<PAGE>
As filed with the Securities and Exchange Commission on October 23, 1996
Registration No. 33-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
_________________________
SUNBASE ASIA, INC.
(Exact Name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Nevada 3562 94-1612110
(State or Jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
____________________
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>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to Offering Price Aggregate Amount of
Securities to be Registered Be Registered Per Share/(1)/ Offering Price Registration Fee
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 1,000,000 $7 3/4 $7,750,000 $2,672
</TABLE>
(1) Estimated solely for purpose of calculating the registration fee. Pursuant
to Rule 457, the maximum offering price per share is based upon the average
of the closing bid and asking prices of the Common Stock on the Nasdaq
National Market on October 17, 1996, or $7 3/4.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
ii
<PAGE>
PRELIMINARY PROSPECTUS
----------------------
SUNBASE ASIA, INC.
1,000,000 SHARES OF COMMON STOCK
($.001 PAR VALUE)
This Prospectus relates to the sale of up to 1,000,000 shares (the
"Shares") of Common Stock, par value $.001 per share (the "Common Stock"),
of Sunbase Asia, Inc. (the "Company") which may be offered by certain
Selling Shareholders. The Shares were acquired by the Selling Shareholders
in a private placement as described under the caption "Selling
Shareholders" herein. The Selling Shareholders may offer the Shares for
sale as described under the caption "Plan of Distribution." The expenses
of the offering, estimated at $102,672, will be paid by the Company. The
Company will not receive any proceeds from the sale of the Shares by the
Selling Shareholders.
The Common Stock currently trades on the Nasdaq National Market
("Nasdaq") under the symbol "ASIA." On October 17, 1996, the closing sale
price of the Common Stock as reported by Nasdaq was $7 3/4, per share.
See "Price Range of Common Stock." Prospective investors should carefully
consider the matters discussed under the caption "Risk Factors" on page 9.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=========================================================================================
Underwriting
Discounts and Proceeds to Selling
Common Stock Price to Public(1) Commissions(2) Shareholders
=========================================================================================
<S> <C> <C> <C>
Per Share $7 3/4 N/A $7 3/4
Maximum Total $7,750,000 N/A $7,750,000
=========================================================================================
</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 October 17, 1996.
(2) No underwriter will participate in any sales on behalf of the Selling
Shareholders. See "PLAN OF DISTRIBUTION." All expenses of the
offering, which are estimated to be $102,672, will be paid by the
Company.
THE DATE OF THIS PROSPECTUS IS OCTOBER __, 1996
1
<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
2
<PAGE>
generally prepared to accept a foreign judgment as evidence of a debt due.
An action may then be commenced in Hong Kong for recovery of this debt. A
Hong Kong court will only accept a foreign judgment as evidence of a debt
due if: (i) the judgment is for a liquidated amount in a civil matter;
(ii) the judgment is final and conclusive and has not been stayed or
satisfied in full; (iii) the judgment is not directly or indirectly for the
payment of foreign taxes, penalties, fines or charges of a like nature (in
this regard, a Hong Kong court is unlikely to accept a judgment for an
amount obtained by doubling, trebling or otherwise multiplying a sum
assessed as compensation for the loss or damage sustained by the person in
whose favor the judgment was given); (iv) the judgment was not obtained by
actual or constructive fraud or duress; (v) the foreign court has taken
jurisdiction on grounds that are recognized by the common law rules as to
conflict of laws in Hong Kong (vi) the proceedings in which the judgment
was obtained were not contrary to natural justice (i.e., the concept of
fair adjudication); (vii) the proceedings in which the judgment was
obtained, the judgment itself and the enforcement of the judgment are not
contrary to the public policy of Hong Kong; (viii) the person against whom
the judgment is given is subject to the jurisdiction of the Hong Kong
court; and (ix) the judgment is not on a claim for contribution in respect
of damages awarded by a judgment which does not satisfy the foregoing.
Enforcement of a foreign judgment in Hong Kong may also be limited or
affected by applicable bankruptcy, insolvency, liquidation, arrangement,
moratorium or similar laws relating to or affecting creditors' rights
generally and will be subject to a statutory limitation of time within
which proceedings may be brought.
3
<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.
SUNBASE ASIA, INC.
Common Stock trades-on
NASDAQ NMS
(Nevada Corporation)
100% 100%
CHINA BEARING
HOLDINGS LIMITED
(Bermuda Holding Company) SOUTHWEST
PRODUCTS
COMPANY
(California Corporation)
100% OPERATING COMPANY
CHINA INTERNATIONAL
BEARING HOLDINGS LIMITED
(Hong Kong Holding Company)
99% 99.90%
HARBIN SUNBASE HARBIN XINHENGLI
DEVELOPMENT DEVELOPMENT
COMPANY LIMITED COMPANY LIMITED
(PRC JV Holding Co.) (PRC JV Holding Co.)
10% 41.57%
HARBIN BEARING COMPANY, LTD
(A) (PRC Joint Stock Company)
OPERATING COMPANY
(A) Sunbase Asia's effective ownership
in Harbin Bearing is 51.4%
6
<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 six month periods ended June 30, 1995 and
1996. All U.S. dollar amounts have been converted from Renminbi based on
the exchange rate on June 30, 1996 of $1.00 US to each Rmb 8.32 as quoted
at the People's Bank of China. Due to the reorganization of the Harbin
Bearing General Factory on January 1, 1994, the 1993 financial information
was prepared on a pro-forma basis as if the acquisition of China Bearing
and Harbin Bearing had occurred on January 1, 1993. (See the discussion
after the table under the caption "Selected Consolidated Financial
Information").
<TABLE>
<CAPTION>
OPERATIONS DATA
Twelve Months Ended December 31 Six Months Ended June 30
--------------------------------------------------- ---------------------------------
(UNAUDITED)
1993 1994 1995 1995 1995 1996 1996
RMB RMB RMB US$ RMB RMB US$
PROFORMA
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales 687,064 719,842 672,359 80,812 434,833 465,689 55,972
Cost of sales (439,417) (441,854) (381,377) (45,838) (265,683) (285,917) (34,365)
Gross profit 247,647 277,988 290,982 34,974 169,150 179,772 21,607
Selling, general and
administrative expense (91,197) (95,218) (113,002) (13,582) (51,045) (62,359) (7,495)
Interest expense, net (40,638) (43,446) (48,446) (5,822) (23,589) (30,421) (3,656)
Foreign exchange gain/loss- - 725 - - -
Reorganization expenses (7,307) (7,307) - - - -
Income before income taxes 108,505 132,742 129,534 15,570 94,516 86,992 10,456
Provision for income taxes (16,700) (22,687) (20,472) (2,461) (14,499) (14,420) (1,733)
Income before minority
interests 91,805 110,055 109,062 13,109 80,017 72,572 8,723
Minority interests (50,495) (58,447) (54,967) (6,607) (39,907) (39,690) (4,771)
Net income 41,310 51,608 54,095 6,502 40,110 32,882 3,952
<CAPTION>
BALANCE SHEET DATA
AT JUNE 30, 1996
----------------
RMB US$
<S> <C> <C>
Current Assets 1,188,986 142,908
Working Capital 331,729 39,871
Long-Term Debt 155,786 18,725
Minority Interests 382,831 46,013
Shareholders' Equity 398,927 47,948
Total Assets 1,794,801 215,723
</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
9
<PAGE>
could be sufficiently great to preclude Harbin Bearing from meeting foreign
financial obligations it might incur in the future or from paying
distributions to the Company.
RECENT TURBULENT RELATIONS WITH THE U.S.; ENTRY INTO THE WORLD TRADE
ORGANIZATION. The United States has from time to time considered
revocation of China's most favored nation ("MFN") trade status, which
provides China with the trading privileges available generally to trading
partners of the United States, and the United States and China have
recently been involved in several controversies, including over the
protection in China of intellectual property rights. While the United
States and China have recently reached an agreement on the protection of
intellectual property rights that averted a trade war, there can be no
assurance that future controversies will not arise that again threaten the
status quo involving trade between the United States and China, or that the
United States will not revoke or refuse to extend China's MFN status. In
either of such eventualities, the business of the Company could be
adversely affected. In this regard, under MFN status, US bearing tariffs
are between 3.5% - 10.2%. If MFN status is lost, US tariffs would increase
to 35% - 67%. In addition, the United States has announced a change in
policy that may make it easier for China to join the World Trade
Organization (the "WTO"), the successor to the General Agreement on Tariffs
and Trade. However, if China does not joint the WTO, the Company and its
customers located in China may not benefit from the lower tariffs and other
privileges enjoyed by competitors located in countries which are members of
the world trade system and, as a result, the Company's business could be
adversely affected. However, the admission of China as a member of the WTO
could lead to increased foreign competition for Harbin Bearing. If China
becomes a member of the WTO, the Chinese government will likely be required
to reduce import restrictions and tariffs on bearing products.
POLITICAL AND ECONOMIC DEVELOPMENTS AFFECTING HONG KONG. The Company's
executive offices are located in Hong Kong. Accordingly the Company may be
materially adversely affected by factors affecting Hong Kong's political
situation and its economy or in its international political and economic
relations. Hong Kong is currently a British Crown Colony, but sovereignty
over Hong Kong will be transferred effective July 1, 1997 to China. As a
result, there can be no assurance as to the continued stability of
political, economic or commercial conditions in Hong Kong.
COMPETITION RISKS RELATING TO THE COMPANY.
Harbin Bearing's main competitors can be separated into three
principal groups: (i) two nationwide domestic bearing manufacturers with
wide product lines; (ii) small bearing production facilities which compete
on a local basis by manufacturing small-sized, commodity-type bearings; and
(iii) foreign bearing manufacturers. Competition is principally based on
pricing and quality considerations.
Chinese Competition
Harbin Bearing, Wafangdian Bearing Factory and Luoyang Bearing
Factory are the three largest bearing manufacturers in China, based on 1994
sales. The combined sales
10
<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
15
<PAGE>
joint stock company is required by applicable Chinese Company Law to
reserve 10% of its after-tax earnings and profits as the mandatory retained
fund and 5 - 10% of its after-tax earnings and profits as the collective
welfare fund. The collective welfare fund must be used to finance
buildings and other capital expenditures for the collective staff benefits.
The joint stock company does not have to reserve for the mandatory retained
fund if the amount of such fund has reached 50% of a company's registered
capital. For 1994 and 1995, Harbin Bearing contributed 10% and 5%,
respectively, of after-tax profits as determined under Chinese accounting
principles for such purposes. Distributions of dividends by Harbin Bearing
to its shareholders are required to be in proportion to each shareholder's
percentage interest in Harbin Bearing.
All distributions by Harbin Bearing will be paid to its
shareholders of record, which include the joint venture partners controlled
by the Company (See, Chart of the organizational structure on page 7.
Applicable Chinese laws and regulations require that, before a Sino-foreign
equity joint venture (such as the joint venture partners) distributes
dividends, it must: (1) satisfy all tax liabilities; (2) provide for
losses in previous years; and (3) make allocations of capital to its
official surplus accumulation fund and public welfare fund. The Company
indirectly owns 99% and 99.9% of the two joint venture partners and,
therefore, approximately 1.1% of distributions received by such partners
will be paid to the Chinese parties of these joint ventures.
Remittance of earnings outside of China is subject to certain
factors outside of the control of the Company. See "Risk Factors - Risks
Relating to Operating in China."
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial data
(expressed in thousands) have been derived from the audited financial
statements of Harbin Bearing General Factory (the predecessor operating
company to Harbin Bearing) for the year ended December 31, 1991, 1992 and
1993 and the audited financial statements of the Company for the years
ended December 31, 1994 and 1995, and the unaudited financial statements of
the Company for the six month periods ended June 30, 1995 and 1996. All
U.S. dollar amounts have been converted from Renminbi based on the exchange
rate on June 30, 1996 of $1.00 US to each Rmb 8.32 as quoted at the
People's Bank of China. Due to the reorganization of the Harbin Bearing
General Factory on January 1, 1994, the 1993 financial information was
prepared on a pro-forma basis as if the acquisition of Harbin Bearing had
occurred on January 1, 1993. See "Organization of the Company" and "Certain
Relationship and Related Transactions." The pro forma adjustments are
described after the table. Due to the reorganization of the Harbin Bearing
General Factory on January 1, 1994 and the ownership by the Company of only
51.4% of Harbin Bearing, period to period comparisons of the selected
financial data are not meaningful.
16
<PAGE>
OPERATIONS DATA
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
-------------------------
(UNAUDITED)
1991 1992 1993 1993 1994 1995 1995 1995 1996
RMB RMB RMB RMB RMB RMB US$ RMB RMB US$
ACTUAL ACTUAL ACTUAL PROFORMA
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales 424,845 643,678 687,064 687,064 719,842 672,359 80,812 434,833 465,689 55,972
Cost of sales (335,882) (452,594) (441,467) (439,417) (441,854) (381,377) (45,838) (265,683) (285,917) (34,365)
Gross profit 88,963 191,084 245,597 247,647 277,988 290,982 34,974 169,150 179,772 21,607
Selling, general
and administrative
expense (80,136) (100,142) (94,685) (91,197) (95,218) (113,002) (13,582) (51,045) (62,359) (7,495)
Interest expense,
net (24,404) (27,986) (40,723) (40,638) (43,446) (48,446) (5,822) (23,589) (30,421) (3,656)
Foreign exchange
gain/loss - (566) (3,446) - 725 - - - -
Reorganization
expenses - - - (7,307) (7,307) - - - -
Income before
income taxes (15,577) 62,390 106,743 108,505 132,742 129,534 15,570 94,516 86,992 10,456
Provision for
income taxes (13,020) (11,123) (11,080) (16,700) (22,687) (20,472) (2,461) (14,499) (14,420) (1,733)
Income before
minority interests N/A N/A N/A 91,805 110,055 109,062 13,109 80,017 72,572 8,723
Minority interests N/A N/A N/A (50,495) (58,447) (54,967) (6,607) (39,907) (39,690) (4,771)
Net income (28,579) (51,267) 95,663 41,310 51,608 54,095 6,502 40,110 32,882 3,952
<CAPTION>
BALANCE SHEET DATA
DECEMBER 31 JUNE 30, 1996
1991 1992 1993 1993 1994 1995 1995
RMB RMB RMB RMB RMB RMB US$ RMB US$
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current Assets 411,380 494,177 933,639 576,812 893,994 1,032,600 124,110 1,188,986 142,908
Working Capital 17,932 64,143 398,994 252,404 247,990 306,288 36,812 331,729 39,871
Long-Term Debt 83,390 145,442 440,366 216,915 235,656 218,383 26,248 155,786 18,725
Minority Interests - - - 229,728 288,175 343,142 41,243 382,831 46,013
Shareholders'
Equity 196,221 266,989 304,731 189,267 248,182 330,565 39,731 398,927 47,948
Total Assets 673,059 842,465 1,279,742 960,318 1,418,017 1,618,402 194,520 1,794,801 215,723
</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$5 million promissory
note for the year ended December 31, 1993;
(k) To adjust for reorganization expenses for the year ended December
31, 1993 as a result of the reverse acquisition;
(l) To adjust the provision for income taxes to reflect the Chinese
income taxes applicable to joint stock enterprises from January
1, 1993 for Harbin Bearing; and
(m) To account for the effect of the minority interests.
The following table sets certain information concerning exchange
rates between Renminhi and US dollars for the periods indicated.
<TABLE>
<CAPTION>
Noon Buying Rate
(expressed in RMB per US$)
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
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
SIX MONTHS ENDED JUNE 30, 1995 AND 1996:
The following table sets forth certain unaudited operating data (in
Rmb and as a percentage of the Company's sales) for the six months ended
June 30, 1995 and 1996.
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1995 1996
---------- ---------
Rmb % Rmb %
--- - --- -
<S> <C> <C> <C> <C>
Sales 434,833 100.0 465,689 100.0
Cost of sales (265,683) (61.1) (285,917) (61.4)
-------- --- -------- -----
Gross profit 169,150 38.9 179,772 38.6
-------- --- -------- -----
Selling expenses (9,753) (2.3) (12,371) (2.7)
General and administrative expenses (41,292) (9.5) (49,988) (10.7)
Interest expense (23,589) (5.4) (30,421) (6.5)
-------- --- -------- -----
Income before income taxes 94,516 21.7 86,992 18.7
Provision for income taxes (14,499) (3.3) (14,420) (3.1)
-------- --- -------- -----
Income before minority interests 80,017 18.4 72,572 15.6
Minority interests (39,907) (9.2) (39,690) (8.5)
-------- --- -------- -----
Net income 40,110 9.2 32,882 7.1
======== === ======== =====
</TABLE>
Sales
-----
Sales (including Rmb 16,073 from Southwest Products) for the six
months ended June 30, 1996 increased by Rmb 30,856 or 7.1% as compared to
the six months ended June 30, 1995. Excluding Southwest Products
operations, sales increased by Rmb 14,783 or 3.4% for the six months ended
June 30, 1996 as compared to the six months ended June 30, 1995. The rate
at which sales had been growing has slowed in 1996 as compared to 1995 as a
result of the Company's efforts beginning in the latter part of 1995 to
consolidate the distribution of its products in China by shifting smaller
OEM accounts to certain large distributors. See - "Liquidity and Capital
Resources."
22
<PAGE>
Cost of Sales/Gross Profit
--------------------------
Cost of sales (including Rmb 12,550 from Southwest Products) for the
six months ended June 30, 1996 increased to Rmb 285,917 as compared to Rmb
265,683 for the six months ended June 30, 1995. The cost of sales for
Harbin Bearing for the six months ended June 30, 1996 and 1995 was
calculated using the gross profit method by reference to average annual
gross profit ratios. The cost of sales for Southwest Products for the six
months ended June 30, 1996 was calculated based on actual cost.
Gross profit increased by Rmb 10,662 or 6.3% for the six months ended
June 30, 1996 as compared to the six months ended June 30, 1995. The
increase in gross profit was attributable to the increase in sales. Gross
profit as a percentage of sales decreased to 38.6% in 1996 from 38.9% in
1995 due to Southwest Products' lower gross margin of 21.9%.
Selling Expenses
----------------
Selling expenses (including Rmb 2,501 from Southwest Products) for the
six months ended June 30, 1996 increased by Rmb 2,618 or 26.8% to Rmb
12,371 as compared to Rmb 9,753 for the six months ended June 30, 1995.
The increase in selling expenses was primarily attributable to the
consolidation of Southwest Products' selling expenses in 1996. Selling
expenses as a percentage of sales increased from 2.3% in 1995 to 2.7% in
1996.
General and Administrative Expenses
-----------------------------------
General and administrative expenses (including Rmb 4,370 from
Southwest Products) for the six months ended June 30, 1996 increased by Rmb
8,696 or 21.1% to Rmb 49,988 as compared to Rmb 41,292 for the six months
ended June 30, 1995. General and administrative expenses as a percentage
of sales increased to 10.7% in 1996 from 9.5% in 1995. The increase in
general and administrative expenses was mainly attributable to:
a. The consolidation of Southwest Products' general and
administrative expenses of Rmb 4,370.
b. An increase in the management fee of Rmb 1,816 payable to Harbin
Bearing Holdings Company as a result of a 10% inflation adjustment.
c. An aggregate cash discount of Rmb 6,507 which was granted during
the six months ended June 30, 1996 as incentives to customers for early
settlement of debt in order to accelerate the cash collections. No such
cash discount was granted during the six months ended June 30, 1995.
d. A decrease in compensation expense of Rmb 3,939 related to the
voluntary early retirement program at Harbin Bearing.
23
<PAGE>
Interest Expense
----------------
Interest expense (including Rmb 1,380 from Southwest Products) for the
six months ended June 30, 1996 increased by Rmb 6,832 or 29.0% to Rmb
30,421 as compared to Rmb 23,589 for the six months ended June 30, 1995.
The increase in interest expense was attributable to an increase in
principal amount of bank loans during the six months ended June 30, 1996 as
compared to the six months ended June 30, 1995, and the 1.3% increase in
the interest rate on new short term bank loans effective July 1, 1995.
Net Income
----------
As a result of the aforementioned factors, including the consolidation
of Southwest Products' operations effective January 1, 1996, net income
decreased by Rmb 7,228 or 18.0% to Rmb 32,882 for the six months ended June
30, 1996 as compared to Rmb 40,110 for the six months ended June 30, 1995.
<TABLE>
<CAPTION>
RESULTS FOR 1995 COMPARED TO 1994
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>
24
<PAGE>
Net Sales
---------
Net sales decreased by Rmb 47,483 or 6.6% in 1995 as compared to 1994. The
decrease was mainly due to the change in the Company's marketing strategy
in order to further enhance its credit control on sales in the last quarter
of 1995 whereby a contracted sales order was entered into with a major
distributor, which is a related party beneficially owned by the Harbin
Municipal Government. Delivery was not made in respect of this transaction
at December 31, 1995 and thus this sale was not recognized in the Financial
Statements. However, in anticipation of this transaction, the Company
reduced the delivery of its products to other customers. As a result of
the aforementioned contracted sales order in the last quarter of 1995, the
net reported sales in the last quarter of 1995 was Rmb 21,289.
Throughout 1995, the Company continued to adjust its product mix
by shifting from small and medium sized bearings to higher margin medium
and large sized bearings in order to improve profitability and to cope with
the growth in market demand on these new products. The Company raised the
selling price of all bearing products effective July 1, 1995 by an average
of 3-5% in order to cover increasing costs, as compared to July 1, 1994
when there was a sales price increase of 5-8%. In the last quarter of
1995, the Company changed its marketing strategy by shifting smaller OEM
accounts to designated distributors in order to reduce marketing costs and
credit risks.
Gross Profit
------------
Gross profit increased by Rmb 12,994 or 4.7% in 1995 as compared
to 1994. Gross profit as a percentage of revenue increased from 38.6% in
1994 to 43.3% in 1995. The increase in gross profit was mainly
attributable to the effect of the sales mix change to higher-margin
products, the improved operational efficiency and a reduction in purchase
price of major raw materials.
In previous quarters in 1995, cost of sales was calculated with
reference to the average gross profit ratio for 1994, being 38.6% on
revenue. The average gross profit ratio for 1995 of 43.3% on revenue was
computed from actual results throughout the year after taking into account
various year-end closing inventory adjustments such as a write-back of
obsolete inventories sold during the year which amounted to Rmb 15,805 and
an adjustment to reflect under absorption of labor and overhead of
approximately Rmb 4,700. The gross profit margin for 1995 would have been
only 39.2% on revenue if no account was taken of the year end adjustments
on closing inventories.
25
<PAGE>
Selling Expenses
----------------
Selling expenses decreased by Rmb 1,529 or 7.5% in 1995 as
compared to 1994. The decrease was in line with the decrease in sales this
year. Selling expenses as a percentage of revenue has remained constant at
a rate of 2.8%.
General and Administrative Expenses
-----------------------------------
General and Administrative expenses increased by Rmb 19,313 or
25.8% in 1995 as compared to 1994. General and Administrative expenses as
a percentage of revenues increased from 10.4% to 14.0%. The increase in
General and Administrative expenses was mainly attributable to:
a. An increase in staff wages and welfare costs at Harbin
Bearing of Rmb 7,550 as a result of increments given to the staff this
year.
b. There was a loss of Rmb 4,829 on disposal of fixed assets
as compared to a gain on disposal of fixed assets of Rmb 1,087 in 1994.
c. A cash discount of Rmb 6,490 was granted in 1995 for
incentives to customers for early settlement of debt in order to accelerate
the cash collection. In 1995, an additional bad debt provision of Rmb
2,627 was provided (1994: Rmb 11,300) on certain aged debt.
d. An increase in management fee of Rmb 1,716 payable to
Harbin Bearing Holdings Company as a result of a 10% inflation adjustment.
e. An increase in insurance premium paid of Rmb 1,979 on the
increase in assets.
Interest Expense
----------------
Interest Expense increased by Rmb 5,725 or 13.4% in 1995 as compared
to 1994. The increase was attributable to interest expense of 8% related
to a US$ 5,000 promissory note issued on December 30, 1994 and to a 1.3%
increase in interest rate on increased amounts of short-term bank loans
effective July 1, 1995.
26
<PAGE>
Reorganization Expenses
-----------------------
There was no similar charges in 1995 of the one time reorganization
expenses in 1994 which were incurred in connection with the acquisition of
China Bearing Holdings Limited See "Organization of the Company" and
"Certain Relationships and Related Transactions."
RESULTS FOR ACTUAL 1994 COMPARED TO PROFORMA 1993
<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.
27
<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.
28
<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 six months ended June 30, 1996, the Company's operations
utilized cash resources of Rmb 2,061, as compared to Rmb 5,174 for the six
months ended June 30, 1995. The Company's net working capital increased by
Rmb 25,441 at June 30, 1996, to Rmb 331,729, as compared to Rmb 306,288 at
December 31, 1995, and the Company's current ratio at June 30, 1996 was
1.39:1, as compared to 1.42:1 at December 31, 1995 and 1.47:1 at June 30,
1995.
During the latter part of 1995, the Company began to consolidate
the distribution of its products in China by shifting smaller OEM accounts
to designated large distributors. The Company has granted extended credit
terms to such distributors to facilitate this transition, which the Company
expects to continue at least through the remainder of 1996. This new
marketing strategy is expected to reduce marketing costs and credit risk.
The Company's accounts receivable increased by Rmb 247,618 or
93.7% to Rmb 511,804 at June 30, 1996, as compared to Rmb 264,186 at
December 31, 1995. The increase in accounts receivable for the six months
ended June 30, 1996 is consistent with the increase in accounts receivable
of Rmb 189,291 or 63.5% for the six months ended June 30, 1995. Also
contributing to the increase in accounts receivable during the six months
ended June 30, 1996 was the granting of extended credit terms to designated
large distributors and the slowdown in accounts receivable collections from
the Company's previous smaller OEM accounts.
Offsetting, in part, the effect of the increase in accounts
receivable, accounts payable increased by Rmb 39,907 or 34.3% to Rmb
156,112 at June 30, 1996, as compared to Rmb 116,205 at December 31, 1995.
In addition, due from related companies decreased by Rmb 47,609 or 34.7% to
Rmb 89,470 at June 30, 1996, as compared to Rmb 137,079 at December 31,
1995, and prepaid VAT of Rmb 40,429 at December 31, 1995 was completely
utilized during the six months ended June 30, 1996.
29
<PAGE>
INVESTING ACTIVITIES
Capital expenditures for the six months ended June 30, 1996 of
Rmb 50,034 consisted of costs relating to the construction of new plant and
buildings and the renovation of existing facilities and equipment, and were
financed by bank loans and the sale of common stock. The Company
anticipates that additional capital expenditures for the remainder of 1996
will not exceed Rmb 10,000.
FINANCING ACTIVITIES
The Company has historically relied on both long and short term
bank loans from Chinese banks to support its operating and capital
requirements. Short term bank loans have terms ranging from three months
to six months, are utilized to finance both operating and capital
requirements, and are reviewed on a revolving basis. Long term bank loans
are utilized to fund capital expansion projects. During the six months
ended June 30, 1996, the net increase in bank loans (after deducting
repayments) was Rmb 63,356, which was utilized to fund the repayment of
other loans of Rmb 33,810 and operations and capital expenditures. The
Company believes that it will be able to continue to maintain and expand
its bank borrowings under existing terms and conditions.
In order to finance the Company's continuing operating and
capital requirements, the Company has been evaluating both debt and equity
financing opportunities. During June 1996, the Company sold in a private
placement 1,000,000 shares of common stock at US $5.00 per share,
generating net proceeds of US$ 4,265 (Rmb 35,480). In addition, in August
1996, the Company closed a private financing consisting of US$ 11,500 (Rmb
95,680) aggregate principal amount of convertible debentures. See
"Description of Securities".
The Company anticipates that its cash flows from operations,
combined with cash and cash equivalents, bank lines of credit and other
external sources of debt and equity financing, and the proceeds from the
June 1996 sale of the 1,000,000 shares of common stock and the August sale
of $11,500 principal amount of Convertible Debentures, are adequate to
finance the Company's operating and debt service requirements for the
foreseeable future.
INFLATION AND CURRENCY MATTERS
In recent years, the Chinese economy has experienced periods of
rapid economic growth as well as high rates of inflation, which in turn has
resulted in the periodic adoption by the Chinese government of various
corrective measures designed to regulate growth and contain inflation.
During the six months ended June 30, 1996, the general inflation rate in
China was in excess of 10% on an annualized basis. Since 1993, the Chinese
government has implemented and maintained an economic program designed to
control inflation, which
30
<PAGE>
has resulted in the tightening of working capital available to Chinese
business enterprises. The success of the Company depends in substantial
part on the continued growth and development of the Chinese economy.
The Company continually monitors the effects of inflation. The
Company is generally able to raise its prices to shift a portion of the
inflated costs to its customers. The price of bearing steel, the major raw
material used by the Company, remained fairly stable during 1995 and 1996.
The major impact of inflation was on labor costs due to increases in
employee wages. However, the Company has generally managed to offset the
effects of inflation through improved operational efficiency.
Foreign operations are subject to certain risks inherent in
conduction business abroad, including price and currency exchange controls,
and fluctuations in the relative value of currencies. Changes in the
relative value of currencies occur periodically and may, in certain
instances, materially affect the Company's results of operations.
The Company conducts most of its business in China and,
accordingly, the sale of its products are settled primarily in Rmb. As a
result, continued devaluation of the Rmb against the USD will adversely
affect its financial performance when measured in USD, and may have
material adverse effects upon the results of operations and financial
position of the Company. Although prior to 1994 the Rmb experienced
significant devaluation against the USD, the Rmb has remained fairly stable
from 1994 to present. The unified exchange rate was US$1.00 to Rmb 8.65 at
December 31, 1993, Rmb 8.45 at December 31, 1994, Rmb 8.32 at December 31,
1995, and Rmb 8.32 at June 30, 1996.
BUSINESS
BUSINESS DEVELOPMENT
The Company is engaged in the design, manufacture and
distribution of a broad range of bearing products in the PRC and the US.
The Company also distributes its bearing products in Europe, Asia, South
America and Africa. The Company's subsidiary in China, Harbin Bearing,
employs approximately 13,000 employees. Harbin Bearing is the largest
precision bearing manufacturer and the third largest bearing manufacturer
overall in China. Harbin Bearing produces a wide variety of precision and
commercial-grade, rolling-element bearings in sizes ranging from 10mm to
1000mm (internal diameter). Rolling-element bearings use small metal balls
or cylinders to facilitate rotation with minimal friction and are typically
used in vehicles, aircraft, appliances, machine tools, general machinery
and virtually any product that contains rotating or revolving parts.
Precision bearings are bearings that are produced to more exacting
dimensional tolerances and to higher performance characteristics than
standard commercial bearings. The manufacturing process
31
<PAGE>
for precision bearings generally requires the labor of highly-skilled
machinists and the use of sophisticated machine tools.
On January 16, 1996 (effective December 29, 1995), the Company
acquired Southwest Products, which produces precision spherical bearings
for US, European and Asian aerospace and high tech commercial applications
and the US military.
Over 90% of Harbin Bearing's sales are made to the OEM and
replacement markets in China. Based on low production costs in China and
the on-going world-wide demand for bearings, management has been increasing
Harbin Bearing's efficiency and production output with the intent of
creating a substantial export business to complement the Company's strong
domestic position in the Chinese markets. Historically, Harbin Bearing
export sales have been made through trade intermediaries and by receiving
customer orders that are placed directly to its offices in China.
Southwest Products has commenced providing and will provide engineering and
technical support, and has commenced to and will market and distribute
Harbin Bearing products internationally, focusing on exports of the
products to the US. In addition, Southwest Products has begun to assist
Harbin Bearing in implementing US manufacturing methods, improving quality
control procedures and in developing new products at Harbin Bearing's
facilities in China.
The Company's overall plan is to combine the management style,
technology, quality control and production methods found in the West with
low-cost Chinese manufacturing capacity so as to become a major
international designer, manufacturer and distributor of bearing products.
32
<PAGE>
The following diagram shows the corporate structure of the
Company and its affiliated entities.
SUNBASE ASIA, INC.
Common Stock trades-on
NASDAQ NMS
(Nevada Corporation)
100% 100%
CHINA BEARING
HOLDINGS LIMITED
(Bermuda Holding Company) SOUTHWEST
PRODUCTS
COMPANY
(California Corporation)
100% OPERATING COMPANY
CHINA INTERNATIONAL
BEARING HOLDINGS LIMITED
(Hong Kong Holding Company)
99% 99.90%
HARBIN SUNBASE HARBIN XINHENGLI
DEVELOPMENT DEVELOPMENT
COMPANY LIMITED COMPANY LIMITED
(PRC JV Holding Co.) (PRC JV Holding Co.)
10% 41.57%
HARBIN BEARING COMPANY, LTD
(A) (PRC Joint Stock Company)
OPERATING COMPANY
(A) Sunbase Asia's effective ownership
in Harbin Bearing is 51.4%
33
<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.
34
<PAGE>
Harbin Bearing's products are considered to be among the highest
grades inside of China and medium-grade in world-wide markets. In 1994,
the US was Harbin Bearing's largest export market, accounting for
approximately 60% of total export sales. It is the Company's intention to
increase Harbin Bearing's export sales to the US, Europe and certain
developing countries in South America and Southeast Asia.
Harbin Bearing delivers its bearings by rail (approximately 80%
of Harbin Bearing's domestic deliveries are made by rail), truck, ocean
freight and air freight. Harbin Bearing leases trucks from Harbin
Precision Machinery Manufacturing Company which are used mostly for short-
haul deliveries. See "Certain Relationships and Transactions." Bearings
which are exported are generally shipped by ocean freight.
Chinese Bearing Industry
------------------------
Based on the Ministry of Machinery & Industry's 1993 Annual
Report, China's aggregate domestic demand for bearings in 1995 was expected
to be approximately 900 million units, representing an average annual
increase of approximately 17% based on China's aggregate demand of 560
million units in 1992. Prior to 1989, under China's planned economy, the
production, pricing and sales of bearings were fixed by the Chinese
government. Beginning in 1988, demand for bearings exceeded the available
supply, particularly for small and medium-sized bearings. Beginning in
1989, in connection with the implementation of economic reform measures
undertaken by the Chinese government, production quotas and raw material
subsidies were abolished. By 1991, competition among manufacturers of low-
quality, small and medium-sized bearings had increased. This competition
created an excess supply of such bearings and resulted in a decrease of
profit margins. In July 1992, all price controls on bearing prices were
removed. Even though supply still generally exceeds demand for small and
medium-sized bearings in the low end market, demand continues to be strong
for higher-quality small and medium-sized bearings used in the automobile,
motorcycle, agricultural, electrical appliance and machinery industries.
Overall, demand for bearings used in large agricultural machinery, mineral
and extraction machinery and electric generating equipment, and demand for
precision, special-purpose, large and extra-large-sized bearings continued
to grow through 1995.
Competition
-----------
Harbin Bearing's main competitors can be separated into three
principal groups: (i) two nationwide domestic bearing manufacturers with
wide product lines; (ii) small bearing production facilities which compete
on a local basis by manufacturing small-sized, commodity-type bearings; and
(iii) foreign bearing manufacturers. Competition is principally based on
pricing and quality considerations.
35
<PAGE>
Chinese Competition
Harbin Bearing, Wafangdian Bearing Factory and Luoyang Bearing
Factory are the three largest bearing manufacturers in China, based on 1994
sales. The combined sales revenues of these three manufacturers accounted
for 30% of the US $1.09 billion in total sales revenue of China's bearing
industry (figures are approximate). By comparison, the aggregate sales
revenue of the fourth, fifth and sixth largest Chinese bearing
manufacturers only account for approximately 9.5% of the total sales
revenue of China's bearing industry. Wafangdian Bearing Factory does not
produce high-precision aerospace-quality rolling-element bearings, a market
in which Harbin Bearing has a 70% domestic share (the remaining 30% market
share is split among Luoyang Bearing Factory and Hongshan Bearing Factory).
In addition to the manufacturers described above, there are approximately
270 other manufacturers of rolling element ball bearings in China,
including a number of small bearing factories that were established after
1988 when demand for small-sized bearings greatly exceeded the available
supply. The bearings manufactured by these small factories are generally
of lower quality and are used mostly as replacement bearings in the
electrical appliance and agricultural equipment industry.
Competition from Imports into China
Bearing manufacturers outside of China are able to supply types
and grades of bearings which are not available from Chinese domestic
suppliers, particularly precision bearings of the highest durability and
quality. Imported foreign bearings are generally higher in quality than
Chinese-manufactured bearings, but are also priced higher due to China's
low production costs and the assessment on imported bearings of a 15% or
20% import tariff. The 15% import tariff applies to bearings imported from
countries that have established a tax treaty with China and the 20% import
tariff applies to imports from other countries. Some foreign bearing
manufacturers have established bearing manufacturing facilities in China,
typically through joint ventures with local bearing manufacturers. Such
ventures, if successful, would likely increase competition for Harbin
Bearing in the higher-quality and precision-bearing market segments.
Competition in International Markets
In the international bearing markets, Harbin Bearing's main
competitors are Eastern European manufacturers and manufacturers located in
China. To a lesser extent, Harbin Bearing also competes with large
international bearing manufacturers such as Svenska Kugellager Fabriken
(SKF), Fisher Aktien Gesellschast (FAG) and New Technology Network (NTN).
Management believes that with the assistance of Southwest Products in
implementing US manufacturing methods and quality control procedures and in
developing new products, Harbin Bearing's general competitive position will
be substantially improved. In addition, management believes that Harbin
Bearing will be able to compete in market segments that demand products
with higher precision levels and will more effectively penetrate those
market segments that utilize commodity-type bearings.
36
<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 and 5% for cylindrical
bearings.
Raw Materials
-------------
The principal raw materials used by Harbin Bearing to manufacture
bearings are carbon steel and stainless steel rod, wire and tubing. These
types of steel are specialized alloys designed for hardness, durability and
resistance to rust. A small amount of copper and aluminum tubing and rods
are also used to produce seals, cages and other ancillary bearing
components. Harbin Bearing sources most of its bearing steel directly from
four domestic mills located in Heilongjiang Province, Liaoning Province and
Shanghai. Harbin Bearing imported less than 1% of its raw materials in
1995.
In January 1993, the Chinese government lifted price controls on
steel products and, as a result, the price of bearing steel in 1993
increased by more than 35.2% based on 1992 prices. The price of bearing
steel in China is now approximately the same as the international price of
bearing steel and has remained at approximately US $660.00 per ton since
the end of 1993. Harbin Bearing believes that its sources of bearing steel
are stable and, consistent with industry practice in China, has not entered
into any long-term supply contracts for bearing steel. Harbin Bearing
generally maintains a raw material inventory sufficient for approximately
one-and-a-half months of production. Railroad tracks leading directly to
two of Harbin Bearing's raw material warehouses are used exclusively to
transport raw materials, such as bearing steel, to Harbin Bearing.
In the future, Harbin Bearing intends to purchase bearing steel
from South Korea and other countries. South Korean steel is price-
competitive and is of a much higher quality than most Chinese steel.
Accordingly, the use of South Korean steel will improve the quality of
Harbin Bearing's products while reducing the amount of products that are
scrapped due to the use of lower-quality steel.
Workforce
---------
As of January 16, 1996, Harbin Bearing employed approximately
13,000 full-time personnel in the following areas: executive and
administrative (658), sales and service (507), manufacturing and production
(11,492), and research and development (319). Management believes that in
general, its employee relations are good.
Harbin Bearing has begun to revise its compensation system to
provide incentives to employees by linking productivity with compensation.
Part of the revised compensation system was instituted in May 1994, and
governs the wages of production employees. Depending on actual
productivity, which is determined according to unit output and standard
labor hours, a production employee may be paid more or less than the
average wage. Harbin Bearing has also
37
<PAGE>
revised its compensation system with respect to its sales personnel.
Harbin Bearing sets a monthly sales target for each sales office and each
salesman. If the target is reached, the sales personnel will receive a
bonus in addition to basic wages and allowances. In 1995, the total labor
cost of Harbin Bearing comprised approximately 15% of total production
costs.
The Harbin Municipal Government promulgated regulations that were
effective January 1994, which provide for the establishment of a pension
fund program to which both employer and employee must contribute. Harbin
Bearing is required to contribute a monthly amount equivalent to 20% of its
employees' aggregate monthly income, and each employee is required to
contribute a monthly amount that is equivalent to 2% of such employees'
monthly income.
All of the employees of Harbin Bearing are members of a trade
union. To date, Harbin Bearing has not been subject to any strikes or
other significant labor disputes and is not a party to any collective
bargaining agreements.
Harbin Bearing presently recruits graduates of the Harbin Bearing
Technical Institute and universities all over China and provides ongoing
training for its management and production employees in the form of a
series of training seminars.
SOUTHWEST PRODUCTS COMPANY
Southwest Products, located at a 55,000 square foot facility in
Irwindale, California, designs, engineers and manufactures custom,
spherical bearing products, such as high-precision spherical bearings, rod-
end bearings, bushings and push-pull controls, for aerospace and high tech
commercial applications. Southwest Products employs 58 full-time personnel
in the following areas: executive and administrative (5); sales and
service (5); manufacturing (35) and engineering, research and development
(13). The average length of employee tenure at Southwest Products is in
excess of eight years.
Southwest Products specializes in the design and manufacture of
spherical bearings for use in extremely demanding and flight-critical
applications. Such bearings meet unique load and tolerance requirements
and are known as "Specials." Southwest Products produces small orders of
custom bearings, the sales price of which typically includes the cost of
product design, engineering and development. Southwest Products is
respected worldwide for its ability to engineer and produce precision
bearings, which are used in the Space Shuttle, commercial jet aircraft
(Boeing and McDonnell Douglas), military aircraft (including the B-2
Stealth Bomber, F-117 Stealthfighter, F-15, F-16, C-17 and F-18),
submarines, (Los Angeles Class, Ohio Class, Seawolf and Centurion), and
nuclear power plants. Southwest Products' bearings are used by Northrop
Grumman, Lockheed Martin, NASA, all US military services, Mitsubishi Heavy
Industries, Korea Heavy Industries (Hanjun), Fluor Daniel, General
Electric, Westinghouse, General Dynamics, Textron Marine, Ingalls
Shipbuilding and Newport News Shipbuilding. Southwest Products' bearings
have been used by NASA in all manned space programs since the
38
<PAGE>
launch of Mercury and are used in most NASA orbiters, including Viking,
Magellan and Galileo.
Southwest Products' Proprietary Technology
------------------------------------------
Southwest Products manufactures both metal-on-metal bearings and
self-lubricating bearings, based on Southwest Products' design and on OEM
specifications. Self-lubricating bearings are lined with either Dyflon or
Kentlon, which are both proprietary liner systems of Southwest Products.
Kentlon is qualified by the United States Navy to Mil-B-81820, Mil-B-81934
and Mil-B-81935. It is used in military aircraft, tanks, ground support
equipment, commercial aircraft, space vehicles, launch and payload systems
and in the oil refinery, automotive and heavy manufacturing industries.
Dyflon is one of only two liner systems in existence that is moldable and
machineable that also performs successfully when fully submersed in water.
Accordingly, in addition to the uses described above for Kentlon, Dyflon-
lined parts are used in submarines, surface ships and nuclear power plants.
Although Southwest Products has federally registered its
trademarks "Dyflon" and "Kentlon," Southwest Products has chosen not to
patent its various technologies because the specific formulae and methods
for manufacturing Dyflon and Kentlon would then become a matter of public
record.
PROPERTIES
Harbin Bearing
--------------
Harbin Bearing operates twelve finished product plants and
seventeen auxiliary plants. With the exception of a finished product plant
in Wucangzian, all of the Company's plants are located in four plant
compounds in Harbin. Harbin Bearing plans to relocate the Wucangzian
finished product plant, now located approximately 260 kilometers from the
main site, to a new facility currently under construction approximately 17
kilometers from the main site. The Company believes the costs associated
with the relocation to be approximately Rmb 27 million.
The Harbin branch office of the State Asset Administration Bureau
has granted Harbin Holdings the right to use the properties where Harbin
Bearing's production and other facilities are located, which include the
Wucangzian finished product plant and the four plant compounds. The site
is approximately 540,000 square meters of which production facilities
occupy approximately 290,000 square meters. Harbin Holdings has entered
into a lease agreement with the Company for use of its buildings for five
years. See "Certain Relationships and Related Transactions."
39
<PAGE>
Southwest Products
------------------
Southwest Products leases a 55,000 square foot facility in
Irwindale, California on a month to month basis at a monthly rent of
$14,000.
LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property subject
to, any pending legal proceedings.
ORGANIZATION OF THE COMPANY
Harbin Bearing was the successor to the manufacturing operations of
Harbin Bearing General Factory (the "Bearing Factory"), a Chinese state-
owned enterprise established in 1950. Harbin Bearing was established in
1993 as a joint stock limited company in China. Pursuant to an agreement
between the Bearing Factory and Harbin Bearing, the bearing manufacturing
and sales business together with certain assets and liabilities of the
Bearing Factory were transferred to Harbin Bearing (the "Restructuring").
Certain other assets and liabilities were transferred to Harbin Precision
Machinery Manufacturing Company ("Harbin Precision") and certain ancillary
operations were transferred to Harbin Bearing Holdings Company ("Harbin
Holdings"). Harbin Holdings and Harbin Precision were and are affiliates
of the Harbin Municipal Government.
As part of the Restructuring, Sunbase International (Holdings) Ltd.
("Sunbase International"), a Hong Kong corporation, through a series of
affiliated entities, including China Bearing Holdings Limited, a Bermuda
Corporation ("China Bearing"), acquired an effective ownership interest in
Harbin Bearing of 51.4%. Substantially all of the remaining interests in
Harbin Bearing were and continue to be owned by the employees of Harbin
Bearing (approximately 15%) and Harbin Holdings. After the acquisition of
the controlling interest in Harbin Bearing, Sunbase International
implemented various programs to strengthen the business and operations of
Harbin Bearing. These programs resulted in a shift in product mix to
larger, higher margin bearings which, in turn, increased profitability.
The work force was reduced approximately 25% with minimal negative effects
on production. Incentive-based pay programs and western-style accounting
and reporting systems were implemented to further strengthen and improve
Harbin Bearing's business and operations.
In December 1994, the Company (which was then called Pan American
Industries, Inc.) acquired the 51.4% effective interest in Harbin Bearing
by issuing to Asean Capital newly issued shares representing a controlling
interest in the Company. Asean Capital was, and is, owned 90% by Sunbase
International and 10% by an unrelated company, New China Hong Kong Capital
Ltd. ("New China Hong Kong"). See "Certain Relationships and Related
Transactions."
40
<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
41
<PAGE>
International has various industrial holdings in China, in industries such
as aviation, transportation, cement, steel and retail. Mr. Gao is
responsible for the general strategy of the Company and maintains overall
control of the Company's operations. Mr. Gao is actively and directly
involved in all operational and strategic issues that require his
experience and expertise in handling a wide variety of Chinese business
transactions. During the 1980s, Mr. Gao engaged in trading and investment
activities in industries such as food, timber, real estate, coal and
textiles. Based on his success in these activities and with the support of
several banks in China, Mr. Gao has turned Sunbase International into a
leading China industrial company. Mr. Gao is currently a member of China's
Congress, known as the People's Political Consultative Conference. Mr. Gao
is the youngest member of the Congress and is widely respected for his
contributions to the country's development. Mr. Gao's strong reputation in
China has enabled Sunbase International to engage in and complete many
difficult transactions, including acquiring a majority interest in Harbin
Bearing and obtaining a license to create an airline in China. Now known
as Northern Swan Airlines, this airline enjoys international prominence and
the financial support of the Bank of China and the People's Construction
Bank of China. Mr. Gao serves as a Senior Economic Advisor to several
Chinese municipal and provincial governments, including the governments of
Tianjin, Hebei, Xinjiang and Harbin. In addition, Mr. Gao is the deputy
director of the Sino-Foreign Entrepreneurs Cooperative Committee.
BILLY KAN, VICE CHAIRMAN AND DIRECTOR. Mr. Kan has been a director of
Sunbase Asia since the beginning of 1996 and was elected Vice Chairman on
June 1, 1996. In his capacity at Sunbase International, Mr. Kan reports
directly to its Board of Directors and serves as the communications and
support link in various parts of the world. Mr. Kan holds a Bachelor of
Science Degree from the University of East Anglia, a United Kingdom
university, and is a member of The Institute of Chartered Accountants in
England & Wales as well as the Hong Kong Society of Accountants. Prior to
joining Sunbase International, Mr. Kan held many directorships and senior
management positions in a wide range of professions and industries
including banking, retailing, manufacturing, property, investment and
corporate consulting.
WILLIAM MCKAY, CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR. Mr. McKay
has recently been elected as the Chief Executive Officer, President and a
Director of Sunbase Asia, and has been a Director and President of
Southwest Products since 1991. Prior to becoming President of Southwest
Products, he was Southwest Products' General Manager since 1986. Mr. McKay
has substantial experience in conducting business with China, and is very
familiar with Sino-American joint venture law and policies. Mr. McKay is
responsible for the day-to-day operations of, and the long-term planning
for, the Company in the areas of product development, marketing, financing
and general operations. Prior to jointing Southwest Products, Mr. McKay
practiced law, specializing in the areas of business and real estate. Mr.
McKay holds a Juris Doctorate Degree, Masters in Business Administration
and Bachelor of Arts degree with a major in History and minor in
International Relations from the University of Southern California.
42
<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
43
<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,
44
<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
45
<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>
46
<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
47
<PAGE>
interests held in the two joint venture companies, the Company has an
effective 51.4% ownership interest in Harbin Bearing. (See the
Organizational Chart on page 6). The aggregate cash consideration
contributed by the joint venture companies was Rmb 232.1 million which was
principally financed by an interest free loan from Sunbase International to
China International (the "Sunbase Loan"). China International in turn made
equity contributions and loans to the two joint venture companies.
In April 1994, New China Hong Kong acquired from Sunbase International
10% of the outstanding stock of China Bearing and 10% of the Sunbase Loan.
The Sunbase Loan was later assigned to China Bearing, and China Bearing
assumed the Sunbase Loan for a consideration of the same amount payable to
it by China International. The obligations under the Sunbase Loan were
extinguished by Sunbase International and New China Hong Kong, and the
amount thereof was treated as a contribution of cash to China Bearing and
credited to its contributed surplus account. Thereafter, the shares of
China Bearing owned by Sunbase International and New China Hong Kong were
transferred to Asean Capital, in which Sunbase International and New China
Hong Kong own 90% and 10%, respectively. As set forth above, in December
1994, Asean Capital transferred all of its interest in China Bearing to the
Company.
Pursuant to a Management Services Agreement between Sunbase
International and China Bearing dated January 1, 1994, Sunbase
International agreed to provide China Bearing and its affiliates, including
the Company, advice and consultation, including strategic management,
business planning and development services, accounting and financial
service, human resource service, sales and marketing service and such
additional services as may be agreed upon for an annual fee of US $30,000.
China Bearing is also obligated to reimburse Sunbase International for its
direct out-of-pocket costs incurred in providing the management services.
The Agreement's term was two years and it expired on December 31, 1995.
China Bearing and Sunbase International are presently discussing an
extension of the Agreement.
Harbin Bearing and Harbin Precision have entered into leases (the
"Ancillary Transport Equipment Lease" and the "Manufacturing Machinery
Lease"), covering all equipment and assets of the Bearing Factory relating
to the bearing operations which were not contributed to the Company in the
Restructuring. The Leases cover cars, trucks, machinery and equipment used
in manufacturing, office administration and power generation and provide
for total annual payments of US $3,267,000. At the expiration of the two
Leases in December 31, 1998 and December 31, 2001, respectively, Harbin
Bearing has the right to either renew the Leases or acquire the equipment.
Harbin Bearing and Harbin Holdings have entered into a lease covering
plants and buildings used in Harbin Bearing business which were not
contributed to Harbin Bearing in the Restructuring (the "Plant Lease").
The Plant Lease provides for annual rent payments of US $451,000. At the
expiration of the lease on December 31, 1998, Harbin Bearing has the right
to extend the lease at market rent for another five years.
48
<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.
49
<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)
_________________________
* less than 1 percent
</TABLE>
50
<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".
51
<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.
52
<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
53
<PAGE>
of the Series A Preferred Stock have a right to vote as a class with the
holders of Common Stock on the basis of 500,000 votes per share of Series A
Preferred Stock.
The Series B Preferred Stock participates with the shares of Common
Stock on an as converted basis with respect to any dividends paid by the
Company. Upon any liquidation, dissolution or winding up, the holders of
the Series B Preferred Stock are entitled, before any distribution to
holders of Common Stock or any other shares of the Company ranking junior
to the Series B Preferred Stock to receive an amount equal to $500 per
share. Holders of the Series B Preferred Stock will be entitled to vote on
matters submitted to the shareholders of the Company on an as converted
basis (for such purposes, each share of Series B Preferred Stock being
deemed convertible into 100 shares of Common Stock). At the individual
option of a holder, the Company is required to redeem the number of shares
of Series B Preferred Stock held by such holder that is specified in a
request for redemption delivered to the Company by the holder on or prior
to 15 days from the date the Company notifies such holder of its intent to
file a Registration Statement with the Securities Exchange Commission for
the public offering of the Common Stock of the Company with respect to
which the applicable Registration Statement designates that a portion of
the proceeds thereof will be used to redeem the Series B Preferred Stock.
The Company is required to redeem such stock out of the proceeds of such
public offering by paying $500 per share less the holder's pro rata share
of the underwriter's commission for the sale in the public offering of that
number of shares of Common Stock necessary to redeem the Series B Preferred
Stock. The shares of the Series B Preferred Stock are convertible into
Common Stock to the extent that a holder does not elect to redeem the
shares of Series B Preferred Stock as provided above and on the basis of
100 shares of Common Stock for each share of Preferred Stock. If, by the
date which is two years after the date on which the shares of Series B
Preferred Stock are distributed to the holders, such holders have not been
able to redeem their shares because the Company has not made a public
offering as specified, the holder's shares are automatically converted into
shares of Common Stock on the following basis: On the first business day
following the expiration of the two year period, each share is to be
automatically converted into that number of shares of Common Stock that
equals $500 divided by the lesser of $5.00 or the average closing price of
Common Stock computed by taking the then most recent 60 consecutive trading
days when the Company's Common Stock is traded at a minimum volume of 2,000
shares per day for 45 of those 60 trading days.
Series A Warrants
-----------------
The Company has outstanding an aggregate of 10,392,167 Series A
Warrants (the "Warrants") to acquire the Common Stock of the Company. The
Warrants expire on June 30, 1998. For each share of Common Stock to be
purchased, the holder is required to deliver 70 Warrants together with an
exercise price per share of Common Stock of $175.00.
Convertible Debentures
----------------------
Pursuant to a Subscription Agreement dated August 2, 1996 (the
"Subscription Agreement"), among China Bearing, Asean Capital, China
International Bearing Holdings Limited, the Company and Southwest Products
(collectively, the "Sunbase Group"); Glory
54
<PAGE>
Mansion Limited ("GML") and Wardley China Investment Trust (collectively,
the "Funds"); MC Private Equity Partners Asia Limited ("MC Partners"); and
Chine Investissement 2000 ("CI2000") (the Funds, MC Partners and CI2000 are
hereinafter referred to as the "Investors"), on August 23, 1996, China
Bearing issued an aggregate of $11,500,000 principal amount of Convertible
Debentures (the "Convertible Debentures") to the Investors. Unless the
Convertible Debentures have been converted, the Convertible Debentures are
due and payable in August, 1999 (the "Maturity Date"). The Convertible
Debentures bear interest at the rate of the higher of (i) 5% per annum (net
of withholding tax, if applicable) and (ii) such percentage of the dividend
yield calculated by reference to dividing the annual dividend declared per
share of Common Stock of the Company by the Conversion Price (as
hereinafter defined). Interest is payable quarterly.
The Investors have the right to convert at any time the whole or any
part of the principal amount of the Convertible Debentures into shares of
the Common Stock of the Company. The Conversion Price (the "Conversion
Price") is initially $5.00 per share, subject to adjustment for (a) change
in par value of the Common Stock, (b) issuance of shares by way of
capitalization of profits or reserves, (c) capital distributions, (d)
rights offering at a price which is less than the lower of the then market
price or Conversion Price, (e) issuance of derivative securities where the
total consideration per share initially receivable is less than the lower
of the then market price or Conversion Price, (f) issuance of shares at a
price per share which is less than the lower of the then market price or
the Conversion Price, and (g) if the cumulative audited earnings per share
for any two consecutive fiscal years commencing with the fiscal year ending
1996 and ending with the fiscal year ending 1998 are less than the
specified projection of cumulative earnings per share for such period.
The Convertible Debentures are required to be redeemed on the Maturity
Date at its principal amount outstanding together with any accrued but
unpaid interest together with an amount that would enable the Investors to
yield an aggregate internal rate of return of 12% per annum on the cost of
their investment. In addition, if any of the events of default specified
in the Convertible Debentures occurs, the Convertible Debentures are
automatically due and payable at the principal amount outstanding together
with accrued interest and an amount that would enable the Investors to
yield an aggregate internal rate of return on their investment of 19.75%
per annum. Events of default include the delisting of the shares on NASDAQ
or its suspension thereof; default in performance after failure to cure
after notice; failure to pay principal or interest; failure to pay
indebtedness for borrowed money; bankruptcy, insolvency or unsatisfied
judgments; failure to achieve earnings per share of at least $.55 for
fiscal years commencing January 1, 1996; and accounts receivable reaching a
certain level in relationship to net sales.
The obligations of China Bearing under the Convertible Debentures are
guaranteed by the other members of the Sunbase Group.
Pursuant to the provisions of the Subscription Agreement, each member
of the Sunbase Group undertakes to appoint a nominee of GML to each of its
respective boards of directors and the Company is required to appoint a
nominee of GML as a member of its audit committee.
55
<PAGE>
Additionally, the Subscription Agreement contains various affirmative and
negative covenants pertaining to such matters as corporate governance,
conduct of board meetings, provision of financial statements and other
information, delivery of budgets and business plans, inspection of property
and books and records, use of the proceeds from the issuance of the
Convertible Debentures (limited to working capital to expand the business
of the Sunbase Group and to repay existing debt), and consultation rights.
The Subscription Agreement requires that each member of the Sunbase
Group receive the approval from each of the Funds prior to attempting to
make certain fundamental changes such as a change to its capital structure;
issuance of securities; amendment to its charter documents; effecting any
merger; consolidation or subdivision of its shares; change in rights with
respect to shares; and the redemption, purchase or cancellation of shares.
Additionally, for so long as the Funds hold in the aggregate more than 50%
of the total principal amount of the Convertible Debentures outstanding,
the Funds have certain first refusal rights with respect the future
issuance of securities by any member of the Sunbase Group. Also, there are
restrictions on the ability of any member of the Sunbase Group to grant or
permit to exist any security interest upon its assets or the provision of
any guaranty or indemnity in respect of its securities. The Subscription
Agreement further provides that unless the approval of the Funds have been
obtained, no member of the Sunbase Group may acquire assets in excess of
$3,000,000; borrow, lend or give any guaranty of any amount greater than
$3,000,000; sell assets having a fair market value in excess of $3,000,000;
make dividend payments in excess of 20% of the Company's audited earnings
per share; grant liens in excess of $3,000,000; or enter into certain
related party transactions.
The Subscription Agreement also provides for certain demand
registration rights in favor of the Investors in the event that any such
Investor is deemed an affiliate of the Company.
Limitations on Directors' Liabilities and Indemnification
---------------------------------------------------------
The Company's Articles of Incorporation and Bylaws currently provide
that the liability of the directors of Company for monetary damages shall
be eliminated to the fullest extent permitted under Nevada Law. The
Company's Bylaws provide that a director who performs the duties as
described in the Bylaws shall not be liable or obligated to the
shareholders or other directors for any mistake of fact or judgment made in
carrying out the duties of the director, absent fraud, deceit or any
wrongful taking.
Transfer and Warrant Agent
--------------------------
U.S. Stock Transfer Company, 1745 Gardena Avenue, 2nd Floor, Glendale,
California 91204-2991, serves as transfer and warrant agent for the
Company's Common Stock and Series A Warrants.
56
<PAGE>
Reports to Shareholders
-----------------------
The Company intends to furnish annual reports to shareholders which
will include audited financial statements reported on by its certified
public accountants. In addition, the Company may issue unaudited quarterly
or other interim reports to shareholders as it deems appropriate.
Shares Eligible for Future Sale
-------------------------------
As of the date of this Prospectus, Asean Capital owned 10,111,000
shares of Common Stock and 36 shares of the Company's Series A Preferred
Stock which is convertible into 3,600,000 of the Company's Common Stock at
any time (collectively the Asean Securities). The Asean Securities were
issued on December 22, 1994 and are deemed "restrictive securities" under
the Securities Act and, as such, will be subject to restrictions on the
timing, manner and volume of sales of such shares pursuant to Rule 144 of
the Securities Act. On June 10, 1996, the Company issued 1,000,000 shares
of the Company's Common Stock (the "Private Placement Shares") in a private
placement. Pursuant to Registration Rights Agreements between the Company
and each of such investors, the Company has agreed to file a Registration
Statement covering the Private Placement Shares. This Prospectus is a part
of such Registration Statement. Upon the effectiveness of such
Registration Statement, the Private Placement Shares would be freely
tradable. In addition to the 3,600,000 shares of the Common Stock issuable
upon conversion of the Series A Preferred Stock, the Company has issued an
aggregate of 6,800 shares of Series B Preferred Stock which are convertible
under certain circumstances into an aggregate of 680,000 shares of Common
Stock. The shares of the Common Stock issuable upon conversion of the
Series B Preferred Stock will be deemed to be restricted shares, but,
pursuant to Rule 144 as presently in effect, will become eligible for sale
in the public market on or before January 16, 1998, subject to the volume
and limitations imposed by Rule 144 with respect to shares owned by William
McKay.
Additionally, as of the date of this Prospectus, there are 10,392,167
warrants outstanding to purchase an aggregate of 148,459 shares of Common
Stock at an exercise price of $175 per share, and an aggregate of 2,050,000
options to purchase Common Stock granted pursuant to the Company's 1995
Stock Option Plan at exercise prices ranging from $6.375 to $12.75 per
share. On August 23, 1996, the Company issued an aggregate of $11,500,000
principal amount of Convertible Debentures to four institution investors.
The Convertible Debentures are convertible at any time at an initial
exercise price of $5.00, which conversion price is subject to adjustment as
set forth in the Debenture documents. See "Description of Securities."
The holders of the Convertible Debentures have certain demand registration
rights with respect to the shares issuable pursuant to the conversion of
the Convertible Debentures. The Company also agreed to issue to an
investment banking firm in connection with the placement of the Convertible
Debentures warrants to purchase an aggregate of 240,000 shares at an
exercise price of $6.375 per share, one third of which is to be exercisable
on January 16, 1997, one third on January 16, 1998 and one third on January
16, 1999, with each such tranche to be available for exercise six years
commencing with the date of the earliest exercise.
57
<PAGE>
In general, under Rule 144, as currently in effect, any holder of
restricted shares, including an affiliate of the Company, as to which at
least two years have elapsed since the later of the date of the acquisition
of such restricted shares from the company or an affiliate, is entitled
within any three-month period to sell a number of shares that does not
exceed the greater of 1% of the then-outstanding shares of Common Stock or
the average weekly trading volume of the Common Stock in the Nasdaq
National Market during the four calendar weeks preceding the date on which
notice of the sale is filed with the Commission. Sales under Rule 144 are
also subject to certain manner of sale provisions, notice requirements and
the availability of current public information about the Company.
Affiliates of the Company must comply with the requirements of Rule 144
(except for the two-year holding period requirement) in order to sell
shares of Common Stock which are not "restricted securities."
Further, under Rule 144(k) a person who holds restricted shares as to
which at least three years have elapsed since the date of their acquisition
from the Company or an affiliate, and who is not deemed to have been an
affiliate of the Company at any time during the three months preceding a
sale, is entitled to sell such shares under Rule 144 without regard to
volume limitations, manner of sale provisions, notice requirements or
availability of current public information concerning the Company.
SELLING SHAREHOLDERS
The following table will provide certain information with respect
to the persons offering the shares of the Common Stock pursuant to this
Prospectus (the "Selling Shareholders") including their name and the number
of shares to be offered. All of the shares were acquired by the Selling
Shareholders pursuant to a Private Placement which was consummated on or
about June 10, 1996. Pursuant to Registration Rights Agreements between
the Company and the Selling Shareholders, the Company was required to file
a Registration Statement covering the resale of the shares of Common Stock
acquired. None of the Selling Shareholders personally owns in excess of
5% of the outstanding shares of Common Stock on a fully diluted basis
(after taking into account the shares of Common Stock issuable upon
conversion of the Series A Preferred Stock, the Series B Preferred Stock
and the Convertible Debentures), except that affiliates of HSBC Asset
Management Bahamas Ltd. beneficially own in excess of 5% as a result of
their ownership of the Convertible Debentures.
<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
</TABLE>
58
<PAGE>
<TABLE>
<S> <C>
Vickers Ballas Holdings
Ltd. 200,000
Clarex Ltd. 100,000
Clemente Global Growth
Fund 100,000
Cosco Investment
(Singapore) Ltd. 50,000
Roberto Fabros 3,000
Steven Gluckstein 3,000
Hamac & Company 68,000
Rick Howell 10,000
HSBC Asset Management
Bahamas Ltd. 100,000
Plitt & Co. 32,000
Sterneck Aggressive
Growth, LP 40,000
Sterneck Partners LP 60,000
William Storms 10,000
Todd Stockbauer 2,400
David Lutz 1,800
Cameron McKay 2,000
William McKay 25,000
Ernst Renezeder 3,000
Tim R. Wulfekuhle 3,000
Frank Brothers 1,800
</TABLE>
59
<PAGE>
<TABLE>
<S> <C>
AFAM Controlled Risk
Asian Equity Fund Ltd. 25,000
TR Enterprises Defined
Benefit Plan 5,000
</TABLE>
PLAN OF DISTRIBUTION
The Shares are being offered by the Selling Shareholders from time to
time on the NASDAQ system, in privately negotiated transactions or on other
markets. Any Shares sold in brokerage transactions will involve customary
broker's commissions. No underwriter will participate in any sales on
behalf of the Selling Stockholders.
EXPERTS
The consolidated financial statements of the Company at December 31,
1994 and 1995 and for each of the two years in the period ended December
31, 1995 and the financial statements of the Harbin Bearing General Factory
at December 31, 1993 and 1992 and for each of the three years ended
December 31, 1993 appearing in this Prospectus and the Registration
Statement have been audited by Ernst & Young, independent auditors, as set
forth in their report thereon and elsewhere herein and in the Registration
Statement, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF
HARBIN GENERAL FACTORY FOR THE
YEARS ENDED DECEMBER 31, 1993, 1992
and 1991
Report of Independent Auditors F-3
Balance Sheets as of December 31,
1992 and 1993 F4
Statements of Income for the years
ended December 31, 1991, 1992 and
1993 F5
Statements of Cash Flows for the
years ended December 31, 1992 and 1993 F6-F7
Statements of Changes in Equity
for the years ended December 31,
1991, 1992 and 1993 F8
Notes to Financial Statements F9 - F16
FINANCIAL STATEMENTS OF THE COMPANY
FOR THE YEARS ENDED DECEMBER 31,
1995 AND 1994
Report of Independent Auditors F17
Consolidated Balance Sheets as of
December 31, 1994 and December 31, 1995 F18 - F19
Consolidated Statements of Income for the
years ending December 31, 1994 and
December 31, 1995 F20
Consolidated Statements of Cash Flows
for the years ending December 31, 1994
and December 31, 1995 F21 - F22
F-1
<PAGE>
Consolidated Statements of Changes
in Shareholders' Equity for the years ended
December 31, 1994 and December 31, 1995 F23
Notes to Consolidated Financial Statements F24 - F43
UNAUDITED FINANCIAL STATEMENTS OF
THE COMPANY FOR THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1995
Consolidated Condensed Balance Sheet
as of June 30, 1996 F44 - F45
Consolidated Condensed Statements of
Income for the six months ended
June 30, 1995 and 1996 F46
Consolidated Condensed Statements
of Cash Flows for the six months
ended June 30, 1995 and 1996 F47 - F48
Notes to Consolidated Financial
Statements F49 - F53
F-2
<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:
Buildings 20 years
Machinery and equipment 10 years
Motor vehicles 5 years
Furniture, fixtures and
office equipment 5 years
Construction-in-progress represents staff quarters, factories
and other buildings under construction and plant and machinery
pending installation. This includes the costs of construction, the
costs of plant and machinery and interest charges to finance these
assets during the period of construction or installation.
(e) Income taxes
The income taxes reflect the accounting standards in Statement
of Financial Accounting Standards No.109, "Accounting for Income
Taxes".
F-10
<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 centre
rate, the People's Bank of China publishes a daily exchange rate for
Renminbi based on the previous day's dealings in the inter-bank market.
The official exchange rate and Shanghai swap center rate as of
December 31, 1993 together with the floating exchange rates at January
1, 1994, September 30, 1994 and March 31, 1995 were as follows:
<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 US$
--- --- ---
<S> <C> <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 -- -- -- -- 12,255 (12,255)
(note 20) -- ------ ------ ------- ------ -------
Balance at 99 44,533 28,288 151,942 25,266 80,437
December 31, 1995 == ====== ====== ======= ====== =======
</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. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
The pro forma results for the year ended December 31, 1994
presented below are prepared after giving effect to the following pro forma
adjustments:
(a) Interest expense in respect of the US$5 million secured
promissory note issued pursuant to the restructuring as detailed above; and
(b) reversal of the reorganization expenses which had already been
reflected in the pro forma results for the year ended December 31, 1993 on
the basis as if the reorganization was completed on January 1, 1993.
The pro forma results of operations have been prepared for
comparative purposes only and do not purport to indicate the results of
operations which would actually have occurred had the acquisitions been in
effect on January 1, 1993 or which may occur in the future.
<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 been 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:
Year ended
December 31,
1994 1995
Effect of
- Statutory tax rate 15.0% 15.0%
Permanent difference 2.0% 0.8%
---- ----
17.0% 15.8%
===== =====
The determination of the amount of the unrecognized deferred tax
liability for temporary differences related to investments in foreign
subsidiaries and corporate joint ventures is not practicable.
5. ACCOUNTS RECEIVABLE
Accounts receivable comprise:
<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
<TABLE>
<CAPTION>
Inventories comprise:
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 (continued)
The Group's buildings are located in PRC and the land on which the
Group's buildings are situated is State-owned.
The gross amounts of assets recorded under capital leases and the
accumulated depreciation thereon are analyzed as follows:
<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$11,500,000 Convertible Debentures to various institutional
investors. The investors have the right to convert at any time the
whole or any part of the principal amount of the Convertible Debentures
into shares of the Common Stock of the Company at the conversion price
agreed on the subscription agreement dated August 2, 1996. The
Convertible Debentures bear interest at the rate of the higher of (1)
5% per annum (net of withholding tax) and (2) such percentage of the
dividend yield calculated by reference to dividing the annual dividend
declared per share of Common Stock of the Company by the conversion
price. The Convertible Debentures are due and payable in August, 1999
and the obligations of China Bearing under the Convertible Debentures
are guaranteed by the other members of the Sunbase Group.
F-43
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, 1995 AND JUNE 30, 1996
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
------------------- -----------------
Note RMB US$ RMB US$
---- --- --- --- ---
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and bank balances 30,944 3,719 44,301 5,325
Accounts receivable, net 264,186 31,753 511,804 61,515
Notes receivable 25,756 3,096 28,701 3,450
Inventories, net 4 476,997 57,331 443,213 53,271
Prepaid VAT 40,429 4,859 - -
Other receivables 57,209 6,876 71,497 8,593
Due from related companies 137,079 16,476 89,470 10,754
--------- ------- --------- --------
Total current assets 1,032,600 124,110 1,188,986 142,908
Fixed assets 554,086 66,597 575,969 69,227
Deferred asset 18,134 2,180 16,704 2,008
Long term investments 1,438 173 1,012 122
Goodwill 12,144 1,460 12,130 1,458
--------- ------- --------- --------
Total assets 1,618,402 194,520 1,794,801 215,723
========= ======= ========= ========
</TABLE>
(Continued)
F-44
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (continued)
DECEMBER 31, 1995 AND JUNE 30, 1996
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
December 31, 1995 June 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 33,271 393,569 47,304
Accounts payable 116,205 13,967 156,112 18,764
Notes payable 15,627 1,878 18,597 2,235
Accrued liabilities and other payables 90,108 10,831 74,348 8,936
Short term obligations under capital leases 17,269 2,075 18,013 2,165
Other loans 33,810 4,064 - -
Secured promissory note 5 41,600 5,000 41,600 5,000
Income tax payable 5,874 706 22,577 2,714
Tax other than income - - 2,793 336
Due to related companies 111,654 13,420 115,150 13,840
Due to shareholders 17,352 2,086 14,498 1,743
--------- ------- ---------- -------
Total current liabilities 726,312 87,298 857,257 103,037
Long term bank loans 110,670 13,302 57,270 6,884
Long term obligations under capital leases 107,713 12,946 98,516 11,841
Minority interests 343,142 41,243 382,831 46,013
--------- ------- ---------- -------
1,287,837 154,789 1,395,874 167,775
--------- ------- ---------- -------
Shareholders' equity:
Common Stock, par value US$0.001 each,
50,000,000 shares authorized;
12,700,104 shares (1995 - 11,700,104 shares)
issued, and fully paid up 6 99 12 107 13
Preferred Stock, par value US$0.001 each,
25,000,000 shares authorized;
Convertible Preferred Stock - Series A;
36 shares issued and outstanding 44,533 5,352 44,533 5,353
Convertible Preferred Stock - Series B;
6,800 shares issued and outstanding 28,288 3,400 28,288 3,400
Contributed surplus 151,942 18,262 187,414 22,525
Reserves 25,266 3,037 25,266 3,037
Retained earnings 80,437 9,668 113,319 13,620
--------- ------- ---------- -------
Total shareholders' equity 330,565 39,731 398,927 47,948
--------- ------- ---------- -------
Total liabilities and shareholders' equity 1,618,402 194,520 1,794,801 215,723
========= ======= ========== =======
</TABLE>
The accompanying notes form an integral part of these consolidated condensed
financial statements.
F-45
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1995 1996 1996
Notes RMB RMB US$
----- --- --- ---
<S> <C> <C> <C> <C>
Net sales
-third parties 371,921 436,073 52,412
-related parties 62,912 29,616 3,560
---------- ---------- ----------
434,833 465,689 55,972
Cost of sales (265,683) (285,917) (34,365)
---------- ---------- ----------
Gross profit 169,150 179,772 21,607
---------- ---------- ----------
Selling, general and
administrative expenses
- third parties (31,224) (40,288) (4,842)
- related parties (19,821) (22,071) (2,653)
---------- ---------- ----------
(51,045) (62,359) (7,495)
---------- ---------- ----------
Interest expense
- third parties (17,767) (25,282) (3,038)
- related parties (5,822) (5,139) (618)
---------- ---------- ----------
(23,589) (30,421) (3,656)
---------- ---------- ----------
Income before income taxes 94,516 86,992 10,456
Provision for income taxes
- Current (14,499) (14,420) (1,733)
---------- ---------- ----------
Income before minority interests 80,017 72,572 8,723
Minority interests (39,907) (39,690) (4,771)
---------- ---------- ----------
Net income 40,110 32,882 3,952
========== ========== ==========
Earnings per common share 2 2.62 2.04 .25
========== ========== ==========
Number of shares outstanding 2 15,300,104 16,089,994 16,089,994
========== ========== ==========
</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)
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1995 1996 1996
RMB RMB US$
--- ---- ---
<S> <C> <C> <C>
Cash flows from operating activities:
Net income 40,110 32,882 3,952
Adjustments to reconcile net income to net cash
used in operating activities:
Minority interests 39,907 39,690 4,771
Depreciation 22,220 28,151 3,383
Loss on disposal of fixed assets 969 - -
Amortization of goodwill - 14 2
Others (463) 1,429 172
Changes in operating assets
and liabilities -
(Increase) decrease in assets:
Accounts receivable (189,291) (247,618) (29,762)
Notes receivable (26,744) (2,945) (354)
Inventories 80,276 33,784 4,060
Prepaid VAT - 40,429 4,859
Other receivables (30,811) (14,288) (1,717)
Due from related companies 38,925 47,609 5,722
Increase (decrease) in liabilities:
Accounts payable (45,865) 39,907 4,797
Notes payable 15,225 2,970 357
Accrued liabilities and other payables 41,363 (15,760) (1,894)
Income tax payable 6,737 16,703 2,008
Taxes other than income 22,855 2,793 336
Due to related companies (19,247) (4,957) (596)
Due to shareholders (1,340) (2,854) (343)
-------- -------- -------
Net cash used in operating activities
(5,174) (2,061) (247)
-------- -------- -------
Cash flows from investing activities:
Disposal of long term investments - 426 51
Proceeds from disposal of fixed assets 274 - -
Additions to fixed assets (35,966) (50,034) (6,014)
-------- -------- -------
Net cash used in investing activities
(35,692) (49,608) (5,963)
-------- -------- -------
</TABLE>
F-47
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1995 1996 1996
Note RMB RMB US$
---- --- ---- ---
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase in bank loans 21,471 63,356 7,615
Repayment of other loans - (33,810) (4,064)
Proceeds from sale of common stock, net of 6 35,480 4,265
costs -------- -------- -------
Net cash provided by financing activities
21,471 65,026 7,816
-------- -------- -------
Net increase (decrease) in cash and (19,395) 13,357 1,606
cash equivalents 65,646 30,944 3,719
Cash and cash equivalents, at beginning of -------- -------- -------
period 46,251 44,301 5,325
======== ======== =======
Cash and cash equivalents, at end of period
Non-cash transaction:
Financing of lease arrangements 7,769 8,453 1,016
======== ======== =======
</TABLE>
The accompanying notes form an integral part of these consolidated condensed
financial statements.
F-48
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
1. ORGANIZATION
Sunbase Asia, Inc. (the "Company") acquired 100% of the issued share
capital of China Bearing Holdings Limited ("China Bearing") on
December 2, 1994 pursuant to a Share Exchange Agreement with Asean
Capital Limited in exchange for 10,261,000 shares of common stock.
The transaction has been treated as a recapitalization of China
Bearing with China Bearing as the acquirer (reverse acquisition). The
historical financial statements prior to December 2, 1994 are those of
China Bearing.
The Company is a Nevada corporation which owns, through various
subsidiaries and joint venture interests, a 51.4% indirect ownership
interest in Harbin Bearing Company Limited, a joint stock limited
company organized under the law of the People's Republic of China
("Harbin Bearing"). Harbin Bearing manufactures a wide variety of
bearings in China for use in commercial, industrial and aerospace
applications that are sold primarily in China and certain western
countries, including the United States.
On January 16, 1996 (effective December 29, 1995), the Company
acquired Smith Acquisition Company, Inc. dba Southwest Products
Company ("Southwest") in exchange for 6,800 shares of Series B
convertible preferred stock with a stated value of US$ 500 per share.
The Series B convertible preferred stock is convertible into 680,000
shares of common stock. The acquisition of Southwest has been
accounted for under the purchase method of accounting, and was
recorded as of December 31, 1995. The results of operations of
Southwest have been consolidated into the Company's consolidated
results of operations commencing January 1, 1996. Southwest
manufactures precision spherical bearings that are sold primarily to
the aerospace and commercial aviation industries. Its major customers
are located in the United States.
The following unaudited pro forma financial information for the six
months ended June 30, 1995 is prepared on the basis as if the
acquisition of Southwest had occurred on January 1, 1995, and includes
pro forma depreciation and amortization resulting from the increase to
reflect the fair value of assets and the goodwill arising from the
acquisition of Southwest. The unaudited pro forma financial
information has been prepared for comparative purposes only and does
not purport to represent the results of operations which would
actually have occurred had the acquisition of Southwest been in effect
on January 1, 1995, or which may occur in the future.
F-51
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
1. ORGANIZATION (continued)
Six Months Ended June 30, 1995 (RMB)
<TABLE>
<S> <C>
Net sales 454,541
Net income 36,069
Earnings per common share 2.26
</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. All material intercompany accounts
and transactions were eliminated on consolidation.
The accompanying consolidated condensed financial statements are
unaudited but, in the opinion of the management of the Company,
contain all adjustments necessary to present fairly the financial
position at June 30, 1996, the results of operations for the three
months and six months ended June 30, 1995 and 1996, and the changes in
cash flows for the six months ended June 30, 1995 and 1996. These
adjustments are of a normal recurring nature. The consolidated
balance sheet as of December 31, 1995 is derived from the Company's
audited financial statements. Certain information and footnote
disclosures normally included in financial statements that have been
prepared in accordance with generally accepted accounting principals
have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission, although management of the
Company believes that the disclosures contained in these financial
statements are adequate to make the information presented therein not
misleading. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995, as filed with the Securities and Exchange Commission.
The earnings per common share for the six months ended June 30, 1995
and 1996 have been calculated using the weighted average number of
shares of common stock and common stock equivalents outstanding during
each respective period, and assumes that all outstanding shares of
convertible preferred stock have been converted into common stock.
Included in the calculation for 1996 are the preferred shares issued
in conjunction with the Southwest acquisition, which was recorded as
of December 31, 1995, and the 1,000,000 shares of common stock issued
on June 10, 1996.
The results of operations for the six months ended June 30, 1996 are
not necessarily indicative of the results of operations to be expected
for the full fiscal year ending December 31, 1996.
F-52
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE
In preparing the consolidated financial statements, the financial
statements of the Company are measured using Renminbi ("RMB") as the functional
currency. All foreign currency transactions are translated into RMB using the
applicable floating rates of exchange quoted by the People's Bank of China
prevailing at the dates of the transactions. Monetary assets and liabilities
denominated in foreign currencies have been translated into RMB using the
applicable exchange rates prevailing at the balance sheet dates. The resulting
exchange gains or losses have been credited or charged to the statements of
income for the periods in which they occur.
The Company's share capital is denominated in United States dollars
(US$) and the reporting currency is the RMB. For financial reporting purposes,
the US$ share capital amounts have been translated into RMB at the applicable
rates prevailing on the transaction dates.
For financial reporting purposes, translation of amounts from RMB into
US$ for the convenience of the reader has been made at the exchange rate quoted
by the People's Bank of China on June 30, 1996, of US$ 1.00 = RMB 8.32. No
representation is made that the RMB amounts could have been, or could be,
converted into US$ at that rate on June 30, 1996 or at any other certain rate on
June 30, 1996.
F-53
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
4. INVENTORIES
Inventories consist of the following at December 31, 1995 and June
30, 1996:
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
----------------- -------------
RMB US$ US$ RMB
--- --- --- ---
<S> <C> <C> <C> <C>
Raw materials 105,132 12,636 107,483 12,919
Work-in-progress 104,697 12,584 117,837 14,163
Finished goods 271,477 32,629 222,384 26,729
------- ------ ------- ------
481,306 57,849 447,704 53,811
Less: Allowance for
obsolescence (4,309) (518) (4,491) (540)
------- ------ ------- ------
Inventories, net
476,997 57,331 443,213 53,271
======= ====== ======= ======
</TABLE>
5. SECURED PROMISSORY NOTE
A promissory note (the "Note") was issued to Asean Capital Limited
("Asean") in connection with the Share Exchange Agreement and is
secured by a continuing security interest in all of the Company's
title and interest in the outstanding capital stock of its wholly-
owned subsidiary, China Bearing. The Note is denominated in United
States dollars, is repayable in full in United States dollars on
December 31, 1996 and bears interest at 8% per annum.
6. SALE OF COMMON STOCK
On June 10, 1996, the Company sold 1,000,000 shares of common stock
at US$ 5.00 per share, which generated net proceeds of US$ 4,265 (RMB
35,480). The Company has agreed to promptly file a registration
statement with the U.S. Securities and Exchange Commission to register
the shares of common stock.
7. CONVERTIBLE DEBENTURES
On August 23, 1996, China Bearing issued an aggregate of
US$11,500,000 Convertible Debentures to various institutional
investors. The investors have the right to convert at any time the
whole or any part of the principal amount of the Convertible
Debentures into shares of the Common Stock of the Company at the
conversion price agreed on the subscription agreement dated August 2,
1996. The Convertible Debentures bear interest at the rate of the
higher of (1) 5% per annum (net of withholding
F-54
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
7. CONVERTIBLE DEBENTURES (continued)
tax) and (2) such percentage of the dividend yield calculated by
reference to dividing the annual dividend declared per share of Common
Stock of the Company by the conversion price. The Convertible
Debentures are due and payable in August, 1999 and the obligations of
China Bearing under the Convertible Debentures are guaranteed by the
other members of the Sunbase Group.
F-55
<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>
<CAPTION>
<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.
11. On December 30, 1993, the Company issued to Marshall
Andrea Bouvier Jr. 375,000 shares for payment of debt.
II-3
<PAGE>
12. On December 30, 1993, the Company issued to Salad M.
Janmohamed and Shenaaz Janmohamed 100,000 shares in a private
placement.
13. On December 30, 1993, the Company issued to Cecil
Engineering Inc. 16,900 shares in connection with a payment of an
account payable.
14. On December 30, 1993, the Company issued to Melvin
W. Ashland 3,000 shares in connection with a payment of an account
payable.
15. On December 30, 1993, the Company issued to Malik
Nasir Baz 2,000 shares in a private placement.
16. On December 30, 1993, the Company issued to Leland
B. Cecil 3,000 shares in connection with a payment of an account
payable.
17. On December 30, 1993, the Company issued to Wayne E.
Crumpley 4,000 shares for expense reimbursement.
18. On December 30, 1993, the Company issued to Janes
Neufield 10,000 shares in a private placement.
19. On December 30, 1993, the Company issued to Charles
W. Richards 11,000 shares in connection with a payoff of a note
payable.
20. On December 30, 1993, the Company issued to Doris
Christine Scott 111,000 shares in connection with a payoff of a note
payable.
21. On December 30, 1993, the Company issued to Ephraim
J. Acuirre 5,000 shares in a private placement.
22. On March 31, 1993, the Company issued to Herald
Investment Co., Ltd. 220,000 shares in connection with a payment of a
note payable.
23. On March 31, 1993, the Company issued to Herald
Investment Co., Ltd. 20,000 shares in connection with a payment of a
note payable.
24. On March 31, 1993, the Company issued to Herald
Investment Co., Ltd. 50,000 shares in connection with a payment of a
note payable.
25. On March 31, 1993, the Company issued to Herald
Investment Co., Ltd. 50,000 shares in connection with a payment of a
note payable.
26. On March 31, 1993, the Company issued to Herald
Investment Co., Ltd. 40,000 shares in connection with a payment of a
note payable.
II-4
<PAGE>
27. On March 31, 1993, the Company issued to Herald
Investment Co., Ltd. 20,000 shares in connection with a payment of a
note payable.
28. On March 31, 1993, the Company issued to Armon K.
Boyajian 100,000 shares in connection with a payment of a note
payable.
29. On July 18, 1994, the Company issued to Raz Goen
20,000 shares in connection with a pay-off of an account payable.
30. On July 18, 1994, the Company issued to Sayad M.
Janmohamed 150,000 shares in connection with a payment on a note
payable.
31. On July 18, 1994, the Company issued to Alice
Cutteridge 40,000 shares in connection with a payment on a note
payable.
32. On July 18, 1994, the Company issued to Kent R.
Spigute 20,000 shares in connection with an account payable/legal
services.
33. On July 18, 1994, the Company issued to Herold
Investment Company 200,000 shares in connection with a payment on a
note payable.
34. On July 18, 1994, the Company issued to Cecil
Engineering 27,200 shares in connection with a pay-off of an account
payable.
35. On July 18, 1994, the Company issued to Tom Dooley
40,000 shares in connection with a pay-off of an account payable.
36. On July 18, 1994, the Company issued to Floyd and
Judy Cannon 10,000 shares in connection with a pay-off of an account
payable.
37. On September 22, 1994, the Company issued to
California Quality Printer/Jeffrey M. Lawton 2,857 shares in
connection with an account payable/printing.
38. On September 22, 1994, the Company issued to Sayad
M. Janmohamed 5,000 shares in connection with a payment on a note
payable.
39. On September 22, 1994, the Company issued to Armon
Boyajian c/o Herold Investment Company 2,857 shares in connection with
a payment on a note payable.
40. On September 22, 1994, the Company issued to Herold
Investment Company 16,429 shares in connection with a payment on a
note payable.
II-5
<PAGE>
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)/
10.3 Joint Venture Contract between China
</TABLE>
II-7
<PAGE>
<TABLE>
<S> <C> <C>
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. 133
10.20 Form of Registration Rights Agreement 144
relating to the Private Placement Shares.
10.21 Employment Agreement dated as of 154
August 1, 1996 between the Company and
Billy Kan.
10.22 Subscription Agreement (together with 165
Form of Debentures and Guaranty) dated
August 2, 1996 among China Bearing,
Asean Capital, China International Bearing
Holdings Limited, the Company,
Southwest Products, Glory Mansion
Limited, Wardley China Investment Trust,
MC Private Equity Partners Asia Limited
and Chine Investissement 2000.
</TABLE>
II-9
<PAGE>
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>
_____________
(1) Filed with the Company's Form 8-K, dated December 22, 1994 and
incorporated herein.
(2) Filed with the Company's Form 8-K/A, dated December 22, 1994 and
incorporated by reference herein.
(3) Filed with the Company's Form 10-K dated March 3, 1995 and
incorporated by reference herein.
(4) Filed with the Company's Form 10-K dated May 3, 1996 and
incorporated by reference herein.
II-10
<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.
(h) The undersigned registrant hereby undertakes that:
II-12
<PAGE>
(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 registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City
of Los Angeles, State of California, on October 21, 1996.
SUNBASE ASIA, INC.
By: /s/ William McKay
--------------------------------------
William McKay,
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on October 21, 1996.
Date: October 21, 1996 By: /s/ Gunter Gao
--------------------------------------
Gunter Gao, Chairman and Director
Date: October 21, 1996 By: /s/ Billy Kan
--------------------------------------
Billy Kan, Vice Chairman and Director
Date: October 21, 1996 By: /s/ William McKay
--------------------------------------
William McKay, Chief Executive
Officer, President and Director
Date: October 21, 1996 By: /s/ (Roger) Li Yuen Fai
--------------------------------------
(Roger) Li Yuen Fai, Vice President
and Chief Financial Officer and
Director
Date: October 21, 1996 By: /s/ (Franco) Ho Cho Hing
--------------------------------------
(Franco) Ho Cho Hing, Director
II-14
<PAGE>
Date: October 21, 1996 By: /s/ (Dickens) Chang Shing Yam
--------------------------------------
(Dickens) Chang Shing Yam, Chief
Accounting Officer
Date: October 21, 1996 By: /s/Philip P.Y. Yuen
--------------------------------------
Philip P.Y. Yuen, Director
Date: October 21, 1996 By: /s/ George Raffini
--------------------------------------
George Raffini, Director
II-15
<PAGE>
SUNBASE ASIA, INC.
------------------
1995 STOCK OPTION PLAN
----------------------
1. ESTABLISHMENT, PURPOSE AND DEFINITIONS.
---------------------------------------
(a) The 1995 Stock Option Plan (the "1995 Option
Plan") of Sunbase Asia, Inc., a Nevada corporation (the "Company"), is
hereby adopted. The 1995 Option Plan shall provide for the issuance of
incentive stock options ("ISOs") and nonqualified stock options
("NSOs").
(b) The purpose of this 1995 Option Plan is to
promote the long- term success of the Company by attracting,
motivating and retaining key executives, consultants and directors
(the "Participants") through the use of competitive long-term
incentives which are tied to stockholder value. The 1995 Option Plan
seeks to balance Participants' and stockholder interests by providing
incentives to the Participants in the form of stock options which
offer rewards for achieving the long- term strategic and financial
objectives of the Company.
(c) The 1995 Option Plan is intended to provide a
means whereby Participants may be given an opportunity to purchase
shares of Stock of the Company pursuant to (i) options which may
qualify as ISOs under Section 422 of the Internal Revenue Code of
1986, as amended (the "Internal Revenue Code"), or (ii) NSOs which may
not so qualify.
(d) The term "Affiliates" as used in this 1995
Option Plan means parent or subsidiary corporations, as defined in
Section 424(e) and (f) of the Code (but substituting "the Company" for
"employer corporation"), including parents or subsidiaries which
become such after adoption of the 1995 Option Plan.
2. ADMINISTRATION OF THE PLAN.
---------------------------
(a) The 1995 Option Plan shall be administered by
the Compensation Committee (the "Committee") appointed by the Board of
Directors of the Company from time to time (the "Board").
(b) The Committee shall consist entirely of
directors qualifying as "disinterested persons" as such term is
defined in Rule 16b-3 promulgated by the Securities and Exchange
Commission (the "Committee"). The Committee shall consist of at least
two Disinterested Directors. Members of the Committee shall serve at
the pleasure of the Board. None of the members of the Committee shall
receive, while serving on the Committee, a grant or award of equity
securities under (i) the 1995 Option Plan or (ii) any other plan of
the Company or its Affiliates under which the participants are
entitled to acquire Stock (including restricted Stock), stock
Exhibit 10.1
<PAGE>
options, stock bonuses, related rights or stock appreciation rights of
the Company or any of its Affiliates, other than pursuant to
transactions in any such other plan which do not disqualify a director
from being a disinterested person under Rule 16b-3.
(c) The Committee may from time to time determine
which employees of the Company or its Affiliates or other individuals
or entities (each an "option holder") shall be granted options under
the 1995 Option Plan, the terms thereof (including without limitation
determining whether the option is an incentive stock option and the
times at which the options shall become exercisable), and the number
of shares of Stock for which an option or options may be granted.
(d) If rights of the Company to repurchase Stock are
imposed, the Board or the Committee may, in its sole discretion,
accelerate, in whole or in part, the time for lapsing of any rights of
the Company to repurchase shares of such Stock or forfeiture
restrictions.
(e) If rights of the Company to repurchase Stock are
imposed, the certificates evidencing such shares of Stock awarded
hereunder, although issued in the name of the option holder concerned,
shall be held by the Company or a third party designated by the
Committee in escrow subject to delivery to the option holder or to the
Company at such times and in such amounts as shall be directed by the
Board under the terms of this 1995 Option Plan. Share certificates
representing Stock which is subject to repurchase rights shall have
imprinted or typed thereon a legend or legends summarizing or
referring to the repurchase rights.
(f) The Board or the Committee shall have the sole
authority, in its absolute discretion, to adopt, amend and rescind
such rules and regulations, consistent with the provisions of the 1995
Option Plan, as, in its opinion, may be advisable in the
administration of the 1995 Option Plan, to construe and interpret the
1995 Option Plan, the rules and regulations, and the instruments
evidencing options granted under the 1995 Option Plan and to make all
other determinations deemed necessary or advisable for the
administration of the 1995 Option Plan. All decisions, determinations
and interpretations of the Committee shall be binding on all option
holders under the 1995 Option Plan.
3. STOCK SUBJECT TO THE PLAN.
--------------------------
(a) "Stock" shall mean Common Stock of the Company
or such stock as may be changed as contemplated by Section 3(c) below.
Stock shall include shares drawn from either the Company's authorized
but unissued shares of Common Stock or from reacquired shares of
Common Stock, including without limitation shares repurchased by the
Company in the open market.
(b) Options may be granted under the 1995 Option
Plan from time to time to eligible persons to purchase an aggregate of
up to 2.5 million shares of
2
<PAGE>
Stock. Stock options awarded pursuant to the 1995 Option Plan which
are forfeited, terminated, surrendered or cancelled for any reason
prior to exercise shall again become available for grants under the
1995 Option Plan (including any option cancelled in accordance with
the cancellation regrant provisions of Section 6(f) herein).
(c) If there shall be any change in the Stock
subject to the 1995 Option Plan, including Stock subject to any option
granted hereunder, through merger, consolidation, recapitalization,
reorganization, reincorporation, stock split, reverse stock split,
stock dividend, combination or reclassification of the Company's Stock
or other similar events, an appropriate adjustment shall be made by
the Committee in the number of shares and/or the option price with
respect to any unexercised shares of Stock. Consistent with the
foregoing, in the event that the outstanding Stock is changed into
another class or series of capital stock of the Company, outstanding
options to purchase Stock granted under the 1995 Option Plan shall
become options to purchase such other class or series and the
provisions of this Section 3(c) shall apply to such new class or
series.
(d) The Company may grant options under the 1995
Option Plan in substitution for options held by employees of another
company who become employees of the Company as a result of merger or
consolidation. The Company may direct that substitute options be
granted on such terms and conditions as deemed appropriate by the
Board or the Committee.
(e) The aggregate number of shares of Stock approved
by the 1995 Option Plan may not be exceeded without amending the 1995
Option Plan and obtaining stockholder approval within twelve months of
such amendment.
4. ELIGIBILITY.
------------
Persons who shall be eligible to receive stock options
granted under the 1995 Option Plan shall be those individuals and
entities as the Committee in its discretion determines should be
awarded such incentives given the best interests of the Company;
provided, however, that (i) ISOs may only be granted to employees of
the Company and its Affiliates and (ii) any person holding capital
stock possessing more than 10% of the total combined voting power of
all classes of Stock of the Company or any Affiliate shall not be
eligible to receive ISOs unless the exercise price per share of Stock
is at least 110% of the fair market value of the Stock on the date the
option is granted.
5. EXERCISE PRICE FOR OPTIONS GRANTED UNDER THE PLAN.
--------------------------------------------------
(a) All ISOs will have option exercise prices per
option share not less than the fair market value of a share of the
Stock on the date the option is granted, except that in the case of
ISOs granted to any person possessing more than
3
<PAGE>
10% of the total combined voting power of all classes of stock of the
Company or any Affiliate the price shall be not less than 110% of such
fair market value. The price of ISOs or NSOs granted under the 1995
Option Plan shall be subject to adjustment to the extent provided in
Section 3(c) above.
(b) The fair market value on the date of grant shall
be determined based upon the closing price on an exchange on that day
or, if the Stock is not listed on an exchange, on the average of the
closing bid and asked prices in the Over the Counter Market on that
day.
6. TERMS AND CONDITIONS OF OPTIONS.
-------------------------------
(a) Each option granted pursuant to the 1995 Option
Plan shall be evidenced by a written stock option agreement (the
"Option Agreement") executed by the Company and the person to whom
such option is granted. The Option Agreement shall designate whether
the option is an ISO or an NSO.
(b) The term of each ISO and NSO shall be no more
than 10 years, except that the term of each ISO issued to any person
possessing more than 10% of the voting power of all classes of stock
of the Company or any Affiliate shall be no more than 5 years.
Subsequently issued options, if Stock becomes available because of
further allocations or the lapse of previously outstanding options,
will extend for terms determined by the Board or the Committee but in
no event shall an ISO be exercised after the expiration of 10 years
from the date of its grant.
(c) In the case of ISOs, the aggregate fair market
value (determined as of the time such option is granted) of the Stock
to which ISOs are exercisable for the first time by such individual
during any calendar year (under this 1995 Option Plan and any other
plans of the Company or its Affiliates if any) shall not exceed the
amount specified in Section 422(d) of the Internal Revenue Code, or
any successor provision in effect at the time an ISO becomes
exercisable.
(d) The Option Agreement may contain such other
terms, provisions and conditions regarding vesting, repurchase or
other provisions as may be determined by the Committee. To the extent
such terms, provisions and conditions are inconsistent with this 1995
Option Plan, the specific provisions of the Option Agreement shall
prevail. If an option, or any part thereof, is intended to qualify as
an ISO, the Option Agreement shall contain those terms and conditions
which the Committee determine are necessary to so qualify under
Section 422 of the Internal Revenue Code.
(e) The Committee shall have full power and
authority to extend the period of time for which any option granted
under the 1995 Option Plan is to remain exercisable following the
option holder's cessation of service as an employee, director or
consultant, including without limitation cessation as a result of
death or disability;
4
<PAGE>
provided, however, that in no event shall such option be exercisable
after the specified expiration date of the option term.
(f) The Committee shall have full power and
authority to effect at any time and from time to time, with the
consent of the affected option holders, the cancellation of any or all
outstanding options under the 1995 Option Plan and to grant in
substitution new options under the 1995 Option Plan covering the same
or different numbers of shares of Stock with the same or different
exercise prices.
(g) As a condition to option grants under the 1995
Option Plan, the option holder agrees to grant the Company the
repurchase rights as Company may at its option require and as may be
set forth in a separate repurchase agreement.
(h) Any option granted under the 1995 Option Plan
may be subject to a vesting schedule as provided in the Option
Agreement and, except as provided in this Section 6 herein, only the
vested portion of such option may be exercised at any time during the
Option Period. All rights to exercise any option shall lapse and be of
no further effect whatsoever immediately if the option holder's
service as an employee is terminated for "Cause" (as hereinafter
defined) or if the option holder voluntarily terminates the option
holder's service as an employee. The unvested portion of the option
will lapse and be of no further effect immediately upon any
termination of employment of the option holder for any reason. In the
remaining cases where the option holder's service as an employee is
terminated by the employee voluntarily or due to death, permanent
disability, or is terminated by the Company (or its affiliates)
without Cause at any time, the vested portion of the option will
extend for a period of three (3) months following the termination of
employment and shall lapse and be of no further force or effect
whatsoever only if it is not exercised before the end of such three
(3) month period. "Cause" shall be defined in an Employment Agreement
between Company and option holder and if none there shall be "Cause"
for termination if (i) the option holder is convicted of a felony,
(ii) the option holder engages in any fraudulent or other dishonest
act to the detriment of the Company, (iii) the option holder fails to
report for work on a regular basis, except for periods of authorized
absence or bona fide illness, (iv) the option holder misappropriates
trade secrets, customer lists or other proprietary information
belonging to the Company for the option holder's own benefit or for
the benefit of a competitor, (v) the option holder engages in any
willful misconduct designed to harm the Company or its stockholders,
or (vi) the option holder fails to perform properly assigned duties.
(i) No fractional shares of Stock shall be issued
under the 1995 Option Plan, whether by initial grants or any
adjustments to the 1995 Option Plan.
5
<PAGE>
7. USE OF PROCEEDS.
---------------
Cash proceeds realized from the sale of Stock under the
1995 Option Plan shall constitute general funds of the Company.
8. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN.
-------------------------------------------------
(a) The Board may at any time suspend or terminate
the 1995 Option Plan, and may amend it from time to time in such
respects as the Board may deem advisable provided that (i) such
amendment, suspension or termination complies with all applicable
state and federal requirements and requirements of any stock exchange
on which the Stock is then listed, including any applicable
requirement that the 1995 Option Plan or an amendment to the 1995
Option Plan be approved by the stockholders, and (ii) the Board shall
not amend the 1995 Option Plan to increase the maximum number of
shares of Stock subject to ISOs under the 1995 Option Plan or to
change the description or class of persons eligible to receive ISOs
under the 1995 Option Plan without the consent of the stockholders of
the Company sufficient to approve the 1995 Option Plan in the first
instance. The 1995 Option Plan shall terminate on the earlier of (i)
January 2, 2006 or (ii) the date on which no additional shares of
Stock are available for issuance under the 1995 Option Plan.
(b) No option may be granted during any suspension
or after the termination of the 1995 Option Plan, and no amendment,
suspension or termination of the 1995 Option Plan shall, without the
option holder's consent, alter or impair any rights or obligations
under any option granted under the 1995 Option Plan.
(c) The Committee, with the consent of affected
option holders, shall have the authority to cancel any or all
outstanding options under the 1995 Option Plan and grant new options
having an exercise price which may be higher or lower than the
exercise price of cancelled options.
(d) Nothing contained herein shall be construed to
permit a termination, modification or amendment adversely affecting
the rights of any option holder under an existing option theretofore
granted without the consent of the option holder.
9. ASSIGNABILITY OF OPTIONS AND RIGHTS.
------------------------------------
Each option granted pursuant to this 1995 Option Plan
shall, during the option holder's lifetime, be exercisable only by the
option holder, and neither the option nor any right to purchase Stock
shall be transferred, assigned or pledged by the option holder, by
operation of law or otherwise, other than by will upon a beneficiary
designation executed by the option holder and delivered to the Company
or the laws of descent and distribution.
6
<PAGE>
10. PAYMENT UPON EXERCISE.
----------------------
Payment of the purchase price upon exercise of any
option or right to purchase Stock granted under this 1995 Option Plan
shall be made by giving the Company written notice of such exercise,
specifying the number of such shares of Stock as to which the option
is exercised. Such notice shall be accompanied by payment of an amount
equal to the Option Price of such shares of Stock. Such payment may be
(i) cash, (ii) by check drawn against sufficient funds, (iii) by
delivery to the Company of the option holder's promissory note, (iv)
such other consideration as the Committee, in its sole discretion,
determines and is consistent with the 1995 Option Plan's purpose and
applicable law, or (v) any combination of the foregoing. Any Stock
used to exercise options to purchase Stock (including Stock withheld
upon the exercise of an option to pay the purchase price of the shares
of Stock as to which the option is exercised) shall be valued in
accordance with procedures established by the Committee. Any
promissory note used to exercise options to purchase Stock shall be a
full recourse, interest-bearing obligation secured by Stock in the
Company being purchased and containing such terms as the Committee
shall determine. If a promissory note is used to exercise options the
option holder agrees to execute such further documents as the Company
may deem necessary or appropriate in connection with issuing the
promissory note, perfecting a security interest in the stock purchased
with the promissory note and any related terms the Company may
propose. Such further documents may include, without limitation, a
security agreement and an assignment separate from certificate. If
accepted by the Committee in its discretion, such consideration also
may be paid through a broker-dealer sale and remittance procedure
pursuant to which the option holder (I) shall provide irrevocable
written instructions to a designated brokerage firm to effect the
immediate sale of the purchased Stock and remit to the Company, out of
the sale proceeds available on the settlement date, sufficient funds
to cover the aggregate option price payable for the purchased Stock
plus all applicable Federal and State income and employment taxes
required to be withheld by the Company in connection with such
purchase and (II) shall provide written directives to the Company to
deliver the certificates for the purchased Stock directly to such
brokerage firm in order to complete the sale transaction.
11. WITHHOLDING TAXES.
------------------
(a) Shares of Stock issued hereunder shall be
delivered to an option holder only upon payment by such person to the
Company of the amount of any withholding tax required by applicable
federal, state, local or foreign law. The Company shall not be
required to issue any Stock to an option holder until such obligations
are satisfied.
(b) The Committee may, under such terms and
conditions as it deems appropriate, authorize an option holder to
satisfy withholding tax obligations under this Section 11 by
surrendering a portion of any Stock previously issued to the
7
<PAGE>
option holder or by electing to have the Company withhold shares of
Stock from the Stock to be issued to the option holder, in each case
having a fair market value equal to the amount of the withholding tax
required to be withheld.
12. RATIFICATION.
-------------
This 1995 Option Plan and all options issued under this
1995 Option Plan shall be void unless this 1995 Option Plan is or was
approved or ratified by (i) the Board; and (ii) a majority of the
votes cast at a stockholder meeting at which a quorum representing at
least a majority of the outstanding shares of Stock is (either in
person or by proxy) present and voting on the 1995 Option Plan within
twelve months of the date this 1995 Option Plan is adopted by the
Board. No ISOs shall be exercisable prior to the date such stockholder
approval is obtained.
13. CORPORATE TRANSACTIONS.
-----------------------
(a) For the purpose of this Section 13, a "Corporate
Transaction" shall include any of the following stockholder-approved
transactions to which the Company is a party:
(i) a merger or consolidation in which the
Company is not the surviving entity, except for a transaction the
principal purpose of which is to change the State of the Company's
incorporation;
(ii) the sale, transfer or other disposition
of all or substantially all of the assets of the Company in
liquidation or dissolution of the Company; or
(iii) any reverse merger in which the Company
is the surviving entity but in which beneficial ownership of
securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities are
transferred to holders different from those who held such securities
immediately prior to such merger.
(b) Upon the occurrence of a Corporate Transaction,
if the surviving corporation or the purchaser, as the case may be,
does not assume the obligations of the Company under the 1995 Option
Plan, then irrespective of the vesting provisions contained in
individual option agreements, all outstanding options shall become
immediately exercisable in full and each option holder will be
afforded an opportunity to exercise their options prior to the
consummation of the merger or sale transaction so that they can
participate on a pro rata basis in the transaction based upon the
number of shares of Stock purchased by them on exercise of options if
they so desire. To the extent that the 1995 Option Plan is unaffected
and assumed by the successor corporation or its parent company a
Corporate Transaction will have no
8
<PAGE>
effect on outstanding options and the options shall continue in effect
according to their terms.
(c) Each outstanding option under this 1995 Option
Plan which is assumed in connection with the Corporate Transaction or
is otherwise to continue in effect shall be appropriately adjusted,
immediately after such Corporate Transaction, to apply and pertain to
the number and class of securities which would have been issued to the
option holder in connection with the consummation of such Corporate
Transaction had such person exercised the option immediately prior to
such Corporate Transaction. Appropriate adjustments shall also be made
to the option price payable per share, provided the aggregate option
price payable for such securities shall remain the same. In addition,
the class and number of securities available for issuance under this
1995 Option Plan following the consummation of the Corporate
Transaction shall be appropriately adjusted.
(d) The grant of options under this 1995 Option Plan
shall in no way affect the right of the Company to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to
merge, consolidate, dissolve, liquidate or sell or transfer all or any
part of its business or assets.
14. LOANS OR GUARANTEE OF LOANS.
----------------------------
(a) The Committee may, in its discretion, assist any
option holder in the exercise of options granted under this 1995
Option Plan, including the satisfaction of any Federal and State
income and employment tax obligations arising therefrom by (i)
authorizing the extension of a loan from the Company to such option
holder, (ii) permitting the option holder to pay the exercise price
for the Stock in installments over a period of years or (iii)
authorizing a guarantee by the Company of a third party loan to the
option holder. The terms of any loan, installment method of payment or
guarantee (including the interest rate and terms of repayment) will be
upon such terms as the Committee specifies in the applicable option or
issuance agreement or otherwise deems appropriate under the
circumstances. Loans, installment payments and guarantees may be
granted with or without security or collateral (other than to option
holders who are not employees, in which event the loan must be
adequately secured by collateral other than the purchased Stock).
However, the maximum credit available to the option holder may not
exceed the exercise or purchase price of the acquired shares of Stock
plus any Federal and State income and employment tax liability
incurred by the option holder in connection with the acquisition of
such shares of Stock.
(b) The Committee may, in its absolute discretion,
determine that one or more loans extended under this financial
assistance program shall be subject to forgiveness by the Company in
whole or in part upon such terms and conditions as the Committee may
deem appropriate.
9
<PAGE>
15. REGULATORY APPROVALS.
---------------------
The obligation of the Company with respect to Stock
issued under the Plan shall be subject to all applicable laws, rules
and regulations and such approvals by any governmental agencies or
stock exchanges as may be required. The Company reserves the right to
restrict, in whole or in part, the delivery of Stock under the Plan
until such time as any legal requirements or regulations have been met
relating to the issuance of Stock, to their registration or
qualification under the Securities Exchange Act of 1934, if
applicable, or any applicable state securities laws, or to their
listing on any stock exchange at which time such listing may be
applicable.
16. NO EMPLOYMENT/SERVICE RIGHTS.
-----------------------------
Neither the action of the Company in establishing this
1995 Option Plan, nor any action taken by the Board or the Committee
hereunder, nor any provision of this 1995 Option Plan shall be
construed so as to grant any individual the right to remain in the
employ or service of the Company (or any parent, subsidiary or
affiliated corporation) for any period of specific duration, and the
Company (or any parent, subsidiary or affiliated corporation retaining
the services of such individual) may terminate or change the terms of
such individual's employment or service at any time and for any
reason, with or without cause.
17. MISCELLANEOUS PROVISIONS.
-------------------------
(a) The provisions of this 1995 Option Plan shall be
governed by the laws of the State of Nevada, as such laws are applied
to contracts entered into and performed in such State, without regard
to its rules concerning conflicts of law.
(b) The provisions of this 1995 Option Plan shall
inure to the benefit of, and be binding upon, the Company and its
successors or assigns, whether by Corporate Transaction or otherwise,
and the option holders, the legal representatives of their respective
estates, their respective heirs or legatees and their permitted
assignees.
(c) The option holders shall have no divided rights,
voting rights or any other rights as a stockholder with respect to any
options under the 1995 Option Plan prior to the issuance of a stock
certificate for such Stock.
(d) If there is a conflict between the terms of any
employment agreement pursuant to which options under this Plan are to
be granted and the provisions of this Plan, the terms of the
employment agreement shall prevail.
10
<PAGE>
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement (this "Agreement") is made and entered
into as of May 28, 1996, by and among Sunbase Asia, Inc., a Nevada
corporation (the "Company"), and the person or entity set forth on the
signature page of this Agreement (the "Investor").
RECITALS
--------
Pursuant to a confidential private placement memorandum dated February 1,
1996 (the "Private Placement Memorandum"), the Investor has subscribed for
and has purchased shares of the Company's common stock, $.001 par value
(the "Shares").
The Company and the Investor desire to enter into a specific agreement
setting forth the terms and conditions upon which the Shares may be
registered under certain applicable law.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the parties hereto agree as follows:
1. REGISTRATION RIGHTS
1.1 CERTAIN DEFINITIONS. As used in this Agreement, the
-------------------
following terms shall have the meanings set forth below:
(a) "Closing" means the date when all the Shares
have been delivered to the Investor.
(b) "Commission" means the Securities and Exchange
Commission or any other federal agency at the time administering the
Securities Act.
(c) "Exchange Act" means the Securities Exchange Act
of 1934, as amended, or any similar successor federal statute and the rules
and regulations thereunder, all as the same shall be in effect from time to
time.
(d) "Holder" means any Investor who holds
Registrable Securities and any holder of Registrable Securities to whom the
registration rights conferred by this Agreement have been transferred in
compliance with Section 1.8 hereof
(e) "Other Shareholders" means persons other than
Holders who, by virtue of agreements with the Company, are entitled or
permitted to include their securities in a registration hereunder.
(f) "Registrable Securities" means (i) the Shares
and (ii) any common stock issued as a dividend or other distribution with
respect to or in exchange for or in replacement of the Shares. However,
Registrable Securities shall not include any shares
Exhibit 10.20
<PAGE>
of common stock of the Company for which a registration statement with the
Commission has become effective for the period set forth in Section 1.2,
which have been transferred to any person that is not an "Affiliate" (as
defined in the Exchange Act) of the Investor pursuant to Rule 144, or which
ceases to be outstanding.
(g) The terms "register," "registered" and
"registration" shall refer to a registration effected by preparing and
filing a registration statement in compliance with the Securities Act and
applicable rules and regulations thereunder, and the declaration or
ordering by the Commission of the effectiveness of such registration
statement.
(h) "Registration Expenses" means all expenses
incurred in effecting any registration pursuant to this Agreement,
including, without limitation, all registration, qualification, and filing
fees, printing expenses, escrow fees, listing and NASD fees, fees and
disbursements of counsel for the Company, blue sky fees and expenses, and
expenses of any regular or special audits or "cold comfort" letters
incident to or required by any such registration, but shall not include
Selling Expenses.
(i) "Rule 144" means Rule 144 as promulgated by the
Commission under the Securities Act as such rule may be amended from time
to time, or any similar successor rule that may be promulgated by the
Commission.
(j) "Rule 415" means Rule 415 as promulgated by the
Commission under the Securities Act, as such rule may be amended from time
to time, or any similar successor rule that may be promulgated by the
Commission.
(k) "Securities Act" means the Securities Act of
1933, as amended, or any similar successor federal statute and the rules
and regulations thereunder, all as the same shall be in effect from time to
time.
(l) "Selling Expenses" means all underwriting
discounts and selling commissions applicable to the sale of Registrable
Securities and fees and disbursements of counsel for any Holder.
1.2 REGISTRATION. The Company shall use its best efforts
------------
to file a registration statement within 30 days from Closing (and will,
in no event, file such statement later than 60 days from Closing) with
respect to the Registrable Securities under the Securities Act (including,
without limitation, filing post-effective amendments, appropriate
qualifications under applicable blue sky or other state securities laws,
and appropriate compliance with the Securities Act), and to thereafter
cause such registration statement to become effective for a period (the
"Registration Period") that ends on the earlier to occur of that date which
is: two years after the date of the Closing, the date of the expiration of
the holding period as described in Rule 144(d)(1), or that date on which
the Holders have completed the distribution described in the registration
statement relating thereto.
2
<PAGE>
The Company shall not be obligated to effect, or to take any
action to effect, any such registration pursuant to this Section 1.2 in any
particular jurisdiction in which the Company would be required to execute a
general consent to service of process in effecting such registration,
qualification, or compliance, unless the Company is already subject to
service in such jurisdiction and except as may be required by the
Securities Act.
The registration statement filed may include other
securities of the Company designated by the Company, and may include
securities of the Company being sold for the account of the Company.
1.3 EXPENSES OF REGISTRATION. All Registration Expenses
------------------------
incurred in connection with any registration, qualification or compliance
pursuant to Section 1.2 hereof shall be borne by the Company. All Selling
Expenses relating to securities registered shall be borne by the Holders of
such securities.
1.4 REGISTRATION PROCEDURES. With respect to a
-----------------------
registration effected by the Company pursuant to Section 1.2 hereof, the
Company shall use its best efforts to:
(a) Keep such registration effective for the
Registration Period;
(b) Prepare and file with the Commission such
amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such registration
statement;
(c) Furnish such number of prospectuses and other
documents incident thereto, including any amendment of or supplement to the
prospectus, as a Holder from time to time may reasonably request.
(d) Notify each seller of Registrable Securities
covered by such registration statement at any time when a prospectus
relating thereto is required to be delivered under the Securities Act of
the happening of any event as a result of which the prospectus included in
such registration statement, as then in effect, include an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing, and at the
request of any such seller, prepare and furnish to such seller a reasonable
number of copies of a supplement to or an amendment of such prospectus as
may be necessary so that, as thereafter delivered to the purchasers of such
shares, such prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or incomplete in
the light of the circumstances then existing;
(e) Cause all such Registrable Securities registered
pursuant hereunder to be listed on each securities exchange on which
similar securities issued by the Company are then listed;
3
<PAGE>
(f) Register or qualify all Registrable Securities
covered by such registration statement under such other United States state
securities or blue sky laws of such jurisdictions as each Holder shall
reasonably request, to keep such registration statement qualification in
effect for the period referred to in Section 1.2 hereof, and take any other
action which may be reasonably necessary or advisable to enable each Holder
to consummate the disposition in such jurisdictions of the securities owned
by each Holder, except that the Company shall not for any such purpose be
required to (i) qualify generally to do business as a foreign corporation
in any jurisdiction wherein it would not, but for the requirements of this
Section 1.4(f), be obligated to be so qualified, (ii) subject itself to
taxation in any such jurisdiction or (iii) consent to general service of
process in any such jurisdiction; and
(g) Otherwise comply with all applicable rules and
regulations of the Commission and not file any amendment or supplement to
such registration statement or prospectus to which a majority of the Holder
shall have reasonably objected in writing on the grounds that such
amendment or supplement does not comply in all material respects with the
requirements of the Securities Act or of the rules or regulations
thereunder, having been furnished with a copy thereof (other than with
respect to pricing amendment or a prospectus filed pursuant to Rule
424(b)(1) under the Securities Act) at least two business days prior to the
filing thereof.
1.5 INDEMNIFICATION.
---------------
(a) The Company will indemnify each Holder, each of
its officers, directors and partners, legal counsel, and accountants and
each person controlling such Holder within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages and
liabilities (or actions, proceedings or settlements in respect thereof)
arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, offering
circular, or other document (including any related registration statement,
notification, or the like) incident to any such registration,
qualification, or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation
by the Company of the Securities Act or any rule or regulation thereunder
applicable to the Company and relating to action or inaction required of
the Company in connection with any such registration, qualification, or
compliance, and will reimburse each such Holder, each of its officers,
directors, partners, legal counsel, and accountants and each person
controlling such Holder, for any legal and any other expenses reasonably
incurred in connection with investigating and defending or settling any
such claim, loss, damage, liability, or action, provided that the Company
will not be liable in any such case to the extent that any such claim,
loss, damage, liability, or expense arises out of or is based on any untrue
statement or omission based upon written information furnished to the
Company by such Holder and stated to be specifically for use therein. It is
agreed that the indemnity agreement contained in this Section 1.5(a) shall
not apply to amounts paid in settlement of any such loss, claim, damage,
liability, or action if such settlement is effected without the consent of
the Company (which consent has not been unreasonably withheld).
4
<PAGE>
(b) Each Holder will, if Registrable Securities
held by him are included in the securities as to which such registration,
qualification, or compliance is being effected, indemnify the Company, each
of its directors, officers, partners, legal counsel, and accountants, each
other, such Holder and Other Shareholder, and each of their officers,
directors and partners, and each person controlling such Holder or Other
Shareholder, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any such
registration statement, prospectus, offering circular, or other document,
or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading, and will reimburse the Company and such Holders, Other
Shareholders, directors, officers, partners, legal counsel, and
accountants, persons, underwriters, or control persons for any legal or any
other expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability, or action, in each case
to the extent, but only to the extent, that such untrue statement (or
alleged untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular, or other document in
reliance upon and in conformity with written information furnished to the
Company by such Holder and stated to be specifically for use therein;
provided, however, that the obligations of such Holder hereunder shall not
apply to amounts paid in settlement of any such claims, losses, damages, or
liabilities (or actions in respect thereof) if such settlement is effected
without the consent of such Holder (which consent shall not be unreasonably
withheld).
(c) Each party entitled to indemnification under
this Section 1.5 (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly
after such Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the Indemnifying Party to assume
the defense of such claim or any litigation resulting therefrom, provided
that counsel for the Indemnifying Party, who shall conduct the defense of
such claim or any litigation resulting therefrom, shall be approved by the
Indemnified Party (whose approval shall not unreasonably be withheld), and
the Indemnified Party may participate in such defense at such party's
expense, and provided further that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Section 1, except to the extent that the
Indemnifying Party is actually prejudiced by such failure to give notice.
Notwithstanding the foregoing, the Indemnified Party or Parties shall have
the right to employ its or their own counsel in any such case but the fees
and expenses of such counsel shall be at the expense of such Indemnified
Party or Parties unless (i) the employment of such counsel shall have been
authorized in writing by the Indemnifying Parties in connection with the
defense of such action at the expense of the Indemnifying Party or Parties,
(ii) the Indemnifying Party or Parties shall not have employed counsel
reasonably satisfactory to such Indemnified Party or Parties to have charge
of the defense of such action within a reasonable time after notice of the
commencement of the action or (iii) such Indemnified Party or Parties shall
have reasonably concluded that there may be defenses available to it or
them which are different from or additional to those available to one or
all of the Indemnifying Parties (in which case the Indemnifying Parties
shall not have the right to direct the defense of such action on behalf of
the Indemnified Party or Parties),
5
<PAGE>
in any of which events such fees and expenses of one additional counsel
shall be borne by Indemnifying Party or Parties. No Indemnifying Party, in
the defense of any such claim or litigation, shall, except with the consent
of each Indemnified Party, consent to entry of any judgment or enter into
any settlement that does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such Indemnified Party of a release
from all liability in respect to such claim or litigation. Each Indemnified
Party shall furnish such information regarding itself or the claim in
question as an Indemnifying Party may reasonably request in writing and as
shall be reasonably required in connection with defense of such claim and
litigation resulting therefrom.
(d) If the indemnification provided for in this
Section 1.5 is unavailable to an Indemnified Party with respect to any
loss, liability, claim, damage, or expense referred to therein, then the
Indemnifying Party, in lieu of indemnifying such Indemnified Party
hereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage, or
expense in such proportion as is appropriate to reflect the relative fault
of the Indemnifying Party on the one hand and of the Indemnified Party on
the other in connection with the statements or omissions that resulted in
such loss, liability, claim, damage, or expense as well as any other
relevant equitable considerations. The relative fault of the Indemnifying
Party and of the Indemnified Party shall be determined by reference to,
among other things, whether the action in question, including any untrue or
alleged, untrue statement of a material fact or omission or alleged
omission to state a material fact, relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative
intent, knowledge, access to information, and opportunity to correct or
prevent such actions, statement or omission. The amount paid or payable by
a party as a result of the losses, claims, damages, liabilities and
expenses referred to above shall be deemed to include any legal or other
fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding. The parties hereto agree that it would not be
just and equitable if contribution pursuant to this Section 1.5(d) were
determined by pro rata allocation or by any other method of allocation that
does not take account of the equitable considerations referred to in this
paragraph. No person guilty of fraudulent misrepresentation (within the
meaning of Section 10(f) of the Securities Act) shall be entitled to
contribution from any person.
If indemnification is available under this Section 1.5, the
Indemnifying Party or Parties shall indemnify each Indemnified Party or
Parties to the full extent provided herein without regard to the relative
fault of said Indemnifying Parties or Indemnified Parties or any other
equitable consideration provided for in this Section 1.5(d).
1.6 INFORMATION BY HOLDER. Each Holder of Registrable
---------------------
Securities shall furnish to the Company such information regarding such
Holder and the distribution proposed by such Holder as the Company may
reasonably request in writing and as shall be reasonably required in
connection with any registration, qualification, or compliance referred to
in this Section 1.
6
<PAGE>
1.7 RULE 144 REPORTING. With a view to making available
------------------
the benefits of certain rules and regulations of the Commission that may
permit the sale of the Restricted Securities to the public without
registration, the Company agrees to use its best efforts to:
(a) Make and keep public information regarding the
Company available as those terms are understood and defined in Rule 144
under the Securities Act;
(b) File with the Commission in a timely manner all
reports and other documents required of the Company under the Securities
Act and the Exchange Act at any time after it has become subject to such
reporting requirements;
(c) So long as a Holder owns any Restricted
Securities, furnish to Holder forthwith upon written request a written
statement by the Company as to its compliance with the reporting
requirements of Rule 144, a copy of the most recent annual or quarterly
report of the Company, and such other reports and documents so filed as a
Holder may reasonably request in availing itself of any rule or regulation
of the Commission allowing a Holder to sell any such securities without
registration.
1.8 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The
---------------------------------------------
rights to cause the Company to register securities granted to a Holder by
the Company under this Section 1 may be transferred or assigned by a
Holder, provided that the Company is given written notice at the time of or
within a reasonable time after said transfer or assignment, stating the
name and address of the transferee or assignee and identifying the
securities with respect to which such registration rights are being
transferred or assigned, and, provided further, that the transferee or
assignee of such rights assumes the obligations of such Holder under this
Agreement by a written agreement reasonably acceptable to the Company.
1.9 "MARKET STAND-OFF" AGREEMENT. If requested by the
----------------------------
Company and an underwriter of common stock (or other securities) of the
Company, a Holder shall not sell or otherwise transfer or dispose of any
Registrable Securities held by such Holder during such period, not
exceeding 90 days, following the effective date of the registration
statement of the Company covering such underwritten offering filed under
the Securities Act specified by the Company; provided that foregoing
restriction shall apply only if (a) each director and executive officer of
the Company agrees to a similar restriction on the sale of his or her
shares, and (b) there are no shareholders selling shares in the
underwritten public offering unless the Holders are also offered the
opportunity to sell their Registrable Securities in the underwritten public
offering. The Registration Period shall not include the period during
which foregoing stand-off obligations are in effect.
The obligations described in this Section 1.9 shall not apply
to a registration relating solely to employee benefit plans on Form S-1 or
Form S-8 or similar forms that may be promulgated in the future, or a
registration relating solely to a Commission Rule 145 transaction on Form
S-4 or similar forms that may be promulgated in the future.
7
<PAGE>
1.10 DELAY OF REGISTRATION. No Holder shall have any right
---------------------
to take any action to restrain, enjoin, or otherwise delay any registration
as the result of any controversy that might arise with respect to the
interpretation or implementation of this Agreement.
2. MISCELLANEOUS
2.1 GOVERNING LAW. This Agreement shall be governed in
-------------
all respects by the laws of the state of California, as if entered into by
and between California residents exclusively for performance entirely
within California.
2.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly
----------------------
provided herein, the provisions hereof shall inure to the benefit of, and
be binding upon, the successors, assigns, heirs, executors and
administrators of the parties hereto.
2.3 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement
-----------------------------------
constitutes the full and entire understanding and agreement between the
parties with regard to the subjects hereof. Neither this Agreement nor any
term hereof may be amended, waived, discharged or terminated, except by a
written instrument signed by the Company and the Investor.
2.4 NOTICES, ETC. All notices and other communications
-------------
required or permitted hereunder shall be in writing and shall be mailed by
United States first-class mail, postage prepaid, or delivered personally by
hand or nationally recognized courier addressed (a) if to Investor, as
indicated on the signature page of this Agreement, or at such other address
as such Investor or permitted assignee shall have furnished to the Company
in writing, or (b) if to the Company, Sunbase Asia, Inc., 19/F First
Pacific Centre, 51-57 Gloucester Road, Wanchai, Hong Kong, or at such other
address as the Company shall have furnished to Investor in writing. All
such notices and other written communications shall be effective on the
date of mailing or delivery.
2.5 RIGHTS; SEVERABILITY. Unless otherwise expressly
--------------------
provided herein, a Holder's rights hereunder are several rights, not rights
jointly held with any of the other Holders. In case any provision of the
Agreement shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any
way be affected or impaired thereby.
2.6 INFORMATION CONFIDENTIAL. Each Holder acknowledges
------------------------
that the information received by them pursuant hereto may be confidential
and for its use only, and it will not use such confidential information in
violation of the Exchange Act or reproduce, disclose or disseminate such
information to any other person (other than its employees or agents having
a need to know the contents of such information, and its attorneys), except
in connection with the exercise of rights under this Agreement, unless the
Company has made such information available to the public generally or such
Holder is required to disclose such information by a governmental body.
8
<PAGE>
2.7 TITLES AND SUBTITLES. The titles of the paragraphs
--------------------
and subparagraphs of this Agreement are for convenience of reference only
and are not to be considered in construing this Agreement.
2.8 COUNTERPARTS. This Agreement may be executed in any
------------
number of counterparts, each of which shall be an original, but all of
which together shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
registration rights agreement effective as of the day and year first above
written.
COMPANY:
SUNBASE ASIA, INC.
By: ________________________________
Name: ______________________________
Title: ___________________
INVESTOR:
By: ________________________________
Name:_______________________________
Title:____________________
Address:____________________________
____________________________________
____________________________________
By:_________________________________
Name:_______________________________
Title:____________________
Address:____________________________
____________________________________
____________________________________
9
<PAGE>
DATED: 1 AUGUST 1996
SUNBASE ASIA, INC. (1)
KAN CHE KIN, BILLY ALBERT (2)
---
________________________________
EMPLOYMENT CONTRACT
________________________________
<PAGE>
TABLE OF CONTENTS
CLAUSE HEADINGS
------ --------
1 DEFINITIONS AND INTERPRETATION
2 TERM OF EMPLOYMENT
3 DUTIES AND WORKING HOURS
4 SALARY
5 STOCK OPTIONS
6 EXPENSES
7 INSURANCE
8 SICKNESS OR DISABILITY
9 HOLIDAYS
10 CONFIDENTIAL INFORMATION
11 TERMINATION
12 SUSPENSION
13 OBLIGATIONS UPON TERMINATION OF EMPLOYMENT
14 RESTRICTIONS AFTER TERMINATION
15 GRIEVANCE AND DISCIPLINARY PROCEDURE
16 NOTICES
17 CANCELLATION OF PREVIOUS AGREEMENTS
18 GOVERNING LAW, JURISDICTION
19 CONTINUANCE OF TERMS
EXECUTION
<PAGE>
DATED: 1 AUGUST 1996
-----
PARTIES:
-------
(1) Sunbase Asia, Inc., a Nevada corporation whose registered office is at
1280 Terminal Way, Suite 3, Reno, Nevada 89502, United States of
America and whose Hong Kong office is at 19/F First Pacific Bank
Centre, 51-57 Gloucester Road, Wanchai, Hong Kong (the "Company"); and
(2) KAN CHE KIN, BILLY ALBERT of D6, Dragon Garden, 1-4 Chun Fai Terrace,
---
Tai Hong Road, Hong Kong (the "Director").
OPERATIVE PROVISIONS:
--------------------
1. DEFINITIONS AND INTERPRETATION
------------------------------
1.1 In this Agreement, unless the context otherwise requires, the
following words and expressions shall have the following meanings:
"Associated Company" any company which is (a) a subsidiary company,
or (b) a company having an ordinary share
capital of which not less than 25% is owned
directly or indirectly by the Company, or (c) a
company to which the Company or any of its
Associated Companies renders managerial,
administrative or technical services in the
ordinary course of its business;
"Board" the board of directors from time to time of the
Company and any duly appointed committee
thereof;
"Business of the Company" the business of trading, marketing,
manufacturing or otherwise dealing in bearing
components or products;
"Commencement Date" 1 August 1996;
"subsidiary" the same meanings as attributed to it by section
2 of the Companies Ordinance (Cap.32) Laws of
Hong Kong; and
"Option" an option to subscribe for Shares in Sunbase
Asia, Inc.;
"Option Period" the term of each Option shall be no more than
ten years from the Year(s) of Exercise;
"Share" an ordinary share in the capital of the Company
to be issued fully paid;
<PAGE>
"Shareholder" the holder of a Share;
"$" and "cents" Hong Kong dollars and cents;
"US$ and cents" United States dollars and cents.
1.2 Words denoting the singular shall include the plural and vice versa
and words denoting any gender shall include all genders.
1.3 Headings used in this Agreement are for convenience only and shall
not affect its interpretation.
2. TERM OF EMPLOYMENT
------------------
2.1 The Director shall serve the Company as Vice Chairman and Managing
Director or in such other capacity of an equivalent status as the Company
may reasonably require. The director accepts that the Company may require
him to perform other duties or tasks not within the scope of his normal
duties and the Director agrees to perform those duties or undertake those
tasks as if they were specifically required under this Agreement.
2.2 The Director's employment shall commence on the Commencement Date
and shall continue (subject to earlier termination as provided in this
Agreement) until terminated by either party giving to the other not less
than 12 months' prior notice expiring on or at any time after the end of
the specified period.
2.3 The Company is entitled at any time to appoint another person or
persons to act jointly with the Director.
3. DUTIES AND WORKING HOURS
------------------------
3.1 During the continuance of his employment hereunder the Director
shall:
(a) develop, market and promote such products of the Company or
any Associated Company as may be required by the Board;
(b) exercise such powers and functions and perform such duties in
relation to the Business of the Company or any Associated
Company as may from time to time be vested in or assigned to
him by the Board and shall comply with all directions from
time to time given to him by the Board (or by anyone
authorized by the Board) and with all rules and regulations
from time to time laid down by the Company concerning its
employees;
(c) (unless prevented by ill health or accident and except during
holidays permitted by this Agreement) devote not less than 100
hours each month of his time, attention and abilities to
carrying out his duties hereunder;
2
<PAGE>
(d) carry out his duties in a proper loyal and efficient manner
and shall use his best endeavours to promote the interests and
reputation of the Company and its Associated Companies and not
do anything which is to their detriment;
(e) work at and/or travel to such places in such manner and on
such occasions as the Company may from time to time require;
(f) keep the Board promptly and fully informed (in writing if so
requested) of his conduct of the business or affairs of the
Company and its Associated Companies and provide such
explanations as the Board may require.
4. SALARY
------
4.1 The Director shall be paid by way of remuneration for his services
during his employment hereunder a salary at the rate of HK$1,625,000.00 per
annum. Such salary shall be paid by twelve monthly instalments in arrear
on the last day of every month and one instalment on the last day before
Chinese New Year Day.
4.2 The salary payable hereunder shall be reviewed annually by the
Board and the rate thereof may be increased with effect from any such
review date.
4.3 If Director dies or, as defined in Section 11.1(e) below, becomes
totally disabled, the Company shall continue to pay Director or Director's
heirs, successors or assigns the Salary for a period of six months,
commencing on the date that Director dies or becomes totally disabled.
5. STOCK OPTIONS
-------------
5.1 The Company shall grant the following Stock Options to the Director
under the terms and conditions as approved by the Company's Compensation
Committee on 1 July 1996:
Exercise Price Number of Shares
Years of Exercise per Share per Option Rights
----------------- --------- -----------------
one year from 16 Jan 1996 US$6.375 200,000
one year from 16 Jan 1997 US$6.375 200,000
one year from 16 Jan 1998 US$6.375 200,000
-------
600,000
5.2 If Director dies or as defined in Section 11.1(e) below becomes
totally disabled, then in addition to any Options that have vested in any
previous year(s) of employment hereunder, the amount of One Hundred
Thousand (100,000) Options will be deemed vested in Director if Director
has completed less than one hundred eighty-three (183) calendar days of
employment for the relevant year and the amount of Two Hundred Thousand
(200,000) Options will be deemed vested in Director if Director has
completed more than one hundred eighty-three (183) calendar days of
employment for the relevant year. Any Options that have
3
<PAGE>
vested as of the date that Director dies or becomes totally disabled may be
exercise by Director's estate, heirs, successors or assigns, prior to such
Option's expiration as described in Section 1.1 above.
5.3 If Director's employment with the Company is terminated, then in
addition to any Options that have vested in any previous year(s) of
employment hereunder, the amount of Options accrue from day to day will
also be deemed vested in Director up to the last day of employment for the
relevant year. Any Options that have vested in Director during his
employment may be exercise by him or his estate, heirs, successors or
assigns at any time prior to such Option's expiration as described in
Section 1.1 above notwithstanding that he no larger works for the Company.
5.4 Upon the written request of the Director or his estate, heirs,
successors, or assigns, at any time during the ten (10) year period that
commences after 16 Jan 1997, the Company shall file with the Securities and
Exchange Commission all necessary Forms and Registration Statements
covering that amount of shares of the common stock of Sunbase Asia, Inc.
which are issued to the Director hereunder.
6. EXPENSES
--------
The Company shall reimburse to the Director all reasonable travel,
accommodation, entertainment and other out-of-pocket expenses which he may
from time to time properly incur in the exercise of his duties hereunder
PROVIDED THAT the Company shall be entitled to require such expenses to be
duly vouched by written evidence.
7. INSURANCE
---------
7.1 The Company shall take out such liability insurance coverage as
approved by the Board to protect the Director of his position of being a
Director and Officer of the Company. In the event that no sufficient
liability coverage is arranged by the Company, any losses of the Director's
personal assets not covered by insurance shall be indemnifiable by the
Company.
8. SICKNESS OR DISABILITY
----------------------
8.1 First class Medical benefits are to be provided to the Director,
his spouse and unmarried children under the age of 18. The Board may
determine whether it wish to take out a comprehensive healthcare coverage
such as the BUPA Gold medical scheme or such other less comprehensive
medical care and hospitalization schemes but to reimburse the Director of
any excess not covered.
8.2 The Company shall continue to pay the Director his full
remuneration if the Director is absent from work on medical grounds for a
consecutive period of 90 working days or for any aggregate period of 120
working days in any period of 6 months provided that the
4
<PAGE>
Director shall, if required, supply the Company with medical certificates
covering his period or periods of absence.
8.3 In the event of the Director being prevented by illness or
incapacity from performing his duties hereunder for a consecutive period of
90 working days or for any aggregate period of 120 working days in any
period of 6 months the Company may terminate this Agreement in accordance
with the provisions of Clause 11.
9. HOLIDAYS
--------
9.1 The holiday year is from 1st January to 31st December.
9.2 The Director will be entitled during every holiday year to the
following holidays, during which his salary will continue to be paid:
(a) statutory holidays in Hong Kong; and
(b) 28 working days' holiday (exclusive of statutory holidays).
9.3 The overriding decision as to when holiday entitlement may be taken
lies with the Board.
9.4 Any holiday not taken by the end of the relevant holiday may be
carried forward or be paid in lieu provided agreed in writing by the Board.
9.5 For the calendar year during which the employment commences the
Director shall be entitled to such proportion of his annual holiday
entitlement as the period of his employment for such year shall bear to one
calendar year.
10. CONFIDENTIAL INFORMATION
------------------------
10.1 The Director shall not either during his appointment or at any time
after its termination:
(a) disclose to any person or persons (except to those authorized
by the Company to know);
(b) use for his own purposes or for any purposes other than those
of the Company; and
(c) through any failure to exercise all due care and diligence
cause any unauthorized disclosure of any private, confidential
or secret information of the Company (including, without
limitation, lists or details of customers of the Company or
relating to the working of any process or intervention carried
on or used by the Company) which he has obtained by virtue of
his appointment
5
<PAGE>
or in respect of which the Company is bound by an obligation
of confidence to a third party. These restrictions shall cease
to apply to information or knowledge which may (otherwise than
through the default of the Director) become available to the
public generally.
10.2 The provisions of clause 10.1 shall apply mutatis mutandis in
relation to the private, confidential or secret information of each
Associated Company which the Director may have received or obtained during
his appointment and the Director shall upon request enter into an
enforceable agreement with any such company to the like effect.
10.3 All notes, memoranda, records and writing made by the Director
relating to the Business of the Company or its Associated Company shall be
and remain the property of the Company or Associated Company to whose
business they relate and shall be delivered by him to the company to which
they belong forthwith upon request.
10.4 Without prejudice to the generality of this clause all notes,
memoranda, records or other written information which are marked as being
private, confidential or secret shall be treated as private, confidential
or secret (as the case may be) for the purposes of this clause.
11. TERMINATION
-----------
11.1 The Company may without prejudice to any remedy which it may have
against the Director for the breach or non-performance of any of the
provisions of this Agreement, by notice in writing to him forthwith
terminate the employment of the Director if he:
(a) is guilty of misconduct or conduct likely to be prejudicial to
the Company or if he commits any act of dishonesty or serious
breach of his obligations hereunder or repeated or continued
(after warning) breaches of his obligations hereunder or he
becomes bankrupt or makes any composition or enters into any
deed of arrangement with his creditors;
(b) becomes a patient as defined in the Mental Health Ordinance
(Cap. 136) of the Laws of Hong Kong;
(c) is convicted of any criminal offence (other than an offence
under road traffic legislation in Hong Kong or elsewhere); or
(d) is prevented by illness or otherwise from performing his
duties hereunder for a consecutive period of 90 working days
or for any aggregate period of 120 working days in any period
of 6 months.
11.2 If before the expiration of this Agreement the employment of the
Director hereunder shall be terminated by reason of the liquidation of the
company for the purposes of the amalgamation or reconstruction or as part
of any arrangement for the amalgamation of the undertaking of the Company
not involving liquidation and the Director shall be offered
6
<PAGE>
employment with the amalgamated or reconstructed company on terms generally
not less favourable than the terms of this Agreement the Director shall
have no claim against the Company in respect of the termination of his
employment by the Company.
11.3 If during his employment hereunder the Director shall (otherwise
than by reason of death or resignation) cease to be a director of the
Company his employment hereunder shall continue as if it had been to the
office of a manager of the Company.
11.4 The Company reserves the right to pay to the Director his basic
salary (at the rate then current) for the unexpired portion of the duration
of his appointment or in lieu of his entitlement to notice as provided for
in Clause 2.2 (as the case may be).
11.5 If either party to this Agreement shall terminate the Director's
employment on notice in accordance with Clause 2.2 then the Company hereby
reserve the right to require the Director and the Director agrees not to
work at his place of work during any such notice period. During any period
in which the Director is required not to work at his place of work in
accordance with this clause the Company shall continue to comply with its
obligations under the terms of this Agreement and in particular, but
without limitation, shall continue to remunerate the Director throughout
the notice period in the normal manner. The Director shall throughout any
such period in which he is not required to work at his place of work
continue to be an employee of the Company and shall not, without
limitation, seek any alternative employment of whatsoever nature or
howsoever arising with any other company, firm or person during such period
without the express consent in writing of the Board.
12. SUSPENSION
----------
Notwithstanding the provisions of Clause 3 of this Agreement the
Company shall be under no obligation to vest in or assign to the Director
any powers or duties or to provide any work for the Director and the
Company may at any time or from time to time suspend the Director from the
performance of his duties or exclude him from any premises of the Company,
but salary shall not cease to be payable by reason only of that suspension
or exclusion of the Director unless and until his employment under this
Agreement shall be terminated under any provision of this Agreement.
13. OBLIGATIONS UPON TERMINATION OF EMPLOYMENT
------------------------------------------
Upon the termination of his employment hereunder for any cause
whatsoever the Director shall:
(a) immediately delivery top the Company all documents, accounts,
records, programs and other items of whatsoever nature or
description which may be in his possession or under his
control which relate in any way to the Business of the company
or of any Associated Company and no copies of any such
documents as aforesaid or any part thereof shall be retained
by him;
7
<PAGE>
(b) if so requested send to the Company Secretary a signed
statement confirming that he has complied with Clause 14.1;
(c) at any time at the request of the Board:
(i) resign without compensation from office as a director of
the Company or any Associated Company as the Director
may hold at the time of such request; and
(ii) transfer any shares in the Company or any Associated
Company which the Director holds as nominee to such
other person as the Board may direct and should the
Director fail so to do the Company is HEREBY IRREVOCABLY
------------------
APPOINTED by way of security for the performance of the
---------
Director's obligations hereunder as the Director's
attorney to sign any documents and perform any other
acts as are required to give effect hereto; and
(d) not at any time represent himself as being employed by or
connected with the Company or any Associated Company.
14. RESTRICTIONS AFTER TERMINATION
------------------------------
14.1 The Director agrees that for a period of 2 years after termination
of his employment hereunder (howsoever caused) he shall not within the
Prohibited Area (as hereinafter defined):
(a) be directly or indirectly engaged, concerned or interested
whether as director, principal, agent, partner, consultant,
shareholder, employee or otherwise in any other business of
whatever kind which is wholly or partly in competition with
the Business of the Company.
(b) accept employment in any executive with any business concern
which is wholly or partly in competition with the Business of
the Company;
(c) provide advice to any business concern which is wholly or
partly in competition with the Business of the Company; or
14.2 The Director shall not within the Prohibited Area for a period of
12 months after the termination of his period of his employment hereunder
(howsoever that comes about and whether lawfully or not) directly or
indirectly and whether on his own behalf or on behalf of any other business
concern, person, partnership, firm, company or other body which is wholly
or party in competition with the Business of the Company:
(a) canvass, solicit or approach or caused to be canvassed or
solicited or approached for business any person or persons who
at the date of the
8
<PAGE>
termination of the Directors' appointment is or was a client
or customer of the Company or was in the habit of dealing with
the Company;
(b) solicit or entice or endeavour to solicit or entice away from
the Company any person employed by the Company at the date of
such termination; or
(c) employ any person who was employed by the Company during the
last 12 months of the Director's employment hereunder.
14.3 The Director hereby convenants with the Company (acting on its own
behalf and as trustee for each Associated Company) that he will perform and
observe in relation to each such Associated Company the several convenants
set out in the subclause and this convenant shall be construed and
enforceable as a separate convenant in relation to each such Associated
Company.
14.4 It is agreed that the restrictions contained in this clause are
considered reasonable by the parties but in the event that any such
restrictions shall be found to be void but would be valid if some part
thereof were deleted or the period or area of application reduced such
restrictions shall apply with such modification as may be necessary to make
them valid and effective.
14.5 In this clause "the Prohibited Areas" means Hong Kong.
14.6 It is hereby agreed and declared that each of the convenants
contained in the preceding sub-clauses on the part of the Director shall be
a separate convenant and shall be construed and enforceable as a separate
convenant.
15. GRIEVANCE AND DISCIPLINARY PROCEDURE
------------------------------------
In the event of the Director wishing to seek redress for any
grievance relating to his employment or if he is dissatisfied with any
disciplinary decision relating to him he should first apply in person to
the Chairman of the Company. The Director must then promptly answer (in
writing if required) such questions (if any) as the Chairman or the Board
wishes to put to him on the matter before the Board comes to a decision.
The decision of the Board on such matter shall be final.
16. NOTICES
-------
Any notice to be given hereunder must be in writing. Notice to the
Director will be sufficiently served by being delivered personally to him
or by being sent by registered post addressed to him at his usual or last
known place of abode. Notice to the Company shall be sufficiently served
by being delivered to the Company Secretary or by being sent by registered
post to the registered office of the Company. Any notice is so posted
shall be deemed served upon the second day following that on which it was
posted if not actually received sooner.
9
<PAGE>
17. CANCELLATION OF PREVIOUS AGREEMENTS
-----------------------------------
As from the Commencement Date all previous agreements or
arrangements (whether written or oral, express or implied) between the
Company and the Director relating to the employment of the Director by the
Company shall be deemed to have been cancelled.
18. GOVERNING LAW, JURISDICTION
---------------------------
This Agreement is governed by and is to be construed in accordance
with the laws of Hong Kong and the parties hereby agree to submit to the
non-exclusive jurisdiction of the courts of Hong Kong.
19. CONTINUANCE OF TERMS
--------------------
The expiration or determination of this Agreement howsoever arising
shall not affect such of the provisions hereof as are expressed to operate
or have effect after the termination of this Agreement.
IN WITNESS whereof the Director has been signed by or on behalf of
the parties hereto the day and year first before written.
For and on behalf of
SUNBASE ASIA, INC.
_______________________________________
Authorized Signature(s)
SIGNED by )
on behalf of the Company )
in the presence of: )
SIGNED, SEALED AND DELIVERED )
by the Director in the )
presence of: )
10
<PAGE>
EXHIBIT 10.22
=====================================================================
DATED THE 2ND DAY OF AUGUST, 1996
(1) CHINA BEARING HOLDINGS LIMITED
AND
(2) ASEAN CAPITAL LIMITED
AND
(3) CHINA INTERNATIONAL BEARING
HOLDINGS LIMITED
AND
(4) SUNBASE ASIA, INC.
AND
(5) SMITH ACQUISITION COMPANY, INC.
AND
(6) GLORY MANSION LIMITED
AND
(7) WARDLEY CHINA INVESTMENT TRUST
AND
(8) MC PRIVATE EQUITY PARTNERS
ASIA LIMITED
AND
(9) CHINE INVESTISSEMENT 2000
_________________________________
SUBSCRIPTION AGREEMENT
IN RESPECT OF CERTAIN
CONVERTIBLE DEBENTURES TO BE ISSUED BY\
CHINA BEARING HOLDINGS LIMITED
_________________________________
CHAO AND CHUNG
=====================================================================
Exhibit 10.22
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
DESCRIPTION PAGE NO.
--------------------------------------------------------------------------------
<S> <C>
1. Purpose and Definition 2
2. Issue and subscription of the Debenture 5
3. Conditions Precedent 6
4. Completion 7
5. Representations and Warranties 9
6. Representations by each of the Investors 10
7. Specific Undertakings by ACL 11
8. Further Covenants 12
9. Specific Undertakings by SAI 18
10. Specific Undertaking by SPC 18
11. Corporate Governance 19
12. Notices 20
13. Costs and Expenses 21
14. Governing Law and Jurisdiction 22
15. Announcements and Confidentiality 24
16. General Provisions 25
17. Counterparts 26
SCHEDULE 1
Part I Corporate Chart 27
Part II Other Corporate details 28
Part III Status and Characteristics of the securities issued by SAI 36
SCHEDULE 2
Form of Certificate 37
Terms and Conditions of the Debentures 38
SCHEDULE 3
Representations and Warranties 61
SCHEDULE 4
Form of Guarantee 68
SCHEDULE 5
Employees / Directors' Options 77
SCHEDULE 6
Certification on Conversion Notice 78
SCHEDULE 7
Undertaking by ACL 79
SIGNATURE PAGE 87
</TABLE>
<PAGE>
THIS AGREEMENT is made on the 2nd day of August, 1996.
(1) CHINA BEARING HOLDINGS LIMITED, the registered office of which is
at Cedar House, 41 Cedar Avenue Hamilton HM12, Bermuda (the
"COMPANY");
(2) ASEAN CAPITAL LIMITED, the registered office of which is at Omar
Hodge Building, Wickhams Cay I, P.O. Box 362, Road Town, Tortola,
British Virgin Islands ("ACL");
(3) CHINA INTERNATIONAL BEARING HOLDINGS LIMITED, the registered
office of which is at 19th Floor, 51-57 Gloucester Road, Wanchai,
Hong Kong ("CIBHL");
(4) SUNBASE ASIA, INC., the registered office of which is at 1280
Terminal Way, Suite 3, Reno Nevada 89502, United States of
America ("SAI");
(5) SMITH ACQUISITION COMPANY, INC., a California corporation doing
business as Southwest Products Company, the registered office of
which is at 2240 Buena Vista, Irwindale, CA 91706, United States
of America ("SPC");
(6) GLORY MANSION LIMITED, the registered office of which is at
Craigmuir Chambers, P.O. Box 71, Road Town, Tortola, British
Virgin Islands ("GML");
(7) WARDLEY CHINA INVESTMENT TRUST, the registered office of which is
at c/o Suite 1610, P.O. Box 1016, 885 West Georgia Street,
Vancouver B.C., V6C 3E8, Canada ("WCIT");
(the parties at (6) and (7) hereinafter collectively referred to us
the "FUNDS" and each a "FUND");
(8) MC PRIVATE EQUITY PARTNERS ASIA LIMITED the registered office of
which is at P.O. Box 309, Ugland House, South Church Street,
Grand Cayman, Cayman Islands, British West Indies ("MC
PARTNERS"); and
(9) CHINE INVESTISSEMENT 2000, a Luxembourg-registered Unit Trust,
the registered office of which is at L1118 Luxembourg, 14 Rue
Aldringen ("CI 2000");
(the parties at (6), (7), (8) and (9) hereinafter collectively
referred to as the "INVESTORS" and each an "INVESTOR")
<PAGE>
WHEREAS:-
(A) The Company was incorporated in Bermuda under the Companies Act
1981 Bermuda and presently has such authorised and issued share
capital as set out in Schedule 1 hereof. SAI is the holding
company of the Company and was incorporated under the laws of
Nevada and presently has a share capital as set out in Schedule 1
hereof.
(B) The Company intends to issue certain convertible debentures of an
aggregate principal value of US$11,500,000, and has agreed with
the Investors to issue and each of the Investors has agreed to
subscribe such number of Debentures (as hereafter defined)
convertible into Shares (as hereinafter defined) upon and subject
to such terms and conditions set out in this Agreement.
(C) Each of the Funds is an investment fund (or a wholly- owned
subsidiary of such Fund) managed by HSBC Private Equity
Management Limited ("HPEM").
(D) SAI, CIBHL and SPC has each agreed to guarantee the obligations
of the Company and of each other arising under this Agreement,
the Debentures and the Guarantee.
(E) ACL has agreed to guarantee, inter alia, the payment obligations
of the Company under this Agreement and the Debentures.
NOW IT IS HEREBY AGREED as follows:
1. PURPOSE AND DEFINITION
----------------------
1.1 The Schedules form an integral part of this Agreement and shall
be construed and have the same full force and effect as if
expressly set out in the main body of this Agreement.
1.2 The words and expressions set out below shall have the meanings
attributed to them below unless the context otherwise requires:-
"ACCOUNTS" the latest published audited
consolidated accounts or financial
statements of SAI Group comprising their
consolidated balance sheet as at 31st
December, 1995 and their consolidated
profit and loss account or income
statement in respect of the financial
year ended 31st December, 1995;
2
<PAGE>
"ACL PROMISSORY NOTES" promissory notes issued by SAI in favour
of ACL in the aggregate principal amount
of UNITED STATES FIVE MILLION DOLLARS
(US$5,000,000);
"ACL UNDERTAKING" an undertaking or guarantee to be given
by ACL in favour of the Investors in the
form or substantially the same form as
set out in Schedule 7 hereof;
"AGREEMENT" this Subscription Agreement;
"BUSINESS DAY" a day (excluding Saturday) on which
banks in Hong Kong and New York are
generally open for business;
"BOARD" board of directors;
"CERTIFICATE" the certificate to be issued in respect
of the Debenture substantially in the
form set out in Schedule 2 hereof;
"COMPLETION" completion of the subscription
contemplated herein pursuant to Clause
4;
"COMPLETION DATE" (a) the fifteenth (15th) Business Day
following the date hereof or if on
such date the Conditions Precedent
shall not have been fulfilled (or
waived by the Majority Investors)
the seventh (7th) Business Day
following the date on which the
Conditions Precedent are fulfilled
(or waived by the Majority
Investors); or
(b) such other date as may be agreed
between the Majority Investors and
the Company provided that such date
shall not be any later than the
Long Stop Date;
"CONDITIONS" the terms and conditions to be attached
to the Certificate substantially in the
form set out in Schedule 2 hereof;
"CONDITIONS PRECEDENT" the conditions precedent set out in
Clause 3.1 hereof;
<PAGE>
"CONVERSION DATE" the date on which the Conversion Rights
are exercised in accordance with the
Conditions;
"CONVERSION RIGHTS" the rights attached to the Debentures to
convert the principal amount or any part
thereof into Shares;
"CONVERSION SHARES" "the Shares to be issued by SAI under
the Debentures upon conversion;
"DEBENTURE" or the convertible debentures issued in
"DEBENTURES" denominations of US$250,000 each by the
Company in the form or substantially in
the form set out in the Schedule 2
hereof;
"DEBENTUREHOLDER" or the person or persons who is or are
"DEBENTUREHOLDERS" for the time being the holder of the
Debentures;
"EVENT OF DEFAULT" an event of default as described in
Condition 11 of the Conditions;
"GUARANTEE" the guarantee to be given by the
Guarantors in the form or substantially
the same form as set out in Schedule 4
hereof;
"GUARANTORS" or "GUARANTOR" SAI, CIBHL and SPC;
"LONG STOP DATE" Forty-five (45) days from the date of
this Agreement;
"MAJORITY INVESTORS" the majority of the Investors in value
holding more than 50% of the total
principal amount of the Debentures
outstanding;
"PAYMENT BUSINESS DAY" a day (excluding Saturday) on which
banks in Hong Kong and New York are
generally open for business;
"SAI GROUP" SAI and those companies appearing in the
corporate chart of SAI as set out in
Part I of Schedule 1 hereof (including
those companies that shall from time to
time become subsidiaries (as defined by
the Companies Ordinance (Cap.
4
<PAGE>
32 of the Laws of Hong Kong) of SAI
after the date of this Agreement;
"SHARES" the shares in the common stock of SAI
existing at the date of this Agreement
and all other (if any) stock or shares
from time to time and for the time being
to be issued ranking pari passu
therewith and all other (if any) shares
or stock resulting from any sub-
division, consolidation or re-
classification of the Shares;
"SUPER-VOTING RIGHTS" such weighted voting rights of 500,000
votes per Series A Preferred Stock
issued by the Company;
"WARRANTIES" the representations and warranties
contained in Clause 5 and Schedule 3
hereof;
"HK"$ Hong Kong dollars; and
"US"$ United States dollars.
1.3 Except as otherwise expressly provided, expressions defined in
the Companies Ordinance (Cap. 32 of the Laws of Hong Kong) have
the same meaning in this Agreement.
1.4 A reference to a statute or statutory provision includes a
reference:
(a) to that statute or provision as from time to time modified
or re-enacted;
(b) to any repealed statute or statutory provision which it re-
enacts (with or without modification); and
(c) to any orders, regulations, instruments or other subordinate
legislation made under the relevant statute or statutory
provision.
1.5 Unless the context otherwise requires:-
(a) words in the singular include the plural, and vice versa;
(b) words importing any gender include all genders; and
(c) a reference to a person includes a reference to a body
corporate and to an unincorporated body of persons.
5
<PAGE>
1.6 A reference to a Clause, sub-Clause or Schedule is to a clause,
sub-Clause or schedule (as the case may be) of or to this
Agreement.
1.7 The headings are for convenience only and do not affect
interpretation.
2. ISSUE AND SUBSCRIPTION OF THE DEBENTURE
---------------------------------------
2.1 Subject to fulfilment of the Conditions Precedent, at Completion,
each of the Investors shall subscribe for Debentures of such
aggregate principal value as set out against its name hereunder
and shall pay or procure that there shall be paid to the Company
(or any company or person as shall be directed by the Company)
the amount of the subscription moneys for the Debentures:
<TABLE>
<CAPTION>
Aggregate Principal
US$ value of the
Name of Investor Subscription Monies Debenture(s) to be issued
---------------- ------------------- -------------------------
<S> <C> <C>
GML 6,000,000 6,000,000
WCIT 2,000,000 2,000,000
MC Partners 2,000,000 2,000,000
CI 2000 1,500,000 1,500,000
------------------- -------------------------
Total: US$11,500,000 US$11,500,000
</TABLE>
2.2 Subject to fulfilment of the Conditions Precedent and at
Completion, the Company shall, upon receipt of the subscription
moneys referred to in Clause 2.1, issue the Debenture(s) at its
full principal value to the respective Investors.
2.3 (a) None of the Funds shall be obliged to subscribe for any of
the Debentures if the subscription for the Debentures is not
completed simultaneously by the other two Investors in which
case subscription hereunder shall be at the Funds' absolute
discretion and the Company is obliged to complete the issue
of such Debentures to the Funds pursuant to the terms and
provisions of this Agreement if the Funds so elect
notwithstanding the default by the other Investors but no
default by only one of the Investors (not being a Fund)
shall excuse the Funds from the performance of the Funds'
and the non-defaulting Investor's (not being a Fund)
obligations hereunder and Completion so effected shall, for
the avoidance of doubt, in no way affect the obligations and
the undertakings of the parties contained herein.
(b) MC Partners shall not be obliged to subscribe for such
Debentures as set out against its name in sub-Clause 2.1 if
the subscription by the Funds for the Debentures against the
Funds' names is not completed simultaneously.
6
<PAGE>
If the Funds shall fail to complete the subscription of the
Debentures pursuant to sub-Clause 2.1, MC Partners shall be
entitled, at its absolute discretion, to subscribe for the
Debentures that would have been subscribed by the Funds
pursuant to sub-Clause 2.1 but for the Funds' default and
the Company shall be obliged to complete the issue of such
Debentures to MC Partners pursuant to the terms and
provisions of this Agreement if MC Partners so elect.
3. CONDITIONS PRECEDENT
--------------------
3.1 The following are conditions precedent to Completion:-
(a) a legal opinion shall have been obtained from the US
lawyers, Messrs. Loeb & Loeb, to the satisfaction of the
Majority Investors confirming (i) that no approvals or
consents need to be applied for from any US authorities,
bodies, governmental agencies or institutions in relation to
the issue of the Debentures; (ii) that each of SAI and SPC
has the power, capacity and authority to issue the
Conversion Shares, to enter into this Agreement and the
Guarantee and that in doing so it shall not have breached
any laws (federal or state), regulations or contractual
obligations; (iii) that (subject to approval being obtained
on the listing of the Conversion Shares) the issue and
allotment of the Conversion Shares will not be in breach of
any regulations, codes or laws (federal or state); (iv) that
save as mentioned there are no other approvals or consents
that need to be applied for or obtained from any US
authorities (federal or state) in connection with the
transactions or matters contemplated hereunder; (v) that the
share structure and other corporate details as contained in
Schedule 1 hereof are accurate and correct and not in any
way misleading; and (vi) that there are nothing the Majority
Investors ought to be aware of or ought to be brought to
their attention in relation thereto in order to effect the
issue of the Conversion Shares or to maintain or effect the
legality, validity and enforceability of this Agreement, the
Debenture and the Guarantee against SAI or SPC;
(b) (if applicable) relevant approval from the Bermuda Monetary
Authority shall have been obtained;
(c) (if applicable) such employment contracts with the key
management of the SAI Group shall have been entered upon
such terms to the satisfaction of the Funds; and
(d) (if applicable) such management agreements or other
agreements as shall be required by the Funds shall have been
entered into or such acts or
7
<PAGE>
deeds as shall be required by the Funds shall have been
performed to the Funds' satisfaction in order to enable the
subscription hereunder to qualify as a VCOC qualifying
investment;
3.2 If the Conditions Precedent are not fulfilled on or before the
Long Stop Date, this Agreement (save for Clauses 1, 12 to 17 and
this Clause 3) will lapse and become null and void and the
parties will be released from all obligations hereunder (save for
Clauses 1, 12 to 17 and this Clause 3), save for any liabilities
for any antecedent breaches hereof.
4. COMPLETION
----------
Subject to fulfilment of the Conditions Precedent, Completion shall
take place on the Completion Date and each party referred to below
shall perform its respective obligations as follows:-
4.1 The Company shall:
(a) (if required by the Investors) deliver evidence in a form
reasonably satisfactory to the Majority Investors that the
Conditions Precedent referred to in Clause 3 hereof have
been duly satisfied and fully complied with (unless
otherwise waived by the Majority Investors);
(b) deliver to the Investors a certified copy of the Board
resolution of the Company approving and authorising
execution and completion of this Agreement and the issue of
the Debenture and the Certificate upon the terms and subject
to the Conditions contained herein;
(c) deliver to the Investors a certified copy of the Board
resolution of SAI (i) approving and authorising execution
and completion of this Agreement; (ii) the issue of the
Debenture and Certificate by the Company upon the terms and
subject to the conditions; (iii) approving and authorising
the execution of the Guarantee; (iv) approving the issuance
of the Conversion Shares upon conversion of the Debenture;
and (v) resolving to effect and do all that is necessary to
give effect to the Agreement, the Debenture, the Guarantee
and the conversion under the Debentures;
(d) deliver to the Investors a certified copy of Board
resolution from each of CIBHL and SPC in each case approving
and authorising the execution and completion of this
Agreement and the Guarantee and resolving to effect and do
all that is necessary to give effect to the Agreement, the
Debenture, the Guarantee and the conversion under the
Debentures;
8
<PAGE>
(e) deliver to the Investors, a certified copy of Board
resolution from ACL approving and authorising the execution
and completion of this Agreement and the ACL Undertaking and
resolving to effect and do all that is necessary to give
effect to the Agreement, the Debenture and the ACL
Undertaking; and
(f) (against reasonable evidence that the monies referred in 4.2
below having been received from the Investors by the
Company) deliver to each of the Investors (or to such
persons at such place as the relevant Investor may direct) a
Certificate or Certificates duly issued for the amount
representing the subscription in favour of the relevant
Investor (or its nominee).
4.2 At Completion, each of the Investors shall:
(a) deliver to the Company evidence in a form reasonably
satisfactory to the Company of its authority for the
execution of this Agreement and the subscription of the
Debentures thereunder; and
(b) pay to the Company or as the Company may direct such amount
of relevant subscription monies.
4.3 SAI and CIBHL shall enter into the Guarantee in the form or
substantially the same form as set out in Schedule 4 hereof.
4.4 ACL shall enter into the ACL Undertaking in the form or
substantially the same form as set out in Schedule 7 hereof.
4.5 All the obligations described herein are inter- conditional and
none of the transactions shall be completed unless all of them
are completed at Completion. Subject to Clause 2.3, none of the
parties shall be obliged to complete this Agreement unless the
other parties complies fully with their obligations hereunder.
Without Prejudice to Clause 2.3, to the extent that the
obligations of any parties hereto are not fully complied with at
Completion, the other parties not in default may defer Completion
to another day or proceed to Completion as far as practicable
(without limiting its rights under this Agreement) or treat this
Agreement as terminated for breach of a condition.
5. REPRESENTATIONS AND WARRANTIES
5.1 Each of the Company, the Guarantors and ACL (collectively the
"WARRANTORS") hereby jointly and severally, represents, warrants
and undertakes to each of the Investors that each of the
Warranties is true and accurate in all material respects and not
misleading as at the date hereof and shall continue to be true
and accurate
9
<PAGE>
in all material respects and not misleading on each day hereafter
up to and including the Completion Date as if repeated on each
such day.
5.2 Each of the Warranties shall be construed as a separate and
independent warranty and (save where expressly provided to the
contrary) shall not be limited or restricted by reference to or
influence from any other term of this Agreement or any other
warranty.
5.3 If any party hereto fails to perform its obligations hereunder or
if any of the Warranties shall have been breached prior to
Completion then without prejudice to all and any rights or
remedies available to the non-defaulting party, it may by notice
either require the defaulting party to perform any of its
obligation on or prior to Completion or treat the defaulting
party as having repudiated this Agreement and rescind the same.
5.4 Each of the Warrantors represents and warrants that no offer to
sell the Securities (as defined in Clause 6) was made in the
United States nor did any member of the SAI Group or any of their
affiliates or any person acting on its or their behalf engage in
any directed selling efforts (as defined in Regulation S of the
Securities Act (as defined in Clause 6 below)) in the United
States of America with respect to the offer or sale of the
Securities (as defined in Clause 6).
6. REPRESENTATIONS BY EACH OF THE INVESTORS
----------------------------------------
Each of the Investors hereby represents and warrants that:
(a) it has full power and authority to enter into this Agreement.
This Agreement to which the Investor is a party constitutes the
Investor's valid and legally binding obligation, enforceable in
accordance with its terms except as may be limited by (i)
applicable bankruptcy, insolvency, reorganisation or other laws
of general application relating to or affecting the enforcement
of creditors' rights generally and (ii) the effect of rules of
law governing the availability of equitable remedies;
(b) it is not a U.S. person (as defined in Regulation S under the
Securities Act of 1933, as amended (the "SECURITIES ACT")), was
not organised under the laws of any United States jurisdiction
and was not formed for the purpose of investing in securities not
registered under the Securities Act;
(c) at the time of execution of this Agreement, it was outside the
United States and the sale of the Debentures and the Conversion
Shares (collectively the "SECURITIES") has not been prearranged
with a buyer in the United States;
10
<PAGE>
(d) it is purchasing the Securities for its own account for
investment purposes and not for distribution;
(e) all subsequent offers and sales of the Securities (i) (if to be
made outside the United States) will be made in compliance with
Rule 903 or Rule 904 of Regulation S or (ii) will be made
pursuant to registration of the Securities under the Securities
Act, or (iii) will be made pursuant to an exemption from
registration and that there can be no assurance that it will be
able to rely on any such exemption;
(f) it understands that the Securities are being offered and sold to
it in reliance on specific provisions of federal and state laws
and that the Company is relying upon the truth and accuracy of
the representations, warranties, agreements, acknowledgements and
understandings of the Investor set forth herein in order to
determine the applicability of such provisions; and
(g) it acknowledges that the Securities have not been registered
under the Securities Act as at the date of this Agreement and for
a period of 40 days after Completion it will not offer, sell, or
deliver the Securities, directly or indirectly, in the United
States or to, or for the benefit or account of, U.S. persons
except pursuant to registration under the Securities Act or an
exemption from such registration. Terms used herein have the
meanings specified in Regulation S under the Securities Act.
7. SPECIFIC UNDERTAKINGS BY ACL
----------------------------
7.1 ACL hereby irrevocably and unconditionally undertakes that for so
long as any of the Debentures are outstanding, no amounts are to
be repaid in respect of the ACL Promissory Notes unless:
(a) there is sufficient positive operating cash flow for working
capital, debt repayment and capital expenditure for the
ensuing twelve- month period, such sufficiency to be
determined by the Majority Investors on the basis of the
cash flow forecast presented to it by ACL and/or SAI in the
format and substance satisfactory to the Majority Investors;
and
(b) the repayment is made in accordance with the following
schedule:
Payment Period Amount
-------------- ------
1st August, 1996 - 31st July, 1997 up to US$2,000,000 plus
accrued interest
1st August, 1997 - 31st July, 1998 up to US$1,500,000 plus
accrued interest
11
<PAGE>
1st August, 1998 - 31st July, 1999up to US$1,500,000 plus
accrued interest
----------------------------------
Total: US$5,000,000 plus accrued interest
In the event of dispute as to the sufficiency of the operating
cash flow in (a) above, an independent merchant bank of repute or
an independent firm of international accountants mutually agreed
between ACL and the Majority Investors shall be appointed to
determine the sufficiency of such operating cash flow whose
decision shall be final and binding on the parties.
7.2 Each of ACL and SAI hereby undertakes that to the extent that any
terms contained in Clause 7.1 above should conflict with any
terms of the ACL Promissory Notes, the terms hereunder shall
prevail and the ACL Promissory Notes shall be deemed to have been
varied or modified to such extent so as to give effect to the
provisions hereunder. ACL and SAI shall do and perform all that
is necessary to give effect to this provision including the
execution of any deeds, document and supplemental agreements.
7.3 ACL hereby irrevocably and unconditionally undertakes to each of
the Investors that for so long as the Debenture is outstanding,
ACL shall not without the prior written approval of the Majority
Investors, exercise any Super-voting Rights attached to the
Series A Preferred Stock to which ACL is entitled.
7.4 ACL hereby unconditionally and irrevocably undertakes to each of
the Investors that for so long as any of the Debentures are
outstanding, ACL shall, directly or indirectly, remain the legal
and beneficial owner of not less than 51% of the Deemed Total
Issued Share Capital of SAI (as defined in sub- Clause 8.5(c))
and retain control over not less than 51% of the voting rights of
SAI (which for this purpose shall exclude Super-voting Rights but
shall include a substitution of 100,000 votes per Series A
Preferred Stock held for the purposes of calculation hereunder).
ACL further undertakes that (subject to sub-Clause 8.5 hereof) it
shall not sell, mortgage, pledge, charge, assign or otherwise
purport to deal with the beneficial interest therein or any right
in relation thereto (including voting rights) or create any lien
or encumbrance over the Shares and/or the voting rights attached
thereto.
8. FURTHER COVENANTS
-----------------
8.1 Representation
--------------
(a) Each of the Company and the Guarantors hereby undertakes to
appoint such person as shall be nominated by GML to each of
its respective Boards as a director.
12
<PAGE>
(b) SAI shall appoint such person as shall be nominated by GML
as a member of the audit committee of SAI.
(c) Each of the Company, the Guarantors and ACL shall procure
that such appointments referred to in (a) and (b) shall
continue for so long as any of the Debentures which are held
by GML remains outstanding.
8.2 Continuing obligations
----------------------
Each of the Company, the Guarantors and ACL hereby undertakes
that for so long as any of the Debentures remains outstanding:
(a) SAI shall and ACL shall procure that SAI shall convene a
meeting of its Board at least once every 3 months;
(b) SAI shall and ACL shall procure that SAI shall deliver to
each of the Investors a written agenda for each meeting of
the Board, specifying in reasonable detail the matters to be
raised at the meeting (together with a copy of the notice
for convening the meeting) not less than two (2) working
days before the date of the proposed meeting of the Board
and each of the Investors shall be entitled to attend, but
not to vote (unless if it is a director) at such meeting;
(c) the Company shall bear all costs and expenses associated
with or incurred in connection with attendances at such
meetings referred to at (a) above by any of the Investors;
(d) it shall prepare and provide or procure the preparation or
provision of annual audited financial statements of the SAI
Group to each of the Investors as soon as practicable after
the end of the relevant financial year but in any event no
later than 7 days after the filing of such audited financial
statements with the U.S. Securities and Exchange Commission,
such statements to be prepared in accordance with generally
accepted accounting principal and practices and audited by
internationally recognised independent firm of accountants
acceptable to the Majority Investors;
(e) it shall prepare and provide to each of the Investors or
procure such preparation or provision of quarterly
consolidated unaudited management accounts including
variance analysis of key financial data showing the
financial position and affairs of the SAI Group as soon as
practicable after the end of each quarter but in any event
no later than 7 days after the filing of such quarterly
accounts with the U.S. Securities and Exchange Commission or
in the case of the fourth (4th) quarter accounts no later
13
<PAGE>
than 60 days after the end of such quarter, such management
accounts to be in the same format as a Form 10-Q to be filed
with the U.S. Securities and Exchange Commission;
(f) it shall prepare and provide to each of the Investors or
procure such preparation or provision of monthly
consolidated management information of the SAI Group
including but not limited to critical financial data as soon
as practicable after the end of each month but in any event
no later than 30 days;
(g) it shall prepare and deliver or procure such preparation or
provision of to each of the Investors no later than the day
before the beginning of each financial year a proposed
annual operating business plan and budget in the form and
substance mutually agreed between SAI and the Majority
Investors for the forthcoming financial year;
(h) it shall allow any of the Investors, at the Investor's
expense, to visit and inspect the property and premises of
any member of the SAI Group at such reasonable time as may
be requested by the relevant Investors;
(i) it shall prepare and provide to each of the Investors or
procure such preparation or provision of copies of all
available financial statements, forecast and projection
approved by the Board of SAI and all notices, minutes, proxy
material, consents and other material provided to the Board
of SAI, copies of all filings made with the US Securities
and Exchange Commission and any other information relating
to the business or financial data of SAI and/or the Company
as the Investors may reasonably request;
(j) it shall procure and ensure that the subscription moneys
obtained by the Company from the subscription hereunder
shall only be used as working capital to expand the business
of the SAI Group and to repay existing debts and for no
other purposes;
(k) it shall ensure that all capital expenditure and related
party transactions concerning SAI and/or the Company which
require approvals from the respective Boards must first be
submitted to the Funds for consultation and discussion
before submission to the relevant Board for determination;
(l) it shall ensure that each of the Funds shall enjoy the
following management rights:
(i) the rights to be consulted and to give advice to the
management in respect of any relevant material
development affecting any business
14
<PAGE>
of any member of the SAI Group; to discuss the
business operations, property and financial or other
conditions of any member of the SAI Group with its
respective officers, employees and directors; the
rights to be consulted with or to give advice to the
management on significant business issues or meet
regularly with management during each year for such
consultation and advice;
(ii) the rights to inspect the books and records of SAI
and appoint a qualified accountant to inspect SAI's
accounting records at such reasonable time and as
often as the Funds may reasonably request.
(m) it shall notify each of the Investors promptly and without
any delay after the happening of any events or changes that
has a material adverse impact on the business, affairs,
prospects, operations, properties, assets or condition of
any member of the SAI Group or on ACL as the case may be;
(n) it shall maintain the authorisation of the quotation of the
Shares on NASDAQ and ensure that Conversion Shares to be
issued will be authorised for quotation on NASDAQ.
8.3 Undertakings
------------
Each of the Company, the Guarantors and ACL hereby further
undertakes and agrees that it shall procure that no member
of the SAI Group shall at any time and for so long as any of
the Debentures remains outstanding (including the exercise
of all such voting powers and control it has, directly or
indirectly over the members of the SAI Group), save with the
prior written approval from each of the Funds:
(a) make any changes to its capital structure or make any
issues, sell or offer any Securities (as defined below) or
any rights to subscribe for Securities whatsoever (except
options or warrants already issued prior to the date of this
Agreement as set out in Part III of Schedule I and Schedule
5 hereof); or
(b) make any amendment to its memorandum and articles of
association or equivalent constitutive documents; or
(c) effect any merger, reconstruction or amalgamation with any
other entity or undertaking; or
15
<PAGE>
(d) effect any consolidation of all or any of its shares into
shares of larger amount or sub-divide all or any of the
shares into smaller amounts; or
(e) vary, modify or abrogate any of the rights attaching to any
of the Shares or redeem, purchase or cancel all or any of
such Shares.
For purpose of this sub-Clause, "SECURITIES" means any shares,
stocks, debentures, loan stocks, funds, bonds or notes (excluding
bank borrowings in the ordinary course of conducting the bearing
business) of or issued by any of member of the SAI Group and
includes (i) all rights, options or interest in or in respect of
the foregoing (ii) certificate of interest or participation in or
temporary or interim certificate for, receipt for, or warrants
(including covered warrants) to subscribe to or purchase any of
the foregoing, and (iii) index-linked instruments, future
contracts or any other instruments commonly known as securities.
8.4 Right of First Refusal
----------------------
(a) Each of the Company, the Guarantors and ACL hereby
agrees that it shall exercise all such voting powers
and control it has, directly or indirectly over the
members of the SAI Group to procure that for so long as
the Funds shall hold in aggregate more than 50% of the
total principal amount of the Debentures outstanding if
any of the Securities were offered with the approval
from the Funds pursuant to Clause 8.3 hereof, such
Securities (as defined in sub- Clause 8.3) shall first
be offered to each of the Funds by the relevant company
in the SAI Group prior to the offer of any of such
Securities to any other persons ("FIRST REFUSAL RIGHT")
and if such offer is proposed for the first time since
the date of this Agreement, in such manner as specified
in sub-Clause 8.4(b) hereof.
(b) The Securities shall first be offered to MC Partners who
shall promptly notify the Funds of the terms of such offer
and the details in relation thereto. MC Partners shall
discuss with the Funds as to the level of their respective
participations, it being understood that each of the Funds
shall be entitled to participate in full or in such
proportions it shall determine by virtue of the First
Refusal Right granted to it under sub-Clause 8.4(a) hereof.
8.5 Negative Pledge
---------------
(a) Without prejudice to sub-Clause 8.3 and Clause 11, for so
long as any Debentures remains outstanding SAI, CIBHL, SPC
and the Company hereby jointly and severally undertakes :-
16
<PAGE>
(i) that none of the members of the SAI Group will create
or permit to subsist any Security Interest (as
defined below) for the benefit of the holders of any
Securities (as defined in sub-Clause 8.3) upon the
whole or any part of its property or assets, present
or future, including for the purposes of securing (i)
payment of any sum due (ii) any payment under any
guarantee or (iii) any indemnity or other like
obligation;
(ii) that no other person (and it shall procure that no
other person shall) create or permit to exist any
Security Interest upon the whole or any part of the
property or assets, present or future, of that other
person to secure (i) any Securities (as defined in
sub-Clause 8.3) of any member of the SAI Group or
(ii) any guarantee of or indemnity in respect of any
member of the SAI Group; and
(iii) to procure that no person, other than SAI, CIBHL, SPC
or the Company, gives any guarantee of or indemnity
in respect of the Securities of any member of the SAI
Group.
(b) Without prejudice to sub-Clause 8.3 or of any of the
foregoing, for so long as any of the Debentures remains
outstanding, ACL undertakes that it shall not create or
permit to subsist any Securities Interest (as defined below)
upon the whole or any part of its property or assets,
present or future, including for the purposes of securing
(i) payment of any sum due (ii) any payment under any
guarantee or (iii) any indemnity or other like obligation
unless:
(i) such Securities Interest is created in favour of a
financial institution independent of and not
connected with ACL or any member of the SAI Group on
the one hand and any of the Majority Investors on the
other hand;
(ii) subject always to Clause 7.4 hereof, in relation to
the creation of Securities Interest over any of the
Shares held by ACL directly or indirectly, such
Securities Interest created shall not result in ACL
holding less than 35 per cent. of the Deemed Total
Issued Share Capital of SAI (as defined below) free
from all Securities Interest; and
(iii) ACL shall notify promptly the Majority Investors
thereafter of such creation.
(c) For the purpose of this sub-Clause 8.5, the following words
shall have the following meanings:
17
<PAGE>
"SECURITY INTEREST" means any pledge, mortgage, lien,
charge, hypothecation, encumbrance or other security
interest.
"DEEMED TOTAL ISSUED SHARE CAPITAL OF SAI" means the total
Share capital of SAI deemed to be in issue which for this
purpose, shall be the then actual existing total issued
Share capital of SAI and (if any Series A Preferred Stock or
Series B Preferred Stock is left outstanding) that number of
Shares that would have been issued in respect of Series A
Preferred Stock and Series B Preferred Stock had the same
been all converted immediately prior to the relevant date
under consideration as if such Shares form part of the
enlarged issued Share capital of SAI in aggregate.
8.6 Registration
------------
Each of SAI and the Company hereby covenants, undertakes and
agrees with the Investors that each Investor shall, if it is
deemed to be an "AFFILIATE" under the U.S. Securities Act of 1933
of SAI (which interpretation shall be determined by a U.S. law
firm to be agreed between the Funds and SAI or the Securities and
Exchange Commission as the case may be), have the right to
require SAI and/or the Company to file a registration statement
under the Securities Act for a public offering / resale of all or
any number of Conversion Shares held by the Investor upon
conversion of any of the Debentures, such rights to be
exercisable by the delivery of a written notice to SAI and/or the
Company (the "NOTICE") specifying in detail the number of
Conversion Shares required to be made the subject of the
registration, the identity of the Investor and the intended
method of resale of the Conversion Shares and SAI and/or the
Company shall take all reasonable steps to commence the procedure
for such filing within five (5) Business Days of receipt of the
Notice.
8.7 Schedule 13D filing
-------------------
Each of ACL, SAI and the Company hereby jointly and severally
agrees to assist HPEM, GML and (if required) WCIT in filing
Schedule 13D as soon as practicable after Completion and in any
event no later than seven (7) days after the Completion Date.
9. SPECIFIC UNDERTAKINGS BY SAI
----------------------------
9.1 SAI shall issue the Shares upon conversion by the
Debentureholders pursuant to the terms of this Agreement and that
of the Debentures and shall further keep available for issue,
free from pre- emptive rights, out of its authorised but unissued
capital sufficient Shares to satisfy in full the Conversion
Rights and all
18
<PAGE>
other rights for the time being outstanding of subscription for
and conversion into Shares.
9.2 SAI shall not in any way modify the rights attached to the Shares
as a class or attach any special restrictions thereto except with
the prior written consent from the Funds.
9.3 SAI shall procure that at no time shall there be an issue of
Shares of differing nominal value except with the prior written
consent from the Funds.
9.4 SAI shall use its best endeavours (i) to maintain the
authorisation of the quotation of all the issued Shares on
NASDAQ; (ii) to obtain and maintain the authorisation of the
quotation on NASDAQ (or a listing on an alternative stock
exchange approved by the Funds) for all the Shares issued on the
exercise of the Conversion Rights attaching to the Debenture.
9.5 SAI shall provide the Debentureholder with a copy of its annual
reports, annual financial statements, interim reports and all
other statements and circulars sent by SAI to its shareholders
within fourteen days after SAI sends the same to its
shareholders.
9.6 SAI shall ensure that all Shares issued upon conversion of the
Debenture will be duly and validly issued, fully paid and non-
assessable and will not be subject to pre-emptive rights.
10. SPECIFIC UNDERTAKING BY SPC
---------------------------
SPC hereby undertakes that it shall and SAI hereby undertakes
that it shall procure SPC shall within 10 Business Days following
the first to occur of (a) the repayment in full of all sums due
and owing to Foothill Capital Corporation under a Security
Agreement dated as 17 March, 1995 between SPC and Foothill
Capital Corporation and (b) 31 December 1996 (or such other date
as shall be determined by the Majority Investors provided that
all the Investors shall first have given their prior written
consent to the alteration of this date), execute and deliver to
the Investors the Guarantee in substantially the form attached
hereto as Schedule 4 (to apply mutatis mutandis). For the
avoidance of doubt failure by SPC to sign the Guarantee pursuant
to this Clause shall constitute an Event of Default.
11. CORPORATE GOVERNANCE
--------------------
Unless the prior written approval from the Funds have been
obtained, each of the Company, the Guarantors and ACL undertakes
that it shall and shall procure that
19
<PAGE>
each of them shall exercise all such voting rights and other
powers of control as is or shall be available to them to procure
that no member in the SAI Group shall:-
(a) acquire assets in excess of US$3,000,000;
(b) borrow, lend or give any guarantee of any amount greater
than US$3,000,000;
(c) sell assets having a fair market value in excess of
US$3,000,000;
(d) make dividend payments in excess of twenty percent (20%) of
SAI's Audited Earnings per Share ("EPS") for the relevant
financial year. For this purpose, EPS shall mean audited
earnings for the year minus or add back extraordinary items
as defined under International Accounting Standard IAS8 and
adding back interest expenses on the Debenture divided by
the total weighted average number of Shares outstanding on a
fully diluted basis (including the number of Shares that
would have been issued had all the Debentures then
outstanding been converted);
(e) give any charge, mortgage, pledge or other security interest
in excess of US$3,000,000;
(f) enter into any related party transaction which itself
exceeds or enter into any related party transactions in any
12-month period which when taken together exceeds
US$1,000,000 except where such transaction is a normal
commercial arms length transaction entered into in the
ordinary course of the SAI Group's business of the
manufacturing and sales of bearing products;
(g) allow any of the events referred to in this Clause (a) to
(e) above to occur if such event will involve such an amount
or value (notwithstanding such amount may or may not exceed
the relevant limit specified for that event under this
Clause (a) to (e) hereof) when added to the existing
cumulative total of the value of that event occurring in the
preceding 12 months will take the overall cumulative total
over 15% of the net asset value of SAI as shown in the
latest audited consolidated accounts of SAI.
12. NOTICES
-------
Any notice required or permitted to be given by or under this
Agreement shall be in writing and shall be given by delivering it
to the address or facsimile number of the relevant party
connected shown below:-
20
<PAGE>
THE COMPANY : c/o China International Bearing Holdings
Limited
19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
ATTN.: MR. BILLY KAN / MR. ROGER LI
SAI : c/o China International Bearing Holdings
Limited
19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
ATTN.: MR. BILLY KAN / MR. ROGER LI
SPC : c/o China International Bearing Holdings
Limited
19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293 ATTN.:
Mr. Billy Kan / Mr. Roger Li
ACL : c/o China International Bearing Holdings
Limited
19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
ATTN.: MR. BILLY KAN / MR. ROGER LI
CIBHL : 19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
ATTN.: MR. BILLY KAN / MR. ROGER LI
GML : c/o HPEM, 10th Floor, Citibank Tower,
3 Garden Road, Hong Kong
Tel: (852) 2845 7688
Fax: (852) 2845 9992
ATTN.: MR. GEORGE RAFFINI / MR. BRIAN LAW
WCIT : c/o HPEM, 10th Floor, Citibank Tower,
3 Garden Road, Hong Kong
Tel: (852) 2845 7688
Fax: (852) 2845 9992
21
<PAGE>
ATTN.: MR. GEORGE RAFFINI / MR. BRIAN LAW
MC PARTNERS : c/o MC Capital Asia Pte Limited
Unit No. 1002 C/D 10th Floor,
Tower 1, Admiralty Centre,
10 Harcourt Road, Hong Kong
Tel: (852) 2866 3393
Fax: (852) 2866 2693
ATTN.: MR. YUJI KOMIYA/MR. TATSUYA
KUROYANAGI
CI 2000 : c/o Banque Worms, Hong Kong Branch
39th Floor, Central Plaza
18 Harbour Road, Hong Kong
Tel: (852) 2802 8382
Fax: (852) 2802 8065
ATTN.: MR. FABRICE JACOB/MR. ANTOINE
FOSSORIER
or to such other address or facsimile number at the party
concerned may have been notified to the other party pursuant to
this Clause and may be given by sending it by hand to such
address or by facsimile transmission to such facsimile number, or
to such other address or facsimile number as the party concerned
may have notified to the other party in accordance with this
Clause. Such notice shall be deemed to be served on the day of
delivery or facsimile transmission (or, if the day of delivery or
transmission is not a Business Day or if the delivery or
transmission is made after 5:00 p.m. Hong Kong time, deemed to be
served on the immediately following Business Day), or if sooner
upon acknowledgement of receipt by or on behalf of the party to
which it is addressed.
13. COSTS AND EXPENSES
------------------
The legal costs incurred by the Funds in connection with the
preparation and negotiation of this Agreement shall be borne by
the Company.
14. GOVERNING LAW AND JURISDICTION
------------------------------
14.1 This Agreement shall be governed by and construed in accordance
with the laws of Hong Kong and each party hereby submits to the
non-exclusive jurisdiction of the courts of Hong Kong as regards
any claim or matter arising under this Agreement.
14.2 Each of the parties hereto irrevocably agrees for the benefit of
each of the Investors that the courts of Hong Kong shall have
jurisdiction to hear and
22
<PAGE>
determine any suit, action or proceeding, and to settle any
disputes, which may arise out of or in connection with this
Agreement and, for such purposes, irrevocably submits to the
jurisdiction of such courts.
14.3 Each of the parties hereto irrevocably waives any objection it
might now or hereinafter have to the courts referred to in sub-
Clause 14.1 above nominated as the forum to hear and determine
any suit, action or proceeding, and to settle any disputes, which
may arise out of or in connection with this Agreement and agrees
not to claim that any such courts is not a convenient or
appropriate forum.
14.4 Each of the Company, SAI, ACL and SPC hereby irrevocably appoints
CIBHL (details of which are set out below) and CIBHL hereby
accepts such appointment as each of their process agent to
receive and acknowledge on its behalf service of any writ,
summons, order, judgement or other notice of legal process in
Hong Kong. Each of GML, WCIT, MC Partners and CI 2000 also hereby
irrevocably appoints the persons set out against its name below
to be its process agent:-
Company : China International Bearing Holdings Limited
------- 19th Floor, First Pacific Bank Centre,
1-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
ATTN.: MR. BILLY KAN / MR. ROGER LI
SAI : China International Bearing Holdings Limited
--- 19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
ATTN.: MR. BILLY KAN / MR. ROGER LI
ACL : China International Bearing Holdings Limited
--- 19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
ATTN.: MR. BILLY KAN / MR. ROGER LI
SPC : China International Bearing Holdings Limited
--- 19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
ATTN.: MR. BILLY KAN / MR. ROGER LI
23
<PAGE>
GML : HPEM, 10th Floor, Citibank Tower,
--- 3 Garden Road, Hong Kong
Tel: (852) 2845 7688
Fax: (852) 2845 9992
ATTN.: MR. GEORGE RAFFINI / MR. BRIAN LAW
WCIT : HPEM, 10th Floor, Citibank Tower,
---- 3 Garden Road, Hong Kong
Tel: (852) 2845 7688
Fax: (852) 2845 9992
ATTN.: MR. GEORGE RAFFINI / MR. BRIAN LAW
MC Partners : MC Capital Asia Pte Limited
----------- Unit No. 1002 C/D 10th Floor,
Tower 1, Admiralty Centre,
10 Harcourt Road, Hong Kong
Tel: (852) 2866 3393
Fax: (852) 2866 2693
ATTN.: MR. YUJI KOMIYA/MR. TATSUYA KUROYANAGI
CI 2000 : Banque Worms, Hong Kong Branch
------- 39th Floor, Central Plaza
18 Harbour Road, Hong Kong
Tel: (852) 2802 8382
Fax: (852) 2802 8065
ATTN.: MR. FABRICE JACOB/MR. ANTOINE FOSSORIE
14.5 Each of the parties hereby consent generally in respect of any
legal action or proceeding arise out of or in connection with
this Agreement to the giving of any relief or any issue of any
process in connection with such action or proceeding including,
without limitation, the making, enforcement or execution against
any property whatsoever (irrespective of its use or intended use)
of any order or judgement which may be made or given in such
action or proceeding.
15. ANNOUNCEMENTS AND CONFIDENTIALITY
---------------------------------
15.1 Subject to sub-Clause 15.2 below, no announcement or disclosure
concerning the Agreement or any ancillary matter nor concerning
any information of a confidential or proprietary nature of ACL or
any member of the SAI Group shall be made by any parties hereto
without the prior written approval of the other parties, any such
approval not to be unreasonably withheld or delayed.
24
<PAGE>
15.2 Either party may disclose information concerning this Agreement
or any ancillary matter which would otherwise be confidential if
and to the extent:
(i) required by the law of any relevant jurisdiction;
(ii) required by existing contractual obligations;
(iii) required by any securities exchange or regulatory or
governmental body to which either party is subject or
submits, wherever situated, whether or not the requirement
for information has the force of law;
(iv) required to vest the full benefit of the Agreement in the
other either parties;
(v) disclosed to the professional advisors, auditors and
bankers of each party;
(vi) the information has come into the public domain through no
fault of that party; or
(vii) the other party has given prior written approval to the
disclosure, such approval not to be unreasonably withheld
or delayed
in which case the party concerned shall take all such steps as
may be reasonable and practicable in the circumstances to agree
the contents of such announcement with the other parties before
making such announcement PROVIDED THAT any such announcement
shall be made only after consultation with or notice to the other
party.
15.3 Subject to sub-Clause 15.2, each party shall treat as strictly
confidential all information received or obtained as a result of
entering into or performing the Agreement which relates to the
provisions of the Agreement, the negotiations relating to the
Agreement, the subject matter of the Agreement or the other
parties.
15.4 Notwithstanding any termination of this Agreement, the
restrictions contained in this Clause shall continue to apply
after such termination for a period of five years thereafter.
16. GENERAL PROVISIONS
------------------
16.1 As regards any date or period time shall be of the essence of
this Agreement.
25
<PAGE>
16.2 This Agreement shall be binding on and enure for the benefit of
the successors of each of the parties and shall not be
assignable.
16.3 The exercise of or failure to exercise any right to remedy in
respect of any breach of this Agreement shall not, save as
provided herein, constitute a waiver by such party of any other
right or remedy it may have in respect of that breach.
16.4 Any right or remedy conferred by this Agreement on any party for
breach of this Agreement (including without limitation the breach
of any representations and warranties) shall be in addition and
without prejudice to all other rights and remedies available to
it in respect of that breach.
16.5 This Agreement constitutes the entire agreement between the
parties with respect to its subject matter (neither party having
relied on any representation or warranty made by the other party
which is not contained in this Agreement) and no variation of
this Agreement shall be effective unless made in writing and
signed by all of the parties.
16.6 This Agreement supersedes all and any previous agreements,
arrangement or understanding between the parties relating to the
matters referred to in this Agreement and all such previous
agreements, understanding or arrangements (if any) shall cease
and determine with effect from this date hereof.
16.7 If at any time any provision of this Agreement is or becomes
illegal, void or unenforceable in any respect, the remaining
provisions hereof shall in no way be affected or impaired
thereby.
17. COUNTERPARTS
------------
This Agreement may be executed by the parties hereto in any
number of counterparts and on separate counterparts, each of
which when so executed shall be deemed an original but all of
which shall constitute one and the same instrument and is binding
on all parties.
AS WITNESS whereof this Agreement has been duly executed on the date
first above written.
26
<PAGE>
SCHEDULE 1
----------------------------------
PART I
--------------------------------
I. CORPORATE CHART
---------------
[CORPORATE CHART APPEARS HERE]
* Subject to qualification contained in Clause 4.2 of Schedule 3
27
<PAGE>
II. OTHER CORPORATE DETAILS
SUNBASE ASIA, INC.
------------------
Date of Incorporation : 21st September, 1994
Place of Incorporation : State of Nevada, United States
Registered Office : 1280 Terminal Way,
Suite 3, Reno,
Nevada 89502,
United States
Registered Number : 14740-94
Authorised Share Capital : COMMON:
-------
50,000,000 shares of US$0.001 each
PREFERRED:
----------
25,000,000 shares of US$0.001 each
Issued Share Capital : COMMON:
-------
12,711,104 shares of US$0.001 each
PREFERRED:
----------
Series A Preferred Stock
------------------------
36 shares
Series B Preferred Stock
------------------------
6,800 shares
Shareholders : Asean Capital Ltd. : 80.69%
Public: 19.31%
Directors : Gunter Gao
Billy Kan
William Mckay
Roger Li Yuen Fai
Linda Yang
Franco Ho Cho Hing
Philip Yuen
Secretary : Davis Lai Kwun Fai
28
<PAGE>
CHINA BEARING HOLDINGS LIMITED
------------------------------
Date of Incorporation : 10th January, 1994
Place of Incorporation : Bermuda
Registered Office : Cedar House,
41 Cedar Avenue,
Hamilton HM 12,
Bermuda
Registered Number : N/A
Authorised Share Capital : 1,200,000 shares of US$0.01 each
Issued Share Capital : 1,200,000 shares of US$0.01 each
Shareholders : 100% held by Sunbase Asia
Directors : Gunter Gao
Linda Yang
Peter Bubenzer
Judith Collis
Billy Kan
Roger Li
Secretary : Linda Yang
29
<PAGE>
CHINA INTERNATIONAL BEARING (HOLDINGS) LIMITED
----------------------------------------------
Date of Incorporation : 23rd June, 1993
Place of Incorporation : Hong Kong
Registered Office : 19th Floor, First Pacific Bank
Centre 51-57 Gloucester Road
Wanchai, Hong Kong
Registered Number : 429038
Authorised Share Capital : HK$10,000
Issued Share Capital : 2 shares of HK$1.00 each
Shareholders : 100% held by China Bearing
Holdings Limited
Directors : Gunter Gao
Linda Yang
Billy Kan
Roger Li
Secretary : Astrine Limited
30
<PAGE>
HARBIN SUNBASE DEVELOPMENT COMPANY LIMITED
------------------------------------------
Date of Incorporation : 28th January, 1993
Place of Incorporation : China
Registered Office : 158 Zhong Shan Road,
Harbin, China
Registered Number : (1993) 539
Authorised Capital : RMB50,000,000
Capital Contribution : RMB50,000,000
Shareholders : China International Bearing
(Holdings) Limited: 99%
Harbin Hazhou Bearing
Distributing Company : 1%
Directors : Gunter Gao
Linda Yang
Roger Li Yuen Fai
Peter Lam Chi Keong
Davis Lai Kwun Fai
Bi Qiu-Yuan
Mok Chei Wai
Secretary : N/A
31
<PAGE>
HARBIN XINHENGLI DEVELOPMENT CO. LTD.
-------------------------------------
Date of Incorporation : 18th September, 1993
Place of Incorporation : China
Registered Office : 160 Zhong Shan Road,
Harbin, China
Registered Number : Harbin BR711
Authorised Capital : RMB50,000,000
Capital Contribution : RMB50,000,000
Shareholders : China International Bearing (Holdings)
Limited: 99.9% Harbin Everising
Construction and Development Co. Ltd.:
1%
Directors : Gunter Gao
Linda Yang
Davis Lai Kwun Fai
Liu Guang Zhi
Mok Chei Wai
Secretary : N/A
32
<PAGE>
HARBIN BEARING COMPANY LIMITED
--------------------------------------------
Date of Incorporation : 28th December, 1993
Place of Incorporation : China
Registered Office : 14 Hongqi Street,
Harbin, China
Registered Number : 12802473-0
Authorised Capital : RMB300,000,000
Capital Contribution : RMB300,000,000
Shareholders : Harbin Xinhengli Development
Co. Ltd. 41.57%
Harbin Sunbase Development Co. Ltd.
10%
Harbin Bearing Holdings Company:
33.33%
Employees: 15%
Harbin Xin Da Di Electrical Machinery
Equipment Company: 0.1%
Directors : Gunter Gao
Linda Yang
Lai Kwun Fai
Ma Ji Bo
Shun Hong Bin
Zhang Zheng Bin
An Fong Ming
Ye Ruan
Mok Chei Wai
Secretary : N/A
33
<PAGE>
SMITH ACQUISITION COMPANY, INC. DBA
-----------------------------------
SOUTHWEST PRODUCTS COMPANY
--------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Date of
Incorporation : 20th March, 1990
Place of
Incorporation : State of California,
United States
Registered
Office : 2240 Buena Vista,
Irwindale, CA 91706,
United States
Registered
Number : 3855488-7
Authorised
Capital : Share Common:
10,000,000 shares of US$0.01 each
Preferred : 4,000,000 shares with no par value
Issued Share
Capital : Common:
US$3,400,000
Shareholders : 100% held by Sunbase Asia
Directors : Billy Kan
Roger Li
William R. Mckay
Dickens Chang
Peter Lam Chi Keong
Secretary : William R. Mckay
</TABLE>
34
<PAGE>
SHANGHAI SOUTHWEST BEARING COMPANY
----------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Date of
Incorporation : 2nd August, 1994
Place of
Incorporation : China
Registered
Office : 937 Zhongshan Nan Yi Road
Shanghai, China
Registered
Number : Shanghai BR5202
Authorised
Capital : US$3,600,000
Capital
Contribution : US$3,600,000
Shareholders
Factory: : Shanghai Hongxing Bearing
72.22%
Southwest Products
Company:
27.78%
Directors : Yang Shu Jie
: (others to be appointed later) (Note:
according to Joint Venture agreement, 4
directors are nominated from Shanghai
Hongxing and 2 directors are nominated
from Southwest Products)
Secretary : N/A
</TABLE>
35
<PAGE>
PART III
--------
STATUS AND CHARACTERISTICS OF THE SECURITIES ISSUED BY SAI
----------------------------------------------------------
1. SERIES A WARRANTS
-----------------
SAI has outstanding an aggregate of 10,392,167 Series A Warrants
(the "WARRANTS") to acquire an aggregate of 148,459.52 shares of
SAI Common Stock. The Warrants expire on June 30, 1998. For each
share of Common Stock to be purchased, the holder is required to
deliver 70 Warrants together with an exercise price per share of
Common Stock of $175.00.
2 SERIES A PREFERRED STOCK
------------------------
The holders of the Series A Preferred Stock have the right to
convert each share of the Series A Preferred Stock into 100,000
shares of Common Stock.
3. SERIES B PREFERRED STOCK
------------------------
To the extent that the holders do not elect to redeem the shares
of Series B Preferred Stock in connection with a public offering
of SAI Common Stock, the Series B Preferred Stock is convertible
into Common Stock on the basis of 100 shares of Common Stock for
each share of Series B Preferred Stock. If, by the date which is
two years after the date on which the shares of Series B
Preferred Stock are distributed to the holders, such holders have
not been able to redeem their shares because SAI has not made a
public offering as specified, the Series B Preferred Stock will
be automatically converted into shares of Common Stock on the
following basis: On the first business day following the
expiration of the two year period, each share is to be
automatically converted into that number of shares of Common
Stock that equals $500.00 divided by the lesser of $5.00 or the
average closing price of SAI Common Stock computed by taking the
then most recent 60 consecutive trading days when SAI Common
Stock is traded at a minimum volume of 2,000 shares per day for
45 of those 60 consecutive trading days.
36
<PAGE>
SCHEDULE 2
----------
FORM OF CERTIFICATE
-------------------
[ ] HOLDINGS LIMITED
(INCORPORATED IN BERMUDA WITH LIMITED LIABILITY)
[US$ ] CONVERTIBLE DEBENTURE
Issued pursuant to the Memorandum of Association and Bye-laws of [_]
Holdings Limited and a resolution of its Board of Directors passed on
[_], 199[_].
THIS IS TO CERTIFY that [_] whose registered office is situate at [_]
is the registered holder (the "DEBENTUREHOLDER") of the above-
mentioned Convertible Debenture (the "DEBENTURE"). The Debenture is
issued with the benefit of and subject to the terms and conditions
attached hereto which shall form an integral part of this Certificate.
GIVEN under the Seal of [_] Holdings Limited this day of
_____________, 199[_].
__________________________________________
Director
__________________________________________
Secretary / Director
The Debenture cannot be transferred to bearer on delivery and is only
transferable to the extent permitted by Condition 4 of the terms and
conditions thereof. This Certificate must be delivered to the
secretary of [_] Holdings Limited for cancellation and reissue of an
appropriate certificate in the event of any such transfer.
The Debenture has not been registered under the U.S. Securities Act of
1933, as amended (the "SECURITIES ACT"), and may not be exercised by
or on behalf of U.S. persons unless registered or an exemption from
registration is available.
37
<PAGE>
TERMS AND CONDITIONS OF THE DEBENTURES
--------------------------------------
The Debenture shall be held subject to and with the benefit of the
terms and conditions set out below. Expressions defined in the
Subscription Agreement dated [ ], 199[6] (the "SUBSCRIPTION
AGREEMENT") between Asean Capital Limited, China International Bearing
Holdings Limited, Sunbase Asia, Inc., Smith Acquisition Company, Inc.,
Glory Mansion Limited, Wardley China Investment Trust, MC Partners
Asia Limited, Chine Investissement 2000 and China Bearing Holdings
Limited (the "COMPANY") relating to the Debenture shall bear the same
meaning in this Certificate.
1. PERIOD
------
Subject as provided herein, the outstanding principal amount of
the Debentures shall be converted into Shares and/or shall be
repaid subject to and in accordance with the terms of the
Debentures on the third anniversary of the date of issue of the
Debentures (the "MATURITY DATE").
2. STATUS, FORM, DENOMINATION AND TITLE
------------------------------------
(A) STATUS
The obligations of the Company arising under the Debentures
constitute general, unsecured obligations of the Company and
rank, and will rank equally among themselves and pari passu with
all other present and future unsecured and unsubordinated
obligations of the Company except for obligations accorded
preference by mandatory provisions of applicable law. No
application will be made for a listing of the Debentures.
(B) FORM AND DENOMINATION
The Debentures are issued in registered form in the denomination
of US$250,000 each. Debenture certificate(s) (each a
"CERTIFICATE") will be issued to each Debentureholder in respect
of its registered holding(s) of Debenture(s). Each Debenture and
each Certificate will be numbered serially with an identifying
number which will be recorded on the relevant Certificate and in
the register of Debentureholder kept by the Company.
(C) TITLE
Title to the Debentures passes only by registration in the
register of Debentureholders. The holder of any Debenture will
(except as otherwise required by law) be treated as its absolute
owner for all purposes (whether or not it is overdue and
regardless of any notice of ownership, trust or any interest in
it or
38
<PAGE>
any writing on, or the theft or loss of, the Certificate issued
in respect of it) and no person will be liable for so treating
the holder.
3. NEGATIVE PLEDGE
---------------
The Company, SAI, CIBHL, SPC and ACL have given in the
Subscription Agreement certain negative pledges over creation of
Securities Interest (as defined in the Subscription Agreement)
for so long as any of the Debentures remains outstanding.
4. TRANSFERS OF DEBENTURES; ISSUE OF CERTIFICATES
----------------------------------------------
(A) TRANSFER
(i) No Debentures may be transferred by any Debentureholders
unless such transfer is in accordance with the provisions
of (A)(ii) below.
(ii) Debentures held by any of the Investors may be transferred
at any time provided that:
(a) such proposed transfer is in respect of half of or
the entire amount of the principal amount of the
Debentures then outstanding and held by that Investor
or in the case of the Investor being a Fund, the
Funds taken together in aggregate. No other transfer
of any other amounts shall be allowed unless with the
approval of the Company;
(b) the Certificate(s) evidencing the Debenture(s) with
the form of transfer duly completed and signed shall
have been lodged with the specified office of the
Company in accordance with the provisions at (iii)
below; and
(c) (in the event of a transfer by any of the Funds only)
if the proposed transfer is to a transferee outside
the HSBC Group (as defined below) such transfer must
specify that the transferee shall not have assigned
to it nor in any way enjoy or benefit from the
various rights relating to management hitherto
enjoyed by and granted to the Funds pursuant to the
Subscription agreement.
(iii) (a) the form of transfer shall be in a form previously
agreed between the Company and the Debentureholders
and shall be executed under the hand of the
transferor and the transferee (or their duly
authorised representatives) or, where either the
transferor or
39
<PAGE>
transferee is a corporation, under its common seal
(if any) and under the hand of one of its officers
duly authorised in writing or otherwise executed by a
duly authorised officer thereof. In this Condition
"transferor" shall, where the context permits or
requires, include joint transferors or can be
construed accordingly.
(b) the Certificate of the Debenture must be delivered
for registration to the Company accompanied by (i) a
duly executed form of transfer; (ii) in the case of
the execution of a form of transfer on behalf of a
corporation by its officers, the authority of that
person or those persons to do so; (iii) such other
evidence as the Company may reasonably require if the
form of transfer is executed by some other person on
behalf of the Debentureholder; and (iv) such other
evidence as the Company may reasonably require to
support that the conditions and requirements of this
Condition are satisfied.
(iv) For so long as neither the Debentures nor the Conversion
Shares have been registered under The Securities Act of
1933 or under the securities laws of any other
jurisdiction, the Debentures and the Conversion Shares
must not be sold unless such securities are registered
under the Securities Act of 1933, or an exemption from the
registration requirements of the Securities Act of 1933 is
available. SAI may cause the certificate or certificates
evidencing all or any of the Conversion Shares to bear a
legend to that effect.
(v) For the purposes of this Condition 4(A), "HSBC GROUP"
shall mean any company or entity which is at any time a
member of the Hongkong Bank Group or which (or the holding
company of which) has its operation managed by a member of
the Hongkong Bank Group and "HONGKONG BANK GROUP" means
HSBC Holdings PLC and its subsidiaries.
(B) DELIVERY OF NEW CERTIFICATES
Subject to compliance with applicable securities laws and
regulations, the Company shall, within 7 Business Days of receipt
of such documents from the Debentureholder, cancel the existing
Certificate and issue a new certificate under the seal of the
Company, in favour of the transferee or assignee as applicable.
Where only part of a principal amount (being that of one or more
Debentures) of the Debentures in respect of which a Certificate
is issued is to be transferred, converted or redeemed, a new
Certificate in respect of the Debenture not so transferred,
converted or redeemed will, within three (3) Business Days of
delivery of the original Certificate to the Company be available
for collection by the Debentureholders.
40
<PAGE>
(C) FORMALITIES FREE OF CHARGE
Registration of transfer of Debentures will be effected without
charge by or on behalf of the Company, but upon payment (or the
giving of such indemnity as the Company may require) in respect
of any tax or other governmental charges which may be imposed in
relation to such transfer.
(D) For the purpose of this Condition, any change in:
(i) the beneficial ownership of the Debentureholder (whether or
not the registered holder of the Debenture is changed); or
(ii) the ultimate control of the Debentureholder
shall be regarded as a transfer of the Debentures, and the
Debentureholder shall procure that the conditions, requirements
and other provisions regarding transfer under this Condition
shall be followed and complied with by the beneficial owner of
the Debentures and by its ultimate controller and ultimate
beneficial shareholder accordingly.
5. INTEREST
--------
(A) Subject to Condition 5(B) below, the Debentures will bear
interest from the date of issue on the principal amount of the
Debentures outstanding from time to time at the rate of the
higher of (i) 5 per cent. per annum (net of withholding tax, if
applicable) and (ii) such percentage of the dividend yield
calculated by reference to dividing the annual dividend declared
per Share by the Conversion Price. The interest will, subject as
provided herein, be payable by the Company quarterly in arrears
on dates falling three months, six months, nine months, one year,
one year and three months, one year and six months, one year and
nine months and two years, two years and three months, two years
and six months, two years and nine months after the date of issue
of the Debenture.
(B) In the event that the Debentureholder has converted part or whole
of the principal amount of the Debentures into Shares, the
Debentureholder shall be entitled to interest in respect of such
part or whole of the principal amount for the period from the
last preceding interest payment date (or the date of issue of the
Debenture, as the case may be) up to the Conversion Date
concerned.
41
<PAGE>
6. PAYMENTS
--------
(A) Payment of the interest and principal (if any) in respect of the
Debentures shall be made on the due dates into such bank account
as the Debentureholder may notify the Company in writing from
time to time. All payments by the Company shall be made in United
States dollars.
(B) If the due date for payment of any amount in respect of the
Debentures is not a Payment Business Day, the Debentureholder
will be entitled to payment on the next following Payment
Business Day in the same manner together with interest accrued in
respect of any such delay.
7. CONVERSION
----------
(A) CONVERSION RIGHT
(a) The Conversion Right: Subject as hereinafter provided, the
Debentureholders have the right to convert the whole or part of
the principal amount of the Debentures into Shares at any time
and from time to time, from the date of issue of the Debenture up
to the close of business on the Maturity Date in amounts of not
less than US$250,000 (and in integral multiples thereof) on each
conversion. The Company shall procure that such Shares be issued
by SAI upon the exercise of such right hereunder.
(b) Number of Shares: The number of Shares to be issued on conversion
of a Debenture will be determined by dividing the principal
amount of the Debenture to be converted by the Conversion Price
in effect at the Conversion Date (both as hereinafter defined).
On conversion the right of the converting Debentureholder to
repayment of the principal amount of the Debentures being
converted shall be extinguished and released, and in
consideration and in exchange therefor SAI shall allot and issue
Shares credited as paid up in full as provided in this Condition.
A Conversion Right may be exercised in respect of one or more
Debentures. If more than one Debenture held by the same holder is
converted at any one time by the same holder, the number of
Shares to be issued upon such conversion will be calculated on
the basis of the aggregate principal amount of the Debentures to
be converted.
(c) Fractions of Shares: Fractions of Shares will not be issued on
conversion. Notwithstanding the foregoing, SAI will upon
conversion of Debenture pay in cash in United States dollars a
sum equal to such portion of the principal amount of the
Debenture or Debentures evidenced by the Certificate deposited in
connection with the exercise of Conversion Rights as corresponds
to any fraction of a Share not issued as a result if such sum
exceeds US$10.
42
<PAGE>
(d) Conversion Price: The price at which Shares will be issued upon
conversion (the "CONVERSION PRICE") will initially be US$5.00 per
Share but will be subject to adjustment in the manner provided in
this Condition.
(e) Meaning of "Shares": As used in these Conditions, the expression
"SHARES" means shares of SAI listed and traded on NASDAQ or
shares of any class or classes resulting from any subdivision,
consolidation or re-classification of those shares, which as
between themselves have no preference in respect of dividends or
of amounts payable in the event of any voluntary or involuntary
liquidation or dissolution of SAI.
(f) Conversion Date: The conversion date in respect of a Debenture
must fall at a time when the Conversion Right attaching to the
Debenture is expressed in these Conditions to be exercisable and
will be deemed to be the Business Day immediately following the
date of the surrender of the Certificate in respect of such
Debenture and the delivery of such Conversion Notice (as defined
below).
(g) Status of Conversion Shares: The Shares issued upon conversion of
the Debenture will in all respects rank pari passu with the
Shares in issue on the relevant Registration Date (as defined
below). Save as set out in these Conditions, a holder of Shares
issued on conversion of Debenture shall not be entitled to any
rights the record date for which precedes the relevant
Registration Date.
(B) CONVERSION PROCEDURE
(a) Conversion Notice: To exercise the Conversion Right attaching to
any Debenture, the holder thereof must complete, execute and
deposit during normal business hours at the specified office of
the Company a notice of conversion (a "CONVERSION NOTICE"). The
Conversion Notice must state a certification as contained in
Schedule 6 of the Subscription Agreement.
(b) Registration: As soon as practicable, and in any event not later
than 7 days after the Conversion Date, SAI will, in the case of
Debentures converted on exercise of the Conversion Right and in
respect of which a duly completed Conversion Notice has been
delivered and the relevant Certificate and amounts payable by the
relevant Debentureholder deposited as required, register the
person or persons designated for the purpose in the Conversion
Notice as holder(s) of the relevant number of Shares in its Share
register and will cause its share registrar to mail, such
certificate or certificates to the person and at the place
specified in the Conversion Notice, together with any other
securities, property or cash required to be delivered upon
conversion and such assignments and other documents (if any) as
may be required by law to effect the transfer thereof. The person
or persons will become the holder of record of the number of
Shares issuable upon
43
<PAGE>
conversion with effect from the date he is or they are registered
as such in the SAI's register of members (the "REGISTRATION
DATE").
(c) Subsequent Adjustments: Debentures which are converted will be
cancelled by removal of the Debentureholder's name from the
register of Debentureholders on the relevant Registration Date.
If the Conversion Price is adjusted with effect (retroactively or
otherwise) from a date falling on or before the Registration Date
of any Shares issued on conversion of a Debenture the
Debentureholder's entitlement to which was arrived at on the
basis of the unadjusted Conversion Price, SAI will procure that
the provisions of this sub-paragraph shall be applied, mutatis
mutandis, to the number of additional Shares which would have
been required to be issued on conversion of such Debenture if the
relevant adjustment had been given effect to as at the Conversion
Date.
(C) ADJUSTMENTS IN CONVERSION PRICE
The Conversion Price shall from time to time be adjusted in
accordance with the following relevant provisions and if the
event giving rise to any such adjustment shall be such as would
be capable of falling within more than one of the following sub-
paragraphs, it shall fall within the first of the applicable
paragraphs to the exclusion of the remaining paragraphs:
(a) If and whenever the SAI Shares by reason of any
consolidation or sub- division become of a different nominal
amount (par value), the Conversion Price in force
immediately prior thereto shall be adjusted by multiplying
it by the revised nominal amount (par value) and dividing
the result by the former nominal amount(par value). Each
such adjustment shall be effective from the close of
business in Hong Kong on the day immediately preceding the
date on which the consolidation or sub-division becomes
effective.
(b) If and whenever SAI shall issue any SAI Shares (except if
such issue is made as a result of an election to receive
scrip instead of cash dividend provided that if such scrip
is valued at the closing market price of the SAI Share on
the date the dividend is declared) credited as fully paid by
way of capitalisation of profits or reserves (including any
share premium account and capital redemption reserve fund),
the Conversion Price in force immediately prior to such
issue shall be adjusted by multiplying it by the aggregate
nominal amount of the issued and paid up SAI Shares
immediately before such issue and dividing the result by the
sum of such aggregate nominal amount and the aggregate
nominal amount of the SAI Shares issued in such
capitalisation. Each such adjustment shall be effective (if
appropriate retroactively) from the commencement of the day
next following the record date for such issue.
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<PAGE>
(c) If and whenever SAI shall make any Capital Distribution (as
defined below) to holders of SAI Shares (in their capacity
as such) (whether on a reduction of capital or otherwise)
the Conversion Price in force immediately prior to such
distribution shall be adjusted by multiplying it by the
following fraction:-
A - B
-----
A
where:
A = the closing market price (as defined below) per
SAI Share on the dealing date immediately
preceding the date on which the Capital
Distribution is publicly announced or (failing any
such announcement) the day preceding the date of
the Capital Distribution; and
B = the fair market value on the day of such
announcement or if no such announcement was made
(as the case may require) the day before the date
of the Capital Distribution, as determined by an
independent merchant bank or such professional
adviser jointly approved by SAI and the Majority
Investors of that portion of the Capital
Distribution or of such rights which is
attributable to one Share,
such adjustment shall be effective (if appropriate
retroactively) from the commencement of the day next
following the record date for the Capital Distribution.
(d) If and whenever SAI shall offer to holders of SAI Shares new
Shares for subscription by way of rights, or shall grant to
holders of Shares any options or warrants to subscribe for
new SAI Shares, at a price which is less than the lower of
the market price and the Conversion Price at the date of the
announcement of the terms of the offer or grant, the
Conversion Price shall be adjusted by multiplying the
Conversion Price in force immediately before the date of the
announcement of such offer or grant by the following
fraction:-
C + D
-----
C + E
where:
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<PAGE>
C = the number of SAI Shares in issue immediately
before the date of such announcement;
D = the number of SAI Shares which the aggregate of
the two following amounts would purchase at the
lower of such market price and the Conversion
Price:
(a) the total amount (if any) payable for the
rights, options or warrants being offered or
granted; and
(b) the total amount payable for all of the new
SAI Shares being offered for subscription or
comprised in the options or warrants being
granted; and
E = the aggregate number of SAI Shares offered for
subscription or comprised in the options or
warrants being granted.
Such adjustment shall become effective (if appropriate
retroactively) from the commencement of the day next
following the record date for the relevant offer or grant.
(e) (aa) If and whenever SAI shall issue wholly for cash
any securities which by their terms are
convertible into or exchangeable for or carry
rights of subscription for new SAI Shares, and the
total Effective Consideration per SAI Share (as
defined below) initially receivable for such
securities is less than the lower of the market
price and the Conversion Price at the date of the
announcement of the terms of issue of such
securities, the Conversion Price shall be adjusted
by multiplying the Conversion Price in force
immediately prior to the issue by the following
fraction:
F + G
-----
F + H
where:
F = the number of SAI Shares in issue
immediately before the date of the issue;
G = the number of SAI Shares which the total
Effective Consideration receivable for
the securities issued would purchase at
the lower
46
<PAGE>
of such market price and the Conversion
Price; and
H = the number of SAI Shares to be issued upon
conversion or exchange of, or the exercise
of the subscription rights conferred by,
such securities at the initial conversion
or exchange rate or subscription price.
Such adjustment shall become effective (if
appropriate retrospectively) from the close of
business in Hong Kong on the Business Day next
preceding whichever is the earlier of the date on
which the issue is announced and the date on which
the issuer determines the conversion or exchange
rate or subscription price.
(bb) If and whenever the rights of conversion or
exchange or subscription attached to any such
securities as are mentioned in section (aa) of
this sub- paragraph (e) are modified so that the
total Effective Consideration per SAI Share
initially receivable for such securities shall be
less than the lower of the market price and the
Conversion Price at the date of announcement of
the proposal to modify such rights of conversion
or exchange or subscription, the Conversion Price
shall be adjusted by multiplying the Conversion
Price in force immediately prior to such
modification the following fraction:
I + J
I + K
where:
I = the number of SAI Shares in issue immediately
before the date of such modification;
J = the number of SAI Shares which the total Effective
Consideration receivable for the securities issued at
the modified conversion or exchange price would
purchase at the lower of such market price and
Conversion Price; and
K = is the number of SAI Shares in issue immediately
before such date of modification plus the number of SAI
Shares to be issued
47
<PAGE>
upon conversion or exchange of or the exercise of the
subscription rights conferred by such securities at
the modified conversion or exchange rate or
subscription price.
Such adjustment shall become effective as at the date
upon which such modification shall take effect. A
right of conversion or exchange or subscription shall
not be treated as modified for the foregoing purposes
where it is adjusted to take account of rights or
capitalisation issues and other events nominally
giving rise to adjustment of conversion or exchange
terms.
For the purposes of this sub-paragraph (e), the "TOTAL
EFFECTIVE CONSIDERATION" receivable for the securities
issued shall be deemed to be the consideration
receivable by SAI for any such securities plus the
additional minimum consideration (if any) to be
received by SAI upon (and assuming) the conversion or
exchange thereof or the exercise of such subscription
rights, and the total Effective Consideration per SAI
Share initially receivable for such securities shall
be such aggregate consideration divided by the number
of SAI Shares to be issued upon (and assuming) such
conversion or exchange at the initial conversion or
exchange rate or the exercise of such subscription
rights at the initial subscription price, in each case
without any deduction for any commissions, discounts
or expenses paid, allowed or incurred in connection
with the issue.
(f) If and whenever SAI shall issue wholly for cash any
SAI Shares at a price per SAI Share which is less than
the lower of the market price and the Conversion Price
at the date of the announcement of the terms of such
issue, the Conversion Price shall be adjusted by
multiplying the Conversion Price in force immediately
before the date of such announcement by the following
fraction:-
L + M
-----
L + N
where:
L = the number of SAI Shares in issue immediately
before the date of such announcement;
M = the number of SAI Shares which the aggregate
amount payable for the issue would purchase
at the
48
<PAGE>
lower of such market price and the
Conversion Price; and
N = the number of SAI Shares in issue immediately
before the date of such announcement plus the
number of SAI Shares so issued.
Such adjustment shall become effective on the date of
the issue.
(g) If and whenever the cumulative Audited Earnings Per
Share ("EPS") for any two consecutive financial years
commencing with the financial year ending 1996 and
ending with the financial year ending 1998 are less
than the corresponding management's projection of
cumulative EPS for such years as stated below ("MP"),
the Conversion Price shall be adjusted in accordance
with the following formula:-
MP - EPS
Adjusted Conversion Price=US$5.00* [1 ]
MP
*(Subject to adjustment pursuant to this Condition
7(C)(a) to (f) inclusive)
where:
MP : MP\\1\\ + MP\\2\\ OR MP\\2\\ + MP\\3\\
MP\\1\\ : 1996 = US$0.72
MP\\2\\ : 1997 = US$1.07
MP\\3\\ : 1998 = US$1.61
and EPS shall be the EPS for the corresponding financial
years.
Provided Always:
(i) the Company shall present a certificate showing the
calculation and the adjustment to be effected within 7
Business Days from the date the audited accounts of
SAI for the relevant financial year first becomes
available;
(ii) the adjustment occurring in this Condition 7(C)(g)
shall become effective on the 14th Business Day
following the day the audited accounts of SAI for the
relevant financial year first becomes available;
49
<PAGE>
(iii) for the avoidance of doubt, if the Conversion Price
has already been adjusted in 1998 in respect of the
two financial years ending 1996 and 1997 (the "FIRST
ADJUSTED PRICE") and the Conversion Price falls to be
further adjusted in 1999 in respect of the two
financial years ending 1997 and 1998 (the "SECOND
ADJUSTED PRICE"), the second adjustment mentioned
hereunder shall also be made on the basis of US$5.00
(as adjusted, if relevant, by any of the Condition
7(C)(a) to (f) inclusive); and
(iv) if two adjustments fall to be made by virtue of the
provisions of this Condition 7(C)(g), the Second
Adjusted Price shall prevail over the First Adjusted
Price whereupon the First Adjusted Price shall lapse
and be of no effect.
(D) DEFINITIONS AND EXCEPTIONS
(a) For the purpose of this Condition:-
"announcement" shall include the release of an announcement
to the press or the delivery or transmission by telephone,
telex or otherwise of an announcement to NASDAQ or the
relevant stock exchange and "date of announcement" shall
mean the date on which the announcement is first so
released, delivered or transmitted;
"Audited Earning per share or EPS" is defined as audited
earnings for the year minus or add back extraordinary items
as defined under International Accounting Standard, IAS8,
and adding back interest expenses on the Debenture divided
by the total weighted average number of Shares outstanding
on a fully diluted basis (including the number of Shares
that would have been issued had all the Debentures then
outstanding been converted);
"Capital Distribution" means non-cash dividend or other
distribution (other than any distribution in winding-up) in
cash or in specie;
"issue" shall include allot;
"market price" means the closing price of one SAI Share as
shown by the official list (or the equivalent thereof) of
NASDAQ for one or more board lots of SAI Shares on the day
on which the market price is to be ascertained;
"SAI Shares" means Shares and includes, for the purposes of
SAI Shares comprised in any issue or, distribution or grant
pursuant to this provision
50
<PAGE>
of any such Shares of the Company
as, when fully paid, will be SAI Shares;
"reserves" includes unappropriated profits; and
"rights" includes rights in whatsoever form issued.
(b) (i) Subject to (b)(ii) below, the provisions of
Condition 7(C) shall not apply to an issue of SAI
Shares or other securities of SAI wholly or partly
convertible into, or carrying rights to acquire,
SAI Shares to officers or employees of SAI Group
pursuant to an employee or executive share option
scheme for an aggregate of 2,500,000 SAI Shares as
set out in Schedule 5 of the Subscription
Agreement.
(ii) 2,050,000 SAI Shares out of 2,500,000 SAI Shares
must be issued and allotted to those persons and
upon such terms as set out in Schedule 5 hereof
and the balance of 450,000 SAI Shares must also be
granted by SAI's Compensation Committee and issued
and allotted pursuant to SAI's 1995 Option Plan at
a value not being less than the fair market value
of the SAI Shares on the date the options are
granted.
(iii) The provisions of Condition 7(C) shall also not
apply to the issue of Shares in connection with
the conversion of the Series B Preferred Stock as
described in Part III of Schedule 1 hereof.
(E) ADJUSTMENTS DETERMINATION
(a) On any adjustment if the relevant Conversion Price is not an
integral multiple of one US cent, such shall be rounded down
to the nearest US cent.
(b) No adjustment shall be made to the Conversion Price where
such adjustment (rounded down if applicable) would be less
than one per cent. of the Conversion Price then in effect.
Any adjustment not required to be made, and any amount by
which the Conversion Price has been rounded down, shall be
carried forward and taken into account in any subsequent
adjustments. Notice of any adjustment shall be given to
Debentureholders as soon as practicable after the
determination thereof. The Conversion Price may not be
reduced so that, on conversion of Debentures, Shares would
fall to be issued at a discount to their par value.
(c) Where more than one event which gives or may give rise to an
adjustment to the Conversion Price occurs within such a
short period of time that in
51
<PAGE>
the opinion of the Majority Investors the provisions at
Condition 7(C) would need to be operated subject to some
modification in order to give the intended result, such
modification shall be made to the operation of the
provisions at Condition 7(C) as may be advised by the
Majority Investors to be in their opinion appropriate in
order to give such intended result.
(d) No adjustment involving an increase in the Conversion Price
will be made, except in the case of a consolidation of the
Shares as referred to above or in the case of adjustment
under Condition 7(C)(g) above or in the case to correct an
error in a previous calculation of the Conversion Price.
(e) In any circumstances where any of the Debentureholders shall
not agree with the adjustment to the Conversion Price
whether as regards to the basis upon which adjustment has
made or as regards the effective date, the Majority
Investors may appoint an independent merchant bank or such
professional adviser jointly approved by SAI and the
Majority Investors to consider how the adjustment should be
appropriately done to reflect the relative interest of the
persons affected thereby and such determination shall modify
or nullify the adjustment accordingly.
(f) Whenever the Conversion Price falls to be adjusted, the
Company shall prepare such adjustments as soon as
practicable but in any event no later than 7 days after the
occurrence of the relevant adjustment event (except in
relation to an event occurring under Condition 7(C)(g)
hereunder in which case the provisions thereunder shall
apply) and give notice to the Debentureholders that the
Conversion Price has been adjusted and shall at all times
thereafter for so long as the Debentures remains outstanding
make available for inspection at the principal place of
business of the Company a copy of the certificate signed by
an independent director of SAI setting forth details of the
event giving rise to the adjustment.
8. PROCEDURE FOR CONVERSION
The Conversion Rights pursuant to Condition 7(A) may, subject as
provided herein, be exercised on any Business Day prior to
maturity of the Debenture by the Debentureholder delivering to
the principal place of business of the Company in Hong Kong a
written notice stating the intention of the Debentureholder to
convert and the address for the delivery of the share
certificates of the Conversion Shares pursuant to 7(B) together
with the Certificate. The Company shall be responsible for
payment of all taxes and stamp duty, issue and registration
duties (if any) and levies and charges (if any) arising on any
such conversion.
52
<PAGE>
9. REDEMPTION
10. UPON MATURITY
Unless previously redeemed or converted or purchased and
cancelled as provided herein, the Company will redeem each
Debenture on the Maturity Date at its principal amount
outstanding together with any accrued but unpaid interest
calculated up to and including the date of payment together with
an amount that would enable the Debentureholder to yield in
aggregate an internal rate of return ("IRR") of 12% per annum on
the costs of its investment. For this purpose, the internal rate
of return shall bear the same meaning as defined in Condition
11(C). Redemption upon maturity is mandatory and automatic
without service of any notice. The Company can not redeem the
Debentures in whole or in part at its option prior to the
Maturity Date.
(A) Upon the occurrence of an Event of Default
Upon the occurrence of an Event of Default, the Company shall
redeem the whole of or part of the Debentures as shall be
required by virtue by the Debentureholders in such manner as
specified in Condition 11 below.
(B) Upon the occurrence of certain event of adjustment
(a) In the event that an adjustment arising by virtue of an
event described in Condition 7(C)(g) occurs and such
adjustment would result in (i) the number of Shares that
would have been issued to the Funds in aggregate had
Conversion immediately taken place or (ii) the number of
Shares that would have been issued to any one of the
Investors had Conversion immediately taken place to exceed
20% of the Deemed Total Issued Share Capital of SAI
(including also for this purpose such number of Shares that
would have been issued upon Conversion of all of the
Debentures), that portion of the Debenture(s) representing
the excess of such Shares over such 20% ("THE EXCESS") (as
defined below) shall, at the option of the relevant
Debentureholder, be redeemed by the Company at its principal
amount outstanding together with any accrued but unpaid
interest calculated up to and including the date of payment
together with an amount that would enable the
Debentureholder to yield in aggregate an IRR (as defined
below) of 19.75% per annum. The Debentureholders shall
exercise this right by service of a notice on the Company
and the Company shall promptly make payment within 45 days
after receipt of such notice.
(b) For the purpose of this Condition, Excess shall be
calculated as follows:
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<PAGE>
Q (PIE) (R(PIE) S)
where:
Q = principal amount of the Debentures outstanding held
by the Funds or the Investor (not being a Fund) as
the case may be
R = Conversion Price, as adjusted by virtue of Condition
7(C)(g)
S = the number of Shares that need to be issued upon
conversion of the Debentures in order to give a
twenty percent (20%) holding by the Funds in
aggregate or the Investor (not being a Fund) as
the case may be of the Deemed Total Issued Share
Capital of SAI (including also for this purpose
such number of Shares that would have been issued
upon Conversion of all of the Debentures)
(D) All Debentures which are redeemed, converted or purchased by the
Company will forthwith be cancelled.
11. Protection of the Debentureholder
The Guarantors and ACL have undertaken certain matters in the
Subscription Agreement for the protection of the Debentureholders
for so long as any of the Debentures remains outstanding.
12. Events of default
(A) If any of the following events ("EVENT OF DEFAULTS") occurs
each of the Debentures shall automatically become
immediately due and payable in full by the Company at its
principal amount outstanding together with any accrued but
unpaid interest calculated up to and including the date of
payment together with an amount that would enable the
Debentureholder to yield in aggregate IRR on its cost of
investment of 19.75% per annum unless the Company shall have
received a notice from any of the Debentureholders to the
effect that such redemption shall only be in respect of part
of the Debentures held by that Debentureholder in which case
the amount payable hereunder shall only be in relation to
that part of the Debentures that Debentureholder wishes to
redeem.
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<PAGE>
(B) An Event of Default occurs when:-
(a) the listing of the Shares (as a class) on NASDAQ:-
(i) ceases;
(ii) is suspended for a continuous period of 90 days on each
of which NASDAQ is generally open for trading, such
suspension having occurred by any reason whatsoever; or
(b) SAI or the Company fails to obtain a listing or
authorisation for quotation of the Conversion Shares on
NASDAQ; or
(c) the Company or any of the Guarantors or ACL defaults in
performance of any of its obligations contained in the terms
and conditions of the Debenture or the Subscription
Agreement or the ACL Undertaking, and such event to the
extent it can be remedied continues to subsist for a
continuous period of 30 days after notice of such event is
given from the Majority Debentureholders to the Company; or
(d) there is default in the payment of principal or the premium
(if any) or interest on any of the Debenture within seven
(7) days in the case of principal or premium of fourteen
(14) days in the case of interest from the due date for
payment; or
(e) any Indebtedness of a material nature for borrowed money of
any member of the SAI Group becomes due and repayable
prematurely by reason of an event of default (however
described) or any member of the SAI Group fails to make any
payment in respect of any Indebtedness for borrowed money of
the due date for payment as extended by any originally
applicable grace period or any security given by any of them
for any Indebtedness for borrowed money becomes enforceable
or if any default is made by any of them in making any
payment due under any guarantee and/or indemnity given by it
in relation to any Indebtedness for borrowed money of any
other person and such occurrence has or will have in the
opinion of the Majority Debentureholders a materially
adverse impact on any member of the SAI Group; or
(f) any legal process is levied or enforced or sued out upon or
against any part of the property, assets or revenues of any
member of the SAI Group which in the opinion of the Majority
Debentureholders has a materially adverse effect upon any of
them, and is not discharged or stayed within 60 days (or
such longer period as the Majority Debentureholders may
consider appropriate in relation to the jurisdiction
concerned) of having
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<PAGE>
been so levied, enforced or sued out unless and for so long as
the Majority Debentureholders is satisfied that it is being
contested in good faith, diligently and with a reasonable
prospect of success by legal action; or
(g) an encumbrancer takes possession or a receiver, manager or
other similar officer is appointed of, or an attachment
order is issued in respect of, the whole or any part of the
undertaking, property, assets or revenues of any member of
the SAI Group or of ACL which in the opinion of the Majority
Debentureholders has a materially adverse effect upon any of
them; or
(h) any member of the SAI Group is unable to pay its debts as
they mature or takes any proceeding under any law for a
readjustment or deferment of its obligations or any part of
them or makes or enters into a general assignment or an
arrangement or composition with or for the benefit of its
creditors which in the opinion of the Majority
Debentureholders has a materially adverse effect upon any of
them; or
(i) an order of a court of competent jurisdiction is made or an
resolution passed for the winding up or
dissolution or administration of any member of the SAI Group
or of ACL, ceases or threatens to cease to carry on all or
substantially all of its business or any of them stops or
threatens to stop payment (within, if applicable, the
meaning of the bankruptcy law of any appropriate
jurisdiction) or applies for or consents to or suffers the
appointment of an administrator, liquidator or receiver over
the whole or any material part of the undertaking, property,
assets or revenues of or any of them; or
(j) proceedings shall have been initiated against ACL or any
member of the SAI Group under any applicable bankruptcy,
insolvency or reorganisation law and such proceedings shall
not have been discharged or stayed within a period of 60
days (or such longer period as the Funds may consider
appropriate in relation to the jurisdiction concerned)
unless and for so long as the Majority Debentureholders is
satisfied that it is being contested in good faith,
diligently and with a reasonable prospect of success by
legal action; or
(k) any event occurs which under the laws of any relevant
jurisdiction and in the opinion of Majority Debentureholders
has an analogous effect to any of the event referred to in
any of the foregoing paragraphs; or
(l) the EPS (as defined in the Condition 7(D)) of SAI for any of
the financial years falling between the financial year ended
31st December, 1995 and the Maturity Date is less than
US$0.55; or
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<PAGE>
(m) if:
(i) at the end of each quarter of a financial year ("QUARTER
DATE"), the trade debts (after provisions) left outstanding
relating to the sales achieved in a period occurring
immediately before the 12- month period preceding the
relevant Quarter Date is or exceeds 10 percent of net sales
achieved by SAI in the 12 months immediately preceding the
relevant Quarter Date; or
(ii) at the end of each Quarter Date, the trade debts (after
provisions) left outstanding relating to the sales
achieved in a 12-month period immediately preceding the
Quarter Date is or exceeds 40 per cent of the net sales
achieved by SAI in the same period of time and such
outstanding debts are not accordingly repaid or
remedied to fall below the 10 per cent or 40 per cent
level as the case may be within 30 days after the
elease of the 10-Q Quarterly Report or the 10-K Annual
Report. The first of the Quarter Dates shall commence
on 31st December, 1996.
(C) For the purpose of this Debenture, IRR is the annual internal
rate of return compounded on a quarterly basis, which is the
discount rate at which the present value of future cash flows,
including proceeds from interest, dividends and transfer / sale
of the Debentures and any repayment of the principal amount of
the Debentures outstanding is equal to the initial subscription
amount of all the Debentures subscribed and is calculated in
accordance with the following formula:-
OI = (D1 + C1) + (D2 + C2) + (D3 + C3) + ... +(Dn + Cn)+
--------- --------- --------- ---------
Pn
--
1 + R (1 + R)/2/ (1 + R)/3/ (1 + R)/n/ (1 + R)/n/
Where:
Pn = the amount to be paid by the Company to the Debentureholder
on the day of payment for redemption, provided always that
Pn shall not be less than zero;
OI = the price of the Debenture paid by the Debentureholder for
the Debenture pursuant to the Subscription Agreement;
Cn = (if applicable) the amount of any capital repayment or
reduction made during the quarter denoted by "n";
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<PAGE>
Dn = the amount or value of any interest or other money paid with
respect to the outstanding Debentures during the quarter
denoted by "n";
n = the number of complete quarters from the issue date of
the Debentures to the date of redemption; and
R = the quarterly internal rate of return in the event of
redemption of the Debentures which shall be 4.61%
(given an annual internal rate of return of 19.75% per
annum) and shall be 2.87% (given an annual internal
rate of return of 12% per annum)
and for the purposes of this calculation only, all cashflows
(denoted by Pn, Dn or Cn) shall be deemed to arise on the last
day of the quarter in which they occur or are paid.
(D) In this Condition 11:
(a) the determination of "materiality", "material" or "materially"
shall be by the Majority Debentureholders and in the event of
disagreement of or any disputes over the applicability or the
interpretation of the occurrence of any such events as described
in Condition 11(B)(e), (f), (g), (h), (i), (j) or (k), an
independent professional adviser (including a merchant bank of
repute, an international firm of accountants or legal adviser)
shall be appointed by the Company from a selection of three (3)
names given by the Majority Debentureholders to the Company who
shall determine the same and whose decision shall be final and
binding;
(b) "Majority Debentureholders" shall mean the majority of the
Debentureholders in value holding more than 50% of the total
principal amount of the Debentures outstanding.
12. VOTING
The Debentureholder will not be entitled to receive notices of,
attend or vote at any meetings of the Company by reason only of
it being the Debentureholder.
13. REGISTER
The Company shall maintain a register in Bermuda or in Hong Kong
of the particulars of the Debenture and the Debentureholder.
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14. REPLACEMENT NOTE
If any of the Debentures is lost or mutilated the Debentureholder
shall forthwith notify the Company and a replacement Debenture
shall be issued if the Debentureholder provides the Company with:
(1) the mutilated Debenture; (ii) a declaration by the
Debentureholder or its officer that the Debenture had been lost
or mutilated (as the case may be) or other evidence that the
Debenture had been lost or mutilated; and (iii) an appropriate
indemnity in such form and content as the Company may reasonably
require. Any Debenture replaced in accordance with this Condition
shall forthwith be cancelled.
15. NOTICES
Any notice required or permitted to be given shall be given by
delivering it to the party:
(a) in the case of the Debentureholder:
being GML : c/o HPEM
10th Floor, Citibank Tower
Citibank Plaza, 3 Garden Road, Central,
Hong Kong
Tel: (852) 2845 7685
Fax: (852) 2845 9992
ATTN.: MR. GEORGE RAFFINI / MR. BRIAN LAW
being WCIT : c/o HPEM, 10th Floor, Citibank Tower,
3 Garden Road, Hong Kong
Tel: (852) 2845 7688
Fax: (852) 2845 9992
ATTN.: MR. GEORGE RAFFINI / MR. BRIAN LAW
being MC
Partners : c/o MC Capital Asia Pte Limited
Unit No. 1002 C/D 10th Floor,
Tower 1, Admiralty Centre,
10 Harcourt Road, Hong Kong
Tel: (852) 2866 3393
Fax: (852) 2866 2693
ATTN.: MR. YUJI KOMIYA/MR. TATSUYA
KUROYANAGI
59
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being CI
2000 : c/o Banque Worms, Hong Kong Branch
39th Floor, Central Plaza
18 Harbour Road, Hong Kong
Tel: (852) 2802 8382
Fax: (852) 2802 8065
ATTN.: MR. FABRICE JACOB/MR. ANTOINE
FOSSORIER
(b) in the case of the Company
c/o China International Bearing
Holdings Limited,
19th Floor, First Pacific Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
Attn.: Mr. Billy Kan / Mr. Roger Li
-----------------------------------
(c) in the case of SAI:-
c/o China International Bearing
Holdings Limited,
19th Floor, First Pacific Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
Attn.: Mr. Billy Kan / Mr. Roger Li
-----------------------------------
or to such other Hong Kong address as the party concerned may
have notified to the other party pursuant to this Condition and
may be given by sending it by hand to such address or to such
other address as the party concerned may have notified to the
other parties in accordance with this Condition and such notice
shall be deemed to be served on the day of delivery (or on the
immediately following Business Day, if the day of delivery is not
a Business Day), or if sooner upon acknowledgement or receipt by
or on behalf of the party to which it is addressed.
16. ENFORCEMENT
At any time after the Debentures have become due and repayable,
any of the Funds may, at its discretion and not necessarily with
any further notice, take such proceedings against the Company
and/or the Guarantors as it may think fit to enforce repayment of
the Debenture together with accrued interest and to enforce the
provisions of the Subscription Agreement, but it will not be
bound to take any such proceedings unless (a) it shall have been
so requested in writing by the
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holders of not less than one-third in principal amount of the
Debentures then outstanding or shall have been so directed by
resolution of the Debentureholders and (b) it shall have been
indemnified to its satisfaction. No Debentureholder will be
entitled to proceed directly against the Company or the
Guarantors or ACL unless the Funds, having become bound to do so,
fails to do so within a reasonable period and such failure shall
be continuing.
17. AMENDMENT
The terms and conditions of the Debentures may only be varied,
expanded or amended by agreement in writing between the Company
and all of the Debentureholders.
18. GOVERNING LAW AND JURISDICTION
The Debenture and the terms of the Debenture are governed by and
shall be construed in accordance with Hong Kong law and the
parties agree to submit to the non-exclusive jurisdiction of the
courts of Hong Kong. In relation to any legal actions or
proceedings arising out of or in connection with the Subscription
Agreement and/or the Debentures, each of the Company and the
Guarantors has in the Subscription Agreement irrevocably
submitted to the courts of Hong Kong and has in relation thereto
appointed an agent for service of process in Hong Kong.
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SCHEDULE 3
----------
REPRESENTATIONS AND WARRANTIES
------------------------------
1. INFORMATION
-----------
1.1 All information relating to the SAI Group and ACL set out herein
is true and accurate in all material respects and nothing has
been omitted which would make any of the information set out
therein misleading.
1.2 No circumstances have occurred and none of the Warrantors is
aware of any circumstances which may or are likely to occur which
in either event would result in any information relating to any
member of the SAI Group or ACL which has been given to the
Majority Investors in the course of the negotiations leading up
to this Agreement to be untrue, inaccurate or misleading in any
material respect.
1.3 There is no fact or circumstance relating to the affairs of any
member of the SAI Group or of ACL which has not been disclosed to
the Investors and which if disclosed will, to the actual
knowledge of the Investors, influence the decision of the
Investors to buy the Debentures on the terms contained in this
Agreement.
1.4 No member of the SAI Group nor has ACL omitted to state a
material fact necessary to make the statements herein contained
or any information made to the Investors not misleading.
1.5 No Warrantor is an "INVESTMENT COMPANY" within the meaning of the
U.S. Investment Company Act 1942, as amended.
2. GROUP STRUCTURE ETC.
--------------------
2.1 SAI will at Completion have sufficient authorised but unissued
share capital free of pre-emptive rights in order to enable it to
perform its obligations under the Debentures upon conversion and
the directors of SAI are authorised to issue the Conversion
Shares upon conversion of the Debentures.
2.2 Except as set forth in Part III of Schedule 1 and Schedule 5,
there are no agreements or commitments, securities or obligations
outstanding which calls for the allotment, issue or transfer of,
or accords to any person the right to call for the allotment or
issue of or conversion into, any common stock or debentures in or
securities of any member of the SAI Group. No person has any
rights of any nature whatsoever on, over or affecting any
unissued shares or loan capital in any member of the SAI Group
and no person has the right to call for the transfer of
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any issued shares under any option or other agreement or to
convert any shares or securities into share capital or share
capital of a different class.
2.3 SAI does not hold any ownership or other interests (whether by
way of shareholding or otherwise) in any other Company or
undertaking except those otherwise disclosed.
2.4 None of the members in SAI Group nor ACL has taken any action nor
(to the actual knowledge of the Warrantors) has any steps been
taken or legal, legislative, or administrative proceedings been
started or threatened (i) to wind up, dissolve, or eliminate
itself, or (ii) to withdraw, revoke or cancel its business
licence.
3. CAPACITY AND AUTHORITY
----------------------
3.1 Each of the Warrantors is a legal person, duly organised, validly
existing, and in good standing under the laws of the respective
jurisdiction of its incorporation.
3.2 Each of the Warrantors has full power and authority to carry on
its business to own its property and other assets and to enter
into and perform this Agreement and to exercise its rights and
perform its obligations hereunder.
3.3 Each of the Warrantors represents that the execution, delivery
and performance of this Agreement including, but without
limitation, the issuance of the Debenture and the Shares, none of
the Warrantors has been in breach of any applicable laws or any
order or judgement of any court applicable to it or any of its
assets and will not result in any breach of the terms if any
agreement or obligation applicable to it or any of its assets and
that all corporate and other action required to authorise its
execution of this Agreement and its performance of its
obligations hereunder has been duly taken.
4. SHARES AND SUBSIDIARIES
-----------------------
4.1 Save as disclosed in 4.2 below, the particulars relating to the
share capital and corporate structure of the SAI Group referred
to in Recital (A) and Parts I, II and III of Schedule 1 of this
Agreement are correct and accurate.
4.2 The investment by SPC in Shanghai Southwest Bearing Company
("SBB") of an aggregate of US$1 million has not been completed.
As at the date of this Agreement, SAI had only invested
US$150,000 in SBB, representing only 4.167% of the aggregate
issued capital if the whole of the contributions were made to SBB
by the joint venture parties. Upon completion of the contribution
of
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the balance of US$850,000 by SPC, SPC will have an aggregate of
27.78% interest in SBB.
4.3 No mortgage, pledge, lien or other security interest exists on or
over any of the shares in the SAI Group.
4.4 The execution and delivery of, and the performance by each of the
Company and the Guarantors of its obligations under this
Agreement the Guarantee or the Debenture will not:-
(i) result in a breach of any provision of its memorandum and
articles of association or equivalent constitutional
documents;
(ii) result in a breach or constitute a default under any
instrument to which any of the Company, ACL and the
Guarantors is a party or by which it or any of its assets
is bound; or
(iii) result in a breach of any order, judgement in decree of
any court or governmental agency to which any of the
Company, ACL and the Guarantors is a party or by which it
is bound.
4.5 The entire existing issued shares in the common stock capital of
SAI is authorised for quotation on NASDAQ and none of the
Warrantors is aware of any circumstance whereby such
authorisation will be suspended, cancelled or revoked before
Completion as a result of this Agreement or the transactions
contemplated hereunder.
5. FINANCIAL INFORMATION
---------------------
5.1 The Accounts have been prepared in accordance with the disclosed
accounting policies of and is in accordance with generally
accepted accounting principles and practices in its place of
incorporation. Except as stated such Accounts have not been
affected by any extraordinary or exceptional or non-recurring
item or by any other circumstances rendering the profits or
losses for the period covered by the financial statements
unusually high or low.
5.2 The Accounts (i) show a true and fair view of the assets,
liabilities, capital commitments and the state of affairs of the
SAI Group as at the relevant financial year end date and of the
profits and losses of the SAI Group for the period concerned;
(ii) reserve or provide in full for depreciation and all bad and
doubtful debts and all other liabilities, actual, contingent or
otherwise and for all financial commitments in existence at the
relevant financial year end date; (iii) reserve or provide in
full for all taxation including any contingent or deferred
liability
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<PAGE>
therefor for which the SAI Group was at the relevant financial
year end date liable and whether or not any member of the SAI
Group has or may have any right of reimbursement against any
other person.
5.3 Since the relevant financial year end date the business of the
SAI Group has been carried on in the ordinary course and so as to
maintain the same as a going concern and no member of the SAI
Group has entered into any transaction or circumstances outside
the ordinary course of business or of an unusual or onerous
nature and there has been no reduction in the value of the net
tangible assets of the SAI Group on the basis of the valuation
adopted in the financial statements and there has been no
material adverse change in the financial position or trading
prospects of the SAI Group.
6. CHANGES
-------
Since 31st December, 1995,
(a) the business of each of the members of the SAI Group has
been carried on in the ordinary course so as to maintain the
same as a going concern and none of the members of the SAI
Group has entered into any transaction or circumstances
outside the ordinary course of business or which is of an
unusual or onerous nature;
(b) no material adverse changes have occurred in the conditions,
financial or otherwise or the earnings, business affairs,
position, prospects, assets and liabilities (whether actual
or contingent) of any member of the SAI Group as shown in
the Accounts and there has been no reduction in the value of
the net tangible assets of each of the members of the SAI
Group on the basis of the valuation adopted in the Accounts;
(c) the business of each of the members of the SAI Group has not
been materially adversely affected by the loss of any
important contract or customer or source of supply or by any
other material factor;
(d) no dividends, bonuses or distributions have been declared,
paid or made in the case of any member of the SAI Group
except as provided for in the Accounts; and
(e) none of the member of the SAI Group has to any material
extent acquired, sold, transferred or otherwise disposed of
any assets of whatsoever nature or cancel or waive or
release or discount in whole or in part any debts or claims,
except in each case in the ordinary course of business.
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7. TAXATION
--------
There is no dispute or disagreement outstanding nor is any
contemplated with any revenue authority regarding liability or
potential liability to any tax or duty (including in each case
penalties or interest) recoverable from any member of the SAI
Group regarding the availability of any relief from tax or duty
to any member of the SAI Group and there are no circumstances
which make it likely that any such dispute or disagreement will
commence.
8. CONTRACTS
---------
8.1 None of the members of the SAI Group is a party to any contract
which may be affected by reason of Completion, nor has it entered
into any material, long-term, onerous or unusual contract or
commitment binding upon it nor has any contract been entered into
otherwise than on an arm's length basis or otherwise than in the
ordinary course of business nor is it under any obligation, nor
is it a party to any contract, which cannot readily be fulfilled
or performed by it on time and without undue or unusual
expenditure of money or effort nor is it aware of any breach of,
or any invalidity, or grounds for determination, rescission,
avoidance or repudiation of, any contract to which any member of
the SAI Group is a party.
8.2 There is no contract or arrangement in respect of which
obligations are still outstanding to which any member of the SAI
Group or ACL is, or was, a party and in which any member of the
SAI Group or ACL, or any director of the SAI Group or of ACL is
beneficially interested or any person connected with indirectly,
which is not of an arm's length nature for this Agreement.
9. APPROVALS AND VALIDITY
----------------------
9.1 Subject to the fulfilment of the Conditions Precedent, all
necessary consents, authorisations and approvals of any
governmental agencies or bodies or any other consents,
authorisation or approvals as shall be required for or in
connection with this Agreement the issuance of the Debenture
hereunder the performance of the obligations thereof have been
obtained or made or will have been obtained or made by
Completion.
9.2 Subject to the fulfilment of the Conditions Precedent, the issue
of the Debenture and the Certificate and the Conversion Shares
upon conversion thereunder will not infringe and will not be
contrary to any applicable laws and will not result in any breach
of the terms of the Memorandum of Association and Bye-laws of the
Company or the respective constitutive documents of each of the
Warrantors nor
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<PAGE>
would it breach the terms of any agreement or obligation
applicable to any of the Warrantors.
9.3 Upon the issue of the Debentures and the execution of the
Certificates by the Company and delivery of the same, the
Debentures and the Certificates will constitute valid and binding
obligations of the Company and of SAI enforceable against the
Company and SAI as the case may be.
10. BUSINESS
--------
All the members of the SAI Group have obtained, maintained in
force and complied with all necessary licences and consents
required for the proper carrying on of its business and to the
actual knowledge of the Warrantors there are no circumstances
which indicate that any such licences or consents shall have
revoked or not renewed.
11. LITIGATION AND UNLAWFUL ACTS
----------------------------
None of the Warrantors is involved in any litigation, arbitration
or administrative proceeding which materially and adversely
affects the business or financial condition of any of them and no
such proceedings is currently taking place or pending or
threatened against any member of the SAI Group or of ACL or its
respective assets.
12. LIABILITIES
-----------
12.1 No member of the SAI Group is nor is ACL in default under any
law, regulation, judgement, order, authorisation, agreement or
obligation applicable to it or its assets or revenues the
consequences of which default could materially and adversely
affect its business or financial condition or the ability of any
of them to perform its obligation under this Agreement or the
Debentures and no Event of Default has occurred.
12.2 None of the members of the SAI Group has nor has ACL entered into
or is bound by any guarantee, indemnity or other agreement to
secure an obligation of a third party other than another member
of the SAI Group, under which any liability or contingent
liability is outstanding.
12.3 None of the members of the SAI Group has nor has ACL committed or
is liable for any criminal, illegal or unlawful action or breach
of any obligation or duty whether imposed by or pursuant to
statute, contract or otherwise.
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12.4 None of the members of the SAI Group has nor has ACL received
notification that any investigation is being or has been
conducted by any governmental body in respect of the affairs of
any such member and no member is aware of any circumstances which
would give rise to such investigations.
13. WORKING CAPITAL
---------------
Each member of the SAI Group has and ACL has adequate working
capital for its current requirements, taking into account its
current and projected financial commitments and the proceeds of
the Debentures.
14. INSURANCE
---------
14.1 All the assets of the SAI Group and ACL of an insurable nature
have at all material times been and are insured in amounts to the
full replacement value thereof against fire and other risks
normally or prudently insured against by persons carrying on the
same classes of business as those carried on by the SAI Group and
by ACL, and each member of the SAI Group and ACL has at all
material times been and is adequately covered against accident,
third party and other risks normally or prudently covered by
insurance.
14.2 No claim is outstanding or may be made under any insurance
policies taken out and no event has occurred or circumstances
exist which are likely to give rise to any material claim;
nothing has been done or omitted to be done which is likely to
result in an increase in premium; and nothing has been done or
omitted to be done which would make any such policy of insurance
void or voidable.
15. ENVIRONMENTAL
-------------
None of the members in the SAI Group has nor has ACL been in
breach of any laws, regulations, judgements, orders or
agreements, or codes of conducts in respect of or in connection
with any environmental issues and protection.
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SCHEDULE 4
FORM OF GUARANTEE
69
<PAGE>
THIS GUARANTEE dated the day of , 1996 is made between:-
(1) SUNBASE ASIA, INC., of 1280 Terminal Way, Suite 3, Reno Nevada
89502, United States of America ("SAI");
(2) CHINA INTERNATIONAL BEARING HOLDINGS LIMITED, of Cedar House, 41
Cedar Avenue, Hamilton HM12, Bermuda ("CIBHL");
[(3) SMITH ACQUISITION COMPANY, INC. of 2240 Buena Vista, Irwindale,
CA 91706 ("SPC");]
(The parties referred to at (1), (2) [and (3)] hereinafter referred to
as the "GUARANTORS" and each a "GUARANTOR".)
(4) GLORY MANSION LIMITED, of Craigmuir Chambers, P.O. Box 71, Road
Town, Tortola, British Virgin Islands ("GML");
(5) WARDLEY CHINA INVESTMENT TRUST, of c/o Suite 1610, P.O. Box 1016,
885 West Georgia Street, Vancouver B.C., V6C 3E8, Canada
("WCIT");
(6) MC PRIVATE EQUITY PARTNERS ASIA LIMITED of P.O. Box 309, Ugland
House, South Church Street, Grand Cayman, Cayman Islands, British
West Indies ("MC PARTNERS"); and
(7) CHINE INVESTISSEMENT 2000, of L1118 Luxembourg, 14 Rue Aldringen
("CI 2000");
(The parties referred to at [(4), (5), (6) and (7)] hereinafter
collectively referred to as "INVESTORS" and each an "INVESTOR").
WHEREAS:-
(A) By a subscription agreement dated [ ] , 1996 (the "SUBSCRIPTION
AGREEMENT") which expression shall include such Debenture (as
made from time to time the supplemented or amended) and made
between (1) China Bearing Holdings Limited (the "COMPANY"); (2)
Asean Capital Limited ("ACL"); (3) China International Bearing
Holdings Limited ("CIBHL"); (4) Sunbase Asia, Inc. ("SAI"); (5)
Smith Acquisition Company Inc. ("SPC"); (6) GML; (7) WCIT; (8) MC
Partners and (9) CI 2000 under which the Investors have agreed to
subscribe for and the Company to issue Convertible Debentures up
to an aggregate principal value of US$11,500,000 upon such terms
and conditions as described therein.
(B) It is the condition of the Subscription Agreement that the
Guarantors shall execute the Guarantee in respect of the
obligations of the Company and the other parties
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<PAGE>
(not being the Investors) under the Subscription Agreement and
the Debentures. Accordingly, this Guarantee supplements the
Subscription Agreement and the Debentures.
(on SPC's Guarantee)
[(B) SAI and CIBHL ("OTHER GUARANTORS") have already given a Guarantee
dated [ ] in similar form at Completion ("SAME GUARANTEE"). SPC
has given an undertaking in the Subscription Agreement to also
execute the Guarantee in respect of the Company's and the other
parties (not being an Investor) obligations under the
Subscription Agreement and the Debentures. Accordingly, this
Guarantee supplements the Subscription Agreement, the Debentures
and the Same Guarantee.]
(C) Expressions defined in the Subscription Agreement shall, unless
specifically defined or re-defined herein or the context
otherwise requires, bear the same meanings when used herein.
NOW THIS GUARANTEE WITNESSETH AND IT IS HEREBY AGREED as follows:-
1. GUARANTEE
---------
(A) In consideration of the subscription of the Debentures pursuant
to the Subscription Agreement by the Investors, each of the
Guarantors hereby as primary obligor, irrevocably and
unconditionally and together with each of the other Guarantors
(the "OTHER GUARANTORS") jointly and severally, guarantees to
each of the Investors:-
(i) the full due and punctual observance and performance of all
the terms, conditions and covenants on the part of the
Company contained in the Subscription Agreement and the
Debentures including the due and punctual payment of all
sums now or subsequently payable under the Subscription
Agreement or the Debentures and agrees to perform or procure
the performance of such obligations of the Company from time
to time and on demand by any of the Investors pay any and
every sum or sums of money which the Company shall at any
time be liable to pay to the Investors under or pursuant to
the Subscription Agreement or the Debentures as the case may
be;
(ii) the full due and punctual observance and performance of all
the terms, conditions and covenants on the part of each
Other Guarantor to which such Other Guarantor is a party to
the Subscription Agreement and this
71
<PAGE>
Guarantee including the due and punctual payment of all sums
now or subsequently payable under the Subscription Agreement
or this Guarantee and agrees to perform or procure the
performance of such obligations of the Other Guarantors from
time to time and on demand by any of the Investors pay any
and every sum or sums of money which the Other Guarantors
shall at any time be liable to pay to the Investors under or
pursuant to the Subscription Agreement or this Guarantee as
the case may be; and
(iii) to indemnify the Investors from time to time on demand by
any of the Investors from and against any loss incurred by
the Investors or any of them as a result of any of the
obligations of the Company under the Subscription Agreement
or the Debenture or of any of the obligations of the Other
Guarantors under or pursuant to the Subscription Agreement
or this Guarantee not being fulfilled or performed or being
or becoming void, voidable, unenforceable or ineffective as
against the Company or any of the Other Guarantors as the
case may be for any reason whatsoever, whether or not known
to the Investors or any of them or any other person.
The Guarantors' obligations hereunder is as if it is a principal
debtor in respect of any amount and liability and obligation and
not merely a surety, and without any requirement for the
Investors first to have recourse against the Company or any of
the Other Guarantors as the case may be and such liability shall
not be impaired or reduced by any undertaking granted.
[(B) SPC has undertaken in the Subscription Agreement to execute
this Guarantee at a later date than the date of this
Guarantee pursuant to Clause 10 of the Subscription
Agreement. For the purpose of this Guarantee, "OTHER
GUARANTORS" shall therefore be construed to include SPC
notwithstanding that SPC is not giving the Guarantee
simultaneously as the Guarantors hereunder.]
2. PRESERVATION OF RIGHTS
----------------------
(A) The obligations of the Guarantors herein contained shall be in
addition to and independent of every other security which the
Investors or any of them may at any time hold in respect of any
of the Company or the Guarantors' obligations hereunder.
(B) The obligations of each of the Guarantors herein contained shall
constitute and be continuing obligations notwithstanding any
settlement of account or other matter or thing whatsoever, and in
particular but without limitation, shall not be considered
satisfied by any intermediate payment or satisfaction of all or
any of
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the obligations of the Company or any of the Other Guarantors and
shall continue in full force and effect until final payment in
full of all amounts owing by the Company or any of the Other
Guarantors hereunder and total satisfaction of all the Company's
or any of the Other Guarantors actual and contingent obligations
hereunder.
(C) None of the obligations of any of the Guarantors herein contained
nor the rights, powers and remedies conferred upon the Investors
by the Subscription Agreement or the Debenture or this Guarantee
or by law shall be discharged, impaired or otherwise affected
by:-
(i) the winding-up, dissolution, administration or re-
organisation of the Company or any of the Guarantors or any
other person or any change in its status, function, control
or ownership;
(ii) any of the obligations of the Company or any of the
Guarantors or any other person hereunder or under any other
security taken in respect of any of its obligations
hereunder being or becoming illegal, invalid, unenforceable
or ineffective in any respect;
(iii) time or other indulgence being granted or agreed to be
granted to the Company or any of the Guarantors or any
other person in respect of its obligations hereunder or
under any such other security;
(iv) any amendment to, or any variation, waiver or release of,
any obligation of the Company or any of the Guarantors or
any other person hereunder or under any such other
security;
(v) any failure to take, or fully to take, any security
contemplated hereby or otherwise agreed to be taken in
respect of the Company, any of the Guarantor's or any other
person's obligations hereunder;
(vi) any failure to realise or fully to realise the value of, or
any release, discharge, exchange or substitution of, any
security taken in respect of the Company, any of the
Guarantor's or any other person's obligations hereunder; or
(vii) any other act, event or omission which, might operate to
discharge, impair or otherwise affect any of the
obligations of any of the Guarantors herein contained or
any of the rights, powers or remedies conferred upon the
Investors or any of them by the Subscription Agreement or
the Debentures or by law.
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<PAGE>
(D) None of the Investors shall be obliged before exercising any of
the rights, powers or remedies conferred upon each of them
hereunder or by law:-
(i) to make any demand of the Company or any of the Guarantors;
(ii) to take any action or obtain judgement in any court against
the Company or any of the Guarantors;
(iii) to make or file any claim or proof in a winding-up or
dissolution of the Company or any of the Guarantors; or
(iv) to enforce or seek to enforce any other security taken in
respect of any of the obligations of the Company or any of
the Guarantors hereunder.
(E) Each Guarantor agrees that, so long as any amounts are or may be
owed by the Company or the Other Guarantors hereunder or when any
of the Company or the Other Guarantors is under any actual or
contingent obligations hereunder, it shall not exercise any
rights which it may at any time have by reason of performance by
it of its obligations hereunder:-
(i) to be indemnified by the Company or any of the Guarantors;
and/or
(ii) to claim any contribution from the Other Guarantors; and/or
(iii) to take the benefit (in whole or in part and whether by way
of subrogation or otherwise) of any rights of the Investors
hereunder or of any other security taken pursuant to, or in
connection with, the Subscription Agreement or the
Debenture by all or any of the Investors.
3. REPRESENTATIONS AND WARRANTIES
------------------------------
Each of the Guarantors hereby represents and warrants to each of
the Investors that:-
(a) it is a company validly incorporated, duly organised and
subsisting and of good standing under the law of the
jurisdiction under which it was incorporated;
(b) it has the necessary capacity to give this Guarantee and to
perform and observe the obligations contained herein. The
execution, delivery and performance of this Guarantee have
been duly authorised by all necessary corporation action of
the Guarantor and do not contravene the constitution of the
Guarantor under any applicable laws or regulations. This
74
<PAGE>
Guarantee, as executed and delivered constitutes legal
valid and binding obligations of the Guarantor and also
bought in accordance with its terms;
(c) the execution and delivery of, and the performance of the
provisions of, this Guarantee does not and will not during
the continuance of this Guarantee (i) contravene any
existing applicable laws, ordinance, regulation, decree,
instrument, franchise, concession, licence or permit, or any
order, judgement, decree or award, administrative or
governmental authority, department or agency presently in
effect an applicable, or (ii) contravene any contractual
restrictions binding on the Guarantors or any of its assets,
or (iii) cause any limit on any of the borrowing,
guaranteeing, charging or other powers of the Guarantor, or
(iv) create or result in or obliged the Guarantor to create
any lien, charge, security interest or encumbrance on the
whole or any part of the corporate Guarantor's property;
(d) all necessary governmental and other consents, authorities
and approvals to execute this Guarantee has been obtained
and are in full force, validity and effect;
(e) no litigation, attribution, administrative or other
proceedings pending before the court, tribunal, arbitrator
or governmental agency has been threatened against any of
the Guarantor; and
(f) the obligations of each of the Guarantors under this
Guarantee are direct, general, and unconditional obligations
and rank at least pari passu with all such Guarantor's other
present and future unsecured and unsubordinated and other
obligations.
4. FURTHER PRESERVATION OF RIGHTS
------------------------------
Should any purported obligation of the Company or any of the
Guarantors being the subject of this Guarantee be or become
wholly or in part invalid or unenforceable on any grounds
whatsoever, the Guarantor shall nevertheless be liable to the
Investors in respect of such purported obligation or liability as
if the same were wholly valid and enforceable in each of the
Guarantors as the principal debtor in respect thereof. Each of
the Guarantors hereby agrees to keep each of the Investors fully
indemnified against all damages, loss, costs and expenses arising
from any failure of the Company or any of the Guarantors to carry
out any of such purported obligations.
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<PAGE>
5. MISCELLANEOUS
-------------
(A) This Guarantee shall be binding on and each of which for the
benefit of each of the parties' successor and assign and personal
representatives (as the case may be) but no assignment may be
made of any of the rights obligations hereunder of any party
without the prior written consent of the other parties.
(B) This Guarantee may be signed in any number of counterparts, each
of which shall be binding on the party who shall have executed it
in which together shall constitutes but one Agreement.
(C) The Guarantors shall bear the legal and professional fees, costs
and expenses incurred in relation to the negotiation, preparation
and execution of this Guarantee.
(D) Any notice required to be sent must be in writing and shall be
given by delivering it to the address or facsimile number as
shown in Clause 12 of the Subscription Agreement.
(E) This Agreement shall be governed by and construed in accordance
with the laws of Hong Kong and the parties hereby submitted the
non-exclusive jurisdiction of the Supreme Court of Hong Kong. In
relation to any legal action or proceedings arising out of or in
connection with this Guarantee, each of the Guarantors have
irrevocably submitted in the Subscription Agreement to the courts
of Hong Kong and in relation thereto has appointed an agent for
service of process.
IN WITNESS WHEREOF the Guarantors have duly executed this Guarantee
the date and year first above written.
The Common Seal of )
SUNBASE ASIA, INC. )
was hereunto affixed )
in the presence of:- )
The Common Seal of )
SMITH ACQUISITION )
COMPANY INC. )
was hereunto affixed )
in the presence of:-] )
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<PAGE>
The Common Seal of )
CHINA INTERNATIONAL )
BEARING HOLDINGS LIMITED )
was hereunto affixed )
in the presence of:- )
SIGNED by )
duly authorised for and on behalf )
of GLORY MANSION LIMITED )
in the presence of:- )
SIGNED by )
duly authorised for and on behalf )
of WARDLEY CHINA )
INVESTMENT TRUST )
in the presence of:- )
SIGNED by )
duly authorised for and on behalf )
of MC PRIVATE EQUITY PARTNERS )
ASIA LIMITED )
in the presence of:- )
SIGNED by )
duly authorised for and on behalf )
of CHINE INVESTISSEMENT 2000 )
in the presence of:- )
77
<PAGE>
SCHEDULE 5
----------
EMPLOYEES / DIRECTORS' OPTIONS
------------------------------
<TABLE>
<CAPTION>
Exercise Price Number of Shares
Option Holder Years of Exercise Per Share per Option Rights
<S> <C> <C> <C>
William Mckay one year from 16 Jan, 1996 $6.65 160,000
one year from 16 Jan, 1997 $7.75 160,000
one year from 16 Jan, 1998 $9.25 160,000
one year from 16 Jan, 1999 $10.75 160,000
one year from 16 Jan, 2000 $12.75 160,000
-------------
800,000
-------------
Billy Kan one year from 16 Jan, 1996 $6.375 200,000
one year from 16 Jan, 1997 $6.375 200,000
one year from 16 Jan, 1998 $6.375 200,000
-------------
600,000
-------------
Roger Li one year from 16 Jan, 1996 $6.375 200,000
one year from 16 Jan, 1997 $6.375 200,000
one year from 16 Jan, 1997 $6.375 200,000
-------------
600,000
-------------
Dickens Chang one year from 16 Jan, 1996 $6.375 15,000
one year from 16 Jan, 1997 $6.375 15,000
one year from 16 Jan, 1998 $6.375 20,000
-------------
50,000
-------------
Total 2,050,000
=============
</TABLE>
The remaining 450,000 Shares may be granted by SAI's Compensation
Committee under SAI's 1995 Option Plan provided that the exercise price
per Share in relation to the grant of such option over the 450,000
Shares shall not be less than the fair market value of each Share on the
date such options are granted.
78
<PAGE>
SCHEDULE 6
----------
CERTIFICATION ON CONVERSION NOTICE
[CERTIFICATION ON CONVERSION -- TO APPEAR ON THE CONVERSION NOTICE]
In connection with our exercise this day of [describe debenture and amount
to be exercised -- provide for defined terms, such as the Company, the
Debenture and the Common Stock], we hereby certify as follows (check one
box):-
[_] We are a non-U.S. person located outside the United States that is
acquiring the Common Stock for the account of a non-U.S. person and not
for distribution.
[_] We are a U.S. institutional investor that is acquiring the Common Stock
for our own account or accounts for which we exercise sole investment
discretion and not with a view to or for sale in connection with any
distribution thereof, and we have received such information concerning
the Company and the Common Stock as we have deemed relevant to our
decision to purchase the Common Stock. We agree that we will not resell
the Common Stock except pursuant to an exemption from the registration
requirements of the U.S. securities laws and any state "blue sky" or
securities laws.
79
<PAGE>
SCHEDULE 7
----------
UNDERTAKING BY ACL
------------------
80
<PAGE>
THIS UNDERTAKING dated the _______ day of ________________, 1996 is
made between:-
(1) ASEAN CAPITAL LIMITED, of Omar Hodge Building, Wickhams Cay I,
P.O. Box 362, Road Town, Tortola, British Virgin Islands ("ACL");
(2) WARDLEY CHINA INVESTMENT TRUST, of c/o Suite 1610, P.O. Box 1016,
885 West Georgia Street, Vancouver B.C., V6C 3E8, Canada
("WCIT");
(3) GLORY MANSION LIMITED, of Craigmuir Chambers, P.O. Box 71, Road
Town, Tortola, British Virgin Islands ("GML");
(4) MC PRIVATE EQUITY PARTNERS ASIA LIMITED, of P.O. Box 309, Ugland
House, South Church Street, Grand Cayman, Cayman Islands, British
West Indies ("MC PARTNERS"); and
(5) CHINE INVESTISSEMENT 2000, of L1118 Luxembourg, 14 Rue Aldringen
("CI 2000").
(The parties referred to at (2), (3), (4) and (5) hereinafter
collectively referred to as "INVESTORS" and each an "INVESTOR").
WHEREAS:-
(A) By a subscription agreement dated [ ] , 1996 (the "SUBSCRIPTION
AGREEMENT") which expression shall include such Debenture (as
made from time to time the supplemented or amended) and made
between (1) China Bearing Holdings Limited (the "COMPANY"); (2)
ACL; (3) China International Bearing Holdings Limited ("CIBHL");
(4) Sunbase Asia, Inc. ("SAI"); (5) Smith Acquisition Company
Inc. ("SPC"); (6) GML; (7) WCIT; (8) MC Partners and (9) CI 2000
under which, inter alia, the Investors have agreed to subscribe
for and the Company has agreed to issue Convertible Debentures up
to an aggregate principal value of US$11,500,000 upon such terms
and conditions as described therein.
(B) It is the condition of the Subscription Agreement that ACL shall
execute the ACL Undertaking in respect of the payment obligations
of the Company under the Subscription Agreement and the
Debentures and accordingly, this Undertaking supplements the
Subscription Agreement and the Debentures.
(C) Expressions defined in the Subscription Agreement shall, unless
specifically defined or re-defined herein or the context
otherwise requires, bear the same meanings when used herein.
81
<PAGE>
NOW THIS UNDERTAKING WITNESSETH AND IT IS HEREBY AGREED as follows:-
1. GUARANTEE
---------
In consideration of the subscription of the Debentures pursuant
to the Subscription Agreement by the Investors, ACL hereby as
primary obligor, irrevocably and unconditionally guarantees and
undertakes to each of the Investors:-
(i) the full due and punctual payment of all sums now or
subsequently payable under the Subscription Agreement or the
Debentures by the Company and agrees to perform or procure
the performance of such payment obligations of the Company
from time to time and on demand by any of the Investors pay
any and every sum or sums of money which the Company shall
at any time be liable to pay to the Investors under or
pursuant to the Subscription Agreement or the Debentures as
the case may be; and
(ii) to indemnify the Investors from time to time on demand by
any of the Investors from and against any losses or costs
incurred by the Investors or any of them as a result of any
of the payment obligations of the Company under the
Subscription Agreement or the Debentures or any payment
obligations thereunder not being fulfilled or performed or
being or becoming void, voidable, unenforceable or
ineffective as against the Company or any of the Guarantors
as the case may be for any reason whatsoever, whether or not
known to the Investors or any of them or any other person.
ACL's obligations hereunder is as if it is a principal debtor in
respect of any amount and liability and obligation and not merely
a surety, and without any requirement for the Investors first to
have recourse against the Company or any of the Guarantors as the
case may be and such liability shall not be impaired or reduced
by any undertaking granted.
2. UNDERTAKING
-----------
ACL hereby further undertakes to use its best endeavours
(including the exercise of any voting rights and control it has)
to ensure that the obligations of SAI, CBHL, CIBHL and SPC under
the Subscription Agreement, the Debentures and the Guarantee
(including but without limitation to the specific undertakings
under Clauses 8, 9 and 10 of the Subscription Agreement) will be
observed, fulfilled and performed and shall do all that is
necessary so as to give effect to, render possible or assist in
the fulfilment or compliance with such provisions.
82
<PAGE>
3. PRESERVATION OF RIGHTS
----------------------
(A) The obligations of ACL herein contained shall be in addition to
and independent of every other security which the Investors or
any of them may at any time hold in respect of any of the
Company's or the Guarantors' obligations under the Guarantee.
(B) The obligations of ACL herein contained shall constitute and be
continuing obligations notwithstanding any settlement of account
or other matter or thing whatsoever, and in particular but
without limitation, shall not be considered satisfied by any
intermediate payment or satisfaction of all or any of the
obligations of the Company or any of the Guarantors and shall
continue in full force and effect until final payment in full of
all amounts owing by the Company.
(C) None of the obligations of ACL herein contained nor the rights,
powers and remedies conferred upon the Investors by the
Subscription Agreement or the Debenture or this Undertaking or by
law shall be discharged, impaired or otherwise affected by:-
(i) the winding-up, dissolution, administration or re-
organisation of the Company or any of the Guarantors or any
other person or any change in its status, function, control
or ownership;
(ii) any of the obligations of the Company or any of the
Guarantors or any other person hereunder or under any other
security taken in respect of any of its obligations
hereunder being or becoming illegal, invalid, unenforceable
or ineffective in any respect;
(iii) time or other indulgence being granted or agreed to be
granted to the Company or any of the Guarantors or any
other person in respect of its obligations hereunder or
under any such other security;
(iv) any amendment to, or any variation, waiver or release of,
any obligation of the Company or any of the Guarantors or
any other person hereunder or under any such other
security;
(v) any failure to take, or fully to take, any security
contemplated hereby or otherwise agreed to be taken in
respect of the Company, any of the Guarantor's or any other
person's obligations hereunder;
(vi) any failure to realise or fully to realise the value of, or
any release, discharge, exchange or substitution of, any
security taken in respect of the
83
<PAGE>
Company, any of the Guarantor's or any other person's
obligations hereunder; or
(vii) any other act, event or omission which, might operate to
discharge, impair or otherwise affect any of the
obligations of any of the Guarantors contained in the
Guarantee or any of the rights, powers or remedies
conferred upon the Investors or any of them by the
Subscription Agreement or the Debentures or by law.
(D) None of the Investors shall be obliged before exercising any of
the rights, powers or remedies conferred upon each of them
hereunder or by law:-
(i) to make any demand of the Company or any of the Guarantors;
(ii)to take any action or obtain judgement in any court against
the Company or any of the Guarantors;
(iii) to make or file any claim or proof in a winding-up or
dissolution of the Company or any of the Guarantors; or
(iv)to enforce or seek to enforce any other security taken in
respect of any of the obligations of the Company or any of the
Guarantors.
(E) ACL agrees that, so long as any amounts are or may be owed by the
Company or the Guarantors or when any of the Company or the
Guarantors is under any actual or contingent obligations to any
of the Investors, it shall not exercise any rights which it may
at any time have by reason of performance by it of its
obligations hereunder:-
(i) to be indemnified by the Company or the Guarantors; and/or
(ii)to claim any contribution from the Company or the Guarantors;
and/or
(iii) to take the benefit (in whole or in part and whether by way
of subrogation or otherwise) of any rights of the Investors
hereunder or of any other security taken pursuant to, or in
connection with, the Subscription Agreement or the Debenture by
all or any of the Investors.
4. REPRESENTATIONS AND WARRANTIES
------------------------------
ACL hereby represents and warrants to each of the Investors
that:-
84
<PAGE>
(a) it is a company validly incorporated, duly organised and
subsisting and of good standing under the law of the
jurisdiction under which it was incorporated;
(b) it has the necessary capacity to give this Undertaking and
to perform and observe the obligations contained herein. The
execution, delivery and performance of this Undertaking have
been duly authorised by all necessary corporation action and
do not contravene the constitution of ACL under any
applicable laws or regulations. This Undertaking, as
executed and delivered constitutes legal valid and binding
obligations of ACL and also bought in accordance with its
terms;
(c) the execution and delivery of, and the performance of the
provisions of, this Undertaking does not and will not during
the continuance of this Undertaking (i) contravene any
existing applicable laws, ordinance, regulation, decree,
instrument, franchise, concession, licence or permit, or any
order, judgement, decree or award, administrative or
governmental authority, department or agency presently in
effect an applicable, or (ii) contravene any contractual
restrictions binding on ACL or any of its assets, or (iii)
cause any limit on any of the borrowing, guaranteeing,
charging or other powers of ACL, or (iv) create or result in
or obliged ACL to create any lien, charge, security interest
or encumbrance on the whole or any part of the ACL's
property;
(d) all necessary governmental and other consents, authorities
and approvals to execute this Undertaking has been obtained
and are in full force, validity and effect;
(e) no litigation, attribution, administrative or other
proceedings pending before the court, tribunal, arbitrator
or governmental agency has been threatened against ACL; and
(f) the obligations of ACL under this Undertaking are direct,
general, and unconditional obligations and rank at least
pari passu with all ACL's other present and future unsecured
and unsubordinated and other obligations.
5. FURTHER PRESERVATION OF RIGHTS
------------------------------
Should any purported payment obligation of the Company being the
subject of this Undertaking be or become wholly or in part
invalid or unenforceable on any grounds whatsoever, ACL shall
nevertheless be liable to the Investors in respect of such
purported payment obligation or liability as if the same were
wholly valid and enforceable as the principal debtor in respect
thereof. ACL hereby agrees to
85
<PAGE>
keep each of the Investors fully indemnified against all damages,
loss, costs and expenses arising from any failure of the Company
to carry out any of such purported payment obligations.
6. MISCELLANEOUS
-------------
(A) This Undertaking shall be binding on and each of which for the
benefit of each of the parties' successor and assign and personal
representatives (as the case may be) but no assignment may be
made of any of the rights obligations hereunder of any party
without the prior written consent of the other parties.
(B) This Undertaking may be signed in any number of counterparts,
each of which shall be binding on the party who shall have
executed it in which together shall constitutes but one
Agreement.
(C) ACL shall bear the legal and professional fees, costs and
expenses incurred in relation to the negotiation, preparation and
execution of this Undertaking.
(D) Notices required to be sent pursuant to this Undertaking must be
sent in writing to the addresses or facsimile number of the
parties contained in Clause 12 of the Subscription Agreement.
(E) This Agreement shall be governed by and construed in accordance
with the laws of Hong Kong and the parties hereby submitted the
non-exclusive jurisdiction of the Supreme Court of Hong Kong. In
relation to any legal action or proceedings arising out of or in
connection with this Undertaking, ACL has irrevocably submitted
in the Subscription Agreement to the courts of Hong Kong and in
relation thereto has appointed an agent for service of process.
IN WITNESS WHEREOF ACL have duly executed this Undertaking the date
and year first above written.
The Common Seal of )
ASEAN CAPITAL LIMITED )
was hereunto affixed )
in the presence of:- )
86
<PAGE>
SIGNED by )
duly authorised for and on behalf )
of GLORY MANSION LIMITED )
in the presence of:- )
SIGNED by )
duly authorised for and on behalf )
of WARDLEY CHINA )
INVESTMENT TRUST )
in the presence of:- )
SIGNED by )
duly authorised for and on behalf )
of MC PRIVATE EQUITY PARTNERS )
ASIA LIMITED )
in the presence of:- )
SIGNED by )
duly authorised for and on behalf )
of CHINE INVESTISSEMENT 2000 )
in the presence of:- )
SIGNATURE PAGE
SIGNED by Dr. Gunter Gao )
duly authorised for and on behalf )
of CHINA BEARING )
HOLDINGS LIMITED )
in the presence of:- )
87
<PAGE>
SIGNED by Dr. Gunter Gao )
duly authorised for and on behalf )
of ASEAN CAPITAL LIMITED )
in the presence of:- )
SIGNED by Dr. Gunter Gao )
duly authorised for and on behalf )
of )
CHINA INTERNATIONAL )
BEARING HOLDINGS LIMITED )
in the presence of:- )
SIGNED by Dr. Gunter Gao )
duly authorised for and on behalf )
of SUNBASE ASIA, INC. )
in the presence of:- )
SIGNED by Mr. Billy Kan )
duly authorised for and on behalf )
of SMITH ACQUISITION )
COMPANY INC. )
in the presence of:- )
SIGNED by Ms. Jessie Fok as attorney )
duly authorised for and on behalf )
of GLORY MANSION LIMITED )
in the presence of:- )
88
<PAGE>
SIGNED by Mr. George Raffini )
duly authorised for and on behalf )
of WARDLEY CHINA )
INVESTMENT TRUST )
in the presence of:- )
SIGNED by Mr. Yiji Komiya )
duly authorised for and on behalf )
of MC PRIVATE EQUITY PARTNERS )
ASIA LIMITED )
in the presence of:- )
SIGNED by Mr. Fabrice Jacob )
duly authorised for and on behalf )
of CHINE INVESTISSEMENT 2000 )
in the presence of:- )
89
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts", "Summary
Consolidated Financial Information", "Selected Consolidated Financial
Information" and to the use of our report dated February 20, 1995, on the
financial statements of Harbin Bearing General Factory, and our report dated
April 5, 1996, on the consolidated financial statements of Sunbase Asia, Inc. in
the Registration Statement (From S-1) and related Prospectus of Sunbase Asia,
Inc. for the registration of 1,000,000 shares of its common stock.
Ernst & Young
Hong Kong
October 22, 1996
