SUNBASE ASIA INC
10-K405, 1996-05-08
CRUDE PETROLEUM & NATURAL GAS
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                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 (FEE REQUIRED)

     For the fiscal year ended December 31, 1995

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

     For the transition period from __________________ to _________________.

                        Commission File Number: 0-3132

                              SUNBASE ASIA, INC.
            (Exact Name of Registrant as specified in its charter)

             Nevada                                          94-1612110
  (State or other jurisdiction                            (I.R.S. Employer
of incorporation or organization)                       Identification No.)

                        19/F, First Pacific Bank Centre
                             51-57 Gloucester Road
                              Wanchai, Hong Kong
                   (Address of principal executive offices)

      Registrant's telephone number, including area code: (852) 2865-1511

             SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
                                      None

             SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
                                  Common Stock

     Indicate by check mark whether the Registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X]   No [_]
<PAGE>
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     As of March 15, 1996, 11,700,063 shares of Common Stock were outstanding.
The aggregate market value of the outstanding stock of the Registrant held by
non-affiliates on March 15, 1996 was $11,520,707.

     Documents incorporated by reference:  Certain exhibits are incorporated by
reference to the Registrant's Form 8-K dated December 22, 1994, the Registrant's
Form 8-K/A dated December 22, 1994 and the Company's Form 10-K dated March 3,
1995.

     The total number of pages in this report is 255.  The exhibit index is
located on pages 39 through 42.

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                                    PART I.

Item 1.   BUSINESS.

General
- -------

          Sunbase Asia, Inc., a Nevada corporation (the "Company," which term
shall include, when 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"), the
United States ("US"), Europe, Asia, South America and Africa.  The Company's
subsidiary in China, Harbin Bearing Company, Ltd. ("Harbin Bearing"), employs
approximately 13,000 personnel.  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.

          On January 16, 1996 (effective December 29, 1995), the Company
acquired Southwest Products Company ("Southwest Products"), an engineering-
intensive company that produces precision spherical bearings for US, European
and Asian aerospace and high tech commercial applications and the US military.
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. Southwest Products recently established a joint venture company in
Shanghai, China (the "Shanghai Joint Venture") that will begin production in
1996 of a line of precision grade, high-profit-margin spherical bearings
primarily for distribution to international aircraft original equipment
manufacturers (OEMs) that have major "offset" commitments to purchase made-in-
China parts.

          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 will provide engineering
and technical support, and will market and distribute Harbin Bearing products
internationally, focusing on exports of the products to the US.  In addition,
Southwest Products 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.

                                       3
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          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.

          The following diagram shows the corporate structure of the Company and
its affiliated entities.

                             [CHART APPEARS HERE]

                                       4
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HARBIN BEARING

          Harbin Bearing presently produces a wide range of bearings, ranging
from 10mm to 1000mm (internal diameter).  Harbin Bearing specializes in the
manufacture of precision bearings and has the capability of manufacturing more
than 5,000 of the approximately 6,000 different specifications of bearings that
are available in China today.  Harbin Bearing produces seven major types of
bearings:  deep-groove ball bearings, self-aligning ball bearings, cylindrical
rolling bearings, angular-contact ball bearings, tapered rolling bearings,
thrust ball bearings and linear-motion ball bearings.  Each of such bearings are
manufactured in micro, small, medium and large sizes.  In 1995, deep-groove
bearings comprised approximately 75% of Harbin Bearing's sales in units, and
approximately 43% of sales in revenue.

          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, (particularly in medium sizes and precision
grades).  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.  In addition, Harbin Bearing plans to increase its production
of high-speed angular-contact and precision angular-contact ball bearings and to
generally improve the quality of its non-precision bearings so they meet ISO
standards.

          Harbin Bearing has recently expanded its product line to include self-
aligning roller bearings.  Self-aligning roller bearings are used predominantly
in mining and extraction machinery.  Management believes that based on the PRC
government's policy of developing its mining and extraction industry, the demand
for self-aligning roller bearings will likely remain strong in the near future.

          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.  Pursuant to the Strategic Plan, 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

                                       5
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industries representing, respectively, approximately 28%, 30% and 35% of its
total sales to OEMs.  The remaining 7% of sales were made to miscellaneous
categories of OEM customers.  Approximately 68% of Harbin Bearing's sales in
1995 were made to distributors.

          Harbin Bearing has 18 sales offices in major cities in China,
including Beijing, Shanghai and Guangzhou.  All sales are coordinated through
Harbin Bearing's headquarters in Harbin, including sales to local distributors
and transportation industries, overseas agents, and domestic import and export
companies.  Harbin Bearing's sales force consists of 152 sales personnel and 288
support personnel who are responsible for product promotion, marketing,
aftermarket services and technical support.  Harbin Bearing sells its bearings
in China and abroad under the "HRB" trademark.

          Harbin Bearing's products are considered to be the highest grade
inside of China and medium-grade in world-wide markets.  Harbin Bearing's
pricing is considered to be very competitive in the international market.  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 ITEM
13, "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.

                                       6
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Competition
- -----------

Chinese 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.  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 of 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 accounted
for only 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).  Luoyang Bearing Factory and Wafangdian
Bearing Factory produce nine of the ten classified types of bearings in China in
a full range of sizes.  Wafangdian Bearing Factory, like Harbin Bearing,
produces a full line of rolling-element bearings, but it does not produce a full
series of sizes of bearings for the majority of its product line.  Luoyang
Bearing Factory only produces large-size rolling-element bearings.  In addition
to the manufacturers described above, there are approximately 270 other
manufacturers of ball bearings in China, including a number of small bearing
factories in China, 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 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 certain types of bearings, such as Hongshan
Bearing Factory and Shanghai Micro Bearing Factory.  Hongshan Bearing Factory,
located in Guizhou, produces mainly lower-rated precision bearings.  Shanghai
Micro Bearing Factory produces almost exclusively small-sized deep-groove ball
bearings.

Chinese Competition from Imports

          Foreign bearing manufacturers 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

                                       7
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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 SKF, FAG and NTN.  Management
believes that 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.

          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
steels are specialized alloys designed for hardness, durability and resistance
to rust.  A small amount of copper and aluminum tubing and rods are also used to
produce seals, cages and other ancillary bearing components.  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
much higher quality than most Chinese steel.  Accordingly, the use of South
Korean steel will improve the quality of

                                       8
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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 employs 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 recently begun to enter into employment contracts
with all of its employees.  The use of such employment contracts is an example
of the steps Harbin Bearing is taking to raise its workforce productivity and
efficiency.

          Harbin Bearing has begun to revise its compensation system to provide
incentives to employees by linking productivity with compensation.  Part of the
revised compensation system was instituted in May 1994, and governs the wages of
production employees.  Depending on actual productivity, which is determined
according to unit output and standard labor hours, a production employee may be
paid more or less than the average wage.  Harbin Bearing has also revised its
compensation system with respect to its sales personnel.  Harbin Bearing sets a
monthly sales target for each sales office and each salesman.  If the target is
reached, the sales personnel will receive a bonus in addition to basic wages and
allowances.  In 1995, the total labor cost of Harbin Bearing comprised
approximately 15% of total production costs.

          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, short-order
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

                                       9
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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, Korean Heavy Industries (Hanjun), Fluor Daniel, General
Electric, Westinghouse, General Dynamics, Textron Marine, Ingalls Shipbuilding
and Newport News Shipbuilding.  Southwest Products' bearings have been used by
NASA in all manned space programs since the launch of Mercury and are used in
most NASA orbiters, including Viking, Magellan and Galileo.

          Southwest Products has operated continuously since it was established
in 1945.  The assets of Southwest Products were purchased during a Chapter 11
bankruptcy proceeding in 1991 by an investment group led by James McN. Stancill,
a distinguished author and professor of finance at the University of Southern
California.  The investment group developed a plan for Southwest Products
pursuant to which it would increase its production and sales of higher-volume
standard spherical bearings.  Standard spherical bearings rely on technology
that is similar to the technology used to produce Specials, but require less
sophisticated design and manufacturing methods.  Standards are produced and used
in substantially greater volume than Specials, and price and delivery are the
primary competitive factors.  Generally, Standards are ordered in large
quantities for delivery over a number of years, whereas Specials are usually
ordered in very small quantities.  Typically, Standards sell for about $25 per
unit while Specials sell for over $150 per unit.  Certain Specials sell for
$25,000 per unit or more.

          To facilitate its entrance into the Standards market, Southwest
Products has been developing its production capacity for standard spherical
bearings at the Shanghai Southwest Bearing Company, Ltd. Joint Venture
("Shanghai Joint Venture") and has contributed to the Shanghai Joint Venture
certain proprietary technology, engineering assistance, technical support,
training and plant management.  The Shanghai Joint Venture partner has
contributed the plant (which is now operational), equipment and general labor
force.  Upon completion of the transfer of certain technology (expected to be
completed by May of 1996), Southwest Products will have a 28% interest in the
Shanghai Joint Venture and the exclusive right to purchase up to 100% of the
Shanghai Joint Venture's production, with the exclusive rights to distribute all
of the Shanghai Joint Venture's products that are exported from China.
Southwest Products also has the right to appoint the General Manager, manage the
day-to-day operations and establish the long-term plans of the Shanghai Joint
Venture.  Southwest Products has commenced the training of the Shanghai

                                      10
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Joint Venture workforce and has completed the production of product prototypes.
Qualification testing to ensure that the products of the Shanghai Joint Venture
meet US Navy standards has begun, and commercial production is expected to
commence in the fall of 1996.  See "Shanghai Joint Venture."

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.

SHANGHAI JOINT VENTURE

          In 1991, principals of Southwest Products met with principals of Hong
Xing Bearing Company ("HXBC") to discuss the establishment of a joint venture
between Southwest Products and HXBC that would manufacture standard spherical
bearings in Shanghai, PRC.  Such a joint venture would assist Southwest Products
in effectively penetrating the Standards market by improving Southwest Products'
international cost competitiveness.

          In late 1992, Southwest Products and HXBC signed a Technology Transfer
Agreement pursuant to which Southwest Products licenses technology to the
Shanghai Joint Venture and manages the Shanghai Joint Venture's manufacturing
activities.  Because the types of bearings covered by the Technology Transfer
Agreement are restricted commodities covered by the US Export Administration
Regulations Commerce Control List, the transfer of technology relating to such
bearings was subject to Southwest Products receiving from the United States
Department of Commerce a Validated Export License ("License"), which permits the
technology to be transferred by Southwest Products to the PRC.  The License was
issued in February 1994 after being reviewed and approved by the US Department
of Defense.  To management's knowledge, Southwest Products is the only company
in the US to possess such a license.

          Immediately following the issuance of the License, Southwest Products
and HXBC entered into a Joint Venture Agreement, thereby forming the Shanghai
Southwest Bearing

                                      11
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Company, Ltd. Joint Venture, the main objective of which is to manufacture
standard spherical bearings primarily for sale outside the PRC.  The transfer of
technology commenced in mid-1994 and the formal training by Southwest Products
of Chinese manufacturing personnel commenced in March 1995.  The Shanghai Joint
Venture will employ 57 personnel in the following areas:  executive, management
and administration (5), sales and service (2), manufacturing (40), product
quality and control (8), and engineering and research and development (2).  The
Shanghai Joint Venture ordered new machinery and equipment for its facility in
mid-1994, most of which is already installed.  The Shanghai Joint Venture is
located at a new 35,000 square foot facility and has the option to expand its
operation into an additional 50,000 square feet.  The qualification of the
Shanghai Joint Venture's bearing prototypes by the United States Navy to the
Navy's Mil-B-81820, Mil-B-81934 and Mil-B-81935 standards will enable the
Shanghai Joint Venture to sell such bearings to substantially all international
users of such bearings.  The worldwide annual market for bearings employing Mil-
B-81820 qualified liners is in excess of $400,000,000.  Southwest Products will
supervise all aspects of the qualification process and anticipates that such
bearing prototypes will be qualified by summer 1996.

          At present, the Boeing Commercial Airplane Group, McDonnell Douglas
Corporation and Airbus Industries have "offset" agreements with the PRC under
which these OEMs have committed to purchase equipment and parts from Chinese
producers for use on commercial aircraft as an "offset" to China's substantial
purchases of jet aircraft.  Due to shortages of high-quality Chinese-made
aircraft parts, these OEMs have not been able to purchase a sufficient volume of
products from China at competitive prices to satisfy their purchase requirements
under the offset program.  Although the Shanghai Joint Venture cannot sell its
products to these OEMs until the product prototypes have been qualified by the
US Navy, management and Boeing and McDonnell Douglas have engaged in preliminary
discussions regarding purchase of the Shanghai Joint Venture's products which,
management believes, will likely lead to sales of such products to these OEMs.

                               OPERATING IN CHINA
                               ------------------

          Because the production operations of the Company are based to a
substantial extent in China, the Company (through Harbin Bearing and the
Shanghai Joint Venture) 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.
Finally, economic

                                      12
<PAGE>
 
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.

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 ("Rmb"), 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

                                      13
<PAGE>
 
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 (the "PBOC"). On January 1, 1994, the official exchange
rate was abolished pursuant to a Notice (the "PBOC Notice") of the PBOC and a
new managed floating rate system was implemented. This new rate system
effectively replaced the dual exchange rate system with a unitary exchange rate
system. All future foreign currency exchange transactions are to be conducted
through a unified interbank foreign exchange trading market based upon rates set
by the PBOC. According to the PBOC Notice, enterprises operating in the PRC may
no longer sell their products in the PRC for foreign currency; all sales of
goods and services in the PRC must now be priced and paid for in Rmb. Domestic
enterprises are required to sell all of their foreign exchange revenues to the
authorized foreign exchange banks in the PRC and may obtain foreign currency for
expenditures only upon SAEC approval. However, Sino-foreign equity joint
ventures, such as the Shanghai Joint Venture, as foreign investment enterprises,
are not required to sell their foreign exchange revenues to such banks. Although
the China Foreign Exchange Center and the new rate system were fully established
as of April 1994, as of May 1, 1996, the swap centers have remained in
existence.

VOLATILITY OF EXCHANGE RATES.  The January 1, 1994 establishment of the unitary
exchange rate system produced a significant devaluation of the Rmb, resulting in
the US Dollar-Rmb exchange rate increasing from $1.00 to Rmb 5.7 to
approximately $1.00 to Rmb 8.7.  The US Dollar-Rmb exchange rate has been
relatively stable since January 1, 1994 and the exchange rate quoted by the PBOC
on December 31, 1995 was $1.00 to Rmb 8.32.  However, the US Dollar-Rmb exchange
rate may vary in the future and, as in 1993, the US Dollar-Rmb exchange rate
could become volatile.  Any devaluation of the Rmb against the US Dollar will
have an adverse effect upon the US Dollar equivalent of the Company's net income
and will increase the effective cost of any foreign currency expenses and
liabilities, including any distributions to the shareholders of the Company
which are to be made in US Dollars.  Currently, the Company is unable to hedge
its US Dollar-Rmb exchange rate exposure in China because neither the PBOC nor
any other financial institution authorized to engage in foreign currency
transactions offers forward exchange contracts with respect to Rmb.

                          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.  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.

                                      14
<PAGE>
 
          As part of the Restructuring, Sunbase International (Holdings) Ltd.
("Sunbase International"), a Hong Kong corporation, through a series of
affiliated entities, 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 a 51.4% effective interest in Harbin Bearing by
issuing to Asean Capital Limited ("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 ITEM 13, "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."

                                      15
<PAGE>
 
ITEM 2.   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, which include the Wucangzian finished product
plant and the four plant compounds.  The site is approximately 540,000 km/(2)/
of which production facilities occupy approximately 290,000 km/(2)/ square
meters.  Harbin Holdings has entered into a lease agreement with the Company for
use of its buildings for five years.  See Item 13, "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."


Southwest Products
- ------------------

       Southwest Products leases a 55,000 square foot facility in Irwindale,
California on a month to month basis at a monthly rent of $14,000.


ITEM 3.  LEGAL PROCEEDINGS

       The Company is not a party to, nor is any of its property subject to, any
pending legal proceedings.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

       No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1995.

                                      16
<PAGE>
 
                                    PART II.

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

       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           6-1/32  7-7/8
 
</TABLE>



       The approximate number of record security holders of the Common Stock at
March 15, 1996 was 1,700.

       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 and requirements for capital
improvements.

       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

                                      17
<PAGE>
 
the losses of the previous years have been made up and certain funds retained.
A joint stock company is required by applicable Company Law to reserve 10% of
its after-tax earnings and profits as the mandatory retained fund and 5% of its
after-tax earnings and profits as the public welfare fund.  The joint stock
company does not have to reserve for the mandatory retained fund if the amount
of such fund has reached 50% of the company's registered capital.  For 1994,
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 the Harbin Bearing.

       All distributions by Harbin Bearing will be paid to its shareholders of
record, which include the joint venture partners.  Applicable Chinese laws and
regulations require that, before a Sino-foreign equity joint venture (such as
the joint venture partners) distributes dividends, it must:  (1) satisfy all tax
liabilities; (2) provide for losses in previous years; and (3) make allocations
of capital to its official surplus accumulation fund and public welfare fund.
The Company indirectly owns 99% and 99.9% of the two joint venture partners and,
therefore, approximately 1.1% of distributions received by such partners will be
paid to the Chinese parties of these joint ventures.


ITEM 6.  SELECTED FINANCIAL DATA

       The following selected financial data (expressed in thousands) have been
derived from the audited financial statements of Harbin Bearing General Factory
for the year ended December 31, 1993 and the audited financial statements of the
Company for the years ended December 31, 1994 and 1995.  All U.S. dollar amounts
have been converted from Renminbi based on the exchange rate on December 31,
1995 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.

                                      18
<PAGE>
 
<TABLE> 
<CAPTION> 
OPERATING DATA
                                PROFORMA
                                    1993         1994         1995       1995
                                     RMB          RMB          RMB        US$
<S>                             <C>         <C>          <C>          <C>
 
Net sales                        687,064      719,842      672,359     80,812
Cost of sales                   (439,417)    (441,854)    (381,377)   (45,838)
Gross profit                     247,647      277,988      290,982     34,974
Selling, general and
  administrative expense.        (91,197)     (95,218)    (113,002)   (13,582)
Interest expense, net            (40,638)     (43,446)     (48,446)    (5,822)
Foreign exchange gain/loss             -          725            -          -
Reorganization expenses           (7,307)      (7,307)           -          -
Income before income taxes       108,505      132,742      129,534     15,570
Provision for income taxes       (16,700)     (22,687)     (20,472)    (2,461)
Income before minority
  interests                       91,805      110,055      109,062     13,109
Minority interests               (50,495)     (58,447)     (54,967)    (6,607)
Net income                        41,310       51,608       54,095      6,502
 
BALANCE SHEET

<CAPTION> 
                                PROFORMA
                                    1993         1994         1995       1995
                                     RMB          RMB          RMB        US$
 
Current Assets                   580,412      893,994    1,032,600    124,110
Working Capital                  256,004      247,990      306,288     36,812
Long-Term Debt                   216,915      235,656      218,383     26,248
Minority Interests               229,728      288,175      343,142     41,243
Shareholders' Equity             189,267      248,182      330,565     39,731
Total Assets                     960,318    1,418,017    1,618,402    194,520
</TABLE>

                                      19
<PAGE>
 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS.

OVERVIEW
- --------

          The Company owns, through various subsidiaries and joint venture
interests, a 51.4% indirect ownership in Harbin Bearing, which develops and
manufactures bearings in China and sells bearings in China as well as western
countries, including the United States.

          The Company produces seven types of bearings:  deep groove ball
bearings, self-aligning bearings, cylindrical roller bearings, angular contact
ball bearings, tapered roller bearings, thrust bearings and linear-motion ball
bearings, with a focus on medium and large sized bearings which have a
relatively higher profit margin.  During the year, 92 new bearing products were
introduced.  These new bearing products are mainly medium and large sized self-
aligning ball bearings and angular contact ball bearings which are used for
motor vehicles and machine-tools applications, respectively.

          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.

          Effective December 29, 1995, the Company acquired Southwest Products
Company ("Southwest Products") which is a small but strategically-positioned,
engineering-intensive company that produces precision spherical bearings for US,
European and Asian aerospace and high tech commercial applications and the US
military.  Southwest Products recently established a joint venture company in
Shanghai, China (the "Shanghai Joint Venture") that is expected to begin
production in the second half of 1996 of a line of precision-grade, high-profit-
margin spherical bearings primarily for distribution to international aircraft
original equipment manufacturers ("OEMs") that have major "offset" commitments
to purchase made-in-China parts.  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 have not
been consolidated into the Company and will be 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 Group at December 31, 1995.

          After acquiring Southwest Products, the management of the Company has
developed a Strategic Plan to foster future growth.  The Strategic Plan has
three main objectives:

                                      20
<PAGE>
 
          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.

          3.  To achieve rapid growth of the Shanghai Joint Venture by
targeting customers with "offset" commitments to purchase made-in-China parts.

          Unless specifically stated, all amounts in this Management's
Discussion and Analysis are in thousands (RMB000).

                                      21
<PAGE>
 
RESULTS OF OPERATIONS
- ---------------------

RESULTS FOR 1995 COMPARED TO 1994
<TABLE>
<CAPTION>
 
                                 Year ended      Year ended
                                December 31,    December 31,
                                        1995            1994
                                         RMB             RMB
                                ------------    ------------
<S>                             <C>             <C>
 
Net sales                            672,359         719,842
Cost of sales                       (381,377)       (441,854)
                                    --------        --------
 
Gross Profit                         290,982         277,988
 
Gross Profit percentage                 43.3%           38.6%
 
Selling expenses                     (18,942)        (20,471)
General and Administrative
  expenses                           (94,060)        (74,747)
Interest Expense                     (48,446)        (42,721)
Reorganization Expenses                    -          (7,307)
                                    --------        --------
 
Income Before Income Taxes           129,534         132,742
Provision for Income Taxes           (20,472)        (22,687)
                                    --------        --------
 
Income Before Minority
  Interests                          109,062         110,055
Minority Interests                   (54,967)        (58,447)
                                    --------        --------
 
Net Income                            54,095          51,608
                                    ========        ========
</TABLE>

NET SALES
- ---------

Net sales decreased by RMB 47,483 or 6.6% in 1995 as compared to 1994.  The
decrease was mainly due to the change in the Company's marketing strategy in
order to further enhance its credit control on sales in the last quarter of 1995
whereby a contracted sales order was entered into with a major distributor,
which is a related party beneficially owned by the Harbin Municipal Government.
Delivery was not made in respect of this transaction at December 31, 1995 and
thus this sale was not recognized in the Financial Statements.  However, in
anticipation of this transaction, the Company reduced the delivery of its
products to other customers.  As a result of the aforementioned contracted sales
order in the last quarter of 1995, the net reported sales in the last quarter of
1995 was RMB 21,289.

                                      22
<PAGE>
 
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.


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 adjustment to reflect under
absorption of labor and overhead of approximately RMB 4,700.  The gross profit
margin for 1995 would have been only 39.2% on revenue if no account was taken of
the year end adjustments on closing inventories.


SELLING EXPENSES
- ----------------

          Selling expenses decreased by RMB 1,529 or 7.5% in 1995 as compared to
1994.  The decrease was in line with the decrease in sales this year.  Selling
expenses as a percentage of revenue has remained constant at a rate of 2.8%.


GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------

          General and Administrative expenses increased by RMB 19,313 or 25.8%
in 1995 as compared to 1994.  General and Administrative expenses as a
percentage of revenues increased from 10.4% to 14.0%.  The increase in General
and Administrative expenses was mainly attributable to:

          a. An increase in staff wages and welfare costs 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.

                                      23
<PAGE>
 
          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.


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.


LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------


OPERATING ACTIVITIES
- --------------------

          The Company utilized cash in operating activities of RMB 39,057 in
1995 as compared to RMB 86,312 used in operating activities in 1994.  The
decrease in cash used in operating activities was mainly due to net improvements
in cash settlements from accounts receivable.  The Company continues to
strengthen the enforcement of credit controls and the acceleration of cash
collections.

          As of December 31, 1995, the Company's working capital had increased
to RMB 306,288 as compared to RMB 247,990 at December 31, 1994.  The Company's
current ratio was 1.42:1 as of December 31, 1995 as compared to 1.38:1 at
December 31, 1994.

                                      24
<PAGE>
 
INVESTING ACTIVITIES
- --------------------

          As of December 31, 1995, the Company had outstanding capital
expenditure commitments of RMB 46,027 (December 31, 1994: RMB 91,500).  These
capital commitments are expected to be funded through December 1996.

          Total capital expenditure for 1995 were RMB 92,571 and were mainly for
construction of new plant, buildings and renovating existing facilities and
equipment.  They were financed primarily by internally generated funds and
short-term and long-term bank loans (see below).


FINANCING ACTIVITIES
- --------------------

          The Company relies on both short-term and long-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, and are reviewed
on a revolving basis.  During the year of 1995, new short-term bank loans (after
deducting repayment of previous loans) totaled RMB 49,735.  The net proceeds
from short-term bank loans in 1995 were mainly utilized to fund capital
expansion projects.

          Long-term bank loans have terms ranging from 2 to 4 years and are
utilized for funding capital expansion projects.  During the year 1995, new
long-term bank loans after deducting repayment of previous loans totaled RMB
42,246.

          The Company believes that it will be able to continue to maintain and
expand its bank borrowings under existing terms and conditions.  The Company
believes that cash flow from operations, combined with cash and bank balances
and bank borrowings, will provide sufficient cash flow to finance internal
growth, capital projects and debt service requirements for the foreseeable
future.


EFFECT OF INFLATION
- -------------------

          In China, the general inflation rate continued to be in excess of 10%
during the year 1995 but it is expected that the Chinese government will
continue to make substantial efforts to curb inflation over the near term.
During the last quarter of 1995, the inflation growth rate has begun to slow
down.

          The Company constantly monitors the effects of inflation.  In general,
the Company is able to raise its selling prices to shift a portion of the
inflated costs to the customers.  The price of the major raw material used by
the Company (bearing steel) remained fairly stable during 1994 and 1995.  The
major impact of inflation on cost was from labor costs due to

                                      25
<PAGE>
 
increases in employees wages.  However, the improved operational efficiency, as
reflected by the increased gross profit ratio during the year of 1995, managed
to offset the effects of inflation.


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 China Bearing and the Company had occurred on January 1,
1993 which 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 in the aforesaid Proforma Financial
Statements.

          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.

                                      26
<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
34.8% in 1993, primarily due to the slight increase in general sales price and
the effect of the sales mix change to higher margin products and the change in
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.


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.

                                      27
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------

The Company's overall cash position decreased by RMB 101,000 in 1994 from 1993.
The cash used in operating activities decreased from RMB 87,500 in 1993 to RMB
86,300 in 1994.  The cash was mainly used to finance accounts receivable.  In
1994, cash used in investing activities amounted to RMB 153,000 compared to RMB
26,000 in 1993.  The increase was attributable to the investment in new
equipment and construction of a new plant in order to cope with the future
expansion.  Cash from financing activities was decreased from RMB 266,500 in
1993 to RMB 138,300 in 1994.  In 1994, the cash received was mainly in the form
of loans to finance working capital and capital projects whereas in 1993, the
cash from financing was mainly arising from equity financing for the joint
venture and employees' stock comprised RMB 300,000.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

          The financial statements and exhibits are listed at Item 14 "Exhibits,
Financial Statement Schedules and Reports on Form 8-K".

          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 12/31/95: 8:32 RMB to $1)
<S>                 <C>         <C>        <C>         <C>
 
1995                  RMB         RMB        RMB             RMB
First Quarter         198,854     76,758     15,328           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>

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE.

          Not Applicable.

                                      28
<PAGE>
 
                                   PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

          A.  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                 43            1996
William McKay             41            1996
(Roger) Li Yuen Fai       35            1994
Linda Yang                35            1994
(Franco) Ho Cho Hing      43            1994
</TABLE>

          B.  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
William McKay                   41   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
(John) Chong Chi Yeung          28   Corporate Secretary            1995
 
</TABLE>

GUNTER GAO, CHAIRMAN AND DIRECTOR, 40.  Mr. Gao, a Hong Kong businessman who has
extensive business experience in China, is the Chairman of the Board and a
principal of Sunbase International, which indirectly owns a controlling position
in Sunbase Asia.  Sunbase International has various industrial holdings in
China, in industries such as aviation, transportation, cement,

                                      29
<PAGE>
 
steel and retail.  Mr. Gao is also the Chairman of the Board of Sunbase Asia.
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, DIRECTOR, 43.  Mr. Kan has been a director of Sunbase Asia since the
beginning of 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, 41.  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 was instrumental in
establishing the joint venture between Southwest Products and Shanghai Hong Xing
Bearing Factory.  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.

(ROGER) LI YUEN FAI, GROUP FINANCIAL CONTROLLER, CHIEF FINANCIAL OFFICER, VICE-
PRESIDENT AND DIRECTOR, 35.  Mr. Li has been the Group Financial Controller of
Sunbase International since

                                      30
<PAGE>
 
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.

LINDA YANG, DIRECTOR, 35.  Ms. Yang has been the Executive Director and a
principal of Sunbase International since 1989.  Ms. Yang was a co-founder of
Sunbase International, has extensive experience in China business operations and
holds a degree from a Chinese university.  She is the wife of Gunter Gao.

(FRANCO) HO CHO HING, DIRECTOR, 43.  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).

KEY MANAGEMENT

MR. MA JI BO, GENERAL MANAGER, 57.  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 for scientific
and technological progress in the Chinese bearing industry and holds a degree in
rocket science from Northwest China Engineering University.

MR. MEI HAI YOU, DEPUTY GENERAL MANAGER, 59.  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, 50.  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
proven very effective at 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 MANAGER AND CHIEF ACCOUNTING OFFICER, 29.
Since 1994, Mr. Chang has been the Assistant Manager of Finance of Sunbase
International and has been the Chief Accounting Officer of Sunbase Asia since
1995.  Mr. Chang was employed by

                                      31
<PAGE>
 
the international accounting firm of Ernst & Young in Hong Kong from 1989 to
1994, most recently as audit manager.

TODD STOCKBAUER, FINANCE MANAGER, 33.  Mr. Stockbauer has been employed as the
Finance Manager of Southwest Products since 1991 and 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 from the University of California at Santa Barbara with an emphasis in
accounting, and is a Certified Public Accountant in the State of California.

ERNST RENEZEDER, DIRECTOR OF MANUFACTURING, 59.  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, 59.  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, 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, 35.  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.

                                      32
<PAGE>
 
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- -------------------------------------------------

          Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year and certain written
representations, no persons who were either a director, officer, beneficial
owner of more than 10% of the Company's common stock, failed to file on a timely
basis reports required by Section 16(a) of the Exchange Act during the most
recent fiscal year.

ITEM 11.  EXECUTIVE COMPENSATION.

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 Holdings Limited 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 Ms. Yang, Mr. Li and Mr.
Chang).  In consideration of the provision of such services, 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 ITEM 13 "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 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

                                      33
<PAGE>
 
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.

EMPLOYMENT AGREEMENT

          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.

                                      34
<PAGE>
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

          The following table sets forth, as of March 15, 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)/        85.80%         28,111,000/(4)/     92.53%
 
Gunter Gao                           13,711,000/(2) (5)/    77.22%         25,299,900/(4)/     83.28%
Chairman and Director
 
Linda Yang                           13,711,000/(2) (5)/    77.22%         25,299,900/(4)/     83.28%
Director
 
William McKay/(6)/                         -                  -                  -               -
Chief Executive Officer,
President and Director
 
Li Yuen Fai (Roger)                        -                  -                  -               -
Chief Financial Officer,
Vice President and Director
 
Dickens Chang                              -                  -                  -               -
Chief Accounting Officer
 
Billy Kan                                  -                  -                  -               -
Director
 
Ho Cho Hing (Franco)                       -                  -                  -               -
Director
 
Sunbase International                13,711,000             77.22%         25,299,900          83.28%
(Holdings) Limited/(7)/
 
All directors and officers           13,711,000             85.80%         28,111,000          92.50%
of the Company as a Group/(8)/
</TABLE>
_________________________
* less than 1 percent

(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 15,980,063 shares of Common Stock outstanding on a fully-diluted
     basis calculated as follows:  (a) 11,700,063 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.

                                      35
<PAGE>
 
(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)  Does not include 800,000 shares of Common Stock issuable upon exercise of
     the stock options granted to Mr. McKay.  See "Stock Option Plan."

(7)  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%.

(8)  Consists of shares beneficially owned by Gunter Gao and Linda Yang.

                                      36
<PAGE>
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        As discussed above (See ITEM 1 "BUSINESS 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 Holdings Limited ("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 (See,
"Organizational Chart").  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.

        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.

                                      37
<PAGE>
 
        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.

        Harbin Holdings and Harbin Bearing have entered into a lease providing
for the use of land by Harbin Bearing at US $301,000 per annum.

        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 (US $18,000) payable to each
of the joint venture companies.

                                      38
<PAGE>
 
                                    PART IV.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

     (a) The following financial statements and exhibits are filed with and as a
part of this Report.

<TABLE>
<CAPTION>
                                                                    Page No.(s)
                                                                    -----------
         <S>                                                        <C>
         (1) Financial Statements.
             --------------------                                          
 
             Index to Financial Statements                                   46
 
             Report of Independent Auditors                                  47
 
             Consolidated Balance Sheets as of                               
              December 31, 1994 and December 31, 1995                        48
 
             Consolidated Statements of Income for the years 
              ending December 31, 1994 and December 31, 1995                 50
 
             Consolidated Statements of Cash Flows for the years
              ending December 31, 1994 and December 31, 1995                 51
 
             Consolidated Statements of Changes in Shareholders'
              Equity for the years ended December 31, 1994 and
              December 31, 1995                                              53
 
             Notes to Consolidated Financial Statements                      54
 
         (2) Exhibits
</TABLE> 

<TABLE> 
<CAPTION> 
 
     Exhibit No.       Description of Document                       Page No.(s)
     -----------       -----------------------                       -----------
     <S>               <C>                                           <C> 
     (a) Exhibits.  The following exhibits of the Company are
          included herein.
 
         (2) Plan of acquisition, reorganization, arrangement, 
              liquidation or succession.
</TABLE>

                                      39
<PAGE>
 
<TABLE>
     <S>               <C>                                           <C> 
     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          75
                       Designation for Series B Preferred Stock
 
     (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
                       International and Harbin Hazhou Bearing
                       Distributing Company with respect to Harbin
                       Sunbase./(3)/
 
</TABLE>

                                      40
<PAGE>
 
<TABLE>
     <S>               <C>                                           <C> 
     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)/
 
     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)/
 
</TABLE>

                                      41
<PAGE>
 
<TABLE>
     <S>               <C>                                           <C> 
     10.16             Ancillary and Transport Equipment Lease
                       Agreement between Harbin Precision and
                       Harbin Bearing./(3)/
 
     10.17             Know-How Contract dated December 18,               84
                       1992 between Southwest Products and
                       Shanghai Hong Xing Bearing Factory.
 
     10.18             Contract for Joint Ventures dated March 21,       124
                       1994 between Southwest Products and
                       Shanghai Hong Xing Bearing Factory.
 
     10.19             Articles of Association for Joint Venture         158
                       dated March 21, 1994 relating to the
                       Shanghai Joint Venture.
 
     10.20             Agreement and Plan of Reorganization and          190
                       Merger dated as of December 29, 1995
                       among the Company, Southwest Products
                       and the shareholders of Southwest Products.
 
     10.21             Employment Agreement dated as of January          232
                       16, 1996 between the Company, Southwest
                       Products and William McKay.
 
     10.22             1995 Stock Option Plan.                           245
</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.


    22            The Company's subsidiaries are:
<TABLE>
<CAPTION>
 
                                    Effective
                                    Percentage
Name of Subsidiary                  Ownership     Place of Incorporation
- ---------------------------         ----------    -------------------------
<S>                                 <C>           <C>
 
CHINA BEARING                       100%          Bermuda Holding Company
HOLDINGS LIMITED
 
CHINA INTERNATIONAL                 100%          Hong Kong Holding Company
BEARING HOLDINGS LIMITED
 
</TABLE>

                                      42
<PAGE>
 
<TABLE>
<S>                                 <C>           <C>
HARBIN SUNBASE                       99%          PRC JV Holding Co.
DEVELOPMENT COMPANY
LIMITED
 
HARBIN XINHENGLI                     99.90%       PRC JV Holding Co.
DEVELOPMENT
COMPANY LIMITED
 
HARBIN BEARING                       51.4%        PRC Joint Stock Company
COMPANY, LTD.
 
SOUTHWEST PRODUCTS                  100%          California Corporation
COMPANY
 
SHANGHAI SOUTHWEST                   28%          PRC Joint Venture
BEARING COMPANY
COMPANY

</TABLE>
______________
(b) No Reports on Form 8-K were filed during or related to the last quarter of
    1995.

                                      43
<PAGE>
 
                                   SIGNATURES
                                   ----------



In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                              Sunbase Asia, Inc.


Date:  May 3, 1996            By: /s/ William McKay
                                  ------------------------
                                  William McKay, President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.


Date: May 3, 1996             By: /s/ Gunter Gao
                                  ------------------------
                                  Gunter Gao, Chairman


Date: May 3, 1996             By: /s/ Billy Kan
                                  ------------------------
                                  Billy Kan, Director


Date: May 3, 1996             By: /s/ William McKay
                                  ------------------------
                                  William McKay, Chief Executive
                                  Officer, President and Director


Date: May 3, 1996             By: /s/ Roger Li
                                  ------------------------
                                  (Roger) Li Yuen Fai, Vice
                                  President and Chief Financial
                                  Officer and Director


Date: May 3, 1996             By: /s/ Linda Yang
                                  ------------------------
                                  Linda Yang, Director


Date: May 3, 1996             By: /s/ Franco Ho Cho Hing
                                  ------------------------
                                  (Franco) Ho Cho Hing, Director


Date: May 3, 1996             By: /s/ Dickens Chang
                                  ------------------------
                                  (Dickens) Change Shing Yam, Chief
                                  Accounting Officer

                                      44
<PAGE>
 
                              Financial Statements


                      SUNBASE ASIA, INC. AND SUBSIDIARIES





                                 ERNST & YOUNG
                                   HONG KONG
<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS
<TABLE> 
<CAPTION> 

                                                                            Page
                                                                            ----
<S>                                                                         <C>

SUNBASE ASIA, INC. AND SUBSIDIARIES:
 
  Report of Independent Auditors                                             F-2
 
  Consolidated Balance Sheets as of December 31, 1994                    F-3 - 4
    and December 31, 1995
 
  Consolidated Statements of Income                                          F-5
    for the years ended December 31, 1994 and December 31, 1995
 
  Consolidated Statements of Cash Flows                                  F-6 - 7
    for the years ended December 31, 1994 and December 31, 1995
 
  Consolidated Statements of Changes in Shareholders'                        F-8
    Equity for the years ended December 31, 1994
    and December 31, 1995
 
  Notes to Consolidated Financial Statements                            F-9 - 29
</TABLE>

                                      F-1
<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-2
<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
Obligations and commitments                  13          --          --        --
</TABLE>

                                                          Continued on next page

             The accompanying notes form an integral part of these
                       consolidated financial statements

                                      F-3
<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>
Shareholders' equity:
Common Stock, par value US$0.001 each,         19          99          99        12
  50,000,000 shares authorized;
  11,700,063 issued, and fully paid up
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'                 1,418,017   1,618,402   194,520
 equity                                             =========   =========   =======
 
</TABLE>
             The accompanying notes form an integral part of these
                       consolidated financial statements

                                      F-4
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME
          FOR THE YEARS ENDED 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 to
  -  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-5
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
          FOR THE YEARS ENDED 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>
                                                        (Continued on next page)

             The accompanying notes form an integral part of these
                      consolidated financial statements.


                                      F-6
                                     
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
          FOR THE YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1995
                                  (continued)

                             (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
                                       1994        1995        1995
                                        RMB         RMB         US$
                                        ---         ---         ---
<S>                                    <C>         <C>         <C>
Cash flows from financing
activities:
Proceeds from short term bank
  loans                                 440,213     518,573     62,328
Repayment of short term bank
  loans                                (360,344)   (468,838)   (56,351)
Redemption of debentures                (10,000)         --         --
Proceeds from long term bank
  loans                                  68,424      54,289      6,525
Repayment of long term bank loans            --     (12,043)    (1,447)
                                       --------    --------    -------
Net cash provided by financing
  activities                            138,293      91,981     11,055
                                       --------    --------    -------
 
Net decrease in cash and cash
  equivalents                          (100,969)    (34,702)    (4,171)
Cash and cash equivalents, at           
  beginning of year                     166,615      65,646      7,890
                                       --------    --------    -------
Cash and cash equivalents, at end
  of year                                65,646      30,944      3,719
                                       ========    ========    =======
 
Income taxes paid                        10,920      15,953      1,917
Interest paid (net of amount
  capitalized)                           30,856      35,186      4,229
Non-cash transactions:
Financing 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-7
<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
New issue (note 1)               --         --    28,288             --         --         --
Net income                       --         --        --             --         --     54,095
Appropriation to
 reserves (note 20)              --         --        --             --     12,255    (12,255)
                                 --     ------   -------        -------     ------    -------
 
Balance at 
 December 31, 1995               99     44,533    28,288        151,942     25,266     80,437
                                 ==     ======    ======        =======     ======     ======
</TABLE>
             The accompanying notes form an integral part of these
                      consolidated financial statements.

                                      F-8
<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
10,261,000 common stock shares, 36 shares of Series A convertible preferred
stock and a US$5 million secured promissory note to Asean Capital in exchange
for the entire issued share capital of China Bearing Holdings Limited ("China
Bearing").

          The Series A convertible preferred stock is convertible at the option
of the holder at a conversion rate of 100,000 common stock shares per Series A
share. As preferred shares, they also carry 500,000 votes per share and are
entitled to the same dividend as the common stock shareholders on the basis as
if the preferred shares had been converted to common stock shares at the
conversion rate as noted above.

          The total number of common stock shares 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 then 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%, equity interests in 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.

                                      F-9
<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)

          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 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 others (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

                                      F-10
<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)

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.

          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

                                      F-11
<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)

not effected 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.

          Southwest is a manufacturer of spherical bearings and supplies its
products to the aerospace, commercial aviation and other industries around the
world. Its major customers are in the United States of America. 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 reallocate a portion of the purchase consideration to
the investment in the Shanghai Joint Venture, with a commensurate reduction to
goodwill. Such reallocation, 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 and Southwest 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

                                      F-12
<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)

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. Accordingly,
no consolidated statements of income and cash flows were prepared for the year
ended December 31, 1993.

          These 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 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.

                                      F-13
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (Amounts in thousands, except number of shares and per share data)

     2.  BASIS OF PRESENTATION (Continued)

             The financial information has been prepared in Renminbi (RMB), the
     national currency of China. Solely for the convenience of the reader,
     certain elements of these financial statements have been translated into
     United States dollars prevailing at the People's Bank of China on December
     31, 1995 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
     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.

                                      F-14
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (Amounts in thousands, except number of shares and per share data)

     3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

             (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 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

                                      F-15
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (Amounts in thousands, except number of shares and per share data)

     3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     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 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%.

                                      F-16
<PAGE>

                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (Amounts in thousands, except number of shares and per share data)

     4.  INCOME TAXES (Continued)

             The 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 is not practicable.

             The reconciliation of the effective income tax rates based on
     income before income taxes stated in the consolidated statement of income
     to the statutory income tax rate in China applicable to the Company's only
     operating subsidiary is as follows:

<TABLE>
<CAPTION>
 
                                    Year ended
                                    December 31,
                                   1994    1995
<S>                                <C>     <C>
         Effect of
           - Statutory tax rate    15.0%   15.0%
         Permanent difference       2.0%    0.8%
                                   ----    ----

                                   17.0%   15.8%
                                   ====    ====
</TABLE>


     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)
                                                       -------    --------
 
         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.
 
                                      F-17
<PAGE>

                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (Amounts in thousands, except number of shares and per share data)

6.  INVENTORIES
 
    Inventories comprise:

<TABLE> 
<CAPTION> 
                                                      December 31,
                                                      1994        1995
                                                       RMB         RMB
 <S>                                              <C>         <C>  
 Raw materials                                     122,684     105,132
 Work-in-progress                                   87,839     104,697
 Finished goods                                    169,948     271,477
                                                  --------    --------
                                                   380,471     481,306
 Less: Allowance for obsolescence                  (19,016)     (4,309)
                                                  --------    --------
 
 Inventories, net                                  361,455     476,997
                                                  ========    ========
 
 Movement of allowance for obsolescence
  Balance as at January 1,                          23,857      19,016
  Provided during the year                               -       1,098
  Obsolete inventories sold during
   the year                                         (4,841)    (15,805)
                                                  --------    --------
 
  Balance as at December 31,                        19,016       4,309
                                                  ========    ========
 </TABLE> 
 
7.  FIXED ASSETS
 
<TABLE> 
<CAPTION> 
                                                       December 31,
                                                      1994        1995
                                                       RMB         RMB
 <S>                                              <C>         <C> 
 Buildings                                          71,644      68,725
 Machinery and equipment                           283,748     402,390
 Motor vehicles                                     16,970      16,712
 Furniture, fixtures and office equipment            4,240       5,110
 Construction in progress                          149,255     141,757
                                                   -------     -------
                                                   525,857     634,694
 Less: Accumulated depreciation                    (44,562)    (80,608)
                                                   -------     -------
 
                                                   481,295     554,086
                                                   =======     =======
</TABLE>

             Total amount of interest capitalized during the year and included
     in the above fixed assets are RMB 10,411 (1994: RMB 1,334).

             The Group's buildings are located in PRC and the land on which the
     Group's buildings are situated is State-owned.

                                      F-18
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (Amounts in thousands, except number of shares and per share data)

     7.  FIXED ASSETS (Continued)

             The 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 permitted to offset the balance
     of RMB38,860 against its VAT payable within a period of five years starting
     from January 1, 1995. Accordingly, a discount has been applied using Harbin
     Bearing's average 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-19
<PAGE>

                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (Amounts in thousands, 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-20
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (Amounts in thousands, 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 commitment 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.  


     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 stock 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

                                      F-21
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (Amounts in thousands, except number of shares and per share data)

     17.  NUMBER OF SHARES/EARNINGS PER SHARE (Continued)

     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, 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 the full
     convertibility of Renminbi into United States dollars or other foreign
     currencies. Payment for imported materials and the 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 centre is granted to enterprises in China for
     valid reasons such as purchases of imported goods and the 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:

                                      F-22
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (Amounts in thousands, except number of shares and per share data)

     19.  CONTRIBUTED SURPLUS (Continued)

     <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 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. DISTRIBUTIONS OF PROFIT AND APPROPRIATIONS TO RESERVES

             According to the relevant laws and regulations for joint stock
     limited enterprises and Harbin Bearing's articles of association, the
     distribution of 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>

                                      F-23
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (Amounts in thousands, except number of shares and per share data)

     20.  DISTRIBUTIONS OF PROFIT AND APPROPRIATIONS TO RESERVES (Continued)

             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 for staff were 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 PRC 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 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-24
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (Amounts in thousands, 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 trade receivables from HBIE and Xin Dadi
             included under due from related companies were RMB 65,520 (1994:
             RMB 54,496) and RMB Nil (1994: RMB 9,164), respectively. An amount
             due to Xin Dadi is included in due to related companies as at
             December 31, 1995 at 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-25
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (Amounts in thousands, except number of shares and per share data)

     23. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (Continued)  

         (c) Leases of Buildings

             Options to extend the leases and to purchase the leased assets have
             been granted to Harbin Bearing upon expiring of the initial
             leases. All these leases are treated as capital leases.

             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

                                      F-26
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (Amounts in thousands, except number of shares and per share data)

     23. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (Continued)

         (f) Trademark license (Continued)

             an annual basis at 0.5% of the net sales of Harbin Bearing
             effective from January 1, 1994 to December 31, 2003 and at 0.3% of
             the net sales from January 1, 2004 to December 31, 2013.  The
             trademark license can be transferred to Harbin Bearing thereafter
             upon mutual agreement between the two parties 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 stock
     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 note 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
         approximates 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.

                                      F-27
<PAGE>

                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (Amounts in thousands, except number of shares and per share data)

     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:

             Financial instruments that potentially subject the Group to a
         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

             On January 2, 1996, the Company's board of directors adopted a
         stock option plan (the "Plan"). The Plan permits the directors to grant
         options to purchase an aggregate of up to 2,500,000 shares of the
         common stock of the Company. All incentive stock options 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

                                      F-28
<PAGE>
 
                      SUNBASE ASIA, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (Amounts in thousands, except number of shares and per share data)

     27. SUBSEQUENT EVENT (Continued)

         affiliate of the Company, the price shall not be less than 110% of such
         fair market value.  The Plan terminates on the earlier of the date on
         which no additional shares of common stock are available for issuance
         under the Plan or January 2, 2006.

                                     F-29

<PAGE>
 
                                                                     EXHIBIT 3.5

             THIRD AMENDED AND RESTATED CERTIFICATE OF DESIGNATION
             -----------------------------------------------------



          WHEREAS, the Board of Directors of this Corporation has previously
          authorized the issuance of Series B Preferred Stock and has filed a
          Certificate of Designation relating thereto with the Secretary of
          State of Nevada on December 14, 1994, which Certificate of Designation
          this Corporation has, by filing appropriate certificates, amended and
          restated on December 16, 1994 and on December 30, 1994, and corrected
          on January 3, 1995;


          WHEREAS, no shares of such Series B Preferred Stock have been issued;


          WHEREAS, the Board of Directors of this Corporation has filed a
          Certificate of Designation with the Secretary of State of Nevada on
          January 3, 1996 intending such Certificate to supersede, amend and
          restate all Certificates filed by this Corporation with respect to the
          Series B Preferred Stock.  However, the Certificate filed on January
          3, 1996 did not set forth such intentions;


          WHEREAS, the Board of Directors of this Corporation hereby determines
          that it is in the best interests of this Corporation that this Third
          Amended and Restated Certificate of Designation completely supersede,
          amend and restate all of the aforementioned Certificates with respect
          to the Series B Preferred Stock as follows:


          WHEREAS, the Articles of Incorporation of this Corporation, as
          amended, authorize this Corporation to issue 50,000,000 shares of
          preferred stock, par value $.001 per share;
<PAGE>
 
          WHEREAS, the Articles of Incorporation of this Corporation, as
          amended, authorize the Board of Directors of this Corporation to
          determine the designations, powers, preferences, rights and
          limitations of such preferred stock, including the rights, if any, of
          the holders thereof with respect to voting, dividends, redemption,
          liquidation and conversion;


          WHEREAS, the Board of Directors of this Corporation has previously
          authorized the issuance of Series A Preferred Stock of this
          Corporation;


          WHEREAS, the Board of Directors hereby determines that it is in the
          best interests of this Corporation to designate 6,800 shares of Series
          B Preferred Stock upon the following terms and conditions:


          NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby
          fixes and determines the designation of, the number of shares
          constituting, and the powers, preferences, rights and limitations
          relating to, said Series B Preferred Stock, as follows:


          1.   Designation and Number of Shares. The designation of such series
               --------------------------------                     
of Preferred Stock is Series B Preferred Stock and the number of shares of such
series is 6,800.


          2.    Dividend Rights. Each of the shares of the Series B Preferred
                --------------- 
Stock, on an "as-converted" and pro-rata basis, shall participate with the
shares of the Common Stock of this Corporation in any dividends paid by this
Corporation thereon.


          3.   Rights of Liquidation. Upon any voluntary or involuntary
               ---------------------
liquidation, dissolution or winding up of the Corporation, the holders of Series
B Preferred Stock shall

                                       2
<PAGE>
 
be entitled, before any distribution of assets shall be made to the holders of
Common Stock or any other shares of the Corporation ranking junior to Series B
Preferred Stock, to receive an amount equal to $500 per share of Series B
Preferred Stock so held.  After the full preferential liquidation amount has
been paid to, or determined or set apart for, the holders of Series B Preferred
Stock, the remaining assets shall be paid to the holders of all classes of
Common Stock and other shares of the Corporation ranking junior to Series B
Preferred Stock.  In the event the assets of the Corporation, after being valued
at the highest value permitted by law, are insufficient to pay the full
preferential liquidation amount required to be paid to the holders of Series B
Preferred Stock, the entire remaining assets shall be paid to the holders of
Series B Preferred Stock on a pro-rate basis, and the holders of Common Stock
and any other shares of the Corporation ranking junior to Series B Preferred
Stock shall receive nothing.  Neither the merger, consolidation or
reorganization of the Corporation nor the sale, lease or conveyance of all or
substantially all of the Corporation's assets shall be deemed a liquidation,
dissolution or winding up of the Corporation within the meaning of this section.
However, the Company shall notify the holders of the Series B Preferred Stock as
to any such merger, consolidation or reorganization.


          4.   Rights Upon Reorganizations, Mergers; Consolidations or Sale of 
               ---------------------------------------------------------------
Assets.  If at any time there shall be a capital reorganization of the
- ------                                                                
Corporation's Common Stock (other than a stock dividend, combination or split
provided for herein) or merger of the Corporation into another corporation, or
the sale of the Corporation's properties and assets as, or substantially as, an
entirety to any other person or entity, then, as part of such reorganization,
merger or sale, lawful provision shall be made so that the holders of the Series
B Preferred Stock shall thereafter be entitled to receive upon conversion of the
Series B Preferred Stock, the number of shares of stock or other securities or
property of the Corporation, or of the successor corporation resulting from such
merger, to which the holders of the Common Stock deliverable upon conversion of
the Series B Preferred Stock would have been entitled on such capital
reorganization, merger or sale if the Series B Preferred Stock had been
converted immediately before that capital reorganization, merger or sale to the
end that the provisions of this Section 4 (including adjustment of the
"Conversion Rate", defined below, then in effect and number of shares
purchasable upon conversion of the Series B Preferred Stock) shall be applicable
after that event as nearly equivalently as may be practicable.

                                       3
<PAGE>
 
          5.   Voting Rights.
               ------------- 


               (a)  Holders of Series B Preferred Stock will to the extent
permitted by law be entitled to vote on matters submitted to a vote of
shareholders of the Corporation as if the Series B Preferred Stock were
converted into shares of Common Stock pursuant to the other provisions hereof on
the record date for determining who is so entitled to receive notice of and vote
upon any such matter, or, if no record was taken, the date as of which holders
of Common Stock entitled to vote was determined.  Notwithstanding the foregoing,
each share of Series B Preferred Stock will be deemed convertible into 100
shares of Common Stock solely for purposes of determining voting rights until
such share has been converted as provided below.


               (b)  So long as any of the shares of Series B Preferred Stock are
outstanding, the Corporation will not, without the affirmative vote or consent
of the holders of at least fifty percent (50%) of the shares of Series B
Preferred Stock (the holders of such shares voting or consenting separately as a
class) at the time outstanding, given in person or by proxy, either in writing
or by a resolution adopted at a meeting called for the purpose of amending,
altering or repealing any of the provisions of the Corporation's Articles of
Incorporation, By-laws or the resolution providing for the issuance of such
shares, pass any stockholder resolution, including such action effected by
merger or similar transaction in which the Corporation is the surviving
corporation, if such amendment or resolution would affect adversely the
preferences, special rights or powers of the shares of Series B Preferred Stock.


          6.   Redemption Rights.
               ----------------- 


               (a)  At the individual option of each holder of shares of Series
B Preferred Stock, the Corporation shall 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 Corporation by the holder on or prior to fifteen
(15) days from the date that the Corporation notifies such holder of its intent
to file a registration statement (the "Optional Registration Statement") with
the Securities and Exchange Commission (the "Commission") for a public offering
by the Corporation of the Common Stock of the Corporation with respect to which
the applicable

                                       4
<PAGE>
 
registration statement designates that all or a portion of the proceeds thereof
will be used to redeem the Series B Preferred Stock.  The Corporation shall
redeem such shares out of the proceeds of such public offering by paying in cash
therefor $500 per share (as adjusted for any stock dividends, combinations or
splits with respect to such shares) 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.


               (b)  Application of Funds; Payment.  If, on that date that is
                    -----------------------------                           
twenty-one (21) business days after the date of closing of any public offering
of the Corporation the net proceeds of which are designated to be used to redeem
the Series B Preferred Stock (the "Redemption Date"), the funds necessary for
such redemption shall have been irrevocably set aside by the Corporation,
separate and apart from its other funds, for the pro rata benefit of the holders
of the shares of Series B Preferred Stock so called for redemption, then
notwithstanding that any certificate for the shares of Series B Preferred Stock
so called for redemption shall not have been surrendered for cancellation by the
Redemption Date, the shares represented thereby shall no longer be deemed
outstanding, the right to receive any dividends thereon shall cease to
accumulate from the Redemption Date, and all rights of the holders of the shares
so called for redemption shall forthwith, after the Redemption Date, cease and
terminate, excepting only the right of the holder thereof to receive the
redemption price therefor, but without interest, upon surrender of the
certificate or certificates evidencing such shares as provided in the notice of
redemption.  Any funds so set aside by the Corporation and unclaimed at the end
of two (2) years from the Redemption Date shall revert to the general funds of
the Corporation, after which reversion, the holders of such shares of Series B
Preferred Stock so called for redemption shall look solely to the Corporation
for payment of the redemption price.  Any interest accrued on funds so deposited
shall be paid to the party entitled to such funds.  Notwithstanding the
foregoing, if such funds become available or are paid to a public official
pursuant to any abandoned property, escheat or similar law, the Corporation
shall have no further obligation with respect to such funds or payment of the
redemption proceeds to any former holder of such shares.


          7.   Conversion.  The shares of Series B Preferred Stock shall be 
               ----------                                         
convertible into the Common Stock of the

                                       5
<PAGE>
 
Corporation, on and subject to the following terms and conditions:


               (a)  The conversion rights set forth herein shall apply only as
follows:


                    (i)    To the extent that a holder does not elect to redeem
the shares of Series B Preferred Stock as provided in Section 6 above, the
remaining Series B Preferred Stock shall be automatically converted, on the same
date that the redemption price is paid to the redeeming holders, into one
hundred (100) shares of Common Stock (as adjusted for any stock dividends,
combinations or splits);


                    (ii)   If, by that date which is two (2) years after the
date on which the shares of the Series B Preferred Stock are distributed to the
holders (the "Two Year Date"), such holders have not been able to redeem their
shares because Purchaser has not made a public offering, the net proceeds of
which are designated to be used to redeem the Sunbase Preferred Shares, the
holder's shares shall automatically convert into shares of the Common Stock of
Purchaser as follows: On the first business day following the Two Year Date,
each share shall automatically be converted into that number of shares of Common
Stock of Purchaser that equals $500 divided by the lesser of (a) $5.00
("Conversion Share Amount") or (b) the average closing price of the Common Stock
of the Purchaser (subject to adjustment for stock dividends, combinations or
splits). As used herein, the average closing price shall be computed by taking
the then most recent 60 consecutive trading days where Purchaser's Common Stock
has traded at a minimum volume of 2,000 shares per day for 45 of those 60
trading days.


               (b)  In order to convert the shares of Series B Preferred Stock
into shares of Common Stock, the holder thereof shall surrender at any office of
the Corporation the certificate or certificates therefore, duly endorsed or
assigned to the Corporation or in blank.


     Shares of Series B Preferred Stock shall be deemed to have been converted
as provided herein notwithstanding the failure of any holder to surrender such
holder's certificates, and the person or persons entitled to receive Common
Stock issuable upon the effective date of such conversion

                                       6
<PAGE>
 
shall be treated for all purposes as the record holder or holders of such Common
Stock at such time.  As promptly as practicable on or after the effective date
of conversion, the Corporation shall issue and shall deliver at said office a
certificate or certificates for the number of full shares of Common Stock
issuable upon such conversion.


               (c)  In case the outstanding shares of Common Stock shall be
subdivided or combined into a greater or smaller number of shares of Common
Stock, then the rates of conversion set forth in subsections (a)(i) and (a)(ii)
above (collectively, the "Conversion Rate") shall be adjusted as follows:  (i)
with regard to a conversion under subsection (a)(i) above, the number of shares
of Common Stock issuable upon conversion of the shares of Series B Preferred
Stock shall be proportionately increased in the event the shares of Common Stock
are subdivided and proportionately decreased in the event the shares of Common
Stock are combined; and (ii) with regard to a conversion under subsection
(a)(ii) above, the Conversion Share Amount shall be proportionately decreased in
the event the shares of Common Stock are subdivided and proportionately
increased in the event the shares of Common Stock are combined.  Any adjustment
to the Conversion Rate shall become effective immediately after the opening of
business on the day following the day upon which such subdivision or combination
becomes effective.


               (d)  Whenever the Conversion Rate is adjusted as herein provided:


                    (i)    the Corporation shall compute the adjusted Conversion
Rate in accordance with these Resolutions and shall prepare a certificate signed
by the Treasurer of the Corporation setting forth the adjusted Conversion Rate
and showing in reasonable detail the facts upon which such adjustment is based,
and such certificate shall forthwith be filed with the transfer agent or agents
for the Series B Preferred Stock; and


                    (ii)   a notice stating that the Conversion Rate has been
adjusted and setting forth the adjusted Conversion Rate shall forthwith be
required, and as soon as practicable after it is required, such notice shall be
mailed to the holders of record of the outstanding shares of the Series B
Preferred Stock.

                                       7
<PAGE>
 
               (e)  The Corporation shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
Common Stock, for the purpose of effecting the conversion of the shares of
Series B Preferred Stock, the full number of shares of Common Stock then
deliverable upon the conversion of all shares of Series B Preferred Stock then
outstanding.


               (f)  The Company will round-up any fractional shares of Common
Stock that would otherwise be issued by the Corporation.


               (g)  The Corporation will pay any and all taxes that may be
payable in respect of the issue or delivery of shares of Common Stock on
conversion of shares of the Series B Preferred Stock pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of the Series B
Preferred Stock so converted were registered, and no such issue or delivery
shall be made unless and until this person requesting such issue has paid to the
Corporation the amount of any such tax, or has established, to the satisfaction
of the Corporation, that such tax has been paid.


               (h)  For the purpose of this Section 7, the term "Common Stock"
shall include any stock of any class of the Corporation which has no preference
in respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation and which
is not subject to redemption by the Corporation. However, shares issuable on
conversion of shares of the Series B Preferred Stock shall include only shares
of the class designated as Common Stock of the Corporation as the date hereof or
shares of any class or classes resulting from any reclassification or
reclassifications thereof and which have no preference in respect of dividends
or of amounts payable in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation and which are not subject to
redemption by the Corporation; provided that if at any time there shall be more
than one such resulting class, the shares of each such class then so issuable
shall be substantially in the proportion which the total number of shares of
such class resulting from all such reclassifications bears to the total number
of shares of all such classes resulting from all such reclassifications.

                                       8
<PAGE>
 
          RESOLVED FURTHER, that the president or the Vice President and the
          Secretary or Assistant Secretary of the Corporation are each
          authorized to do or cause to be done all such acts or things and to
          make, execute and deliver or cause to be made, executed and delivered
          all such agreements, documents, instruments and certificates in the
          name and on behalf of the Corporation or otherwise as they deem
          necessary, desirable or appropriate to execute or carry out the
          purpose and intent of the foregoing resolutions.

     Each of the undersigned swears that the foregoing is true and accurate and
that he has the authority to sign this document on behalf of the Corporation.

     IN WITNESS WHEREOF, we have executed this Certificate and duly affirm the
foregoing as true under the penalties of perjury as of this ____ day of January,
1996.



______________________________                   ______________________________ 
Roger Li, Vice President                         John Chong, Secretary

                                       9

<PAGE>
 
                                                                   EXHIBIT 10.17

                        K N O W - H O W  C O N T R A C T

                                      FOR

                      SELF-LUBRICATING SPHERICAL BEARINGS

                     AND STEEL-TO-STEEL SPHERICAL BEARINGS



                        CONTRACT NO. 92MMG-129(62)230US



                                    BEIJING

                               DECEMBER 18, 1992
<PAGE>
 
                                                                             -2-

                                    CONTENTS

PREAMBLE

Section 1    DEFINITIONS
 
Section 2    CONTENT AND SCOPE OF THE CONTRACT

Section 3    PRICES

Section 4    PAYMENT AND PAYMENT CONDITIONS

Section 5    DELIVERY OF TECHNICAL DOCUMENTATION

Section 6    MODIFICATION AND IMPROVEMENT OF TECHNICAL DOCUMENTATION

Section 7    CHECKING AND INSPECTING

Section 8    GUARANTEE AND CLAIMS

Section 9    INFRINGEMENT

Section 10   TAXES

Section 11   ARBITRATION

Section 12   FORCE MAJEURE

Section 13   EFFECTIVENESS, TERMINATION AND MISCELLANEOUS

Section 14   LEGAL ADDRESSES
<PAGE>
 
                                                                             -3-

                                    ANNEXES


Annex 1:     TYPES AND SIZES OF CONTRACT PRODUCTS

Annex 2:     DELIVERY OF TECHNICAL DOCUMENTS

Annex 3:     TRAINING OF THE TECHNICAL PERSONNEL OF LICENSEE AT LICENSOR'S
             FACILITY

Annex 4:     TECHNICAL SERVICES OF EXPERTS SENT BY LICENSOR AT LICENSEE'S
             FACILITY

Annex 5:     CHECKING AND ACCEPTING OF THE CONTRACT PRODUCTS

Annex 6:     RESALE OF THE CONTRACT PRODUCTS

Annex 7:     SPECIMEN OF THE IRREVOCABLE LETTER OF GUARANTEE ISSUED BY
             LICENSEE'S BANK

Annex 8:     SPECIMEN OF THE IRREVOCABLE LETTER OF GUARANTEE ISSUED BY
             LICENSOR'S BANK
<PAGE>
 
                                                                             -4-

                                    PREAMBLE

This CONTRACT is signed in Beijing on December 18, 1992 by and between

          Southwest Products Co.
          2240 Buena Vista
          Irwindale, CA  91706
          The United States of America

          --hereinafter referred to as "LICENSOR"--

          as the one party

and       Shanghai Hong Xing Bearing Factory
          937, Zhong Shan (South 1) Road
          Shanghai 200023
          People's Republic of China

          represented by

          China National Machinery Import & Export Corp.
          Er-Li-Gou, Xijiao, Beijing
          People's Republic of China

          --hereinafter referred to as "LICENSEE"--

          as the one party

whereas LICENSOR is disposing of valuable know-how and experience in the design,
manufacture, sell, installation and technical service of self-lubricating
spherical bearings, and

whereas LICENSOR has the right and is willing to grant LICENSEE a license for
the use of said know-how and experience, and

whereas LICENSEE is desirous to acquire said know-how and experience from
LICENSOR and to design, manufacture, sell, and export self-lubricating spherical
bearings in accordance with LICENSOR's know-how and experience.

the two parties entered into this CONTRACT under the terms and conditions as
follows:
<PAGE>
 
                                                                             -5-

- -----------------------

    1.1   "KNOW-HOW" as used herein shall mean the technical knowledge and
          experience being in LICENSOR's possession at the effective date hereof
          with regard to the design, manufacture, marketing,

          installation, application and maintenance of the CONTRACT PRODUCTS.

    1.2   "CONTRACT PRODUCTS" as used herein shall mean self-lubricating 
          spherical plain bearings as per MIL-B-81820 and steel to steel
          spherical bearings as per MIL-B-8976 with bore size from 3/16" to 2"
          which made by LICENSOR's KNOW-HOW of the type as described in Annex 1
          hereto.

    1.3   "TECHNICAL DOCUMENTATION" as used herein shall mean drawings and other
          documentation in respect of the CONTRACT PRODUCTS as specified in
          Annex 2 hereto. TECHNICAL DOCUMENTATION shall be, as available with
          LICENSOR, in English language and in British system.
<PAGE>
 
                                                                             -6-
 
SECTION 2 - CONTENT AND SCOPE OF THE CONTRACT
- ---------------------------------------------

    2.1   The content of CONTRACT is the transfer of LICENSOR's KNOW-HOW to
          LICENSEE with regard to the CONTRACT PRODUCTS by means of TECHNICAL
          DOCUMENTATION, Training and Technical Services as specified below,
          i.e., LICENSEE agreed to acquire from LICENSOR and LICENSOR agrees to
          make available to LICENSEE the KNOW-HOW. The types and technical
          specification of the CONTRACT PRODUCTS for self-lubricating spherical
          plain bearings and steel to steel spherical bearings will be set forth
          in Annex 2 hereto.

    2.2   By this CONTRACT LICENSOR grants LICENSEE the exclusive, 
          non-transferrable rights
          A.  to design, manufacture and use the CONTRACT PRODUCTS in the 
              People's Republic of China and

          B.  to sell, supply the CONTRACT PRODUCTS in the People's Republic of
              China and worldwide with exception of the following countries
              within the validity period of the CONTRACT, for which LICENSOR is
              legally bound by agreements with third parties: EUROPE, MIDDLE
              EAST, NORTH AMERICA, JAPAN, TURKEY, AUSTRALIA, NEW ZEALAND,
              BRAZIL, ARGENTINA, VENEZUELA

    2.3   LICENSOR shall supply to the LICENSEE the TECHNICAL DOCUMENTATION in
          the scope and at the terms and conditions as set forth in Annex 3
          hereto.

    2.4   LICENSOR shall train LICENSEE's technical personnel at LICENSOR's
          facilities in the KNOW-HOW of the CONTRACT PRODUCTS in the scope and
          at the terms and conditions as set forth in Annex 3 hereto.

    2.5   LICENSOR shall send its technical experts to LICENSEE's factory for
          rendering Technical Services for assisting LICENSEE in the scope and
          at the terms and conditions as set forth in Annex 4 hereto.

    2.6   The checking methods and requirements of the CONTRACT PRODUCTS will
          be set forth in Annex 5 hereto.
<PAGE>
 
                                                                             -7-


    2.7   LICENSOR shall supply to the LICENSEE components, materials and
          toolings for the manufacture of the CONTRACT PRODUCTS at reasonable 
          prices in the scope at the terms and conditions to be agreed upon 
          between LICENSEE and LICENSOR and to be set forth in separate 
          contracts.

    2.8   During the validity period of CONTRACT LICENSEE have the rights to
          export the CONTRACT PRODUCTS out of China with exception specified in
          subsection 2.2 and the LICENSOR has marketing rights for CONTRACT
          PRODUCTS out of China.

    2.9   LICENSEE shall treat as strictly confidential and not disclose to any
          third party any information received orally, in writing or otherwise
          by LICENSOR under this CONTRACT during the validity period of the
          CONTRACT.

   2.10   Neither party shall transfer this KNOW-HOW to any third party in
          LICENSEE's country during the currency of the CONTRACT.

   2.11   LICENSOR agrees that during the validity period of the CONTRACT
          LICENSEE may mark the "Manufacture under license of SWPC" in the
          CONTRACT PRODUCTS which made under LICENSOR's design, technology and
          standards.

   2.12   LICENSOR guarantees that the TECHNICAL DOCUMENTATION supplied by
          LICENSOR shall be the latest documentation being used by LICENSOR in
          its then current manufacturing.
<PAGE>
 
                                                                             -8-
 
SECTION 3 - PRICES
- ------------------

    3.1   The total KNOW-HOW transfer fee to be paid by the LICENSEE to the
          LICENSOR pursuant to the content and scope of the CONTRACT as
          stipulated in section 2 is $900,000 (in words: Nine hundred thousand
          U.S. dollar).

    3.2   The CONTRACT PRICE includes transportation and insurance cost for the
          TECHNICAL DOCUMENTATION provided by LICENSOR to LICENSEE.
<PAGE>
 
                                                                             -9-
 
SECTION 4 - PAYMENT AND PAYMENT CONDITIONS
- ------------------------------------------

   4.1    All payments to be made under contract shall be effected in U.S.
          currency. The payments made by LICENSEE to LICENSOR shall be effected
          through the Bank of China, headquarters, Beijing.

   4.2    All bank charges incurred inside the People's Republic of China shall
          be borne by the LICENSEE whereas the bank charges incurred outside the
          People's Republic of China shall be borne by the LICENSOR.

   4.3    The KNOW-HOW transfer fee as per subsection 3.1 hereof shall be paid
          by LICENSEE to the LICENSOR in the following manner and rates:

 4.3.1    Fifteen percent (15%) of the KNOW-HOW transfer fee, i.e., $135,000 (in
          words: One hundred and thirty-five thousand U.S. dollars) shall be
          paid by LICENSEE to LICENSOR not later than thirty (30) days from
          effective date of the contract always provided that the LICENSEE has
          received from LICENSOR the correct documents as follows:

          A.   One photostat copy of a valid Export Licence issued by the
               relevant authority or of a letter stating that the said Export
               Licence is not required.
          B.   Five copies of Commercial Invoice covering 15% (Fifteen percent)
               of the KNOW-HOW transfer fee.
          C.   One original and one copy of a Sight Draft.
          D.   One original and one copy of an Irrevocable Documentary Letter of
               Guarantee presented by LICENSOR to LICENSEE (see specimen under
               Annex 8 hereto).

 4.3.1(A)  When making the above payment, the Bank of China, headquarters,
           shall also open an Irrevocable Documentary Letter of Guarantee
           with one original and one copy in favour of the LICENSOR in the
           amount of $180,000 (in words: one hundred and eighty thousand
           U.S. dollars) (see specimen under Annex 7 hereto).
<PAGE>
 
                                                                            -10-

  4.3.2    Forty percent (40%) of the KNOW-HOW transfer fee, i.e. $360,000--
           (in words: Three hundred and sixty thousand U.S. dollars) shall
           be paid by the LICENSEE to the LICENSOR within thirty (30) days
           after delivery of the technical documents as set forth in Annex
           2 on presentation of the following documents:

           A.   Five copies of the Commercial Invoice
 
           B.   One original and one copy of a Sight Draft.

           C.   Two photostat copies of the Airway Bill of Loading for
                complete Lot No. 1 of the TECHNICAL DOCUMENTATION according
                to the stipulations of section 2 hereof and one copy of the
                TECHNICAL DOCUMENTATION has been completely delivered.

  4.3.3    Twenty-Five percent (25%) of the KNOW-HOW transfer fee, i.e.
           $225,000--(in words: Two hundred and twenty-five thousand U.S.
           dollar)--shall be paid by the LICENSEE to the LICENSOR within
           thirty (30) days after the Training has been completed by the
           LICENSOR to the LICENSEE according to the stipulations of Annex 3
           on presentation of the following documents:

           A.   Five copies of the Commercial Invoice
           B.   One original and one copy of a Sight Draft.
           C.   One original and one copy of the Certificate issued by the
                LICENSEE and the LICENSOR to the effect that Training has
                been completed.

           Half of the above fee will be paid after Training of the first
           group of personnel has been completed, balance paid after
           Training of the second group of personnel has been completed and
           payable against above mentioned documents.

  4.3.4.   Fifteen percent (15%) of the KNOW-HOW transfer fee, i.e. 
           $135,000--(in words: One hundred and thirty-five thousand U.S.
           dollars)--shall be paid by the LICENSEE to the LICENSOR within
           thirty (30) days after check and acceptance of the CONTRACT
           PRODUCTS on presentation of the following documents:

           A.   Five copies of the Commercial Invoice
           B.   One original and one copy of a Sight Draft.
           C.   One original and one copy of the Acceptance Certificate
                issued by U.S. Navy.

           The LICENSEE shall pay up this part of fee even if the LICENSEE
           has failed to submit CONTRACT PRODUCTS to the U.S. Navy to
           attempt to qualify under MIL-B-81820 for one year. (Counting from
           the date when the machinery has been checked and accepted).
<PAGE>
 
                                                                            -11-
 
  4.3.5   Five percent (5%) of the KNOW-HOW transfer fee, i.e. $45,000--(in
          words: forty-five thousand U.S. dollar)-- shall be paid by the
          LICENSEE to the LICENSOR within thirty (30) days after reception
          of the following documents, due twelve (12) months after the date
          when checking and accepting the CONTRACT PRODUCTS.
          A.   Five copies of the Commercial Invoice
          B.   One original and one copy of a Sight Draft.
          The LICENSEE shall pay up this part of fee due eighteen (18)
          months after the machinery has been checked and accepted even if
          the LICENSEE has failed to submit CONTRACT PRODUCTS to the U.S.
          Navy to a attempt to qualify under MIL-B-81820 for one year.
          (Counting from the day when the machinery had been checked and
          accepted).

  4.4     The LICENSEE has the right to deduct the penalty and/or claims from
          any above mentioned payment, which LICENSEE is liable to pay according
          to the stipulations of this CONTRACT.
<PAGE>
 
                                                                            -12-
 
SECTION 5 - DELIVERY OF TECHNICAL DOCUMENTATION
- -----------------------------------------------

    5.1   LICENSOR shall according to the delivery schedule and contents
          stipulated in Annex 2 hereto deliver the TECHNICAL DOCUMENTATION CIF
          Shanghai Airport.

    5.2   The date stamped by Air Transportation Agency at Shanghai Airport
          shall be taken as the actual date of delivery. Upon receiving each lot
          of the TECHNICAL DOCUMENTATION, LICENSEE shall inform LICENSOR hereof
          by Fax immediately.

    5.3   Within 48 (forty-eight) hours after despatch of each lot of the
          TECHNICAL DOCUMENTATION, LICENSOR shall notify LICENSEE by Fax of the
          CONTRACT number, number and date of Air Bill, item number of the
          TECHNICAL DOCUMENTATION, number of pieces, weight, flight number and
          expected date of arrival at destination, and shall airmail to LICENSEE
          2 (two) copies of each of the Airway Bill and detailed list of the
          TECHNICAL DOCUMENTATION dispatched.

    5.4   If the TECHNICAL DOCUMENTATION is lost or found to be short or damaged
          during the air transportation LICENSOR shall supply LICENSEE once
          again free of charge within 30 (thirty) days after the receipt by
          LICENSOR from LICENSEE of such written notice stating in detail all
          the lost or shortcoming or damaged TECHNICAL DOCUMENTATION without any
          delay.

    5.5   The TECHNICAL DOCUMENTATION shall be packed in strong cases suitable
          for long distance transportation, numerous handlings, rain proof and
          moisture proof.

    5.6   On the surface of each package of the TECHNICAL DOCUMENTATION the
          following items shall be marked in English:

          A. CONTRACT number              92 MMG-129(62)230US     
          B. Consignee                    China National Machinery
                                          Import & Export Corp.    
                                          Shanghai Hong Xing       
                                          Bearing Factory           
          C. Destination                  Shanghai         
          D. Shipping Mark                92MMG-129(62)230US       
                                          ------------------       
                                          SHANGHAI, CHINA           
          E. Weight (Kg)                  
          F. Case, Piece number           
          G. Consignee Code               
<PAGE>
 
                                                                            -13-
 
    5.7   Inside the cases these shall be 2 (two) copies of a detailed packing
          list of the TECHNICAL DOCUMENTATION describing List of TECHNICAL
          DOCUMENTATION shipped with names and/or drawing numbers.
<PAGE>
 
                                                                            -14-
 
SECTION 6 - MODIFICATION AND IMPROVEMENT OF THE TECHNICAL DOCUMENTATION
- -----------------------------------------------------------------------

    6.1   If the TECHNICAL DOCUMENTATION failed to meet the industry standards
          (such as Standards of design, material, technology, equipment and
          other conditions), LICENSOR shall have obligations to assist LICENSEE
          to amend the TECHNICAL DOCUMENTATION and confirm it in written form,
          so that LICENSEE can make qualified CONTRACT PRODUCTS.

    6.2   Any modification and improvement made by either of the parties with
          regard to CONTRACT PRODUCTS during the validity period of this
          contract shall be sent to other party with no charge.

    6.3   Inventions made by either of the parties with regard to CONTRACT
          PRODUCTS during the currency of this contract shall be property of the
          party whose employees made the respective invention. Such party may
          apply for respective rights.
<PAGE>
 
                                                                            -15-
 
SECTION 7 - CHECK AND ACCEPTANCE
- --------------------------------

    7.1   Agreed upon between two parties, the CONTRACT PRODUCTS made according
          to the TECHNICAL DOCUMENTATION shall be checked and accepted jointly
          by both parties as set forth in Annex 5.

    7.2   If the performance of the CONTRACT PRODUCTS meets the stipulations as
          specified in MIL-B-81820 through approval by the U.S. Navy, it will be
          considered as qualified.

    7.3   If the technical features of the tested CONTRACT PRODUCTS fail to meet
          the requirements of technical specifications defined in Annex 5, both
          parties shall study and analyze the reasons, take action to eliminate
          defect in order to start the second feature test and verification. The
          CONTRACT PRODUCTS have to be approved by U.S. Navy with an issued
          acceptance Certification.

    7.4   If any test failed due to problems with the TECHNICAL DOCUMENTATION
          and/or items and tools of the CONTRACT PRODUCTS delivered by LICENSOR,
          LICENSOR should send their technicians for another test and acceptance
          and all costs according to Annex 5 should be borne by LICENSOR. If the
          reason for test failure lies with LICENSEE, LICENSEE will bear all
          costs.

    7.5   If the third test fails due to reasons of LICENSOR, it shall be
          settled according to Subsection 8.7. If the failure lies with
          LICENSEE, both parties will discuss how to execute the CONTRACT.
<PAGE>
 
                                                                            -16-
 
SECTION 8 - GUARANTEE AND CLAIMS
- --------------------------------

    8.1   LICENSOR guarantees that the TECHNICAL DOCUMENTATION provided by
          LICENSOR shall be the latest documentation being used by LICENSOR in
          its then current manufacturing and provide any modification and
          improvement in the TECHNICAL DOCUMENTATION with regard to the CONTRACT
          PRODUCTS at no charge during the currency of this contract.

    8.2   LICENSOR guarantees that the TECHNICAL DOCUMENTATION supplied by
          LICENSOR shall be completed, correct and legible as stipulated in
          Annex 2 to the CONTRACT.

    8.3   If the TECHNICAL DOCUMENTATION does not meet the stipulations in
          subsection 8.2 hereof, LICENSOR shall deliver LICENSEE once again free
          of charge within thirty (30) days after the receipt of the written
          notice from LICENSEE stating in detail all the missing or incompleted
          or incorrect TECHNICAL DOCUMENTATION without any delay.

    8.4   If LICENSOR fails to deliver the TECHNICAL DOCUMENTATION within the
          time defined in the CONTRACT, LICENSOR should pay a penalty of 0.5%
          per week, maximum 5% based on the amount of delayed objective.

    8.5   LICENSOR will not be released from their obligations of continuing to
          deliver the TECHNICAL DOCUMENTATIONS if LICENSOR is fined according to
          subsection 8.4.

    8.6   Warranty and claim concerning tools and material supplied by LICENSOR.
          LICENSEE shall forthwith inspect each delivery of tools and material
          supplied by LICENSOR and inform LICENSEE of any shortfall, damage,
          incompletion of faultiness within 90 days upon arrival at Shanghai,
          otherwise LICENSOR will be relieved from any claim resulting from any
          defect of delivered items.

    8.7   If the LICENSOR hasn't delivered the TECHNICAL DOCUMENTS more than
          three (3) months as stipulated in Annex 2, LICENSEE is entitled to
          handle it according to subsection 8.8.
<PAGE>
 
                                                                            -17-

    8.8   If the third test fails due to reasons of LICENSOR, it shall be 
          handled as follows:

          If the acceptance of tested CONTRACT PRODUCTS can't be reached, so 
          that LICENSEE can't manufacture, and LICENSOR is not able to solve 
          it, LICENSEE is entitled to cancel the CONTRACT. LICENSOR shall 
          return all the payments plus 8% interest per annual to LICENSEE.
<PAGE>
 
                                                                            -18-

SECTION 9 - INFRINGEMENT
- ------------------------

    9.1   LICENSOR assures that it is the legitimate owner of the KNOW-HOW to 
          be supplied to LICENSEE according to the stipulations of the CONTRACT
          and that it is lawfully in a position to transfer the KNOW-HOW to
          LICENSEE. Should the use by LICENSEE of KNOW-HOW licensed according to
          this CONTRACT infringe any letters patent or other rights of any third
          party, then the LICENSOR shall be responsible for solving the problems
          arising with the third party and LICENSOR shall take responsibilities
          legally and economically.
<PAGE>
 
                                                                            -19-

SECTION 10 - TAXES
- ------------------

   10.1   All taxes, customs and other duties in connection with the
          performance of the CONTRACT arising outside LICENSEE's country shall
          be borne by LICENSOR.

   10.2   In the execution of the CONTRACT, any income made by LICENSOR within
          territory of P.R.C. shall be subject to taxation according to "the
          Sino-America Double Taxation agreement signed between P.R.C. and
          U.S.A.". This income tax will amount to 10% (ten percent) of every
          payment to be made by LICENSOR to LICENSEE. LICENSEE shall deduct this
          amount from every payment for Income Tax to be paid to the Chinese
          Taxation Bureau on behalf of LICENSOR. After taxation, LICENSEE shall
          send LICENSOR by registered airmail and without delay the original
          receipt issued by the said bureau.
<PAGE>
 
                                                                            -20-

SECTION 11 - ARBITRATION
- ------------------------

    11.1  The two parties shall use their best endeavors to settle any 
          disputes and/or misunderstandings arising from this CONTRACT in an
          amicable way. Where such settlement can't be reached the respective
          dispute and/or misunderstanding shall be submitted to the Arbitration
          Committee of the China Council for the Promotion of International
          Trade.

    11.2  The decision of the arbitration shall be final and bonding upon both
          parties.
 
    11.3  The costs of arbitration shall be borne by the losing party.

    11.4  In the course of arbitration, the CONTRACT shall be continuously 
          executed except the part which is under arbitration.
<PAGE>
 
                                                                            -21-

SECTION 12 - FORCE MAJEURE
- --------------------------

    12.1  If either the contracting parties is prevented from the performance
          of the CONTRACT by natural disasters such as serious typhoon, fire,
          flood, heavy snow, earthquake, etc., war or by other occurences
          recognized as force majeure to the international practice agreed upon
          by both parties, the time for the performance of such contractual
          obligations of both parties prevented from the performance shall be
          extended by a period equal to the time lost due to force majeure.

    12.2  The party prevented from performing the CONTRACT shall notify the 
          other by cable or telex, within the shortest possible time, of the
          occurence of force majeure and, within fourteen (14) days, send the
          other party by registered airmail a certificate issued by the
          authorities concerned as the confirmation to the other party as soon
          as the incident of force majeure is eliminated and certify the
          elimination by registered airmail.

    12.3  Neither of the parties shall claim compensation from the other party
          for its non-fulfillment of the contractual obligations due to the
          force majeure occurrence.

    12.4  In the event that the occurrence of force majeure lasts over 120 
          (one hundred and twenty) days, both parties shall settle the matter of
          the performance of the CONTRACT through friendly consultation and
          reach an agreement as soon as possible.
<PAGE>
 
                                                                            -22-
 

SECTION 13 - EFFECTIVENESS, TERMINATION AND MISCELLANEOUS
- ---------------------------------------------------------

    13.1  The CONTRACT is signed by the representatives of both parties in 
          Beijing. After signing the CONTRACT both parties shall apply to their
          respective Authorities for approval. The date of approval last
          obtained shall be taken as the date of effectiveness of the CONTRACT.
          Both parties shall exert their best efforts to obtain the approval
          within sixty (60) days and inform the other party by fax and 
          thereafter confirm the same by letter.

    13.2  The CONTRACT shall be valid for five (5) years from the date of 
          effectiveness, and shall become null and void automatically upon the
          expiry of the validity period of the CONTRACT, unless otherwise agreed
          upon by both parties to continue term of the CONTRACT.

    13.3  The CONTRACT is made out in English in 4 (four) copies, 2 (two) for
          each party.

    13.4  Annexes 1 to 8 to the CONTRACT shall form an integral part of the 
          CONTRACT, having the same effectiveness as the CONTRACT.

    13.5  Should any of the contents of the CONTRACT be amended and 
          supplemented, documents in written form shall be signed by the
          representatives of both parties after a negotiation held by the
          representatives of both parties and such documents shall form an
          integral part of the CONTRACT, having the same effectiveness.

    13.6  For the execution of the CONTRACT, the correspondence between both 
          parties shall be written in English. All formal notices shall be in
          written form, 2 (two) copies of each text airmailed as registered
          matter.

    13.7  Any kind of termination of this CONTRACT shall not effect in any way
          the debts and relevant rights and liabilities between the two parties
          and the debtor shall be kept liable until he fully pays up his debts
          to the creditor after the termination of the CONTRACT.
<PAGE>
 
                                                                            -23-

    13.8  LICENSOR and LICENSEE agree that any performance by either party to
          this Agreement is solely dependent upon the parties hereto executing
          this KNOW-HOW CONTRACT, a Joint Venture Agreement between the parties
          hereto and an Equipment Purchase Agreement. All contracts must be
          approved by the parties hereto and all contracts must be approved by
          the Chinese Government and if not all three contracts are approved,
          neither party will be obligated to perform. LICENSOR will grant
          LICENSEE until September 30, 1993 to obtain the approval of the
          Chinese Government for KNOW-HOW CONTRACT, the Joint Venture Contract
          and the Equipment Purchase Contract.
<PAGE>
 
                                                                            -24-

 
SECTION 14 - LEGAL ADDRESSES
- ----------------------------
 
LICENSOR:                          LICENSEE:

SOUTHWEST PRODUCTS CO.             Shanghai Hong Xing Bearing Factory
2240 Buena Vista                   937, Zhong Shan (South 1) Road
Irwindale, CA 91706                200023, Shanghai
The United States of America       People's Republic of China

Phone:      (818) 358-0181         Phone:      (021) 433-6860
Telex:      182562                 Telex:      4861
Telefax:    (818) 303-6141         Telefax:    (021) 431-1702
 

Signed by                          Signed by

/s/ Signature not decipherable     /s/ Signature in Chinese
- ------------------------------     -------------------------------
 
 
                                   represented by
 
                                   China National Machinery                
                                   Import & Export Corp.      
                                   Er-Li-Gou, Xijiao, Beijing 
                                   People's Republic of China 
                                
                                   Post Code:  100044  
                                   Phone:      (01) 849-5010  
                                   Telex:      22885 CMIEC CN  
                                   Telefax:    (01) 831-4137  
                                   Signed by

                                   /s/ Signature in Chinese
                                   -------------------------------

<PAGE>
 
                                                                            -25-

 
                                    Annex 1
                   Types and sizes of the contract products
 
1. Title:  self-lubricating spherical plain bearings and steel-to-steel
           spherical plain bearings.

2. Names of the contract products:

2.1  MS14101   Bearings with plan, self-lubricating, self-aligning, low speed,
               narrow, grooved outer ring, -65 to 325 degrees F
 
     Dash No.  3, 4, 5, 5A, 6, 7, 8, 9, 10, 12, 14, 16
 
     Total Types:   12
 
2.2  MS14103   Bearings with plain, self-lubricating, self-aligning, low speed,
               wide, grooved other ring, -65 to 325 degrees F
 
     Dash No.  3, 4, 5, 6, 7, 7A, 8, 9, 10, 12, 14, 16
 
     Total Types:   12
 
2.3  MS14102   Bearings with plain, self-lubricating, self-aligning, low speed,
               wide, chamfered outer ring, -65 to 325 degrees F
 
     Dash No.  3, 4, 5, 6, 7, 8, 9, 10, 12, 14, 16
 
     Total types:   11
 
2.4  MS14104   Bearings with plain, self-lubricating, self-aligning, low speed,
               narrow, chamfered outer ring, -65 to 325 degrees F
 
     Dash No.  3, 4, 5, 6, 7, 8, 9, 10, 12, 14, 16
 
     Total types:   11
 
2.5  MIL-B-8976   MS-21154S GROOVED TYPE
 
     Dash No.  3, 4, 5, 6, 7, 8, 9, 10, 12, 14, 16
 
     Total types:   11
 
<PAGE>
 
                                                                            -26-

2.6  MIL-B-8976   MS-21155S PLAIN TYPE
 
     Dash No.  3, 4, 5, 6, 7, 8, 9, 10, 12, 14, 16
 
     Total types:   11
<PAGE>
 
                                                                            -27-

                                    Annex 2
                        Delivery of technology documents
 

Due 45 days following execution of Agreement, Licensor shall provide licensee
with at least four copies of the following documents:

Item 1:  Assembly and component blueprints for products list in Annex 1 attached
         hereto ("Products"). These blueprints will contain all relevant
         dimensions, types of material including liner material, types of heat
         treat, surface finish callouts, and other relevant data.

Item 2:  Loads, stress analysis, estimated performance, test criteria for the
         Products.

Item 3:  Manufacturing operation sheets for each of the Products, which
         operation sheets shall contain all relevant manufacturing processes
         necessary to manufacture the Products. Such processes may include
         rought blanking, face and turn, heat treats, grind, hone, polish and
         assembly. The manufacturing process shall contain technical processes.

Item 4:  Formula for liner material, including manufacturing and storage
         methods.

Item 5:  Drawings for tools and tooling used in manufacturing process as per
         item 3.

Item 6:  Provide the latest edition of America Military Standard: MIL-B-81820,
         MIL-B-81934, MIL-B-81935, MIL-B-197, MIL-B-8942, MIL-B-8976, MIL-P-116,
         MIL-I-6868, MIL-I-5606, MIL-H-6875, MIL-H-83282, MIL-L-7808, MIL-A-
         8243, MIL-T-5624, MIL-S-5002, MIL-STD-105, MIL-STD-129, MIL-STD-130,
         MIL-STD-1599, QQ-C-320, QQ-P-416, QQ-P-35, TT-S-735, ANSI B46, C-794,
         MIL-I-45208, Boeing DI-9000 and comprehensive explanations of MIL-B-
         81934, 81820, 81935 and standards with regard to material of the
         contract products as per item 1.
<PAGE>
 
                                                                            -28-

Item 7:  Provide testing methods, names of testing tools and testing procedure
         which are required in component-manufacturing process as per item 3.

Item 8:  Provide inspection methods, name of instruments or machines and
         inspection procedure used to inspect the Products.

Item 9:  Quality control data: A MIL-I-45208 approved quality management manual,
         Statistical process control data.

Item 10: Production control data.

Item 11: Accounting system data.
<PAGE>
 
                                                                            -29-

                                    Annex 3
                      Training of the technical personnel
                       of licensee at licensor's facility


Item 1:  The technical personnel and employees of licensee will be trained in
         licensor's facility by licensor. Number: 15. Period: 25 working
         days/person. Training will consist of maintenance, repair and operation
         of all machinery, inserts, tools and tooling used in all manufacturing
         process as specified under item 3 of Annex 2. Training will also 
         consist of maintenance and operation of all testing instruments and 
         machines as per Item 6, 7 of Annex 2. Quality control.

Item 2:  Licensor shall designate qualified trainers to instruct the technical
         personnel of licensee as per Item 1.

Item 3:  Licensor shall give trainees comprehensive instruction in their
         respective positions. These instruction shall include: set up,
         operation, troubleshooting and regulation of instruments and machines,
         etc.

Item 4:  According to general practice of our country, the expenses of personnel
         sent by both parties shall be borne by sending party itself.
<PAGE>
 
                                                                            -30-

                                    Annex 4
                 Technical services of experts sent by Licensor
                             at Licensee's factory


Item 1:  Licensee agrees that Licensor send experts to Licensee's factory for
         technical services and instruction at mutually agreed upon times. The
         number of experts, period and times and training to be provided will be
         decided through consultation by two parties.

Item 2:  Content of technical services:

   2.1:  Instruction in the production of the Products.

   2.2:  Instruction in the set up of a proper room for preparation of MIL-B-
         81820, 81934, 81935 liners.

   2.3:  Instruction in the establishment of a MIL-B-45208 quality control
         system. Assist Licensee in attempting qualify and maintain
         qualification under MIL-B-81820.

   2.4:  Instruction in establishing a functioning production control system.

   2.5:  Instruction in setting up an accounting system according to Licensor's
         accounting system requirements.

Item 3:  Period and person-times of technical services: Licensor shall send a
         bearing manufacturing expert to Licensee's factor for instruction as
         per Item 2.1, 2.2 for one to three months, which divided into four
         sections of period: installing and preparing of machinery, trail
         production, normal lot production and receptive inspection. Licensor
         shall send respective experts to assist Licensee as per Item 2.3, 2.4,
         2.5.

Item 4:  According to general practice of our country, the expenses of personnel
         sent by both parties shall be borne by sending party itself.
<PAGE>
 
                                                                            -31-
 
 
                                    Annex 5
                Checking and Accepting of the contract products


Item 1:  After Licensor had installed and debugged the machinery, when the
         machinery is in good condition, Licensee will carry out checking and
         accepting the contract products. These products will be produced
         according to manufacturing methods provided by Licensor.

Item 2:  Select two kinds of products (including self-lubricating spherical
         plain bearing, steel-to-steel spherical bearings) with three different
         sizes options, which mean small size, middle size and large size. The
         detail size could be consulted by two parties. Then there are six (6)
         kinds of bearings.

Item 3:  The finished bearings will be inspected by inspection and sampling
         program under MIL-B-81820, 8976. In addition, it is essential to select
         a set of bearings from six kinds of bearings to carry out
         metallographical examination, hardness test and surface roughness test.

Item 4:  The material used in test parts will be provided by Licensor at
         Licensee's expense.

Item 5:  The contract products produced by Licensee shall be submitted to U.S.
         Navy for inspection only after these Products are approved for
         qualification testing submission by Licensor. If the products inspected
         prove to be qualified, the qualification fees shall be borne by
         Licensee. In case the products inspected fail to be qualified, the
         qualification fees shall be reimbursed to Licensee by Licensor, and
         Licensor shall pay all future qualification fees to the U.S. Navy until
         such time as the products are qualified.
<PAGE>
 
                                                                            -32-


                                    Annex 6
                        Resale of the CONTRACT PRODUCTS


Item 1:  After the CONTRACT PRODUCTS made by LICENSEE has been approved by U.S.
         Navy, LICENSOR and LICENSEE shall use their best efforts to market the
         CONTRACT PRODUCTS outside of P.R.C. at a volume of 300,000 pieces per
         year at a total annual cost of $2,000,000.00.

Item 2:  The detail types and prices of the CONTRACT PRODUCTS for marketing will
         be decided by two parties' frank negotiations.

Item 3:  The CONTRACT PRODUCTS for marketing will be marked "Manufacture under
         license of SWPC" during the validity period of this CONTRACT.
<PAGE>
 
                                                                            -33-


                                    Annex 7
                     SPECIMEN OF THE IRREVOCABLE LETTER OF
                      GUARANTEE ISSUED BY LICENSEE'S BANK


     On December 18, 1992 a KNOW-HOW CONTRACT for Self-lubricating Spherical
Bearings and Steel-to-Steel Spherical Bearings Number 92MMG-129(62)230US was
signed by and between Southwest Products Company, hereafter referred to as
LICENSOR and Shanghai Hong Xing Bearing Factory represented by China National
Machinery Import & Export Corp., hereafter referred to as LICENSEE.

     The contract provides several payments by LICENSEE to LICENSOR, one of
which is in the amount of $180,000 U.S. and is described in Section 4.3.1(A),
4.3.4 and 4.3.5 of the CONTRACT.

     We, at the request of LICENSEE, hereby open our irrevocable Letter of
Guarantee in LICENSOR's favor in the amount of $180,000.00 and we hereby
undertake with LICENSOR as follows:

     If LICENSEE has failed to pay LICENSOR the sum of $135,000 U.S., written
     notice of LICENSEE's failure to pay and we shall within five banking days
     following receipt of LICENSOR's notice pay to LICENSOR the sum of $135,000
     with interest at the rate of 8% calculated from the date of LICENSEE's
     qualification under MIL-B-81820 by the U.S. Navy.

     If LICENSEE fails to manufacture and check CONTRACT PRODUCTS, as stated in
     Section 4.3.4, interest shall be calculated six months from the date when
     the machinery has been checked and accepted under a separate Equipment
     Purchase Agreement.

     If LICENSEE has failed to pay LICENSOR the sum of $45,000 pursuant to
     Section 4.3.5 of the CONTRACT, LICENSOR shall send us written notice of
     LICENSEE's failure to pay and we shall within five banking days following
     receipt of LICENSOR's notice, pay to LICENSOR the sum of $45,000 with
     interest at the rate of 8% calculated from the date of LICENSEE's
     qualification under MIL-B-81820 by the U.S. Navy. If LICENSEE fails to
     manufacture and check CONTRACT PRODUCTS as stated in Section 4.3.5,
     interest shall be calculated six months from the date when the machinery
     has been checked and accepted under a separate Equipment Purchase
     Agreement.
<PAGE>
 
                                                                            -34-

     This Letter of Guarantee is valid for partial exercise.

     This Letter of Guarantee shall automatically reduce to 5% (Five percent) of
     total Contract value after 15% (Fifteen percent) of total Contract
     value specified in Section 4.3.4 is effected.

     This Letter of Guarantee is to be returned upon the expiration of our
     Guarantee and obligations thereunder.
<PAGE>
 
                                                                            -35-

                                    Annex 8
                     SPECIMEN OF THE IRREVOCABLE LETTER OF
                      GUARANTEE ISSUED BY LICENSOR'S BANK


To:  China National Machinery Import & Export Corp.
     Er-Li-Gou, Xijiao, Beijing
     People's Republic of China
Re:  Our Irrevocable Letter of Guarantee No. ___________


With reference to KNOW-HOW transfer CONTRACT No. _________ (hereafter referred
to as the Contract) signed on December 18, 1992 between your Corp. and

Southwest Products Company:
 2240 Buena Vista
 Irwindale, CA 91706
 The United States of America
(hereafter referred to as LICENSOR), with Contract value amounting to $900,000
(Nine Hundred Thousand Dollars).  We hereby undertake as follows:

1.   Our liability under this Letter of Guarantee shall be limited to the
advance payment of 15% (fifteen percent) of the Contract value, namely, i.e.
$135,000 (One Hundred Thirty-five Thousand Dollars).

2.   If LICENSOR has failed to deliver the documents listed in Annex 2 and if
LICENSOR has failed to perform after receiving notice under Section 5.4 of the
CONTRACT within the 30 (thirty) day period of 5.4, then LICENSEE may send
written notice of LICENSOR's failure to fulfill its contractual obligations.
Within 5 (five) banking days after receipt of your written notice stating in
which way the LICENSOR has failed to fulfill its contractual obligations and
demanding refund from LICENSOR due to non-delivery of Technical Documentation
under Annex 2 to the Contract, we shall immediately and unconditionally refund
to you the above-mentioned 15% (fifteen percent) of the KNOW-HOW transfer fee
and pay you the interest at the rate of 8% (eight percent) per year counting
from the date of effecting the advance payment to the date of the refunding.
<PAGE>
 
                                                                            -36-

3.   This Letter of Guarantee shall become effective as from the date when the
advance payment is effected by you and shall remain valid until the 15th day
after LICENSOR has delivered the Technical Documentation.

4.   This Letter of Guarantee is to be returned upon the expiration of our
guarantee and obligations thereunder.
<PAGE>
 

                              [Chinese Characters]

                           CONTRACT AMENDMENT ADVICE
                           -------------------------
 
[Chinese Characters]:                           [Chinese Characters]:
Contra No.: 92MMG-129(62)23OUS                  Date: AUG. 24, 1993
            ----------------------------------        --------------------------
 
                      92MMG-129(62)23OUS      
[Chinese Characters]: ------------------------  
Shipph Mark:          SHANGHAI, CHINA           [Chinese Characters]:
            ----------------------------------                       -----------
[Chinese Characters]:
Place Destination:    SHANGHAI AIRPORT, CHINA   [Chinese Characters]:  
                  ----------------------------                       -----------

                             [Chinese Characters]
     This serves to notify that an amendment made on a parts of the contents 
of the above contract has been agreed upon by both parties; Please amend 
accordingly.
<TABLE> 
<CAPTION> 
- ---------------------------------------------------------------------------------------------- 
                                                                              Contents Amended
                                                           -----------------------------------
  Item of               Name of            Reason for
 Contract              Commodity           Amendment       Before Amendment    After Amendment
- ----------------------------------------------------------------------------------------------
<S>                <C>                  <C>                <C>                 <C>   
SECTION 4.3.1      KNOW-HOW             ACCORDING TO THE   
        4.3.1(A)   TRANSFER FOR         SELLER'S REQUEST   
        4.3.2      SELF-LUBRICATING 
        4.3.3      SPHERICAL                                    DETAILS AS PER ATTACHMENT   
                   BEARINGS AND                                   
SECTION 13.8       STEEL TO STEEL  
                   SPHERICAL
ANNEX   1          BEARINGS
        7
- ---------------------------------------------------------------------------------------------- 
     [Chinese Characters]                                   [Chinese Characters]
     Buys:    China National Machinery                      Sellers:  SOUTHWEST PRODUCTS CO.
              Import & Export Corporation
     /s/ Signature in Chinese                               /s/ James ? Mancill
                                                                      Chairman

</TABLE> 
<PAGE>
 

ATTACHMENT TO AMENDMENT OF CONTRACT NO. 92MMG-129(62)23OUS
==========================================================

THE REVISED TEXT FOR ANNEX 7

BENEFICIARY:   SOUTHWEST PRODUCTS COMPANY
               2240 BUENA VISTA
               IRWINDALE, CA 91706
               U.S.A.

OUR REFERENCE NO:
ADVISING BANK:
RE:  OUR IRREVOCABLE LETTER OF GUARANTEE NO. __________

WITH REFERENCE TO CONTRACT NO. 92MMG-129(62)23OUS (HEREINAFTER REFERRED TO AS
THE CONTRACT) SIGNED ON DEC. 18, 1992 BETWEEN YOU (HEREINAFTER REFERRED TO AS
THE SELLER) AND CHINA NATIONAL MACHINERY IMPORT AND EXPORT CORP. (HEREINAFTER
REFERRED TO AS THE BUYER) CONCERNING KNOW-HOW TRANSFER FOR SELF-LUBRICATING
SPHERICAL BEARING AND STEEL TO STEEL SPHERICAL BEARINGS AMOUNTING TO
USD900,000.00 (SAY: US DOLLAR NINE HUNDRED THOUSAND ONLY).

WE, BANK OF CHINA H.O., AT THE REQUEST OF THE BUYER, HEREBY ISSUE OUR
IRREVOCABLE LETTER OF GUARANTEE NO. __________ IN FAVOR OF THE SELLER TO THE
EXTENT OF USD180,000.00 (SAY: US DOLLAR ONE HUNDRED EIGHTY THOUSAND ONLY) EQUAL
TO 20% (TWENTY PERCENT) OF THE TOTAL CONTRACT PRICE AND GUARANTEE THAT THE
PAYMENTS WILL BE MADE BY THE BUYER ACCORDING TO THE TERMS AND CONDITIONS OF THE
CONTRACT AND HEREBY UNDERTAKE WITH THE SELLER AS FOLLOWS:

IN CASE THE SELLER FULFILLS THE ABOVE MENTIONED CONTRACT OBLIGATIONS AND
PROVIDES THE DOCUMENTS ACCORDING TO THE STIPULATIONS OF CLAUSES SECTION 5 OF THE
CONTRACT, BUT THE BUYER FAILS TO PAY THE ABOVE MENTIONED AMOUNTS PARTIALLY OR
WHOLLY, THEN WE SHALL WITHIN 7 (SEVEN) WORKING DAYS AFTER RECEIPT OF THE
SELLER'S WRITTEN NOTICE, PAY TO THE SELLER THE RELEVANT AMOUNTS OF CLAUSES
SECTION 4.3.4 AND/OR 4.3.5 UNDER THE CONTRACT, PLUS SIMPLE INTEREST AT THE RATE
OF 6% (SIX PERCENT) PER ANNUM, PROVIDED THAT THE BUYER CANNOT PROVE THAT THE
DOCUMENTS THE SELLER PRESENTED ARE NOT IN CONFORMITY WITH THE STIPULATIONS OF
THE CONTRACT.

THE AMOUNT OF THE L/G SHALL BE AUTOMATICALLY DECREASED IN PROPORTION TO THE
PAYMENTS MADE BY THE BUYER.

THE L/G SHALL COME INTO FORCE UPON ITS ISSUING DATE AND SHALL REMAIN VALID UNTIL
THE BUYER HAS MADE THE PAYMENT AS SPECIFIED IN CLAUSE SECTION 4.3.5 BUT NOT
LATER THAN ____________________.  THE L/G SHOULD BE RETURNED BACK TO OUR BANK
WHEN IT BECOMES NULL AND VOID.

ALL BANKING CHARGES INCURRED INSIDE OF CHINA WILL BE BORNE BY THE BUYER, AND ALL
THE BANKING CHARGES INCURRED OUTSIDE OF CHINA WILL BE BORNE BY THE SELLER.
<PAGE>
 
 
          ATTACHMENT TO AMENDMENT OF CONTRACT NO. 92MMG-129(62)23OUS
================================================================================

                               CONTENTS AMENDED
________________________________________________________________________________

    BEFORE AMENDMENT                               AFTER AMENDMENT

1.  SECTION 4.3.1                  1.  DELETE THE ORIGINAL SECTION 4.3.1/2
    SECTION 4.3.2                      NEW SECTION 4.3.1:
                                       30 DAYS PRIOR TO THE DATE OF DELIVERY,
                                       THE LICENSEE SHALL OPEN AN IRREVOCABLE
                                       LETTER OF CREDIT WITH BANK OF CHINA,
                                       HEADOFFICE, BEIJING, IN FAVOR OF THE
                                       LICENSOR FOR 55% (FIFTY-FIVE PERCENT) OF
 
                                   1.  FIVE ORIGINALS OF COMMERCIAL INVOICE

                                   2.  ONE ORIGINAL AND ONE COPY OF A SIGHT 
                                       DRAFT

                                   3.  TWO COPIES OF AIRWAY BILL MARKED 
                                       "FREIGHT PREPAID" FOR COMPLETE LOT NO. 1
                                       OF THE TECHNICAL DOCUMENTATION ACCORDING
                                       TO THE STIPULATIONS OF SECTION 2 HEREOF
                                       AND ONE COPY OF THE TECHNICAL
                                       DOCUMENTATION HAS BEEN COMPLETELY
                                       DELIVERED. AND ONE COPY OF DETAILED LIST
                                       OF TECHNICAL DOCUMENTS DISPATCHED

                                   4.  COPY OF FAX/TELEX TO THE LICENSEE 
                                       ADVISING PARTICULARS OF SHIPMENT
                                       IMMEDIATELY AFTER SHIPMENT IS MADE
        
                                   5.  INSURANCE POLITY OR CERTIFICATE IN ONE
                                       ORIGINAL AND FOUR COPIES COVERING
                                       110% OF INVOICE VALUE AGAINST ALL RISKS.

<PAGE>
 
          ATTACHMENT TO AMENDMENT OF CONTRACT NO. 92MMG-129(62)23OUS
================================================================================

                               CONTENTS AMENDED
________________________________________________________________________________

    BEFORE AMENDMENT                           AFTER AMENDMENT

2.  SECTION 4.3.3                  2.  SECTION 4.3.2

3.  SECTION 4.3.1(A)               3.  SECTION 4.3.3  THE TEXT REVISED AS
                                       FOLLOWS:
                                       AFTER THE TRAINING HAS BEEN COMPLETED,
                                       THE LICENSEE SHALL OPEN AN IRREVOCABLE
                                       LETTER OF GUARANTEE THROUGH BANK OF
                                       CHINA, HEADOFFICE, BEIJING WITH ONE
                                       ORIGINAL AND ONE COPY IN FAVOR OF THE
                                       LICENSOR IN THE AMOUNT OF USD180,000.00
                                       (IN WORDS: ONE HUNDRED AND EIGHTY
                                       THOUSAND U.S. DOLLARS, THE VALUE OF
                                       SECTION 4.3.4 + SECTION 4.3.5)
                                       (SEE REVISED SPECIMEN UNDER ANNEX 7 
                                       HERETO)

4.  SECTION 13.8                   4.  THE LICENSOR WILL GRANT LICENSEE UNTIL/
                                       BEFORE THE END OF DECEMBER, 1993 TO
                                       OBTAIN THE APPROVAL OF THE CHINESE
                                       GOVERNMENT FOR KNOW-HOW CONTRACT, THE
                                       JOINT VENTURE CONTRACT AND THE EQUIPMENT
                                       PURCHASE CONTRACT.

5.  ANNEX 1                        5.  ANNEX 1
          2.1-2.6                      DASH NO. AND TOTAL TYPES WILL
                                       BE INCREASED AS FOLLOWS:
          2.1                          2.1  INCREASED DASH NO.
                                       18,20,22,24,26,28,30,32
          TOTAL TYPES: 12              TOTAL TYPES: 20
          2.2                          2.2  INCREASED DASH NO.
                                       18,20,22,24,26,28,30,32
          TOTAL TYPES: 12              TOTAL TYPES: 20
          2.3                          2.3  INCREASED DASH NO.
                                       18,20,22,24,26,28,30,32
          TOTAL TYPES: 11              TOTAL TYPES: 19
          2.4                          2.4  INCREASED DASH NO.
                                       18,20,22,24,26,28,30,32
          TOTAL TYPES: 11              TOTAL TYPES: 19

<PAGE>
 
                   CONTRACT FOR JOINT VENTURES USING CHINESE
                             AND FOREIGN INVESTMENT

                         Chapter 1 General Provisions

     In accordance with "The Law of the People's Republic of China on Joint
Ventures Using Chinese and Foreign investment" and other relevant Chinese laws
and regulations, Shanghai Hong Xing Bearing Factory and Smith Acquisition
Company dba.  Southwest Products Company, adhering to the principle of quality
and mutual benefit and through friendly consultations, agree to jointly invest
to set up a joint venture enterprise in Shanghai the People's Republic of China.
The contract is worked out hereunder.

                    Chapter 2 Parties to the Joint Venture

Article 1

     Parties of this contract are as follows: Shanghai Hong Xing Bearing Factory
(hereinafter referred to as Party A), registered with Shanghai in China, and
its legal address is at 937, Zhong Shan Nan Yi Road,  Lu wan district,
Shanghai, China.

                                       1

<PAGE>
 
                  Legal representative:              Name:  Hu Xie Juan 
                                                     Position:  Director
                                                     Nationality:  China
 
Smith Acquisition Company dba.  Southwest Products Company (hereinafter referred
to as Party B), a California corporation.  Its legal address is at 2240 Buena
Vista, Irwindale, CA 91706.

                  Legal representative:              Name:  William Reed Mckay
                                                     Position:  President
                                                     Nationality:  America

             Chapter 3  Establishment of the Joint Venture Company

Article 2

     In accordance with "The Law of the People's Republic of China on Joint
Ventures Using Chinese and Foreign Investment" and other relevant Chinese laws
and regulations, both parties to the joint venture agree to set up Shanghai
Southwest Bearing joint venture limited liability company (hereinafter referred
to as the joint venture company).

Article 3

     The name of the joint venture company is Shanghai 

                                       2
<PAGE>
 
Southwest Bearing Company Ltd.

     The name in foreign language is _____________.

     The legal address of the joint venture company, is at 937, Zhong Shan Nan
 Yi Road, Shanghai, China.
 
     All activities of the joint venture company shall be governed by the laws,
decrees and pertinent rules and regulations of the People's Republic of China.

Article 5

     The organization form of the joint venture company, is a limited liability
company.  Each party to the joint venture company is liable to the joint venture
company within the limit of _______ capital subscribed by it.  The profits,
risks and losses of the joint venture company shall be shared by the parties in
proportion to their real contributions of the registered capital.

                                       3
<PAGE>
 
                    Chapter 4  Purpose, Scope and Scale of
                            Production and Business

Article 6

     The purpose of the parties to the joint venture is in conformity with the
enhancing of the economic cooperation and technical exchange, to improve the
product quality, develop new products, and gain competitive position in the
world market in quality and price by adopting advanced and appropriate
technology and scientific management method, so as to raise economic results and
ensure satisfactory economic benefits for each investor.
 
Article 7

     The productive and business scope of the joint venture company is to
design, manufacture and sell spherical bearing products and related modified
products.  

     The spherical bearing products will consist of steel to steel and
self-lubricating spherical and journal bearings.  These bearings are standard,
precision, for special uses.  

     Provide maintenance service after the sale of the products; Study and
develop new products and new liner material,

                                       4
<PAGE>
 
bonding technology.

Article 8

     The production scale of the joint venture company is as follows:

     1.  The production capacity after the joint venture is put into operation
is 600,000 units per year for normal years.

     2.  The production scale and product varieties may be increased with the
development of the production and operation. (see Feasibility Study Report)

                   Chapter 5  Total Amount of Investment and
                              Registered Capital
 
Article 9

     The total amount of investment of the joint venture company is $ 7,200,000.

Article 10

     Investment contributed by the parties is $3,600,000 which will be the
registered capital of the joint venture company.

     Of which:  Party A shall pay $ 2,600,000, accounting for 

                                       5
<PAGE>
 
72.22%; Party B shall pay $ 1,000,000, accounting for 27.78%.

Article 11

     Both Party A and Party B will contribute the following as their investment:

         Party A:

             Technology:  $900,000 (was imported for producing
                          steel - to - steel and self - lubricating
                          spherical bearings)

             Machines and Instruments:  $1,100,000

             Premises:  $600,000

         Party B:

             Cash:  $800,000

             Technology:  $200,000 (for manufacturing and
                          bonding self-lubricating liner)

     Note:  Both Party A and Party B shall strictly comply with Technology
Transfer Contract signed in Beijing On Dec. 18, 1992 (with Contract Amendment
signed on Aug. 24, 1993) and a second Technology Transfer Contract which will be
signed in Shanghai between the joint venture company and Party B in the future,
and Machinery Contract.

                                       6
<PAGE>
 
Article 12

     In accordance with Technology Transfer Contract and Machinery Contract, the
registered capital of the joint venture company shall be paid in installments by
Party A and Party B according to their respective proportion of their
investment.

Article 13

     In case either party to the joint venture intends to assign all or part of
his investment subscribed to a third party, written consent shall first be
obtained from the other party to the joint venture, and approval from the
examination and approval authority is required.

     When one party to the joint venture assigns all or part of his investment,
the other party has preemptive right to acquire the assignment provided this
preemptive right is not in violation of United States law or Chinese law.
 
                   Chapter 6  Responsibilities of Each Party
                             to the Joint Venture

Article 14

     Party A and Party B shall be respectively responsible for the 

                                       7
<PAGE>
 
following matters:

     Responsibilities of Party A:

     Handling of applications for approval, registration, business license
and other matters concerning the establishment of the joint venture company from
relevant departments in charge in China;

     Processing for applying the right to the use of a site to the authority in
charge of the land;

     Organizing the design and construction of the premises and other
engineering facilities of the joint venture company;

     Provided technology, machinery and instrument, construction and premises in
accordance with the stipulations in Article 11;

     Assisting the joint venture company for processing import customs
declaration for buying technology from Party B and arranging the transportation
within the Chinese territory;

     Assisting the joint venture company in purchasing or leasing equipment,
materials, raw materials, articles for office use, means of transportation and
communication facilities, etc;
 
     Assisting the joint venture company in contacting and settling the
fundamental facilities such as water, electricity, transportation, etc;

     Assisting the joint venture company in recruiting Chinese 

                                       8
<PAGE>
 
management personnel, technical personnel, workers and other personnel needed;

     Assisting foreign workers and staff in obtaining housing and in
applying for the entry visa, work license and processing their travelling
matters;

     Responsible for handling other matters entrusted by the joint venture
company.

     Responsibilities for Party B:

     Providing cash in accordance with the stipulations in Article 11 under time
limit as followings:

          At first, as first installment of contribution by Party B pay US
          $400,000 (four hundred thousand dollars) to the joint venture company
          in half a year upon the date of establishing the joint venture; At
          second, as second installment of contribution by Party B pay US
          $200,000 (two hundred thousand dollars) to the joint venture within
          one year upon the date of its establishing; 

          At last, as third installment of contribution by Party B pay US
          $200,000 (two hundred thousand dollars) to the joint venture in one
          year and half a year upon the date of establishment of the joint

                                       9
<PAGE>
 
venture company.


     and responsible for shipping to a Chinese port technical documents, etc;

     Handling the matters entrusted by the joint venture company, such as
selecting and purchasing machinery and equipment outside China;

     Providing needed technical personnel for installing, testing and trial
production of the equipment, as well as technical personnel for production and
inspecting;

     Training the technical personnel and workers of the joint venture company;

     Because Party B is the licensor, he shall be responsible for handling
American technology export license and the stable production of qualified
products of the joint venture company in the light of design capacity within the
stipulated period, and meet the production quote;

     Responsible for other matters entrusted by the joint venture company.

                                      10


<PAGE>
 
                       Chapter 7 Transfer of Technology
Article 15

     Both Party A and Party B agree that a technology transfer agreement
shall be signed between Party A, the joint venture company and Party B so as to
obtain advanced production technology needed for realizing the production and 
operation purpose and the production scale stipulated in Chapter 4 in the
contract, including products designing, technology of manufacturing, means of
testing, liner materials prescription and bonding technology, quality standard
and the training of personnel, etc. (see Technology Transfer Agreement signed in
Beijing)

     Party B offers the following guarantees on the transfer of technology:

     1.  Party B guarantees that the overall technology such as the
designing, technology of manufacturing, technological process, tests and
inspecting of steel to steel spherical bearings, self-lubricating spherical
bearings, rod end bearings, bushings provided to the joint venture company must
be integrated, precise and reliable.  It is to meet the requirement of the joint
venture's operation purpose, and be able to obtain the standard of 

                                       11
<PAGE>
 
production quality and production capacity stipulated in the contract.

     2.  Party B guarantees that he possesses the rights of the technology
stipulated in this contract and the technology transfer agreement, Party B
should the legitimate owner of the Technology.  Should any legal prosecution
caused by disputes of possession henceforth, it will be settled by Party B
solely.  So should any unsuccess of integrity and continuity arising from above
in executing the Contract be brought about, Party B should bear relevant
responsibility (refer to items regulated in Technology Transfer Contract),  
and Party B has the rights to transfer it under license to Party A and the joint
venture company, and pledges that the provided technology should be truly most
advanced among the same type of technology of Party B, the model, specification
and quality of the equipment are excellent to meet the requirement of
technological operation and practical usage;

     3.  Party B shall work out a detailed list of the provided technology
and technological service at various stages as stipulated in the technology
transfer agreement to be an appendix to the contract, and guarantee its
performance;

     4.  The drawings, technological conditions and other detailed

                                       12
<PAGE>
 
information are part of the transferred technology and shall be offered on time.

     5.  Within the validity period of the technology transfer agreement,
Party B shall provide the joint venture company with the improvement of the
technology and the improved information and technological materials in time, and
shall not charge separate fees;

     6.  Party B shall guarantee that technological personnel and the
workers in the joint venture company can master all the technology transferred
within the period stipulated in the technology transfer agreement.

Article 17

     In case Party B fails to provide equipment or technology in accordance
with the stipulations in this contract and in the technology transfer agreement
or in case any deceiving or concealing actions are found, Party B shall be
responsible for compensating the direct losses to the joint venture company.

Article 18

     Within the duration of the joint venture company, the joint venture
shall have the right to use, research and develop the 

                                       13
<PAGE>
 
imported technology as stipulated in technology transfer contract signed between
Party A, joint venture company and Party B. Both Party A and Party B shall
guarantee to provide each other with the improvement of the technology and
developed process, productive and designing information in time without extra
charge.

                        Chapter 8  Selling of Products

Article 19

     The products of the joint venture company will be sold both on Chinese
market and on overseas market, the export part accounting for more than 90% of
annual overall output of the joint venture, and less than 10% for domestic
market.  The parts will not be sold in violation of United States laws.
 
Article 20
              
     Products may be sold on overseas market through the following channels:

     The joint venture company may directly sell its products on the
international market only to those areas not specified in Item 2.2 of the
Technology Transfer Contract.

                                       14
<PAGE>
 
     Party B will sell the products made by the joint Venture in the areas
specified in Item 2.2 of the Technology Transfer Contract (executing as Article
9 in Articles of association).  The amount sold will be no less than 300 to 540
thousand units per year.  Party B will sell these products to Smith Acquisition
Company dba Southwest Products Company ("Buyer" ). The price of the Products
sold to Buyer shall be set by agreement of the General Manager and Deputy
General Manager. The price shall be based upon the JV's cost to manufacture the
Products plus a reasonable profit added thereto.  The price established by the
JV must be agreed upon and accepted by the Buyer in the form of a purchase order
to be valid.  The price shall basically at least not lower than the price as
specified in annex of the Feasibility Study Report.

Article 21

     The joint venture's products to be sold in China may be sold directly by
joint venture company to enterprises and commercial departments in China, but
may not be sold in violation of United States laws.

                                       15
<PAGE>
 
Article 22

     The trade mark of the joint venture's products will be decided by the
board of the directors of the joint venture company (SW - SH for temporarily 
use). The joint venture company shall apply for the registration of the trade
mark with the Trademark Office of the Administrative Authority for Industry and
Commerce in China, the right of trademark shall be protected by law.  The joint
venture company shall enjoy an exclusive right to use the trademark.  Should
products made by the Joint Venture be sold outside of China, the Joint Venture
company would have rights to use the trademark of Southwest Products Company,
but it is necessary to mark the site of production in clear position.

                       Chapter 9  The Board of Directors

Article 23

     The date of registration of the joint venture company shall be the
establishment of the board of directors of the joint venture company.

                                       16
<PAGE>
 
Article 24

     The board of directors are composed of six directors, of which four
directors shall be appointed by Party A, two by Party B. The chairman of the
board shall be appointed by Party A, and its vice - chairman by Party B. The
term of office for the directors, chairman and vice-chairman is four years; 
Their term of office may be renewed if continuously appointed by the relevant
party.

Article 25

     The highest authority of the joint venture company shall be its board
of directors.  It shall decide all major issues concerning the joint venture
company.  Unanimous approval shall be required before any decisions are made
concerning major issues (See the Article 29 of Articles of Association).  As for
other matters, approval by more than half of member of the board of directors
shall be required.

Article 26

     The chairman of the board is the legal representative of the joint
venture company.  Should the chairman be unable to exercise his responsibilities
for some reason, he shall authorize 

                                       17
<PAGE>
 
the vice - chairman or any other director the represent the joint venture
company temporarily.

Article 27

     The board of directors shall convene at least one meeting every year.
The meeting shall be called and presided over by the chairman of the board.  The
chairman may convene an interim meeting based on a proposal made by more than
one-third of the total number of directors. Minutes of the meetings shall be
placed on file.

                    Chapter 10  Business Management Office

Article 28

     The joint venture company shall establish a management office which
shall be responsible for its daily management.  The management office shall have
a general manager, appointed by Party B at the initial term; Two deputy general
managers by Party A; After the first term, nomination will be decided upon by
the unanimous agreement of the board of directors. The general manager and
deputy general managers shall be invited by the board of directors whose term of
office is four years.

                                       18
<PAGE>
 
Article 29

     The responsibility of the general manager is to carry out the decisions of
the board meeting and organize and conduct the daily management of the joint
venture company. The deputy general managers shall assist the general manager in
his work.

     Several department managers may be appointed by the management office,
who shall be responsible for the works in various department respectively,
handle the matters handed over by the general manager and deputy general
managers and shall be responsible to them.

Article 30

     In case of graft or serious dereliction of duty on the part of the
general manager and deputy general managers, the board of directors shall have
the power to dismiss them at any time.

                       Chapter 11 Purchase of Equipment

Article 31

     In its purchase of required raw materials, fuel, parts, means of
transportation and articles for office use, etc., the joint venture company
shall give first priority to purchase in China 

                                       19
<PAGE>
 
where conditions are the same and the customer will accept Chinese raw material.

Article 32

     In case the joint venture company entrusts Party B to purchase equipment on
overseas market, Party B shall invite persons appointed by Party A to take part
in the purchasing and pay attention to the site conditions of Party A.
 
                   Chapter 12  Preparation and Construction
Article 33

     During the period of preparation and construction, a preparation and
construction office shall be set up under the board of directors.  The
preparation and construction office shall consist of five persons, among which
four persons will be from Party A, one person from Party B.  The preparation
and construction office shall have one manager recommended by Party A, and one
deputy manager by Party B. The manager and deputy manager shall be appointed by
the board of directors.

                                       20

<PAGE>
 
Article 34

     The preparation and construction office is responsible for the following
concrete work: examining the designs of the project, signing project
construction contract, organizing the purchasing and inspecting of relative
equipment, materials, etc., working out the general schedule of project
construction, compiling the expenditure plans, controlling project financial
payments and final accounts of the project, drawing up managerial methods and
keeping and filing documents, drawings, files and materials, etc., during the
construction period of the project.

Article 35

     A technical group with several technical personnel appointed by Party A and
Party B shall be organized. The group, under the leadership of the preparation
and construction office, is in charge of the examination, supervision,
inspection, testing, checking and accepting and performance checking for the
project design, the quality of project, the equipment and materials and the
imported technology.

Article 36

     After approved by both parties, the establishment, 

                                       21
<PAGE>
 
remuneration and the expenses of the staff of the preparation and construction
office shall be paid respectively by Party A and Party B with Party A paying its
assigned personnel and Party B paying its delegate.

Article 37

     After having completed the project and finishing the turning over
procedures, the preparation and construction office shall be dissolved upon the
approval of the board of directors.

                         Chapter 13  Labour Management

Article 38

     Labour contract covering the recruitment, employment, dismissal and
resignation, wages, labour insurance, welfare, rewards, penalty and other
matters concerning the staff and workers of the joint venture company shall be
drawn up between the joint venture company and the Trade Union of the joint
venture company as a whole or individual employees in accordance with the
"Regulations of the People's Republic of China on Labour Management in Joint
Ventures Using Chinese and Foreign Investment" and its implementation rules.

                                       22
<PAGE>
 
     The labour contracts shall, after being signed, be filed with the local
labour management department.

Article 39

     The appointment of high-ranking administrative personnel recommended
by both parties, their salaries, social insurance, welfare and the standard of
travelling expenses, etc., shall be decided by the meeting of the board of
directors.

                     Chapter 14  Taxes, Finance and Audit

Article 40

     Joint venture company shall pay taxes in accordance with the stipulations
of Chinese laws and other relative regulations.

Article 41

     Staff members and workers of the joint venture company shall pay individual
income tax according to the "Individual Income Tax Law of the People's Republic
of China."
 
Article 42

     Allocations for reserve funds, expansion funds of the joint 

                                       23
<PAGE>
 
venture company and welfare funds and bonuses for staff and workers shall be set
aside in accordance with the stipulations in "The Law of the People's Republic
of China on Joint Ventures Using Chinese and Foreign Investment." The annual
proportion of allocations shall be decided by the board of directors according
to the business situation of the joint venture company.

Article 43

     The fiscal year of the joint venture company shall be from January 1 to
December 31. All vouchers, receipts, statistic statements and reports, account
books shall be written in Chinese and English.

Article 44

     Financial checking and examination of the joint venture company shall be
conducted by an auditor registered in China and reports shall be submitted to
the board of directors and the general manager.

     In case Party B considers it is necessary to employ a foreign auditor
registered in another country to undertake annual financial checking and
examination, Party A shall give its consent. All the expenses thereof shall be
borne by Party B.
 
                                       24
<PAGE>
 
Article 45

     In the first three months of each fiscal year, the general manager shall
prepare previous year's balance sheet, profit and loss statement and proposal
regarding the disposal of profits, and submit them to the board of directors for
examination and approval.

                   Chapter 15  Duration of the Joint Venture

Article 46

     The duration of the joint venture company is 25 years. The establishment of
the joint venture company shall start from the date on which the business
license of the joint venture company is issued.

     An application for the extension of the duration, proposed by one party and
unanimously approved by the board of directors, shall be submitted to the
Shanghai Foreign Investment Commission six months prior to the expiry date of
the joint venture.

                                       25
<PAGE>
 
              Chapter 16  The Disposal of Assets After Expiration
                                of the Duration

Article 47

     Upon the expiration of the duration or termination before the date of
expiration of the joint venture, liquidation shall be carried out as per
liquidated procedure stipulated in Regulations of Shanghai Municipality on
Liquidation of Enterprises with Foreign Investment and according to the relevant
laws. The liquidated assets shall be distributed in accordance with the
proportion of investment contributed by Party A and Party B.

                             Chapter 17  Insurance

Article 48

     Insurance policies of the joint venture company on various kinds of risks
shall be underwritten with the People's Republic of China. Types, value and
duration of insurance shall be decided by the board of directors in accordance
with the stipulations of the insurance company in China.

                                       26
<PAGE>
 
                   Chapter 18  The Amendment, Alteration and
                           Discharge of the Contract

Article 49

     The amendment of the contract or other appendices shall come into force
after the written agreement is signed by Party A and Party B and approved by the
original examination and approval authority.

Article 50
 
     In case of inability to fulfill contract or to continue operation due to
heavy losses in successive years without any increased investment as a result of
force majeure, the duration of the joint venture and the contract shall be
terminated before the time of expiration after being unanimously agreed upon by
the board of directors and approved by the original examination and approval
authority.

Article 51

     Should the joint venture company be unable to continue its operations
or achieve the business purpose stipulated in the contract due to the fact that
one of the contracting parties fails to 

                                       27
<PAGE>
 
fulfill the obligations prescribed by the contract and articles of association,
or seriously violates the stipulations of the contract and articles of
association, that party shall be deemed as unilaterally terminating the
contract. The other party shall have the right to terminate the contract in
accordance with the provisions of the contract after being approved by the
original examination and approval authority as well as to claim damages. In case
Party A and Party B of the joint venture company agree to continue the
operation, the party who fails to fulfill the obligations shall be liable to the
economic losses thus caused to the joint venture company.

                 Chapter 19  Liabilities for Breach of Contract
 
Article 52

     Should either Party A or Party B fail to pay on schedule the contributions
in accordance with the provisions defined in Chapter 5 of this contract, the
breaching party shall pay to the other party 5% of the contribution starting
from the first month after exceeding the time limit. Should the breaching party
fail to pay after 3 months, 15% of the contribution shall be paid to the other
party, who shall have the right to terminate the contract and 

                                       28
<PAGE>
 
to claim damages to the breaching party in accordance with the stipulations in
Article 53 of this contract.

Article 53

     Should all or part of the contract and its appendices be unable to be
fulfilled owing to the fault of one party, the breaching party shall bear the
responsibilities thus caused and compensate relevant economic losses. Should it
be the fault of both parties, they shall bear their respective responsibilities
and be liable to relevant economic losses according to actual situations.

                           Chapter 20  Force majeure

Article 54

     Should either of the parties to the contract be prevented from executing
the contract by force majeure, such as earthquake, typhoon, flood, fire and war
and other unforeseen events, and their happening and consequences are
unpreventable and unavoidable, the prevented party shall notify the other party
by Fax without any delay, and within 15 days thereafter provide the detailed
information of the events and a valid document for 

                                       29

<PAGE>
 
evidence issued by the relevant public notary organization for explaining of the
reason of its inability to execute or delay the execution of all or part of the
contract. Both parties shall, through consultations, decide whether to terminate
the contract or to exempt the part of obligations for implementation of the
contract or whether to delay the execution of the contract according to the
effects of the events on the performance of the contract.

                           Chapter 21  Applicable Law

Article 55

     The formation of this contract, its validity, interpretation, execution and
settlement of the disputes shall be governed by the related laws of the People's
Republic of China.

                       Chapter 22  Settlement of Disputes

Article 56
 
     Any disputes arising from the execution of, or in connection with, the
contract shall be settled through friendly consultations between both parties.
In case no settlement can be reached 

                                      30
<PAGE>
 
through consultations, the disputes shall be submitted to Shanghai branch of the
International Economic and Trade Arbitration Commission of the China Council for
arbitration in accordance with its rules of procedure. The arbitral award is
final and binding upon both parties.

Article 57

     During the arbitration, the contract shall be executed continuously by both
parties except for matters in dispute.

                              Chapter 23  Language

Article 58

     The contract shall be written in Chinese version and in English version.
Both languages are equally authentic. In the event of any discrepancy between
the two aforementioned versions, the Chinese version shall prevail.

                                      31

<PAGE>
 
                   Chapter 24  Effectiveness of the Contract
                                 and Miscellany

Article 59
 
     The appendices drawn up in accordance with the principles of this contract
are integral part of this contract, including: the project agreement, the
technology transfer agreement, the sales agreement . . . .

Article 60

     The contract and its appendices shall come into force beginning from the
date of approval by Shanghai Mechanical & Electrical Industrial Administration
Bureau.

Article 61

     The technology transfer contract signed in Beijing between Party A and
Party B will be signed in Shanghai between the joint venture company and Party
B, the machinery purchasing contract with which the joint venture company
entrusts Party B to purchase equipment on overseas market are all appendices of
this contract.

                                      32
<PAGE>
 
     If there are some contradictions among above mentioned contracts, this
contract shall prevail.

Article 62

     Should notices in connection with any party's rights and obligations be
sent by either Party A or Party B by telegram or telex, etc., the written letter
notices shall be also required afterwards. The legal addresses of Party A and
Party B listed in this contract shall be the posting addresses.
 
Article 63

     The contract is signed in Shanghai of China by the authorized
representatives of both parties on March 21, 1994.

               For Party A                  For Party B
               (Signature)                  (Signature)

                                      33

<PAGE>
 
                                                                   EXHIBIT 10.19

                            ARTICLES OF ASSOCIATION
                               FOR JOINT VENTURES
                      USING CHINESE AND FOREIGN INVESTMENT



                                SHANGHAI, CHINA
                                 18 MARCH, 1994
<PAGE>
 
                   ARTICLES OF ASSOCIATION FOR JOINT VENTURES
                      USING CHINESE AND FOREIGN INVESTMENT


                         CHAPTER I GENERAL PROVISIONS

ARTICLE 1

          In accordance with "The Law of the People's Republic of China on Joint
Ventures Using Chinese and Foreign Investment" and the contract, in which two
parties agree on setting up Shanghai Southwest Bearing joint venture company
Ltd. (hereinafter referred to as the joint venture company), signed by Shanghai
Hong Xing Bearing Factory (hereinafter referred to as Party A and Smith
Acquisition Company dba. Southwest Products Company of U.S.A. (hereinafter
referred to as Party B) in Shanghai, China, the articles of association hereby
is formulated.

ARTICLE 2

          The name of the joint venture company is Shanghai Southwest Bearing
Company Ltd.

          The name in Chinese language is ______________.  

                                     . 1 .
<PAGE>
 
The legal address of the joint venture company is at 937, Zhong Shan Nan Yi
Road, Shanghai China.

ARTICLE 3

          The names and legal addresses of the parties to the joint venture are
as follows:

          Party A:  Shanghai Hong Xing Bearing Factory at 937, Zhong Shan Nan Yi
                    Road, Shanghai, China

          Party B:  Smith Acquisition Company dba. Southwest Products Co. of
                    U.S.A. at 2240, Buena Vista, Irwindale, CA 91706, America

ARTICLE 4

          The joint venture company is a limited liability company.

ARTICLE 5

          The joint venture company has the status of a legal person and is
subject to the jurisdiction and protection of China's laws concerned.  All its
activities shall be governed by Chinese laws, decrees and other pertinent rules
and regulations.

                                     . 2 .
<PAGE>
 
                   CHAPTER II  PURPOSE AND SCOPE OF BUSINESS

ARTICLE 6

          The purpose of the joint venture is to produce and sell spherical
bearing products as stipulated in the Contract for Joint Venture, to develop new
liner material and bonding technology, and to reach world class level for
obtaining satisfactory economic benefits for the parties to the joint venture
company.

ARTICLE 7

          The business scope of the joint venture company is to design,
manufacture and sell spherical bearing products and related modified products,
machines; provide after sale-services.

ARTICLE 8
          The scale of production of the joint venture company is as follows:

          First year:    100,000 units
          Second year:   500,000 units
          Third year:    600,000 units

                                     . 3 .
<PAGE>
 
ARTICLE 9

          The joint venture company may sell its products on the Chinese
domestic market and on the international market, its selling proportion based on
annual total output is as following:

          First year:   100%
          Second Year:  90% for export;
                        10% for the domestic market
          Third Year:   more than 90% for export; remaining for the domestic
                        market.


       CHAPTER III THE TOTAL AMOUNT OF INVESTMENT AND REGISTERED CAPITAL

ARTICLE 10

          The total amount of investment of the joint venture company is
$4,600,000.  Its registered capital is $7,200,000.

                                     . 4 .
<PAGE>
 
ARTICLE 11

          The investment contributed by each party is as follows:

          PARTY A:  Investment subscribed is $2,600,000, accounting for 72.22%
                    of the registered capital, among which,
                    Technology:  $900,000 (was imported for producing steel to
                                 steel and self-lubricating spherical bearings)
                    Machines and Instruments:  $1,100,000
                    Premises:  $600,000

          PARTY B:  Investment subscribed is $1,000,000, accounting for 27.78%
                    of the registered capital, among which,
                    Cash:  $800,000
                    Technology:  $200,000 (for manufacturing and bonding self-
                                 lubricating liner)

ARTICLE 12

          The parties to the joint venture shall pay in all the investment
subscribed according to the time limit stipulated in the contract.

                                     . 5 .
<PAGE>
 
ARTICLE 13

          After the investment is paid by the parties to the joint venture, an
accountant who had been registered in China, agreed upon by both parties invited
by the joint venture company shall verify it and provide a certificate of
verification. According to this certificate, the joint venture shall issue an
investment certificate which includes the following items: name of the joint
venture; date of the establishment of the joint venture; names of the parties
and the investment contributed; date of the contribution of the investment; and
the date of issuance of the investment certificate.

ARTICLE 14

          Within the term of the joint venture, the joint venture company shall
not reduce its registered capital.

ARTICLE 15

          Should one party assign all or part of its investment subscribed,
written consent shall be obtained from the other party of the joint venture.
When one party assigns investment, the other party has preemptive right. Such

                                     . 6 .
<PAGE>
 
assignment shall not be in violation of United States or Chinese law.

ARTICLE 16

          Any increase or assignment of the registered capital of the joint
venture company shall be unanimously approved by the board of directors and
submitted to the original examination and approval authority for approval.  The
registration procedures for changes shall be dealt with at the original
registration and administration office.


                       CHAPTER IV THE BOARD OF DIRECTORS

ARTICLE 17

          The joint venture shall establish the board of directors which is the
highest authority of the joint venture company.

ARTICLE 18
          The board of directors shall decide all major issues concerning the
joint venture company.  Its functions and powers are as follows:

                                     . 7 .
<PAGE>
 
          _____  deciding and approving the important reports submitted by the
general manager (for instance: production plan, annual business report, funds,
loans, etc.,);

          _____  approving annual financial reports, budget of receipts and
expenditures, distribution plan of annual profits;

          _____  adopting major rules and regulations of the company;

          _____  deciding to set up branches;

          _____  amending the parties of association of the company;

          _____  discussing and deciding the termination of production,
termination of the company or merging with another economic organization;

          _____  deciding the engagement of high-rank officials such as the
general manager, chief engineer, treasurer, auditor, etc.;

          _____  being in charge of expiration of the company and the
liquidation matters upon the expiration of the joint venture company;

          _____  other major issues which shall be decided by the board of
directors.

                                     . 8 .
<PAGE>
 
ARTICLE 19

          The board of directors shall consist of six directors, of which four
directors shall be appointed by Party A, two by Party B.  The term of office for
the directors is four years and may be renewed.

ARTICLE 20

          Chairman of the board shall be appointed by Party A and vice chairman 
of the board by Party B.

ARTICLE 21

          When appointing and replacing directors, a written notice shall be
submitted to the board.

ARTICLE 22

          The board of directors shall convene one meeting every year.  The
chairman may convene an interim meeting based on a proposal made by more than
one-third of the total number of directors.

ARTICLE 23

          The board meeting will be held in principle on the 

                                     . 9 .
<PAGE>
 
location of the company.

ARTICLE 24

          The board meeting will be called and presided over by the chairman.
Should the chairman be absent, the vice chairman shall call and preside over the
board meeting.

ARTICLE 25

          The chairman shall give each director a written notice 30 days before
the date of the board meeting.  The notice shall cover the agenda, time and
place of the meeting.

ARTICLE 26

          Should a director be unable to attend the board meeting, he may
present a proxy in written form to the board.  In case the director neither
attends nor entrusts other to attend the meeting, he will be regarded as
abstention.

ARTICLE 27

          The board meeting requires a quorum of at least two-thirds of the
total number of directors.  When the quorum is less than two-thirds, the
decisions adopted by 

                                    . 10 .
<PAGE>
 
the board meeting are invalid; Each board decision must be approved by at least
one board member appointed by Party B.

ARTICLE 28

          Detailed written records shall be made for each board meeting and
signed by all the attending directors or by the attending proxy.  The record
shall be made in Chinese and English, and shall be filed with the company.

ARTICLE 29

          The following issues shall be unanimously agreed upon by the board of
directors:

          _____  amending the articles of association of the joint venture
company;

          _____  increasing and assignment the registered capital of the joint
venture company;

          _____  deciding annual plan of production and selling, financial
budget and final account;

          _____  deciding distribution plan of annual profits, use and
distribution proportion of reserve funds, expansion funds of the joint venture
company, welfare funds and

                                    . 11 .
<PAGE>
 
bonuses for staff and workers.

          _____  appointing and removing of the general manager and deputy
general managers;

          _____  merging with other economic organization;

          _____  terminating and disbanding the joint venture company;

          _____  liquidation organization and plan of the joint venture company,

ARTICLE 30

          The other important issues shall be passed by more than half of the
total number of directors, but must be approved by at least one director
appointed by Party B.


                  CHAPTER V BUSINESS MANAGEMENT ORGANIZATION

ARTICLE 31

          The joint venture company shall establish a management organization.
It consists of production, technology, marketing, finance and administration
offices, etc.

ARTICLE 32

                                    . 12 .
<PAGE>
 
          The joint venture company shall have one general manager and two
deputy general managers who are engaged by the board of directors.  The first
general manager shall be recommended by Party B; After the first term,
recommendation will be decided upon negotiation of the board of directors.
Deputy general managers shall be recommended by Party A, and approved by the
general manager.

ARTICLE 33

          The general manager is directly responsible to the board of directors.
He shall carry out the decisions of the board of directors, organize and conduct
the daily production, technology and operation and management of the joint
venture company.  The deputy general managers shall assist the general manager
in his work and act as the agent of the general manager during his absence and
exercise the functions of the general manager.

ARTICLE 34

          Decision on the major issues concerning the daily work of the joint
venture company shall be signed jointly by the general manager and deputy
general managers, then the 

                                    . 13 .
<PAGE>
 
decisions shall come into effect. Issues which need co-signatures shall be
specifically stipulated by the board of directors.

ARTICLE 35

          The term of office for the general manager and deputy general managers
shall be four years.  After the initial term, the general manager and the deputy
general managers should continue to be nominated by the same parties as
originally stipulated, and be approved by the board of directors.

ARTICLE 36

          At the invitation of the board of directors, the chairman, vice-
chairman or directors of the board may concurrently be the general manager,
deputy general managers or other high-ranking personnel of the joint venture
company.

ARTICLE 37

          The general manager or deputy general managers shall not hold posts
concurrently as general manager or deputy 

                                    . 14 .
<PAGE>
 
general managers of other economic organizations in commercial competition with
their own joint venture company.

ARTICLE 38

          The joint venture company shall have one chief engineer, one treasurer
and one auditor engaged by the board of directors and approved by the general
manager.

ARTICLE 39

          The general engineer, treasurer and auditor shall be under the
leadership of the general manager.

          The treasurer shall exercise leadership in financial and accounting
affairs, organize the joint venture company to carry out overall business
accounting and implement the economic responsibility system.

          The auditor shall be in charge of the auditing work of the joint
venture company, examine and check the financial receipts and expenditure and
the accounts, and submit written reports to the general manager and the board of
directors.

                                    . 15 .
<PAGE>
 
ARTICLE 40

          The general manager, deputy general manager, chief engineer,
treasurer, auditor and the other high-ranking personnel who wish to quit the job
with the joint venture shall submit their written resignation to the board of
directors in advance.

          In case any one of the above-mentioned persons conduct graft or
serious dereliction of duty, they may be dismissed at any time upon the decision
of the board.  Those who violate the criminal law shall be under criminal
sanction.


                       CHAPTER IV FINANCE AND ACCOUNTING

ARTICLE 41

          The finance and accounting of the joint venture company shall be
handled in accordance with the "Stipulations of the Finance and Accounting
System of the Joint Ventures Using Chinese and Foreign Investment
formulated by the Ministry of Finance of the People's Republic of China.

                                    . 16 .
<PAGE>
 
ARTICLE 42

          The fiscal year of the joint venture company shall coincide with the
calendar year, i.e. from January 1 to December 31 on the Gregorian calendar.

ARTICLE 43

          All vouchers, account books, statistic statements and reports of the
joint venture company shall be written in Chinese and English.

ARTICLE 44

          The joint venture company adopts RMB as its accounts keeping unit.
The conversion of RMB into other currency shall be in accordance with the
exchange rate of the converting day published by the State Administration of
Exchange Control of the People's Republic of China.

ARTICLE 45

          The joint venture company shall open accounts in RMB and foreign
currency with the Bank of China or other banks agreed by the Bank of China.

                                    . 17 .
<PAGE>
 
ARTICLE 46

          The accounting of the joint venture company shall adopt the
internationally used accrual basis and debit and credit accounting system in
their work.

ARTICLE 47

          The following items shall be covered in the financial accounts books:

          1.   The amount of overall cash receipts and expense of the joint
venture company;

          2.   All material purchasing and selling of the joint venture company;

          3.   The registered capital and debts situation of the joint venture
company;

          4.   The time of payment, increase and assignment of the registered
capital of the joint venture company.

          5.   Other financial information deemed necessary by the general
manager to assist him in performing his duties.

ARTICLE 48

          The joint venture company shall work out the statement 

                                    . 18 .
<PAGE>
 
of assets and liabilities and losses and gains accounts of the past year in the
first three months of each fiscal year, and submit to the board meeting for
approval after being examined and signed by the auditor.


ARTICLE 49

          Parties to the joint venture have the right to invite an auditor to
undertake annual financial check and examination at their own expense.  The
joint venture company shall provide convenience for checking and examination.

ARTICLE 50

          The depreciation period for the fixed assets of the joint venture
company shall be decided by the board of directors in accordance with the Rules
for the Implementation of the Income Tax Law of the People's Republic of China
Concerning Joint Venture with Chinese and Foreign Investment.

ARTICLE 51

          All matters concerning foreign exchange shall be handled in accordance
with the "Provisional Regulations for 

                                    . 19 .
<PAGE>
 
Exchange Control of the People's Republic Of China", and other pertaining
regulations as well as the stipulations of the joint venture contract.


                          CHAPTER VI PROFITS SHARING

ARTICLE 52

          The joint venture company with unanimous approval of the board of
directors will draw reserve funds, expansion funds and bonuses and welfare funds
for staff and workers after payment of taxes. The proportion of allocation is
decided by the board of directors.

ARTICLE 53

          After paying the taxes in accordance with law and drawing the various
funds, the remaining profits will be distributed according to the proportion of
each party's investment in the registered capital.  At the beginning period of
the joint venture company, profits will be distributed by RMB currency.

ARTICLE 54

                                    . 20 .
<PAGE>
 
          The joint venture company shall distribute its profits each year.  The
profit distribution plan and the amount of profit distributed to each party
shall be published within the first three months following each fiscal year.

ARTICLE 55

          The joint venture company shall not distribute profits unless the
losses of previous fiscal year have been made up. Remaining profit from previous
year can be distributed together with that of the current year.


                        CHAPTER VIII STAFF AND WORKERS

ARTICLE 56

          The employment, recruitment, dismissal and resignation of the staff
and workers of the joint venture company and their salary, welfare benefits,
labour insurance, labour protection, labour discipline and other matters shall
be handled according to the "Regulations of the People's Republic of China on
Labour Management in Joint Ventures Using Chinese and Foreign Investment" and
its implementation rules.

                                    . 21 .
<PAGE>
 
ARTICLE 57

          The required staff and workers to be recruited by the joint venture
company will be recommended by the local labour department or the joint venture
will do so through public selection examinations and employ those who are
qualified with the consent of the labour department.

ARTICLE 58

          The joint venture company has the right to take disciplinary actions,
record a demerit and reduce salary against those staff members and workers who
violate the rules and regulations of the joint venture company and labour
discipline. Those with serious cases may be dismissed. Discharging of workers
shall be filed with the labour and personnel department in the locality.

ARTICLE 59

          The salary treatment of the staff and workers shall be set by the
board of directors according to the specific situation of the joint venture, 
with reference to pertaining stipulations of China, and shall be specified in 
detail in

                                    . 22 .
<PAGE>
 
the labour contract.

          The salary of the staff and workers shall be increased correspondingly
with the development of production and the raising of the ability and technology
of the staff and workers.

ARTICLE 60

          Matters concerning the welfare funds, bonuses, labour protection and
labour insurance, etc. shall be stipulated in various rules by the joint venture
company to ensure that the staff and workers go in for production and work under
normal conditions.


                      CHAPTER IX TRADE UNION ORGANIZATION

ARTICLE 61

          The staff and workers of the joint venture company have the right to
establish trade union organization and carry out activities in accordance with
the stipulations of the Trade Union Law of the People's Republic of China".

ARTICLE 62

                                    . 23 .
<PAGE>
 
          The trade union in the joint venture company representative of the
interests of the staff and workers.  The tasks of the trade union are:  to
protect the democratic rights and material interests of the staff and workers
pursuant to the law; to assist the joint venture company to arrange and make
rational use of welfare funds and bonuses; to organize professional, scientific
and technical studies, carry out literary, art and sports activities; and
educate staff and workers to observe labour discipline and strive to fulfil the
economic tasks of the joint venture company.

ARTICLE 63

          The trade union of the joint venture company shall sign labour
contracts with the joint venture company on behalf of the staff and workers, and
supervise the implementation of the contracts.

ARTICLE 64

          Persons in charge of the trade union of the joint venture company have
the right to attend as nonvoting members and to report the opinions and demands
of staff and workers to meetings of the board of directors held to

                                    . 24 .
<PAGE>
 
discuss issues such as development plans, production and operational activities
of the joint venture.

ARTICLE 65

          The trade union shall take part in the mediation of disputes arising
between the staff and workers and the joint venture company.

ARTICLE 66

          The joint venture company shall allot an amount of money totalling 2%
of all the salaries of the staff and workers of the joint venture company as
trade union's funds, which shall be used by the trade union in accordance with
the "Managerial Rules for the Trade Union Funds" formulated by the All China
Federation of Trade Unions.


                CHAPTER X DURATION, TERMINATION AND LIQUIDATION

ARTICLE 67
          The duration of the joint venture company shall be 25 years, beginning
from the day when business license is issued.

                                    . 25 .
<PAGE>
 
ARTICLE 68

          An application for the extension of duration shall, proposed by both
parties and approved at the board meeting, be submitted to the original
examination and approval authority six months prior to the expiry date of the
joint venture. Only upon its approval may the duration be extended, and the
joint venture company shall go through registration formalities for the
alteration at the original registration office.

ARTICLE 69

          The joint venture may be terminated before its expiration in case the
parties to the joint venture agree unanimously that the termination of the joint
venture is for the best interests of the parties.

          To terminate the joint venture before the term expires shall be
decided by the board of directors through a plenary meeting, and it shall be
submitted to the original examination and approval authority for approval.

ARTICLE 70

                                    . 26 .
<PAGE>
 
[MISSING PAGE 27]

                                    . 27 .
<PAGE>
 
priority from the existing assets of the joint venture company.

ARTICLE 74

          The remaining property after the clearance of debts of the joint
venture company shall be distributed between the parties to the joint venture
according to the proportion of each party's investment in the registered
capital.

ARTICLE 75

          On completion of the liquidation, the joint venture company shall
submit a liquidation report to the original examination and approval authority,
go through the formalities for nullifying its registration in the original
registration office and hand in its business license, and at the same time, make
an announcement to the public.

ARTICLE 76

          After winding up of the joint venture company, its account books shall
be left in the care of the Chinese participant.

                                    . 28 .
<PAGE>
 
ARTICLE 77

          Following are the rules and regulations formulated by the board of
directors of the joint venture company.

          1.  Management regulations, including the powers and functions of the
managerial branches and its working rules and procedures;

          2.  Rules for the staff and workers;

          3.  Rules to keep secret;

          4.  System of labour and salary;

          5. System of work attendance record, promotion and awards and penalty
for staff members and worker's;

          6.  Detailed rules of staff and worker's welfare;

          7.  Financial system;

          8.  Liquidation procedures upon the dissolution of the joint venture
company;

          9.  Other necessary rules and regulations;

                                    . 29 .
<PAGE>
 
                      CHAPTER XII SUPPLEMENTARY ARTICLES

ARTICLE 78

          The amendments to the Articles of Association shall be unanimously
agreed on and decided by the board of directors and submitted to the original
examination and approval authority for approval.

ARTICLE 79

          The Articles of Association is written in Chinese language and English
language.  Both languages shall be equally authentic.  In the event of any
discrepancy between the two above mentioned versions, the Chinese version shall
prevail.

ARTICLE 80

          The Articles of Association shall come into effect upon the approval
by the Shanghai Foreign Investment Commission.  The same applies in the event of
amendments.

ARTICLE 81

                                    . 30 .
<PAGE>
 
          The Articles of Association is signed in Shanghai of China by the
authorized representatives of both parties on March 21, 1994.

                For Party A                     For Party B
                (Signature)                     (Signature)

           [Signature appears here]        [Signature appears here]

                                    . 31 .

<PAGE>
 
                                                                   EXHIBIT 10.20

                AGREEMENT AND PLAN OF REORGANIZATION AND MERGER

                                     Among

                               SUNBASE ASIA, INC.
                                  as Purchaser



                        SMITH ACQUISITION COMPANY, INC.
                                     d/b/a
                           SOUTHWEST PRODUCTS COMPANY
                                 as the Company


                                      and



        THOSE PERSONS SET FORTH ON THE SIGNATURE PAGES OF THIS AGREEMENT

                              as the Shareholders

                                     Dated:

                            As of December 29, 1995
<PAGE>
 
                AGREEMENT AND PLAN OF REORGANIZATION AND MERGER

          THIS AGREEMENT AND PLAN OF REORGANIZATION AND MERGER, dated and deemed
effective by the parties hereto as of December 29, 1995, is made and entered
into by and among Sunbase Asia, Inc., a Nevada corporation ("Purchaser"); those
persons set forth on the signature pages of this Agreement (collectively, the
"Shareholders" and individually, a "Shareholder"); and Smith Acquisition
Company, Inc., a California corporation, d/b/a Southwest Products Company (the
"Company") with reference to the following:

          A. Prior to the conversion described below, the Shareholders own the
number of issued and outstanding shares of the (a) no par value common stock and
(b) the no par value preferred stock (the "Southwest Preferred Shares") of the
Company together with the principal amount of Subordinated Debt (the
"Subordinated Debt") set forth opposite the applicable Shareholder's name on
Schedule 5.3.

          B. The Shareholders intend to recapitalize the Company so that
immediately prior to the consummation of this transaction all of the Southwest
Preferred Shares and the Subordinated Debt will be converted to Southwest Common
Stock.

          C. The respective directors of Purchaser and the Company and the
Shareholders have determined that it is in the best interests of the Company,
Purchaser and the Shareholders for the Company to be merged with a California
corporation to be created by Purchaser ("Newco") upon the terms and conditions
set forth in this Agreement.

          D. Pursuant to this Agreement, the Shareholders are hereby approving
the merger of the Company and Newco.

          NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties hereby agree as follows:

                                   ARTICLE I
                                   ---------

                                  DEFINITIONS
                                  -----------

          When used in this Agreement, the following terms shall have the
respective meanings set forth below:

          "Affiliate" shall mean, with respect to any Person, (i) a Person
directly or indirectly controlling, controlled by or under common control with
such Person; (ii) a Person owning or controlling 10% or more of the outstanding
voting securities of such Person; or (iii) an officer, director or partner of
such Person.  When the
<PAGE>
 
Affiliate is an officer, director or partner of such Person, any other Person
for which the Affiliate acts in that capacity shall also be considered an
Affiliate.  For these purposes, control means the possession, direct or
indirect, of the power to direct or cause the direction of the management and
policies of a Person, whether by the ownership of voting securities, by contract
or otherwise.

          "Agreement" shall mean this Agreement and Plan of Reorganization and
Merger, including all exhibits and schedules thereto, as the same may hereafter
be amended, modified or supplemented from time to time.

          "Authority" shall mean any governmental, regulatory or administrative
body, agency or authority, any court of judicial authority, any arbitrator or
any public, private or industry regulatory authority, whether international,
national, Federal, state or local.

          "Business" shall mean the manufacture, assembly and sale of bearing
products.

          "Closing" shall have the meaning specified in Section 3.1 hereof.

          "Closing Date" shall mean the date upon which the Closing occurs.

          "Code" shall mean the Internal Revenue Code of 1986, as the same may
hereafter be amended from time to time.  Any reference to a specific section of
the Code shall refer to the cited provision as the same may be subsequently
amended from time to time, as well as to any successor provision(s).

          "Company" shall mean Smith Acquisition Company, Inc. d/b/a Southwest
Products Company, a California corporation.

          "Company Documents" shall mean this Agreement and  all other
agreements, instruments and certificates to be executed by the Company in
connection with this Agreement.

          "Contracts and Other Agreements" shall mean all contracts, agreements,
warranties, guaranties, indentures, bonds, options, leases, subleases,
easements, mortgages, plans, collective bargaining agreements, licenses,
commitments or binding arrangements of any nature whatsoever, express or
implied, written or unwritten, and all amendments thereto, entered into or
binding upon the applicable party or to which the property of the applicable
party may be subject.

                                       2
<PAGE>
 
          "Effective Time" shall have the meaning specified in Section 2.1
hereof.

          "Knowledge" shall mean, (i) with respect to any Shareholder who is not
a director, the actual knowledge of such person, and the Knowledge that such
person would have acquired by attending all of the meetings of the Board of
Directors of the Company and by reviewing all of the corporate minutes therefor,
(ii) with respect to any Shareholder who is also a director of Southwest, the
actual knowledge of each such person, the knowledge that such person would have
acquired upon reasonable inquiry, and the Knowledge that such person would have
acquired by attending all of the meetings of the Board of Directors of the
Company and by reviewing all of the corporate minutes therefor, and (iii) with
respect to the Company, the actual knowledge of each of its directors, executive
officers and key employees, the knowledge that each such person would have
acquired upon diligent inquiry and the knowledge that is imputed to each such
person and/or the Company by operation of Law.

          "Labor Agreements" shall mean, collectively, (i) all employment
agreements, collective bargaining agreements or other labor agreements to which
the Company is a party or by which its properties is bound; (ii) all pension,
profit sharing, deferred compensation, bonus, stock option, stock purchase,
savings, retainer, consulting, non-competition, retirement, welfare or incentive
plans or contracts (including ERISA Plans) to which the Company is a party or by
which its properties is bound; and (iii) all plans or agreements under which
"fringe benefits" (including, but not limited to, hospitalization plans or
programs, medical insurance, vacation plans or programs, sick plans or programs
and related benefits) are afforded to any employees of the Company.

          "Law" shall mean any law, statute, regulation, ordinance, requirement,
or other binding action or requirement of an Authority.

          "Licenses and Permits" shall mean all licenses and permits issued to
the Company or in which the Company has any interest (including the right to
use).

          "Lien or Other Encumbrance" shall mean any lien, pledge, mortgage,
security interest, lease, charge, conditional sales contract, option,
restriction, reversionary interest, right of first refusal, voting trust
arrangement, preemptive right, claim under bailment or storage contract,
easement or any other adverse claim or right whatsoever.

          "Losses" shall have the meaning specified in Section 12.1 hereof.

                                       3
<PAGE>
 
          "Material Adverse Change" or "Material Adverse Effect" or other
similar phrase including the word "material" with respect to the condition
(financial or otherwise), assets, liabilities, Business, operations or prospects
of the Company shall mean any adverse change or effect or potential adverse
change or effect, or any series thereof, involving more than Fifty Thousand
Dollars ($50,000) in the aggregate.

          "Merger" shall have the meaning specified in Section 2.1 hereof.

          "Newco" shall have the meaning specified in Recital C above.

          "Non-Competition Agreement" shall mean the agreement of William McKay
referred to in Section 7.6 hereof.

          "Order" shall mean any decree, order, judgment, writ, award,
injunction, rule or consent of or by an Authority.

          "Outside Date" shall have the meaning specified in Section 3.1 hereof.

          "Person" shall mean any entity, corporation, company, association,
joint venture, joint stock company, partnership, trust, organization, individual
(including personal representatives, executors and heirs of a deceased
individual), nation, state, government (including agencies, departments,
bureaus, boards, divisions and instrumentalities thereof), trustee, receiver or
liquidator.

          "Purchaser Financial Statements" shall mean the audited (a)
consolidated balance sheets of Purchaser as of December 31, 1993 and December
31, 1994; (b) the consolidated statement of income for the years ended December
31, 1993 and December 31, 1994; (c) consolidated statement of cash flows for the
years ended December 31, 1993 and December 31, 1994; and (d) consolidated
statements of changes in shareholder's equity for the years ended December 31,
1993 and December 31, 1994, including all notes thereto.

          "Property Rights" shall have the meaning specified in Section 5.9
hereof.

          "Purchaser Documents" shall mean this Agreement and all other
agreements, instruments and certificates to be executed and delivered by
Purchaser in connection with this Agreement.

                                       4
<PAGE>
 
          "Securities Act" shall have the meaning specified in Section 4.9
hereof.

          "Shareholder Documents" shall mean this Agreement and all other
agreements, instruments and certificates to be executed and delivered by the
Shareholders in connection with this Agreement.

          "Southwest Financial Statements" shall mean the unaudited balance
sheets as of June 30, 1995 and June 30, 1994 and the unaudited statements of
income and statements of cash flow of the Company, for the twelve month periods
then ended, including all notes thereto, and the unaudited balance sheets as of
September 30, 1995 and the unaudited statements of income and statements of cash
flow of the Company, for the three month period then ended, including all notes
thereto.

          "Southwest Common Stock" shall mean any issued and outstanding shares
of the common stock of the Company.

          "Southwest Preferred Shares" shall have the meaning specified in
Recital A above.

          "Southwest Shares" shall mean all of the issued and outstanding shares
of the common stock of the Company after conversion of the Southwest Preferred
Shares and the Subordinated Debt, and the exercise or cancellation of all
outstanding options.

          "Subordinated Debt" shall have the meaning specified in Recital A
above.

          "Subsidiary" shall mean each corporation, partnership, joint venture,
trust or other entity in which the Company has, directly or indirectly, an
equity interest representing 10% or more of the capital stock thereof or other
equity interest therein.

          "Subsidiary Merger Agreement" shall have the meaning specified in
Section 2.1 hereof.

          "Sunbase Preferred Shares" shall have the meaning specified in Section
2.1 hereof.

          "Sunbase Shares" shall have the meaning specified in Section 4.9
hereof.

          "Taxes" shall mean, collectively, all taxes, including without
limitation, income, gross receipts, net proceeds, alternative, add-on, minimum,
ad valorem, value added, turnover, sales, use, property, personal property
(tangible and intangible), stamp, leasing, excise, duty,

                                       5
<PAGE>
 
franchise, transfer, license, withholding, payroll, employment, fuel, excess
profits, environmental, occupational, interest equalization, windfall profits
and severance taxes, and all other like charges imposed by an Authority.

          "Tax Returns" shall mean, collectively all Federal, state, foreign and
local tax reports, returns, information returns and other related documents
required to be filed with any relevant taxing Authority.

                                   ARTICLE II
                                   ----------

                   SUBSCRIPTION OF NEW ISSUE SHARES AND SALE
                   -----------------------------------------
                             AND PURCHASE OF SHARES
                             ----------------------

          2.1 The Merger. Subject to the terms and conditions of this Agreement
              ----------
Newco shall be merged into the Company (with the Company being the surviving
corporation of the merger) in accordance with the applicable provisions of the
California Corporations Code (the "Merger") pursuant to the Agreement of Merger
attached to this Agreement as Schedule 2.1 (the "Subsidiary Merger Agreement").
The Merger shall be effective when the Subsidiary Merger Agreement shall have
been filed with the Secretary of State of the State of California. When used in
this Agreement, the term "Effective Time" shall mean the time of filing of the
Subsidiary Merger Agreement with the Secretary of State. The authorized and
issued capital stock of Newco, all of which shall be owned by Purchaser
immediately prior to the Effective Time, at the Effective Time, pursuant to the
Subsidiary Merger Agreement and without any further action on the part of
Purchaser, shall be converted into one share of the common stock of the Company
(the "Surviving Stock"). Each outstanding stock certificate which prior to the
Effective Time represented shares of capital stock of Newco automatically and
for all purposes shall be deemed to represent the number of shares of the
Company into which the shares of capital stock of Newco represented by such
certificate have been converted as provided herein. At the Effective Time, all
of the Southwest Shares shall be converted into and become the right to receive
an aggregate of six thousand three hundred (6,300) shares of Series B
Convertible Preferred Stock (the "Sunbase Preferred Shares") of Purchaser to be
distributed to the Shareholders in accordance with Schedule 5.3. The terms of
the Sunbase Preferred Shares shall be set forth on Schedule 2.1 and will include
the following:

              (a) Each of the Sunbase Preferred shares, on an "as-converted" and
pro-rata basis, shall participate with the shares of the common stock of
Purchaser in any dividends paid by Purchaser thereon.

                                       6
<PAGE>
 
              (b) Each holder of the Sunbase Preferred Shares shall be entitled
to the number of votes equal to the number of shares of common stock of
Purchaser into which such Shares could be converted under 2.1(c) below and shall
have voting rights and powers equal to the voting rights and powers of the
common stock (voting together with the common stock as a single class), except
that any action to be taken by Purchaser which would adversely affect the rights
of the holders of the Sunbase Preferred Shares shall require the approval of a
majority in interest of such holders;

              (c) At the option of each holder, the shares owned by such holder
may be redeemed from the proceeds of the next public offering of Purchaser, the
net proceeds of which are designated to be used to redeem the Sunbase Preferred
Shares. Purchaser shall provide to each holder (i) notice of its intention to
file a registration statement with the Securities and Exchange Commission with
respect to a public offering of its shares and (ii) a copy of Purchaser's most
recent reports and registration statements filed with the SEC. In the event that
such holder elects to redeem such holder's Sunbase Preferred Shares, such holder
shall provide notice to Purchaser within 15 days from the date of the notice
from Purchaser. The per share redemption price shall be $500 less the pro rata
portion of the underwriter's commission with respect to the public offering. By
way of example, if the redemption price otherwise payable to such holder is
$400,000 and the underwriter's commission is 10%, Purchaser shall pay the
redeeming holder $360,000. The redemption price payable to the redeeming holders
shall be paid by Purchaser to such holders within twenty (20) business days
after the closing of any public offering (as described herein) made by
Purchaser. In the event that a holder elects not to have such holder's Sunbase
Preferred Shares so redeemed, each Share not redeemed shall, on the same date
that the redemption price is paid to the redeeming holders, be automatically
converted into 100 shares of the common stock of Purchaser. The per share
redemption price and the number of shares of common stock to be issuable upon
conversion shall be subject to adjustment in the event of stock dividends,
combinations or splits with respect to the common stock.

              (d) If, by that date which is two (2) years after the date on
which the Sunbase Preferred Shares are distributed to the holders (the "Two Year
Date"), such holders have not been able to redeem their Sunbase Preferred Shares
because Purchaser has not made a public offering, the net proceeds of which are
designated to be used to redeem the Sunbase Preferred Shares, the holder's
Sunbase Preferred Shares shall automatically convert into shares of the common
stock of Purchaser as follows: On the first business day following the Two Year
Date, each Sunbase Preferred Share

                                       7
<PAGE>
 
shall automatically be converted into that number of shares of common stock of
Purchaser that equals $500 divided by the lesser of (a) $5.00 or (b) the average
closing price of the common stock of the Purchaser (subject to adjustment for
stock dividends, combinations or splits).  As used herein, the average closing
price shall be computed by taking the then most recent 60 consecutive trading
days where Purchaser's common stock has traded at a minimum volume of 2,000
shares per day for 45 of those 60 trading days.

          2.2 Transfer Taxes. The Shareholders shall be solely responsible for
              --------------
the payment of any and all Taxes, impositions, liens, levies, assessments and
similar charges incident to or incurred as a result of the transfer of the
Southwest Shares pursuant to the Merger contemplated herein.

                                  ARTICLE III
                                  -----------

                                    CLOSING
                                    -------

          3.1 Time and Place. Subject to the provisions of Sections 11.1 and
              --------------
11.2 hereof, the Closing (the "Closing") shall take place at the offices of Loeb
and Loeb, 1000 Wilshire Boulevard, Suite 1800, Los Angeles, California 90017, no
later than January 19, 1996 (the "Outside Date").

          3.2 Transactions at the Closing. At the Closing, the following shall
              --------------------------- 
occur:

              3.2.1 Pursuant to the Merger, the Shareholders shall receive
certificates representing the Sunbase Preferred Shares;

              3.2.2 Pursuant to the Merger, the Southwest Shares will be
automatically converted into Sunbase Preferred Shares, and the Shareholders
shall surrender all of the certificates evidencing the Southwest Shares for
conversion into Sunbase Preferred Shares;

              3.2.3 The Company shall deliver to Purchaser the opinion of
counsel referred to in Section 9.5 hereof;

              3.2.4 Purchaser shall deliver to the Company and the Shareholders
the opinion of counsel referred to in Section 10.6 hereof;

              3.2.5 All of the directors of the Company other than William McKay
shall deliver the resignations referred to in Section 7.5 hereof;

              3.2.6 William McKay shall deliver the Non-Competition Agreement
referred to in Section 7.6 hereof;

                                       8
<PAGE>
 
              3.2.7 The Company and Purchaser on the one hand and, on the other
hand, William McKay, shall execute and deliver counterpart copies of the
employment agreement referred to in Section 8.3 hereof;

              3.2.8 The Company shall provide to Purchaser a certificate of good
standing with respect to its jurisdiction of formation and each other
jurisdiction in which the Company has qualified to do business; and

              3.2.9 The Company shall deliver to Purchaser any and all other
assignments, documents, instruments and conveyances requested by Purchaser or
necessary to effect the consummation of the transactions contemplated by this
Agreement.

The foregoing transactions shall be deemed to occur simultaneously at the
Closing.

                                   ARTICLE IV
                                   ----------

                     REPRESENTATIONS AND WARRANTIES OF THE
                     -------------------------------------
          SHAREHOLDERS REGARDING THE SOUTHWEST SHARES AND THEIR STATUS
          ------------------------------------------------------------

          Each Shareholder, individually, represents and warrants to Purchaser
that:

          4.1       Title to Southwest Shares.  Such Shareholder has good and
                    -------------------------                                
marketable title to the Southwest Shares, which are free and clear of all Liens
or Other Encumbrances excepting only such restrictions upon transfer, if any, as
may be imposed by federal or state securities Laws.

          4.2       Authority to Execute and Perform Agreements. Such 
                    -------------------------------------------
Shareholder has the full right, power and authority to enter into, execute and
deliver this Agreement and all other Shareholder Documents.

          4.3       Due Authorization; Enforceability. Such Shareholder has
                    --------------------------------- 
taken all actions necessary to authorize such Shareholder to enter into and
perform said Shareholder's obligations under this Agreement and all other
Shareholder Documents. This Agreement is, and as of the Closing Date the other
Shareholder Documents will be, the legal, valid and binding obligations of such
Shareholder, enforceable in accordance with their respective terms.

          4.4       No Violation of Order or Law. Such Shareholder is not a
                    ---------------------------- 
party to, subject to or bound by any Law or Order which would prevent the
execution or delivery of this Agreement by such Shareholder or the performance
by such Shareholder of such Shareholder's obligations hereunder.

                                       9
<PAGE>
 
          4.5       Adverse Agreements; Consents. Neither the execution or 
                    ----------------------------
delivery by such Shareholder of this Agreement or any other Shareholder Document
nor the consummation by such Shareholder of the transactions contemplated herein
or therein require the consent of any Person except, as applicable, the consent
of each Shareholder's spouse, which consent shall be given by such spouse
substantially in the form which is attached hereto as Schedule 4.5.

          4.6       Securities Laws. Such Shareholder has obtained all necessary
                    ---------------
permits and other authorizations or Orders of exemption as may be necessary or
appropriate under any and all applicable state securities Laws with respect to
the transactions contemplated herein, except that no such representation or
warranty is made with respect to the issuance by Purchaser of the Sunbase
Preferred Shares or the Sunbase Shares.

          4.7       No Adverse Litigation. To such Shareholder's Knowledge, such
                    ---------------------
Shareholder is not a party to any pending or threatened litigation which seeks
to enjoin or restrict such Shareholder's own ability to sell or transfer his
Southwest Shares hereunder, nor is any such litigation threatened against such
Shareholder. Furthermore, to such Shareholder's Knowledge, there is no
litigation pending or threatened against such Shareholder which, if decided
adversely to such Shareholder, could adversely affect such Shareholder's ability
to consummate the transactions contemplated herein.

          4.8       No Broker. No broker or finder has acted for such 
                    ---------
Shareholder in connection with this Agreement or the transactions contemplated
herein, and no broker or finder is entitled to any brokerage or finder's fees or
other commissions in respect of such transactions based in any way upon
agreements, arrangements or understandings made by or on behalf of such
Shareholder.

          4.9       Investment Capacity. Each of the Shareholders understands 
                    -------------------
and agrees that (a) the Sunbase Preferred Shares to be issued to the
Shareholders and the shares of Purchaser's Common Stock issuable upon conversion
of the Sunbase Preferred Shares (together with the Sunbase Preferred Shares, the
"Sunbase Shares") will not have been registered under the Securities Act of
1933, as amended (the "Securities Act") or the securities laws of any state,
based upon an exemption from such registration requirements under the Securities
Act; (b) the Sunbase Shares are and will be "restricted securities", as said
term is defined in Rule 144 of the Rules and Regulations promulgated under the
Securities Act; (c) the Sunbase Shares may not be sold or otherwise transferred
unless they have been first registered under the Securities Act and applicable
state securities

                                       10
<PAGE>
 
laws, or unless exemptions from such registration provisions are available with
respect to said resale or transfer; (d) except as expressly set forth herein,
Purchaser is under no obligation to register the Sunbase Shares under the
Securities Act or any state securities laws, or to take any action and make any
exemption from such registration provisions available; and (e) Purchaser is
relying on the representation by each Shareholder (which is herein being made)
that such Shareholder has such knowledge and experience in financial or business
matters that such Shareholder is capable of evaluating the merits and risks
involved in the investment in the Sunbase Preferred Shares and is able to bear
the economic risk and complete loss of such Shareholder's investment.

          4.10      Status of Shareholders; Receipt of Documentation.  The
                    ------------------------------------------------      
Shareholders acknowledge that they have received a copy of the following
documents of Purchaser: Form 10-K for the transition period from July 1, 1994 to
December 31, 1994; Form 10-Q for the quarter ended March 31, 1995; Form 10-Q for
the quarter ended June 30, 1995; From 10-Q for the quarter ended September 30,
1995; Form 8-K as of December 22, 1994; and Form 8-K/A as of December 22, 1994
and any other reports and registration statements filed by Purchaser with the
SEC after December 31, 1994.  Each Shareholder has been furnished with such
information and documents pertaining to Purchaser as such Shareholder has
requested, and has been given the opportunity to meet with officials of
Purchaser and to have such persons answer questions regarding Purchaser's
affairs and condition.  Each Shareholder has substantial experience in business
and financial matters and in making investments of the type contemplated by this
Agreement; is capable of evaluating the merits and risks of the acquisition of
the Sunbase Preferred Shares; and is able to bear the economic risks of such
Shareholder's investment.

          4.11      Waiver of Appraisal Rights.  Each of the Shareholders hereby
                    --------------------------                                  
waives any right to require appraisal or  to otherwise exercise any other rights
pursuant to Chapter 13 of the California Corporations Code.

          4.12      Issuance of Sunbase Preferred Shares to Third Parties. Each
                    ----------------------------------------------------- 
of the Shareholders understands and agrees that in connection with the loan
described in Section 9.8 below, 500 Sunbase Preferred Shares will be issued to
certain third parties as incentive for such third parties to make a loan to the
Company. Because Sunbase will issue a total of 6,800 Sunbase Preferred Shares in
connection with the Merger, and based on the issuance of 500 Sunbase Preferred
Shares to such certain parties, the Shareholders will receive a total of 6,300
Sunbase Preferred Shares, as set forth in Section 2.1 above.

                                       11
<PAGE>
 
                                   ARTICLE V
                                   ---------

                   REPRESENTATIONS, WARRANTIES AND COVENANTS
                   -----------------------------------------
                            RELATING TO THE COMPANY
                            -----------------------

          The Company and, to their Knowledge, each of the Shareholders, hereby
severally represent, warrant and covenant to Purchaser as follows:

          5.1       Organization, Standing, Etc. of the Company.  The Company is
                    -------------------------------------------                 
a corporation duly organized, validly existing and in good standing under the
laws of the State of California and has all requisite corporate power and
authority to carry on its business as currently conducted and to own or lease
and to operate the properties that it now owns or leases.  The Company is duly
qualified and in good standing to do business as a foreign corporation in the
jurisdictions described in Schedule 5.1.  Except as set forth in Schedule 5.1,
there are no other states or jurisdictions in which the character or location of
the properties owned or leased by it, or the conduct of its business, make such
qualification necessary or where the failure to so qualify and be in good
standing would have a material adverse effect on the Company's financial
condition or results of operation.  Copies of the Company's Articles of
Incorporation and all amendments thereto, and of the Company's Bylaws as amended
to date, have been furnished to Purchaser and are complete and correct.

          5.2       No Violation.  Neither the execution and delivery of this
                    ------------                                             
Agreement or the Subsidiary Merger Agreement and all other Company Documents nor
the consummation of the transactions contemplated herein and therein will (a)
violate any provision of the Articles of Incorporation or Bylaws of the Company;
(b) violate, conflict with, or constitute a default under any material Contract
or Other Agreement or other instrument to which the Company is a party or by
which it or its property is bound; (c) except as set forth in Schedule 5.2,
require the consent of any party to any material Contract or Other Agreement to
which the Company is a party by which it or its property is bound; or (d)
violate any Laws or Orders to the which the Company or its property is subject.

          5.3       Capitalization.  Immediately prior to the Closing, the
                    --------------                                        
authorized capital stock of the Company will consist of ten million (10,000,000)
shares of no par value Common Stock of which 9,450,000 shares are issued and
outstanding.  Schedule 5.3 sets forth a true, correct and complete list of the
shareholders of the Company, and (i) prior to conversion, the number of shares
of Common Stock and Southwest Preferred Shares issued and outstanding, together
with the principal amount and holders of the

                                       12
<PAGE>
 
Subordinated Debt and (ii) after conversion, the number of the Southwest Shares.
Except as set forth on such Schedule, there are no options, warrants, calls or
rights of any kind to purchase or otherwise acquire, and no securities are
convertible into, the capital stock of Company, and there are no other
agreements of any kind or character obligating the Company to issue, transfer or
sell any of its capital stock authorized or outstanding or to register any such
stock with any securities agency.  There is no personal liability, and there are
no preemptive or similar rights, attached to the Company's Common Stock or
Preferred Stock.  The Southwest Shares have been duly authorized and are fully
paid and non-assessable.

          5.4       Authority for Agreement.  The Company has all requisite
                    -----------------------                                
power and authority to enter into this Agreement and the Subsidiary Merger
Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby.  This Agreement constitutes or will
constitute, as the case may be, the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms.  The
execution and delivery of this Agreement and the Subsidiary Merger Agreement and
the consummation of the transactions contemplated hereby will not conflict with,
or result in any violation of or default under, any provision of any mortgage,
indenture, lease, agreement or other instrument, or any permit, concession,
grant, franchise, license, Order or Law, applicable to the Company or any of its
properties.

          5.5       Consents.  No consent, license, approval, order or
                    --------                                          
authorization of, or registration, filing or declaration with, any Authority is
required to be obtained or made, and no consent of any third party is required
to be obtained, by the Company in connection with the execution, delivery or
performance of this Agreement or the Subsidiary Merger Agreement, or the
consummation of any other transactions contemplated hereby or thereby.

          5.6       Financial Statements.  The Southwest Financial Statements
                    --------------------                                     
which are attached hereto as Schedule 5.6, were prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except as may be otherwise indicated in the notes
thereto), and fairly present the financial position of the Company as of the
dates thereof and the results of its operations and changes in financial
position for the periods then ended.

          5.7       Subsidiaries.  Except as set forth on Schedule 5.7, the
                    ------------                                           
Company has no Subsidiaries and does not own, directly or indirectly, any
capital stock of, or have

                                       13
<PAGE>
 
any direct or indirect equity or ownership interest in the business of, any
corporation or entity.

          5.8       Litigation.  Except as set forth on Schedule 5.8 hereto,
                    ----------                                              
there is no action, proceeding, investigation or inquiry whatsoever pending, or,
to the Company's or Shareholders' Knowledge, threatened, affecting the Company
or its assets or which questions the validity of this Agreement.

          5.9       Trademarks, Trade Names, Patents, Etc.  Schedule 5.9 hereto
                    --------------------------------------                     
contains a complete and correct list and description of trademarks, trade names,
copyrights, patents and all applications therefor, and other similar
intellectual property rights used or held for use by the Company (the "Property
Rights").  To the best of the Company's Knowledge, the Company owns or has the
right to use all of the Property Rights which are material to the Business of
the Company and to continue to do so after the Closing on substantially the same
basis.  None of the Property Rights violates any laws, statutes, ordinances or
regulations, or infringes upon or violates any rights of others, or is being
infringed by others.  The Company has not received any notice or claim that any
Property Right is not valid or enforceable by its owner or that there has been
any infringement of any copyright, patent or other property right of any third
party by the Company.

          5.10      Employees.  Schedule 5.10 hereto contains a complete and
                    ---------                                               
correct list of the names of all current employees, consultants and commission
agents of the Company together with compensation earned during the twelve months
ended June 30, 1995 (including any bonuses and commissions and fringe benefits
not generally available to the Company's employees).  For employees, consultants
and commission agents hired or retained since June 30, 1995, Schedule 5.10 sets
forth the rate of compensation.  To the Company's Knowledge, the Company is in
compliance in all material respects with all applicable Laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours.  There are no pending or, to the Company's Knowledge,
threatened, labor negotiations, work stoppages or work slow downs involving or
affecting the Company or its Business, and no union representation questions
exist, and there are no organizing activities, in respect of any of the
employees of the Company.

          5.11      Contracts.  Schedule 5.11 attached hereto contains a
                    ---------                                           
complete and correct list as of the date hereof of all Contracts and other
Agreements to which the Company is a party or by which it or any of its property
is bound which are material to the Company, its assets or its financial
condition.  Except as disclosed on Schedule 5.11A, (a)

                                       14
<PAGE>
 
all Contracts and other Agreements are in full force and effect and unimpaired
by any defaults, acts or omissions of the Company and, based on the Company's
Knowledge, unimpaired by any defaults, acts or omissions of any party thereto;
and (b) no approval or consent of any party to such Contracts and Agreements is
required in connection with the consummation of the transactions contemplated
hereby.

          5.12      Transactions with Interested Persons.  Except as set forth
                    ------------------------------------                      
on Schedule 5.12, no officer, director or employee (or spouse or any child
thereof) of the Company owns, directly or indirectly, on an individual or joint
basis, any material interest in, or serves as an officer, director or employee
of, any customer, competitor or supplier of the Company or any person or entity
which has a contract or arrangement with the Company (including without
limitation leases, as lessor, of real property or personal property).

          5.13      Bank Accounts.  Attached hereto as Schedule 5.13 is a
                    -------------                                        
complete and correct list of each bank or other financial institution in which
the Company has an account or safe deposit or lock box, the account or box
number, as the case may be, and the name of every person authorized to draw
thereon or having access thereto.

          5.14      Compliance with Other Instruments or Laws.  To the best of
                    -----------------------------------------                 
the Company's Knowledge, the operations of the Company are in material
compliance with all Laws applicable to the operation of the Company's business.
Schedule 5.14 hereto lists all material permits, concessions, grants,
franchises, licenses and other governmental authorizations or approvals
applicable to the operation of the Business.

          5.15      Environmental Matters.  Except as disclosed in the Phase I
                    ---------------------                                     
Environmental Site Assessment and Limited Phase II Subsurface Investigation
Report dated April 7, 1995, prepared by Converse Environmental West, and
notwithstanding the introduction paragraph to this Article V, based on the
actual knowledge of both the Shareholders and the Company:  (i) the operations
of the Company comply in all respects with all applicable federal, state and
local environmental, health and safety statutes and regulations; (ii) none of
the operations of the Company involves the unlawful generation, transportation,
treatment or disposal of hazardous waste, as defined under 40 C.F.R. Parts 260-
270 or any state equivalent, the Company has not disposed of any hazardous waste
or substance by placing it in or on the ground of any premises owned, leased or
used by the Company, and no underground storage tanks or surface impoundments
are on any of the premises of the Company; (iii) no lien in favor of any
Governmental Authority for (a) any liability

                                       15
<PAGE>
 
under federal or state environmental laws or regulations, or (b) damages arising
from or costs incurred by such Governmental Authority in response to a release
of a hazardous or toxic waste, substance or constituent, or other substance,
into the environment, has been filed or attached to any premises of the Company,
and the Company has no contingent liability in connection with any release of
any hazardous or toxic waste, substance or constituent, or other substance, into
the environment, (iv) none of the operations of the Company is subject to any
judicial or administrative proceeding alleging the violation of any federal,
state or local environmental, health or safety statute or regulation, and none
of the operations of the Company is the subject of any federal or state
investigation evaluating whether any remedial action is needed to respond to a
release of any hazardous or toxic waste, substance or constituent, or any other
substance, into the environment.

          5.16      Broker's Commissions.  No broker is entitled to any
                    --------------------                               
brokerage or finder's fee or other commission or fee from the Company as a
direct or indirect consequence of any commitment or other arrangement made on
behalf of the Company in connection with the transactions contemplated by this
Agreement.

          5.17      Tax Returns and Payments.  Except as set forth on Schedule
                    ------------------------                                  
5.17, all Tax Returns or appropriate extensions therefor of the Company have
been duly, properly and timely filed, and, to the best of the Company's
Knowledge, all Taxes which have become due and payable have been paid in full.
Complete and accurate copies of all Tax Returns for the taxable years ended
February 28, 1993 and February 28, 1994 have been delivered to Purchaser.
Except as set forth on Schedule 5.17, neither the Internal Revenue Service nor
any other Tax Authority is now asserting or, to the best Knowledge of the
Company, threatening to assert against the Company a deficiency or claim for
additional Taxes or interest thereon or penalties in connection therewith.

          5.18      Disclosure.  The representations and warranties contained in
                    ----------                                                  
this Agreement and the information contained in the Schedules and the
certificates required to be delivered pursuant hereto in connection with the
transactions contemplated hereby are true and correct in all material respects
and do not omit to state any material fact necessary to make the statements
contained therein not misleading.

          5.19      Liabilities.  Except as set forth on Schedule 5.19, the
                    -----------                                            
Company does not have any material liability or obligation, whether accrued,
absolute, contingent or otherwise, which (a) has not been reflected in the
Southwest

                                       16
<PAGE>
 
Financial Statements, or (b) has not been incurred since June 30, 1995 in the
ordinary course of business or in connection with the transactions contemplated
by this Agreement.

          5.20      Insurance.  Schedule 5.20 contains a complete and accurate
                    ---------                                                 
list of all policies of fire, liability, workmen's compensation, health, key man
and other forms of insurance currently in effect with respect to the Company and
the Business, true copies of which have heretofore been delivered to Purchaser.

          5.21      ERISA.
                    ----- 

                    (i) Plans. Schedule 5.21 lists each "employee pension
                        -----
benefit plan" of the Company (collectively called "Pension Plans" and severally
called a "Pension Plan"), as such term is defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and each
"employee welfare benefit plan" (collectively called "Welfare Plans" and
severally called a "Welfare Plan") of the Company as such term is defined in
Section 3(1) of ERISA, which is maintained by the Company or to which it
contributes or is obligated or required to contribute or has been terminated by
the Company. The Pensions Plans and Welfare Plans are hereinafter sometimes
collectively referred to as the "Plans" and severally referred to as a "Plan".
At present and during the past five years, the Company has neither sponsored,
participated in, nor contributed to: (i) any defined benefit plans to which
Section 4021 of ERISA applies that would create a liability under Title IV of
ERISA and/or (ii) any "multi-employer plan" as defined in Section 3(37) of
ERISA.

                    (ii) Qualification. Each Pension Plan and the trust (if any)
                         -------------
forming a part thereof has been determined by the Internal Revenue Service
("IRS") to be qualified under Section 401(a) of the Code, except with respect to
changes in federal law resulting from the Tax Reform Act of 1986 and subsequent
revenue acts, and is exempt from taxation under Section 501(a) of the Code, and
to the Knowledge of the Company, nothing has occurred since the date of such
determination which would severally affect such qualification.

                    (iii) Compliance with Law and Plan. All Plans are now and
                          ---------------------------- 
have at all times been established, maintained and operated in all material
respects in accordance with all applicable Law (including, but not limited to
ERISA and the Code and for health plans all COBRA requirements) and the Plan
documents. All plan fiduciaries and plan officials are bonded as required.

                                       17
<PAGE>
 
                    (iv) Contributions; Benefit. The Company has paid in full
                         ----------------------
all amounts which are required to have been paid by it on or prior to the date
hereof as contributions to any of the Pension Plans. All contributions,
premiums, charges or obligations to each Welfare Plan have been complete and
timely made or will be made prior to the Closing Date. The amount of each
payment to each Plan is sufficient to provide for all benefits earned or
promised and other liabilities accrued under each Plan through the Closing Date.
For each non-funded Plan, the Company has established reserves on its books to
provide for the benefits earned and other liabilities accrued under each Plan
through the Closing Date in amounts sufficient to provide for such benefits. No
funds held or under the control of the Company would be deemed plan assets.

          5.22      Compliance With Securities Laws.  The Company is, and at all
                    -------------------------------                             
times since its inception has been, in compliance in all material respects with
all federal and state securities statutes, orders, rules and regulations
(including without limitation statutes, orders, rules and regulations pertaining
to any purchase or sale of the capital stock of the Company and any private
offering of securities of the Company under Regulation D of the Securities Act)
applicable to it or to the operation of the Business.  The Company has no basis
to expect, nor has it received, during the five-year period prior to the date
hereof, any order, notice or other communication from any federal or state
agency administering or enforcing the federal and state securities laws of any
alleged, actual or potential violation and/or failure to comply with any such
statute, order, rule or regulation.

          5.23      Inventories.  All inventories shown on the Southwest
                    -----------                                         
Financial Statements and all inventories existing as of the date hereof
consisted of, and consist of, items of a quality and quantity usable and
saleable in the ordinary course of the Business without markdown or discount;
were, and are, merchantable and fit for the particular purpose, except for
obsolete and slow-moving items and items below standard quality (which in any
event did not, and do not, exceed normal commercial standards and amount), all
of which had been, and have been, written down on the books of the Company to
the lower of cost or net realizable market value or had been, and have been,
provided for by adequate reserves.  The amounts of the inventories shown on the
Southwest Financial Statements were based on quantities determined by physical
count or measurement, taken on the date of the applicable balance sheet, and
valued at the lower of cost (determined on a first-in, first-out basis) or
market value and on a basis consistent with that of prior years.

                                       18
<PAGE>
 
                              ARTICLE VI
                              ----------

             REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
             ------------------------------------------------------

          Purchaser represents, warrants and covenants to the Company and the
Shareholders as follows:

          6.1       Organization, Standing, Etc. of the Company.  Purchaser is a
                    -------------------------------------------                 
corporation duly organized, validly existing and in good standing under the laws
of the State of Nevada and has all requisite corporate power and authority to
carry on its business as currently conducted and to own or lease and to operate
the properties that it now owns or leases.  Purchaser is duly qualified and in
good standing to do business as a foreign corporation in those states and
jurisdictions where the failure to so qualify would have a material adverse
effect on Purchaser's financial condition or the results of its operations.
Copies of Purchaser's Articles of Incorporation and all amendments thereto, and
of Purchaser's Bylaws as amended to date, have been furnished to the Company and
the Shareholders and are complete and correct.

          6.2       Authority for Agreement.  Purchaser has all requisite power
                    -----------------------                                    
and authority to enter into this Agreement and the Subsidiary Merger Agreement,
to perform its obligations hereunder and to consummate the transactions
contemplated hereby.  This Agreement constitutes the legal, valid and binding
obligation of Purchaser, enforceable against Purchaser in accordance with its
terms.  The execution and delivery of this Agreement and the Subsidiary Merger
Agreement and the consummation of the transactions contemplated hereby will not
conflict with, or result in any violation of or default under, any provision of
any mortgage, indenture, lease, agreement or other instrument, or any permit,
concession, grant, franchise, license, Order or Law, applicable to Purchaser or
any of its properties.

          6.3       No Violation.  Neither the execution and delivery of this
                    ------------                                             
Agreement and the Purchaser Documents nor the consummation of the transactions
contemplated herein and therein will (a) violate any provision of the Articles
of Incorporation or bylaws of Purchaser; (b) violate, conflict with, or
constitute a default under any material Contract or Other Agreement or other
instrument to which Purchaser is a party or by which it or its property is
bound; (c) require the consent of any party to any material Contract or Other
Agreement to which Purchaser is a party or by which it or its property is bound;
or (d) violate any Laws or Orders to which Purchaser or its property is subject.

          6.4       Litigation.  There is no action, proceeding, investigation
                    ----------                                                
or inquiry pending or, based on the actual

                                       19
<PAGE>
 
knowledge of the Purchaser, threatened, that materially affects Purchaser, its
Affiliates or its assets, or that questions the validity of this Agreement.

          6.5       Contracts.  All Contracts and other Agreements to which
                    ---------                                              
Purchaser is a party are in full force and effect and unimpaired by any
defaults, acts or omissions of Purchaser and no approval or consent of any party
to such Contracts and Agreements is required in connection with the consummation
of the transactions contemplated hereby.   Without limiting the generality of
the foregoing, there are no provisions in Purchaser's Articles of Incorporation
or Bylaws, or in any Contracts or other Agreements to which Purchaser is a
party, which would prevent Purchaser from redeeming the Sunbase Preferred
Shares, nor will Purchaser amend such Articles (including a reincorporation) or
Bylaws, or enter into any Contract or other Agreement, the effect of which would
prevent the redemption of the Sunbase Preferred Shares by Purchaser.  In
addition, based on Purchaser's actual knowledge, Purchaser's joint venture
contract with Shanghai Hong Xing Bearing Factory, dated March 18, 1994 is
unimpaired by any defaults, acts or omissions of Shanghai Hong Xing Bearing
Factory.

          6.6       Approvals.  All consents, approvals, authorizations and
                    ---------                                              
other requirements prescribed by any Law or Order, including, but not limited
to, those relating to federal and state securities laws with respect to the
issuance of the Sunbase Preferred Shares, which must be obtained or satisfied by
Purchaser and which are necessary for the execution and delivery by Purchaser of
this Agreement and all other Purchaser Documents, and the consummation of the
transactions contemplated in this Agreement will be obtained and satisfied prior
to Closing.

          6.7       SEC Filings.  Since January 1, 1995, Purchaser has timely
                    -----------                                              
filed and, as required by Section 13 of the Exchange Act, will continue to
timely file, all the required forms, reports and other documents with the
Securities and Exchange Commission.  As of the date hereof, and at the Effective
Time, all reports, forms and other documents so filed do not, and will not,
contain any 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, in
light of the circumstances under which they were made, not misleading.

          6.8       No Adverse Change.  Except as may be disclosed in the SEC
                    -----------------                                        
filings described in Section 6.7  above, there has not been any material adverse
change in the assets, or existing or prospective financial condition of
Purchaser since December 31, 1994.

                                       20
<PAGE>
 
          6.9     Sunbase Financial Statements.  The Sunbase Financial
                  ----------------------------                        
Statements were prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved (except as
may otherwise be indicated in the notes thereto) and fairly present the
financial position of Purchaser as of the dates thereof and the results of
operations and changes in financial position for the periods then ended.

          6.10      Investment Representation.  Purchaser is acquiring the
                    -------------------------                             
Southwest Shares for investment purposes only and not with a view to any
distribution or resale thereof.

          6.11      Sunbase Preferred Shares.  At the Closing, the Sunbase
                    ------------------------                              
Preferred Shares and, at the time of their issuance pursuant to Article II
hereof, the Sunbase Shares, shall be duly authorized, validly issued, fully paid
and non-assessable.

          6.12      No Broker.  Except for Millennium Capital Partners, Ltd., no
                    ---------                                                   
broker, finder, agent or similar intermediary has acted for or on behalf of
Purchaser in connection with this Agreement or the transactions contemplated
hereby, and no broker, finder, agent or similar intermediary is entitled to any
broker's, finder's, or similar fee or other commission in connection therewith
based on any agreement, arrangement or understanding with Purchaser or any
action taken by Purchaser.

          6.13      Formation of Newco.  As soon as practicable after execution
                    ------------------                                         
of this Agreement, Purchaser shall cause Newco to be formed, all of the stock of
which will be held by Purchaser.

          6.14      Capitalization.  The authorized capital stock of Purchaser
                    --------------                                            
consists of 50,000,000 shares of Common Stock with a par value of $.001 of which
11,700,063 shares are issued and outstanding and 25,000,000 of Preferred Stock
with a par value of $.001 of which 36 shares of Series A Preferred Stock are
issued and outstanding.  Except as set forth on Schedule 6.14, there are no
options, warrants, calls or rights of any kind to purchase or otherwise acquire,
and no securities are convertible into, the capital stock of Purchaser, there
are no other agreements of any kind or character obligating Purchaser to issue,
transfer or sell any of its capital stock authorized or outstanding and there is
no personal liability, and there are no preemptive or similar rights, attached
to Purchaser's Common Stock or Preferred Stock.

                                       21
<PAGE>
 
                                  ARTICLE VII
                                  -----------

                    COVENANTS AND AGREEMENTS OF THE PARTIES
                    ---------------------------------------
                          EFFECTIVE PRIOR TO CLOSING
                          --------------------------

          7.1       Corporate Examinations and Investigations.  Prior to the
                    -----------------------------------------               
Closing Date, Purchaser shall be entitled, through its employees and
representatives, to make such investigations of the property and plant and such
examination of the books, records and financial condition of the Company as
Purchaser may request.  In order that Purchaser may have the full opportunity to
do so, the Company and the Shareholders shall furnish Purchaser and its
representatives during such period with all such information concerning the
affairs of the Company as Purchaser or such representatives may request and
cause the Company's officers, employees, consultants, agents, accountants and
attorneys to cooperate fully with Purchaser or such representatives in
connection with such review and examination and to make full disclosure of all
information and documents reasonably requested by Purchaser and/or such
representatives.  Any such investigations and examinations shall be conducted at
reasonable times and under reasonable circumstances.

          7.2       Cooperation; Consents.  Prior to the Closing Date, each
                    ---------------------                                  
party shall cooperate with the other to the end that the parties shall (i) in a
timely manner make all necessary filings with, and conduct negotiations with,
all Authorities and other Persons the consent or approval of which, or a license
or permit from which, is required for the consummation of the transactions
contemplated by this Agreement and the Subsidiary Merger Agreement and (ii)
provide to each other party such information as the other party may reasonably
request in order to enable it to prepare such filings and to conduct such
negotiations.  Without limiting the foregoing, Purchaser shall cause Newco to
take all actions necessary to execute and file the Subsidiary Merger Agreement
and to effect all transactions contemplated of Newco by this Agreement.  The
parties shall also use their respective best efforts to expedite the review
process and to obtain all such necessary consents, approvals, licenses and
permits as promptly as practicable.  To the extent permitted by Law, the parties
shall request that each Authority or other Person whose review, consent or
approval is requested treat as confidential all information which is submitted
to it.

          7.3       Conduct of Business.  From the date hereof through the
                    -------------------                                   
Closing Date, the Company and Purchaser shall conduct their respective
businesses and operations in such a manner so that the representations and
warranties contained in Article V hereof shall continue to be true and correct
as

                                       22
<PAGE>
 
of the Closing Date as if made at and as of the Closing Date.

          7.4       Preservation of Business.  From the date hereof through the
                    ------------------------                                   
Closing Date, the Company and Purchaser shall conduct their respective
Businesses only in the ordinary course and consistent with prior practices and
shall use their best efforts to (a) maintain their respective existences and
business organizations; (b) maintain their respective relationships with
customers and suppliers; (c) preserve their respective goodwill; and (d) satisfy
their respective obligations to their creditors and suppliers.  Without limiting
the generality of the foregoing, the Company shall not, unless Purchaser shall
otherwise agree in writing or as otherwise expressly provided herein, directly
or indirectly, do any of the following:

                    (i) amend its Articles of Incorporation or Bylaws;

                    (ii) authorize for issuance, issue, sell, deliver or agree
to commit to issue, sell or deliver any shares of any class of its capital stock
or any securities convertible into shares of any class of its capital stock;

                    (iii) split, combine or reclassify any shares of its capital
stock; declare, set aside or pay any dividend or other distribution in respect
of its capital stock; or purchase, redeem or otherwise acquire any shares of its
capital stock;

                    (iv) except for the loan described in Section 9.8 below,
create, incur or assume any debt or assume, guarantee, endorse or otherwise
become liable for the obligations of any person or make any loans, advances or
capital contributions to, or investments in, any other person; and

                    (v) except in the ordinary course of business consistent
with past practices, sell, transfer, mortgage or otherwise dispose of or
encumber any properties.

          7.5       Resignations.  On or prior to the Closing Date, all of the
                    ------------                                              
directors of the Company except William McKay shall resign, in writing, as
directors of the Company, and the designees of Purchaser shall be elected to the
Board of Directors of the Company, all effective as of the Closing Date.

          7.6       Non-Competition.  On or prior to the Closing Date, William
                    ---------------                                           
McKay shall execute and deliver to the Company a Non-Competition Agreement in
form and substance reasonably satisfactory to Purchaser.

                                       23
<PAGE>
 
          7.7       No Solicitation or Negotiation.  Unless and until this
                    ------------------------------                        
Agreement is terminated, neither the Company nor any of the Shareholders shall,
nor shall they cause, suffer or permit the directors, officers, employees,
representatives, agents, investment bankers, advisors, accountants or attorneys
of the Company or the Shareholders to, directly or indirectly, solicit or
negotiate any offer for the sale of the Company's assets or stock.

          7.8       Update of Representations and Warranties.  Each party hereto
                    ----------------------------------------                    
shall promptly notify the other party in writing of any changes to such party's
representations and warranties contained herein which occurred during the period
between the date hereof and the Closing Date.  The obligation contained in this
Section 7.9 is not intended to nor shall it diminish such party's obligation
with respect to the completeness and correctness of such party's representations
and warranties made as of the date hereof.

                                  ARTICLE VIII
                                  ------------

                     CONDITIONS PRECEDENT TO THE OBLIGATION
                     --------------------------------------
                             OF EACH PARTY TO CLOSE
                             ----------------------

          The obligation of the Shareholders, the Company and Purchaser to
consummate the transactions contemplated herein shall be subject to the
fulfillment, at or prior to the Closing, of all of the conditions set forth
below in this Article VIII.

          8.1       No Action or Proceeding.  No action, suit or proceeding
                    -----------------------                                
shall have been instituted or be pending before any court or governmental body
seeking to challenge or restrain the transactions contemplated herein which
presents a substantial risk that such transactions will be restrained or that
either party hereto may suffer material damages or other relief as a result of
consummating such transactions.

          8.2       Governmental Approvals.  Any and all permits and approvals
                    ----------------------                                    
from any Authority required for the lawful consummation of the transactions
contemplated herein shall have been obtained.

          8.3       Employment Agreements.  The Company and Purchaser, on the
                    ---------------------                                    
one hand, and William McKay, on the other hand, shall have entered into an
employment agreement covering certain tasks to be performed by William McKay on
behalf of the Company and the Purchaser.

                                       24
<PAGE>
 
                                  ARTICLE IX
                                  ----------

                    CONDITIONS PRECEDENT TO THE OBLIGATION
                    --------------------------------------
                             OF PURCHASER TO CLOSE
                             ---------------------

          The obligation of Purchaser to consummate the transactions
contemplated herein shall be subject to the fulfillment, at or before the
Closing Date, of all of the conditions set forth below in this Article IX.

          9.1       Representations and Warranties.  The representations and
                    ------------------------------                          
warranties of the Shareholders and the Company contained in this Agreement, in
any Company Document and in any Shareholder Document shall be true on and as of
the Closing Date with the same force and effect as though made on and as of the
Closing Date, and at the Closing each Shareholder and the Company shall each
have delivered to Purchaser a certificate to such effect signed by such
Shareholder and the President of the Company (as to his best Knowledge and
solely in his capacity as President), as appropriate, and addressed to
Purchaser.

          9.2       Performance of Covenants.  Each of the obligations of each
                    ------------------------                                  
Shareholder to be performed by such Shareholder and each obligation of the
Company to be performed by it on or before the Closing Date pursuant to the
terms of this Agreement shall have been duly performed on or before the Closing
Date, and at the Closing each Shareholder and the Company shall have delivered
to Purchaser a certificate attesting to such performance signed by such
Shareholder and the President of the Company (as to his Knowledge and solely in
his capacity as President), as appropriate, and addressed to Purchaser.

          9.3       Third-Party Consents.  Except as set forth in Schedule
                    --------------------                                  
5.11A, all consents, permits and approvals from Authorities and from parties to
any Contract or Other Agreement listed in Schedule 5.11 which may be required in
connection with the consummation of the transactions contemplated hereby or the
continuance of such Contract or Other Agreement after the Closing Date shall
have been obtained by the Company upon terms and conditions satisfactory to
Purchaser.

          9.4       No Adverse Change.  Except for liabilities incurred in the
                    -----------------                                         
ordinary course of business and consistent with past practice, there shall not
have occurred between the date hereof and the Closing Date any Material Adverse
Change in the condition (financial or otherwise), assets, liabilities (whether
absolute, accrued, contingent or otherwise) of the Company, the Business or in
the ability of the Shareholders or the Company to consummate the transactions
contemplated herein.

                                       25
<PAGE>
 
          9.5       Opinion of Counsel to the Company.  Purchaser shall have
                    ---------------------------------                       
received the favorable opinion of Bruck & Perry, counsel to the Company, dated
as of the Closing Date, addressed to Purchaser, in form and substance
satisfactory to Purchaser's counsel, to the substantial effect that:

                    9.5.1    The Company is duly organized, validly existing
and in good standing under the Laws of California and has all requisite power to
own, lease and operate its assets, properties and Business as now conducted.

                    9.5.2    The Company has the full right, power and
authority required to enter into, execute and deliver this Agreement and the
other Company Documents in connection herewith and to perform fully its
obligations hereunder and thereunder.

                    9.5.3    This Agreement and the other Company Documents
have been duly and validly authorized, executed and delivered by the Company,
and constitute the legal, valid and binding obligations of the Company executing
the same, enforceable in accordance with their respective terms, except as such
enforceability may be limited by (i) bankruptcy, insolvency, reorganization,
moratorium or similar Laws now or hereafter in effect relating to or limiting
creditors' rights generally, and (ii) general principles of equity (whether
considered in an action in equity or at law) which provide, among other things,
that the remedies of specific performance and injunctive and other forms of
equitable relief are subject to equitable defenses and to the discretion of the
court before which any proceedings therefor may be brought.

                    9.5.4    Neither the execution and delivery of this
Agreement and the Company Documents, nor the consummation of the transactions
contemplated hereby and thereby will (i) violate any provision of the Articles
of Incorporation, bylaws, or other charter documents of the Company; or (ii) to
the best knowledge of such counsel after diligent inquiry, violate, or
constitute a default under, or permit the termination or acceleration of the
maturity of, any material indebtedness of the Company except as described in
Schedule 5.2.

                    9.5.5    The Southwest Shares have been duly authorized, 
validly issued and are fully paid and non-assessable.

As to any matter contained in such opinion which involves the Laws of a
jurisdiction in which such counsel is not admitted to practice, such counsel may
rely upon the opinion of local counsel of established reputation satisfactory to
Purchaser.  Any such opinion may expressly rely as to

                                       26
<PAGE>
 
matters of fact upon certificates furnished by appropriate officers of the
Company or appropriate governmental officials.

          9.6       Southwest Shares.  Immediately prior to the Closing, the
                    ----------------                                        
Southwest Shares shall represent all of the outstanding shares of the capital
stock of the Company on a fully diluted basis.

          9.7       Derivative Securities.  All existing Subordinated Debt,
                    ---------------------                                  
Preferred Shares and outstanding options and warrants shall have been converted,
exercised or cancelled by the holder thereof on or prior to the Closing Date so
no other shares of capital stock other than the Southwest Shares shall be
outstanding or issuable pursuant to exercise or conversion and the Subordinated
Debt shall have been extinguished.

          9.8       Shareholder Loan.  One or more of the Shareholders and
                    ----------------                                      
certain third parties shall have made a loan to the Company in the aggregate
amount of Five Hundred Thousand Dollars ($500,000) on the terms and conditions
set forth in Schedule 9.8.  The loan shall be repaid on the earlier of (i) one
(1) year from the Closing Date or (ii) that date on which Purchaser receives
proceeds of at least Two Million Dollars ($2,000,000) from a placement or
offering of securities of Purchaser after the Closing Date.  The Company's
obligation to repay the loan to such Shareholders shall be guaranteed by
Purchaser.

          9.9       Foothill Consent.  Foothill Capital Corporation ("Foothill")
                    ----------------                                            
shall have consented to the transactions contemplated herein, waived any right
to accelerate any obligation owed by the Company to Foothill as a result of the
Merger, and provided to Purchaser written confirmation as to the status of the
loan made by Foothill to Southwest in such form and substance as Purchaser, at
its sole discretion, deems acceptable.

          9.10      Delivery of Southwest Shares.  Each of the Shareholders
                    ----------------------------                           
shall have surrendered all of the Southwest Shares owned by such Shareholder for
conversion into Sunbase Preferred Shares.

                                   ARTICLE X
                                   ---------

                     CONDITIONS PRECEDENT TO THE OBLIGATION
                     --------------------------------------
                  OF THE SHAREHOLDERS AND THE COMPANY TO CLOSE
                  --------------------------------------------

          The obligation of the Shareholders and the Company to consummate the
transactions contemplated herein shall be subject to the fulfillment, at or
before the Closing Date, of all the conditions set forth below in this Article
X.

                                       27
<PAGE>
 
          10.1     Representations and Warranties.  The representations and
                   ------------------------------                          
warranties of Purchaser contained in this Agreement and in any Purchaser
Document shall be true on and as of the Closing Date with the same force and
effect as though made on and as of the Closing Date, and at the Closing
Purchaser shall have delivered to the Shareholders a certificate to such effect
signed by the Chief Financial Officer of Purchaser.

          10.2      Performance of Covenants.  Each of the obligations of
                    ------------------------                             
Purchaser to be performed by it on or before the Closing Date pursuant to the
terms of this Agreement shall have been duly performed on or before the Closing
Date, and at the Closing, Purchaser shall have delivered to Shareholders a
certificate to such effect signed by the Chief Financial Officer of Purchaser.

          10.3      Authority.  All actions required to be taken by, or on the
                    ---------                                                 
part of, Purchaser to authorize the execution, delivery and performance of this
Agreement, and the consummation of the transactions contemplated hereby shall
have been duly and validly taken by Purchaser's Board of Directors.

          10.4      No Adverse Change.  Except as may be disclosed in the SEC
                    -----------------                                        
filings described in Section 6.7 above, there has not been any material adverse
change in the assets, or existing or prospective financial condition of
Purchaser, since December 31, 1994.  Furthermore, except for liabilities
incurred in the ordinary course of business and consistent with past practice,
there shall not have occurred between the date hereof and the Closing Date any
material adverse change in the condition (financial or otherwise), assets,
liabilities (whether absolute, accrued, contingent or otherwise) of Purchaser,
its business, or in the ability of Purchaser to consummate the transactions
contemplated herein.

          10.5      Third-Party Consents.  Except as set forth in Schedule 10.5,
                    --------------------                                        
all consents, permits and approvals from Authorities and from parties to any
Contract or Other Agreement which may be required in connection with the
consummation of the transactions contemplated hereby or the continuance of such
Contract or Other Agreement after the Closing Date shall have been obtained by
Purchaser upon terms and conditions satisfactory to the Company.

          10.6      Opinion of Counsel to Purchaser.  The Shareholders and the
                    -------------------------------                           
Company shall have received the favorable opinion of Loeb and Loeb, counsel to
Purchaser, dated as of the Closing Date, addressed to the Company, in form and
substance satisfactory to the Company's counsel, to the substantial effect that:

                                       28
<PAGE>
 
                    10.6.1   Purchaser is a corporation duly incorporated, 
validly existing and in good standing under the Laws of the State of Nevada.

                    10.6.2   Purchaser has all requisite power, authority and
approval required to enter into, execute and deliver this Agreement and the
Purchaser Agreements and to perform fully Purchaser's obligations hereunder and
thereunder.

                    10.6.3   This Agreement and all Purchaser Documents have
been duly and validly authorized, executed and delivered by Purchaser and
constitute the legal, valid and binding obligations of Purchaser, enforceable in
accordance with their respective terms, except as such enforceability may be
limited by (i) bankruptcy, insolvency, reorganization, moratorium or similar
Laws now or hereafter in effect relating to or limiting creditors' rights
generally, and (ii) general principles of equity (whether considered in an
action in equity or at law) which provide, among other things, that the remedies
of specific performance and injunctive and other forms of equitable relief are
subject to equitable defenses and to the discretion of the court before which
any proceedings therefor may be brought.

                    10.6.4   At the time of Closing, the Sunbase Preferred
Shares will be duly authorized, validly issued, fully paid and non-assessable.

As to any matter contained in such opinion which involves the Laws of a
jurisdiction in which such counsel is not admitted to practice, such counsel may
rely on the opinion of local counsel of established reputation satisfactory to
the Shareholders.  Any such opinion may rely as to matters of fact upon
certificates furnished by appropriate officers of Purchaser or appropriate
governmental officials.

          10.7      Capital Contribution.  As soon as reasonably practicable
                    --------------------                                    
after the Closing, Purchaser shall make a capital contribution or loan of an
aggregate of $2,500,000 to the Company, which contribution or loan shall be
applied in part as follows:  Foothill Capital Corporation long term debt payoff:
$1,095,000; Foothill Capital Corporation note payoff: $336,307; Southwest
Working Capital:  $1,000,000

                                   ARTICLE XI
                                   ----------

                             TERMINATION; REMEDIES
                             ---------------------

          11.1      Termination Without Default.  In the event that as of the
                    ---------------------------                              
Outside Date, any event or state of facts not constituting a default by the
Company or the Shareholders, on the one hand, or Purchaser, on the other hand,
shall

                                       29
<PAGE>
 
exist, which event or state of facts constitutes a failure of the conditions
precedent for such party's benefit, the party for whose benefit such condition
precedent is imposed hereby shall have the right, at its sole option, to
terminate this Agreement without liability to the other party.  Such right may
be exercised by Purchaser, on the one hand, or the Company and the Shareholders,
on the other hand, as the case may be, by giving written notice to the other,
specifying the event or state of facts giving rise to such right of termination.

          11.2      Termination Upon Default.  Either Purchaser, on the one
                    ------------------------                               
hand, or the Company or the Shareholders, on the other hand, may terminate this
Agreement by giving notice to the other prior to the Closing Date, without
prejudice to any rights or obligations it may have, if the other party has
materially failed in the due and timely performance of any of its covenants or
agreements herein contained or there shall have been a material breach of the
other's warranties and representations herein contained.  In any such event the
party who is not guilty of the breach may, in addition to all of its other
rights and remedies, recover from the party responsible for the breach all
losses incurred.

          11.3      Specific Performance.  The parties acknowledge that the
                    --------------------                                   
Southwest Shares are unique and cannot be obtained by Purchaser except from the
Shareholders, and for that reason, among others, Purchaser will be irreparably
damaged in the absence of the consummation of this Agreement.  Therefore, in the
event of any breach by the Shareholders or the Company of this Agreement,
Purchaser shall have the right, at its election, to obtain an Order for specific
performance of this Agreement, without the need to post a bond or other
security, to prove any actual damage or to prove that money damages would not
provide an adequate remedy.

          11.4      Attorneys' Fees.  If any Shareholder, the Company or
                    ---------------                                     
Purchaser shall bring an action against the other by reason of any alleged
breach of any covenant, provision or condition hereof, or otherwise arising out
of this Agreement, the unsuccessful party shall pay to the prevailing party all
attorneys' fees and costs actually incurred by the prevailing party, in addition
to any other relief to which it may be entitled.  If more than one Person is a
party adverse to Purchaser in any such action, however, such Persons shall
designate one counsel to represent all of them in the action and, if Purchaser
is not the prevailing party, Purchaser shall be required to pay the attorneys'
fees of such one counsel only.  As used in this Section 11.4 and elsewhere in
this Agreement, "actual attorneys' fees" or "attorneys' fees actually incurred"
means the full and actual cost of any legal services actually performed in

                                       30
<PAGE>
 
connection with the matter for which such fees are sought calculated on the
basis of the usual fees charged by the attorneys performing such services, and
shall not be limited to "reasonable attorneys' fees" as that term may be defined
in statutory or decisional Authority.

                                  ARTICLE XII

                                INDEMNIFICATION
                                ---------------

          12.1      Indemnification by the Shareholders and the Company.  Each
                    ---------------------------------------------------       
of the Shareholders and the Company hereby agrees to severally indemnify and
hold Purchaser harmless from and against any and all losses, obligations,
deficiencies, liabilities, claims, costs and expenses (collectively, "Losses"),
(including, without limitation, the amount of any settlement entered into
pursuant hereto and all reasonable legal and other expenses incurred in
connection with the investigation, prosecution or defense of the matter) caused
by, arising out of, relating to, resulting or occurring from or in connection
with the breach of any representation, warranty or covenant made by the Company
or each such Shareholder in this Agreement or in any of the Company Documents or
Shareholder Documents.  Notwithstanding the foregoing, the liability of any
Shareholder hereunder shall not exceed an amount in excess of an amount
determined by multiplying the amount of the Loss by such Shareholder's pro rata
share of the Southwest Shares as of the Closing, and no Shareholder shall be
liable hereunder for any breach of any representation, warranty or covenant made
by the Company or any other Shareholder.  Further, the Company shall not be
liable hereunder for any breach of any representation, warranty or covenant of
any Shareholder relating to the Southwest Shares.  Notwithstanding anything
herein to the contrary, no Shareholder shall be liable hereunder for an amount
in excess of the number of Sunbase Shares received by such Shareholder
multiplied by $500.  Notwithstanding the foregoing, the Shareholders and the
Company shall only be required to indemnify Purchaser if, on a cumulative and
aggregate basis, the amount of Losses described in this Section 12.1 exceeds
$50,000.  However, if the cumulative and aggregate amount of such Losses exceeds
$50,000, all of the Losses shall be subject to indemnification hereunder by the
Shareholders and the Purchaser.  The Shareholders may satisfy any obligation to
indemnify Purchaser hereunder by (i) paying Purchaser the amount due Purchaser
hereunder in cash, (ii) assigning to Purchaser that number of Sunbase Preferred
shares owned by the Shareholders which, when multiplied by $500 equals the
amount due Purchaser hereunder or (iii) assigning to Purchaser that number of
shares of the common stock of Purchaser owned by the Shareholders which, when
multiplied by $5, equals the amount due Purchaser hereunder.

                                       31
<PAGE>
 
          12.2     Indemnification by Purchaser.  Purchaser hereby agrees to
                   ----------------------------                             
indemnify and hold each of the Shareholders harmless from and against any and
all Losses (including, without limitation, the amount of any settlement entered
into pursuant hereto and all reasonable, legal and other expenses incurred in
connection with the investigation, prosecution or defense of the matter) caused
by, arising out of, relating to, or resulting or occurring from or in connection
with the breach of any representation, warranty or covenant made by Purchaser in
this Agreement or in any of the Purchaser Documents.  Notwithstanding the
foregoing, Purchaser shall only be required to indemnify the Shareholders if, on
a cumulative and aggregate basis, the amount of Losses described in this Section
12.2 exceeds $50,000.  However, if the cumulative and aggregate amount of the
Losses exceeds $50,000, all of the Losses shall be subject to indemnification
hereunder by Purchaser.

          12.3      Notice to Indemnifying Party.  If any party hereto (the
                    ----------------------------                           
"Indemnified Party") receives notice of any claim or other commencement of any
action or proceeding with respect to which any other party (the "Indemnifying
Party") is obligated to provide indemnification pursuant to Sections 12.1 or
12.2 above, the Indemnified Party shall promptly give the Indemnifying Party
written notice thereof which notice shall specify, if known, the amount or an
estimate of the amount of the liability arising therefrom.  Such notice shall be
a condition precedent to any liability of the Indemnifying Party for
indemnification hereunder.  The Indemnified Party shall not settle or compromise
any claim by a third party for which it is entitled to indemnification
hereunder, without the prior written consent of the Indemnifying Party, unless
suit shall have been instituted against it and the Indemnifying Party shall not
have taken control of such suit after notification thereof as provided in
Section 12.4 below.

          12.4      Defense by Indemnifying Party.  In connection with any claim
                    -----------------------------                               
giving rise to indemnity hereunder resulting from or arising out of any claim or
legal proceeding by a person who is not a party to this Agreement, the
Indemnifying Party at its sole cost and expense may, upon written notice to the
Indemnified Party, assume the defense of any such claim or legal proceeding
using counsel of its choice (subject to the approval of the Indemnified Party,
which approval may not be unreasonably withheld or delayed) if it acknowledges
to the Indemnified Party in writing its obligations to indemnify the Indemnified
Party with respect to all elements of such claim.  The Indemnified Party shall
be entitled to participate in (but not control) the defense of any such action,
with its counsel and at its own expense; provided, however, that if the
Indemnified Party, in its sole discretion, determines that there exists a
conflict of

                                       32
<PAGE>
 
interest between the Indemnifying Party and the Indemnified Party, the
Indemnified Party shall have the right to engage separate counsel, the
reasonable costs and expenses of which shall be paid by the Indemnifying Party,
but in no event shall the Indemnified Party be liable to pay for the costs and
expenses of more than one such separate counsel.  If the Indemnifying Party does
not assume the defense of any such claim or litigation resulting therefrom, the
Indemnified Party may defend against such claim or litigation, after giving
notice of the same to the Indemnifying Party, on such terms as the Indemnified
Party may deem appropriate, and the Indemnifying Party shall be entitled to
participate in (but not control) the defense of such action, with its counsel
and at its own expense.  Notwithstanding the foregoing, however, Purchaser shall
in all cases be entitled to control the defense of any such action if it (i) may
result in injunctions or other equitable remedies in respect of Purchaser; (ii)
may result in liabilities which would not be fully indemnified hereunder; or
(iii) may have an adverse impact on the financial condition of Purchaser even if
the Company and/or the Shareholders pay all indemnification amounts in full.

          12.5      Reliance Upon Representations and Warranties.  The
                    --------------------------------------------      
representations and warranties contained in this Agreement shall be considered
to have been relied upon by the Company, the Shareholders or Purchaser, as the
case may be, and shall survive until and through that date which is one (1) year
after the Closing Date.

                                  ARTICLE XIII
                                  ------------

                           EXPENSES; CONFIDENTIALITY
                           -------------------------

          13.1      Expenses of Sale.  Each party hereto shall bear such party's
                    ----------------                                            
direct and indirect expenses incurred in connection with the negotiation and
preparation of this Agreement and the consummation and performance of the
transactions contemplated herein.

          13.2      Confidentiality.  Subject to any obligation to comply with
                    ---------------                                           
(i) any Law (ii) any rule or regulation of any Authority or securities exchange
or (iii) any subpoena or other legal process to make information available to
the Persons entitled thereto, whether or not the transactions contemplated
herein shall be concluded, all information obtained by any party about any
other, and all of the terms and conditions of this Agreement, shall be kept in
confidence by each party, and each party shall cause its shareholders,
directors, officers, employees, agents and attorneys to hold such information
confidential.  Such confidentiality shall be maintained to the same degree as
such party maintains its own confidential information and shall be

                                       33
<PAGE>
 
maintained until such time, if any, as any such data or information either is,
or becomes, published or a matter of public knowledge; provided, however, that
the foregoing shall not apply to any information obtained by Purchaser through
its own independent investigations of the Company or received by Purchaser from
a third party not under any obligation to keep such information confidential nor
to any information obtained by Purchaser which is generally known to others
engaged in the trade or business of the Company; and provided, further, that
from and after the Closing, Purchaser shall be under no obligation to maintain
confidential any such information concerning the Company.  If this Agreement
shall be terminated for any reason, each party shall return or cause to be
returned to the other all written data, information, files, records and copies
of documents, worksheets and other materials obtained by such party in
connection with the transactions contemplated herein.

          13.3      Publicity.  No publicity release or announcement concerning
                    ---------                                                  
this Agreement or the transactions contemplated herein shall be issued without
advance written approval of the form and substance thereof by Purchaser and the
Company; provided, however, that such restrictions shall not apply to any
disclosure required by regulatory Authorities, applicable Law or the rules of
any securities exchange which may be applicable.

                                  ARTICLE XIV
                                  -----------

                                    NOTICES
                                    -------

          14.1      Notices.  All notices, requests and other communications
                    -------                                                 
hereunder shall be in writing and shall be delivered by courier or other means
of personal service (including by means of a nationally recognized courier
service or professional messenger service), or sent by telex or telecopy or
mailed first class, postage prepaid, by certified mail, return receipt
requested, in all cases, addressed to:

          Purchaser:

               Sunbase Asia, Inc.
               19/F., First Pacific Bank Centre
               51-57 Gloucester Road
               Wanchai, Hong Kong
               Attention:  Roger Li

               Telecopy No. 011-852-2865-4293

                                       34
<PAGE>
 
          With a copy to:

               David L. Ficksman, Esq. 
               Loeb and Loeb
               1000 Wilshire Boulevard, Suite 1800
               Los Angeles, California 90017

               Telecopy No. (213) 688-3460

          Each Shareholder:

               To the address set forth below each Shareholder's signature
               block.

          Company:

               Southwest Products Company
               2240 Buena Vista Street
               Irwindale, California  91706
               Attention:  William McKay, President

               Telecopy No. (818) 303-6141

          With a copy to:

               Daniel K. Donahue, Esq.
               Bruck & Perry
               A Professional Corporation
               One Newport Place
               Newport Beach, California  92660
 
               Telecopy No. (714) 955-0835

All notices, requests and other communications shall be deemed given on the date
of actual receipt or delivery as evidenced by written receipt, acknowledgement
or other evidence of actual receipt or delivery to the address specified above.
In case of service by telecopy, a copy of such notice shall be personally
delivered or sent by registered or certified mail, in the manner set forth
above, within three (3) business days thereafter.  Any party hereto may from
time to time by notice in writing served as set forth above designate a
different address or a different or additional Person to which all such notices
or communications thereafter are to be given.

                                   ARTICLE XV
                                   ----------

                                 MISCELLANEOUS
                                 -------------

          15.1      Further Assurances.  Each of the parties shall use its
                    ------------------                                    
reasonable and diligent best efforts to proceed promptly with the transactions
contemplated herein, to

                                       35
<PAGE>
 
fulfill the conditions precedent for such party's benefit or to cause the same
to be fulfilled and to execute such further documents and other papers and
perform such further acts as may be reasonably required or desirable to carry
out the provisions hereof and the transactions contemplated herein.  Without
limiting the generality of the foregoing, the Shareholders shall use their best
efforts to cause the Company to fulfill its covenants hereunder prior to the
Closing.

          15.2      Modifications and Amendments; Waivers and Consents.  At any
                    --------------------------------------------------         
time prior to the Closing Date or termination of this Agreement, Purchaser, on
the one hand, and the Company and the Shareholders, on the other hand, may, by
written agreement:

                    (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto;

                    (b) waive any inaccuracies in the representations and
warranties made by the other parties contained in this Agreement or any other
agreement or document delivered pursuant to this Agreement; and

                    (c) waive compliance with any of the covenants or agreements
of the other parties contained in this Agreement. However, no such waiver shall
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure. Whenever this Agreement requires or permits a waiver or consent by or
on behalf of any party hereto, such waiver or consent shall be given in writing.

          15.3      Entire Agreement.  This Agreement (including any exhibits
                    ----------------                                         
and schedules hereto, which are hereby incorporated herein by this reference)
and the agreements, documents and instruments to be executed and delivered
pursuant hereto or thereto shall embody the final, complete and exclusive
agreement among the parties with respect to the exchange of the Southwest Shares
for Sunbase Preferred Shares and related transactions; shall supersede all prior
agreements, understandings and representations written or oral, with respect
thereto; and may not be contradicted by evidence of any such prior or
contemporaneous agreement, understanding or representation, whether written or
oral.

          15.4      Governing Law and Venue.  This Agreement is to be governed
                    -----------------------                                   
by and construed in accordance with the Laws of the State of California
applicable to contracts made and to be performed wholly within such State, and
without regard to the conflicts of laws principles thereof.

                                       36
<PAGE>
 
          15.5     Binding Effect.  This Agreement and the rights, covenants,
                   --------------                                            
conditions and obligations of the respective parties hereto and any instrument
or agreement executed pursuant hereto shall be binding upon the parties and
their respective successors, assigns and legal representatives.  Neither this
Agreement, nor any rights or obligations of any party hereunder, may be assigned
by Purchaser, the Company or the Shareholders without the prior written consent
of the other parties hereto; provided, however, that prior to or following the
Closing, this Agreement and any rights and obligations of Purchaser hereunder,
and under any Purchaser Document may, without the prior written consent of the
Company and Shareholders, be assigned and delegated by Purchaser to any
Affiliate of Purchaser and following the Closing, this Agreement and any rights
and obligations of Purchaser hereunder and under any Purchaser Document may also
be assigned and delegated by Purchaser, without the prior written consent of the
Company and the Shareholders, to any successor-in-interest of Purchaser to the
Sunbase Shares; provided, however, that no delegation by Purchaser of any such
obligation shall relieve Purchaser of liability therefor.

          15.6      Counterparts.  This Agreement may be executed simultaneously
                    ------------                                                
in any number of counterparts, each of which shall be deemed an original but all
of which together shall constitute one and the same instrument.  In making proof
of this Agreement it shall not be necessary to produce or account for more than
one counterpart.

          15.7      Section Headings.  The section headings of this Agreement
                    ----------------                                         
are for convenience of reference only and shall not be deemed to alter or affect
any provision hereof.

          15.8      Gender, Tense, Etc.  Where the context or construction
                    -------------------                                   
requires, all words applied in the plural shall be deemed to have been used in
the singular, and vice versa; the masculine shall include the feminine and
neuter, and vice versa; and the present tense shall include the past and future
tense, and vice versa.

          15.9      Severability.  In the event that any provision or any part
                    ------------                                              
of any provision of this Agreement shall be void or unenforceable for any reason
whatsoever, then such provision shall be stricken and of no force and effect.
However, unless such stricken provision goes to the essence

                                       37
<PAGE>
 
of the consideration bargained for by a party, the remaining provisions of this
Agreement shall continue in full force and effect, and to the extent required,
shall be modified to preserve their validity.

          15.10     Third-Party Rights.  Nothing in this Agreement, whether
                    ------------------                                     
express or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any Persons other than the parties to it and their
respective successors and assigns, nor is anything in this Agreement intended to
relieve or discharge the obligation or liability of any third Persons to any
party to this Agreement, nor shall any provision give any third Persons any
right of subrogation over or action against any party to this Agreement.

          15.11     Construction.  The language in all parts of this Agreement
                    ------------                                              
shall in all cases be construed simply, according to its fair meaning, and not
strictly for or against any of the parties hereto.  Without limitation, there
shall be no presumption against any party on the ground that such party was
responsible for drafting this Agreement or any part thereof.

          IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.

                         PURCHASER

                         Sunbase Asia, Inc.



                         By:
                            --------------------------------  
                            Its:
                                ----------------------------

                         THE COMPANY

                         Smith Acquisition Company, Inc. d/b/a Southwest
                         Products Company


                         By:
                            --------------------------------
                            Its:
                                ----------------------------

                                       38
<PAGE>
 
                         SHAREHOLDERS:


                         -----------------------------------        
                         Badr Al-Aiban
                         c/o Delta International
                         P.O. Box 6782
                         Jeddah, 2145 Saudi Arabia


                         -----------------------------------
                         Gary Awad
                         1800 Austin Parkway,
                         Apt. #1104
                         Sugar Land, Texas  77479


                         -----------------------------------
                         J. Thomas Chess
                         500 Columbia Street
                         Pasadena, California  91030


                         -----------------------------------
                         John Coman
                         216 Fairhills Drive
                         San Rafael, California  94901


                         -----------------------------------
                         William R. McKay
                         777 South Woodward Boulevard
                         Pasadena, California  91107


                         -----------------------------------
                         James McN. Stancill
                         3642 Mountain View Avenue
                         Pasadena, California  91107


                         -----------------------------------
                         Tom Naygrow
                         c/o Steven J. Orlando
                         1805 Parliament Circle
                         Carmichael, California  95608

                                       39
<PAGE>
 
                         -----------------------------------
                         Dick Orfalea
                         1235 North Louise Street
                         Glendale, California  91207


                         -----------------------------------
                         Steven J. Orlando
                         1805 Parliament Circle
                         Carmichael, California  95608


                         -----------------------------------
                         Carol Orlando
                         c/o Steven J. Orlando
                         1805 Parliament Circle
                         Carmichael, California  95608


                         RJN Enterprises


                         By:
                            -------------------------------
                           Its:
                               ----------------------------
                         c/o Steven J. Orlando
                         1805 Parliament Circle
                         Carmichael, California  95608


                         ----------------------------------
                         Frank Brothers
                         128 DeForest Road
                         Wilton, Connecticut  06397


                         ----------------------------------
                         David C. Lutz
                         8807 Fox Briar Lane
                         Boerne, Texas  78006-5585

                                       40
<PAGE>
 
                         ----------------------------------
                         Cameron McKay
                         505 East Plaza Serena
                         Ontario, California  91764


                         ----------------------------------
                         Ernst Renezeder
                         1603 Hanging Rock Avenue
                         Montebello, California  90640


                         ----------------------------------
                         Todd Stockbauer
                         16701 Algonquin Street, #308
                         Huntington Beach, California  92649

                                       41

<PAGE>
 
                                                                   EXHIBIT 10.21
 
                             EMPLOYMENT AGREEMENT
                             --------------------


     This Employment Agreement ("Agreement") is entered into as of January 16,
1996, by and between, on the one hand, Sunbase Asia, Inc., a Nevada corporation
("Sunbase") and Smith Acquisition Company, Inc. d/b/a/ Southwest Products
Company, a California corporation ("Southwest") and, on the other hand, William
R. McKay, an individual ("Employee"), with respect to the following facts:

          A.     Pursuant to that certain Agreement and Plan of Reorganization
and Merger, dated December 29, 1995, by and among Sunbase, Southwest and certain
shareholders of Southwest (including, but not limited to, Employee) Southwest is
being merged with a subsidiary of Sunbase, whereby Southwest will be the
surviving corporation.

          B.     Southwest and Sunbase desire to employ Employee as President
and Chief Executive Officer of Southwest and Sunbase.

          C.     Employee desires to be so employed.

          NOW, THEREFORE, in consideration of the premises and mutual promises
set forth herein, the parties hereto hereby agree as follows:

          1.     Term of Employment. Southwest and Sunbase hereby employ
                 ------------------
Employee and Employee accepts such employment commencing on the date first set
forth above and terminating on that date which is five (5) years therefrom,
unless sooner terminated as provided herein.

          2.     Services to be Rendered.
                 ----------------------- 

          2.1    Duties. Employee shall be employed to serve as President and
                 ------
Chief Executive Officer of Southwest and in such other executive capacities as
the Board of Directors of Southwest (the "Board") may, in its sole discretion,
determine from time to time. Employee shall also serve, without any additional
salary or compensation, as President and Chief Executive Officer of Sunbase and
shall, if requested by the Board, provide services as an officer to any parent
or subsidiary of Southwest or Sunbase, or any company into which Southwest may
be merged, and any parent or subsidiary thereof (individually, a "Related
Entity"), provided that the business of any such Related Entity is related to
the manufacture, distribution or sale of bearing products. Employee shall have
the responsibilities, duties and powers customarily associated with such
positions and shall perform such duties pertaining to the business of
<PAGE>
 
Southwest, Sunbase or any Related Entity as the Board may from time to time
direct.  Employee hereby consents to serve as a director of Southwest, Sunbase
or any Related Entity without any additional salary or compensation, if
requested to do so by the Board.  Employee shall be subject to the policies and
procedures generally applicable to senior executive employees of Southwest to
the extent the same are not inconsistent with any term of this Agreement.
Employee's principal place of employment shall be located within the County of
Los Angeles, State of California.

          2.2    Exclusive Services. Employee shall at all times faithfully,
                 ------------------
industriously and to the best of his ability, experience and talents, perform
all of the duties that may be assigned to him hereunder and shall devote such
time to the performance of these duties as may be customary, necessary or
appropriate therefor. Employee shall be available on a full time basis to
perform the duties assigned to him hereunder; provided, however, that Employee
may devote time to personal and family investments and charitable and
philanthropic activities to the extent that such investments and activities do
not conflict with the business of Southwest, Sunbase or any Related Entity. The
existence of such a conflict shall be determined in good faith by the Board.

          3.     Compensation and Benefits. Southwest shall pay the compensation
                 -------------------------
and provide the benefits which are set forth below to Employee during the term
hereof, and Employee shall accept the same as full and complete payment for all
services rendered by Employee to, or for the benefit of, Southwest, Sunbase or
any Related Entity:

          3.1    Salary. A base salary ("Base Salary") of Two Hundred Eighty-
                 ------
Five Thousand Dollars ($285,000) per annum. The Base Salary shall be payable in
accordance with the then current payroll practices of Southwest which Southwest
may, in its sole discretion, change from time to time. McKay's Base Salary shall
be reviewed annually, as soon as the relevant financial information is available
for, as applicable, Southwest, Sunbase and the Related Entities, but in no event
later than four (4) months after the end of each fiscal year of Southwest, by
the Board or by a compensation committee (the "Compensation Committee") which is
established by the Board, provided that the Compensation Committee is
established to review the compensation of all senior officers. As a result of
such review, the Base Salary may be increased or, if based on United States
generally accepted accounting principles, Southwest has failed to generate a
positive net operating income for the immediately preceding year, decreased, at
the sole discretion of the Board or the Compensation Committee,

                                       2
<PAGE>
 
provided that the following review procedures are followed by the Board or the
Compensation Committee, as applicable.

          (a)    Decrease of Salary.  In reviewing the performance of Employee
                 ------------------                                           
with respect to decreasing the Base Salary, the Board or the Compensation
Committee shall exclusively evaluate whether Southwest has generated a positive
net operating income for the relevant fiscal year based solely on Southwest's
sales of those products that are manufactured by Southwest.  The Board or the
Compensation Committee shall exclude from the calculation of Southwest's net
operating income: (i) any payments of principle or interest made by Southwest to
Foothill Capital Corporation, as a result of Sunbase failing to make a capital
contribution to Southwest as required under Section 10.7 of the Agreement and
Plan of Reorganization and Merger, dated December 29, 1995, by and among
Sunbase, Southwest and certain shareholders of Southwest, (ii) any payments of
interest made by Southwest to Sunbase as a result of Sunbase making a capital
contribution to Southwest in the form of debt, (iii) any payments of income tax
made by Southwest and (iv) any costs, expenses or losses that would normally and
reasonably be attributed to, and any revenue that is generated by, Sunbase or
any Related Entity, including, but not limited to, any revenue, costs, expenses
or losses relating to the distribution or marketing of products of Hong Xing
Bearing Company or Harbin Bearing Company Limited.  Should any such revenues,
costs, expenses or losses be attributed to Southwest for purposes of cost
allocation, accounting or any other reason, for purposes of this Section 3.1
only, the financial statements of Southwest shall be adjusted so that they
exclusively reflect the performance of Southwest as provided above, to the
exclusion of any such revenue, costs, expenses or losses.

          (b)    Increase of Salary.  In reviewing the performance of Employee
                 ------------------                                           
with respect to increasing the Base Salary, the Board or the Compensation
Committee shall evaluate the profitability of Southwest and may, in addition and
at its sole discretion, evaluate the profitability of Sunbase and any Related
Entity.

          (c)    Minimum Base Salary.  In no event shall the Board decrease the
                 -------------------                                           
Base Salary to an amount less than Two Hundred Twenty-Five Thousand Dollars
($225,000).

          (d)    Change in Base Salary.  If the Board or the Compensation
                 ---------------------                                   
Committee increases the Base Salary at any time other than before the first
payment of Base Salary normally due in any year hereunder, Southwest shall make
a lump sum payment to Employee at the time of

                                       3
<PAGE>
 
such increase, in an amount equal to the difference between (i) the total amount
of Base Salary that Employee would have been paid if the Base Salary, as so
increased, had been paid from the beginning of such year to the date on which
the Base Salary is actually increased and (ii) the amount of Base Salary
actually paid for such period.  In addition, Southwest shall equally increase
the remaining payments of the Base Salary on a go-forward basis so that the
total Base Salary paid for such year equals the total amount of the Base Salary
as increased.  If the Board or the Compensation Committee decreases the Base
Salary for any year hereunder, Southwest shall, at the time it decreases the
Base Salary and on a go-forward basis, equally decrease all remaining payments
of the Base Salary for such year so that the total Base Salary paid to Employee
for such year is equal to the total Base Salary as so decreased.  If Employee's
Base Salary is decreased hereunder for any fiscal year, and Southwest generates
a positive net operating income in the subsequent year, Employee's Base Salary
shall be increased to, at a minimum, Two Hundred Eighty-Five Thousand Dollars
($285,000) for the year following such subsequent year.

          (e)    Effect of Employee's Death or Disability on Base Salary.  If
                 -------------------------------------------------------     
Employee dies or, as defined in Section 7.1 below, becomes totally disabled,
Southwest shall continue to pay Employee or Employee's heirs, successors or
assigns the Base Salary for a period of six (6) months, commencing on the date
that Employee dies or becomes totally disabled.

          3.2    Bonus. At the end of each fiscal year of Southwest, the Board
                 -----
of Directors of Sunbase (the "Sunbase Board") shall review Employee's
performance for such fiscal year and, in addition to the Base Salary, may choose
to pay Employee, at the sole discretion of the Sunbase Board, a bonus for the
relevant fiscal year. Any payment hereunder to Employee of a bonus in any
particular year shall not obligate Sunbase or Southwest to pay Employee a bonus
in any other year. In reviewing the performance of Employee with respect to
paying Employee a bonus, the Sunbase Board shall review the performance and
profitability of Southwest, Sunbase and any Related Entity to which Employee
provides services hereunder.

          3.3    Stock Options. Sunbase shall grant Employee, under the 1995
                 -------------
Sunbase Asia, Inc. Stock Option Plan, options to purchase shares of the common
stock of Sunbase ("Options"). The principal terms of the Options are set forth
below and all of the terms of the Options are set forth in a stock option
agreement (a copy of which is attached hereto as Exhibit A and incorporated
herein by this

                                       4
<PAGE>
 
reference).  Concurrent with the due execution of this Agreement, Sunbase shall
issue Employee eight hundred thousand (800,000) Options, each of which will
entitle Employee the right to purchase from Sunbase one (1) share of the common
stock of Sunbase.  The right to purchase such shares, at the respective price
per share as set forth below, will vest in Employee at the rate of one hundred
sixty thousand (160,000) Options per each full year during which Employee
remains employed by Employer, with the first year period commencing as of the
date first set forth above.  Employee may exercise the Options that have vested
and purchase shares of the common stock of Sunbase, 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>

          (a)    Expiration of Options.  All unexercised Options shall expire on
                 ---------------------                                          
that date which is six (6) years after the date on which such Options have
vested.

          (b)    Effect of Employee's Death or Disability on Options.  If, on
                 ---------------------------------------------------         
the date that Employee dies or, as defined in Section 7.1 below, becomes totally
disabled, Employee has completed one hundred eighty-three (183) or more days of
employment for the relevant year, then in addition to any Options that have
vested in any previous year(s) of employment hereunder, the amount of one
hundred sixty thousand (160,000) Options will be deemed vested in Employee as if
Employee had remained employed for the full year.  If, on the date that Employee
dies or becomes totally disabled Employee has completed one hundred eighty-two
(182) or less days of employment for the relevant year, then, in addition to any
Options that have vested in Employee for any previous year(s) of employment
hereunder, the amount of eighty thousand (80,000) Options shall be deemed vested
in Employee.  Any Options that have vested as of the date that Employee dies may
be exercised by Employee's estate, heirs, successors or assigns, prior to such
Options' expiration as described in Section 3.3(a) above.  If Employee becomes
totally disabled, Employee, or, if necessary, Employee's assigns, may exercise
any Options which have vested as of the date on which Employee becomes so
disabled prior to such Options' expiration as described in Section 3.3(a) above.

                                       5
<PAGE>
 
          (c)    Effect of Employee's Termination.  If Employee is terminated
                 --------------------------------                            
pursuant to Section 7.2 below, all unexercised Options shall expire on that date
which is ninety (90) days after the date of such termination; provided, however,
that notwithstanding Section 3.3 (e) below, upon Employee's written request, at
any time during the two-week period that commences on the date that Employee is
terminated pursuant to Section 7.2 below and, provided that such a registration
statement is not already in effect, Sunbase shall file a Form S-8 Registration
Statement with the Securities and Exchange Commission covering that amount of
shares of the common stock of Sunbase which are issued to Employee hereunder.
Provided that Employee requests that the Form S-8 Registration Statement be so
filed in accordance with the foregoing, Sunbase shall file the Form S-8
Registration Statement by such date, or toll the ninety (90) day period set
forth above for such amount of time, so that Employee has no less than thirty
(30) days to sell the common stock of Sunbase while the Form S-8 Registration
Statement is in effect.

          (d)    Effect of Employee's Improper Termination of This Agreement.
                 -----------------------------------------------------------  
If Employee resigns or terminates this Agreement for any reason other than based
on a material breach hereof by Southwest or Sunbase, all unexercised Options
shall expire immediately.

          (e)    Registration Rights and Holding Period.  Upon Employee's
                 --------------------------------------                  
written request, at any time during the eight (8) year period that commences two
(2) years after the date first set forth, Sunbase shall file with the Securities
and Exchange Commission a Form S-8 Registration Statement covering that amount
of shares of the common stock of Sunbase which are issued to Employee hereunder.
Notwithstanding the foregoing, Employee shall not resell any shares of the
common stock underlying the Options that are issued to Employee hereunder for a
holding period of one (1) year, which period shall commence on the date that the
right to exercise the Options with respect to such shares vests in Employee.

          3.5    Benefits and Vacation. Employee shall be entitled to
                 ---------------------
participate in benefits under Southwest's benefit plans and arrangements made
available by Southwest to its senior officers, subject to and on a basis
consistent with the terms, conditions and overall administration of such plans
and arrangements. Southwest shall have the right to amend or delete any such
benefit plan or arrangement made available by Southwest to its senior officers.
Employee shall be entitled to the number of paid vacation days in each calendar
year determined by Southwest from time to time

                                       6
<PAGE>
 
for its senior officers which, at a minimum, shall be twenty-eight (28) days per
year, provided that Employee shall not take more than fourteen (14) such days
sequentially at any given time.  Employee shall also be entitled to all paid
holidays given to Southwest's senior officers.

          3.6    Automobile Expense. During the term of this Agreement,
                 ------------------
Southwest shall pay to Employee the amount of Fifteen Thousand Dollars ($15,000)
per annum as reimbursement for any and all costs and expenses which Employee
incurs in connection with the purchase or lease, operation and maintenance of an
automobile. The foregoing reimbursement does not include costs and expenses
incurred by employee in connection with Employee's renting of automobiles, as
necessary or appropriate to satisfy Employee's obligations hereunder.

          3.7    Expenses. Southwest shall reimburse Employee for reasonable
                 --------
out-of-pocket expenses incurred by Employee in connection with the business of
Southwest, Sunbase and any Related Entity and the performance of Employee's
duties hereunder, subject to (i) such policies as the Board may from time to
time establish and (ii) Employee furnishing Southwest with documentation in the
form of receipts satisfactory to Southwest substantiating such expenses.

          3.8    Withholding and Other Deductions. All compensation payable and
                 --------------------------------
benefits provided to Employee hereunder shall be subject to such deductions as
Southwest is from time to time required to make pursuant to law, governmental
regulation or order.

          4.     Representations and Warranties of Employee. Employee represents
                 ------------------------------------------
and warrants to Southwest that Employee is not a party to any contract or
subject to any restriction or obligation which is inconsistent with the
execution of this Agreement, the performance of his duties hereunder or any
other interest of Southwest, Sunbase or any Related Entity, and that Employee is
fully physically and mental able and competent to performance his duties
hereunder.

          5.     Confidential Information. Employee acknowledges that the nature
                 ------------------------
of Employee's engagement hereunder is such that Employee will have access to
"Confidential Information" (as defined below) which is of great value and that
except for such engagement, Employee would not otherwise have access to the
Confidential Information. During the term of this Agreement, Employee shall keep
all Confidential Information in confidence and shall not disclose any of the
same to any other person, except (i) the personnel of

                                       7
<PAGE>
 
Southwest or Sunbase with a need to know and (ii) other persons designated in
writing by the Board.  Employee shall not cause, suffer or permit the
Confidential Information to be used for the gain or benefit of any party outside
of Southwest or Sunbase or for Employee's personal gain or benefit outside the
scope of Employee's employment hereunder.  The term "Confidential Information"
as used herein means all information or material not generally known other than
by the personnel of Southwest or Sunbase which (i) gives Southwest or Sunbase a
competitive business advantage or the opportunity of obtaining such advantage,
or the disclosure of which could be detrimental to the interests of Southwest or
Sunbase; (ii) is owned by Southwest or Sunbase or in which Southwest or Sunbase
has an interest and (iii) is either marked "Confidential Information,"
"Proprietary Information" or the like or is known or should be known by Employee
to be considered confidential and proprietary by Southwest or Sunbase.
NOTWITHSTANDING THE ABOVE, HOWEVER, NO INFORMATION CONSTITUTES CONFIDENTIAL
INFORMATION IF IT IS GENERIC INFORMATION OR GENERAL KNOWLEDGE WHICH EMPLOYEE
WOULD HAVE LEARNED IN THE COURSE OF SIMILAR EMPLOYMENT ELSEWHERE IN THE TRADE OR
IF IT IS OTHERWISE PUBLICLY KNOWN AND IN THE PUBLIC DOMAIN.

          6.     Insurance. Southwest shall have the right to take out life,
                 ---------
health, accident, "key-man" or other insurance covering Employee, in the name of
Southwest and at Southwest's expense in any amount deemed appropriate by
Southwest. Employee shall assist Southwest in obtaining such insurance,
including, but not limited to, submitting to any required examinations and
providing information and data which are required by insurance companies.

          7.     Termination.
                 ----------- 

          7.1    Death or Total Disability of Employee. If Employee dies or
                 -------------------------------------
becomes totally disabled during the term of this Agreement, this Agreement and
Employee's employment hereunder shall automatically terminate. For purposes of
this Section 7.1, Employee shall be deemed totally disabled if Employee becomes
physically or mentally incapacitated or disabled or otherwise unable fully to
discharge Employee's duties hereunder for any period of ninety (90) consecutive
calendar days or for one hundred twenty (120) calendar days in any one hundred
eighty (180) calendar-day period.

          7.2    Termination for Cause. Employee's employment hereunder may be
                 ---------------------
terminated immediately by Southwest for cause. For purposes of this Section 7.2,
the term "cause" means the occurrence of any of the following events:

                                       8
<PAGE>
 
          (a)    Employee's breach of any of the covenants contained in Section
5 above;

          (b)    Employee's conviction by, or entry of a plea of guilty or nolo
contendere in, a court of competent and final jurisdiction for any crime which
results in the imprisonment of Employee in a federal or state penitentiary;

          (c)    Employee's willful failure or refusal to perform Employee's
duties as required by this Agreement provided that Employee does not cure such
failure or refusal to perform within four (4) weeks of written notice thereof by
Southwest;

          (d)    Employee's gross negligence or material violation of any duty
of loyalty to Southwest, Sunbase or any Related Entity provided that Employee
does not cure such negligence or violation within four (4) weeks of written
notice thereof by Southwest; or

          (e)    Employee's breach of any other provision of this Agreement,
provided that prior to termination of Employee's employment pursuant to this
subsection (e), Employee shall have first received written notice from the Board
stating with specificity the nature of such breach and affording Employee four
(4) weeks to correct the alleged breach.

Notwithstanding the foregoing Section 7.2, Employee's refusal to disclose to any
person or entity information concerning or relating to the business or
technology of Sunbase, Southwest or any Related Entity, which would constitute a
violation of applicable law, will not, based solely on such refusal, constitute
"cause" as such term is used herein or otherwise be deemed a breach of this
Agreement.

          7.3    Dissolution of Southwest. Southwest or Sunbase can immediately
                 ------------------------
terminate this Agreement, and Employee's employment hereunder, if Southwest is
dissolved or ceases to conduct business for any reason whatsoever; provided,
however, that upon such termination Southwest shall pay Employee an amount equal
to twelve (months) of Employee's Base Salary, based on the amount of the Base
Salary at the time of such termination.

          7.4    Return of Property. If this Agreement is terminated for any
                 ------------------
reason, Southwest shall have the right to require Employee to vacate his offices
prior to the effective date of such termination and to cease all

                                       9
<PAGE>
 
activities on Southwest's and Sunbase's behalf.  Upon the termination of his
employment, Employee shall immediately surrender to Southwest all lists, books
and records relating to the business of Southwest, Sunbase and any Related
Entity and all other property belonging to Southwest, Sunbase or any Related
Entity, it being distinctly understood that all such lists, books and records,
and other documents are the property of Southwest, Sunbase or any Related
Entity.

          8.     General Relationship.  Employee shall be an employee of
                 --------------------                                   
Southwest within the meaning of all federal, state and local laws and
regulations including, but not limited to, laws and regulations governing
unemployment insurance, workers' compensation, industrial accident, labor and
taxes.

          9.     Miscellaneous.
                 ------------- 

          9.1    Modification; Prior Claims.  This Agreement sets forth
                 --------------------------                            
the entire understanding of the parties with respect to the subject matter
hereof, supersedes all existing agreements between them concerning such subject
matter, and may be modified only by a written instrument duly executed by each
party.  Employee hereby waives any claims that may exist on the date hereof
arising from his prior employment with Southwest, other than for compensation
payable or reimbursement of reasonable expenses, all as incurred in the ordinary
course of business.

          9.2    Assignment. The rights and obligations of Southwest under this
                 ----------
Agreement may, without the consent of Employee, be assigned by Southwest or
Sunbase (i) to any person, firm, corporation or other entity which, whether by
purchase, merger or otherwise, directly or indirectly, acquires or controls all
or substantially all of the assets or business of Southwest, or (ii) to any
Related Entity provided that the business of such assignee is related to the
manufacture, distribution or sale of bearing products. The rights and
obligations of Employee under this Agreement cannot be assigned.

          9.3    Third-Party Beneficiaries. Other than as expressly set forth in
                 -------------------------
this Agreement, this Agreement does not create and shall not be construed as
creating any rights enforceable by any person or entity not a party to this
Agreement .

          9.4    Waiver. The failure of either party hereto at any time to
                 ------
enforce performance by the other party of any provision of this Agreement shall
in no way affect such party's rights thereafter to enforce the same, nor

                                       10
<PAGE>
 
shall the waiver by either party of any breach of any provision hereof be deemed
to be a waiver by such party of any other breach of the same or any other
provision hereof.

          9.5    Section Headings. The headings of the sections in this
                 ----------------
Agreement are inserted solely for the convenience of the parties and are not a
part of, and are not intended to govern, limit or aid in the construction of any
term or provision hereof.

          9.6    Notices. All notices, requests and other communications
                 -------
hereunder shall be in writing and shall be delivered by courier or other means
of personal service, sent by telex or telecopy or mailed first class, postage
prepaid, by certified mail, return receipt requested, addressed as follows:

          Southwest:

                 Smith Acquisition Company
                 d/b/a Southwest Products Company
                 2240 Buena Vista Street
                 Irwindale, CA  91706
                 Facsimile:  (818) 303-6141
                 Attention:  William R. McKay

          Sunbase:

                 Sunbase Asia, Inc.
                 19/F, First Pacific Bank Centre
                 51-57 Gloucester Road
                 Wanchai, Hong Kong
                 Facsimile:  011-852-2865-4293
                 Attention:  Mr. Roger Li

          Employee:

                 William R. McKay
                 777 South Woodward Boulevard
                 Pasadena, CA  91107
                 Facsimile:  (818) 405-0189

All notices, requests and other communications shall be deemed given on the date
of actual receipt or delivery as evidenced by written receipt, acknowledgement
or other evidence of actual receipt or delivery to the address.  In case of
service by telecopy, a copy of such notice shall be personally delivered or sent
by registered or certified mail, in the manner set forth above, within three (3)
business days thereafter.  Any party hereto may from time to time by notice in
writing served as set forth above desig-

                                       11
<PAGE>
 
nate a different address or a different or additional person to which all such
notices or communications thereafter are to be given.

          10.    Severability. All sections, clauses and covenants contained in
                 ------------
this Agreement and portions thereof are severable, and in the event any of them
shall be held to be invalid by a court of competent jurisdiction, this Agreement
shall be interpreted as if such invalid sections, clauses or covenants or
portions thereof were not contained herein or, if appropriate or reasonable,
such court shall have the power to modify such section, clause or covenant or
portion thereof and, in its so modified form, such section, clause or covenant
shall then be deemed valid and enforceable.

          10.1   Governing Law and Venue. This Agreement shall be governed by
                 -----------------------
and construed in accordance with the laws of the State of California applicable
to contracts made and to be performed wholly within such State, and without
regard to the conflicts of laws principles thereof. Any suit brought hereon
shall be brought in the State or Federal courts located in the County of Los
Angeles, State of California, the parties hereto hereby waiving any claim or
defense that such forum is not convenient or proper. Each party hereto hereby
agrees that any such court shall have in personam jurisdiction over it and
consents to service of process in any manner authorized by California law.

          10.2   Attorneys' Fees. If any legal action, arbitration or other
                 ---------------
proceeding is brought for the enforcement of this Agreement, or because of any
alleged dispute, breach, default or misrepresentation in connection with this
Agreement, the successful or prevailing party shall be entitled to recover
reasonable attorneys' fees and other costs it incurs in such action or
proceeding, in addition to any other relief to which it may be entitled.

          10.3   Gender and Tense. Where the context so requires, the use of the
                 ----------------
masculine gender shall include the feminine and/or neuter genders and the
singular shall include the plural, and vice versa.

          10.4   Counterparts. This Agreement may be executed in one or more
                 ------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.

                                       12
<PAGE>
 
          10.5   Construction.  The rule of construction that any ambiguity in
                 ------------                                                 
an agreement be construed against such agreement's drafter shall apply to this
Agreement.

          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date hereinabove set forth.


Sunbase Asia, Inc.                           -----------------------------------
                                             William R. McKay


By:
   ----------------------------------
Name:
     --------------------------------
Title:
      -------------------------------

Smith Acquisition Company, Inc.
d/b/a Southwest Products Company


By:
   ----------------------------------
Name:
     --------------------------------
Title:
      -------------------------------

                                       13

<PAGE>
 
                                                                   EXHIBIT 10.22

                              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
<PAGE>
 
Affiliates under which the participants are entitled to acquire Stock (including
restricted Stock), stock 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.

                                       2
<PAGE>
 
     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
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.

                                       3
<PAGE>
 
     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 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.

                                       4
<PAGE>
 
          (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; 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

                                       5
<PAGE>
 
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.

     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.

                                       6
<PAGE>
 
          (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.

     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

                                       7
<PAGE>
 
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 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.

                                       8
<PAGE>
 
     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 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

                                       9
<PAGE>
 
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.

     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

                                      10
<PAGE>
 
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.

                                      11

<TABLE> <S> <C>

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
       
<S>                             <C>
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1995
<PERIOD-START>                             JAN-01-1995
<PERIOD-END>                               DEC-31-1995
<CASH>                                           3,719
<SECURITIES>                                         0
<RECEIVABLES>                                   31,753
<ALLOWANCES>                                         0
<INVENTORY>                                     57,331
<CURRENT-ASSETS>                               124,110
<PP&E>                                          66,597
<DEPRECIATION>                                       0
<TOTAL-ASSETS>                                 194,520
<CURRENT-LIABILITIES>                           87,298
<BONDS>                                              0
                                0
                                      8,752
<COMMON>                                            12
<OTHER-SE>                                      30,967
<TOTAL-LIABILITY-AND-EQUITY>                   194,520
<SALES>                                         80,812
<TOTAL-REVENUES>                                80,812
<CGS>                                           45,838
<TOTAL-COSTS>                                   59,420
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                               5,822
<INCOME-PRETAX>                                 15,570
<INCOME-TAX>                                     2,461
<INCOME-CONTINUING>                             13,109
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     6,502
<EPS-PRIMARY>                                        0
<EPS-DILUTED>                                     0.42
        

</TABLE>


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