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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURI-
TIES EXCHANGE ACT OF 1934
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 [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant computed by reference to the closing sales price as reported on
the OTC Electronic Bulletin Board on May 19, 1999 was approximately $194,557.
As of May 19, 1999, there were outstanding 14,118,751 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and the
Securities Exchange Act of 1934. Forward-looking statements are typically
identified by words such as "believe," "expect," "anticipate," "intend,"
"estimate" and similar expressions, and include, among others, statements
concerning the Company's strategy, its liquidity and capital resources, its debt
levels, its ability to obtain financing and service debt, competitive pressures
and trends in the PRC bearing industry, prevailing levels of interest and
foreign exchange rates, legal proceedings and regulatory matters, general
economic conditions in the PRC and elsewhere, and costs and risks associated
with Year 2000 issues. Forward-looking statements involve a number of risks
and uncertainties, many of which are beyond our control. Actual results of the
Company could differ materially from those statements. Factors ("cautionary
statements") that could cause or contribute to such differences include, but are
not limited to, those factors discussed under the heading "FACTORS THAT MAY
AFFECT FUTURE RESULTS" in ITEM 7 and elsewhere in this Annual Report. In light
of these risks and uncertainties, there can be no assurance that the results and
events contemplated by the forward-looking information contained in this Annual
Report will in fact transpire and therefore undue reliance should not be placed
on these forward-looking statements. All subsequent written or oral forward-
looking statements attributed to the Company or persons acting on its behalf are
expressly qualified in their entirety by these cautionary statements.
The Company publishes its financial statements in both Renminbi ("RMB") and
U.S. dollars. For convenience, this Annual Report contains translations of
certain RMB amounts into U.S. dollars. You should not construe any such
translations as representations that the RMB amounts actually represent U.S.
dollar amounts or could be converted into U.S. dollars at the exchange rates
assumed. The financial statements have been prepared in accordance with
generally accepted accounting principles in the U.S.
THE COMPANY
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.
Through various subsidiaries and joint venture interests, the Company owns
51.43% of Harbin Bearing Company Ltd. ("Harbin Bearing"), which is located in
the People's Republic of China ("China" or the "PRC"). Harbin Bearing
manufactures and distributes a wide variety of precision and commercial-grade
rolling element bearings in sizes ranging from 10 mm to 1,000 mm (internal
diameter) primarily for use in commercial, industrial and aerospace
applications. Rolling-element bearings use small metal balls or cylinders to
facilitate rotation with minimal friction and are typically used in vehicles,
aircraft, appliances, machine tools, and virtually any product that contains
rotating or revolving parts. Precision bearings are bearings that are produced
to more exacting dimensional tolerances and to higher performance
characteristics than standard commercial bearings. The manufacturing process
for precision bearings generally requires the labor of highly skilled mechanics
and the use of sophisticated machine tools. Harbin Bearing sells its bearings
primarily in China and in certain western countries, including the United
States. Harbin Bearing has been in business since 1950, has approximately
11,750 employees and operates out of facilities occupying in excess of two
million square feet.
In January 1996, the Company acquired Smith Acquisition Company, Inc.
d/b/a Southwest Products Company ("Southwest Products"), a bearing manufacturing
company located in Los Angeles, California, that has been in business since
1945. Southwest Products is an engineering-intensive company that designs and
manufactures high-precision plain spherical bearings, rod-end bearings, bushings
and push-pull controls for U.S., European and Asian aerospace and high
technology commercial applications and the U.S. military. Spherical bearings
are "ball and socket" mechanisms that allow for motion in three dimensions and
which move loads from one plane to another. For flight critical applications, a
spherical bearing must have extremely precise tolerances and it must be able to
endure heavy loads without failure.
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As a result of the acquisition of Southwest Products, the Committee on
Foreign Investment in the United States ("CFIUS"), an inter-agency committee of
the United States Government, began an investigation of the Company to determine
if the ownership of Southwest Products by the Company would pose any threat to
the national security interests of the United States. In December 1998, the
Company voluntarily agreed to divest Southwest Products and, pending such
disposition, placed its ownership interest in Southwest Products into an
irrevocable trust. An independent trustee acceptable to the U.S. Department of
Defense was appointed to oversee the operations of Southwest Products to insure
Southwest Product's compliance with all U.S. laws and regulations and to work
with the Company's Board of Directors to actively pursue a suitable buyer. In
light of the Company's decision to appoint a trustee pending the sale of
Southwest Products, the CFIUS investigation was terminated.
At the time of creation of the trust, all "foreign persons" within the
meaning of 31 C.F.R. (S)800.213 who were serving as officers and/or directors of
Southwest Products tendered their resignations. In addition, in order to
further implement the separation of the Company and Southwest Products, CFIUS
required as part of its agreements that William McKay no longer serve as an
officer and director of the Company. On May 6, 1999, William McKay was removed
as a director by the Company's majority shareholder and as President and Chief
Executive Officer of the Company by the Company's board of directors. Gunter
Gao was named as the replacement President and Chief Executive Officer of the
Company. Due to the creation of the trust, since December 31, 1998, except under
very limited circumstances, the Company can not exercise any control or
influence over the business or management of Southwest Products and has no
access to visit or obtain information from Southwest Products without prior
trustee approval. As a result, the Company lost its control over Southwest
Products since December 31, 1998 and all information contained in this Annual
Report with respect to Southwest Products subsequent to December 31, 1998 has
been obtained through the trustee and the Company can not verify the accuracy or
completeness of the information for the period subsequent to December 31, 1998.
In acquiring Southwest Products, the Company expected to benefit from its
technical and marketing capabilities, including leveraging such capabilities to
improve the competitive position of Harbin Bearing in China and internationally.
However, under the terms of the trust into which the Company deposited its
ownership interest in Southwest Products, the Company is not permitted access to
these capabilities, which has had a significant impact on the Company's growth
plans. The Company is currently reevaluating its business strategy, which may
involve restructuring to reduce operating expenses, seeking an alliance with a
strategic partner, reorganizing the Company's operations and/or divesting the
Company's bearing manufacturing assets in China to diversify into other lines of
business. In this regard, the Company is considering the retention of an
investment banking firm to assist in the development and evaluation of future
strategic initiatives. See ITEM 7, "FACTORS THAT MAY AFFECT FUTURE RESULTS."
ORGANIZATION OF THE COMPANY
Harbin Bearing was the successor to the manufacturing operations of Harbin
Bearing General Factory (the "Bearing Factory"), a Chinese state-owned
enterprise established in 1950. Harbin Bearing was formed in 1993 as a joint
stock limited company. Pursuant to an agreement between the Bearing Factory and
Harbin Bearing, the bearing manufacturing and sales business, together with
certain assets and liabilities of the Bearing Factory were transferred to Harbin
Bearing (the "Restructuring"). Certain other assets and liabilities were
transferred to Harbin Precision Machinery Manufacturing Company ("Harbin
Precision") and certain ancillary operations were transferred to Harbin Bearing
Holdings Company ("Harbin Holdings"). Harbin Holdings and Harbin Precision are
affiliates of the Harbin Municipal Government.
As part of the Restructuring, Sunbase International (Holdings) Ltd.
("Sunbase International"), a Hong Kong corporation, through a series of
affiliated entities, acquired a 51.43% ownership interest in Harbin Bearing.
Substantially all of the remaining interests in Harbin Bearing were and continue
to be owned by employees of Harbin Bearing (approximately 15%) and by Harbin
Holdings (approximately 33.43%).
In December 1994, the Company (which was then called Pan American
Industries, Inc.) acquired a 51.43% effective interest in Harbin Bearing by
issuing to Asean Capital Limited ("Asean Capital"), a wholly-owned subsidiary of
Sunbase International, newly issued shares representing a controlling interest
in the Company. See ITEM 13, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
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The following diagram shows the corporate structure of the Company and its
affiliated companies as of December 31, 1998:
[DIAGRAM APPEARS HERE]
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(1) In August 1996, China Bearing Holdings Limited ("China Bearings") issued
U.S. $11.5 million aggregate principal amount of convertible debentures
(the "Convertible Debentures"), which were convertible at the option of the
holder into shares of Common Stock of the Company. As described in more
detail under "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES" in Item 7, in
October 1998, the Convertible Debentures were restructured as a loan with
an aggregate principal amount of U.S.$13.2 million bearing interest at a
rate of 10% per annum and maturing over a period of three years ending in
July 2000. As part of the Restructuring, the Company also issued 466,667
shares of its Common Stock to the holders of the Convertible Debentures.
(2) In response to the CFIUS investigation, the Company has voluntarily agreed
to divest its interest in this company and, pending such disposition,
placed its ownership interest into an irrevocable trust over which the
Company may not exert any influence or control.
(3) 0.1% of Harbin Xinhengli Development Company Limited is held by Harbin
Everising Construction and Development Limited, which is related to Sunbase
International. 1.0% of Harbin Sunbase Development Company Limited is held
by a local PRC partner.
(4) The remaining 48.43% of this company is owned by its employees and by
Harbin Holdings.
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HARBIN BEARING
Harbin Bearing specializes in the manufacture of precision bearings and can
manufacture more than 5,000 of the approximately 6,000 different specifications
of bearings that are available in China 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 1997
and 1998, deep-groove bearings comprised approximately 57.8% and 57.2%,
respectively, of Harbin Bearing's sales revenue.
Sales and Marketing
Harbin Bearing primarily sells its products in China and to a lesser
extent, in western countries such as the U.S. The major end-users of Harbin
Bearing's products are manufacturers of electrical machinery, machine tools,
mining and extraction machinery, automobiles, motorcycles, household appliances
and aircraft and aerospace equipment. However, because of stringent
qualifications such as ISO 9000 certification required by many end-users outside
of the PRC, Harbin Bearing's access to these markets has been impeded. The
Company had hoped that its acquisition of Southwest Products would enhance
Harbin Bearing's ability to access these markets, but with the Company's
decision to voluntary divest its interest, the Company is currently evaluating
alternative strategies. SEE ITEM 7, "FACTORS THAT MAY AFFECT FUTURE RESULTS."
In 1998, approximately 36% of Harbin Bearing's sales were made to original
equipment manufacturers ("OEMs") in the machinery, transportation, electrical
equipment industries and miscellaneous categories representing, respectively,
approximately 58%, 10% 31% and 1% of its total sales to OEMs. In 1997,
approximately 30% of Harbin Bearing's sales were made to OEMs in these
industries representing, respectively, approximately 50%, 7%, 30% and 13% of its
total sales to OEMs. The remaining sales in 1998 were made to local
distributors and overseas agents.
Sales to related parties accounted for RMB 38,886,000 (or 8.1%) in 1998 and
RMB 171,373,000 (or 24.6%) in 1997. These sales were made to Harbin Bearings
Import and Export Company and Xin Dadi Mechanical and Electrical Equipment
Company, both of which are owned by the Harbin Municipal Government.
Harbin Bearing has 11 sales offices in major cities in China, including
Beijing, Shanghai and Guangzhou , all of which were strategically located to
increase market share and widen the channel of sales. All sales are coordinated
through Harbin Bearing's headquarters in Harbin, including sales to local
distributors, overseas agents, and PRC import and export companies. As of
December 31, 1998, Harbin Bearing had 118 sales personnel and 230 support
personnel who are responsible for product promotion, marketing, after-sales
services and technical support. Harbin Bearing sells its bearings in China and
abroad under the "HRB" trademark.
Harbin Bearing delivers its bearings by rail, truck, ocean freight and
airfreight. Deliveries by truck have been increasing due to improved highway
networks and conditions in the PRC. This substantially shortens delivery time
over delivery by rail. Harbin Bearing leases its trucks from its affiliate,
Harbin Precision Machinery Manufacturing Company, which are used mostly for
short-haul deliveries. See ITEM 13, "CERTAIN RELATIONSHIPS AND TRANSACTIONS."
In addition, railroad tracks leading directly to two of Harbin Bearing's raw
material warehouses are used exclusively to transport raw materials, such as
bearing steel, reducing raw material freight costs.
Due to the adverse market conditions in the PRC which resulted from the
general financial turmoil in Asia during 1997 and 1998, Harbin Bearing has
further enhanced its credit review procedures and has been more conservative in
extending credit to customers in an effort to mitigate against difficulties in
collecting receivables. See ITEM 7, "FACTORS THAT MAY AFFECT FUTURE RESULTS."
Manufacturing/Engineering/New Product Development
In the face of greater competition in the bearing industry, Harbin Bearing
has been endeavoring to improve productivity and quality so as to control and
reduce manufacturing cost in order to become more competitive. One of Harbin
Bearing's goals is to manufacture OEM products with the quality required for the
U.S. aerospace and automotive markets. However, the original schedule to
implement system improvements designed to meet various worldwide
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recognizable manufacturing standards such as ISO 9000 has been indefinitely
extended due to the Company's divestiture of Southwest Products. The Company
intends in the near term to focus on maintaining its position in the
PRC market. See ITEM 7, "FACTORS THAT MAY AFFECT FUTURE RESULTS."
Workforce
As of December 31, 1998, Harbin Bearing employed approximately 11,750 full-
time personnel in the following areas: executive and administrative (458),
sales and service (506), manufacturing and production (10,670), and research and
development (116). Management believes that, in general, its relationship with
the employees is good. The Harbin Municipal Government has promulgated
regulations which provide for the establishment of a pension fund program to
which both employer and employees must contribute. Under these regulations,
Harbin Bearing is required to contribute monthly to this fund an amount
equivalent to 22% of its employees' aggregate monthly income.
All of the employees of Harbin Bearing are members of a trade union. To
date, Harbin Bearing has not been subject to any strikes or other significant
labor disputes and is not a party to any collective bargaining agreements.
Harbin Bearing presently recruits graduates of the Harbin Bearing Technical
Institute and universities all over China and provides ongoing training for its
management and production employees in the form of a series of training
seminars.
SOUTHWEST PRODUCTS
Southwest Products 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, aviation, military and
high tech commercial applications. 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.
The Company believes that Southwest Products is respected worldwide for its
ability to engineer and produce precision bearings, which are used in the Space
Shuttle, commercial jet aircraft, military aircraft (including the B-2 Stealth
Bomber, F-117 Stealthfighter, F-15, F-16, F-18 and C-17), submarines, (Los
Angeles Class, Seawolf and Centurion), and nuclear power plants. Southwest
Products' customers include Northrop Grumman, Lockheed Martin, NASA, all U.S.
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 employs 63 full-time personnel in the following areas:
executive and administrative (5); sales and marketing (5); manufacturing (40)
and engineering, research and development (13). The average length of employee
tenure at Southwest Products is in excess of ten years.
In response to the CFIUS investigation, in December 1998, the Company
voluntary agreed to divest its interest in Southwest Products and, pending such
divestiture, placed its ownership interest into an irrevocable trust. Pursuant
to a voting trust agreement (the "Voting Trust Agreement"), the trustee, who has
no relationship with the Company, has full and absolute discretion to vote the
shares held by the Company in Southwest Products and to manage and operate
Southwest Products as he sees fit based on his own independent judgment, except
for certain actions relating to a significant sale or encumbrance of the assets
of Southwest Products or any merger, consolidation, reorganization or
dissolution of Southwest Products or the filing of any petition for bankruptcy.
Except in these instances, the Company can not exercise any control or influence
over the business or management of Southwest Products. All visits to or
requests for information from Southwest by the Company must be submitted to the
trustee in advance and receive the trustee's approval.
The trustee has also agreed to use best efforts to effect a sale of
Southwest Products on terms and conditions acceptable to the Company. In that
regard, the trustee has retained a U.S.-based investment banking firm to serve
as
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financial advisor to Southwest Products with respect to the sale of its stock or
all or substantially all of its assets. Until such divestiture, the trustee is
relying upon the legal advice of Southwest Products' special legal counsel on
International Traffic in Arms Regulations ("ITAR") to ensure that Southwest
Products complies with all relevant U.S. laws, including those laws relating to
export controls. The Company and Southwest Products have jointly and severally
indemnified the trustee from any and all claims arising from or in any way
connected to his performance as a trustee, officer or director of Southwest
Products except for his own gross negligence or willful misconduct.
Sales and Marketing
In 1998, sales to various military and commercial buyers in the aerospace
industry accounted for approximately 90% of Southwest Product's total sales. The
balance of its sales were to various military and commercial buyers outside the
aerospace industry. During 1998, Southwest marketed its products primarily
through cold-calls and on-the-road sales activities conducted by its five sales
managers.
Proprietary Technology
Southwest Products manufactures both metal-on-metal bearings and self-
lubricating bearings, based on designs developed by Southwest Products and OEM
specifications. Self-lubricating bearings are lined with either Dyflon or
Kentlon, which are both proprietary liner systems developed by Southwest
Products. Kentlon is qualified by the U.S. 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 that is moldable and machinable 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," it has chosen not to patent its various technologies to
avoid the specific formula and methods for manufacturing Dyflon and Kentlon
becoming a matter of public record.
RAW MATERIALS
The principal raw materials used to manufacture bearings are carbon steel
and stainless steel rod, wire and tubing. These steels are specialized alloys
designed for hardness, durability and resistance to rust. A small amount of
copper and aluminum tubing and rods are also used to produce seals, cages and
other ancillary bearing components. The Company sources most of the bearing
steel required for Harbin Bearing directly from four domestic mills located in
Heilongjiang Province, Liaoning Province and Shanghai.
The Company believes that its sources of bearing steel are stable and,
consistent with industry practice in China, has not entered into any long-term
supply contracts for bearing steel. Harbin Bearing generally maintains a raw
material inventory sufficient for more than 45 days of production. In
addition, railroad tracks leading directly to two of Harbin Bearing's raw
material warehouses are used exclusively to transport raw materials, such as
bearing steel, reducing raw material freight costs.
COMPETITION
The Company's main competitors can be categorized into three principal
groups: (i) a few very large national PRC bearing manufacturers offering a wide
range of products; (ii) small local Chinese bearing production facilities that
compete on a local basis by manufacturing small-sized, commodity-type bearings;
and (iii) non-Chinese bearing manufacturers. Competition is principally based
upon pricing considerations.
Competition in the PRC
The Company believes that there are five major PRC bearing manufacturers:
Wafangdian Bearing Company Limited, Luoyang Bearing Group, Northwest Bearing
Joint Stock Company, Xiangyang Bearing Joint Stock Company
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and the Company's majority-owned subsidiary, Harbin Bearing. The balance of the
PRC bearing industry is fragmented, comprised of a larger number of smaller
bearing companies producing mostly lower grade bearings often on a local basis
for use mostly as replacement bearings in the electrical appliance and
agricultural equipment industries.
Due to lower levels of capital expenditures, greater labor intensive
production processes and the relative lack of operational skills and training,
PRC bearing manufacturers are often unable to produce bearings of as high
precision, consistency and durability as those produced by the leading
multinational manufacturers. As a result, companies in China import precision
bearings and other special bearings with high technical contents and high added
value. This has led the PRC authorities to encourage foreign investment in
higher grade bearing manufacturers and to demand a halt to approvals of foreign
investment supporting the production of lower grade bearings.
Bearings imported into the PRC are currently subjected to import tariffs
ranging from 10% to 17%. If , however, the PRC becomes a part of the World
Trade Organization, the import tariff could be phased out, potentially
increasing competition from foreign manufacturers.
The potential for growth in the PRC bearing industry is substantially
dependent upon the performance of the PRC industrial sector and the economy in
general. Since 1978, China has been pursuing economic reform policies in an
effort to improve its industrial sector and revitalize its economy.
Nevertheless, due to the recent financial crises in Asia, the central PRC
government has implemented various policies to minimize the adverse effects upon
the PRC economy. Such policies include closer supervision of the PRC banking
system and tighter control over capital expenditures by PRC enterprises. Such
policies also include resistance to devaluation of the RMB, leading to less
competitive export pricing and thus an oversupply of bearings in the PRC
domestic market (although similar effects on products, equipment and machinery
produced in the PRC requiring bearings may act to increase domestic demand for
bearings). These policies have indirectly resulted in greater competition due to
this oversupply and are expected to continue to have a significant adverse
impact on the performance of PRC bearing manufacturers, including the Company.
Competition in International Markets
The international bearing industry is extremely competitive. Although the
Company's main competitors are Eastern European manufacturers and manufacturers
located in China, to a lesser extent, the Company also competes with companies
such as Svenska Kugellager Fabriken, Fisher Aktien Gesellschast, New Technology
Network, NSK, Timken, Torrington-Fafnir and Nippon Miniature Bearing, who
dominate this market. The Company had hoped that its acquisition of Southwest
Products would not only allow it to access the U.S. bearing market, but also
allow it to implement U.S. manufacturing methods and quality control procedures
at Harbin Bearing to develop new products and meet the stringent requirements of
many non-PRC OEMs. By doing so, the Company expected to increase its penetration
of the international bearing market. As a result of the Company's decision to
dispose of Southwest Products in response to the CFIUS investigation, however,
the Company is currently reevaluating its business strategy, which may involve
restructuring to reduce operating expenses, seeking an alliance with a strategic
partner, reorganizing the Company's operations and/or divesting its bearing
manufacturing assets in China to diversify into other lines of business. See
ITEM 7, "FACTORS THAT MAY AFFECT FUTURE RESULTS."
OPERATING IN CHINA
Because the production operations of the Company are based to a substantial
extent in China, the Company is subject to rules and restrictions governing
China's legal and economic system as well as general economic and political
conditions in the country. These include the following:
Political and Economic Matters. Under its current leadership, the Chinese
government has been pursuing economic reform policies, which include the
encouragement of private economic activity and greater economic
decentralization. There can be no assurance, 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 devaluation or the expropriation of
private enterprises 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 development may be limited by the imposition of austerity
measures intended to reduce
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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 control inflation. In 1995,
China's overall inflation rate (retail price index) was approximately 15%,
compared to approximately 21% in 1994 and 13% in 1993. However, after the
implementation of strict monetary policies, the inflation rates were
approximately 6%, 8% and minus 2.6% in 1996, 1997 and 1998, respectively. High
inflation has in the past and may in the future cause the PRC government to
impose controls on prices, or to take other actions which could inhibit economic
activity in China, which in turn could affect demand for the Company's products.
In view of the change in market conditions and greater competition, Harbin
Bearing may unable to increase its selling prices to shift a portion of its
inflated costs to its customers. The price of bearing steel, the major raw
material used by the Company, remained fairly stable from 1994 to 1998 in China
and the only major impact of inflation on the Company's costs in its Chinese
operations was on the cost of labor (due to the rising level of compensation of
Harbin Bearing's employees).
Foreign Exchange Control and Exchange Rate Risks. Prior to January 1, 1994
the PRC had two exchange rates: the Official Rate and the Swap Centre Rate. On
January 1, 1994 this dual foreign exchange system was abolished. The control on
the purchase of foreign exchange is being relaxed. Pursuant to the PRC Foreign
Exchange Control Regulations which came into effect on April 1, 1996,
enterprises which require foreign exchange for current account transactions
(such as trading activities) may purchase foreign exchange from designated banks
subject to production of relevant supporting documents. The Administrative
Regulations on the Settlement, Sale and Payment of Foreign Exchange, which came
into force on July 1, 1996, set out the procedures for the purchase, sale and
settlement of foreign exchange for current account transactions. In addition,
these Regulations provide that foreign exchange required for the payment of
dividends that are payable in foreign currencies under applicable regulations
may be purchased from designated foreign exchange banks subject to the payment
of taxes on such dividends and upon presentation of board resolutions
authorizing the distribution of profits or dividends of the company concerned.
Despite the relaxation of foreign exchange control over current account
transactions, the approval of the State Administration for Foreign Exchange
("SAFE") is still required before a PRC enterprise may borrow in a foreign
currency, provide any foreign exchange guarantee, make any investment outside
the PRC or enter into any other capital account transaction which involves the
purchase of foreign exchange. In general, all organizations and individuals
within the PRC, including foreign investment enterprises ("FIEs"), are required
to sell their foreign exchange earnings to designated banks in the PRC. FIEs,
however, are permitted to retain a certain percentage of their foreign exchange
earnings and the sums retained may be deposited into foreign exchange bank
accounts maintained with designated banks.
Despite the relaxation of foreign exchange control over current account
transactions, RMB remains a currency which is not freely convertible into other
currencies. There can be no assurance that shortages of foreign currency at the
swap centers or designated banks will not restrict the Company's ability to
obtain sufficient foreign currency to pay dividends to the shareholders of the
Company or to meet other foreign currency requirements or that the RMB will not
be subject to further devaluation were the Company otherwise able to pay such
dividends. Currently, the Company is unable to hedge its U.S. Dollar-RMB
exchange rate
9
<PAGE>
exposure in China because no financial institutions are authorized to engage in
foreign currency transactions offering forward exchange contracts with respect
to the RMB.
ITEM 2. PROPERTIES
The Company leases the office space for its Hong Kong headquarters from
Sunbase International.
HARBIN BEARING
Harbin Bearing operates twelve finished product plants and thirteen
auxiliary plants. With the exception of a newly relocated finished product
plant in Daowaiqu of Limin Trade Development Zone, all of the Company's plants
are located in four plant compounds in Harbin.
The Harbin branch of the Office of the State Asset Administration Bureau
has granted Harbin Holdings the right to use the properties where Harbin
Bearing's production and other facilities are located. The site is
approximately 540,000 square meters of which production facilities occupy
approximately 290,000 square meters. Harbin Holdings has entered into a lease
agreement with the Company for use of its buildings for five years commencing
January 1, 1994. Although this lease expired on December 31, 1998, Harbin
Bearing is currently still using the premises and is in process of negotiating
a renewal of this lease agreement. See ITEM 13, "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
SOUTHWEST PRODUCTS
Southwest Products leases a 5,110 square meter facility in Irwindale,
California pursuant to a short-term lease agreement which expires December 31,
1999 at a monthly rent of $22,000. Upon its expiration, Southwest Products may
be required to relocate its operations to another premises. The cost of
relocation, if necessary, is estimated to be approximately $1,000,000.
ITEM 3. LEGAL PROCEEDINGS
Foreign Investment Matters
After the acquisition of Southwest Products by the Company, CFIUS began a
review of such acquisition to determine if the ownership of Southwest Products
by the Company would pose a potential threat to the national security interests
of the United States.
In response to the CFIUS investigation, in December 1998, the Company
voluntarily agreed to divest its interest in Southwest Products and, pending
such divestiture, placed its ownership interest into an irrevocable trust.
Pursuant to the Voting Trust Agreement, the trustee, who has no relationship
with the Company, has full and absolute discretion to vote the shares held by
the Company in Southwest Products and to manage and operate Southwest Products
as he sees fit based on his own independent judgment, except for certain actions
relating to a significant sale or encumbrance of the assets of Southwest
Products or any merger, consolidation, reorganization or dissolution of
Southwest Products or the filing of any petition for bankruptcy. Except in these
instances, the Company can not exercise any control or influence over the
business or management of Southwest Products. All visits to or requests for
information from Southwest by the Company must be submitted to the trustee in
advance and receive the trustee's approval.
The trustee has also agreed to use best efforts to effect a sale of
Southwest Products on terms and conditions acceptable to the Company. In that
regard, the trustee has retained a U.S.-based investment banking firm to serve
as financial advisor to Southwest Products with respect to the sale of its stock
or all or substantially all of its assets. Until such divestiture, the trustee
is relying upon the legal advice of Southwest Products' special legal counsel on
ITAR to ensure that Southwest Products complies with all relevant U.S. laws,
including those laws relating to export controls. The Company and Southwest
Products have jointly and severally indemnified the trustee from any and all
claims arising
10
<PAGE>
from or in any way connected to his performance as a trustee, officer or
director of Southwest Products except for his own gross negligence or willful
misconduct.
At the time of creation of the trust, all "foreign persons" within the
meaning of 31 C.F.R. (S)800.213 who were serving as officers and/or directors of
Southwest Products tendered their resignations. In addition, in order to
further implement the separation of the Company and Southwest Products, CFIUS
required, as part of its agreement to allow the withdrawal of the Company's
voluntary notice, that William McKay no longer serve as an officer and director
of the Company. On May 6, 1999, William McKay was removed as a director by the
Company's majority shareholder and as President and Chief Executive Officer of
the Company by the Company's board of directors. Gunther Gao was named as the
replacement President and Chief Executive Officer of the Company. Except under
very limited circumstances, the Company can not exercise any control or
influence over the business or management of Southwest Products and has no
access to visit or obtain information from Southwest Products without prior
trustee approval.
The Company is currently determining if any claims may be brought by the
Company against any party involved in its acquisition of Southwest Products as a
result of the CFIUS investigation. However, no assurance can be given that any
such claims by the Company would fully reimburse it for any loss it might
realize as a result of the divestiture of Southwest Products.
ITAR Regulations
In December 1997, Southwest Products registered with the Office of Defense
Trade Controls of the Department of State ("DTC") as a manufacturer of defense
articles subject to regulation under ITAR. Southwest Products had not
previously been registered with DTC, although it appears that such registration
was required. Southwest Products subsequently reviewed its export history and
the classification of its exported products under ITAR. In November 1998, the
Company submitted a report to DTC (and subsequently in 1999, Southwest Products
submitted reports to DTC) on Southwest Products' export transactions for the
previous five years to enable DTC to determine whether any inadvertent
violations, in fact, occurred. Southwest Products is continuing to work with DTC
on product classification and licensing issues and believes that it is now
exporting in compliance with the ITAR.
At this time, no proceedings related to any potential violations by
Southwest Products of the ITAR have been instituted or threatened. While
violations of the ITAR can result in a variety of civil or criminal penalties,
the Company believes that if such proceedings were instituted, any sanctions
that might be imposed would take into account the inadvertent nature of any such
violations by Southwest Products as well as the Company's cooperation in
providing information to DTC. However, no assurances can be given as to the
outcome should DTC elect to initiate such proceedings in the future.
Other
In addition to those disclosed above, the Company may from time to time be
party to various litigation matters which are incidental to its business. The
Company's management does not expect the outcome of any such proceedings to have
a material adverse effect on its financial condition, results of operations or
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of 1998 to a vote
of security holders nor was there any solicitation of proxies.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock began trading on the Nasdaq National Market
("Nasdaq") under the symbol "ASIA" on February 9, 1996. On January 30, 1998 the
Company changed its symbol to "SNBS."
The following tables set forth the high and low sales prices of the
Company's Common Stock on Nasdaq. Such prices reflect prices between dealers in
securities and do not include any retail markup, markdown or commission and may
not necessarily represent actual transactions.
Fiscal 1997 High Low
- ----------- ---- ---
Quarter Ended March 31, 1997 5-1/2 4
bQuarter Ended June 30, 1997 6-1/2 3-3/4
Quarter Ended September 30, 1997 6-1/2 3-3/8
Quarter Ended December 31, 1997 3-7/8 2-1/2
Fiscal 1998 High Low
- ----------- ---- ---
Quarter Ended March 31, 1998 4-3/8 2
Quarter Ended June 30, 1998 2-7/8 0-3/8
Quarter Ended September 30, 1998 1-1/8 0-1/4
Quarter Ended December 31, 1998 1-1/4 0-1/4
In November 1998, the Company received notice from Nasdaq of the Company's
failure to meet the minimum acceptable level of a US$5 million market value of
its public float and for its failure to meet the minimum continuing closing
price of US$1.00. The Company requested a hearing with Nasdaq to review the
potential delisting of the Company's Common Stock. A Nasdaq panel held a hearing
and decided to delist the Company's Common Stock from Nasdaq effective at the
close of business on February 10, 1999. After such delisting, the Company's
Common Stock traded on the OTC Electronic Bulletin Board (the "Bulletin Board").
From January 1, 1999 through February 10, 1999, the high and low sales prices
of the Company's Common Stock as reported by Nasdaq were 13/32 and 1/8,
respectively. From February 11, 1999 through May 19, 1999, the high and the low
closing prices of the Company's Common Stock as quoted on the Bulletin Board
were 1/4 and 1/32, respectively. Since May 20, 1999 the Company's Common Stock
has not been trading on the Bulletin Board because there are no market makers
making a market in the Common Stock and the Company is not current with its
public information requirements. The Company is making efforts to become current
in its public information requirements but no assurance can be given as to when
trading in the Company's Common Stock on the Bulletin Board will resume.
As of May 19, 1999, there were 137 holders of record of the Common Stock
not including the three holders of the Company's Series B Preferred Stock, which
was automatically converted into Common Stock by its terms on January 19, 1998,
although the holders had not, as of May 19, 1999, surrendered their certificates
for conversion.
The Company has paid no cash dividends on its Common Stock and has no
present intention of paying cash dividends in the foreseeable future. Pursuant
to the Settlement Agreement with respect to the Company's Convertible Debenture,
no dividend payments can be made on any Common Stock without the prior written
consent of the holders of the Convertible Debentures. It is the present policy
of the Board of Directors to retain all earnings to provide for the growth of
the Company. Payment of cash dividends in the future will depend upon, among
other things, future cash flow and requirements for capital improvements.
12
<PAGE>
Applicable Chinese laws and regulations provide that a joint stock company
(such as Harbin Bearing) can not distribute its after-tax earnings and profits
made in a fiscal year unless the losses of the previous years have been made up
and certain funds retained. A joint stock company is required by applicable
Company Law to reserve 10% of its after-tax earnings and profits as the
mandatory retained fund and 5% of its after-tax earnings and profits as the
public welfare fund. The joint stock company does not have to reserve for the
mandatory retained fund if the amount of such fund has reached 50% of the
company's registered capital. For 1998, Harbin Bearing contributed 10% and 5%,
respectively, of after-tax profits as determined under Chinese accounting
principles for such purposes. Distribution of dividends by Harbin Bearing to its
shareholders are required to be in proportion to each shareholder's percentage
interest in Harbin Bearing. In addition, distribution of dividends by Harbin
Bearing will be paid to its shareholders of record, which include the joint
venture partners. Applicable Chinese laws and regulations require that, before
a Sino-foreign equity joint venture (such as the joint venture partners)
distributes dividends, it must: (1) satisfy all tax liabilities; (2) provide for
losses in previous years; and (3) make allocations of capital to its official
surplus accumulation fund and public welfare fund. The Company indirectly owns
99% and 99.9% of the two joint venture partners and, therefore, approximately
1.1% of distributions received by such partners will be paid to the Chinese
parties of these joint ventures.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical financial data
(expressed in thousands) are derived from and should be read in conjunction with
the audited financial statements of the Company as of December 31, 1997 and 1998
and for the years ended December 31, 1996, 1997 and 1998 included elsewhere in
this Annual Report on Form 10-K and the Company's audited financial statements
as of December 31, 1994, 1995 and 1996 and for the years ended December 1994 and
1995 which are not included in this Annual Report on Form 10-K. All U.S. dollar
amounts have been converted from RMB based on the exchange rate on December 31,
1998 of U.S. $1.00 to each RMB 8.3 as quoted at the People's Bank of China. The
report of Ernst & Young contains an explanatory paragraph relating to the
Company's ability to continue as a going concern as described in Note 2 to such
financial statements.
13
<PAGE>
OPERATING DATA
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1998
---------- ---------- ---------- ---------- ---------- ----------
RMB RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C> <C>
Net sales................................. 719,842 672,359 854,066 697,175 475,310 57,266
Cost of sales............................. (441,854) (380,279) (520,804) (479,089) (362,925) (43,726)
Provisions on inventories................. - (1,098) (1,000) (30,600) (100,600) (12,120)
Gross profit.............................. 277,988 290,982 332,262 187,486 11,785 1,420
Selling, general and administrative
expense............................... (95,218) (110,375) (99,829) (76,901) (82,533) (9,944)
Interest expense, net..................... (42,721) (48,446) (54,134) (67,195) (66,644) (8,029)
Reorganization expenses................... (7,307) - - - - -
Provisions on accounts receivable......... - (2,627) (3,998) (16,262) (31,961) (3,850)
Provisions an other receivables........... - - - - (12,404) (1,494)
Provisions on balance due from
related companies....................... - - - - (49,000) (5,904)
Write-off of the deposit with a
financial institution................... - - - - (23,750) (2,861)
Other income.............................. - - 16,640 - - -
Income before income taxes................ 132,742 129,534 190,941 27,128 (254,507) (30,662)
Provision for income taxes................ (22,687) (20,472) (27,792) (7,584) - -
Income before minority interests.......... 110,055 109,062 163,149 19,544 (254,507) (30,662)
Minority interests........................ (58,447) (54,967) (77,342) (21,006) 111,081 13,383
Net income/(loss) from continuing
operations.............................. 51,608 54,095 85,807 (1,462) (143,426) (17,279)
Net income/(loss) from
discontinued operations................. - - (9,273) (2,722) (2,958) (357)
Net income/(loss)......................... 51,608 54,095 76,534 (4,184) (146,384) (17,636)
Income (loss) per common share:
Basic................................... 4.41 4.62 6.24 (0.33) (10.64) (1.28)
Diluted................................. 3.37 3.54 4.62 (0.33) (10.64) (1.28)
Income (loss) per common share
from continuing operations:
Basic................................... 4.41 4.62 7.00 (0.12) (10.46) (1.26)
Diluted................................. 3.37 3.54 5.15 (0.12) (10.46) (1.26)
</TABLE>
BALANCE SHEET
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- ---------
RMB RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C> <C>
Current assets........ 893,994 1,032,600 1,181,609 1,368,266 1,293,702 155,868
Working capital....... 247,990 306,288 404,618 308,473 61,884 7,455
Long-term debts....... 235,656 218,383 231,824 84,938 47,550 5,729
Minority interests.... 288,175 343,142 420,484 441,490 330,409 39,808
Shareholders' equity.. 248,182 330,565 443,184 439,000 295,521 35,605
Total assets.......... 1,418,017 1,618,402 1,872,483 2,025,220 1,905,298 229,554
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The acquisition of Southwest Products has been accounted for under the
purchase method of accounting, and the results for Southwest Products have been
included in the Company's consolidated results of operations since January 1,
1996. However, as a result of the arrangement with CFIUS to place Southwest
Products under trusteeship of the Trustee by which Sunbase shall divest
Southwest Products (see ITEM 1, "SOUTHWEST PRODUCTS COMPANY" and ITEM 3,
"Foreign Investment Matters"), the operations of Southwest Products are treated
as discontinued operations in the Company's 1998 consolidated financial
statements.
As a result of adverse market conditions in China which existed as a result
of the general financial turmoil which affected Asia in 1997 and 1998,
especially during the last quarter of 1998, the funds designated to Chinese
stated-owned enterprises, which included customers of Harbin Bearing, became
even less available than in previous years. As a result, it became increasingly
more difficult for Harbin Bearing to collect on its accounts receivable, which
had an adverse impact on Harbin Bearing and the Company's annual results.
Unless otherwise indicated in this ITEM 7, all RMB and U.S. Dollar amounts
except per share information are expressed in thousands ('000).
RESULTS OF OPERATIONS
Net Sales
Net sales for the Company from continuing operations for 1998 decreased by
RMB 221,865, or 31.8%, to RMB 475,310 as compared to RMB 697,175 in 1997. This
decrease in net sales was primarily due to the adverse market conditions which
persisted in the PRC in 1998 and in Asia generally. Stringent controls on
capital expenditure of PRC enterprises by the Chinese government decreased
demand for the Company's products, which are components of machinery and
equipment. As a result, competition within the PRC bearing industry increased in
1998 for the fewer sales orders being placed for bearings. The Company has
responded to the continuing adverse market conditions in China by increasing its
marketing efforts, enhancing its credit review procedures, and restricting sales
to customers where collectability of payment for purchased product is uncertain.
Cost of Sales
Cost of sales for the Company from continuing operations for 1998 decreased
by RMB 116,164 or 24.2%, to RMB 362,925 from RMB 479,089 for 1997. This decrease
in cost of sales was primarily due to the decrease in volume of production as a
result of contraction in sales in the Company's continuing operations.
Gross Profit
The Company's gross profit from continuing operations for 1998 decreased
from RMB 187,486 in 1997 to RMB 11,785, a decrease of RMB 175,701, or 93.7%.
Gross profit as a percentage of revenue also decreased from 26.9% for 1997 to
2.5% for 1998. The significant decrease in gross profit was mainly attributable
to the decrease in sales caused by the adverse market conditions in the PRC,
which led to a plunge in units of bearings produced in 1998. In addition, in
response to the continuous drop in the market selling price of bearings due to
keen competition, the provision on inventories for 1998 was increased to RMB
100,600 as compared to RMB 30,600 for 1997, which resulted in a 93.7% decrease
in gross profit in 1998. Due to prolonged adverse market conditions, the Company
was forced to lower its selling price for certain bearings below its cost of
production.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations for
1998 increased by RMB 5,632, or 7.3%, to RMB 82,533 from 76,901 in 1997.
Selling, general and administrative expenses as a percentage of revenues
increased from 11.0% for 1997
15
<PAGE>
to 17.36% for 1998. Selling, general and administrative expenses for the
Company's continuing operations increased mainly as a result of increased
transportation costs and travel expenses for sales personnel, which were
partially offset by a decrease in royalties paid in China 1998. During 1998, the
Company adopted stronger controls on its overhead and implemented certain cost-
cutting measures in order to improve its profitability and competitiveness.
However, this cost saving effort was mitigated by the adverse impact of the
Asian financial turmoil and the continued adverse economic situation in the PRC.
Interest Expense
Interest expense for the Company from continuing operations for 1998
remained essentially flat from 1997 and did not have significant fluctuation
that year.
Provisions on Accounts Receivable and Other Receivables
The provision for accounts receivable from continuing operations increased
by RMB 15,699, or 96.5%, to RMB 31,961 in 1998 from RMB 16,262 in 1997 to
provide for the slower recovery of accounts receivable due mainly to the turmoil
in the PRC and Asia in 1998, and the decrease in funds which had been previously
made available by the Chinese government to state-owned enterprises, including
customers of Harbin Bearing. In addition, the Company recorded provisions for
other receivables due from third parties and balances due from related
companies, amounting to RMB 61,404, in aggregate, due to uncertainty regarding
their collectability based on the length of time that the receivables were
outstanding and the continued adverse economic situation in the PRC and Asia.
There was also a specific provision made for deposits with a Chinese financial
institution in the amount of RMB 23,750 for 1998 in view of the current economic
situation and the liquidity problems experienced by the financial institution in
the PRC. The Company has responded to these adverse economic conditions by
tightening credit controls and enhancing its credit review procedures for new
sales orders. The Company believes that the current economic situation in Asia
will continue into the immediate future and the Company expects to continue to
encounter difficulties in receivable collections.
Loss From Continuing Operations
As a result of the aforementioned factors, the Company generated a net loss
from continuing operations of RMB 143,426 in 1998 as compared to a net loss from
continuing operations of RMB 1,462 in 1997.
Net Loss From Discontinued Operations
The Company's net loss from discontinued operations was RMB 2,958 in 1998 as
compared to RMB 2,722 in 1997. The increase in the Company's net loss from
discontinued operations is mainly due to a decrease in gross profit despite a
slight increase in revenues as a result of the hiring of a new manufacturing
consultant and an increase in labor costs. The decrease in gross profit,
however, was partially offset by reduced selling, general and administrative
expenses from a reduction in salaries and travel expenses paid to sales
personnel, partially offset by increased legal fees associated with CFIUS and
U.S. export control issues, and a decrease in interest expense due to the
repayment of third party loans.
RESULTS FOR 1997 COMPARED TO 1996
Net Sales
Net sales for the Company from continuing operations for 1997 decreased by
RMB 156,891, or 18.4%, to RMB 697,175 from 854,066 in 1996. This decrease in
sales in 1997 was due principally to the Company's continuing efforts to adjust
to tightening credit conditions in the PRC. The Company responded to such
conditions by enhancing its credit review procedures and being more conservative
in extending credit to customers. Moreover, stringent controls on capital
expenditures by PRC enterprises by the Chinese government also caused a decrease
in the demand for the Company's products, which are used as components in
machinery and equipment. As a result, competition for the limited sales orders
in the bearing market became greater in 1997 than in 1996.
16
<PAGE>
Cost of Sales/Provisions on Inventories/Gross Profit
Cost of sales for the Company from continuing operations for 1997 were RMB
479,089 as compared to RMB 520,804 for 1996, a decrease of 8.0%. Gross profit
decreased by RMB 144,776, or 43.6% primarily due to the adverse market
conditions which persisted in the PRC during 1997 and which led to a plunge in
unites of bearings produced in 1997 as compared to 1996. The decrease in
production output resulted in an increase in overhead absorbed by each unit
produced and an increase in the unit cost of goods sold. Also, there was no
material change in selling prices during 1997 as compared to 1996. Furthermore,
an additional provision for obsolete and slow moving inventory totaling RMB
30,600 was made in 1997, an increase of RMB 29,600 over that in 1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations for
1997 decreased by RMB 22,928, or 22.9%, to RMB 76,901 from RMB 99,829 in 1996.
Selling, general and administrative expenses as a percentage of revenues
improved slightly from 11.68% for 1996 to 11.0% for 1997. The decrease in
selling, general and administrative expenses in 1997 was primarily attributable
to the decrease in royalty costs, packing expenses and government taxes in China
as a result of a decrease in sales output resulting from the financial turmoil
in China and Asia generally. Tighter control over expenditures in view of the
adverse market conditions also helped fuel this decrease.
Interest Expense
Interest expense for the Company from continuing operations for 1997
increased by RMB 13,061, or 24.1%, to RMB 67,195 from RMB 54,134 in 1996. The
increase in interest expense was attributable to the increase in bank loans
borrowed during 1997 as compared to 1996 and the increase in interest payable
with respect to the Convertible Debentures. The substantial rise was due to a
full year of interest payable on the Convertible Debentures in 1997 as compared
to four months in 1996 and an increase in the interest rate from 12% to 19.75%
per annum (which amounted to RMB 10,480) due to the Company's default of certain
conditions contained in the agreement under which the Convertible Debentures
were issued. See "LIQUIDITY AND CAPITAL RESOURCES." These increases were
partially offset, however, by an increase in interest income from advances made
to related parties.
Provisions on Accounts Receivable
In 1997, the Company increased its provision for accounts receivable from
continuing operations to RMB 16,262 as compared to RMB 3,998 in 1996 to provide
for the slow recovery of accounts receivable which persisted in 1997 due to the
financial turmoil in the PRC and Asia generally in 1997.
Other Income
In 1996, other income from continuing operations represented a gain on the
sale of a short term investment in a subsidiary by China Bearing to a third
party, which amounted to RMB 16,640.
Net Income/Loss From Continuing Operations
As a result of the aforementioned factors, the Company generated a net loss
from continuing operations of RMB 1,462 in 1997 as compared to a net gain of RMB
85,807 in 1996.
Net Loss From Discontinued Operations
The Company's net loss from discontinued operations was RMB 2,722 in 1997
as compared to a net loss of RMB 9,273 in 1996. This improvement resulted
primarily from increased sales, as well as decreased selling, general and
administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
17
<PAGE>
Operating Activities
Net cash used in operating activities from continuing operations was RMB
137,655 in 1998, as compared to net cash used in operating activities from
continuing operations of RMB 39,593 in 1997 and net cash generated by operating
activities from continuing operations of RMB 105,768 in 1996. The increased use
of cash in operating activities from continuing operations is primarily due to
the unsatisfactory market conditions in the PRC and Asia generally which existed
in 1997 and worsened in 1998. These adverse market conditions led to a decrease
in sales and the slower recovery of trade receivables from customers.
As of December 31, 1998, the Company's working capital had decreased to RMB
61,844 as compared to RMB 308,473 at December 31, 1997 and RMB 404,618 at
December 31, 1996. The Company's current ratio was 1.05:1 as of December 31,
1998, 1.29:1 at December 31, 1997 and 1.52:1 at December 31, 1996.
Investing Activities
Net cash provided by investing activities was RMB 21,233 in 1998 as
compared to net cash used in investing activities of RMB 57,245 in 1997 and RMB
240,545 in 1996, mainly due to decreased capital expenditures and decreases in
amounts due from related companies in 1998 as compared to 1997 and 1996. Capital
expenditures of RMB 16,586 in 1998 (RMB 48,287 in 1997 and RMB 167,430 in 1996)
consisted of costs related to the construction of new plant and machinery, as
well as the renovation of existing facilities and equipment. These capital
expenditures were financed primarily through short-term and long-term bank
loans. The Company does not expect to spend more than the minimum required to
maintain its equipment and facilities in 1999. As of December 31, 1998, the
Company had no outstanding capital expenditure commitments.
Financing Activities
Net cash provided by financing activities was RMB 96,824 in 1998 as
compared to RMB 87,692 in 1997 and RMB 176,072 in 1996. The Company has
historically relied on both short-term and long-term bank loans from Chinese
banks to support its operating and capital requirements. Short-term bank loans,
which have terms ranging from three months to six months, are utilized to
finance both operating and capital requirements and are renewed on a revolving
basis. Long-term bank loans are utilized to fund capital expansion projects. In
1997, principally all net cash provided by financing activities came from short-
term and long-term bank loans. The Company believes that it will be able to
continue to maintain and expand its bank borrowings under its current lending
arrangements.
In order to finance the Company's continuing operating and capital
requirements, the Company has in the past evaluated, and is also currently
evaluating, both debt and equity financing opportunities. During June 1996, the
Company in a private placement sold 1,000,000 shares of common stock at U.S.
$5.00 per share, generating net proceeds of U.S. $4,347 (RMB 36,085).
In August 1996, China Bearings issued U.S.$11.5 million aggregate principal
amount of the Convertible Debentures to three investors. The Convertible
Debentures were convertible, at the option of the holders, in whole or in part,
at any time into shares of Common Stock of the Company. The conversion price
(the "Conversion Price") was initially U.S. $5.00 per share, subject to
adjustment for (a) a change in par value of the Common Stock, (b) the issuance
of shares by way of capitalization of profits or reserves, (c) capital
distributions, (d) a rights offering at a price which is less than the lower of
the then market price of the Common Stock or the Conversion Price, (e) the
issuance of derivative securities where the total consideration per share
initially received is less than the lower of the then market price of the Common
Stock or the Conversion Price, (f) the issuance of shares at a price per share
which is less than the lower of the then market price of the Common Stock or the
Conversion Price and (g) if the cumulative audited earnings per common share for
any two consecutive fiscal years commencing with the fiscal year ended December
31, 1996 and ending with the fiscal year ending December 31, 1998 are less than
the specified projection of cumulative earnings per common share for such
period. Due the Company's failure to achieve the projected cumulative audited
earnings per common share of U.S.$1.79 for the two years ended December 31,
1997, the Conversion Price was adjusted to U.S.$1.84 per share pursuant to the
terms of the Subscription Agreement.
Unless earlier converted, the Convertible Debentures matured in August
1999. Interest accrued at a rate equal to the higher of (i) 5% per annum (net of
withholding tax, if applicable) and (ii) the percentage of the dividend yield
calculated by dividing the annual dividend declared per share of Common Stock of
the Company by the Conversion Price. Interest on the Convertible Debentures was
payable quarterly.
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<PAGE>
At maturity, the Convertible Debentures were required to be redeemed
at a redemption price equal to the principal amount then outstanding plus
any accrued but unpaid interest, together with an amount sufficient to enable
the holders to receive an aggregate internal rate of return of 12% per annum on
the cost of their investment. In addition, if any of the events of default
specified in the Subscription Agreement occurred, the Convertible Debentures
become automatically due and payable at the principal amount outstanding
together with accrued and unpaid interest and an amount that would enable the
Investors to yield an aggregate internal rate of return on their investment of
19.75% per annum. Events of default included breach of covenants after failure
to cure after notice, failure to pay principal or interest, failure to pay
indebtedness for borrowed money, certain events of bankruptcy or insolvency,
judgement defaults, failure to achieve earnings per common share of at least
U.S. $0.55 for each fiscal year commencing January 1, 1996, accounts receivable
reaching a certain level in relationship to net sales and delisting or
suspension of trading of the Company's Common Stock from Nasdaq.
Due to the failure of the Company to achieve the required minimum earnings
per common share of U.S.$0.55 in 1997, an event of default occurred. As a
result, interest accrued at the default rate of 19.75% per annum. Pursuant to
a Settlement Agreement reached in October 1998 with the investors, the investors
agreed not to demand the immediate repayment of the Convertible Debentures. In
addition, the aggregate principal amount of the Convertible Debentures (plus
simple interest at a rate of 12.375% per annum until July 22, 1998 less interest
paid) was restructured as a loan in an aggregate principal amount of U.S.
$13,173. The debt, which carries a simple interest rate of 10% per annum, is
required to be repaid over a period of three years ending on July 23, 2001. As
part of the settlement, the Company also issued 466,667 shares of Common Stock
to the investors, which are not transferable for a period of three years. The
members of the Sunbase Group agreed that 50% of any public market funds raised
by the Company or its subsidiaries would be applied immediately towards
discharging the then outstanding debt and interest accrued thereon. The
obligations of China Bearing under the Settlement Agreement are guaranteed by
other members of the Sunbase Group on an at least pari passu basis with the
guarantors' other present and future unsecured and unsubordinated obligations.
China Bearing has failed to make three scheduled payments under the
Settlement Agreement: (i) principal of $831 and interest of $109 due as of March
23, 1999, (ii) principal of $28 and interest of $102 due as of April 23, 1999
and (iii) principal of $29 and interest of $101 due as of May 23, 1999. As a
result, there currently exists an event of default under the Settlement
Agreement, and the investors are entitled to accelerate the entire principal
amount outstanding together with any accrued but unpaid interest under the
Settlement Agreement, and to call upon the guarantees by the other members of
the Sunbase Group. The Company, China Bearing and the other members of the
Sunbase Group are currently in negotiations with the investors regarding these
events of default. While the Company believes that a workable solution can be
reached with the investors in due course, no assurance can be given as to when
or if such negotiations will result in a resolution that is favorable to the
Company.
In connection with the acquisition by the Company of its interest in Harbin
Bearing from Asean Capital, in addition to shares of Common Stock issued by
the Company to Asean Capital, the Company issued a promissory note for U.S.
$5,000 (RMB 41,600) (the "Promissory Note"). The Promissory Note is secured by a
continuing security interest in all of the Company's right, title and interest
in the outstanding capital stock of its wholly-owned subsidiary, China Bearing.
The Promissory Note is denominated and repayable in full in U.S. dollars, and
bears interest at a rate of 8% per annum. In connection with the issuance of the
Convertible Debentures, Asean Capital agreed that for so long as any of the
Convertible Debentures are outstanding, no amounts may be repaid by the Company
on the Promissory Note unless there is sufficient working capital and the
repayment is made in accordance with the following schedule:
Payment Period Amount
- -------------- ------
August 1, 1996 to July 31, 1997 up to U.S.$2,000 plus accrued interest
August 1, 1997 to July 31, 1998 up to U.S.$1,500 plus accrued interest
August 1, 1998 to July 31, 1999 up to U.S.$1,500 plus accrued interest
In accordance with this schedule, a principal payment of U.S.$2,000 (RMB
16,700) was made in September 1996. As a result of the Company's current
financial position, the directors do not expect to make any other repayments in
the foreseeable future.
The financial condition of the Company raises substantial doubt about the
Company's ability to continue as an independent going concern. The description
of the business, financial condition and results of operations of the Company
contained in this Annual Report and in the financial statements included herein,
however, have been prepared on a going concern basis. They do not include any
19
<PAGE>
adjustments that might result from the outcome of the uncertainty relating to
the Company's ability to continue as a going concern, including, without
limitation, adjustments to the carrying value of assets and liabilities or the
classification of liabilities that would be necessary if the Company were not
considered to be a going concern. Such adjustments would have a material adverse
effect on the Company's financing condition. See "FACTORS THAT MAY AFFECT FUTURE
RESULTS" below and the financial statements of the Company and the Independent
Auditor's Report thereon, included elsewhere herein.
See Note 2 to the Company's 1998 consolidated financial statements for a
description of the Company's plans to maintain liquidity and obtain financing.
Inflation/Deflation and Currency Matters
In recent years, the Chinese economy has experienced periods of rapid
economic growth as well as high rates of inflation, which in turn has resulted
in periodic adoption by the Chinese government of various corrective measures
designed to regulate growth and contain inflation. During 1998, the general
inflation rate in the PRC was under control, with the PRC experiencing a 2.6%
deflation in prices in 1998. Since 1993, the Chinese government has implemented
and maintained an economic program designed to control inflation, which has
resulted in the tightening of working capital available to Chinese business
enterprises. The success of the Company depends in substantial part on the
continued growth and development of the Chinese economy.
The Company continually monitors the effects of inflation and deflation. In
view of the change in market conditions and increased competition, the Company
in an inflationary market may be unable to raise its prices to shift a portion
of the inflated costs to customers, and the Company in a deflationary market may
be forced to lower its prices to maintain competitive prices. The price of
bearing steel, the major raw material used by the Company, remained fairly
stable during 1996, 1997 and 1998.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. Changes in the relative value
of currencies occur periodically and may, in certain instances, materially
affect the Company's results of operations.
Although the Company has export ambitions, historically, substantially all
of the Company's sales have been domestic and settled in RMB. Moreover,
historically, substantially all of the Company's costs have been incurred in
RMB. It is possible, however, that the revenue/cost profile of the Company could
change in the future, and if it does, then it is possible that a devaluation of
the RMB against the U.S. Dollar could have a material adverse effect upon the
results of operations. Currently, all of the Company's bank debts are
denominated in RMB. However, the Company has indebtedness in respect of the
Convertible Debentures that is denominated in U.S. dollars, so that a
devaluation of the RMB against the U.S. Dollar could have a material adverse
effect upon the Company's financial position. Although prior to 1994 the RMB
experienced significant devaluation against the U.S. Dollar, the RMB has
remained fairly stable from 1994 to present. The unified exchange rate was
U.S.$1.00 to RMB 8.45 at December 31, 1994, RMB 8.32 at December 31, 1995, RMB
8.3 at December 31, 1996, RMB 8.3 at December 31, 1997 and RMB 8.3 at December
31, 1998. The People's Bank of China has declared its intention not to devalue
the RMB. However, it is possible that competitive pressures resulting from the
significant devaluation of other Asian currencies will ultimately force the
Government of China to reconsider its position on devaluation of the RMB.
YEAR 2000 COMPLIANCE
The Company has completed an assessment of its non-information technology
systems, and believes based on that assessment that these systems do not contain
any elements that are susceptible to Year 2000 problems. Based on recent
assessments of its information technology systems, the Company has determined
that some portions of its information processing systems, particularly the
mainframe computer used by Southwest Products, will require modification or
replacement in order to ensure that those systems are Year 2000 compliant. The
Company intends to replace some of these information processing systems, but
does not believe that the cost of such replacement will be material. The Company
believes that Southwest Products will assume the cost of modifying or replacing
the information processing systems used by Southwest Products, including the
mainframe computer used by Southwest Products.
The Company has also asked each of its third-party suppliers and vendors to
confirm that they are Year 2000 compliant. Substantially all of the Company's
suppliers and vendors have indicated that they expect to be Year 2000
20
<PAGE>
compliant or that they do not anticipate that they are susceptible to Year 2000
problems. Most of Harbin Bearing's suppliers and vendors in China perform their
operations and data recording manually without the use of computers or other
information technology systems. As a result, the Company does not anticipate any
Year 2000 problems from its suppliers and vendors in China.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Foreign Investment Matters
Pursuant to the terms of the trusteeship which holds the Company's interest
in Southwest Products, except under very limited circumstances, the Company can
not exercise any control or influence over the business or management of
Southwest Products and has no access to visit or obtain information from
Southwest Products without prior trustee approval. As a result, the Company lost
its control over Southwest Products since December 31, 1998 and all information
contained in this Annual Report with respect to Southwest Products for the
period subsequent to December 31, 1998 has been obtained through the trustee and
the Company can not verify the accuracy or completeness of the information for
the period subsequent to December 31, 1998. See ITEM 3, "LEGAL PROCEEDINGS."
In addition, in acquiring Southwest Products, the Company expected to
benefit from its technical and marketing capabilities, including leveraging such
capabilities to improve the competitive position of Harbin Bearing in China and
internationally. However, the terms of the trusteeship have inhibited the
Company's ability to do so, which has had a significant impact on the Company's
growth plans. The Company is currently reevaluating its business strategy, which
may involve restructuring to reduce operating expenses, seeking an alliance with
a strategic partner, reorganizing the Company's operations and/or divesting the
Company's bearing manufacturing assets in China to diversify into other lines of
business. However, no assurance can be given as to whether or when the Company
will be able to successfully pursue any of these alternatives. See ITEM 1,
"BUSINESS."
The Company is currently conducting a review to determine if any claims may
be brought by the Company against any party involved in its acquisition of
Southwest Products as a result of the CFIUS investigation. However, no assurance
can be given that any such claims by the Company would fully reimburse it for
any loss it might realize upon a divestiture of Southwest Products.
ITAR Regulations
For the duration of the Voting Trust Agreement, Southwest Products is
subject to a temporary export licensing regime which requires all export sales
or other overseas transfers of Southwest Products' products or technology to be
reviewed and approved in advance by the DTC. Under this regime, the Company
can not obtain access to Southwest Products' products, technology or facilities
without prior written approval from the U.S. government.
Nasdaq De-Listing
In February 1999, the Company's Common Stock was delisted from Nasdaq.
After its delisting from Nasdaq, the Common Stock traded on the Bulletin Board.
However, since May 20, 1999, the Company's Common Stock has not been trading on
the Bulletin Board because there are currently no market makers making a market
in the Common Stock and the Company is not current with its public information
requirements. The Company is making efforts to become current in its public
information requirements but no assurance can be given as to when trading in the
Company's Common Stock on the Bulletin Board will resume or, if resumed, as to
the market that will develop for the Common Stock or the prices at which it will
trade. See Item 5, "MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS."
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<PAGE>
Potential Acceleration of Amounts due under the Settlement Agreement
As a result of the failure by China Bearing to make three payments due
under the installment provisions of the Settlement Agreement, the holders of the
Convertible Debentures have the right to accelerate the payment of all amounts
due under the Settlement Agreement, as well as the right to exercise all other
remedies available to them under the subscription agreement pursuant to which
the Convertible Debentures were purchased. While the Company believes that an
equitable resolution may be reached with the holders of this indebtedness no
assurances can be given in this regard and any acceleration would have a severe
negative effect on the liquidity of the Company.
Substantial Leverage; Inadequacy of Earnings to Cover Fixed Charges
The Company has, on a consolidated basis, total indebtedness of
approximately RMB 814,484 (US$ 98,131) in 1998, resulting in a ratio of debt to
total capitalization of 2.85:1 at that date. Substantially all of such
indebtedness is denominated in RMB.
The Company will require substantial cash flow to meet its repayment
obligations on its indebtedness, as well as on any future additional
indebtedness it may incur. For 1998, the Company's earnings were inadequate to
cover fixed charges by approximately RMB 263,623 (U.S. $31,762) (Note: For
purposes of this calculation, the term "fixed charges" means the total amount of
debt service (principal and interest) due under the Convertible Debentures, as
modified by the Settlement Agreement, during 1999. Debt service figures for 1998
in respect of the Convertible Debentures, as modified by the Settlement
Agreement are not available because the Settlement Agreement was not entered
into until the fourth quarter of 1998. The Promissory Note issued to Asean
Capital also did not appear to be meaningful for purposes of this calculation
because the Promissory Note is subordinated to the Convertible Debentures and
was issued to a related party. The term "earnings" means net loss from continued
operations during fiscal year 1998. Thus, for this calculation, 1998 net loss
was simply added to 1999 debt service under the Convertible Debentures, as
modified by the Settlement Agreement.)
The ability of the Company to make scheduled interest payments on, and
retire at maturity the principal of, its indebtedness is dependent on the
Company's future performance. However, the Company experienced operating losses
and negative cash flow from operations of RMB 146,384 and RMB 137,947,
respectively, in 1998. The Company expects that net losses may continue for the
foreseeable future in view of the current economic situation in China and many
other factors beyond its control. In addition, the Convertible Debentures and
the Settlement Agreement impose significant operating and financial restrictions
on the Company. Such restrictions limit the Company's ability to create liens
and its use of the proceeds from certain asset sales. These factors may make the
Company more vulnerable to economic and industry downturns, limit its ability to
obtain additional financing to fund future working capital requirements, capital
expenditures or other general corporate purposes, and reduce its flexibility in
responding to changing business or economic conditions or to a substantial
decline in operating results.
The Company may require substantial additional funds in the event it fails
to meet its projected operating results or its needs exceed its projected
capital requirements. The Company's future sources of financing may include
equity and debt financings. Accordingly, the Company may be required to
refinance a substantial portion of its indebtedness since cash flow from
operations may be inadequate to meet payment obligations arising from its long
term indebtedness. There can be no assurance that the Company will be able to
raise necessary debt and/or equity proceeds to meet these debt obligations or
that the Company will have requisite access to capital markets on acceptable
terms.
Ability of the Company to Continue as a Going Concern
The financial condition of the Company raises substantial doubt about the
Company's ability to continue as an independent going concern. The description
of the business, financial condition and results of operations of the Company
set forth herein, and in the Company's financial statements included herein,
however, have been prepared on a going concern basis. They do not include any
adjustments that might result from the outcome of the uncertainty relating to
the Company's ability to continue as a going concern, including, without
limitation, adjustments to the carrying value of assets and liabilities or the
classification of liabilities that would be necessary if the Company were not
considered to be a going concern. Such adjustments would have a material adverse
effect on the Company's reported financial condition.
22
<PAGE>
Potential Changes in the Economy of China
The economy of the PRC has experienced significant growth in the past
decade. Much of this growth has been a result of governmental policies which
have encouraged substantial private economic activity. The continuation of
growth in China is now subject to a number of uncertainties including, without
limitation, a continuation of governmental policies favoring private enterprise,
continued success in maintaining a moderate rate of inflation, the ability of
China to remain competitive with other Asian countries that have experienced
significant devaluation of their currencies during the past two years,
resolution of liquidity problems affecting the Chinese banking system and
economy as a whole and the maintenance of uninterrupted trading relationships
with the United States and other major trading partners. In the event that
negative developments in these or other areas result in a slowdown or decline in
the economy of China, it is likely that the future results of operations of the
Company will be adversely effected.
Political and Regulatory Considerations in China
Although the government of China has been pursuing economic reform policies
for over a decade, there can be no assurances that such policies will continue.
Any change in such policies could have a substantial adverse effect on the
economic growth of China which would likely diminish the market for the
Company's products in China. Moreover, changes in the laws or regulations
governing business operations, restrictions on foreign ownership of Chinese
companies, exchange controls, changes in the tax laws or restrictions on the
repatriation of profits could be imposed in a manner which would result in
negative consequences to the Company and its interest in Harbin.
Failure to Qualify Harbin Bearings to Automotive and Aerospace Quality
Standards; Ability to Remain Competitive with Multinational Manufacturers.
To date Harbin Bearing has been unable to establish procedures that would
enable it to qualify to international quality standards, generally accepted
automotive quality standards or aerospace quality standards. Such failure has
resulted in Harbin Bearing's inability to capture orders from the U.S.
automotive and aerospace industries. The international bearing industry is
extremely competitive. Although the Company's main competitors are Eastern
European manufacturers and manufacturers located in China, to a lesser extent,
the Company also competes with companies such as Svenska Kugellager Fabriken,
Fisher Aktien Gesellschast, New Technology Network, NSK, Timken, Torrington-
Fafnir and Nippon Miniature Bearing, who dominate this market. The Company had
hoped that its acquisition of Southwest Products would not only allow it to
access the U.S. bearing market, but also allow it to implement U.S.
manufacturing methods and quality control procedures at Harbin Bearing to
develop new products and meet the stringent requirements of many non-PRC OEMs.
By doing so, the Company expected to increase its penetration of the
international bearing market. As a result of the Company's decision to dispose
of Southwest Products in response to the CFIUS investigation, however, the
Company has suspended indefinitely its plan to enable Harbin Bearing to meet
these international standards. Failure to qualify Harbin Bearing to these
standards is expected to constrain the Company's future growth.
The Company's products may become obsolete as a result of new technologies
or new developments affecting the bearing industry. The Company's ability to
remain competitive depends in significant part on its ability to anticipate and
stay abreast of new technological developments, fund research and development,
introduce new products and retain key personnel for these functions. Some of the
Company's competitors have substantially greater resources available for these
purposes. To the extent that the Company does not generate adequate cash flow or
obtain other financing to fund product development, the Company's competitive,
including by positioning will probably be adversely effected, which may result
in a loss of sales or lower productivity.
Southwest Products Company Environmental Issues
Southwest Products occupies property that has been the subject of
environmental remediation mandated by the County of Los Angeles. Remediation
took place in 1993 and again in 1997. Employees of the lessor for the property
have informed Southwest Products that the remediation has been successfully
completed and that the lessor has received approval from the State of California
for the remediation that has been conducted. Southwest Products does not believe
that it has any liability regarding this issue. However, no assurance can be
given in this regard.
Impact of the Turmoil in Asian Markets
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<PAGE>
The turmoil in Asian markets may affect the political and economic policies
in China and the continued deterioration of the Asian market coupled with the
liquidity restraints imposed in China could adversely affect the Company's
operations and the collectability of its accounts receivable. Continuation of
these trends could also impair the Company's liquidity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates and
foreign currency exchange rates, which could affect its future results of
operations and financial condition. The Company manages its exposure to these
risks through its regular operating and financing activities. Currently, the
Company is unable to hedge its RMB-hard currency exchange risks due to
restrictions imposed by the government of the PRC which prevent financial
institutions to engage in foreign currency transactions offering forward
exchange contracts with respect to the RMB.
Foreign Currency Risk
Although the Company has export ambitions, historically, substantially all
of the Company's sales have been domestic and settled in RMB. Moreover,
historically, substantially all of the Company's costs have been incurred in
RMB. Thus, the functional currency of Harbin Bearing and the Company's other PRC
subsidiaries is the RMB. It is possible, however, that the revenue/cost profile
of the Company could change in the future, and if it does, then it is possible
that a devaluation of the RMB against the U.S. Dollar could have a material
adverse effect upon the results of operations.
Currently, all of the Company's bank debts are denominated in RMB. However,
the Company has indebtedness under the Settlement Agreement (and under the
Convertible Debentures and Subscription Agreement in the event a satisfactory
settlement can not be made pursuant to default under the Settlement Agreement)
that is denominated in U.S. dollars, so that a devaluation of the RMB against
the U.S. Dollar could have a material adverse effect upon the Company's
financial position.
As a result of the foregoing factors, the Company is subject to risk from
fluctuations in the value of the RMB relative to the U.S. dollar.
The RMB is translated into U.S. dollars in consolidation, and will result
in cumulative translation adjustments which are included in other comprehensive
income (loss). The potential effect on other comprehensive income (loss)
resulting from a hypothetical 5%, 10% and 20% weakening in the quoted RMB rate
against the U.S. dollar would have resulted in a $1,695, $3,237 and $5,934
decrease in consolidated stockholders' equity and an $840, $1,603 and $2,939
decrease in net loss in 1998. The same hypothetical movements would have
resulted in an RMB 5,402, RMB 10,803 and RMB 21,604 increase in the amount of
debt service payable by the Company under the Settlement Agreement in 1998 on an
annualized basis. Actual results may differ.
Interest Rate Risk
The Company's bank loans are all fixed rate and denominated in RMB. Fixed
rates range between 7.6% per annum and 9.5% per annum for short-term loans, and
between 3.7% per annum and 15.12% per annum for long-term loans. The total
amount of short-term bank loans outstanding as of December 31, 1998 was RMB
516,232, with an effective interest rate of 7.9% per annum The total amount
of long-term bank loans outstanding as of December 31, 1998 was RMB 156,113,
with an effective interest rate of 8.4% per annum. In addition, the Company has
indebtedness under the Settlement Agreement (and under the Convertible
Debentures and Subscription Agreement in the event a satisfactory settlement
can not be made pursuant to default under the Settlement Agreement) at fixed
rates of interest (see ITEM 7 - "FINANCING ACTIVITIES"). As such, the Company is
exposed to interest rate risk on its long-term bank loans and in respect of its
indebtedness under the Settlement Agreement (or Convertible Debentures and
Subscription Agreement). Given banking practices in the PRC, the Company
believes that it will be able to refinance its long-term bank loans at market
rates whenever they drop significantly below the fixed rates specified on its
long-term bank loans. At present, the Company believes that the risk of a
significant drop in relevant market
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<PAGE>
interest rates during the term of the debt under the Settlement Agreement is
remote; however, the Company may consider entering into hedge transactions if
such a risk is perceived to increase.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited financial statements as of December 31, 1997 and 1998
and for the years ended December 31, 1996, 1997 and 1998 are set forth beginning
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE
REGISTRANT
The Company's directors, executive officers and significant employees as of
May 31, 1999 are listed below. The Board of Directors of the Company is
comprised of only one class. Directors are elected annually to serve until the
following annual shareholders' meeting.
<TABLE>
<CAPTION>
Name Age Office
- ---- --- ------
<S> <C> <C>
Gunter Gao 43 Chairman Chief Executive Officer and
President
(Roger) Li Yuen Fai 38 Director, Vice President and
Chief Financial Officer
Philip Yuen 62 Director
(Davis) Lai Kwan Fai 35 Corporate Secretary
Zhang Zheng Bin 51 General Manager, Harbin Bearing
(Harris) Lau Kwok Kei 34 Chief Accounting Officer
Todd Stockbauer 36 Chief Financial Officer, Southwest Products
John Leonaik 62 Chief Engineer, Southwest Products
</TABLE>
GUNTER GAO, CHAIRMAN AND DIRECTOR, 43. 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 The Company. Sunbase International has various industrial holdings in China,
in industries such as aviation, transportation, cement, steel and retail. Mr.
Gao is also the Chairman of the Board of The Company. Mr. Gao is responsible for
the overall strategy of the Company. Mr. Gao is actively and directly involved
in all operational and strategic transactions. During the 1980's, Mr. Gao
engaged in trading and investment activities in industries such as food, timber,
real estate, coal and textiles. Based on his success in these activities and
with the support of several banks in China, Mr. Gao has turned Sunbase
International into a leading China industrial company. Mr. Gao is currently a
member of the Chinese People's Political Consultative Conference. Mr. Gao is the
youngest member of the Congress and is widely respected for his contributions to
the country's
25
<PAGE>
development. Mr. Gao's strong reputation in China has enabled Sunbase
International to engage in and complete many difficult transactions, including
acquiring a majority interest in Harbin Bearing and obtaining a license to
create an airline in China. Now known as Northern Swan Airlines, this airline
enjoys international prominence and the financial support of the Bank of China
and the People's Construction Bank of China. Mr. Gao serves as a Senior Economic
Advisor to several Chinese municipal and provincial governments, including the
governments of Tianjin, Hebei, Shaanxi, Xinjiang and Harbin. In addition, Mr.
Gao is the deputy director of the Sino-Foreign Entrepreneurs Cooperative
Committee.
(ROGER) LI YUEN FAI, CHIEF FINANCIAL OFFICER, VICE-PRESIDENT AND DIRECTOR,
38. Mr. Li has been the Chief Financial Officer and a Director of the Company
since 1994. From 1990 to 1991 he was compliance manager of Hong Kong Securities
Clearing Company Limited. Mr. Li was employed by Coopers & Lybrand in Hong Kong
from 1980 to 1990 (his most recent position was audit manager) and was a partner
in a Hong Kong accounting firm from 1992 to 1993.
PHILIP YUEN, DIRECTOR, 62. Mr. Yuen is a solicitor of the Supreme Court of
Hong Kong. He became a practicing solicitor in 1962 and founded the solicitors'
firm of Yung, Yu, Yuen & Co. in 1965. He is currently the managing partner of
his firm. He has over 30 years experience in legal practice. Mr. Yuen has been a
member of The National Committee of the Chinese People's Political Consultative
Conference since 1983 and has been a member of the China International Economic
and Trade Arbitration Commission for the past 16 years. Mr. Yuen has established
extensive relationships with businesses in the PRC and is also a non-executive
director of Tsingtao Brewery Company Limited, Henderson Development Company
Limited, Henderson (China) Investment Company Limited and Melbourne Enterprises
Limited, all of which are listed on The Stock Exchange of Hong Kong Limited.
(DAVIS) LAI KWAN FAI, CORPORATE SECRETARY, 35. Mr. Lai has been the
Corporate Secretary of The Company since 1996. Mr. Lai holds a Master of Arts
Degree in Economics and Finance from the University of Leeds in the United
Kingdom. Prior to joining The Company, he was employed in the commercial sector
with over 5 years of experience in enterprise management and business
development in China.
ZHANG ZHENG BIN, GENERAL MANAGER, 51. Mr. Zhang was appointed the General
Manager of Harbin Bearing in 1997 and is responsible for the day-to-day
operations as well as sales and marketing of Harbin Bearing. Mr. Zhang has been
a high ranking employee of Harbin Bearing for over 11 years in a variety of
senior management positions. Mr. Zhang holds a degree in Engineering from Harbin
Polytechnic University. Mr. Zhang departed from the Company in April of 1999.
(HARRIS) LAU KWOK KEI, CHIEF ACCOUNTING OFFICER, 34. Mr. Lau has been the
Chief Accounting Officer of The Company since February 1998. Mr. Lau holds a
Master of Business Administration Degree with emphasis in Strategic and
Marketing Management from University of Leicester in United Kingdom. He has over
7 years of work experience in the accounting and auditing profession. Prior to
joining The Company, Mr. Lau was employed by the international accounting firm
of Deloitte Touche Tohmatsu specializing in corporate advisory and merger and
acquisition services.
TODD STOCKBAUER, CHIEF FINANCIAL OFFICER, 36. Mr. Stockbauer has been
employed as the Chief Financial Officer 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 with an emphasis in Accounting from the University of
California at Santa Barbara and is a Certified Public Accountant in the State of
California.
JOHN LEONIAK, CHIEF ENGINEER, 62. Mr. Leoniak has been the Chief Engineer
at Southwest Products since 1991. As Chief Engineer, Mr. Leoniak supervises
Southwest Products' engineering. 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 Degree in Mechanical Engineering from the
Polytechnic Institute of Brooklyn.
26
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth information regarding compensation for
services in all capacities paid or accrued for the fiscal years indicated by the
Company to its Chief Executive Officer and the only other executive officer
whose compensation exceeded U.S.$100,000 in 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
-------------------------------
- --------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- --------------------------------------------------------------------------------------------------------------------
Other
Name Annual Restricted Securities All Other
and Compen- Stock Underlying LTIP Compen-
Principal sation Awards Options Payouts sation
Position Year Salary (US$) Bonus (US$) (US$) (US$) (#) (US$) (US$)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William McKay/(1)/ 1998 285,000 -- 15,000 /(3)/ -- -- -- 9,097/(4)/
------------------------------------------------------------------------------------------------
CEO, President, 1997 285,000 -- -- -- -- -- --
Director ------------------------------------------------------------------------------------------------
1996 284,327 -- -- -- 800,000 -- --
- --------------------------------------------------------------------------------------------------------------------
Billy Kan/(2)/ 1998 220,025 -- -- -- -- -- --
------------------------------------------------------------------------------------------------
Vice Chairman, 1997 209,677 -- -- -- -- -- --
Director ------------------------------------------------------------------------------------------------
1996 111,804 -- -- -- 600,000 -- --
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As part of the arrangements with CFIUS, William McKay was removed as Chief
Executive Officer, Vice President and Director of the Company effective as
of May 6, 1999.
(2) Billy Kan resigned from his position as Vice Chairman and Managing Director
as of November 22, 1998. The employment agreement with Billy Kan was
effective as of August 1, 1996. As such, his compensation for 1996 included
only five months.
(3) Consists of US$15,000 per annum car allowance.
(4) Consists of US$1,079 matching contribution by Southwest Products under its
401(k) plan, and US$8,018 constituting the cash value of unused vacation
days paid by Southwest Products during 1998.
OPTIONS GRANTS IN 1998
No stock options were granted in 1998.
27
<PAGE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
-------------------------------------------------------------------------------------------------
Value of
Number of Securities Unexercised
Underlying In-the-Money
Unexercised Options Options
at FY-End (#) at FY-End ($) /(3)/
Shares Acquired
on Exercise Value Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William McKay --- --- 320,000/480,000 ---/---
- -------------------------------------------------------------------------------------------------
Billy Kan --- --- 569,863/ 30,137/(1)/ ---/---
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) The employment agreement with Mr. Kan provided for vesting of options "day
to day" up to his last day of employment. In accordance with the terms of
this employment agreement, the number of vested stock options is arrived at
by calculating the number of days from January 16, 1998, the date on which
Mr. Kan entered into his employment agreement with the Company, through
November 22, 1998, the date of Mr. Kan's resignation, divided by 365 days,
and multiplied by 200,000 options, the number of options which would have
otherwise vested had Mr. Kan not resigned. The employment agreement between
Mr. Kan and the Company provides that his options which have vested during
his employment may be exercised notwithstanding the fact that he no longer
works for the Company.
(3) The value of unexercised in-the-money options is determined by using the
difference between the exercise price and the average bid price at December
31, 1998. As of December 31, 1998, no options granted were in the money.
STOCK OPTION PLAN
On January 2, 1996, the Company's Board of Directors adopted the 1995
Sunbase Asia, Inc. Stock Option Plan (the "Plan"). The Plan permits the grant of
options to purchase an aggregate of up to 2,500,000 shares of the Common Stock
of the Company. Under the Plan, incentive stock options and non-qualified stock
options may be issued. Eligible participants under the Plan are those
individuals that the compensation committee of the board of directors of the
Company (the "Committee") in its discretion determines should be awarded such
incentives in the best interests of the Company; provided, however, that
incentive stock options may only be granted to employees of the Company and its
affiliates. The Committee has the power to determine the price, terms and
vesting schedule of the options granted. All incentive stock options will have
option exercise prices per option share not less than the fair market value of a
share of the Common Stock on the date the option is granted, except that in the
case of incentive stock options granted to any person possessing more than 10%
of the total combined voting power of all classes of stock of the Company or any
affiliate of the Company, the price shall not be less than 110% of such fair
market value. The Plan terminates on the earlier of that date on which no
additional shares of Common Stock are available for issuance under the Plan or
January 2, 2006.
Under the employment agreement dated January 16, 1996 between the Company
and William R. McKay, and pursuant to the Plan, the Company granted Mr. McKay
options to purchase an aggregate of up to 800,000 shares of Common Stock of the
Company. The options granted to Mr. McKay vested at the rate of 160,000 shares
per each full year of Mr. McKay's employment under the Agreement. All
unexercised options expire six years after the date on which such options
vested, unless Mr. McKay first resigns or is terminated for cause as defined in
his employment agreement. On May 6, 1999, as required by the CFIUS, Mr. McKay
was removed as a director and executive officer of the Company. As of such date,
Mr. McKay had vested options exercisable for 480,000 shares of Common Stock. He
also had unexercisable options for an additional 320,000 shares. By the terms of
his employment agreement, the options for the 320,000 shares which had not yet
vested became null and void. However, the Company has not yet made a
determination as to whether Mr.
28
<PAGE>
McKay's removal constituted termination for cause or termination without cause
under his employment agreement, which affects the exercisability of his
remaining options. If Mr. McKay was terminated for cause, the 480,000 vested
options will be exercisable until August 4, 1999. If he was terminated without
cause, the vested options will be exercisable for six years after the date on
which they vested (but, in any case, only until January 16, 2006). Of the
480,000 options which had vested at the time of Mr. Kay's departure from the
Company, 160,000 are exercisable at U.S. $6.65 per share, 160,000 are
exercisable at U.S. $7.75 per share and the remaining 160,000 are exercisable at
U.S. $9.25 per share.
On July 1, 1996, the Compensation Committee of the Company also granted
stock options to the following individuals on the following terms:
<TABLE>
<CAPTION>
Vesting Exercise
Schedule - Price/Share Number
Option Holder one year from: (U.S.) Option
- ----------------- ---------------- ------------- -------
<S> <C> <C> <C>
Billy Kan(1) January 16, 1996 6.375 200,000
January 16, 1997 6.375 200,000
January 16, 1998 6.375 200,000
-------
600,000
=======
Roger Li January 16, 1996 6.375 200,000
January 16, 1997 6.375 200,000
January 16, 1998 6.375 200,000
-------
600,000
=======
Dickens Chang(2) January 16, 1996 6.375 15,000
January 16, 1997 6.375 15,000
January 16, 1998 6.375 20,000
-------
50,000
=======
</TABLE>
(1) Mr. Billy Kan resigned from employment with the Company effective November
22, 1998. The employment agreement between Mr. Kan and the Company provides that
his options which have vested during his employment may be exercised
notwithstanding the fact that he no longer works for the Company. See footnote
(1) to the "Aggregated Option Exercises and Fiscal Year-End Option Value
Table."
(2) Mr. Dickens Chang resigned from employment with the Company effective
February 28, 1998. Pursuant to the Option Agreement between Mr. Chang and the
Company, all unexercised options held by Mr. Chang (whether or not vested)
expired immediately upon termination of employment.
EMPLOYMENT AGREEMENTS
On January 16, 1996, the Company and Southwest Products entered into an
employment agreement with William R. McKay (the "Agreement") pursuant to which
Mr. McKay was employed to serve as President and Chief Executive Officer of
Southwest Products and as President and Chief Executive Officer of the Company
for a term of five years. Under the terms of the Agreement, Mr. McKay was paid
an annual base salary of $285,000. The base salary was to be increased or
decreased (to a minimum of $225,000), based upon an annual review of Mr. McKay's
performance. In addition to the base salary, the Board of Directors of the
Company had sole discretion to pay Mr. McKay a bonus for any particular year of
his employment. Mr. McKay was also entitled to stock options as described under
"Stock Option Plan." As part of the conclusion of the CFIUS investigation, Mr.
McKay was removed from his positions as President and Chief Executive Officer
effective May 6, 1999.
29
<PAGE>
On January 16, 1996, the Company, Southwest Products and Mr. McKay also
entered into a Confidentiality and Non-Competition Agreement pursuant to which
Mr. McKay agreed to keep certain information of the Company, Southwest Products
and their affiliates confidential, and was prohibited from competing with the
Company, Southwest Products and their affiliates during the term of that
agreement.
Pursuant to the terms of an employment agreement between the Company and
Mr. Kan dated August 1, 1996, Mr. Kan was employed as the Vice Chairman and the
Managing Director of the Company. The term of the employment commenced August 1,
1996. Mr. Kan's duties included the development, marketing and promotion of the
products of the Company as determined and assigned by the Board of Directors.
Mr. Kan was paid a salary of HK$1,625,000 (approximately U.S. $209,000 per
annum) and was subject to the review by the Board of Directors on an annual
basis. Mr. Kan was also entitled to stock options as described under "Stock
Option Plan." Mr. Kan resigned from his positions as Vice Chairman and Managing
Director effective November 22, 1998.
DIRECTOR COMPENSATION
With the exception Mr. Kan, whose compensation under his employment
agreement included services rendered as both an executive officer and a director
of the Company, no director is entitled to receive compensation in respect of
his or her services as a director of the Company.
There are no interlocking relationships between members of the compensation
committee and executive officers, and there is no insider participation in the
making of compensation decisions.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of May 19, 1999, the stock ownership of
all persons known to own beneficially five percent (5%) or more of the voting
securities of the Company, and all directors and executive officers of the
Company, individually and as a group. Unless otherwise indicated in these
footnotes, each stockholder has sole voting and investment power with respect to
shares beneficially owned and all addresses are in care of the Company.
Beneficial ownership has been determined pursuant to Rule 13d-3 under the
Securities Exchange Act of 1934, (the "Exchange Act"). All information with
respect to beneficial ownership has been furnished by the respective director,
executive officer or stockholder, as the case may be.
<TABLE>
<CAPTION>
Common Stock Series A Preferred
Stock
Amount of Beneficial Percent Amount of Beneficial Percent
-------------------- ------- -------------------- -------
Ownership of Class Ownership of Class
--------- -------- --------- --------
Name (Position) (# shares) % (# shares) %
- --------------- ---------- - ---------- -
<S> <C> <C> <C> <C>
Directors & Officers:
- --------------------
Gunter Gao 12,339,900 (1) 46.6% 36 (2) 100%
(3) (3)
Roger Li Yuen Fai 600,000 (4) 4.1% -- --
Davis Lai Kwan Fai -- -- -- --
Philip Yuen -- -- -- --
Directors & Executive Officers As A 12,939,900 47.8% 36 (2) 100%
Group (3)
(4 persons)
5% Stockholders:
- ---------------
Sunbase International (Holdings) Limited 12,339,900 (1) 46.6% 36 (2) 100%
Asean Capital Limited 12,339,900 (1) 46.6% 36 (2) 100%
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
The New China Hong Kong Limited 1,311,100 7.4% -- --
</TABLE>
Notes:
- -----
(1) Consists of 8,739,900 outstanding shares of Common Stock owned by Asean
Capital and 3,600,000 shares of Common Stock issuable upon the conversion
of the 36 shares of Series A Preferred Stock owned by Asean Capital.
Sunbase International owns 100% of Asean Capital, and Gunter Gao and his
spouse, Linda Yang, together own 100% of Sunbase International.
(2) All of these shares are owned by Asean Capital and may be deemed to be
beneficially owned by Sunbase International and Mr. Gao. Each share
entitles the holder thereof to 500,000 voting rights. However, pursuant to
the terms of the Settlement Agreement (and the terms of the Subscription
Agreement and Convertible Debentures), Asean Capital is prohibited from
exercising these voting rights.
(3) Includes shares of the Company's Common Stock and Series A Preferred Stock
beneficially owned by Gunter Gao and his spouse, Linda Yang, due to each of
them owning 50% of the capital stock of Sunbase International, which in
turn owns all of the capital stock of Asean Capital. Each of Ms. Yang and
Mr. Gao disclaims beneficial ownership of the shares held by the other.
(4) Consists of 600,000 shares of Common Stock issuable upon exercise of
currently exercisable stock options granted to Mr. Li. See
"Stock Option Plan."
The address of Mr. Gao and Messrs. Li, and Lai is 19/F., First Pacific
Bank Centre, 51-57 Gloucester Road, Wanchai, Hong Kong. The address of New China
Hong Kong is 25/F., Bank of China Tower, 1 Garden Road, Hong Kong. The address
of Mr. Yuen is 11/F., Wing Lung Bank Building., 45 Des Voeus Road, Hong Kong.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (all figures expressed
in thousands)
In December 1994, Asean Capital transferred all of its interest in China
Bearing to the Company in exchange for shares of the Company's common stock and
the Promissory Note (in an aggregate principal amount of U.S.$5,000) which is
secured by a continuing security interest in all of the Company's right, title
and interest in the outstanding capital stock of its wholly-owned subsidiary,
China Bearing. The Promissory Note is denominated and repayable in full in U.S.
dollars, and bears interest at a rate of 8% per annum. In connection with the
issuance of the Convertible Debentures, Asean Capital agreed that for so long as
any of the Convertible Debentures are outstanding, no amounts may be repaid by
the Company on the Promissory Note unless there is sufficient working capital
and the repayment is made in accordance with the following schedule:
Payment Period Amount
- -------------- ------
August 1, 1996 to July 31, 1997 up to U.S.$2,000 plus accrued interest
August 1, 1997 to July 31, 1998 up to U.S.$1,500 plus accrued interest
August 1, 1998 to July 31, 1999 up to U.S.$1,500 plus accrued interest
31
<PAGE>
In accordance with this schedule, a principal payment of U.S.$2,000 (RMB
16,700) was made in September 1996. The directors do not envisage any other
repayments being made in the foreseeable future.
Harbin Bearing and Harbin Precision have entered into leases (the
"Ancillary Transport Equipment Lease" and the "Manufacturing Machinery Lease"
together the "Leases"), covering all equipment and assets of the Bearing Factory
relating to the bearing operations which were not contributed to the Company in
the Restructuring. The Leases cover cars, trucks, machinery and equipment used
in manufacturing, office administration and power generation and provide for
total annual payments of RMB 25,530 (U.S.$ 3,076). The Company is currently
negotiating a renewal of the Ancillary Transport Equipment Lease which expired
on December 31, 1998. At the expiration of the Manufacturing Machinery Lease in
December 31, 2001, Harbin Bearing has the right to either renew the lease or
acquire the equipment.
Harbin Bearing and Harbin Holdings have entered into a lease covering
plants and buildings used in Harbin Bearing's business which were not
contributed to Harbin Bearing in the restructuring (the "Plant Lease"). The
Plant Lease provides for annual rent payments of RMB 3,751 (U.S.$ 452). Although
the Plant Lease expired on December 31, 1998, Harbin Bearing is still currently
using the premises and is in the process of negotiating a renewal of the Plant
Lease, has the right to extend the Plant Lease at market rent for another five
years.
Harbin Holdings and Harbin Bearing entered into a lease on January 1, 1994
providing for the use of land by Harbin Bearing at the rate of RMB 2,508 (U.S.$
302) per annum, subject to future adjustments in accordance with changes in
government fees.
As a result of the Restructuring, Harbin Holdings owns the rights to the
trademark "HRB." Pursuant to an exclusive and perpetual trademark license
agreement, Harbin Holdings has granted Harbin Bearing the exclusive and
perpetual right to use the "HRB" trademark on its products and marketing
materials. The royalty on the trademark license agreement is 0.5% of annual
sales from 1994 to 2003 and 0.3% from 2004 to 2013.
Pursuant to the Restructuring, Harbin Holdings assumed responsibilities for
the pension payments of all employees of the Bearing Factory who retired or left
the Bearing Factory prior to the Restructuring. Harbin Bearing and Harbin
Holdings have entered into an agreement (the "Pension Agreement") relating to
pension arrangements after the Restructuring. The Pension Agreement provides
that Harbin Bearing may satisfy the statutory requirement to pay an amount equal
to 22% of annual wages to the municipal government to fund future pension
obligations of its existing employees by making such payments to Harbin Holdings
as representative of the municipal government of Harbin, and Harbin Holdings
agrees to be responsible for all pension obligations to employees of Harbin
Bearing who retire or leave after the Restructuring.
See Note 21 of the Company's 1998 consolidated financial statements for
more detailed information.
32
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FROM 8-K
(a) The following are filed as part of this Form 10-K:
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED
Report of Independent Auditor.......................................................................
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1998...........................
Consolidated Statements of Income for the years ended December 31, 1996, December 31, 1997
and December 31, 1998..............................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 1996, December 31,
1997 and December 31, 1998.........................................................................
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31,
1996, December 31, 1997 and December 31, 1998......................................................
Notes to Consolidated Financial Statements..........................................................
</TABLE>
INDEX TO EXHIBITS:
Exhibit No.
- ----------
Plan of acquisition, reorganization, arrangement, liquidation or succession.
2.1 Share Exchange Agreement, dated December 2, 1994, between the Company,
Valley Financial, Inc., Wayne Crumpley and China Bearing Holdings, Ltd. and
Asean Capital Limited, a subsidiary of Sunbase International. (1)
2.2 Asset Transfer and Assumption Agreement dated December 16, 1994, between
the Company and Valley Financial Corporation. (1)
Certificates of Incorporation and Bylaws
3.1 Nevada Articles of Incorporation. (1)
3.2 Articles of Merger (1)
3.3 Amended and Restated Certificate of Designation for Series A Convertible
Preferred Stock. (1)
3.4 Secured Promissory Note in favor of Asean Capital Limited. (2)
3.5 Third Amended and Restated Certificate of Designation for Series B
Preferred Stock. (4)
Voting trust agreement
9.1 Voting Trust Agreement dated December 31, 1998, between the Company,
Southwest Products and Samuel T. Mok.
Material contracts
33
<PAGE>
10.1 Agreement between the Company and New China Hong Kong with respect to the
Sale and Purchase of shares of China Bearing, together with the Deed of
Novation. (3)
10.2 Memorandum and Articles of Association of China International. (3)
10.3 Joint Venture Contract between China International and Harbin Hazhou
Bearing Distributing Company with respect to Harbin Sunbase. (3)
10.4 Joint Venture Contract between China International and Harbin Bearing
Everising Construction and Development Ltd. with respect to Harbin
Xinhengli. (3)
10.5 Amended Articles of Association of Harbin Sunbase. (3)
10.6 Articles of Association of Harbin Xinhengli. (3)
10.7 Articles of Association of Harbin Bearing. (3)
10.8 Agreement between Harbin Sunbase and Harbin Bearing with respect to the
provision of financial management services to Harbin Bearing. (3)
10.9 Agreement between Harbin Xinhengli and Harbin Bearing with respect to the
provisions of sales and marketing services to Harbin Bearing. (3)
10.10 Pension Fund Aggregation Agreement between Harbin Bearing and Harbin
Holdings with respect to pension payments for existing employees. (3)
10.11 Trademark Licensing Agreement between Harbin Bearing and Harbin Holdings
with respect to the "HRB" trademark. (3)
10.12 Service Agreement between Harbin Holdings and Harbin Bearing. (3)
10.13 Land Use Right Lease Agreement between Harbin Holdings and Harbin Bearing.
(3)
10.14 Power Supply and Manufacturing Equipment Lease Agreement between Harbin
Precision and Harbin Bearing. (3)
10.15 Plant Buildings Lease Agreement between Harbin Precision and Harbin
Bearing. (3)
10.16 Ancillary and Transportation Equipment Lease Agreement between Harbin
Precision and Harbin Bearing. (3)
10.17 Agreement and Plan of Reorganization and Merger dated as of December 29,
1995 among the Company, Southwest Products and the shareholders of
Southwest Products. (4)
10.18 Employment Agreement dated as of January 16, 1996 between the Company,
Southwest Products and William McKay. (4)
10.19 1995 Stock Option Plan. (5)
10.20 Form of Registration Rights Agreement relating to the Private Placement
Shares. (5)
10.21 Employment Agreement dated as of August 1, 1996 between the Company and
Billy Kan. (5)
10.22 Subscription Agreement (together with Form of Debentures and Guaranty)
dated August 2, 1996 among China Bearing, Asean Capital, China
International Bearing Holdings Limited, the Company, Southwest Products,
Glory Mansion, Wardley China Investment Trust, MC Private Equity Partners
Asia Limited and Chine Investissement 2000. (5)
34
<PAGE>
10.23 Settlement Agreement dated October 16, 1998, among China Bearing, Asean
Capital, China International Bearing Holdings Limited, the Company,
Southwest Products, Sunbase International, Extensive Resources, Glory
Mansion, Wardley China Investment Trust, MC Private Equity Partners Asia
Limited and Chine Investissement 2000.
10.24 Letter of O'Melveny & Myers to U.S. Department of the Treasury dated
December 16, 1998, and reply letter of U.S. Department of the Treasury to
O'Melveny & Myers dated December 17, 1998.
Statement re computation of per share earnings
11.1 See Note 18 to the Company's consolidated financial statements.
Statement re computation of ratios
12.1 Statement re computation of ratios.
Annual report to security holders, Form 10-Q or quarterly report to security
holders
13.1 None.
Letter re change in certifying accountant
16.1 None.
Letter re change in accounting principles
18.1 None.
Subsidiaries of the Company
21.1 Subsidiaries of the Company (7)
Published report regarding matters submitted to vote of securityholders
22.1 None.
Consents of experts and counsel
23.1 None.
Power of attorney
24.1 None.
Financial Data Schedule
27.1 Financial Data Schedule for FY 1998.
27.2 Restated Financial Data Schedule for FY 1997.
27.3 Restated Financial Data Schedule for FY 1996.
Notes:
- -----
(1) Filed with the Company's Form 8-K, dated December 22, 1994 and
incorporated herein.
(2) Filed with the Company's Form 8-K/A, dated December 22, 1994 and
incorporated by reference herein.
(3) Filed with the Company's Form 10-K, dated March 3, 1995 and
incorporated by reference herein.
35
<PAGE>
(4) Filed with the Company's Form 10-K, dated May 3, 1996 and incorporated
by reference herein.
(5) Filed with the Company's Form S-1, dated October 23, 1996 and
incorporated by reference herein.
(6) Filed with the Company's Form 10-K, dated April 4, 1997 and
incorporated by reference herein.
(7) Filed with the Company's Form 10-K, dated March 15, 1998 and
incorporated by reference herein.
(b) Reports on Form 8-K:
None.
(c) Reference is made to the list of Exhibits and the Exhibits filed as a
part of this Form 10-K.
(d) Reference is made to the financial statement schedules filed as part
of this Form 10-K.
36
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SUNBASE ASIA, INC.
Date: June 10, 1999 By: /s/ Gunter Gao
-----------------------------------
Gunter Gao, Chairman, President, Chief
Executive Officer, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES
Date: June 10, 1999 By: /s/ Gunter Gao
-------------------------------------
Gunter Gao Chairman, President,
Chief Executive Officer, and Director
Date: June 10, 1999 By: /s/ (Roger) Li Yuen Fai
-------------------------------------
(Roger) Li Yuen Fai, Vice President
Chief Financial Officer and Director
Date: June 10, 1999 By: /s/ Philip Yuen
-------------------------------------
Philip Yuen, Director
Date: June 10, 1999 By: /s/ Harris Lau
-------------------------------------
Harris Lau, Chief Accounting Officer
37
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Pages
-----
SUNBASE ASIA, INC. AND SUBSIDIARIES:
Report of Independent Auditors 2
Consolidated Balance Sheets as of December 31, 1997 3 - 4
and December 31, 1998
Consolidated Statements of Income for the years ended
December 31, 1996, December 31, 1997 and December 31, 1998 5 - 7
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, December 31, 1997 and December 31, 1998 8 - 10
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1996,
December 31, 1997 and December 31, 1998 11
Notes to Consolidated Financial Statements 12 - 45
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, 1998 and 1997 and the related
statements of income, cash flows and changes in shareholders' equity for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the consolidated financial position of Sunbase Asia, Inc. and its
subsidiaries at December 31, 1998 and 1997, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 1998, in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming that
Sunbase Asia Inc. and its subsidiaries (hereafter referred to as the "Group")
will continue to operate as a going concern. As more fully described in note 2,
the Group incurred a substantial consolidated net loss for the year ended
December 31, 1998 which resulted in a tight cash flow position and a default in
repayment of an instalment loan subsequent to December 31, 1998. These
conditions raise substantial doubt about the Group's ability to continue as a
going concern. Management's plans in regard to these matters are described in
note 2. The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amount and classification of liabilities that may result from the outcome of
this uncertainty.
Ernst & Young
Certified Public Accountants
Hong Kong
7 June 1999
2
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997
AND DECEMBER 31, 1998
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 1997 1998 1998
RMB RMB US$
--- --- ---
<S> <C> <C> <C> <C>
ASSETS
Current assets
Unrestricted cash and bank balances 39,343 19,075 2,298
Deposit with a financial institution 23,750 - -
Accounts receivable, net 5 480,400 468,075 56,396
Notes receivable 6,190 2,440 294
Inventories, net 6 477,217 572,176 68,937
Other receivables 41,342 26,720 3,219
Due from related companies 21 300,023 205,216 24,724
--------- --------- -------
Total current assets 1,368,265 1,293,702 155,868
Fixed assets 7 631,812 559,245 67,379
Net assets of discontinued operation 8 - 42,798 5,156
Deferred assets 9 14,383 9,553 1,151
Goodwill 8 10,760 - -
--------- --------- -------
Total assets 2,025,220 1,905,298 229,554
========= ========= =======
</TABLE>
continued/...
The accompanying notes form an integral part of these
consolidated financial statements.
3
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997,
AND DECEMBER 31, 1998 (continued)
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 1997 1998 1998
RMB RMB US$
--- --- ---
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short term bank loans 10 435,403 516,232 62,197
Long term bank loans, current portion 14 140,772 156,113 18,809
Accounts payable 115,646 141,616 17,062
Accrued liabilities and other payables 111,501 122,431 14,751
Short term obligations under capital leases 11 20,441 20,933 2,522
Secured promissory note 1,12 12,450 24,900 3,000
Income tax payable 4 50,392 50,358 6,068
Taxes other than income 38,972 30,417 3,664
Due to related companies 21 18,730 51,579 6,214
Other loans 13 - 117,239 14,125
Interest payable on convertible debentures 13 20,035 - -
Convertible debentures 13 95,450 - -
--------- --------- -------
Total current liabilities 1,059,792 1,231,818 148,412
Long term obligations under capital leases 11 68,483 47,550 5,729
Long term bank loans 14 4,005 - -
Secured promissory note 1,12 12,450 - -
Minority interests 441,490 330,409 39,808
--------- --------- -------
1,586,220 1,609,777 193,949
Shareholders' equity:
Common Stock, par value US$0.001 each,
50,000,000 shares authorized;
13,652,084 (1997: 12,700,142) issued,
and fully paid-up 1,17 107 115 14
466,667 (1997: Nil) shares issuable
on debt restructuring 1,17 - 2,905 350
Preferred Stock, par value US$0.001 each,
25,000,000 shares authorized;
Convertible Preferred Stock
- Series A; 36 shares issued and outstanding 1,17 44,533 44,533 5,365
Convertible Preferred Stock
- Series B; Nil (1997: 6,800 shares)
issued and outstanding 1 28,288 - -
Contributed surplus 17 186,772 215,052 25,910
Reserves 18 27,971 28,002 3,374
Accumulated other comprehensive income 19 1,247 1,247 150
Retained earnings 150,082 3,667 442
--------- --------- -------
Total shareholders' equity 439,000 295,521 35,605
--------- --------- -------
Total liabilities and shareholders' equity 2,025,220 1,905,298 229,554
========= ========= =======
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
4
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1997
AND DECEMBER 31, 1998
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 1996 1997 1998 1998
RMB RMB RMB US$
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Continuing operations
Net sales to
- third parties 621,728 525,802 436,424 52,581
- related parties 21 232,338 171,373 38,886 4,685
-------- -------- -------- ---------
854,066 697,175 475,310 57,266
Cost of sales
- third parties (504,259) (463,296) (344,456) (40,543)
- related parties 21 ( 16,545) ( 15,793) ( 18,469) ( 3,183)
-------- -------- -------- ---------
(520,804) (479,089) (362,925) (43,726)
Provisions on inventories 6 1,000 ( 30,600) (100,600) (12,120)
-------- -------- -------- ---------
Gross profit 332,262 187,486 11,785 1,420
-------- -------- -------- ---------
Selling, general and administrative
expenses
- third parties ( 69,682) ( 67,478) ( 67,761) ( 8,164)
- related parties 21 ( 30,147) ( 9,423) ( 14,772) ( 1,780)
-------- -------- -------- ---------
( 99,829) ( 76,901) ( 82,533) ( 9,944)
Interest expense
- third parties ( 44,286) ( 59,472) ( 61,109) ( 7,362)
- related parties 21 ( 9,848) ( 7,723) ( 5,535) ( 667)
-------- -------- -------- ---------
( 54,134) ( 67,195) ( 66,644) ( 8,029)
Provisions on accounts receivable 5 ( 3,998) ( 16,262) ( 31,961) ( 3,850)
Provisions on other receivable - - ( 12,404) ( 1,494)
Provisions on balances due from
related companies 21 - - ( 49,000) ( 5,904)
Write-off of the deposit with
a financial institution - - ( 23,750) ( 2,861)
Other income 20 16,640 - - -
-------- -------- -------- ---------
Income/(loss) before income taxes 190,941 27,128 (254,507) (30,662)
-------- -------- -------- ---------
</TABLE>
continued/...
The accompanying notes form an integral part of these
consolidated financial statements
5
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1997
AND DECEMBER 31, 1998
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 1996 1997 1998 1998
RMB RMB RMB US$
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Income/(loss) before income taxes 190,941 27,128 (254,507) (30,662)
Provision for income taxes 4 ( 27,792) ( 7,584) - -
-------- -------- -------- ---------
Income/(loss) before minority interests 163,149 19,544 (254,507) (30,662)
Minority interests ( 77,342) ( 21,006) 111,081 13,383
-------- -------- -------- ---------
Net income/(loss) from continuing
operations 85,807 ( 1,462) (143,426) (17,279)
Net loss from discontinued
operations, net of income taxes
of Nil, RMB7 and RMB215
for the year ended December 31,
1996, 1997 and 1998, respectively 8 ( 9,273) ( 2,722) ( 2,958) ( 357)
-------- -------- -------- ---------
76,534 ( 4,184) (146,384) ( 17,636)
======== ======== ======== =========
Net income/(loss) per common share:
Basic earnings/(loss) from continuing
operations 15 7.00 ( 0.12) ( 10.46) ( 1.26)
======== ======== ======== =========
Basic net earnings/(loss) 15 6.24 ( 0.33) ( 10.67) ( 1.28)
======== ======== ======== =========
Dilute earnings/(loss) from continuing
operations 15 5.15 ( 0.12) ( 10.46) ( 1.26)
======== ======== ======== =========
Dilute net earnings/(loss) 15 4.62 ( 0.33) ( 10.67) ( 1.28)
======== ======== ======== =========
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements
6
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1997
AND DECEMBER 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1997 1998 1998
RMB RMB RMB US$
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss) 76,534 ( 4,184) (146,384) (17,636)
Adjustments to reconcile income to net
cash provided by operating activities from
continuing operations:
Minority interests 77,342 21,006 (111,081) (13,383)
Share of net losses from discontinued
operations, net of income tax - - 2,958 356
Depreciation 62,872 70,738 75,040 9,041
Loss/(gain) on disposal of fixed assets ( 670) 1,283 ( 1,349) ( 163)
Amortization of goodwill 847 827 - -
Amortization of present value discount
on deferred asset ( 783) ( 783) ( 782) ( 94)
Amortization of deferred debenture issue
expenses 446 1,318 1,969 237
Decrease/(increase) in assets:
Accounts receivable ( 49,605) (166,609) 6,059 730
Notes receivable 10,544 9,022 3,750 452
Inventories 588 ( 808) (105,262) (12,682)
Deferred assets 40,429 - 3,643 439
Other receivables ( 12,866) 29,745 13,125 1,581
Due from related companies ( 20,310) ( 56,657) 55,283 6,660
Increase/(decrease) in liabilities:
Accounts payable 35,766 ( 36,325) 26,907 3,242
Notes payable ( 12,827) ( 2,800) - -
Interest payable on convertible debentures 2,882 17,153 - -
Accrued liabilities and other payables ( 37,446) 58,839 14,127 1,702
Income tax payable 32,494 12,024 ( 34) ( 4)
Taxes other than income 25,225 21,033 ( 8,474) ( 1,021)
Due to related companies ( 114,567) ( 14,415) 32,850 3,958
Due to a shareholder ( 11,127) - - -
--------- -------- -------- --------
Net cash provided by/(used in) operating
activities from continuing operations 105,768 ( 39,593) (137,655) (16,621)
</TABLE>
continued/...
The accompanying notes form an integral part of these
consolidated financial statements.
7
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1997
AND DECEMBER 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
1996 1997 1998 1998
RMB RMB RMB US$
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from investing activities:
Increase/(decrease) restricted
bank deposit ( 15,189) 15,189 - -
Disposal of long term investments 426 - - -
Proceeds from disposal of fixed assets 3,243 525 2,196 265
Additions of goodwill ( 290) - - -
Additions to fixed assets ( 167,430) ( 48,287) ( 16,586) ( 1,963)
Receivable from disposal of
an investment ( 13,419) 13,419 - -
Decrease/(increase) in due from related
companies ( 47,886) ( 38,091) 39,524 4,761
Advances to subsidiary proposed for disposal - - ( 3,901) ( 470)
--------- ---------- ---------- ----------
Net cash provided by/(used in) investing
activities ( 240,545) ( 57,245) 21,233 2,593
--------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from short term bank loans 701,710 665,373 630,477 75,961
Repayment of short term bank loans ( 597,988) (588,817) ( 549,648) ( 66,223)
Repayment of other loans ( 33,810) - 4,659 561
Repayment of secured promissory note ( 16,700) - - -
Proceeds from issuance of convertible
debentures 95,450 - - -
Proceeds from sales of common stock,
net of costs 36,085 - - -
Proceeds from long term bank loans 1,283 11,136 11,336 1,366
Advance from/(repayment to) shareholders ( 6,225) - - -
Debenture issue expense ( 3,733) - - -
--------- ---------- ---------- ----------
Net cash provided by financing activities 176,072 87,692 96,824 11,665
--------- ---------- ---------- ----------
Net increase/(decrease) in cash and
cash equivalents 41,295 ( 9,146) ( 19,598) ( 2,361)
Cash and cash equivalents, at beginning
of year 7,194 48,489 39,343 4,740
Cash and cash equivalents from subsidiary
proposed for disposal, at beginning
of year - - ( 670) ( 81)
--------- ---------- ---------- ----------
7,194 48,489 38,673 4,659
--------- ---------- ---------- ----------
Cash and cash equivalents, at end of year 48,489 39,343 19,075 2,298
========== ========== ========== ==========
</TABLE>
continued/...
The accompanying notes form an integral part of these
consolidated financial statements.
8
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1997
AND DECEMBER 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
Notes 1996 1997 1998 1998
RMB RMB RMB US$
------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Income taxes paid - - 1,737 209
Interest paid
(net of amounts capitalized in the
fixed assets and other loan) 51,835 64,748 52,628 6,340
Non-cash transactions:
Financing lease arrangements 17,270 18,788 18,788 2,263
======= ======== ======= =======
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
9
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, DECEMBER 31, 1997
AND DECEMBER 31, 1998
(Amounts in thousands, except number of shares)
<TABLE>
<CAPTION>
Accumu-
Shares lated
Number issuable other
of issued Issued on debt Preferred Contri compre-
common common re- stock -buted hensive Retained
stock stock structuring Series A Series B surplus Reserves income earnings
RMB RMB RMB RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995 11,700,063 99 - 44,533 28,288 150,695 25,266 1,247 80,437
New issue (note 1) 1,000,000 8 - - - 36,077 - - -
Reverse stock split
(note 1) 46 - - - - - - - -
Net comprehensive
income - - - - - - - - 76,534
Appropriation to
reserves (note 18) - - - - - - 2,600 - ( 2,600)
---------- ------ ----------- -------- --------- ------- -------- ------- --------
Balance at December 31,
1996 12,700,109 107 - 44,533 28,288 186,772 27,866 1,247 154,371
Reverse stock split
(note 1) 33 - - - - - - - -
Net comprehensive
loss - - - - - - - - ( 4,184)
Appropriation to
reserves (note 18) - - - - - - 105 - ( 105)
---------- ------ ----------- -------- --------- ------- -------- ------- --------
Balance at December 31,
1997 12,700,142 107 - 44,533 28,288 186,772 27,971 1,247 150,082
Net comprehensive
loss - - - - - - - (146,384)
Conversion from
Series B shares
(note 1, 17) 987,004 8 - - (28,288) 28,280 - - -
Reverse stock split
(note 1) 4 - - - - - - - -
Reversal of common
stocks in respect of
Series A Warrants
(note 1) ( 35,066) - - - - - - - -
Shares issuable on
debt restructuring
(note1) - - 2,905 - - - - - -
Appropriation to
reserves (note 18) - - - - - - 31 - ( 31)
---------- ------ ----------- -------- --------- ------- -------- ------- --------
Balance at December 31,
1998 13,652,084 115 2,905 44,533 - 215,052 28,002 1,247 3,667
========== ====== =========== ======== ========= ======= ======== ======= ========
<CAPTION>
Total
RMB
<S> <C>
Balance at December 31,
1995 330,565
New issue (note 1) 36,085
Reverse stock split
(note 1) -
Net comprehensive
income 76,534
Appropriation to
reserves (note 18) -
--------
Balance at December 31,
1996 443,184
Reverse stock split
(note 1) -
Net comprehensive
loss ( 4,184)
Appropriation to
reserves (note 18) -
--------
Balance at December 31,
1997 439,000
Net comprehensive
loss (146,384)
Conversion from
Series B shares
(note 1, 17) -
Reverse stock split
(note 1) -
Reversal of common
stocks in respect of
Series A Warrants
(note 1) -
Shares issuable on
debt restructuring
(note1) 2,905
Appropriation to
reserves (note 18) -
--------
Balance at December 31,
1998 295,521
========
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
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
Sunbase Asia, Inc. ("the Company") entered into a share exchange
agreement ("Share Exchange Agreement") with Asean Capital Limited ("Asean
Capital") on December 2, 1994. Pursuant to the Share Exchange Agreement
and certain subsequent changes thereto, as agreed between the Company and
Asean Capital, and further to a board resolution of the Company on March
31, 1995, the Company issued 10,261,000 common stock shares, 36 shares of
Series A convertible preferred stock and a US$5 million secured promissory
note to Asean Capital in exchange for the entire issued share capital of
China Bearing Holdings Limited ("China Bearing"). This transaction has been
treated as a recapitalization of China Bearing with China Bearing as the
acquirer (reverse acquisition). The total number of common stock shares
outstanding subsequent to this arrangement was 11,700,063. Included in the
new issued common stocks were 35,066 shares which were deemed to be
converted by the Series A Warrants (the "Warrants") issued to the warrant
holders without consideration. As the Warrants expired on June 30, 1998,
and no such Warrants were exercised during the periods ended December 31,
1998, such shares of common stock were reversed during the year.
The Series A convertible preferred stock is convertible at the option
of the holder at a conversion rate of 100,000 common stock shares per
Series A share. As preferred shares, they also carry 500,000 votes per
share and are entitled to the same dividend as the common stock
shareholders on the basis as if the preferred shares had been converted to
common stock shares at the conversion rate as noted above.
On June 10, 1996, the company issued an additional 1,000,000 shares of
common stock with a par value of US$0.001 (RMB0.0083) at US$5.00 (RMB8.3)
per share. The respective share premium of RMB36,077 had been included in
the contributed surplus for the year ended December 31, 1996.
In addition, 46, 33 and 4 shares of common stock were issued from a
reverse stock split for the year ended December 31, 1996, 1997 and 1998,
respectively.
On October 16, 1998, the Company, certain of its subsidiaries and
Asean Capital entered into a settlement agreement ("Settlement Agreement")
with the investors of the convertible debentures ("Debenture holders").
This Settlement Agreement was entered into connection with the replacement
of the US$11,500 convertible debentures ("Convertible Debentures") issued
by China Bearing to the Debenture Holders on August 23, 1996, by an
instalment loan ("Instalment Loan") as further explained in Note 13 to the
financial statements. Pursuant to one of the conditions set out in the
Settlement Agreement, the Company agreed to issue an additional 466,667
shares of common stock with par value of US$0.001 (RMB0.083) per share in
favour of the Debenture Holders, within 90 days. Such common stocks were
issued on January 14, 1999. The fair value of these additional shares,
being the market price of Company's common stock at date of the Settlement
Agreement, was accounted for as the issuable shares on debt restructuring
in the balance sheet at December 31, 1998.
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)
China Bearing is a holding company which was established to acquire a
100% interest in China International Bearing (Holdings) Company Limited
("China International"). China International was incorporated in Hong Kong
as the holding company of Harbin Xinhengli Development Co. Ltd. ("Harbin
Xinhengli") and Harbin Sunbase Development Co. Ltd. ("Harbin Sunbase"),
Sino-foreign equity joint ventures in the People's Republic of China
("China" or the "PRC") established to acquire, in aggregate, a 51.6%
interest in Harbin Bearing Company Limited ("Harbin Bearing") which is a
joint stock limited company established in China under the Trial Measures
on Share Companies and the Opinion on the Standardization of Joint Stock
Companies promulgated by the State Council of China and the successor to
the manufacturing operations of Harbin Bearing General Factory, a Chinese
state-owned enterprise established in 1950.
On December 29, 1995, the Company entered into a reorganization
agreement ("Reorganization Agreement") with Southwest Products Company
("Southwest"), a company incorporated in the United States of America, and
the shareholders of Southwest for the acquisition of 100% of the issued
common stock of Southwest. The above transaction has been treated as a
business combination and is accounted for under the purchase method of
accounting. 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 until 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.
Pursuant to the Reorganization Agreement, a wholly-owned subsidiary of
the Company was incorporated for the purpose of merging with Southwest
pursuant to a separate merger agreement. In connection with the merger,
the Company issued an aggregate of 6,800 shares of Series B convertible
preferred stock ("Series B stock") to the then shareholders of Southwest or
their designates. As preferred shares, the shares carry 100 votes per
share and are entitled to the same dividend as the common shareholders on
the basis as if the preferred shares had been converted to common stock
shares at the conversion rate as noted above. At the option of the Series
B stockholders, the stock may be redeemed at US$500 per Series B share by
the Company from the proceeds of the next permanent equity offering, the
net proceeds of which will be designated for such redemption. Any shares
not so redeemed will automatically be converted into common stock shares on
the date and in accordance with the formula set forth below. If the
aforesaid public offering or the redemption are not effected within two
years from the date of issue of the Series B stock, the stock will
automatically be converted into common stock on the first business date
after expiry of the two-year period of the Reorganisation Agreement, which
is on January 19, 1998. Pursuant to the Reorganisation agreement, the
number of shares of common stock converted from the Series B shares are
based on US$500 per Series B shares divided by the lesser of (a) US$5.00 or
(b) the "Average Closing Price" of the common stock of the Company.
Average Closing Price is defined as the closing market prices of the most
recent 60 trading days, with 45 of which traded at a minimum of 2,000
shares. As at January 19, 1998, the entire 6,800 shares of Series B stocks
were automatically converted into 987,004 shares of common stock according
to the conditions as set out above. Thereafter, no Preferred Series B
shares were outstanding at December 31, 1998.
12
<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)
As a result of the review undertaken by the Committee on Foreign
Investment in the United States ("CFIUS") as more fully explained in note
8, on December 26, 1998, the Company informed CFIUS that it intended to
divest Southwest. The Company has appointed a U.S. citizen, as trustee
(the "Trustee") pursuant to a Voting Trust Agreement dated December 31,
1998 (the "Voting Trust Agreement") between the Company, Southwest Products
and the Trustee to act as the director of Southwest to manage and operate
Southwest. Accordingly, the results of Southwest for the years ended
December 31, 1996, 1997 and 1998 have been accounted for as a discontinued
operation.
2. BASIS OF PRESENTATION
Fundamental uncertainty
-----------------------
The Company and its subsidiaries (hereafter referred to as the
"Group") sustained a consolidated net loss after minority interests of
RMB146,384 for the year ended December 31, 1998 (1997: loss of RMB4,184;
1996: profit of RMB76,534). As a result, the Company had sustained a
substantial reduction in the retained earnings to RMB3,667 (1997: retained
profits RMB150,082) as at that date. In light of the substantial losses
incurred, the Company has experienced tight cash flows during the year in
sustaining its existing operations as well as repaying its existing bank
and other loans which amounted to an aggregate balances of RMB789,584 as at
December 31, 1998. This resulted in a default in repayment of the
Instalment Loan subsequent to the balance sheet date in March 1999.
Accordingly, the board of directors of the Company recognised that
immediate remedial actions should be taken in order to enable the Group to
continue its operations as a going concern. In this regard, the directors
have adopted the following measures to improve the financial position, cash
flow, profitability and operations of the Group:
(a) Proposal for the sale of Southwest
Pursuant to a resolution dated December 16, 1998, the board of
directors decided to dispose Southwest and began to seek potential
investors through the appointment of a trustee. Currently, the Company has
received responses from several investors who have expressed interest in
acquiring Southwest. The directors estimate the sale of Southwest will be
completed in mid 1999.
(b) Negotiation on the revision of the terms of the Instalment Loan
The Group is currently conducting negotiations with the creditors of
the Instalment Loan (the "Creditors") in relation to the event of default
in repayment of the Instalment Loan since March 1999. The directors
believe that a workable solution, which would include a revised repayment
schedule upon the disposal of Southwest, can be made with the Creditors in
due course.
13
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
2. BASIS OF PRESENTATION (continued)
Fundamental uncertainty (continued)
-----------------------
(c) Renewal of PRC bank loans
In the past the Group has been allowed by the PRC bankers to roll over
the loans due for repayment. Accordingly, the directors believe that the
existing bank loans will be renewed in the forthcoming year.
(d) Operational and improved profitability measures
The directors are in the process of implementing certain measures
designed to further restore the Group's financial strength. Such measures
include, inter-alia:
i) the rationalisation of overheads which comprises certain cost
cutting measures;
ii) the revision of its pricing policy to boost sales;
iii) active negotiations with existing and new bankers for new
banking facilities;
iv) tighter credit controls over debts collections;
v) active negotiations with existing raw material suppliers to
obtain a longer credit terms; and
vi) the exploration of new clientele in other provinces in the
PRC.
(e) Restructuring of the Group
The directors are in the process of evaluating the Group's business
strategy which may involve an alliance with a strategic partner,
reorganisation of the Group's operations and/or divestiture of its bearing
manufacturing assets in the PRC.
14
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
2. BASIS OF PRESENTATION (continued)
Fundamental uncertainty (continued)
-----------------------
In the opinion of the directors, in light of the measures completed to
date together with the expected results of other measures in progress, it
is reasonable to expect that the Group will be able to ease its liquidity
problem in the near future. The management have dedicated their efforts to
reviving the operations of the Group by eliminating, to the extent
possible, all the factors leading up to the deterioration of its
performance in the past. After taking into account the existing banking
facilities, expected net proceeds from the disposal of Southwest and
subject to the successful negotiation with the creditors of the Instalment
Loan to reach a workable solution, the directors believe that the Group
will have sufficient working capital for its current requirements for a
period of one year after the balance sheet date. Accordingly, the
financial statements have been prepared on a going concern basis.
Basis of consolidation
----------------------
These consolidated financial statements incorporate the results of
operations of the Group for the three year period ended December 31, 1998.
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.
15
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 1998 which was US$1.00 = RMB8.30. 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, 1998.
(a) Cash and bank balances
Cash and bank balances include cash on hand and demand deposits with
banks with an original maturity of three months or less.
(b) Inventories
Inventories are stated at the lower of cost, on a first-in, first-out
basis, or market value. Work in progress and finished goods include direct
materials, direct labor and an attributable proportion of production
overheads.
(c) Fixed assets and depreciation
Property, machinery and equipment are stated at cost less accumulated
depreciation. Depreciation of property, machinery and equipment is
computed using the straight-line method over the assets' estimated useful
lives. The estimated useful lives of property, machinery and equipment are
as follows:
Buildings 20 years
Machinery and equipment 8-10 years
Motor vehicles 3-5 years
Furniture, fixtures and office equipment 5 years
(d) Construction in progress
Construction in progress represents factory buildings, plant and
machinery and other fixed assets under construction and is stated at cost.
Cost comprises direct costs of construction as well as interest charges on
borrowed funds. Capitalization of interest charges ceases when an asset is
ready for its intended use. Construction in progress is transferred to
fixed assets upon commissioning when it is capable of producing saleable
output on a commercial basis, notwithstanding any delays in the issue of
the relevant commissioning certificates by the appropriate PRC authorities.
16
<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)
(d) Construction in progress (continued)
No depreciation is provided on construction in progress until the
asset is completed and put into productive use.
(e) Income taxes
The income taxes reflect the accounting 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 is being amortized over a fifteen year period. The
carrying value of goodwill is assessed on an ongoing basis and provision is
made to the extent that there is permanent diminution in value.
17
<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)
(i) Stock Options
As the Company has elected to follow the accounting method under
APB25, accounting for stock based compensation is based on the intrinsic
value method. The compensation cost to record is based on the difference
between the fair value of the share and the exercise price at the time both
the number of options the employee is entitled to receive and the exercise
price is known. This compensation cost is recognized over the period the
employee performs the related services.
(j) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(k) Comprehensive income
The Group adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("SFAS 130") in 1998, which established
standards for reporting and display of comprehensive income/loss and its
components. SFAS 130 requires foreign currency translation adjustments to
be included in other comprehensive income/loss. Comprehensive income/loss
is reported in the consolidated statements of shareholders' equity. The
adoption of SFAS 130 did not have a material effect on the Group's
financial position or results of operations.
(l) Segment and related information
In 1998, the Group adopted Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related
Information"("SFAS 131"), which established standards for the way that
information about operating segments is reported. SFAS 131 also
established standards for related disclosures about products and services,
geographic areas and major customers. The information for 1997 and 1996
has been revised to conform to SFAS 131.
(m) Impact of recently issued accounting standards and other
pronouncements
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which is required to be adopted in years
beginning after June 15, 1999. The Group expects to adopt the new
statement effective January 1, 2000. The statement will require the Group
to recognize all derivatives on the balance sheet at fair value. The Group
has not yet determined what the effect of SFAS 133 will be on the earnings
and financial position of the Group.
18
<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)
(n) Comparative amounts
Certain comparative amounts have been reclassified to conform with the
current year's presentation.
4. INCOME TAXES
Sunbase Asia, Inc. was incorporated in the State of Nevada in the
United States of America. The Company is subject to U.S. federal tax on
its income. Nevada does not impose any tax on corporations organized under
its laws.
China Bearing was incorporated under the laws of Bermuda and, under
current Bermudan law, is not subject to tax on income or on capital gains.
China International was incorporated under the Hong Kong Companies
Ordinance and under the current Hong Kong tax law, 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 by China Bearing from the joint
venture enterprises 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. Income of Harbin
Bearing, being a joint stock limited company registered in the Special
Economic and Technological Development Zone in the Municipal City of
Harbin, is normally subject to a maximum income tax rate of 20%. Pursuant
to the same income tax basis applicable to the Special Economic and
Technological Development Zone, Harbin Bearing has been designated a high
technology production enterprise and is entitled to a special income tax
rate of 15%.
The Company has undertaken not to require China Bearing to make any
distribution of dividends and the directors of Harbin Xinhengli and Harbin
Sunbase have decided not to distribute any dividend income related to
income earned for the year received from Harbin Bearing outside of China.
As a result, deferred income taxes have not been accrued in the financial
statements in respect of income distributions. At December 31, 1998, no
undistributable earnings of the Chinese subsidiaries of the Group as
accumulated losses were carried forward.
19
<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 reconciliation of provision/(benefit) for income tax computed at the
PRC statutory tax rate applicable to the Group to income tax expense is as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
RMB RMB RMB
<S> <C> <C> <C>
PRC statutory tax rate 15% 15% 15%
Computed expected tax/(benefit) 28,641 4,069 (38,171)
Net increase of valuation allowance - - 34,004
Non-deductible losses/(non-taxable income) ( 849) 3,515 4,167
------ ----- -------
Income tax expense for the year 27,792 7,584 -
====== ===== =======
</TABLE>
The deferred tax asset of the Group at December 31, 1998 is comprised of
the following:
<TABLE>
<CAPTION>
December 31,
1998
RMB
<S> <C>
Deferred tax asset:
Net operating loss carry forwards 34,004
Less: Valuation allowance for deferred tax asset ( 34,004)
-------
-
=======
</TABLE>
20
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
5. ACCOUNTS RECEIVABLE
Accounts receivable comprise:
<TABLE>
<CAPTION>
December 31,
1997 1998
RMB RMB
<S> <C> <C>
Accounts receivable - trade 515,365 534,918
Less: Allowance for doubtful debts ( 34,965) ( 66,843)
-------- --------
Accounts receivable, net 480,400 468,075
======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
RMB RMB RMB
<S> <C> <C> <C>
Movement of allowance for doubtful debts
Balance as at January 1, 13,927 17,925 34,882
Provided during the year 3,998 17,040 31,961
-------- -------- --------
Balance as at December 31, 17,925 34,965 66,843
======== ======== ========
</TABLE>
6. INVENTORIES
Inventories comprise:
<TABLE>
<CAPTION>
December 31,
1997 1998
RMB RMB
<S> <C> <C>
Raw materials 92,039 148,470
Work in progress 141,214 140,238
Finished goods 282,634 419,668
-------- --------
515,887 708,376
Less: Provision ( 38,670) (136,200)
-------- --------
Inventories, net 477,217 572,176
======== ========
</TABLE>
21
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
6. INVENTORIES (continued)
<TABLE>
<CAPTION>
December 31,
1996 1997 1998
RMB RMB RMB
<S> <C> <C> <C>
Movement of inventory provision
Balance as at January 1, 4,309 5,415 35,600
Provided during the year 1,415 33,255 100,600
Obsolete inventories sold during the year ( 309) - -
------- ------- -------
Balance as at December 31, 5,415 38,670 136,200
======= ======= =======
</TABLE>
7. FIXED ASSETS
<TABLE>
<CAPTION>
December 31,
1997 1998
RMB RMB
<S> <C> <C>
Buildings 71,151 83,790
Machinery and equipment 576,892 572,396
Motor vehicles 18,249 22,065
Furniture, fixtures and office equipment 24,283 6,611
Construction in progress 147,298 141,766
-------- --------
837,873 826,628
Less: Accumulated depreciation (206,061) (267,383)
-------- --------
631,812 559,245
======== ========
</TABLE>
The total amount of interest capitalized during the year and included
in the above fixed assets is RMB3,892 (1997: RMB18,207 and 1996: RMB19,473).
22
<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 Group's buildings are located in the PRC and the land on which the
Group's buildings are situated is State-owned.
The gross amounts of assets recorded under capital leases and the
accumulated depreciation are analyzed as follows:
<TABLE>
<CAPTION>
1997 1998
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 ( 80,091) ( 99,069)
-------- --------
75,354 56,376
======== ========
</TABLE>
8. DISCONTINUED OPERATION
<TABLE>
<CAPTION>
1998
RMB
<S> <C>
Cost of investment 28,288
Share of accumulated losses of the unconsolidated subsidiary (15,160)
-------
Net carrying value 13,128
Due from the unconsolidated subsidiary 29,670
-------
42,798
=======
</TABLE>
As stated in Note 1, pursuant to a directors' resolution on December
31, 1998, the Company appointed a U.S. citizen as the trustee of the Company to
manage Southwest, pursuant to a Voting Trust Agreement. The Voting Trust
Agreement also provides that the Trustee will not accept direction from the
Company and will not permit the Company to exercise any control or influence
over the business or management of Southwest. All visits or requests for
information to Southwest by the Company must be submitted to the Trustee in
advance and receive the Trustee's approval. In addition, all "foreign persons"
within the meaning of 31 C.F.R. (S)800.213 serving as officers and/or directors
of Southwest tendered their resignations pursuant to the terms of the Voting
Trust Agreement.
23
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
8. DISCONTINUED OPERATION (continued)
The proposal for the sale of Southwest decided by the Company also
gave rise to the disposal of a segment of a business in accordance with the APB
30. The segment that was held for disposal was all identified as the net assets
of Southwest. The directors expect the disposal of such segment will be
completed in mid 1999. The net assets of Southwest at December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
RMB
<S> <C>
Cash and bank balances 3,724
Inventories 11,208
Accounts receivable 8,061
Prepayment, deposit and other receivable 301
-------
Current assets 23,294
Property, plant and equipment, net 13,150
Goodwill * 9,928
Long term investment 428
-------
Total assets 46,800
-------
Accounts payable ( 7,117)
Other payable ( 3,229)
Taxes other than income ( 56)
Due to holding company (29,670)
-------
Current liabilities (33,672)
-------
Net assets at December 31, 1998 13,128
=======
<CAPTION>
RMB
<S> <C>
* Goodwill of Southwest comprised:
Cost 10,760
Less : Amortization ( 832)
-------
9,928
=======
</TABLE>
The net sales of Southwest for the three years ended December 31, 1996,
1997 and 1998 were RMB35,640, RMB44,521 and RMB44,595 respectively.
At December 31, 1998, as the disposal of Southwest has yet to be completed
and the directors expected that no loss will be resulted from such disposal
as a result, no gain nor loss on disposal of Southwest was recognized in
the consolidated income instatement. In the opinion of directors, such
disposal is estimated to be completed in mid 1999.
24
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
9. DEFERRED ASSETS
<TABLE>
<CAPTION>
December 31,
1997 1998
RMB RMB
<S> <C> <C>
Deferred valued added tax ("VAT") receivable 38,860 38,860
Less: Offset against VAT payable ( 25,664) (29,307)
-------- --------
13,196 9,553
Less: Present value discount ( 782) -
-------- --------
12,414 9,553
-------- --------
Deferred debenture issue expenses 3,733 3,733
Less: Amortization ( 1,764) ( 3,733)
-------- --------
1,969 -
-------- --------
14,383 9,553
======== ========
</TABLE>
Deferred VAT receivable arose from the introduction of the new PRC VAT
system on January 1, 1994. This asset was calculated and accounted for in
accordance with governmental directive by applying the 14% VAT rate to
certain inventory values as at December 31, 1993, with the effect of
reducing the value of certain opening inventories of Harbin Bearing as at
January 1, 1994 by the same amount. A detailed directive regarding the
utilization of the deferred VAT receivable was issued in May 1995 by the
Ministry of Finance and the State General Tax Bureau pursuant to which the
Group is permitted to offset the balance of RMB38,860 against its VAT
payable within a period of five years starting from January 1, 1995.
Accordingly, a discount has been applied using Harbin Bearing's average
borrowing rate over the estimated period of recovery.
Deferred debenture issue expenses represented costs incurred for the
issue of convertible debentures on August 23, 1996. The total amount of
deferred expenses incurred of RMB3,733 were being amortized over the terms
of the debentures of three years. On October 16, 1998, pursuant to the
Settlement Agreement entered into between the Group and the Debenture
Holders, the Debenture Holders agreed not to exercise their rights in
accordance with the terms and conditions of the Subscription Agreement and
to replace the convertible debentures by the Instalment Loan. Accordingly,
all the remaining unamortized deferred debenture issue expenses were
written off during the year.
25
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
10. SHORT TERM BANK LOANS
The short term bank loans bear interest at a weighted average rate of
10.824% and 8.588% per annum as at December 31, 1997 and 1998 respectively,
and are repayable within one year.
11. OBLIGATIONS AND COMMITMENTS
(a) Obligations under capital leases
Harbin Bearing leases machinery and equipment, furniture, fixtures and
office equipment and motor vehicles from Harbin Precision Machinery
Manufacturing Company ("Harbin Precision"), a company wholly-owned by
Harbin Bearing Holdings Company ("Harbin Holdings"), a separately
established enterprise under the supervision and control of the Machine
Bureau, which received 33.3% of the new shares of Harbin Bearing. These
leases are accounted for as capital leases which have lease terms ranging
from five 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 non-cancellable future minimum lease
payments as of December 31, 1998 were as follows:
<TABLE>
<CAPTION>
December 31,
1998
RMB
<S> <C>
Year ending December 31,
1999 25,927
2000 25,927
2001 25,927
-------
Total minimum lease payments 77,781
Less: Amount representing interest ( 9,298)
-------
Present value of minimum lease payments 68,483
Less: Current portion (20,933)
-------
47,550
=======
</TABLE>
26
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
11. OBLIGATIONS AND COMMITMENTS (continued)
(b) Obligations under operating leases
Non-cancellable operating leases commitments payable in the next five
years are as follows:
<TABLE>
<CAPTION>
December 31,
1998
RMB
<S> <C>
Year ending December 31,
1999 2,508
2000 2,508
2001 2,508
2002 2,508
2003 2,508
------
12,540
======
</TABLE>
The lease rentals recorded as expenses in respect of operating leases
during the year amounted to RMB6,259 (1997:RMB6,259 and 1996: RMB6,259).
The Group has an option to extend the terms of the current operating
lease in respect of the buildings which expired on December 31, 1998, for
another five years at market rent. The current annual rental of the
building is RMB3,751 (US$452) (1997: RMB3,751 (US$452)). The renewal of
the leases has yet to be finalized at the date of approval of these
financial statements by the directors of the Company.
As of December 31, 1998, the Group had no outstanding commitments for
capital expenditure.
12. SECURED PROMISSORY NOTE
The secured promissory note (the "Note") was issued in 1995 to Asean
Capital in connection with the Share Exchange Agreement as detailed in Note
1 and was secured by a continuing security interest in and to all of the
Company's title and interest in the outstanding capital stock of China
Bearing.
The Note is denominated in United States dollars and bears interest at
8% per annum.
27
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
12. SECURED PROMISSORY NOTE (continued)
Pursuant to a subscription agreement dated August 2, 1996 entered into
between the Company, certain of its subsidiaries, the convertible
debentures holders and Asean Capital (the "Subscription Agreement") as more
fully described in Note 14 below, Asean Capital has made an irrevocable and
unconditional undertaking that it will not demand repayment of the
Promissory Note unless the Company has sufficient cash flows for working
capital, debt repayment and capital expenditure for the ensuing twelve
month period and the repayment will only be made according to the repayment
schedule defined in the Subscription Agreement. According to the repayment
schedule as set out in the Subscription Agreement, RMB24,900 (US$3,000) is
repayable in two instalments during the twelve month period ended July 31,
1998 and ending July 31, 1999.
Such repayment schedule was further governed by the conditions as set
out in the Settlement Agreement entered into between the Company, certain
of its subsidiaries, Asean Capital and the Debentures Holders, as more
described in Note 14 below, that Asean Capital agreed not to demand for the
repayment the outstanding Promissory Notes within the period of the
Instalment Loan being executed or unless with prior approval by the
Debenture Holders.
13. CONVERTIBLE DEBENTURES AND OTHER LOAN
Balance at December 31, 1997 represented US$11,500 convertible
debentures ("Convertible Debentures") issued by China Bearing to certain
institutional investors on August 23, 1996 pursuant to a Subscription
Agreement dated August 2, 1996. Unless the Convertible Debentures have been
converted, they are due and payable in August 1999 (the "Maturity Date").
The investors have the right to convert at any time, in whole or in part,
the principal amount of the debenture into 2,300,000 shares of the common
stock of the Company based on the initial conversion price (the "Conversion
Price") of US$5.00 per share, subject to certain adjustments in relation to
the capital structure, changes to profits and reserves of the Company.
28
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
13. CONVERTIBLE DEBENTURES AND OTHER LOAN (continued)
Pursuant to one of the conditions set out in the Subscription
Agreement, if and whenever the cumulative audited earnings per share, the
calculation of which is defined in the Subscription Agreement (the "defined
EPS"), for any two consecutive financial years from year ended December 31,
1996 to 1998 are less than the corresponding management's projection of
cumulative EPS for such years as set out in the Subscription Agreement, the
Conversion Price shall be adjusted in accordance with the formula as stated
in the Subscription Agreement. Due to the Company's failure to achieve the
projected cumulative EPS of US$1.79 for the two years ended 31 December
1997, the Conversion Price has been adjusted to US$1.84 per share.
The Convertible Debentures bear interest at the rate of the higher of
(i) 5% per annum (net of withholding tax, if applicable) and (ii) the
percentage of the dividend yield calculated by reference to dividing the
annual dividend declared per share of common stock of the Company by the
Conversion Price.
The Convertible Debentures are required to be redeemed on the Maturity
Date at their principal amount then outstanding together with any accrued
but unpaid interest together with an amount that would enable the investors
to yield an aggregate internal rate of return ("IRR") of 12% per annum on
the cost of their investment. As a result, interest has been accrued in the
financial statements for the year ended December 31, 1996 at the rate of
12% per annum.
Pursuant to the Subscription Agreement, in the event that an
adjustment of the Conversion Price as described above occurs, and such
adjustment would result in the number of shares that would have been issued
to the investors in aggregate had conversion immediately taken place to
exceed 20% of the total issued share capital of the Company (including also
for this purpose such number of shares that would have been issued upon
conversion of all of the Convertible Debentures), that portion of the
Convertible Debenture(s) representing the excess of such shares over such
20% ("the Excess") shall, at the option of the relevant investors, be
redeemed by the Company at its principal amount outstanding together with
any accrued but unpaid interest calculated up to and including the date of
payment together with an amount that would enable the investors to yield in
aggregate an IRR of 19.75% per annum.
In the occurrence of any event of default as defined in the
Subscription Agreement, the Convertible Debentures shall automatically
become immediately due and payable in full by the Company at its principal
amount outstanding together with the accrued but unpaid interest together
with an amount that would enable the investors to yield an aggregate IRR on
their investment of 19.75% per annum unless the Company shall have received
a notice from any of the investors to specify the number of Convertible
Debentures that they wish to redeem, in which case the amount payable shall
only be limited to the specified amount. Due to the failure of the Company
to achieve the defined EPS of US$0.55 for the year ended December 31, 1997,
being an event of default stipulated in the Subscription Agreement,
although the Convertible Debentures bear a face rate of interest of 5% per
annum interest is accrued on these Convertible Debentures at the rate of
19.75% per annum from the date of inception up to December 31, 1997 and the
outstanding amount of Convertible Debentures has been classified as current
liabilities as at December 31, 1997.
29
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
13. CONVERTIBLE DEBENTURES AND OTHER LOAN (continued)
The obligations of China Bearing under the Convertible Debentures are
guaranteed by the Company, Asean Capital Limited, China International
Bearing Holding Limited and Southwest Products Company (hereinafter
collectively referred to as the "Guarantors"). The Guarantors have given
certain negative pledges over the creation of securities interest for as
long as any of the Convertible Debentures remain outstanding.
On October 16, 1998, China Bearing, the Company, certain of its
subsidiaries, Asean Capital and the Debenture Holders entered into a
Settlement Agreement of which the Debenture Holders agreed not to exercise
their rights under the Subscription Agreement in relation to the occurrence
of the events of defaults as noted above and agreed to replace the
Convertible Debentures by an Instalment Loan with the conditions that (i)
China Bearing shall repay by instalments to the Debenture Holders in
respect of the principal amounting to US$13,173 (equivalent to RMB109,340)
at date of the Settlement Agreement and (ii) the Company shall issue in
favour of the Debenture Holders 466,667 shares of common stocks with zero
consideration. The principal balance as set out above was determined by the
outstanding balance of the Convertible Debentures amounting to US$11,500
(equivalent to RMB95,450) plus the unpaid interest expenses of US$1,673 up
to the date of the Settlement Agreement. The unpaid interest expenses were
calculated at the rate of 12.375% on the principal amount of the
Convertible Debentures, net of payment made to the Debenture Holders during
the year. The interest rate of 12.375% was derived from a wavier of 7.375%
from the 19.75% noted above, as mutually agreed between the Debenture
Holders and the Group.
This modification of terms of the debts thus constitutes troubled debt
restructuring under Statement of Financial Accounting Standards No. 15
"Accounting by Debtors and Creditors for Troubled Debt Restructurings"
("FAS 15"). Under FAS15 a debtor shall account for a troubled debt
restructuring, when there is modification of terms of the debts, at the
carrying amount of the payable at the time of the restructuring unless the
carrying amount exceeds the total future cash payments specified by the new
terms.
The principal balance of the Instalment Loan was restated to the face
value of the Convertible Debenture together with any unpaid interest
expenses calculated at the rate of 19.75% as entitled in the Subscription
Agreement, after adjusting the fair value of the common stocks issuable on
debt restructuring. The fair value of the common stocks issuable on debt
restructuring was RMB2,905, being the market value of the Company's trading
stocks at October 16, 1998. Thereafter, the interest expenses of the
Instalment Loan was charged to the profit and loss account on a discounted
basis.
30
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
13. CONVERTIBLE DEBENTURES AND OTHER LOAN (continued)
The maturity of the Instalment Loan was as follows:
<TABLE>
<CAPTION>
RMB
<S> <C>
Payable in year ending December 31,
1999 22,736
2000 32,297
2001 62,206
--------
117,239
========
</TABLE>
This Instalment Loan bears an effective interest of 5.6% per annum and
is repayable with a repayment schedule as set out in the Settlement
Agreement.
Subsequent to the balance sheet date in March 1999, a default in
repayment was noted and in accordance with the Settlement Agreement, the
creditors of the Instalment Loan are entitled to accelerate repayment of
the principal amount outstanding together with the unpaid interest. The
Group is currently conducting negotiations with the Creditors. The
directors believe that a workable solution which would include a revised
repayment schedule upon the disposal of Southwest, can be made with the
Creditors in due course. As a result of the default, the Instalment Loan
was classified as current.
Pursuant to an undertaking as a supplement to the Settlement
Agreement, Asean Capital unconditionally and irrevocably guarantees and
undertakes to each of the Debenture Holders that for so long as any of the
obligations of the Group under the Settlement Agreement remain outstanding
the full due and punctual payment of all sums now or subsequently payable
under the Settlement Agreement by China Bearing and agrees to perform or
procure the performance of such payment obligations of China Bearing.
Pursuant to the Settlement Agreement,the holding company of Asian Capital,
Sunbase International Holdings Limited ("Sunbase International") undertakes
to each of the Debenture Holders that Sunbase International shall not
reduce its current issued beneficial shareholdings (being 100%) in the
share capital of Asean Capital. In addition, one of the subsidiaries of
Sunbase International, Extensive Resources Limited ("ERL") further granted
a charge over 1,000,000 issued shares in the capital of Tianjin Development
Holdings Limited held by ERL in favour of the trustee for and on behalf of
the Debenture Holders. Tianjin Development Holdings Limited is a company
listed in the Hong Kong Stock Exchange. The market value of the pledged
shares was RMB5,400 at December 31, 1998.
14. LONG TERM BANK LOANS
Long term bank loans are principally loans borrowed to finance the
construction in progress. The loans are unsecured, bear fixed interest
rates ranging from 3.7% to 15.22% per annum. Current portion of the loans,
repayable in 1999, together with the overdue portion of the current portion
of the long term loans carried forward from last year, are included in
current liabilities.
31
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
15. NUMBER OF SHARES/EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share.
The exercise of outstanding warrants is not included as part of the
assumption in the calculation of diluted earnings per share as the share
price of the Company for the periods ended December 31, 1996, 1997 and 1998
was lower than the exercise prices.
The computations of basic and diluted earnings/loss per shares are as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
RMB RMB RMB
<S> <C> <C> <C>
Basic
Net income/(loss),
continuing operations 85,807 ( 1,462) 143,426)
discontinued operations ( 9,273) ( 2,722) ( 2,958)
---------- ---------- ----------
( 76,534 ( 4,184) ( 146,384)
========== ========== ==========
Weighted average number of
common shares outstanding:
Share of common shares outstanding
on January 1, 11,700,063 12,700,109 12,700,142
Shares issued as a result of reverse
stock split 46 33 4
1,000,000 common shares issued on
June 10, 1996 558,904 - -
Conversion from Series B preferred shares - - 935,626
Reversal of common shares in respect of
Series A Warrants expired on June 30,
1998 - - ( 17,533)
466,667 shares of common stock issuable
on debt restructuring on October 16,1998 - - 97,169
---------- ---------- ----------
Total weighted average number of common
shares outstanding 12,259,013 12,700,142 13,715,408
========== ========== ==========
Earnings/(loss) per share
-continuing operations 7.00 ( 0.12) ( 10.46)
-discontinued operations ( 0.76) ( 0.21) ( 0.21)
---------- ---------- ----------
6.24 ( 0.33) ( 10.67)
========== ========== ==========
</TABLE>
32
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
15. NUMBER OF SHARES/EARNINGS PER SHARE (continued)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
RMB RMB RMB
<S> <C> <C> <C>
Diluted
Net income/(loss) from
continuing operations 85,807 ( 1,462) ( 143,385)
discontinued operations ( 9,273) ( 2,722) ( 2,958)
Add after tax interest expenses
applicable to Convertible Debentures 4,078 - -
---------- ----------- ----------
80,612 ( 4,184) ( 146,384)
========== =========== ==========
Weighted average number of
common shares outstanding:
Share of common shares outstanding
on January 1, 11,700,063 12,700,109 12,700,142
Shares issued as a result of reverse
stock split 46 33 4
1,000,000 common shares issued on
June 10, 1996 558,904 - -
Conversion from Series B preferred shares - - 935,626
Reversal of common shares in respect of
Series A Warrants expired on June 30,
1998 - - ( 17,533)
466,667 shares of common stock issuable
on debt restructuring on October 16,1998 - - 97,169
---------- ----------- ----------
Total weighted average number of
common shares outstanding 12,259,013 12,700,142 13,715,408
Common share issuable assuming
conversion of the Convertible
Preferred Shares
Series A 3,600,000 - -
Series B 680,000 - -
Common shares issuable assuming
conversion of the Convertible
Debentures on August 23, 1996 812,876 - -
Common shares issuable assuming
exercise of stock options, reduced
by the number of shares which could
have been purchased with the proceeds
from exercise of such stock options 102,017 - -
---------- ----------- ----------
Total weighted average number of
common shares and common shares
equivalents outstanding 17,453,906 12,700,142 13,715,408
========== =========== ==========
Earnings/(loss) per share
-continuing operations 5.15 ( 0.12) ( 10.46)
-discontinued operations ( 0.53) ( 0.21) ( 0.21)
---------- ----------- ----------
4.62 ( 0.33) ( 10.67)
========== =========== ==========
</TABLE>
33
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
15. NUMBER OF SHARES/EARNINGS PER SHARE (continued)
The diluted loss per share for 1997 and 1998 is the same as the basic
loss per share as there was an antidilution effect which reduces the loss
per share. For the year ended December 31, 1998, antidilution resulted
from the substantial losses incurred by the Group during the year. For the
year ended December 31, 1997, the calculation which resulted in such an
anti-dilution was based on the assumptions that the conversion rights under
the Convertible Debentures had been fully exercised, at the adjusted
exercise price as stated in note 15, and the redemption of preferred
shares, both on January 1, 1997. On this basis, the net income calculated
by adding back the interest expenses on the Convertible Debentures net of
income tax is RMB17,746. As a result of the aforesaid, an antidilution
effect was resulted.
16. FOREIGN CURRENCY EXCHANGE
The RMB is not freely convertible into foreign currencies.
Effective from January 1, 1994, a single rate of exchange is quoted
daily by the People's Bank of China (the "Unified Exchange Rate").
However, the unification of the exchange rates does not imply
convertibility of RMB into US$ or other foreign currencies. All foreign
exchange transactions continue to take place either through the Bank of
China or other banks authorized to buy and sell foreign currencies at the
exchange rates quoted by the People's Bank of China.
17. CONTRIBUTED SURPLUS
The respective features of common stock and convertible preferred
stock are detailed in Note 1 to the financial statements.
On June 10, 1996, the Company issued an additional 1,000,000 shares of
common stock with a par value of RMB 0.0083 (US$0.001) at RMB 41.5
(US$5.00) per share. Total share premium on the new issue of shares
amounted to RMB36,077 after deducting the direct expenses arising on the
issue of these shares of RMB5,415 from the gross premium of RMB41,492.
During the year ended December 31, 1998, 987,004 shares of common
stock were converted from the Preferred Series B shares pursuant to the
conditions as set out in Reorganisation Agreement as detailed in Note 1 to
the financial statements. Total share premium arising from such conversion
was RMB28,280.
In connection with the additional 466,667 shares of common stock
issuable on debt restructuring, as no such shares have been issued until
January 14, 1999, no contributed surplus were recognised for the year ended
December 31, 1998.
34
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
18. DISTRIBUTION OF PROFITS AND APPROPRIATIONS TO RESERVES
According to the relevant laws and regulations for joint stock limited
enterprises and Harbin Bearing's articles of association, the distribution
of profits by Harbin Bearing is based on the profits as reported in its
statutory accounts prepared under PRC GAAP after the following allocations
and appropriations:
(a) making up any accumulated losses;
(b) transferring 10% of its profit after taxation to the statutory
surplus reserve;
(c) transferring 5% to 10% of its profit after taxation to a
collective welfare fund; and
(d) transferring a certain amount of its profit after taxation to a
discretionary surplus reserve.
The following appropriations were made and are further described
below:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
RMB RMB RMB
<S> <C> <C> <C>
Statutory surplus reserve 1,733 70 21
Collective welfare fund 867 35 10
----- ---- ----
2,600 105 31
===== ==== ====
</TABLE>
The collective welfare fund must be used for capital expenditure on
staff welfare facilities. Such facilities are for staff use, but are owned
by Harbin Bearing.
The distributable retained earnings of the Group as of December 31,
1998, after taking into account the above restrictions and appropriations
and based on the PRC statutory accounts of Harbin Bearing, amounted to
RMB77,689 (1997: RMB73,260).
The reserves retained in the Chinese subsidiaries of the Group
amounted to RMB28,002 (1997: RMB27,971).
35
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
19. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income at December 31, 1996, 1997 and 1998
represented cumulative foreign translation adjustment.
20. OTHER INCOME
In 1996, other income represented a gain on the sale of investment in
a subsidiary by China Bearing to a third party amounting to RMB16.6
million. The only asset of the subsidiary was a residential property in
Hong Kong which was purchased during that year. No such income was earned
in 1997 and 1998.
21. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
During the year, the Group had transactions with a number of related
parties. The major related party transactions are summarized as follows
and described in further detail below:
<TABLE>
<CAPTION>
Year ended December 31,
Nature of transactions Notes 1996 1997 1998
RMB RMB RMB
<S> <C> <C> <C> <C>
Revenue:
Sales of products (a) 232,338 171,373 38,886
Interest income (b) - 2,547 3,082
======= ======= ======
Capital expenditure:
Leases of equipment capital payments (c) 17,270 18,788 18,788
Leases of buildings (d) 3,751 3,751 3,751
Land use rights (e) 2,508 2,508 2,508
======= ======= ======
Expenses:
Management and administrative services (f) 21,705 2,550 7,486
Trademark royalty fees (g) 4,306 2,924 2,669
Pension and retirement plan expenses (h) 20,681 19,742 23,086
Finance charges on leases of equipment (c) 9,914 8,395 6,742
Interest on promissory note (i) 2,905 1,875 1,875
======= ======= ======
</TABLE>
36
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
21. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
(a) Balances with related companies
<TABLE>
<CAPTION>
1997 1998
Notes RMB RMB
<S> <C> <C> <C>
Balances due from related companies
-----------------------------------
Trade receivables
-----------------
Harbin Bearing Import & Export Company
("HBIE") (i) 126,669 100,742
Xin Dadi Mechanical and Electrical
Equipment Company ("Xin Dadi") (i) 86,199 56,843
------- ------
212,868 157,585
------- -------
Advances to related companies
-----------------------------
Sunbase Resources Limited
("Sunbase Resources") (ii) 38,824 47,621
Harbin Everising Construction &
Development Limited ("Harbin Everising") (ii) 45,450 45,450
Harbin Precision (ii) 1,150 1,150
HBIE (ii) 696 719
Xin Dadi (ii) 482 692
Other related companies (ii) 553 999
------- -------
87,155 96,631
------- -------
300,023 254,216
Provision - ( 49,000)
------- -------
300,023 205,216
======= =======
Balances due to related companies
---------------------------------
Harbin Bearing (Holding) Company (iii) 14,344 49,078
Other related companies 4,386 2,501
------- -------
18,730 51,579
======= =======
</TABLE>
37
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
21. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
Notes:
(i) Significant sales to related companies
Harbin Bearing made sales of RMB9,566 (1997: RMB91,287; 1996: RMB14,549)
and RMB29,320 (1997: RMB80,086; 1996: RMB203,442) to HBIE and Xin Dadi,
related companies owned by the Harbin Municipal Government, respectively,
during the current year. As at December 31, 1998, the amounts of trade
receivables from HBIE, Xin Dadi and other related companies included in the
amounts due from related companies were as above.
(ii) Advances to related companies
Sunbase Resources is a related company of the Group in which the directors
and/or shareholders have a beneficial interest. Harbin Everising
Construction and Development Limited (formerly known as Sunbase
Construction and Development) is a joint venture established in the PRC of
which Sunbase International Holding Limited, another related company of the
Group, has equity interests. Other related companies are owned by the
Harbin Municipal Government.
The above balances are unsecured, repayable within one year and interest-
free except for the balance due from Sunbase Resources. Pursuant to an
agreement dated 1 January 1997 between the Company and Sunbase Resources,
interest was charged on the average balance at a rate of 8% (1997: 10%) per
annum. Total interest earned in respect of such balances was RMB3,082
(1997: RMB2,547) for the year ended December 31, 1998. Asean Capital has
undertaken not to demand repayment of the principal and interest of the
Note, as set out in note 13, until the amount due from Sunbase Resources
has been repaid to the Company.
(iii) Harbin Bearing (Holding) Company ("Harbin Holdings") is the minority
shareholders of Harbin Bearing. The balance due to it represented cash
received by Harbin Bearing on behalf of Harbin Holdings in connection with
the accounts receivable balances owned by Harbin Holdings.
(c) 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 RMB25,927
(US$3,124) and RMB1,256 (US$151), from January 1, 1994 to December 31, 2001
and from January 1, 1994 to December 31, 1998, respectively. Options to
extend the leases and to purchase the leased assets have been granted to
Harbin Bearing upon expiry of the initial leases. All these leases are
treated as capital leases. The renewal of the leases has yet to be
finalised at the date of approval of these financial statements by the
directors of the Company.
38
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
21. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
(d) Leases of buildings
Harbin Bearing has entered into a five year lease agreement with Harbin
Precision to lease buildings related to the operation of Harbin Bearing
with effect from January 1, 1994 at an initial annual rental of RMB3,751
(US$452) (1997: RMB3,751 (US$452)). The initial lease expired 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 rented as an
operating lease. The renewal of the leases has yet to be finalised at the
date of approval of these financial statements by the directors of the
Company.
(e) Land use rights
The municipal government has allocated to Harbin Holdings the right to use
the parcels of land on which Harbin Bearing's operations are conducted.
Harbin Holdings has agreed to lease the land on which the main factory is
situated to Harbin Bearing in return for an initial annual rental of
RMB2,508 (US$302) (1997: RMB2,508 (US$302)) effective from January 1, 1994
subject to future adjustments in accordance with changes in the government
fees.
(f) Management and administrative services agreements
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 RMB20,764 for the financial year
ended December 31, 1996 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. In 1997 and 1998, no such fees were paid as the agreement
expired in December 31, 1996.
Agreements were also entered into by Harbin Bearing with Harbin Xinhengli
and Harbin Sunbase, in respect of general management services to be
provided by the joint ventures from January 1, 1994 to December 31, 1996 at
an annual fee of RMB150 (US$18) payable to each of the joint ventures.
China Bearing is to reimburse Sunbase Resources (1996: Sunbase
International) for administrative services rendered on behalf of China
Bearing at cost. The Company paid a total amount of RMB7,486 (1997:
RMB2,550; 1996: RMB941) to Sunbase Resources (1996: Sunbase International)
for the reimbursement of expenses incurred on the Company's behalf.
39
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
21. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
(g) Trademark license
Pursuant to a trademark license agreement, Harbin Holdings has granted
Harbin Bearing the right to use the "HRB" trademark. Harbin Bearing is
required to pay a royalty cost calculated on an annual basis at 0.5% of the
net sales of Harbin Bearing effective from January 1, 1994 to December 31,
2003 and at 0.3% of the net sales from January 1, 2004 to December 31,
2013. The trademark license can be transferred to Harbin Bearing
thereafter upon mutual agreement between the two parties and subject to the
relevant laws in China.
The trademark royalty paid by Harbin Bearing during 1996, 1997 and 1998
amounted to RMB4,306, RMB2,924 and RMB2,669, respectively.
(h) Pension and retirement plan
Pursuant to an agreement on December 31, 1993, Harbin Bearing is required
to make an annual payment to Harbin Holdings as its contribution to the
pension scheme for all staff retiring after December 28, 1993. Such annual
payment is based on the standard contribution as required by government
regulations calculated at 20% of salary up to the period ended June 30,
1996 and at 22% with effective from July 1, 1996. 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 was entered into on the condition that no compulsory rules and
regulations are implemented by the government such that Harbin Bearing has
to be directly responsible for any pension payments.
The contributions to the pension scheme made by Harbin Bearing in 1996,
1997 and 1998 amounted to RMB20,681, RMB19,742 and RMB23,086, respectively.
(i) Interest on promissory note
As described further in Note 1, in consideration for the purchase of its
interest in China Bearing, the Company issued common shares and preferred
shares to, and assumed vendor financing from Asean Capital Limited. The
vendor financing provided by Asean Capital was in the form of a US$5,000
secured promissory note which is secured on the shares of China Bearing
(See Note 14). US$2,000 was repaid in 1996 and no repayment was made
thereafter. Interest was payable on the remaining balance of US$3,000.
The promissory note was issued to Asean Capital in connection with the
Share Exchange Agreement as detailed in Note 1 and bears interest at 8% per
annum.
22. OPERATIONS WITH STATE-OWNED ENTERPRISES
Harbin Bearing is owned as to 33% by Harbin Holdings which is a
separately established enterprise controlled by and under the
administration of the Harbin Municipal Government. Substantially all of the
business undertaken by Harbin Bearing during the year has been effected
with State-owned enterprises in China and on such terms as determined by
the relevant Chinese authorities.
40
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
23. FINANCIAL INSTRUMENTS
The carrying amount of the Company's cash and bank balances
approximates their fair value because of the short maturity of those
instruments.
The fair value of the Group's borrowings from banks and other third
parties based on the interest rates currently available for borrowings with
similar terms and average maturities approximates the carrying amount of
these borrowings. The fair value of the secured promissory note,
Convertible Debenture and the Instalment Loan are not determinable.
24. SEGMENT DATA
Effective January 1, 1998, the Group adopted FASB Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") and restated 1997 and 1996
segment information to conform to the new standard. SFAS 131 superseded
FASB Statement of Financial Accounting Standards No. 14 "Financial
Reporting for Segments of a Business Enterprise". SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS 131 did not affect the results of
operations or financial position, but did affect the disclosure of segment
information.
The Group principally operates in the ball bearing industry in China
through Harbin Bearing, its 51% subsidiary, which generated 100% of the
Group's net sales from continuing operations for the three years ended
December 31, 1996, 1997 and 1998.
25. CONCENTRATION OF RISK
Concentration of credit risk:
Financial instruments that are 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.
41
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
25. CONCENTRATION OF RISK (continued)
(b) Trade receivables
The Company manufactures and sells general and precision ball bearings
to diversified industries in China. The Company has long standing
relationships with most of its customers and generally does not require
collateral. There is no concentration of receivables in any one specific
industry except for the outstanding receivable balances with two related
companies, HBIE and Xin Dadi which have receivable balances of RMB113,470
(1997: RMB127,365) and RMB57,534 (1997: RMB86,681), respectively, as at
December 31, 1998.
(c) Current vulnerability due to certain concentrations:
The Group's operating assets and primary source of income and cash
flow is its interest in its subsidiaries in the PRC. The value of the
Group's interest in these subsidiaries may be adversely affected by
significant political, economic and social uncertainties in the PRC.
Although the PRC government has been pursuing economic reform policies for
the past several years, no assurance can be given that the PRC government
will continue to pursue such policies or that such policies may not be
significantly altered, especially in the event of a change in leadership,
social or political disruption or unforeseen circumstances affecting the
PRC's political, economic and social life. There is also no guarantee that
the PRC government's pursuit of economic reforms will be consistent or
effective.
26. STOCK OPTION PLAN
On January 2, 1996, the Company's Board of Directors adopted a stock
option plan (the "Plan"). The Plan permits the directors to grant options
to purchase an aggregate of up to 2,500,000 shares of the common stock of
the Company.
All incentive stock options have option exercise prices per option
share not less than the fair market value of a share of the common stock on
the date the option is granted, except that the exercise price of 160,000
options granted to an executive, was lower than the market value of the
common stock on the date the option was granted. If in case of incentive
stock options granted to any person possessing more that 10% of the total
combined voting power of all classes of stock of the Company or any
affiliate of the Company, the price may not be less than 110% of such fair
market value. The Plan terminates on the earlier of either the date on
which no additional shares of common stock are available for issuance under
the Plan, or January 2, 2006.
42
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
26. STOCK OPTION PLAN (continued)
On July 1, 1996, the Compensation Committee of the Company granted
1,250,000 stock options to three executives, including two directors of the
Company, on the following terms:
<TABLE>
<CAPTION>
Exercise price/Share Number of Shares
Vesting schedule US$ per option rights
---------------- --- -----------------
<S> <C> <C>
January 16, 1996 6.375 415,000
January 16, 1997 6.375 415,000
January 16, 1998 6.375 420,000
---------
1,250,000
=========
</TABLE>
Pursuant to the Plan and in accordance with the provisions of an
employment agreement entered into between the Company and a director, the
Company granted, on January 16, 1996, the option to purchase an aggregate
of up to 800,000 shares of common stock of the Company. The option is
intended by the Company and the beneficiary to be, and will be treated as,
an incentive stock option. The beneficiary may exercise the options that
have vested and purchase shares of the common stock as follows:
<TABLE>
<CAPTION>
Exercise price
of the option vest Number of
after each such year shares
Vesting schedule US$ exercisable
---------------- --- -----------
<S> <C> <C>
January 16, 1997 6.65 160,000
January 16, 1998 7.75 160,000
January 16, 1999 9.25 160,000
January 16, 2000 10.75 160,000
January 16, 2001 12.45 160,000
-------
800,000
=======
</TABLE>
As at December 31, 1998, none of the vested options have been
exercised and during 1998, the options granted to two of the Company's
executives were withdrawn as these employees terminated their employment
with the Company at that date and subsequent to the balance sheet date,
another executive as well as directors was removed by the board of
directors.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the date of grant in 1996: Interest rate
on United States treasury bonds; no dividend yield; volatility factors of
the expected market price of the company's common stock of 87%; and a
weighted-average expected life of the options of 3 to 5 years.
43
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
26. STOCK OPTION PLAN (continued)
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require of the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock options.
For the purposes of pro forma disclosures, the estimated fair value of
the options is amortized to write off the amount over the options' vesting
period. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
RMB RMB RMB
<S> <C> <C> <C>
Pro forma net income/(loss) 24,828 (69,270) (216,507)
====== ======= ========
Pro forma earnings/(loss) per share:
Basic 2.03 ( 5.45) ( 15.77)
====== ======= ========
Diluted 1.41 ( 5.45) ( 15.77)
====== ======= ========
</TABLE>
The Company's stock option activities and related information for the years
ended December 31, 1997 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
Exercise Exercise
Options price Options price
US$ US$
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,050,000 6.967 2,050,000 6.967
Forfeited - - ( 650,000) 6.375
--------- -------- ---------- -----
Outstanding at end of year 2,050,000 6.967 1,400,000 7.24*
========= ======== ========== =====
</TABLE>
* Exercise price was presented at the weighted average basis after
discounting such future price.
44
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
27. WARRANTS
The Company agreed to warrants grants to Arnhold and S. Bleichroeder,
Inc., ("ASB") pursuant to an agreement ("ASB Agreement") dated September
30, 1996, entered into between the Company and ASB. ASB was engaged in
connection with the private placement of securities of the Company.
Pursuant to the ASB Agreement, the Company shall issue to ASB warrants
("ASB Warrants") to purchase common stock of the company on the following
basis, without consideration:
<TABLE>
<CAPTION>
Date of Exercise Number of
earliest price per shares Per ASB
exercise share Warrant Rights
<S> <C> <C>
January 16, 1997 US$6.375 80,000
January 16, 1998 US$6.375 80,000
January 16, 1999 US$6.375 80,000
</TABLE>
Each tranche of Warrants will be for a term of six years commencing
with the date of earliest exercise.
As at December 31, 1998 no such warrants were granted or issued to
ASB.
45
<PAGE>
Exhibit 9.1
- --------------------------------------------------------------------------------
Voting Trust Agreement
With Respect to Capital Stock
of
Smith Acquisition Company, Inc.
d/b/a Southwest Products Company
- --------------------------------------------------------------------------------
<PAGE>
Table of Contents
Voting Trust Agreement
With Respect to Capital Stock
of
Smith Acquisition Company, Inc.
d/b/a Southwest Products Company
<TABLE>
<CAPTION>
TOPIC PAGE
- ----- ----
<S> <C>
RECITALS.............................................................. 1
ORGANIZATION.......................................................... 1
ARTICLE 1. - Establishment of Voting Trust............................ 1
ARTICLE 2. - Appointment of Voting Trustee............................ 2
ARTICLE 3. - Acknowledgement of Obligations........................... 4
ARTICLE 4. - Indemnification and Compensation of Voting Trustee....... 6
OPERATIONS............................................................ 7
ARTICLE 5. - Actions by the Voting Trustee............................ 7
ARTICLE 6. - Voting Discretion........................................ 7
ARTICLE 7. - Sale of Corporation...................................... 8
ARTICLE 8. - Export Control Safeguards................................ 9
CONTACTS AND VISITS................................................... 10
ARTICLE 9. - Regulated Meetings, Visits and Communications............ 10
ADMINISTRATION........................................................ 11
ARTICLE 10. - Deposit of Shares....................................... 11
ARTICLE 11. - Voting Trust Certificates............................... 12
ARTICLE 12. - Replacement of Voting Trust Certificates................ 12
ARTICLE 13. - Shares Held by Voting Trustee........................... 12
ARTICLE 14. - Dividends............................................... 13
ARTICLE 15. - Notices................................................. 13
ARTICLE 16. - Inconsistencies with Other Documents.................... 14
ARTICLE 17. - Governing Law; Construction............................. 14
TERMINATION........................................................... 14
ARTICLE 18. - Termination and......................................... 14
ARTICLE 19. - Actions Upon............................................ 15
ARTICLE 20. - Place of Filing......................................... 15
</TABLE>
<PAGE>
EXECUTION..................................................... 15
ARTICLE 21. - Execution....................................... 15
<PAGE>
VOTING TRUST AGREEMENT
WITH RESPECT TO CAPITAL STOCK
OF
SMITH ACQUISITION COMPANY, INC.
D/B/A SOUTHWEST PRODUCTS COMPANY
This Voting Trust Agreement, (the "Agreement") is made this 31st day
of December, 1998, by and between Sunbase Asia, Inc., a Nevada corporation
("Sunbase"), Smith Acquisition Company, Inc. d/b/a Southwest Products Company, a
California corporation, (the "Corporation"), and Samuel T. Mok, and any of his
successors appointed as provided in the Agreement (the "Voting Trustee").
RECITALS
WHEREAS, the Corporation is duly organized and existing under the
laws of the State of California, and has an authorized capital of 10,000,000
shares, all of which are common voting shares, no par value per share, and of
which 9,450,000 shares are issued and outstanding (the "Shares"); and
WHEREAS, Sunbase owns all the Shares of the Corporation; and
WHEREAS, the Corporation's business consists of the manufacture of
precision bearings which the Corporation sells, in part, to contractors and
subcontractors of the United States Department of Defense; and
WHEREAS, in order to address concerns about foreign ownership,
control or influence that have been raised in the investigation of Sunbase's
acquisition of the Corporation by the Committee for Foreign Investment in the
United States ("CFIUS") under 31 C.F.R. (S) 800.501 et seq., all parties
-- ---
hereto have agreed that voting control of the Shares and the control
(except as otherwise specifically provided for herein), operation and management
of the Corporation should be vested in the Voting Trustee who is a United States
citizen.
NOW THEREFORE, it is expressly agreed by and among the parties hereto
that a voting trust in respect of the Shares is hereby created and established,
subject to the following terms and conditions, to which all of the parties
hereto expressly assent and agree:
ORGANIZATION
ARTICLE 1. - Establishment of Voting Trust
1.1. A voting trust is hereby deemed established pursuant to the terms of
the Agreement and in accordance with Section 706(b) of the California
Corporation Code.
1.2. Each of Roger Li and Peter Lam, the only Foreign Persons, within the
meaning of 31 C.F.R. (S) 800.213, serving as officers and/or directors of the
Corporation, have tendered
<PAGE>
their resignations from such positions with the Corporation which resignations
will become effective upon the establishment of this voting trust.
ARTICLE 2. - Appointment of Voting Trustee
2.1. Sunbase shall nominate the initial Voting Trustee. The Voting Trustee
shall be a resident United States citizen and have had no prior contractual,
material financial or employment relationship with the Corporation or any
Affiliate of the Corporation. CFIUS shall receive notice of the selection of the
Voting Trustee. The Voting Trustee shall be acceptable to the Department of
Defense ("DOD"). The Voting Trustee will be someone who has no current or prior
contractual, material financial, or employment relationship with the Government
of the People's Republic of China or any entity thereof, or any political party
of the People's Republic of China, provided that the Voting Trustee's prior
-------------
relationship with the entities identified on Schedule A to the Agreement shall
not be deemed a violation of this provision and without implying that such
entities would fall within the foregoing prohibition. During his tenure as
Voting Trustee, the Voting Trustee will not enter into any of the
aforementioned relationships. The Term "Affiliate" shall mean, with respect to
any entity, any Person that directly, or indirectly through one or more
intermediaries, controls, is controlled by or is under common control with such
entity. The term "Person" shall mean any individual, corporation, partnership,
association, trust, limited liability company or any other entity or
organization.
2.2. Sunbase may remove the Voting Trustee only for (i) gross negligence or
willful misconduct while in office or (ii) acts in violation of the Agreement,
including Section 5.2 and Article 7. Sunbase may remove a Voting Trustee for
such acts by an instrument signed by or on behalf of Sunbase and filed with the
Corporation at its principal office in Irwindale, California and with the Voting
Trustee at the following address: Samuel T. Mok, 1330 Connecticut Avenue, N.W.,
Washington, D.C. 20036. Sunbase will notify CFIUS and the Voting Trustee 20 days
prior to filing such instrument. Such removal shall not be effective until the
appointment of a successor Voting Trustee who is qualified to serve hereunder.
2.3. The Voting Trustee may at any time resign by submitting to the
Corporation at its principal office in Irwindale, California and to Sunbase, a
resignation in writing with a copy to CFIUS. Such resignation shall be effective
on the date of resignation stated by the Voting Trustee provided that the
resignation shall not be effective until the appointment of a successor Voting
Trustee who is qualified to serve hereunder and is acceptable to DOD. No formal
acceptance of resignation by the Corporation or Sunbase is necessary to make the
resignation effective. Upon the effectiveness of such resignation, the Voting
Trustee's obligations and responsibilities under the Agreement are completed.
2.4. Nomination and appointment of a successor Voting Trustee shall be
accomplished as follows:
a. In the event of a death, tender of resignation, removal or
inability to act of the Voting Trustee, a vacancy shall be deemed to exist in
the office, and the Corporation shall give prompt written notice of that fact to
Sunbase and CFIUS. Sunbase shall promptly nominate a successor Voting Trustee
using its Best Efforts and diligence, and shall notify CFIUS of the nominee. In
the event that a nominee is unacceptable to DOD, or CFIUS and Sunbase
cannot
2
<PAGE>
resolve comments provided by CFIUS pursuant to Section 2.4.b, below, Sunbase
shall use its Best Efforts and diligence to nominate an alternate successor
Voting Trustee.
For purposes of the Agreement, the term "Best Efforts," signifies
performance of duties consistent with the reasonable exercise of business
judgment and in good faith, in the manner believed to be in the best interests
of the Corporation and Sunbase, the beneficiary of the trust, with such care,
including reasonable inquiry, as an ordinarily prudent person in a like position
would use under similar circumstances.
b. Any nominee for the position of successor Voting Trustee must be
acceptable to DOD. CFIUS shall have an opportunity to comment on any nominee for
the position of successor Voting Trustee. CFIUS will notify Sunbase of any
comments or any DOD non-acceptance within 20 business days of receipt of the
nomination of a successor Voting Trustee. Each nominee shall satisfy the
criteria for the Voting Trustee set forth in Section 2.1 If CFIUS does not
notify Sunbase of any comments or any DOD non-acceptance within 20 business days
of notification of nomination, CFIUS shall be deemed to have no comments and DOD
shall be deemed to have accepted the nominee.
c. Any nomination and appointment of a successor Voting Trustee
shall be made by an instrument in writing signed an authorized representative
of Sunbase. Counterparts of such instrument shall be delivered to the
Corporation and CFIUS as provided in Section 15.1.
2.5. Appointment by any successor Voting Trustee as provided above may only
be accomplished by his agreement to be bound by the terms of the Agreement on
file at the Corporation's principal office in Irwindale, California, with a copy
to Sunbase and CFIUS. Upon such appointment, such successor Voting Trustee shall
be vested with all the rights, powers, authority and immunities herein conferred
upon the Voting Trustee by the Agreement as though such successor had been
originally a party to the Agreement as a Voting Trustee. The term "Voting
Trustee" as used in the Agreement and in the Voting Trustee Certificates issued
hereunder shall apply to and mean the original Voting Trustee who is party
hereto, and his successors in such capacity.
2.6. On the death, tender of registration, removal or disability of a
Voting Trustee, the Vice Chairman of the Board of Directors of the Corporation
(the "Board") or, if there is no Vice Chairman, the chief executive officer of
the Corporation shall, upon prompt written notice to Sunbase and CFIUS, be
automatically vested with all rights, powers, responsibilities, authorities and
immunities of the Voting Trustee for a period not to exceed 30 days or until a
successor Voting Trustee is appointed in accordance with the terms of Section
2.4. The interim Voting Trustee must be a U.S. citizen.
3
<PAGE>
ARTICLE 3. - Acknowledgement of Obligations
3.1. The Voting Trustee shall nominate and vote for himself to become a
Director of the Corporation. The Voting Trustee may appoint or remove other
Director in his sole discretion. Any such Directors appointed by the Voting
Trustee shall be United States citizens and shall satisfy the criteria set forth
in Section 2.1 for the Voting Trustee. The Board shall elect a Chairman, who
shall be the Voting Trustee. The Corporation shall amend its articles of
incorporation and/or bylaws (or similar organizational documents) as necessary
to permit the foregoing.
3.2. a. The terms of compensation for the Voting Trustee shall be
negotiated between the Voting Trustee and Sunbase and paid by the
Corporation
b. The Voting Trustee shall not, without prior express written
consent of Sunbase, permit the Corporation to adopt any agreement, plan,
provision or understanding which would entitle any non-Voting Trustee director,
officer or employee of the Corporation to compensation or benefits occasioned by
either a change of ownership or control of the Corporation or by that person's
voluntary resignation or involuntary removal, in excess of what such person
would receive on the occurrence of such event under agreements and policies of
the Corporation in force as of the date of the Agreement or as approved by
Sunbase.
3.3. The Voting Trustee agrees to perform the duties and be bound by all
provisions of the Agreement and to exercise the powers and perform the duties
set forth herein according to his Best Efforts.
3.4. a. The Voting Trustee agrees that, in order to be qualified under
the Agreement, he must have had no prior contractual, material financial or
employment relationship with either the Corporation or any of its Affiliates
prior to his appointment. The Voting Trustee further agrees, in order to
maintain his qualification as a Voting Trustee, not to establish any
contractual, material financial or employment relationships of any kind with
Sunbase or any of its Affiliates during the term of this Agreement, except as
may be required or permitted by the Agreement. The Voting Trustee will be
someone who has no current or prior contractual, material financial, or
employment relationship with the Government of the People's Republic of China or
any entity thereof, or any political party of the People's Republic of China,
provided that the Voting Trustee's prior relationship with the entities
identified on Schedule A to the Agreement shall not be deemed a violation of
this provision and without implying that such entities would fall within the
foregoing prohibition. During his tenure as Voting Trustee, the Voting Trustee
will not enter into any of the aforementioned relationships.
b. The Voting Trustee and any successor Voting Trustee shall reside
within the United States during the term of the Agreement so long as he is a
Voting Trustee.
3.5. The Voting Trustee, in recognition of his obligations under the
Agreement, agrees:
4
<PAGE>
a. that the Shares are being placed in a Voting Trust as a security
measure designed to insulate the Corporation from any foreign control or
influence that may arise from Sunbase's ownership of the Shares;
b. that the Voting Trustee, in his role as Chairman of the Board of
Directors of the Corporation will exercise his Best Efforts to ensure that the
Corporation complies with all relevant U.S. laws, including but not limited to
the export control laws and regulations.
c. that the United States Government is placing its reliance upon
the Voting Trustee as a United States citizen to exercise independently all
prerogatives of ownership of the Corporation;
d. not to accept direction from Sunbase on any matter before the
Voting Trustee or the Board and not to permit Sunbase to exercise any control or
influence over the business or management of the Corporation except as provided
in the Agreement;
e. to ensure that each principal officer of the Corporation fully
understands his responsibility to exercise all prerogatives of management with
complete independence from any foreign influence or control;
f. that each principal officer of the Corporation be furnished a
policy statement on foreign ownership and control stating that management has
complete independence from Sunbase; that each principal officer of the
Corporation is barred from taking any action that would countermand the
Agreement; and that any suspected violation of the Agreement be reported
immediately to the Chairman of the Board; and
g. to maintain records, journals, and minutes of meetings and copies
of all communications sent or received by the Voting Trustee in the execution of
his duties.
3.6. The Voting Trustee shall appoint an independent financial auditor to
conduct an annual audit of the Corporation's books and records. Unless the
Voting Trustee determines it to be not in the best interest of the Corporation,
the Voting Trustee shall use the auditor used by Sunbase for its annual audits.
The Voting Trustee shall advise Sunbase of such action. Upon completion of the
audit and review by the Voting Trustee, and subject to the removal of any
information not releasable under the Agreement, the audit report shall be
forwarded to Sunbase.
3.7 The Voting Trustee shall be entitled to rely on information, opinions,
reports or statements, including financial statements and other financial data,
in each case prepared or presented by any of the following:
a. One or more officers or employees of the Corporation whom the
Voting Trustee believes to be reliable and competent in the matters presented;
b. legal counsel, independent accountants or other persons as to
matters which the Voting Trustee believes to be within such person's
professional or expert competence; and
5
<PAGE>
c. a committee composed of members of the Board upon which the
Voting Trustee does not serve, as to matters within its designated authority,
which committee the Voting Trustee believes to merit confidence, so long as, in
any such case, the Voting Trustee acts in good faith, after reasonable inquiry
when the need therefore is indicated by the circumstances and without knowledge
that would cause such reliance to be unwarranted.
3.8 The Voting Trustee shall be obligated to perform such duties and only
such duties as are herein specifically set forth, and no implied duties or
obligations shall be construed from this Agreement.
ARTICLE 4. - Indemnification and Compensation of Voting Trustee
4.1. The Voting Trustee assumes no liability as shareholder. The Voting
Trustee in voting the Shares and in his capacity as director of the Corporation
shall vote and act on all matters in accordance with his Best Efforts; but the
Voting Trustee assumes no responsibility in respect to any action taken by
him or taken in pursuance of his vote so cast, and the Voting Trustee shall not
incur any responsibility by reason of any error in law, mistake of judgment or
any matter or thing done or suffered or omitted to be done under this
Agreement, except for his own individual gross negligence or willful
misconduct.
4.2. The Voting Trustee shall not be liable for the default or misconduct
of any agent or attorney appointed by him in pursuance hereof if such agent or
attorney shall have been selected with reasonable care.
4.3. The Corporation and Sunbase jointly and severally shall indemnify
and hold the Voting Trustee harmless from any and all claims arising from or in
any way connected to his performance as a Voting Trustee, officer or director of
the Corporation under the Agreement except for his own individual gross
negligence or willful misconduct. The Corporation and Sunbase shall advance fees
and costs as incurred in connection with the defense of any such claim. The
terms of this provision shall survive the termination of the Agreement.
4.4. The compensation, reasonable and necessary travel expenses and other
expenses paid or incurred by the Voting Trustee in the administration of his
Voting Trustee duties, including the reasonable expenses incurred to retain
legal counsel including counsel to assist with the Corporation's compliance with
U.S. laws and regulations, including U.S. export control laws, shall be borne
and promptly paid by the Corporation upon submission to it of reasonably
detailed documentation as appropriate. The Corporation hereby agrees to promptly
pay such compensation, travel expenses and other expenses.
4.5. The Corporation shall purchase Directors and Officers liability
insurance from a mutually acceptable insurance provider and in an amount
acceptable to the Voting Trustee. Sunbase shall guarantee the payment of the
premium of such insurance.
4.6. Sunbase agrees to pay (or reimburse the Voting Trustee for) all
reasonable closing costs relating to the execution and delivery of this
Agreement and the reasonable compensation, expenses and disbursements of such
legal counsel, financial advisors and brokers that the Voting Trustee is
permitted to employ pursuant to Section 7.2 of this Agreement.
6
<PAGE>
OPERATIONS
ARTICLE 5. - Actions by the Voting Trustee
5.1. No proxy to vote the Shares may be given to, or voted by, any person
other than the Voting Trustee.
5.2. The Voting Trustee shall act in good faith in a manner the Voting
Trustee believes to be in the best interests of the Corporation and Sunbase, the
beneficiary of the trust, and with such care, including reasonable inquiry, as
an ordinarily prudent person in a like position would use under similar
circumstances.
ARTICLE 6. - Voting Discretion
6.1. Except as otherwise provided in the Agreement, the Voting Trustee
shall possess and shall be entitled to exercise in his sole and absolute
discretion, with respect to any and all of the Shares at any time covered by the
Agreement, the right to vote the same or to consent to any and every act of the
Corporation in the same manner and to the same extent as if the Voting Trustee
were the absolute owner of such Shares in his own right. All decisions and
actions by the Voting Trustee pursuant to the Agreement shall be based on
his independent judgment. All decisions and actions by the Voting Trustee shall
be free of any control or influence from Sunbase in any manner whatsoever except
as specifically permitted in the Agreement.
6.2. In addition to the general authorities conferred by Section 6.1 above,
and unless such actions would conflict with the relevant provisions of the
California Corporations Code or this Agreement, the Voting Trustee is
specifically authorized in the exercise of his sole and absolute discretion with
respect to any and all of the Shares to vote for or consent to:
a. the election of directors of the Corporation;
b. any increase, reduction or reclassification of the capital stock
of the Corporation;
c. any changes or amendments in or to the Articles of Incorporation
or Bylaws of the Corporation involving matters other than those necessary
pursuant to Section 6.3 below;
d. the sale or disposal of the property, assets or business of the
Corporation other than that prohibited in Section 6.3 below;
e. the pledging, mortgaging or encumbering of any assets of the
Corporation, except as described in Section 6.3 below; and
f. any action with respect to the foregoing, or any other matter
affecting the Corporation and not specifically described in Section 6.3 below,
which Sunbase might lawfully exercise.
7
<PAGE>
6.3. Anything in this Agreement to the contrary notwithstanding, the
Voting Trustee is not authorized to take any of the following actions without
the express written approval of Sunbase:
a. the sale or disposal, in any manner, of capital assets or
business of the Corporation where an individual sale or disposition exceeds 25%
of the assets of the Corporation or where sales or dispositions in the aggregate
exceed 45% of the assets of the Corporation;
b. the pledging, mortgaging or encumbering of the assets of the
Corporation for purposes other than obtaining working capital;
c. any merger, consolidation, reorganization or dissolution of the
Corporation; or
d. the filing or making of any petition under the federal bankruptcy
laws or any similar law or statute of any state or any foreign country.
6.4. The Voting Trustee agrees that he shall, upon written request by
Sunbase, take such action or actions as are necessary to recommend, authorize or
approve any of the actions specified in Section 6.3. The Voting Trustee shall
consult with Sunbase concerning such action so that Sunbase may have sufficient
information to ensure that all such actions will be taken in accordance with
applicable United States laws and regulations. Any action of the Voting Trustee
with respect to the matters specified in Section 6.3 which is taken without the
approval of Sunbase shall be void and shall have no effect.
ARTICLE 7.-Sale of Corporation
7.1. The Voting Trustee shall use his Best Efforts to effect a sale of the
Corporation, whether by sale of all the Shares, transfer of all the
Corporation's assets, merger, consolidation or otherwise (the "Sale"), within a
reasonable period of time. The Voting Trustee shall use his Best Efforts to
consummate the Sale with any potential qualified buyer identified to the Voting
Trustee by Sunbase. Notwithstanding the foregoing, nothing contained in the
Agreement shall prevent Sunbase from consummating the Sale on its own.
7.2. The Voting Trustee may engage legal counsel, financial advisors and
brokers, at the expense of Sunbase, to assist with the Sale. Such legal counsel
financial advisors and brokers may have previously represented or have provided
professional services to the Voting Trustee.
7.3. Without limiting the generality of Section 6.4, the Voting Trustee
shall provide to Sunbase:
a. written notice of any offer or expression of interest with
respect to the Sale promptly upon the Voting Trustee's notification thereof;
b. monthly reports on the progress of the Sale which shall include a
description of the Voting Trustee's efforts to effect the Sale, potential
buyers, negotiations and
8
<PAGE>
such other information as Sunbase shall request in writing; the Voting Trustee
also shall deliver such monthly reports to CFIUS; and
c. upon the commencement of negotiations of the Sale with any
party, telephonic or written notice to Roger Li or such other person or persons
as Sunbase shall designate, on a weekly or more frequent basis as the Voting
Trustee shall deem necessary to keep Sunbase fully informed of the progress of
the negotiations.
7.4. The Voting Trustee shall not authorize the consummation of the Sale
without the express written consent of Sunbase pursuant to Section 6.3.
7.5. Upon consummation of the Sale, the Voting Trustee shall provide a
final report to CFIUS describing the terms of the sale, including the purchase
price and the identity of the buyer.
ARTICLE 8. - Export Control Safeguards
8.1. The Board shall ensure that the Corporation complies with all
relevant U.S. laws and regulations and that the Corporation maintains policies
and procedures to comply with the Export Administration Regulations("EAR") and
the International Traffic in Arms Regulations ("ITAR") and implements such
policies and procedures.
8.2. The Board shall exercise its Best Efforts to ensure that the
Corporation develops and implements a Technology Control Plan ("TCP"). The TCP
shall prescribe measures to prevent unauthorized disclosure or export of goods,
services, technology, technical data and information, and other proprietary
technology and data subject to regulatory or contractual control by the U.S.
Government, consistent with applicable United States laws and regulations
("Controlled Information"). The TCP should include procedures to ensure that
visits by foreign persons are handled in accordance with U.S. export control
laws and regulations.
8.3. A Technology Control Officer ("TCO") shall be appointed by the Board
and shall be the principal advisor to the Board concerning the protection of
Controlled Information. The TCO's responsibility shall include the establishment
and administration of all intracompany procedures, including employee training
programs, to prevent the unauthorized disclosure or export of Controlled
Information and to ensure that the Corporation otherwise complies with the
requirements of the EAR and ITAR. The Voting Trustee shall provide the
Department of State, Office of Defense Trade Controls with the name of the TCO.
8.4. Discussions of Controlled Information by the Board shall be held in
closed sessions and accurate minutes of such meetings shall be kept and shall be
made available only to such authorized individuals as are so designated by the
Board.
8.5. Each member of the Board shall exercise his Best Efforts to ensure
that all provisions of the Agreement are carried out and that the Corporation's
directors, officers and employees comply with the provisions of the
Agreement.
9
<PAGE>
8.6. The Voting Trustee will provide CFIUS with monthly reports on the
status of the Corporation's efforts to resolve the outstanding ITAR compliance
issues raised during CFIUS' review and investigation of Sunbase Asia's
acquisition of the Corporation.
8.7 The Board shall ensure that the Corporation submits an export license
application to the Department of State before exporting any product or service.
However, in the case of those exports where the Corporation believes a Munition
License may not be required, the Board shall ensure that the Corporation submits
a commodity jurisdiction request. Notwithstanding the foregoing, if the
Corporation obtains a commodity jurisdiction decision from the Department of
State indicating that a particular product or service is not controlled by the
Department of State, the Corporation is not required to submit a license
application to the Department of State before exporting that commodity.
CONTACTS AND VISITS
ARTICLE 9.- Regulated Meetings, Visits and Communications
9.1. With the exception of the information required to be provided in
Section 7.3, the parties to the Agreement hereby agree to abide by the following
procedures regarding meetings, visits and communications between the Corporation
and any of its Affiliates.
a. The Voting Trustee shall schedule a meeting once each year with
Sunbase. The first meeting shall be on March 31, 1999. Meetings with Sunbase may
be held more frequently than once each year only if the Voting Trustee agrees.
Representatives of the Corporation may attend these meetings if requested by the
Voting Trustee. The Voting Trustee may convene a meeting, either in person or by
phone, with Sunbase at any time so long as the agenda is limited to the matters
described in Section 6.3 of the Agreement. Controlled Information shall not be
disclosed to Sunbase except as specifically authorized by applicable law or
regulation. Suggestions or requests of Sunbase representatives present at these
meetings shall not be binding on the Voting Trustee or the Corporation. Minutes
of meetings in which Sunbase representatives are in attendance shall be prepared
and retained by the Voting Trustee.
b. All proposed visits to the Corporation by any person who
represents the Affiliates (including all of the directors, employees, officers,
representatives, and agents of each) and all proposed visits to any of its
Affiliates by any person who represents the Corporation (including all
directors, employees, officers, representatives, and agents) as well as visits
between such persons at other locations, must be approved in advance by the
Voting Trustee, subject to the Corporation obtaining any necessary export
control approvals. All requests for such approval shall be submitted in writing
to the Voting Trustee. Although strictly social contacts at other locations
between the Corporation's personnel and any individual representing any of its
Affiliates are not prohibited, written reports of such visits must be submitted
after the fact to the Voting Trustee.
c. A written request for approval of a visit must be submitted to
the Voting Trustee not less than seven (7) days prior to the date of the
proposed visit. If any unforeseen exigency precludes compliance with this
schedule, such request may be communicated via telephone or other electronic
means to the Voting Trustee and promptly confirmed in writing.
10
<PAGE>
The exact purpose and justification for the visit must be set forth in detail
sufficient to make a reasonable and prudent evaluation of the proposed visit.
Each proposed visit must be individually justified and a separate approval
request must be submitted for each.
d. Upon receipt of a written request for approval of a visit, the
Voting Trustee, as soon as possible after such receipt, will indicate approval
or disapproval of the request telephonically or by other expeditious means to
the visiting parties. Such approval or disapproval will be promptly confirmed in
writing.
e. All other communications of any nature and by any means between
the Corporation and any of its Affiliates must be in writing and shall be sent
through or to the Voting Trustee.
9.2. Visits and other communications between the Corporation and any of its
Affiliates on such commercial matters as proposed contracts, subcontracts, joint
ventures, partnerships, and teaming arrangements shall be approved in advance by
the Voting Trustee. Notwithstanding the foregoing, the Corporation shall not
provide to any of its Affiliates any Controlled Information.
9.3. Notwithstanding any other provision of this agreement, the Corporation
shall provide to Sunbase in writing through the Voting Trustee monthly financial
reports and all information necessary for Sunbase to meet its U.S. legal
obligations, including information necessary for the preparation and submission
by Sunbase of the required SEC filings and any information that Sunbase is
reasonably likely to be required to disclose under applicable U.S. securities
law. The Corporation shall also respond in writing through the Voting Trustee to
written questions that Sunbase may have concerning information contained in the
monthly financial reports. The Voting Trustee and Sunbase shall engage in
discussions to determine the format of such reporting.
ADMINISTRATION
ARTICLE 10. - Deposit of Shares
10.1. Sunbase agrees that concurrently with the execution and delivery of
the Agreement it will transfer and assign to the Voting Trustee all of the
Shares and will deposit with the Voting Trustee, the certificates for such
Shares, all of which certificates shall be registered in the name of the Voting
Trustee or if not registered in the name of the Voting Trustee, shall be duly
endorsed in blank or accompanied by proper instructions of assignment and
transfer duly executed in blank, and in either case properly stamped for
registration of transfer.
11
<PAGE>
ARTICLE 11. - Voting Trust Certificates
11.1. The Voting Trustee shall issue from time to time, in respect of the
Shares, Voting Trust Certificates for a like number of Shares. The Voting Trust
Certificates shall incorporate or refer to the Agreement and shall be registered
in the name of Sunbase or in such name as Sunbase shall specify in writing.
11.2. The Voting Trust Certificates shall be in a form approved by the
Voting Trustee and shall be signed by the Voting Trustee. The Voting Trust
Certificates may be transferred by the Voting Trustees in accordance with rules
established for that purpose by the Voting Trustee and in accordance with the
Agreement.
ARTICLE 12. - Replacement of Voting Trust Certificates
12.1. In the event any Voting Trust Certificate becomes mutilated,
destroyed, lost or stolen, the Voting Trustee may, in his sole discretion, issue
and deliver a new Voting Trust Certificate representing a like number of the
Shares. In the case of mutilated Voting Trust Certificates, the mutilated Voting
Trust Certificates shall be exchanged and canceled. In the case of destroyed,
lost or stolen Voting Trust Certificates, new Voting Trust Certificates shall be
issued upon production of evidence of such destruction, loss or theft that is
satisfactory to the Voting Trustees, and upon receipt of indemnity satisfactory
to them.
ARTICLE 13. - Shares Held by Voting Trustee
13.1. The certificates for the Shares deposited with the Voting Trustee
that are not registered in the name of the Voting Trustee shall be surrendered
and canceled, and new certificates shall be issued in the name of the Voting
Trustee. All certificates issued in the name of the Voting Trustee shall include
on their face a statement that the certificates are issued pursuant to the
Agreement. The entry of ownership in the books of the Corporation shall also
reflect that the certificates are issued pursuant to the Agreement.
13.2. The Shares shall be held, used and applied by the Voting Trustee and
any successors in the Voting Trustee's office for the purposes of and in
accordance with the Agreement.
13.3. The Voting Trustee may cause any Shares at any time held by the
Voting Trustee under the Agreement to be transferred to any name or names, other
than the Voting Trustee mentioned in the Agreement, if such transfer is
necessary by reason of any change in the persons holding the office of Voting
Trustee.
13.4. If additional Shares are acquired by, or issued to, Sunbase, it
shall be a condition precedent of such issuance that new certificates be issued
in the name of the Voting Trustee. The certificates shall be annotated and
reflected in the books of the Corporation as provided in Section 13.1.
13.5. Nothing in the Agreement shall restrict the right of Sunbase or any
successor owner of the Shares from selling, transferring, pledging or otherwise
encumbering, all or a portion thereof, subject to the terms and conditions of
the Agreement, as appropriate.
12
<PAGE>
Conversely, the Voting Trustee shall not have the power to sell, or transfer or
pledge or otherwise encumber the Shares except in accordance with the terms of
the Agreement.
ARTICLE 14. - Dividends
14.1. During the term of the Agreement, Sunbase shall remain as the
beneficial owner of the Shares and as such shall be entitled from time to time
to receive from the Corporation payments equal to cash dividends issued by the
Corporation against the Shares represented by the Voting Trust Certificates.
14.2. In the event that Sunbase shall be entitled to receive any shares as
a dividend upon the Shares, Sunbase shall accept and deposit such shares with
the Voting Trustee whereupon the Voting Trustee shall issue Voting Trust
Certificates against such new Shares.
ARTICLE 15. - Notices
15.1. All notices required or permitted to be given to the parties to the
Agreement shall be given by mailing the same in a sealed postpaid envelope, via
registered or certified mail, or sending the same by courier or facsimile,
addressed to the addresses shown below, or to such other addresses as the
parties may designate from time to time pursuant to this Section:
For the Corporation: Smith Acquisition Company, Inc.
d/b/a Southwest Products Company
2240 Buena Vista
Irwindale, California 91010
P.O. Box 1028
Monrovia, California 91017-1028
Attention: William R. McKay
Telephone: 818/358-0181
Facsimile: 818/303-6141
For Sunbase: Sunbase Asia, Inc.
19/F, First Pacific Bank Centre
51-57 Gloucester Road
Wanchai
Hong Kong
Attention: Roger Li
Telephone: 852-2865-1511
Facsimile: 852-2865-4293
13
<PAGE>
For the Voting Trustee: Samuel T. Mok
1330 Connecticut Avenue, N.W.
Suite 210
Washington, D.C. 20036
Telephone: 202/828-2614
Facsimile: 202/789-4117
For CFIUS: Committee for Foreign Investment in the United States
c/o Gay Sills Hoar
Director, Office of International Investment
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, DC 20220
Telephone: 202/622-9066
Facsimile: 202/622-0391
ARTICLE 16. - Inconsistencies with Other Documents
16.1. In the event that any resolution, regulation or bylaw of any of the
parties to the Agreement is found to be inconsistent with any provision hereof,
the terms of the Agreement shall control. This provision does not apply to the
employment agreement entered into on January 16, 1996 between William R. McKay,
the Corporation and Sunbase.
ARTICLE 17. - Governing Law; Construction
17.1. The Agreement shall be construed and enforced in accordance with the
laws of the State of California, without reference to conflict of laws
principles.
17.2. In all instances consistent with the context, nouns and pronouns of
any gender shall be construed to include the other gender.
TERMINATION
ARTICLE 18. - Termination and
Amendment of the Agreement
18.1. The Agreement shall automatically be terminated without any action
of or notice by any party hereto upon the consummation of the Sale in accordance
with Article 7 provided that termination shall not occur until Article 7.5 has
been fully implemented.
18.2. The Agreement may be amended by an agreement in writing executed by
all the parties hereto, subsequent to notice to CFIUS after a 30-day comment
period.
18.3. The Voting Trustee is authorized to consult with Sunbase concerning
any proposed amendments to, or termination of the Agreement.
14
<PAGE>
ARTICLE 19. - Action Upon
Termination of the Agreement
19.1. Upon termination of the Agreement, the Voting Trustee, in exchange
for and upon surrender of any Voting Trust Certificates then outstanding shall,
in accordance with the terms hereof, deliver certificates representing capital
stock of the Corporation in the amount called for by such Voting Trust
Certificate to the registered holder thereof and the entry of ownership in the
books of the Corporation shall reflect the termination of the Agreement. Nothing
in this Article 19, or elsewhere in this Agreement contained, shall be construed
to deprive the Voting Trustee of the right as record holder or holders of the
deposited Shares to vote the same and to execute consents with respect thereto,
notwithstanding the termination of this Agreement, so long as he shall continue
to be record holders thereof.
19.2. Upon termination of the Agreement as above provided, and delivery by
the Voting Trustee of any stock or other property then held hereunder in
exchange for outstanding Voting Trust Certificates as provided in this Article
19, all further obligations or duties of the Voting Trustee under this Agreement
or any provision hereof shall cease.
ARTICLE 20. - Place of Filing
20.1. Until the termination of the Agreement, one original counterpart
shall be filed at the principal office of the Corporation, located in Irwindale,
California.
EXECUTION
ARTICLE 21. - Execution
21.1. The Agreement may be executed in several counterparts, each of which
shall be deemed to be an original, and all of such counterparts shall together
constitute but one and the same instrument. All parties to the Agreement are
entitled to retain an executed counterpart of the Agreement.
15
<PAGE>
IN WITNESS WHEREOF, each party hereto has executed, or has caused its
duly authorized representative to execute, this Voting Trust Agreement as of the
date first above written.
SUNBASE ASIA, INC.
By: /s/ MR. ROGER LI
-----------------------------------
Name: MR. ROGER LI
Title: DIRECTOR & CFO
SMITH ACQUISITION COMPANY, INC.
D/B/A SOUTHWEST PRODUCTS COMPANY
By: /s/ William McKay
-----------------------------------
Name: William McKay
Title: President, CEO
VOTING TRUSTEE
By: /s/ Samuel T. Mok
-----------------------------------
Samuel T.Mok
16
<PAGE>
Exhibit 10.23
Dated 16th October, 1998
------------------------
(1) CHINA BEARING HOLDINGS LIMITED
and
(2) ASEAN CAPITAL LIMITED
and
(3) CHINA INTERNATIONAL BEARING
HOLDINGS LIMITED
and
(4) SUNBASE ASIA, INC.
and
(5) SMITH ACQUISITION COMPANY, INC.
and
(6) SUNBASE INTERNATIONAL (HOLDINGS) LIMITED
and
(7) EXTENSIVE RESOURCES LIMITED
and
(8) GLORY MANSION LIMITED
and
(9) WARDLEY CHINA INVESTMENT TRUST
and
(10) MC PRIVATE EQUITY PARTNERS ASIA LIMITED
and
(11) CHINE INVESTISSEMENT 2000
________________________________________
SETTLEMENT AGREEMENT
in respect of certain
convertible debentures issued by
CHINA BEARING HOLDINGS LIMITED
________________________________________
CHAO AND CHUNG
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Description Page No.
----------- --------
<S> <C>
1. INTERPRETATION 2
2. AGREEMENT 3
3. COMPLETION 4
4. SPECIFIC UNDERTAKING BY SIHL 6
5. SPECIFIC UNDERTAKING BY ACL 6
6. UNDERTAKINGS 6
7. SPECIFIC UNDERTAKINGS BY SAI 7
8. CORPORATE GOVERNANCE 8
9. NOTICES 8
10. EVENTS OF DEFAULT 11
11. COSTS AND EXPENSES 11
12. GOVERNING LAW AND JURISDICTION 11
13. GENERAL PROVISIONS 14
14. COUNTERPARTS 14
SCHEDULE 1 15
Corporate Chart 15
SCHEDULE 2 16
Form of written resolution of the sole
shareholder of the Company 16
SCHEDULE 3 17
Repayment Schedule 17
SCHEDULE 4 21
Form of Guarantee 21
SCHEDULE 5 30
Undertaking by ACL 30
SCHEDULE 6 38
Form of Deed of Share Mortgage 38
SIGNATURE PAGE 49
</TABLE>
<PAGE>
THIS AGREEMENT is made on the 16th day of October, 1998.
(1) CHINA BEARING HOLDINGS LIMITED, the registered office of which is at Cedar
House, 41 Cedar Avenue Hamilton HM12, Bermuda (the "Company");
(2) ASEAN CAPITAL LIMITED, the registered office of which is at Omar Hodge
Building, Wickhams Cay I, P.O. Box 362, Road Town, Tortola, British Virgin
Islands ("ACL");
(3) CHINA INTERNATIONAL BEARING HOLDINGS LIMITED, the registered office of
which is at 19th Floor, 51-57 Gloucester Road, Wanchai, Hong Kong
("CIBHL");
(4) SUNBASE ASIA, INC., the registered office of which is at 1280 Terminal Way,
Suite 3, Reno Nevada 89502, United States of America ("SAI");
(5) SMITH ACQUISITION COMPANY, INC., a California corporation doing business as
Southwest Products Company, the registered office of which is at 2240 Buena
Vista, Irwindale, CA 91706, United States of America ("SPC");
(6) SUNBASE INTERNATIONAL (HOLDINGS) LIMITED the registered office of which is
at 19th Floor, 51-57 Gloucester Road, Wanchai, Hong Kong ("SIHL");
(7) EXTENSIVE RESOURCES LIMITED, the registered office of which is at P.O. Box
71, Craigmuir Chambers, Road Town, Tortola, British Virgin Islands ("ERL");
(the parties at (1), (2), (3), (4) and (5) hereinafter collectively referred to
as "Default Parties");
(8) GLORY MANSION LIMITED, the registered office of which is at Craigmuir
Chambers, P.O. Box 71, Road Town, Tortola, British Virgin Islands "(GML");
(9) WARDLEY CHINA INVESTMENT TRUST, the registered office of which is at c/o
Suite 1610, P.O. Box 1016, 885 West Georgia Street, Vancouver B.C., V6C
3E8, Canada ("WCIT");
(10) MC PRIVATE EQUITY PARTNERS ASIA LIMITED the registered office of which is
at P.O. Box 309, Ugland House, South Church Street, Grand Cayman, Cayman
Islands, British West Indies ("MC Partners"); and
(11) CHINE INVESTISSEMENT 2000, a Luxembourg-registered Unit Trust, the
registered office of which is at L1118 Luxembourg, 14 Rue Aldringen ("CI
2000");
<PAGE>
(the parties at (8), (9), (10) and (11) hereinafter collectively referred to as
the "Investors" and each an "Investor")
WHEREAS:-
(A) The parties hereto (except SIHL and ERL) entered into the Subscription
Agreement (as defined below) under which the Investors subscribed for
Debentures of an aggregate principal value of $11,500,000.
(B) The Default Parties have breached certain of their obligations under the
Subscription Agreement and the Investors have agreed not to exercise their
rights under the Subscription Agreement in relation thereto subject to and
upon the terms and conditions set out herein.
NOW IT IS HEREBY AGREED as follows:-
1. INTERPRETATION
--------------
(A) In this Agreement:-
"ACL Undertaking" means an undertaking or guarantee to be given
by ACL in favour of the Investors in the form
or substantially the same form as set out in
Schedule 5 hereof;
"Completion" means performance by the parties hereto of
their respective obligations set out in
Clause 3 upon the signing of this Agreement;
"Deed of Share Mortgage" means the form of share mortgage set out in
Schedule 6;
"Guarantee" means the guarantee to be given by the
Guarantors in the form or substantially the
same form set out in Schedule 4 hereof;
"Hong Kong" means the Hong Kong Special Administrative
Region of the People's Republic of China;
"Principal" means the amount of $13,173,490, being the
amount the Investors have, subject to and
upon the terms and conditions set out herein,
accepted as the principal aggregate amount
due to the Investors as at the date of this
Agreement;
2
<PAGE>
"Repayment Schedule" means the schedule of instalments of
repayment to be made by the Company to
the Investors set out in Schedule 3;
"Subscription Agreement" means an agreement dated 2nd August, 1996
relating to the subscription by the Investors
for the Debentures issued by the Company and
made between the parties hereto; and
"$" means United States dollars, the lawful
currency of the United States of America.
(B) In this Agreement, unless otherwise defined, words and expressions defined
in the Subscription Agreement (including the schedules thereto), when used
in this Agreement, bear the same respective meanings in this Agreement.
2. AGREEMENT
---------
In consideration of the Investors agreeing not to exercise their rights
against the Default Parties in accordance with the terms and conditions of
the Subscription Agreement and the Debentures:-
(A) the parties hereto agree that the Company shall repay by instalments
to the Investors in respect of the Principal and interest on that part
thereof that is outstanding for the time being calculated at 10% per
annum in accordance with the Repayment Schedule PROVIDED THAT the
right of the Company to repay an amount in addition to the what is
provided in the Repayment Schedule ("Additional Payment") shall not be
prejudiced and in which case the Repayment Schedule may be adjusted
(based on the same interest rate and on the basis that the Additional
Payment shall be applied towards discharging the part of the principal
amount comprised in each outstanding repayment instalment which bears
the same proportion to the said principal amount as stated in the
Repayment Schedule as the total amount of the Additional Payment bears
to the aggregate amount of the Principal and interest then
outstanding) as to be advised by the Investors;
(B) SAI will, on Completion, issue in favour of the Investors (or as they
may direct) 466,667 new shares in the common stock of SAI which may
not be sold within a period of three years commencing from the date
hereof (the certificates for which shall bear a legend to the same
effect) ("SAI Shares");
(C) the Default Parties jointly and severally undertake to procure that
50% of any public market funds raised by the Company or any member of
the SAI Group shall be applied immediately towards discharging the
3
<PAGE>
then outstanding part of the Principal and the interest accrued
thereon (whereupon the Repayment Schedule shall be adjusted as if the
application of such funds was an Additional Payment subject to the
provisions of sub-clause (A) of this Clause) as to be advised by the
Investors;
(D) ERL shall grant a charge over one million issued shares in the capital
of Tianjin Development Holdings Limited (the "Tianjin Shares") held by
it in favour of Brilliant Future Holdings Limited (as trustee for and
on behalf of the Investors) to secure the performance of the
obligations of the Company under this Agreement upon such terms and
conditions as set out in the Deed of Share Mortgage;
(E) the Investors agree that upon the Default Parties' fulfilment of all
their obligations under this Agreement, the Debentures issued to the
Investors pursuant to the Subscription Agreement shall be returned to
the Company for cancellation and in the meantime provided that none of
the Default Parties is in default of any of their respective
obligations under this Agreement the Investors shall refrain from
exercising any of their rights under the Subscription Agreement or
under the Conditions; and
(F) the Investors agree that as amongst themselves, their respective
entitlements thereunder to be repaid by the Company and/or issued with
SAI Shares shall be in proportion to the principal amounts of the
Debentures held by them respectively.
3. COMPLETION
----------
(A) Completion shall take place at the offices of Chao and Chung at Suite 601,
Asia Pacific Finance Tower, Citibank Plaza, 3 Garden Road, Hong Kong upon
the signing of this Agreement.
(B) At Completion, the following transactions shall take place:-
(1) SAI in its capacity as the sole shareholder of the Company entitled to
vote at its general meetings shall pass in writing the resolution as
set out in Schedule 2 of this Agreement;
(2) the Company shall:-
(i) deliver to the Investors a certified copy of the Board resolution
of the Company and SIHL (i) approving and authorising execution
and completion of this Agreement; and (ii) resolving to effect
and do all that is necessary to give effect to this Agreement;
4
<PAGE>
(ii) deliver to the Investors a certified copy of the Board
resolution of SAI (i) approving and authorising execution and
completion of this Agreement; (ii) approving and authorising the
execution of the Guarantee and the issue of the SAI Shares; and
(iii) resolving to effect and do all that is necessary to give
effect to this Agreement and the Guarantee;
(iii) deliver to the Investors a certified copy of Board resolution
from each of CIBHL and SPC in each approving and authorising the
execution and completion of this Agreement and the Guarantee and
resolving to effect and do all that is necessary to give effect
to this Agreement and the Guarantee;
(iv) deliver to the Investors a certified copy of Board resolution
from ACL approving and authorising the execution and completion
of this Agreement and the ACL Undertaking and resolving to
effect and do all that is necessary to give effect to this
Agreement and the ACL Undertaking;
(v) deliver to the Investors a certified copy of Board resolution
from ERL approving and authorising the execution and completion
of this Agreement and resolving to effect and do all that is
necessary to give effect to this Agreement; and
(vi) deliver evidence satisfactory to the Investors that the Company
has effected payment by telegraphic transfer to the Investors of
the amount of $520,000.00 required to be paid by the Company on
completion as set out in the Repayment Schedule;
(3) ERL shall execute and deliver to Brilliant Future Holdings Limited the
Deed of Share Mortgage and the Board resolution of ERL approving its
execution of the same;
(4) SAI, CIBHL and SPC shall enter into the Guarantee in the form as set
out in Schedule 4 hereof; and
(5) ACL shall enter into the ACL Undertaking in the form as set out in
Schedule 5 hereof.
(C) All the events which are to take place at Completion shall take place
simultaneously and no party shall be obliged to complete this Agreement
unless the other parties simultaneously comply with their respective
obligations contained in sub-clause (B) of this clause.
(D) For the avoidance of doubt, the continuing obligations of the Default
Parties under this Agreement shall not cease as a result of Completion.
5
<PAGE>
4. SPECIFIC UNDERTAKING BY SIHL
----------------------------
SIHL hereby unconditionally and irrevocably undertakes to each of the
Investors that for so long as any of the obligations of the Company under
this Agreement remain outstanding, SIHL shall not, save with the prior
written approval of each of the Investors, reduce its current issued
beneficial shareholdings (being 100%) in the share capital of ACL carrying
rights to vote in ACL's general meetings.
5. SPECIFIC UNDERTAKING BY ACL
---------------------------
ACL hereby unconditionally and irrevocably undertakes to each of the
Investors that for so long as any of the obligations of the Company under
this Agreement remain outstanding:-
(i) ACL shall, directly or indirectly, (save with the prior written
approval of each of the Investors) remain the legal and beneficial
owner of not less than 51% of the Deemed Total Issued Share Capital of
SAI (as defined hereinafter) and retain control over not less than 51%
of the voting rights of SAI (which for this purpose shall exclude
Super-voting Rights but shall include a substitution of 100,000 votes
per Series A Preferred Stock held for the purposes of calculation
hereunder); and
(ii) no amounts are to be repaid in respect of the ACL Promissory Notes
save and except with the prior written approval of the Investors.
For the purpose of this clause, "Deemed Total Issued Share Capital of SAI"
means the total Share capital of SAI deemed to be in issue which for this
purpose shall be the then actual existing total issued Shared capital of
SAI and (if any Series A Preferred Stock or Series B Preferred Stock is
---
left outstanding) that number of Shares that would have been issued in
respect of Series A Preferred Stock and Series B Preferred Stock had the
same been all converted immediately prior to the relevant date under
consideration as if such Shares form part of the enlarged issued Share
capital of SAI in aggregate.
6. UNDERTAKINGS
------------
6.1 Each of the Company, the Guarantors, SIHL and ACL hereby further undertakes
and agrees that it shall procure that no member of the SAI Group shall at
any time and for so long as the obligations of the Company under this
Agreement remains outstanding (including the exercise of all such voting
powers and control it has, directly or indirectly over the members of the
SAI Group), save with the prior written approval from each of the
Investors, do anything or suffer anything to be done which shall result in
change(s) to the corporate structure of the SAI Group set out in Schedule
1.
6.2 Each of SAI and the Company hereby covenants, undertakes and agrees with
6
<PAGE>
the Investors that:-
(a) certificates in respect of the SAI Shares shall be issued
and delivered to the respective Investors (or as they may
direct) no later than 90 days from the date of this
Agreement; and
(b) each Investor shall, if it is deemed to be an "affiliate"
under the U.S. Securities Act of 1933 of SAI (which
interpretation shall be determined by a U.S. law firm to be
agreed between the Investors and SAI or the Securities and
Exchange Commission as the case may be), have the right to
require SAI and/or the Company to file a registration
statement under the Securities Act for a public offering /
resale of all or any number of the SAI Shares held by the
Investor, such rights to be exercisable by the delivery of
a written notice to SAI and/or the Company (the "Notice")
specifying in detail the number of the SAI Shares required
to be made the subject of the registration, the identity of
the Investor and the intended method of resale of the SAI
Shares and SAI and/or the Company shall take all reasonable
steps to commence the procedure for such filing within five
(5) Business Days of receipt of the Notice.
7. SPECIFIC UNDERTAKINGS BY SAI
----------------------------
SAI hereby undertakes and agrees to ensure that all of the SAI
Shares will be duly and validly issued, fully paid and non-
assessable and will not be subject to pre-emptive rights and that
for a period of 3 years from the date hereof:-
(a) SAI shall not in any way modify the rights attached to the
Shares as a class or attach any special restrictions
thereto except with the prior written consent from the
Investors;
(b) SAI shall procure that at no time shall there be an issue
of Shares of differing nominal value except with the prior
written consent from the Investors;
(c) SAI shall not do anything voluntarily or on its own
initiative which may result in (or can reasonably be
foreseen to result in) the delisting of the issued Shares
on NASDAQ;
(d) SAI shall provide the Investors with a copy of its annual
reports, annual financial statements, interim reports and
all other statements and circulars sent by SAI to its
shareholders within fourteen days after SAI sends the same
to its shareholders; and
(e) SAI shall provide each Investor with a copy of every
document filed from the date hereof with the Securities and
Exchange Commission and the same shall be so provided to
each Investors within fourteen days of
7
<PAGE>
the date of the filing of such document.
8. CORPORATE GOVERNANCE
--------------------
Unless the prior written approval from the Investors have been
obtained, each of the Company, the Guarantors, SIHL and ACL undertakes
that it shall and shall procure that each of them shall exercise all
such voting rights and other powers of control as is or shall be
available to them to procure that no member in the SAI Group (save and
except Harbin Bearing Company Limited for the purposes of sub-clauses
(a),(b),(c),(e) and (g) of this clause) shall:-
(a) acquire assets in excess of $3,000,000;
(b) borrow, lend or give any guarantee of any amount greater than
$3,000,000;
(c) sell assets having a fair market value in excess of
$3,000,000;
(d) make any dividend payments;
(e) give any charge, mortgage, pledge or other security interest
in excess of $3,000,000;
(f) enter into any related party transaction except where such
transaction (i) is a normal commercial arms length
transaction entered into in the ordinary course of the SAI
Group's business of the manufacturing and sales of bearing
products, or (ii) relates to the advancement of loan to any
member of the SAI Group for the purpose of enabling it to
fulfil its obligations under this Agreement;
(g) allow any of the events referred to in sub-clauses (a) to (e)
of this Clause to occur if such event will involve such an
amount or value (notwithstanding such amount may or may not
exceed the relevant limit specified for that event under this
Clause (a) to (e) hereof) when added to the existing
cumulative total of the value of that event occurring in the
preceding 12 months will take the overall cumulative total
over 15% of the net asset value of SAI as shown in the latest
audited consolidated accounts of SAI.
9. NOTICES
-------
Any notice required or permitted to be given by or under this Agreement
shall be in writing and shall be given by delivering it to the address
or facsimile number of the relevant party connected shown below:-
8
<PAGE>
The Company : c/o China International Bearing
----------- Holdings Limited
19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
Attn.: Mr. Billy Kan / Mr. Roger Li
SAI : c/o China International Bearing
--- Holdings Limited
19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
Attn.: Mr. Billy Kan / Mr. Roger Li
ERL : c/o China International Bearing
--- Holdings Limited
19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
Attn.: Mr. Billy Kan / Mr. Roger Li
SIHL : c/o China International Bearing
---- Holdings Limited
19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
Attn.: Mr. Billy Kan / Mr. Roger Li
SPC : c/o China International Bearing
--- Holdings Limited
19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
Attn.: Mr. Billy Kan / Mr. Roger Li
ACL : c/o China International Bearing
--- Holdings Limited
19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
Attn.: Mr. Billy Kan / Mr. Roger Li
9
<PAGE>
CIBHL : 19th Floor, First Pacific Bank Centre,
----- 51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
Attn.: Mr. Billy Kan / Mr. Roger Li
GML : c/o HPEM, 10th Floor, Citibank Tower,
--- 3 Garden Road, Hong Kong
Tel: (852) 2845 7688
Fax: (852) 2845 9992
Attn.: Mr. George Raffini / Mr. Brian Law
WCIT : c/o HPEM, 10th Floor, Citibank Tower,
---- 3 Garden Road, Hong Kong
Tel: (852) 2845 7688
Fax: (852) 2845 9992
Attn.: Mr. George Raffini / Mr. Brian Law
MC Partners : c/o MC Capital Asia Pte Limited
----------- Unit No. 1002 C/D 10th Floor,
Tower 1, Admiralty Centre,
18 Harcourt Road, Hong Kong
Tel: (852) 2866 3393
Fax: (852) 2866 2693
Attn.: Mr. Yuji Komiya
/ Mr. Tatsuya Kuroyanagi
CI 2000 : c/o Asian Asset Management Limited
------- Suite 51, 5th Floor
New Henry House
10 Ice House Street
Central, Hong Kong
Tel: (852) 2804 6188
Fax: (852) 2804 6197
Attn.: Mr. Fabrice Jacob
or to such other address or facsimile number as the party concerned may
have notified to the other party pursuant to this Clause and may be given
by sending it by hand to such address or by facsimile transmission to such
facsimile number, or to such other address or facsimile number as the party
concerned may have notified to the other party in accordance with this
Clause. Such notice shall be deemed to be served on the day of delivery or
facsimile transmission (or, if the day of delivery or transmission is not a
Business Day or if the delivery or transmission is made after 5:00 p.m.
Hong Kong time, deemed to be served on the immediately following Business
Day), or if sooner
10
<PAGE>
upon acknowledgement of receipt by or on behalf of the party to
which it is addressed.
10. EVENTS OF DEFAULT
-----------------
(A) Notwithstanding the repayment obligations of the Company in
accordance with the Repayment Schedule, if any of the following
events ("Event of Default") occurs the Principal shall
automatically become immediately due and payable in full by the
Company at its principal amount outstanding together with any
accrued but unpaid interest calculated up to and including the
date of payment the aggregate amount of which shall be notified
by the Investors to the Company and upon the settlement thereof
in accordance with this clause by the Company the repayment
obligations set out in the Repayment Schedule shall be deemed to
have been discharged by the Company.
(B) An Event of Default occurs when:-
(a) the Company defaults in repayment pursuant to the Repayment
Schedule;
(b) any of the Default Parties fails to perform any of its
obligations under this Agreement;
(c) any of the Guarantors fails to perform any of its
obligations under the Guarantee, and
(d) ACL fails to perform any of its obligations under the ACL
Undertaking.
11. COSTS AND EXPENSES
------------------
The legal costs incurred in connection with the preparation and
negotiation of this Agreement and ancillary documentation shall
be borne as to one-half by the Company and as to the other half
by the Investors.
12. GOVERNING LAW AND JURISDICTION
------------------------------
12.1 This Agreement shall be governed by and construed in accordance
with the laws of Hong Kong and each party hereby submits to the
non-exclusive jurisdiction of the courts of Hong Kong as regards
any claim or matter arising under this Agreement.
12.2 Each of the parties hereto irrevocably agrees for the benefit of
each of the Investors that the courts of Hong Kong shall have
jurisdiction to hear and determine any suit, action or
proceeding, and to settle any disputes, which may arise out of or
in connection with this Agreement and, for such purposes,
11
<PAGE>
irrevocably submits to the jurisdiction of such courts.
12.3 Each of the parties hereto irrevocably waives any objection it might now or
hereinafter have to the courts referred to in sub-Clause 12.1 above
nominated as the forum to hear and determine any suit, action or
proceeding, and to settle any disputes, which may arise out of or in
connection with this Agreement and agrees not to claim that any such courts
is not a convenient or appropriate forum.
12.4 Each of the Company, SAI, ACL, SIHL, ERL and SPC hereby irrevocably
appoints CIBHL (details of which are set out below) and CIBHL hereby
accepts such appointment as each of their process agent to receive and
acknowledge on its behalf service of any writ, summons, order, judgement or
other notice of legal process in Hong Kong. Each of GML, WCIT, MC Partners
and CI 2000 also hereby irrevocably appoints the persons set out against
its name below to be its process agent:-
Company - China International Bearing Holdings Limited
------- 19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
Attn.: Mr. Billy Kan / Mr. Roger Li
SAI - China International Bearing Holdings Limited
--- 19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
Attn.: Mr. Billy Kan / Mr. Roger Li
ERL c/o China International Bearing
--- Holdings Limited
19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
Attn.: Mr. Billy Kan / Mr. Roger Li
SIHL - c/o China International Bearing
---- Holdings Limited
19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
Attn.: Mr. Billy Kan / Mr. Roger Li
12
<PAGE>
ACL- : China International Bearing Holdings Limited
--- 19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
Attn: Mr. Billy Kan / Mr. Roger Li
SPC- : China International Bearing Holdings Limited
--- 19th Floor, First Pacific Bank Centre,
51-57 Gloucester Road, Hong Kong
Tel: (852) 2865 1511
Fax: (852) 2865 4293
Attn: Mr. Billy Kan / Mr. Roger Li
GML- : HPEM, 10th Floor, Citibank Tower,
--- 3 Garden Road, Hong Kong
Tel: (852) 2845 7688
Fax: (852) 2845 9992
Attn: Mr. George Raffini / Mr. Brian Law
WCIT- : HPEM, 10th Floor, Citibank Tower,
---- 3 Garden Road, Hong Kong
Tel: (852) 2845 7688
Fax: (852) 2845 9992
Attn: Mr. George Raffini / Mr. Brian Law
MC Partners- : MC Capital Asia Pte Limited
----------- Unit No. 1002 C/D 10th Floor,
Tower 1, Admiralty Centre,
18 Harcourt Road, Hong Kong
Tel: (852) 2866 3393
Fax: (852) 2866 2693
Attn: Mr. Yuji Komiya / Mr. Tatsuya Kuroyanagi
CI 2000 : Asian Asset Management Limited
------- Suite 51, 5th Floor
New Henry House
10 Ice House Street
Central, Hong Kong
Tel: (852) 2804 6188
Fax: (852) 2804 6197
Attn: Mr. Fabrice Jacob
12.5 Each of the parties hereby consent generally in respect of any legal
action or proceeding arise out of or in connection with this Agreement
to the giving of
13
<PAGE>
any relief or any issue of any process in connection with such action or
proceeding including, without limitation, the making, enforcement or
execution against any property whatsoever (irrespective of its use or
intended use) of any order or judgement which may be made or given in
such action or proceeding.
13. GENERAL PROVISIONS
------------------
13.1 As regards any date or period time shall be of the essence of this
Agreement.
13.2 This Agreement shall be binding on and enure for the benefit of the
successors of each of the parties and shall not be assignable.
13.3 The exercise of or failure to exercise any right to remedy in respect of
any breach of this Agreement shall not, save as provided herein,
constitute a waiver by such party or any other right or remedy it may
have in respect of that breach.
13.4 Any right or remedy conferred by this Agreement on any party for breach
of this Agreement (including without limitation the breach of any
representations and warranties) shall be in addition and without
prejudice to all other rights and remedies available to it in respect of
that breach.
13.5 This Agreement constitutes the entire agreement between the parties with
respect to its subject matter and no variation of this Agreement shall be
effective unless made in writing and signed by all of the parties.
13.6 This Agreement supersedes all and any previous agreements, arrangement or
understanding between the parties relating to the matters referred to in
this Agreement and all such previous agreements, understanding or
arrangements (if any) shall cease and determine with effect from this
date hereof.
13.7 If at any time any provision of this Agreement is or becomes illegal,
void or unenforceable in any respect, the remaining provisions hereof
shall in no way be affected or impaired thereby.
14. COUNTERPARTS
------------
This Agreement may be executed by the parties hereto in any number of
counterparts and on separate counterparts, each of which when so executed
shall be deemed an original but all of which shall constitute one and the
same instrument and is binding on all parties.
AS WITNESS whereof this Agreement has been duly executed on the date first above
written.
14
<PAGE>
SCHEDULE 1
----------
1. Corporate Chart
---------------
--------------------------------------
Sunbase Asia, Inc.
("SAI")
--------------------------------------
100% 100%
-------------------- ---------------------
China Bearing Smith Acquisition
Holdings Limited Company Inc.
("CBH") ("SPC")
-------------------- ---------------------
100%
---------------------
China International
Bearing Holdings
Limited ("CIBHL")
---------------------
99% 99.90%
- -------------------- -----------------------
Harbin Sunbase Harbin Xinhengli
Development Development
Company Limited Company Limited
("Harbin Sunbase") ("Harbin Xinhengli")
- -------------------- -----------------------
10% 41.57%
-----------------
Harbin Bearing
Company Limited
("HBC")
-----------------
15
<PAGE>
SCHEDULE 2
----------
Form of written resolution of the sole shareholder of
-----------------------------------------------------
China Bearing Holdings Limited
------------------------------
Resolution of the sole shareholder of China Bearing Holdings Limited adopted in
writing on [.], 1998
We, being the sole shareholder of the Company for the time being, do HEREBY
RESOLVE the following:-
"THAT:-
(a) the Company be authorised to execute and complete the Settlement Agreement
to be dated [.], 1998 in consideration of the Investors (as defined in the
Settlement Agreement) agreeing not to exercise their rights against the
Company and certain other parties under the Subscription Agreement dated
2nd August, 1996;
(b) Mr. Billy Kan be authorised to effect and do all that is necessary to give
effect to the Settlement Agreement for and on behalf of the Company".
Date 1998
- ----------------------------
Sunbase Asia, Inc.
16
<PAGE>
SCHEDULE 3
----------
Repayment Schedule
- ------------------
1. Completion Principal repayment and Interest on Principal $ 520,000.00
2. 23/12/1998 Principal repayment $ 20,903.42
Interest on Principal $(13,091,590x10%/12) $ 109,096.58
------------
$ 130,000.00
3. 23/1/1999 Principal repayment $ 21,077.61
Interest on Principal $(13,070,686x10%/12) $ 108,922.39
------------
$ 130,000.00
4. 23/2/1999 Principal repayment $ 21,253.26
Interest on Principal $(13,049,609x10%/12) $ 108,746.74
------------
$ 130,000.00
5. 23/3/1999 Principal repayment $ 831,430.37
Interest on Principal $(13,028,355x10%/12) $ 108,569.63
------------
$ 940,000.00
6. 23/4/1999 Principal repayment $ 28,358.96
Interest on Principal $(12,196,925x10%/12) $ 101,641.04
------------
$ 130,000.00
7. 23/5/1999 Principal repayment $ 28,595.28
Interest on Principal $(12,168,566x10%/12) $ 101,404.72
------------
$ 130,000.00
8. 23/6/1999 Principal repayment $ 28,833.58
Interest on Principal $(12,139,971x10%/12) $ 101,166.42
------------
$ 130,000.00
9. 23/7/1999 Principal repayment $ 29,073.86
Interest on Principal $(12,111,137x10%/12) $ 100,926.14
------------
$ 130,000.00
10. 23/8/1999 Principal repayment $ 29,316.14
Interest on Principal $(12,082,063x10%/12) $ 100,683.86
------------
$ 130,000.00
17
<PAGE>
11. 23/9/1999 Principal repayment $ 299,560.44
Interest on Principal $(12,052,747x10%/12) $ 100,439.56
---------------
$ 400,000.00
12. 23/10/1999 Principal repayment $ 302,056.78
Interest on Principal $(11,753,187x10%/12) $ 97,943.22
---------------
$ 400,000.00
13. 23/11/1999 Principal repayment $ 304,573.92
Interest on Principal $(11,451,130x10%/12) $ 95,426.08
---------------
$ 400,000.00
14. 23/12/1999 Principal repayment $ 307,112.03
Interest on Principal $(11,146,556x10%/12) $ 92,887.97
---------------
$ 400,000.00
15. 23/1/2000 Principal repayment $ 309,671.30
Interest on Principal $(10,839,444x10%/12) $ 90,328.70
---------------
$ 400,000.00
16. 23/2/2000 Principal repayment $ 312,251,89
Interest on Principal $(10,529,773x10%/12) $ 87,748.11
---------------
$ 400,000.00
17. 23/3/2000 Principal repayment $ 314,853.99
Interest on Principal $(10,217,521x10%/12) $ 85,146.01
---------------
$ 400,000.00
18. 23/4/2000 Principal repayment $ 317,477.78
Interest on Principal $(9,902,667x10%/12) $ 82,522.22
---------------
$ 400,000.00
19. 23/5/2000 Principal repayment $ 320,123.42
Interest on Principal $(9,585,189x10%/12) $ 79,876.58
---------------
$ 400,000.00
20. 23/6/2000 Principal repayment $ 322,791.12
Interest on Principal $(9,265,066x10%/12) $ 77,208.88
---------------
$ 400,000.00
21. 23/7/2000 Principal repayment $ 325,481.05
Interest on Principal $(8,942,275x10%/12) $ 74,518.95
---------------
$ 400,000.00
18
<PAGE>
22. 23/8/2000 Principal repayment $ 328,193.39
Interest on Principal $(8,616,793x10%/12) $ 71,806.61
--------------
$ 400,000.00
23. 23/9/2000 Principal repayment $ 330,928.33
Interest on Principal $(8,288,600x10%/12) $ 69,071.67
--------------
$ 400,000.00
24. 23/10/2000 Principal repayment $ 333,686.07
Interest on Principal $(7,957,672x10%/12) $ 66,313.93
--------------
$ 400,000.00
25. 23/11/2000 Principal repayment $ 336,466.79
Interest on Principal $(7,623,986x10%/12) $ 63,533.21
--------------
$ 400,000.00
26. 23/12/2000 Principal repayment $ 339,270.68
Interest on Principal $(7,287,518.88x10%/12) $ 60,729.32
--------------
$ 400,000.00
27. 23/1/2001 Principal repayment $ 342,097.93
Interest on Principal $(6,948,248x10%/12) $ 57,902.07
--------------
$ 400,000.00
28. 23/2/2001 Principal repayment $ 344,948.75
Interest on Principal $(6,606,150x10%/12) $ 55,051.25
--------------
$ 400,000.00
29. 23/3/2001 Principal repayment $ 347,823.32
Interest on Principal $(6,261,201x10%/12) $ 52,176.68
--------------
$ 400,000.00
30. 23/4/2001 Principal repayment $ 350,721.85
Interest on Principal $(5,913,378x10%/12) $ 49,278.15
--------------
$ 400,000.00
31. 23/5/2001 Principal repayment $ 353,644.53
Interest on Principal $(5,562,656x10%/12) $ 46,355.47
--------------
$ 400,000.00
32. 23/6/2001 Principal repayment $ 356,591.57
Interest on Principal $(5,209,012x10%/12) $ 43,408.43
--------------
$ 400,000.00
19
<PAGE>
33 23/7/2001 Principal repayment $ 4,852,420.26
Interest on Principal $(4,852,420x10%/12) $ 40,436.84
---------------
$ 4,892,857.10
Total Repayment & Interest
Principal $ 13,173,490.00
Interest on Principal $ 3,019,367.10
---------------
$ 16,192,857.10
===============
20
<PAGE>
SCHEDULE 4
----------
Form of Guarantee
-----------------
21
<PAGE>
THIS GUARANTEE dated the day of , 1998 is made between:-
(1) SUNBASE ASIA, INC., of 1280 Terminal Way, Suite 3, Reno Nevada 89502,
United States of America ("SAI");
(2) CHINA INTERNATIONAL BEARING HOLDINGS LIMITED, of Cedar House, 41 Cedar
Avenue, Hamilton HM12, Bermuda ("CIBHL");
(3) SMITH ACQUISITION COMPANY, INC. of 2240 Buena Vista, Irwindale, CA
91706 ("SPC");
(The parties referred to at (1), (2) and (3) hereinafter referred to as the
"Guarantors" and each a "Guarantor".)
(4) GLORY MANSION LIMITED, of Craigmuir Chambers, P.O. Box 71, Road Town,
Tortola, British Virgin Islands ("GML");
(5) WARDLEY CHINA INVESTMENT TRUST, of c/o Suite 1610, P.O. Box 1016 P.O.
Box 1016, 885 West Georgia Street, Vancouver B.C., V6C 3E8, Canada
("WCIT");
(6) MC PRIVATE EQUITY PARTNERS ASIA LIMITED of P.O. Box 309, Ugland House,
South Church Street, Grand Cayman, Cayman Islands, British West Indies
("MC Partners"); and
(7) CHINE INVESTISSEMENT 2000, of L1118 Luxembourg, 14 Rue Aldringen ("CI
2000");
(The parties referred to at (4), (5), (6) and (7) hereinafter collectively
referred to as "Investors" and each an "Investor")
WHEREAS:-
(A) By a settlement agreement dated [*], 1998 (the "Settlement Agreement")
and made between (1) China Bearing Holdings Limited (the "Company");
(2) Asean Capital Limited ("ACL"); (3) China International Bearing
Holdings Limited ("CIBHL"); (4) Sunbase Asia, Inc. ("SAI"); (5) Smith
Acquisition Company Inc. ("SPC"); (6) Sunbase International (Holdings)
Limited ("SIHL"); (7) Extensive Resources Limited ("ERL"); (8) Glory
Mansion Limited ("GML"); (9) Wardley China Investment Trust ("WCIT");
(10) MC Private Equity Partners Asia Limited ("MC Partners") and (11)
Chine Investissement 2000 ("CI 2000"), the Investors agreed not to
exercise their rights against the Default Parties under the
Subscription Agreement.
(B) It is stipulated in the Settlement Agreement that the Guarantors shall
execute the Guarantee in respect of the obligations of the Company and
the other parties (not being the Investors) under the Settlement
Agreement at
22
<PAGE>
Completion. Accordingly, this Guarantee supplements the Settlement
Agreement.
(B) Expressions defined in the Settlement Agreement shall, unless specifically
defined or re-defined herein or the context otherwise requires, bear the
same meanings when used herein.
NOW THIS GUARANTEE WITNESSETH AND IT IS HEREBY AGREED as follows:-
1. Guarantee
---------
(A) In consideration of the Investors agreeing not to exercise their rights
against the Default Parties, each of the Guarantors hereby as primary
obligor, irrevocably and unconditionally and together with each of the
other Guarantors (the "Other Guarantors") jointly and severally, guarantees
to each of the Investors:-
(i) the full due and punctual observance and performance of all the
terms, conditions and covenants on the part of the Company contained
in the Settlement Agreement including the due and punctual payment
of all sums now or subsequently payable under the Settlement
Agreement and agrees to perform or procure the performance of such
obligations of the Company from time to time and on demand by any of
the Investors pay any and every sum or sums of money which the
Company shall at any time be liable to pay to the Investors under or
pursuant to the Settlement Agreement;
(ii) the full due and punctual observance and performance of all the
terms, conditions and covenants on the part of each Other Guarantor
which such Other Guarantor is a party to the Settlement Agreement
and this Guarantee including the due and punctual payment of all
sums now or subsequently payable under the Settlement Agreement or
this Guarantee and agrees to perform or procure the performance of
such obligations of the Other Guarantors from time to time and on
demand by any of the Investors pay any and every sum or sums of
money which the Other Guarantors shall at any time be liable to pay
to the Investors under or pursuant to the Settlement Agreement or
this Guarantee as the case may be; and
(iii) to indemnify the Investors from time to time on demand by any of the
Investors from and against any loss incurred by the Investors or any
of them as a result of any of the obligations of the Company under
the Settlement Agreement or of any of the obligations of the Other
Guarantors under or pursuant to the Settlement Agreement or this
Guarantee not being fulfilled or performed or being or becoming
void,
23
<PAGE>
voidable, unenforceable or ineffective as against the Company or any
of the Other Guarantors as the case may be for any reason
whatsoever, whether or not know to the Investors or any of them or
any other person.
The Guarantors' obligations hereunder is as if it is a principal debtor in
respect of any amount and liability and obligation and not merely a surety,
and without any requirement for the Investors first to have recourse
against the Company or any of the Other Guarantors as the case may be and
such liability shall not be impaired or reduced by any undertaking granted.
2. Preservation of Rights
----------------------
(A) The obligations of the Guarantors herein contained shall be in addition to
and independent of every other security which the Investors or any of them
may at any time hold in respect of any of the Company or the Guarantors'
obligations hereunder.
(B) The obligations of each of the Guarantors herein contained shall constitute
and be continuing obligations notwithstanding any settlement of account or
other matter or thing whatsoever, and in particular but without limitation,
shall not be considered satisfied by any intermediate payment or
satisfaction of all or any of the obligations of the Company or any of the
Other Guarantors and shall continue in full force and effect until final
payment in full of all amounts owing by the Company or any of the Other
Guarantors hereunder and total satisfaction of all the Company's or any of
the Other Guarantors actual and contingent obligations hereunder.
(C) None of the obligations of any of the Guarantors herein contained nor the
rights, powers and remedies conferred upon the Investors by the Settlement
Agreement or this Guarantee or by law shall be discharged, impaired or
otherwise affected by:-
(i) the winding-up, dissolution, administration or re-organisation of
the Company or any of the Guarantors or any other person or any
change in its status, function, control or ownership;
(ii) any of the obligations of the Company or any of the Guarantors or
any other person hereunder or under any other security taken in
respect of any of its obligations hereunder being or becoming
illegal, invalid, unenforceable or ineffective in any respect;
(iii) time or other indulgence being granted or agreed to be granted to
the Company or any of the Guarantors or any other person in respect
of its obligations hereunder or under any such other security;
(iv) any amendment to, or any variation, waiver or release of, any
24
<PAGE>
obligation of the Company or any of the Guarantors or any other
person hereunder or under any such other security;
(v) any failure to take, or fully to take, any security contemplated
hereby or otherwise agreed to be taken in respect of the Company,
any of the Guarantor's or any other person's obligations hereunder;
(vi) any failure to realise or fully to realise the value of, or any
release, discharge, exchange or substitution of, any security taken
in respect of the Company, any of the Guarantor's or any other
person's obligations hereunder; or
(vii) any other act, event or omission which, might operate to discharge,
impair or otherwise affect any of the obligations of any of the
Guarantors herein contained or any of the rights, powers or remedies
conferred upon the Investors or any of them by the Subscription
Agreement or the Debentures or by law.
(D) None of the Investors shall be obliged before exercising any of the rights,
powers or remedies conferred upon each of them hereunder or by law:-
(i) to make any demand of the Company or any of the Guarantors;
(ii) to take any action or obtain judgement in any court against the
Company or any of the Guarantors;
(iii) to make or file any claim or proof in a winding-up or dissolution of
the Company or any of the Guarantors; or
(iv) to enforce or seek to enforce any other security taken in respect of
any of the obligations of the Company or any of the Guarantors
hereunder.
(E) Each Guarantor agrees that, so long as any amounts are or may be owed by
the Company or the Other Guarantors hereunder or when any of the Company or
the Other Guarantors is under any actual or contingent obligations
hereunder, it shall not exercise any rights which it may at any time have
by reason of performance by it of its obligations hereunder:-
(i) to be indemnified by the Company or any of the Guarantors; and/or
(ii) to claim any contribution from the Other Guarantors; and/or
(iii) to take the benefit (in whole or in part and whether by way of
subrogation or otherwise) of any rights of the Investors hereunder
or of any other security taken pursuant to, or in connection with,
the Settlement Agreement or the Debenture by all or any of the
Investors.
25
<PAGE>
3. Representations and Warranties
------------------------------
Each of the Guarantors hereby represents and warrants to each of the
Investors that:-
(a) it is a company validly incorporated, duly organised and subsisting
and of good standing under the law of the jurisdiction under which it
was incorporated;
(b) it has the necessary capacity to give this Guarantee and to perform
and observe the obligations contained herein. The execution, delivery
and performance of this Guarantee have been duly authorised by all
necessary corporate action of the Guarantor and do not contravene the
constitution of the Guarantor under any applicable laws or
regulations. This Guarantee, as executed and delivered, constitutes
legal valid and binding obligations of the Guarantor;
(c) the execution and delivery of, and the performance of the provisions
of, this Guarantee does not and will not during the continuance of
this Guarantee (i) contravene any existing applicable laws, ordinance,
regulation, decree, instrument, franchise, concession, licence or
permit, or any order, judgement, decree or award, administrative or
governmental authority, department or agency presently in effect and
applicable, or (ii) contravene any contractual restrictions binding on
the Guarantors or any of its assets, or (iii) cause any limit on any
of the borrowing, guaranteeing, charging or other powers of the
Guarantor, or (iv) create or result in or obliged the Guarantor to
create any lien, charge, security interest or encumbrance on the whole
or any part of the Guarantor's property;
(d) all necessary governmental and other consents, authorities and
approvals to execute this Guarantee has been obtained and are in full
force, validity and effect;
(e) no litigation, attribution, administrative or other proceedings
pending before the court, tribunal, arbitrator or governmental agency
has been threatened against any of the Guarantor; and
(f) the obligations of each of the Guarantors under this Guarantee are
direct, general, and unconditional obligations and rank at least pari
passu with all such Guarantor's other present and future unsecured and
unsubordinated and other obligations.
4. Further Preservation of rights
------------------------------
Should any purported obligation of the Company or any of the Guarantors
being the subject of this Guarantee be or become wholly or in part invalid
or
26
<PAGE>
unenforceable on any grounds whatsoever, the Guarantor shall nevertheless
be liable to the Investors in respect of such purported obligation or
liability as if the same were wholly valid and enforceable in each of the
Guarantors as the principal debtor in respect thereof. Each of the
Guarantors hereby agrees to keep each of the Investors fully indemnified
against all damages, loss, costs and expenses arising from any failure of
the Company or any of the Guarantors to carry out any of such purported
obligations.
5. Miscellaneous
-------------
(A) This Guarantee shall be binding on and for the benefit of each of the
parties' successor and assign and personal representatives (as the case may
be) but no assignment may be made of any of the rights obligations
hereunder of any party without the prior written consent of the other
parties.
(B) This Guarantee may be signed in any number of counterparts, each of which
shall be binding on the party who shall have executed it but which together
shall constitute one Agreement.
(C) Any notice required to be sent must be in writing and shall be given by
delivering it to the address or facsimile number as shown in Clause 9 of
the Settlement Agreement.
(D) This Agreement shall be governed by and construed in accordance with the
laws of Hong Kong and the parties hereby submit to the non-exclusive
jurisdiction of the courts of Hong Kong. In relation to any legal action or
proceedings arising out of or in connection with this Guarantee, each of
the Guarantors has irrevocably submitted in the Settlement Agreement to the
courts of Hong Kong and in relation thereto has appointed an agent for
service of process.
IN WITNESS WHEREOF the Guarantors have duly executed this Guarantee the date
and year first above written.
27
<PAGE>
The Common Seal of )
SUNBASE ASIA, INC. )
was hereunto affixed )
in the presence of:- )
The Common Seal of )
SMITH ACQUISITION )
COMPANY INC. )
was hereunto affixed )
in the presence of:- )
The Common Seal of )
CHINA INTERNATIONAL )
BEARING HOLDINGS LIMITED )
was hereunto affixed )
in the presence of:- )
SIGNED by )
duly authorised for and on behalf )
of GLORY MANSION LIMITED )
in the presence of:- )
SIGNED by )
dulty authorized for and on behalf )
of WARDLEY CHINA )
INVESTMENT TRUST )
in the presence of:- )
28
<PAGE>
SIGNED by )
duly authorised for and on behalf )
of MC PRIVATE EQUITY PARTNERS )
ASIA LIMITED )
in the presence of:- )
SIGNED by )
duly authorized for and on behalf )
of CHINE INVESTISSEMENT 2000 )
in the presence of:- )
29
<PAGE>
SCHEDULE 5
----------
Undertaking by ACL
------------------
30
<PAGE>
THIS UNDERTAKING dated the day of , 1998 is made between:-
(1) ASEAN CAPITAL LIMITED, of Omar Hodge Building, Wickhams Cay I, P.O. Box
362, Road Town, Tortola, British Virgin Islands ("ACL");
(2) WARDLEY CHINA INVESTMENT TRUST, of c/o Suite 1610, P.O. Box 1016, 885 West
Georgia Street, Vancouver B.C., V6C 3E8, Canada ("WCIT");
(3) GLORY MANSION LIMITED, of Craigmuir Chambers, P.O. Box 71, Road Town,
Tortola, British Virgin Islands ("GML");
(4) MC PRIVATE EQUITY PARTNERS ASIA LIMITED, of P.O. Box 309, Ugland House,
South Church Street, Grand Cayman, Cayman Islands, British West Indies ("MC
Partners"); and
(5) CHINE INVESTISSEMENT 2000, of L1118 Luxembourg, 14 Rue Aldringen
("CI2000").
(The parties referred to at (2), (3), (4) and (5) hereinafter collectively
referred to as "Investors" and each an "Investor").
WHEREAS:-
(A) By a settlement agreement dated [.], 1998 (the "Settlement Agreement") and
made between (1) China Bearing Holdings Limited (the "Company"); (2) Asean
Capital Limited ("ACL"); (3) China International Bearing Holdings Limited
("CIBHL"); (4) Sunbase Asia, Inc. ("SAI"); (5) Smith Acquistion Company
Inc. ("SPC"); (6) Sunbase International (Holdings) Limited ("SIHL"); (7)
Extensive Resources Limited ("ERL"); (8) Glory Mansion Limited ("GML"); (9)
Wardley China Investment Trust ("WCIT"); (10) MC Private Equity Partners
Asia Limited ("MC Partners") and (11) Chine Investissement 2000 ("CI
2000"), the Investors agreed not to exercise their rights against the
Default Parties under the Subscription Agreement.
(B) It is stipulated in the Settlement Agreement that ACL shall execute the ACL
Undertaking in respect of the payment obligations of the Company under the
Settlement Agreement and accordingly, this Undertaking supplements the
Settlement Agreement.
(C) Expressions defined in the Settlement Agreement shall, unless specifically
defined or re-defined herein or the context otherwise requires, bear the
same meanings when used herein.
NOW THIS UNDERTAKING WITNESSETH AND IT IS HEREBY AGREED as follows:-
31
<PAGE>
1. Guarantee
---------
In consideration of the Investors agreeing not to exercise their rights
against the Default Parties under the Subscription Agreement, ACL hereby as
primary obligor, irrevocably and unconditionally guarantees and undertakes
to each of the Investors:-
(i) the full due and punctual payment of all sums now or subsequently
payable under the Settlement Agreement by the Company and agrees to
perform or procure the performance of such payment obligations of the
Company from time to time and on demand by any of the Investors pay
any and every sum or sums of money which the Company shall at any time
be liable to pay to the Investors under or pursuant to the Settlement
Agreement as the case may be; and
(ii) to indemnify the Investors from time to time on demand by any of the
Investors from and against any losses or costs incurred by the
Investors or any of them as a result of any of the payment obligations
of the Company under the Settlement Agreement or any payment
obligations thereunder not being fulfilled or performed or being or
becoming void, voidable, unenforceable or ineffective as against the
Company or any of the Guarantors as the case may be for any reason
whatsoever, whether or not known to the Investors or any of them or
any other person.
ACL's obligations hereunder is as if it is a principal debtor in respect of
any amount and liability and obligation and not merely a surety, and
without any requirement for the Investors first to have recourse against
the Company or any of the Guarantors as the case may be and such liability
shall not be impaired or reduced by any undertaking granted.
2. Undertaking
-----------
ACL hereby further undertakes to use its best endeavours (including the
exercise of any voting rights and control it has) to ensure that the
obligations of SAI, CBHL, CIBHL and SPC under the Settlement Agreement and
of SAI, CIBHL and SPC under the Guarantee (including but without limitation
to the specific undertakings under Clause 7 of the Settlement Agreement)
will be observed, fulfilled and performed and shall do all that is
necessary so as to give effect to, render possible or assist in the
fulfilment or compliance with such provisions.
32
<PAGE>
3. Preservation of Rights
----------------------
(A) The obligations of ACL herein contained shall be in addition to and
independent of every other security which the Investors or any of them may
at any time hold in respect of any of the Company's or the Guarantors'
obligations under the Guarantee.
(B) The obligations of ACL herein contained shall constitute and be continuing
obligations notwithstanding any settlement of account or other matter or
thing whatsoever, and in particular but without limitation, shall not be
considered satisfied by any intermediate payment or satisfaction of all or
any of the obligations of the Company or any of the Guarantors and shall
continue in full force and effect until final payment in full of all
amounts owing by the Company.
(C) None of the obligations of ACL herein contained nor the rights, powers and
remedies conferred upon the Investors by the Settlement Agreement or this
Undertaking or by law shall be discharged, impaired or otherwise affected
by:-
(i) the winding-up, dissolution, administration or re-organisation of
the Company or any of the Guarantors or any other person or any
change in its status, function, control or ownership;
(ii) any of the obligations of the Company or any of the Guarantors or
any other person hereunder or under any other security taken in
respect of any of its obligations hereunder being or becoming
illegal invalid, unenforceable or ineffective in any respect;
(iii) time or other indulgence being granted or agreed to be granted to
the Company or any of the Guarantors or any other person in respect
of its obligations hereunder or under any such other security;
(iv) any amendment to, or any variation, waiver or release of, any
obligation of the Company or any of the Guarantors or any other
person hereunder or under any such other security;
(v) any failure to take, or fully to take, any security contemplated
hereby or otherwise agreed to be taken in respect of the Company,
any of the Guarantor's or any other person's obligations
hereunder;
(vi) any failure to realise or fully to realise the value of, or any
release, discharge, exchange or substitution of, any security taken
in respect of the Company, any of the Guarantor's or any other
person's obligations hereunder; or
(vii) any other act, event or omission which, might operate to discharge,
impair or otherwise affect any of the obligations of any of the
33
<PAGE>
Guarantors contained in the Guarantee or any of the rights,
powers or remedies conferred upon the Investors or any of them by
the Settlement Agreement or by law.
(D) None of the Investors shall be obliged before exercising any of the rights,
powers or remedies conferred upon each of them hereunder or by law:-
(i) to make any demand of the Company or any of the Guarantors;
(ii) to take any action or obtain judgement in any court against the
Company or any of the Guarantors;
(iii) to make or file any claim or proof in a winding-up or dissolution
of the Company or any of the Guarantors; or
(iv) to enforce or seek to enforce any other security taken in respect
of any of the obligations of the Company or any of the
Guarantors.
(E) ACL agrees that, so long as any amounts are or may be owed by the Company
or the Guarantors or when any of the Company or the Guarantors is under
any actual or contingent obligations to any of the Investors, it shall not
exercise any rights which it may at any time have reason of performance by
it of its obligations hereunder:-
(i) to be indemnified by the Company or the Guarantors; and/or
(ii) to claim any contribution from the Company or the Guarantors;
and/or
(iii) to take the benefit (in whole or in part and whether by way of
subrogation or otherwise) of any rights of the Investors
hereunder or of any other security taken pursuant to, or in
connection with, the Subscription Agreement or the Debenture by
all or any of the Investors.
4. Representations and Warranties
------------------------------
ACL hereby represents and warrants to each of the Investors that:-
(a) it is a company validly incorporated, duly organised and
subsisting and of good standing under the law of the jurisdiction
under which it was incorporated;
(b) it has the necessary capacity to give this Undertaking and to
perform and observe the obligations contained herein. The
execution, delivery and performance of this Undertaking have been
duly authorised by all necessary corporate action and do not
contravene the constitution of ACL under any applicable laws or
regulations. This Undertaking, as
34
<PAGE>
executed and delivered constitutes legal valid and binding obligations
of ACL;
(c) the execution and delivery of, and the performance of the provisions
of, this Undertaking does not and will not during the continuance of
this Undertaking (i) contravene any existing applicable laws,
ordinance, regulation, decree, instrument, franchise, concession,
licence or permit, or any order, judgement, decree or award,
administrative or governmental authority, department or agency
presently in effect and applicable, or (ii) contravene any contractual
restrictions binding on ACL or any of its assets, or (iii) cause any
limit on any of the borrowing, guaranteeing, charging or other powers
of ACL, or (iv) create or result in or obliged ACL to create any lien,
charge, security interest or encumbrance on the whole or any part of
the ACL's property;
(d) all necessary governmental and other consents, authorities and
approvals to execute this Undertaking has been obtained and are in
full force, validity and effect;
(e) no litigation, attribution, administrative or other proceedings
pending before the court, tribunal, arbitrator or governmental agency
has been threatened against ACL; and
(f) the obligations of ACL under this Undertaking are direct, general, and
unconditional obligations and rank at least pari passu with all ACL's
other present and future unsecured and unsubordinated and other
obligations.
5. Further Preservation of rights
------------------------------
Should any purported payment obligation of the Company being the subject of
this Undertaking be or become wholly or in part invalid or unenforceable on
any grounds whatsoever, ACL shall nevertheless be liable to the Investors
in respect of such purported payment obligation or liability as if the same
were wholly valid and enforceable as the principal debtor in respect
thereof. ACL hereby agrees to keep each of the Investors fully indemnified
against all damages, loss, costs and expenses arising from any failure of
the Company to carry out any of such purported payment obligations.
6. Miscellaneous
-------------
(A) This Undertaking shall be binding on and for the benefit of each of the
parties' successor and assign and personal representatives (as the case may
be) but no assignment may be made of any of the rights obligations
hereunder of any party without the prior written consent of the other
parties.
35
<PAGE>
(B) This Undertaking may be signed in any number of counterparts, each of which
shall be binding on the party who shall have executed it but which together
shall constitute one Agreement.
(C) Notices required to be sent pursuant to this Undertaking must be sent in
writing to the addresses or facsimile number of the parties contained in
Clause 9 of the Settlement Agreement.
(D) This Agreement shall be governed by and construed in accordance with the
laws of Hong Kong and the parties hereby submit to the non-exclusive
jurisdiction of the courts of Hong Kong. In relation to any legal action or
proceedings arising out of or in connection with this Undertaking, ACL has
irrevocably submitted in the Settlement Agreement to the courts of Hong
Kong and in relation thereto has appointed an agent for service of process.
IN WITNESS WHEREOF ACL have duly executed this Undertaking the date and year
first above written.
36
<PAGE>
The Common Seal of )
ASEAN CAPITAL LIMITED )
was hereunto affixed )
in the presence of:- )
SIGNED by )
duly authorised for and on behalf )
of GLORY MANSION LIMITED )
in the presence of:- )
SIGNED by )
duly authorised for and on behalf )
of WARDLEY CHINA )
INVESTMENT TRUST )
in the presence of:- )
SIGNED by )
duly authorised for and on behalf )
of MC PRIVATE EQUITY PARTNERS )
ASIA LIMITED )
in the presence of:- )
SIGNED by )
duly authorised for and on behalf )
of CHINE INVESTISSEMENT 2000 )
in the presence of:- )
37
<PAGE>
SCHEDULE 6
----------
Form of Deed of Share Mortgage
------------------------------
38
<PAGE>
Dated 1998
-----------------------------
Extensive Resources Limited
AND
Brilliant Future Holdings Limited
______________________________________________
Deed of Mortgage
relating to
Shares in Tianjin Development Holdings Limited
______________________________________________
Chao and Chung
Hong Kong
39
<PAGE>
THIS DEED is made on the day of , 1998
BETWEEN
(1) Extensive Resources Limited, a company incorporated in British Virgin
Islands and having its registered address at P.O. Box 71, Craigmuir
Chambers, Road Town, Tortola, British Virgin Islands (hereinafter referred
to as the Chargor); and
(2) Brilliant Future Holdings Limited, a company incorporated in British Virgin
Islands and having its registered address at the offices of Offshore
Incorporations Limited, P.O. Box 957, Offshore Incorporations Centre, Road
Town, Tortola, British Virgin Islands (hereinafter referred to as the
"Chargee").
WHEREAS:-
(A) The Chargor is the beneficial owner of the Mortgaged Shares (as defined
hereinafter).
(B) The Chargor has agreed pursuant to the Settlement Agreement to charge in
favour of the Chargee the Mortgaged Shares.
IT IS HEREBY AGREED as follows:-
1. Interpretation
--------------
1.1 Except as otherwise expressly provided, terms defined in the Settlement
Agreement shall have the same respective meanings when used in this Deed.
1.2 In this Deed the following expressions shall have the following meanings
respectively:-
"Disposal" means, any sale, assignment, exchange, transfer, concession,
loan, lease, surrender of lease, tenancy, licence, direct or indirect
reservation, waiver, compromise, release, dealing with or in or granting
of any option, right of first refusal or other right or interest whatsoever
or any agreement for any of the same and "Dispose" shall be construed
accordingly;
"Encumbrance" means any mortgage, charge, pledge, lien (other than a lien
arising by statute or operation of law) or other encumbrance, priority or
security interest, deferred purchase, title retention, leasing, sale-and
repurchase or sale-and leaseback arrangement whatsoever or in any assets,
rights or interest of whatsoever nature and includes any agreement for any
of the same;
40
<PAGE>
"Mortgaged Shares" means the 1,000,000 shares in the capital of
Tianjin Development held by the Chargor to be mortgaged hereunder and
for the time being subject to the charge created hereunder;
"Settlement Agreement" means and agreement dated [.], 1998 relating to
the settlement of obligations of the Default Parties; and
"Tianjin Development" means Tianjin Development Holdings Limited, a
company incorporated in Hong Kong and listed on The Stock Exchange of
Hong Kong Limited.
1.3 In this Deed, unless the context otherwise requires:-
(a) words and expressions defined in the Companies Ordinance (Cap.
32) of the Laws of Hong Kong shall bear the same meanings when
used herein;
(b) references to any statutes or statutory provision shall include
any statute or statutory provision which amends, replaces or re-
enacts, or has amended, replaced or re-enacted, it, and vice
versa, and shall include any statuary instrument, order,
regulation or other subordinate legislation made thereunder.
(c) references to Clauses, paragraphs, Recitals and Schedules are to
clauses and paragraphs of, and recitals and schedules to, this
Agreement and reference to sub-clauses are to sub-clauses of the
clause in which the reference appears;
(d) references to a "company' shall be construed so as to include any
company, corporation or other body corporate, wherever and
however incorporated or established;
(e) references to a "person" shall be construed so as to include any
individual, firm, company, government, state or agency of a
state, local or municipal authority or government body or any
joint venture, association or partnership (whether or not having
separate legal personality); and
(f) words importing the singular include the plural and vice versa,
words importing one gender include every gender.
2. Share Mortgage
--------------
2.1 The Chargor as beneficial owner, mortgages and agrees to mortgage to
the Chargee (as trustee for and on behalf of the Investors) by way of
first mortgage all of the Mortgaged Shares as continuing security for
the discharge of such obligations of the Company under the Settlement
Agreement as shall fall to be
41
<PAGE>
performed in the period up to 31st March, 1999.
2.2 In furtherance of the security constituted by this Deed the Chargor shall
deliver to the Chargee the share certificates representing the Mortgaged
Shares together with duly executed but undated instruments of transfer in
respect of the Mortgaged Shares in favour of the Chargee and/or its
nominees.
3. Covenants
---------
3.1 The Chargor covenants with the Chargee:-
(a) to reimburse to the Chargee all costs, charges and expenses which may
be incurred by it under or arising out of this Deed or in connection
with the Mortgaged Shares (but excluding any costs, charges and
expenses incurred by the Chargee in connection with the preparation
and negotiation of this Deed);
(b) at all times to comply in all respects with any law or directive and
any conditions in relation to this Deed and the Settlement Agreement;
and
(c) on demand made at any time after the security constituted by this Deed
becomes enforceable, procure that the Mortgaged Shares are transferred
into and registered in the share register of Tianjin Development in
the name of the Chargee and/or its nominees.
3.2 The Chargor covenant with the Chargee that it will not create or permit to
subsist any Encumbrance over or Dispose of the Mortgaged Shares (or the
equity of redemption in relation to the same) except with the prior consent
of the Chargee.
4. Share Rights
------------
4.1 Until the security constituted by this Deed becomes enforceable, the
Chargor shall be entitled to exercise any voting rights in respect of the
Mortgaged Shares provided that the Chargor will not exercise, or permit the
exercise of, voting rights in respect of any of the Mortgaged Shares in
such manner as will, in the opinion of the Chargee, contravene any of the
provisions of, or jeopardise any of the security created by this Deed and
the Settlement Agreement.
4.2 Upon the security constituted by this Deed becoming enforceable the Chargee
or its nominees may (to the entire exclusion of the Chargor) at any time,
at the Chargees's discretion, exercise any voting rights in respect of the
Mortgaged Shares and all the powers given to trustees by Section 11(4) and
(5) of the Trustee Ordinance (Cap.29) in respect of securities subject to a
trust and all powers or rights which may be exercised by the person or
persons in whose name or names the Mortgaged Shares are registered under
the terms hereof or
42
<PAGE>
otherwise.
43. The Chargor (or as appropriate his nominee) shall be entitled to retain
for its own benefit any dividends, distributions or other monies paid
(and which the Chargee has agreed should be paid) on or in respect of the
Mortgaged Shares prior to the security constituted by this Deed becoming
enforceable. All dividends, distributions or other monies paid or payable
on or in respect of the Mortgaged Shares at any other time or without the
prior approval of the Chargee, if received by the Chargor or its nominee,
shall be paid over to (and pending such payment shall be held on trust
for) the Chargee.
5. Enforcement
-----------
5.1 The Chargee shall be entitled to declare all or any part of the security
constituted by this Deed enforceable at any time immediately upon the
breach of any of the obligations of the Company as shall fall to be
performed in the period up to 31st March, 1999 under the Settlement
Agreement as the same is certified in writing by the Chargee.
5.2 Upon or at any time after the security constituted by this Deed has
become enforceable, the Chargee shall have the right, at any time,
without notice or any other action with respect to the Chargor, to take
such steps as are necessary to effect a transfer of the Mortgaged Shares
to itself (and/or its nominees) and/or sell the Mortgaged Shares or any
of them in such manner, at such price or prices, without being
responsible for any loss, as the Chargee may at its absolute discretion
deem expedient, and the Chargee shall not be responsible for any loss
from or through brokers or others employed in the sale of the Mortgaged
Shares or for any loss or depreciation in value of any of the Mortgaged
Shares arising from or through any cause whatsoever. The Chargee shall be
entitled to reimburse itself out of the proceeds of sale all costs,
charges and expenses incurred by it in such sale and is authorised to
apply any net proceeds of the Mortgaged Shares towards payment of the
outstanding principal and interest due from the Company to the Investors
under the Settlement Agreement in proportion to the principal amounts of
the Debentures held by each of the Investors respectively.
5.3 The Chargor agrees that upon any Disposal of the Mortgaged Shares or any
other rights under this Deed, the Chargee may make or purport to make a
statement in writing signed by the Chargee that this Deed is enforceable
and that the power of sale has become exercisable which statement shall
be conclusive evidence of the fact in favour of any purchaser or other
person acquiring any of the Mortgaged Shares or other rights and every
purchaser will take the same free of any rights of the Chargor. The
Chargor shall indemnify the Chargee against any claims or demands which
may be made against the Chargee by such purchaser and any liability,
loss, cost or expense which the Chargee may suffer or incur by reason of
any defect in the Chargor's title to the Mortgaged Shares.
43
<PAGE>
5.4 the Chargor agrees to waive any right to require that, prior to the
enforcement of the security constituted by this Deed, proceedings be taken
against the Chargor so that action be taken to realize the security held
pursuant to this Deed.
6. Power of Attorney
-----------------
6.1 The Chargor, by way of security, irrevocably appoints the Chargee and each
of its directors, officers and managers for the time being, with full power
of substitution and delegation, to be his attorney acting singly or
together and in his name, on his behalf to do all such assurances, acts or
things as he ought to do under the covenants and provisions contained in
this Deed and generally in his name and on his behalf to exercise all or
any of the powers, authorities and discretions conferred by or pursuant to
this Deed on the Chargee and generally to execute, seal and deliver and
otherwise perfect any deed, assignment, transfer, assurance, agreement,
instrument, or act which may in the opinion of the Chargee (or any
substitute attorney) be required or considered proper, necessary or
desirable for any of the purposes of this Deed.
6.2 The Chargor ratifies and confirms and agrees to ratify and confirm whatever
any attorney mentioned in this clause does in the exercise or purported
exercise of all or any of the powers, authorities and discretions under
this clause.
7. Termination
-----------
This Deed shall terminate automatically upon performance of all the
obligations of the Company under the Settlement Agreement as shall fall to
be performed in the period up to 31st March, 1999 whereupon the Chargee
shall:-
(a) redeliver to the Chargor the share certificates and instruments of
transfer in respect of the Mortgaged Shares or the remainder of them
(if any);
(b) generally take such other action as may be reasonably required at the
cost of the Chargor to release the Chargor from and to discharge this
Deed.
8. Indulgence
----------
This Deed and the rights of the Chargee under it shall not be discharged or
in any way affected by:-
(a) any time, indulgence, waiver or consent at any time given to, or any
compromise or composition entered into or made with, the Chargor or
any other person or any other release (conditional or otherwise) of
the
44
<PAGE>
Chargor or any other person;
(b) any amendment, variation, supplement or notation, to or of the
Settlement Agreement or any of them (whether or not the change
effected by such amendment, variation, supplement or notation is
material);
(c) any assignment by the Chargee of their rights and obligations under
the Settlement Agreement;
(d) any defect, irregularity or deficiency in any provision of any of the
Settlement Agreement, or the obligations of any party thereunder being
or becoming terminated, invalid, illegal or unenforceable at any item
and/or for any reason (whether or not known to the Subscriber);
(e) any party thereto not being bound by the terms of the Settlement
Agreement, whether as a result of any failure to execute, or any
deficiency in the execution of, the same or as a result of any defect
in or insufficiency or want of the necessary powers or any irregular
or improper exercise thereof, whether or not known to the Chargee or
for any other reason whatsoever; or
(f) the insolvency, bankruptcy, dissolution, winding-up, liquidation,
amalgamation, reconstruction, reorganization, charge in constitution,
death or incapacity of the Chargor.
9. General
-------
9.1 The rights and remedies provided in this Deed are cumulative and not
exclusive of any rights or remedies provided by law or under the Settlement
Agreement.
9.2 Any provision of this Deed may be amended only if the Chargor and the
Chargee agree in writing.
9.3 (A) Any notice or other communication given or made under this Agreement
shall be in writing.
(B) Any such notice or other communication shall be addressed as provided
in sub-clause (C) and, if so addressed, shall be deemed to have been
duly given or made as follows:-
(i) if sent by personally delivery, upon delivery at the address of
the relevant party;
(ii) if sent by post, two clear Business Days (if within Hong Kong) or
7 Business Days (if overseas) after the date of posting;
45
<PAGE>
and
(iii) if sent by facsimile, when despatched;
PROVIDED THAT if, in accordance with the above provisions, any
such notice or other communication would otherwise be deemed to
be given or made outside working hours, such notice or other
communication shall be deemed to be given or made at the start of
working hours on the next Business Day. "Working hours" means
9:00a.m. to 5:30p.m. on the Business Day.
(C) The relevant addressee, address and facsimile number of each party for
the purposes of this Agreement are:-
(i) in the case of the Chargor:-
Address: c/o China International Bearing Holdings Limited
19th Floor, First Pacific Bank Centre
51-57 Gloucester Road, Hong Kong
Facsimile: (852) 2865 4293
Attention: Mr. Billy Kan
(ii) in the case of the Chargee:-
Address: c/o HPEM, 10th Floor, Citibank Tower
3 Garden Road, Hong Kong
Facsimile: (852) 2845 9992
Attention: Mr. George Raffini/Mr. Brian Law
or in each case at or to such other address, facsimile number of
individual as the receiving party may have notified the sending party
provided that such notification shall only be effective on the date
specified in the notification as the date on which the change is to
take place or if no date is specified or the date specified is fewer
than five clear Business Days after the date on which notice if given,
the date falling five clear Business Days after notice of any change
has been given.
9.4 The illegality, invalidity or unenforceability of any provision of
this Deed under the law of any jurisdiction shall not affect its
legality, validity or enforceability under the law of any other
jurisdiction nor the legality, validity or enforceability of any other
provision.
9.5 This Deed shall enure to the benefit of the parties hereto and their
respective permitted successors, assignees and transferees.
46
<PAGE>
9.6 The Chargor and the Chargee may not assign or transfer any or all of their
rights or obligations under this Deed.
10. Law
---
This Deed shall be governed by and construed in accordance with the laws of
Hong Kong.
AS WITNESS whereof this Deed has been duly executed on the date first above
written.
47
<PAGE>
SEALED WITH THE COMMON SEAL )
OF EXTENSIVE RESOURCES LIMITED )
in the presence of:- )
SIGNED BY )
FOR AND ON BEHALF OF )
BRILLIANT FUTURE HOLDINGS LIMITED )
in the presence of:- )
48
<PAGE>
SIGNATURE PAGE
--------------
SIGNED by Kan Chi Kin, Billy )
duly authorised for and on behalf ) /s/ Billy Kan Chi Kin
of CHINA BEARING )
HOLDINGS LIMITED )
in the presence of:- )
/s/ Desmond Chow
Desmond Chow
Solicitor
Hong Kong SAR
SIGNED by Kan Chi Kin, Billy )
duly authorised for and on behalf ) /s/ Billy Kan Chi Kin
of ASEAN CAPITAL LIMITED )
in the presence of:- )
/s/ Desmond Chow
Desmond Chow
Solicitor
Hong Kong SAR
SIGNED by Kan Chi Kin, Billy )
duly authorised for and on behalf ) /s/ Billy Kan Chi Kin
of CHINA INTERNATIONAL )
BEARING HOLDINGS LIMITED )
in the presence of:- )
/s/ Desmond Chow
Desmond Chow
Solicitor
Hong Kong SAR
SIGNED by Kan Chi Kin, Billy )
duly authorised for and on behalf ) /s/ Billy Kan Chi Kin
of SUNBASE ASIA, INC. )
in the presence of:- )
/s/ Desmond Chow
Desmond Chow
Solicitor
Hong Kong SAR
SIGNED by Kan Chi Kin, Billy )
duly authorised for and on behalf ) /s/ Billy Kan Chi Kin
SMITH AQUISITION COMPANY, INC. )
in the presence of:- )
)
/s/ Desmond Chow
Desmond Chow
Solicitor
Hong Kong SAR
49
<PAGE>
SIGNED by Tien-yo Chao, as attorney)
duly authorised for and on behalf ) /s/ Tien-yo Chao
of GLORY MANSION LIMITED )
in the presence of:- )
/s/ Desmond Chow
Desmond Chow
Solicitor
Hong Kong SAR
SIGNED by Brian Law )
duly authorised for and on behalf ) /s/ Brian Law
of WARDLEY CHINA )
INVESTMENT TRUST )
in the presence of:- )
/s/ Desmond Chow
Desmond Chow
Solicitor
Hong Kong SAR
SIGNED by Tatsuya Kuroyanagi )
duly authorised for and on behalf ) /s/ Tatsuya Kuroyanagi
of MC PRIVATE EQUITY PARTNERS )
ASIA LIMITED )
in the presence of:- )
/s/ Desmond Chow
Desmond Chow
Solicitor
Hong Kong SAR
SIGNED by Fabrice Jacob )
duly authorised for and on behalf ) /s/ Fabrice Jacob
of CHINE INVESTISSEMENT 2000 )
in the presence of:- )
/s/ Desmond Chow
Desmond Chow
Solicitor
Hong Kong SAR
SIGNED by Kan Chi Kin, Billy )
duly authorised for and on behalf ) /s/ Billy Kan Chi Kin
of EXTENSIVE RESOURCES )
LIMITED )
in the presence of:- )
/s/ Desmond Chow
Desmond Chow
Solicitor
Hong Kong SAR
50
<PAGE>
SIGNED by Kan Chi Kin, Billy )
duly authorised for and on behalf )
of SUNBASE INTERNATIONAL ) /s/ Billy Kan Chi Kin
(HOLDINGS) LIMITED )
in the presence of:- )
/s/ Desmond Chow
Desmond Chow
Solicitor
Hong Kong SAR
51
<PAGE>
Exhibit 10.24
[LETTER HEAD OF O'MELVENY & MYERS LLP APPEARS HERE]
December 16, 1998
Contains Sensitive And Proprietary Information
Ms. Gay Sills Hoar
Director
Office of International Investment
United States Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Re: Case 98-52: Sunbase International/Southwest Product Company
-----------------------------------------------------------
Dear Ms. Hoar:
Pursuant to 31 C.F.R. (S) 800.505, I am writing on behalf of
Sunbase Asia Inc. ("Sunbase Asia") to request that Sunbase Asia be permitted to
withdraw its voluntary notice to the Committee on Foreign Investment in the
United States ("CFIUS"), submitted on September 24, 1998. As we have previously
informed you, Sunbase Asia has decided to sell Smith Acquisition Company, Inc.
d/b/a Southwest Products Company ("Southwest Products") for a number of reasons,
including its desire to resolve CFIUS' concerns in a satisfactory manner that
will protect United States national security and the interests of Sunbase Asia's
shareholders. To facilitate that process, and address CFIUS concerns about
foreign ownership of Southwest Products, Sunbase Asia proposes to place its
ownership interest in Southwest Products into an irrevocable trust and to
appoint an independent trustee who is a U.S. citizen, pending the sale of
Southwest Products. Sunbase Asia, as a publicly traded company, will notify the
Securities and Exchange Commission of this decision immediately upon appointment
of the trustee.
The trustee will be someone acceptable to the Department of Defense
who has no prior or current contractual, financial or employment relationship
with Sunbase Asia, nor with any individual or entity that directly or indirectly
through one or more intermediaries,
<PAGE>
Page 2
controls, is controlled by, or is under common control with Sunbase Asia or
Southwest Products, and will be charged with using "best efforts," as that term
is defined in Article 2.4(a) of the attached Voting Trust Agreement
("Agreement"), to sell Southwest Products. The trustee will be someone, who to
the best of his knowledge, has no current or prior contractual, material
financial or employment relationship with the Government of the Peoples Republic
of China, or any entity thereof, or any PRC political party. In addition, during
his appointment as trustee, the trustee will not enter into any of the
aforementioned relationships. As the attached document shows, Sunbase Asia has
affirmed its commitment to sell Southwest Products through a resolution of the
Board of Directors, which was originally delivered to CFIUS on December 11,
1998. Sunbase Asia intends for its compensation arrangement with the trustee to
provided for an incentive payment for the prompt sale of Southwest Products.
As an integral part of Sunbase Asia's proposal, Sunbase Asia's
foreign management, Mr. Roger Li and Mr. Peter Lam, upon the appointment of the
trustee, will immediately resign from the Board of Directors of Southwest
Products. Any new board members appointed by the trustee will be United States
citizens and acceptable to the Department of Defense. This will leave the
oversight and management of Southwest Products entirely in the control of United
States citizens, alleviating concerns about foreign influence in, or control
over, Southwest Products. Sunbase Asia will have no direct or indirect
involvement in the management or finances of Southwest Products, other than in
connection with its efforts to work with the trustee to sell Southwest Products.
Further, to maintain the independence of Southwest Products from Sunbase Asia,
Mr. William McKay, no later than 60 days after the appointment of the trustee,
will resign any positions he may hold with Sunbase Asia, or any entity (other
than Southwest Products) that directly or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
Sunbase Asia, and will not reestablish any contractual, material financial or
employment relationship with any such entity during the existence of the trust
as long as he is an officer or director of Southwest Products, other than with
respect to the stock or stock options which he currently holds or to which he is
or will be entitled under existing agreements, and other than as a purchaser of
Southwest Products.
The trustee once appointed will work to develop his plan for the sale
of Southwest Products and will provide CFIUS with a written sales plan shortly
after his appointment. In the interim, Sunbase Asia has contacted a number of
companies with which it does business to see if they are aware of any U.S.
companies that might be interested in purchasing Southwest Products. Sunbase
Asia is also working with its counsel to see if they can develope any contacts
with potential buyers. The trust agreement will require the trustee to inform
Sunbase Asia promptly of all bona fide offers for the purchase of Southwest
Products.
<PAGE>
O'MELVENY & MYERS LLP
Gay Sills Hoar, December 16, 1998 - Page 3
The trustee will be instructed in the trust agreement to provide CFIUS
monthly written status reports on the trustee's efforts to sell Southwest
Products. These reports to CFIUS, which are also to be provided to Sunbase Asia,
will be supplemented by Sunbase Asia in a separate report, as needed, to keep
CFIUS informed of Sunbase Asia's efforts to sell Southwest Products. In
addition, the trustee will provide CFIUS with monthly reports on the status of
Southwest Products efforts to resolve the outstanding ITAR compliance issues.
The trustee and/or Southwest Products also will be obligated to provide Sunbase
Asia any information needed to fulfill Sunbase Asia's obligations under U.S.
law, including its obligations as a public company, such as auditing reports and
reports of events requiring public disclosure, and information needed to allow
for the sale of Southwest Products. The trustee will also provide CFIUS with any
such additional information as CFIUS may request from time to time.
In addition to the trustee's mandate to sell Southwest, the trustee,
as the 100 percent owner of the stock of Southwest Products, will become
Chairman of the Board of Southwest and a company director. As such, the trustee
will have oversight responsibilities for the management of Southwest Products,
including ensuring Southwest Products' compliance with all applicable U.S. laws,
such as export control laws and regulations. This includes diligent efforts to
resolve any outstanding ITAR issues in cooperation with the Department of State.
The trustee will ensure that Southwest Products submits an export license
application to the Department of State before exporting any product or service.
However, in the case of those exports where Southwest Products believes a
Munition License may not be required, the trustee will ensure that Southwest
Products submits a commodity jurisdiction request. If Southwest Products obtains
a commodity jurisdiction decision from the Department of State indicating that a
particular product or service is not controlled by the Department of State,
Southwest Products is, of course, not required to submit a license application
to the Department of State before exporting that commodity. The trustee's duties
and obligations are contained in the attached voting trust agreement. Neither
Sunbase Asia nor any entity that directly or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with
Sunbase Asia, will have any rights or responsibilities with regard to the
management or operations of Southwest Products other than as explicitly provided
for in the trust agreement.
Sunbase Asia provided CFIUS with the name of a trustee candidate on
December 14, 1998 and provided CFIUS with a draft Voting Trust Agreement on
December 11, 1998. Sunbase Asia will promptly conclude negotiations with the
trustee. Sunbase Asia expects to have a trustee appointed to Southwest Products
no later than December 31, 1998. Until the time the trustee is appointed,
Southwest Products will provide CFIUS biweekly written reports on the status of
the matters mentioned above.
In light of Sunbase Asia's proposal to appoint a trustee pending the
sale of Southwest Products, and its willingness to terminate all foreign
involvement in the oversight
<PAGE>
O'MELVENY & MYERS LLP
Gay Sills Hoar, December 16, 1998 - Page 4
and management of Southwest Products, Sunbase Asia seeks permission to withdraw
its notification pursuant to 31 CFR (S) 800.505(a). Sunbase Asia believes CFIUS
should use its discretion to grant such a withdrawal since: (a) there would no
longer be any foreign involvement in the oversight or management of Southwest
Products; (b) U.S. citizens would have sole responsibility for ensuring
Southwest Products' compliance with U.S. laws, (c) the trustee would have
principal responsibility for the sale of Southwest Products, and (d) Sunbase
Asia has taken a series of steps including submitting voluntarily a proposal for
a trustee to the U.S. Government, and passing a board resolution authorizing the
sale of Southwest Products.
By accepting a withdrawal of Sunbase Asia's filing, CFIUS will
preserve maximum flexibility to reopen its investigation if it believes
conditions warrant such action. While Sunbase Asia does not believe CFIUS would
be precluded from reopening its investigation in light of the representations
made herein, it expressly waives all such objections, if any, it might have to
the reinstitution of a CFIUS review.
Sunbase Asia appreciates the time the CFIUS members have taken to
consider its proposal for a trustee. It shares the U.S. Government's interest in
a swift resolution of this matter through the sale of Southwest Products.
Sincerely,
/s/ Stephen J. Harburg
Stephen J. Harburg
of O'Melveny & Myers LLP
Attorneys for Sunbase Asia, Inc.
<PAGE>
RESOLUTION OF THE
BOARD OF DIRECTORS OF
SUNBASE ASIA INC.
- --------------------------------------------------------------------------------
WHEREAS, the Company is the sole shareholder of Southwest Products
Company, a California corporation ("Southwest"); and
WHEREAS, the Committee of Foreign Investments in the United States
("CFIUS") is currently investigating the Company's acquisition of Southwest in
1996; and
WHEREAS, CFIUS' investigation could lead to an order requiring the
Company to divest Southwest; and
WHEREAS, the Company's Board of Directors (the "Board") has determined
that it is the best interest of the Company and its shareholders to sell
Southwest;
NOW THEREFORE BE IT RESOLVED, that the Company shall sell Southwest;
/s/ Gunter Gao /s/ Philip Yuen
- --------------------------------- -----------------------------------
Gunter GAO Philip YUEN
/s/ William R. McKay /s/ Roger Li
- --------------------------------- -----------------------------------
William R. MCKAY Roger LI
<PAGE>
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
December 17, 1998
Stephen J. Harburg, Esq.
O'Melveny & Myers LLP
555 13/th/ Street, N.W.
Washington, D.C. 20004-1109
Re: CFIUS Case 98-52: Sunbase International (Holdings) Ltd. (Hong
-------------------------------------------------------------
Kong)/Southwest Products Company
- --------------------------------
Dear Mr. Harburg:
In his letter of September 24, 1998, Mr. Billy Kan, Vice Chairman of Sunbase
Asia, Inc., notified the Committee on Foreign Investment in the United States
("CFIUS") of the acquisition of Southwest Products Company ("Southwest
Products") by Sunbase Asia, Inc. ("Sunbase Asia"), an indirect subsidiary of
Sunbase International (Holdings), Ltd. ("Sunbase International"). Mr. Kan
provided this notification pursuant to section 721 of the Defense Production Act
of 1950 ("Section 721"), codified at 50 U.S.C. App. sec. 2170. On October 2,
1998, CFIUS accepted this notice pursuant to 31 CFR part 800.404(a), and began a
30-day review.
Sunbase Asia had previously notified this transaction to CFIUS on November 21,
1997. On December 19, 1997, I informed prior counsel for Sunbase Asia that CFIUS
had approved a request for a withdrawal of the notification from Mr. Kan in
order to provide Sunbase Asia and Southwest Products an opportunity to address
issues raised by CFIUS with regard to Southwest Products' compliance with the
International Traffic in Arms Regulations ("ITAR"), which are issued under the
Arms Export Control Act.
In a letter dated November 2, 1998, I wrote to advise Gunter Gao and Linda Yang,
the owners of Sunbase International, that CFIUS had decided to undertake an
investigation of the proposed transaction pursuant to section 721. This
investigation began on November 3, 1998. The statute requires that this
investigation be completed no later than Thursday, December 17, 1998.
In a letter to CFIUS dated December 16, 1998, to which a draft Voting Trust
Agreement was attached, you informed CFIUS of Sunbase Asia's intention to sell
Southwest Products, and requested a withdrawal of the notification pursuant to
31 C.F.R. 800.505(a). The following are among the representations you have made
in your letter on behalf of Sunbase Asia, Sunbase International, and Southwest
Products:
. The Board of Directors of Sunbase Asia has passed and signed a
resolution (a copy of which was provided to CFIUS on December 11)
approving the decision to sell Southwest Products, and will make a
public announcement and disclosure of the sale to the Securities and
Exchange Commission immediately upon appointment of the trustee, which
Sunbase Asia expects to occur by December 31, 1998.
<PAGE>
2
. Sunbase Asia will place its ownership interest in Southwest Products
into an irrevocable trust and appoint an independent trustee
acceptable to the Department of Defense who is a resident U.S. citizen
with no prior or current contractual, employment, or material
financial relationship with Southwest Products, Sunbase Asia, or
Sunbase International, or any affiliate thereof, the People's Republic
of China or any entity thereof, or any PRC political party. In
addition, during his appointment as trustee, the trustee will not
enter into any of the aforementioned relationships.
. The trustee will be charged with using best efforts to sell Southwest
Products, and the trustee's compensation package will include
incentives to encourage the prompt sale of Southwest Products. Shortly
after being appointed, the trustee will provide CFIUS a written
statement of his or her plan for selling Southwest.
. The foreign members of Sunbase Asia's Board of Directors, Mr. Roger Li
and Mr. Peter Lam, will resign immediately upon the appointment of the
trustee. The trustee will become Chairman of the Board of Southwest
Products and a company director. Any new board members appointed by
the trustee will be U.S. citizens acceptable to the Department of
Defense.
. The trustee will be responsible for ensuring Southwest Products'
compliance with U.S. laws and regulations, including U.S. export
control laws and regulations, and will work diligently to resolve all
outstanding ITAR matters.
. The trustee will ensure that Southwest Products submits an export
license application to the Department of State before exporting any
product or service. However, in the case of those exports where
Southwest Products believes a Munition License may not be required,
the trustee will ensure that Southwest Products submits a commodity
jurisdiction request. If Southwest Products obtains a commodity
jurisdiction decision from the Department of State indicating that a
particular product or service is not controlled by the Department of
State, Southwest Products is, of course, not required to submit a
license application to the Department of State before exporting that
commodity.
. The trustee will provide CFIUS monthly written status reports on
efforts made to sell Southwest Products and on activities related to
the operations of Southwest Products of particular concern to CFIUS,
including compliance with U.S. export control laws and regulations,
which Sunbase Asia will supplement with information pertaining to any
efforts it has undertaken to sell Sunbase. In the interim, until the
trustee is appointed, Sunbase Asia will provide CFIUS biweekly written
progress reports on these matters. The trustee will also provide CFIUS
with any additional information as CFIUS may request from time to
time.
<PAGE>
3
In light of these representations and the others in your letter, and commitments
set forth in the draft Voting Trust Agreement, I am writing, on behalf of CFIUS,
to inform you that the Committee grants your request to withdraw the
notification of September 24, 1998. As we have stated on a number of occasions
since you first informed CFIUS of Sunbase Asia's decision to sell Southwest
Products, we expect that serious and concerted efforts will be made to complete
the sale in as short a time as possible. CFIUS reserves the right to initiate a
review under Section 721 at any time. If a foreign person (as defined in 31 CFR
Section 800.213) is identified as a potential acquirer of Southwest Products,
CFIUS would expect that notice be provided under section 721 well before the
sale is consummated.
It is our understanding that the trustee and the Board of Southwest Products
have committed to institute an effective export control compliance program
within Southwest Products. Southwest Products' obligation to obtain State
Department export licenses or to submit commodity jurisdiction requests before
exporting any product or service, as described in your withdrawal request and in
the Voting Trust agreement, is intended as a temporary measure until Southwest
Products has instituted such an effective export control compliance program. In
this regard, it is our hope that the trustee and Southwest Products will seek to
expedite the establishment of such a program. In so far as CFIUS's oversight of
these obligations will cease with the sale of Southwest Products and the
termination of the Voting Trust Agreement, it is our understanding that the
obligation to submit licenses and commodity jurisdiction requests to the State
Department described in the Voting Trust Agreement will also cease with the
termination of the Voting Trust Agreement. However, this will not in any way
limit obligations of Southwest Products to comply with U.S. export control laws
or with any similar or other requirements that might be levied on Southwest
Products by any U.S. export control agency under U.S. law and regulation.
Finally, nothing in this grant of your request serves to bind, constrain, or
limit any action by the United States with respect to any party or to absolve
any party from liability for any violation of U.S. law.
If you have any questions, please call me (202-622-9066) or Jack Dempsey of the
staff of the Office of International Investment (202-622-0411).
Sincerely,
/s/ Gay Sills Hoar
Gay Sills Hoar
Director, Office of International Investment
<PAGE>
Exhibit 12.1
SUNBASE ASIA INC
Statement re computation of ratios
- ----------------------------------
1. Earnings to fixed charge
Earnings = (146,348) = (1.25) : 1
-------------------- ------------
Fixed charges 117,239
2. Net profit margin
Net earnings = (146,348) = (30.7%)
-------------------- ------------
Net Sales 475,310
3. Return on capital employed
Net earnings = (146.384) = (49.5%)
--------------------- ------------
Capital employed 295,521
4. Current ratio
Current assets = 1,293,702 = 1.05:1
--------------------- -------------
Current liabilities (1,231,818)
5. Fixed asset turnover
Sales = 475,310 = 0.85 times
-------------- -----------
Fixed assets 559,245
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule Contains Financial Information Extracted From The Audited
Consolidated Financial Statements Contained In The Company's Annual Report
On Form 10-K For The Annual Period Ended December 31, 1998, And Is
Qualified In Its Entirety by Reference To Such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,298
<SECURITIES> 0
<RECEIVABLES> 59,909
<ALLOWANCES> 0
<INVENTORY> 68,937
<CURRENT-ASSETS> 155,868
<PP&E> 67,379
<DEPRECIATION> 0
<TOTAL-ASSETS> 229,554
<CURRENT-LIABILITIES> 148,412
<BONDS> 0
0
5,365
<COMMON> 14
<OTHER-SE> 29,876
<TOTAL-LIABILITY-AND-EQUITY> 229,554
<SALES> 57,266
<TOTAL-REVENUES> 57,266
<CGS> 43,726
<TOTAL-COSTS> 55,846
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,029
<INCOME-PRETAX> (30,662)
<INCOME-TAX> 0
<INCOME-CONTINUING> (30,662)
<DISCONTINUED> (357)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,636)
<EPS-BASIC> (1.26)
<EPS-DILUTED> (1.26)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule Contains Financial Information Extracted From The Audited
Consolidated Financial Statements Contained In The Company's Annual Report
On Form 10-K For The Annual Period Ended December 31, 1997, And Is
Qualified In Its Entirety by Reference To Such Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,602
<SECURITIES> 0
<RECEIVABLES> 99,754
<ALLOWANCES> 0
<INVENTORY> 57,496
<CURRENT-ASSETS> 164,851
<PP&E> 76,122
<DEPRECIATION> 0
<TOTAL-ASSETS> 244,002
<CURRENT-LIABILITIES> 127,686
<BONDS> 0
0
8,773
<COMMON> 13
<OTHER-SE> 44,104
<TOTAL-LIABILITY-AND-EQUITY> 244,003
<SALES> 83,997
<TOTAL-REVENUES> 83,997
<CGS> 57,722
<TOTAL-COSTS> 57,722
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,096
<INCOME-PRETAX> 3,268
<INCOME-TAX> 915
<INCOME-CONTINUING> (176)
<DISCONTINUED> (328)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (503)
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule Contains Financial Information Extracted From The Audited
Consolidated Financial Statements Contained In The Company's Annual Report
On Form 10-K For The Annual Period Ended December 31, 1996, And Is
Qualified In Its Entirety by Reference To Such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,533
<SECURITIES> 0
<RECEIVABLES> 39,639
<ALLOWANCES> 0
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0
8,773
<COMMON> 13
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<TOTAL-LIABILITY-AND-EQUITY> 225,600
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<CGS> 62,747
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<OTHER-EXPENSES> 0
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<INCOME-TAX> 3,349
<INCOME-CONTINUING> 10,338
<DISCONTINUED> (1,117)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,221
<EPS-BASIC> 0.55
<EPS-DILUTED> 0.55
</TABLE>
