<PAGE>
As filed with the Securities and Exchange Commission on December 11, 1996
=========================================================================
Registration No. 333-14665
==========================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
_________________________
SUNBASE ASIA, INC.
(Exact Name of Registrant as specified in its charter)
Nevada 3562 94-1612110
(State or Jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation Classification Code Number) Identification No.)
or organization)
____________________
19/F, First Pacific Bank Centre William McKay
51-57 Gloucester Road 2240 Buena Vista
Wanchai, Hong Kong Irwindale, California 91706
(852) 2877-3830 (818) 358-0181
(Address and telephone number, (Name, address and telephone
including area code of Registrant's number of agent for service)
principal executive offices)
COPIES TO:
David L. Ficksman, Esq.
Loeb & Loeb LLP
1000 Wilshire Boulevard
Los Angeles, California 90017
(213) 688-3698
Facsimile (213) 688-3460
____________________
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after the effective date of this registration
statement.
If the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box: [X]
<PAGE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
ii
<PAGE>
SUBJECT TO COMPLETION, Dated, December 11, 1996
PRELIMINARY PROSPECTUS
----------------------
SUNBASE ASIA, INC.
1,000,000 SHARES OF COMMON STOCK
($.001 PAR VALUE)
This Prospectus relates to the sale of up to 1,000,000 shares (the
"Shares") of Common Stock, par value $.001 per share (the "Common Stock"),
of Sunbase Asia, Inc. (the "Company") which may be offered by certain
Selling Shareholders. The Shares were acquired by the Selling Shareholders
in a private placement as described under the caption "Selling
Shareholders" herein. The Selling Shareholders may offer the Shares for
sale as described under the caption "Plan of Distribution." The expenses of
the offering, estimated at $102,672, will be paid by the Company. The
Company will not receive any proceeds from the sale of the Shares by the
Selling Shareholders.
The Common Stock currently trades on the Nasdaq National Market
("Nasdaq") under the symbol "ASIA." On December 6, 1996, the closing sale
price of the Common Stock as reported by Nasdaq was $6-5/16, per share.
See "Price Range of Common Stock." Prospective investors should carefully
consider the matters discussed under the caption "Risk Factors" on page 9.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================
Underwriting
Discounts and Proceeds to Selling
Common Stock Price to Public(1) Commissions(2) Shareholders
===================================================================================
<S> <C> <C> <C>
Per Share $ 6-5/16 N/A $ 6-5/16
Maximum Total $6,312,500 N/A $6,312,500
===================================================================================
</TABLE>
(1) Based on the average of the high and low price of the Company's Common
Stock as reported on the Nasdaq National Market as of December 6,
1996.
(2) No underwriter will participate in any sales on behalf of the Selling
Shareholders. See "PLAN OF DISTRIBUTION." All expenses of the
offering, which are estimated to be $102,672, will be paid by the
Company.
THE DATE OF THIS PROSPECTUS IS DECEMBER __, 1996
1
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the
Securities and Exchange Commission (the "Commission"). Such reports and
other information filed by the Company can be inspected and copied at the
public reference facilities of the Commission at Judiciary Plaza, Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at Seven World Trade Center, 13th Floor,
New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can
be obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company has filed with the Commission a Registration Statement on
Form S-1 (the "Registration Statement") under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the Shares offered
hereby. This Prospectus which constitutes part of the Registration
Statement does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Shares offered hereby,
reference is made to the Registration Statement and to the financial
statements, schedules and exhibits filed as a part thereof. Statements
contained in this Prospectus as to the contents of any contract, agreement
or any other document are not necessarily complete and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement or otherwise with the Commission, each such
statement being qualified in all respects by such reference, schedules and
exhibits. The Registration Statement, including all exhibits thereto, may
be inspected without charge at the Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained
from such office after payment of the fees prescribed by the Commission.
CURRENCY OF PRESENTATION
The Company publishes its financial statements in Renminbi yuan, the
lawful currency of the People's Republic of China ("Renminbi or "Rmb"). In
this Prospectus, references to "US$" or "US dollars" are to United States
dollars. Translations of amounts from Renminbi to US dollars are for the
convenience of the reader and for reference only. No representation is made
that the Renminbi amounts could have been, or could be, converted into U.S.
dollars at any certain rate.
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES
Most of the Company's officers and directors and certain of the
Selling Shareholders reside outside the United States and all of the assets
of these persons and a substantial portion of the assets of the Company are
located outside of the United States. As a result, it may not be possible
for investors to effect service of process within the United States upon
such persons, or to enforce against the Company's assets or such persons
judgments obtained in United States courts predicated upon the liability
provisions of the United States securities laws. There is substantial doubt
as to the enforceability against a substantial portion of the Company's
assets or any of its directors and officers located outside the United
States in original actions or in actions for enforcement of judgments of
United States courts of liabilities predicated solely on the civil
liability provisions of the Federal securities laws.
The Company has been advised that no treaty exists between Hong
Kong and the United States providing for the reciprocal enforcement of
foreign judgments. However, the courts of Hong Kong are generally prepared
to accept a foreign judgment as evidence of a debt due. An action may then
be commenced in Hong
2
<PAGE>
Kong for recovery of this debt. A Hong Kong court will only accept a
foreign judgment as evidence of a debt due if: (i) the judgment is for a
liquidated amount in a civil matter; (ii) the judgment is final and
conclusive and has not been stayed or satisfied in full; (iii) the judgment
is not directly or indirectly for the payment of foreign taxes, penalties,
fines or charges of a like nature (in this regard, a Hong Kong court is
unlikely to accept a judgment for an amount obtained by doubling, trebling
or otherwise multiplying a sum assessed as compensation for the loss or
damage sustained by the person in whose favor the judgment was given); (iv)
the judgment was not obtained by actual or constructive fraud or duress;
(v) the foreign court has taken jurisdiction on grounds that are recognized
by the common law rules as to conflict of laws in Hong Kong (vi) the
proceedings in which the judgment was obtained were not contrary to natural
justice (i.e., the concept of fair adjudication); (vii) the proceedings in
which the judgment was obtained, the judgment itself and the enforcement of
the judgment are not contrary to the public policy of Hong Kong; (viii) the
person against whom the judgment is given is subject to the jurisdiction of
the Hong Kong court; and (ix) the judgment is not on a claim for
contribution in respect of damages awarded by a judgment which does not
satisfy the foregoing. Enforcement of a foreign judgment in Hong Kong may
also be limited or affected by applicable bankruptcy, insolvency,
liquidation, arrangement, moratorium or similar laws relating to or
affecting creditors' rights generally and will be subject to a statutory
limitation of time within which proceedings may be brought.
3
<PAGE>
PROSPECTUS SUMMARY
This Prospectus contains certain statements of a forward-looking
nature relating to future events or the future financial performance of the
Company. Prospective investors are cautioned that such statements are only
predictions and that actual events may differ materially. In evaluating
such statements, prospective investors should specifically consider the
various factors identified in this Prospectus, including the matters set
forth under the caption "Risk Factors," which would cause actual results to
differ materially from those indicated by such forward-looking statements.
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial
Statements and notes thereto, appearing elsewhere in this Prospectus.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Securities........ 1,000,000 shares of Common
Stock, $.001 par value per share,
offered by the Selling Shareholders.
Use of Proceeds... The Company will not receive any
proceeds from this offering.
Risk Factors...... Investment in the Company
involves certain risks. See "Risk
Factors."
NASDAQ symbol Common Stock ........ ASIA
The Company's Common Stock is
quoted on the NASDAQ National
Market.
</TABLE>
4
<PAGE>
THE COMPANY
Sunbase Asia, Inc., a Nevada corporation (the "Company," which term
shall include, unless the context so requires, its subsidiaries and
affiliates), is engaged in the design, manufacture and distribution of a
broad range of bearing products in the People's Republic of China ("China"
or the "PRC"), and the United States ("US"). The Company also distributes
its bearing products in Europe, Asia, South America and Africa. The
Company's subsidiary in China, Harbin Bearing Company, Ltd. ("Harbin
Bearing"), employs approximately 13,000 employees. Harbin Bearing is the
largest precision bearing manufacturer and the third largest bearing
manufacturer overall in China. Harbin Bearing produces a wide variety of
precision and commercial-grade rolling-element bearings in sizes ranging
from 10mm to 1000mm (internal diameter). Rolling-element bearings use small
metal balls or cylinders to facilitate rotation with minimal friction and
are typically used in vehicles, aircraft, appliances, machine tools,
general machinery and virtually any other product that contains rotating or
revolving parts. Precision bearings are bearings that are produced to more
exacting dimensional tolerances and to higher performance characteristics
than standard commercial bearings. The manufacturing process for precision
bearings generally requires the labor of highly-skilled machinists and the
use of sophisticated machine tools.
On January 16, 1996 (effective December 29, 1995), the Company acquired
Smith Acquisition Company, Inc., d/b/a Southwest Products Company
("Southwest Products"), an engineering-intensive company located in
Southern California, that produces precision spherical bearings for US,
European and Asian aerospace and high tech commercial applications and the
US military.
Over 90% of Harbin Bearing's sales are made to the OEM and replacement
markets in China. Based on low production costs in China and the on-going
world-wide demand for bearings, management intends to create a substantial
export business to complement the Company's strong domestic position in the
Chinese markets. Historically, Harbin Bearing export sales have been made
through trade intermediaries and by receiving customer orders that are
placed directly to its offices in China. Southwest Products has commenced
providing and will provide engineering and technical support, and has
commenced to and will market and distribute Harbin Bearing products
internationally, focusing on exports of the products to the US. In
addition, Southwest Products has begun to and will assist Harbin Bearing in
implementing US manufacturing methods, improving quality control procedures
and in developing new products at Harbin Bearing's facilities in China.
The Company's principal executive offices are located at 19/F First
Pacific Bank Centre, 51-57 Gloucester Road, Wanchai, Hong Kong, telephone
(852) 2865-1511.
5
<PAGE>
The following is a chart of the Company's organizational structure.
[Chart Appears Here]
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following summary financial data (expressed in thousands) have been
derived from the audited financial statements of Harbin Bearing General
Factory (the predecessor operating company to Harbin Bearing) for the year
ended December 31, 1993 and the audited financial statements of the Company
for the years ended December 31, 1994 and 1995, and the unaudited financial
statements of the Company for the nine month periods ended September 30,
1995 and 1996. All U.S. dollar amounts have been converted from Renminbi
based on the exchange rate on September 30, 1996 of $1.00 US to each Rmb
8.3 as quoted at the People's Bank of China. Due to the reorganization of
the Harbin Bearing General Factory on January 1, 1994, the 1993 financial
information was prepared on a pro-forma basis as if the acquisition of
China Bearing and Harbin Bearing had occurred on January 1, 1993. (See the
discussion after the table under the caption "Selected Consolidated
Financial Information").
<TABLE>
<CAPTION>
OPERATIONS DATA
Twelve Months Ended December 31 Nine Months Ended September 30
--------------------------------------------------- ---------------------------------
(UNAUDITED)
1993 1994 1995 1995 1995 1996 1996
RMB RMB RMB US$ RMB RMB US$
PROFORMA
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales 687,064 719,842 672,359 80,812 651,070 724,960 87,345
Cost of sales (439,417) (441,854) (381,377) (45,838) (397,584) (444,750) (53,584)
Gross profit 247,647 277,988 290,982 34,974 253,486 280,210 33,761
Selling, general and
administrative expense. (91,197) (95,218) (113,002) (13,582) (77,804) (91,731) (11,052)
Interest expense, net (40,638) (43,446) (48,446) (5,822) (36,060) (46,047) (5,548)
Foreign exchange gain/loss- - 725 - - -
Reorganization expenses (7,307) (7,307) - - - -
Income before income taxes 108,505 132,742 129,534 15,570 139,622 142,432 17,161
Provision for income taxes (16,700) (22,687) (20,472) (2,461) (21,497) (23,590) (2,842)
Income before minority
interests 91,805 110,055 109,062 13,109 118,125 118,842 14,319
Minority interests (50,495) (58,447) (54,967) (6,607) (59,168) (64,926) (7,823)
Net income 41,310 51,608 54,095 6,502 58,957 53,916 6,496
BALANCE SHEET DATA
AT SEPTEMBER 30, 1996
------------------------------
RMB US$
Current Assets 1,224,827 147,571
Working Capital 488,671 58,876
Long-Term Debt 262,002 31,567
Minority Interests 408,068 49,165
Shareholders' Equity 419,880 50,587
Total Assets 1,826,106 220,014
</TABLE>
7
<PAGE>
RISK FACTORS
The following risk factors should be carefully considered in
addition to the other information contained in this prospectus:
RISKS RELATING TO OPERATING IN CHINA.
Because the production operations of the Company are based to a
substantial extent in China, the Company (through Harbin Bearing) is
subject to rules and restrictions governing China's legal and economic
system as well as general economic and political conditions in that
country. These include the following:
POLITICAL AND ECONOMIC MATTERS. Under its current leadership, the Chinese
government has been pursuing economic reform policies, which include the
encouragement of private economic activity and greater economic
decentralization. There can be no assurance, however, that the Chinese
government will continue to pursue such policies, or that such policies
will be successful if pursued. Changes in policies made by the Chinese
government may result in new laws, regulations, or the interpretation
thereof, confiscatory taxation, restrictions on imports, currency
devaluations or the expropriation of private enterprise which may, in turn,
adversely affect the Company. Furthermore, business operations in China
can become subject to the risk of nationalization, which could result in
the total loss of investments in China. Also, economic development may be
limited by the imposition of austerity measures intended to reduce
inflation, the inadequate development of an infrastructure, and the
potential unavailability of adequate power and water, transportation,
communication networks, raw materials and parts.
LEGAL SYSTEM. The PRC's legal system is a civil law system based on
written statutes. Unlike the common law system in the United States,
decided legal cases in the PRC have little value as precedents.
Furthermore, the PRC does not have a well-developed body of laws governing
foreign investment enterprises. Definitive regulations and policies with
respect to such matters as the permissible percentage of foreign investment
and permissible rates of equity returns have not yet been published,
statements regarding these evolving policies have been conflicting, and any
such policies, as administered, are likely to be subject to broad
interpretation and modification, perhaps on a case-by-case basis. As the
legal system in the PRC develops with respect to such new forms of
enterprise, foreign investors may be adversely affected by new laws,
changes in existing laws (or interpretation thereof) and the preemption of
provincial or local laws by national laws. Some of the Company's
operations in China are subject to administrative review and approval by
various national and local agencies of the PRC government. Although
management believes that the Company's operations are currently in
compliance with applicable administrative requirements, there is no
assurance that administrative approvals, when necessary or advisable, will
be forthcoming. In addition, although China has promulgated an
administrative law permitting appeal to the courts with respect to certain
administrative actions, this law appears largely untested in the context of
administrative approvals.
8
<PAGE>
INFLATION/ECONOMIC POLICIES. In recent years, the Chinese economy has
experienced periods of rapid growth and high rates of inflation, which
have, from time to time, led to the adoption by the PRC government of
various corrective measures designed to regulate growth and contain
inflation. In 1995, China's overall inflation rate was estimated to be
14.8%, compared to 21.4% in 1994 and 13.2% in 1993. High inflation has in
the past and may in the future cause the PRC government to impose controls
on prices, or to take other action which could inhibit economic activity in
China, which in turn could affect demand for the Company's products. The
Company carefully monitors the effects of inflation on its performance in
China, and Harbin Bearing is usually able to increase its selling prices to
shift a portion of its inflated costs to its customers. The price of
bearing steel, the major raw material used by Harbin Bearing, remained
fairly stable during 1994 and 1995 and the only major impact of inflation
on Harbin Bearing's costs was on the cost of labor (due to the rising level
of compensation of Harbin Bearing's employees). Due to economies of scale
and improved control of Harbin Bearing's production costs, management
believes that an increased inflation rate would have a favorable impact on
its market position, as smaller bearing manufacturers in China would have
greater difficulties in dealing with the effects of increasing inflation.
FOREIGN CURRENCY EXCHANGE. The Renminbi, the currency of China, is not a
freely convertible currency. Both conversion of Rmb into foreign
currencies and the remittance of Rmb abroad are subject to PRC government
approval. The Company earns the majority of its revenues, and incurs the
majority of its costs, in Rmb. Prior to January 1, 1994, Rmb that were
earned within the PRC were not freely convertible into foreign currencies
except with government permission, at rates determined in place at swap
centers, where the exchange rates often differed substantially from the
official rates quoted by the People's Bank of China. On January 1, 1994,
the People's Bank of China introduced a managed floating exchange rate
system based on the market supply and demand and proposed to establish a
unified foreign exchange inter-bank market among designated banks. In
place of the official rate and the swap center rate, the People's Bank of
China publishes a daily exchange rate for Rmb based on the previous day's
dealings in the inter-bank market. It is expected that swap centers will
be phased out in due course. However, the unification of exchange rates
does not imply full convertibility of Rmb into US Dollars or other foreign
currencies. Payment for imported materials and remittance of earnings
outside of China are subject to the availability of foreign currency which
is dependent on the foreign currency denominated earnings of the entity or
allocated to the Company by the government at official exchange rates or
otherwise arranged through a swap center with government approval.
Approval for exchange at the exchange center is granted to enterprises in
China for valid reasons such as purchases of imported goods and remittance
of earnings. While conversion of Rmb into US Dollars or other foreign
currencies can generally be effected at the exchange center, there is no
guarantee that it can be effected at all times. There is still uncertainty
as to how foreign investment enterprises will be treated under this new
system or whether the system will be changed again in the future. In the
event of shortages of foreign currency, Harbin Bearing may be unable to
convert sufficient Renminbi into foreign currency to enable it to comply
with foreign currency payment obligations it may have, including
distributions to the Company. In the event of a depressed market in
Renminbi, the cost of foreign currency could be sufficiently great to
9
<PAGE>
preclude Harbin Bearing from meeting foreign financial obligations it might
incur in the future or from paying distributions to the Company.
RECENT TURBULENT RELATIONS WITH THE U.S.; ENTRY INTO THE WORLD TRADE
ORGANIZATION. The United States has from time to time considered
revocation of China's most favored nation ("MFN") trade status, which
provides China with the trading privileges available generally to trading
partners of the United States, and the United States and China have
recently been involved in several controversies, including over the
protection in China of intellectual property rights. While the United
States and China have recently reached an agreement on the protection of
intellectual property rights that averted a trade war, there can be no
assurance that future controversies will not arise that again threaten the
status quo involving trade between the United States and China, or that the
United States will not revoke or refuse to extend China's MFN status. In
either of such eventualities, the business of the Company could be
adversely affected. In this regard, under MFN status, US bearing tariffs
are between 3.5% - 10.2%. If MFN status is lost, US tariffs would increase
to 35% - 67%. In addition, the United States has announced a change in
policy that may make it easier for China to join the World Trade
Organization (the "WTO"), the successor to the General Agreement on Tariffs
and Trade. However, if China does not joint the WTO, the Company and its
customers located in China may not benefit from the lower tariffs and other
privileges enjoyed by competitors located in countries which are members of
the world trade system and, as a result, the Company's business could be
adversely affected. However, the admission of China as a member of the WTO
could lead to increased foreign competition for Harbin Bearing. If China
becomes a member of the WTO, the Chinese government will likely be required
to reduce import restrictions and tariffs on bearing products.
POLITICAL AND ECONOMIC DEVELOPMENTS AFFECTING HONG KONG. The Company's
executive offices are located in Hong Kong. Accordingly the Company may be
materially adversely affected by factors affecting Hong Kong's political
situation and its economy or in its international political and economic
relations. Hong Kong is currently a British Crown Colony, but sovereignty
over Hong Kong will be transferred effective July 1, 1997 to China. As a
result, there can be no assurance as to the continued stability of
political, economic or commercial conditions in Hong Kong.
COMPETITION RISKS RELATING TO THE COMPANY.
Harbin Bearing's main competitors can be separated into three
principal groups: (i) two nationwide domestic bearing manufacturers with
wide product lines; (ii) small bearing production facilities which compete
on a local basis by manufacturing small-sized, commodity-type bearings; and
(iii) foreign bearing manufacturers. Competition is principally based on
pricing and quality considerations.
Chinese Competition
Harbin Bearing, Wafangdian Bearing Factory and Luoyang Bearing
Factory are the three largest bearing manufacturers in China, based on 1994
sales. The combined sales
10
<PAGE>
revenues of these three manufacturers accounted for 30% of the US $1.09
billion in the total sales revenue of China's bearing industry (figures are
approximate). By comparison, the aggregate sales revenue of the fourth,
fifth and sixth largest Chinese bearing manufacturers only account for
approximately 9.5% of the total sales revenue of China's bearing industry.
Wafangdian Bearing Factory does not produce high-precision aerospace-
quality rolling-element bearings, a market in which Harbin Bearing has a
70% domestic share (the remaining 30% market share is split among Luoyang
Bearing Factory and Hongshan Bearing Factory). In addition to the
manufacturers described above, there are approximately 270 other
manufacturers of rolling element bearings in China, including a number of
small bearing factories, located mainly in the coastal and southeastern
provinces, that were established after 1988 when demand for small-sized
bearings greatly exceeded the available supply. The bearings manufactured
by these small factories are generally of lower quality commercial grade
and are used mostly as replacement bearings in the electrical appliance and
agricultural equipment industry. Harbin Bearing's other significant
domestic competitors are mostly manufacturers that specialize in limited
and specific types of bearings.
Competition from Imports into China
Bearing manufacturers outside of China are able to supply types
and grades of bearings which are not available from Chinese domestic
suppliers, particularly precision bearings of the highest durability and
quality. Imported foreign bearings are generally higher in quality than
Chinese-manufactured bearings, but are also priced higher due to China's
low production costs and the assessment on imported bearings of a 15% or
20% import tariff. The 15% import tariff applies to bearings imported from
countries that have established a tax treaty with China and the 20% import
tariff applies to imports from other countries. Some foreign bearing
manufacturers have established bearing manufacturing facilities in China,
typically through joint ventures with local bearing manufacturers. Such
ventures, if successful, would likely increase competition for Harbin
Bearing in the higher-quality and precision-bearing market segments.
Competition in International Markets
In the international bearing markets, Harbin Bearing's main
competitors are Eastern European manufacturers and manufacturers located in
China. To a lesser extent, Harbin Bearing also competes with large
international bearing manufacturers such as Svenska Kugellager Fabriken
(SKF), Fisher Aktien Gesellschast (FAG), and New Technology Network (NTN).
Management believes that with the assistance of Southwest Products in
implementing US manufacturing methods and quality control procedures and in
developing new products, Harbin Bearing's general competitive position will
be substantially improved. In addition, Harbin Bearing will be able to
compete in market segments that demand products with higher precision
levels and will more effectively penetrate those market segments that
utilize commodity-type bearings.
11
<PAGE>
Leading industrial countries such as the US, Japan and countries
in Europe impose import tariffs on bearings. For example, the US import
tariff for bearings is 9% for ball bearings (a type of rolling element
bearing) and 5% for cylindrical bearings.
DEPENDENCE ON KEY EXECUTIVES
The Company's success depends to a significant extent upon the
contributions of its key management and technical personnel. The Company
believes that its future success will depend on large part upon its ability
to attract, retain and motivate highly skilled employees, who are in great
demand, particularly as to its operations in China.
CONTROL BY PRINCIPAL SHAREHOLDER
Asean Capital Limited ("Asean Capital") beneficially owns
10,111,000 shares of the Company's Common Stock (representing approximately
80.75% of the outstanding Common Stock assuming conversion of all of the
Company's Preferred Stock but before conversion of the Company's
Convertible Debentures and exercise of outstanding warrants and options)
and 36 shares of the Company's Series A Preferred Stock which in turn is
convertible into 3,600,000 shares of Common Stock and has 18,000,000 voting
rights (collectively, the "Asean Securities"). In turn, Sunbase
International (Holdings) Limited owns 90% of the capital stock of Asean
Capital. As a result, Sunbase International is in effective control of the
Company and has the ability to elect all the members of the Board of
Directors of the Company and influence significantly the approval of
important corporate transactions in other matters requiring shareholder
approval without the approval of the minority shareholders. See "Principal
Shareholders."
RELATED PARTY TRANSACTIONS
In the past, the Company has entered into business transactions
with certain affiliates and may continue to enter into such transactions in
the future. The Company has no current plans to do so and its policy is
not to enter into transactions with related persons unless the terms
thereof are at least as favorable to the Company as those that could be
obtained from unaffiliated third parties. See "Certain Relationships and
Related Transactions."
CERTAIN TAX CONSIDERATIONS
The Company is predominantly invested in foreign subsidiaries.
Those subsidiaries are subjected to taxes imposed on them in the foreign
jurisdictions in which they operate and in which they are organized.
Further, their income is subject to US federal and state income taxes when
distributed, deemed distributed or otherwise attributed to, the Company,
which is a US corporation. Complex US tax rules apply for purposes of
determining the calculation of those US taxes, the availability of a credit
for any foreign taxes imposed on the foreign subsidiaries or the Company
and the timing of the imposition of US tax.
12
<PAGE>
Normally, all foreign income earned by a US multinational
eventually will be subject to US tax. Income earned by a foreign branch of
a US company is taxable currently in the United States, and income earned
by a foreign subsidiary will be subject to US tax either in the year
distributed to the US as a dividend or in the year earned by means of
Subpart F, foreign personal holding company or other federal tax rules
requiring current recognition of certain income earned by foreign
subsidiaries.
All of the Company's direct and indirect foreign subsidiaries
constitute "controlled foreign corporations" ("CFCs") for purposes of the
Subpart F rules of the federal Internal Revenue Code. Among other
consequences of CFC status, "Subpart F income," as defined, of the
profitable foreign subsidiaries will be directly taxable to the Company,
whether or not distributed to the Company. In general, Subpart F income is
defined as the income and gains of the foreign subsidiary from its more
passive investment-type activities. Subpart F income extends, in general,
however, to include intercompany payments (e.g., payments of dividends,
interest, royalties, etc.) between related foreign group members. Thus,
for example, dividend distributions from the Company's indirect PRC and
Hong Kong subsidiaries to the Company's Bermuda subsidiary (China Bearing
Holdings Limited) would cause that dividend income of the Bermuda
subsidiary to be directly taxable to the Company, notwithstanding that
Bermuda does not tax such dividend income, and the Bermuda subsidiary does
not distribute that dividend income to the Company, but retains it.
Income earned in foreign countries often is subject to foreign
income taxes. In order to relieve double taxation, the US federal tax law
generally allows US corporations a credit against their US tax liability in
the year the foreign earnings become subject to US tax in the amount of the
foreign taxes paid on those earnings. The credit is limited, however,
under complex limitation rules, to, in general, the US (pre-credit) tax
imposed on the US corporation's foreign source income. Further, complex
rules exist for allocating and apportioning interest, research and
development expenses and certain other expense deductions between US and
foreign sources. Limiting provisions of the source rules decrease the
amount of foreign source income many US multinationals can generate.
Reduced foreign source income results in a smaller foreign tax credit
limitation, as the limitation is based on the ratio of foreign source net
income to total net income. Further, separate income baskets exist for
purposes of the foreign tax credit limitation, which makes it nearly
impossible to reduce the effective foreign tax rate on higher-taxed foreign
operating income by diluting income in the overall basket with relatively
low-taxed foreign investment income.
These rules can prevent US multinationals from crediting all of
the foreign taxes they pay. To the extent that foreign taxes are not
creditable, foreign source income bears a tax burden higher than the US tax
rate.
13
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE; OPTIONS AND WARRANTS
The Asean Securities were issued effective December 22, 1994 and
are deemed "restricted securities" under the Securities Act of 1933 (the
"Securities Act") and, as such, are subject to restrictions on the timing,
manner and volume of sales of such shares. On June 10, 1996, the Company
issued 1,000,000 shares of the Company's Common Stock (the "Private
Placement Shares") pursuant to a private placement. Under Registration
Rights Agreements between the Company and each of the investors in such
Private Placement, the Company has agreed to file a Registration Statement
covering the Private Placement Shares. This Prospectus is a part of such
Registration Statement. Upon and during the effectiveness of such
Registration Statement, the Private Placement Shares would be freely
tradable. In addition to the 3,600,000 shares of the Common Stock issuable
upon conversion of the Series A Preferred Stock which are included within
the Asean Securities, the Company has issued an aggregate of 6,800 shares
of Series B Preferred Stock which are convertible under certain
circumstances into an aggregate of 680,000 shares of Common Stock. The
shares of the Common Stock issuable upon conversion of the Series B
Preferred Stock will be deemed to be restricted shares, but, pursuant to
Rule 144, as presently in effect, will become eligible for sale in the
public market on or before January 16, 1998, subject to the volume and
limitations imposed by Rule 144 with respect to shares owned by William
McKay, the Company's President. Additionally, as of the date of this
Prospectus, there are 10,392,167 warrants outstanding to purchase an
aggregate of 148,459 shares of Common Stock at an exercise price of $175
per share, and an aggregate of 2,050,000 options to purchase Common Stock
granted pursuant to the Company's 1995 Stock Option Plan at exercise prices
ranging from $6.375 to $12.75 per share. On August 23, 1996, the Company
issued an aggregate of $11,500,000 principal amount of Convertible
Debentures (the "Convertible Debentures") to four institutional investors.
The Convertible Debentures are convertible at any time at an initial
exercise price of $5.00, which conversion price is subject to adjustment as
set forth in the Debenture documents. See "Description of Securities."
The holders of the Convertible Debentures have certain demand registration
rights with respect to the shares issuable pursuant to the conversion of
the Convertible Debentures. The Company also agreed to issue to an
investment banking firm in connection with the placement of the Convertible
Debentures warrants to purchase an aggregate of 240,000 shares at an
exercise price of $6.375 per share, one third of which is to be exercisable
on January 16, 1997, one third on January 16, 1998 and one third on January
16, 1999, with each such tranche to be available for exercise for a period
of six years commencing with the date of the earliest exercise thereof.
No prediction can be made as to the effect, if any, that sales of shares of
Common Stock will have on the market prices prevailing from time to time.
The possibility that substantial amounts of Common Stock may be sold in the
public market may adversely affect prevailing market prices for the Common
Stock and could impair the Company's ability to raise capital for the sale
of its equity securities. To the extent that outstanding options and
warrants are exercised or shares of Preferred Stock or the Convertible
Debentures are converted, dilution of the percentage ownership of the
Company's shareholders will occur, and any sales in the public market of
the Common Stock underlying such options, warrants, Convertible
14
<PAGE>
Debentures and Preferred Stock may adversely effect prevailing market
prices for the Common Stock.
PRICE RANGE OF COMMON STOCK
Commencing on February 9, 1996, the Company's Common Stock began
trading on the National Market of Nasdaq under the symbol ASIA. Prior
thereto, the Common Stock was listed for trading on the Nasdaq's Electronic
Bulletin Board (the "Bulletin Board") and on the Pink Sheets.
The following tables set forth the high and low closing prices of
the Company's Common Stock on Nasdaq or the Bulletin Board. Such prices
reflect prices between dealers in securities and do not include any retail
markup, markdown or commission and may not necessarily represent actual
transactions. There was no established trading market for the Company's
Common Stock during fiscal 1994.
<TABLE>
<CAPTION>
High Low
----- ------
<S> <C> <C>
Fiscal 1995
- -----------
Quarter Ended March 31, 1995 3 2
Quarter Ended June 30, 1995 5 1/2 2
Quarter Ended September 30, 1995 5 1/4 2
Quarter Ended December 31, 1995 6 4 1/2
Fiscal 1996
- -----------
Quarter Ended March 31, 1996 7-7/8 6-1/32
Quarter Ended June 30, 1996 8 6-1/2
</TABLE>
The approximate number of record security holders of the Common
Stock at October 5, 1996 was 1,700.
DIVIDEND POLICY
The Company has paid no cash dividends on its Common Stock and
has no present intention of paying cash dividends in the foreseeable
future. It is the present policy of the Board of Directors to retain all
earnings to provide for the growth of the Company. Payment of cash
dividends in the future will depend upon, among other things, future cash
flow, requirements for capital improvements and the ability to obtain
distributions from the Company's Chinese operations.
Applicable Chinese laws and regulations provide that a joint
stock company (such as Harbin Bearing) cannot distribute its after-tax
earnings and profits made in a fiscal year unless the losses of the
previous years have been made up and certain funds retained. A joint stock
15
<PAGE>
company is required by applicable Chinese Company Law to reserve 10% of its
after-tax earnings and profits as the mandatory retained fund and 5 - 10%
of its after-tax earnings and profits as the collective welfare fund. The
collective welfare fund must be used to finance buildings and other capital
expenditures for the collective staff benefits. The joint stock company
does not have to reserve for the mandatory retained fund if the amount of
such fund has reached 50% of a company's registered capital. For 1994 and
1995, Harbin Bearing contributed 10% and 5%, respectively, of after-tax
profits as determined under Chinese accounting principles for such
purposes. Distributions of dividends by Harbin Bearing to its shareholders
are required to be in proportion to each shareholder's percentage interest
in Harbin Bearing.
All distributions by Harbin Bearing will be paid to its
shareholders of record, which include the joint venture partners controlled
by the Company (See, Chart of the organizational structure on page 7.
Applicable Chinese laws and regulations require that, before a Sino-foreign
equity joint venture (such as the joint venture partners) distributes
dividends, it must: (1) satisfy all tax liabilities; (2) provide for losses
in previous years; and (3) make allocations of capital to its official
surplus accumulation fund and public welfare fund. The Company indirectly
owns 99% and 99.9% of the two joint venture partners and, therefore,
approximately 1.1% of distributions received by such partners will be paid
to the Chinese parties of these joint ventures.
Remittance of earnings outside of China is subject to certain
factors outside of the control of the Company. See "Risk Factors - Risks
Relating to Operating in China."
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial data (expressed in
thousands) have been derived from the audited financial statements of
Harbin Bearing General Factory (the predecessor operating company to Harbin
Bearing) for the year ended December 31, 1991, 1992 and 1993 and the
audited financial statements of the Company for the years ended December
31, 1994 and 1995, and the unaudited financial statements of the Company
for the nine month periods ended September 30, 1995 and 1996. All U.S.
dollar amounts have been converted from Renminbi based on the exchange rate
on September 30, 1996 of $1.00 US to each Rmb 8.3 as quoted at the People's
Bank of China. Due to the reorganization of the Harbin Bearing General
Factory on January 1, 1994, the 1993 financial information was prepared on
a pro-forma basis as if the acquisition of Harbin Bearing had occurred on
January 1, 1993. See "Organization of the Company" and "Certain
Relationship and Related Transactions." The pro forma adjustments are
described after the table. Due to the reorganization of the Harbin Bearing
General Factory on January 1, 1994 and the ownership by the Company of only
51.4% of Harbin Bearing, period to period comparisons of the selected
financial data are not meaningful.
16
<PAGE>
OPERATIONS DATA
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31
1991 1992 1993 1993 1994 1995 1995
RMB RMB RMB RMB RMB RMB US$
ACTUAL ACTUAL ACTUAL PROFORMA
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales 424,845 643,678 687,064 687,064 719,842 672,359 80,812
Cost of sales (335,882) (452,594) (441,467) (439,417) (441,854) (381,377) (45,838)
Gross profit 88,963 191,084 245,597 247,647 277,988 290,982 34,974
Selling, general and
administrative expense (80,136) (100,142) (94,685) (91,197) (95,218) (113,002) (13,582)
Interest expense, net (24,404) (27,986) (40,723) (40,638) (43,446) (48,446) (5,822)
Foreign exchange gain/loss - (566) (3,446) - 725 -
Reorganization expenses - - - (7,307) (7,307) - -
Income before income taxes (15,577) 62,390 106,743 108,505 132,742 129,534 15,570
Provision for income taxes (13,020) (11,123) (11,080) (16,700) (22,687) (20,472) (2,461)
Income before minority
interests N/A N/A N/A 91,805 110,055 109,062 13,109
Minority interests N/A N/A N/A (50,495) (58,447) (54,967) (6,607)
Net income (28,579) (51,267) 95,663 41,310 51,608 54,095 6,502
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
----------------------------------
(UNAUDITED)
1995 1996
RMB RMB US$
<S> <C> <C> <C>
Net sales 651,070 724,960 87,345
Cost of sales (397,584) (444,750) (53,584)
Gross profit 253,486 280,210 33,761
Selling, general and
administrative expense (77,804) (91,731) (11,052)
Interest expense, net (36,060) (46,047) (5,548)
Foreign exchange gain/loss - -
Reorganization expenses - -
Income before income taxes 139,622 142,432 17,161
Provision for income taxes (21,497) (23,590) (2,842)
Income before minority
interests 118,125 118,842 14,319
Minority interests (59,168) (64,926) (7,823)
Net income 58,957 53,916 6,496
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
DECEMBER 31
1991 1992 1993 1993 1994 1995 1995
RMB RMB RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C> <C> <C>
Current Assets 411,380 494,177 933,639 576,812 893,994 1,032,600 124,110
Working Capital 17,932 64,143 398,994 252,404 247,990 306,288 36,812
Long-Term Debt 83,390 145,442 440,366 216,915 235,656 218,383 26,248
Minority Interests - - - 229,728 288,175 343,142 41,243
Shareholders'
Equity 196,221 266,989 304,731 189,267 248,182 330,565 39,731
Total Assets 673,059 842,465 1,279,742 960,318 1,418,017 1,618,402 194,520
<CAPTION>
SEPTEMBER 30, 1996
RMB US$
<S> <C> <C>
Current Assets 1,224,827 147,571
Working Capital 488,671 58,876
Long-Term Debt 262,002 31,567
Minority Interests 408,068 49,165
Shareholders'
Equity 419,880 50,587
Total Assets 1,826,106 220,014
</TABLE>
17
<PAGE>
A description of the pro forma adjustments reflecting the effects of
the acquisition of Harbin Bearing (See "Organization of the Company" and
"Certain Relationships and Related Transactions") as follows:
(a) To adjust cost of sales for land use fees for the year ended
December 31, 1993;
(b) (i) To adjust cost of sales for depreciation in respect of the
assets owned by Harbin Bearing for the year ended December
31, 1993;
(ii) To adjust cost of sales for depreciation in respect of the
capital leases of fixed assets for the year ended December
31, 1993;
(iii) To adjust cost of sales for the lease rental charges in
respect of the lease of buildings for the year ended
December 31, 1993;
The actual depreciation charges expensed on the above assets
previously owned by the Harbin Bearing General Factory have been
reversed in the Pro Forma Consolidation Statement of Income;
(c) To adjust cost of sales for the reduction in depreciation
expenses as a result of the allocation of negative goodwill to
non-current assets;
(d) To adjust selling, general and administrative costs for the
management fees payable to Harbin Holdings and Sunbase
International (Holdings) Limited for the year ended December 31,
1993. The actual costs of the social support services previously
paid by Harbin Bearing General Factory reflected in cost of
sales, selling, general and administrative expenses, and other
expenses have been reversed in the Pro Forma Consolidated
Statement of Income;
(e) To adjust selling, general and administrative costs in respect of
trademark and administrative expenses incurred by China Bearing
in relation to Harbin Bearing for the year ended December 31,
1993;
(f) To adjust foreign exchange losses in respect of foreign currency
loans retained by the Predecessor;
(g) To adjust for interest expense in respect of the leases of fixed
assets for the year ended December 31, 1993;
(h) To adjust for interest expense in respect of the short term bank
loans retained by Harbin Holdings for the year ended December 31,
1993;
18
<PAGE>
(i) To adjust interest expense for the fair value effect of current
assets and liabilities as a result of using the purchase method
of accounting;
(j) To adjust interest expense for the 8% US$5 million promissory
note for the year ended December 31, 1993;
(k) To adjust for reorganization expenses for the year ended December
31, 1993 as a result of the reverse acquisition;
(l) To adjust the provision for income taxes to reflect the Chinese
income taxes applicable to joint stock enterprises from January
1, 1993 for Harbin Bearing; and
(m) To account for the effect of the minority interests.
The following table sets certain information concerning exchange
rates between Renminbi and US dollars for the periods indicated.
Noon Buying Rate
(expressed in RMB per US$)
<TABLE>
<CAPTION>
Period Period End Average High Low
- ------ ---------- ------- ---- ----
<S> <C> <C> <C> <C>
1991........... 5.45 5.34 5.45 5.24
1992........... 5.77 5.53 5.90 5.41
1993........... 5.81 5.78 5.82 5.71
1994........... 8.47 8.63 8.74 8.47
1995........... 8.34 8.37 8.50 8.29
January 1996... 8.33 8.34 8.34 8.33
February 1996.. 8.34 8.33 8.34 8.33
March 1996..... 8.35 8.34 8.35 8.33
April 1996..... 8.35 8.34 8.35 8.33
May 1996....... 8.36 8.35 8.50 8.32
June 1996...... 8.32 8.32 8.33 8.31
July 1996...... 8.27 8.32 8.33 8.27
August 1996.... 8.27 8.28 8.30 8.26
September 1996. 8.28 8.31 8.33 8.26
</TABLE>
19
<PAGE>
SUPPLEMENTARY FINANCIAL INFORMATION
Certain unaudited quarterly financial information is set forth in the
following table:
<TABLE>
<CAPTION>
Net
Net Gross Net Income
Sales Profit Income Per Share
(Thousands of Rmb, except per share data)
(Exchange Rate at 6/30/96: 8.32 Rmb to $1)
Rmb Rmb Rmb Rmb
<S> <C> <C> <C> <C>
1996
First Quarter 216,080 83,191 16,065 1.00
Second Quarter 249,609 96,581 16,817 1.04
Third Quarter 259,271 100,438 21,034 1.23
1995
First Quarter 198,854 76,758 15,238 1.00
Second Quarter 235,979 92,392 24,872 1.62
Third Quarter 216,237 84,336 18,846 1.23
Fourth Quarter 21,289 37,496 (4,861) (0.31)
1994
First Quarter 182,677 66,312 12,360 0.81
Second Quarter 208,362 80,259 21,715 1.42
Third Quarter 198,321 81,158 15,925 1.04
Fourth Quarter 130,482 50,259 1,608 0.1
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion of financial condition and results of
operations of the Company should be read in conjunction with the
Consolidated Financial Statements and the related Notes thereto included
elsewhere in this Prospectus. This Prospectus contains forward-looking
statements which involve risks and uncertainties. The Company's actual
results may differ from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are
not limited to, those discussed in "Risk Factors."
Overview of Principal Activities
--------------------------------
The Company owns, through various subsidiaries and joint venture
interests, a 51.4% indirect ownership in Harbin Bearing, which designs,
develops and manufactures a wide range of rolling element bearings in China
and sells such bearings in China as well as western countries, including
the United States.
Effective December 29, 1995, the Company acquired Southwest Products
which manufactures precision spherical bearings that are sold primarily to
the aerospace and commercial aviation industries. See "Business -
Southwest Products Company". The acquisition of Southwest Products has
been treated as a business combination and is accounted for under the
purchase method of accounting. However, since the acquisition was deemed
to have been consummated on December 29, 1995, the results of Southwest
Products were not consolidated into the Company for years prior to 1996 but
are included in the Company's consolidated results of operations from
January 1, 1996. The assets and liabilities of Southwest Products have
been incorporated into the consolidated balance sheet of the Company at
December 31, 1995.
The Company has begun to utilize the resources of Southwest Products
with the following objectives:
1. To increase export sales of Harbin Bearing's products in
the US by selling its products through Southwest Products' distribution
network, and by changing its export product mix to meet the demands of the
international marketplace.
2. To transfer US manufacturing and product development
expertise and technology from Southwest Products to Harbin Bearing to
increase production, efficiency and product quality.
21
<PAGE>
Unless specifically stated otherwise, all amounts in this Management's
Discussion and Analysis are in thousands (Rmb000 or US$000).
Results of Operations
---------------------
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996:
The following table sets forth certain unaudited operating data (in
Rmb and as a percentage of the Company's sales) for the nine months ended
September 30, 1995 and 1996.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------
1995 1996
------ ------
Rmb % Rmb %
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Sales 651,070 100.0 724,960 100.0
Cost of sales (397,584) (61.1) (444,750) (61.3)
-------- ----- -------- -----
Gross profit 253,486 38.9 280,210 38.7
Selling expenses (14,476) (2.2) (20,064) (2.8)
General and administrative expenses (63,328) (9.7) (71,667) (9.9)
Interest expense (36,060) (5.6) (46,047) (6.4)
-------- ----- -------- -----
Income before income taxes 139,622 21.4 142,432 19.6
Provision for income taxes (21,497) (3.3) (23,590) (3.2)
-------- ----- -------- -----
Income before minority interests 118,125 18.1 118,842 16.4
Minority interests (59,168) (9.1) (64,926) (9.0)
-------- ----- -------- -----
Net income 58,957 9.0 53,916 7.4
======== ===== ======== =====
</TABLE>
Sales
-----
Sales (including Rmb 25,560 from Southwest) for the nine months ended
September 30, 1996 increased by Rmb 73,890 or 11.3% as compared to the nine
months ended September 30, 1995. Excluding Southwest's operations, sales
increased
22
<PAGE>
by Rmb 48,330 or 7.4% for the nine months ended September 30, 1996 as
compared to 10.5% for the nine months ended September 30, 1995. The rate of
sales growth has slowed in 1996 as compared to 1995 as a result of the
Company's efforts beginning in the latter part of 1995 to consolidate the
distribution of its products in China by shifting smaller OEM accounts to
certain larger distributors (see - "Liquidity and Capital Resources -
Operating Activities").
Cost of Sales/Gross Profit
--------------------------
Cost of sales (including Rmb 19,515 from Southwest) for the nine months
ended September 30, 1996 increased to Rmb 444,750 as compared to Rmb
397,584 for the nine months ended September 30, 1995. The cost of sales
for Harbin Bearing for the nine months ended September 30, 1996 and 1995
was calculated using the gross profit method by reference to average annual
gross profit ratios. The cost of sales for Southwest for the nine months
ended September 30, 1996 was calculated on actual cost basis.
Gross profit increased by Rmb 26,724 or 10.5% for the nine months ended
September 30, 1996 as compared to the nine months ended September 30, 1995.
The increase in gross profit was attributable to the increase in sales.
Gross profit as a percentage of sales decreased to 38.7% in 1996 from 38.9%
in 1995 due to Southwest's lower gross margin of 23.7%.
Selling Expenses
----------------
Selling expenses (including Rmb 3,780 from Southwest) for the nine months
ended September 30,1996 increased by Rmb 5,588 or 38.6% to Rmb 20,064 as
compared to Rmb 14,476 for the nine months ended September 30, 1995. The
increase in selling expenses was primarily attributable to the
consolidation of Southwest's selling expenses in 1996 and the increase in
royalty costs and government taxes in China as a result of the increase in
sales. Selling expenses as a percentage of sales increased from 2.2% in
1995 to 2.8% in 1996.
General and Administrative Expenses
-----------------------------------
General and administrative expenses (including Rmb 6,720 from
Southwest) for the nine months ended September 30, 1996 increased by Rmb
8,339 or 13.2% to Rmb 71,667 as compared to Rmb 63,328 for the nine months
ended September 30, 1995. General and administrative expenses as a
percentage of sales increased to 9.9% in
23
<PAGE>
1996 from 9.7% in 1995. Significant factors affecting the change in general
and administrative expenses between 1995 and 1996 are as follows:
a. The consolidation of Southwest's general and administrative
expenses of Rmb 6,720 in 1996.
b. An aggregate cash discount of Rmb 6,986 which was granted during
1996 as incentives to customers for early settlement of debt in order to
accelerate cash collection. No such cash discount was granted during 1995.
c. A decrease in compensation expense in 1996 of Rmb 3,954 related
to the voluntary early retirement program at Harbin Bearing.
d. There was a gain on disposal of fixed assets of Rmb 1,111 during
1996 while there was a loss on disposal of fixed assets of Rmb 969 during
1995.
Interest Expense
----------------
Interest expense (including Rmb 1,805 from Southwest) for the nine
months ended September 30, 1996 increased by Rmb 9,987 or 27.7% to Rmb
46,047 as compared to Rmb 36,060 for the nine months ended September 30,
1995. The increase in interest expense was attributable to the
consolidation of Southwest's interest expense in 1996, the increase in
principal amount of bank loans during the nine months ended September 30,
1996 as compared to the nine months ended September 30, 1995, the 1.3%
increase in the interest rate on new short-term bank loans effective July
1, 1995 and the inclusion of Rmb 1,224 of Convertible Debenture interest
calculated at the rate of 12% per annum since August 23, 1996.
Net Income
----------
As a result of the aforementioned factors, including the consolidation
of Southwest's operations effective January 1, 1996, net income decreased
by Rmb 5,041 or 8.6% to Rmb 53,916 for the nine months ended September 30,
1996 as compared to Rmb 58,957 for the nine months ended September 30,
1995.
24
<PAGE>
RESULTS FOR 1995 COMPARED TO 1994
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1995 1994
Rmb Rmb
<S> <C> <C>
Net sales 672,359 719,842
Cost of sales (381,377) (441,854)
-------- --------
Gross Profit 290,982 277,988
Gross Profit percentage 43.3% 38.6%
Selling expenses (18,942) (20,471)
General and Administrative
expenses (94,060) (74,747)
Interest Expense (48,446) (42,721)
Reorganization Expenses - (7,307)
-------- --------
Income Before Income Taxes 129,534 132,742
Provision for Income Taxes (20,472) (22,687)
-------- --------
Income Before Minority
Interests 109,062 110,055
Minority Interests (54,967) (58,447)
-------- --------
Net Income 54,095 51,608
======== ========
</TABLE>
Net Sales
---------
Net sales decreased by Rmb 47,483 or 6.6% in 1995 as compared to 1994. The
decrease was mainly due to the change in the Company's marketing strategy
in order to further enhance its credit control on sales in the last quarter
of 1995 whereby a contracted sales order was entered into with a major
distributor, which is a related party beneficially owned by the Harbin
Municipal Government. Delivery was not made in respect of this transaction
at December 31, 1995 and thus this sale was not recognized in the Financial
Statements. However, in anticipation of this transaction, the Company
reduced the delivery of its products to other customers. As a result of
the aforementioned contracted sales order in the last quarter of 1995, the
net reported sales in the last quarter of 1995 was Rmb 21,289.
Throughout 1995, the Company continued to adjust its product mix by
shifting from small and medium sized bearings to higher margin medium and
large sized bearings in order to improve profitability and to cope with the
growth in market demand on these new products. The Company raised the
selling price of all bearing products effective July 1, 1995 by an average
of 3-5% in order to cover increasing costs, as compared to July 1, 1994
when there was a sales price increase of 5-8%. In the last quarter of 1995,
the Company changed its marketing strategy by shifting smaller OEM accounts
to designated distributors in order to reduce marketing costs and credit
risks.
25
<PAGE>
Gross Profit
------------
Gross profit increased by Rmb 12,994 or 4.7% in 1995 as compared
to 1994. Gross profit as a percentage of revenue increased from 38.6% in
1994 to 43.3% in 1995. The increase in gross profit was mainly
attributable to the effect of the sales mix change to higher-
margin products, the improved operational efficiency and a reduction in
purchase price of major raw materials.
In previous quarters in 1995, cost of sales was calculated with
reference to the average gross profit ratio for 1994, being 38.6% on
revenue. The average gross profit ratio for 1995 of 43.3% on revenue was
computed from actual results throughout the year after taking into account
various year-end closing inventory adjustments such as a write-back of
obsolete inventories sold during the year which amounted to Rmb 15,805 and
an adjustment to reflect under absorption of labor and overhead of
approximately Rmb 4,700. The gross profit margin for 1995 would have been
only 39.2% on revenue if no account was taken of the year end adjustments
on closing inventories.
Selling Expenses
----------------
Selling expenses decreased by Rmb 1,529 or 7.5% in 1995 as
compared to 1994. The decrease was in line with the decrease in sales this
year. Selling expenses as a percentage of revenue has remained constant at
a rate of 2.8%.
General and Administrative Expenses
-----------------------------------
General and Administrative expenses increased by Rmb 19,313 or
25.8% in 1995 as compared to 1994. General and Administrative expenses as
a percentage of revenues increased from 10.4% to 14.0%. The increase in
General and Administrative expenses was mainly attributable to:
a. An increase in staff wages and welfare costs at Harbin
Bearing of Rmb 7,550 as a result of increments given to the staff this
year.
b. There was a loss of Rmb 4,829 on disposal of fixed assets
as compared to a gain on disposal of fixed assets of Rmb 1,087 in 1994.
c. A cash discount of Rmb 6,490 was granted in 1995 for
incentives to customers for early settlement of debt in order to accelerate
the cash collection. In 1995, an additional bad debt provision of Rmb
2,627 was provided (1994: Rmb 11,300) on certain aged debt.
26
<PAGE>
d. An increase in management fee of Rmb 1,716 payable to
Harbin Bearing Holdings Company as a result of a 10% inflation adjustment.
e. An increase in insurance premium paid of Rmb 1,979 on the
increase in assets.
Interest Expense
----------------
Interest Expense increased by Rmb 5,725 or 13.4% in 1995 as compared
to 1994. The increase was attributable to interest expense of 8% related
to a US$ 5,000 promissory note issued on December 30, 1994 and to a 1.3%
increase in interest rate on increased amounts of short-term bank loans
effective July 1, 1995.
Reorganization Expenses
-----------------------
There was no similar charges in 1995 of the one time reorganization
expenses in 1994 which were incurred in connection with the acquisition of
China Bearing Holdings Limited See "Organization of the Company" and
"Certain Relationships and Related Transactions."
27
<PAGE>
Results for Actual 1994 Compared to Proforma 1993
<TABLE>
<CAPTION>
Actual Proforma
Year ended Year ended
December 31, December 31,
1994 1993
Rmb Rmb
<S> <C> <C>
Sales 719,842 711,420
Sales Tax - (24,356)
-------- --------
Net sales 719,842 687,064
Cost of sales (441,854) (439,417)
-------- --------
Gross Profit 277,988 247,647
Gross Profit percentage 38.6% 36.0%
Selling Expenses (20,471) (14,765)
General and Administrative
expenses (74,747) (76,432)
Interest Expense (42,721) (40,638)
Reorganization Expenses (7,307) (7,307)
-------- --------
Income Before Income Taxes
and Minority Interests 132,742 108,505
======== ========
</TABLE>
The above pro forma results for the year ended December 31, 1993 were
prepared on the basis as if the reorganization of Harbin Bearing General
Factory and the acquisition of Harbin Bearing had occurred on January 1,
1993 and are extracted from the Unaudited Proforma Consolidated Statement
of Income for the year ended December 31, 1993 after giving effect to the
proforma adjustments described in further detail at the end of the table
under the caption "Selected Consolidated Financial Information."
The proforma results of operations have been prepared for comparative
purposes only and do not purport to indicate the results of operation which
would actually have incurred had the acquisition been in effect on January
1, 1993 or which may occur in the future.
28
<PAGE>
Sales
-----
Sales increased by Rmb 8,422 or 1.2% in 1994 compared to 1993.
The increase in sales was mainly due to general sales price increases.
Gross Profit
------------
Gross profit increased by 12.3% or Rmb 30,341 in 1994 compared to
1993. Gross profit as a percentage of revenue increased to 38.6% in 1994
from 36% in 1993, primarily due to the slight increase in general sales
price, the effect of the sales mix change to higher margin products and the
change in the VAT system in China effective January 1, 1994.
Selling Expenses
----------------
Selling expenses increased by 38.6% or Rmb 5,706 in 1994 compared
to 1993 which was mainly due to an increase in government taxes of Rmb
7,651. This was offset by a decrease in transportation expenses of Rmb
1,500 in 1994 compared to 1993 as a result of the passing of its
transportation costs directly to certain customers arising from the
introduction of the new VAT system in China.
General and Administration Expenses
-----------------------------------
General and Administrative expenses decreased by 2.2% or Rmb
1,685 in 1994 compared to 1993. General and Administrative expenses as a
percentage of revenues decreased from 10.7% to 10.4%. Although there was a
large decrease in the bad debt provision of Rmb 17,000, this decrease was
however largely offset by a one-time formation expense of Rmb 2,637 and
special compensation payments to workers for early retirement totalling Rmb
7,243 in 1994. This was offset by having no gain on disposal of fixed
assets, whereas a gain was recorded in 1993 for Rmb 4,700.
Interest Expense
----------------
Interest expense increased 5.1% or Rmb 2,083 in 1994 compared to
1993 which was mainly due to an increase in interest rates during 1994.
29
<PAGE>
Reorganization Expenses
-----------------------
On a proforma basis, the one time reorganization expenses in
connection with the acquisition of China Bearing Holdings Limited were
assumed to be incurred on January 1, 1993.
Liquidity and Capital Resources
-------------------------------
Operating activities
For the nine months ended September 30, 1996, the Company's operations
utilized cash resources of RMB 3,697, as compared to RMB 8,078 generated
for the nine months ended September 30, 1995. The Company's net working
capital increased by RMB 182,383 at September 30,1996, to RMB 488,671, as
compared to RMB 306,288 at December 31, 1995, and the Company's current
ratio at September 30, 1996 was 1.66:1 as compared to 1.42:1 at December
31, 1995 and 1.53:1 at September 30, 1995.
During the latter part of 1995, the Company began to consolidate the
distribution of its products in China by shifting smaller OEM accounts to
designated large distributors. The Company has granted extended credit
terms to such distributors to facilitate this transition, which the Company
expects to continue at least through the remainder of 1996. This new
marketing strategy is expected to reduce marketing costs and credit risk.
Accounts receivable increased by RMB 243,397 or 92.1% to RMB 507,583
at September 30, 1996, as compared to RMB 264,186 at December 31, 1995. The
increase in accounts receivable for the nine months ended September 30,
1996 is consistent with the increase in accounts receivable of RMB 253,394
or 85.0% for the nine months ended September 30, 1995. Also contributing to
the increase in accounts receivable during the nine months ended September
30, 1996 was the granting of extended credit terms to designated large
distributors and the resulting slowdown in accounts receivable collections
from the Company's previous smaller OEM accounts.
Due to related companies decreased by RMB 109,646 during the nine
months ended September 30, 1996 as a result of sales to a related company
during 1996.
Investing activities
30
<PAGE>
Capital expenditures for the nine months ended September 30, 1996 of
RMB 66,319 consisted of costs relating to the construction of new plant and
buildings, and the renovation of existing facilities and equipment, and
were financed by bank loans and the sale of common stock.
Financing activities
The Company has historically relied on both long and short term bank
loans from Chinese banks to support its operating and capital requirements.
Short term bank loans have terms ranging from three months to six months,
are utilized to finance both operating and capital requirements, and are
renewed on a revolving basis. Long term bank loans are utilized to fund
capital expansion projects. During the nine months ended September 30,
1996, the net increase in bank loans (after deducting repayments) was RMB
60,758, which was utilized to fund the repayment of other loans of RMB
33,810, operations and a portion of capital expenditures. The Company
believes that it will be able to continue to maintain and expand its bank
borrowings under existing terms and conditions.
In order to finance the Company's continuing operating and capital
requirements, the Company has been evaluating both debt and equity
financing opportunities. During June 1996, the Company sold 1,000,000
shares of common stock at US $5.00 per share generating net proceeds of US$
4,265 (RMB 35,399).
Pursuant to a Subscription Agreement dated August 2, 1996 (the
"Subscription Agreement"), among China Bearing, Asean Capital Limited,
China International Bearing Holdings Limited, the Company and Southwest
Products (collectively, the "Sunbase Group"); Glory Mansion Limited,
Wardley China Investment Trust, MC Private Equity Partners Asia Limited,
and Chine Investissement 2000 (collectively, the "Investors"), on August
23, 1996, China Bearing issued an aggregate of US$11,500 principal amount
of Convertible Debentures (the "Convertible Debentures") to the Investors.
Unless the Convertible Debentures have been converted, the Convertible
Debentures are due and payable in August 1999 (the "Maturity Date"). The
Convertible Debentures bear interest at the rate of the higher of (i) 5%
per annum (net of withholding tax, if applicable) and (ii) such percentage
of the dividend yield calculated by reference to dividing the annual
dividend declared per share of Common Stock of the Company by the
Conversion Price (as hereinafter defined). Interest is payable quarterly.
The Investors have the right to convert at any time, in whole or in
part, the principal amount of the Convertible Debentures into shares of the
Common Stock of the Company. The Conversion Price (the "Conversion Price")
is initially US$5.00 per share, subject to adjustment for (a) change in par
value of the Common Stock, (b) issuance of shares by way of capitalization
of profits or reserves, (c) capital distributions, (d) rights
31
<PAGE>
offering at a price which is less than the lower of the then market price
or Conversion Price, (e) issuance of derivative securities where the total
consideration per share initially received is less than the lower of the
then market price or Conversion Price, (f) issuance of shares at a price
per share which is less than the lower of the then market price or
Conversion Price, and (g) if the cumulative audited earnings per common
share for any two consecutive fiscal years commencing with the fiscal year
ending December 31, 1996 and ending with the fiscal year ending December
31, 1998 are less than the specified projection of cumulative earnings per
common share for such periods.
The Convertible Debentures are required to be redeemed on the Maturity
Date at its principal amount outstanding together with any accrued but
unpaid interest together with an amount that would enable the Investors to
yield an aggregate internal rate of return of 12% per annum on the cost of
their investment. In addition, if any of the events of default specified in
the Convertible Debentures occur, the Convertible Debentures are
automatically due and payable at the principal amount outstanding together
with accrued interest and an amount that would enable the Investors to
yield an aggregate internal rate of return on their investment of 19.75%
per annum. Events of default include the delisting of the shares from
NASDAQ or its suspension thereof; default in performance after failure to
cure after notice; failure to pay principal or interest; failure to pay
indebtedness for borrowed money; bankruptcy, insolvency or unsatisfied
judgments; failure to achieve earnings per common share of at least US$.55
for fiscal years commencing January 1, 1996; and accounts receivable
reaching a certain level in relationship to net sales.
As a result of the foregoing, although the Convertible Debentures bear
interest at the rate of 5% per annum, interest is accrued at the rate of
12% per annum.
The obligations of China Bearing under the Convertible Debentures are
guaranteed by the other members of the Sunbase Group.
A promissory note for US$5,102 (RMB 41,600) (the "Note") was issued to
Asean Capital Limited ("Asean") in connection with the Share Exchange
Agreement and is secured by a continuing security interest in all of the
Company's title and interest in the outstanding capital stock of its
wholly-owned subsidiary China Bearing. The Note is denominated in and is
repayable in full in United States dollars, and bears interest at 8% per
annum.
In connection with the issuance of the Convertible Debentures
described above, Asean has undertaken that for so long as any of the
debentures are outstanding, no amounts are to be repaid on the Note unless
there is a sufficient working capital and the repayment is made in
accordance with the following schedule:
32
<PAGE>
<TABLE>
<CAPTION>
Payment Period Amount
-------------- ------
<S> <C>
August 1, 1996 to July 31, 1997 up to US$2,000 plus accrued interest
August 1, 1997 to July 31, 1998 up to US$1,500 plus accrued interest
August 1, 1998 to July 31, 1999 up to US$1,500 plus accrued interest
</TABLE>
Pursuant to the above described repayment schedule, a principal
payment of US$2,000 (RMB 16,700) plus accrued interest was made on the Note
on September 10, 1996.
The Company anticipates that its cash flows from operations, combined
with cash and cash equivalents, bank lines of credit and other external
sources of debt and equity financing, and the proceeds from the June 1996
sale of the 1,000,000 shares of common stock and the August 1996 issuance
of the Convertible Debentures, are adequate to finance the Company's
operating and debt service requirements for the foreseeable future.
Inflation and Currency Matters
------------------------------
In recent years, the Chinese economy has experienced periods of rapid
economic growth as well as high rates of inflation, which in turn has
resulted in the periodic adoption by the Chinese government of various
corrective measures designed to regulate growth and contain inflation.
During the nine months ended September 30, 1996, the general inflation rate
in China was in excess of 10% on an annualized basis. Since 1993, the
Chinese government has implemented and maintained an economic program
designed to control inflation, which has resulted in the tightening of
working capital available to Chinese business enterprises. The success of
the Company depends in substantial part on the continued growth and
development of the Chinese economy.
The Company continually monitors the effects of inflation. The Company
is generally able to raise its prices to shift a portion of the inflated
costs to the customers. The price of bearing steel, the major raw material
used by the Company, remained fairly stable during 1995 and 1996. The major
impact of inflation was on labor costs due to increases in employees wages.
However, the Company has generally managed to offset the effects of
inflation through improved operational efficiency.
Foreign operations are subject to certain risks inherent in 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.
The Company conducts most of its business in China and, accordingly,
the sale of its products is settled primarily in RMB. As a result,
devaluation of the RMB against the
33
<PAGE>
USD, could have a material adverse effect upon the results of operations
and financial position of the Company. Although prior to 1994 the RMB
experienced significant devaluation against the USD, the RMB has remained
fairly stable from 1994 to present. The unified exchange rate was US$ 1.00
to RMB 8.65 at December 31, 1993, RMB 8.45 at December 31, 1994, RMB 8.32
at December 31, 1995, and RMB 8.3 at September 30, 1996.
BUSINESS
Business Development
--------------------
The Company is engaged in the design, manufacture and distribution of
a broad range of bearing products in the PRC and the US. The Company also
distributes its bearing products in Europe, Asia, South America and Africa.
The Company's subsidiary in China, Harbin Bearing, employs approximately
13,000 employees. Harbin Bearing is the largest precision bearing
manufacturer and the third largest bearing manufacturer overall in China.
Harbin Bearing produces a wide variety of precision and commercial-grade,
rolling-element bearings in sizes ranging from 10mm to 1000mm (internal
diameter). Rolling-element bearings use small metal balls or cylinders to
facilitate rotation with minimal friction and are typically used in
vehicles, aircraft, appliances, machine tools, general machinery and
virtually any product that contains rotating or revolving parts. Precision
bearings are bearings that are produced to more exacting dimensional
tolerances and to higher performance characteristics than standard
commercial bearings. The manufacturing process for precision bearings
generally requires the labor of highly-skilled machinists and the use of
sophisticated machine tools.
On January 16, 1996 (effective December 29, 1995), the Company
acquired Southwest Products, which produces precision spherical bearings
for US, European and Asian aerospace and high tech commercial applications
and the US military.
Over 90% of Harbin Bearing's sales are made to the OEM and replacement
markets in China. Based on low production costs in China and the on-going
world-wide demand for bearings, management has been increasing Harbin
Bearing's efficiency and production output with the intent of creating a
substantial export business to complement the Company's strong domestic
position in the Chinese markets. Historically, Harbin Bearing export sales
have been made through trade intermediaries and by receiving customer
orders that are placed directly to its offices in China. Southwest Products
has commenced providing and will provide engineering and technical support,
and has commenced to and will market and distribute Harbin Bearing products
internationally, focusing on exports of the products to the US. In
34
<PAGE>
addition, Southwest Products has begun to assist Harbin Bearing in
implementing US manufacturing methods, improving quality control procedures
and in developing new products at Harbin Bearing's facilities in China.
The Company's overall plan is to combine the management style,
technology, quality control and production methods found in the West with
low-cost Chinese manufacturing capacity so as to become a major
international designer, manufacturer and distributor of bearing products.
35
<PAGE>
The following diagram shows the corporate structure of the
Company and its affiliated entities.
[Chart Appears Here]
36
<PAGE>
Harbin Bearing
--------------
Harbin Bearing presently produces a wide range of rolling element
bearings, ranging from 10mm to 1000mm (internal diameter) including: deep-
groove ball bearings, cylindrical rolling bearings, angular-contact ball
bearings, and tapered rolling bearings. Each of such bearings are
manufactured in micro, small, medium and large sizes. Harbin Bearing
specializes in the manufacture of precision bearings.
Based on increasing demand and profit opportunities, Harbin
Bearing increased its production of all sizes and grades of cylindrical
rolling bearings and angular-contact ball bearings. In order to enhance
the profitability for deep-groove ball bearings, Harbin Bearing has shifted
its production mix of such bearings by increasing its production of medium-
sized deep-groove ball bearings (especially in precision grades). The
shift in production to medium-sized and precision grade bearings has
enabled Harbin Bearing to expand its customer base, improve its profit
margins, and meet the demand of many of its existing PRC customers for a
full line of bearings.
Harbin Bearing has also recently expanded its product line to
include railway freight car bearings (Harbin Bearing is currently the
leading supplier of railway passenger car bearings in China). Management
believes that demand for railway freight car bearings is growing rapidly
and that demand for such bearings will remain strong. Harbin Bearing has
installed certain equipment which has enabled Harbin Bearing to commence
the production of railway freight car bearings and increase its production
of railway passenger car bearings.
Marketing
---------
The major end-users of Harbin Bearing's products are
manufacturers of electrical machinery, machine tools, mining and extraction
machinery, automobiles, motorcycles, household appliances and aircraft and
aerospace equipment. In 1995, approximately 32% of Harbin Bearing's sales
were made to OEMs in the machinery, transportation and electrical equipment
industries representing, respectively, approximately 28%, 30% and 35% of
its total sales to OEMs. Approximately 68% of Harbin Bearing's sales in
1995 were made to distributors.
Harbin Bearing has 18 sales offices in major cities in China,
including Beijing, Shanghai and Guangzhou. All sales are coordinated
through Harbin Bearing's headquarters in Harbin, including sales to local
distributors and transportation industries, overseas agents, and domestic
import and export companies. Harbin Bearing's sales force consists of 152
sales personnel and 288 support personnel who are responsible for product
promotion, marketing, aftermarket services and technical support. Harbin
Bearing sells its bearings in China and abroad under the "HRB" trademark.
Harbin Bearing's products are considered to be among the highest
grades inside of China and medium-grade in world-wide markets. In 1994,
the US was Harbin Bearing's largest export
37
<PAGE>
market, accounting for approximately 60% of total export sales. It is the
Company's intention to increase Harbin Bearing's export sales to the US,
Europe and certain developing countries in South America and Southeast
Asia.
Harbin Bearing delivers its bearings by rail (approximately 80%
of Harbin Bearing's domestic deliveries are made by rail), truck, ocean
freight and air freight. Harbin Bearing leases trucks from Harbin
Precision Machinery Manufacturing Company which are used mostly for short-
haul deliveries. See "Certain Relationships and Transactions." Bearings
which are exported are generally shipped by ocean freight.
Chinese Bearing Industry
------------------------
Based on the Ministry of Machinery & Industry's 1993 Annual
Report, China's aggregate domestic demand for bearings in 1995 was expected
to be approximately 900 million units, representing an average annual
increase of approximately 17% based on China's aggregate demand of 560
million units in 1992. Prior to 1989, under China's planned economy, the
production, pricing and sales of bearings were fixed by the Chinese
government. Beginning in 1988, demand for bearings exceeded the available
supply, particularly for small and medium-sized bearings. Beginning in
1989, in connection with the implementation of economic reform measures
undertaken by the Chinese government, production quotas and raw material
subsidies were abolished. By 1991, competition among manufacturers of low-
quality, small and medium-sized bearings had increased. This competition
created an excess supply of such bearings and resulted in a decrease of
profit margins. In July 1992, all price controls on bearing prices were
removed. Even though supply still generally exceeds demand for small and
medium-sized bearings in the low end market, demand continues to be strong
for higher-quality small and medium-sized bearings used in the automobile,
motorcycle, agricultural, electrical appliance and machinery industries.
Overall, demand for bearings used in large agricultural machinery, mineral
and extraction machinery and electric generating equipment, and demand for
precision, special-purpose, large and extra-large-sized bearings continued
to grow through 1995.
Competition
-----------
Harbin Bearing's main competitors can be separated into three
principal groups: (i) two nationwide domestic bearing manufacturers with
wide product lines; (ii) small bearing production facilities which compete
on a local basis by manufacturing small-sized, commodity-type bearings; and
(iii) foreign bearing manufacturers. Competition is principally based on
pricing and quality considerations.
Chinese Competition
Harbin Bearing, Wafangdian Bearing Factory and Luoyang Bearing
Factory are the three largest bearing manufacturers in China, based on 1994
sales. The combined sales revenues of these three manufacturers accounted
for 30% of the US $1.09 billion in total sales revenue of
38
<PAGE>
China's bearing industry (figures are approximate). By comparison, the
aggregate sales revenue of the fourth, fifth and sixth largest Chinese
bearing manufacturers only account for approximately 9.5% of the total
sales revenue of China's bearing industry. Wafangdian Bearing Factory does
not produce high-precision aerospace-quality rolling-element bearings, a
market in which Harbin Bearing has a 70% domestic share (the remaining 30%
market share is split among Luoyang Bearing Factory and Hongshan Bearing
Factory). In addition to the manufacturers described above, there are
approximately 270 other manufacturers of rolling element ball bearings in
China, including a number of small bearing factories that were established
after 1988 when demand for small-sized bearings greatly exceeded the
available supply. The bearings manufactured by these small factories are
generally of lower quality and are used mostly as replacement bearings in
the electrical appliance and agricultural equipment industry.
Competition from Imports into China
Bearing manufacturers outside of China are able to supply types
and grades of bearings which are not available from Chinese domestic
suppliers, particularly precision bearings of the highest durability and
quality. Imported foreign bearings are generally higher in quality than
Chinese-manufactured bearings, but are also priced higher due to China's
low production costs and the assessment on imported bearings of a 15% or
20% import tariff. The 15% import tariff applies to bearings imported from
countries that have established a tax treaty with China and the 20% import
tariff applies to imports from other countries. Some foreign bearing
manufacturers have established bearing manufacturing facilities in China,
typically through joint ventures with local bearing manufacturers. Such
ventures, if successful, would likely increase competition for Harbin
Bearing in the higher-quality and precision-bearing market segments.
Competition in International Markets
In the international bearing markets, Harbin Bearing's main
competitors are Eastern European manufacturers and manufacturers located in
China. To a lesser extent, Harbin Bearing also competes with large
international bearing manufacturers such as Svenska Kugellager Fabriken
(SKF), Fisher Aktien Gesellschast (FAG) and New Technology Network (NTN).
Management believes that with the assistance of Southwest Products in
implementing US manufacturing methods and quality control procedures and in
developing new products, Harbin Bearing's general competitive position will
be substantially improved. In addition, management believes that Harbin
Bearing will be able to compete in market segments that demand products
with higher precision levels and will more effectively penetrate those
market segments that utilize commodity-type bearings.
Leading industrial countries such as the US, Japan and countries
in Europe impose import tariffs on bearings. For example, the US import
tariff for bearings is 9% for ball bearings and 5% for cylindrical
bearings.
39
<PAGE>
Raw Materials
-------------
The principal raw materials used by Harbin Bearing to manufacture
bearings are carbon steel and stainless steel rod, wire and tubing. These
types of steel are specialized alloys designed for hardness, durability and
resistance to rust. A small amount of copper and aluminum tubing and rods
are also used to produce seals, cages and other ancillary bearing
components. Harbin Bearing sources most of its bearing steel directly from
four domestic mills located in Heilongjiang Province, Liaoning Province and
Shanghai. Harbin Bearing imported less than 1% of its raw materials in
1995.
In January 1993, the Chinese government lifted price controls on
steel products and, as a result, the price of bearing steel in 1993
increased by more than 35.2% based on 1992 prices. The price of bearing
steel in China is now approximately the same as the international price of
bearing steel and has remained at approximately US $660.00 per ton since
the end of 1993. Harbin Bearing believes that its sources of bearing steel
are stable and, consistent with industry practice in China, has not entered
into any long-term supply contracts for bearing steel. Harbin Bearing
generally maintains a raw material inventory sufficient for approximately
one-and-a-half months of production. Railroad tracks leading directly to
two of Harbin Bearing's raw material warehouses are used exclusively to
transport raw materials, such as bearing steel, to Harbin Bearing.
In the future, Harbin Bearing intends to purchase bearing steel
from South Korea and other countries. South Korean steel is price-
competitive and is of a much higher quality than most Chinese steel.
Accordingly, the use of South Korean steel will improve the quality of
Harbin Bearing's products while reducing the amount of products that are
scrapped due to the use of lower-quality steel.
Workforce
---------
As of January 16, 1996, Harbin Bearing employed approximately
13,000 full-time personnel in the following areas: executive and
administrative (658), sales and service (507), manufacturing and production
(11,492), and research and development (319). Management believes that in
general, its employee relations are good.
Harbin Bearing has begun to revise its compensation system to
provide incentives to employees by linking productivity with compensation.
Part of the revised compensation system was instituted in May 1994, and
governs the wages of production employees. Depending on actual
productivity, which is determined according to unit output and standard
labor hours, a production employee may be paid more or less than the
average wage. Harbin Bearing has also revised its compensation system with
respect to its sales personnel. Harbin Bearing sets a monthly sales target
for each sales office and each salesman. If the target is reached, the
sales personnel will receive a bonus in addition to basic wages and
allowances. In 1995, the total labor cost of Harbin Bearing comprised
approximately 15% of total production costs.
40
<PAGE>
The Harbin Municipal Government promulgated regulations that were
effective January 1994, which provide for the establishment of a pension
fund program to which both employer and employee must contribute. Harbin
Bearing is required to contribute a monthly amount equivalent to 20% of its
employees' aggregate monthly income, and each employee is required to
contribute a monthly amount that is equivalent to 2% of such employees'
monthly income.
All of the employees of Harbin Bearing are members of a trade
union. To date, Harbin Bearing has not been subject to any strikes or
other significant labor disputes and is not a party to any collective
bargaining agreements.
Harbin Bearing presently recruits graduates of the Harbin Bearing
Technical Institute and universities all over China and provides ongoing
training for its management and production employees in the form of a
series of training seminars.
Southwest Products Company
--------------------------
Southwest Products, located at a 55,000 square foot facility in
Irwindale, California, designs, engineers and manufactures custom,
spherical bearing products, such as high-precision spherical bearings, rod-
end bearings, bushings and push-pull controls, for aerospace and high tech
commercial applications. Southwest Products employs 58 full-time personnel
in the following areas: executive and administrative (5); sales and
service (5); manufacturing (35) and engineering, research and development
(13). The average length of employee tenure at Southwest Products is in
excess of eight years.
Southwest Products specializes in the design and manufacture of
spherical bearings for use in extremely demanding and flight-critical
applications. Such bearings meet unique load and tolerance requirements
and are known as "Specials." Southwest Products produces small orders of
custom bearings, the sales price of which typically includes the cost of
product design, engineering and development. Southwest Products is
respected worldwide for its ability to engineer and produce precision
bearings, which are used in the Space Shuttle, commercial jet aircraft
(Boeing and McDonnell Douglas), military aircraft (including the B-2
Stealth Bomber, F-117 Stealthfighter, F-15, F-16, C-17 and F-18),
submarines, (Los Angeles Class, Ohio Class, Seawolf and Centurion), and
nuclear power plants. Southwest Products' bearings are used by Northrop
Grumman, Lockheed Martin, NASA, all US military services, Mitsubishi Heavy
Industries, Korea Heavy Industries (Hanjun), Fluor Daniel, General
Electric, Westinghouse, General Dynamics, Textron Marine, Ingalls
Shipbuilding and Newport News Shipbuilding. Southwest Products' bearings
have been used by NASA in all manned space programs since the launch of
Mercury and are used in most NASA orbiters, including Viking, Magellan and
Galileo.
Southwest Products' Proprietary Technology
------------------------------------------
Southwest Products manufactures both metal-on-metal bearings and
self-lubricating bearings, based on Southwest Products' design and on OEM
specifications. Self-lubricating
41
<PAGE>
bearings are lined with either Dyflon or Kentlon, which are both
proprietary liner systems of Southwest Products. Kentlon is qualified by
the United States Navy to Mil-B-81820, Mil-B-81934 and Mil-B-81935. It is
used in military aircraft, tanks, ground support equipment, commercial
aircraft, space vehicles, launch and payload systems and in the oil
refinery, automotive and heavy manufacturing industries. Dyflon is one of
only two liner systems in existence that is moldable and machineable that
also performs successfully when fully submersed in water. Accordingly, in
addition to the uses described above for Kentlon, Dyflon-lined parts are
used in submarines, surface ships and nuclear power plants.
Although Southwest Products has federally registered its
trademarks "Dyflon" and "Kentlon," Southwest Products has chosen not to
patent its various technologies because the specific formulae and methods
for manufacturing Dyflon and Kentlon would then become a matter of public
record.
Properties
----------
Harbin Bearing
Harbin Bearing operates twelve finished product plants and
seventeen auxiliary plants. With the exception of a finished product plant
in Wucangzian, all of the Company's plants are located in four plant
compounds in Harbin. Harbin Bearing plans to relocate the Wucangzian
finished product plant, now located approximately 260 kilometers from the
main site, to a new facility currently under construction approximately 17
kilometers from the main site. The Company believes the costs associated
with the relocation to be approximately Rmb 27 million.
The Harbin branch office of the State Asset Administration Bureau
has granted Harbin Holdings the right to use the properties where Harbin
Bearing's production and other facilities are located, which include the
Wucangzian finished product plant and the four plant compounds. The site
is approximately 540,000 square meters of which production facilities
occupy approximately 290,000 square meters. Harbin Holdings has entered
into a lease agreement with the Company for use of its buildings for five
years. See "Certain Relationships and Related Transactions."
Southwest Products
Southwest Products leases a 55,000 square foot facility in
Irwindale, California on a month to month basis at a monthly rent of
$14,000.
42
<PAGE>
Legal Proceedings
-----------------
The Company is not a party to, nor is any of its property subject
to, any pending legal proceedings.
ORGANIZATION OF THE COMPANY
Harbin Bearing was the successor to the manufacturing operations of
Harbin Bearing General Factory (the "Bearing Factory"), a Chinese state-
owned enterprise established in 1950. Harbin Bearing was established in
1993 as a joint stock limited company in China. Pursuant to an agreement
between the Bearing Factory and Harbin Bearing, the bearing manufacturing
and sales business together with certain assets and liabilities of the
Bearing Factory were transferred to Harbin Bearing (the "Restructuring").
Certain other assets and liabilities were transferred to Harbin Precision
Machinery Manufacturing Company ("Harbin Precision") and certain ancillary
operations were transferred to Harbin Bearing Holdings Company ("Harbin
Holdings"). Harbin Holdings and Harbin Precision were and are affiliates
of the Harbin Municipal Government.
As part of the Restructuring, Sunbase International (Holdings) Ltd.
("Sunbase International"), a Hong Kong corporation, through a series of
affiliated entities, including China Bearing Holdings Limited, a Bermuda
Corporation ("China Bearing"), acquired an effective ownership interest in
Harbin Bearing of 51.4%. Substantially all of the remaining interests in
Harbin Bearing were and continue to be owned by the employees of Harbin
Bearing (approximately 15%) and Harbin Holdings. After the acquisition of
the controlling interest in Harbin Bearing, Sunbase International
implemented various programs to strengthen the business and operations of
Harbin Bearing. These programs resulted in a shift in product mix to
larger, higher margin bearings which, in turn, increased profitability.
The work force was reduced approximately 25% with minimal negative effects
on production. Incentive-based pay programs and western-style accounting
and reporting systems were implemented to further strengthen and improve
Harbin Bearing's business and operations.
In December 1994, the Company (which was then called Pan American
Industries, Inc.) acquired the 51.4% effective interest in Harbin Bearing
by issuing to Asean Capital newly issued shares representing a controlling
interest in the Company. Asean Capital was, and is, owned 90% by Sunbase
International and 10% by an unrelated company, New China Hong Kong Capital
Ltd. ("New China Hong Kong"). See "Certain Relationships and Related
Transactions."
43
<PAGE>
MANAGEMENT
Directors
- ---------
The Board of Directors of the Company is comprised of only one class. The
Company's current directors are listed below. The Directors are elected to serve
until the following annual shareholders' meeting.
<TABLE>
<CAPTION>
Name Age First Elected
- ---------------------------- --- -------------
<S> <C> <C>
Gunter Gao 40 1994
Billy Kan 44 1996
William McKay 42 1996
(Roger) Li Yuen Fai 35 1994
(Franco) Ho Cho Hing 43 1994
Philip P.Y. Yuen 60 1996
George Raffini 40 1996
</TABLE>
Executive Officers
- ------------------
The Company's current executive officers are listed below. Executive
officers are elected to serve until the following annual meeting of the
Company's Board of Directors:
<TABLE>
<CAPTION>
Name Age Office First Elected
- ---------------------------- --- -------------
<S> <C> <C> <C>
Gunter Gao 40 Chairman 1994
Billy Kan 44 Vice Chairman 1996
William McKay 42 Chief Executive 1996
Officer and
President
(Roger) Li Yuen Fai 35 Vice President and 1994
Chief Financial Officer
(Dickens) Chang
Shing Yam 29 Chief Accounting 1995
Officer
(Davis) Lai Kwun Fai 33 Corporate Secretary 1996
</TABLE>
GUNTER GAO, CHAIRMAN AND DIRECTOR. Mr. Gao, a Hong Kong businessman who has
extensive business experience in China, is the Chairman of the Board and a
principal of Sunbase International, which indirectly owns a controlling position
in Sunbase Asia. Sunbase International has various industrial holdings in China,
in industries such as aviation, transportation, cement,
44
<PAGE>
steel and retail. Mr. Gao is responsible for the general strategy of the
Company and maintains overall control of the Company's operations. Mr. Gao
is actively and directly involved in all operational and strategic issues
that require his experience and expertise in handling a wide variety of
Chinese business transactions. During the 1980s, Mr. Gao engaged in
trading and investment activities in industries such as food, timber, real
estate, coal and textiles. Based on his success in these activities and
with the support of several banks in China, Mr. Gao has turned Sunbase
International into a leading China industrial company. Mr. Gao is
currently a member of China's Congress, known as the People's Political
Consultative Conference. Mr. Gao is the youngest member of the Congress
and is widely respected for his contributions to the country's development.
Mr. Gao's strong reputation in China has enabled Sunbase International to
engage in and complete many difficult transactions, including acquiring a
majority interest in Harbin Bearing and obtaining a license to create an
airline in China. Now known as Northern Swan Airlines, this airline enjoys
international prominence and the financial support of the Bank of China and
the People's Construction Bank of China. Mr. Gao serves as a Senior
Economic Advisor to several Chinese municipal and provincial governments,
including the governments of Tianjin, Hebei, Xinjiang and Harbin. In
addition, Mr. Gao is the deputy director of the Sino-Foreign Entrepreneurs
Cooperative Committee.
BILLY KAN, VICE CHAIRMAN AND DIRECTOR. Mr. Kan has been a director of
Sunbase Asia since the beginning of 1996 and was elected Vice Chairman on
June 1, 1996. In his capacity at Sunbase International, Mr. Kan reports
directly to its Board of Directors and serves as the communications and
support link in various parts of the world. Mr. Kan holds a Bachelor of
Science Degree from the University of East Anglia, a United Kingdom
university, and is a member of The Institute of Chartered Accountants in
England & Wales as well as the Hong Kong Society of Accountants. Prior to
joining Sunbase International, Mr. Kan held many directorships and senior
management positions in a wide range of professions and industries
including banking, retailing, manufacturing, property, investment and
corporate consulting.
WILLIAM MCKAY, CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR. Mr. McKay
has recently been elected as the Chief Executive Officer, President and a
Director of Sunbase Asia, and has been a Director and President of
Southwest Products since 1991. Prior to becoming President of Southwest
Products, he was Southwest Products' General Manager since 1986. Mr. McKay
has substantial experience in conducting business with China, and is very
familiar with Sino-American joint venture law and policies. Mr. McKay is
responsible for the day-to-day operations of, and the long-term planning
for, the Company in the areas of product development, marketing, financing
and general operations. Prior to jointing Southwest Products, Mr. McKay
practiced law, specializing in the areas of business and real estate. Mr.
McKay holds a Juris Doctorate Degree, Masters in Business Administration
and Bachelor of Arts degree with a major in History and minor in
International Relations from the University of Southern California.
45
<PAGE>
(ROGER) LI YUEN FAI, GROUP FINANCIAL CONTROLLER, CHIEF FINANCIAL OFFICER,
VICE-PRESIDENT AND DIRECTOR. Mr. Li has been the Group Financial
Controller of Sunbase International since 1994. He has been the Chief
Financial Officer and a Director of Sunbase Asia since 1995 and has
recently been elected as the Vice-President of Sunbase Asia. From 1990 to
1991 he was compliance manager of Hong Kong Securities Clearing Company
Limited. Mr. Li was employed by Coopers & Lybrand in Hong Kong from 1980
to 1990 (his most recent position was audit manager) and was a partner in a
Hong Kong accounting firm from 1992 to 1993.
(FRANCO) HO CHO HING, DIRECTOR. Mr. Ho has been a Director of the New
China Hong Kong Group since 1993, and a Director of Sunbase Asia since
1995. Mr. Ho is also a registered investment advisor with the Securities
and Futures Commission in Hong Kong. Mr. Ho held executive positions with
Trenomics Securities Limited (1981 to 1983), Shun Loong Bear Stearns Asia
Limited (1985 to 1988) and Best Securities Company (1991 to 1993).
PHILIP YUEN, DIRECTOR. Mr. Yuen is a solicitor of the Supreme Court of
Hong Kong. He became a practicing solicitor in 1962 and founded the
solicitors' firm Yung, Yu, Yuen & co. in 1965. He is currently the
managing partner of his firm. He has over 30 years' experience in legal
practice. Mr. Yuen has been a member of The National Committee of the
Chinese People's Political Consultative Conference since 1983 and has been
a member of the China International Economic and Trade Arbitration
Commission for the past 15 years. Mr. Yuen has established extensive
relationships with businesses in the PRC and is also a non-executive
director of Tsingtao Brewery Company Limited, Henderson Development Company
Limited, Henderson (China) Investment Company Limited and Melbourne
Enterprises Limited, all of which are listed on the stock exchange of Hong
Kong Limited.
GEORGE RAFFINI, DIRECTOR. Mr. Raffini is currently the Deputy Managing
Director of HSBC Private Equity Management Limited with responsibility for
managing the investment process for projects and regional private equity
investment funds with total capital under management of approximately
$500,000,000. Mr. Raffini received his Bachelor of Science degree from The
American University, a diploma in Political and Economic Affairs from the
Institut D'etudes Politiques, Paris, France, a Master's degree in
International Affairs from Columbia University and a MBA from Harvard
University. Mr. Raffini is the nominee of certain of the investors of the
Convertible Debentures. See "Description of Securities".
Key Management
--------------
MA JI BO, GENERAL MANAGER - HARBIN BEARING. Mr. Ma is the General Manager
of Harbin Bearing and is responsible for the day-to-day operations of
Harbin Bearing as well as strategic planning in the areas of marketing,
product development and general operations. Mr. Ma has made significant
contributions relating to the design and manufacture of a broad range of
Harbin Bearing's products. Mr. Ma has been awarded various provincial and
national Chinese awards
46
<PAGE>
for scientific and technological progress in the Chinese bearing industry
and holds a degree in rocket science from Northwest China Engineering
University.
MEI HAI YOU, DEPUTY GENERAL MANAGER - HARBIN BEARING. Mr. Mei is the
Deputy General Manager of Harbin Bearing where he has been employed for 35
years. Mr. Mei is the head of Harbin Bearing's manufacturing operations
and has extensive experience in the fields of research and development,
product development and manufacturing engineering. Mr. Mei is the author
of a number of works on mechanical engineering and bearings and holds a
degree in mechanical engineering from Harbin Polytechnic University.
MR. ZHANG ZHENG BIN, DEPUTY GENERAL MANAGER - HARBIN BEARING. Mr. Zhang
has been employed by Harbin Bearing as Deputy General Manager of Sales and
Marketing for 10 years. Mr. Zhang has extensive contacts in the Chinese
engineering community and has the responsibility of penetrating existing
markets and developing new markets for Harbin Bearing. Mr. Zhang holds a
degree in engineering from Harbin Polytechnic University.
(DICKENS) CHANG SHING YAM, ASSISTANT FINANCIAL CONTROLLER AND CHIEF
ACCOUNTING OFFICER. Mr. Chang is presently the Assistant Financial
Controller of Sunbase International and has been the Chief Accounting
Officer of Sunbase Asia since 1995. Mr. Chang was employed by the
international accounting firm of Ernst & Young in Hong Kong from 1989 to
1994, most recently as audit manager.
TODD STOCKBAUER, CHIEF FINANCIAL OFFICER - SOUTHWEST PRODUCTS. Mr.
Stockbauer is the Chief Financial Officer of Southwest Products and has
been employed by Southwest Products since 1991. He currently directs its
financial and administrative operations. Prior to 1991, he was employed in
the public accounting sector, specializing in bankruptcy, litigation
support and business turnarounds. Mr. Stockbauer holds a Bachelor of Arts
degree in business and economics with an emphasis in accounting from the
University of California at Santa Barbara, and is a Certified Public
Accountant in the State of California.
ERNST RENEZEDER, DIRECTOR OF MANUFACTURING - SOUTHWEST PRODUCTS. Mr.
Renezeder has been the Director of Manufacturing at Southwest Products
since 1992. Mr. Renezeder has over 24 years experience in manufacturing,
engineering, management, and product research and development. Mr.
Renezeder holds a Bachelor of Science degree in Molding and Foundry, which
is equivalent to a Bachelor of Science in manufacturing engineering with an
emphasis in mechanical engineering.
JOHN LEONIAK, CHIEF ENGINEER - SOUTHWEST PRODUCTS. Mr. Leoniak has been
the Chief Engineer at Southwest Products since 1991. As Chief Engineer,
Mr. Leoniak supervises Southwest Products' engineering and research and
development. Prior to joining Southwest Products, Mr. Leoniak was employed
by Grumman Aircraft Systems as the head of its Landing Gear, Armament,
Carrier Suitability and Survivability Group. Mr. Leoniak has contributed
to the writing of various US Navy manufacturing specifications, including
MIL-B-8942, MIL-B-81820,
47
<PAGE>
MIL-B-81819 and MIL-STD-1599. Mr. Leoniak holds a Bachelor of Science in
mechanical engineering from the Polytechnic Institute of Brooklyn.
PETER WANG, QUALITY CONTROL MANAGER - SOUTHWEST PRODUCTS. Mr. Wang has
been the Quality Control Manager of Southwest Products since 1993 where he
supervises the Quality Control and Inspection Departments. Prior to
joining Southwest Products, Mr. Wang held positions as a mechanical
engineer and a senior quality engineer. Mr. Wang has extensive experience
in quality and statistical process control, is fluent in Mandarin and holds
a Master of Science degree in mechanical engineering from North Carolina
A&T State University and a Bachelor of Science degree in physics from
Lenoir Rhyne College.
(DAVIS) LAI KWUN FAI, SENIOR ASSISTANT MANAGER AND CORPORATE SECRETARY.
Mr. Lai has been the Senior Assistant Manager of Sunbase International and
the Corporate Secretary of Sunbase Asia since 1996. Mr. Lai holds a
Masters of Arts degree in economics and finance from the University of
Leeds in United Kingdom.
Management Compensation
-----------------------
No compensation was earned by or awarded to any of the Company's
officers or directors in 1995. In 1995, in connection with a Management
and Services Agreement between China Bearing and Sunbase International,
Sunbase International provided to the Company and its affiliates office
space and equipment, administrative services and the services of Mr. Gao
and other employees of Sunbase International (such as Mr. Li and Mr.
Chang). In consideration of the provision of such services, in 1995, China
Bearing Holdings Limited paid Sunbase International a total of US $30,000
plus certain out-of-pocket expenses such as travel and entertainment. See
"Certain Relationships and Transactions." Based on the foregoing, no
executive officer of the Company received compensation of US $100,000 or
more from the Company.
Stock Option Plan
-----------------
On January 2, 1996, the Company's Board of Directors adopted the
1995 Sunbase Asia, Inc. Stock Option Plan (the "Plan"). The Plan permits
the grant of options to purchase an aggregate of up to 2,500,000 Shares of
the Common Stock of the Company. Under the Plan, incentive stock options
and non-qualified stock options may be issued. Eligible participants under
the Plan are those individuals and entities that the stock option committee
of the Company (the "Committee") in its discretion determines should be
awarded such incentives given the best interests of the Company; provided,
however, that incentive stock options may only be granted to employees of
the Company and its affiliates. The Committee has the power to determine
the price, terms and vesting schedule of the options granted, subject to
the express provisions of the Plan. All incentive stock options will have
option exercise prices per option share not less than the fair market value
of a share of the Common Stock on the date the option is granted, except
that in the case of incentive stock options granted to any person
possessing more than 10% of
48
<PAGE>
the total combined voting power of all classes of stock of the Company or any
affiliate of the Company, the price shall not be less than 110% of such fair
market value. The Plan terminates on the earlier of that date on which no
additional shares of Common Stock are available for issuance under the Plan or
January 2, 2006.
In connection with an employment agreement entered into by and between the
Company and William R. McKay on January 16, 1996, and pursuant to the Plan, the
Company granted Mr. McKay the option to purchase an aggregate of up to 800,000
shares of Common Stock of the Company. The option is intended by the Company and
Mr. McKay to be, and will be treated as, an incentive stock option. The options
granted to Mr. McKay vest at the rate of 160,000 shares per each full year of
Mr. McKay's employment under the Agreement. Mr. McKay may exercise the options
that have vested and purchase shares of the Common Stock of the Company at the
following prices:
<TABLE>
<CAPTION>
Exercise Price of
Full Years of Options that Vest
Employment After Each Such Year
------------- --------------------
<S> <C>
One $ 6.65
Two $ 7.75
Three $ 9.25
Four $10.75
Five $12.75
</TABLE>
All unexercised options will expire on that date which is six years after
the date on which such options have vested.
On July 1, 1996, the Compensation Committee of the Company granted stock
options to the following individuals on the following terms:
<TABLE>
<CAPTION>
Number of
Exercise Shares per
Option Holder Vesting Schedule Price/share Option Rights
- -------------------- ---------------- ----------- -------------
<S> <C> <C> <C>
Billy Kan January 16, 1996 $6.375 200,000
January 16, 1997 $6.375 200,000
January 16, 1998 $6.375 200,000
-------
600,000
=======
Roger Li January 16, 1996 $6.375 200,000
January 16, 1997 $6.375 200,000
January 16, 1998 $6.375 200,000
-------
600,000
=======
</TABLE>
49
<PAGE>
<TABLE>
<S> <C> <C> <C>
Dickens Chang January 16, 1996 $6.375 15,000
January 16, 1997 $6.375 15,000
January 16, 1998 $6.375 20,000
------
50,000
======
</TABLE>
Employment Agreements
- ---------------------
On January 16, 1996, Sunbase Asia and Southwest Products entered into an
employment agreement with William R. McKay (the "Agreement") pursuant to which
Mr. McKay is employed to serve as President and Chief Executive Officer of
Southwest Products and as President and Chief Executive Officer of Sunbase Asia.
Under the terms of the Agreement, Mr. McKay will be paid an annual base salary
of $285,000. The base salary may be increased or decreased (to a minimum of
$225,000), based upon an annual review of Mr. McKay's performance. In addition
to the base salary, the Board of Directors of Sunbase Asia may, at its sole
discretion, pay Mr. McKay a bonus for any particular year of his employment. On
January 16, 1996, in connection with the execution of the Agreement, Sunbase
Asia, Southwest Products and Mr. McKay entered into a Confidentiality and Non-
Competition Agreement pursuant to which Mr. McKay agrees to keep certain
information of Sunbase Asia, Southwest Products and their affiliates
confidential, and is prohibited from competing with Sunbase Asia, Southwest
Products and their affiliates during the term of the Agreement.
Pursuant to the terms of an Employment Agreement between the Company and
Mr. Kan dated August 1, 1996, Mr. Kan is employed as the Vice Chairman of the
Board of Directors or such other capacity of an equivalent status as the Company
may reasonably require. The term of employment commenced on August 1, 1996 and
continues until terminated by either party giving to the other not less than 12
months prior notice expiring on or at any time after the end of the specified
period. Mr. Kan's duties include the development, marketing and promoting of the
products of the Company as may be required by the Board of Directors. Mr. Kan is
to exercise such powers and functions and perform such duties in relation to the
business of the Company as may from time to time be assigned to him by the
Board. Mr. Kan will be paid a salary of HK$1,625,000 per annum subject to review
by the Board on an annual basis. Mr. Kan is also entitled to stock options. See
"Management - Stock Options."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As discussed above (See "Organization of the Company"), an effective 51.4%
in Harbin Bearing was acquired at the end of 1993 by then affiliates of Sunbase
International. This was accomplished by the acquisition by China Bearing of
China International Bearing (Holdings) Limited ("China International"). China
International was incorporated to act as the holding company of two Sino-foreign
joint venture companies which in turn were formed to acquire in the aggregate a
51.6% interest in Harbin Bearing. China International has a 99.9% equity
interest in one of the joint venture companies and a 99% equity interest in the
other, which in turn hold a 41.6% and 10% interest, respectively, in Harbin
Bearing. Because of the minority interests held
50
<PAGE>
in the two joint venture companies, the Company has an effective 51.4%
ownership interest in Harbin Bearing. (See the Organizational Chart on
page 6). The aggregate cash consideration contributed by the joint venture
companies was Rmb 232.1 million which was principally financed by an
interest free loan from Sunbase International to China International (the
"Sunbase Loan"). China International in turn made equity contributions and
loans to the two joint venture companies.
In April 1994, New China Hong Kong acquired from Sunbase International
10% of the outstanding stock of China Bearing and 10% of the Sunbase Loan.
The Sunbase Loan was later assigned to China Bearing, and China Bearing
assumed the Sunbase Loan for a consideration of the same amount payable to
it by China International. The obligations under the Sunbase Loan were
extinguished by Sunbase International and New China Hong Kong, and the
amount thereof was treated as a contribution of cash to China Bearing and
credited to its contributed surplus account. Thereafter, the shares of
China Bearing owned by Sunbase International and New China Hong Kong were
transferred to Asean Capital, in which Sunbase International and New China
Hong Kong own 90% and 10%, respectively. As set forth above, in December
1994, Asean Capital transferred all of its interest in China Bearing to the
Company.
Pursuant to a Management Services Agreement between Sunbase
International and China Bearing dated January 1, 1994, Sunbase
International agreed to provide China Bearing and its affiliates, including
the Company, advice and consultation, including strategic management,
business planning and development services, accounting and financial
service, human resource service, sales and marketing service and such
additional services as may be agreed upon for an annual fee of US $30,000.
China Bearing is also obligated to reimburse Sunbase International for its
direct out-of-pocket costs incurred in providing the management services.
The Agreement's term was two years and it expired on December 31, 1995.
China Bearing and Sunbase International are presently discussing an
extension of the Agreement.
Harbin Bearing and Harbin Precision have entered into leases (the
"Ancillary Transport Equipment Lease" and the "Manufacturing Machinery
Lease"), covering all equipment and assets of the Bearing Factory relating
to the bearing operations which were not contributed to the Company in the
Restructuring. The Leases cover cars, trucks, machinery and equipment used
in manufacturing, office administration and power generation and provide
for total annual payments of US $3,267,000. At the expiration of the two
Leases in December 31, 1998 and December 31, 2001, respectively, Harbin
Bearing has the right to either renew the Leases or acquire the equipment.
Harbin Bearing and Harbin Holdings have entered into a lease covering
plants and buildings used in Harbin Bearing business which were not
contributed to Harbin Bearing in the Restructuring (the "Plant Lease").
The Plant Lease provides for annual rent payments of US $451,000. At the
expiration of the lease on December 31, 1998, Harbin Bearing has the right
to extend the lease at market rent for another five years.
51
<PAGE>
As a result of the Restructuring, Harbin Holdings owns the rights to
the trademark "HRB." Pursuant to an exclusive and perpetual trademark
license agreement, Harbin Holdings has granted Harbin Bearing the exclusive
and perpetual right to use the "HRB" trademark on its products and
marketing materials. The royalty on the trademark license agreement is
0.5% of annual sales from 1994 to 2003 and 0.3% from 2004 to 2013.
Pursuant to the Restructuring, Harbin Holdings assumed
responsibilities of the pension payments of all employees of the Bearing
Factory who retired or left the Bearing Factory prior to the Restructuring.
Harbin Bearing and Harbin Holdings have entered into an agreement (the
"Pension Agreement") relating to pension arrangements after the
Restructuring. The Pension Agreement provides that Harbin Bearing may
satisfy the statutory requirement to pay an amount equal to 20% of annual
wages to the municipal government to fund future pension obligations of its
existing employees, by making such payments to Harbin Holdings as
representative of the municipal government of Harbin, and Harbin Holdings
agrees to be responsible for all pension obligations to employees of Harbin
Bearing who retire or leave after the Restructuring.
Subsequent to December 31, 1993, Harbin Bearing and Harbin Holdings
entered into a management and administrative services agreement. The
agreement provides for the payment by Harbin Bearing of an annual fee of
Rmb 17,160,000 (approximately US $2,049,000) in connection with services
for medical, heating, education and other staff-related benefits provided
by Harbin Holdings for a term of three years. The costs of these services
were previously fully paid by the Bearing Factory and have now been
superseded by the above agreement. The fees are subject to an annual 10%
inflation adjustment.
Agreements were also entered into by Harbin Bearing with the two joint
venture holding companies of Harbin Bearing in respect of general
management services to be provided by the joint venture companies from
January 1, 1994 to December 31, 1995 at an annual fee of Rmb 150,000,000
(US $18,000) payable to each of the joint venture companies.
Harbin Bearing made sales of Rmb 42,855,000 (1994: Rmb 46,578,000) and
Rmb 40,257,000 (1994: Rmb 7,832,000) to Harbin Bearing Import & Export
Company ("HBIE") and Xin Dadi Mechanical and Electrical Equipment Company
("Xin Dadi"), related companies owned by the Harbin Municipal Government,
respectively, during the fiscal year ended December 31, 1995. As at
December 31, 1995, the amounts of the trade receivables from HBIE and Xin
Dadi included under due from related companies were Rmb 65,520,000 (1994:
Rmb 54,496,000) and Rmb Nil (1994: Rmb 9,164,000), respectively. Amount
due to Xin Dadi included in due to related companies as at December 31,
1995 was Rmb 105,171,000, representing advance payment received in respect
of future sales.
The municipal government of Harbin has allocated to Harbin
Holdings the right to use the parcels of land on which Harbin Bearing's
operations are conducted. Harbin Holdings has agreed to lease the land on
which the main factory is situated to Harbin Bearing in return for an
initial annual rental of Rmb 2,508,000 (US$301,000) effective from January
1, 1994 subject to future adjustments in accordance with changes in
government fees.
52
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of September 5, 1996, the stock
ownership of all persons known to own beneficially five percent (5%) or more of
the equity securities of the Company, and all directors and officers of the
Company and its affiliates, individually and as a group. Each person has sole
voting and investment power over the shares indicated, except as noted.
<TABLE>
<CAPTION>
Equity Ownership Voting Rights
---------------- -------------
Amount of Percent Amount of
Name and Beneficial of Beneficial
Address Ownership/(1)/ Class/(2)/ Ownership/(1)/ Percent
- ---------------------------------------- -------------------- ------------ ---------------- -------
<S> <C> <C> <C> <C>
Asean Capital 13,711,000/(3)/ 80.75% 28,111,000/(4)/ 80.36%
Gunter Gao 13,711,000/(3)(5)/ 80.75% 28,111,000/(4)/ 80.36%
Chairman and Director
Glory Mansion Limited ("GML") 1,200,000/(6)/ 6.6% 1,200,000/(6)/ 3.3%
Wardley China Investment Trust 400,000/(7)/ 2.3% 400,000/(8)/ 1.1%
("Wardley")
Private Equity 1,200,000/(8)/ 6.6% 1,200,000 3.3%
Management BVI Limited ("PEM")
William McKay/(9)/ 25,000 - 25,000 -
Chief Executive Officer,
President and Director
Li Yuen Fai (Roger)/(10)/ - - - -
Chief Financial Officer,
Vice President and Director
Dickens Chang/(11)/ - - - -
Chief Accounting Officer
Lai Kwan Fai (Davis) - - - -
Corporate Secretary
Billy Kan/(12)/ - - - -
Vice Chairman and Director
Ho Cho Hing (Franco) - - - -
Director
Philip Yuen - - - -
Director
George Raffini/(13)/ - - - -
Director
Sunbase International 13,711,000 80.75% 28,111,000 80.36%
(Holdings) Limited/ (14)/
All directors and officers 13,711,000 80.75% 28,111,000 80.36%
of the Company as a Group/ (15)/
</TABLE>
_________________________
* less than 1 percent
53
<PAGE>
(1) As used in this table, "beneficial ownership" means the sole or shared
power to vote, or to direct the voting of, a security, or the sole or
share investment power with respect to a security (i.e., the power to
dispose of, or to direct the disposition of a security).
(2) Based on 16,980,104 shares of Common Stock outstanding calculated as
follows: (a) 12,700,104 shares outstanding; (b) 3,600,000 shares
issuable upon conversion of the Series A Preferred Stock and (c)
680,000 shares issuable upon conversion of the Series B Preferred
Stock. This amount excludes shares of Common Stock issuable pursuant
to conversion of the Convertible Debentures, warrants and options.
(3) Includes 10,111,000 outstanding shares of Common Stock and 3,600,000
shares of Common Stock issuable upon conversion of the Series A
Preferred Stock.
(4) Includes 10,111,000 voting rights held by way of Asean Capital's
ownership of 10,111,000 shares of Common Stock and 18,000,000 voting
rights held by way of Asean Capital's ownership of 36 shares of the
Series A Preferred Stock.
(5) Includes shares of Sunbase Common Stock and Preferred Stock
beneficially owned by Gunter Gao and Linda Yang, husband and wife, by
way of the ownership by each of Mr. Gao and Ms. Yang of 50% of the
capital stock of Sunbase International, which in turn owns 90% of the
capital stock of Asean Capital. Each of Ms. Yang and Mr. Gao disclaims
beneficial ownership of the shares held by the other, although their
ownership has been aggregated for purposes of this table.
(6) Consists of shares issuable upon conversion of the Convertible
Debentures at an initial exercise price of $5.00 per share. GML is the
record owner of $6,000,000 in principal amount of Convertible
Debentures.
(7) Consists of shares issuable upon conversion of the Convertible
Debentures at an initial exercise price of $5.00 per share. Wardley is
the record owner of $2,000,000 in principal amount of Convertible
Debentures.
(8) PEM, as the general partner of the HSBC Private Equity Fund, L.P., the
parent of GML, shares voting power and has sole investment power over
shares of Common Stock issuable to GML upon conversion of the
Convertible Debentures.
(9) Does not include 800,000 shares of Common Stock issuable upon exercise
of the stock options granted to Mr. McKay (See "Management Stock Option
Plan.") or any shares issuable upon conversion of 18 shares of Series B
Preferred Stock owned by Mr. McKay.
(10) Does not include 600,000 shares of Common Stock issuable upon exercise
of stock options granted to Mr. Li. See "Management Stock Option
Plan."
(11) Does not include 50,000 shares of Common Stock issuable upon exercise
of stock options granted to Mr. Chang. See "Management Stock Option
Plan".
54
<PAGE>
(12) Does not include 600,000 shares of Common Stock issuable upon exercise
of stock options granted to Mr. Kan. See "Management Stock Option
Plan."
(13) Does not include any shares issuable upon conversion of the
Convertible Debentures owed by GML and Wardley. Mr. Raffini is an
employee of HSBC and the nominee of GML and Wardley to the Board of
Directors.
(14) Consists of 10,111,000 outstanding shares of Common Stock and
3,600,000 shares of Common Stock issuable upon conversion of the
Series A Preferred Stock owned by Asean Capital, of which Sunbase
International owns 90%.
(15) Consists of shares beneficially owned by Gunter Gao. See also (9),
(10), (11) and (12) above.
55
<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
------------
The Company is authorized to issue 50,000,000 shares, $.001 par value.
All shares have equal voting rights and are fully paid and non-assessable.
Voting rights are not cumulative, and, therefore, the holders of more than
50% of the Common Stock of the Company could, if they chose to do so, elect
all the Directors.
Holders of the Common Stock are entitled to share ratably in all of the
assets of the Company available for distribution to the holders of shares
of Common Stock upon the liquidation, dissolution or winding up of the
Company. The holders of the Common Stock do not have preemptive rights to
subscribe for any securities of the Company and have no right to require
the Company to redeem or purchase their shares.
Holders of Common Stock are entitled to share equally when, as and if
declared by the Board of Directors of the Company, out of funds legally
available thereafter. The Company has not paid any cash dividends on its
Common Stock, and it is unlikely that any such dividends will be declared
in the foreseeable future. See "Dividend Policy."
Preferred Stock
---------------
The Company is authorized to issue 25,000,000 shares of Preferred
Stock, $.001 par value. The Preferred Stock may be issued in series from
time to time with such designation, rights, preferences and limitations as
the Board of Directors of the Company may determine by resolution. The
rights, preferences and limitations of separate series of Preferred Stock
may differ with respect to such matters as may be determined by the Board
of Directors, including, without limitation, the rate of dividends, method
and nature of payment of dividends, terms of redemption, amounts payable on
liquidation, sinking fund provisions (if any), conversion rights (if any),
and voting rights. Unless the nature of a particular transaction and
applicable statutes require such approval, the Board of Directors has the
authority to issue these shares without shareholders approval. The
issuance of Preferred Stock may have the effect of delaying or preventing a
change in control of the Company without any further action by
shareholders. There are no present plans to issue any such shares.
As of the date of this Prospectus, 36 shares of Series A Preferred
Stock and 6,800 shares of Series B Preferred Stock are outstanding. The
Series A Preferred Stock participates with the shares of Common Stock on an
as converted basis with respect to any dividends declared by the Company.
The holders of Series A Preferred Stock are entitled to share ratably with
the holders of the Common Stock in all of the assets of the Company (on an
as converted basis) upon the liquidation, dissolution or winding up of the
Company. The Series A Preferred Stock has no liquidation preference. The
holders of the Series A Preferred Stock have the right to convert each
share of the Series A Preferred Stock into 100,000 shares of Common Stock.
The holders of the
56
<PAGE>
Series A Preferred Stock have a right to vote as a class with the holders
of Common Stock on the basis of 500,000 votes per share of Series A
Preferred Stock.
The Series B Preferred Stock participates with the shares of Common
Stock on an as converted basis with respect to any dividends paid by the
Company. Upon any liquidation, dissolution or winding up, the holders of
the Series B Preferred Stock are entitled, before any distribution to
holders of Common Stock or any other shares of the Company ranking junior
to the Series B Preferred Stock to receive an amount equal to $500 per
share. Holders of the Series B Preferred Stock will be entitled to vote on
matters submitted to the shareholders of the Company on an as converted
basis (for such purposes, each share of Series B Preferred Stock being
deemed convertible into 100 shares of Common Stock). At the individual
option of a holder, the Company is required to redeem the number of shares
of Series B Preferred Stock held by such holder that is specified in a
request for redemption delivered to the Company by the holder on or prior
to 15 days from the date the Company notifies such holder of its intent to
file a Registration Statement with the Securities Exchange Commission for
the public offering of the Common Stock of the Company with respect to
which the applicable Registration Statement designates that a portion of
the proceeds thereof will be used to redeem the Series B Preferred Stock.
The Company is required to redeem such stock out of the proceeds of such
public offering by paying $500 per share less the holder's pro rata share
of the underwriter's commission for the sale in the public offering of that
number of shares of Common Stock necessary to redeem the Series B Preferred
Stock. The shares of the Series B Preferred Stock are convertible into
Common Stock to the extent that a holder does not elect to redeem the
shares of Series B Preferred Stock as provided above and on the basis of
100 shares of Common Stock for each share of Preferred Stock. If, by the
date which is two years after the date on which the shares of Series B
Preferred Stock are distributed to the holders, such holders have not been
able to redeem their shares because the Company has not made a public
offering as specified, the holder's shares are automatically converted into
shares of Common Stock on the following basis: On the first business day
following the expiration of the two year period, each share is to be
automatically converted into that number of shares of Common Stock that
equals $500 divided by the lesser of $5.00 or the average closing price of
Common Stock computed by taking the then most recent 60 consecutive trading
days when the Company's Common Stock is traded at a minimum volume of 2,000
shares per day for 45 of those 60 trading days.
Series A Warrants
-----------------
The Company has outstanding an aggregate of 10,392,167 Series A
Warrants (the "Warrants") to acquire the Common Stock of the Company. The
Warrants expire on June 30, 1998. For each share of Common Stock to be
purchased, the holder is required to deliver 70 Warrants together with an
exercise price per share of Common Stock of $175.00.
Convertible Debentures
----------------------
Pursuant to a Subscription Agreement dated August 2, 1996 (the
"Subscription Agreement"), among China Bearing, Asean Capital, China
International Bearing Holdings Limited, the Company and Southwest Products
(collectively, the "Sunbase Group"); Glory
57
<PAGE>
Mansion Limited ("GML") and Wardley China Investment Trust (collectively,
the "Funds"); MC Private Equity Partners Asia Limited ("MC Partners"); and
Chine Investissement 2000 ("Cl2000") (the Funds, MC Partners and CI2000 are
hereinafter referred to as the "Investors"), on August 23, 1996, China
Bearing issued an aggregate of $11,500,000 principal amount of Convertible
Debentures (the "Convertible Debentures") to the Investors. Unless the
Convertible Debentures have been converted, the Convertible Debentures are
due and payable in August, 1999 (the "Maturity Date"). The Convertible
Debentures bear interest at the rate of the higher of (i) 5% per annum (net
of withholding tax, if applicable) and (ii) such percentage of the dividend
yield calculated by reference to dividing the annual dividend declared per
share of Common Stock of the Company by the Conversion Price (as
hereinafter defined). Interest is payable quarterly.
The Investors have the right to convert at any time the whole or any
part of the principal amount of the Convertible Debentures into shares of
the Common Stock of the Company. The Conversion Price (the "Conversion
Price") is initially $5.00 per share, subject to adjustment for (a) change
in par value of the Common Stock, (b) issuance of shares by way of
capitalization of profits or reserves, (c) capital distributions, (d)
rights offering at a price which is less than the lower of the then market
price or Conversion Price, (e) issuance of derivative securities where the
total consideration per share initially receivable is less than the lower
of the then market price or Conversion Price, (f) issuance of shares at a
price per share which is less than the lower of the then market price or
the Conversion Price, and (g) if the cumulative audited earnings per share
for any two consecutive fiscal years commencing with the fiscal year ending
1996 and ending with the fiscal year ending 1998 are less than the
specified projection of cumulative earnings per share for such period.
The Convertible Debentures are required to be redeemed on the Maturity
Date at its principal amount outstanding together with any accrued but
unpaid interest together with an amount that would enable the Investors to
yield an aggregate internal rate of return of 12% per annum on the cost of
their investment. In addition, if any of the events of default specified
in the Convertible Debentures occurs, the Convertible Debentures are
automatically due and payable at the principal amount outstanding together
with accrued interest and an amount that would enable the Investors to
yield an aggregate internal rate of return on their investment of 19.75%
per annum. Events of default include the delisting of the shares on NASDAQ
or its suspension thereof; default in performance after failure to cure
after notice; failure to pay principal or interest; failure to pay
indebtedness for borrowed money; bankruptcy, insolvency or unsatisfied
judgments; failure to achieve earnings per share of at least $.55 for
fiscal years commencing January 1, 1996; and accounts receivable reaching a
certain level in relationship to net sales.
The obligations of China Bearing under the Convertible Debentures are
guaranteed by the other members of the Sunbase Group.
Pursuant to the provisions of the Subscription Agreement, each member
of the Sunbase Group undertakes to appoint a nominee of GML to each of its
respective boards of directors and the Company is required to appoint a
nominee of GML as a member of its audit committee. Additionally, the
Subscription Agreement contains various affirmative and negative covenants
pertaining to such matters as corporate governance, conduct of board
meetings, provision of
58
<PAGE>
financial statements and other information, delivery of budgets and
business plans, inspection of property and books and records, use of the
proceeds from the issuance of the Convertible Debentures (limited to
working capital to expand the business of the Sunbase Group and to repay
existing debt), and consultation rights.
The Subscription Agreement requires that each member of the Sunbase
Group receive the approval from each of the Funds prior to attempting to
make certain fundamental changes such as a change to its capital structure;
issuance of securities; amendment to its charter documents; effecting any
merger; consolidation or subdivision of its shares; change in rights with
respect to shares; and the redemption, purchase or cancellation of shares.
Additionally, for so long as the Funds hold in the aggregate more than 50%
of the total principal amount of the Convertible Debentures outstanding,
the Funds have certain first refusal rights with respect the future
issuance of securities by any member of the Sunbase Group. Also, there are
restrictions on the ability of any member of the Sunbase Group to grant or
permit to exist any security interest upon its assets or the provision of
any guaranty or indemnity in respect of its securities. The Subscription
Agreement further provides that unless the approval of the Funds have been
obtained, no member of the Sunbase Group may acquire assets in excess of
$3,000,000; borrow, lend or give any guaranty of any amount greater than
$3,000,000; sell assets having a fair market value in excess of $3,000,000;
make dividend payments in excess of 20% of the Company's audited earnings
per share; grant liens in excess of $3,000,000; or enter into certain
related party transactions.
The Subscription Agreement also provides for certain demand
registration rights in favor of the Investors in the event that any such
Investor is deemed an affiliate of the Company.
Limitations on Directors' Liabilities and Indemnification
---------------------------------------------------------
The Company's Articles of Incorporation and Bylaws currently provide
that the liability of the directors of Company for monetary damages shall
be eliminated to the fullest extent permitted under Nevada Law. The
Company's Bylaws provide that a director who performs the duties as
described in the Bylaws shall not be liable or obligated to the
shareholders or other directors for any mistake of fact or judgment made in
carrying out the duties of the director, absent fraud, deceit or any
wrongful taking.
Transfer and Warrant Agent
--------------------------
U.S. Stock Transfer Company, 1745 Gardena Avenue, 2nd Floor, Glendale,
California 91204-2991, serves as transfer and warrant agent for the
Company's Common Stock and Series A Warrants.
Reports to Shareholders
-----------------------
The Company intends to furnish annual reports to shareholders which
will include audited financial statements reported on by its certified
public accountants. In addition, the Company may issue unaudited quarterly
or other interim reports to shareholders as it deems appropriate.
59
<PAGE>
Shares Eligible for Future Sale
-------------------------------
As of the date of this Prospectus, Asean Capital owned 10,111,000
shares of Common Stock and 36 shares of the Company's Series A Preferred
Stock which is convertible into 3,600,000 of the Company's Common Stock at
any time (collectively the Asean Securities). The Asean Securities were
issued on December 22, 1994 and are deemed "restrictive securities" under
the Securities Act and, as such, will be subject to restrictions on the
timing, manner and volume of sales of such shares pursuant to Rule 144 of
the Securities Act. On June 10, 1996, the Company issued 1,000,000 shares
of the Company's Common Stock (the "Private Placement Shares") in a private
placement. Pursuant to Registration Rights Agreements between the Company
and each of such investors, the Company has agreed to file a Registration
Statement covering the Private Placement Shares. This Prospectus is a part
of such Registration Statement. Upon the effectiveness of such
Registration Statement, the Private Placement Shares would be freely
tradable. In addition to the 3,600,000 shares of the Common Stock issuable
upon conversion of the Series A Preferred Stock, the Company has issued an
aggregate of 6,800 shares of Series B Preferred Stock which are convertible
under certain circumstances into an aggregate of 680,000 shares of Common
Stock. The shares of the Common Stock issuable upon conversion of the
Series B Preferred Stock will be deemed to be restricted shares, but,
pursuant to Rule 144 as presently in effect, will become eligible for sale
in the public market on or before January 16, 1998, subject to the volume
and limitations imposed by Rule 144 with respect to shares owned by William
McKay.
Additionally, as of the date of this Prospectus, there are 10,392,167
warrants outstanding to purchase an aggregate of 148,459 shares of Common
Stock at an exercise price of $175 per share, and an aggregate of 2,050,000
options to purchase Common Stock granted pursuant to the Company's 1995
Stock Option Plan at exercise prices ranging from $6.375 to $12.75 per
share. On August 23, 1996, the Company issued an aggregate of $11,500,000
principal amount of Convertible Debentures to four institution investors.
The Convertible Debentures are convertible at any time at an initial
exercise price of $5.00, which conversion price is subject to adjustment as
set forth in the Debenture documents. See "Description of Securities."
The holders of the Convertible Debentures have certain demand registration
rights with respect to the shares issuable pursuant to the conversion of
the Convertible Debentures. The Company also agreed to issue to an
investment banking firm in connection with the placement of the Convertible
Debentures warrants to purchase an aggregate of 240,000 shares at an
exercise price of $6.375 per share, one third of which is to be exercisable
on January 16, 1997, one third on January 16, 1998 and one third on January
16, 1999, with each such tranche to be available for exercise six years
commencing with the date of the earliest exercise.
In general, under Rule 144, as currently in effect, any holder of
restricted shares, including an affiliate of the Company, as to which at
least two years have elapsed since the later of the date of the acquisition
of such restricted shares from the company or an affiliate, is entitled
within any three-month period to sell a number of shares that does not
exceed the greater of 1% of the then-outstanding shares of Common Stock or
the average weekly trading volume of the Common Stock in the Nasdaq
National Market during the four calendar weeks preceding the date on which
60
<PAGE>
notice of the sale is filed with the Commission. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. Affiliates of the
Company must comply with the requirements of Rule 144 (except for the two-year
holding period requirement) in order to sell shares of Common Stock which are
not "restricted securities."
Further, under Rule 144(k) a person who holds restricted shares as to which
at least three years have elapsed since the date of their acquisition from the
Company or an affiliate, and who is not deemed to have been an affiliate of the
Company at any time during the three months preceding a sale, is entitled to
sell such shares under Rule 144 without regard to volume limitations, manner of
sale provisions, notice requirements or availability of current public
information concerning the Company.
SELLING SHAREHOLDERS
The following table will provide certain information with respect to
the persons offering the shares of the Common Stock pursuant to this Prospectus
(the "Selling Shareholders") including their name and the number of shares to be
offered. All of the shares were acquired by the Selling Shareholders pursuant to
a Private Placement which was consummated on or about June 10, 1996. Pursuant to
Registration Rights Agreements between the Company and the Selling Shareholders,
the Company was required to file a Registration Statement covering the resale of
the shares of Common Stock acquired. None of the Selling Shareholders personally
owns in excess of 5% of the outstanding shares of Common Stock on a fully
diluted basis (after taking into account the shares of Common Stock issuable
upon conversion of the Series A Preferred Stock, the Series B Preferred Stock
and the Convertible Debentures), except that affiliates of HSBC Asset Management
Bahamas Ltd. beneficially own in excess of 5% as a result of their ownership of
the Convertible Debentures.
<TABLE>
<CAPTION>
NAME SHARES TO BE OFFERED
<S> <C>
Arnhold & S.
Bleichroeder, Inc. 30,000
Asian Managed
Volatility Fund LLC 25,000
Asia Commercial
Bank (nominees) Ltd. 100,000
Vickers Ballas Holdings
Ltd. 200,000
Clarex Ltd. 100,000
</TABLE>
61
<PAGE>
<TABLE>
<S> <C>
Clemente Global Growth
Fund 100,000
Cosco Investment
(Singapore) Ltd. 50,000
Roberto Fabros 3,000
Steven Gluckstein 3,000
Hamac & Company 68,000
Rick Howell 10,000
HSBC Asset Management
Bahamas Ltd. 100,000
Plitt & Co. 32,000
Sterneck Aggressive
Growth, LP 40,000
Sterneck Partners LP 60,000
William Storms 10,000
Todd Stockbauer 2,400
David Lutz 1,800
Cameron McKay 2,000
William McKay 25,000
Ernst Renezeder 3,000
Tim R. Wulfekuhle 3,000
Frank Brothers 1,800
AFAM Controlled Risk
Asian Equity Fund Ltd. 25,000
TR Enterprises Defined
Benefit Plan 5,000
</TABLE>
62
<PAGE>
PLAN OF DISTRIBUTION
The Shares are being offered by the Selling Shareholders from time to
time on the NASDAQ system, in privately negotiated transactions or on other
markets. Any Shares sold in brokerage transactions will involve customary
broker's commissions. No underwriter will participate in any sales on
behalf of the Selling Stockholders.
EXPERTS
The consolidated financial statements of the Company at December 31,
1994 and 1995 and for each of the two years in the period ended December
31, 1995 and the financial statements of the Harbin Bearing General Factory
at December 31, 1993 and 1992 and for each of the three years ended
December 31, 1993 appearing in this Prospectus and the Registration
Statement have been audited by Ernst & Young, independent auditors, as set
forth in their report thereon and elsewhere herein and in the Registration
Statement, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
63
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF
HARBIN GENERAL FACTORY FOR THE
YEARS ENDED DECEMBER 31, 1993, 1992
and 1991
<S> <C>
Report of Independent Auditors F-3
Balance Sheets as of December 31,
1992 and 1993 F4
Statements of Income for the years
ended December 31, 1991, 1992 and
1993 F5
Statements of Cash Flows for the
years ended December 31, 1992 and 1993 F6-F7
Statements of Changes in Equity
for the years ended December 31,
1991, 1992 and 1993 F8
Notes to Financial Statements F9-F16
FINANCIAL STATEMENTS OF THE COMPANY
FOR THE YEARS ENDED DECEMBER 31,
1995 AND 1994
Report of Independent Auditors F17
Consolidated Balance Sheets as of
December 31, 1994 and December 31, 1995 F18-F19
Consolidated Statements of Income for the
years ending December 31, 1994 and
December 31, 1995 F20
Consolidated Statements of Cash Flows
for the years ending December 31, 1994
and December 31, 1995 F21-F22
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Consolidated Statements of Changes
in Shareholders' Equity for the years ended
December 31, 1994 and December 31, 1995 F23
Notes to Consolidated Financial Statements F24-F43
UNAUDITED FINANCIAL STATEMENTS OF
THE COMPANY FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995
Consolidated Condensed Balance Sheets as of
December 31 1995 and September 30, 1996 F44-F45
Consolidated Condensed Statements of
Income for the nine months ended
September 30, 1995 and 1996 F46
Consolidated Condensed Statements
of Cash Flows for the nine months
ended September 30, 1995 and 1996 F47
Notes to Consolidated Financial
Statements F48-F54
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Sunbase Asia, Inc.
We have audited the accompanying balance sheets of Harbin Bearing
General Factory as predecessor of Harbin Bearing Company Limited
(incorporated in the People's Republic of China ("China")) as of December
31, 1992 and 1993, and the related statements of income, cash flows and
changes in equity for the years ended December 31, 1991, 1992 and 1993.
These financial statements are the responsibility of Harbin Bearing General
Factory's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Harbin Bearing
General Factory as predecessor of Harbin Bearing Company Limited at
December 31, 1992 and 1993, and the results of its operations and its cash
flows for the years ended December 31, 1991, 1992 and 1993, in conformity
with accounting principles generally accepted in the United States of
America.
ERNST & YOUNG
Hong Kong
February 20, 1995
F-3
<PAGE>
HARBIN BEARING GENERAL FACTORY
BALANCE SHEETS AS OF DECEMBER 31, 1992 AND 1993
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
1992 1993
Notes Rmb Rmb
<S> <C> <C> <C>
ASSETS
Current assets
Cash and bank balances 21,434 174,467
Accounts receivable, net 5 201,430 331,123
Inventories, net 6 211,619 319,859
other receivables 57,392 96,814
Due from related companies 2,302 11,376
------- ---------
Total current assets 494,177 933,639
Fixed assets, net 7 341,120 338,841
Long term investments 8 7,168 7,262
------- ---------
Total assets 842,465 1,279,742
======= =========
LIABILITIES AND EQUITY
Current liabilities
Short term bank loans 9 277,156 298,752
Current portion of long term bank loans 11 25,390 36,700
Accounts payable 53,123 116,906
Other payables 40,135 58,482
Due to related companies 5,961 1,604
Debentures 10 10,000 10,000
Taxes other than income 18,269 12,201
------- ---------
Total current liabilities 430,034 534,645
Long term bank loans 11 112,830 106,556
Long term loans 12 32,612 33,810
Loans from prospective investors 13 - 300,000
------- ---------
575,476 975,011
Obligations and commitments 14
Equity:
Dedicated capital 16 261,297 203,376
Retained earnings 5,692 101,355
------- ---------
Total equity 266,989 304,731
------- ---------
Total liabilities and equity 842,465 1,279,742
======= =========
</TABLE>
The accompanying notes form an integral part of
the financial statements.
F-4
<PAGE>
HARBIN BEARING GENERAL FACTORY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(Amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1991 1992 1993
Notes Rmb Rmb Rmb
<S> <C> <C> <C> <C>
Sales 457,857 680,724 711,420
Sales tax ( 33,012) ( 37,046) ( 24,356)
-------- -------- --------
Net sales 424,845 643,678 687,064
Cost of sales (335,882) (452,594) (441,467)
-------- -------- --------
Gross profit 88,963 191,084 245,597
Selling, general and
administrative expenses ( 80,136) (100,142) ( 94,685)
Interest expense, net 22 ( 24,404) ( 27,986) ( 40,723)
Foreign exchange losses - ( 566) ( 3,446)
-------- -------- --------
Income/(loss) before income
taxes ( 15,577) 62,390 106,743
Provision for income taxes 4 ( 13,020) ( 11,123) ( 11,080)
-------- -------- --------
Net income/(loss) ( 28,597) 51,267 95,663
======== ======== ========
</TABLE>
The accompanying notes form an integral part of
the financial statements.
F-5
<PAGE>
HARBIN BEARING GENERAL FACTORY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(Amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1991 1992 1993
Rmb Rmb Rmb
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income (28,597) 51,267 95,663
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 18,584 21,025 27,128
(Gain) loss on disposals of
property, machinery & equipment ( 1,629) ( 540) 1,005
Foreign exchange losses - 566 3,446
(Increase) decrease in assets:
Accounts receivable 3,967 ( 28,878) (129,693)
Inventories (18,208) ( 13,225) (108,240)
Other receivables (16,110) ( 23,154) ( 39,422)
Due from related companies - (534) ( 9,074)
Increase (decrease) in liabilities:
Accounts payable 20,086 ( 12,926) ( 63,783)
Other payables 7,661 3,765 18,347
Due to related companies 7,928 ( 5,491) ( 4,357)
Taxes other than income 3,484 8,134 ( 6,068)
------- -------- --------
Net cash used in operating
activities ( 2,834) 9 ( 87,482)
Cash flows from investing
activities:
Acquisition of fixed assets (88,596) (107,868) ( 25,854)
Purchase of long term investment ( 499) - ( 94)
Proceeds from disposals of
fixed assets 1,464 774 -
------- -------- --------
Net cash used in investing
activities (87,631) (107,094) ( 25,948)
------- -------- --------
</TABLE>
The accompanying notes form an integral part of
the financial statements.
F-6
<PAGE>
HARBIN BEARING GENERAL FACTORY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993 (continued)
(Amounts in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1991 1992 1993
Rmb Rmb Rmb
<S> <C> <C> <C>
Cash flows from financing
activities:
Proceeds from short term
bank loans 51,950 30,696 23,666
Repayment of short term bank loans - - ( 2,070)
Issue (redemption) of debentures (12,082) 10,000 -
Proceeds from long term
bank loans 69,112 31,282 7,864
Repayment of long term
bank loans (29,891) - ( 6,274)
Proceeds from long term loans - 32,612 1,198
Proceeds of loan from
prospective investors - - 300,000
Contribution from (Distribution to)
State 8,555 19,501 ( 57,921)
------- ------- --------
Net cash provided by financing
activities 87,644 124,091 266,463
------- ------- --------
Net increase (decrease) in
cash and cash equivalents ( 2,821) 17,006 153,033
Cash and cash equivalents,
at beginning of period 7,249 4,428 21,434
------- ------- --------
Cash and cash equivalents,
at end of period 4,428 21,434 174,467
======= ======= ========
</TABLE>
The accompanying notes form an integral part of
the financial statements.
F-7
<PAGE>
HARBIN BEARING GENERAL FACTORY
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
(Amounts in thousands)
<TABLE>
<CAPTION>
Dedicated Retained
Capital Earnings
Rmb Rmb
<S> <C> <C>
Balance at December 31, 1990 224,606 ( 8,343)
Net loss - ( 28,597)
Transfer to dedicated capital 4,106 ( 4,106)
Contribution from State 8,555 -
-------- --------
Balance at December 31, 1991 237,267 ( 41,046)
Net income - 51,267
Transfer to dedicated capital 4,529 ( 4,529)
Contribution from State 19,501 -
-------- --------
Balance at December 31, 1992 261,297 5,692
Net income - 95,663
Transfer to dedicated capital - -
Distribution to State ( 57,921) -
-------- --------
Balance at December 31, 1993 203,376 101,355
======== ========
</TABLE>
The accompanying notes form an integral part of
the financial statements.
F-8
<PAGE>
HARBIN BEARING GENERAL FACTORY
NOTES TO FINANCIAL STATEMENTS
(Amounts expressed in thousands unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Harbin Bearing Company Limited ("Harbin Bearing") was incorporated in
the People's Republic of China ("China") as an equity joint stock enterprise
limited by shares on December 28, 1993, under The Trial Measures on Share
Companies and the Opinion on the Standardization of Joint Stock Companies
promulgated by the State Council of China.
Harbin Bearing is the successor to the manufacturing operations of
Harbin Bearing General Factory (the "Company", the "Predecessor" or "Bearing
Factory"), a Chinese state-owned enterprise established in 1950 managed by
the municipal government of the City of Harbin of the Heilongjiang Province.
Harbin Bearing commenced operations on January 1, 1994 and continued the
ball bearing manufacturing and sales business of Bearing Factory.
Pursuant to an agreement between the Predecessor and Harbin Bearing, the
ball bearing manufacturing and sales business together with certain assets
and liabilities were transferred to Harbin Bearing. Certain other assets and
liabilities relating to the bearing business were transferred to Harbin
Precision Machinery Manufacturing Company ("Harbin Precision"), and certain
ancillary operations, businesses, facilities used to provide community
services to employees of the factory and their families in Harbin were
transferred to Harbin Bearing Holdings Company ("Harbin Holdings"). Harbin
Holdings is a separate newly established enterprise under the supervision
and control of the Machine Bureau and Harbin Precision is wholly-owned by
Harbin Holdings. Harbin Holdings, in return, received 33.3% of the new
shares of Harbin Bearing in consideration for the net assets transferred
thereto from the Predecessor.
The above has been disclosed as a subsequent event in note 23 to the
financial statements.
2. BASIS OF PRESENTATION
The accompanying financial statements of Bearing Factory present the
financial position, results of operations and cash flows of Bearing Factory
prior to January 1, 1994. The assets and liabilities of Bearing Factory have
been stated at historical cost.
The accompanying financial statements of Bearing Factory were prepared
in accordance with accounting principles generally accepted in the United
States of America ("U.S. GAAP"). This basis of accounting differs from that
used in the statutory accounts of Bearing Factory, which were prepared in
accordance with the accounting principles and the relevant financial
regulations applicable to state-owned industrial enterprises, where
applicable, as established by the Ministry of Finance of China ("PRC GAAP").
The principal adjustments made to conform the statutory accounts of
Bearing Factory to U.S. GAAP included the following:
. Provision for doubtful accounts receivable;
. Provision for inventory obsolescence;
F-9
<PAGE>
HARBIN BEARING GENERAL FACTORY
NOTES TO FINANCIAL STATEMENTS
(Amounts expressed in thousands unless otherwise stated)
2. BASIS OF PRESENTATION (continued)
. Valuation of inventories;
. Depreciation expense for property, machinery and equipment to more
accurately reflect the economic useful life of these assets;
. Reclassification of certain items, designated as "reserves appropriated
from net income", as a charge to income; and
. Recognition of sales and cost of sales upon delivery to the customers.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Sales
Sales represent the invoiced value of goods, net of sales tax,
recognized upon delivery to customers.
(b) Cash and cash equivalents
Cash and cash equivalents include cash on hand and demand deposits
with banks with an original maturity of three months or less.
(c) Inventories
Inventories are stated at the lower of cost, on a first-in, first-
out basis, or market. Work-in-progress and finished goods include
direct materials, direct labor and an attributable proportion of
production overheads.
(d) Fixed assets and construction in progress
Fixed assets are stated at cost less accumulated depreciation.
Depreciation is computed using the straight line method over the
assets' estimated useful lives. The estimated useful lives of property,
machinery and equipment are as follows:
<TABLE>
<S> <C>
Buildings 20 years
Machinery and equipment 10 years
Motor vehicles 5 years
Furniture, fixtures and
office equipment 5 years
</TABLE>
Construction-in-progress represents staff quarters, factories and
other buildings under construction and plant and machinery pending
installation. This includes the costs of construction, the costs of
plant and machinery and interest charges to finance these assets during
the period of construction or installation.
(e) Income taxes
The income taxes reflect the accounting standards in Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
F-10
<PAGE>
HARBIN BEARING GENERAL FACTORY
NOTES TO FINANCIAL STATEMENTS
(Amounts expressed in thousands unless otherwise stated)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(f) Foreign currency translation
Bearing Factory's financial records are maintained and the
statutory financial statements are stated in Renminbi (Rmb). All
foreign currency transactions and monetary assets and liabilities
denominated in foreign currency are translated into Renminbi at the
rates of exchange set by the government from time to time ("official
exchange rate"). In preparing these financial statements, all foreign
currency transactions during the year have been translated into Rmb
using applicable rates of exchange quoted by the applicable foreign
exchange adjustment center ("swap center") for the respective years.
Monetary assets and liabilities denominated in foreign currencies are
translated into Rmb using the applicable swap center exchange rates
prevailing at the balance sheet date. The resulting exchange
differences have been credited or charged to the statements of income.
(g) Dedicated capital
Bearing Factory maintains discretionary dedicated capital, which
includes a general reserve fund, an enterprise expansion fund and a
staff welfare and an incentive bonus fund. Bearing Factory determined
on an annual basis the amount of the annual appropriations to dedicated
capital. Such appropriations are reflected in the year end balance
sheets under equity as dedicated capital; however, the appropriation
for the staff welfare and incentive bonus fund is charged to income.
4. INCOME TAXES
Deferred taxes have not been provided for in respect of Bearing Factory
since the amount of income tax payable has been predetermined and agreed
with the tax authority each year and accordingly income tax payable is not
determined based on income.
Bearing Factory, a state-owned enterprise, was subject to income taxes
at the statutory tax rate of 55% on the taxable income as reported in the
statutory accounts adjusted for taxation purposes in accordance with the
relevant income tax laws in China. However, Bearing Factory had agreed with
the Harbin Tax Bureau to pay a fixed amount of income tax each year,
regardless of actual taxable income.
A reconciliation of the effective income tax rate to the statutory
income tax rate each year is summarized below:
<TABLE>
<CAPTION>
1991 1992 1993
<S> <C> <C> <C>
Statutory income tax rate 55.0% 55.0% 55.0%
Effect of agreed tax rate (138.6%) (37.2%) (44.6%)
------- ------ ------
Effective income tax rate (83.6%) 17.8% 10.4%
======= ====== ======
</TABLE>
F-11
<PAGE>
HARBIN BEARING GENERAL FACTORY
NOTES TO FINANCIAL STATEMENTS
(Amounts expressed in thousands unless otherwise stated)
4. INCOME TAXES (continued)
Further to the reorganization summarized in Note 1, Harbin Bearing, the
successor to Bearing Factory, will be subject to an income tax rate of 15%.
5. ACCOUNTS RECEIVABLE
Accounts receivable are comprised of:
<TABLE>
<CAPTION>
December 31,
1992 1993
Rmb Rmb
<S> <C> <C>
Accounts receivable - trade 328,238 473,055
Less: Allowance for doubtful debts (126,808) (141,932)
-------- --------
Accounts receivable, net 201,430 331,123
======== ========
</TABLE>
6. INVENTORIES
Inventories are comprised of:
<TABLE>
<CAPTION>
December 31,
1992 1993
Rmb Rmb
<S> <C> <C>
Raw materials 101,431 116,808
Work-in-progress 59,460 105,234
Finished goods 84,365 121,674
-------- --------
245,256 343,716
Less: Allowance for obsolescence ( 33,637) ( 23,857)
-------- --------
Inventories, net 211,619 319,859
======== ========
</TABLE>
7. FIXED ASSETS
<TABLE>
<CAPTION>
December 31,
1992 1993
Rmb Rmb
<S> <C> <C>
Buildings 197,847 201,616
Machinery and equipment 233,209 252,487
Motor vehicles 20,232 20,682
Furniture, fixtures and office equipment 3,897 6,451
Construction in progress 176,337 162,220
-------- --------
631,522 643,456
Less: Accumulated depreciation (290,402) (304,615)
-------- --------
Fixed assets, net 341,120 338,841
======== ========
</TABLE>
F-12
<PAGE>
HARBIN BEARING GENERAL FACTORY
NOTES TO FINANCIAL STATEMENTS
(Amounts expressed in thousands unless otherwise stated)
7. FIXED ASSETS (continued)
The Company's buildings are located in China and the land on
which the Company's buildings is situated is State-owned.
8. LONG TERM INVESTMENTS
Long term investments are stated at cost and represent
investments in treasury bonds issued by the Chinese government. The
investments bear interest ranging from 4% to 15% per annum and are
redeemable on maturity or as advised by the government.
9. SHORT TERM BANK LOANS
The short term bank loans bear interest at an average rate of 11%
and are repayable within one year.
10. DEBENTURES
Debentures are issued to the employees and bear interest at 12%
per annum and are repayable within one year.
11. LONG TERM BANK LOANS
Long term bank loans bear an average interest rate of
approximately 8.64% per annum and are repayable as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1992 1993
Rmb Rmb
<S> <C> <C>
1993 25,390 -
1994 18,600 36,700
1995 78,230 64,356
1996 - 22,200
1997 16,000 20,000
1998 - -
-------- --------
138,220 143,256
Less: Portion repayable within one year (25,390) (36,700)
-------- --------
112,830 106,556
======== ========
</TABLE>
12. LONG TERM LOANS
On December 10, 1992, the Company received Rmb33,810 from its
employees to finance the operation's operating and capital
commitments. The loans are unsecured and bear interest at 15% per
annum. The funds are repayable together with the accumulated interest
in December 1995.
F-13
<PAGE>
HARBIN BEARING GENERAL FACTORY
NOTES TO FINANCIAL STATEMENTS
(Amounts expressed in thousands unless otherwise stated)
13. LOANS FROM PROSPECTIVE INVESTORS
During 1993, the Company received in advance Rmb 300 million from
Harbin Xinhengli and Harbin Sunbase, the employees of the Company and
other parties in consideration for 66.7% of the newly issued shares of
Harbin Bearing. The funds represented the cash contribution to the
equity of Harbin Bearing of Rmb 450 million, the balance being
represented by the net assets contributed by Bearing Factory of Rmb
150 million (33.3%).
The advances were unsecured and non-interest bearing.
14. OBLIGATIONS AND COMMITMENTS
As of December 31, 1993, the Company had outstanding capital
commitments for purchases of equipment of approximately Rmb 64,000
(US$7,503).
15. FOREIGN CURRENCY EXCHANGE
The Chinese government imposes control over its foreign currency.
Renminbi, the official currency of China, is not freely convertible.
Prior to December 31, 1993, all foreign exchange transactions
involving Renminbi had to be undertaken either through the Bank of
China or other institutions authorized to buy and sell foreign
exchange or at a swap center. The exchange rates used for transactions
through the Bank of China and other authorized banks are set by the
government from time to time whereas the exchange rates available at a
swap center are determined largely by supply and demand. Payment for
imported materials and remittance of earnings outside of China are
subject to the availability of foreign currency which is dependent on
the foreign currency denominated earnings of the entity or allocated
to the Company by the government at official exchange rates or must be
arranged through a swap center with government approval.
On January 1, 1994, the People's Bank of China introduced a
managed floating exchange rate system based on the market supply and,
demand and established a unified foreign exchange inter-bank market
amongst designated banks. In place of the official rate and the swap
center rate, the People's Bank of China publishes a daily exchange
rate for Renminbi based on the previous day's dealings in the inter-
bank market.
The official exchange rate and Shanghai swap center rate as of
December 31, 1993 together with the floating exchange rates at January
1, 1994, September 30, 1994 and March 31, 1995 were as follows:
<TABLE>
<CAPTION>
December 31, January 1, December 31, March 31,
1993 1994 1994 1995
Rmb Rmb Rmb Rmb
<S> <C> <C> <C> <C>
Rmb equivalent of U.S.$1
Official exchange rate 5.8 - - -
Beijing swap center rate 8.7 - - -
Floating exchange rate - 8.7 8.45 8.38
</TABLE>
F-14
<PAGE>
HARBIN BEARING GENERAL FACTORY
NOTES TO FINANCIAL STATEMENTS
(Amounts expressed in thousands unless otherwise stated)
16. DISTRIBUTION OF PROFIT
As stipulated by the relevant laws and regulations for state-
owned enterprises, Bearing Factory was required to maintain
discretionary dedicated capital, which included a general reserve
fund, an enterprise expansion fund and a staff welfare and incentive
bonus fund. Bearing Factory determined on an annual basis the amount
of the annual appropriations to dedicated capital. Dedicated capital
is classified into contributory and discretionary dedicated capital.
Contributory dedicated capital represents annual appropriations
from net income after tax as presented in the statutory accounts, for
which the levels of appropriation are governed by government
regulations. Discretionary dedicated capital represents appropriations
made at the sole discretion of the company's management. Both
contributory and discretionary dedicated capital are not distributable
in the form of dividends.
In the accompanying statements of income, amounts designated for
payments of staff welfare (to the extent that it is not related to
capital expenditure) and incentive bonus to employees have been
charged to income before arriving at net income and are reflected in
the accompanying balance sheets in accordance with U.S. GAAP.
The retained earnings balances in these financial statements
reflect the effect of U.S. GAAP adjustments only and do not represent
distributable reserves under Chinese regulations.
17. RETIREMENT PLAN
As stipulated by the regulations of the Chinese government,
Bearing Factory has a defined contribution plan for all staff. Staff
are entitled to an annual pension from the State equal to their basic
salary amount at their retirement date. Bearing Factory pays to the
State 20% of the basic salary of its staff. The pension costs incurred
by Harbin Bearing in 1991, 1992, and 1993 were Rmb 8,470, Rmb 10,108,
and Rmb 22,773, respectively.
18. RELATED PARTY TRANSACTIONS
A significant portion of the business undertaken by the Company
during the relevant period has been effected with other State-owned
enterprises in China and on such terms as determined by the relevant
Chinese authorities.
F-15
<PAGE>
HARBIN BEARING GENERAL FACTORY
NOTES TO FINANCIAL STATEMENTS
(Amounts expressed in thousands unless otherwise stated)
19. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year ended December 31,
1991 1992 1993
Rmb Rmb Rmb
<S> <C> <C> <C>
Cash paid for:
Interest 30,193 44,460 47,481
Less: Interest capitalised (5,300) (8,562) (10,815)
------- ------- --------
24,893 35,898 36,666
Income taxes 13,020 11,123 11,080
</TABLE>
20. FINANCIAL INSTRUMENTS
The carrying amounts of Harbin Bearing's cash and loans
approximate their fair value because of the short maturity of those
instruments. The carrying amounts of bank loans approximate their fair
value based on the borrowing rates currently available for bank loans
with similar terms and average maturities.
21. CONCENTRATION OF CREDIT RISK
The Company manufactures and sells general and precision ball
bearings in diversified industries in the PRC. The Company has long
standing relationships with most of its customers and generally does
not require collateral. There is no concentration of receivables in
any specific industry.
22. OTHER SUPPLEMENTAL INFORMATION
Interest expense, net of the amounts capitalised, is represented
as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1991 1992 1993
Rmb Rmb Rmb
<S> <C> <C> <C>
Interest incurred 29,704 36,548 51,538
Interest capitalised (5,300) (8,562) (10,815)
------- ------- -------
Interest expense 24,404 27,986 40,723
</TABLE>
23. SUBSEQUENT EVENT
Subsequent to the year end date, on January 1, 1994, the Company
transferred its ball bearing manufacturing and sales business together
with certain assets and liabilities to Harbin Bearing pursuant to an
agreement between the Company and Harbin Bearing (see Note 1).
The assets acquired and the liabilities assumed by Harbin Bearing
were revalued at the then respective fair values. The fair value of
the net assets so transferred was Rmb 173,788.
F-16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Sunbase Asia, Inc.
We have audited the accompanying consolidated balance sheets of
Sunbase Asia, Inc. and its subsidiaries as of December 31, 1995 and 1994
and the related statements of income, cash flows and changes in
shareholders' equity for each of the years in the two-year period ended
December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Sunbase Asia, Inc. and its subsidiaries at December 31, 1995 and 1994, and
the consolidated results of their operations and cash flows for each of the
years in the two-year period ended December 31, 1995, in conformity with
accounting principles generally accepted in the United States of America.
ERNST & YOUNG
Hong Kong
April 5, 1996
F-17
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1994
AND DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
NOTES 1994 1995 1995
RMB RMB US$
--------- --------- -------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and bank balances 65,646 30,944 3,719
Accounts receivable, net 5 261,184 264,186 31,753
Notes receivable -- 25,756 3,096
Inventories, net 6 361,455 476,997 57,331
Prepaid VAT -- 40,429 4,859
Other receivables 35,636 57,209 6,876
Due from related companies 23 170,073 137,079 16,476
--------- --------- -------
Total current assets 893,994 1,032,600 124,110
Fixed Assets 7 481,295 554,086 66,597
Deferred asset 8 35,729 18,134 2,180
Long term investments 9 6,999 1,438 173
Goodwill 10 -- 12,144 1,460
--------- --------- -------
Total assets 1,418,017 1,618,402 194,520
========= ========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short term bank loans 11 227,078 276,813 33,271
Accounts payable 151,853 116,205 13,967
Notes payable 12 -- 15,627 1,878
Accrued liabilities and other 44,761 90,108 10,831
payables
Short term obligations under 13 15,873 17,269 2,075
capital leases
Other loans 14 33,810 33,810 4,064
Secured promissory note 1,15 -- 41,600 5,000
Income tax payable 4 9,342 5,874 706
Taxes other than income 20,970 -- --
Due to related companies 130,635 111,654 13,420
Due to shareholders 11,682 17,352 2,086
--------- --------- -------
Total current liabilities 646,004 726,312 87,298
Long term bank loans 16 68,424 110,670 13,302
Long term obligations 13 124,982 107,713 12,946
under capital leases
Secured promissory note 1,15 42,250 -- --
Minority interests 288,175 343,142 41,243
--------- --------- -------
1,169,835 1,287,837 154,789
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements
F-18
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1994
AND DECEMBER 31, 1995 (continued)
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
NOTES 1994 1995 1995
RMB RMB US$
--------- --------- -------
<S> <C> <C> <C> <C>
Obligations and commitments 13 -- -- --
Shareholders' equity:
Common Stock, par value US$0.001 each,
50,000,000 shares authorized;
11,700,063 issued, and fully paid up 19 99 99 12
Preferred Stock, par value US$0.001
each, 25,000,000 shares authorized,
Convertible Preferred Stock -
Series A;
36 shares issued and outstanding 1, 19 44,533 44,533 5,352
Convertible Preferred Stock -
Series B;
6,800 shares issued and outstanding
(1994: Nil issued) 1 - 28,288 3,400
Contributed surplus 19 151,942 151,942 18,262
Reserves 20 13,011 25,266 3,037
Retained earnings 38,597 80,437 9,668
--------- --------- -------
Total shareholders' equity 248,182 330,565 39,731
--------- --------- -------
Total liabilities and shareholders'
equity 1,418,017 1,618,402 194,520
========= ========= =======
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements
F-19
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDING DECEMBER 31, 1994 AND DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
NOTES 1994 1995 1995
RMB RMB US$
----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales
- third parties 655,848 569,248 68,419
- related parties 23 63,994 103,111 12,393
---------- ---------- ----------
719,842 672,359 80,812
Cost of sales (441,854) (381,377) (45,838)
---------- ---------- ----------
Gross profit 277,988 290,982 34,974
Selling, general and
administrative expenses
- third parties (57,434) (71,820) (8,632)
- related parties 23 (37,784) (41,182) (4,950)
---------- ---------- ----------
(95,218) (113,002) (13,582)
Interest expense
- third parties (30,128) (37,136) (4,463)
- related parties 23 (12,593) (11,310) (1,359)
---------- ---------- ----------
(42,721) (48,446) (5,822)
Reorganization expenses 21 (7,307) -- --
---------- ---------- ----------
Income before income taxes 132,742 129,534 15,570
Provision for income taxes: 4
- Current (19,087) (20,472) (2,461)
- Deferred (3,600) -- --
---------- ---------- ----------
(22,687) (20,472) (2,461)
---------- ---------- ----------
Income before minority interests 110,055 109,062 13,109
Minority interests (58,447) (54,967) (6,607)
---------- ---------- ----------
Net income 51,608 54,095 6,502
========== ========== ==========
Earnings per common share 17 3.37 3.54 0.42
========== ========== ----------
Numbers of shares outstanding 17 15,300,063 15,300,063 15,300,063
========== ========== ==========
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements
F-20
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDING DECEMBER 31, 1994 AND DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES 1994 1995 1995
RMB RMB US$
--------- --------- --------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income 51,608 54,095 6,502
Adjustments to reconcile income
to net cash provided by
operating activities:
Minority interests 58,447 54,967 6,606
Depreciation 44,562 44,447 5,342
Loss on disposal of fixed assets -- 4,829 580
Exchange difference on secured
promissory note -- (650) (78)
Reorganization expenses 7,307
Others 1,226 17,595 2,115
(Increase) decrease in assets:
Accounts receivable (261,184) (1,312) (157)
Inventories (80,457) (107,824) (12,960)
Notes receivable -- (25,756) (3,096)
Prepaid VAT -- (40,429) (4,859)
Other receivables 32,372 (21,086) (2,534)
Due from related companies (157,118) 32,994 3,965
Deferred tax asset 3,600 -- --
Increase (decrease) in
liabilities:
Accounts payable 34,947 (41,836) (5,028)
Notes payable -- 4,000 481
Accrued liabilities and other
payables 18,361 40,531 4,872
Income tax payable 9,342 (3,468) (417)
Taxes other than income 20,970 (20,970) (2,520)
Due to related companies 129,031 (34,854) (4,189)
Due to shareholders 674 5,670 681
-------- -------- -------
Net cash used in operating
activities (86,312) (39,057) (4,694)
Cash flows from investing
activities:
Purchase of a subsidiary 22 -- (731) (88)
Disposal of long term investments 263 5,561 668
Proceeds from disposal of fixed
assets -- 115 14
Additions to fixed assets (153,213) (92,571) (11,126)
-------- -------- -------
Net cash used in investing
activities (152,950) (87,626) (10,532)
</TABLE>
F-21
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDING DECEMBER 31, 1994 AND DECEMBER 31, 1995
(continued)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES 1994 1995 1995
Rmb Rmb Rmb
--- --- ---
<S> <C> <C> <C>
Cash flows from financing
activities:
Proceeds from short term bank
loans 440,213 518,573 62,328
Repayment of short term bank
loans (360,344) (468,838) (56,351)
Redemption of debentures (10,000) -- --
Proceeds from long term bank
loans 68,424 54,289 6,525
Repayment of long term bank loans -- (12,043) (1,447)
-------- -------- -------
Net cash provided by financing
activities 138,293 91,981 11,055
-------- -------- -------
Net decrease in cash and cash
equivalents (100,969) (34,702) (4,171)
Cash and cash equivalents, at
beginning of year 166,615 65,646 7,890
-------- -------- -------
Cash and cash equivalents, at end
of year 65,646 30,944 3,719
======== ======== =======
Income taxes paid 10,920 15,953 1,917
Interest paid (net of amount
capitalized) 30,856 35,186 4,229
Non-cash transactions:
Financing of lease arrangements 14,590 15,873 1,908
Purchase of a subsidiary by issue
of convertible stock -- 28,288 3,400
-------- ======== =======
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
F-22
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Common Preferred Contributed Retained
Stock stock Surplus Reserves earnings
Series A Series B
Rmb Rmb Rmb Rmb Rmb Rmb
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993
(note 1) 99 44,533 -- 144,635 -- --
Reorganization expenses
(note 21) -- -- -- 7,307 -- --
Net income -- -- -- -- -- 51,608
Appropriation to
reserves
(note 20) -- -- -- -- 13,011 (13,011)
------ --------- ------ ------- ------ -------
Balance at
December 31, 1994 99 44,533 -- 151,942 13,011 38,597
Now issue (note 1) -- -- 28,288 -- -- --
Net income -- -- -- -- -- 54,095
Appropriation to
reserves
(note 20) -- -- -- -- 12,255 (12,255)
------ --------- ------ ------- ------ -------
Balance at
December 31, 1995 99 44,533 28,288 151,942 25,266 80,437
====== ========= ====== ======= ====== =======
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
F-23
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Sunbase Asia, Inc. ("the Company") entered into a share exchange
agreement ("Share Exchange Agreement") with Asean Capital Limited ("Asean
Capital") on December 2, 1994. Pursuant to the agreement and certain subsequent
changes thereto as agreed between the Company and Asean Capital, and further to
a board resolution of the Company on March 31, 1995, the Company issued in
effect 10,261,000 common stock, 36 shares of Series A convertible preferred
stock and a US$5 million secured promissory note to Asean Capital in exchange
for the entire issued share capital of China Bearing Holdings Limited ("China
Bearing").
The Series A convertible preferred stock is convertible at the option
of the holder at a conversion rate of 100,000 common stock per Series A share.
As preferred shares, the shares carry 500,000 votes per share and are entitled
to the same dividend as the common stock shareholders on the basis as if the
preferred shares had been converted to common stock shares at the conversion
rate as noted above.
The total number of common stock outstanding subsequent to this
arrangement was 11,700,063. For the purpose of these financial statements, the
Share Exchange Agreement and all subsequent amendments thereto were deemed to be
effected as of December 31, 1993.
This transaction has been treated as a recapitalization of China
Bearing with China Bearing as the acquirer (reverse acquisition). The
historical financial statements prior to December 2, 1994 are those of China
Bearing.
China Bearing is a holding company which was establishing to acquire a
100% interest in China International Bearing (Holdings) Company Limited ("China
International"), a company wholly-owned by Sunbase International (Holdings)
Limited ("Sunbase International"), at a nominal consideration of HK$0.002 on
March 8, 1994. China International was incorporated in Hong Kong on June 23,
1993 to act as the holding company of Harbin Xinhengli Development Co. Ltd.
("Harbin Xinhengli") and Harbin Sunbase Development Co. Ltd. ("Harbin Sunbase"),
Sino-foreign equity joint ventures in the People's Republic of China ("China" or
the "PRC") established on September 18, 1993 and January 28, 1993, respectively,
and to acquire in aggregate a 51.6% interest in Harbin Bearing Company Limited
("Harbin Bearing"). China International has a 99.9% equity interest in Harbin
Xinhengli and a 99.0% equity interest in Harbin Sunbase, which hold 41.6% and
10.0%, of the equity interests of Harbin Bearing. The aggregate cash
consideration contributed by Harbin Xinhengli and Harbin Sunbase to Harbin
Bearing was Rmb 232.1 million for the acquisitions of the 51.6% interest in
Harbin Bearing.
Harbin Bearing is the successor to the manufacturing operations of
Harbin Bearing General Factory (the "Predecessor" or "Bearing Factory"), a
Chinese state-owned enterprise established in 1950. In connection with the
restructuring of the Predecessor, Harbin Bearing was established on December 28,
1993 as a joint stock limited company under the Trial Measures on Share
Companies and the Opinion on the Standardization of Joint Stock Companies
promulgated by the State Council of China.
Pursuant to an agreement between the Predecessor and Harbin Bearing,
the ball bearing manufacturing and sales businesses, together with certain
assets and liabilities, were transferred to Harbin Bearing. Certain other
assets and liabilities relating to the bearing business were transferred
F-24
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
to Harbin Precision Machinery Manufacturing Company ("Harbin Precision"), and
certain ancillary operations, businesses, facilities used to provide community
services to employees of the factory and their families in Harbin were
transferred to Harbin Bearing Holdings Company ("Harbin Holdings").
However, certain assets such as accounts receivable and construction
in progress and certain liabilities such as the long term bank loan were not
transferred to Harbin Bearing. Harbin Bearing will account for all new sales
and subsequent collections effective from January 1, 1994 and assist the
Predecessor in the collection of its outstanding accounts receivable prior to
the reorganization. This service will be provided at no cost.
Harbin Holdings is a separately established enterprise controlled by
and under the administration of the Harbin Municipal Government and the
industrial oversight of the Machine Bureau. Harbin Precision is wholly-owned by
Harbin Holdings. Harbin Holdings received 33.3% of the new shares of Harbin
Bearing in consideration for the net assets transferred thereto from the
Predecessor.
Details of the equity capital of Harbin Bearing are as follows:
<TABLE>
<CAPTION>
Contribution
to Registered Ownership
Capital Percentage
Rmb million
<S> <C> <C>
Harbin Xinhengli and Harbin Sunbase 232.1 51.6%
Harbin Holdings (in the form of assets) 150.0 33.3%
Current employees of Harbin Bearing
and other (in cash) 67.9 15.1%
----- -----
450.0 100.0%
===== =====
</TABLE>
The assets acquired and the liabilities assumed by Harbin Bearing from
the Predecessor were revalued on December 31, 1993 at the then respective fair
values which included certain fixed assets revalued by the State Administration
of Assets Bureau. The book value of the net assets so transferred was Rmb
150,000. After giving effect to the principal adjustments in conformity with
accounting principles generally accepted in the United States of America ("U.S.
GAAP") as explained in Note 2 below, the fair value of the net assets
transferred to Harbin Bearing from the Predecessor was Rmb 173,118. The total
fair value of the net assets of Harbin Bearing after taking into account the
cash received from the other investors totalled Rmb 473,118.
China International completed its acquisition of an effective interest
of 51.4% interest in Harbin Bearing through Harbin Xinhengli and Harbin Sunbase
on December 28, 1993. Harbin Holdings together with some individual investors
retained 48.4% and the remaining 0.2% which was held by the joint venture
partners of Harbin Xinhengli and Harbin Sunbase.
The following unaudited pro forma information for the years ended
December 31, 1994 and 1993 has been prepared on the basis as if the acquisition
of China Bearing and Harbin Bearing had occurred on January 1, 1993.
F-25
<PAGE>
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. ORANIZATION AND PRINCIPAL ACTIVITIES (continued)
The pro forma results for the year ended December 31, 1994 presented
below are prepared after giving effect to the following pro forma adjustments:
(a) Interest expense in respect of the US$5 million secured
promissory note issued pursuant to the restructuring as detailed above; and
(b) reversal of the reorganization expenses which had already been
reflected in the pro forma results for the year ended December 31, 1993 on the
basis as if the reorganization was completed on January 1, 1993.
The pro forma results of operations have been prepared for comparative
purposes only and do not purport to indicate the results of operations which
would actually have occurred had the acquisitions been in effect on January 1,
1993 or which may occur in the future.
<TABLE>
<CAPTION>
Year ended
December 31,
1993 1994
Rmb Rmb
(unaudited)
<S> <C> <C>
Net sales 687,064 719,842
Net income 41,310 55,563
Earnings per common stock share 2.70 3.63
</TABLE>
On December 29, 1995, the Company entered into a reorganization
agreement ("Reorganization Agreement") with Southwest Products Company
("Southwest") and the shareholders of Southwest for the acquisition of 100% of
the issued common stock of Southwest.
Pursuant to the Reorganization Agreement, a wholly-owned subsidiary of
the Company was incorporated for the purpose of merging with Southwest pursuant
to a separate merger agreement. In connection with the merger, the Company
issued an aggregate of 6,800 shares of Series B convertible preferred stock
("Series B stock") to the then shareholders of Southwest or their designates. At
the option of the Series B stockholders, the stock may be redeemed at US$500 per
Series B share by the Company from the proceeds of the next permanent equity
offering, the net proceeds of which will be designated for such redemption. Any
shares not so redeemed will automatically be converted into common stock shares
at the rate of 100 common stock shares per Series B stock. If the aforesaid
public offering or the redemption are not affected within two years from date of
issue of the Series B stock, the stock will automatically be converted into
common stock at the rate of 100 common stock shares per Series B stock. As
preferred shares, the shares carry 100 votes per share and are entitled to the
same dividend as the common shareholders on the basis as if the preferred shares
had been converted to common stock shares at the conversion rate as noted above.
This transaction has been treated as a business combination and is
accounted for under the purchase method of accounting. However, since the
acquisition was consummated on December 31, 1995, the results of Southwest for
the year then ended have not ben consolidated into the Company but will accrue
to the Company from January 1, 1996.
F-26
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
Southwest is a manufacturer of spherical bearings which supplies its
products to the aerospace, commercial aviation and other industries around the
world. Its major customers are in the United States of America. Southwest also
has an interest in a Shanghai Joint Venture. As a result of a lack of
information available with respect to the financial condition of the Shanghai
Joint Venture, management of the Company was unable to determine the fair value
of the 28% equity interest in the Shanghai Joint Venture owned by Southwest.
Accordingly, the Company did not allocate any portion of the Southwest purchase
consideration to the investment in the Shanghai Joint Venture at December 31,
1995. The Company is attempting to obtain additional information, and to the
extent that such additional information is obtained during 1996, the Company may
subsequently determine to allocate a portion of the purchase consideration to
the investment in the Shanghai Joint Venture, with a commensurate reduction to
goodwill. Such allocation, if it occurs, would not have a material effect on the
consolidated results of operations or financial position of the Company.
The following unaudited pro forma information for the years ended
December 31, 1995 and 1994 are prepared on the basis as if the acquisition of
Southwest and China Bearing by the Company had occurred on January 1, 1994. The
unaudited pro forma information for the year ended December 31, 1994 is
presented after taking into account the effect of the following pro forma
adjustments in respect of the acquisition of China Bearing by the Company:
(a) interest expense in respect of the US$5 million secured
promissory note issued pursuant to the restructuring of the Company for the
acquisition of China Bearing;
(b) reversal of the reorganization expenses incurred for the
aforesaid restructuring as if the reorganization were completed on January 1,
1993; and
(c) amortization of goodwill and the effect of the increment of fair
values on assets arising from acquisition of Southwest.
The following pro forma financial information has been prepared for
comparative purposes only and do not purport to indicate the results of
operations which would actually have occurred had the acquisitions and the
reorganization been in effect on January 1, 1994 or which may occur in the
future.
<TABLE>
<CAPTION>
Year ended
December 31,
1994 1995
Rmb Rmb
(unaudited)
<S> <C> <C>
Net sales 755,234 708,658
Net income 67,463 58,003
Pro forma earnings per common share 4.22 3.63
</TABLE>
2. BASIS OF PRESENTATION
The Company's first operating subsidiary, Harbin Bearing, was formed
on December 28, 1993 and commenced operations on January 1, 1994.
F-27
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
2. BASIS OF PRESENTATION (continued)
Accordingly, no consolidated statements of income and cash flows were prepared
for the year ended December 31, 1993.
The consolidated financial statements incorporate the results of
operations of the Company and its subsidiaries (hereinafter referred to as the
"Group") on the basis that the Group with all its present components had been so
constituted during the two-year period ended December 31, 1995, except for
Southwest, the acquisition of which was completed on December 31, 1995. These
financial statements include the fair value of the net assets of Southwest at
December 31, 1995. All material intra group transactions and balances have been
eliminated on consolidation.
The consolidated financial statements were prepared in accordance with
U.S. GAAP. This basis of accounting for the purpose of these financial
statements differs from that used in the statutory and management accounts of
Harbin Bearing which were prepared in accordance with the accounting principles
and the relevant financial regulations applicable to joint stock enterprises as
established by the Ministry of Finance of China ("PRC GAAP").
The principal adjustments made to conform the statutory accounts of
Harbin Bearing to U.S. GAAP included the following:
. Revenue recognition;
. Provision for doubtful accounts receivable;
. Provision for inventory obsolescence;
. Valuation of inventories;
. Accounting of assets financed under capital leases as assets of
the Company together with the corresponding liabilities; and
. Deferred taxation.
The financial information has been prepared in Renminbi (Rmb), the
national currency of China. Solely for the convenience of the reader, the
financial statements have been translated into United States dollars prevailing
at the People's Bank of China on June 30, 1996 which was US$1.00 = Rmb8.32. No
representation is made that the Renminbi amounts could have been, or could be,
converted into United States dollars at that rate or any other certain rate on
December 31, 1995.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and bank balances
Cash and bank balances include cash on hand and demand deposits with
banks with an original maturity of three months or less. None of the Group's
cash is restricted as to withdrawal or use.
(b) Inventories
Inventories are stated at the lower of cost, on a first-in, first-out
basis, or market. Work-in-progress and finished goods include direct
F-28
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
materials, direct labor and an attributable proportion of production overheads.
(c) Fixed assets and depreciation
Property, machinery and equipment are stated at cost less accumulated
depreciation. Depreciation of property, machinery and equipment is computed
using the straight-line method over the assets' estimated useful lives. The
estimated useful lives of property, machinery and equipment are as follows:
Buildings 20 years
Machinery and equipment 8-10 years
Motor vehicles 3 years
Furniture, fixtures and office equipment 5 years
(d) Construction in progress
Construction in progress represents factory buildings, plant and
machinery and other fixed assets under construction and is stated at cost. Cost
comprises direct costs of construction as well as interest charges on borrowed
funds. Capitalization of interest charges ceases when an asset is ready for its
intended use. Construction in progress is transferred to fixed assets upon
commissioning when it is capable of producing saleable output on a commercial
basis, notwithstanding any delays in the issue of the relevant commissioning
certificates by the appropriate PRC authorities.
No depreciation is provided on construction in progress until the
asset is completed and put into productive use.
(e) Income taxes
The income taxes reflect the accounting standards in Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
(f) Foreign currency translation
Foreign currency transactions are translated into Renminbi at the
applicable floating rates of exchange quoted by the People's Bank of China,
prevailing at the dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies are translated into Renminbi using the
applicable exchange rates prevailing at the balance sheet date.
The Company's share capital is denominated in United States Dollars
and the reporting currency is Renminbi. For financial reporting purposes the
United States Dollars share capital amounts have been translated into Renminbi
at the applicable rates prevailing on the dates of receipt.
(g) Capital leases
Leases that transfer substantially all the rewards and risks of
ownership of assets to the Group, other than legal title, are accounted for as
capital leases. At the inception of a capital lease, the cost of the leased
asset is capitalized at the present value of the minimum lease payments and
F-29
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
recorded together with the obligation, excluding the interest element, to
reflect the purchase and financing. Assets held under capital leases are
included in fixed assets and depreciated over the estimated useful lives of
the assets. The finance costs of such leases are charged to the profit and
loss account so as to provide a constant periodic rate over the lease
terms.
Leases where substantially all the rewards and risks of ownership
of assets remain with the leasing company are accounted for as operating
leases. Rentals applicable to such operating leases are charged to the
profit and loss account on the straight-line basis over the lease terms.
(h) Goodwill
Goodwill represents the excess of the consideration paid for the
purchase of a subsidiary over the fair value of the net assets of
businesses acquired and are being amortized over a 15-year period. The
carrying value of goodwill is assessed on an ongoing basis. The
measurement of possible impairment is based primarily on the ability to
recover the balance of the goodwill from expected future operating cash
flows on an undiscounted basis of the entity acquired. If the review
indicates goodwill may be impaired, the carrying value of the goodwill is
reduced.
(i) Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
4. INCOME TAXES
Sunbase Asia, Inc. was incorporated in the State of Nevada in the
United States of America. The Company is subject to U.S. federal tax on
its income. Nevada does not impose any tax on corporations organized under
its laws.
Southwest was incorporated in the State of California in the
United States of America and is subject to U.S. federal tax on its income.
China Bearing was incorporated under the laws of Bermuda and,
under current Bermudan law, is not subject to tax on income or on capital
gains. China Bearing has received an undertaking from the Ministry of
Finance of Bermuda pursuant to the provisions of the Exempted Undertakings
Tax Protection Act, 1966, as amended, that in the event that Bermuda enacts
any legislation imposing tax computed on profits or income, including any
dividend or capital gains withholding tax, or computed on any capital
asset, gain or appreciation, or any tax in the nature of estate duty or
inheritance tax, then the imposition of any such tax shall not be
applicable to China Bearing or to any of its operations or the shares,
debentures or other obligations of China Bearing, until March 28, 2016.
This undertaking is not to be construed so as to (i) prevent the
application of any such tax or duty to such persons as are ordinarily
resident in Bermuda; or (ii) prevent the application of any tax payable in
accordance with the provision of the Land Tax Act, 1967 or otherwise
payable in relation to any land leased to China Bearing in Bermuda.
China International was incorporated under the Hong Kong Companies
Ordinance and under the current Hong Kong tax law, any income arising in
and
F-30
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
4. INCOME TAXES (continued)
deriving from businesses carried on in Hong Kong will be subject to tax. No tax
will be charged on dividends received and capital gains earned.
Harbin Xinhengli and Harbin Sunbase are subject to Chinese income
taxes at the applicable tax rates of 30% for Sino-foreign equity joint venture
enterprises. Dividend income received is exempt from any Chinese income taxes.
The applicable tax rate for joint stock limited enterprises in China
is 33% which is levied on the taxable income as reported in the statutory
accounts adjusted for taxation in accordance with the relevant income tax laws
applicable to joint stock limited enterprises. Harbin Bearing, being a joint
stock limited company registered in the Special Economic and Technological
Development Zone in the Municipal City of Harbin, will normally be subject to a
maximum income tax rate of 20%. Pursuant to the same income tax basis applicable
to the Special Economic and Technological Development Zone, Harbin Bearing has
been designated a high technology production enterprise and is entitled to a
special income tax rate of 15%.
The Company has undertaken not to require China Bearing to make any
distribution of dividends and the directors of Harbin Xinhengli and Harbin
Sunbase have decided not to distribute any dividend income related to income
earned for the year received from Harbin Bearing outside of China. As a result,
deferred income taxes have not been accrued in the financial statements in
respect of income distributions. The determination of the amount of the
unrecognized deferred tax liability for temporary differences related to such
investments in foreign subsidiaries and foreign corporate joint ventures is not
practicable.
The reconciliation of the effective income tax rates based on income
before income taxes stated in the consolidated statement of income to the
statutory income tax rate in China applicable to the Company's only operating
subsidiary is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
1994 1995
<S> <C> <C>
Effect of
- Statutory tax rate 15.0% 15.0%
Permanent difference 2.0% 0.8%
---- ----
17.0% 15.8%
===== =====
</TABLE>
The determination of the amount of the unrecognized deferred tax
liability for temporary differences related to investments in foreign
subsidiaries and corporate joint ventures is not practicable.
5. ACCOUNTS RECEIVABLE
Accounts receivable comprise:
<TABLE>
<CAPTION>
December 31,
1994 1995
Rmb Rmb
<S> <C> <C>
Accounts receivable - trade 272,484 278,113
Less: Allowance for doubtful debts (11,300) (13,927)
------- -------
</TABLE>
F-31
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
5. ACCOUNTS RECEIVABLE (continued)
<TABLE>
<S> <C> <C>
Accounts receivable, net 261,184 264,186
======= =======
Movement of allowance for doubtful debts
Balance as at January 1, - 11,300
Provided during the year 11,300 2,627
------- -------
Balance as at December 31, 11,300 13,927
======= =======
</TABLE>
The accounts receivable of the Predecessor were not transferred to
Harbin Bearing as part of the reorganization on formation of Harbin Bearing on
December 28, 1993. However, Harbin Bearing will account for new sales and
subsequent collections effective from January 1, 1994 and assist the Predecessor
in the collection of its accounts receivable prior to the reorganization.
6. INVENTORIES
Inventories comprise:
<TABLE>
<CAPTION>
December 31,
1994 1995
Rmb Rmb
<S> <C> <C>
Raw materials 122,684 105,132
Work-in-progress 87,839 104,697
Finished goods 169,948 271,477
-------- --------
380,471 481,306
Less: Allowance for obsolescence (19,016) (4,309)
-------- --------
Inventories, net 361,455 476,997
======== ========
Movement of allowance for obsolescence
Balance as at January 1, 23,857 19,016
Provided during the year - 1,098
Obsolete inventories sold during
the year (4,841) (15,805)
-------- --------
Balance as at December 31, 19,016 4,309
======== ========
</TABLE>
7. FIXED ASSETS
<TABLE>
<CAPTION>
December 31,
1994 1995
Rmb Rmb
<S> <C> <C>
Buildings 71,644 68,725
Machinery and equipment 283,748 402,390
Motor vehicles 16,970 16,712
Furniture fixtures and office equipment 4,240 5,110
Construction in progress 149,255 141,757
-------- --------
525,857 634,694
Less: Accumulated depreciation (44,562) (80,608)
-------- --------
481,295 554,086
======== ========
</TABLE>
Total amount of interest capitalized during the year and included in
the above fixed assets are Rmb 10,411 (1994: Rmb 1,334).
F-32
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
7. FIXED ASSETS (continuned)
The Group's buildings are located in PRC and the land on which the
Group's buildings are situated is State-owned.
The gross amounts of assets recorded under capital leases and the
accumulated depreciation thereon are analyzed as follows:
<TABLE>
<CAPTION>
1994 1995
Rmb Rmb
<S> <C> <C>
Machinery and equipment 150,337 150,337
Motor vehicles 4,181 4,181
Furniture, fixtures and office
equipment 927 927
-------- --------
155,445 155,445
Less: Accumulated depreciation (20,371) (40,742)
-------- --------
135,074 114,703
======== ========
</TABLE>
8. DEFERRED ASSET
<TABLE>
<CAPTION>
December 31,
1994 1995
Rmb Rmb
<S> <C> <C>
Deferred asset comprises:
Deferred valued added tax ("VAT")
receivable 38,860 20,482
Less: Present value discount (3,131) (2,348)
------- -------
35,729 18,134
======= =======
</TABLE>
This represents the deemed VAT receivable arising from the
introduction of the new PRC VAT system on January 1, 1994. This asset was
calculated and accounted for in accordance with governmental directions by
applying the 14% VAT rate to certain inventory values as at December 31, 1993,
with the effect of reducing the value of certain opening inventory of Harbin
Bearing as at January 1, 1994 by the same amount. A detailed directive regarding
the utilization of the deferred VAT receivable was issued in May 1995 by the
Ministry of Finance and the State General Tax Bureau pursuant to which the Group
will be able to offset the balance of Rmb38,860 against its VAT payable within a
period of five years starting from January 1, 1995. Accordingly, a discount has
been applied using Harbin Bearing's average rate of borrowing over the estimated
period of recovery.
9. LONG TERM INVESTMENTS
Long term investments are stated at cost and represent investments in
treasury bonds issued by the Chinese Government. The investments bear interest
ranging from 3% to 8% per annum and are redeemable on maturity or otherwise
prior thereto as advised by the government.
The long term investments were pledged as one element of the security
to the Group's bankers to secure a short term bank loan of Rmb 418.4 million
which was utilized to the extent of Rmb 358 million. Other collateral includes
the Group's fixed assets of Rmb 137,782 and a third party guarantee from Harbin
Holdings.
F-33
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
10. GOODWILL
The goodwill arises as a result of the acquisition of Southwest on
December 31, 1995. Nor amortization was provided during the year as the
acquisition was completed on December 31, 1995.
11. SHORT TERM BANK LOANS
The short term bank loans bear interest at a weighted average rate of
14% and 11% per annum for the years ended December 31, 1995 and 1994,
respectively, and are repayable within one year.
12. NOTES PAYABLE
Included in the total amount was an amount of Rmb 11,627 which
represents a long term note payable to a bank. The Group is in the process of
refinancing the note and accordingly the amount has been classified under
current liabilities.
13. OBLIGATIONS AND COMMITMENTS
(a) Obligations under capital leases
Harbin Bearing leases machinery and equipment, furniture, fixtures and
office equipment and motor vehicles from Harbin Precision, a company wholly-
owned by Harbin Holdings, a separately established enterprise under the
supervision and control of the Machine Bureau, which received 33.3% of the new
shares of Harbin Bearing. These leases are accounted for as capital leases which
have lease terms ranging from five years to eight years.
The lease obligations for the machinery and equipment, furniture,
fixtures and office equipment and motor vehicles have an implicit annual
interest rate at 8.46%. The scheduled future minimum lease payments as of
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
December 31,
1995
Rmb
<S> <C>
Year ending December 31,
1996 27,183
1997 27,183
1998 27,183
1999 25,927
2000 25,927
2001 25,927
--------
Total minimum lease payments 159,330
Less: Amount representing interest (34,348)
--------
Present value of minimum lease payments 124,982
Less: Current portion (17,269)
--------
107,713
========
</TABLE>
F-34
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
13. OBLIGATIONS AND COMMITMENTS (continued)
The lease rentals incurred during the year amounted to Rmb27,183
(1994: Rmb27,183), out of which Rmb 11,310 (1994: Rmb12,593) was the interest
portion.
(b) Other commitments
As of December 31, 1995, the Group had outstanding commitments for
capital expenditure of Rmb 46,027 (US$5,532) (1994: Rmb 91,500 (US$10,919)) and
outstanding operating lease commitments expiring in 1998 in respect of buildings
of approximately Rmb 11,254 (US$ 1,353) (1994: Rmb 15,004 (US$1,790)).
14. OTHER LOANS
The loans are due to the employees of Harbin Bearing, are unsecured
and bear interest at 15% per annum. The loans, together with the accumulated
interest, were repaid in full subsequent to December 31, 1995.
15. SECURED PROMISSORY NOTE
The secured promissory note (the "Note") was issued to Asean Capital
Limited in connection with the Share Exchange Agreement as detailed in Note 1
and is secured by a continuing security interest in and to all of the Company's
title and interest in the outstanding capital stock of China Bearing. The
carrying value of the net assets of China Bearing represents all the
consolidated net assets of the Company before taking into account the carrying
value of the Note, the consolidated net assets of Southwest of Rmb 16,144 and
the goodwill arising on acquisition of Southwest of Rmb 12,144.
The Note is denominated in United States dollars, is repayable in full
in United States dollars on December 31, 1996 and bears interest at 8% per
annum.
16. LONG TERM BANK LOANS
The long term bank loans are principally loans borrowed to finance the
construction in progress. The loans bear interest ranging from 3.7% to 9.25% per
annum and are not repayable within one year. During the year, total interest
expenses incurred in respect of these loans amounted to Rmb 10,411 (1994: Rmb
1,334) and were capitalized as part of the cost of construction in progress.
17. NUMBER OF SHARES/EARNINGS PER SHARE
As detailed in Note 1 to the financial statements, the Company issued
new shares in consideration for the acquisition of its interest in Southwest.
The earnings per common share for the years ended December 31, 1994 and 1995,
which excludes the results of Southwest, is calculated using the common stock
and common stock equivalents, after assuming that all convertible preferred
stocks except those issued in connection with the acquisition of Southwest, have
been converted into common stock, as if these shares had been outstanding
throughout all periods presented. The pro forma earnings per common share for
the years ended December 31, 1994 and 1995,
F-35
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
17. NUMBER OF SHARES/EARNINGS PER SHARE (continued)
which includes the results of Southwest, as stated in Note 1, is calculated by
including all the convertible preferred stocks.
18. FOREIGN CURRENCY EXCHANGE
The Chinese government imposes control over its foreign currency.
Renminbi, the official currency in China, is not freely convertible. Prior to
December 31, 1993, all foreign exchange transactions involving Renminbi had to
be undertaken either through the Bank of China or other institutions authorized
to buy and sell foreign exchange or at a swap center. The exchange rates used
for transactions through the Bank of China and other authorized banks were set
by the government from time to time whereas the exchange rates available at a
swap center were determined largely by supply and demand.
On January 1, 1994, the People's Bank of China introduced a managed
floating exchange rate system based on the market supply and demand and proposed
to establish a unified foreign exchange inter-bank market amongst designated
banks. In place of the official rate and the swap centre rate, the People's Bank
of China publishes a daily exchange rate for Renminbi based on the previous
day's dealings in the inter-bank market. It is expected that swap centres will
be phased out in due course.
However, the unification of exchange rates does not imply full
convertibility of Renminbi into United States dollars or other foreign
currencies. Payment for imported materials and remittance of earnings outside of
China were subject to the availability of foreign currency which is dependent on
the foreign currency denominated earnings of the entity or allocated to the
company by the government at official exchange rates or otherwise arranged
through a swap center with government approval. Approval for exchange at the
exchange centre is granted to enterprises in China for valid reasons such as
purchases of imported goods and remittance of earnings. While conversion of
Renminbi into United States dollars or other foreign currencies can generally be
effected at the exchange centre, there is no guarantee that it can be effected
at all times.
19. CONTRIBUTED SURPLUS
As part of the reorganization of Sunbase Asia, Inc. on December 2,
1994 as detailed in Note 1 above, the entire share capital and contributed
surplus of China Bearing were acquired by Sunbase Asia, Inc. The consideration
for the shares in China Bearing on the basis that the reorganization took place
on December 31, 1993 was as follows:
<TABLE>
<CAPTION>
Rmb U.S.$
<S> <C> <C>
Common stock, paid up capital 99 12
Convertible preferred stock 44,533 5,314
Promissory note 42,250 5,042
Contributed surplus 144,635 17,260
------- ------
Net asset value of China Bearing
at December 31, 1993 231,517 27,628
======= ======
</TABLE>
The net assets of China Bearing were allocated first to the legal paid
up capital at the par value of US$0.001 per share of 11,700,063 shares. The
amount of net assets allocated to the convertible preferred stock was
F-36
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
19. CONTRIBUTED SURPLUS (continued)
based on the total equivalent common shares attributable to the preferred stock.
The remaining net assets were allocated to the contributed surplus. As more
fully explained in note 21, reorganization expenses of Rmb 7,307 were credited
to contributed surplus pursuant to the Share Exchange Agreement in 1994.
20. DISTRIBUTION OF PROFIT AND APPROPRIATION TO RESERVES
According to the relevant laws and regulations for joint stock limited
enterprises and Harbin Bearing's articles of association, distribution of profit
by Harbin Bearing is based on the profits as reported in the statutory accounts
after the following allocations and appropriations:
(a) making up any accumulated losses;
(b) transferring 10% of its profit after taxation measured under
PRC accounting standards to the statutory surplus reserve;
(c) transferring 5% to 10% of its profit after taxation measured
under PRC accounting standards to a collective welfare fund;
and
(d) transferring a certain amount of its profit after taxation
measured under PRC accounting standards to a discretionary
surplus reserve.
The following appropriations were made and are further described
below:
<TABLE>
<CAPTION>
Year ended
December 31,
1994 1995
Rmb Rmb
<S> <C> <C>
Statutory surplus reserve 8,674 8,170
Collective welfare fund 4,337 4,085
------ ------
13,011 12,255
====== ======
</TABLE>
The collective welfare fund must be used for capital expenditure on
staff welfare facilities and cannot be used to finance staff welfare expenses.
Such facilities are for the staff and are owned by Harbin Bearing.
The distributable retained earnings of the Group as of December 31,
1995, after taking into account of the above restrictions and appropriations and
based on the Chinese statutory accounts of Harbin Bearing, amounted to Rmb
73,591.
21. REORGANIZATION EXPENSES
The amount represents expenses related to the cost of the minority-
owned 1,439,063 common stock (the "Shares") valued at the pro-rated net asset
value of the Company on December 2, 1994, which approximated the fair value,
pursuant to the Share Exchange Agreement detailed in Note 1, after accounting
for relevant discounts relating to minority interest and the trading
F-37
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
21. REORGANIZATION EXPENSES (continued)
restrictions of the Shares. The value assigned to these shares is considered a
cost of the restructuring of the Company and is charged to income and credited
to contributed surplus. The proforma earnings per common stock for the year
ended December 31, 1994 after excluding such non-recurring reorganization
expenses is Rmb 3.85.
22. NOTE TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
Purchase of a subsidiary
<TABLE>
<CAPTION>
December 31,
1995
Rmb
<S> <C>
Net assets acquired:
Cash and bank balance 18
Accounts receivable 1,690
Inventories 7,718
Other receivables 487
Fixed assets 29,611
Accounts payable (6,188)
Notes payable (11,627)
Accrued liabilities (4,816)
--------
16,893
Goodwill 12,144
--------
29,037
========
Satisfied by:
Shares issued 28,288
Current account 749
--------
29,037
========
</TABLE>
F-38
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
23. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
During the year, the Group had transactions with several related
parties. The major related party transactions are summarized as follows and
described in further detail below:
<TABLE>
<CAPTION>
Year ended December 31,
Nature of transactions Notes 1994 1995
Rmb Rmb
<S> <C> <C> <C>
Revenue:
Sales of products (a) 63,994 103,111
Leases of equipment
Capital payments (b) 14,590 15,873
Expenses:
Leases of equipment
Finance charges (b) 12,593 11,310
Leases of buildings (c) 3,751 3,751
Land use rights (d) 2,508 2,508
Management and
administrative services (e) 17,416 19,126
Trademark royalty fees (f) 3,599 3,362
Pension and retirement
plan expenses (g) 16,769 18,394
</TABLE>
(a) Significant sales to related companies
Harbin Bearing made sales of Rmb 42,855 (1994: Rmb 46,578) and Rmb
40,257 (1994: Rmb 7,832) to Harbin Bearing Import & Export Company
("HBIE") and Xin Dadi Mechanical and Electrical Equipment Company
("Xin Dadi"), related companies owned by the Harbin Municipal
Government, respectively, during the current year. As at December 31,
1995, the amounts of the trade receivables from HBIE and Xin Dadi
included under due from related companies are Rmb 65,520 (1994: Rmb
54,496) and Rmb Nil (1994: Rmb 9,164), respectively. Amount due to Xin
Dadi included in due to related companies as at December 31, 1995 is
Rmb 105,171, representing advance payment received in respect of
future sales.
(b) Leases of equipment
Harbin Bearing has entered into an eight year lease agreement with
Harbin Precision to lease machinery and equipment and a five year
lease agreement with Harbin Precision to lease motor vehicles,
furniture, fixtures and equipment related to the business at an
initial annual rental of Rmb 25,927 (US$3,116) and Rmb 1,256 (US$151),
respectively, from January 1, 1994 to December 31, 2001 and from
January 1, 1994 to December 31, 1998, respectively.
F-39
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
23. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
(c) Leases of Buildings
Harbin Bearing has entered into a five year lease agreement with
Harbin Precision to lease buildings related to the operation of Harbin
Bearing with effect from January 1, 1994 at an initial annual rental
of Rmb 3,751 (US$451). The initial lease will expire on December 31,
1998 and Harbin Bearing has been granted an option to extend the lease
at market rent for another five years. This lease is treated as an
operating lease.
(d) Land use rights
The municipal government has allocated to Harbin Holdings the right to
use the parcels of land on which Harbin Bearing's operations are
conducted. Harbin Holdings has agreed to lease the land on which the
main factory is situated to Harbin Bearing in return for an initial
annual rental of Rmb 2,508 (US$301) effective from January 1, 1994
subject to future adjustments in accordance with changes in government
fees.
(e) Management and administrative services agreements
In 1994, Harbin Bearing and Harbin Holdings entered into a management
and administrative services agreement. The agreement provides for the
payment by Harbin Bearing of an annual fee of Rmb 18,876 (US$2,269)
(1994: Rmb 17,160) in connection with services for medical, heating,
education and other staff-related benefits provided by Harbin Holdings
for a term of three years. The fees are subject to an annual 10%
inflation adjustment. The costs of these services were previously
fully paid by the Predecessor and have now been superseded by the
above agreement.
Agreements were also entered into by Harbin Bearing with Harbin
Xinhengli and Harbin Sunbase, respectively, in respect of general
management services to be provided by the joint ventures from January
1, 1994 to December 31, 1995 at an annual fee of Rmb 150 (US$18)
payable to each of the joint ventures.
An agreement was entered into between China Bearing and Sunbase
International, a majority shareholder of the Company, in respect of
general management and administrative services at an annual fee of Rmb
250 (US$30). In addition, China Bearing is to reimburse Sunbase
International for administrative services rendered on behalf of China
Bearing at cost. No additional administrative services were rendered
by Sunbase International in the current year.
(f) Trademark license
Pursuant to a trademark license agreement, Harbin Holdings has granted
Harbin Bearing the right to use the "HRB" trademark. Harbin Bearing is
required to pay a royalty cost calculated on an annual basis at 0.5%
of the net sales of Harbin Bearing effective from January 1, 1994 to
December 31, 2003 and at 0.3% of the net sales from January 1, 2004 to
December 31, 2013. The trademark license can be transferred to Harbin
Bearing thereafter upon mutual
F-40
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
23. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
agreement between the two parties subject to the relevant laws in
China.
The trademark royalty paid by Harbin Bearing during the current year
amounted to Rmb 3,362 (1994: Rmb 3,599).
(g) Pension and retirement plan
Pursuant to an agreement on December 31, 1993, Harbin Bearing will
make an annual payment to Harbin Holdings as its contribution to the
pension scheme for all staff retiring after December 28, 1993. Such
annual payment should be made based on the standard contribution as
required by government regulations calculated at 20% of salary. Harbin
Holdings is then responsible for the entire pension payment to staff
who have retired after December 28, 1993. Harbin Holdings has
undertaken to bear all pension payments to staff who have retired
before December 28, 1993. This agreement will only be effective on the
condition that no compulsory rules and regulations are implemented in
the future such that Harbin Bearing has to be directly responsible for
any pension payments.
The contribution to the pension scheme made by Harbin Bearing in the
current year amounted to Rmb 18,394 (1994: Rmb 16,769).
Management expects that the arrangements detailed in (b), (c) and (d)
above will be renewed after the initial contract term.
As described further in Note 1, the Company, in consideration for the
purchase of its interest in China Bearing, exchanged common shares, preferred
shares and assumed vendor financing from Asean Capital Limited. The vendor
financing provided from Asean Capital is in the form of US$5,000 secured
promissory notes secured on the shares of China Bearing (see Note 15).
A significant portion of the business undertaken by Harbin Bearing
during the year has been effected with State-owned enterprises in China and on
such terms as determined by the relevant Chinese authorities.
24. FINANCIAL INSTRUMENTS
The carrying amount of the Company's cash and bank balances
approximate their fair value because of the short maturity of those
instruments. The carrying amounts of the Company's borrowings approximate
their fair value based on the borrowing rates currently available for
borrowings with similar terms and average maturities.
25. SEGMENT DATA
The Company operates mainly in the ball bearing industry in China,
consequently, no segment reporting disclosures are required.
26. CONCENTRATION OF RISK
Concentration of credit risk:
F-41
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
26. CONCENTRATION OF RISK (continued)
Financial instruments that potentially subject the Group to
significant concentration of credit risk consist principally of cash
deposits, trade receivables and amounts due from related companies.
(a) Cash deposits
The Group places its cash deposits with various PRC State-owned
financial institutions.
(b) Trade receivables
The Company manufactures and sells general and precision ball bearings
in diversified industries in China. The Company has long standing
relationships with most of its customers and generally does not require
collateral. There is no concentration of receivables in any one specific
industry except for the outstanding receivable balance with a distributor,
HBIE, which has a receivable balance of Rmb 65,520 as at December 31, 1995.
Current vulnerability due to certain concentrations:
The Group's operating assets and primary source of income and cash
flow is its interest in its subsidiary in the PRC. The value of the Group's
interest in this subsidiary may be adversely affected by significant
political, economic and social uncertainties in the PRC. Although the PRC
government has been pursuing economic reform policies for the past 17
years, no assurance can be given that the PRC government will continue to
pursue such policies or that such policies may not be significantly
altered, especially in the event of a change in leadership, social or
political disruption or unforeseen circumstances affecting the PRC's
political, economic and social life. There is also no guarantee that the
PRC government's pursuit of economic reforms will be consistent or
effective.
27. SUBSEQUENT EVENT
(a) On January 2, 1996, the Company's board of directors adopted a
stock option plan (the "Plan"). The Plan permits the grant of options to
purchase an aggregate of up to 2,500,000 shares of the common stock of the
Company. All incentive stock options will have option exercise prices per
option share not less than the fair market value of a share of the common
stock on the date the option is granted, except that in the case of
incentive stock options granted to any person possessing more than 10% of
the total combined voting power of all classes of stock of the Company or
any affiliate of the Company, the price shall not be less than 110% of such
fair market value. The Plan terminates on the earlier of that date on which
no additional shares of common stock are available for issuance under the
Plan or January 2, 2006.
(b) Unaudited
On June 10, 1996, the Company sold 1,000,000 shares of common stock at
US $5.00 per share, which generated net proceeds of US$ 4,265 (RMB 35,480).
The Company has agreed to promptly file a registration statement with the
U.S. Securities and Exchange Commission to register the shares of common
stock.
F-42
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
27. SUBSEQUENT EVENT (continued)
(c) Unaudited
On August 23, 1996, China Bearing issued an aggregate of
US$11,500,000 Convertible Debentures to various institutional investors.
The investors have the right to convert at any time the whole or any part
of the principal amount of the Convertible Debentures into shares of the
Common Stock of the Company at the conversion price agreed on the
subscription agreement dated August 2, 1996. The Convertible Debentures
bear interest at the rate of the higher of (1) 5% per annum (net of
withholding tax) and (2) such percentage of the dividend yield calculated
by reference to dividing the annual dividend declared per share of Common
Stock of the Company by the conversion price. The Convertible Debentures
are due and payable in August, 1999 and the obligations of China Bearing
under the Convertible Debentures are guaranteed by the other members of the
Sunbase Group.
F-43
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, 1995 AND SEPTEMBER 30,1996
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
December 31, 1995 September 30, 1996
------------------- ---------------------
Notes RMB US$ RMB US$
----- --- --- --- ---
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and bank balances 30,944 3,728 104,249 12,560
Accounts receivable, net 264,186 31,830 507,583 61,155
Notes receivable 25,756 3,103 16,008 1,929
Inventories, net 4 476,997 57,470 403,361 48,598
Prepaid VAT 40,429 4,871 - -
Other receivables 57,209 6,893 67,376 8,118
Due from related companies 137,079 16,515 126,250 15,211
--------- ------- --------- -------
Total current assets 1,032,600 124,410 1,224,827 147,571
Fixed assets 554,086 66,757 572,486 68,974
Deferred asset 18,134 2,185 15,989 1,926
Long term investments 1,438 173 1,012 122
Goodwill 12,144 1,463 11,792 1,421
Total assets 1,618,402 194,988 1,826,106 220,014
========= ======= ========= ========
</TABLE>
(continued)
F-44
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (continued)
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
December 31, 1995 September 30, 1996
------------------- -------------------
Notes RMB US$ RMB US$
----- --- --- --- ---
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short term bank loans 276,813 33,351 387,910 46,736
Accounts payable 116,205 14,001 146,404 17,639
Notes payable 15,627 1,883 21,855 2,633
Accrued liabilities and other payables 90,108 10,856 70,010 8,435
Short term obligations under capital leases 17,269 2,081 18,396 2,217
Other loans 33,810 4,073 - -
Short term portion of secured
promissory note 5 41,600 5,012 12,450 1,500
Income tax payable 5,874 708 34,938 4,210
Taxes other than income - - 28,664 3,454
Due to related companies 111,654 13,452 14,823 1,786
Due to shareholders 17,352 2,091 706 85
--------- ------- --------- -------
Total current liabilities 726,312 87,508 736,156 88,695
Long term bank loans 110,670 13,334 60,331 7,269
Long term obligations under capital leases 107,713 12,977 93,771 11,298
Long term portion of secured promissory note 5 - - 12,450 1,500
Convertible debentures 6 - - 95,450 11,500
Minority interests 343,142 41,342 408,068 49,165
--------- ------- --------- -------
1,287,837 155,161 1,406,226 169,427
--------- ------- --------- -------
Shareholders' equity:
Common Stock, par value US$0.001 each,
50,000,000 shares authorized;
12,700,109 shares (1995 - 11,700,063 shares)
issued, and fully paid up 7 99 12 107 13
Preferred Stock, par value US$0.001 each,
25,000,000 shares authorized;
Convertible Preferred Stock - Series A;
36 shares issued and outstanding 44,533 5,365 44,533 5,365
Convertible Preferred Stock - Series B;
6,800 shares issued and outstanding 28,288 3,408 28,288 3,408
Contributed surplus 151,942 18,306 187,333 22,570
Reserves 25,266 3,044 25,266 3,044
Retained earnings 80,437 9,692 134,353 16,187
--------- ------- --------- -------
Total shareholders' equity 330,565 39,827 419,880 50,587
--------- ------- ---------- -------
Total liabilities and shareholders' equity 1,618,402 194,988 1,826,106 220,014
========= ======= ========== =======
</TABLE>
The accompanying notes form an integral part of these consolidated condensed
financial statements.
F-45
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------
1995 1996 1996
Notes RMB RMB US$
----- --- --- ---
<S> <C> <C> <C> <C>
Net sales
- Third parties 560,473 588,084 70,854
- Related parties 90,597 136,876 16,491
---------- ---------- ----------
651,070 724,960 87,345
Cost of sales (397,584) (444,750) (53,584)
---------- ---------- ----------
Gross profit 253,486 280,210 33,761
---------- ---------- ----------
Selling, general and
administrative expenses
- Third parties (47,037) (58,397) (7,036)
- Related parties (30,767) (33,334) (4,016)
---------- ---------- ----------
(77,804) (91,731) (11,052)
---------- ---------- ----------
Interest expense
- Third parties (27,451) (38,474) (4,636)
- Related parties (8,609) (7,573) (912)
---------- ---------- ----------
(36,060) (46,047) (5,548)
---------- ---------- ----------
Income before income taxes 139,622 142,432 17,161
Provision for income taxes
- Current (21,497) (23,590) (2,842)
---------- ---------- ----------
Income before minority interests 118,125 118,842 14,319
Minority interests (59,168) (64,926) (7,823)
---------- ---------- ----------
Net income 58,957 53,916 6,496
========== ========== ==========
Earnings per common share 2
- Primary 3.85 3.26 0.39
========== ========== ==========
- Fully diluted 3.85 3.25 0.39
========== ========== ==========
Number of shares outstanding 2
- Primary 15,300,063 16,561,644 16,561,644
========== ========== ==========
- Fully diluted 15,300,063 16,963,420 16,963,420
========== ========== ==========
</TABLE>
The accompanying notes form an integral part of these consolidated condensed
financial statements.
F-46
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1995 1996 1996
Notes RMB RMB US$
----- --- --- ---
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income 58,957 53,916 6,496
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Minority interests 59,168 64,926 7,823
Depreciation 33,376 47,232 5,691
Loss (gain) on disposal of fixed assets 969 (1,111) (134)
Amortization of goodwill - 352 42
Others 400 2,145 258
Changes in operating assets and liabilities-
(Increase) decrease in assets:
Accounts receivable (253,394) (243,397) (29,325)
Notes receivable (35,133) 9,748 1,174
Inventories 93,988 73,636 8,872
Prepaid VAT - 40,429 4,871
Other receivables (36,543) (10,167) (1,225)
Due from related companies 32,129 10,829 1,305
Increase (decrease) in liabilities:
Accounts payable (38,848) 30,199 3,638
Notes payable 14,620 6,228 750
Accrued liabilities and other payables 34,608 (20,098) (2,422)
Income tax payable 14,360 29,064 3,502
Taxes other than income 40,593 28,664 3,454
Due to related companies (11,636) (109,646) (13,210)
Due to shareholders 464 (16,646) (2,006)
-------- -------- -------
Net cash provided by (used in) operating activities 8,078 (3,697) (446)
-------- -------- -------
Cash flows from investing activities:
Disposal of long term investments 2,630 426 51
Proceeds from disposal of fixed assets 274 1,798 217
Additions to fixed assets (57,705) (66,319) (7,990)
-------- -------- -------
Net cash used in investing activities (54,801) (64,095) (7,722)
-------- -------- -------
Cash flows from financing activities:
Net increase in bank loans 42,844 60,758 7,320
Repayment of other loans - (33,810) (4,073)
Repayment of secured promissory note 5 - (16,700) (2,012)
Proceeds from issuance of convertible
debentures 6 - 95,450 11,500
Proceeds from sale of common stock, net of costs 7 - 35,399 4,265
-------- -------- -------
Net cash provided by financing activities 42,844 141,097 17,000
-------- -------- -------
Net increase (decrease) in cash and cash equivalents ( 3,879) 73,305 8,832
Cash and cash equivalents, at beginning of period 65,646 30,944 3,728
-------- -------- -------
Cash and cash equivalents, at end of period 61,767 104,249 12,560
======== ======== =======
Non-cash transaction:
Financing of lease arrangements 11,779 12,815 1,544
======== ======== =======
</TABLE>
The accompanying notes form an integral part of these consolidated condensed
financial statements.
F-47
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
1. GENERAL
Sunbase Asia, Inc. (the "Company") acquired 100% of the issued share
capital of China Bearing Holdings Limited ("China Bearing") on December 2, 1994
pursuant to a Share Exchange Agreement with Asean Capital Limited in exchange
for 10,261,000 shares of common stock. The transaction has been treated as a
recapitalization of China Bearing with China Bearing as the acquirer (reverse
acquisition). The historical financial statements prior to December 2, 1994 are
those of China Bearing.
The Company is a Nevada corporation which owns, through various
subsidiaries and joint venture interests, a 51.4% indirect ownership in Harbin
Bearing Company Limited, a joint stock limited company organized under the law
of the People's Republic of China ("Harbin Bearing"). Harbin Bearing
manufactures a wide variety of bearings in China for use in commercial,
industrial and aerospace applications that are sold primarily in China and
certain western countries, including the United States.
On January 16, 1996 (effective December 29, 1995), the Company acquired
Smith Acquisition Company, Inc. dba Southwest Products Company ("Southwest") in
exchange for 6,800 shares of Series B convertible preferred stock with a stated
value of US$500 per share. The Series B convertible preferred stock is
convertible into 680,000 shares of common stock. The acquisition of Southwest
has been accounted for under the purchase method of accounting, and was recorded
as of December 31, 1995. The results of operations of Southwest have been
consolidated into the Company's consolidated results of operations commencing
January 1, 1996, Southwest manufactures precision spherical bearings that are
sold primarily to the aerospace and commercial aviation industries. Its major
customers are located in the United States.
The following unaudited pro forma financial information for the nine months
ended September 30, 1995 is prepared on the basis as if the acquisition of
Southwest had occurred on January 1, 1995, and includes pro forma depreciation
and amortization resulting from the increase to reflect the fair value of assets
and the goodwill arising from the acquisition of Southwest. The unaudited pro
forma
F-48
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
1. GENERAL (continued)
financial information has been prepared for comparative purposes only and does
not purport to represent the results of operations which would actually have
occurred had the acquisition of Southwest been in effect on January 1, 1995, or
which may occur in the future.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1995
RMB
---
<S> <C>
Net sales 679,886
Net income 53,006
Earnings per common share 3.32
</TABLE>
2. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America. All material intercompany accounts and transactions
were eliminated on consolidation.
The accompanying consolidated condensed financial statements are unaudited
but, in the opinion of the management of the Company, contain all adjustments
necessary to present fairly the financial position at September 30, 1996, the
results of operations for the nine months ended September 30, 1995 and 1996, and
the changes in cash flows for the nine months ended September 30, 1995 and 1996.
These adjustments are of a normal recurring nature. The consolidated balance
sheet as of December 31, 1995 is derived from the Company's audited financial
statements. Certain information and footnote disclosures normally included in
financial statements that have been prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the
F-49
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
2. BASIS OF PRESENTATION (continued)
Securities and Exchange Commission, although management of the Company believes
that the disclosures contained in these financial statements are adequate to
make the information presented therein not misleading. For further information,
refer to the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995, as filed with the Securities and Exchange Commission.
For the nine months ended September 30, 1995 and 1996, primary earnings per
common share have been calculated using the weighted average number of shares of
common stock and common stock equivalents outstanding during the respective
periods. Common stock equivalents consist of convertible preferred stock and
outstanding stock options. The computation of fully diluted earnings per share,
where appropriate, assumes the full conversion of the Convertible Debentures and
the elimination of the related after tax interest expense effective August 23,
1996.
The results of operations for the nine months ended September 30, 1996 are
not necessarily indicative of the results of operations to be expected for the
full fiscal year ending December 31, 1996.
3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE
In preparing the consolidated financial statements, the financial
statements of the Company are measured using Renminbi ("RMB") as the functional
currency. All foreign currency transactions are translated into RMB using the
applicable floating rates of exchange as quoted by the People's Bank of China
prevailing at the dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies have been translated into RMB using the
unified exchange rate prevailing at the balance sheet dates. The resulting
exchange gains or losses have been credited or charged to the statements of
income for the periods in which they occur.
The Company's share capital is denominated in United States dollars (US$)
and the reporting currency is the RMB. For financial reporting purposes, the US$
F-50
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE (continued)
share capital amounts have been translated into RMB at the applicable rates
prevailing on the transaction dates.
For financial reporting purposes, translation of amounts from RMB into US$
for the convenience of the reader has been made at the exchange rate quoted by
the People's Bank of China on September 30, 1996 of US$ 1.00 = RMB 8.3. No
representation is made that the RMB amounts could have been, or could be,
converted into US$ at that rate on September 30, 1996 or at any other certain
rate on September 30, 1996.
4. INVENTORIES
Inventories consisted of the following at December 31, 1995 and September
30, 1996:
<TABLE>
<CAPTION>
December 31, 1995 September 30, 1996
------------------- --------------------
RMB US $RMB US$
--------- ------- --------- --------
<S> <C> <C> <C> <C>
Raw materials 105,132 12,667 107,419 12,942
Work-in-progress 104,697 12,614 121,346 14,620
Finished goods 271,477 32,708 178,671 21,527
------- ------ -------- ------
481,306 57,989 407,436 49,089
Less: Allowance for obsolescence (4,309) (519) (4,075) (491)
------- ------ -------- ------
Inventories, net 476,997 57,470 403,361 48,598
======= ====== ======== ======
</TABLE>
5. SECURED PROMISSORY NOTE
A promissory note for US$5,102 (RMB 41,600) (the "Note") was issued to
Asean Capital Limited ("Asean") in connection with the Share Exchange Agreement
and is secured by a continuing security interest in all of the Company's title
and
F-51
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
5. SECURED PROMISSORY NOTE (continued)
interest in the outstanding capital stock of its wholly-owned subsidiary China
Bearing. The Note is denominated in and repayable in full in United States
dollars, and bears interest at 8% per annum.
In connection with the issuance of the Convertible Debentures described at
Note 6, Asean has undertaken that for so long as any of the debentures are
outstanding, no amounts are to be repaid on the Note unless there is sufficient
working capital and the repayment is made in accordance with the following
schedule:
<TABLE>
<CAPTION>
Payment Period Amount
- -------------- ------
<S> <C>
August 1, 1996 to July 31, 1997 up to US$2,000,000 plus accrued interest
August 1, 1997 to July 31, 1998 up to US$1,500,000 plus accrued interest
August 1, 1998 to July 31, 1999 up to US$1,500,000 plus accrued interest
</TABLE>
Pursuant to the above described repayment schedule, a principal payment of
US$2,012 (RMB 16,700) plus accrued interest was made on the Note on September
10, 1996.
6. CONVERTIBLE DEBENTURES
Pursuant to a Subscription Agreement dated August 2, 1996 (the
"Subscription Agreement"), among China Bearing, Asean Capital Limited, China
International Bearing Holdings Limited, the Company and Southwest Products
(collectively, the "Sunbase Group"); Glory Mansion Limited, Wardley China
Investment Trust, MC Private Equity Partners Asia Limited, and Chine
Investissement 2000 (collectively, the "Investors"), on August 23, 1996, China
Bearing issued an aggregate of US$11,500 principal amount of Convertible
Debentures (the "Convertible Debentures") to the Investors. Unless the
Convertible Debentures have been converted, the Convertible Debentures are due
and payable in August 1999 (the "Maturity Date"). The Convertible Debentures
bear interest at the rate of the higher of (i) 5% per annum (net of withholding
tax, if applicable) and (ii) such percentage of the dividend yield calculated by
reference to dividing the annual dividend declared per share of Common Stock of
F-52
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
6. CONVERTIBLE DEBENTURES (continued)
the Company by the Conversion Price (as hereinafter defined). Interest is
payable quarterly.
The Investors have the right to convert at any time, in whole or in part,
the principal amount of the Convertible Debentures into shares of the Common
Stock of the Company. The Conversion Price (the "Conversion Price") is initially
US$5.00 per share, subject to adjustment for (a) change in par value of the
Common Stock, (b) issuance of shares by way of capitalization of profits or
reserves, (c) capital distributions, (d) rights offering at a price which is
less than the lower of the then market price or Conversion Price, (e) issuance
of derivative securities where the total consideration per share initially
received is less than the lower of the then market price or Conversion Price,
(f) issuance of shares at a price per share which is less than the lower of the
then market price or Conversion Price, and (g) if the cumulative audited
earnings per common share for any two consecutive fiscal years commencing with
the fiscal year ending December 31, 1996 and ending with the fiscal year ending
December 31, 1998 are less than the specified projection of cumulative earnings
per common share for such periods.
The Convertible Debentures are required to be redeemed on the Maturity Date
at its principal amount outstanding together with any accrued but unpaid
interest together with an amount that would enable the Investors to yield an
aggregate internal rate of return of 12% per annum on the cost of their
investment. In addition, if any of the events of default specified in the
Convertible Debentures occur, the Convertible Debentures are automatically due
and payable at the principal amount outstanding together with accrued interest
and an amount that would enable the Investors to yield an aggregate internal
rate of return on their investment of 19.75% per annum. Events of default
include the delisting of the shares from NASDAQ or its suspension thereof;
default in performance after failure to cure after notice; failure to pay
principal or interest; failure to pay indebtedness for borrowed money;
bankruptcy, insolvency or unsatisfied judgments; failure to achieve earnings per
common share of at least US$.55 for fiscal years commencing January 1, 1996; and
accounts receivable reaching a certain level in relationship to net sales.
F-53
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
6. CONVERTIBLE DEBENTURES (continued)
As a result of the foregoing, although the Convertible Debentures bear interest
at the rate of 5% per annum, interest is accrued at the rate of 12% per annum.
The obligations of China Bearing under the Convertible Debentures are
guaranteed by the other members of the Sunbase Group.
7. SALE OF COMMON STOCK
On June 10, 1996, the Company sold 1,000,000 shares of common stock (the
"Private Placement Shares") at US$5.00 per share, which generated net proceeds
of US$ 4,265 (RMB 35,399). On October 23, 1996, the Company filed a registration
statement with the Securities and Exchange Commission to register the resale of
the Private Placement Shares.
F-54
<PAGE>
No person has been authorized to give any information or to make any
representations not contained in this Prospectus and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company on the Selling Shareholders. This Prospectus does not constitute
an offer to sell or a solicitation of an offer to buy any securities covered by
this Prospectus in any state or other jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such state or jurisdiction.
Neither the delivery of this Prospectus nor any sales made hereunder shall,
under any circumstances, create an implication that there has been no change in
the facts set forth in the Prospectus or in affairs of the Company since the
date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information......................................... 2
Currency of Presentation...................................... 2
Enforceability of Certain Civil Liabilities................... 2
Prospectus Summary............................................ 4
Risk Factors.................................................. 8
Price Range of the Common Stock............................... 15
Dividend Policy............................................... 15
Selected Consolidated Financial Information................... 16
Supplementary Financial Information........................... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 21
Business...................................................... 31
Organization of the Company................................... 40
Management.................................................... 41
Certain Relationships and Related Transactions................ 47
Principal Shareholders........................................ 50
Description of Securities..................................... 53
Selling Shareholders.......................................... 58
Plan of Distribution.......................................... 60
Experts....................................................... 60
Index to Financial Statements.................................F-1
Financial Information.........................................F-3
</TABLE>
<PAGE>
SUNBASE ASIA, INC.
PART II
Item 13. Other Expenses of Issuance and Distribution.
-------------------------------------------
<TABLE>
<S> <C>
SEC Filing Fees $ 2,672
NASDAQ listing fees 17,500
Blue Sky qualification fees and
expenses/1/ 15,000
Printing and engraving/1/ 5,000
Legal Fees/1/ 40,000
Accounting Fees/1/ 10,000
Miscellaneous/1/ 12,500
--------
TOTAL $102,672
========
</TABLE>
Item 14. Indemnification of Directors and Officers.
-----------------------------------------
The only statute, charter provision, bylaw, contract, or other arrangement
under which any controlling person, director or officer of the Company is
insured or indemnified in any manner against any liability which he may incur in
his capacity as such, is as follows:
(a) The Company has the power under the Nevada Revised Statutes (the
"Statute") to provide indemnification for expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement that are actually and reasonably
incurred in connection with any threatened, pending or completed action, suit or
proceeding other than an action by or in the right of the Company. The person
seeking indemnification must have acted in good faith and in a manner which such
person reasonably believed to be in or not opposed to the best interests of the
Company. In the case of a criminal action or proceeding, the person must also
have had no reasonable cause to believe such person's conduct was unlawful. The
Statute also authorizes indemnification by the Company in the case of actions or
suits by or in the name of the Company. However, such indemnification is limited
to expenses actually and reasonably incurred by the person indemnified in
connection with the defense or settlement of the action or suit. Expenses
include attorneys' fees and amounts paid in settlement. The person indemnified
must have acted in good faith and in a manner which such person reasonably
believed to be in, or not opposed to, the best interests of the Company. The
Company may not indemnify a person for any claim, issue or matter as to which
the person has been adjudged to be liable to the
- -------------------
/1/ Estimates
II-1
<PAGE>
Company or for amounts paid in settlement unless a court determines
that in view of all the circumstances, the person is fairly and
reasonably entitled to indemnification.
The Company is authorized to indemnify, subject to the
respective conditions described above, past or present directors,
officers, employees or agents of the Company. The Statute also
authorizes indemnification of persons who are or were serving at the
request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise.
Pursuant to the Statute, the Company must indemnify a
director, officer, employee or agent to the extent such individual is
successful on the merits "or otherwise" in the defense of any action,
suit or proceeding or in the defense of any claim, issue or matter
therein. This mandatory indemnification is against expenses actually
and reasonably incurred by the indemnitee in connection with a
defense. Such indemnification is required even if the indemnitee is
successful by reason of a defense that is not based on the merits,
such as the statute of limitations. In addition, an indemnitee would
be considered successful in the defense of an action, suit or
proceeding if it is dismissed with prejudice pursuant to a negotiated
settlement agreement which does not provide for any payment or
assumption of liability.
Indemnification is authorized only upon a determination that
indemnification is proper under the circumstances. Unless ordered by
a court, the determination must be made by the shareholders, the board
of directors (by a majority vote of a quorum consisting of directors
who are not parties to the action), or by independent legal counsel.
The Statute provides that the Articles of Incorporation,
Bylaws or an agreement may provide that the expenses incurred by an
officer or director must be paid by the Company as they are incurred
and in advance upon receipt of an undertaking to repay if it is
ultimately determined by a court of competent jurisdiction that such
person is not entitled to be indemnified by the corporation.
(b) The Articles of Incorporation and Bylaws of Registrant
generally require indemnification of officers and directors to the
fullest extent allowed by law.
II-2
<PAGE>
Item 15. Recent Sales of Unregistered Securities
---------------------------------------
During the past three years, the Company has sold its
securities in the following transactions pursuant to the exemption
from the registration requirements of the Securities Act provided by
Section 4(2) of the Securities Act for transactions not involving a
public offering and Regulation D promulgated thereunder or pursuant to
Regulation S promulgated under the Securities Act for offers and sales
made outside the United States. The share amounts set forth below
have been adjusted to reflect the Company's one-for-seventy reverse
split of the Common Stock effective October 5, 1994.
1. On November 23, 1993, the Company issued to The
Questex Group Ltd. 900,000 shares in connection with a stock-swap for
Questex stock.
2. On November 23, 1993, the Company issued to Alice
Cutteridge 90,000 shares for payment on a note payable.
3. On November 23, 1993, the Company issued to Iverna
Tompkins 2,000 shares for payment for investment banking services.
4. On November 23, 1993, the Company issued to Michelle
Mcintosh 3,000 shares for payment for investment banking services.
5. On November 23, 1993, the Company issued to David
Mcintosh 1,000 shares for payment for investment banking services.
6. On November 23, 1993, the Company issued to Casey
Mcintosh 1,000 shares for payment for investment banking services.
7. On November 23, 1993, the Company issued to Daniel
Mcintosh 1,000 shares for payment for investment banking services.
8. On November 23, 1993, the Company issued to Daniel L.
Van Arsdall and Lanora S. Van Arsdall 1,000 shares for payment for
investment banking services.
9. On November 23, 1993, the Company issued to SUCAP
11,000 shares for payment for investment banking services.
10. On November 23, 1993, the Company issued to Wayne A.
Mcintosh and Dianne M. Mcintosh 10,000 shares for payment for
investment banking services.
II-3
<PAGE>
11. On December 30, 1993, the Company issued to Marshall
Andrea Bouvier Jr. 375,000 shares for payment of debt.
12. On December 30, 1993, the Company issued to Salad M.
Janmohamed and Shenaaz Janmohamed 100,000 shares in a private
placement.
13. On December 30, 1993, the Company issued to Cecil
Engineering Inc. 16,900 shares in connection with a payment of an
account payable.
14. On December 30, 1993, the Company issued to Melvin
W. Ashland 3,000 shares in connection with a payment of an account
payable.
15. On December 30, 1993, the Company issued to Malik
Nasir Baz 2,000 shares in a private placement.
16. On December 30, 1993, the Company issued to Leland
B. Cecil 3,000 shares in connection with a payment of an account
payable.
17. On December 30, 1993, the Company issued to Wayne E.
Crumpley 4,000 shares for expense reimbursement.
18. On December 30, 1993, the Company issued to Janes
Neufield 10,000 shares in a private placement.
19. On December 30, 1993, the Company issued to Charles
W. Richards 11,000 shares in connection with a payoff of a note
payable.
20. On December 30, 1993, the Company issued to Doris
Christine Scott 111,000 shares in connection with a payoff of a note
payable.
21. On December 30, 1993, the Company issued to Ephraim
J. Acuirre 5,000 shares in a private placement.
22. On March 31, 1993, the Company issued to Herald
Investment Co., Ltd. 220,000 shares in connection with a payment of a
note payable.
23. On March 31, 1993, the Company issued to Herald
Investment Co., Ltd. 20,000 shares in connection with a payment of a
note payable.
24. On March 31, 1993, the Company issued to Herald
Investment Co., Ltd. 50,000 shares in connection with a payment of a
note payable.
25. On March 31, 1993, the Company issued to Herald
Investment Co., Ltd. 50,000 shares in connection with a payment of a
note payable.
II-4
<PAGE>
26. On March 31, 1993, the Company issued to Herald
Investment Co., Ltd. 40,000 shares in connection with a payment of a
note payable.
27. On March 31, 1993, the Company issued to Herald
Investment Co., Ltd. 20,000 shares in connection with a payment of a
note payable.
28. On March 31, 1993, the Company issued to Armon K.
Boyajian 100,000 shares in connection with a payment of a note
payable.
29. On July 18, 1994, the Company issued to Raz Goen
20,000 shares in connection with a pay-off of an account payable.
30. On July 18, 1994, the Company issued to Sayad M.
Janmohamed 150,000 shares in connection with a payment on a note
payable.
31. On July 18, 1994, the Company issued to Alice
Cutteridge 40,000 shares in connection with a payment on a note
payable.
32. On July 18, 1994, the Company issued to Kent R.
Spigute 20,000 shares in connection with an account payable/legal
services.
33. On July 18, 1994, the Company issued to Herold
Investment Company 200,000 shares in connection with a payment on a
note payable.
34. On July 18, 1994, the Company issued to Cecil
Engineering 27,200 shares in connection with a pay-off of an account
payable.
35. On July 18, 1994, the Company issued to Tom Dooley
40,000 shares in connection with a pay-off of an account payable.
36. On July 18, 1994, the Company issued to Floyd and
Judy Cannon 10,000 shares in connection with a pay-off of an account
payable.
37. On September 22, 1994, the Company issued to
California Quality Printer/Jeffrey M. Lawton 2,857 shares in
connection with an account payable/printing.
38. On September 22, 1994, the Company issued to Sayad
M. Janmohamed 5,000 shares in connection with a payment on a note
payable.
39. On September 22, 1994, the Company issued to Armon
Boyajian c/o Herold Investment Company 2,857 shares in connection with
a payment on a note payable.
II-5
<PAGE>
40. On September 22, 1994, the Company issued to Herold
Investment Company 16,429 shares in connection with a payment on a
note payable.
41. On September 22, 1994, the Company issued to Lloyd
Freltas 1,429 shares in a private placement.
42. On September 22, 1994, the Company issued to Western
Technology Marketing 714 shares in connection with a pay-off of a note
payable.
43. On September 22, 1994, the Company issued to Mark
Dillon 7,143 shares for a finder's fee.
44. On September 22, 1994, the Company issued to
Whitehall Montague & Cie 107,142 shares for a finder's fee.
45. On September 22, 1994, the Company issued to Jehu
Hand 14,286 shares for legal services.
46. On December 22, 1994, the Company issued an
aggregate of 12,960,000 shares of Common Stock (of which 2,699,000
shares were subsequently cancelled) and 36 shares of Series B
Preferred Stock to Asean Capital in connection with the acquisition by
the Company of an effective 51.4% interest in Harbin Bearing.
47. On January 14, 1996, the Company issued an aggregate
of 6,800 shares of its Series B Convertible Preferred Stock to the
shareholders of Southwest Products and a third party who provided a
temporary loan to the Company, all in connection with the acquisition
by the Company of Southwest Products.
48. On June 10, 1996, the Company issued 1,000,000
shares of its Common Stock to the Selling Shareholders, which shares
are covered by the prospectus included within the Registration
Statement.
49. On August 23, 1996, the Company's subsidiary, China
Bearing, issued to four institutional investors an aggregate of
$11,500,000 in principal amount of debentures convertible into the
Common Stock of the Company.
Item 16. Exhibits and Financial Statement Schedules.
------------------------------------------
(a) The following Exhibits are filed as part of this Registration
Statement pursuant to Item 601 of Regulation S-K:
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Document Page No.(s)
- ----------- ----------------------- -----------
<S> <C> <C>
(2) Plan of acquisition, reorganization,
arrangement, liquidation or succession.
2.1 Share Exchange Agreement, dated December
2, 1994, between the Company, Valley
Financial, Inc., Wayne Crumpley and China
Bearing Holdings, Ltd. and Asean Capital
Limited, a subsidiary of Sunbase
Intentional./(1)/
2.2 Asset Transfer and Assumption
Agreement dated December 16, 1994, between
the Company and Valley Financial
Corporation./(1)/
(3) Certificates of Incorporation and Bylaws
3.1 Nevada Articles of Incorporation./(1)/
3.2 Articles of Merger./(1)/
3.3 Amended and Restated Certificate of
Designation for Series A Convertible
Preferred Stock./(1)/
3.4 Secured Promissory Note in favor of Asean
Capital Limited./(2)/
3.5 Third Amended and Restated Certificate of
Designation for Series B Preferred Stock./(4)/
(10) Material contracts
10.1 Agreement between the Company and New
China Hong Kong with respect to the Sale
and Purchase of shares of China Bearing,
together with the Deed of Novation./(3)/
10.2 Memorandum and Articles of Association
of China International./(3)/
</TABLE>
II-7
<PAGE>
<TABLE>
<S> <C> <C>
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
Intentional and Harbin Bearing Everising
Construction and Development Ltd. with
respect to Harbin Xinhengli./(3)/
10.5 Amended Articles of Association of Harbin
Sunbase./(3)/
10.6 Articles of Association of Harbin
Xinhengli./(3)/
10.7 Articles of Association of Harbin
Bearing./(3)/
10.8 Agreement between Harbin Sunbase and
Harbin Bearing with respect to the
provision of financial management services
to Harbin Bearing./(3)/
10.9 Agreement between Harbin Xinhengli and
Harbin Bearing with respect to the
provisions of sales and marketing services
to Harbin Bearing./(3)/
10.10 Pension Fund Aggregation Agreement
Harbin Bearing and Harbin Holdings with
respect to pension payments for existing
employees./(3)/
10.11 Trademark Licensing Agreement between
Harbin Bearing and Harbin Holdings with
respect to the "HRB" trademark./(3)/
10.12 Service Agreement between Harbin
Holdings and Harbin Bearing./(3)/
10.13 Land Use Right Lease Agreement between
Harbin Holdings and Harbin Bearing./(3)/
</TABLE>
II-8
<PAGE>
<TABLE>
<S> <C> <C>
10.14 Power Supply and Manufacturing
Equipment Lease Agreement between
Harbin Precision and Harbin Bearing./(3)/
10.15 Plant Buildings Lease Agreement between
Harbin Precision and Harbin Bearing./(3)/
10.16 Ancillary and Transport Equipment Lease
Agreement between Harbin Precision and
Harbin Bearing./(3)/
10.17 Agreement and Plan of Reorganization and
Merger dated as of December 29, 1995
among the Company, Southwest Products
and the shareholders of Southwest
Products./(4)/
10.18 Employment Agreement dated as of
January 16, 1996 between the Company,
Southwest Products and William McKay./(4)/
10.19 1995 Stock Option Plan./(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 Limited, Wardley
China Investment Trust, MC Private Equity
Partners Asia Limited and Chine
Investissement 2000./(5)/
</TABLE>
II-9
<PAGE>
_____________
(1) Filed with the Company's Form 8-K, dated December 22, 1994 and
incorporated herein.
(2) Filed with the Company's Form 8-K/A, dated December 22, 1994 and
incorporated by reference herein.
(3) Filed with the Company's Form 10-K dated March 3, 1995 and
incorporated by reference herein.
(4) Filed with the Company's Form 10-K dated May 3, 1996 and
incorporated by reference herein.
(5) Filed with the Company's registration statement on Form S-1 dated
October 23, 1996 and incorporated by reference herein.
22 The Company's subsidiaries are:
<TABLE>
<CAPTION>
Effective
Percentage Place of
Name of Subsidiary Ownership Incorporation
- ------------------ ---------- -------------
<S> <C> <C>
China Bearing 100% Bermuda
Holdings Limited
China International 100% Hong Kong
Bearing Holdings Limited
Harbin Sunbase 99% People's Republic of
Development Company Limited China JV Holding
Company
Harbin Xinhengli 99.90% People's Republic of
Development China JV Holding
Company Limited Company
Harbin Bearing 51.4% People's Republic of
Company, Ltd. China Joint Stock
Company
Smith Acquisition Company, Inc., 100% California
dba Southwest Products Company
23.1 Consent of Ernst & Young.
</TABLE>
II-10
<PAGE>
______________
(b) FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements for the years ended December
31, 1995 and 1994 and for the six months ended June 30, 1996.
II-11
<PAGE>
Item 17. Undertakings.
------------
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement, including
(but not limited to) any addition or election of a managing underwriter.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities offered at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(g) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel that matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-12
<PAGE>
(h) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the City
of Los Angeles, State of California, on December 6, 1996.
SUNBASE ASIA, INC.
By: /s/ William McKay
--------------------------------
William McKay,
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed by the following persons
in the capacities indicated on December 6, 1996.
Date: December 6, 1996 By: /s/ Gunter Gao
--------------------------------------------
Gunter Gao, Chairman and Director
Date: December 6, 1996 By: /s/ Billy Kan
--------------------------------------------
Billy Kan, Vice Chairman and Director
Date: December 6, 1996 By: /s/ William McKay
--------------------------------------------
William McKay, Chief Executive Officer,
President and Director
Date: December 6, 1996 By: /s/ (Roger) Li Yuen Fai
--------------------------------------------
(Roger) Li Yuen Fai, Vice President and
Chief Financial Officer and Director
II-14
<PAGE>
Date: December 6, 1996 By: /s/ (Franco) Ho Cho Hing
--------------------------------------------
(Franco) Ho Cho Hing, Director
Date: December 6, 1996 By: /s/ (Dickens) Chang Shing Yam
--------------------------------------------
(Dickens) Chang Shing Yam, Chief
Accounting Officer
Date: December 6, 1996 By: /s/ Philip P.Y. Yuen
--------------------------------------------
Philip P.Y. Yuen, Director
Date: December 6, 1996 By: /s/ George Raffini
--------------------------------------------
George Raffini, Director
II-15
