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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 03132
SUNBASE ASIA, INC.
(Exact name of registrant as specified in its charter)
Nevada 94-1612110
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
19/F., First Pacific Bank Centre
51-57 Gloucester Road
Wanchai, Hong Kong
(Address of principal executive offices)
Registrant's telephone number, including area code: (852) 2865 1511
Securities Registered under Section 12(b) of the Act:
None
Securities Registered under Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the registrant: (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant computed by reference to the closing sales price as reported on the
OTC Electronic Bulletin Board on April 28, 2000 was approximately $882,422.
As of April 28, 2000, there were outstanding 14,118,751 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10K of Sunbase Asia, Inc. (the "Company" which
term shall include, when the context so requires, its subsidiaries and
affiliates) contains "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Forward looking statements are typically identified by words such as
"believe," "expect," "anticipate," "intend," "estimate" and similar expressions,
and include, among others, statements concerning the Company's strategy, its
liquidity and capital resources, its debt levels, its ability to obtain
financing and service debt, competitive pressures and trends in the bearing
industry in the People's Republic of China ("PRC" or "China"), prevailing levels
of interest and foreign exchange rates, legal proceedings and regulatory
matters, general economic conditions in the PRC and elsewhere, and costs.
Forward-looking statements involve a number of risks and uncertainties, many of
which are beyond our control. Actual results of the Company could differ
materially from those statements. Factors ("cautionary statements") that could
cause or contribute to such differences include, but are not limited to, those
factors discussed under the heading "FACTORS THAT MAY AFFECT FUTURE RESULTS" in
ITEM 7 and elsewhere in this Annual Report. In light of these risks and
uncertainties, there can be no assurance that the results and events
contemplated by the forward looking information contained in this Annual Report
will in fact transpire and therefore undue reliance should not be placed on
these forward looking statements. All subsequent written or oral forward looking
statements attributed to the Company or persons acting on its behalf are
expressly qualified in their entirety by these cautionary statements.
The Company publishes its financial statements in both PRC Renminbi ("RMB")
and U.S. dollars. For convenience, this Annual Report contains translations of
certain RMB amounts into U.S. dollars. You should not construe any such
translations as representations that the RMB amounts actually represent U.S.
dollar amounts or could be converted into U.S. dollars at the exchange rates
assumed. The financial statements have been prepared in accordance with
generally accepted accounting principles in the United States.
THE COMPANY
The Company is engaged in the design, manufacture and distribution of a
broad range of bearing products.
Through various subsidiaries and joint venture interests, the Company owns
51.43% of Harbin Bearing Company Ltd. ("Harbin Bearing"), which is located in
China. Harbin Bearing manufactures and distributes a wide variety of precision
and commercial grade rolling element bearings in sizes ranging from 10 mm to
1,000 mm (internal diameter) primarily for use in commercial, industrial and
aerospace applications. Rolling element bearings use small metal balls or
cylinders to facilitate rotation with minimal friction and are typically used in
vehicles, aircraft, appliances, machine tools, and virtually any product that
contains rotating or revolving parts. Precision bearings are bearings that are
produced to more exacting dimensional tolerances and to higher performance
characteristics than standard commercial bearings. The manufacturing process for
precision bearings generally requires the labor of highly skilled mechanics and
the use of sophisticated machine tools. Harbin Bearing sells its bearings
primarily in China and in certain western countries, including the United
States. Harbin
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Bearing has been in business since 1950, has approximately 11,432 full time
employees and operates out of facilities occupying in excess of two million
square feet.
Until April 28, 2000, the Company also owned Smith Acquisition Company,
Inc. d/b/a Southwest Products Company ("Southwest Products"), a bearing
manufacturing company located in Los Angeles, California, that has been in
business since 1945. Southwest Products is an engineering intensive company that
designs and manufactures high precision plain spherical bearings, rod end
bearings, bushings and push pull controls for U.S., European and Asian aerospace
and high technology commercial applications and the U.S. military. Spherical
bearings are "ball and socket" mechanisms that allow for motion in three
dimensions and which move loads from one plane to another. For flight critical
applications, a spherical bearing must have extremely precise tolerances and it
must be able to endure heavy loads without failure.
In January 1996, the Company acquired Southwest Products. As a result of
the acquisition of Southwest Products, the Committee on Foreign Investment in
the United States ("CFIUS"), an inter-agency committee of the United States
Government, began an investigation of the Company to determine if the ownership
of Southwest Products by the Company would pose any threat to the national
security interests of the United States. In December 1998, the Company
voluntarily agreed to divest Southwest Products and, pending such disposition,
placed its ownership interest in Southwest Products into an irrevocable trust.
An independent trustee acceptable to the U.S. Department of Defense was
appointed to oversee the operations of Southwest Products to insure Southwest
Product's compliance with all U.S. laws and regulations and to work with the
Company's Board of Directors to actively pursue the sale of Southwest Products.
In light of the Company's decision to appoint a trustee pending the sale of
Southwest Products, the CFIUS investigation was terminated.
The Company entered into a Stock Purchase Agreement with William McKay on
January 31, 2000. On March 24, 2000, Mr. Mckay assigned his rights under the
Stock Purchase Agreement to Mckay, Brothers & Horany Acquisition Corp. Pursuant
to the Stock Purchase Agreement on April 28, 2000, the Company sold its entire
interest in Southwest Products to McKay, Brothers & Horany Acquisition Corp.
for cash consideration of US$3,500,000 and the release of debt obligations in
the amount of $3,952,000 owed by Southwest Products to the Company. The sale of
Southwest Products result in net proceeds of US$3,335,000 (net of the
professional fees US$165,000) of which US$2,600,000 was paid to the holders of
the Convertible Debentures. See ITEM 7, "LIQUIDITY AND CAPITAL RESOURCES". The
remaining proceeds US$735,000 has been retained by the Company as additional
working capital. Upon the sale of Southwest Products, the Company terminated the
trust arrangement with the independent trustee for Southwest Products.
ORGANIZATION OF THE COMPANY
Harbin Bearing was the successor to the manufacturing operations of Harbin
Bearing General Factory (the "Bearing Factory"), a Chinese state owned
enterprise established in 1950. Harbin Bearing was formed in 1993 as a joint
stock limited company. Pursuant to an agreement between the Bearing Factory and
Harbin Bearing, the bearing manufacturing and sales business, together with
certain assets and liabilities of the Bearing Factory, were transferred to
Harbin Bearing (the "Restructuring"). Certain other assets and liabilities were
transferred to Harbin Precision Machinery Manufacturing Company ("Harbin
Precision") and certain ancillary operations were transferred to Harbin Bearing
Holdings Company ("Harbin Holdings"). Harbin Holdings and Harbin Precision are
affiliates of the Harbin Municipal Government.
As part of the Restructuring, Sunbase International (Holdings) Ltd.
("Sunbase International"), a Hong Kong corporation, through a series of
affiliated entities, acquired a 51.43% ownership interest in
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Harbin Bearing. Substantially all of the remaining interests in Harbin Bearing
were and continue to be owned by employees of Harbin Bearing (approximately 15%)
and by Harbin Holdings (approximately 33.43%).
In December 1994, the Company (which was then called Pan American
Industries, Inc.) acquired a 51.43% effective interest in Harbin Bearing by
issuing to Asean Capital Limited ("Asean Capital"), a wholly owned subsidiary of
Sunbase International, newly issued shares representing a controlling interest
in the Company. See ITEM 13, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
The following diagram shows the corporate structure of the Company and its
affiliated companies as of December 31, 1999:
---------------------------------------
SUNBASE ASIA, INC.
Common Stock has been quoted on OTC
Bulletin Board
(Nevada Corporation)
---------------------------------------
100% 100%
-------------------------- --------------------------
CHINA BEARING SOUTHWEST
HOLDINGS LIMITED PRODUCTS COMPANY
(Bermuda Holdings (California corporation
(Company) (1) (2)
-------------------------- --------------------------
OPERATING COMPANY
100%
--------------------------
CHINA INTERNATIONAL
BEARING HOLDINGS
LIMITED
(Hong Kong Holding
(Company)
--------------------------
99% 99.9%
- ------------------------------- -------------------------------
HARBIN SUNBASE HARBIN XINHENGLI
DEVELOPMENT COMPANY LIMITED DEVELOPMENT COMPANY LIMITED
(PRC JV Holdings Co.) (PRC JV Holdings Co.) (3)
- ------------------------------- -------------------------------
10% 41.57%
-------------------------------
HARBIN BEARING COMPANY
LTD (PRC Joint Stock Company)
(4)
-------------------------------
OPERATING COMPANY
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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 transferred its
interest in Southwest Products to a trust administered by an independent
trustee and sold that interest on April 28, 2000. Upon the sale of
Southwest Products, the Company terminated the trust arrangement with the
independent trustee.
(3) 0.1% of Harbin Xinhengli Development Company Limited is held by Harbin
Everising Construction and Development Limited, which is related to Sunbase
International. 1.0% of Harbin Sunbase Development Company Limited is held
by a local PRC partner.
(4) Sunbase Asia's ownership in Harbin Bearing is 51.57% whereas the effective
ownership is 51.43%. The remaining 48.43% of this company is owned by its
employees and by Harbin Holdings.
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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. Harbin Bearing produces seven major
types of bearings: deep groove ball bearings, self aligning ball bearings,
cylindrical rolling bearings, angular contact ball bearings, tapered rolling
bearings, thrust ball bearings and linear motion ball bearings. Each of such
bearings is manufactured in micro, small, medium and large sizes.
Sales and Marketing
Harbin Bearing primarily sells its products in China and to a lesser
extent, in western countries such as the U.S. The major end users of Harbin
Bearing's products are manufacturers of electrical machinery, machine tools,
mining and extraction machinery, automobiles, motorcycles, household appliances
and aircraft and aerospace equipment. However, because of stringent
qualifications such as ISO 9000 certification required by many end users outside
of the PRC, Harbin Bearing's access to these markets has been impeded. The
Company had hoped that its acquisition of Southwest Products would enhance
Harbin Bearing's ability to access these markets. However, with the Company's
decision to sell its interest in Southwest Products, the Company has to consider
alternative restructuring strategies for its business. SEE ITEM 7, "FACTORS THAT
MAY AFFECT FUTURE RESULTS."
Sales to related parties accounted for RMB 22,283,000 (or 4.8%) in 1999 and
RMB 38,886,000 (or 8.1%) in 1998. These sales were made to Harbin Bearings
Import and Export Company and Xin Dadi Mechanical and Electrical Equipment
Company, both of which are owned by the Harbin Municipal Government.
Harbin Bearing has 13 sales offices in major cities in China, including
Beijing, Shanghai and Guangzhou all of which were strategically located to
increase market share and widen the channel of sales. All sales are coordinated
through Harbin Bearing's headquarters in Harbin, including sales to local
distributors, overseas agents, and PRC import and export companies. As of
December 31, 1999, Harbin Bearing had 158 sales personnel and 187 support
personnel who are responsible for product promotion, marketing, after sales
services and technical support. Harbin Bearing sells its bearings in China and
abroad under the "HRB" trademark.
Harbin Bearing delivers its bearings by rail, truck, ocean freight and air
freight. Deliveries by truck have been increasing due to improved highway
networks and conditions in the PRC. This substantially shortens delivery time
over delivery by rail. Harbin Bearing leases its trucks from its affiliate,
Harbin Precision, which are used mostly for short haul deliveries. See ITEM 13,
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." In addition, railroad tracks
leading directly to two of Harbin Bearing's raw material warehouses are used
exclusively to transport raw materials, such as bearing steel, reducing raw
material freight costs.
Due to the adverse market conditions in the PRC which resulted from the
general financial turmoil in Asia since 1997, Harbin Bearing has further
enhanced its credit review procedures and has been more conservative in
extending credit to customers in an effort to mitigate against difficulties in
collecting receivables. See ITEM 7, "FACTORS THAT MAY AFFECT FUTURE RESULTS."
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Manufacturing/Engineering/New Product Development
In the face of greater competition in the bearing industry, Harbin Bearing
has been endeavoring to improve productivity and quality so as to control and
reduce manufacturing cost in order to become more competitive. However, the
original schedule to implement system improvements designed to meet various
worldwide recognizable manufacturing standards such as ISO 9000 has been
indefinitely extended due to the Company's divestiture of Southwest Products.
See ITEM 7, "FACTORS THAT MAY AFFECT FUTURE RESULTS."
Workforce
As of December 31, 1999, Harbin Bearing employed approximately 11,432 full
time personnel in the following areas: executive and administrative (455), sales
and service (502), manufacturing and production (10,361), and research and
development (114). Management believes that, in general, its relationship with
the employees is good. The Harbin Municipal Government has promulgated
regulations which provide for the establishment of a pension fund program to
which both employer and employees must contribute. Under these regulations,
Harbin Bearing is required to contribute monthly to this fund an amount
equivalent to 22% of its employees' aggregate monthly income.
All of the employees of Harbin Bearing are members of a trade union. To
date, Harbin Bearing has not been subject to any strikes or other significant
labor disputes and is not a party to any collective bargaining agreements.
Harbin Bearing presently recruits graduates of the Harbin Bearing Technical
Institute and universities all over China and provides ongoing training for its
management and production employees in the form of a series of training
seminars.
SALE OF SOUTHWEST PRODUCTS
Pursuant to a resolution dated December 16, 1998, the board of directors
decided to dispose Southwest Products and subsequently on January 31, 2000, the
Company entered into a Stock Purchase Agreement with William McKay. On March 24,
2000, Mr. Mckay assigned his rights under the Stock Purchase Agreement to McKay,
Brothers & Horany Acquisition Corp. Pursuant to the Stock Purchase Agreement on
April 28, 2000, the Company sold its entire interest in Southwest Products to
McKay, Brothers & Horany Acquisition Corp. for cash consideration of
US$3,500,000 and the release of debt obligations in the amount of $3,952,000
owed by Southwest Products to the Company. The sale of Southwest Products result
in net proceeds of US$3,335,000 (net of the professional fees US$165,000) of
which US$2,600,000 was paid to the holders of the Convertible Debentures. See
ITEM 7, "LIQUIDITY AND CAPITAL RESOURCES". The remaining proceeds US$735,000 has
been retained by the Company as additional working capital. Upon the sale of
Southwest Products, the Company terminated the trust arrangement with the
independent trustee for Southwest Products. Such sale was completed on April 28,
2000. See ITEM 7, "LIQUIDITY AND CAPITAL RESOURCES" for a description of the use
of the net proceeds on sale of Southwest Products.
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RAW MATERIALS
The principal raw materials used to manufacture bearings are carbon steel
and stainless steel rod, wire and tubing. These steels are specialized alloys
designed for hardness, durability and resistance to rust. A small amount of
copper and aluminum tubing and rods are also used to produce seals, cages and
other ancillary bearing components. The Company sources most of the bearing
steel required for Harbin Bearing directly from four domestic mills located in
Heilongjiang Province, Liaoning Province and Shanghai.
The Company believes that its sources of bearing steel are stable and,
consistent with industry practice in China, has not entered into any long term
supply contracts for bearing steel. Harbin Bearing generally maintains a raw
material inventory sufficient for more than 43 days of production. In addition,
railroad tracks leading directly to two of Harbin Bearing's raw material
warehouses are used exclusively to transport raw materials, such as bearing
steel, reducing raw material freight costs.
COMPETITION
The Company's main competitors can be categorized into three principal
groups: (i) a few very large national PRC bearing manufacturers offering a wide
range of products; (ii) small local Chinese bearing production facilities that
compete on a local basis by manufacturing small sized, commodity type bearings;
and (iii) non-Chinese bearing manufacturers. Competition is principally based
upon pricing considerations.
Competition in the PRC
The Company believes that there are five major PRC bearing manufacturers:
Wafangdian Bearing Company Limited, Luoyang Bearing Group, Northwest Bearing
Joint Stock Company, Xiangyang Bearing Joint Stock Company and the Company's
majority owned subsidiary, Harbin Bearing. The balance of the PRC bearing
industry is fragmented, comprised of a larger number of smaller bearing
companies producing mostly lower grade bearings often on a local basis for use
mostly as replacement bearings in the electrical appliance and agricultural
equipment industries.
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Due to lower levels of capital expenditures, greater labor intensive
production processes and the relative lack of operational skills and training,
PRC bearing manufacturers are often unable to produce bearings of as high
precision, consistency and durability as those produced by the leading
multinational manufacturers. As a result, companies in China import precision
bearings and other special bearings with high technical contents and high added
value. This has led the PRC authorities to encourage foreign investment in
higher grade bearing manufacturers and to demand a halt to approvals of foreign
investment supporting the production of lower grade bearings.
Bearings imported into the PRC are currently subject to import tariffs
ranging from 10% to 17%. If, however, the PRC becomes a part of the World Trade
Organization, the import tariff could be phased out, potentially increasing
competition from foreign manufacturers.
The potential for growth in the PRC bearing industry is substantially
dependent upon the performance of the PRC industrial sector and the economy in
general. Since 1978, China has been pursuing economic reform policies in an
effort to improve its industrial sector and revitalize its economy. The central
PRC government has implemented various policies to minimize the adverse effects
upon the PRC economy of the financial crisis in Asia that began in 1997. Such
policies include closer supervision of the PRC banking system and tighter
control over capital expenditures by PRC enterprises. Such policies also include
resistance to devaluation of the RMB, leading to less competitive export pricing
and thus an oversupply of bearings in the PRC domestic market (although similar
effects on products, equipment and machinery produced in the PRC requiring
bearings may act to increase domestic demand for bearings). These policies have
indirectly resulted in greater competition due to this oversupply and are
expected to continue to have a significant adverse impact on the performance of
PRC bearing manufacturers, including the Company.
Competition in International Markets
The international bearing industry is extremely competitive. Although the
Company's main competitors are Eastern European manufacturers and manufacturers
located in China, to a lesser extent, the Company also competes with companies
such as Svenska Kugellager Fabriken, Fisher Aktien Gesellschast, New Technology
Network, NSK, Timken, Torrington Fafnir and Nippon Miniature Bearing, which
dominate this market. The Company had hoped that its acquisition of Southwest
Products in 1996 would not only allow it to access the U.S. bearing market, but
also allow it to implement U.S. manufacturing methods and quality control
procedures at Harbin Bearing to develop new products and meet the stringent
requirements of many non-Chinese OEMs. By doing so, the Company expected to
increase its penetration of the international bearing market. As a result of the
Company's sale of Southwest Products in response to the CFIUS investigation,
however, the Company is currently reevaluating its business strategy, which may
involve restructuring to reduce operating expenses, seeking an alliance with a
strategic partner, reorganizing the Company's operations and/or divesting its
bearing manufacturing assets in China to diversify into other lines of business.
See ITEM 7, "FACTORS THAT MAY AFFECT FUTURE RESULTS."
OPERATING IN CHINA
Because the production operations of the Company are based to a substantial
extent in China, the Company is subject to rules and restrictions governing
China's legal and economic system as well as
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general economic and political conditions in the country. These include the
following:
Political and Economic Matters
Under its current leadership, the Chinese government has been pursuing
economic reform policies, which include the encouragement of private economic
activity and greater economic decentralization. There can be no assurance that
such policies will be successful. Changes in policies made by the Chinese
government may result in new laws, regulations, or the interpretation thereof,
confiscatory taxation, currency devaluation or the expropriation of private
enterprises which may, in turn, adversely affect the Company. Chinese economic
development may be limited by the imposition of austerity measures intended to
reduce inflation, the inadequate development of infrastructure, and the
potential unavailability of adequate power and water, transportation,
communication networks, raw materials and parts.
Legal System
China's legal system is a civil law system based on written statutes.
Unlike the common law system in the United States, decided legal cases in the
PRC have little value as precedents. Furthermore, the PRC does not have a well
developed body of law governing foreign investment enterprises. Definitive
regulations and policies with respect to such matters as the permissible
percentage of foreign investment and permissible rates of equity returns have
not yet been published, statements regarding these evolving policies have been
conflicting, and any such policies, as administered, are likely to be subject to
broad interpretation and modification, perhaps on a case by case basis. As the
legal system in the PRC develops with respect to such new forms of enterprise,
foreign investors may be adversely affected by new laws, changes in existing
laws (or interpretation thereof) and the preemption of provincial or local laws
by national laws. Some of the Company's operations in China are subject to
administrative review and approval by various national and local agencies of the
PRC government. Although management believes that the Company's operations are
currently in compliance with applicable administrative requirements, there is no
assurance that administrative approvals, when necessary or advisable, will be
forthcoming. In addition, although China has promulgated an administrative law
permitting appeal to the courts with respect to certain administrative actions,
this law appears largely untested in the context of administrative approvals.
Inflation/Economic Policies
In recent years, the Chinese economy has experienced periods of rapid
growth and high rates of inflation, which have, from time to time, led to the
adoption by the PRC government of various corrective measures designed to
regulate growth and control inflation. In 1995, China's overall inflation rate
(retail price index) was approximately 15%, compared to approximately 21% in
1994 and 13% in 1993. However, after the implementation of strict monetary
policies, the inflation rates were approximately 6%, 8%, minus 2.6% and minus 3%
in 1996, 1997, 1998 and 1999, respectively. High inflation has in the past and
may in the future cause the PRC government to impose controls on prices, or to
take other actions which could inhibit economic activity in China, which in turn
could affect demand for the Company's products. In view of the change in market
conditions and greater competition, Harbin Bearing may be unable to increase its
selling prices to shift a portion of its inflated costs to its customers. The
price of bearing steel, the major raw material used by the Company, remained
fairly stable from 1994 to 1999 in China and the only major impact of inflation
on the Company's costs in its Chinese operations was on the cost of labor (due
to the rising level of
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compensation of Harbin Bearing's employees).
Foreign Exchange Control and Exchange Rate Risks
Prior to January 1, 1994 the PRC had two exchange rates: the Official Rate
and the Swap Center Rate. On January 1, 1994 this dual foreign exchange system
was abolished. Controls on the purchase of foreign exchange are being relaxed.
Pursuant to the PRC Foreign Exchange Control Regulations which came into effect
on April 1, 1996, enterprises which require foreign exchange for current account
transactions (such as trading activities) may purchase foreign exchange from
designated banks subject to production of relevant supporting documents. The
Administrative Regulations on the Settlement, Sale and Payment of Foreign
Exchange, which came into force on July 1, 1996, set out the procedures for the
purchase, sale and settlement of foreign exchange for current account
transactions. In addition, these Regulations provide that foreign exchange
required for the payment of dividends that are payable in foreign currencies
under applicable regulations may be purchased from designated foreign exchange
banks subject to the payment of taxes on such dividends and upon presentation of
board resolutions authorizing the distribution of profits or dividends of the
company concerned. Despite the relaxation of foreign exchange control over
current account transactions, the approval of the State Administration for
Foreign Exchange ("SAFE") is still required before a PRC enterprise may borrow
in a foreign currency, provide any foreign exchange guarantee, make any
investment outside the PRC or enter into any other capital account transaction
which involves the purchase of foreign exchange. In general, all organizations
and individuals within the PRC, including foreign investment enterprises
("FIEs"), are required to sell their foreign exchange earnings to designated
banks in the PRC. FIEs, however, are permitted to retain a certain percentage of
their foreign exchange earnings and the sums retained may be deposited into
foreign exchange bank accounts maintained with designated banks.
Despite the relaxation of foreign exchange control over current account
transactions, RMB remains a currency which is not freely convertible into other
currencies. There can be no assurance that shortages of foreign currency at the
swap centers or designated banks will not restrict the Company's ability to
obtain sufficient foreign currency to pay dividends to the shareholders of the
Company or to meet other foreign currency requirements or that the RMB will not
be subject to further devaluation were the Company otherwise able to pay such
dividends. Currently, the Company is unable to hedge its U.S. Dollar/RMB
exchange rate exposure in China because no financial institutions are authorized
to engage in foreign currency transactions offering forward exchange contracts
with respect to the RMB.
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ITEM 2. PROPERTIES
The Company leases the office space for its Hong Kong headquarters from
Sunbase International.
HARBIN BEARING
Harbin Bearing operates twelve finished product plants and thirteen
auxiliary plants. With the exception of a newly relocated finished product plant
in Daowaiqu of Limin Trade Development Zone, all of the Company's plants are
located in four plant compounds in Harbin.
The Harbin branch of the Office of the State Asset Administration Bureau
has granted Harbin Holdings the right to use the properties where Harbin
Bearing's production and other facilities are located. The site is approximately
540,000 square meters of which production facilities occupy approximately
290,000 square meters. Harbin Holdings has entered into a lease agreement with
the Company for use of its buildings for five years commencing January 1, 1994.
Although this lease expired on December 31, 1998, Harbin Bearing is currently
still using the premises without renewal of the lease. See ITEM 13, "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
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ITEM 3. LEGAL PROCEEDINGS
Internal Revenue Service Dispute
The U.S. Internal Revenue Service ("IRS") has asserted that the Company
improperly failed to withhold U.S. taxes on a payment of $730,776 to Asean
Capital Limited in 1996 with respect to a promissory note of the Company and
that the Company is liable for such taxes in the amount of $219,233, plus
penalties of $43,837, plus interest. The Company has controverted that assertion
in administrative procedures with the IRS, but the matter has not been resolved.
The Company believes the IRS will serve a notice of deficiency as to the taxes
the IRS asserts are due. The Company intends to contest vigorously any IRS
action. The Company is unable to state what the outcome of this dispute will be.
Other
In addition to those matters disclosed above, the Company may from time to
time be party to various litigation matters which are incidental to its
business. The Company's management does not expect the outcome of any such
proceedings to have a material adverse effect on its financial condition,
results of operations or cash flows.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of 1999 to a vote
of security holders nor was there any solicitation of proxies.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's Common Stock began trading on the Nasdaq National Market
("Nasdaq") under the symbol "ASIA" on February 9, 1996. The Common Stock ceased
trading on Nasdaq on February 10, 1999. Subsequently, the Common Stock began
being quoted on the OTC Bulletin Board (The "Bulletin Board") on February 11,
1999. As a result, the Company changed its symbol to "SNBSE."
The following tables set forth the high and low sales prices of the
Company's Common Stock on Nasdaq and the Bulletin Board. Such prices reflect
prices between dealers in securities and do not include any retail markup,
markdown or commission and may not necessarily represent actual transactions.
Fiscal 1998 High Low
- ----------- ---- ---
Quarter Ended March 31, 1998 4-3/8 2
Quarter Ended June 30, 1998 2-7/8 0-3/8
Quarter Ended September 30, 1998 1-1/8 0-1/4
Quarter Ended December 31, 1998 1-1/4 0-1/4
Fiscal 1999 High Low
- ----------- ---- ---
Quarter Ended March 31, 1999 0-7/8 0-7/8
Quarter Ended June 30, 1999 0-3/4 0-3/4
Quarter Ended September 30, 1999 Trading Suspended
Quarter Ended December 31, 1999 0-1/4 0-1/4
From January 1, 1999 through February 10, 1999, the high and low sales
prices of the Company's Common Stock as reported by Nasdaq were 13/32 and 1/8,
respectively. From February 11, 1999 through May 19, 1999, the high and the low
closing prices of the Company's Common Stock as quoted on the Bulletin Board
were 1/4 and 1/32, respectively. Between May 20, 1999 and October 26, 1999 the
Company's Common Stock did not trade on the Bulletin Board because there were no
market makers making a market in the Common Stock and the Company was not
current with its public information requirements.
As of April 28, 2000, there were 136 holders of record of the Common Stock.
The Company has paid no cash dividends on its Common Stock and has no
present intention of paying cash dividends in the foreseeable future. Pursuant
to the Settlement Agreement with respect to the Company's Convertible Debenture,
no dividend payments can be made on any Common Stock
15
<PAGE>
without the prior written consent of the holders of the Convertible Debentures.
It is the present policy of the Board of Directors to retain all earnings to
provide for the growth of the Company. Payment of cash dividends in the future
will depend upon, among other things, future cash flow and requirements for
capital improvements.
Applicable Chinese laws and regulations provide that a joint stock company
(such as Harbin Bearing) can not distribute its after tax earnings and profits
made in a fiscal year unless the losses of the previous years have been made up
and certain funds retained. A joint stock company is required by applicable
Company Law to reserve 10% of its after tax earnings and profits as the
mandatory retained fund and 5% of its after tax earnings and profits as the
public welfare fund. The joint stock company does not have to reserve for the
mandatory retained fund if the amount of such fund has reached 50% of the
company's registered capital. For 1998, Harbin Bearing contributed 10% and 5%,
respectively, of after tax profits as determined under Chinese accounting
principles for such purposes. Distribution of dividends by Harbin Bearing to its
shareholders are required to be in proportion to each shareholder's percentage
interest in Harbin Bearing. In addition, distribution of dividends by Harbin
Bearing will be paid to its shareholders of record, which include the joint
venture partners. Applicable Chinese laws and regulations require that, before a
Sino foreign equity joint venture (such as the joint venture partners)
distributes dividends, it must: (1) satisfy all tax liabilities; (2) provide for
losses in previous years; and (3) make allocations of capital to its official
surplus accumulation fund and public welfare fund. The Company indirectly owns
99% and 99.9% of the two joint venture partners and, therefore, approximately
1.1% of distributions received by such partners will be paid to the Chinese
parties of these joint ventures.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical financial data
(expressed in thousands) derived from and should be read in conjunction with the
audited financial statements of the Company as of December 31, 1998 and 1999 and
for the years ended December 31, 1997, 1998 and 1999 included elsewhere in this
Annual Report on Form 10 K and the Company's audited financial statements as of
December 31, 1995, 1996 and 1997 and for the years ended December 1995 and 1996
which are not included in this Annual Report on Form 10 K. All U.S. dollar
amounts have been converted from RMB based on the exchange rate on December 31,
1999 of U.S. $1.00 to each RMB 8.275 as quoted at the People's Bank of China.
The report of Ernst & Young contains an explanatory paragraph relating to the
Company's ability to continue as a going concern as described in Note 2 to such
financial statements.
OPERATING DATA
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999 1999
---------- ---------- ---------- ---------- ---------- ----------
RMB RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C> <C>
Net sales .......................... 672,359 854,066 697,175 475,310 468,087 56,567
Cost of sales ...................... (380,279) (520,804) (479,089) (362,925) (462,930) (55,943)
Provisions on inventories .......... (1,098) (1,000) (30,600) (100,600) (79,000) (9,547)
Gross profit/(loss) ................ 290,982 332,262 187,486 11,785 (73,843) (8,923)
Selling, general and administrative
expense ........................ (110,375) (99,829) (76,901) (82,533) (120,943) (14,615)
Interest expense, net .............. (48,446) (54,134) (67,195) (66,644) (61,993) (7,492)
Provisions on accounts receivable .. (2,627) (3,998) (16,262) (31,961) (136,170) (16,456)
Provisions on other receivables .... - - - (12,404) (3,729) (450)
Provisions on balance due from
related companies ................ - - - (49,000) (79,000) (9,547)
Write-off of the deposit with a
financial institution ............ - - - (23,750) - -
Provision on impairment of fixed
assets ........................... - - - - (15,000) (1,813)
Other income ....................... - 16,640 - - - -
Income/(loss) before income taxes .. 129,534 190,941 27,128 (254,507) (490,678) (59,296)
Provision for income taxes ......... (20,472) (27,792) (7,584) - - -
Income before minority interests ... 109,062 163,149 19,544 (254,507) (490,678) (59,296)
Minority interests ................. (54,967) (77,342) (21,006) 111,081 232,813 28,315
Net income/(loss) from continuing
operations ....................... 54,095 85,807 (1,462) (143,426) (257,865) (31,161)
Net income/(loss) from
discontinued operations .......... - (9,273) (2,722) (2,958) (18,674) (2,257)
Net income/(loss) .................. 54,095 76,534 (4,184) (146,384) (276,539) (33,418)
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Net income/(loss) per common share:
Basic ............................ 4.62 6.24 (0.33) (10.67) (19.58) (2.37)
Diluted .......................... 3.54 4.62 (0.33) (10.67) (19.58) (2.37)
Net income/(loss) per common share
from continuing operations:
Basic ............................ 4.62 7.00 (0.12) (10.46) (18.26) (2.20)
Diluted .......................... 3.54 5.15 (0.12) (10.46) (18.26) (2.20)
Net income/(loss) per common share
from discontinued operations
Basic and diluted................ _ (0.73) (0.21) (0.21) (1.32) (0.17)
</TABLE>
BALANCE SHEET
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999 1999
---------- ---------- ---------- ---------- ---------- ----------
RMB RMB RMB RMB RMB US$
<S> <C> <C> <C> <C> <C> <C>
Current assets ........ 1,032,600 1,181,609 1,368,266 1,293,702 1,058,112 127,866
Working capital ....... 306,288 404,618 308,473 61,884 (371,373) (44,881)
Long-term debts ....... 218,383 231,824 84,938 47,550 24,777 2,994
Minority interests .... 343,142 420,484 441,490 330,409 97,596 11,794
Shareholders' equity .. 330,565 443,184 439,000 295,521 19,112 2,307
Total assets .......... 1,618,402 1,872,483 2,025,220 1,905,298 1,570,970 189,842
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
1999 was an exceptionally tough year for the Company as the major operation
of the Company in the PRC, Harbin Bearing, continued to suffer serious setbacks.
Several factors collectively contributed to these setbacks. First, the PRC
economy continued to be in a state of deflation in 1999. Demand for products
continued to decline and seriously dempen the demand for bearings in the PRC. As
a result, Harbin Bearing had to make large provisions for its products
inventories. Also, this suppressed market condition forced Harbin Bearing to
leave much of its manufacturing capacity idle, thus further aggravating its
financial results. Second, state owned enterprises, which form the majority of
the customer base of Harbin Bearing, continued to experience serious
difficulties in 1999. Their inability to make payments required that Harbin
Bearing had to make exceptionally large provisions for its accounts receivables.
The combination of these factors seriously affected the financial results of the
Company in 1999. The management of the Company does not expect this adverse
market situation will improve significantly in the year 2000.
The sale of Southwest Products was completed on April 28, 2000. As the
Company retained a share of Southwest Products net assets amounting to RMB
26,193 (US$3,163) in 1999, which did not exceed the net proceeds of US$3,335,
and consequently no anticipated loss on sale of Southwest Products was noted.
Upon the sale of Southwest Products, the Company did not derive any capital gain
tax liability. See Note 8 to the Company's 1999 consolidated financial
statements for a description of the loss on sale of Southwest Products.
Unless otherwise indicated in this ITEM 7, all RMB and U.S. Dollar amounts
except per share information are expressed in thousands ( '000).
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
Net Sales
Net sales for the Company from continuing operations for 1999 decreased by
RMB 7,223 or 1.5%, to RMB 468,087 as compared to RMB 475,310 in 1998. The
decrease in net sales was due to persisting adverse market conditions in the
PRC.
Cost of Sales
Cost of sales for the Company from continuing operations for 1999 increased
by RMB 100,005 or 27.5% to RMB 462,930 from RMB 362,925 for 1998. Prevailing
adverse market conditions forced the Company to gear sales towards those
customers which could afford to make timely payments. Thus, the Company accepted
some very low-priced orders, which though reflecting market prices in the PRC,
generated revenue that may be lower than related total production costs.
However, the Company accepted these orders to maintain its production in order
to cover some of its fixed cost as well as to maintain some of its market share.
Continuous late payments by customers have significantly tightened the liquidity
of the Company. In turn, this liquidity problem had seriously affected the
planning of production and worsened the Company's operating efficiency, causing
a substantial
19
<PAGE>
increase on the cost of sales.
Gross Loss
The Company's gross profit from continuing operations of RMB 11,785 in 1998
turned into a gross loss of RMB 73,843 in 1999. This loss was mainly due to the
continuous adverse market conditions and the tight liquidity condition of the
Company, which in turn elevated the cost of sales significantly. Another cause
was the large provision made by the Company on product inventories.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations for
1999 increased by RMB 38,410 or 46.5% to RMB 120,943 from RMB 82,533 in 1998. As
a percentage of revenues, these expenses increased from 17.4% for 1998 to 25.8%
for 1999. The increase was mainly due to the exceptionally large write-off of
idling capacity on plant, machinery and equipment.
Interest Expense
Interest expense for the Company from continuing operations for 1999
remained essentially unchanged from 1998.
Provision on Accounts Receivable and Other Receivables
The provision for accounts receivables from continuing operations increased
by RMB 104,209, or 326%, to RMB 136,170 in 1999 from RMB 31,961 in 1998. This
large provision was mainly attributable to the financial reforms and state owned
enterprises reforms in the PRC. As a result of the implementation of reforms by
the PRC Government, many of our state owned enterprises customers were deprived
of financing from banks which in the past would lend money to them as directed
by the local governments irrespective of their financial health. Also, these
customers were unable to recover receivables from their state owned enterprise
customers which were also affected by these reforms. The combined effects of
these reforms forced the Company to make large provisions for accounts
receivables accumulated from business done with these customers in previous
years. In addition, the Company recorded provisions for other receivables due
from third parties and balances due from related companies, amounting to RMB
82,729, in aggregate, due to uncertainty regarding their collectability because
of the age of the receivables and the continued adverse economic situation in
the PRC. The Company believes that this adverse economic situation in the PRC
will continue into the immediate future and the Company expects to continue to
encounter difficulties in receivables collections.
Provision on impairment of Fixed Assets
A provision on impairment of fixed assets from continuing operations of RMB
15,000 was made in 1999 as a result of adverse market condition in the PRC which
led the Company to have excess production capacity which the Company expects to
persist into the foreseeable future.
Loss From Continuing Operations
20
<PAGE>
As a result of the aforementioned economic and business factors, the
Company generated a net loss from continuing operations of RMB 257,865 in 1999
as compared to a net loss from continuing operations of RMB 143,426 in 1998, an
increase of RMB 114,439.
Net Loss from Discontinued Operations
The Company's net loss from discontinued operations was RMB 18,674 in 1999
as compared to RMB 2,958 in 1998. The increase in net loss was due to a write-
off of the Goodwill of Southwest Products in order to write-down the carrying
value to the approximate realizable value.
1998 COMPARED TO 1997
Net Sales
Net sales for the Company from continuing operations for 1998 decreased
by RMB 221,865, or 31.8%, to RMB 475,310 as compared to RMB 697,175 in 1997.
This decrease in net sales was primarily due to the adverse market conditions
which persisted in the PRC in 1998 and in Asia generally. Stringent controls on
capital expenditure of PRC enterprises by the Chinese government decreased
demand for the Company's products, which are components of machinery and
equipment. As a result, competition within the PRC bearing industry increased in
1998 for the fewer sales orders being placed for bearings. The Company
responded to the continuing adverse market conditions in China by increasing its
marketing efforts, enhancing its credit review procedures, and restricting sales
marketing to customers where collectability of payment for purchased product is
uncertain.
Cost of Sales
Cost of sales for the Company from continuing operations for 1998 decreased
by RMB 116,164 or 24.2%, to RMB 362,925 from RMB 479,089 for 1997. This decrease
in cost of sales was primarily due to the decrease in volume of production as a
result of contraction in sales in the Company's continuing operations.
Gross Profit
The Company's gross profit from continuing operations for 1998 decreased
from RMB 187,486 in 1997 to RMB 11,785, a decrease of RMB 175,701, or 93.7%.
Gross Profit as a percentage of revenue also decreased from 26.9% for 1997 to
2.5% for 1998. The significant decrease in gross profit was mainly attributable
to the decrease in sales caused by the adverse market conditions in the PRC,
which led to a plunge in units of bearings produced in 1998. In addition, in
response to the continuous drop in the market selling price of bearings due to
keen competition, the provision on inventories for 1998 was increased to RMB
100,600 as compared to RMB 30,600 for 1997, which resulted in a 93.7% decrease
in gross profit in 1998. Due to prolonged adverse market conditions, the Company
was forced to lower its selling price for certain bearing below its cost of
production.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations for
1998 increased by
21
<PAGE>
RMB 5,632, or 7.3%, to RMB 82,533 from 76,901 in 1997. Selling, general and
administrative expenses as a percentage of revenues increased from 11.0% for
1997 to 17.36% for 1998. Selling, general and administrative expenses for the
Company's continuing operations increased mainly as a result of increased
transportation costs and travel expenses for sales personnel, which were
partially offset by a decrease in royalties paid in 1998. During 1998, the
Company adopted stronger controls on its overhead and implemented certain cost-
cutting measures in order to improve its profitability and competitiveness.
However, this cost saving effort was mitigated by the adverse impact of the
Asian financial turmoil and the continued adverse economic situation in the PRC.
Interest Expense
Interest expense for the Company from continuing operations for 1998
remained essentially flat from 1997 and did not have significant fluctuation in
that year.
Provision on Accounts Receivable and Other Receivables
The provision for accounts receivable from continuing operations increased
by RMB 15,699, or 96.5% to RMB 31,961 in 1998 from RMB 16,262 in 1997 to provide
for the slower recovery of accounts receivable due mainly to the turmoil in the
PRC and Asia in 1998, and the decrease funds which had been previously made
available by the Chinese government to state-owned enterprises, including
customers of Harbin Bearing. In addition, the Company recorded provisions for
other receivables due from third parties and balances due from related
companies, amounting to RMB 61,404, in aggregate, due to uncertainty regarding
their collectability based on the length of time that the receivables were
outstanding and the continued adverse economic situation in the PRC and Asia.
There was also a specific provision made for deposits with a Chinese financial
institution in the amount of RMB 23,750 for 1998 in view of the current economic
situation and the liquidity problems experienced by the financial institution in
the PRC. The Company responded to these adverse economic conditions by
tightening credit controls and enhancing its credit review procedures for new
sales orders.
Loss From Continuing Operations
As a result of the aforementioned factors, the Company generated a net loss
from continuing operations of RMB 143,426 in 1998 as compared to a net loss from
continuing operations of RMB 1,462 in 1997.
Net Loss From Discontinued Operations
The Company's net loss from discontinued operations was RMB 2,958 in 1998
as compared to RMB 2,722 in 1997. The increase in the Company's net loss from
discontinued operations is mainly due to a decrease in gross profit despite a
slight increase in revenues as a result of the hiring of a new manufacturing
consultant and an increase in labor costs. The decrease in gross profit,
however, was partially offset by reduced selling, general and administrative
expenses from a reduction in salaries and travel expenses paid to sales
personnel, partially offset by increased legal fees associated with CFIUS and
U.S. export control issues, and a decrease in interest expense due to the
repayment of third party loans.
22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash used in operating activities from continuing operations was RMB
60,444 in 1999, as compared to net cash used in operating activities from
continuing operations of RMB 137,655 in 1998 and net cash used in operating
activities from continuing operations of RMB 39,593 in 1997. The increased use
of cash in operating activities from continuing operations is primarily due to
the unsatisfactory market conditions in the PRC and Asia generally which has
continued since 1997. These adverse market conditions led to a decrease in sales
and the slower recovery of trade receivables from customers.
As of December 31, 1999, the Company's negative working capital was RMB
371,373 as compared to the working capital of RMB 61,844 at December 31, 1998
and RMB 308,473 at December 31, 1997. The Company's current ratio was 0.74:1 as
of December 31, 1999, 1.05:1 at December 31, 1998 and 1.29:1 at December 31,
1997.
Investing Activities
Net cash used in investing activities was RMB 25,207 in 1999 as compared to
net cash provided by investing activities of RMB 21,233 in 1998 and net cash
used in investing activities of RMB 57,245 in 1997, mainly due to increases in
capital expenditures and decreases in amounts due from related companies in 1999
as compared to 1998. Capital expenditures of RMB 24,744 in 1999 (RMB 16,586 in
1998 and RMB 48,287 in 1997) consisted of costs related to completion of
construction in progress of new plant and machinery as well as the renovation of
existing facilities and equipment. These capital expenditures were financed
primarily through short-term and long-term bank loans. The Company does not
expect to spend more than the minimum required to maintain its equipment and
facilities in 2000. As of December 31, 1999, the Company had no outstanding
capital expenditure commitments.
Financing Activities
Net cash provided by financing activities was RMB 74,941 in 1999 as
compared to net cash provided by financing activities of RMB 96,824 in 1998 and
RMB 87,682 in 1997. The Company has historically relied on both short-term and
long-term bank loans from Chinese banks to support its operating and capital
requirements. Short-term bank loans, which have terms ranging from three months
to six months, are utilized to finance both operating and capital requirements
and are renewed on a revolving basis. Long-term bank loans are utilized to fund
capital expansion projects. Since 1997, principally all net cash provided by
financing activities has come from short- term and long-term bank loans. The
Company believes that it will be able to continue to maintain its bank
borrowings under its current lending arrangements.
After the completion of the sale of Southwest Products and the execution of
the Supplemental Agreement referred to below, the Company has retained US$735 of
the proceeds as additional working capital. There can be no assurance that the
Company's business will generate cash flow that, together with additional
financing, to the extent available, will be sufficient to allow the Company to
meet its requirements for working capital, capital expenditures and debt
payments.
In August 1996, China Bearings issued U.S.$11.5 million aggregate principal
amount of Convertible Debentures to three investors. The Convertible Debentures
were convertible, at the option of the holders, in whole or in part, at any time
into shares of Common Stock of the Company. The conversion price (the
"Conversion Price") was initially U.S. $5.00 per share, subject to adjustment
for (a) a change in par value of the Common Stock, (b) the issuance of shares by
way of capitalization of profits or reserves, (c) capital distributions, (d) a
rights offering at a price which is less than the lower of the then market price
of the Common Stock or the Conversion Price, (e) the issuance of derivative
23
<PAGE>
securities where the total consideration per share initially received is less
than the lower of the then market price of the Common Stock or the Conversion
Price, (f) the issuance of shares at a price per share which is less than the
lower of the then market price of the Common Stock or the Conversion Price and
(g) if the cumulative audited earnings per common share for any two consecutive
fiscal years commencing with the fiscal year ended December 31, 1996 and ending
with the fiscal year ending December 31, 1998 are less than the specified
projection of cumulative earnings per common share for such period. Due the
Company's failure to achieve the projected cumulative audited earnings per
common share of U.S.$1.79 for the two years ended December 31, 1997, the
Conversion Price was adjusted to U.S.$1.84 per share pursuant to the terms of
the Subscription Agreement.
Unless earlier converted, the Convertible Debentures matured in August
1999. Interest accrued at a rate equal to the higher of (i) 5% per annum (net of
withholding tax, if applicable) and (ii) the percentage of the dividend yield
calculated by dividing the annual dividend declared per share of Common Stock of
the Company by the Conversion Price. Interest on the Convertible Debentures was
payable quarterly.
At maturity, the Convertible Debentures were required to be redeemed at a
redemption price equal to the principal amount then outstanding plus any accrued
but unpaid interest, together with an amount sufficient to enable the holders to
receive an aggregate internal rate of return of 12% per annum on the cost of
their investment. In addition, if any of the events of default specified in the
Subscription Agreement occurs, the Convertible Debentures become automatically
due and payable at the principal amount outstanding together with accrued and
unpaid interest and an amount that would enable the investors to yield an
aggregate internal rate of return on their investment of 19.75% per annum.
Events of default included breach of covenants after failure to cure after
notice, failure to pay principal or interest, failure to pay indebtedness for
borrowed money, certain events of bankruptcy or insolvency, judgement defaults,
failure to achieve earnings per common share of at least U.S. $0.55 for each
fiscal year commencing January 1, 1996, accounts receivable reaching a certain
level in relationship to net sales and delisting or suspension of trading of the
Company's Common Stock from Nasdaq.
Due to the failure of the Company to achieve the required minimum earnings
per common share of U.S.$0.55 in 1997, an event of default occurred. As a
result, interest accrued at the default rate of 19.75% per annum. Pursuant to a
Settlement Agreement reached in October 1998 with the investors, the investors
agreed not to demand the immediate repayment of the Convertible Debentures. In
addition, the aggregate principal amount of the Convertible Debentures (plus
simple interest at a rate of 12.375% per annum until July 22, 1998 less interest
paid) was restructured as a loan in an aggregate principal amount of U.S.
$13,173. The debt, which carries a simple interest rate of 10% per annum, is
required to be repaid over a period of three years ending on July 23, 2001. As
part of the settlement, the Company also issued 466,667 shares of Common Stock
to the investors, which are not transferable for a period of three years. The
members of the Sunbase International agreed that 50% of any public market funds
raised by the Company or its subsidiaries would be applied immediately towards
discharging the then outstanding debt and interest accrued thereon. The
obligations of China Bearing under the Settlement Agreement are guaranteed by
other members of the Sunbase International on an at least pari passu basis with
the guarantors' other present and future unsecured and unsubordinated
obligations.
On March 1, 2000, the Company entered into a supplemental agreement to the
Settlement Agreement ("Supplemental Agreement") with the holders of the
Convertible Debentures. Pursuant to the Supplemental Agreement, the Company
promised, upon the receipt of the consideration from the sale of Southwest
Products, to pay US$2,600 as partial settlement of the overdue portion of the
Convertible Debentures and the holders of the Convertible Debentures agreed that
the remaining undue portion of the Convertible Debentures is repayable on the
schedule originally set out in the Settlement Agreement.
China Bearing has failed to make the scheduled monthly payments under the
Settlement Agreement since March 23, 1999. The total amount of principal and
interest due as of December 31, 1999 are $2,608 and $582 respectively. Upon the
completion of Southwest Products's sale on April 28, 2000, a payment of $2,600
was made as partial settlement of outstanding debt under the Settlement
24
<PAGE>
Agreement. After the payment, the total amount of principal and interest past
due as of April 23, 2000 are $1,402 and $198 respectively. Thus, the Company,
China Bearing and the other members of the Sunbase International will continue
to seek further equitable resolution with the investors regarding these amounts.
While the Company believes that a workable solution can be reached with
investors in due course, no assurance can be given as to when or if such
negotiations will result in a resolution that is favorable to the Company.
In connection with the acquisition by the Company of its interest in Harbin
Bearing from Asean Capital, in addition to shares of Common Stock issued by the
Company to Asean Capital, the Company issued a promissory note for U.S. $5,000
(RMB 41,600) (the "Promissory Note"). The Promissory Note is secured by a
continuing security interest in all of the Company's right, title and interest
in the outstanding capital stock of its wholly-owned subsidiary, China Bearing.
The Promissory Note is denominated and repayable in full in U.S. dollars, and
bears interest at a rate of 8% per annum. In connection with the issuance of the
Convertible Debentures, Asean Capital agreed that for so long as any of the
Convertible Debentures are outstanding, no amounts may be repaid by the Company
on the Promissory Note unless there is sufficient working capital and the
repayment is made in accordance with the following schedule:
<TABLE>
<CAPTION>
Payment Period Amount
- -------------- ------
<S> <C>
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
</TABLE>
In accordance with this schedule, a principal payment of U.S.$2,000 (RMB
16,700) was made in September 1996. As a result of the Company's current
financial position, the directors do not expect to make any other payments in
the foreseeable future.
The financial condition of the Company raises substantial doubt about the
Company's ability to continue as an independent going concern. The description
of the business, financial condition and results of operations of the Company
contained in this Annual Report and in the financial statements included herein,
however, have been prepared on a going concern basis. They do not include any
adjustments that might result from the outcome of the uncertainty relating to
the Company's ability to continue as a going concern, including, without
limitation, adjustments to the carrying value of assets and liabilities or the
classification of liabilities that would be necessary if the Company were not
considered to be a going concern. Such adjustments would have a material adverse
effect on the Company's financing condition. See "FACTORS THAT MAY AFFECT FUTURE
RESULTS" below and the financial statements of the Company and the Independent
Auditor's Report thereon, included elsewhere herein.
See Note 2 to the Company's 1999 consolidated financial statements for a
description of the Company's plans to maintain liquidity and obtain financing.
Inflation and Currency Matters
In recent years, the Chinese economy has experienced periods of rapid
growth and high rates of inflation, which have, from time to time, led to the
adoption by the PRC government of various corrective measures designed to
regulate growth and control inflation. In 1995, China's overall
25
<PAGE>
inflation rate (retail price index) was approximately 15%, compared to
approximately 21% in 1994 and 13% in 1993. However, after the implementation of
strict monetary policies, the inflation rates were approximately 6%, 8%, minus
2.6% and minus 3% in 1996, 1997, 1998 and 1999, respectively. High inflation has
in the past and may in the future cause the PRC government to impose controls on
prices, or to take other actions which could inhibit economic activity in China,
which in turn could affect demand for the Company's products. In view of the
change in market conditions and greater competition, Harbin Bearing may be
unable to increase its selling prices to shift a portion of its inflated costs
to its customers. The price of bearing steel, the major raw material used by the
Company, remained fairly stable from 1994 to 1999 in China and the only major
impact of inflation on the Company's costs in its Chinese operations was on the
cost of labor (due to the rising level of compensation of Harbin Bearing's
employees).
The Company continually monitors the effects of inflation and deflation. In
view of the change in market conditions and increased competition, the Company
in an inflationary market may be unable to raise its prices to shift a portion
of the inflated costs to customers, and the Company in a deflationary market may
be forced to lower its prices to maintain competitive prices. The price of
bearing steel, the major raw material used by the Company, remained fairly
stable during 1997, 1998 and 1999.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. Changes in the relative value
of currencies occur periodically and may, in certain instances, materially
affect the Company's results of operations.
Although the Company has export ambitions, historically, substantially all
of the Company's sales from businesses that continues to own and operate have
been domestic and settled in RMB. Moreover, historically, substantially all of
the Company's costs from businesses that it continues to own and operate have
been incurred in RMB. It is possible, however, that the revenue/cost profile of
the Company could change in the future, and if it does, then it is possible that
a devaluation of the RMB against the U.S. Dollar could have a material adverse
effect upon the results of operations. Currently, all of the Company's bank
debts are denominated in RMB. However, the Company has indebtedness in respect
of the Convertible Debentures that is denominated in U.S. dollars, so that a
devaluation of the RMB against the U.S. Dollar could have a material adverse
effect upon the Company's financial position. Although prior to 1994 the RMB
experienced significant devaluation against the U.S. Dollar, the RMB has
remained fairly stable from 1994 to present. The unified exchange rate was
U.S.$1.00 to RMB 8.32 at December 31, 1995, RMB 8.3 at December 31, 1996, RMB
8.3 at December 31, 1997, RMB 8.3 at December 31, 1998 and RMB 8.275 at December
31, 1999. The People's Bank of China has declared its intention not to devalue
the RMB. However, it is possible that competitive pressures resulting from the
significant devaluation of other Asian currencies will ultimately force the
Government of China to reconsider its position on devaluation of the RMB.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Nasdaq De-Listing
In February 1999, the Company's Common Stock was delisted from Nasdaq. After
its delisting from Nasdaq, the Common Stock traded on the Bulletin Board.
Between May 20, 1999 and October 26, 1999 the Company's Common Stock did not
trade on the Bulletin Board because there were no market
26
<PAGE>
makers making a market in the Common Stock and the Company was not current with
its public information requirements.
Potential Acceleration of Amounts due under the Settlement Agreement
As a result of the failure by China Bearing to make the scheduled monthly
payments due under the installment provisions of the Settlement Agreement, the
holders of the Convertible Debentures have the right to accelerate the payment
of all amounts due under the Settlement Agreement, as well as the right to
exercise all other remedies available to them under the subscription agreement
pursuant to which the Convertible Debentures were purchased. While the Company
believes that an equitable resolution may be reached with the holders of this
indebtedness no assurances can be given in this regard and any acceleration
would have a severe negative effect on the liquidity of the Company and on its
ability to continue its business.
Substantial Leverage; Inadequacy of Earnings to Cover Fixed Charges
The Company has, on a consolidated basis, total indebtedness of
approximately RMB 864,525 (US$104,474) in 1999, resulting in a ratio of debt to
total capitalization of 55:1 at that date. Substantially all of such
indebtedness is denominated in RMB.
The Company will require substantial cash flow to meet its repayment
obligations on its indebtedness, as well as on any future additional
indebtedness it may incur. For 1999, the Company's earnings were inadequate to
cover fixed charges by approximately RMB 393,828 (US $47,592) (Note: For
purposes of this calculation, the term "fixed charges" means the total amount of
debt service (principal and interest) due under the Convertible Debentures, as
modified by the Settlement Agreement, during 1999. The Promissory Note issued to
Asean Capital also did not appear to be meaningful for purposes of this
calculation because the Promissory Note is subordinated to the Convertible
Debentures and was issued to a related party. The term "earnings" means net loss
from continued operations during fiscal year 1999. Thus, for this calculation,
1999 net loss was simply added to 1999 debt service under the Convertible
Debentures, as modified by the Settlement Agreement.)
The ability of the Company to make scheduled interest payments on, and
retire at maturity the principal of, its indebtedness is dependent on the
Company's future performance. However, the Company experienced operating losses
and negative cash flow from operations of RMB 276,539 and RMB 60,444
respectively, in 1999. The Company expects that net losses may continue for the
foreseeable future in view of the current economic situation in China and many
other factors beyond its control. In addition, the Convertible Debentures and
the Settlement Agreement impose significant operating and financial restrictions
on the Company. Such restrictions limit the Company's ability to create liens
and its use of the proceeds from certain asset sales. These factors may make the
Company more vulnerable to economic and industry downturns, limit its ability to
obtain additional financing to fund future working capital requirements, capital
expenditures or other general corporate purposes, and reduce its flexibility in
responding to changing business or economic conditions or to a substantial
decline in operating results.
The Company may require substantial additional funds in the event it fails
to meet its projected operating results or its needs exceed its projected
capital requirements. The Company's future sources
27
<PAGE>
of financing may include equity and debt financings. Accordingly, the Company
may be required to refinance a substantial portion of its indebtedness since
cash flow from operations may be inadequate to meet payment obligations arising
from its long term indebtedness. There can be no assurance that the Company will
be able to raise necessary debt and/or equity proceeds to meet these debt
obligations or that the Company will have requisite access to capital markets on
acceptable terms.
Ability of the Company to Continue as a Going Concern
The financial condition of the Company raises substantial doubt about the
Company's ability to continue as an independent going concern. The description
of the business, financial condition and results of operations of the Company
set forth herein, and in the Company's financial statements included herein,
however, have been prepared on a going concern basis. They do not include any
adjustments that might result from the outcome of the uncertainty relating to
the Company's ability to continue as a going concern, including, without
limitation, adjustments to the carrying value of assets and liabilities or the
classification of liabilities that would be necessary if the Company were not
considered to be a going concern. Such adjustments would have a material adverse
effect on the Company's reported financial condition.
Potential Changes in the Economy of China
The economy of the PRC has experienced significant growth in the past
decade. Much of this growth has been a result of governmental policies which
have encouraged substantial private economic activity. The continuation of
growth in China is now subject to a number of uncertainties including, without
limitation, a continuation of governmental policies favoring private enterprise,
continued success in maintaining a moderate rate of inflation, the ability of
China to remain competitive with other Asian countries that have experienced
significant devaluation of their currencies during the past two years,
resolution of liquidity problems affecting the Chinese banking system and
economy as a whole and the maintenance of uninterrupted trading relationships
with the United States and other major trading partners. In the event that
negative developments in these or other areas result in a slowdown or decline in
the economy of China, it is likely that the future results of operations of the
Company will be adversely effected.
Political and Regulatory Considerations in China
Although the government of China has been pursuing economic reform policies
for over a decade, there can be no assurances that such policies will continue.
Any change in such policies could have a substantial adverse effect on the
economic growth of China which would likely diminish the market for the
Company's products in China. Moreover, changes in the laws or regulations
governing business operations, restrictions on foreign ownership of Chinese
companies, exchange controls, changes in the tax laws or restrictions on the
repatriation of profits could be imposed in a manner which would result in
negative consequences to the Company and its interest in Harbin.
Failure to Qualify Harbin Bearings to Automotive and Aerospace Quality
Standards; Ability to Remain Competitive with Multinational Manufacturers.
To date Harbin Bearing has been unable to establish procedures that would
enable it to qualify to international quality standards, generally accepted
automotive quality standards or aerospace quality standards. Such failure has
resulted in Harbin Bearing's inability to capture orders from the U.S.
28
<PAGE>
automotive and aerospace industries. The international bearing industry is
extremely competitive. Although the Company's main competitors are Eastern
European manufacturers and manufacturers located in China, to a lesser extent,
the Company also competes with companies such as Svenska Kugellager Fabriken,
Fisher Aktien Gesellschast, New Technology Network, NSK, Timken, Torrington-
Fafnir and Nippon Miniature Bearing, who dominate this market. The Company had
hoped that its acquisition of Southwest Products would not only allow it to
access the U.S. bearing market, but also allow it to implement U.S.
manufacturing methods and quality control procedures at Harbin Bearing to
develop new products and meet the stringent requirements of many non-PRC OEMs.
By doing so, the Company expected to increase its penetration of the
international bearing market. As a result of the Company's decision to dispose
of Southwest Products in response to the CFIUS investigation, however, the
Company has suspended indefinitely its plan to enable Harbin Bearing to meet
these international standards. Failure to qualify Harbin Bearing to these
standards is expected to constrain the Company's future growth.
The Company's products may become obsolete as a result of new technologies
or new developments affecting the bearing industry. The Company's ability to
remain competitive depends in significant part on its ability to anticipate and
stay abreast of new technological developments, fund research and development,
introduce new products and retain key personnel for these functions. Some of the
Company's competitors have substantially greater resources available for these
purposes. To the extent that the Company does not generate adequate cash flow or
obtain other financing to fund product development, the Company's competitive
position will probably be adversely affected, which may result in a loss of
sales or lower productivity.
Impact of the Turmoil in Asian Markets
The turmoil in Asian markets may affect the political and economic policies
in China and the continued deterioration of the Asian market coupled with the
liquidity restraints imposed in China could adversely affect the Company's
operations and the collectability of its accounts receivable. Continuation of
these trends could also impair the Company's liquidity.
29
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates and
foreign currency exchange rates, which could affect its future results of
operations and financial condition. The Company manages its exposure to these
risks through its regular operating and financing activities. Currently, the
Company is unable to hedge its RMB-hard currency exchange risks due to
restrictions imposed by the government of the PRC which prevent financial
institutions that engage in foreign currency transactions from offering forward
exchange contracts with respect to the RMB.
Foreign Currency Risk
Although the Company has export ambitions, historically, substantially all
of the Company's sales from businesses that it continues to own and operate have
been made in China and settled in RMB. Moreover, historically, substantially all
of the Company's costs from businesses that it continues to own and operate have
been incurred in RMB. Thus, the functional currency of Harbin Bearing and the
Company's other PRC subsidiaries is the RMB. It is possible, however, that the
revenue/cost profile of the Company could change in the future, and if it does,
then it is possible that a devaluation of the RMB against the U.S. Dollar could
have a material adverse effect upon the results of operations.
Currently, all of the Company's bank debts are denominated in RMB. However,
the Company has indebtedness under the Settlement Agreement (and under the
Convertible Debentures and Subscription Agreement in the event a satisfactory
settlement can not be made pursuant to default under the Settlement Agreement)
that is denominated in U.S. dollars, so that a devaluation of the RMB against
the U.S. Dollar could have a material adverse effect upon the Company's
financial position.
As a result of the foregoing factors, the Company is subject to risk from
fluctuations in the value of the RMB relative to the U.S. dollar.
The RMB is translated into U.S. dollars in consolidation, and will result
in cumulative translation adjustments which are included in other comprehensive
income (loss). The potential effect on other comprehensive income (loss)
resulting from a hypothetical 5%, 10% and 20% weakening in the quoted RMB rate
against the U.S. dollar would have resulted in a $110, $210 and $385 decrease in
consolidated stockholders' equity and an $1,592, $3,039 and $5,571 decrease in
net loss in 1999. The same hypothetical movements would have resulted in an RMB
5,790, RMB 11,580 and RMB 23,159 increase in the amount of debt service payable
by the Company under the Settlement Agreement in 1999 on an annualized basis.
Actual results may differ.
Interest Rate Risk
The Company's bank loans are all fixed rate and denominated in RMB. Fixed
rates range between 6.435% per annum and 9.24% per annum for short-term loans,
and between 3.7% per annum and 15.12% per annum for long-term loans. The total
amount of short-term bank loans outstanding as of December 31, 1999 was RMB
575,562, with an effective interest rate of 8.085% per annum The total amount of
long-term bank loans outstanding as of December 31, 1999 was RMB 168,974, with
an effective interest rate of 8.4% per annum. In addition, the Company has
indebtedness of RMB 115,797 and accrued interest payable of RMB 4,102 under the
Settlement Agreement (and under the Convertible Debentures and Subscription
Agreement in the event a satisfactory settlement can not be made pursuant to
default under the Settlement Agreement) at
30
<PAGE>
fixed rates of interest (see ITEM 7-"LIQUIDITY AND CAPITAL RESOURCES"). As such,
the Company is exposed to interest rate risk on its long-term bank loans and in
respect of its indebtedness under the Settlement Agreement (or Convertible
Debentures and Subscription Agreement). Given banking practices in the PRC, the
Company believes that it will be able to refinance its long-term bank loans at
market rates whenever they drop significantly below the fixed rates specified on
its long-term bank loans. At present, the Company believes that the risk of a
significant drop in relevant market interest rates during the term of the debt
under the Settlement Agreement is remote; however, the Company may consider
entering into hedge transactions if such a risk is perceived to increase.
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited financial statements as of December 31, 1998 and 1999
and for the years ended December 31, 1997, 1998 and 1999 are set forth beginning
on page F-1.
32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
33
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES OF THE
REGISTRANT
The Company's directors, executive officers and significant employees are
listed below. The Board of Directors of the Company is comprised of only one
class. Directors serve until their successors are elected or appointed.
<TABLE>
<CAPTION>
Name Age Office
- ---- --- ------
<C> <C> <S>
Gunter Gao 44 Chairman, Chief Executive Officer and President
(Roger) Li Yuen Fai 39 Director, Vice President and Chief Financial Officer
Hongfei Chen 37 Director
(Davis) Lai Kwan Fai 36 Corporate Secretary
Liu En Shi 52 General Manager, Harbin Bearing
</TABLE>
GUNTER GAO, CHAIRMAN, CHIEF EXECUTIVE OFFICER AND DIRECTOR, 44. Mr. Gao, a
Hong Kong businessman who has extensive business experience in China, has been
the Chairman of the Board and a principal of Sunbase International since its
incorporation in 1991, which indirectly owns a controlling position in the
Company. Sunbase International has various industrial holdings in China, in
industries such as aviation, transportation, cement, steel and retail. Mr. Gao
is also the Chairman of the Board of the Company. Mr. Gao is responsible for the
overall strategy of the Company. Mr. Gao is actively and directly involved in
all operational and strategic transactions. During the 1980's, Mr. Gao engaged
in trading and investment activities in industries such as food, timber, real
estate, coal and textiles. Based on his success in these activities and with the
support of several banks in China, Mr. Gao has turned Sunbase International into
a leading China industrial company. Mr. Gao is currently a member of the Chinese
People's Political Consultative Conference. Mr. Gao is the youngest member of
the Congress and is widely respected for his contributions to the country's
development. Mr. Gao's strong reputation in China has enabled Sunbase
International to engage in and complete many difficult transactions, including
acquiring a majority interest in Harbin Bearing and obtaining a license to
create an airline in China. Now known as Northern Swan Airlines, this airline
enjoys international prominence and the financial support of the Bank of China
and the People's Construction Bank of China. Mr. Gao serves as a Senior Economic
Advisor to several Chinese municipal and provincial governments, including the
governments of Tianjin, Hebei, Shaanxi, Xinjiang and Harbin. In addition, Mr.
Gao is the deputy director of the Sino-Foreign Entrepreneurs Cooperative
Committee.
(ROGER) LI YUEN FAI, CHIEF FINANCIAL OFFICER, VICE-PRESIDENT AND DIRECTOR,
39. Mr. Li has been the Chief Financial Officer and a Director of the Company
since 1994. From 1990 to 1991 he was compliance manager of Hong Kong Securities
Clearing Company Limited. Mr. Li was employed by Coopers & Lybrand in Hong Kong
from 1980 to 1990 (his most
34
<PAGE>
recent position was audit manager) and was a partner in a Hong Kong accounting
firm from 1992 to 1993.
HONGFEI CHEN, DIRECTOR, 37. Mr. Chen was appointed as a director by the
Board in December 22, 1999. He is a lawyer admitted to practice law both in
Australia and in China. Mr. Chen obtained his law degrees from a leading Chinese
university and the University of Melbourne. Prior to joining the Sunbase Group,
Mr. Chen worked with one of the leading Australian law firms in Melbourne. He
was engaged to provide advice on establishing investment projects both in
Australia and in China. He assisted a number of Australian corporations to
develop and manage joint venture projects in China. Mr. Chen has considerable
experience in international investment projects and has a good understanding of
business practice in Australia and in China.
(DAVIS) LAI KWAN FAI, CORPORATE SECRETARY, 36. Mr. Lai has been the
Corporate Secretary of the Company since 1996. Mr. Lai holds a Master of Arts
Degree in Economics and Finance from the University of Leeds in the United
Kingdom. Prior to joining Company, he was employed in the commercial sector with
over six years of experience in enterprise management and business development
in China.
LIU EN SHI, GENERAL MANAGER, 52. Mr. Liu was appointed the General Manager
of Harbin Bearing in April 1999 and is responsible for the day-to-day operations
as well as sales and marketing of Harbin Bearing. Mr. Liu has been a high
ranking executive for a number of machinery manufactures in the City of Harbin
for over 15 years. In 1994 to 1995, Mr. Liu was sent to Singapore University by
Harbin authorities to attend a business management course. Mr. Liu has
considerable experience in business management.
35
<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. $100,000 in 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
-------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- ----------------------------------------------------------------------------------------------------------------------------
Other
Name Annual Restricted Securities All Other
and Compen- Stock Underlying LTIP Compen-
Principal Year Salary Bonus Sation Awards Options Payouts sation
Position (US$) (US$) (US$) (US$) (#) (US$) (US$)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gunter Gao 1999 - - - - - - - - - - - - - -
---------------------------------------------------------------------------------------------------
CEO,
President,
Director
- ----------------------------------------------------------------------------------------------------------------------------
William McKay (1) 1999 118,750 - - 6,250 (2) - - - - - - - -
---------------------------------------------------------------------------------------------------
Ex-CEO, Vice 1998 285,000 - - 15,000 - - - - - - 9,037
President, ---------------------------------------------------------------------------------------------------
Director 1997 285,000 - - - - - - - - - - - -
---------------------------------------------------------------------------------------------------
1996 284,327 - - - - - - 800,000 - - - -
- ----------------------------------------------------------------------------------------------------------------------------
</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. Accordingly, the salary and with annual compensation was
calculated on a time-apportionment basis up to April 30, 1999.
(2) Consists of US$6,250 car allowance.
36
<PAGE>
OPTIONS GRANTS IN 1999
No stock options were granted in 1999.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- -----------------------------------------------------------------------------------------------------------------
Value of
Number of Securities Unexercised
Underlying In-the-Money
Unexercised Options Options
at FY-End (#) at FY-End ($) /(1)/
Shares Acquired
on Exercise Value Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William McKay - - - - - - 320,000/480,000 - - - / - - -
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
1. The value of unexercised in-the-money options is determined by using the
difference between the exercise price and the average bid price at December
31, 1999. As of December 31, 1999, no options granted were in the money.
STOCK OPTION PLAN
On January 2, 1996, the Company's Board of Directors adopted the 1995
Sunbase Asia, Inc. Stock Option Plan (the "Plan"). The Plan permits the grant of
options to purchase an aggregate of up to 2,500,000 shares of the Common Stock
of the Company. Under the Plan, incentive stock options and non-qualified stock
options may be issued. Eligible participants under the Plan are those
individuals that the compensation committee of the board of directors of the
Company (the "Committee") in its discretion determines should be awarded such
incentives in the best interests of the Company; provided, however, that
incentive stock options may only be granted to employees of the Company and its
affiliates. The Committee has the power to determine the price, terms and
vesting schedule of the options granted. All incentive stock options will have
option exercise prices per option share not less than the fair market value of a
share of the Common Stock on the date the option is granted, except that in the
case of incentive stock options granted to any person possessing more than 10%
of the total combined voting power of all classes of stock of the Company or any
affiliate of the Company, the price shall not be less than 110% of such fair
market value. The Plan terminates on the earlier of that date on which no
additional shares of Common Stock are available for issuance under the Plan or
January 2, 2006.
Under the employment agreement dated January 16, 1996 between the Company
and William R.
37
<PAGE>
McKay, and pursuant to the Plan, the Company granted Mr. McKay options to
purchase an aggregate of up to 800,000 shares of Common Stock of the Company.
The options granted to Mr. McKay vested at the rate of 160,000 shares per each
full year of Mr. McKay's employment under the Agreement. All unexercised options
expire six years after the date on which such options vested, unless Mr. McKay
first resigns or is terminated for cause as defined in his employment agreement.
On May 6, 1999, as required by the CFIUS, Mr. McKay was removed as a director
and executive officer of the Company. As of such date, Mr. McKay had vested
options exercisable for 480,000 shares of Common Stock. He also had
unexercisable options for an additional 320,000 shares. By the terms of his
employment agreement, the options for the 320,000 shares which had not yet
vested became null and void. Of the 480,000 options which had vested at the time
of Mr. McKay's departure from the Company, 160,000 are exercisable at U.S. $6.65
per share, 160,000 are exercisable at U.S. $7.75 per share and the remaining
160,000 are exercisable at U.S. $9.25 per share.
38
<PAGE>
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>
Roger Li January 16, 1996 6.375 200,000
January 16, 1997 6.375 200,000
January 16, 1998 6.375 200,000
-------
600,000
=======
</TABLE>
As of December 31, 1999, no options were exercised or granted.
EMPLOYMENT AGREEMENTS
On January 16, 1996, the Company and Southwest Products entered into an
employment agreement with William R. McKay (the "Agreement") pursuant to which
Mr. McKay was employed to serve as President and Chief Executive Officer of
Southwest Products and as President and Chief Executive Officer of the Company
for a term of five years. Under the terms of the Agreement, Mr. McKay was paid
an annual base salary of $285,000. The base salary was to be increased or
decreased (to a minimum of $225,000), based upon an annual review of Mr. McKay's
performance. In addition to the base salary, the Board of Directors of the
Company had sole discretion to pay Mr. McKay a bonus for any particular year of
his employment. Mr. McKay was also entitled to stock options as described under
"Stock Option Plan." As part of the conclusion of the CFIUS investigation, Mr.
McKay was removed from his positions as President and Chief Executive Officer
effective May 6, 1999.
On January 16, 1996, the Company, Southwest Products and Mr. McKay also
entered into a Confidentiality and Non-Competition Agreement pursuant to which
Mr. McKay agreed to keep certain information of the Company, Southwest Products
and their affiliates confidential, and was prohibited from competing with the
Company, Southwest Products and their affiliates during the term of that
agreement.
DIRECTOR COMPENSATION
In 1999, no director is entitled to receive compensation in respect of his
or her services as a director of the Company.
39
<PAGE>
The Company currently does not have a compensation committee because none of
its executive officers now in office receive compensation from the Company.
40
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 28, 2000, the stock ownership
of all persons known to own beneficially five percent (5%) or more of the voting
securities of the Company, and all directors and executive officers of the
Company, individually and as a group. Unless otherwise indicated in these
footnotes, each stockholder has sole voting and investment power with respect to
shares beneficially owned and all addresses are in care of the Company.
Beneficial ownership has been determined pursuant to Rule 13d-3 under the
Securities Exchange Act of 1934 (the "Exchange Act"). All information with
respect to beneficial ownership has been furnished by the respective director,
executive officer or stockholder, as the case may be.
<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)
Roger Li Yuen Fai 600,000 (4) 4.1% -- --
Directors & Executive Officers 12,939,900 47.8% 36 (2) 100%
As A Group (3)
(4 persons)
5% Stockholders:
- ----------------
Sunbase International (Holdings) Limited 12,339,900 (1) 46.6% 36 (2) 100%
Asean Capital Limited 12,339,900 (1) 46.6% 36 (2) 100%
</TABLE>
41
<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, Chen and Lai is 19/F., First Pacific
Bank Centre, 51-57 Gloucester Road, Wanchai, Hong Kong. The address of New China
Hong Kong is 25/F., Bank of China Tower, 1 Garden Road, Hong Kong.
42
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(all figures expressed in thousands)
In December 1994, Asean Capital transferred all of its interest in China
Bearing to the Company in exchange for shares of the Company's common stock and
the Promissory Note (in an aggregate principal amount of U.S.$5,000) which is
secured by a continuing security interest in all of the Company's right, title
and interest in the outstanding capital stock of its wholly-owned subsidiary,
China Bearing. The Promissory Note is denominated and repayable in full in U.S.
dollars, and bears interest at a rate of 8% per annum. In connection with the
issuance of the Convertible Debentures, Asean Capital agreed that for so long as
any of the Convertible Debentures are outstanding, no amounts may be repaid by
the Company on the Promissory Note unless there is sufficient working capital
and the repayment is made in accordance with the following schedule:
Payment Period Amount
- -------------- ------
August 1, 1996 to July 31, 1997 up to U.S.$2,000 plus accrued interest
August 1, 1997 to July 31, 1998 up to U.S.$1,500 plus accrued interest
August 1, 1998 to July 31, 1999 up to U.S.$1,500 plus accrued interest
43
<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). Although the lease expired on
December 31, 1998, Harbin Bearing is currently using the premises without
renewal of the lease. At the expiration of the Manufacturing Machinery Lease in
December 31, 2001, Harbin Precision has the right to either renew the lease or
acquire the equipment.
Harbin Bearing and Harbin Holdings have entered into a lease covering
plants and buildings used in Harbin Bearing's business which were not
contributed to Harbin Bearing in the restructuring (the "Plant Lease"). The
Plant Lease provides for annual rent payments of RMB 3,751 (U.S.$ 452). Although
the Plant Lease expired on December 31, 1998, Harbin Bearing is still currently
using the premises under the same terms and conditions as the previous lease
without renewal of the lease.
Harbin Holdings and Harbin Bearing entered into a lease on January 1, 1994
providing for the use of land by Harbin Bearing at the rate of RMB 2,508 (U.S.$
302) per annum, subject to future adjustments in accordance with changes in
government fees.
As a result of the Restructuring, Harbin Holdings owns the rights to the
trademark "HRB." Pursuant to an exclusive and perpetual trademark license
agreement, Harbin Holdings has granted Harbin Bearing the exclusive and
perpetual right to use the "HRB" trademark on its products and marketing
materials. The royalty on the trademark license agreement is 0.5% of annual
sales from 1994 to 2003 and 0.3% from 2004 to 2013.
Pursuant to the Restructuring, Harbin Holdings assumed responsibilities for
the pension payments of all employees of the Bearing Factory who retired or left
the Bearing Factory prior to the Restructuring. Harbin Bearing and Harbin
Holdings have entered into an agreement (the "Pension Agreement") relating to
pension arrangements after the Restructuring. The Pension Agreement provides
that Harbin Bearing may satisfy the statutory requirement to pay an amount equal
to 22% of annual wages to the municipal government to fund future pension
obligations of its existing employees by making such payments to Harbin Holdings
as representative of the municipal government of Harbin, and Harbin Holdings
agrees to be responsible for all pension obligations to employees of Harbin
Bearing who retire or leave after the Restructuring.
See Note 20 of the Company's 1999 consolidated financial statements for
more detailed information.
44
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 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, 1998 and December 31, 1999.................................
Consolidated Statements of Income for the years ended December 31, 1997, December 31, 1998
and December 31, 1999...................................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 1997, December 31,
1998 and December 31, 1999...............................................................................
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31,
1997, December 31, 1998 and December 31, 1999...........................................................
Notes to Consolidated Financial Statements................................................................
</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)
45
<PAGE>
3.3 Amended and Restated Certificate of Designation for Series A Convertible
Preferred Stock. (1)
3.4 Secured Promissory Note in favor of Asean Capital Limited. (2)
3.5 Third Amended and Restated Certificate of Designation for Series B
Preferred Stock. (4)
Voting trust agreement
9.1 Voting Trust Agreement dated December 31, 1998, between the Company,
Southwest Products and Samuel T. Mok.
Material contracts
10.1 Agreement between the Company and New China Hong Kong with respect to the
Sale and Purchase of shares of China Bearing, together with the Deed of
Novation. (3)
10.2 Memorandum and Articles of Association of China International. (3)
10.3 Joint Venture Contract between China International and Harbin Hazhou
Bearing Distributing Company with respect to Harbin Sunbase. (3)
10.4 Joint Venture Contract between China International and Harbin Bearing
Everising Construction and Development Ltd. with respect to Harbin
Xinhengli. (3)
10.5 Amended Articles of Association of Harbin Sunbase. (3)
10.6 Articles of Association of Harbin Xinhengli. (3)
10.7 Articles of Association of Harbin Bearing. (3)
10.8 Agreement between Harbin Sunbase and Harbin Bearing with respect to the
provision of financial management services to Harbin Bearing. (3)
10.9 Agreement between Harbin Xinhengli and Harbin Bearing with respect to the
provisions of sales and marketing services to Harbin Bearing. (3)
10.10 Pension Fund Aggregation Agreement between Harbin Bearing and Harbin
Holdings with respect to pension payments for existing employees. (3)
10.11 Trademark Licensing Agreement between Harbin Bearing and Harbin Holdings
with respect to the "HRB" trademark. (3)
10.12 Service Agreement between Harbin Holdings and Harbin Bearing. (3)
10.13 Land Use Right Lease Agreement between Harbin Holdings and Harbin
Bearing. (3)
46
<PAGE>
10.14 Power Supply and Manufacturing Equipment Lease Agreement between Harbin
Precision and Harbin Bearing. (3)
10.15 Plant Buildings Lease Agreement between Harbin Precision and Harbin
Bearing. (3)
10.16 Ancillary and Transportation Equipment Lease Agreement between Harbin
Precision and Harbin Bearing. (3)
10.17 Agreement and Plan of Reorganization and Merger dated as of December 29,
1995 among the Company, Southwest Products and the shareholders of
Southwest Products. (4)
10.18 Employment Agreement dated as of January 16, 1996 between the Company,
Southwest Products and William McKay. (4)
10.19 1995 Stock Option Plan. (5)
10.20 Form of Registration Rights Agreement relating to the Private Placement
Shares. (5)
10.21 Employment Agreement dated as of August 1, 1996 between the Company and
Billy Kan. (5)
10.22 Subscription Agreement (together with Form of Debentures and Guaranty)
dated August 2, 1996 among China Bearing, Asean Capital, China
International Bearing Holdings Limited, the Company, Southwest Products,
Glory Mansion, Wardley China Investment Trust, MC Private Equity Partners
Asia Limited and Chine Investissement 2000. (5)
10.23 Settlement Agreement dated October 16, 1998, among China Bearing, Asean
Capital, China International Bearing Holdings Limited, the Company,
Southwest Products, Sunbase International, Extensive Resources, Glory
Mansion, Wardley China Investment Trust, MC Private Equity Partners Asia
Limited and Chine Investissement 2000. (8)
10.24 Letter of O'Melveny & Myers to U.S. Department of the Treasury dated
December 16, 1998, and reply letter of U.S. Department of the Treasury to
O'Melveny & Myers dated December 17, 1998. (8)
10.25 Stock Purchase Agreement dated January 31, 2000, among William McKay,
Southwest Products, the Company and Samuel T.Mok.
10.26 Supplemental Agreement (together with Settlement Agreement dated October
16, 1998) dated March 1, 2000 among China Bearing Holdings Limited, Asean
Capital Limited, China International Bearing Holdings Limited, the
Company, Southwest Products, Sunbase International (Holdings) Limited,
Extensive Resources Limited, Glory Mansion Limited, Wardley China
Investment Trust, MC Private Equity Partners Asia Limited and Chine
Investissement 2000.
10.27 First Amendment (together with Stock Purchase Agreement dated January 31,
2000) dated February 10, 2000 among William McKay, Southwest Products,
the Company and Samuel T.Mok.
47
<PAGE>
10.28 Assignment of Rights (together with Stock Purchase Agreement dated
January 31, 2000) dated March 24, 2000 among William McKay, Southwest
Products, the Company and Samuel T. Mok.
10.29 Second Amendment (together with Stock Purchase Agreement dated January
31, 2000) dated April 10, 2000 among William McKay, Southwest Products,
the Company and Samuel T.Mok.
10.30 Modification Agreement (together with Supplemental Agreement dated March
1, 2000) dated April 15, 2000 among China Bearing Holdings Limited,
Asean Capital Limited, China International Bearing Holdings Limited, the
Company, Southwest Products, Sunbase International (Holdings) Limited,
Extensive Resources Limited, Glory Mansion Limited, Wardley China
Investment Trust, MC Private Equity Partners Asia Limited and Chine
Investissement 2000.
Statement re computation of per share earnings
11.1 See Note 15 to the Company's consolidated financial statements.
Statement re computation of ratios
12.1 Statement re computation of ratios.
Annual report to security holders, Form 10-Q or quarterly report to security
holders
13.1 None.
Letter re change in certifying accountant
16.1 None.
Letter re change in accounting principles
18.1 None.
Subsidiaries of the Company
21.1 Subsidiaries of the Company (7)
Published report regarding matters submitted to vote of security holders
22.1 None.
48
<PAGE>
Consents of experts and counsel
23.1 None.
Power of attorney
24.1 None.
Financial Data Schedule
27.1 Financial Data Schedule for FY 1999.
27.2 Restated Financial Data Schedule for FY 1998.
27.3 Restated Financial Data Schedule for FY 1997.
Notes:
(1) Filed with the Company's Form 8-K, dated December 22, 1994 and
incorporated herein.
(2) Filed with the Company's Form 8-K/A, dated December 22, 1994 and
incorporated by reference herein.
(3) Filed with the Company's Form 10-K, dated March 3, 1995 and incorporated
by reference herein.
49
<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.
(8) Filed with the Company' Form 10-K, dated June 10, 1999 and incorporated
by reference herein.
(b) Reports on Form 8-K: None.
(c) Reference is made to the list of Exhibits and the Exhibits filed as a
part of this Form 10-K.
(d) Reference is made to the financial statement schedules filed as part of
this Form 10-K.
50
<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: May 15 , 2000 By: /s/ Gunter Gao
-----------------------------------
Gunter Gao, Chairman, President, Chief
Executive Officer, and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES
Date: May 15, 2000 By: /s/ Gunter Gao
------------------------------------------
Gunter Gao, Chairman, President,
Chief Executive Officer, and Director
Date: May 15, 2000 By: /s/ (Roger) Li Yuen Fai
------------------------------------------
(Roger) Li Yuen Fai, Vice President
Chief Financial Officer and Director
Date: May 15, 2000 By: /s/ HongFei Chen
------------------------------------------
HongFei Chen, Director
51
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
SUNBASE ASIA, INC. AND SUBSIDIARIES:
Report of the Independent Auditors 2
Consolidated Balance Sheets as at December 31, 1998 3-4
and December 31, 1999
Consolidated Statements of Operations for the years ended
December 31, 1997, December 31, 1998 and December 31, 1999 5-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, December 31, 1998 and December 31, 1999 7-9
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1997,
December 31, 1998 and December 31, 1999 10
Notes to Consolidated Financial Statements 11-44
</TABLE>
1
<PAGE>
REPORT OF THE INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Sunbase Asia, Inc.
We have audited the accompanying consolidated balance sheets of Sunbase
Asia, Inc. and its subsidiaries as of December 31, 1999 and 1998 and the related
statements of operations, cash flows and changes in shareholders' equity for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the consolidated financial position of Sunbase Asia, Inc. and its
subsidiaries at December 31, 1999 and 1998, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming that
Sunbase Asia, Inc. and its subsidiaries (hereafter referred to as the "Group")
will continue to operate as a going concern. As more fully described in note 2,
the Group incurred a substantial consolidated net loss for the year ended
December 31, 1999 which resulted in a negative cash flow position and a default
in repayment of an installment loan during the year. These conditions raise
substantial doubt about the Group's ability to continue as a going concern.
Management's plans in regard to these matters are described in note 2. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amount
and classification of liabilities that may result from the outcome of this
uncertainty.
ERNST & YOUNG
Hong Kong
May 12, 2000
2
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 1998
AND DECEMBER 31, 1999
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 1998 1999 1999
RMB RMB US$
--------- --------- -------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Unrestricted cash and bank balances 19,075 8,420 1,018
Accounts receivable, net 5 418,261 380,986 46,040
Notes receivable 2,440 2,148 259
Inventories, net 6 572,176 448,121 54,153
Other receivables 26,720 25,848 3,123
Due from related companies 20 283,538 192,589 23,273
--------- --------- -------
Total current assets 1,322,210 1,058,112 127,866
Fixed assets 7 559,245 486,665 58,811
Net assets of discontinued operations 8 42,798 26,193 3,165
Deferred assets 9 9,553 - -
--------- --------- -------
Total assets 1,933,806 1,570,970 189,842
========= ========= =======
</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 AT DECEMBER 31, 1998,
AND DECEMBER 31, 1999 (continued)
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 1998 1999 1999
RMB RMB US$
--------- ------------ ---------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short term bank loans 10 516,232 575,652 69,565
Long term installment loan, current portion 13 117,239 115,797 13,993
Interest payable on installment loan 13 - 4,102 496
Long term bank loans, current portion 14 156,113 168,974 20,420
Accounts payable 141,616 138,840 16,778
Accrued liabilities and other payables 150,939 178,916 21,621
Short term obligations under capital leases 11 20,933 22,774 2,752
Secured promissory note 1,12 24,900 24,825 3,000
Income tax payable 4 50,358 40,703 4,918
Taxes other than income 30,417 75,140 9,081
Due to related companies 20 51,579 83,762 10,123
--------- --------- --------
Total current liabilities 1,260,326 1,429,485 172,747
Long term obligations under capital leases 11 47,550 24,777 2,994
Minority interests 330,409 97,596 11,794
--------- --------- --------
1,638,285 1,551,858 187,535
Shareholders' equity:
Common Stock, par value US$0.001 each,
50,000,000 shares authorized;
14,118,751 (1998: 13,652,084) issued,
and fully paid-up 1,17 115 119 14
Nil (1998: 466,667) shares issuable
on debt restructuring 1,17 2,905 - -
Preferred Stock, par value US$0.001 each,
25,000,000 shares authorized;
Convertible Preferred Stock
- Series A; 36 shares issued and outstanding 1,17 44,533 44,533 5,381
Contributed surplus 17 215,052 217,953 26,338
Reserves 18 28,002 28,052 3,389
Accumulated other comprehensive income 19 1,247 1,377 166
Retained earnings/(accumulated losses) 3,667 (272,922) (32,981)
--------- --------- --------
Total shareholders' equity 295,521 19,112 2,307
--------- --------- --------
Total liabilities and shareholders' equity 1,933,806 1,570,970 189,842
========= ========= ========
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
4
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, DECEMBER 31, 1998
AND DECEMBER 31, 1999
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 1997 1998 1999 1999
RMB RMB RMB US$
--- --- --- ----
Continuing operations
<S> <C> <C> <C> <C> <C>
Net sales to
- third parties 525,802 436,424 445,804 53,874
- related parties 20 171,373 38,886 22,283 2,693
--------- --------- --------- ---------
697,175 475,310 468,087 56,567
Cost of sales
- third parties (463,296) (344,456) (440,638) (53,249)
- related parties 20 (15,793) (18,469) (22,292) (2,694)
--------- --------- --------- ---------
(479,089) (362,925) (462,930) (55,943)
Provisions on inventories 6 (30,600) (100,600) (79,000) (9,547)
--------- --------- --------- ---------
Gross profit/(loss) 187,486 11,785 (73,843) (8,923)
--------- --------- --------- ---------
Selling, general and administrative
expenses
- third parties (67,478) (67,761) (118,117) (14,274)
- related parties 20 (9,423) (14,772) (2,826) (341)
--------- --------- --------- ---------
(76,901) (82,533) (120,943) (14,615)
Interest expense, net
- third parties (59,472) (64,389) (61,524) (7,435)
- related parties 20 (7,723) (2,255) (469) (57)
--------- --------- --------- ---------
(67,195) (66,644) (61,993) (7,492)
Provisions on accounts receivable 5 (16,262) (31,961) (136,170) (16,456)
Provisions on other receivables - (12,404) (3,729) (450)
Provisions on balances due from
related companies 20 - (49,000) (79,000) (9,547)
Provision on impairment of fixed assets - - (15,000) (1,813)
Write-off of the deposit with
a financial institution - (23,750) - -
--------- --------- --------- ---------
Income/(loss) before income taxes 27,128 (254,507) (490,678) (59,296)
--------- --------- --------- ---------
</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, 1997, DECEMBER 31, 1998
AND DECEMBER 31, 1999 (continued)
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 1997 1998 1999 1999
RMB RMB RMB US$
--- --- --- ---
<S> <C> <C> <C> <C> <C>
Income/(loss) before income taxes 27,128 (254,507) (490,678) (59,296)
Provision for income taxes 4 (7,584) - - -
---------- ---------- ---------- ----------
Income/(loss) before minority interests 19,544 (254,507) (490,678) (59,296)
Minority interests (21,006) 111,081 232,813 28,135
---------- ---------- ---------- ----------
Loss from continuing operations (1,462) (143,426) (257,865) (31,161)
Net loss from discontinued
operations, net of income taxes
of RMB7, RMB215 and RMB7 for
the years ended December 31, 1997,
1998 and 1999, respectively 8 (2,722) (2,958) (18,674) (2,257)
---------- ---------- ---------- ----------
(4,184) (146,384) (276,539) (33,418)
========== ========== ========== ==========
Net loss per common share:
Basic and diluted loss from
continuing operations 15 (0.12) (10.46) (18.26) (2.20)
Basic and diluted loss from
discontinued operations 15 (0.21) (0.21) (1.32) (0.17)
---------- ---------- ---------- ----------
Basic and diluted net loss 15 (0.33) (10.67) (19.18) (2.37)
========== ========== ========== ==========
</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, 1997, DECEMBER 31, 1998
AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
(Amounts in thousands)
1997 1998 1999 1999
RMB RMB RMB US$
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss (4,184) (146,384) (276,539) (33,418)
Adjustments to reconcile income to net
cash provided by operating activities from
continuing operations:
Minority interests 21,006 (111,081) (232,813) (28,135)
Share of net losses from discontinued
operations, net of income tax - 2,958 18,674 2,257
Depreciation 70,738 75,040 78,737 9,515
Provision for impairment losses on fixed
assets - - 15,000 1,812
Loss/(gain) on disposal of fixed assets 1,283 (1,349) 3,066 370
Write-off of deferred VAT receivable - - 5,911 714
Amortization of goodwill 827 - - -
Amortization of present value discount
on deferred asset (783) (782) - -
Amortization of deferred debenture issue
expenses 1,318 1,969 - -
Decrease/(increase) in assets:
Accounts receivable (166,609) 55,873 37,275 4,505
Notes receivable 9,022 3,750 292 35
Inventories (808) (105,262) 124,055 14,992
Other receivables 29,745 13,125 872 105
Due from related companies (56,657) (23,039) 89,864 10,859
Deferred assets - 3,643 - -
Increase/(decrease) in liabilities:
Accounts payable (36,325) 26,907 (2,776) (335)
Notes payable (2,800) - - -
Interest payable on convertible debentures 17,153 - - -
Accrued liabilities and other payables 58,839 42,635 7,045 851
Income tax payable 12,024 (34) (9,655) (1,167)
Taxes other than income 21,033 (8,474) 48,365 5,846
Due to related companies (14,415) 32,850 32,183 3,890
-------- -------- -------- -------
Net cash used in operating
activities from continuing operations (39,593) (137,655) (60,444) (7,304)
</TABLE>
continued/...
7
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, DECEMBER 31, 1998
AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
(Amounts in thousands)
1997 1998 1999 1999
RMB RMB RMB US$
<S> <C> <C> <C> <C>
Cash flows from investing activities:
Increase in restricted bank deposit 15,189 - - -
Proceeds from disposal of fixed assets 525 2,196 521 63
Additions to fixed assets (48,287) (16,586) (24,744) (2,990)
Receivable from disposal of
an investment 13,419 - - -
Decrease/(increase) in due from related
companies (38,091) 39,524 1,085 132
Advances to subsidiary proposed for disposal - (3,901) (2,069) (250)
-------- -------- -------- -------
Net cash provided by/(used in) investing
activities (57,245) 21,233 (25,207) (3,045)
-------- -------- -------- -------
Cash flows from financing activities:
Proceeds from short term bank loans 665,373 630,477 684,280 82,692
Repayment of short term bank loans (588,817) (549,648) (624,860) (75,512)
Repayment of installment loans - 4,659 (1,442) (174)
Interest payable or installment loan - - 4,102 495
Proceeds from long term bank loans 11,136 11,336 12,861 1,555
-------- -------- -------- -------
Net cash provided by financing activities 87,692 96,824 74,941 9,056
-------- -------- -------- -------
Net decrease in cash and
cash equivalents (9,146) (19,598) (10,710) (1,293)
Translation differences - - 55 6
Cash and cash equivalents, at beginning
of year 48,489 39,343 19,075 2,305
Cash and cash equivalents from subsidiary
proposed for disposal, at beginning
of year - (670) - -
-------- -------- -------- -------
48,489 38,673 19,075 2,305
-------- -------- -------- -------
Cash and cash equivalents, at end of year 39,343 19,075 8,420 1,018
======== ======== ======== =======
</TABLE>
8
continued/...
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, DECEMBER 31, 1998
AND DECEMBER 31, 1999 (continued)
(Amounts in thousands)
<TABLE>
<CAPTION>
1997 1998 1999 1999
RMB RMB RMB US$
--- --- --- ---
<S> <C> <C> <C> <C>
Income taxes paid - 1,737 9,655 1,167
Interest paid
(net of amounts capitalized in the
fixed assets) 64,748 52,628 65,128 7,870
Non-cash transactions:
Financing lease arrangements 18,788 18,788 17,587 2,125
====== ====== ====== =====
</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, 1997, DECEMBER 31, 1998
AND DECEMBER 31, 1999
(Amounts in thousands, except number of shares)
<TABLE>
<CAPTION>
Accumu-
Shares lated Retained
Number issuable other earnings/
of issued Issued on debt Preferred Contri compre- (accumu-
common common re- stock -buted hensive lated
stock stock structuring Series A Series B surplus Reserves income losses) Total
RMB RMB RMB RMB RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997 12,700,109 107 - 44,533 28,288 186,772 27,866 1,247 154,371 443,184
Reverse stock split
(note 1) 33 - - - - - - - - -
Net comprehensive
loss - - - - - - - - (4,184) (4,184)
Appropriation to
reserves (note 18) - - - - - - 105 - (105) -
---------- ------ ----------- ------ --------- ------- -------- ------- --------- --------
Balance at December 31,
1997 12,700,142 107 - 44,533 28,288 186,772 27,971 1,247 150,082 439,000
Net comprehensive
loss - - - - - - - (146,384) (146,384)
Conversion from
Series B shares
(note 1, 17) 987,004 8 - - (28,288) 28,280 - - - -
Reverse stock split
(note 1) 4 - - - - - - - - -
Reversal of common
stocks in respect of
Series A Warrants
(note 1) (35,066) - - - - - - - - -
Shares issuable on
debt restructuring
(note1) - - 2,905 - - - - - - 2,905
Appropriation to
reserves (note 18) - - - - - - 31 - (31) -
---------- ------ ----------- ------ --------- ------- -------- ------- --------- --------
Balance at December 31,
1998 13,652,084 115 2,905 44,533 - 215,052 28,002 1,247 3,667 295,521
Shares issued on debt
restructuring (note 1) 466,667 4 (2,905) - - 2,901 - - - -
Net comprehensive
income/(loss) - - - - - - - 130 (276,539) (276,409)
Appropriation to
reserves (note 18) - - - - - - 50 - (50) -
---------- ------ ----------- ------ --------- ------- -------- ------- --------- --------
Balance at December 31,
1999 14,118,751 119 - 44,533 - 217,953 28,052 1,377 (272,922) 19,112
========== ====== =========== ====== ========= ======= ======== ======= ========= ========
</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 years ended December 31,
1998, such shares of common stock were reversed during the year ended 31
December 1998.
China Bearing is a holding company which was established to acquire a
100% interest in China International Bearing (Holdings) Company Limited
("China International"). China International was incorporated in Hong Kong
as the holding company of Harbin Xinhengli Development Co. Ltd. ("Harbin
Xinhengli") and Harbin Sunbase Development Co. Ltd. ("Harbin Sunbase"),
Sino-foreign equity joint ventures in the People's Republic of China
("China" or the "PRC") established to acquire, in aggregate, a 51.6%
interest in Harbin Bearing Company Limited ("Harbin Bearing"), which is a
joint stock limited company established in China under the Trial Measures
on Share Companies and the Opinion on the Standardization of Joint Stock
Companies promulgated by the State Council of China and the successor to
the manufacturing operations of Harbin Bearing General Factory, a Chinese
state-owned enterprise established in 1950.
The Series A convertible preferred stock is convertible at the option
of the holder at a conversion rate of 100,000 common stock shares per
Series A share. As preferred shares, they also carry 500,000 votes per
share and are entitled to the same dividend as the common stock
shareholders on the basis as if the preferred shares had been converted to
common stock shares at the conversion rate as noted above.
On June 10, 1996, the Company issued an additional 1,000,000 shares of
common stock with a par value of US$0.001 (RMB0.0083) at US$5.00 (RMB8.3)
per share. The respective share premium of RMB36,077 had been included in
the contributed surplus for the year ended December 31, 1996.
11
<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)
On December 29, 1995, the Company entered into a reorganization
agreement ("Reorganization Agreement") with Southwest Products Company
("Southwest"), a company incorporated in the United States of America, and
the shareholders of Southwest for the acquisition of 100% of the issued
common stock of Southwest. The above transaction has been treated as a
business combination and is accounted for under the purchase method of
accounting. Southwest is a manufacturer of spherical bearings and supplies
its products to the aerospace, commercial aviation and other industries
around the world. Its major customers are in the United States of America.
Pursuant to the Reorganization Agreement, a wholly-owned subsidiary of
the Company was incorporated for the purpose of merging with Southwest
pursuant to a separate merger agreement. In connection with the merger,
the Company issued an aggregate of 6,800 shares of Series B convertible
preferred stock ("Series B stock") to the then shareholders of Southwest or
their designates. As preferred shares, the shares carry 100 votes per
share and are entitled to the same dividend as the common shareholders on
the basis as if the preferred shares had been converted to common stock
shares at the conversion rate as noted above. At the option of the Series
B stockholders, the stock may be redeemed at US$500 per Series B share by
the Company from the proceeds of the next permanent equity offering, the
net proceeds of which will be designated for such redemption. Any shares
not so redeemed will automatically be converted into common stock shares on
the date and in accordance with the formula set forth below. If the
aforesaid public offering or the redemption are not effected within two
years from the date of issue of the Series B stock, the stock will
automatically be converted into common stock on the first business day
after the expiry of the two-year period of the Reorganisation Agreement,
which was on January 19, 1998. Pursuant to the Reorganization Agreement,
the number of shares of common stock converted from the Series B shares are
based on US$500 per Series B shares divided by the lesser of (a) US$5.00 or
(b) the "Average Closing Price" of the common stock of the Company.
Average Closing Price is defined as the closing market prices of the most
recent 60 trading days, with 45 of which traded at a minimum of 2,000
shares. As at January 19, 1998, the entire 6,800 shares of Series B stocks
were automatically converted into 987,004 shares of common stock according
to the conditions as set out above. Thereafter, no preferred Series B
shares were outstanding at December 31, 1998.
12
<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)
On October 16, 1998, the Company, certain of its subsidiaries and
Asean Capital entered into a settlement agreement ("Settlement Agreement")
with the investors of the convertible debentures ("Debenture Holders").
This Settlement Agreement was entered into connection with the replacement
of the US$11,500 convertible debentures ("Convertible Debentures") issued
by China Bearing to the Debenture Holders on August 23, 1996, by an
installment loan ("Installment Loan") as further explained in Note 13 to
the financial statements. Pursuant to one of the conditions set out in the
Settlement Agreement, the Company agreed to issue an additional 466,667
shares of common stock with par value of US$0.001 (RMB0.083) per share in
favour of the Debenture Holders, within 90 days. Such common stocks were
issued on January 14, 1999. The fair value of these additional shares,
being the market price of Company's common stock at the date of the
Settlement Agreement, was accounted for as the issuable shares on debt
restructuring in the balance sheet at December 31, 1998. Such shares were
issued during the year, the respective share premium of RMB2,901 had been
credited to the reserves.
During the year ended December 31, 1998, a review was undertaken by
the Committee on Foreign Investment in the United States (CFIUS) which is
more fully explained in note 8. On December 26, 1998, the Company informed
CFIUS that it intended to divest Southwest. The Company has appointed a US
citizen, as trustee (the "Trustee"), pursuant to a Voting Trust Agreement
dated December 31, 1998 (the "Voting Trust Agreement") between the Company,
Southwest and the Trustee to act as the director of Southwest to manage and
operate Southwest.
Subsequent to the balance sheet date on January 31, 2000, the Company
entered into a Stock Purchase Agreement with a former director, William
McKay ("Stock Purchase Agreement"). On March 24, 2000, Mr McKay assigned
his rights under the Stock Purchase Agreement to McKay, Brothers & Horany
Acquisition Corp. Pursuant to the Stock Purchase Agreement, on April 28,
2000, the Company sold its entire interest in Southwest to McKay, Brothers
& Horany Acquisition Corp. for cash consideration of US$3,500. Upon the
sale Southwest, the Company terminated the trust arrangement with the
Trustee for Southwest. Accordingly, the results of Southwest for the years
ended December 31, 1998 and 1999 have been accounted for as a discontinued
operation.
In addition, 46, 33, 4 and nil shares of common stock were issued from
a reverse stock split for the years ended December 31, 1996, 1997, 1998 and
1999, respectively.
13
<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
Fundamental uncertainty
-----------------------
The Company and its subsidiaries (hereafter referred to as the
"Group") sustained a consolidated net loss after minority interests of
RMB276,539 for the year ended December 31, 1999 (1998: loss of RMB146,384;
1997: loss of RMB4,184). As a result, the Company had sustained a
substantial increase in accumulated losses to RMB272,922 (1998: retained
earnings of RMB3,677; 1997: retained earnings of RMB150,082) as at that
date. In the light of the substantial losses incurred, the Company
experienced negative cash flows during the year in sustaining its existing
operations as well as repaying its existing bank and installment loans
which amounted to an aggregate balances of RMB864,525 as at December 31,
1999. This has resulted in a default in repayment of the Installment Loan
since March 1999. Accordingly, the board of directors of the Company
recognized that immediate remedial actions should be taken in order to
enable the Group to continue its operations as a going concern. In this
regard, the directors have adopted the following measures to improve the
financial position, cash flows, profitability and operations of the Group:
(a) Disposal of Southwest
Pursuant to a resolution dated December 16, 1998, the board of
directors decided to dispose of Southwest and subsequently on January 31,
2000, the Company entered into a Stock Purchase Agreement, as mentioned
above, with McKay, Brothers & Horany Acquisition Corp., a company which is
beneficially owned by a former director of the Company, Mr. William McKay.
Pursuant to the Stock Purchase Agreement, the Company agreed to sell the
entire beneficial interest in Southwest to Mr. William McKay with a
consideration of US$3,500, of which US$165 was incurred as expenditure of
all relating professional fees. Accordingly, the net proceeds received by
the Company was US$3,335 which was used to repay certain debt of the Group,
as detailed in note (b) below. Such sale was completed on April 28, 2000.
(b) Negotiation on the revision of the terms of the Installment Loan
The Group has been conducting negotiations with the creditors of the
Installment Loan (the "Creditors") in relation to the event of default in
repayment of the Installment Loan since March 1999. On March 1, 2000, the
Company entered into a supplemental agreement to the Settlement Agreement
("Supplemental Agreement") with the Creditors. Pursuant to the
Supplemental Agreement, the Group promised, upon the receipt of the
consideration from the disposal of Southwest as mentioned in (a) above, to
pay US$2,600 for the partial settlement of the overdue portion of the
Installment Loan and the Creditors agreed that the remaining undue portion
of the Installment Loan is repayable on schedule as originally set out in
the Settlement Agreement (details of Settlement Agreement refer to note 13
to the financial statements). The repayment of US$2,600 was made on April
28, 2000. The Group is conducting further negotiations with the Creditors
as to the possible restructuring of the Installment Loan.
(c) Renewal of PRC bank loans
In the past the Group has been allowed by the PRC bankers to roll over
the loans due for repayment. Accordingly, consistent with previous years,
the directors believe that the existing bank loans will be renewed in the
forthcoming year.
14
<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, consistent with previous years,
the directors believe that the existing bank loans will be renewed in the
forthcoming year.
(d) Operational and improved profitability measures
The directors have been implementing certain measures designed to
further restore the Group's financial strength. Such measures include,
inter-alia:
i) the rationalization of overheads which comprises certain cost
cutting measures;
ii) the revision of its pricing policy to boost sales;
iii) active negotiations with existing and new bankers for new
banking facilities;
iv) tighter credit controls over debts collections;
v) active negotiations with existing raw material suppliers to
obtain longer credit terms; and
vi) the exploration of new clientele in other provinces in the PRC.
(e) Restructuring of the Group
The directors are evaluating the Group's business strategy which may
involve an alliance with a strategic partner, reorganization of the Group's
operations and/or divestiture of its bearing manufacturing assets and to
diversify into other lines of business in the PRC.
15
<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)
-----------------------
Upon the completion of the disposal of Southwest as mentioned in (a)
and the execution of the Supplemental Agreement as mentioned in (b), above,
the Group could retained a net receipt of US$735 as additional working
capital of the Group, to ease out the negative cash flows. After taking
into account the existing banking facilities, and subject to the successful
negotiation with the creditors of the Installment Loan to reach a workable
solution, the directors believe that the Group will have sufficient working
capital for its current requirements for a period of one year after the
balance sheet date. Accordingly, the financial statements have been
prepared on a going concern basis.
Basis of consolidation
----------------------
These consolidated financial statements incorporate the results of
operations of the Group for the three-year period ended December 31, 1999.
All material intra-group transactions and balances have been eliminated on
consolidation.
The consolidated financial statements were prepared in accordance with
U.S. GAAP. This basis of accounting differs from that used in the statutory
and management accounts of Harbin Bearing which were prepared in accordance
with the accounting principles and the relevant financial regulations
applicable to joint stock enterprises as established by the Ministry of
Finance of China ("PRC GAAP").
The principal adjustments made to conform the statutory accounts of
Harbin Bearing to U.S. GAAP included the following:
. Revenue recognition;
. Provision for doubtful accounts receivable;
. Provision for inventory obsolescence;
. Valuation of inventories;
. Accounting of assets financed under capital leases as assets of the
Company together with the corresponding liabilities; and
. Deferred tax.
16
<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 readers,
certain elements of these financial statements have been translated into
United States dollars prevailing at the People's Bank of China on December
31, 1999 which was US$1.00 = RMB8.275. No representation is made that the
Renminbi amounts could have been, or could be, converted into United States
dollars at that rate or any other certain rate on December 31, 1999.
(a) Cash and bank balances
Cash and bank balances include cash on hand and demand deposits with
banks with an original maturity of three months or less.
(b) Inventories
Inventories are stated at the lower of cost, on a first-in,
first-out basis, or market value. Work in progress and finished goods
include direct materials, direct labor and an attributable proportion of
production overheads.
(c) Fixed assets and depreciation
Property, machinery and equipment are stated at cost less accumulated
depreciation. Depreciation of property, machinery and equipment is
computed using the straight-line method over the assets' estimated useful
lives. The estimated useful lives of property, machinery and equipment are
as follows:
Buildings 20 years
Machinery and equipment 8-10 years
Motor vehicles 3-5 years
Furniture, fixtures and office equipment 5 years
(d) Construction in progress
Construction in progress represents factory buildings, plant and
machinery and other fixed assets under construction and is stated at cost.
Cost comprises direct costs of construction as well as interest charges on
borrowed funds. Capitalization of interest charges ceases when an asset is
ready for its intended use. Construction in progress is transferred to
fixed assets upon commissioning when it is capable of producing saleable
output on a commercial basis, notwithstanding any delays in the issue of
the relevant commissioning certificates by the appropriate PRC authorities.
17
<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 standard in Statement of
Financial Accounting Standards No.109, "Accounting for Income Taxes".
(f) Foreign currency translation
Foreign currency transactions are translated into Renminbi at the
applicable floating rates of exchange quoted by the People's Bank of China,
prevailing at the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies are translated into Renminbi
using the applicable exchange rates prevailing at the balance sheet date.
The Company's share capital is denominated in United States dollars
and the reporting currency is Renminbi. For financial reporting purposes,
the United States dollars share capital amounts have been translated into
Renminbi at the applicable rates prevailing on the dates of receipt.
(g) Capital leases
Leases that transfer substantially all the rewards and risks of
ownership of assets to the Group, other than legal title, are accounted for
as capital leases. At the inception of a capital lease, the cost of the
leased asset is capitalized at the present value of the minimum lease
payments and recorded together with the obligation, excluding the interest
element, to reflect the purchase and financing. Assets held under capital
leases are included in fixed assets and depreciated over the estimated
useful lives of the assets. The finance costs of such leases are charged
to the profit and loss account so as to provide a constant periodic rate
over the lease terms.
Leases where substantially all the rewards and risks of ownership of
assets remain with the lessor are accounted for as operating leases.
Rentals applicable to such operating leases are charged to the profit and
loss account on the straight-line basis over the lease terms.
(h) Goodwill
Goodwill represents the excess of the consideration paid for the
purchase of a subsidiary over the fair value of the net assets of
businesses acquired and is being amortized over a fifteen-year period. The
carrying value of goodwill is assessed on an ongoing basis and provision is
made to the extent that there is permanent diminution in value.
18
<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 1999, which established
standards for the report and display of comprehensive income/loss and its
components. SFAS 130 requires foreign currency translation adjustments to
be included in other comprehensive income/loss. Comprehensive income/loss
is reported in the consolidated statements of shareholders' equity.
(l) Segment and related information
In 1998, the Group adopted Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related
Information"("SFAS 131"), which established standards for the way that
information about operating segments is reported. SFAS 131 also established
standards for related disclosures about products and services, geographical
areas and major customers. The information for 1997 has been revised to
conform to SFAS 131.
(m) Long-lived assets
Statement of Financial Accounting Standard No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" ("SFAS 121") requires impairment losses be recognized for
long-lived assets, whether these assets are held for disposal or continue
to be used in operations, when indicators of impairment are present and the
fair values of these assets are estimated to be less than their carrying
amounts.
(n) Comparative amounts
Certain comparative amounts have been reclassified to conform
with the current year presentation.
19
<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
Sunbase Asia, Inc. was incorporated in the State of Nevada in the
United States of America. The Company is subject to U.S. federal tax on its
income. Nevada does not impose any tax on corporations organized under its
laws.
China Bearing was incorporated under the laws of Bermuda and, under
current Bermudan law, is not subject to tax on income or on capital gains.
China International was incorporated under the Hong Kong Companies
Ordinance and under the current Hong Kong tax law, therefore any income
arising in and deriving from businesses carried on in Hong Kong will be
subject to tax. No tax will be charged on dividends received and capital
gains earned.
Harbin Xinhengli and Harbin Sunbase are subject to Chinese income
taxes at the applicable tax rates of 30% for Sino-foreign equity joint
venture enterprises. Dividends received from the joint venture enterprises
by China Bearing are exempt from any Chinese income taxes.
The applicable tax rate for joint stock limited enterprises in China
is 33%, which is levied on the taxable income as reported in the statutory
accounts adjusted for taxation in accordance with the relevant income tax
laws applicable to joint stock limited enterprises. The income of Harbin
Bearing, being a joint stock limited company registered in the Special
Economic and Technological Development Zone in the Municipal City of
Harbin, is normally subject to a maximum income tax rate of 20%. Pursuant
to the same income tax basis applicable to the Special Economic and
Technological Development Zone, Harbin Bearing has been designated a high
technology production enterprise and is entitled to a special income tax
rate of 15%.
The Company has undertaken not to require China Bearing to make any
distribution of dividends and the directors of Harbin Xinhengli and Harbin
Sunbase have decided not to distribute any dividend income related to
income earned for the year received from Harbin Bearing outside of China.
As a result, deferred income taxes have not been accrued in the financial
statements in respect of income distributions. At December 31, 1998 and
1999, no undistributable earnings of the Chinese subsidiaries of the Group
as accumulated losses were carried forward.
20
<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,
1997 1998 1999
RMB RMB RMB
<S> <C> <C> <C>
PRC statutory tax rate 15% 15% 15%
Computed expected tax/(benefit) 4,069 (38,171) (73,595)
Net increase of valuation allowance - 34,004 73,085
Non-deductible losses 3,515 4,167 510
------- ------- -------
Income tax expense for the year 7,584 - -
======= ======= =======
</TABLE>
The deferred tax asset of the Group at December 31, 1998 and 1999 is
comprised of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
RMB RMB
<S> <C> <C>
Deferred tax asset:
Net operating loss carry-forwards 34,004 107,089
Less: Valuation allowance for deferred tax asset (34,004) (107,089)
-------- --------
-- --
======== ========
</TABLE>
Net operating losses were carried forward from Harbin Bearing. As
Harbin Bearing had substantial losses during the years ended December 31,
1999, utilization of deferred tax benefits will depend on the profitability
of these operations in future years. The Company believes that a valuation
allowance covering 100% of its deferred tax assets is appropriate in the
circumstances.
21
<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,
1998 1999
RMB RMB
<S> <C> <C>
Accounts receivable - trade 485,104 583,999
Less: Allowance for doubtful debts (66,843) (203,013)
-------- --------
Accounts receivable, net 418,261 380,986
======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
1997 1998 1999
RMB RMB RMB
<S> <C> <C> <C>
Movement of allowance for doubtful debts:
Balance as at January 1, 17,925 34,882 66,843
Provided during the year 17,040 31,961 136,170
-------- -------- ---------
Balance as at December 31, 34,965 66,843 203,013
======== ======== =========
</TABLE>
6. INVENTORIES
Inventories comprise:
<TABLE>
<CAPTION>
December 31,
1998 1999
RMB RMB
<S> <C> <C>
Raw materials 148,470 120,515
Work in progress 140,238 126,888
Finished goods 419,668 412,018
-------- --------
708,376 659,421
Less: Provision (136,200) (211,300)
-------- --------
Inventories, net 572,176 448,121
======== ========
</TABLE>
22
<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,
1997 1998 1999
RMB RMB RMB
<S> <C> <C> <C>
Movement of inventory provision:
Balance as at January 1, 5,415 35,600 136,200
Provided during the year 33,255 100,600 79,000
Obsolete inventories sold during the year - - (3,900)
------ ------- -------
Balance as at December 31, 38,670 136,200 211,300
====== ======= =======
</TABLE>
7. FIXED ASSETS
<TABLE>
<CAPTION>
December 31,
1998 1999
RMB RMB
<S> <C> <C>
Buildings 83,790 94,964
Machinery and equipment 572,396 594,835
Motor vehicles 22,065 20,276
Furniture, fixtures and office equipment 6,611 8,254
Construction in progress 141,766 114,456
-------- --------
826,628 832,785
Less: Accumulated depreciation (267,383) (331,120)
-------- --------
559,245 501,665
Less: Provision for impairment - (15,000)
-------- --------
559,245 486,665
======== ========
</TABLE>
The total amount of interest capitalized during the year and included
in the above fixed assets is RMB7,248 (1998: RMB3,892 and 1997: RMB18,207).
During the year, the Group made a provision for impairment amounting
to RMB15,000 to write down the Group's long lived assets, fixed assets, to
their fair value at December 31, 1999. The fair value of the fixed assets
is determined by the Company's directors based on the future usage of the
fixed assets and the possible disposal value of such assets.
23
<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>
1998 1999
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 (99,069) (117,861)
-------- --------
56,376 37,584
======== ========
</TABLE>
8. DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
1998 1999
RMB RMB
<S> <C> <C>
Cost of investment 28,288 28,288
Share of accumulated losses of the unconsolidated subsidiary (15,160) (33,834)
------- -------
Net carrying value 13,128 (5,546)
Due from the unconsolidated subsidiary 29,670 31,739
------- -------
42,798 26,193
======= =======
</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.
24
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
8. DISCONTINUED OPERATIONS (continued)
The entering of the Stock Purchase Agreement by the Company for the
sale of Southwest gave rise to the disposal of a segment of a business in
accordance with the APB 30. The segment that was held for disposal was all
identified as the net assets of Southwest. Pursuant to the Stock Purchase
Agreement, the disposal of Southwest was completed in April 2000. The net
assets of Southwest at December 31, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
1998 1999
RMB RMB
<S> <C> <C>
Cash and bank balances 3,724 1,248
Inventories 11,208 16,819
Accounts receivable 8,061 3,413
Prepayment, deposit and other receivable 301 199
------- -------
Current assets 23,294 21,679
Property, plant and equipment, net 13,150 11,849
Goodwill * 9,928 -
Long term investment 428 151
------- -------
Total assets 46,800 33,679
------- -------
Accounts payable (7,117) (2,225)
Other payable (2,730) (5,178)
Taxes other than income (56) (76)
Income taxes (488) (7)
Due to holding company (29,670) (31,739)
------- -------
Current liabilities (33,672) (39,225)
------- -------
Net assets/(deficiency in assets)
at December 31, 1998 and 1999 13,128 (5,546)
======= =======
* Goodwill of Southwest comprised:
Cost 10,760 10,760
Less : Amortisation (832) (832)
Less: Write off - (9,928)
------- -------
9,928 -
======= =======
</TABLE>
The net sales of Southwest for the three years ended December 31, 1997,
1998 and 1999 were RMB44,521, RMB44,595 and RMB37,613 respectively.
In 1998, the directors estimated that the net proceeds from the disposal of
Southwest would cover the net assets and future operating losses of
Southwest. However, due to the final consideration of this disposal as
referred to the Stock Purchase Agreement was lower than that previously
predicted by the directors, consequently, a write off of the goodwill of
Southwest was resulted in order to write down the carrying value of
Southwest to the approximate realizable value. The operating loss of
Southwest for the year ended December 31, 1999 was RMB8,746.
25
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
8. DISCONTINUED OPERATIONS (continued)
Pursuant to the Stock Purchase Agreement, the Company received net proceeds
of approximately US$3,335, being the gross consideration of US$3,500 less
US$165 of relating to professional fees incurred for the sale transaction,
upon the completion subsequent to the balance sheet date in April 2000. The
Group retained a share of Southwest's net assets amounting to RMB26,193
(US$3,165) at the balance sheet date, which did not exceed the net proceeds
of US$3,335, and consequently no anticipated loss on disposal of Southwest
was noted. Accordingly, no provision for loss on this disposal was made
during the year ended December 31, 1999.
9. DEFERRED ASSETS
<TABLE>
<CAPTION>
December 31,
1998 1999
RMB RMB
<S> <C> <C>
Deferred valued-added tax ("VAT") receivable 38,860 38,860
Less: Offset against VAT payable (29,307) (32,949)
------- -------
9,553 5,911
Less: Write off - (5,911)
------- -------
9,553 -
------- -------
Deferred debenture issue expenses 3,733 3,733
Less: Amortization (3,733) (3,733)
------- -------
- -
------- -------
9,553 -
======= =======
</TABLE>
The deferred VAT receivable arose from the introduction of the new PRC
VAT system on January 1, 1994. This asset was calculated and accounted for
in accordance with a governmental directive by applying the 14% VAT rate to
certain inventory values as at December 31, 1993, with the effect of
reducing the value of certain opening inventories of Harbin Bearing as at
January 1, 1994 by the same amount. A detailed directive regarding the
utilization of the deferred VAT receivable was issued in May 1995 by the
Ministry of Finance and the State General Tax Bureau, pursuant to which the
Group was permitted to offset the balance of RMB38,860 against its VAT
payable within a period of five years starting from January 1, 1995.
Accordingly, a discount has been applied using Harbin Bearing's average
borrowing rate over the estimated period of recovery. The provision for
the net present value discount was fully amortized for the four years ended
December 31, 1998. Because there is no offsetting allowable from January
1, 2000, the net balance of RMB5,911 at December 31, 1999 not yet offset
against the VAT payable has been fully written off to income statement for
the year ended December 31, 1999.
26
<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 (continued)
Deferred debenture issue expenses represented costs incurred for the
issue of convertible debentures on August 23, 1996. The total amount of
deferred expenses incurred of RMB3,733 were amortized over the terms of the
debentures of three years. On October 16, 1998, pursuant to the Settlement
Agreement entered into between the Group and the Debenture Holders, the
Debenture Holders agreed not to exercise their rights in accordance with
the terms and conditions of the Subscription Agreement and to replace the
convertible debentures by the Installment Loan. Accordingly, all of the
remaining unamortized deferred debenture issue expenses were written off
during the year ended December 31, 1998.
10. SHORT TERM BANK LOANS
The short term bank loans bore interest at a weighted average rate of
8.588% and 8.085% per annum as at December 31, 1998 and 1999 respectively,
and were repayable within one year.
11. OBLIGATIONS AND COMMITMENTS
(a) Obligations under capital leases
Harbin Bearing leases machinery and equipment, furniture, fixtures and
office equipment and motor vehicles from Harbin Precision Machinery
Manufacturing Company ("Harbin Precision"), a company wholly-owned by
Harbin Bearing Holdings Company ("Harbin Holdings"), a separately
established enterprise under the supervision and control of the Machine
Bureau, which received 33.3% of the new shares of Harbin Bearing. These
leases are accounted for as capital leases which have lease terms ranging
from five to eight years.
The lease obligations for the machinery and equipment, furniture,
fixtures and office equipment and motor vehicles have an implicit annual
interest rate of 8.46%. The scheduled non-cancellable future minimum lease
payments as at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
December 31,
1999
RMB
<S> <C>
Year ending December 31,
2000 25,927
2001 25,927
-------
Total minimum lease payments 51,854
Less: Amount representing interest (4,303)
-------
Present value of minimum lease payments 47,551
Less: Current portion (22,774)
-------
24,777
=======
</TABLE>
27
<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 lease commitments payable in the next five
years are as follows:
<TABLE>
<CAPTION>
December 31,
1999
RMB
<S> <C>
Year ending December 31,
2000 2,508
2001 2,508
2002 2,508
2003 2,508
2004 2,508
------
12,540
======
</TABLE>
The lease rentals recorded as expenses in respect of operating leases
during the year amounted to RMB6,259 (1998:RMB6,259 and 1997: RMB6,259).
The terms of the current operating lease in respect of the buildings
expired on December 31, 1998. Up to the date of these financial
statements, no renewed agreement had been signed. The current annual
rental of the building is RMB3,751 (US$452) (1998: RMB3,751 (US$452)).
As at December 31, 1999, the Group had no outstanding commitments for
capital expenditure.
12. SECURED PROMISSORY NOTE
The secured promissory note (the "Note") was issued in 1995 to Asean
Capital in connection with the Share Exchange Agreement as detailed in Note
1. It was secured by a continuing security interest in and to all of the
Company's title and interest in the outstanding capital stock of China
Bearing.
The Note is denominated in United States dollars and bears interest at
8% per annum.
28
<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 13 below, Asean Capital made an irrevocable and
unconditional undertaking that it will not demand repayment of the
Promissory Note unless the Company has sufficient cash flow for working
capital, debt repayment and capital expenditure for the ensuing twelve-
month period and the repayment will only be made according to the repayment
schedule defined in the Subscription Agreement. According to the repayment
schedule as set out in the Subscription Agreement, RMB24,900 (US$3,000) is
repayable in two Installments during the twelve-month periods ended July
31, 1998 and July 31, 1999.
This repayment schedule was further governed by the condition as set
out in the Settlement Agreement entered into between the Company, certain
of its subsidiaries, Asean Capital and the Debentures Holders, as detailed
in Note 13 below, that Asean Capital agreed not to demand for the repayment
of the outstanding Promissory Notes within the period of the Installment
Loan being executed unless it has prior approval by the Debenture Holders.
13. CONVERTIBLE DEBENTURES AND INSTALLMENT LOAN
Pursuant to the subscription agreement entered into between the
Company, certain of its subsidiaries, Asean Capital and certain
institutional inventors, dated August 2, 1996 (the "Subscription
Agreement"), China Bearing issued US$11,500 convertible debentures
("Convertible Debentures") to certain institutional investors on August 23,
1996. Unless the Convertible Debentures were converted, they were due and
were payable in August 1999 (the "Maturity Date").
The obligations of China Bearing under the Convertible Debentures were
guaranteed by the Company, Asean Capital Limited, China International
Bearing Holding Limited and Southwest Products Company (hereinafter
collectively referred to as the "Guarantors"). The Guarantors have given
certain negative pledges over the creation of securities interest for as
long as any of the Convertible Debentures remain outstanding.
The Convertible Debentures bear interest at the rate of the higher of
(i) 5% per annum (net of withholding tax, if applicable) and (ii) the
percentage of the dividend yield calculated by reference to dividing the
annual dividend declared per share of common stock of the Company by the
Conversion Price.
The Convertible Debentures are required to be redeemed on the Maturity
Date at their principal amount then outstanding, together with any accrued
but unpaid interest, together with an amount that would enable the
investors to yield an aggregate internal rate of return ("IRR") of 12% per
annum on the cost of their investment.
29
<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 INSTALLMENT LOAN (continued)
However, due to the occurrence of certain events of default, as
defined in the Subscription Agreement during the year ended December 31,
1997, the Convertible Debentures shall automatically become immediately due
and payable in full by the Company at the principal amount outstanding
together with the accrued but unpaid interest together with an amount that
would enable the investors to yield an aggregate IRR on their investment of
19.75% per annum. As a result, interest has been accrued in the financial
statements for the year ended December 31, 1997 at the rate of 19.755 per
annum.
On October 16, 1998, the same parties who entered into the
Subscription Agreement further entered into a settlement agreement
("Settlement Agreement") of which the Debenture Holders agreed to replace
the Convertible Debentures by an Installment Loan under the conditions that
(i) China Bearing shall repay by Installments to the Debenture Holders the
principal amounting to US$13,173 (equivalent to RMB109,340) at date of the
Settlement Agreement and (ii) the Company shall issue in favour of the
Debenture Holders 466,667 shares of common stocks with zero consideration.
The principal balance as set out above was determined by the outstanding
balance of the Convertible Debentures amounting to US$11,500 (equivalent to
RMB95,450) plus the unpaid interest expenses of US$1,673 up to the date of
the Settlement Agreement. The unpaid interest expenses were calculated at
the rate of 12.375% on the principal amount of the Convertible Debentures,
net of the payment made to the Debenture Holders during the year. The
interest rate of 12.375% was derived from a wavier of 7.375% from the
19.75% noted above, as mutually agreed between the Debenture Holders and
the Group pursuant to the Settlement Agreement.
This modification of terms of the debts thus constitutes troubled debt
restructuring under Statement of Financial Accounting Standard No. 15
"Accounting by Debtors and Creditors for Troubled Debt Restructurings"
("FAS 15"). Under FAS15 a debtor shall account for troubled debt
restructuring, when there is modification of terms of the debts, at the
carrying amount of the payable at the time of the restructuring unless the
carrying amount exceeds the total future cash payments specified by the new
terms.
The principal balance of the Installment Loan was restated to the face
value of the Convertible Debenture together with any unpaid interest
expenses calculated at the rate of 19.75% as entitled in the Subscription
Agreement, after adjusting the fair value of the common stocks issuable on
debt restructuring. The fair value of the common stocks issuable on debt
restructuring was RMB2,905, being the market value of the Company's trading
stocks at October 16, 1998. Thereafter, the interest expenses of the
Installment Loan were charged to the profit and loss account on a
discounted basis.
This Installment Loan bears an effective interest rate of 5.6% per
annum and is repayable with a repayment schedule as set out in the
Settlement Agreement.
30
<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 INSTALLMENT LOAN (continued)
Pursuant to an undertaking as a supplement to the Settlement
Agreement, Asean Capital unconditionally and irrevocably guarantees to
each of the Debenture Holders that for so long as any of the obligations of
the Group under the Settlement Agreement remain outstanding, it will
undertake the full amount due and ensure the punctual payment of all sums
now or subsequently payable under the Settlement Agreement by China
Bearing. Asean Capital also agrees to perform or procure such payment
obligations of China Bearing. Pursuant to the Settlement Agreement, the
holding company of Asean Capital, Sunbase International Holdings Limited
("Sunbase International") undertakes to each of the Debenture Holders that
Sunbase International shall not reduce its current issued beneficial
shareholdings (being 100%) in the share capital of Asean Capital. In
addition, one of the subsidiaries of Sunbase International, Extensive
Resources Limited ("ERL") further granted a charge over 1,000,000 issued
shares in the capital of Tianjin Development Holdings Limited held by ERL
in favour of the trustee for and on behalf of the Debenture Holders.
Tianjin Development Holdings Limited is a company listed on the Hong Kong
Stock Exchange. The market value of the pledged shares was RMB4,334 at
December 31, 1999.
The maturity of the Installment Loan based on the original repayment
schedule as set out in the Settlement Agreement is as follows:
<TABLE>
<CAPTION>
RMB
<S> <C>
Payable for year ended/ending December 31,
1999 21,579
2000 35,450
2001 58,768
-------
115,797
=======
</TABLE>
Since March 1999, default in repayment has been noted and, in
accordance with the Settlement Agreement, the creditors of the Installment
Loan are entitled to accelerate repayment of the principal amount
outstanding together with the unpaid interest. Accordingly, the unpaid
balance of the Installment Loan was classified as a current liability as at
December 31, 1999.
However, subsequent to the balance sheet date, on March 1, 2000, the
same parties of the Settlement Agreement further entered into a
supplemental agreement (the "Supplemental Agreement") stating that (i) the
Group shall, upon the receipt of the proceeds from the disposal of
Southwest pursuant to the Stock Purchase Agreement as mentioned in note 2
above, repay US$2,600 for the partial settlement of the overdue portion of
the Installment Loan; (ii) the creditors requested that the remaining
portion of the overdue Installments shall be immediately due but agreed not
to demand immediate settlement of the undue portion which shall remain at
the original repayment schedule, as set out in the Settlement Agreement;
(iii) one of the guarantors, ERL agreed to grant a new charge on certain
pledged listed shares, as mentioned above, in favor of the trustee of the
Creditors; and (iv) the guarantee from Southwest shall be released upon the
settlement of US$2,600, as mentioned above.
31
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
14. LONG TERM BANK LOANS
Long term bank loans are principally loans borrowed to finance the
construction in progress. The loans are unsecured, and bear fixed interest
rates ranging from 3.7% to 15.22% per annum. The current portion of the
loans together with the overdue portion of the current portion of the long
term loans carried forward from last year, are included in current
liabilities.
15. NUMBER OF SHARES/EARNINGS PER SHARE
In 1998, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share.
The exercise of outstanding warrants is not included as part of the
assumption in the calculation of diluted earnings per share as the share
prices of the Company for the years ended December 31, 1997, 1998 and 1999
were lower than the exercise prices.
The computations of basic and diluted earnings/loss per shares are as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
1997 1998 1999
RMB RMB RMB
<S> <C> <C> <C>
Basic and diluted
Net loss
- continuing operations (1,462) (143,426) (257,865)
- discontinued operations (2,722) (2,958) (18,674)
---------- ---------- ------------
(4,184) (146,384) (276,539)
========== ========== ============
Weighted average number of
common shares outstanding:
Share of common shares outstanding
on January 1, 12,700,109 12,700,142 13,652,084
Shares issued as a result of reverse stock split 33 4 -
Conversion from Series B preferred shares - 935,626 -
Reversal of common shares in respect of Series
A Warrants expired on June 30, 1998 - (17,533) -
466,667 shares of common stock issuable
on debt restructuring on October 16, 1998 - 97,169 466,667
---------- ---------- ------------
Total weighted average number of common
shares outstanding 12,700,142 13,715,408 14,118,751
========== ========== ============
</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,
1997 1998 1999
RMB RMB RMB
<S> <C> <C> <C>
Loss per share
-continuing operations (0.12) (10.46) (18.26)
-discontinued operations (0.21) (0.21) (1.32)
--------- --------- ---------
(0.33) (10.67) (19.58)
========= ========= =========
</TABLE>
The diluted loss per share for 1997, 1998 and 1999 was the same as the
basic loss per share because there was an antidilution effect which reduced
the loss per share. For the years ended December 31, 1998 and 1999,
antidilution resulted from the substantial losses incurred by the Group
during the years. For the year ended December 31, 1997, the calculation
which resulted in such an anti-dilution was based on the assumption that
the conversion rights under the Convertible Debentures were fully
exercised, at the adjusted exercise price, as stated in note 13, and the
redemption of preferred shares, both on January 1, 1998.
16. FOREIGN CURRENCY EXCHANGE
The RMB is not freely convertible into foreign currencies.
Since January 1, 1994, a single rate of exchange has been quoted daily
by the People's Bank of China (the "Unified Exchange Rate"). However, the
unification of the exchange rates does not imply convertibility of RMB into
US$ or other foreign currencies. All foreign exchange transactions continue
to take place either through the People's Bank of China or other banks
authorized to buy and sell foreign currencies at the exchange rates quoted
by the People's Bank of China.
17. CONTRIBUTED SURPLUS
The respective features of common stock and convertible preferred
stock are detailed in Note 1 to the financial statements.
On June 10, 1996, the Company issued an additional 1,000,000 shares of
common stock with a par value of RMB 0.0083 (US$0.001) at RMB 41.5
(US$5.00) per share. The total share premium on the issue of new shares
amounted to RMB36,077 after deducting the direct expenses arising on the
issue of these shares of RMB5,415 from the gross premium of RMB41,492.
33
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
17. CONTRIBUTED SURPLUS (continued)
During the year ended December 31, 1998, 987,004 shares of common
stock were converted from the Preferred Series B shares pursuant to the
conditions as set out in the Reorganization Agreement as detailed in Note 1
to the financial statements. The total share premium arising from this
conversion was RMB28,280.
With regards to the additional 466,667 shares of common stock issuable
on debt restructuring, no such shares were issued until January 14, 1999
and consequently, the contributed surplus of RMB2,was recognized for the
year ended December 31, 1999.
18. DISTRIBUTION OF PROFITS AND APPROPRIATIONS TO RESERVES
According to the relevant laws and regulations for joint stock limited
enterprises and Harbin Bearing's articles of association, the distribution
of profits by Harbin Bearing is based on the profits as reported in its
statutory accounts prepared under PRC GAAP after the following allocations
and appropriations:
(a) making up any accumulated losses;
(b) transferring 10% of its profit after tax to the statutory surplus
reserve;
(c) transferring 5% to 10% of its profit after tax to a collective
welfare fund; and
(d) transferring a certain amount of its profit after tax to a
discretionary surplus reserve.
The following appropriations were made and are further described
below:
Year ended December 31,
1997 1998 1999
RMB RMB RMB
Statutory surplus reserve 70 21 33
Collective welfare fund 35 10 17
---- ---- ----
105 31 50
==== ==== ====
The collective welfare fund must be used for capital expenditure on
staff welfare facilities. Such facilities are for staff use, but are owned
by Harbin Bearing. The distributable retained earnings of the Group as at
December 31, 1999, after taking into account the above restrictions and
appropriations and based on the PRC statutory accounts of Harbin Bearing,
amounted to RMB81,534 (1998: RMB81,427).
The reserves retained by the Chinese subsidiaries of the Group
amounted to RMB28,052 (1998: RMB28,002).
34
<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, 1997, 1998 and 1999
represented cumulative foreign translation adjustment.
20. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
During the year, the Group had transactions with a number of related
parties. The major related party transactions are summarized as follows and
are described in further detail below:
<TABLE>
<CAPTION>
Year ended December 31,
Nature of transactions Notes 1997 1998 1999
RMB RMB RMB
<S> <C> <C> <C> <C>
Revenue:
Sales of products (a) 171,373 38,886 22,283
Interest income (b) 2,547 6,362 6,401
======= ====== ======
Capital expenditure:
Leases of equipment capital payments (c) 18,788 18,788 17,587
Operating leases of motor vehicles,
furniture, fixtures and equipment (c) - - 1,256
Lease of buildings (d) 3,751 3,751 3,751
Land use rights (e) 2,508 2,508 2,508
======= ====== ======
Expenses:
Management and administrative services (f) 2,550 7,486 4,868
Trademark royalty fees (g) 2,924 2,669 2,346
Pension and retirement plan expenses (h) 19,742 23,086 17,904
Finance charges on leases of equipment (c) 8,395 6,742 4,995
Interest on promissory note (i) 1,875 1,875 1,875
======= ====== ======
</TABLE>
35
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
20. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
(a) Balances with related companies
<TABLE>
<CAPTION>
1998 1999
Notes RMB RMB
<S> <C> <C> <C>
Balances due from related companies
-----------------------------------
Trade receivables
-----------------
Harbin Bearing Import & Export Company
("HBIE") (i) 100,742 106,834
Xin Dadi Mechanical and Electrical
Equipment Company ("Xin Dadi") (i) 135,165 128,689
-------- --------
235,907 235,523
-------- --------
Advances to related companies
-----------------------------
Sunbase Resources Limited
("Sunbase Resources") (ii) 47,621 42,577
Harbin Everising Construction &
Development Limited ("Harbin Everising") (ii) 45,450 -
Harbin Precision (ii) 1,150 2,407
HBIE (ii) 719 (11,775)
Xin Dadi (ii) 692 1,295
Other related companies (ii) 999 1,562
-------- --------
96,631 36,066
-------- --------
Total balances 332,538 271,589
Provision (49,000) (79,000)
-------- --------
283,538 192,589
======== ========
</TABLE>
Movement of the provision for balances due from related companies is analyzed as
follows:
<TABLE>
<CAPTION>
1998 1999
RMB RMB
<S> <C> <C>
Balance at beginning of year - 49,000
Provided for the year 49,000 79,000
Write-off against provision - (49,000)
-------- --------
Balance at end of year 49,000 79,000
======== ========
</TABLE>
36
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
20. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
(a) Balances with related companies (continued)
Balances due to related companies
---------------------------------
1998 1999
RMB RMB
Harbin Bearing (Holding) Company (iii) 49,078 80,192
Other related companies 2,501 3,570
-------- --------
51,579 83,762
======== ========
Notes:
(i) Significant sales to related companies
Harbin Bearing made sales of RMB7,711 (1998: RMB9,566; 1997: RMB91,287) and
RMB14,572 (1998: RMB 29,320; 1997: RMB80,086) to HBIE and Xin Dadi, related
companies owned by the Harbin Municipal Government, respectively, during
the current year. As at December 31, 1999, the amounts of trade receivables
from HBIE and Xin Dadi included in the amounts due from related companies
were as above.
(ii) Advances to related companies
Sunbase Resources is a related company of the Group in which the directors
and/or shareholders have a beneficial interest. Harbin Everising
Construction and Development Limited (formerly known as Sunbase
Construction and Development) is a joint venture established in the PRC of
which Sunbase International (Holdings) Limited, another related company of
the Group, has equity interests. Other related companies are owned by the
Harbin Municipal Government.
The above balances are unsecured, repayable within one year and are
interest-free except for the balance due from Sunbase Resources. Pursuant
to an agreement dated 1 January, 1997 between the Company and Sunbase
Resources, interest was charged on the average balance at a rate of 8%
(1998: 10%) per annum. Total interest earned in respect of such balances
was RMB3,371 (1998: RMB3,280; 1997: RMB2,547) for the year ended December
31, 1999. Asean Capital has undertaken not to demand repayment of the
principal and interest of the Note, as set out in note 12, until the amount
due from Sunbase Resources has been repaid to the Company.
(iii) Harbin Bearing (Holding) Company ("Harbin Holdings") is a minority
shareholders of Harbin Bearing. The balance due to it represented cash
received by Harbin Bearing on behalf of Harbin Holdings in connection with
the accounts receivable balances owed by Harbin Holdings.
37
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
20. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
Notes:
(b) Interest income
Notes 1997 1998 1999
RMB RMB RMB
Sunbase Resources Limited
("Sunbase Resources") (i) 2,547 3,280 3,371
Southwest (ii) - 3,082 3,030
------- ------- -------
2,547 6,362 6,401
======= ======= =======
Notes:
(i) Interest was charged on the average balance due from Sunbase
Resources at a rate of 8% (1998: 10%) per annum.
(ii) Interest was charged on the average balance due from Southwest at
a rate of 10% (1998: 10%) per annum.
(c) Leases of equipment
Harbin Bearing has entered into an eight year lease agreement with Harbin
Precision to lease machinery and equipment. Harbin Bearing has also entered
into a five year lease agreement with Harbin Precision to lease motor
vehicles, furniture, fixtures and equipment related to the business. The
initial annual rental is RMB25,927 (US$3,124) and RMB1,256 (US$151), from
January 1, 1994 to December 31, 2001 and from January 1, 1994 to December
31, 1998, respectively. Options to extend the leases and to purchase the
leased assets have been granted to Harbin Bearing upon expiry of the
initial leases. All of these leases are treated as capital leases. The
renewal of the leases was yet to be finalised at the date of approval of
these financial statements by the directors of the Company. Harbin Bearing
continued to make the lease payment of RMB1,256 during the year ended
December 31, 1999 and this has been treated as an operating lease.
(d) Lease of buildings
Harbin Bearing entered into a five year lease agreement with Harbin
Precision to lease buildings related to the operation of Harbin Bearing
from January 1, 1994 at an initial annual rental of RMB3,751 (US$452)
(1998: RMB3,751 (US$452); 1997: RMB3,751 (US$452)). The initial lease
expired on December 31, 1998 and Harbin Bearing was granted an option to
extend the lease at market rental for another five years. This lease is an
operating lease. The renewal of the leases was yet to be finalised at the
date of approval of these financial statements by the directors of the
Company. However, Harbin Bearing continued to pay the rental expenses for
the year ended December 31, 1999.
38
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
20. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
(e) Land use rights
The municipal government has allocated to Harbin Holdings the right to use
the parcels of land on which Harbin Bearing's operations are conducted.
Harbin Holdings agreed to lease the land on which the main factory is
situated to Harbin Bearing in return for an initial annual rental of
RMB2,508 (US$302) (1998: RMB2,508 (US$302)) effective from January 1, 1994
subject to future adjustments in accordance with changes in the government
fees.
(f) Management and administrative services agreements
China Bearing is to reimburse Sunbase International for administrative
services rendered on behalf of China Bearing, at cost. The Company paid a
total amount of RMB4,868 (1998: RMB7,486; 1997: RMB2,550) to Sunbase
International for the reimbursement of expenses incurred on the Company's
behalf.
(g) Trademark license
Pursuant to a trademark license agreement, Harbin Holdings granted Harbin
Bearing the right to use the "HRB" trademark. Harbin Bearing is required
to pay a royalty cost calculated on an annual basis at 0.5% of the net
sales of Harbin Bearing effective from January 1, 1994 to December 31, 2003
and at 0.3% of the net sales from January 1, 2004 to December 31, 2013.
The trademark license can be transferred to Harbin Bearing thereafter upon
mutual agreement between the two parties and subject to the relevant laws
in China.
The trademark royalty paid by Harbin Bearing during 1997, 1998 and 1999
amounted to RMB2,924 RMB2,669 and RMB2,346, respectively.
(h) Pension and retirement plan
Pursuant to an agreement on December 31, 1993, Harbin Bearing is required
to make an annual payment to Harbin Holdings as its contribution to the
pension scheme for all staff retiring after December 28, 1993. This annual
payment is based on the standard contribution as required by government
regulations calculated at 20% of salaries up to the period ended June 30,
1996 and at 22%, effective from July 1, 1996. Harbin Holdings is then
responsible for the entire pension payments to staff who have retired after
December 28, 1993. Harbin Holdings has undertaken to bear all pension
payments to staff who retired before December 28, 1993. This agreement was
entered into on the condition that no compulsory rules and regulations are
implemented by the government such that Harbin Bearing has to be directly
responsible for any pension payments.
The contributions to the pension scheme made by Harbin Bearing in 1997,
1998 and 1999 amounted to RMB19,742, RMB23,086 and RMB17,904, respectively.
39
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
20. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
(i) Interest on promissory note
As described further in Note 1, in consideration for the purchase of its
interest in China Bearing, the Company issued common shares and preferred
shares to, and assumed vendor financing from, Asean Capital Limited. The
vendor financing provided by Asean Capital was in the form of a US$5,000
secured promissory note which is secured on the shares of China Bearing
(See Note 12). US$2,000 was repaid in 1996 and no repayment was made
thereafter. Interest was payable on the remaining balance of US$3,000.
The promissory note was issued to Asean Capital in connection with the
Share Exchange Agreement as detailed in Note 1 and bears interest at 8% per
annum.
21. OPERATIONS WITH STATE-OWNED ENTERPRISES
Harbin Bearing is owned as to 33% by Harbin Holdings, which is a
separately established enterprise controlled by and under the
administration of the Harbin Municipal Government. Substantially all of the
business undertaken by Harbin Bearing during the year was with State-owned
enterprises in China and on such terms as determined by the relevant
Chinese authorities.
22. FINANCIAL INSTRUMENTS
The carrying amount of the Company's cash and bank balances
approximates their fair value because of the short maturity of those
instruments.
The fair value of the Group's borrowings from banks and other third
parties based on the interest rates currently available for borrowings with
similar terms and average maturities approximates the carrying amount of
these borrowings. The fair value of the secured promissory note,
Convertible Debenture and the Installment Loan are not determinable.
40
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
23. SEGMENT DATA
The Group principally operates in the ball bearing industry in China
through Harbin Bearing, its 51% subsidiary, which generated 100% of the
Group's net sales from continuing operations for the three years ended
December 31, 1999.
24. CONCENTRATION OF RISK
Concentration of credit risk:
Financial instruments that potentially subject the Group to a
significant concentration of credit risk consist principally of cash
deposits, trade receivables and the amounts due from related companies.
(a) Cash deposits
The Group places its cash deposits with various PRC State-owned
financial institutions.
(b) Trade receivables
The Company manufactures and sells general and precision ball bearings
to diversified industries in China. The Company has long standing
relationships with most of its customers and generally does not require
collateral. There is no concentration of receivables in any one specific
industry except for the outstanding receivable balances with two related
companies, HBIE and Xin Dadi which were of RMB106,834 (1998: RMB100,742)
and RMB128,689(1998: RMB135,165), respectively, as at December 31, 1999.
(c) Current vulnerability due to certain concentrations:
The Group's operating assets and primary source of income and cash
flow are its interest in its subsidiaries in the PRC. The value of the
Group's interest in these subsidiaries may be adversely affected by
significant political, economic and social uncertainties in the PRC.
Although the PRC government has been pursuing economic reform policies for
the past several years, no assurance can be given that the PRC government
will continue to pursue such policies or that such policies may not be
significantly altered, especially in the event of a change in leadership,
social or political disruption or unforeseen circumstances affecting the
PRC's political, economic and social life. There is also no guarantee that
the PRC government's pursuit of economic reforms will be consistent or
effective.
41
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
25. STOCK OPTION PLAN
On January 2, 1996, the Company's board of directors adopted a stock
option plan (the "Plan"). The Plan permits the directors to grant options
to purchase an aggregate of up to 2,500,000 shares of the common stock of
the Company.
All incentive stock options have option exercise prices per option
share not less than the fair market value of a share of the common stock on
the date the option is granted, except that the exercise price of 160,000
options granted to an executive, was lower than the market value of the
common stock on the date the option was granted. If incentive stock options
are granted to any person possessing more than 10% of the total combined
voting power of all classes of stock of the Company or any affiliate of the
Company, the price may not be less than 110% of the fair market value of
the shares. The Plan terminates on the earlier of either the date on which
no additional shares of common stock are available for issuance under the
Plan, or January 2, 2006.
On July 1, 1996, the Compensation Committee of the Company granted
1,250,000 stock options to three executives, including two directors of the
Company, on the following terms:
<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 an incentive stock option
and will be treated as such. The beneficiary may exercise the options that
have vested and purchase shares of the common stock as follows:
<TABLE>
<CAPTION>
Exercise price
of the option vested Number of
after each 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>
42
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
25. STOCK OPTION PLAN (continued)
As at December 31, 1999, none of the vested options had been exercised
and during 1998, the options granted to two of the Company's executives
were withdrawn because these employees terminated their employment with the
Company at that date.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its stock options under the fair value method. The fair
value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average
assumptions for the date of grant in 1997: Interest rate on United States
treasury bonds; no dividend yield; volatility factors of the expected
market price of the Company's common stock of 87%; and a weighted-average
expected life of the options of 3 to 5 years.
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock options.
For the purposes of pro forma disclosures, the estimated fair value of
the options is amortized to write off the amount over the options' vesting
period. The Company's pro forma information is as follows:
Year ended December 31,
1997 1998 1999
RMB RMB RMB
Pro forma net loss (69,270) (216,507) (331,416)
======= ======== =========
Pro forma loss per share:
Basic (5.45) (15.77) (23.47)
======= ======== =========
Diluted (5.45) (15.77) (23.47)
======= ======== =========
43
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
25. STOCK OPTION PLAN (continued)
The Company's stock option activities and related information for the years
ended December 31, 1998 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
Exercise Exercise Exercise
Options price Options price Options price
US$ US$
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,050,000 6,967 2,050,000 6.967 1,400,000 7.24
Forfeited - - (650,000) 6.375 - -
--------- ----- --------- ----- --------- --------
Outstanding at end of year 2,050,000 6,967 1,400,000 7.24 * 1,400,000 7.24
========= ===== ========= ====== ========= ========
</TABLE>
* Exercise price was presented at the weighted average basis after
discounting such future price.
26. WARRANTS
The Company agreed to grant warrants to Arnhold and S. Bleichroeder,
Inc., ("ASB") pursuant to an agreement ("ASB Agreement") dated September
30, 1997, entered into between the Company and ASB. ASB was engaged in
connection with the private placement of securities of the Company.
Pursuant to the ASB Agreement, the Company shall issue to ASB warrants
("ASB Warrants") to purchase common stock of the company on the following
basis, without consideration:
Date of Exercise Number of
earliest price per shares Per ASB
exercise share Warrant Rights
January 16, 1997 US$6.375 80,000
January 16, 1998 US$6.375 80,000
January 16, 1999 US$6.375 80,000
Each tranche of Warrants will be for a term of six years commencing
with the date of earliest exercise.
As at December 31, 1999 no such warrants were granted or issued to
ASB.
44
<PAGE>
EXHIBIT 10.25
----------------------------
STOCK PURCHASE AGREEMENT
----------------------------
dated as of January 31, 2000
by and among
WILLIAM MCKAY
as Buyer
and
SMITH ACQUISITION COMPANY, INC.,
d/b/a SOUTHWEST PRODUCTS COMPANY, INC.
as Company
and
SUNBASE ASIA, INC.
as Parent
and
SAMUEL T. MOK
as Voting Trustee
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
<S> <C>
ARTICLE I...................................................................................................... 1
PURCHASE AND SALE OF COMPANY SHARES................................................................... 1
1.1 Sale of Company Shares by Seller.................................................... 1
1.2 Time and Place of Closing........................................................... 1
1.3 No Implied Representations or Warranties............................................ 2
ARTICLE II..................................................................................................... 2
PURCHASE PRICE........................................................................................ 2
2.1 Purchase Price...................................................................... 2
ARTICLE III.................................................................................................... 2
SELLER REPRESENTATIONS AND WARRANTIES................................................................. 2
3.1 Organization; Title to Company Shares............................................... 2
3.2 Certificate of Incorporation and Bylaws............................................. 3
3.3 Authority........................................................................... 3
3.4 No Conflict; Required Filings and Consents.......................................... 3
3.5 Absence of Litigation............................................................... 3
3.6 Brokers............................................................................. 4
ARTICLE IV..................................................................................................... 4
COMPANY REPRESENTATIONS AND WARRANTIES................................................................ 4
4.1 Organization........................................................................ 4
4.2 Capital Stock....................................................................... 4
4.3 Certificate of Incorporation and Bylaws............................................. 4
4.4 No Conflict; Required Filings and Consents.......................................... 4
4.5 Absence of Litigation............................................................... 4
4.6 Absence of Obligation............................................................... 4
ARTICLE V...................................................................................................... 5
BUYER REPRESENTATIONS AND WARRANTIES.................................................................. 5
5.1 Organization; Approvals............................................................. 5
5.2 Authority........................................................................... 5
5.3 No Conflict; Required Filings and Consents.......................................... 5
5.4 Absence of Litigation............................................................... 5
5.5 Brokers............................................................................. 6
5.6 Status of Buyer..................................................................... 6
ARTICLE VI..................................................................................................... 6
CERTAIN COVENANTS.....................................................................................
6.1 Expenses............................................................................ 6
6.2 Retention of Records................................................................ 6
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE VII.................................................................................................... 6
ADDITIONAL AGREEMENTS................................................................................. 6
7.1 Notification of Certain Matters..................................................... 6
7.2 Public Announcements................................................................ 6
7.3 Indemnification by Buyer............................................................ 7
7.4 Mutual Release between Buyer, Seller and the Company................................ 7
7.5 Release of Service Providers........................................................ 7
7.6 Consent and Release of Corporate Guarantee from Seller's Debenture Holders ......... 7
7.7 Liquidated Damages.................................................................. 7
7.8 Cooperation......................................................................... 7
ARTICLE VIII CONDITIONS OF CLOSING............................................................................. 8
8.1 Conditions to Obligations of Each Party............................................. 8
8.2 Additional Conditions to Obligations of Buyer....................................... 8
8.3 Additional Conditions to Obligations of the Seller.................................. 9
ARTICLE IX..................................................................................................... 10
GENERAL PROVISIONS.................................................................................... 10
9.1 No Survival of Representations, Warranties, Covenants and Agreements................ 10
9.2 Notices............................................................................. 10
9.3 Certain Definitions................................................................. 11
9.4 Headings............................................................................ 11
9.5 Severability........................................................................ 12
9.6 Entire Agreement.................................................................... 12
9.7 Assignment.......................................................................... 12
9.8 Parties In Interest................................................................. 12
9.9 Governing Law....................................................................... 12
9.10 Counterparts........................................................................ 12
9.11 Amendment........................................................................... 12
9.12 Waiver of Jury Trial................................................................ 12
</TABLE>
ii
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT dated as of January 31, 2000 (the
"Agreement") between William McKay ("Buyer") and SMITH ACQUISITION COMPANY,
INC., D/B/A SOUTHWEST PRODUCTS COMPANY, INC., a California corporation (the
"Company"), SUNBASE ASIA, INC., a Nevada corporation (the "Seller"), and SAMUEL
T. MOK, as voting trustee for all of the issued and outstanding shares of
capital stock of the Company (the "Trustee").
RECITALS:
WHEREAS, Buyer desires to acquire all of the issued and outstanding
shares (the "Company Shares") of capital stock of the Company upon the terms and
conditions set forth herein; and
WHEREAS, the Company is a wholly-owned subsidiary of Seller; and
WHEREAS, voting rights with respect to all of the Company Shares have
been transferred to a trust administered by the Trustee pursuant to that certain
Voting Trust Agreement (the "Trust Agreement") dated as of December 31, 1998 by
and between the Company, Seller and Trustee; and
WHEREAS, the Seller and Trustee desire to sell the Company Shares upon
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF COMPANY SHARES
1.1 Sale of Company Shares by Seller. Subject to the satisfaction or
waiver of the conditions set forth in this Agreement, at the Closing (as defined
in Section 1.2), Seller shall sell, assign, transfer, convey and deliver to
Buyer, and Buyer shall purchase and accept from Seller, all of the Company
Shares, free and clear of all restrictions on transfer (subject, however, to
restrictions on the transferability thereof under all applicable securities laws
and regulations thereunder), liens, options, warrants, purchase rights,
contracts, commitments, equities, claims and demands (other than the rights of
Buyer under this Agreement).
1.2 Time and Place of Closing.
(a) The closing of the transactions contemplated hereby (the
"Closing") will take place on April 10, 2000, or as such other time as the
parties agree at or prior to 60 days after the date of execution of the
Agreement. (the "Closing Date"). The Closing shall be held at the offices of
Jenkens & Gilchrist, 1919 Pennsylvania Ave., N.W., Suite 600, Washington, D.C.
20006, or such location as may be agreed upon by the parties.
1
<PAGE>
(b) At the Closing:
(i) Buyer shall deliver Seller (A) immediately available
funds by wire transfer to an account specified by Seller in an amount equal to
the Purchase Price (as defined in Section 2.1), offset as provided in Section
2.1, and (B) the certificates and other agreements and documents set forth in
Article VIII; and
(ii) Seller shall deliver to Buyer (A) the certificate or
certificates representing all of the Company Shares, either duly endorsed for
transfer to Buyer or accompanied by appropriate duly executed stock powers and
with all requisite stock transfer stamps and taxes attached or provided for, (B)
the certificates and other documents set forth in Article VIII, and (C)
resignations from each member of the Company's Board of Directors.
1.3 No Implied Representations or Warranties. William McKay, the
Buyer, has been the chief executive officer of the Company since 1991. It is the
intention of the parties that the sole representations and warranties of Seller
and/or the Company are set forth in Article III and Article IV hereof and that
except as specifically provided in Article III or Article IV, the Company Shares
and the Company are being purchased "WHERE IS, AS IS."
ARTICLE II
PURCHASE PRICE
2.1 Purchase Price. The aggregate purchase price for the Company
Shares shall be Three Million Five Hundred Thousand United States Dollars (US
$3,500,000) (the "Purchase Price"). On the date of this Agreement, Buyer shall
deliver to the Voting Trustee the amount of One Hundred Thousand United States
Dollars (US $100,000) as earnest money. At Closing, the earnest money shall be
offset against the Purchase Price, the balance of which shall be delivered by
Buyer to Seller at Closing by wire transfer in immediately available federal
funds to an account designated by Seller by written notice to Buyer given at
least two days prior to the Closing Date.
ARTICLE III
SELLER REPRESENTATIONS AND WARRANTIES
Seller represents and warrants to Buyer as follows:
3.1 Organization; Title to Company Shares. Seller is a corporation
validly existing and in good standing under the laws of the State of Nevada.
Seller is, and on the Closing Date will be, the record and beneficial owner of
the Company Shares, and Seller owns, and on the Closing Date will own, the
Company Shares free and clear of all restrictions on transfer, liens, options,
warrants, purchase rights, contracts, commitments, equities, claims and demands
(other than restrictions on transferability under applicable securities laws and
regulations thereunder and the rights of Buyer under this Agreement). The
delivery on the Closing Date of the certificates representing the Company Shares
purchased hereunder to Buyer will transfer to Buyer good, valid and marketable
title to the Company
2
<PAGE>
Shares, free and clear of all restrictions on transfer (other than restrictions
on transferability under applicable securities laws and regulations thereunder),
liens, options, warrants, purchase rights, contracts, commitments, equities,
claims and demands.
3.2 Certificate of Incorporation and Bylaws. Seller has made
available to Buyer a true, complete and accurate copy of its Certificate of
Incorporation and Bylaws, as amended or restated (the "Seller Certificate and
----------------------
Bylaws"). Such Seller Certificate and Bylaws are in full force and effect.
- ------
Seller is not in violation of any of the provisions of the Seller Certificate
and Bylaws.
3.3 Authority. Each of Seller and Trustee has the requisite power and
authority to execute and deliver this Agreement, to perform its obligations
under this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement by Seller and the consummation by
Seller of the transactions contemplated hereby have been duly and validly
authorized by all necessary corporate action and no other corporate proceedings
on the part of Seller are necessary to authorize this Agreement or to consummate
the transactions contemplated hereby (other than applicable stockholder
approvals). This Agreement has been duly executed and delivered by, and
constitutes a valid and binding obligation of, Seller and, assuming due
authorization, execution and delivery by Buyer, is enforceable against Seller in
accordance with its terms, except as enforcement may be limited by general
principles of equity whether applied in a court of law or a court of equity and
by bankruptcy, insolvency and similar laws affecting creditors' rights and
remedies generally.
3.4 No Conflict; Required Filings and Consents. The execution and
delivery of this Agreement by Seller does not, and the performance of this
Agreement and the transactions contemplated hereby by Seller shall not, (i)
conflict with or violate the Seller Certificate and Bylaws (ii) conflict with or
violate any federal or state law, statute, ordinance, rule, regulation, order,
judgment or decree (collectively, "Laws") applicable to Seller or by which it or
any of its properties are bound or affected, or (iii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration, cancellation of, or result in the creation of a lien on
Seller or any of its assets pursuant to any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Seller is a party, except for any such conflicts,
violations, breaches, defaults or other occurrences that have been waived or
that individually or in the aggregate, would not, or be reasonably likely to
have, have a Material Adverse Effect with respect to Seller.
3.5 Absence of Litigation. Seller is not a party to any, and there
are no pending or, to the knowledge of Seller, threatened, legal,
administrative, arbitral or other proceedings, claims, actions or governmental
or regulatory investigations of any nature against Seller challenging the
validity or propriety of the transactions contemplated by this Agreement which
if unfavorably determined would prevent the consummation of the transactions
contemplated hereby, except where such events would not have, or be reasonably
likely to have, a Material Adverse Effect with respect to Seller or the Company.
3
<PAGE>
3.6 Brokers. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Seller, except as provided in that certain agreement between Seller
and Trustee and that certain agreement between Seller and Friedman, Billings,
Ramsey & Co., Inc. regarding such fees, which fees are the sole responsibility
of, and are to be paid by, Seller.
ARTICLE IV
COMPANY REPRESENTATIONS AND WARRANTIES
Seller represents and warrants to Buyer with respect to both Seller and the
Company, as follows:
4.1 Organization. The Company is a corporation validly existing and
in good standing under the laws of the State of California.
4.2 Capital Stock. As of the Closing Date, the authorized capital
stock of the Company consists of 10,000,000 shares of common stock, no par
value, and 4,000,000 shares of preferred stock, no par value. As of the Closing
Date, the only issued and outstanding shares of common stock are the Company
Shares, all of which are, duly authorized, validly issued, fully paid and
nonassessable, and the issuance thereof was in compliance with all applicable
Laws.
4.3 Certificate of Incorporation and Bylaws. The Company has made
available to Buyer a true, complete and accurate copy of its Certificate of
Incorporation and Bylaws, as amended or restated (the "Company Certificate and
-----------------------
Bylaws"). Such Company Certificate and Bylaws are in full force and effect.
- ------
4.4 No Conflict; Required Filings and Consents. The transactions
contemplated hereby by the Company shall not, (i) conflict with or violate the
Company Certificate and Bylaws or (ii) conflict with or violate any Laws
applicable to the Company or by which it or any of its properties are bound or
affected, except for any such conflicts, violations, breaches, defaults or other
occurrences that individually or in the aggregate, would not have a Material
Adverse Effect with respect to the Company.
4.5 Absence of Litigation. To the knowledge of Seller, the Company is
not a party to any, and there are no pending or, to the knowledge of the
Company, threatened, legal, administrative, arbitral or other proceedings,
claims, actions or governmental or regulatory investigations of any nature
against the Company challenging the validity or propriety of the transactions
contemplated by this Agreement which if unfavorably determined would prevent the
consummation of the transactions contemplated hereby. This representation does
not purport to apply to the pending ITAR investigation.
4.6 Absence of Obligations. Except as set forth on Schedule 4.6
hereto, Seller has not executed any agreement creating any obligation for the
Company (other than in connection with those obligations set forth in Section
8.2(f), which obligations will be discharged on the Closing Date).
4
<PAGE>
ARTICLE V
BUYER REPRESENTATIONS AND WARRANTIES
Buyer represents and warrants to the Company and Seller as follows:
5.1 Organization; Approvals. Buyer has the requisite power and
authority and is in possession of all franchises, grants, authorizations,
licenses, permits, easements, consents, certificates, approvals and orders
("Buyer Approvals") necessary to own, lease and operate its properties and to
---------------
carry on its business as it is now being conducted, and Buyer has not received
any notice of proceedings relating to the revocation or modification of any
Buyer Approvals, except where the failure to be so organized, existing and in
good standing or to have such power, authority, Buyer Approvals and revocations
or modifications would not, individually or in the aggregate, have a Material
Adverse Effect with respect to Buyer.
5.2 Authority. Buyer has the requisite power and authority to execute
and deliver this Agreement, to perform its obligations under this Agreement and
to consummate the transactions contemplated hereby. The execution and delivery
of this Agreement by Buyer and the consummation by Buyer of the transaction
contemplated hereby have been duly and validly authorized by all necessary
corporate action and no other corporate proceedings on the part of Buyer are
necessary to authorize this Agreement or to consummate the transaction
contemplated hereby. This Agreement has been duly executed and delivered by, and
constitutes a valid and binding obligation of, Buyer and, assuming due
authorization, execution and delivery by the Company and Seller, is enforceable
against Buyer in accordance with its terms, except as enforcement may be limited
by general principles of equity whether applied in a court of law or a court of
equity and by bankruptcy, insolvency and similar laws affecting creditors'
rights and remedies generally.
5.3 No Conflict; Required Filings and Consents. The execution and
delivery of this Agreement by Buyer does not, and the performance of this
Agreement and the transaction contemplated hereby by Buyer shall not, (i)
conflict with or violate any Laws applicable to Buyer or by which it or any of
its properties are bound or affected, or (ii) result in any breach of or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of a Lien
on any of the properties or assets of Buyer pursuant to any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Buyer is a party or by which it or any
of its properties is bound or affected, except in the case of clauses (ii) and
(iii) for any such conflicts, violations, breaches, defaults or other
occurrences that individually or in the aggregate, would not have a Material
Adverse Effect with respect to Buyer.
5.4 Absence of Litigation. Buyer is not a party to any, and there are
no pending or, to the knowledge of Buyer, threatened, legal, administrative,
arbitral or other proceedings, claims, actions or governmental or regulatory
investigations of any nature against Buyer challenging the validity or propriety
of the transactions contemplated by this Agreement which if unfavorably
determined would prevent the consummation of the transaction contemplated
hereby.
5
<PAGE>
5.5 Brokers. There is no broker, finder or investment banker who is
entitled to any brokerage, finder's or other fee or commission from Seller or
any of its affiliates in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of Buyer.
5.6 Status of Buyer. Buyer is knowledgeable and experienced in making
business investments, and able to bear the economic risk of loss of its
investment in the Company Shares.
ARTICLE VI
CERTAIN COVENANTS
6.1 Expenses. All Expenses (as defined below) incurred by Buyer, on
the one hand, and Seller, on the other hand, shall be borne solely and entirely
by Buyer, on the one hand, and Seller, on the other hand. "Expenses" as used in
--------
this Agreement shall include all reasonable fees and out-of-pocket expenses
(including without limitation all fees and expenses of counsel, accountants,
investment bankers, experts and consultants to the party and its affiliates)
incurred by a party or on its behalf in connection with or related to the
authorization, preparation and execution of this Agreement, the solicitation of
stockholder approvals and all other matters related to the closing of the
transactions contemplated hereby. Seller shall be liable for and assume and pay
the broker's fees owed to Friedman, Billings, Ramsey & Co., Inc.
6.2 Retention of Records. Buyer shall retain all books and records of
the Company that Buyer receives from the Company for a period of six years
following the Closing Date. After the Closing, Seller and its representatives
shall have reasonable access to all such books and records during normal
business hours. In addition, Buyer shall upon reasonable request furnish to
Seller, at Seller's expense, copies of any such books or records.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 Notification of Certain Matters. Seller and the Company shall
give prompt notice to Buyer, and Buyer shall give prompt notice to Seller and
the Company, of (i) the occurrence or non-occurrence of any event, the
occurrence or nonoccurrence of which would be likely to cause any representation
or warranty contained in this Agreement to be untrue or inaccurate and (ii) any
failure of Seller or the Company or Buyer, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
7.2 Public Announcements. Buyer and Seller shall consult with each
other before issuing any press release or otherwise making any public statements
with respect to the transaction contemplated hereby and shall not issue any such
press release or make any such public statement prior to such consultation,
except as may be required by Law.
6
<PAGE>
7.3 Indemnification by Buyer. Buyer and the Company shall indemnify
and hold harmless Seller, its affiliates and the officers, directors and
shareholders of Seller and its affiliates, from any and all claims, losses,
damages or other amounts (including reasonable attorneys fees and expenses)
relating to any claims by any party relating to or arising out of the Seller's
purchase of the Company from its former shareholders, including without
limitation Seller's alleged failure to issue certain capital stock in a timely
fashion.
7.4 Mutual Release between Buyer, Seller and the Company. At Closing,
Buyer and Seller shall execute a mutual release pursuant to which each party
shall release the other (together with its affiliates, agents, officers,
directors and shareholders) from any and all claims and causes of action,
whether now existing or hereafter arising, relating to any event or matter,
including, without limitation, the employment agreement between the Company,
Seller and Buyer. The mutual release shall exclude obligations under this
Agreement and shall be in a form mutually acceptable to Buyer and Seller.
7.5 Release of Service Providers. At Closing, the Company shall
execute a release pursuant to which it releases the Voting Trustee, Friedman,
Billings, Ramsey & Co., Inc., Jenkens & Gilchrist and Oppenheimer, Wolff,
Donnelly and Bayh (together with their affiliates, officers, directors and
shareholders) from any and all claims and causes of action, whether now existing
or hereafter arising, relating to any event or matter. The release shall be in a
form mutually acceptable to the Company and the person being released.
7.6 Consent and Release of Corporate Guarantee from Seller's
Debenture Holders. Prior to Closing, Seller shall use its best efforts to obtain
the written consent of its debenture holders to the transactions contemplated
hereby and a release by its debenture holders of the Company, which release
shall be effective upon the debenture holders' receipt of immediately available
funds in the amount of U.S. $2.6 million at Closing.
7.7 Liquidated Damages. In the event that Buyer shall fail to close
the purchase of the Company for any reason other than a breach of this Agreement
by Seller or the fact that a condition to Buyer's obligations to close set forth
in Section 8.1 or Section 8.2 shall not have been satisfied, Seller shall be
entitled to keep the $100,000 earnest money and Buyer shall promptly pay Seller
the additional amount of $900,000. Such amounts shall constitute liquidated
damages and not a penalty. Buyer's obligations under this Section shall be
personally guaranteed by William McKay pursuant to a guaranty executed on the
date hereof in form acceptable to Seller.
7.8 Cooperation. No party to this Agreement shall take any action
that materially impairs the ability of such party or the ability of the parties
to consummate the transactions contemplated hereby.
7
<PAGE>
ARTICLE VIII
CONDITIONS OF CLOSING
8.1 Conditions to Obligations of Each Party. The respective
obligations of each party to effect the transactions contemplated hereby shall
be subject to the satisfaction at or prior to the Closing Date of the following
condition:
(a) No Order. No federal or state governmental or regulatory
--------
authority or other agency or commission, or federal or state court of competent
jurisdiction, shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, executive order, decree, injunction or other order
(whether temporary, preliminary or permanent) which restricts, prevents or
prohibits consummation of the transactions contemplated by this Agreement.
8.2 Additional Conditions to Obligations of Buyer. The obligations of
Buyer to effect the transactions contemplated hereby are also subject to the
following conditions:
(a) Representations and Warranties. Each of the representations
------------------------------
and warranties of the Company and Seller contained in this Agreement shall be
true and correct in all material respects (except that where any statement in a
representation or warranty expressly includes a standard of materiality, such
statement shall be true and correct in all respects).
(b) Trust Agreement. The Trustee shall have provided Buyer
---------------
evidence as to the termination of the Trust Agreement upon the Closing.
(c) Agreements and Covenants. The Company shall have performed
------------------------
or complied in all material respects with all agreements and covenants required
by this Agreement to be performed or complied with by it on or prior to the
Closing Date.
(d) Consents Obtained. All consents, waivers, approvals,
-----------------
authorizations or orders required to be obtained and all filings required to be
made by Seller or the Company for the authorization, execution and delivery of
this Agreement and the consummation by it of the transactions contemplated
hereby shall have been obtained and made by Seller and the Company, except those
for which failure to obtain such approvals or make such filings would not
individually or in the aggregate, have a Material Adverse Effect with respect to
the Company.
(e) No Challenge. There shall not be pending any action,
------------
proceeding or investigation before any court or administrative agency or by a
government agency (i) challenging or seeking material damages in connection
with, the transactions hereby contemplated or (ii) seeking to restrain, prohibit
or limit the exercise of full rights of ownership or operation by Buyer of all
or any portion of the Company.
(f) Certain Obligations. Any obligations of the Company to the
-------------------
Voting Trustee, Friedman, Billings, Ramsey & Co., Jenkens & Gilchrist and
Oppenheimer, Wolff, Donnelly and Bayh
8
<PAGE>
shall have been paid and discharged by the Company. The Company shall have been
released from any obligations to Seller (including any amounts owing as
intercompany loans or capital investment) and to Seller's debenture holders,
such release is to be effective upon the debenture holders' receipt of
immediately available funds in the amount of U.S. $2.6 million at Closing.
(g) Material Adverse Effect. Neither the Seller or the Voting
-----------------------
Trustee shall have executed a contract or agreement dated after the date hereof
that has a Material Adverse Effect on the Company.
8.3 Additional Conditions to Obligations of the Seller. The
obligations of Seller to effect the transactions contemplated hereby are also
subject to the following conditions:
(a) Representations and Warranties. Each of the representations
------------------------------
and warranties of Buyer set forth in this Agreement shall be true and correct in
all material respects (except that where any statement in a representation or
warranty expressly includes a standard of materiality, such statement shall have
been true and correct in all respects).
(b) Agreements and Covenants. Buyer shall have performed or
------------------------
complied in all material respects with all agreements and covenants required by
this Agreement to be performed or complied with by it on or prior to the Closing
Date.
(c) Consents Under Agreements. All consents, waivers, approvals,
-------------------------
authorizations or orders required to be obtained, and all filings required to be
made by Buyer for the authorization, execution and delivery of this Agreement
and the consummation by it of the transactions contemplated hereby shall have
been obtained and made by Buyer, except where failure to obtain any consents,
waivers, approvals, authorizations or orders required to be obtained or any
filings required to be made would not have a Material Adverse Effect with
respect to Buyer.
(d) No Challenge. There shall not be pending any action,
------------
proceeding or investigation before any court or administrative agency or by a
government agency (i) challenging or seeking material damages in connection
with, transactions hereby contemplated or (ii) seeking to restrain, prohibit or
limit the exercise of full rights of ownership or operation by Buyer of all or
any portion of the Company, which in either case would have a Material Adverse
Effect with respect to the Company.
(e) Required Consents. At or prior to Closing, Seller shall have
received all material governmental approvals and governmental consents
contemplated by this transaction and the written consent of Seller's debenture
holders to this transaction.
9
<PAGE>
ARTICLE IX
GENERAL PROVISIONS
9.1 No Survival of Representations, Warranties, Covenants and
Agreements. The representations and warranties of the parties shall expire at
Closing.
9.2 Notices. All notices and other communications given or made
pursuant to this Agreement shall be in writing and shall be deemed given if
delivered personally, telecopied (with confirmation), mailed by certified mail
(postage prepaid, return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice) and shall be effective upon receipt:
(a) If to Seller or the Trustee:
Samuel T. Mok, Voting Trustee
1001 Connecticut Avenue, N.W.
Suite 1035
Washington, D.C. 20036
Attention: Samuel T. Mok
With copies to:
Jenkens & Gilchrist, a Professional Corporation
1445 Ross Ave., Suite 3200
Dallas, Texas 75202
1919 Pennsylvania Avenue, NW
Suite 600
Washington, D.C. 20006-3404
Telecopier: (202) 326-1555
Attention: Andrew Lynch
(b) If to Buyer:
William McKay
Southwest Products
2240 Buena Vista
Irwindale, CA 91706
Telecopier: (626) 303-6141
Attention: William McKay
10
<PAGE>
With a copy to:
______________________________
______________________________
______________________________
Telecopier: _________________
Attention: __________________
9.3 Certain Definitions. For purposes of this Agreement, the term:
(a) "Law" shall have the meaning set forth in Section 3.4.
---
(b) "Lien" shall mean any conditional sale agreement, default of
----
title, easement, encroachment, encumbrance, hypothecation, infringement, lien,
mortgage, pledge, reservation, restriction, security interest, title retention
or other security arrangement, or any adverse right or interest, charge, or
claim of any nature whatsoever of, on, or with respect to any property or
property interest, other than (i) liens for current property taxes not yet due
and payable, and (ii) liens which do not materially impair the use of, or title
to, or value of the assets subject to such lien.
(c) "Material Adverse Effect" means, with respect to Buyer,
-----------------------
Seller, the Company or Company, (i) any adverse effect on the assets,
properties, liabilities, results of operations or financial condition of, and
which is material with respect to, such party (or the Company), or (ii) any
effect that materially impairs the ability of such party to consummate the
transactions contemplated hereby; provided, however, that Material Adverse
Effect shall not be deemed to include the impact of (A) actions contemplated by
this Agreement, (B) changes in laws and regulations or interpretations thereof
that are generally applicable to the manufacturing industry and (C) changes in
generally accepted accounting principles that are generally applicable to the
manufacturing industry.
(d) "person" means an individual, corporation, partnership,
------
association, trust, unincorporated organization, other entity or group (as
defined in Section 13(d) of the Exchange Act); and
(e) "subsidiary" or "subsidiaries" of the Company, Seller, Buyer
---------- ------------
or any other person, means any corporation, partnership, joint venture or other
legal entity of which either the Company, Seller, Buyer, or such other person,
as the case may be (either alone or through or together with any other
subsidiary), owns, directly or indirectly, 50% or more of the stock or other
equity interests the holders of which are generally entitled to vote for the
election of the board of directors or other governing body of such corporation
or other legal entity.
9.4 Headings. The headings contained in this Agreement are for
--------
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
11
<PAGE>
9.5 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the extent possible.
9.6 Entire Agreement. This Agreement constitutes the entire agreement
of the parties and supersedes all prior agreements and undertakings, both
written and oral, between the parties, or any of them, with respect to the
subject matter hereof and, except as otherwise expressly provided herein, are
not intended to confer upon any other person any rights or remedies hereunder.
9.7 Assignment. This Agreement shall not be assigned by operation of
law or otherwise, without the prior written consent of each of Buyer, Seller and
Trustee.
9.8 Parties In Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party and nothing in this Agreement, express
or implied, is intended to or shall confer upon any other person any right,
benefit or remedy of any nature whatsoever under or by reason of this Agreement.
9.9 Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California, regardless of the laws
that might otherwise govern under applicable principles of conflict of laws.
9.10 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties in separate counterparts, each of
which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
9.11 Amendment. This Agreement may be amended by the agreement in
writing of all of the parties and in accordance with their applicable charter
documents and applicable Law.
9.12 Waiver of Jury Trial. Each of Seller and Buyer waives rights to a
trial by jury of any claim or cause of action based upon or arising out of or
related to this Agreement, any assignment or the transactions contemplated
hereby, in any action, proceeding or other litigation of any type brought by any
party against the other parties, whether with respect to contract claims, tort
claims or otherwise. Each of Seller and Buyer agrees that any such claim or
cause of action shall be tried without a jury. Without limiting the foregoing,
the parties further agree that their respective rights to a trial by jury is
waived by operation of this Section as to any action, counterclaim or other
proceeding which seeks, in whole or in part, to challenge the validity or
enforceability of this Agreement, any assignment or any provision hereof or
thereof. This waiver shall apply to any subsequent amendments, renewals,
supplements or modifications to this Agreement or any assignment.
12
<PAGE>
[Signature page follows.]
13
<PAGE>
IN WITNESS WHEREOF, the Company, Buyer and Trustee have caused this
Agreement to be executed as of the date first written above by their respective
officers thereunto duly authorized.
SMITH ACQUISITION COMPANY INC.,
d/b/a SOUTHWEST PRODUCTS COMPANY,
INC. ("Company")
By: /s/ Samuel T. Mok
----------------------------------
Name: SAMUEL T. MOK
--------------------------------
Title: CHAIRMAN
-------------------------------
/S/ William McKay
-------------------------------------
WILLIAM MCKAY
SUNBASE ASIA, INC. ("Seller")
By: /S/ Li Yuen Fai (Roger)
----------------------------------
Name: LI YUEN FAI
--------------------------------
Title: CHIEF FINANCIAL OFFICER
-------------------------------
/s/ Samuel T. Mok
----------------------------------
SAMUEL T. MOK, AS TRUSTEE
<PAGE>
ACTIONS BY UNANIMOUS WRITTEN CONSENT
OF THE BOARD OF DIRECTORS
OF
SUNBASE ASIA INC.
----------------------------------------------------------------
The undersigned, being all the directors of Sunbase
Asia Inc., a Nevada Corporation (the "Corporation"), in
accordance with Section 78.315 (2) of the Nevada General
Corporation Law and Article III, Section 15 of the By-laws
of the Corporation, hereby consent to the adoption of the
following resolution without a meeting.
RESOLVED to dispose the equity interest of Southwest
Products Company to William Mckay at a consideration of
US$3,500,000. It was further resolved that the attached stock
purchase agreement in relation to the disposal of the equity
increase of Southwest Products Company was approved.
RESOLVED to authorize Mr. Roger Li to sign on the stock
purchase agreement in regarding to the disposal of Southwest
Products Company on behalf of the company.
- --------------------------------------------------------------------------------
Dated : 2 FEB 2000 /s/ Gunter Gao
--------------------------- ---------------------------
Gunter Gao
Dated : 2 FEB 2000 /s/ Li Yuen Fai (Roger)
--------------------------- ---------------------------
Li Yuen Fai (Roger)
Dated : 2 Feb 2000 /s/ Hongfei Chen
--------------------------- ---------------------------
Hongfei Chen
<PAGE>
EXHIBIT 10.26
Dated 1st March, 2000
---------------------
(1) CHINA BEARING HOLDINGS LIMITED
and
(2) ASEAN CAPITAL LIMITED
and
(3) CHINA INTERNATIONAL BEARING
HOLDINGS LIMITED
and
(4) SUNBASE ASIA, INC.
and
(5) SMITH ACQUISITION COMPANY, INC.
and
(6) SUNBASE INTERNATIONAL (HOLDINGS) LIMITED
and
(7) EXTENSIVE RESOURCES LIMITED
and
(8) GLORY MANSION LIMITED
and
(9) WARDLEY CHINA INVESTMENT TRUST
and
(10) MC PRIVATE EQUITY PARTNERS ASIA LIMITED
and
(11) CHINE INVESTISSEMENT 2000
________________________________________________
SUPPLEMENTAL AGREEMENT
in respect of certain
arrangements relating to
CHINA BEARING HOLDINGS LIMITED
________________________________________________
Chao and Chung
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Description Page No.
----------- --------
<S> <C>
1. INTERPRETATION 2
2. CONDITION 3
3. AGREEMENT 4
4. COMPLETION 4
5. EFFECT OF THIS AGREEMENT 6
6. COSTS AND EXPENSES 6
7. GOVERNING LAW AND JURISDICTION 6
8. GENERAL PROVISIONS 6
9. COUNTERPARTS 7
SCHEDULE 1 8
Form of the New Share Mortgage 8
SCHEDULE 2 19
Form of the Release 19
SIGNATURE PAGES 24
ANNEXURE 1
FORM OF THE ESCROW LETTER
ANNEXURE 2
FORM OF THE CONSENT
</TABLE>
<PAGE>
THIS AGREEMENT is made on the 1/st/ day of March, 2000.
(1) CHINA BEARING HOLDINGS LIMITED, the registered office of which is at Cedar
House, 41 Cedar Avenue Hamilton HM12, Bermuda (the "Company");
(2) ASEAN CAPITAL LIMITED, the registered office of which is at Omar Hodge
Building, Wickhams Cay I, P.O. Box 362, Road Town, Tortola, British Virgin
Islands ("ACL");
(3) CHINA INTERNATIONAL BEARING HOLDINGS LIMITED, the registered office of
which is at 19th Floor, 51-57 Gloucester Road, Wanchai, Hong Kong
("CIBHL");
(4) SUNBASE ASIA, INC., the registered office of which is at 1280 Terminal Way,
Suite 3, Reno Nevada 89502, United States of America ("SAI");
(5) SMITH ACQUISITION COMPANY, INC., a California corporation doing business as
Southwest Products Company, the registered office of which is at 2240 Buena
Vista, Irwindale, CA 91706, United States of America ("SPC");
(6) SUNBASE INTERNATIONAL (HOLDINGS) LIMITED the registered office of which is
at 19th Floor, 51-57 Gloucester Road, Wanchai, Hong Kong ("SIHL");
(7) EXTENSIVE RESOURCES LIMITED, the registered office of which is at P.O. Box
71, Craigmuir Chambers, Road Town, Tortola, British Virgin Islands ("ERL");
(the parties at (1), (2), (3), (4), (5), (6) and (7) hereinafter collectively
referred to as "Sunbase Parties");
(8) GLORY MANSION LIMITED, the registered office of which is at Craigmuir
Chambers, P.O. Box 71, Road Town, Tortola, British Virgin Islands ("GML");
(9) WARDLEY CHINA INVESTMENT TRUST, the registered office of which is at c/o
Suite 1610, P.O. Box 1016, 885 West Georgia Street, Vancouver B.C., V6C
3E8, Canada ("WCIT");
(10) MC PRIVATE EQUITY PARTNERS ASIA LIMITED the registered office of which is
at P.O. Box 309, Ugland House, South Church Street, Grand Cayman, Cayman
Islands, British West Indies ("MC Partners"); and
(11) CHINE INVESTISSEMENT 2000, a Luxembourg-registered Unit Trust, the
registered office of which is at L1118 Luxembourg, 14 Rue Aldringen ("CI
2000");
<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 Sunbase Parties (except SIHL and ERL) breached certain of their
obligations under the Subscription Agreement and the Investors agreed not
to exercise their rights under the Subscription Agreement in relation
thereto subject to and upon the terms and conditions set out in the
Settlement Agreement (as defined below).
(C) Certain obligations of the Sunbase Parties under the Settlement Agreement
have not been complied with.
(D) SAI and SPC have entered into an agreement with William McKay as purchaser
and with Samuel T. Mok as voting trustee for all of the issued and
outstanding shares of capital stock of SPC whereby SAI will sell its entire
interests in its subsidiary, SPC.
(E) The parties hereto agree to supplement the repayment arrangements
contemplated in the Settlement Agreement on the terms and conditions set
out herein.
NOW IT IS HEREBY AGREED as follows:-
1. INTERPRETATION
--------------
(A) In this Agreement:-
"Completion" means performance by the parties hereto of their
respective obligations set out in Clause 4;
"Completion Amount" means the sum of $2,600,000 payable by the Company to
the Investors at Completion;
"Consent" means a letter of consent in the form annexed hereto
as Annexure 2 in connection with the Sale;
"Escrow Agent" means Jenkens & Gilchrist of 1919 Pennsylvania Avenue,
NW Suite 600, Washington D.C. 20006-3404;
2
<PAGE>
"Escrow Letter" means an escrow letter in the form annexed
hereto as Annexure 1 given or to be given by
the Investors to the Escrow Agent in
connection with, inter alia, the Completion
Amount;
"Existing Share Mortgage" means the Deed of Mortgage dated 16/th/
October, 1998 relating to 1,000,000 issued
shares in the capital of Tianjin Development
Holdings Limited executed by ERL in favour of
Brilliant Future Holdings Limited pursuant to
the Settlement Agreement;
"New Share Mortgage" means the form of share mortgage set out in
Schedule 1;
"Release" means the release of the Guarantee in the
form as set out in Schedule 2;
"Sale" the sale by SAI of its entire interests in
SPC in accordance with the agreement referred
to in Recital (D);
"Settlement Agreement" means an agreement dated 16/th/ October, 1998
made between the parties hereto in respect of
the Debentures issued by the Company;
"Subscription Agreement" means an agreement dated 2nd August, 1996
relating to the subscription by the Investors
for the Debentures issued by the Company; and
"$" means United States dollars, the lawful
currency of the United States of America.
(B) In this Agreement, unless otherwise defined, words and expressions defined
in the Settlement Agreement (including the schedules thereto) or in the
Subscription Agreement as adopted for use in the Settlement Agreement, when
used in this Agreement, bear the same respective meanings in this
Agreement.
2. CONDITION
---------
The obligations of the respective parties hereto under this Agreement are
conditional on (i) the Consent being duly executed by the parties thereto
upon signing of this Agreement; (ii) the Release being duly executed by the
parties thereto upon signing of this Agreement and the same having been
delivered to the Escrow Agent by GML (as hereby expressly authorised by all
parties
3
<PAGE>
hereto) pursuant to the Escrow Letter; and (iii) the Sale being completed
on or before 10/th/ April, 2000 (or such later date as may be agreed by the
Investors in writing), to the intent that none of the parties shall be
bound by any provisions herein unless the Sale is completed on or before
the said date.
3. AGREEMENT
---------
3.1 The parties hereto agree to supplement the terms and conditions of the
Settlement Agreement as follows:-
(A) the Company shall pay to the Investors on Completion the Completion
Amount in settlement of such part of the principal amount and interest
as equivalent to the Completion Amount comprised in those outstanding
repayment instalments specified in the Repayment Schedule which are
overdue for repayment as at the date of Completion (the "Overdue
Amount");
(B) the remaining balance of the outstanding overdue repayment instalments
shall remain immediately repayable and all subsequent repayment
instalments set out in the Repayment Schedule respectively falling due
for payment by the Company thereafter shall remain due and payable on
the respective dates specified therefor in the Repayment Schedule;
(C) ERL shall execute the New Share Charge in favour of Brilliant Future
Holdings Limited (as trustee for an on behalf of the Investors) in
replacement of the Existing Share Mortgage on Completion; and
(D) upon receipt of the New Share Charge duly executed, the Investors will
execute the Release, and will send by courier the Release to the
Escrow Agent in accordance with the terms of the Escrow Letter.
4. COMPLETION
----------
(A) Completion shall take place at the offices of Chao and Chung at Suites
2601-5, Asia Pacific Finance Tower, Citibank Plaza, 3 Garden Road, Hong
Kong on the second Business Day (or such other day as the Company, SAI and
the Investors may agree) following the last to occur (i) completion of the
Sale; (ii) receipt by the Investors from the Escrow Agent of the Completion
Amount pursuant to the Escrow Letter; and (iii) release of the Release by
the Escrow Agent pursuant to the Escrow Letter.
(B) At Completion, the following transactions shall take place:-
(1) the Company shall:-
(i) deliver to the Investors a certified copy of the board resolution
4
<PAGE>
of the Company approving and authorising execution and
completion of this Agreement and resolving to effect and do all
that is necessary to give effect to this Agreement;
(ii) deliver to the Investors a certified copy of the board
resolution of SAI approving and authorising execution and
completion of this Agreement and resolving to effect and do all
that is necessary to give effect to this Agreement and the
Guarantee;
(iii) deliver to the Investors a certified copy of the board
resolution of CIBHL approving and authorising the execution and
completion of this Agreement and resolving to effect and do all
that is necessary to give effect to this Agreement and the
Guarantee;
(iv) deliver to the Investors a certified copy of the board
resolution of ACL approving and authorising the execution and
completion of this Agreement and resolving to effect and do all
that is necessary to give effect to this Agreement and the ACL
Undertaking;
(v) deliver to the Investors a certified copy of the board
resolution of SIHL approving and authorising the execution and
completion of this Agreement and resolving to effect and do all
that is necessary to give effect to this Agreement; and
(vi) deliver evidence satisfactory to the Investors that the Company
has effected payment by cashier order to Chao and Chung in
respect of all the costs and expenses referred to in Clause 6
hereof, the amount of which shall be notified to the Company by
the Investors prior to Completion;
(2) ERL shall execute and deliver to Brilliant Future Holdings Limited the
New Share Mortgage and the board resolution of ERL approving and
authorising the execution and completion of this Agreement and the New
Share Charge and resolving to effect and do all that is necessary to
give effect to this Agreement and the New Share Charge; and
(C) All the events which are to take place at Completion shall take place
simultaneously and no party shall be obliged to complete this Agreement
unless the other parties simultaneously comply with their respective
obligations contained in sub-clause (B) of this clause.
(D) For the avoidance of doubt, the continuing obligations of the Sunbase
Parties under the Settlement Agreement shall not cease as a result of
Completion other than for SPC, whose continuing obligations under the
Settlement Agreement are released by the operation and effect of the
Release after Completion.
5
<PAGE>
5. EFFECT OF THIS AGREEMENT
------------------------
Provided that Completion takes place as provided in Clause 4 the Settlement
Agreement shall thenceforth be read and construed and will continue to take
effect subject only to the express modification provided herein and for
this purpose each of the Sunbase Parties hereby agrees, acknowledges and
declares that it shall continue to be bound of each and all of the
undertakings, covenants, obligations and agreements on its part undertaken
in (as the case may be) the Settlement Agreement, the Guarantee, the ACL
undertaking and the Existing Share Mortgage as the same is (and to the
extent) expressly modified by this Agreement. But if Completion shall fail
to take place as herein provided, all of the rights, obligations and
liabilities of the respective parties under and pursuant to the Settlement
Agreement, the Guarantee, the Undertaking and the Existing Share Mortgage
shall be preserved.
6. COSTS AND EXPENSES
------------------
The legal costs incurred in connection with the preparation and negotiation
of this Agreement and ancillary documentation shall be borne by the
Company.
7. GOVERNING LAW AND JURISDICTION
------------------------------
7.1 This Agreement shall be governed by and construed in accordance with the
laws of Hong Kong and each party hereby submits to the non-exclusive
jurisdiction of the courts of Hong Kong as regards any claim or matter
arising under this Agreement.
7.2 Each of the parties hereto irrevocably agrees for the benefit of each of
the Investors that the courts of Hong Kong shall have jurisdiction to hear
and determine any suit, action or proceeding, and to settle any disputes,
which may arise out of or in connection with this Agreement and, for such
purposes, irrevocably submits to the jurisdiction of such courts.
7.3 Each of the parties hereto irrevocably waives any objection it might now
or hereinafter have to the courts referred to in Clause 7.1 above nominated
as the forum to hear and determine any suit, action or proceeding, and to
settle any disputes, which may arise out of or in connection with this
Agreement and agrees not to claim that any of such courts is not a
convenient or appropriate forum.
8. GENERAL PROVISIONS
------------------
8.1 As regards any date or period time shall be of the essence of this
Agreement.
6
<PAGE>
8.2 This Agreement shall be binding on and enure for the benefit of the
successors of each of the parties and shall not be assignable.
8.3 The exercise of or failure to exercise any right to remedy in respect of
any breach of this Agreement shall not, save as provided herein, constitute
a waiver by such party of any other right or remedy it may have in respect
of that breach.
8.4 Any right or remedy conferred by this Agreement on any party for breach of
this Agreement shall be in addition and without prejudice to all other
rights and remedies available to it in respect of that breach.
8.5 The Settlement Agreement as expressly modified by this Agreement
constitutes the entire agreement between the parties with respect to its
subject matter and shall (including the Repayment Schedule as modified as a
result of the application of the Completion Amount as provided in Clause
3.1(A) above) remain binding on and enforceable against the parties
thereto, and no variation of the Settlement Agreement as so modified shall
be effective unless made in writing and signed by all of the parties.
8.6 Save and except the Subscription Agreement, the Settlement Agreement, the
ACL Undertaking and the Guarantee or any other signed agreements in
connection with the aforesaid, this Agreement supersedes all and any
previous agreements, arrangement or understanding between the parties
relating to the matters referred to in this Agreement and all such previous
agreements, understanding or arrangements (if any) shall cease and
determine with effect from this date hereof.
8.7 If at any time any provision of this Agreement is or becomes illegal, void
or unenforceable in any respect, the remaining provisions hereof shall in
no way be affected or impaired thereby.
9. COUNTERPARTS
------------
This Agreement may be executed by the parties hereto in any number of
counterparts and on separate counterparts, each of which when so executed
shall be deemed an original but all of which shall constitute one and the
same instrument and is binding on all parties.
AS WITNESS whereof this Agreement has been duly executed on the date first above
written.
7
<PAGE>
SCHEDULE 1
----------
Form of the New Share Mortgage
------------------------------
8
<PAGE>
EXHIBIT 10.26(a)
Dated 1st March, 2000
---------------------------
Extensive Resources Limited
AND
Brilliant Future Holdings Limited
___________________________________
Deed of Mortgage
relating to
Shares in Tianjin Development Holdings Limited
___________________________________
Chao and Chung
Hong Kong
9
<PAGE>
THIS DEED is made on the 1st day of March 2000
BETWEEN
(1) Extensive Resources Limited, a company incorporated in British Virgin
Islands and having its registered address at P.O. Box 71, Craigmuir
Chambers, Road Town, Tortola, British Virgin Islands (hereinafter
referred to as the Chargor); and
(2) Brilliant Future Holdings Limited, a company incorporated in British
Virgin Islands and having its registered address at the offices of
Offshore Incorporations Limited, P.O. Box 957, Offshore Incorporations
Centre, Road Town, Tortola, British Virgin Islands (hereinafter
referred to as the "Chargee").
WHEREAS:-
(A) The Chargor is the beneficial owner of the Mortgaged Shares (as
defined hereinafter).
(B) The Chargor agreed pursuant to the Settlement Agreement to charge in
favour of the Chargee the Mortgaged Shares and executed the Existing
Share Mortgage.
(C) The Chargor has agreed pursuant to the Supplemental Agreement to
execute this Deed in replacement of the Existing Share Mortgage.
IT IS HEREBY AGREED as follows:-
1. Interpretation
--------------
1.1 Except as otherwise expressly provided, terms defined in the
Supplemental Agreement shall have the same respective meanings when
used in this Deed.
1.2 In this Deed the following expressions shall have the following
meanings respectively:-
"Disposal" means, any sale, assignment, exchange, transfer,
concession, loan, lease, surrender of lease, tenancy, licence, direct
or indirect reservation, waiver, compromise, release, dealing with or
in or granting of any option, right of first refusal or other right or
interest whatsoever or any agreement for any of the same and Dispose
shall be construed accordingly;
"Encumbrance" means any mortgage, charge, pledge, lien (other than a
lien arising by statute or operation of law) or other encumbrance,
priority or security interest, deferred purchase, title retention,
leasing, sale-and repurchase
10
<PAGE>
or sale-and leaseback arrangement whatsoever or in any assets, rights
or interest of whatsoever nature and includes any agreement for any of
the same;
"Mortgaged Shares" means the 1,000,000 shares in the capital of
Tianjin Development held by the Chargor to be mortgaged hereunder and
for the time being subject to the charge created hereunder;
"Settlement Agreement" means a settlement agreement dated 16th
October, 1999 as modified by a supplemental agreement dated 1st March,
2000 relating to certain repayment arrangements of the Company; and
"Tianjin Development" means Tianjin Development Holdings Limited, a
company incorporated in Hong Kong and listed on The Stock Exchange of
Hong Kong Limited.
1.3 In this Deed, unless the context otherwise requires:-
(a) words and expressions defined in the Companies Ordinance (Cap.
32) of the Laws of Hong Kong shall bear the same meanings when
used herein;
(b) references to any statutes or statutory provision shall include
any statute or statutory provision which amends, replaces or re-
enacts, or has amended, replaced or re-enacted, it, and vice
versa, and shall include any statuary instrument, order,
regulation or other subordinate legislation made thereunder.
(c) references to Clauses, paragraphs, Recitals and Schedules are to
clauses and paragraphs of, and recitals and schedules to, this
Agreement and references to sub-clauses are to sub-clauses of the
clause in which the reference appears;
(d) references to a "company' shall be construed so as to include any
company, corporation or other body corporate, wherever and
however incorporated or established;
(e) references to a "person" shall be construed so as to include any
individual, firm, company, government, state or agency of a
state, local or municipal authority or government body or any
joint venture, association or partnership (whether or not having
separate legal personality); and
(f) words importing the singular include the plural and vice versa,
words importing one gender include every gender.
11
<PAGE>
2. Share Mortgage
--------------
2.1 The Chargor, as beneficial owner, mortgages and agrees to mortgage to the
Chargee (as trustee for and on behalf of the Investors) by way of first
mortgage all of the Mortgaged Shares as a continuing security for the
discharge of such obligations of the Company under the Settlement Agreement
as shall fall to be performed.
2.2 In furtherance of the security constituted by this Deed the Chargor shall
deliver to the Chargee the share certificates representing the Mortgaged
Shares (and the Chargee hereby acknowledge receipt thereof) together with
duly executed but undated sold notes, instruments of transfer in respect of
the Mortgaged Shares in favour of the Chargee and/or its nominees.
3. Covenants
---------
3.1 The Chargor covenants with the Chargee:-
(a) to reimburse to the Chargee all costs, charges and expenses which may
be incurred by it under or arising out of this Deed or in connection
with the Mortgaged Shares (but excluding any costs, charges and
expenses incurred by the Chargee in connection with the preparation
and negotiation of this Deed);
(b) at all times to comply in all respects with any law or directive and
any conditions in relation to this Deed and the Settlement Agreement;
and
(c) on demand made at any time after the security constituted by this Deed
becomes enforceable, procure that the Mortgaged Shares are transferred
into and registered in the share register of Tianjin Development in
the name of the Chargee and/or its nominees.
3.2 The Chargor covenant with the Chargee that it will not create or permit to
subsist any Encumbrance over or Dispose of the Mortgaged Shares (or the
equity of redemption in relation to the same) except with the prior consent
of the Chargee.
4. Share Rights
------------
4.1 Until the security constituted by this Deed becomes enforceable, the
Chargor shall be entitled to exercise any voting rights in respect of the
Mortgaged Shares provided that the Chargor will not exercise, or permit the
exercise of, voting rights in respect of any of the Mortgaged Shares in
such manner as will, in the opinion of the Chargee, contravene any of the
provisions of, or jeopardise any of the security created by this Deed and
the Settlement Agreement.
12
<PAGE>
4.2 Upon the security constituted by this Deed becoming enforceable the Chargee
or its nominees, may (to the entire exclusion of the Chargor) at any time,
at the Chargee's discretion, exercise any voting rights in respect of the
Mortgaged Shares and all the powers given to trustees by Section 11(4) and
(5) of the Trustee Ordinance (Cap.29) in respect of securities subject to a
trust and all powers or rights which may be exercised by the person or
persons in whose name or names the Mortgaged Shares are registered under
the terms hereof or otherwise.
4.3 The Chargor (or as appropriate his nominee) shall be entitled to retain for
its own benefit any dividends, distributions or other monies paid (and
which the Chargee has agreed should be paid) on or in respect of the
Mortgaged Shares prior to the security constituted by this Deed becoming
enforceable. All dividends, distributions or other monies paid or payable
on or in respect of the Mortgaged Shares at any other time or without the
prior approval of the Chargee, if received by the Chargor or its nominee,
shall be paid over to (and pending such payment shall be held on trust for)
the Chargee.
5. Enforcement
-----------
5.1 The Chargee shall be entitled to declare all or any part of the security
constituted by this Deed enforceable at any time immediately upon the
breach of any of the obligations of the Company under the Settlement
Agreement as the same is certified in writing by the Chargee.
5.2 Upon or at any time after the security constituted by this Deed has become
enforceable, the Chargee shall have the right, at any time, without notice
or any other action with respect to the Chargor, to take such steps as are
necessary to effect a transfer of the Mortgaged Shares to itself (and/or
its nominees) and/or sell the Mortgaged Shares or any of them in such
manner, at such price or prices, without being responsible for any loss, as
the Chargee may at its absolute discretion deem expedient, and the Chargee
shall not be responsible for any loss from or through brokers or others
employed in the sale of the Mortgaged Shares or for any loss or
depreciation in value of any of the Mortgaged Shares arising from or
through any cause whatsoever. The Chargee shall be entitled to reimburse
itself out of the proceeds of sale all costs, charges and expenses incurred
by it in such sale and is authorised to apply any net proceeds of the
Mortgaged Shares towards payment of the outstanding principal and interest
due from the Company to the Investors under the Settlement Agreement in
proportion to the principal amounts of the Debentures held by each of the
Investors respectively.
5.3 The Chargor agrees that upon any Disposal of the Mortgaged Shares or any
other rights under this Deed, the Chargee may make or purport to make a
statement in writing signed by the Chargee that this Deed is enforceable
and that the power of sale has become exercisable which statement shall be
conclusive evidence of the fact in favour of any purchaser or other person
acquiring any of the Mortgaged Shares or other rights and every purchaser
will
13
<PAGE>
take the same free of any rights of the Chargor. The Chargor shall
indemnify the Chargee against any claims or demands which may be made
against the Chargee by such purchaser and any liability, loss, cost or
expense which the Chargee may suffer or incur by reason of any defect in
the Chargor's title to the Mortgaged Shares.
5.4 The Chargor agrees to waive any right to require that, prior to the
enforcement of the security constituted by this Deed, proceedings be taken
against the Chargor so that action be taken to realize the security held
pursuant to this Deed.
6. Power of Attorney
-----------------
6.1 The Chargor, by way of security, irrevocably appoints the Chargee and each
of its directors, officers and managers for the time being, with full power
of substitution and delegation, to be his attorney acting singly or
together and in his name, on his behalf to do all such assurances, acts or
things as he ought to do under the covenants and provisions contained in
this Deed and generally in his name and on his behalf to exercise all or
any of the powers, authorities and discretions conferred by or pursuant to
this Deed on the Chargee and generally to execute, seal and deliver and
otherwise perfect any deed, assignment, transfer, assurance, agreement,
instrument, or act which may in the opinion of the Chargee (or any
substitute attorney) be required or considered proper, necessary or
desirable for any of the purposes of this Deed.
6.2 The Chargor ratifies and confirms and agrees to ratify and confirm whatever
any attorney mentioned in this clause does in the exercise or purported
exercise of all or any of the powers, authorities and discretions under
this clause.
7. Termination
-----------
This Deed shall terminate automatically upon performance of all the
obligations of the Company under the Settlement Agreement whereupon the
Chargee shall:-
(a) redeliver to the Chargor the share certificates and instruments of
transfer in respect of the Mortgaged Shares or the remainder of them
(if any);
(b) generally take such other action as may be reasonably required at the
cost of the Chargor to release the Chargor from and to discharge this
Deed.
8. Indulgence
----------
This Deed and the rights of the Chargee under it shall not be discharged or
in any way affected by:-
14
<PAGE>
(a) any time, indulgence, waiver or consent at any time given to, or any
compromise or composition entered into or made with, the Chargor or
any other person or any other release (conditional or otherwise) of
the Chargor or any other person;
(b) any amendment, variation, supplement or notation, to or of the
Settlement Agreement or any of them (whether or not the change
effected by such amendment, variation, supplement or notation is
material);
(c) any assignment by the Chargee of their rights and obligations under
the Settlement Agreement;
(d) any defect, irregularity or deficiency in any provision of any of the
Settlement Agreement, or the obligations of any party thereunder being
or becoming terminated, invalid, illegal or unenforceable at any time
and/or for any reason (whether or not known to the Subscriber);
(e) any party thereto not being bound by the terms of the Settlement
Agreement, whether as a result of any failure to execute, or any
deficiency in the execution of, the same or as a result of any defect
in or insufficiency or want of the necessary powers or any irregular
or improper exercise thereof, whether or not known to the Chargee or
for any other reason whatsoever; or
(f) the insolvency, bankruptcy, dissolution, winding-up, liquidation,
amalgamation, reconstruction, reorganization, charge in constitution,
death or incapacity of the Chargor.
9. General
-------
9.1 The rights and remedies provided in this Deed are cumulative and not
exclusive of any rights or remedies provided by law or under the Settlement
Agreement.
9.2 Any provision of this Deed may be amended only if the Chargor and the
Chargee agree in writing.
9.3 (A) Any notice or other communication given or made under this Agreement
shall be in writing.
(B) Any such notice or other communication shall be addressed as provided
in sub-clause (C) and, if so addressed, shall be deemed to have been
duly given or made as follows:-
(i) if sent by personally delivery, upon delivery at the address of
the relevant party;
15
<PAGE>
(ii) if sent by post, two clear Business Days (if within Hong Kong)
or 7 Business Days (if overseas) after the date of posting; and
(iii) if sent by facsimile, when despatched;
PROVIDED THAT if, in accordance with the above provisions, any such
notice or other communication would otherwise be deemed to be given or
made outside working hours, such notice or other communication shall
be deemed to be given or made at the start of working hours on the
next Business Day. "Working hours" means 9:00a.m. to 5:30p.m. on the
Business Day.
(C) The relevant addressee, address and facsimile number of each party for the
purposes of this Agreement are:-
(i) in the case of the Chargor:-
Address: c/o China International Bearing Holdings Limited
19th Floor, First Pacific Bank Centre
51-57 Gloucester Road, Hong Kong
Facsimile: (852) 2865 4293
Attention: Mr. Roger Li / Mr. Chen Hong Fei
(ii) in the case of the Chargee:-
Address: c/o HPEM, Level 17, 1 Queen's Road,
Central, Hong Kong
Facsimile: (852) 2845 9992
Attention: Mr. George Raffini/Ms. Glory Gunawan
or in each case at or to such other address, facsimile number of individual
as the receiving party may have notified the sending party provided that
such notification shall only be effective on the date specified in the
notification as the date on which the change is to take place or if no date
is specified or the date specified is fewer than five clear Business Days
after the date on which notice if given, the date falling five clear
Business Days after notice of any change has been given.
9.4 The illegality, invalidity or unenforceablility of any provision of this
Deed under the law of any jurisdiction shall not affect its legality,
validity or enforceability under the law of any other jurisdiction nor the
legality, validity or enforceability of any other provision.
16
<PAGE>
9.5 This Deed shall enure to the benefit of the parties hereto and their
respective permitted successors, assignees and transferees.
9.6 The Chargor and the Chargee may not assign or transfer any or all of their
rights or obligations under this Deed.
10. Law
---
This Deed shall be governed by and construed in accordance with the laws of
Hong Kong.
AS WITNESS whereof this Deed has been duly executed on the date first above
written.
17
<PAGE>
SEALED WITH THE COMMON SEAL )
OF EXTENSIVE RESOURCES LIMITED )
in the presence of:- )
SIGNED BY Tien-yo Chao )
AS DULY AUTHORISED ATTORNEY )
FOR AND ON BEHALF OF )
BRILLIANT FUTURE HOLDINGS LIMITED )
in the presence of:- )
18
<PAGE>
SCHEDULE 2
----------
Form of the Release
-------------------
19
<PAGE>
Exhibit 10.26(b)
Dated 1st March 2000
--------------------------------------------
(1) Glory Mansion Limited
and
(2) Wardley China Investment Trust
and
(3) MC Private Equity Partners Asia Limited
and
(4) Chine Investissement 2000
and
(5) Sunbase Asia, Inc.
and
(6) China International Bearing Holdings Limited
and
(7) Smith Acquisition Company, Inc
_____________________________________
RELEASE
_____________________________________
20
<PAGE>
THIS RELEASE is made this 1st day of March 2000
BY:
(1) Glory Mansion Limited, the registered office of which is at Craigmuir
Chambers, P.O. Box 71, Road Town, Tortola, British Virgin Islands ("GML");
(2) Wardley China Investment Trust, the registered office of which is at c/o
Suite 1610, P.O. Box 1016, 885 West Georgia Street, Vancouver B.C., V6C
3E8, Canada ("WCIT");
(3) MC Private Equity Partners Asia Limited, the registered office of which is
at P.O. Box 309, Ugland House, South Church Street, Grand Cayman, Cayman
Islands, British West Indies ("MC Partners");
(4) Chine Investissement 2000, a Luxembourg-registered Unit Trust, the
registered office of which is at L1118 Luxembourg, 14 Rue Aldringen ("CI
2000");
(The parties referred to at (1), (2), (3) and (4) hereinafter collectively
referred to as "Investors" and each an "Investor")
(5) Sunbase Asia, Inc., the registered office of which is at 1280 Terminal Way,
Suite 3, Reno Nevada 89502, United States of America ("SAI");
(6) China International Bearing Holdings Limited, the registered office of
which is at 19th Floor, 51-57 Gloucester Road, Wanchai, Hong Kong
("CIBHL");
(The parties referred to at (5) and (6) hereinafter collectively referred
to as "Continuing Guarantors" and each a "Continuing Guarantor").
(7) Smith Acquisition Company, Inc., a California corporation doing business as
Southwest Products Company, the registered office of which is at 2240 Buena
Vista, Irwindale, CA 91706, United States of America ("SPC");
WHEREAS:-
(A) SPC and the Continuing Guarantors signed a guarantee in favour of the
Investors dated 16/th/ October, 1998 (the "Guarantee") securing payment of
certain amounts (the "Debt") and performance of certain obligations.
(B) In consideration of the Debt being partially discharged pursuant to a
Supplemental Agreement dated 1/st/ March, 2000 executed between, inter
alia, SPC, the Continuing Guarantors, the Investors and certain other
parties, the Investors have agreed to discharge and release the obligations
of SPC under the Guarantee on the terms and conditions contained herein.
21
<PAGE>
NOW THIS RELEASE WITNESSETH that:
1. In consideration of the Debt being partially discharged pursuant to the
Supplemental Agreement as referred to in Recital (B) above, the Investors
hereby discharge and release SPC from all liabilities and obligations due
and owing as at the date hereof by SPC to the Investors under the Guarantee
or any other documents in connection with the Debt including without limit
the Settlement Agreement dated 16/th/ October, 1998 and the Supplemental
Agreement (the "Debt Documents").
2. Each of the Continuing Guarantors hereby acknowledges that its continuing
obligations under the Guarantee shall remain notwithstanding the execution
of this Release and that it shall have no rights against SPC under the
Guarantee upon signing of this Release.
3. This Release is governed by the laws of the Hong Kong Special
Administrative Region of the People's Republic of China.
IN WITNESS WHEREOF this Release has been executed this 1st day of March 2000
SIGNED by Tien-yo Chao )
duly authorised attorney for and on behalf )
of GLORY MANSION LIMITED )
in the presence of:- )
SIGNED by Tien-yo Chao )
duly authorised attorney for and on behalf )
of WARDLEY CHINA )
INVESTMENT TRUST )
in the presence of:- )
22
<PAGE>
SIGNED by Mr. Yasushi Okahisa )
duly authorised for and on behalf )
of MC PRIVATE EQUITY PARTNERS )
ASIA LIMITED )
in the presence of:- )
SIGNED by Tien-yo Chao )
duly authorised attorney )
for and on behalf )
of CHINE INVESTISSEMENT 2000 )
in the presence of:- )
The Common Seal of )
SUNBASE ASIA, INC. )
was hereunto affixed )
in the presence of:- )
The Common Seal of )
CHINA INTERNATIONAL )
BEARING HOLDINGS LIMITED )
was hereunto affixed )
in the presence of:- )
SIGNED by )
duly authorised for and on behalf )
of SMITH ACQUISITION )
COMPANY, INC. )
in the presence of:- )
23
<PAGE>
SIGNATURE PAGES
---------------
SIGNED by /s/ Roger Li )
duly authorised for and on behalf )
of CHINA BEARING ) /s/ Roger Li
HOLDINGS LIMITED )
in the presence of:- /s/ Hongfei Chen )
SIGNED by /s/ Roger Li )
duly authorised for and on behalf ) /s/ Roger Li
of ASEAN CAPITAL LIMITED )
in the presence of:- /s/ Hongfei Chen )
SIGNED by /s/ Roger Li )
duly authorised for and on behalf )
of CHINA INTERNATIONAL ) /s/ Roger Li
BEARING HOLDINGS LIMITED )
in the presence of:- /s/ Hongfei Chen )
SIGNED by /s/ Roger Li )
duly authorised for and on behalf ) /s/ Roger Li
of SUNBASE ASIA, INC. )
in the presence of:- /s/ Hongfei Chen )
SIGNED by )
duly authorised for and on behalf )
SMITH ACQUISITION COMPANY, INC. ) /s/ Samuel Mok Trustee
in the presence of:- )
24
<PAGE>
SIGNED by Tien-yo Chao )
duly authorised attorney for and on behalf ) /s/ Tien-yo Chao
of GLORY MANSION LIMITED )
in the presence of:- /s/ Desmond Chow )
Desmond Chow
Solicitor
Hong Kong SAR
SIGNED by Tien-yo Chao )
duly authorised attorney for and on behalf )
of WARDLEY CHINA ) /s/ Tien-yo Chao
INVESTMENT TRUST )
in the presence of:- /s/ Desmond Chow )
Desmond Chow
Solicitor
Hong Kong SAR
SIGNED by Mr. Yasushi Okahisa )
duly authorised for and on behalf )
of MC PRIVATE EQUITY PARTNERS ) /s/ Mr. Yasushi Okahisa
ASIA LIMITED )
in the presence of:- /s/ Desmond Chow )
Desmond Chow
Solicitor
Hong Kong SAR
SIGNED by Tien-yo Chao )
duly authorised attorney )
for and on behalf ) /s/ Tien-yo Chao
of CHINE INVESTISSEMENT 2000 )
in the presence of:- /s/ Desmond Chow )
Desmond Chow
Solicitor
Hong Kong SAR
SIGNED by /s/ Roger Li )
duly authorised for and on behalf )
of EXTENSIVE RESOURCES ) /s/ Roger Li
LIMITED )
in the presence of:- /s/ Hengfei Chen )
25
<PAGE>
SIGNED by /s/ Roger Li )
duly authorised for and on behalf )
of SUNBASE INTERNATIONAL ) /s/ Roger Li
(HOLDINGS) LIMITED )
in the presence of:- /s/ Hongtei Chen }
26
<PAGE>
ANNEXURE 1
----------
FORM OF THE ESCROW LETTER
-------------------------
<PAGE>
BY COURIER AND BY FAX (002-1-202-3261555)
- -----------------------------------------
1/st/ March, 2000
Jenkens & Gilchrist
1919 Pennsylvania Avenue, NW
Suite 600
Washington D.C. 200060
Attn: Mr. Andrew C. Lynch / Mr. Christopher E. Ondeck
- -----------------------------------------------------
Dear Sirs,
Re: Monies to be held in Escrow
-------------------------------
1. We refer to (i) the Stock Purchase Agreement dated 31/st/ January entered
into between Sunbase Asia, Inc ("SAI"), Samuel T. Mok, an investment group
led by William McKay (the "Buyer") and Smith Acquisition Company Inc
("SPC") in connection with the sale and purchase of shares of capital stock
of SPC (the "Sale"); and (ii) the Supplemental Agreement dated 1/st/ March,
2000 entered into between SAI, ourselves and certain other parties in
connection with certain supplemental arrangements relating to repayments
prescribed in a Settlement Agreement dated 16/th/ October, 1998.
2. For the purpose of facilitating completion of the Sale, we enclose a duly
executed release (the "Release"), to be dated the day as mentioned in
paragraph 4 below, in relation to the release of SPC from its obligations
under the Guarantee dated 16th October, 1998.
3. You are instructed to hold the Release in escrow pending the transfer by
you (solely from the proceeds of the Closing (as "Closing" is referred to
and defined in the said Stock Purchase Agreement)) of the following
respective amounts by telegraphic transfer into the following bank
accounts:-
The HSBC Private Equity Fund, L.P.
----------------------------------
--------------------------------------------------------------------------
Bank: HSBC Bank USA, New York
140 Broadway
New York NY10015
U.S.A.
SWIFT: MRMD US 33
--------------------------------------------------------------------------
Account name: HSBC International Trustee Limited a/c HPEF
(General)
--------------------------------------------------------------------------
Account no: 000-05073-3
--------------------------------------------------------------------------
Amount: US$1,356,522
--------------------------------------------------------------------------
<PAGE>
Wardley China Investment Trust
------------------------------
--------------------------------------------------------------------------
Bank: Brown Brothers Harriman and Co., New York
--------------------------------------------------------------------------
Account name: Royal Trust Corporation of Canada, London
--------------------------------------------------------------------------
Account no: 7027436
--------------------------------------------------------------------------
SWIFT CODE: BBHCUS33
--------------------------------------------------------------------------
For further credit to: Wardley China Investment Trust
--------------------------------------------------------------------------
Account no: 877653
--------------------------------------------------------------------------
Amount: US$452,174
--------------------------------------------------------------------------
MC Private Equity Partners Asia
-------------------------------
--------------------------------------------------------------------------
Bank: Bangkok Bank Public Company Ltd Singapore
--------------------------------------------------------------------------
180 Cecil Street, Singapore 069546
--------------------------------------------------------------------------
Account no: 0700-388629-412
--------------------------------------------------------------------------
Account holder MC Private Equity Partners Asia
--------------------------------------------------------------------------
Currency Type US$ ACU Call
--------------------------------------------------------------------------
PIC of Bank Ms Sumalee (Tel: 65-229-7429)
--------------------------------------------------------------------------
Amount: US$452,174
--------------------------------------------------------------------------
Chine Investissement 2000
-------------------------
--------------------------------------------------------------------------
Bank: Bank of America New York
--------------------------------------------------------------------------
SWIFT: BWORFRPP
--------------------------------------------------------------------------
Account name: Banque Worms, Paris
--------------------------------------------------------------------------
For further credit to: Chine Investissement 2000
--------------------------------------------------------------------------
Account no.: 0356631361P
--------------------------------------------------------------------------
IBAN Code: FR60-3099-8000-0303-5663-1361-P76
--------------------------------------------------------------------------
Amount: US$339,130
--------------------------------------------------------------------------
4. Upon our receipt of the respective amounts and in the manner set out in
paragraph 3 which should not be later than 15/th/ April, 2000 and subject
to paragraph 5 below, we shall promptly notify you in writing and you may
release and deliver the Release to the Buyer and insert as the date of the
Release (which you are hereby authorised to do on our behalf) the day on
which the Release is so released and delivered to the Buyer. Save as
aforesaid, you shall not release or otherwise deal with the Release.
5. If we do not receive the sum and in the manner set out in paragraphs 3 on
or before 15/th/ April, 2000, we shall have the right by written notice to
you to demand the prompt return of the Release to us, whereupon you are
obliged to return the Release by courier to Glory Mansion Limited (on
behalf of itself and the rest of us), care of HSBC Private Equity (Asia)
Limited at Level 17, 1 Queen's Road Central, Hong Kong. If the Release is
not released pursuant to
<PAGE>
this letter by April 30, 2000, you have the option of returning the Release
to us (by returning it to Glory Mansion Limited in the manner
aforementioned), and upon such return of the Release the obligations of you
arising from this letter shall cease and terminate.
6. You need to have no regard to the sufficiency, accuracy or genuineness of
any notice or confirmation received by you in your capacity as escrow agent
hereunder of any incapacity and limitation upon the powers of any person
signing and issuing such notice or confirmation which appears on its face
to be in order and may assume such notice or confirmation which appears on
its face to be in order is correct and properly made.
7. This letter shall be governed by and construed in accordance with the laws
of The Hong Kong Special Administrative Region of the People's Republic of
China ("Hong Kong"). All disputes in connection with this letter shall be
subject to the non-exclusive jurisdiction of the courts of Hong Kong.
8. This letter shall not be amended or varied except by written notification
duly executed by all parties hereto.
9. By signing and acknowledging the terms of this letter, you irrevocably
agree to strictly abide by and adhere to the provisions of this letter.
10. Please countersign below to acknowledge your agreement to the above.
<TABLE>
<CAPTION>
Yours faithfully,
<S> <C>
/s/ Tien-yo Chao /s/ Tien-yo Chao
- ------------------------------------ ---------------------------------
Tien-yo Chao Tien-yo Chao
Duly authorised attorney Duly authorised attorney
for and on behalf for and on behalf
of Glory Mansion Limited of Wardley China Investment Trust
/s/ Yasushi Okahisa /s/ Tien-yo Chao
- ------------------------------------ ----------------------------------------
Mr. Yasushi Okahisa Tien-yo Chao
for and on behalf Duly authorised attorney
of MC Private Equity Partners for and on behalf
Asia Limited of Chine Investissement 2000
</TABLE>
<PAGE>
We hereby acknowledge and
agree to the above terms.
/s/ Nikelars F. Schalbame
- -------------------------------
For and on behalf of
Jenkens & Gilchrist
Date:
<PAGE>
ANNEXURE 2
----------
FORM OF THE CONSENT
-------------------
<PAGE>
CONSENT
-------
THIS CONSENT (the "Consent") dated as of 1/st/ March, 2000 is delivered pursuant
-------
to that certain Stock Purchase Agreement (the "Stock Purchase Agreement"), dated
------------------------
January 31, 2000, by and among SMITH ACQUISITION COMPANY D/B/A SOUTHWEST
PRODUCTS COMPANY, INC., (the "Company"), SAMUEL T. MOK, as voting trustee,
-------
SUNBASE ASIA, INC., and WILLIAM MCKAY ("Buyer"), as such agreement may be
-----
amended.
Subject to (i) the Supplemental Agreement dated 1st March, 2000 entered
into among, inter alia, China Bearing Holdings Limited and several other parties
----------
with respect to certain supplemental repayment arrangements and (ii) our receipt
of an aggregate sum of U.S. Two Million Six Hundred Thousand Dollars (U.S.
$2,600,000) pursuant to an escrow letter signed between ourselves and Jenkens &
Gilchrist in connection with the above matter, the signatories hereto consent to
the sale of the Company to the Buyer, for a purchase price of not less than U.S.
Three Million Five Hundred Thousand Dollars (U.S. $3,500,000).
IN WITNESS WHEREOF, this Consent has been duly executed under seal by the
parties hereto effective as of the date first above written.
GLORY MANSION LIMITED
/s/ Tien-yo Chao
---------------------------------
By: Tien-yo Chao
Duly authorised attorney
for an on behalf of
GLORY MANSION LIMITED
WARDLEY CHINA INVESTMENT TRUST
/s/ Tien-yo Chao
----------------------------------
By: Tien-yo Chao
Duly authorised attorney
for an on behalf of
WARDLEY CHINA INVESTMENT TRUST
<PAGE>
MC PRIVATE EQUITY PARTNERS ASIA LIMITED
/s/ Yasushi Okahisa
---------------------------------------
By: Mr. Yasushi Okahisa
Duly authorised
for an on behalf of
MC PRIVATE EQUITY PARTNERS ASIA
LIMITED
CHINE INVESTISSEMENT 2000
/s/ Tien-yo Chao
---------------------------------------
By: Tien-yo Chao
Duly authorised attorney
for an on behalf of
CHINE INVESTISSEMENT 2000
<PAGE>
Exhibit 10.27
William McKay
2240 Buena Vista
Irwindale, CA 91706
February 10, 2000
BY TELECOPY
- -----------
Samuel T. Mok., Voting Trustee
1001 Connecticut Avenue, N.W.
Suite 1035
Washington, D.C. 20036
Attention: Samuel T. Mok
and also to,
Sunbase Asia, Inc.
Smith Acquisition Company d/b/a Southwest Products Company, Inc.
Dear Ladies and Gentlemen:
This letter agreement shall represent an amendment to that certain Stock
Purchase Agreement (the "Stock Purchase Agreement") pursuant to which William
------------------------
McKay has agreed to acquire all of the issued and outstanding capital stock of
Smith Acquisition Company d/b/a Southwest Products Company, Inc..
Section 1.2 of the Stock Purchase Agreement shall be amended read as
-----------
follows:
1.2 Time and Place of Closing.
(a) The closing of the transactions contemplated hereby (the
"Closing") will take place on April 10, 2000, or such earlier date as the
-------
parties may agree in writing (the "Closing Date"). The Closing shall be
------------
held at the offices of Jenkens & Gilchrist, 1919 Pennsylvania Ave., N.W.,
Suite 600, Washington, D.C. 20006, or such location as may be agreed upon
by the parties.
<PAGE>
A substitute page that amends Section 1.2 to that effect is attached herewith
(to replace page 1 of the Stock Purchase Agreement).
Section 4.2 is amended to insert: "10,000,000 shares of common stock, no
par value, and 4,000,000 shares of preferred stock, no par value".
A substitute page that sets forth in Section 4.2 the number of issued and
authorized shares of the Company is attached herewith (to replace page 4 of the
Stock Purchase Agreement).
WILLIAM MCKAY
By: /s/ William Reed McKay
-----------------------------------
Print Name: William Reed McKay
------------------------
AGREED AND ACCEPTED:
SMITH ACQUISITION COMPANY D/B/A
SOUTHWEST PRODUCTS COMPANY, INC.
By: /s/ Samuel T. Mok
-----------------------------------
Name: SAMUEL T. MOK
------------------------------
Title: CHAIRMAN
-----------------------------
SAMUEL T. MOK
Voting Trustee
By: /s/ Samuel T. Mok
-----------------------------------
Print Name: SAMUEL T. MOK
------------------------
<PAGE>
SUNBASE ASIA, INC.
By: /s/ Li Yuen Fai Roger
-----------------------------------
Name: LI YUEN FAI ROGER
------------------------------
Title: CHIEF FINANCIAL OFFICER
-----------------------------
<PAGE>
Exhibit 10.28
ASSIGNMENT OF RIGHTS IN
STOCK PURCHASE AGREEMENT
WHEREAS:
a. On January 31, 2000, William McKay entered into a Stock Purchase Agreement
(the "Agreement") with Smith Acquisition Company, Inc., d/b/a Southwest
Products Company, Inc. (the "Company"), Sunbase Asia, Inc. and Samuel T.
Mok, Trustee, to purchase all of the outstanding stock of the Company from
Sunbase Asia, Inc. and Samuel T. Mok, Trustee.
b. The Agreement does not permit the assignment of a party's rights under the
Agreement without the written consent of the other parties.
c. As previously disclosed to the Trustee, William McKay wishes to purchase
the Company stock with two other current management employees of the
Company, so that their combined ownership of the Company will be William
McKay - 70%, Frank P. Brothers - 15% and Gary S. Horany - 15%.
d. The lender who will be financing the purchase has requested that its loan
be made directly to the Company rather than the individual purchasers.
e. In order to structure the purchase with a loan to the Company, William
McKay, Frank P. Brothers and Gary S. Horany plan to create a new
corporation which will actually purchase the stock of the Company and
simultaneously merge with the Company, leaving the Company as the surviving
corporation. That would place the loan with the Company as requested by the
lender, and the Company would be owned 70% by William McKay, 15% by Frank
P. Brothers and 15% by Gary S. Horany.
1
<PAGE>
f. Accordingly, William McKay wishes to assign his right to purchase all
of the stock of the Company to the new corporation to be formed under
the name "McKay, Brothers & Horany Acquisition Corp.," the shares of
which will be owned 70% by William McKay, 15% by Frank P. Brothers and
15% by Gary S. Horany.
g. The Company, Sunbase Asia, Inc. and Samuel T. Mok, Trustee, wish to
consent to that assignment.
ACCORDINGLY:
William McKay hereby assigns to McKay, Brothers & Horany Acquisition
Corp., a corporation owned 70% by William McKay, 15% by Frank P. Brothers and
15% by Gary S. Horany, all of his right, title and interest in and to the
Agreement, including all of his duties, obligations and responsibilities
thereunder. William McKay acknowledges and agrees that this assignment to McKay,
Brothers & Horany Acquisition Corp. will not relieve him personally of any of
the duties, obligations and responsibilities he has under the Agreement or any
other agreement or guaranty executed in connection therewith.
Dated: March 24, 2000 /s/ William McKay
-----------------------------
William McKay
ACCEPTANCE OF ASSIGNMENT
On behalf of McKay, Brothers & Horany Acquisition Corp., we hereby accept
this assignment and agree to be bound by all of the duties, obligations and
responsibilities of the purchaser under the Agreement.
Dated: March 24, 2000 /s/ William McKay
------------------------------
William McKay
2
<PAGE>
Dated March 24, 2000 /s/ Frank P. Brothers
______________________________
Frank P. Brothers
Dated March 24, 2000 /s/ Gary S. Horany
______________________________
Gary S. Horany
CONSENT TO ASSIGNMENT
We hereby consent to the above assignment.
Smith Acquisition Company, Inc.
d/b/a Southwest Products Company, Inc.
Dated: March 24, 2000 /s/ Samuel T. Mok
---------------------------------
Samuel T. Mok, Chairman
Sunbase Asia, Inc.
Dated: March 27, 2000 /s/ Li Yuen Fai (Roger)
---------------------------------
Li Yuen Fai (Roger), Chief Fin'l
Officer
Dated: March 24, 2000 /s/ Samuel T. Mok
---------------------------------
Samuel T. Mok, Trustee
3
<PAGE>
Exhibit 10.29
McKay, Brothers & Horany Acquisition Corp.
2240 Buena Vista
Irwindale, CA 91706
April 10, 2000
BY TELECOPY
- -----------
Sunbase Asia, Inc.
Samuel T. Mok
c/o Samuel T. Mok., Voting Trustee
1001 Connecticut Avenue, N.W.
Suite 1035
Washington, D.C. 20036
Attention: Samuel T. Mok
Gentlemen:
Reference is made to that certain Stock Purchase Agreement dated January
31, 2000, by and among Smith Acquisition Company D/b/a Southwest Products
Company, Inc., (the "Company"), Samuel T. Mok, as voting trustee, Sunbase Asia,
-------
Inc., and William McKay (William McKay, together with his assignee, McKay,
Brothers & Horany Acquisition Corp., the "Buyer"), as amended by a letter
-----
agreement dated February 10, 2000 (the "Stock Purchase Agreement").
------------------------
This letter agreement constitutes a second amendment to the Stock Purchase
Agreement. The parties have agreed to extend the expiration date of the Stock
Purchase Agreement to April 28, 2000, to increase by $300,000 the amount of
earnest money deposited into escrow and to certain other changes as set forth
below.
The Stock Purchase Agreement is amended as follows:
1. Section 1.2(a) is amended to read as follows:
1.2 Time and Place of Closing.
(a) The closing of the transactions contemplated hereby (the
"Closing") will take place on April 28, 2000, or such earlier date as the
-------
parties may agree in writing (the "Closing Date"). The Closing shall be
------------
held at the offices of Jenkens & Gilchrist, 1919 Pennsylvania Ave., N.W.,
Suite 600, Washington, D.C. 20006, or such location(s) as may be agreed
upon by the parties.
<PAGE>
Sunbase Asia, Inc.
Samuel T. Mok
April 10, 2000
Page 2
2. Section 2.1 is amended to read as follows:
2.1 Purchase Price. The aggregate purchase price for the Company
Shares shall be Three Million Five Hundred Thousand United States Dollars
(US $3,500,000) (the "Purchase Price"). Buyer shall deliver to the Voting
--------------
Trustee as earnest money, the aggregate amount of Four Hundred Thousand
United States Dollars (US $400,000) as follows: (a) on the date of this
Agreement, the amount of One Hundred Thousand United States Dollars (US
$100,000), (b) on or prior to April 14, 2000, the amount of Two Hundred
Thousand United States Dollars (US $200,000), and (c) on or prior to April
19, 2000, the amount of One Hundred Thousand United States Dollars (US
$100,000). At Closing, the earnest money shall be offset against the
Purchase Price, the balance of which shall be delivered by Buyer to Seller
at Closing by wire transfer in immediately available federal funds to an
account designated by Seller by written notice to Buyer given at least two
days prior to the Closing Date.
3. Section 4.6 is amended to read as follows:
4.6 Absence of Obligations. Except as set forth on Schedule 4.6
hereto, Seller has not executed any agreement creating any obligation for
the Company (other than those obligations addressed in Section 7.9 or
Section 3.6).
4. The first sentence of Section 7.7 is amended to read as follows:
In the event that Buyer shall fail to close the purchase of the
Company for any reason other than a breach of this Agreement by Seller or
the fact that a condition to Buyer's obligations to close set forth in
Section 8.1 or Section 8.2 shall not have been satisfied, Seller shall be
entitled to keep the $400,000 earnest money and Buyer shall promptly pay
Seller the additional amount of $600,000.
5. A new Section 7.9 is added to read as follows:
7.9 Payment of Certain Obligations. At or prior to Closing, the
------------------------------
obligations of the Company to the Jenkens & Gilchrist and Oppenheimer,
Wolff, Donnelly and Bayh shall have been paid in full by the Company. In
the event that
<PAGE>
Sunbase Asia, Inc.
Samuel T. Mok
April 10, 2000
Page 3
the Company has not paid such amounts to Jenkens & Gilchrist and
Oppenheimer, Wolff, Donnelly and Bayh, Buyer shall pay such amounts at or
prior to Closing on behalf of the Company. Buyer acknowledges that the
Company shall have the obligation to pay amounts owing to the United States
offices of Ernst & Young. At or prior to the Closing, the Company shall pay
$10,000 for legal fees and expenses of O'Melveny & Myers LLP incurred in
connection with the Closing of this Agreement. In the event that the
Company has not paid such amount to O'Melveny & Myers LLP, Buyer shall pay
such amounts at or prior to Closing on behalf of the Company. Seller shall
be responsible to pay all amounts owing to the Trustee through April 28,
2000. In the event the Closing occurs after May 1, 2000, the Company shall,
at or prior to Closing, pay the Trustee the additional amount of $33,666
due to the Trustee under the compensation agreement relating to the Voting
Trust. In the event that the Company has not paid such amount to the
Trustee, Buyer shall pay such amounts at or prior to Closing on behalf of
the Company. Notwithstanding the prior two sentences, Seller shall have no
obligation to extend this Agreement past the date April 28, 2000. In the
event the Company does not or cannot pay the obligations specified to be
paid by the Company in this Section 7.9, such failure of payment shall not
constitute a breach of this Agreement or otherwise limit Buyer's obligation
under this Agreement and the Buyer shall pay such amounts as specified
above.
6. The first sentence of Section 8.2(f) is deleted so that Section 8.2(f)
reads in its entirety as follows:
(f) Certain Obligations. The Company shall have been released from
-------------------
any obligations to Seller (including any amounts owing as intercompany
loans or capital investment) and to Seller's debenture holders, such
release is to be effective upon the debenture holders' receipt of
immediately available funds in the amount of U.S.$2.6 million at Closing.
<PAGE>
Sunbase Asia, Inc.
Samuel T. Mok
April 10, 2000
Page 4
Please indicate your agreement with the foregoing by signing this letter
agreement below, whereupon the Stock Purchase Agreement shall be amended as
provided herein.
BUYER:
MCKAY, BROTHERS & HORANY
ACQUISITION CORP.
By: /s/ William Reed McKay
------------------------------
Print Name: William Reed McKay
---------------------
GUARANTOR:
WILLIAM MCKAY
/s/ William McKay
---------------------------------
Agreed and Accepted:
SMITH ACQUISITION COMPANY D/B/A
SOUTHWEST PRODUCTS COMPANY, INC.
By: /s/ Samuel T. Mok
------------------------
Name: Samuel T. Mok
-----------------------
Title: Chairman
---------------------
<PAGE>
Sunbase Asia, Inc.
Samuel T. Mok
April 10, 2000
Page 5
SAMUEL T. MOK
Voting Trustee
By: /s/ Samuel T. Mok
-----------------------------
Print Name: Samuel T. Mok
-----------------------
SUNBASE ASIA, INC.
By: /s/ Roger Li
----------------------------
Name: ROGER LI
----------------------------
Title: CHIEF FINANCIAL OFFICER
----------------------------
<PAGE>
EXHIBIT 10.30
MODIFICATION AGREEMENT
THIS MODIFICATION AGREEMENT ("Modification Agreement") is entered into as of the
15/th/ day of April, 2000 by the undersigned parties.
RECITALS
--------
A. On or about March 1, 2000, a certain Supplemental Agreement in respect of
certain arrangements relating to China Bearing Holdings Limited (the
"Supplemental Agreement") was executed by and among China Bearing Holdings,
Limited, Asean Capital Limited, China International Bearing Holdings
Limited, Sunbase Asia, Inc., Smith Acquisition Company, Inc. Sunbase
International (Holdings) Limited, Extensive Resources Limited, Glory
Mansion Limited, Wardley China Investment Trust, MC Private Equity Partners
Asia Limited and Chine Investissement 2000;
B. In connection with the Supplemental Agreement, a certain Release (the
"Release") was executed by and among Glory Mansion Limited, Wardley China
Investment Trust, MC Private Equity Partners Asia Limited. Chine
Investissement 2000, Sunbase Asia, Inc., China International Bearing
Holdings Limited and Smith Acquisition Company, Inc. which Release was
undated and was delivered to Jenkens & Gilchrist, pursuant to the Escrow
Letter described below;
C. On or about March 1, 2000, a certain Escrow Letter (the "Escrow Letter")
was executed by and among Glory Mansion Limited, MC Private Equity Partners
Asia Limited, Wardley China Investment Trust, Chine Investissement 2000 and
Jenkens & Gilchrist.
D. Each of the Supplemental Agreement, the Release and the Escrow Letter
contemplate the closing on or about April 10, 2000 of a certain Stock
Purchase Agreement dated January 31, 2000 (the "Stock Purchase Agreement"),
by and among Smith Acquisition Company D/b/a Southwest Products Company,
Inc., Samuel T. Mok, as voting trustee, Sunbase Asia Inc., and William
McKay, as amended.
E. The parties to the Stock Purchase Agreement have agreed to extend the term
of the Stock Purchase Agreement to April 28, 2000 with closing to take
place on or prior to such date.
F. The parties to the Supplemental Agreement, the Release and the Escrow
Letter desire to indicate their agreement that the closing of the Stock
Purchase Agreement can occur on or prior to April 28, 2000 without
affecting the agreements of the parties set forth therein (other than as to
the date of the closing of the Stock Purchase Agreement).
NOW, THEREFORE, in consideration of the mutual covenants and conditions herein
contained, the undersigned agree as follows:-
<PAGE>
1. Modification to Supplemental Agreement. In each place where the date
--------------------------------------
10/th/ April, 2000 appears in the Supplemental Agreement such date is
modified to be 28/th/ April, 2000.
2. Modification to Escrow Letter. In each place where the date 15/th/ April,
-----------------------------
2000 appears in the Escrow Letter such date is modified to be 4th May,
2000. In each place where the date 30/th/ April, 2000 appears in the Escrow
Letter such date is modified to be 15/th/ May, 2000.
3. Counterparts. This Modification Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Modification Agreement has been duly executed under
seal by the parties hereto effective as of the date first above written.
GLORY MANSION LIMITED
By: /s/ Tien-yo Chao
------------------------------------
Tien-yo Chao
Duly authorised attorney
for and on behalf of
GLORY MANSION LIMITED
WARDLEY CHINA INVESTMENT TRUST
By: /s/ Tien-yo Chao
------------------------------------
Tien-yo Chao
Duly authorised attorney
for and on behalf of
WARDLEY CHINA INVESTMENT TRUST
2
<PAGE>
MC PRIVATE EQUITY PARTNERS ASIA LIMITED
By: /s/ Yasushi Okahisa
-------------------------------------
Mr. Yasushi Okahisa
Duly authorised
for and on behalf of
MC PRIVATE EQUITY PARTNERS
ASIA LIMITED
CHINE INVESTISSEMENT 2000
By: /s/ Tien-yo Chao
-------------------------------------
Tien-yo Chao
Duly authorised attorney
for and on behalf of
CHINE INVESTISSEMENT 2000
CHINA BEARING HOLDINGS, LIMITED,
By: /s/ Li Yeun Fai Roger
---------------------------------
Name: Li Yeun Fai Roger
---------------------------------
Title: Director
---------------------------------
ASEAN CAPITAL LIMITED
By: /s/ Li Yeun Fai Roger
---------------------------------
Name: Li Yeun Fai Roger
---------------------------------
Title: Director
---------------------------------
3
<PAGE>
CHINA INTERNATIONAL BEARING HOLDINGS
LIMITED
By: /s/ Li Yeun Fai Roger
---------------------------------
Name: Li Yeun Fai Roger
---------------------------------
Title: Director
---------------------------------
SUNBASE ASIA, INC.
By: /s/ Li Yeun Fai Roger
---------------------------------
Name: Li Yeun Fai Roger
---------------------------------
Title: Chief Financial Officer
---------------------------------
SMITH ACQUISITION COMPANY, INC.
By: /s/ Samuel Mok
---------------------------------
Name: Samuel Mok
---------------------------------
Title: Voting Trustee
---------------------------------
SUNBASE INTERNATIONAL (Holdings) LIMITED
By: /s/ Li Yeun Fai Roger
---------------------------------
Name: Li Yeun Fai Roger
---------------------------------
Title: Director
---------------------------------
EXTENSIVE RESOURCES LIMITED
By: /s/ Li Yeun Fai Roger
---------------------------------
Name: Li Yeun Fai Roger
---------------------------------
Title: Authorised Representative
---------------------------------
4
<PAGE>
Exhibit 12.1
SUNBASE ASIA INC
Statement re computation of ratios
- ----------------------------------
1. Earnings to fixed charges
Earnings = (276,539) = (2.36):1
----------------- ---------
Fixed charges 117,239
2. Net profit margin
Net earnings = (276,539) = (59.1%)
----------------- ---------
Net Sales 468,087
3. Return on capital employed
Net earnings = (276,539 = (1,446.9%)
----------------- --------
Capital employed 19,112
4. Current ratio
Current assets = 1,058,112 = 0.74:01
------------------- ---------
Current liabilities 1,429,485
5. Fixed asset turnover
Sales = 468,087 = 0.96 times
----------------- ---------
Fixed assets 486,665
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE ANNUAL PERIOD ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,018
<SECURITIES> 0
<RECEIVABLES> 46,040
<ALLOWANCES> 0
<INVENTORY> 54,153
<CURRENT-ASSETS> 127,866
<PP&E> 58,811
<DEPRECIATION> 9,515
<TOTAL-ASSETS> 189,842
<CURRENT-LIABILITIES> 172,747
<BONDS> 0
0
5,381
<COMMON> 14
<OTHER-SE> (3,088)
<TOTAL-LIABILITY-AND-EQUITY> 189,842
<SALES> 56,567
<TOTAL-REVENUES> 56,567
<CGS> 55,943
<TOTAL-COSTS> 55,943
<OTHER-EXPENSES> 14,615
<LOSS-PROVISION> 37,813
<INTEREST-EXPENSE> 7,492
<INCOME-PRETAX> (59,296)
<INCOME-TAX> 0
<INCOME-CONTINUING> (31,161)
<DISCONTINUED> (2,257)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,418)
<EPS-BASIC> (2.37)
<EPS-DILUTED> (2.37)
</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, 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>
