shares of capital stock of SPC whereby SAI will sell its entire interests in its subsidiary, SPC. (E) The parties hereto agree to supplement the repayment arrangements contemplated in the Settlement Agreement on the terms and conditions set out herein. NOW IT IS HEREBY AGREED as follows:- 1. INTERPRETATION -------------- (A) In this Agreement:- "Completion" means performance by the parties hereto of their respective obligations set out in Clause 4; "Completion Amount" means the sum of $2,600,000 payable by the Company to the Investors at Completion; "Consent" means a letter of consent in the form annexed hereto as Annexure 2 in connection with the Sale; "Escrow Agent" means Jenkens & Gilchrist of 1919 Pennsylvania Avenue, NW Suite 600, Washington D.C. 20006-3404; 2 "Escrow Letter" means an escrow letter in the form annexed hereto as Annexure 1 given or to be given by the Investors to the Escrow Agent in connection with, inter alia, the Completion Amount; "Existing Share Mortgage" means the Deed of Mortgage dated 16/th/ October, 1998 relating to 1,000,000 issued shares in the capital of Tianjin Development Holdings Limited executed by ERL in favour of Brilliant Future Holdings Limited pursuant to the Settlement Agreement; "New Share Mortgage" means the form of share mortgage set out in Schedule 1; "Release" means the release of the Guarantee in the form as set out in Schedule 2; "Sale" the sale by SAI of its entire interests in SPC in accordance with the agreement referred to in Recital (D); "Settlement Agreement" means an agreement dated 16/th/ October, 1998 made between the parties hereto in respect of the Debentures issued by the Company; "Subscription Agreement" means an agreement dated 2nd August, 1996 relating to the subscription by the Investors for the Debentures issued by the Company; and "$" means United States dollars, the lawful currency of the United States of America. (B) In this Agreement, unless otherwise defined, words and expressions defined in the Settlement Agreement (including the schedules thereto) or in the Subscription Agreement as adopted for use in the Settlement Agreement, when used in this Agreement, bear the same respective meanings in this Agreement. 2. CONDITION --------- The obligations of the respective parties hereto under this Agreement are conditional on (i) the Consent being duly executed by the parties thereto upon signing of this Agreement; (ii) the Release being duly executed by the parties thereto upon signing of this Agreement and the same having been delivered to the Escrow Agent by GML (as hereby expressly authorised by all parties 3 hereto) pursuant to the Escrow Letter; and (iii) the Sale being completed on or before 10/th/ April, 2000 (or such later date as may be agreed by the Investors in writing), to the intent that none of the parties shall be bound by any provisions herein unless the Sale is completed on or before the said date. 3. AGREEMENT --------- 3.1 The parties hereto agree to supplement the terms and conditions of the Settlement Agreement as follows:- (A) the Company shall pay to the Investors on Completion the Completion Amount in settlement of such part of the principal amount and interest as equivalent to the Completion Amount comprised in those outstanding repayment instalments specified in the Repayment Schedule which are overdue for repayment as at the date of Completion (the "Overdue Amount"); (B) the remaining balance of the outstanding overdue repayment instalments shall remain immediately repayable and all subsequent repayment instalments set out in the Repayment Schedule respectively falling due for payment by the Company thereafter shall remain due and payable on the respective dates specified therefor in the Repayment Schedule; (C) ERL shall execute the New Share Charge in favour of Brilliant Future Holdings Limited (as trustee for an on behalf of the Investors) in replacement of the Existing Share Mortgage on Completion; and (D) upon receipt of the New Share Charge duly executed, the Investors will execute the Release, and will send by courier the Release to the Escrow Agent in accordance with the terms of the Escrow Letter. 4. COMPLETION ---------- (A) Completion shall take place at the offices of Chao and Chung at Suites 2601-5, Asia Pacific Finance Tower, Citibank Plaza, 3 Garden Road, Hong Kong on the second Business Day (or such other day as the Company, SAI and the Investors may agree) following the last to occur (i) completion of the Sale; (ii) receipt by the Investors from the Escrow Agent of the Completion Amount pursuant to the Escrow Letter; and (iii) release of the Release by the Escrow Agent pursuant to the Escrow Letter. (B) At Completion, the following transactions shall take place:- (1) the Company shall:- (i) deliver to the Investors a certified copy of the board resolution 4 of the Company approving and authorising execution and completion of this Agreement and resolving to effect and do all that is necessary to give effect to this Agreement; (ii) deliver to the Investors a certified copy of the board resolution of SAI approving and authorising execution and completion of this Agreement and resolving to effect and do all that is necessary to give effect to this Agreement and the Guarantee; (iii) deliver to the Investors a certified copy of the board resolution of CIBHL approving and authorising the execution and completion of this Agreement and resolving to effect and do all that is necessary to give effect to this Agreement and the Guarantee; (iv) deliver to the Investors a certified copy of the board resolution of ACL approving and authorising the execution and completion of this Agreement and resolving to effect and do all that is necessary to give effect to this Agreement and the ACL Undertaking; (v) deliver to the Investors a certified copy of the board resolution of SIHL approving and authorising the execution and completion of this Agreement and resolving to effect and do all that is necessary to give effect to this Agreement; and (vi) deliver evidence satisfactory to the Investors that the Company has effected payment by cashier order to Chao and Chung in respect of all the costs and expenses referred to in Clause 6 hereof, the amount of which shall be notified to the Company by the Investors prior to Completion; (2) ERL shall execute and deliver to Brilliant Future Holdings Limited the New Share Mortgage and the board resolution of ERL approving and authorising the execution and completion of this Agreement and the New Share Charge and resolving to effect and do all that is necessary to give effect to this Agreement and the New Share Charge; and (C) All the events which are to take place at Completion shall take place simultaneously and no party shall be obliged to complete this Agreement unless the other parties simultaneously comply with their respective obligations contained in sub-clause (B) of this clause. (D) For the avoidance of doubt, the continuing obligations of the Sunbase Parties under the Settlement Agreement shall not cease as a result of Completion other than for SPC, whose continuing obligations under the Settlement Agreement are released by the operation and effect of the Release after Completion. 5 5. EFFECT OF THIS AGREEMENT ------------------------ Provided that Completion takes place as provided in Clause 4 the Settlement Agreement shall thenceforth be read and construed and will continue to take effect subject only to the express modification provided herein and for this purpose each of the Sunbase Parties hereby agrees, acknowledges and declares that it shall continue to be bound of each and all of the undertakings, covenants, obligations and agreements on its part undertaken in (as the case may be) the Settlement Agreement, the Guarantee, the ACL undertaking and the Existing Share Mortgage as the same is (and to the extent) expressly modified by this Agreement. But if Completion shall fail to take place as herein provided, all of the rights, obligations and liabilities of the respective parties under and pursuant to the Settlement Agreement, the Guarantee, the Undertaking and the Existing Share Mortgage shall be preserved. 6. COSTS AND EXPENSES ------------------ The legal costs incurred in connection with the preparation and negotiation of this Agreement and ancillary documentation shall be borne by the Company. 7. GOVERNING LAW AND JURISDICTION ------------------------------ 7.1 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. 7.2 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 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. 7.3 Each of the parties hereto irrevocably waives any objection it might now or hereinafter have to the courts referred to in Clause 7.1 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 of such courts is not a convenient or appropriate forum. 8. GENERAL PROVISIONS ------------------ 8.1 As regards any date or period time shall be of the essence of this Agreement. 6 8.2 This Agreement shall be binding on and enure for the benefit of the successors of each of the parties and shall not be assignable. 8.3 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. 8.4 Any right or remedy conferred by this Agreement on any party for breach of this Agreement shall be in addition and without prejudice to all other rights and remedies available to it in respect of that breach. 8.5 The Settlement Agreement as expressly modified by this Agreement constitutes the entire agreement between the parties with respect to its subject matter and shall (including the Repayment Schedule as modified as a result of the application of the Completion Amount as provided in Clause 3.1(A) above) remain binding on and enforceable against the parties thereto, and no variation of the Settlement Agreement as so modified shall be effective unless made in writing and signed by all of the parties. 8.6 Save and except the Subscription Agreement, the Settlement Agreement, the ACL Undertaking and the Guarantee or any other signed agreements in connection with the aforesaid, 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. 8.7 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. 9. 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. 7 SCHEDULE 1 ---------- Form of the New Share Mortgage ------------------------------ 8 EXHIBIT 10.26(a) Dated 1st March, 2000 --------------------------- Extensive Resources Limited AND Brilliant Future Holdings Limited ___________________________________ Deed of Mortgage relating to Shares in Tianjin Development Holdings Limited ___________________________________ Chao and Chung Hong Kong 9 THIS DEED is made on the 1st day of March 2000 BETWEEN (1) Extensive Resources Limited, a company incorporated in British Virgin Islands and having its registered address at P.O. Box 71, Craigmuir Chambers, Road Town, Tortola, British Virgin Islands (hereinafter referred to as the Chargor); and (2) Brilliant Future Holdings Limited, a company incorporated in British Virgin Islands and having its registered address at the offices of Offshore Incorporations Limited, P.O. Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands (hereinafter referred to as the "Chargee"). WHEREAS:- (A) The Chargor is the beneficial owner of the Mortgaged Shares (as defined hereinafter). (B) The Chargor agreed pursuant to the Settlement Agreement to charge in favour of the Chargee the Mortgaged Shares and executed the Existing Share Mortgage. (C) The Chargor has agreed pursuant to the Supplemental Agreement to execute this Deed in replacement of the Existing Share Mortgage. IT IS HEREBY AGREED as follows:- 1. Interpretation -------------- 1.1 Except as otherwise expressly provided, terms defined in the Supplemental Agreement shall have the same respective meanings when used in this Deed. 1.2 In this Deed the following expressions shall have the following meanings respectively:- "Disposal" means, any sale, assignment, exchange, transfer, concession, loan, lease, surrender of lease, tenancy, licence, direct or indirect reservation, waiver, compromise, release, dealing with or in or granting of any option, right of first refusal or other right or interest whatsoever or any agreement for any of the same and Dispose shall be construed accordingly; "Encumbrance" means any mortgage, charge, pledge, lien (other than a lien arising by statute or operation of law) or other encumbrance, priority or security interest, deferred purchase, title retention, leasing, sale-and repurchase 10 or sale-and leaseback arrangement whatsoever or in any assets, rights or interest of whatsoever nature and includes any agreement for any of the same; "Mortgaged Shares" means the 1,000,000 shares in the capital of Tianjin Development held by the Chargor to be mortgaged hereunder and for the time being subject to the charge created hereunder; "Settlement Agreement" means a settlement agreement dated 16th October, 1999 as modified by a supplemental agreement dated 1st March, 2000 relating to certain repayment arrangements of the Company; and "Tianjin Development" means Tianjin Development Holdings Limited, a company incorporated in Hong Kong and listed on The Stock Exchange of Hong Kong Limited. 1.3 In this Deed, unless the context otherwise requires:- (a) words and expressions defined in the Companies Ordinance (Cap. 32) of the Laws of Hong Kong shall bear the same meanings when used herein; (b) references to any statutes or statutory provision shall include any statute or statutory provision which amends, replaces or re- enacts, or has amended, replaced or re-enacted, it, and vice versa, and shall include any statuary instrument, order, regulation or other subordinate legislation made thereunder. (c) references to Clauses, paragraphs, Recitals and Schedules are to clauses and paragraphs of, and recitals and schedules to, this Agreement and references to sub-clauses are to sub-clauses of the clause in which the reference appears; (d) references to a "company' shall be construed so as to include any company, corporation or other body corporate, wherever and however incorporated or established; (e) references to a "person" shall be construed so as to include any individual, firm, company, government, state or agency of a state, local or municipal authority or government body or any joint venture, association or partnership (whether or not having separate legal personality); and (f) words importing the singular include the plural and vice versa, words importing one gender include every gender. 11 2. Share Mortgage -------------- 2.1 The Chargor, as beneficial owner, mortgages and agrees to mortgage to the Chargee (as trustee for and on behalf of the Investors) by way of first mortgage all of the Mortgaged Shares as a continuing security for the discharge of such obligations of the Company under the Settlement Agreement as shall fall to be performed. 2.2 In furtherance of the security constituted by this Deed the Chargor shall deliver to the Chargee the share certificates representing the Mortgaged Shares (and the Chargee hereby acknowledge receipt thereof) together with duly executed but undated sold notes, instruments of transfer in respect of the Mortgaged Shares in favour of the Chargee and/or its nominees. 3. Covenants --------- 3.1 The Chargor covenants with the Chargee:- (a) to reimburse to the Chargee all costs, charges and expenses which may be incurred by it under or arising out of this Deed or in connection with the Mortgaged Shares (but excluding any costs, charges and expenses incurred by the Chargee in connection with the preparation and negotiation of this Deed); (b) at all times to comply in all respects with any law or directive and any conditions in relation to this Deed and the Settlement Agreement; and (c) on demand made at any time after the security constituted by this Deed becomes enforceable, procure that the Mortgaged Shares are transferred into and registered in the share register of Tianjin Development in the name of the Chargee and/or its nominees. 3.2 The Chargor covenant with the Chargee that it will not create or permit to subsist any Encumbrance over or Dispose of the Mortgaged Shares (or the equity of redemption in relation to the same) except with the prior consent of the Chargee. 4. Share Rights ------------ 4.1 Until the security constituted by this Deed becomes enforceable, the Chargor shall be entitled to exercise any voting rights in respect of the Mortgaged Shares provided that the Chargor will not exercise, or permit the exercise of, voting rights in respect of any of the Mortgaged Shares in such manner as will, in the opinion of the Chargee, contravene any of the provisions of, or jeopardise any of the security created by this Deed and the Settlement Agreement. 12 4.2 Upon the security constituted by this Deed becoming enforceable the Chargee or its nominees, may (to the entire exclusion of the Chargor) at any time, at the Chargee's discretion, exercise any voting rights in respect of the Mortgaged Shares and all the powers given to trustees by Section 11(4) and (5) of the Trustee Ordinance (Cap.29) in respect of securities subject to a trust and all powers or rights which may be exercised by the person or persons in whose name or names the Mortgaged Shares are registered under the terms hereof or otherwise. 4.3 The Chargor (or as appropriate his nominee) shall be entitled to retain for its own benefit any dividends, distributions or other monies paid (and which the Chargee has agreed should be paid) on or in respect of the Mortgaged Shares prior to the security constituted by this Deed becoming enforceable. All dividends, distributions or other monies paid or payable on or in respect of the Mortgaged Shares at any other time or without the prior approval of the Chargee, if received by the Chargor or its nominee, shall be paid over to (and pending such payment shall be held on trust for) the Chargee. 5. Enforcement ----------- 5.1 The Chargee shall be entitled to declare all or any part of the security constituted by this Deed enforceable at any time immediately upon the breach of any of the obligations of the Company under the Settlement Agreement as the same is certified in writing by the Chargee. 5.2 Upon or at any time after the security constituted by this Deed has become enforceable, the Chargee shall have the right, at any time, without notice or any other action with respect to the Chargor, to take such steps as are necessary to effect a transfer of the Mortgaged Shares to itself (and/or its nominees) and/or sell the Mortgaged Shares or any of them in such manner, at such price or prices, without being responsible for any loss, as the Chargee may at its absolute discretion deem expedient, and the Chargee shall not be responsible for any loss from or through brokers or others employed in the sale of the Mortgaged Shares or for any loss or depreciation in value of any of the Mortgaged Shares arising from or through any cause whatsoever. The Chargee shall be entitled to reimburse itself out of the proceeds of sale all costs, charges and expenses incurred by it in such sale and is authorised to apply any net proceeds of the Mortgaged Shares towards payment of the outstanding principal and interest due from the Company to the Investors under the Settlement Agreement in proportion to the principal amounts of the Debentures held by each of the Investors respectively. 5.3 The Chargor agrees that upon any Disposal of the Mortgaged Shares or any other rights under this Deed, the Chargee may make or purport to make a statement in writing signed by the Chargee that this Deed is enforceable and that the power of sale has become exercisable which statement shall be conclusive evidence of the fact in favour of any purchaser or other person acquiring any of the Mortgaged Shares or other rights and every purchaser will 13 take the same free of any rights of the Chargor. The Chargor shall indemnify the Chargee against any claims or demands which may be made against the Chargee by such purchaser and any liability, loss, cost or expense which the Chargee may suffer or incur by reason of any defect in the Chargor's title to the Mortgaged Shares. 5.4 The Chargor agrees to waive any right to require that, prior to the enforcement of the security constituted by this Deed, proceedings be taken against the Chargor so that action be taken to realize the security held pursuant to this Deed. 6. Power of Attorney ----------------- 6.1 The Chargor, by way of security, irrevocably appoints the Chargee and each of its directors, officers and managers for the time being, with full power of substitution and delegation, to be his attorney acting singly or together and in his name, on his behalf to do all such assurances, acts or things as he ought to do under the covenants and provisions contained in this Deed and generally in his name and on his behalf to exercise all or any of the powers, authorities and discretions conferred by or pursuant to this Deed on the Chargee and generally to execute, seal and deliver and otherwise perfect any deed, assignment, transfer, assurance, agreement, instrument, or act which may in the opinion of the Chargee (or any substitute attorney) be required or considered proper, necessary or desirable for any of the purposes of this Deed. 6.2 The Chargor ratifies and confirms and agrees to ratify and confirm whatever any attorney mentioned in this clause does in the exercise or purported exercise of all or any of the powers, authorities and discretions under this clause. 7. Termination ----------- This Deed shall terminate automatically upon performance of all the obligations of the Company under the Settlement Agreement whereupon the Chargee shall:- (a) redeliver to the Chargor the share certificates and instruments of transfer in respect of the Mortgaged Shares or the remainder of them (if any); (b) generally take such other action as may be reasonably required at the cost of the Chargor to release the Chargor from and to discharge this Deed. 8. Indulgence ---------- This Deed and the rights of the Chargee under it shall not be discharged or in any way affected by:- 14 (a) any time, indulgence, waiver or consent at any time given to, or any compromise or composition entered into or made with, the Chargor or any other person or any other release (conditional or otherwise) of the Chargor or any other person; (b) any amendment, variation, supplement or notation, to or of the Settlement Agreement or any of them (whether or not the change effected by such amendment, variation, supplement or notation is material); (c) any assignment by the Chargee of their rights and obligations under the Settlement Agreement; (d) any defect, irregularity or deficiency in any provision of any of the Settlement Agreement, or the obligations of any party thereunder being or becoming terminated, invalid, illegal or unenforceable at any time and/or for any reason (whether or not known to the Subscriber); (e) any party thereto not being bound by the terms of the Settlement Agreement, whether as a result of any failure to execute, or any deficiency in the execution of, the same or as a result of any defect in or insufficiency or want of the necessary powers or any irregular or improper exercise thereof, whether or not known to the Chargee or for any other reason whatsoever; or (f) the insolvency, bankruptcy, dissolution, winding-up, liquidation, amalgamation, reconstruction, reorganization, charge in constitution, death or incapacity of the Chargor. 9. General ------- 9.1 The rights and remedies provided in this Deed are cumulative and not exclusive of any rights or remedies provided by law or under the Settlement Agreement. 9.2 Any provision of this Deed may be amended only if the Chargor and the Chargee agree in writing. 9.3 (A) Any notice or other communication given or made under this Agreement shall be in writing. (B) Any such notice or other communication shall be addressed as provided in sub-clause (C) and, if so addressed, shall be deemed to have been duly given or made as follows:- (i) if sent by personally delivery, upon delivery at the address of the relevant party; 15 (ii) if sent by post, two clear Business Days (if within Hong Kong) or 7 Business Days (if overseas) after the date of posting; and (iii) if sent by facsimile, when despatched; PROVIDED THAT if, in accordance with the above provisions, any such notice or other communication would otherwise be deemed to be given or made outside working hours, such notice or other communication shall be deemed to be given or made at the start of working hours on the next Business Day. "Working hours" means 9:00a.m. to 5:30p.m. on the Business Day. (C) The relevant addressee, address and facsimile number of each party for the purposes of this Agreement are:- (i) in the case of the Chargor:- Address: c/o China International Bearing Holdings Limited 19th Floor, First Pacific Bank Centre 51-57 Gloucester Road, Hong Kong Facsimile: (852) 2865 4293 Attention: Mr. Roger Li / Mr. Chen Hong Fei (ii) in the case of the Chargee:- Address: c/o HPEM, Level 17, 1 Queen's Road, Central, Hong Kong Facsimile: (852) 2845 9992 Attention: Mr. George Raffini/Ms. Glory Gunawan or in each case at or to such other address, facsimile number of individual as the receiving party may have notified the sending party provided that such notification shall only be effective on the date specified in the notification as the date on which the change is to take place or if no date is specified or the date specified is fewer than five clear Business Days after the date on which notice if given, the date falling five clear Business Days after notice of any change has been given. 9.4 The illegality, invalidity or unenforceablility of any provision of this Deed under the law of any jurisdiction shall not affect its legality, validity or enforceability under the law of any other jurisdiction nor the legality, validity or enforceability of any other provision. 16 9.5 This Deed shall enure to the benefit of the parties hereto and their respective permitted successors, assignees and transferees. 9.6 The Chargor and the Chargee may not assign or transfer any or all of their rights or obligations under this Deed. 10. Law --- This Deed shall be governed by and construed in accordance with the laws of Hong Kong. AS WITNESS whereof this Deed has been duly executed on the date first above written. 17 SEALED WITH THE COMMON SEAL ) OF EXTENSIVE RESOURCES LIMITED ) in the presence of:- ) SIGNED BY Tien-yo Chao ) AS DULY AUTHORISED ATTORNEY ) FOR AND ON BEHALF OF ) BRILLIANT FUTURE HOLDINGS LIMITED ) in the presence of:- ) 18 SCHEDULE 2 ---------- Form of the Release ------------------- 19 Exhibit 10.26(b) Dated 1st March 2000 -------------------------------------------- (1) Glory Mansion Limited and (2) Wardley China Investment Trust and (3) MC Private Equity Partners Asia Limited and (4) Chine Investissement 2000 and (5) Sunbase Asia, Inc. and (6) China International Bearing Holdings Limited and (7) Smith Acquisition Company, Inc _____________________________________ RELEASE _____________________________________ 20 THIS RELEASE is made this 1st day of March 2000 BY: (1) Glory Mansion Limited, the registered office of which is at Craigmuir Chambers, P.O. Box 71, Road Town, Tortola, British Virgin Islands ("GML"); (2) 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"); (3) 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"); (4) Chine Investissement 2000, a Luxembourg-registered Unit Trust, the registered office of which is at L1118 Luxembourg, 14 Rue Aldringen ("CI 2000"); (The parties referred to at (1), (2), (3) and (4) hereinafter collectively referred to as "Investors" and each an "Investor") (5) Sunbase Asia, Inc., the registered office of which is at 1280 Terminal Way, Suite 3, Reno Nevada 89502, United States of America ("SAI"); (6) China International Bearing Holdings Limited, the registered office of which is at 19th Floor, 51-57 Gloucester Road, Wanchai, Hong Kong ("CIBHL"); (The parties referred to at (5) and (6) hereinafter collectively referred to as "Continuing Guarantors" and each a "Continuing Guarantor"). (7) 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"); WHEREAS:- (A) SPC and the Continuing Guarantors signed a guarantee in favour of the Investors dated 16/th/ October, 1998 (the "Guarantee") securing payment of certain amounts (the "Debt") and performance of certain obligations. (B) In consideration of the Debt being partially discharged pursuant to a Supplemental Agreement dated 1/st/ March, 2000 executed between, inter alia, SPC, the Continuing Guarantors, the Investors and certain other parties, the Investors have agreed to discharge and release the obligations of SPC under the Guarantee on the terms and conditions contained herein. 21 NOW THIS RELEASE WITNESSETH that: 1. In consideration of the Debt being partially discharged pursuant to the Supplemental Agreement as referred to in Recital (B) above, the Investors hereby discharge and release SPC from all liabilities and obligations due and owing as at the date hereof by SPC to the Investors under the Guarantee or any other documents in connection with the Debt including without limit the Settlement Agreement dated 16/th/ October, 1998 and the Supplemental Agreement (the "Debt Documents"). 2. Each of the Continuing Guarantors hereby acknowledges that its continuing obligations under the Guarantee shall remain notwithstanding the execution of this Release and that it shall have no rights against SPC under the Guarantee upon signing of this Release. 3. This Release is governed by the laws of the Hong Kong Special Administrative Region of the People's Republic of China. IN WITNESS WHEREOF this Release has been executed this 1st day of March 2000 SIGNED by Tien-yo Chao ) duly authorised attorney for and on behalf ) of GLORY MANSION LIMITED ) in the presence of:- ) SIGNED by Tien-yo Chao ) duly authorised attorney for and on behalf ) of WARDLEY CHINA ) INVESTMENT TRUST ) in the presence of:- ) 22 SIGNED by Mr. Yasushi Okahisa ) duly authorised for and on behalf ) of MC PRIVATE EQUITY PARTNERS ) ASIA LIMITED ) in the presence of:- ) SIGNED by Tien-yo Chao ) duly authorised attorney ) for and on behalf ) of CHINE INVESTISSEMENT 2000 ) in the presence of:- ) The Common Seal of ) SUNBASE ASIA, INC. ) was hereunto affixed ) in the presence of:- ) 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 SMITH ACQUISITION ) COMPANY, INC. ) in the presence of:- ) 23 SIGNATURE PAGES --------------- SIGNED by /s/ Roger Li ) duly authorised for and on behalf ) of CHINA BEARING ) /s/ Roger Li HOLDINGS LIMITED ) in the presence of:- /s/ Hongfei Chen ) SIGNED by /s/ Roger Li ) duly authorised for and on behalf ) /s/ Roger Li of ASEAN CAPITAL LIMITED ) in the presence of:- /s/ Hongfei Chen ) SIGNED by /s/ Roger Li ) duly authorised for and on behalf ) of CHINA INTERNATIONAL ) /s/ Roger Li BEARING HOLDINGS LIMITED ) in the presence of:- /s/ Hongfei Chen ) SIGNED by /s/ Roger Li ) duly authorised for and on behalf ) /s/ Roger Li of SUNBASE ASIA, INC. ) in the presence of:- /s/ Hongfei Chen ) SIGNED by ) duly authorised for and on behalf ) SMITH ACQUISITION COMPANY, INC. ) /s/ Samuel Mok Trustee in the presence of:- ) 24 SIGNED by Tien-yo Chao ) duly authorised attorney for and on behalf ) /s/ Tien-yo Chao of GLORY MANSION LIMITED ) in the presence of:- /s/ Desmond Chow ) Desmond Chow Solicitor Hong Kong SAR SIGNED by Tien-yo Chao ) duly authorised attorney for and on behalf ) of WARDLEY CHINA ) /s/ Tien-yo Chao INVESTMENT TRUST ) in the presence of:- /s/ Desmond Chow ) Desmond Chow Solicitor Hong Kong SAR SIGNED by Mr. Yasushi Okahisa ) duly authorised for and on behalf ) of MC PRIVATE EQUITY PARTNERS ) /s/ Mr. Yasushi Okahisa ASIA LIMITED ) in the presence of:- /s/ Desmond Chow ) Desmond Chow Solicitor Hong Kong SAR SIGNED by Tien-yo Chao ) duly authorised attorney ) for and on behalf ) /s/ Tien-yo Chao of CHINE INVESTISSEMENT 2000 ) in the presence of:- /s/ Desmond Chow ) Desmond Chow Solicitor Hong Kong SAR SIGNED by /s/ Roger Li ) duly authorised for and on behalf ) of EXTENSIVE RESOURCES ) /s/ Roger Li LIMITED ) in the presence of:- /s/ Hengfei Chen ) 25 SIGNED by /s/ Roger Li ) duly authorised for and on behalf ) of SUNBASE INTERNATIONAL ) /s/ Roger Li (HOLDINGS) LIMITED ) in the presence of:- /s/ Hongtei Chen } 26 ANNEXURE 1 ---------- FORM OF THE ESCROW LETTER ------------------------- BY COURIER AND BY FAX (002-1-202-3261555) - ----------------------------------------- 1/st/ March, 2000 Jenkens & Gilchrist 1919 Pennsylvania Avenue, NW Suite 600 Washington D.C. 200060 Attn: Mr. Andrew C. Lynch / Mr. Christopher E. Ondeck - ----------------------------------------------------- Dear Sirs, Re: Monies to be held in Escrow ------------------------------- 1. We refer to (i) the Stock Purchase Agreement dated 31/st/ January entered into between Sunbase Asia, Inc ("SAI"), Samuel T. Mok, an investment group led by William McKay (the "Buyer") and Smith Acquisition Company Inc ("SPC") in connection with the sale and purchase of shares of capital stock of SPC (the "Sale"); and (ii) the Supplemental Agreement dated 1/st/ March, 2000 entered into between SAI, ourselves and certain other parties in connection with certain supplemental arrangements relating to repayments prescribed in a Settlement Agreement dated 16/th/ October, 1998. 2. For the purpose of facilitating completion of the Sale, we enclose a duly executed release (the "Release"), to be dated the day as mentioned in paragraph 4 below, in relation to the release of SPC from its obligations under the Guarantee dated 16th October, 1998. 3. You are instructed to hold the Release in escrow pending the transfer by you (solely from the proceeds of the Closing (as "Closing" is referred to and defined in the said Stock Purchase Agreement)) of the following respective amounts by telegraphic transfer into the following bank accounts:- The HSBC Private Equity Fund, L.P. ---------------------------------- -------------------------------------------------------------------------- Bank: HSBC Bank USA, New York 140 Broadway New York NY10015 U.S.A. SWIFT: MRMD US 33 -------------------------------------------------------------------------- Account name: HSBC International Trustee Limited a/c HPEF (General) -------------------------------------------------------------------------- Account no: 000-05073-3 -------------------------------------------------------------------------- Amount: US$1,356,522 -------------------------------------------------------------------------- Wardley China Investment Trust ------------------------------ -------------------------------------------------------------------------- Bank: Brown Brothers Harriman and Co., New York -------------------------------------------------------------------------- Account name: Royal Trust Corporation of Canada, London -------------------------------------------------------------------------- Account no: 7027436 -------------------------------------------------------------------------- SWIFT CODE: BBHCUS33 -------------------------------------------------------------------------- For further credit to: Wardley China Investment Trust -------------------------------------------------------------------------- Account no: 877653 -------------------------------------------------------------------------- Amount: US$452,174 -------------------------------------------------------------------------- MC Private Equity Partners Asia ------------------------------- -------------------------------------------------------------------------- Bank: Bangkok Bank Public Company Ltd Singapore -------------------------------------------------------------------------- 180 Cecil Street, Singapore 069546 -------------------------------------------------------------------------- Account no: 0700-388629-412 -------------------------------------------------------------------------- Account holder MC Private Equity Partners Asia -------------------------------------------------------------------------- Currency Type US$ ACU Call -------------------------------------------------------------------------- PIC of Bank Ms Sumalee (Tel: 65-229-7429) -------------------------------------------------------------------------- Amount: US$452,174 -------------------------------------------------------------------------- Chine Investissement 2000 ------------------------- -------------------------------------------------------------------------- Bank: Bank of America New York -------------------------------------------------------------------------- SWIFT: BWORFRPP -------------------------------------------------------------------------- Account name: Banque Worms, Paris -------------------------------------------------------------------------- For further credit to: Chine Investissement 2000 -------------------------------------------------------------------------- Account no.: 0356631361P -------------------------------------------------------------------------- IBAN Code: FR60-3099-8000-0303-5663-1361-P76 -------------------------------------------------------------------------- Amount: US$339,130 -------------------------------------------------------------------------- 4. Upon our receipt of the respective amounts and in the manner set out in paragraph 3 which should not be later than 15/th/ April, 2000 and subject to paragraph 5 below, we shall promptly notify you in writing and you may release and deliver the Release to the Buyer and insert as the date of the Release (which you are hereby authorised to do on our behalf) the day on which the Release is so released and delivered to the Buyer. Save as aforesaid, you shall not release or otherwise deal with the Release. 5. If we do not receive the sum and in the manner set out in paragraphs 3 on or before 15/th/ April, 2000, we shall have the right by written notice to you to demand the prompt return of the Release to us, whereupon you are obliged to return the Release by courier to Glory Mansion Limited (on behalf of itself and the rest of us), care of HSBC Private Equity (Asia) Limited at Level 17, 1 Queen's Road Central, Hong Kong. If the Release is not released pursuant to this letter by April 30, 2000, you have the option of returning the Release to us (by returning it to Glory Mansion Limited in the manner aforementioned), and upon such return of the Release the obligations of you arising from this letter shall cease and terminate. 6. You need to have no regard to the sufficiency, accuracy or genuineness of any notice or confirmation received by you in your capacity as escrow agent hereunder of any incapacity and limitation upon the powers of any person signing and issuing such notice or confirmation which appears on its face to be in order and may assume such notice or confirmation which appears on its face to be in order is correct and properly made. 7. This letter shall be governed by and construed in accordance with the laws of The Hong Kong Special Administrative Region of the People's Republic of China ("Hong Kong"). All disputes in connection with this letter shall be subject to the non-exclusive jurisdiction of the courts of Hong Kong. 8. This letter shall not be amended or varied except by written notification duly executed by all parties hereto. 9. By signing and acknowledging the terms of this letter, you irrevocably agree to strictly abide by and adhere to the provisions of this letter. 10. Please countersign below to acknowledge your agreement to the above.
Yours faithfully, /s/ Tien-yo Chao /s/ Tien-yo Chao - ------------------------------------ --------------------------------- Tien-yo Chao Tien-yo Chao Duly authorised attorney Duly authorised attorney for and on behalf for and on behalf of Glory Mansion Limited of Wardley China Investment Trust /s/ Yasushi Okahisa /s/ Tien-yo Chao - ------------------------------------ ---------------------------------------- Mr. Yasushi Okahisa Tien-yo Chao for and on behalf Duly authorised attorney of MC Private Equity Partners for and on behalf Asia Limited of Chine Investissement 2000
We hereby acknowledge and agree to the above terms. /s/ Nikelars F. Schalbame - ------------------------------- For and on behalf of Jenkens & Gilchrist Date: ANNEXURE 2 ---------- FORM OF THE CONSENT ------------------- CONSENT ------- THIS CONSENT (the "Consent") dated as of 1/st/ March, 2000 is delivered pursuant ------- to that certain Stock Purchase Agreement (the "Stock Purchase Agreement"), dated ------------------------ January 31, 2000, by and among SMITH ACQUISITION COMPANY D/B/A SOUTHWEST PRODUCTS COMPANY, INC., (the "Company"), SAMUEL T. MOK, as voting trustee, ------- SUNBASE ASIA, INC., and WILLIAM MCKAY ("Buyer"), as such agreement may be ----- amended. Subject to (i) the Supplemental Agreement dated 1st March, 2000 entered into among, inter alia, China Bearing Holdings Limited and several other parties ---------- with respect to certain supplemental repayment arrangements and (ii) our receipt of an aggregate sum of U.S. Two Million Six Hundred Thousand Dollars (U.S. $2,600,000) pursuant to an escrow letter signed between ourselves and Jenkens & Gilchrist in connection with the above matter, the signatories hereto consent to the sale of the Company to the Buyer, for a purchase price of not less than U.S. Three Million Five Hundred Thousand Dollars (U.S. $3,500,000). IN WITNESS WHEREOF, this Consent has been duly executed under seal by the parties hereto effective as of the date first above written. GLORY MANSION LIMITED /s/ Tien-yo Chao --------------------------------- By: Tien-yo Chao Duly authorised attorney for an on behalf of GLORY MANSION LIMITED WARDLEY CHINA INVESTMENT TRUST /s/ Tien-yo Chao ---------------------------------- By: Tien-yo Chao Duly authorised attorney for an on behalf of WARDLEY CHINA INVESTMENT TRUST MC PRIVATE EQUITY PARTNERS ASIA LIMITED /s/ Yasushi Okahisa --------------------------------------- By: Mr. Yasushi Okahisa Duly authorised for an on behalf of MC PRIVATE EQUITY PARTNERS ASIA LIMITED CHINE INVESTISSEMENT 2000 /s/ Tien-yo Chao --------------------------------------- By: Tien-yo Chao Duly authorised attorney for an on behalf of CHINE INVESTISSEMENT 2000 EX-10.27 4 FIRST AMENDMENT Exhibit 10.27 William McKay 2240 Buena Vista Irwindale, CA 91706 February 10, 2000 BY TELECOPY - ----------- Samuel T. Mok., Voting Trustee 1001 Connecticut Avenue, N.W. Suite 1035 Washington, D.C. 20036 Attention: Samuel T. Mok and also to, Sunbase Asia, Inc. Smith Acquisition Company d/b/a Southwest Products Company, Inc. Dear Ladies and Gentlemen: This letter agreement shall represent an amendment to that certain Stock Purchase Agreement (the "Stock Purchase Agreement") pursuant to which William ------------------------ McKay has agreed to acquire all of the issued and outstanding capital stock of Smith Acquisition Company d/b/a Southwest Products Company, Inc.. Section 1.2 of the Stock Purchase Agreement shall be amended read as ----------- follows: 1.2 Time and Place of Closing. (a) The closing of the transactions contemplated hereby (the "Closing") will take place on April 10, 2000, or such earlier date as the ------- parties may agree in writing (the "Closing Date"). The Closing shall be ------------ held at the offices of Jenkens & Gilchrist, 1919 Pennsylvania Ave., N.W., Suite 600, Washington, D.C. 20006, or such location as may be agreed upon by the parties. A substitute page that amends Section 1.2 to that effect is attached herewith (to replace page 1 of the Stock Purchase Agreement). Section 4.2 is amended to insert: "10,000,000 shares of common stock, no par value, and 4,000,000 shares of preferred stock, no par value". A substitute page that sets forth in Section 4.2 the number of issued and authorized shares of the Company is attached herewith (to replace page 4 of the Stock Purchase Agreement). WILLIAM MCKAY By: /s/ William Reed McKay ----------------------------------- Print Name: William Reed McKay ------------------------ AGREED AND ACCEPTED: SMITH ACQUISITION COMPANY D/B/A SOUTHWEST PRODUCTS COMPANY, INC. By: /s/ Samuel T. Mok ----------------------------------- Name: SAMUEL T. MOK ------------------------------ Title: CHAIRMAN ----------------------------- SAMUEL T. MOK Voting Trustee By: /s/ Samuel T. Mok ----------------------------------- Print Name: SAMUEL T. MOK ------------------------ SUNBASE ASIA, INC. By: /s/ Li Yuen Fai Roger ----------------------------------- Name: LI YUEN FAI ROGER ------------------------------ Title: CHIEF FINANCIAL OFFICER ----------------------------- EX-10.28 5 ASSIGNMENT OF RIGHTS Exhibit 10.28 ASSIGNMENT OF RIGHTS IN STOCK PURCHASE AGREEMENT WHEREAS: a. On January 31, 2000, William McKay entered into a Stock Purchase Agreement (the "Agreement") with Smith Acquisition Company, Inc., d/b/a Southwest Products Company, Inc. (the "Company"), Sunbase Asia, Inc. and Samuel T. Mok, Trustee, to purchase all of the outstanding stock of the Company from Sunbase Asia, Inc. and Samuel T. Mok, Trustee. b. The Agreement does not permit the assignment of a party's rights under the Agreement without the written consent of the other parties. c. As previously disclosed to the Trustee, William McKay wishes to purchase the Company stock with two other current management employees of the Company, so that their combined ownership of the Company will be William McKay - 70%, Frank P. Brothers - 15% and Gary S. Horany - 15%. d. The lender who will be financing the purchase has requested that its loan be made directly to the Company rather than the individual purchasers. e. In order to structure the purchase with a loan to the Company, William McKay, Frank P. Brothers and Gary S. Horany plan to create a new corporation which will actually purchase the stock of the Company and simultaneously merge with the Company, leaving the Company as the surviving corporation. That would place the loan with the Company as requested by the lender, and the Company would be owned 70% by William McKay, 15% by Frank P. Brothers and 15% by Gary S. Horany. 1 f. Accordingly, William McKay wishes to assign his right to purchase all of the stock of the Company to the new corporation to be formed under the name "McKay, Brothers & Horany Acquisition Corp.," the shares of which will be owned 70% by William McKay, 15% by Frank P. Brothers and 15% by Gary S. Horany. g. The Company, Sunbase Asia, Inc. and Samuel T. Mok, Trustee, wish to consent to that assignment. ACCORDINGLY: William McKay hereby assigns to McKay, Brothers & Horany Acquisition Corp., a corporation owned 70% by William McKay, 15% by Frank P. Brothers and 15% by Gary S. Horany, all of his right, title and interest in and to the Agreement, including all of his duties, obligations and responsibilities thereunder. William McKay acknowledges and agrees that this assignment to McKay, Brothers & Horany Acquisition Corp. will not relieve him personally of any of the duties, obligations and responsibilities he has under the Agreement or any other agreement or guaranty executed in connection therewith. Dated: March 24, 2000 /s/ William McKay ----------------------------- William McKay ACCEPTANCE OF ASSIGNMENT On behalf of McKay, Brothers & Horany Acquisition Corp., we hereby accept this assignment and agree to be bound by all of the duties, obligations and responsibilities of the purchaser under the Agreement. Dated: March 24, 2000 /s/ William McKay ------------------------------ William McKay 2 Dated March 24, 2000 /s/ Frank P. Brothers ______________________________ Frank P. Brothers Dated March 24, 2000 /s/ Gary S. Horany ______________________________ Gary S. Horany CONSENT TO ASSIGNMENT We hereby consent to the above assignment. Smith Acquisition Company, Inc. d/b/a Southwest Products Company, Inc. Dated: March 24, 2000 /s/ Samuel T. Mok --------------------------------- Samuel T. Mok, Chairman Sunbase Asia, Inc. Dated: March 27, 2000 /s/ Li Yuen Fai (Roger) --------------------------------- Li Yuen Fai (Roger), Chief Fin'l Officer Dated: March 24, 2000 /s/ Samuel T. Mok --------------------------------- Samuel T. Mok, Trustee 3 EX-10.29 6 SECOND AMENDMENT Exhibit 10.29 McKay, Brothers & Horany Acquisition Corp. 2240 Buena Vista Irwindale, CA 91706 April 10, 2000 BY TELECOPY - ----------- Sunbase Asia, Inc. Samuel T. Mok c/o Samuel T. Mok., Voting Trustee 1001 Connecticut Avenue, N.W. Suite 1035 Washington, D.C. 20036 Attention: Samuel T. Mok Gentlemen: Reference is made to that certain Stock Purchase Agreement dated January 31, 2000, by and among Smith Acquisition Company D/b/a Southwest Products Company, Inc., (the "Company"), Samuel T. Mok, as voting trustee, Sunbase Asia, ------- Inc., and William McKay (William McKay, together with his assignee, McKay, Brothers & Horany Acquisition Corp., the "Buyer"), as amended by a letter ----- agreement dated February 10, 2000 (the "Stock Purchase Agreement"). ------------------------ This letter agreement constitutes a second amendment to the Stock Purchase Agreement. The parties have agreed to extend the expiration date of the Stock Purchase Agreement to April 28, 2000, to increase by $300,000 the amount of earnest money deposited into escrow and to certain other changes as set forth below. The Stock Purchase Agreement is amended as follows: 1. Section 1.2(a) is amended to read as follows: 1.2 Time and Place of Closing. (a) The closing of the transactions contemplated hereby (the "Closing") will take place on April 28, 2000, or such earlier date as the ------- parties may agree in writing (the "Closing Date"). The Closing shall be ------------ held at the offices of Jenkens & Gilchrist, 1919 Pennsylvania Ave., N.W., Suite 600, Washington, D.C. 20006, or such location(s) as may be agreed upon by the parties. Sunbase Asia, Inc. Samuel T. Mok April 10, 2000 Page 2 2. Section 2.1 is amended to read as follows: 2.1 Purchase Price. The aggregate purchase price for the Company Shares shall be Three Million Five Hundred Thousand United States Dollars (US $3,500,000) (the "Purchase Price"). Buyer shall deliver to the Voting -------------- Trustee as earnest money, the aggregate amount of Four Hundred Thousand United States Dollars (US $400,000) as follows: (a) on the date of this Agreement, the amount of One Hundred Thousand United States Dollars (US $100,000), (b) on or prior to April 14, 2000, the amount of Two Hundred Thousand United States Dollars (US $200,000), and (c) on or prior to April 19, 2000, the amount of One Hundred Thousand United States Dollars (US $100,000). At Closing, the earnest money shall be offset against the Purchase Price, the balance of which shall be delivered by Buyer to Seller at Closing by wire transfer in immediately available federal funds to an account designated by Seller by written notice to Buyer given at least two days prior to the Closing Date. 3. Section 4.6 is amended to read as follows: 4.6 Absence of Obligations. Except as set forth on Schedule 4.6 hereto, Seller has not executed any agreement creating any obligation for the Company (other than those obligations addressed in Section 7.9 or Section 3.6). 4. The first sentence of Section 7.7 is amended to read as follows: In the event that Buyer shall fail to close the purchase of the Company for any reason other than a breach of this Agreement by Seller or the fact that a condition to Buyer's obligations to close set forth in Section 8.1 or Section 8.2 shall not have been satisfied, Seller shall be entitled to keep the $400,000 earnest money and Buyer shall promptly pay Seller the additional amount of $600,000. 5. A new Section 7.9 is added to read as follows: 7.9 Payment of Certain Obligations. At or prior to Closing, the ------------------------------ obligations of the Company to the Jenkens & Gilchrist and Oppenheimer, Wolff, Donnelly and Bayh shall have been paid in full by the Company. In the event that Sunbase Asia, Inc. Samuel T. Mok April 10, 2000 Page 3 the Company has not paid such amounts to Jenkens & Gilchrist and Oppenheimer, Wolff, Donnelly and Bayh, Buyer shall pay such amounts at or prior to Closing on behalf of the Company. Buyer acknowledges that the Company shall have the obligation to pay amounts owing to the United States offices of Ernst & Young. At or prior to the Closing, the Company shall pay $10,000 for legal fees and expenses of O'Melveny & Myers LLP incurred in connection with the Closing of this Agreement. In the event that the Company has not paid such amount to O'Melveny & Myers LLP, Buyer shall pay such amounts at or prior to Closing on behalf of the Company. Seller shall be responsible to pay all amounts owing to the Trustee through April 28, 2000. In the event the Closing occurs after May 1, 2000, the Company shall, at or prior to Closing, pay the Trustee the additional amount of $33,666 due to the Trustee under the compensation agreement relating to the Voting Trust. In the event that the Company has not paid such amount to the Trustee, Buyer shall pay such amounts at or prior to Closing on behalf of the Company. Notwithstanding the prior two sentences, Seller shall have no obligation to extend this Agreement past the date April 28, 2000. In the event the Company does not or cannot pay the obligations specified to be paid by the Company in this Section 7.9, such failure of payment shall not constitute a breach of this Agreement or otherwise limit Buyer's obligation under this Agreement and the Buyer shall pay such amounts as specified above. 6. The first sentence of Section 8.2(f) is deleted so that Section 8.2(f) reads in its entirety as follows: (f) Certain Obligations. The Company shall have been released from ------------------- any obligations to Seller (including any amounts owing as intercompany loans or capital investment) and to Seller's debenture holders, such release is to be effective upon the debenture holders' receipt of immediately available funds in the amount of U.S.$2.6 million at Closing. Sunbase Asia, Inc. Samuel T. Mok April 10, 2000 Page 4 Please indicate your agreement with the foregoing by signing this letter agreement below, whereupon the Stock Purchase Agreement shall be amended as provided herein. BUYER: MCKAY, BROTHERS & HORANY ACQUISITION CORP. By: /s/ William Reed McKay ------------------------------ Print Name: William Reed McKay --------------------- GUARANTOR: WILLIAM MCKAY /s/ William McKay --------------------------------- Agreed and Accepted: SMITH ACQUISITION COMPANY D/B/A SOUTHWEST PRODUCTS COMPANY, INC. By: /s/ Samuel T. Mok ------------------------ Name: Samuel T. Mok ----------------------- Title: Chairman --------------------- Sunbase Asia, Inc. Samuel T. Mok April 10, 2000 Page 5 SAMUEL T. MOK Voting Trustee By: /s/ Samuel T. Mok ----------------------------- Print Name: Samuel T. Mok ----------------------- SUNBASE ASIA, INC. By: /s/ Roger Li ---------------------------- Name: ROGER LI ---------------------------- Title: CHIEF FINANCIAL OFFICER ---------------------------- EX-10.30 7 MODIFICATION AGREEMENT EXHIBIT 10.30 MODIFICATION AGREEMENT THIS MODIFICATION AGREEMENT ("Modification Agreement") is entered into as of the 15/th/ day of April, 2000 by the undersigned parties. RECITALS -------- A. On or about March 1, 2000, a certain Supplemental Agreement in respect of certain arrangements relating to China Bearing Holdings Limited (the "Supplemental Agreement") was executed by and among China Bearing Holdings, Limited, Asean Capital Limited, China International Bearing Holdings Limited, Sunbase Asia, Inc., Smith Acquisition Company, Inc. Sunbase International (Holdings) Limited, Extensive Resources Limited, Glory Mansion Limited, Wardley China Investment Trust, MC Private Equity Partners Asia Limited and Chine Investissement 2000; B. In connection with the Supplemental Agreement, a certain Release (the "Release") was executed by and among Glory Mansion Limited, Wardley China Investment Trust, MC Private Equity Partners Asia Limited. Chine Investissement 2000, Sunbase Asia, Inc., China International Bearing Holdings Limited and Smith Acquisition Company, Inc. which Release was undated and was delivered to Jenkens & Gilchrist, pursuant to the Escrow Letter described below; C. On or about March 1, 2000, a certain Escrow Letter (the "Escrow Letter") was executed by and among Glory Mansion Limited, MC Private Equity Partners Asia Limited, Wardley China Investment Trust, Chine Investissement 2000 and Jenkens & Gilchrist. D. Each of the Supplemental Agreement, the Release and the Escrow Letter contemplate the closing on or about April 10, 2000 of a certain Stock Purchase Agreement dated January 31, 2000 (the "Stock Purchase Agreement"), by and among Smith Acquisition Company D/b/a Southwest Products Company, Inc., Samuel T. Mok, as voting trustee, Sunbase Asia Inc., and William McKay, as amended. E. The parties to the Stock Purchase Agreement have agreed to extend the term of the Stock Purchase Agreement to April 28, 2000 with closing to take place on or prior to such date. F. The parties to the Supplemental Agreement, the Release and the Escrow Letter desire to indicate their agreement that the closing of the Stock Purchase Agreement can occur on or prior to April 28, 2000 without affecting the agreements of the parties set forth therein (other than as to the date of the closing of the Stock Purchase Agreement). NOW, THEREFORE, in consideration of the mutual covenants and conditions herein contained, the undersigned agree as follows:- 1. Modification to Supplemental Agreement. In each place where the date -------------------------------------- 10/th/ April, 2000 appears in the Supplemental Agreement such date is modified to be 28/th/ April, 2000. 2. Modification to Escrow Letter. In each place where the date 15/th/ April, ----------------------------- 2000 appears in the Escrow Letter such date is modified to be 4th May, 2000. In each place where the date 30/th/ April, 2000 appears in the Escrow Letter such date is modified to be 15/th/ May, 2000. 3. Counterparts. This Modification Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, this Modification Agreement has been duly executed under seal by the parties hereto effective as of the date first above written. GLORY MANSION LIMITED By: /s/ Tien-yo Chao ------------------------------------ Tien-yo Chao Duly authorised attorney for and on behalf of GLORY MANSION LIMITED WARDLEY CHINA INVESTMENT TRUST By: /s/ Tien-yo Chao ------------------------------------ Tien-yo Chao Duly authorised attorney for and on behalf of WARDLEY CHINA INVESTMENT TRUST 2 MC PRIVATE EQUITY PARTNERS ASIA LIMITED By: /s/ Yasushi Okahisa ------------------------------------- Mr. Yasushi Okahisa Duly authorised for and on behalf of MC PRIVATE EQUITY PARTNERS ASIA LIMITED CHINE INVESTISSEMENT 2000 By: /s/ Tien-yo Chao ------------------------------------- Tien-yo Chao Duly authorised attorney for and on behalf of CHINE INVESTISSEMENT 2000 CHINA BEARING HOLDINGS, LIMITED, By: /s/ Li Yeun Fai Roger --------------------------------- Name: Li Yeun Fai Roger --------------------------------- Title: Director --------------------------------- ASEAN CAPITAL LIMITED By: /s/ Li Yeun Fai Roger --------------------------------- Name: Li Yeun Fai Roger --------------------------------- Title: Director --------------------------------- 3 CHINA INTERNATIONAL BEARING HOLDINGS LIMITED By: /s/ Li Yeun Fai Roger --------------------------------- Name: Li Yeun Fai Roger --------------------------------- Title: Director --------------------------------- SUNBASE ASIA, INC. By: /s/ Li Yeun Fai Roger --------------------------------- Name: Li Yeun Fai Roger --------------------------------- Title: Chief Financial Officer --------------------------------- SMITH ACQUISITION COMPANY, INC. By: /s/ Samuel Mok --------------------------------- Name: Samuel Mok --------------------------------- Title: Voting Trustee --------------------------------- SUNBASE INTERNATIONAL (Holdings) LIMITED By: /s/ Li Yeun Fai Roger --------------------------------- Name: Li Yeun Fai Roger --------------------------------- Title: Director --------------------------------- EXTENSIVE RESOURCES LIMITED By: /s/ Li Yeun Fai Roger --------------------------------- Name: Li Yeun Fai Roger --------------------------------- Title: Authorised Representative --------------------------------- 4 EX-12.1 8 STATEMENT RE COMPUTATION OF RATIOS Exhibit 12.1 SUNBASE ASIA INC Statement re computation of ratios - ---------------------------------- 1. Earnings to fixed charges Earnings = (276,539) = (2.36):1 ----------------- --------- Fixed charges 117,239 2. Net profit margin Net earnings = (276,539) = (59.1%) ----------------- --------- Net Sales 468,087 3. Return on capital employed Net earnings = (276,539 = (1,446.9%) ----------------- -------- Capital employed 19,112 4. Current ratio Current assets = 1,058,112 = 0.74:01 ------------------- --------- Current liabilities 1,429,485 5. Fixed asset turnover Sales = 468,087 = 0.96 times ----------------- --------- Fixed assets 486,665 EX-27.1 9 FINANCIAL DATA SCHEDULE FOR FY 1999
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE ANNUAL PERIOD ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1,018 0 46,040 0 54,153 127,866 58,811 9,515 189,842 172,747 0 0 5,381 14 (3,088) 189,842 56,567 56,567 55,943 55,943 14,615 37,813 7,492 (59,296) 0 (31,161) (2,257) 0 0 (33,418) (2.37) (2.37)
EX-27.2 10 RESTATED FINANCIAL DATA SCHEDULE FOR FY 1998
5 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE ANNUAL PERIOD ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 2,298 0 59,909 0 68,937 155,868 67,379 0 229,554 148,412 0 0 5,365 14 29,876 229,554 57,266 57,266 43,726 55,846 0 0 8,029 (30,662) 0 (30,662) (357) 0 0 (17,636) (1.26) (1.26)
EX-27.3 11 RESTATED FINANCIAL DATA SCHEDULE FOR FY 1997
5 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE ANNUAL PERIOD ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 7,602 0 99,754 0 57,496 164,851 76,122 0 244,002 127,686 0 0 8,773 13 44,104 244,003 83,997 83,997 57,722 57,722 0 0 8,096 3,268 915 (176) (328) 0 0 (503) 0.04 0.04
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