PRER14A 1 v231635_prer14a.htm PRELIMINARY REVISED PROXY SOLICITING MATERIALS Unassociated Document
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
SCHEDULE 14A
(Amendment No. 1)
(RULE 14a-101)
 
SCHEDULE 14A INFORMATION
 
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
 
Filed by the Registrant x
 
Filed by a Party other than the Registrant ¨
 
Check the appropriate box:
 
 
x
Preliminary Proxy Statement.
 
 
¨
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)).
 
 
¨
Definitive Proxy Statement.
 
 
¨
Definitive Additional Materials.
 
 
¨
Soliciting Material Pursuant to §240.14a-12.
 
Harbin Electric, Inc. 

(Name of Registrant as Specified In Its Charter)
 
 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
 
Payment of Filing Fee (Check the appropriate box):
 
 
¨
No fee required.
 
 
x
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
 
 
(1)
Title of each class of securities to which transaction applies:
 
Common stock, par value $0.00001 per share, of Harbin Electric, Inc. (“Common Stock”)
 
 
(2)
Aggregate number of securities to which transaction applies:
 
 
31,434,168 shares of Common Stock
 
260,000 options to purchase Common Stock
 
 
(3)
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11(b)(1) (set forth the amount on which the filing fee is calculated and state how it was determined):
 
The maximum aggregate value was determined for purposes of calculating the filing fee only based upon the sum of (A) 18,738,784 shares of Common Stock multiplied by $24.00 per share, (B) options to purchase 260,000 shares of Common Stock with an exercise price of less than $24.00 multiplied by $7.89 (which is the difference between $24.00 and the weighted average exercise price of such options of $16.11 per share), and (C) 12,695,384 shares of Common Stock multiplied by $24.00 per share, representing shares of Common Stock to be contributed to the acquiring entity in the transactions described on this schedule. The filing fee was calculated by multiplying this aggregate value by 0.00011610.
 
 
(4)
Proposed maximum aggregate value of transaction:
 
 
$756,471,432
 
 
(5)
Total fee paid:
 
 
$87,826.33
 
 
¨
Fee paid previously with preliminary materials.
 
 
þ
Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
 
 
(1)
Amount Previously Paid:
 
 
 
$87,595.59
 
 
(2)
Form, Schedule or Registration Statement No.:
 
 
 
Schedule 14A
 
 
(3)
Filing Party:
 
 
 
Harbin Electric, Inc.
 
 
(4)
Date Filed:
 
 
 
July 13, 2011
 
 
 

 

PRELIMINARY PROXY STATEMENT–SUBJECT TO COMPLETION, DATED AUGUST 12, 2011
 
 
[●], 2011
 
Dear Stockholder:
 
You are cordially invited to attend a special meeting of stockholders, which we refer to as the special meeting, of Harbin Electric, Inc., which we refer to as the Company or Harbin, to be held on _________, 2011, at ______a.m./p.m. (local time). The meeting will be held at [●].
 
On June 19, 2011, the Company entered into a merger agreement with Tech Full Electric Company Limited, or Parent, an entity currently whollyowned by Mr. Tianfu Yang, the Company’s Chairman and Chief Executive Officer, and Tech Full Electric Acquisition, Inc., a wholly-owned subsidiary of Parent, which we refer to as Merger Sub.  Pursuant to the merger agreement, Merger Sub will merge with and into the Company, and the Company will continue as the surviving corporation and will be a wholly-owned subsidiary of Parent.  At the special meeting, you will be asked to consider and vote upon a proposal to approve the merger agreement.
 
If the merger contemplated by the merger agreement is completed, you will be entitled to receive $24.00 in cash, without interest, for each share of our common stock, par value $0.00001 per share (which we refer to as “our common stock” or “Company common stock”), that you own.  Shares held in the treasury of the Company or owned, directly or indirectly, by Parent, Merger Sub, or any wholly-owned subsidiary of the Company immediately prior to the effective time of the merger will be cancelled without consideration.  Shares of our common stock beneficially owned by Mr. Tianfu Yang and his affiliates, affiliates of Abax Global Capital, which we refer to as Abax, and certain of the Company’s directors, officers, and employees will be cancelled for no consideration, because these parties are contributing their shares to Parent in exchange for ownership interests in Parent’s holding company, pursuant to a contribution agreement, as part of what we refer to as the Rollover Transactions.  In this proxy statement, we refer collectively to Mr. Tianfu Yang, Hero Wave Investments Limited, Tianfu Investments Limited, Parent, Merger Sub, Abax, Abax Lotus Ltd., Abax Nai Xin A Ltd., Abax Global Capital (Hong Kong) Limited, Abax Global Opportunities Fund, Abax Emerald Ltd., AGC Asia 5 Ltd., Prosper Expand Ltd., Mr. Tianli Yang, Mr. Zedong Xu, Mr. Suofei Xu, and Ms. Lanxiang Gao as the Buyer Group.
 
If the merger is completed, the Company will continue its operations as a privately-held company beneficially owned by the Buyer Group. As a result of the merger, the Company’s shares will no longer be listed on the NASDAQ Global Select Market.
 
Our board of directors has determined that it is in the best interests of the stockholders to enter into the merger agreement and has approved and declared advisable the merger agreement. Our board of directors made its determination after careful consideration of a number of factors more fully described in this proxy statement, including the unanimous recommendation of an independent special committee of the board of directors, which we refer to as the Special Committee, that was formed to consider the merger agreement, the transactions contemplated by the merger agreement, and strategic alternatives. Our board of directors recommends that you vote “FOR” the proposal to approve the merger agreement, “FOR” the proposal to approve, on a non-binding advisory basis, the golden parachute compensation that may be payable to the Company’s named executive officers in connection with the merger, and “FOR” the proposal to adjourn or postpone the special meeting in order to take such actions as our board of directors determines are necessary or appropriate, including to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to approve the merger agreement.

 
 

 
 
Your vote is very important. The merger cannot be completed unless the Company obtains (i) the affirmative vote of holders of at least a majority of the combined voting power of the outstanding shares of our common stock, and (ii) the affirmative vote of holders of a majority of the combined voting power of the outstanding shares of our common stock not beneficially owned by the Buyer Group or any affiliate of the Buyer Group, in favor of approval of the merger agreement. For purposes of the merger agreement, affiliates of the Buyer Group include any person our board of directors, upon recommendation by the Special Committee, reasonably believes has reached an agreement or understanding with the Buyer Group to receive, in connection with the consummation of the merger, some benefit or value other than and in addition to the merger consideration to be received for such person’s shares. In this proxy statement, we refer to both approval requirements together as the “stockholder approval.” Please note that failing to vote has the same effect as a vote “AGAINST” the proposal to approve the merger agreement.
 
Whether or not you plan to attend the special meeting, please complete, date, sign, and return, as promptly as possible, the enclosed proxy card in the accompanying prepaid reply envelope, or submit your proxy by telephone or the Internet. If you attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted. The deadline to return your proxy card is _____________, 2011, at _______ a.m./p.m. (Eastern time). Each stockholder is entitled to one vote for each share held as of the close of business on September 13, 2011.
 
If your shares of our common stock are held in “street name” by your bank, broker, or other nominee, your bank, broker, or other nominee will be unable to vote your shares of our common stock without instructions from you. You should instruct your bank, broker, or other nominee to vote your shares of our common stock in accordance with the procedures provided by your bank, broker, or other nominee. The failure to instruct your bank, broker, or other nominee to vote your shares of our common stock “FOR” the proposal to approve the merger agreement will have the same effect as a vote “AGAINST” the proposal to approve the merger agreement.
 
This proxy statement provides a detailed description of the merger agreement and the proposed merger. In addition, it contains important information regarding the special meeting. A copy of the merger agreement is attached as Annex A. We urge you to read carefully this entire proxy statement, its annexes, and all of the documents incorporated into this proxy statement by reference, including the merger agreement. You may also obtain additional information about the Company from documents we have filed with the United States Securities and Exchange Commission, or SEC, which are available for free without charge at the SEC’s website www.sec.gov.
 
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES AT THIS TIME. IF THE MERGER IS COMPLETED, YOU WILL RECEIVE INSTRUCTIONS REGARDING THE SURRENDER OF YOUR STOCK CERTIFICATES.
 
If you have any questions or need assistance voting your shares, please call MacKenzie Partners, Inc., our proxy solicitor, at +1 (212) 929-5500 or toll-free at +1 (800) 322-2885.
 
Thank you in advance for your cooperation and continued support.
 
Sincerely,
Sincerely,
   
Boyd R. Plowman
Tianfu Yang
   
On behalf of the Special Committee
Chairman of the Board
 
 
 

 
 
  This proxy statement is dated August 12, 2011, and is first being mailed to the stockholders on or about ________, 2011.
 
NEITHER THE SEC NOR ANY STATE SECURITIES REGULATORY AGENCY HAS APPROVED OR DISAPPROVED THE MERGER, PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THIS LETTER OR IN THE ACCOMPANYING NOTICE OF THE SPECIAL MEETING OR PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 
 

 

 
HARBIN ELECTRIC, INC.
No. 9 Ha Ping Xi Lu, Ha Ping Lu Ji Zhong Qu
Harbin Kai Fa Qu, Harbin
People’s Republic of China, 150060
 

 
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [], 2011
 

 
Notice is hereby given that a special meeting of the stockholders of Harbin Electric, Inc. (which we refer to as the Company or Harbin), will be held on ____________, 2011, at _________ a.m./p.m. (local time) at [●] for the following purposes:
 
1.           To consider and vote on a proposal to approve the Agreement and Plan of Merger, dated as of June 19, 2011, as it may be amended from time to time, among the Company, Tech Full Electric Company Limited, a Cayman Islands exempted company with limited liability and currently wholly owned indirectly by Mr. Tianfu Yang, the Company’s Chairman and Chief Executive Officer, and which we refer to as Parent, and Tech Full Electric Acquisition, Inc., a Nevada corporation and a wholly-owned subsidiary of Parent, which we refer to as Merger Sub, pursuant to which Merger Sub will merge with and into the Company and the Company will continue as the surviving corporation and will be a wholly-owned subsidiary of Parent. A copy of the merger agreement is attached as Annex A to the accompanying proxy statement.
 
2.           To consider and vote on a proposal to approve the following non-binding resolution:
 
“RESOLVED, that the compensation that may be paid or become payable to the Company’s named executive officers in connection with the merger, as disclosed in the section titled “Special Factors—Golden Parachute Compensation” pursuant to Item 402(t) of Regulation S-K, and the agreements or understandings pursuant to which such compensation may be paid or become payable, are hereby APPROVED.”
 
Recently adopted Section 14A of the Securities Exchange Act of 1934, as amended, or the Exchange Act, requires that the Company provide its stockholders with the opportunity to approve, on a non-binding advisory basis, the golden parachute compensation that may be payable to the Company’s named executive officers in connection with the merger, as disclosed in the accompanying proxy statement.  In accordance with Section 14A of the Exchange Act, our stockholders are being asked to approve the foregoing non-binding resolution at the special meeting.
 
The proposal to approve the golden parachute compensation that may be received by the Company’s named executive officers in connection with the merger will be approved if a majority of the votes cast on such proposal in person or by proxy vote “FOR” the proposal (assuming the presence of a quorum at the special meeting).  Approval of this proposal is not a condition to the completion of the merger, and the vote with respect to this proposal is advisory only.  Because the vote is advisory in nature, it will not be binding on either the Company or Parent regardless of whether the merger agreement is approved.
 
3.           To consider and vote on a proposal to adjourn or postpone the special meeting in order to take such actions as our board of directors determines are necessary or appropriate, including, without limitation, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to approve the merger agreement. A motion to adjourn or postpone the special meeting requires an affirmative vote of a majority of the shares represented at the meeting in order to pass.
 
Any other business that may properly come before the special meeting, or any adjournment or postponement of the special meeting, by or at the direction of the board of directors of the Company, will also be transacted at the special meeting.
 
The merger agreement must be approved by the holders of (i) at least a majority of the combined voting power of the outstanding shares of our common stock, and (ii) a majority of the combined voting power of the outstanding shares of our common stock not beneficially owned by the Buyer Group, which is comprised of Mr. Tianfu Yang, Hero Wave Investments Limited, Tianfu Investments Limited, Parent, Merger Sub, Abax, Abax Lotus Ltd., Abax Nai Xin A Ltd., Abax Global Capital (Hong Kong) Limited, Abax Global Opportunities Fund, Abax Emerald Ltd., AGC Asia 5 Ltd., Prosper Expand Ltd., Mr. Tianli Yang, Mr. Zedong Xu, Mr. Suofei Xu, and Ms. Lanxiang Gao, or by any affiliate of the Buyer Group. For purposes of the merger agreement, affiliates of the Buyer Group include any person our board of directors, upon recommendation by the Special Committee, reasonably believes has reached an agreement or understanding with the Buyer Group to receive, in connection with the consummation of the merger, some benefit or value other than and in addition to the merger consideration to be received for such person’s shares.

 
 

 
 
Only stockholders of record as of the close of business (Eastern time) on September 13, 2011, the record date for the special meeting, are entitled to notice of and to vote at the special meeting and any adjournments of the special meeting.
 
Please read the attached proxy statement carefully.
 
OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSAL TO APPROVE THE MERGER AGREEMENT, “FOR” THE PROPOSAL TO APPROVE, ON A NON-BINDING ADVISORY BASIS, THE GOLDEN PARACHUTE COMPENSATION THAT MAY BE PAYABLE TO THE COMPANY’S NAMED EXECUTIVE OFFICERS IN CONNECTION WITH THE MERGER, AND “FOR” THE PROPOSAL TO ADJOURN OR POSTPONE THE SPECIAL MEETING IN ORDER TO TAKE SUCH ACTIONS AS OUR BOARD OF DIRECTORS DETERMINES ARE NECESSARY OR APPROPRIATE, INCLUDING TO SOLICIT ADDITIONAL PROXIES IF THERE ARE INSUFFICIENT VOTES AT THE TIME OF THE SPECIAL MEETING TO APPROVE THE PROPOSAL TO APPROVE THE MERGER AGREEMENT.
 
It is important that your shares be represented and voted whether or not you plan to attend the special meeting in person. Even if you plan to attend the special meeting in person, we request that you complete, sign, date and return the enclosed proxy as promptly as possible. The deadline to return your proxy card is _____________, 2011, at _________ a.m./p.m. (Eastern time). Your vote is very important to us regardless of the number of shares of our common stock you own. If you are a stockholder of record, voting in person at the meeting will revoke any proxy previously submitted. If your shares of our common stock are held in “street name” by your bank, broker, or other nominee, your bank, broker, or other nominee will be unable to vote your shares of our common stock without instructions from you. You should instruct your bank, broker, or other nominee to vote your shares of our common stock in accordance with the procedures provided by your bank, broker, or other nominee. Submitting a proxy by mailing the enclosed proxy card in a timely manner will ensure your shares are represented at the special meeting. Please review the instructions in the accompanying proxy statement and the enclosed proxy card or the information forwarded by your bank, broker, or other nominee regarding the voting of your shares.
 
If you have any questions or need assistance voting your shares, please call MacKenzie Partners, Inc., our proxy solicitor, at +1 (212) 929-5500, or toll-free at +1 (800) 322-2885.
 
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES AT THIS TIME. IF THE MERGER IS COMPLETED, YOU WILL RECEIVE INSTRUCTIONS REGARDING THE SURRENDER OF YOUR STOCK CERTIFICATES.
 
 
 

 
 
Stockholders do not have statutory appraisal or dissenters rights with respect to the merger and the merger agreement.
 
 
BY ORDER OF THE BOARD OF DIRECTORS,
 
     
     
 
Tianfu Yang
 
 
Chief Executive Officer and Chairman of the Board
     
 
_____________, 2011
 
 
 
 

 

TABLE OF CONTENTS
 
   
Page
     
SUMMARY TERM SHEET
 
1
Parties Involved in the Merger
 
1
Structure and Effects of the Merger
 
2
Merger Consideration
 
2
Date, Time, and Place of Special Meeting
 
2
Purpose of the Special Meeting
 
2
Recommendation of the Special Committee and Board of Directors
 
3
Record Date
 
3
Quorum
 
4
Voting Procedures
 
4
Revocation of Proxies
 
4
Vote Required
 
4
Opinion of Morgan Stanley & Co. LLC
 
5
Opinion of Lazard Frères & Co. LLC
 
5
Position of the Buyer Group Regarding the Fairness of the Merger
 
6
Financing of the Merger
 
6
Limited Guarantee
 
7
Interests of Certain Persons in the Merger
 
7
Obligation Not to Solicit Alternative Acquisition Proposals
 
8
Conditions to the Merger
 
9
Termination of the Merger Agreement
 
9
Termination Fees
 
10
Limitation on Remedies; Specific Performance
 
11
Dissenter’s Rights
 
11
Certain Material U.S. Federal Income Tax Consequences of the Merger for U.S. Holders
 
11
Regulatory Approvals
 
12
Delisting and Deregistration of the Company Common Stock
 
12
Litigation Relating to the Merger
 
12
     
SPECIAL FACTORS
 
13
Merger Consideration
 
13
Background of the Merger
 
13
Reasons for Length of Evaluation Process
  30
Recommendation of the Special Committee and Board of Directors and Their Reasons for the Merger
 
30
Opinion of Morgan Stanley & Co. LLC
 
35
Opinion of Lazard Frères & Co. LLC
 
41
Management’s Projected Financial Information
 
48
Purposes and Reasons of the Buyer Group for the Merger
 
56
Position of the Buyer Group Regarding the Fairness of the Merger
 
57
Nature of Business Conducted
 
60
Plans for the Company after the Merger
 
61
Financing of the Merger
 
62
Limited Guarantee
 
67
Voting Support Agreement
 
67
Closing and Effective Time of the Merger
 
68
Payment of Merger Consideration and Surrender of Stock Certificates
 
68
Interests of Certain Persons in the Merger
 
69
Golden Parachute Compensation
 
71
Estimated Fees and Expenses
 
72
Certain Material PRC Tax Consequences of the Merger for U.S. Holders
 
72
Certain Material U.S. Federal Income Tax Consequences of the Merger for U.S. Holders
 
74
Regulatory Approvals and Notices
 
76
Delisting and Deregistration of the Company’s Common Stock
 
76
Provisions for Unaffiliated Stockholders
 
77
Litigation Related to the Merger
 
77
 
 
i

 

TABLE OF CONTENTS
(Continued)
 
     
Page
     
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING
 
81
     
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
 
89
     
PARTIES INVOLVED IN THE MERGER
 
91
The Company
 
91
Mr. Tianfu Yang and the Other Members of the Buyer Group That Are Parties to the Contribution Agreement
 
91
Holdco, Parent, and Merger Sub
 
93
Abax and Certain Other Affiliates of Abax
 
94
     
THE SPECIAL MEETING
 
96
General Information
 
96
Date, Time, and Place of Special Meeting
 
96
Purpose of the Special Meeting
 
96
Record Date; Voting
 
96
Quorum
 
97
Recommendation of the Special Committee
 
97
Recommendation of the Company’s Board of Directors
 
97
Attendance
 
98
Vote Required
 
98
Abstentions and Broker Non-Votes
 
98
Stock Ownership and Interests of Certain Persons
 
99
Voting Procedures
 
99
Other Business
 
100
Revocation of Proxies
 
101
Adjournments and Postponements
 
101
Anticipated Date of Completion of the Merger
 
101
Rights of Dissenting Stockholders
 
101
Solicitation of Proxies
 
102
Availability of Documents Incorporated by Reference
 
102
Questions and Additional Information
 
102
     
THE MERGER AGREEMENT
 
103
Explanatory Note Regarding the Merger Agreement
 
103
Structure and Effects of the Merger
 
103
Closing and Effective Time of the Merger
 
103
Articles of Incorporation, Bylaws, and Directors and Officers of the Surviving Corporation
 
104
Treatment of Capital Stock
 
104
Treatment of Stock Options, Equity-Based Awards, and Warrants
 
104
Exchange and Payment Procedures
 
105
Representations and Warranties
 
107
Conduct of Our Business Pending the Merger
 
112
Acquisition Proposals
 
114
Stockholders Meeting
 
117
Access to Information; Confidentiality
 
117
Further Action; Efforts
 
118
Takeover Laws
 
119
Indemnification and Insurance
 
119
Financing; Equity Rollover
 
120
Delisting of Our Common Stock
 
121
Knowledge of Inaccuracies
 
121
Conditions to the Merger
 
121
Termination
 
123
Expenses
  
125
 
 
ii

 

TABLE OF CONTENTS
(Continued)
 
     
Page
     
Termination Fees
 
125
Amendment; Waiver
 
126
Enforcement
 
126
     
DISSENTERS RIGHTS
 
127
     
ADVISORY VOTE ON GOLDEN PARACHUTE COMPENSATION   127
Golden Parachute Compensation Proposal
  127
Vote Required and Board Recommendation
  127
     
IMPORTANT INFORMATION REGARDING THE COMPANY
 
128
Directors and Executive Officers of the Company
 
128
Use of Officers, Employees, and Corporate Assets in Connection with the Transaction
 
131
Financial Statements and Supplementary Financial Information
 
131
Signed Accountant’s Report
 
131
Historical Selected Financial Data
 
131
Ratio of Earnings to Fixed Charges
 
133
Net Book Value Per Share
 
133
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
134
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
134
Quantitative and Qualitative Disclosures About Market Risk
 
134
Description of Business
 
134
Description of Property
 
134
Legal Proceedings
 
134
Transactions in Common Stock
 
134
Ownership of Common Stock by Certain Beneficial Owners and Directors and Executive Officers
 
135
Market Price of the Company’s Common Stock and Dividend Information
 
137
Delisting and Deregistration of the Company’s Common Stock
 
138
     
OTHER MATTERS
 
139
Other Matters for Action at the Special Meeting
 
139
Future Stockholder Proposals in the Event the Merger is Not Consummated
 
139
Stockholders Sharing the Same Address
 
139
     
WHERE YOU CAN FIND MORE INFORMATION
 
140
 

 
ANNEX A
AGREEMENT AND PLAN OF MERGER
A-1
ANNEX B
LIMITED GUARANTEE
B-1
ANNEX C
VOTING SUPPORT AGREEMENT
C-1
ANNEX D
CONTRIBUTION AGREEMENT
D-1
ANNEX E
ABAX COMMITMENT LETTER
E-1
ANNEX F
OPINION OF MORGAN STANLEY& CO. LLC
F-1
ANNEX G
OPINION OF LAZARD FRÈRES & CO. LLC
G-1
ANNEX H
CONSENT OF FRAZER FROST, LLP H-1
ANNEX I
FORM OF PROXY CARD I-1
 

 
 
iii

 
 

 
SUMMARY TERM SHEET
 
The following summary term sheet highlights selected information in this proxy statement and may not contain all the information that may be important to you.  Accordingly, we encourage you to read carefully this entire proxy statement, its annexes, and the documents referred to and incorporated by reference in this proxy statement.  Each item in this summary term sheet includes a page reference directing you to a more complete description of that topic.  You may obtain the information incorporated by reference in this proxy statement without charge by following the instructions in the section titled “Where You Can Find More Information” beginning on page 140.
 
Parties Involved in the Merger (see page 91)
 
Harbin Electric, Inc., or Harbin, the Company, we, or us, a Nevada corporation, is a holding company with its principal place of business in the People’s Republic of China, or PRC or China. Through our U.S. and China-based subsidiaries, we design, develop, manufacture, supply, and service a wide range of electric motors, including linear motors, specialty micro-motors, and industrial rotary motors. We focus on innovation, creativity, and value-added products. We sell our products principally in China, but also to certain international markets.
 
Mr. Tianfu Yang is the Chairman and Chief Executive Officer of the Company.  In this proxy statement, we refer collectively to Mr. Tianfu Yang, Hero Wave Investments Limited, Tianfu Investments Limited, Parent, Merger Sub, Abax, Abax Lotus Ltd., Abax Nai Xin A Ltd., Abax Global Capital (Hong Kong) Limited, Abax Global Opportunities Fund, Abax Emerald Ltd., AGC Asia 5 Ltd., Prosper Expand Ltd., Mr. Tianli Yang, Mr. Zedong Xu, Mr. Suofei Xu, and Ms. Lanxiang Gao as the Buyer Group.  Mr. Tianfu Yang and certain other members of the Buyer Group have agreed to contribute their shares of Company common stock to Parent in exchange for newly-issued ordinary shares of Parent’s holding company, Tianfu Investments Limited, pursuant to a contribution agreement dated June 19, 2011, as part of what we refer to in this proxy statement as the Rollover Transactions.  These members of the Buyer Group will remain indirect owners of the surviving corporation after the merger.
 
Tianfu Investments Limited, or Holdco, was formed under the laws of the Cayman Islands by Tianfu Yang solely for the purpose of owning Parent and arranging the financing of the merger, and he is currently Holdco’s sole beneficial owner. Prior to the closing of the merger, certain members of the Buyer Group will receive ownership interests in Holdco in exchange for contributing their shares of our common stock to Parent as part of the Rollover Transactions. In addition, prior to the closing of the merger, certain members of the Buyer Group that are affiliates of Abax will purchase shares of Holdco for an aggregate purchase price of $38.8 million. Holdco has not engaged in any business except for activities incidental to its formation and in connection with the transactions contemplated by the merger agreement, including the merger and related financing transactions.
 
Tech Full Electric Company Limited, or Parent, was incorporated under the laws of the Cayman Islands and was formed by Mr. Tianfu Yang solely for the purpose of owning the Company after the merger and arranging the financing of the merger. Parent is a wholly-owned subsidiary of Holdco. Parent has not engaged in any business except for activities incidental to its formation and in connection with the transactions contemplated by the merger agreement, including the merger. Upon completion of the merger, the Company, as the surviving corporation in the merger, will be a direct wholly-owned subsidiary of Parent.
 
Tech Full Electric Acquisition, Inc., or Merger Sub, is a Nevada corporation formed by Parent solely for the purpose of effecting the merger. Merger Sub is a wholly-owned subsidiary of Parent. Merger Sub has not engaged in any business except for activities incidental to its formation and in connection with the transactions contemplated by the merger agreement, including the merger. After the merger, Merger Sub will no longer exist. The Company will be the surviving corporation and will continue to exist as a wholly-owned subsidiary of Parent.

 
1

 
 

 
Abax Global Capital, or Abax, is an alternative investment manager with a focus on Greater China. Abax’s principal executive offices are located at Suite 6708, Two International Finance Centre, 8 Finance Street, Central, Hong Kong and its telephone number is +852-3602-1800. Abax Lotus Ltd., Abax Nai Xin A Ltd., and Abax Emerald Ltd. are each a special purpose vehicle wholly owned by Abax Global Opportunities Fund, one of the affiliated funds through which Abax manages its investments. Abax Global Capital (Hong Kong) Limited is the investment advisor to Abax, and Abax Global Capital (Hong Kong) Limited and Abax act as the investment advisory and management companies to the various affiliated Abax funds and exercise control relationships over these affiliated funds.
 
In this proxy statement, we refer to the Agreement and Plan of Merger, dated as of June 19, 2011, as it may be amended from time to time, among the Company, Parent, and Merger Sub, as the merger agreement, and the merger of Merger Sub with and into the Company, as the merger.
 
Structure and Effects of the Merger (see page 103)
 
The merger agreement provides that Merger Sub will merge with and into the Company on the terms and subject to the conditions in the merger agreement.  After the merger, Merger Sub will no longer exist.  The Company will be the surviving corporation and will continue to exist as a wholly-owned subsidiary of Parent.  Upon completion of the merger, the Company will cease to be a publicly-traded company.  You will not own any shares of capital stock of the surviving corporation, and you will cease to have any rights in the Company as a stockholder.  We have attached the merger agreement to this proxy statement as Annex A.  We encourage you to read the entire merger agreement carefully, because it is the legal document that governs the merger.
 
Merger Consideration (see page 13)
 
In the merger, each outstanding share of our common stock (except for shares which are held in the treasury of the Company or owned, directly or indirectly, by Parent (including shares owned by members of the Buyer Group and contributed to Parent as part of the Rollover Transactions), Merger Sub, or any of our wholly-owned subsidiaries) will be converted into the right to receive $24.00 in cash, without interest. We refer to this amount as the merger consideration. No merger consideration will be paid for shares which are held in the treasury of the Company or owned, directly or indirectly, by Parent (including shares owned by members of the Buyer Group and contributed to Parent as part of the Rollover Transactions), Merger Sub, or any of our wholly-owned subsidiaries. For a discussion of the treatment of stock options and warrants in the merger, see “The Merger Agreement—Treatment of Stock Options, Equity-Based Awards, and Warrants” beginning on page 104.
 
Date, Time, and Place of Special Meeting (see page 96)
 
The special meeting is scheduled to be held at [●] on [●], 2011, at [●] a.m./p.m. (local time).
 
Purpose of the Special Meeting (see page 96)
 
At the special meeting, you will be asked:
 
 
·
to consider and vote on a proposal to approve the merger agreement, pursuant to which Merger Sub will be merged with and into the Company, with the Company as the surviving corporation, as further described in the sections titled “Special Factors” beginning on page 13, and “The Merger Agreement,” beginning on page 103;
 
 
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·
to consider and vote on a proposal to approve, on a non-binding advisory basis, the golden parachute compensation that may be payable to the Company’s named executive officers in connection with the merger; and
 
 
·
to consider and vote on a proposal to adjourn or postpone the special meeting in order to take such actions as our board of directors determines are necessary or appropriate, including to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to approve the merger agreement
 
Any other business that may properly come before the special meeting, or any adjournment or postponement of the special meeting, by or at the direction of the board of directors of the Company, will also be transacted at the special meeting.
 
A copy of the merger agreement is attached as Annex A to this proxy statement.
 
Recommendation of the Special Committee and Board of Directors (see page 30)
 
The Special Committee has unanimously (i) determined that the merger agreement and the merger are advisable to, and in the best interests of, the Company and its unaffiliated stockholders, and (ii) recommended that our full board of directors approve, declare advisable, and submit to our stockholders the merger agreement and the transactions contemplated by the merger agreement, including the merger, for their approval, and that our board of directors recommend to the stockholders that they vote in favor of approval of the merger agreement.
 
After carefully considering the unanimous recommendation of the Special Committee and other factors, our board of directors, with interested directors Mr. Tianfu Yang and Ms. Lanxiang Gao having recused themselves from the meeting after establishment of a quorum, (i) determined that the merger and the merger agreement are fair to, and in the best interests of, the Company and its unaffiliated stockholders, and that it is advisable and in the best interests of the Company and its unaffiliated stockholders to enter into the merger agreement; (ii) authorized, approved, and adopted the merger and the merger agreement and the transactions contemplated by the merger agreement; (iii) determined that the consideration to be paid to our stockholders (other than members of the Buyer Group) in the merger is, and the merger and the merger agreement are, fair to, and in the best interests of, the Company’s unaffiliated stockholders; and (iv) resolved to recommend that the stockholders vote in favor of approval of the merger agreement and the transactions contemplated by the merger agreement, including the merger.
 
Our board of directors recommends that you vote “FOR” the proposal to approve the merger agreement, “FOR” the proposal to approve, on a non-binding advisory basis the golden parachute compensation that may be payable to the Company’s named executive officers in connection with the merger, and “FOR” the proposal to adjourn or postpone the special meeting in order to take such actions as our board of directors determines are necessary or appropriate, including to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to approve the merger agreement.
 
Record Date (see page 96)
 
You are entitled to vote at the special meeting if you owned shares of our common stock at the close of business (Eastern time) on September 13, 2011, which we have set as the record date for the special meeting and which we refer to as the record date. You may cast one vote for each share of our common stock that you owned as of that record date.

 
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Quorum (see page 97)
 
The presence, in person or by proxy, of stockholders holding at least a majority of the shares of our common stock issued, outstanding, and entitled to vote at the special meeting constitutes a quorum for purposes of the special meeting. At the close of business on the record date for the special meeting, there were 31,434,168 shares of our common stock issued and outstanding and entitled to vote. Thus, 15,717,085 shares must be represented by proxy or by stockholders present and entitled to vote at the special meeting to have a quorum.
 
Voting Procedures (see page 99)
 
Any stockholder of record entitled to vote at the special meeting may submit a proxy by telephone, over the Internet, or by returning the enclosed proxy card in the accompanying prepaid reply envelope, or may vote in person by appearing at the special meeting.  If your shares of Company common stock are held in “street name” through a bank, broker, or other nominee, you should instruct your bank, broker, or other nominee on how to vote your shares of our common stock using the instructions provided by your bank, broker, or other nominee.  If you fail to submit a proxy or to vote in person at the special meeting, or do not provide your bank, broker, or other nominee with voting instructions, as applicable, your shares of our common stock will not be voted on the proposal to approve the merger agreement, which will have the same effect as a vote “AGAINST” the proposal to approve the merger agreement, and your shares of our common stock will not have an effect on approval of the proposal to approve, on a non-binding advisory basis, the golden parachute compensation that may be payable to the Company’s named executive officers in connection with the merger, or on approval of the proposal to adjourn the special meeting in order to take such actions as our board of directors determines are necessary or appropriate, including to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to approve the merger agreement.
 
Revocation of Proxies (see page 101)
 
You have the right to revoke a proxy by submitting a new proxy again at a later date through any of the methods available to you, by attending the special meeting and voting in person, or by giving written notice of revocation to our Secretary. Attending the special meeting without taking one of the other actions described in the preceding sentence will not in itself revoke your proxy. Please note that to be effective, your new proxy card, Internet or telephonic voting instructions, or written notice of revocation, must be received by us before the day of the special meeting.
 
Vote Required (see page 98)
 
Approval of the merger agreement by our stockholders requires the affirmative vote of both:
 
 
·
the holders of at least a majority of the combined voting power of the outstanding shares of our common stock; and
 
 
·
the holders of a majority of the combined voting power of the outstanding shares of our common stock not beneficially owned by the Buyer Group or any affiliate of the Buyer Group. For purposes of the merger agreement, affiliates of the Buyer Group include any person that our board of directors, upon recommendation by the Special Committee, reasonably believes has reached an agreement or understanding with the Buyer Group to receive, in connection with the consummation of the merger, some benefit or value other than and in addition to the merger consideration to be received for such person’s shares.
 
 
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The requirement that the merger agreement be approved by a majority of the combined voting power of the outstanding shares of our common stock not beneficially owned by the Buyer Group or any affiliate of the Buyer Group (which, for purposes of the merger agreement, includes any person our board of directors, upon recommendation by the Special Committee, reasonably believes has reached an agreement or understanding with the Buyer Group to receive, in connection with the consummation of the merger, some benefit or value other than and in addition to the merger consideration to be received for such person’s shares), is not mandated by Nevada law but was negotiated by the Special Committee in order to protect the interests of the unaffiliated holders of our common stock in connection with the merger.
 
As of the record date for the special meeting, members of the Buyer Group together beneficially own approximately 40.6% of the Company’s outstanding shares of common stock.  Certain members of the Buyer Group have entered into a voting support agreement in which they agreed to vote all of their shares in favor of approval of the merger agreement at the special meeting.  Please see the section titled “Special Factors—Voting Support Agreement” beginning on page 67.
 
The proposal to approve, on a non-binding advisory basis, the golden parachute compensation that may be payable to the Company’s named executive officers in connection with the merger will be approved if a majority of the votes cast on such proposal in person or by proxy vote “FOR” the proposal (assuming the presence of a quorum at the special meeting).  A motion to adjourn or postpone the special meeting in order to take such actions as our board of directors determines are necessary or appropriate, including to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to approve the merger agreement, requires an affirmative vote of a majority of the shares represented at the meeting to pass.
 
Opinion of Morgan Stanley & Co. LLC (see page 35)
 
At the meeting of the Special Committee held on June 19, 2011 to consider the merger agreement, Morgan Stanley & Co. LLC, which we refer to as Morgan Stanley, rendered to the Special Committee an oral opinion, subsequently confirmed in writing, that as of June 19, 2011, and based on and subject to the assumptions, considerations, qualifications, and limitations set forth in the written opinion, the $24.00 per share cash merger consideration to be received by the holders of shares of Company common stock (other than the Buyer Group and their respective affiliates) pursuant to the merger agreement was fair from a financial point of view to such holders (other than the Buyer Group and their respective affiliates).
 
The full text of Morgan Stanley’s written opinion, dated as of June 19, 2011, is attached as Annex F to this proxy statement.  We encourage you to read the entire opinion, which discusses the assumptions made, procedures followed, and factors considered, and the limitations of the review undertaken, by Morgan Stanley in rendering the opinion.  This summary is qualified in its entirety by reference to the full text of the opinion.  Morgan Stanley’s opinion is directed to the Special Committee and our board of directors and addresses only the fairness, as of the date of the opinion and from a financial point of view, of the $24.00 per share cash merger consideration to be received by the holders of shares of Company common stock (other than the Buyer Group and their respective affiliates).  Morgan Stanley’s opinion did not in any manner address any other aspects of the merger.  Morgan Stanley expressed no opinion or recommendation to the stockholders of the Company as to how to vote at the special meeting to be held in connection with the merger.
 
Opinion of Lazard Frères & Co. LLC (see page 41)
 
At the meeting of the Special Committee held on June 19, 2011 to evaluate the merger agreement, Lazard Frères & Co. LLC, which we refer to as Lazard, rendered to the Special Committee an oral opinion, subsequently confirmed in writing, that based upon and subject to the assumptions, procedures, factors, limitations, and qualifications set forth in the opinion, the per share merger consideration to be paid to our stockholders (other than the Buyer Group) in the merger was fair, from a financial point of view, to such stockholders.

 
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The full text of Lazard’s written opinion, dated as of June 19, 2011, is attached as Annex G to this proxy statement. We encourage you to read the entire opinion, which discusses the assumptions made, procedures followed, and factors considered, and the limitations of the review undertaken, by Lazard in rendering the opinion. This summary is qualified in its entirety by reference to the full text of the opinion. Lazard’s opinion is directed to the Special Committee and addresses only the fairness, as of the date of the opinion and from a financial point of view, of the $24.00 per share cash merger consideration to be paid to our stockholders (other than the Buyer Group). Lazard’s opinion did not address any other aspects of the merger, and Lazard expressed no opinion or recommendation to the stockholders of the Company as to how to vote at the special meeting.
 
Position of the Buyer Group Regarding the Fairness of the Merger (see page 57)
 
The Buyer Group believes that the merger is fair to the unaffiliated stockholders of the Company.  In arriving at their position as to the fairness of the merger, the Buyer Group considered factors discussed in the section titled “Special Factors—Position of the Buyer Group Regarding the Fairness of the Merger” beginning on page 57.
 
Financing of the Merger (see page 62)
 
The Buyer Group estimates that the total amount of funds necessary to consummate the merger and related transactions, including the payment of fees and expenses in connection with the merger, will be approximately $768.5 million. The Buyer Group expects to fund this amount through a combination of:
 
 
·
the proceeds from a term loan facility in an amount of $400 million from China Development Bank Corporation Hong Kong Branch, or China Development Bank, as lender, which we refer to as the CDB Loan, pursuant and subject to a facility agreement between Parent and China Development Bank, which is described in the section titled “Special Factors—Financing of the Merger” beginning on page 62;
 
 
·
the proceeds from the issuance and sale of notes, which we refer to as the Abax Notes, in an amount of $25 million, pursuant and subject to a note purchase agreement between Abax Emerald Ltd., as note purchaser, and Holdco, as note issuer, which is described in the section “Special Factors—Financing of the Merger” beginning on page 62;
 
 
·
the proceeds from a cash investment in ordinary shares of Holdco by certain affiliates of Abax in an amount of $38.8 million, pursuant and subject to an equity commitment letter among Abax Global Capital (Hong Kong) Limited, Abax, and Holdco, which is described in the section titled “Special Factors—Financing of the Merger” beginning on page 62; and
 
 
·
the contribution of 12,695,384 shares of our common stock to Parent (the equivalent of an investment of approximately $304.7 million based upon the per share merger consideration of $24.00), and the issuance of ordinary shares of Holdco in consideration therefor, prior to the merger by certain members of the Buyer Group, which is described in the section titled “Special Factors—Financing of the Merger” beginning on page 62.
 
 
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None of Parent, Holdco, or Merger Sub has entered into any alternative financing arrangements or alternative financing plans. Both the debt financing and the equity financing are subject to certain conditions described in the section titled “Special Factors—Financing of the Merger” beginning on page 62. The contribution of shares contemplated by the Rollover Transactions is subject to the satisfaction or waiver of all of the conditions to the obligations of Parent and Merger Sub to complete the merger. We are an express third-party beneficiary of the contribution agreement with respect to the Rollover Transactions and have the right directly to enforce specifically the terms and provisions of the contribution agreement against Parent, Holdco, and the members of the Buyer Group who are party to the contribution agreement.
 
Limited Guarantee (see page 67)
 
Concurrently with the execution of the merger agreement, Mr. Tianfu Yang and three affiliates of Abax—Abax Global Opportunities Fund, AGC Asia 5 Ltd., and Prosper Expand Ltd.—delivered a limited guarantee in which they agreed to guarantee the obligation of Parent to pay the $30 million termination fee that may become payable to the Company by Parent under certain circumstances set forth in the merger agreement.  In addition, Mr. Tianfu Yang, Abax Global Opportunities Fund, AGC Asia 5 Ltd., and Prosper Expand Ltd. will be liable for the costs of enforcing the guarantee, if necessary.  Please see the section titled “The Merger Agreement—Termination Fees” beginning on page 125 for a discussion of circumstances under which the termination fee may become payable by Parent.  Please see the section titled “Special Factors—Limited Guarantee” beginning on page 67 for more information regarding the limited guarantee.  We also encourage you to read the entire limited guarantee, which is attached as Annex B to this proxy statement.
 
 Interests of Certain Persons in the Merger (see page 69)
 
Aside from their interests as Company stockholders, our directors and executive officers have interests in the merger that are different from those of other stockholders. Among other things, while evaluating and negotiating the merger agreement and the merger, and determining to recommend to our stockholders that the merger agreement be approved, our board of directors was aware of and considered Parent’s agreement to indemnify the Company’s directors and officers against certain claims and liabilities arising from the actions of our directors and officers taken prior to the effective time of the merger for the six years following the effective time of the merger. In addition, consistent with the treatment of equity awards and warrants generally, all stock options held by our directors and executive officers will be cashed out in the merger. Also, certain of our directors or executive officers will remain directors and officers of the surviving corporation following the merger.
 
You should also be aware that, concurrently with the execution and delivery of the merger agreement, Parent delivered to us a contribution agreement executed by certain members of the Buyer Group, which include Mr. Tianfu Yang and certain other of the Company’s directors, officers, and employees who are also stockholders. These members of the Buyer Group have agreed, among other things, to contribute the shares of our common stock owned by them to Parent in exchange for newly issued ordinary shares of Holdco. The effect of these transactions will be to allow such members of the Buyer Group to remain indirect owners of the surviving corporation after the merger is completed. Because of their equity ownership of Holdco, each such member of the Buyer Group will enjoy the benefits from any future earnings and growth of the Company after the merger and will also bear the corresponding risks of any possible decreases in future earnings, growth, or value. Such members of the Buyer Group may also benefit after the merger from the elimination of expenses associated with public company reporting and compliance requirements and increased flexibility as a private rather than a publicly-traded company. Please see the section titled “Special Factors—Interests of Certain Persons in the Merger” beginning on page 69.

 
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Obligation Not to Solicit Alternative Acquisition Proposals (see page 114)
 
Subject to certain exceptions described below, we and our subsidiaries may not, and we may not permit or authorize our or their officers, directors, employees, agents, and representatives, directly or indirectly, to:
 
 
·
initiate, solicit, endorse, knowingly encourage, induce or facilitate (including by providing information), or provide access to our or our subsidiaries’ employees, business, properties, assets, books, or records with respect to any inquiries, proposals, or offers relating to an alternative acquisition proposal;
 
 
·
engage, continue or otherwise participate in any negotiations or discussions, or provide to any person any non-public information or data relating to us or our subsidiaries in connection with an alternative acquisition proposal;
 
 
·
approve, endorse, or recommend any alternative acquisition proposal;
 
 
·
approve, endorse or recommend, or execute or enter into any letter of intent, agreement in principle, merger agreement, acquisition agreement, or other similar agreement relating to an acquisition proposal; or
 
 
·
resolve or agree to do any of the foregoing.
 
However, notwithstanding the restrictions described in the preceding paragraph, if, prior to obtaining the stockholder approval, we receive an unsolicited bona fide written alternative acquisition proposal that did not otherwise result from a breach of our non-solicitation obligations under the merger agreement and that the Special Committee determines in good faith (after consulting its independent legal and financial advisors) constitutes or may reasonably be expected to lead to a superior proposal, we may:
 
 
·
furnish information about us and our subsidiaries to the person making the alternative acquisition proposal, pursuant to a customary confidentiality agreement containing terms (including with respect to “standstill” provisions) at least as restrictive as those contained in our existing confidentiality agreement with Abax Global Capital (Hong Kong) Limited; and
 
 
·
participate through the Special Committee in discussions or negotiations regarding the alternative acquisition proposal with the person making the alternative acquisition proposal and its representatives.
 
We use the terms “alternative acquisition proposal” and “superior proposal” in this summary term sheet as they are described below in the section titled “The Merger Agreement—Acquisition Proposals” beginning on page 114.
 
Subject to exceptions described in the next paragraph, our board of directors (and any committee thereof) may not, with respect to any alternative acquisition proposal:
 
 
·
withdraw or modify, or publicly propose to withdraw or modify, in a manner adverse to Parent or Merger Sub, its recommendation of the merger agreement or the merger;
 
 
·
adopt, approve, or recommend, or publicly propose to adopt, approve or recommend, any alternative acquisition proposal; or
 
 
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·
adopt, approve, or recommend, or allow us or any of our subsidiaries to execute or enter into any letter of intent, memorandum of understanding, agreement in principle, merger agreement, acquisition agreement, option agreement, or other similar agreement constituting or related to, or that would reasonably be expected to result in, an alternative acquisition proposal (except for certain confidentiality agreements).
 
We refer to the actions listed in either of the first two bullets above as “adverse recommendation changes.” Notwithstanding the restrictions described in the preceding paragraph, at any time prior to obtaining the stockholder approval, the Special Committee may recommend an adverse recommendation change to our board of directors if the Special Committee determines in good faith (after consulting its independent legal and financial advisors) that failure to do so would be inconsistent with the discharge or exercise of its fiduciary duties under applicable law. If our board of directors receives such a recommendation from the Special Committee, our board of directors may effect an adverse recommendation change or terminate the merger agreement in order to enter into a definitive written agreement with respect to a superior proposal (so long as we comply with the termination provisions in the merger agreement, including payment of the termination fee discussed in the section “The Merger Agreement—Termination Fees” beginning on page 125). However, at least three business days before doing so, we must notify Parent and Merger Sub of our board of directors’ determination. We must then negotiate with Parent and Merger Sub (to the extent they desire to negotiate) in good faith during such three-business-day period to make adjustments to the terms and conditions of the merger agreement and the financing documents as would permit our board of directors not to take action with respect to a superior proposal. Please see the section titled “The Merger Agreement—Acquisition Proposals” beginning on page 114.
 
Conditions to the Merger (see page 121)
 
The obligations of the Company, Parent, and Merger Sub to consummate the merger are subject to the satisfaction or waiver of certain conditions, including receipt of the stockholder approval (including approval of the majority of the combined voting power of the outstanding shares of our common stock not beneficially owned by the Buyer Group or any affiliate of the Buyer Group, including any person our board of directors, upon recommendation by the Special Committee, reasonably believes has reached an agreement or understanding with the Buyer Group to receive, in connection with the consummation of the merger, some benefit or value other than and in addition to the merger consideration to be received for such person’s shares), the absence of any temporary restraining order, preliminary or permanent injunction, or other judgment, order, or decree that prohibits the merger, the accuracy of the representations and warranties of the parties, and compliance by the parties with their respective obligations under the merger agreement.
 
Termination of the Merger Agreement (see page 123)
 
We and Parent may, by mutual written consent, terminate the merger agreement and abandon the merger at any time prior to the effective time of the merger, whether before or after our stockholders have approved the merger agreement.
 
The merger agreement may also be terminated and the merger abandoned at any time prior to the effective time of the merger as follows:
 
 
·
by either Parent or the Company, if:
 
 
o
the merger has not been consummated by March 8, 2012, except that this right will not be available to any party whose failure to comply with the merger agreement primarily causes or results in the failure of the merger to be consummated by that date;

 
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o
any final, non-appealable governmental judgment, order, injunction, rule, decree, or other action prohibits the completion of the merger, except that the party seeking to terminate must have used its reasonable best efforts to contest, appeal, and remove such judgment, order, injunction, rule, decree, or other action; or
 
 
o
our stockholders meeting has been held and completed but the stockholder approval has not been obtained at such meeting or any adjournment or postponement of such meeting;
 
 
·
by the Company, if:
 
 
o
Parent or Merger Sub has breached or failed to perform any of their representations, warranties, covenants, or agreements, such that a failure of the conditions to the obligation of the Company to close the merger cannot be cured by March 8, 2012, provided that we will not have this right to terminate unless we have given Parent at least 30 days’ written notice of our intention to terminate, and provided further that we will not have this right to terminate if we are then in material breach of any of our covenants or agreements contained in the merger agreement;
 
 
o
at any time the guarantee or the financing documents are not in full force and effect in all material respects (with respect to the commitment to pay or fund thereunder) and such condition continues until the earlier of March 8, 2012, or five business days following our written notice to Parent (provided that we will not have this right to terminate if we are then in material breach of any of our covenants or agreements contained in the merger agreement);
 
 
o
necessary in order to enter into a definitive written agreement with respect to a superior proposal in accordance with the terms of the merger agreement; or
 
 
o
all of the conditions to the obligations of Parent and Merger Sub have been satisfied or are capable of being satisfied and Parent fails to fund the payment fund within one business day following the date the closing of the merger should have occurred;
 
 
·
by Parent, if:
 
 
o
we have breached or failed to perform any of our representations, warranties, covenants or agreements, such that a failure of the conditions to the obligations of Parent and Merger Sub to close the merger cannot be cured by March 8, 2012, provided that Parent will not have this right to terminate unless Parent has given us at least 30 days’ written notice of its intention to terminate, and provided further that Parent will not have this right to terminate if Parent or Merger Sub is then in material breach of any of their covenants or agreements contained in the merger agreement; or
 
 
o
our board of directors makes an adverse recommendation change.
 
Termination Fees (see page 125)
 
If either we or Parent terminate the merger agreement under certain circumstances described in the section titled “The Merger Agreement—Termination Fees” beginning on page 125, then:
 
 
·
we may be obligated to pay to Parent a termination fee of $22.5 million; or
 
 
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·
Parent may be obligated to pay us a termination fee of $30 million. Mr. Tianfu Yang and certain affiliates of Abax party to the limited guarantee have agreed to guarantee the obligation of Parent to pay this termination fee should it become payable. In addition, the guarantors will be liable for the costs to enforce the guarantee, if necessary.
 
Limitation on Remedies; Specific Performance (see page 125)
 
Our right to terminate the merger agreement and receive the termination fee of $30 million from Parent under certain circumstances is our sole and exclusive remedy against Parent or Merger Sub or any of their affiliates or financing sources for certain breaches of the merger agreement described in the section titled “The Merger Agreement—Termination Fees” beginning on page 125.
 
Parent and Merger Sub are entitled to specific performance of the terms of the merger agreement and may seek an injunction against us to prevent breaches of the merger agreement. We have agreed to waive certain defenses in an action for specific performance. In addition to its right to specific performance, Parent may have the right to receive from us a termination fee of $22.5 million under the circumstances described in the section titled “The Merger Agreement—Termination Fees” beginning on page 125.
 
Dissenters Rights (see page 127)
 
You are not entitled to dissenter’s rights or other statutory rights of objection in connection with the merger under Nevada law. Section 92A.390 of the Nevada Revised Statutes, or the NRS, does not provide any right of dissent with respect to a plan of merger under criteria described in that section of the NRS, which the Company satisfies.
 
Certain Material U.S. Federal Income Tax Consequences of the Merger for U.S. Holders (see page 74)
 
The receipt of merger consideration in exchange for our common stock will be taxable to you for U.S. federal income tax purposes if you are a U.S. holder (as defined below in the section titled “Special Factors—Certain Material U.S. Federal Income Tax Consequences of the Merger for U.S. Holders” beginning on page 74).  A U.S. holder who receives cash in exchange for shares of our common stock pursuant to the merger will recognize gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount of cash received and the U.S. holder’s adjusted tax basis in the stock surrendered for cash pursuant to the merger. If the shares surrendered are held as capital assets, such gain or loss will be capital gain or loss, and will be long -term capital gain or loss if the U.S. holder’s holding period for such stock is more than one year at the time of completion of the merger.  The payment of cash to a U.S. holder in connection with the merger generally will be subject to information reporting and may be subject to backup withholding, currently at a 28% rate, if the U.S. holder fails to furnish a correct taxpayer identification number or otherwise fails to comply with applicable backup withholding rules and certification requirements.  The tax consequences of the merger to you are complex and will depend upon your particular circumstances.  You should consult your own tax advisor for a full understanding of the tax consequences of the merger to you under federal, state, local, foreign and other tax laws.  Please see the section titled “Special Factors—Certain Material U.S. Federal Income Tax Consequences of the Merger for U.S. Holders” beginning on page 74.
 

 
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Regulatory Approvals (see page 12)
 
None of the parties is aware of any regulatory approvals or filings required for the completion of the merger, other than filing the Articles of the Merger with the Nevada Secretary of State and complying with the SEC proxy filing requirements.
 
Delisting and Deregistration of the Company Common Stock (see page 76)
 
As soon as practicable following the effective time of the merger, Parent will cause our common stock to be delisted from the NASDAQ Global Select Market, or NASDAQ, and deregistered under the Exchange Act.
 
Litigation Relating to the Merger (see page 77)
 
Eleven stockholder class action lawsuits were filed against the Company and/or certain officers and the members of its board of directors in connection with the October 10, 2010 non-binding proposal made by Mr. Tianfu Yang and Baring Private Equity Asia Group Limited to acquire all of the outstanding shares of the Company’s common stock not currently owned by Mr. Tianfu Yang and his affiliates for $24.00 per share in cash (the “Yang-Baring Proposal”).  Six actions were filed in Nevada state court (Carson City, Clark County, or Washoe County), two actions were filed in Nevada federal district court, and three actions were filed in New York state court.  All of the actions assert claims against the Company and/or members of the board of directors for allegedly breaching their fiduciary duties in connection with the Yang-Baring Proposal, as described further below.

On or about October 19, 2010, the Company became aware that the first of the stockholder class actions had been filed against the Company and the members of its board of directors in connection with the Yang-Baring Proposal.  The plaintiffs allege, among other things, that the proposed buyout price and the process of evaluating the Yang-Baring Proposal are unfair and inadequate.  The plaintiffs seek, among other relief, to enjoin the defendants from consummating the Yang-Baring Proposal and to direct the defendants to exercise their fiduciary duties to obtain a transaction that is in the best interests of the Company’s stockholders.
 
The Company intends to deny these allegations and to vigorously defend itself and its directors. Please see the section titled “Special Factors—Litigation Related to the Merger” on page 77 for a detailed discussion of the litigation.

 
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SPECIAL FACTORS
 
Merger Consideration
 
In the merger, each outstanding share of our common stock (except for shares owned by us or owned, directly or indirectly, by Parent, Merger Sub, or any of our wholly-owned subsidiaries) will be converted into the right to receive $24.00 in cash, without interest.  We refer to this amount as the merger consideration.  No merger consideration will be paid for shares owned by us or owned, directly or indirectly, by Parent (including shares owned by members of the Buyer Group and contributed to Parent as part of the Rollover Transactions), Merger Sub, or any of our wholly-owned subsidiaries.  For a discussion of the treatment of stock options and warrants in the merger, please see the section titled “The Merger Agreement—Treatment of Stock Options, Equity-Based Awards, and Warrants” beginning on page 104.
 
Background of the Merger
 
Events leading to the execution of the definitive agreement and plan of merger described in this Background of the Merger occurred in China, Hong Kong, Los Angeles, and New York.  For consistency, the Pacific time zone is used for all dates and times given herein.
 
From time to time prior to October 10, 2010, the Company’s Chairman and Chief Executive Officer, Mr. Tianfu Yang, received inquiries from private equity firms and investment banks concerning his possible willingness to sponsor a going-private transaction for the Company.  Starting in August 2010, Mr. Tianfu Yang began to develop a proposal for a going-private transaction working with Baring Private Equity Asia Group Limited (“Baring”).  On October 10, 2010, Mr. Tianfu Yang and Baring signed an agreement providing that they would work with each other on an exclusive basis to negotiate and consummate the acquisition of all of the outstanding Company common stock in a going-private transaction.  On October 10, 2010, a special meeting of the Company’s board of directors was called at the request of Mr. Tianfu Yang.  At the special meeting, an unsolicited proposal letter from Mr. Tianfu Yang and Baring to acquire all of the outstanding shares of Company common stock not currently owned by Mr. Tianfu Yang and his affiliates in a going-private transaction for $24.00 per share in cash, subject to certain conditions (the “Yang-Baring Proposal”) was delivered to the Company’s board of directors.  The $24.00 per share price represented a premium of 20.2% over the October 8, 2010 per share closing price for the Company common stock of $19.96, and a premium of 38% of the volume weighted average price of $17.45 over the prior 12 months.  At that time, Mr. Tianfu Yang owned, directly or indirectly, approximately 31.1% of the Company common stock.  At the special meeting, following its receipt of the Yang-Baring Proposal, the Company’s board of directors appointed the Special Committee comprised solely of independent and disinterested directors—Professor Ching Chuen Chan, David Gatton, and Boyd Plowman—to consider the Yang-Baring Proposal.
 
 
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Later on October 10, 2010, the Special Committee met telephonically with representatives of Loeb & Loeb LLP, the Company’s regular outside legal counsel, and elected Mr. Plowman chair of the Special Committee.  At this meeting, the Special Committee also discussed a draft press release to be issued by the Company the next day announcing the receipt of the Yang-Baring Proposal and the formation of the Special Committee.  All references to Gibson Dunn & Crutcher LLP, counsel to the Special Committee, Loeb & Loeb LLP, counsel to the Company, Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to Mr. Tianfu Yang, and Davis Polk & Wardwell LLP, special counsel to Abax, in this proxy statement are made in respect of their respective capacities as counsel to their respective clients.
 
On October 11, 2010, the Company issued a press release prior to the commencement of trading on NASDAQ announcing the Yang-Baring Proposal and the formation of the Special Committee.
 
On October 12, 2010, the Special Committee met telephonically (without Professor Chan, who was unable to attend) and had a detailed discussion of the responsibilities of the Special Committee, and retaining independent legal and financial advisors to assist with its evaluation of the Yang-Baring Proposal.  The Special Committee decided to retain legal counsel as the first step, and then engage a financial advisor.  After discussion of potential candidates, the Special Committee authorized Mr. Plowman to arrange interviews with potential legal and financial advisors.
 
Between October 13, 2010 and June 27, 2011, eight putative stockholder class action complaints were filed in state and federal courts in Nevada against the Company, members of the Company’s board of directors (including Mr. Tianfu Yang and members of the Special Committee), and, in some cases, Baring Private Equity Asia Group Limited.  In addition, between October 15, 2010, and October 25, 2010, three putative stockholder class action complaints were filed in state court in New York against Mr. Tianfu Yang, the Company, and, in one case, the members of the Special Committee.  On January 25, 2011, the plaintiffs in the New York actions filed a single consolidated complaint naming only Mr. Tianfu Yang and the Company as defendants.
 
The Nevada and New York complaints generally allege that Mr. Tianfu Yang and other directors breached their fiduciary duties to stockholders by agreeing to sell the Company at a price that is unfair and inadequate, and by failing to inform the stockholders adequately concerning the proposed merger and thus precluding them from casting a fully informed vote.  In some cases, the complaints further allege that the Company aided and abetted the directors’ purported breaches of their fiduciary duties.  The complaints seek injunctive relief, rescission of the proposed merger to the extent already implemented, damages, and attorneys’ fees.  The Company intends to deny these allegations and to vigorously defend itself and its directors.  Please see the section titled “Special Factors—Litigation Related to the Merger” beginning on page 77 for a detailed discussion of the litigation.
 
On October 14, 2010, the Special Committee met telephonically (without Professor Chan, who was unable to attend) and interviewed Gibson, Dunn & Crutcher LLP (“Gibson Dunn”) and one other law firm to serve as legal advisor to the Special Committee.  Messrs. Gatton and Plowman asked questions of each firm, but postponed selection of legal counsel until such time as all three Special Committee members could participate in the selection process and discuss the candidates.  Throughout mid-October, 2010, Mr. Plowman also responded to several unsolicited messages from law firms seeking to represent the Special Committee.
 
On October 17, 2010, the Special Committee met telephonically, and after deliberation unanimously selected Gibson Dunn as legal advisor to the Special Committee.  After the Special Committee discussed the economic terms of such an engagement, the Special Committee authorized Mr. Plowman to negotiate the specific terms of Gibson Dunn’s engagement and to execute its engagement letter on behalf of the Special Committee.  Among the reasons for the selection of Gibson Dunn were Gibson Dunn’s extensive experience in public company special committee representations, its extensive experience with going-private transactions, its strong reputation, the team it assembled to represent the Special Committee, the absence of any prior material relationship with the Company, Mr. Tianfu Yang, or Baring, and its ability to easily communicate in both English and Mandarin.
 
 
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On October 20, 2010, the Special Committee met in person (with Professor Chan in attendance by telephone) and, together with its legal advisor, interviewed three investment banks to serve as a potential financial advisor to the Special Committee.  The members of the Special Committee asked numerous questions of the banks’ representatives, including, among others, their respective experience with special committee representations, going-private transactions, and China-based U.S.-listed companies, and asked questions regarding the banks’ existing relationships with the Company, Mr. Tianfu Yang, and Baring.  After deliberation, the Special Committee unanimously selected Morgan Stanley & Co. LLC (“Morgan Stanley”) to serve as the Special Committee’s financial advisor and, after the Special Committee discussed the economic terms of such an engagement, authorized Mr. Plowman to negotiate the specific terms of Morgan Stanley’s engagement and to execute its engagement letter on behalf of the Special Committee.  Among the reasons for Morgan Stanley’s selection were its extensive experience with special committee representations and going-private transactions, its strong reputation, its significant experience dealing with Asia-based companies, its lack of existing material relationships with the Company, Mr. Tianfu Yang, or Baring, and its ability to interact in both English and Mandarin.
 
On October 26, 2010, a representative of Gibson Dunn held a call with a representative from Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden Arps”), legal advisor to Mr. Tianfu Yang, in which the Skadden Arps representative expressed strong interest in moving toward negotiating a transaction as early as feasible.  Gibson Dunn advised Skadden Arps that the negotiation process could not begin until after the Special Committee’s charter had been approved by the Company’s board of directors and the Special Committee and its independent legal and financial advisors had carefully reviewed the situation and performed appropriate due diligence investigations of the Company.
 
On October 28, 2010, the Special Committee met telephonically with its legal and financial advisors and discussed Morgan Stanley’s initial interactions with the Company and discussed the recent request from Mr. Tianfu Yang and Baring’s advisors to enter into transaction negotiations, and separately approved entering into engagement letters with Morgan Stanley and Gibson Dunn.  In negotiating and structuring Morgan Stanley’s engagement letter, the Special Committee placed particular weight on fee structure, in particular that it provided strong economic incentives for Morgan Stanley to maximize value for the Company’s stockholders in the event a transaction was consummated.  The Special Committee also reviewed a draft special committee charter prepared by Gibson Dunn and discussed the independence afforded the Special Committee by the draft charter, as well as the related protection it would provide the Company’s stockholders who were not part of the Yang-Baring group.  After discussing the draft charter and the Special Committee’s fiduciary duty obligations at length, the Special Committee unanimously resolved to recommend the draft charter to the Company’s board of directors for approval.
 
On November 3, 2010, representatives of Morgan Stanley discussed the Company’s operations with Professor Chan.
 
 
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At the November 3, 2010 board meeting, the Company’s board of directors (other than Mr. Tianfu Yang, who recused himself from the meeting) approved the Special Committee charter.  The charter authorizes the Special Committee to consider the Yang-Baring Proposal, as well as alternatives available to the Company, including, but not limited to, whether to remain independent or whether to solicit alternative proposals from other potential bidders.  The charter also authorizes the Special Committee to evaluate the terms of the Yang-Baring Proposal and any alternative proposals and discuss any terms of the Yang-Baring Proposal and alternative proposals and their respective implementation as the Special Committee deems appropriate; negotiate the terms of the Yang-Baring Proposal and any alternative proposals, and related ancillary agreements, as the Special Committee deems appropriate; and to report to the Company’s board of directors the recommendations of the Special Committee with respect to the Yang-Baring Proposal or any alternative proposal; provided, however, the execution and delivery of any definitive agreements is specifically subject to the final approval of the board.  The charter further authorizes the Special Committee to make investigations of the Company and its subsidiaries, the Yang-Baring Proposal, any alternative proposals and/or any matters relating thereto as the Special Committee, in its sole discretion, deems appropriate, and to take any and all such action as the Special Committee, in its sole discretion, deems necessary, advisable or appropriate in connection with the Yang-Baring Proposal, any alternative proposal, or other alternatives available to the Company.  At the November 3, 2010 board meeting, the Company’s board of directors also determined to pay each member of the Special Committee $30,000 initially for service through February 28, 2011, and an additional $6,000 monthly retainer for each month or fraction of a month thereafter, with the chair to receive $45,000 for service through February 28, 2011 and $9,000 monthly thereafter.  The Company’s board of directors further determined to indemnify each member of the Special Committee in his capacity as same to the fullest extent permissible under applicable law.
 
On November 4, 2010, representatives of Morgan Stanley performed on-site investigations at the Company’s Harbin facility, meeting with Mr. Tianli Yang, Mr. Zedong Xu, Mr. Yuli He, Ms. Amy Shi, and Mr. Xiang Ji.
 
On November 8, 2010, representatives of Morgan Stanley met with Mr. Tianfu Yang to discuss the Company’s operations.
 
On November 9, 2010, representatives of Morgan Stanley performed on-site investigations at the Company’s Xi’an facility, meeting with Mr. Zhenggang Dou and Mr. Tao Yuan.
 
On November 10, 2010, representatives of Morgan Stanley performed on-site investigations at the Company’s Shanghai facility, meeting with Ms. Lanxiang Gao.
 
On November 11, 2010, the Special Committee met telephonically (without Professor Chan, who was unable to attend) with its independent legal and financial advisors to receive an update regarding Morgan Stanley’s investigation of the Company, and Morgan Stanley’s proposed timeline for identifying and contacting potential financial and strategic buyers for the Company.  The Special Committee discussed its desire to create a competitive bidding environment to ensure the Company’s stockholders receive the highest value attainable for their shares in any transaction.
 
On November 12, 2010, representatives of Morgan Stanley discussed the Company’s operations with the Company’s management team of the Weihai facility.
 
On November 12, 2010, Baring notified Mr. Tianfu Yang that it had determined not to proceed with the Yang-Baring Proposal, and commenced discussions about amending its existing agreement with Mr. Tianfu Yang to reflect this.  Baring did not at that time indicate, nor has Baring subsequently indicated, to Mr. Tianfu Yang why it made that determination.
 
On November 14, 2010, representatives of Morgan Stanley held an introductory call with Goldman, Sachs & Co. (“Goldman Sachs”), financial advisor to Mr. Tianfu Yang.  Mr. Tianfu Yang had formally engaged Goldman Sachs in October 2010 and his decision was based on, among other factors, Goldman Sachs’ extensive experience with mergers and acquisitions transactions, including going-private transactions, its familiarity with the ongoing process, its significant history of representing Asia-based companies, and its ability to easily communicate in both English and Mandarin.  Mr. Tianfu Yang did not request, and Goldman Sachs did not provide, at any time, any opinion to the parties as to the fairness of the $24.00 offer price or as to any valuation of the Company for the purpose of assessing the fairness of such offer price.  Goldman Sachs was not requested to, and did not, recommend at any time the specific consideration payable in the proposed merger, which $24.00 consideration was communicated by Mr. Tianfu Yang to Goldman Sachs and subsequently was determined by negotiations between the Special Committee and Mr. Tianfu Yang and Abax, and as a result, the Company’s decision to enter into the merger agreement was solely that of the Special Committee and the Company’s board of directors.
 
 
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On November 15 and 16, 2010, representatives of Morgan Stanley held calls with representatives of Baring to understand the due diligence investigation Baring had conducted to date.
 
On November 19, 2010, Mr. Tianfu Yang and Baring executed an agreement to amend and restate their existing agreement so that the amended agreement would provide that Baring would not participate in the acquisition of the Company, except that Baring, through an affiliated fund, would have the opportunity (but not the obligation) to provide up to 10% of the financing for the acquisition (either through debt, equity, or a combination of debt and equity) on terms mutually agreeable to the parties.
 
During November 2010, the Company’s management prepared financial forecasts at the request of the Special Committee that were communicated through the Special Committee’s advisors to potential bidders to provide them with a forward-looking view of the business and its prospects.  Mr. Tianfu Yang indicated at the time that long-term Company projections were not typically prepared by the Company’s management.
 
On November 20, 2010, the Special Committee met telephonically (without Professor Chan, who was unable to attend) with its independent legal and financial advisors to discuss the November 19, 2010 letter from Mr. Tianfu Yang to the Company’s board of directors regarding Baring’s termination of its role as exclusive partner to Mr. Tianfu Yang in his acquisition proposal.  The Special Committee took particular note of Mr. Tianfu Yang’s continued interest in taking the Company private with a financing source or sources other than Baring, and discussed how best to create an open and competitive process to maximize stockholder value in any transaction.
 
On November 21, 2010, the Special Committee met telephonically with Mr. Tianfu Yang and Ms. Christy Shue, Harbin’s Executive Vice President and Corporate Secretary, to discuss Mr. Tianfu Yang’s continued interest in taking the Company private, and his desire to do so with a financing source or sources other than Baring.  Mr. Tianfu Yang reiterated his $24.00 per share cash offer price in response to questions from the Special Committee.
 
Between November 23, 2010, and December 8, 2010, representatives of Morgan Stanley held calls with six of the Company’s key customers as part of their due diligence process.
 
On November 24, 2010, a representative of Skadden Arps called a representative of Gibson Dunn to request that the Company’s board of directors adopt resolutions to allow Mr. Tianfu Yang to submit a joint bid with any number of possible third parties for the acquisition of the Company without triggering the provisions of the Nevada Revised Statutes requiring a three-year waiting period for certain acquisition transactions with interested stockholders.  Gibson Dunn agreed to discuss the request with the Special Committee.
 
On November 27, 2010, the Special Committee met telephonically with its independent legal and financial advisors.  At that meeting, representatives of Morgan Stanley updated the Special Committee on its process of contacting third parties (both strategic and financial) who might be interested in an acquisition of the Company.
 
At that meeting, the Special Committee also discussed and considered the request that the Company’s board of directors adopt resolutions providing the requisite approvals to avoid the application of certain sections of the Nevada Revised Statutes requiring a three-year waiting period for certain acquisition transactions with interested stockholders.  The Special Committee, after deliberation with its independent legal and financial advisors, resolved to agree to ask the Company’s board of directors at the appropriate time (assuming this were ever to occur) and on certain conditions as noted in the next paragraph to pass such a resolution, provided the resolution would be narrowly tailored to reach only specified potential partners of Mr. Tianfu Yang as may be approved by the Special Committee, rather than use an open-ended “any and all potential partners” formulation.
 
 
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Later in the same meeting on November 27, 2010, the Special Committee authorized its representatives to inform representatives of Mr. Tianfu Yang of their position, and of certain additional conditions to its position, including:  in the event the Special Committee thought it appropriate, Mr. Tianfu Yang would need to agree to be open to and discuss the possibility of partnering with potential strategic and/or financial parties suggested by the Special Committee and its advisors, and actively engage in discussions and negotiations with such parties; Mr. Tianfu Yang would need to agree not to provide exclusivity to any group or groups; all potential partners of Mr. Tianfu Yang would be required to execute a non-disclosure agreement prepared and negotiated by the Special Committee and its advisors; Morgan Stanley would need to be permitted to coordinate and monitor discussions between Mr. Tianfu Yang and all potential purchaser groups (excepting certain private conversations regarding economics and partnering terms between Mr. Tianfu Yang and such parties, as appropriate); Morgan Stanley would need to be permitted to manage the due diligence process for all potential purchasers; and Mr. Tianfu Yang and his advisors would need to agree to respond to inbound inquiries regarding a transaction by:  (i) describing the process outlined above, (ii) indicating Mr. Tianfu Yang is not “aligned” with any party or parties, (iii) indicating Mr. Tianfu Yang would be available to enter into partnering discussions with interested third parties at the appropriate point in the process, and (iv) directing the inquiring party to contact the Special Committee’s advisors to arrange entering into a non-disclosure agreement on terms specified by the Special Committee.
 
Between mid-November 2010 and early-January 2011, representatives of Morgan Stanley contacted 73 parties (41 strategic and 32 financial) on the Special Committee’s behalf to solicit interest in a potential transaction.  The Special Committee ultimately entered into non-disclosure agreements with 16 parties (3 strategic and 13 financial).  Representatives of Morgan Stanley provided briefing materials to third parties with executed non-disclosure agreements on the Special Committee’s behalf, which included management forecasts, the Company’s investor presentation, Wall Street analyst research, and public filings.
 
On November 29, 2010, representatives of Morgan Stanley and Goldman Sachs discussed the Special Committee’s process, timeline, and third -party outreach program.
 
On December 6, 2010, representatives of Morgan Stanley and Goldman Sachs discussed the Special Committee’s process and potential sources of financing for the potential transaction.
 
Shortly after Abax filed a Schedule 13G with the SEC on December 9, 2010 announcing its greater than 5% ownership of the Company common stock, Mr. Plowman, the Special Committee Chair, brought to the attention of the other members of Special Committee, as well as to Gibson Dunn, the fact that he was then serving as a director of several Abax-controlled entities including Abax Global Opportunities Fund, Abax Arhat Fund, Abax Claremont Ltd., Abax Jade Ltd., Abax Emerald Ltd., Abax Lotus Ltd., Abax Nai Xin A Ltd., and Abax Nai Xin B Ltd. (the “Abax Companies”).
 
On December 16, 2010, the Special Committee retained Ernst & Young (China) Advisory Limited (“Ernst & Young”) to perform vendor due diligence services and prepare a detailed accounting and tax due diligence report (the E&Y Report) on the Company in connection with the potential merger.  Ernst & Young is an internationally recognized accounting services firm that, among other things, is regularly engaged in performing due diligence examinations of corporations throughout the world, and in the PRC.  The Special Committee selected Ernst & Young to perform these services based on Ernst & Young’s qualifications, expertise and reputation, and ability to communicate with representatives of the Company in Mandarin Chinese.  Apart from (i) this engagement, (ii) two consecutive engagements in 2009 and 2010 to assist the Company in evaluating its internal control over financial reporting and compliance with the Sarbanes-Oxley Act of 2002, and (iii) a preliminary verbal agreement to engage Ernst & Young for additional non-audit accounting services, no material relationship has existed between Ernst & Young and the Company during the past two years, and no such relationship is mutually understood to be contemplated.  The Company paid Ernst & Young approximately RMB 2,550,000 for its due diligence services and approximately RMB 3,780,000 for its services in connection with the 2009 and 2010 engagements.  The Company anticipates paying Ernst & Young approximately RMB 400,000 for the non-audit accounting services.
 
Ernst & Young performed its work as a due diligence engagement.  In this context, “due diligence” is a term used to describe work involving inquiries into aspects of the accounts, organization, and activities of the Company, and consisted of applying analytical procedures to financial data provided to Ernst & Young by the Company, calculating working capital amounts, analyzing contracts and agreements, reading tax returns and correspondence with tax authorities, analyzing financial statements, reading audit reports, interviewing the Company’s auditors, comparing the Company’s accounting policies and practices with industry practices, interviewing Company management, and analyzing financial schedules.

Ernst & Young was not required to verify the accuracy, reliability, or completeness of the information provided to it.  The scope of Ernst & Young’s work pursuant to the due diligence engagement also did not constitute an audit performed in accordance with generally accepted auditing standards, nor did it include procedures to detect fraud or illegal acts, or to test the compliance by the Company with the laws or regulations in any jurisdiction.  The foregoing summary describes the material procedures performed by Ernst & Young but does not purport to be a complete description of the procedures performed by Ernst & Young.

Ernst & Young made no recommendations in its report as the report was intended to be a factual presentation of financial and tax information regarding the Company for delivery to potential bidders.  Ernst & Young’s findings consisted of factual statements regarding the nature of the Company’s business, presentation of financial data on sales, gross margin, and net working capital for each of the Company’s major lines of business (medium to large sized rotary motors, small to medium sized rotary motors, linear motors and related systems, and specialty micro-motors), presentation of financial data on pro forma earnings, capital expenditures, rates of taxation, interests accrued to overseas companies, and U.S. taxation of earnings and profits, and were based on the information provided by the Company and Ernst & Young’s application of the aforementioned analyses, including interviews of key personnel.

The Special Committe instructed Ernst & Young to perform such work as Ernst & Young deemed necessary or appropriate in its professional judgment to preparing the requested report on the Company for use by potential bidders.  The scope of Ernst & Young’s report was limited by the Special Committe to accounting and tax due diligence matters, but within that scope there were no limitations placed on Ernst & Young.
 
 
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At various times on December 12 through 14, 2010, representatives of Morgan Stanley and Goldman Sachs held calls to discuss updates regarding Mr. Tianfu Yang’s discussions with China Development Bank and potential equity participants in a going-private transaction, including Abax.
 
On the morning of December 16, 2010, Gibson Dunn held a call with members of the Special Committee to discuss Mr. Tianfu Yang’s recent dinner meeting with representatives of Abax and China Development Bank, the engagement of Ernst & Young by the Special Committee to perform financial due diligence, the relationship between Abax and Mr. Plowman, as well as the relationship between Abax and Morgan Stanley, and plans for a call later that day between representatives of Goldman Sachs, Skadden Arps, Morgan Stanley, and Gibson Dunn.
 
That afternoon, Mr. Plowman submitted a letter to the Abax Companies tendering his resignation, effective immediately, from all director and other positions that he held at the Abax Companies.  In addition, he advised the Abax Companies he would be immediately ceasing all communications, written or oral, direct or indirect, with the Abax Companies and requested that Abax cease communicating with him directly or indirectly, and with respect to any subject.
 
That evening, representatives of Goldman Sachs, Skadden Arps, Morgan Stanley, and Gibson Dunn held a call to discuss certain matters, including the Special Committee’s requirement that all parties wishing to participate in the process would need to enter into non-disclosure agreements with the Company negotiated by the Special Committee, the Special Committee’s process, and the Ernst & Young due diligence process.
 
On December 18, 2010, the members of the Special Committee held a call with Mr. Tianfu Yang, with Ms. Shue serving as interpreter, for the purpose of discussing Mr. Tianfu Yang’s role in the process being run by the Special Committee.  The Special Committee advised Mr. Tianfu Yang of the importance of a robust process to the Special Committee’s work in seeking to maximize stockholder value in any potential transaction.  The Special Committee advised Mr. Tianfu Yang of the importance of his remaining unaligned with any particular potential partner at this time, and of coordinating all negotiations he might have with third parties with the Special Committee’s advisors.  The Special Committee sent Mr. Tianfu Yang a letter (in Chinese and in English) on December 19, 2010, reiterating the foregoing.
 
On December 18, 2010, representatives of Morgan Stanley sent to Abax the Special Committee’s form non-disclosure agreement, which the parties then negotiated and ultimately entered into on January 9, 2011.
 
On December 29, 2010, representatives of Morgan Stanley and Goldman Sachs discussed a timeline for the Special Committee’s process and the next steps in the process.
 
In January 2011, representatives of Morgan Stanley sent Phase I process letters on the Special Committee’s behalf to 16 parties with signed non-disclosure agreements, soliciting preliminary indications of interest by January 18, 2011, or as soon as possible.
 
On January 10, 2011, Abax filed with the SEC a Schedule 13D announcing the execution of the non-disclosure agreement and filing a copy of the agreement as an exhibit to such Schedule 13D.
 
Prior to submission of preliminary indications of interest, representatives of Morgan Stanley facilitated introductory meetings between Mr. Tianfu Yang and certain interested third parties.  Meetings were held in Hong Kong on January 12, 2011 with five potential financial bidders and one potential strategic bidder.

 
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On January 20, 2011, a potential bidder (Bidder #9), which had been contacted by Morgan Stanley in the initial phases of the Special Committee’s process but had delayed entering into a non-disclosure agreement, submitted an executed non-disclosure agreement to Morgan Stanley and asked to be permitted to begin active diligence on the Company.
 
On January 20, 2011, the Special Committee met telephonically with its independent legal and financial advisors to discuss the eight indications of interest Morgan Stanley had received from potential bidders (Bidders #1 through #8), and to begin determining which of the potential bidders should be invited to continue to the next phase of the Special Committee’s process.  The Special Committee discussed with its independent legal and financial advisors how the uniformity in the bid letters created great difficulty in distinguishing among them.  Each letter proposed a $24.00 per share cash price, had substantially similar proposals with respect to financing a transaction, and all but one explicitly envisioned a significant role for Mr. Tianfu Yang in any transaction.  The Special Committee asked numerous questions of its independent legal and financial advisors in an effort to discern meaningfully among the bids and bidders.  After much discussion, the Special Committee concluded that given the central operating and strategic role Mr. Tianfu Yang currently plays at the Company (and that he would likely play in a post-merger Company), the Special Committee needed to have Mr. Tianfu Yang’s direct input if an effective decision to narrow the bidder pool were to be made.  The Special Committee authorized Mr. Plowman to contact Mr. Tianfu Yang and solicit his thoughts on the eight potential bidders as potential partners to Mr. Tianfu Yang in a going-private transaction.
 
Separately, at the January 20, 2011 meeting, the Special Committee also authorized Mr. Plowman to contact the Company in order to initiate the process of establishing an electronic data room for potential bidders to access in the next phase of the Special Committee’s process, and agreed that Bidder #9 should be permitted to conduct active diligence on the Company.  Bidder #9 was asked to submit an indication of interest prior to commencing active diligence, and was sent the briefing materials, including projections, which had been distributed to other potential bidders for use in preparing their indications of interest.
 
On January 22, 2011, Mr. Plowman called Mr. Tianfu Yang, with Ms. Shue on the phone as interpreter, and solicited his thoughts on the eight parties who had submitted indications of interest to Morgan Stanley.
 
On January 22, 2011, the Special Committee met telephonically with its independent legal and financial advisors to determine which of the potential bidders should be invited to continue to the next phase of the Special Committee’s process.  Mr. Plowman reported Mr. Tianfu Yang’s views on the eight parties which had submitted indications of interest.  The Special Committee discussed each of the eight in turn, reviewing, among other factors:  the perceived ability of each party to finance any potential transaction; any conditionality placed on a potential transaction; the party’s reputation and experience in the China market; the perceived likelihood to complete any potential transaction; the party’s responsiveness through the first phase of the Special Committee’s process; the size and composition of the teams sent to meet with Mr. Tianfu Yang; the proposed terms for composition and financing of a potential transaction; and the attitude of Mr. Tianfu Yang towards the potential bidder as a potential business partner.  After the discussion, the Special Committee unanimously resolved to eliminate two bidders from the process (Bidders #3 and #6) due to the Special Committee’s view that these bidders expressed a lower level of commitment to the Special Committee’s process, as evidenced by their lack of keen interest in proceeding, as demonstrated by the size and composition of their teams working on the potential transaction relative to those of the other bidders.  The Special Committee also authorized Morgan Stanley to invite each of the other six bidders who had submitted indications of interest (including Abax) to continue to the next phase of the Special Committee’s process, and to grant them access to the Company’s electronic data room.  Bidder #9 was also to be permitted to continue its due diligence investigation.

 
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After Morgan Stanley’s representatives left the January 22, 2011 Special Committee meeting, and in light of the fact that one of the surviving bidders was Abax, the Special Committee discussed the potential conflict posed by Morgan Stanley’s Investment Management division’s passive ownership stake in each of Abax and Abax Global Capital China Ltd.—facts which had been unknown to either the Special Committee or the Morgan Stanley investment banking professionals advising the Special Committee before Abax crossed the 5% ownership threshold and filed its December 9, 2010 Schedule 13G with the SEC.  After an initial inquiry, the Special Committee learned that Morgan Stanley’s Investment Management division is housed in a part of Morgan Stanley wholly separate from Morgan Stanley’s Investment Banking division, the division responsible for advising the Special Committee on a potential transaction.  After a lengthy discussion, the Special Committee resolved to ask Morgan Stanley to deliver to the Special Committee a comprehensive presentation regarding its relationship with Abax, and its internal controls with respect to information segregation.
 
On January 31, 2011, representatives of Morgan Stanley and Goldman Sachs discussed Mr. Tianfu Yang’s negotiations with China Development Bank and the next phase of the Special Committee’s process.
 
On February 3, 2011, the Special Committee met telephonically with its legal advisors to hear a presentation from Morgan Stanley on potential conflicts posed by the Morgan Stanley–Abax relationship, and the mechanisms in place at Morgan Stanley to prevent confidential transaction information accessible by Morgan Stanley’s Investment Banking division from reaching Morgan Stanley’s Investment Management division.  Senior personnel from Morgan Stanley’s Legal and Compliance division, Control and Special Surveillance division, and Investment Management division attended the meeting and provided the Special Committee with an explanation of Morgan Stanley’s procedures for protecting confidential information, and responded in considerable detail to each of the multiple questions posed by the Special Committee.  Members of Morgan Stanley’s Investment Banking team advising the Special Committee did not participate in the meeting until the presentation on the handling of confidential information had concluded.  The Investment Banking team then delivered to the Special Committee a presentation on economic benefits the Investment Banking division, and the individual members of that team advising the Special Committee, could theoretically derive due to Morgan Stanley’s investment in Abax, should Abax be a successful bidder in the transaction.  The Investment Banking team explained that the relationship between the Morgan Stanley–Abax investment and the work of the Investment Banking division on behalf of the Special Committee was so attenuated as to render negligible any economic benefits to be derived by Morgan Stanley’s investment in Abax.
 
After making their presentations, all representatives of Morgan Stanley disconnected from the meeting, and the Special Committee discussed with its legal advisors the presentations and the potential conflict.  After such discussion, the Special Committee concluded that Morgan Stanley could effectively maintain its status as an independent financial advisor to the Special Committee, provided, as a matter of precaution, additional security protocols for handling information related to the potential transaction were established by Morgan Stanley, and a representative of Gibson Dunn was included in calls between representatives of Morgan Stanley and of Abax.  The Special Committee then authorized Gibson Dunn and Mr. Plowman to inform Morgan Stanley of its decision and to ask Morgan Stanley to consider and then report back to the Special Committee on its ability to render an independent fairness opinion in light of the Morgan Stanley–Abax relationship.
 
On February 8, 2011, the E&Y Report was delivered by Ernst & Young to the Special Committee and subsequently shared with the potential bidders still in the Special Committee’s process, after execution of an Ernst & Young release regarding permitted uses of and reliances on the E&Y Report. The report will be made available for inspection and copying at the Companys principal executive offices during its regular business hours by any interested equity security holder of the Company or a representative of such a holder who has been designated as such in writing by such holder.
 
 
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On February 8, 2011, Morgan Stanley received a formal indication of interest from Bidder #9 to acquire the outstanding shares of the Company’s common stock for $24.00 per share.  Morgan Stanley forwarded Bidder #9’s indication of interest to the members of the Special Committee, who each agreed by e-mail that Bidder #9 should be incorporated into the second phase of the Special Committee’s process, and invited to participate in on-site management presentations, bringing to seven the number of potential bidders remaining in the Special Committee’s process.
 
On February 10, 2011, the potential bidders still in the Special Committee’s process, with the exception of the potential strategic bidder, were granted access to the online data room, which also contained the E&Y Report.
 
Between February 14 and 16, 2011, management presentations were held in Xi’an, China, with all parties admitted to the second phase.  The Company representatives at these presentations included Mr. Tianfu Yang and members of the Company’s management team.
 
On February 21, 2011, the Special Committee met telephonically with its independent legal and financial advisors to receive an update from representatives of Morgan Stanley regarding management presentations to the potential bidders and their respective meetings with Mr. Tianfu Yang.  The Special Committee discussed these presentations with its independent legal and financial advisors, reviewing, among other factors:  each potential bidder’s likely ability to fund both its equity obligations pursuant to a transaction and any anticipated future capital expenditure needs of the Company; each potential bidder’s familiarity and experience with investing in China and Chinese companies and the Company’s industry; any efforts made by the potential bidders to begin arranging financing for the potential transaction; each potential bidder’s level of usage of the virtual data room; the size and composition of the teams sent to the management presentation; and the tenor of interactions with Mr. Tianfu Yang during the management presentation.  After careful deliberation, the Special Committee resolved to authorize Morgan Stanley to inform an additional two parties (Bidders #2 and #9) that they were being formally eliminated from consideration as potential bidders thus leaving five potential bidders still engaged in the process (including Abax).  Bidders #2 and #9 were formally eliminated by the Special Committee in response to comments made by each that, after meeting with Mr. Tianfu Yang they were no longer interested in a potential transaction.
 
Between February 21 and 23, 2011, representatives of Ernst & Young conducted due diligence calls with interested parties to respond to questions regarding the E&Y Report.
 
On or about February 23, 2011, Bidder #2, when informed of the Special Committee’s decision to eliminate it from the process, made a request to representatives of Morgan Stanley to ask the Special Committee for permission to remain in the process so that it could make a further concerted effort to make a favorable impression on Mr. Tianfu Yang.  Morgan Stanley communicated Bidder #2’s request to the Chair of the Special Committee and Gibson Dunn, and the decision was reached to allow Bidder #2 to remain in the process.
 
On February 25, 2011, Gibson Dunn circulated for comment a draft agreement and plan of merger to the Special Committee and its financial advisors.  The draft agreement was prepared for possible future submission to potential bidders over the next several weeks.
 
Also on February 25, 2011, representatives of Morgan Stanley and Goldman Sachs discussed Mr. Tianfu Yang’s conversations with China Development Bank and Mr. Tianfu Yang’s expectation that he would receive $400 million in financing from China Development Bank.
 
On February 28, 2011, the Special Committee met telephonically with Mr. Tianfu Yang, Ms. Shue (as interpreter), and a representative of Morgan Stanley to receive an update from Mr. Tianfu Yang regarding his efforts to obtain financing from China Development Bank for a potential transaction.  Mr. Tianfu Yang informed the Special Committee that China Development Bank was moving forward with the process of approving financing documents for a potential transaction, and no obstacles to obtaining funding from the bank were foreseen at that time.  Mr. Tianfu Yang also commented on the six potential bidders still participating in the Special Committee’s process, expressing interest in having Bidder #1 (Abax) as part of any deal, wondering whether Bidders #2, #5, and #7 would be willing to team up with Bidder #1, noting Bidder #4 was planning to drop out of the process, and expressing concerns regarding Bidder #8’s sources of financing and limited experience with transactions of this type.

 
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On March 4, 2011, representatives of Morgan Stanley and Goldman Sachs discussed the second phase of the Special Committee’s process and China Development Bank’s proposed senior debt financing for the potential transaction.
 
On March 9, 2011, representatives of Morgan Stanley and Goldman Sachs discussed the ongoing due diligence process and, with respect to two of the remaining bidders that were financial sponsors, Goldman Sachs communicated to Morgan Stanley the waning interest levels of such potential bidders in the Special Committee’s process.
 
On March 16, 2011, representatives of Morgan Stanley and Goldman Sachs discussed the ongoing Special Committee process, Abax’s due diligence to date, and outstanding issues.
 
On March 21, 2011, at the direction of the Special Committee, Morgan Stanley mailed the Phase II process letter establishing a bidding deadline of April 18, 2011 to each of the potential bidders remaining in the Special Committee’s process (Abax and Bidders #2 and #7), and Mr. Tianfu Yang. Bidders #4, #5, and #8 were eliminated from the Special Committee’s process based on the Special Committee’s assessment, after consulting with its independent legal and financial advisors, of the strength of their respective bids relative to those of the parties chosen to remain in the Special Committee’s process.  In each case, Bidders #4, #5, and #8 had expressed concerns regarding their potential role as a minority investor along with Abax, and what would consequently be a relatively small investment and commensurate ownership in the Company immediately after the transaction.
 
On April 3, 2011, at the direction of the Special Committee and Gibson Dunn, Morgan Stanley distributed the draft merger agreement to Mr. Tianfu Yang and the three potential bidders remaining in the Special Committee’s process:  Abax, and Bidders #2 and #7.
 
On April 6, 2011, the Company’s management delivered to the Special Committee revised financial projections for first quarter 2011 financial results.
 
On April 6, 2011, representatives of Morgan Stanley and Goldman Sachs discussed the Special Committee’s process and timeline.  During this discussion, Goldman Sachs indicated Mr. Tianfu Yang and Abax intended to submit a joint proposal for the acquisition of the Company.
 
On April 8, 2011, Skadden Arps called Gibson Dunn to discuss the next steps in the process in light of Mr. Tianfu Yang’s expressed intention to proceed at that time only with Abax in developing an acquisition proposal.  Mr. Tianfu Yang had determined that, given Abax’s experience as a leading Asia-based investment firm, his prior relationship with Abax, and Abax’s ability to provide both equity and debt financing for the transaction, proceeding with Abax afforded the best opportunity to achieve a transaction satisfactory to both Mr. Tianfu Yang and the stockholders of the Company within an acceptable period of time.  In particular, Skadden Arps renewed Mr. Tianfu Yangs request that the Company’s board of directors pass resolutions for the benefit of Abax providing for the requisite approvals to avoid application of the Nevada statute requiring a three-year waiting period for certain acquisition transactions with interested stockholders.
 
Since Bidders #2 and #7 had withdrawn from the Special Committee’s process, on April 9, 2011, the Special Committee met telephonically with its independent financial and legal advisors to determine what next steps to take given the fact that only Mr. Tianfu Yang and Abax remained in the Special Committee’s process.  The Special Committee believed a transaction that did not involve Mr. Tianfu Yang could not be successful, due to his history with the Company, his central role to the Company’s business, his leadership regarding strategic direction, and his strong relationships with the Company’s customer base, as well as his declaration in his SEC Schedule 13D that he filed on October 12, 2010 that he intended to remain the largest holder of the common stock of the Company over the long term, whether or not any transaction was consummated.  After discussion, the Special Committee asked representatives of Morgan Stanley to confirm whether Abax was able and interested in acquiring the Company independently of Mr. Tianfu Yang.
 
 
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Separately, at the April 9, 2011 meeting, representatives of Morgan Stanley informed the Special Committee of their conclusion, after consultation with outside counsel and its own legal and compliance divisions, that Morgan Stanley's ability to provide a fairness opinion with respect to a potential transaction involving Abax was unimpaired.  Representatives of Morgan Stanley also confirmed to the Special Committee that all the information-handling protocols the Special Committee had requested be established were in place and functioning as expected.  The representatives of Morgan Stanley then disconnected from the meeting.
 
The Special Committee then discussed the advisability of hiring a second financial advisor in light of any possible perception of a conflict of interest raised by Morgan Stanley’s investment in Abax.  The Special Committee concluded that hiring a second financial advisor was advisable.  Gibson Dunn then updated the Special Committee regarding recent interviews conducted by Gibson Dunn at Mr. Plowman’s request with two other investment banks which the Special Committee had interviewed prior to the Special Committee hiring Morgan Stanley.  After lengthy discussion and deliberation, the Special Committee resolved to engage Lazard Frères & Co. (“Lazard”) as an additional financial advisor to the Special Committee, charged with not only performing all of the tasks typically performed by a financial advisor to a special committee, but also with handling, on an exclusive financial advisor basis, at the Special Committee’s direction, all future contacts with Abax and its financial advisors.
 
On April 12, 2011, Lazard began its due diligence investigation of the Company.
 
On April 13, 2011, representatives of Lazard held a call with representatives of Morgan Stanley regarding the Special Committee’s process to date.  Morgan Stanley then provided Lazard with certain documents, and access to the online data room set up for the transaction.
 
On April 18, 2011, Skadden Arps informed Gibson Dunn by phone that Mr. Tianfu Yang and Abax would shortly be submitting a proposal for the acquisition of the Company, but that financing commitments would not be included as part of the bid package since the negotiations with China Development Bank were ongoing.  In response to an inquiry from the Special Committee, advisors to Mr. Tianfu Yang advised the Special Committee that Baring was not expected to exercise any portion of its option to provide 10% of the financing for the transaction.
 
On April 19, 2011, Skadden Arps, on behalf of Mr. Tianfu Yang and Abax, delivered to Gibson Dunn a joint proposal to acquire the outstanding shares of Company common stock for $24.00 per share.  Due to the absence of financing commitments included with the joint proposal, the proposal was incomplete, did not constitute a bona fide offer, and could not be fully evaluated by the Special Committee and its advisors at that time.
 
On April 20, 2011, the Special Committee met telephonically with its independent financial and legal advisors to discuss the April 19, 2011 joint proposal, including the absence of financing commitments, and possible responses.  The Special Committee spent considerable time discussing the lack of financing documents.  The Special Committee also discussed management’s revised financial projections for the Company (the “April 2011 Case”), incorporating lower than expected actual Q1 2011 results and reflecting its updated views as to the expected future performance of the Company.
 
On April 21, 2011, representatives of Morgan Stanley, Lazard, and Goldman Sachs discussed the ongoing Special Committee process and related timeline.
 
On April 21, 2011, representatives of Lazard participated in a management presentation and diligence session with Ms. Shue.
 
 
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On April 22, 2011, representatives of Lazard met with Mr. Tianfu Yang in Beijing and conducted due diligence regarding the Company.
 
On April 24, 2011, representatives of Lazard participated in a site tour and diligence meeting at the Company’s Xi’an facility.
 
On April 28, 2011, representatives of Lazard held a meeting with representatives of E&Y to discuss the E&Y Report and diligence findings.
 
On April 29, 2011, Ms. Shue forwarded to Mr. Plowman a commitment letter for $400 million in debt financing from China Development Bank on behalf of Mr. Tianfu Yang, which the Chair of the Special Committee then provided to the other members of the Special Committee and its financial and legal advisors.
 
On May 1, 2011, Skadden Arps provided Gibson Dunn with a draft facility agreement for the proposed China Development Bank debt financing, which Gibson Dunn then provided to the Special Committee and its financial advisors.
 
On May 2, 2011, the Special Committee met telephonically with its independent financial and legal advisors to receive updates regarding the process of negotiating the draft merger agreement and the draft China Development Bank facility agreement.  Representatives of Morgan Stanley and Lazard then discussed with the Special Committee certain preliminary financial analyses based on the April 2011 Case.  The Special Committee also discussed alternative transactions, including remaining independent, delisting the Company from NASDAQ and relisting on an Asian exchange, as well as a potential IPO of a Company subsidiary.
 
On May 3, 2011, representatives of Lazard held a discussion with Mr. Tianfu Yang regarding the April 2011 Case. This meeting between Lazard and Mr. Tianfu Yang represented Lazards first full opportunity to hear Mr. Tianfu Yang’s views on the Company’s business, its strategic direction, as well as management’s financial projections.
 
On May 4, 2011, representatives of Morgan Stanley and Lazard held a call with Goldman Sachs to discuss issues related to the financing of the proposed transaction.
 
On May 4, 2011, Lazard held a discussion with Abax regarding the status of Abax’s financing and Abax’s ability to finance the proposed transaction.
 
On May 4, 2011, representatives of Morgan Stanley, Lazard, and Goldman Sachs held a call to clarify the bid process, including with respect to the sources and uses of funds and the status of both China Development Bank’s due diligence effort and the Abax note purchase agreement.
 
On May 7, 2011, Lazard sent a list of diligence questions to Abax regarding Abax’s proposed financing for the transaction.
 
On May 8, 2011, the Special Committee met telephonically to discuss potential responses to the April 19, 2011 joint proposal delivered by Mr. Tianfu Yang and Abax.  After reviewing the outstanding points of disagreement between the parties regarding the draft merger agreement, the Special Committee authorized and requested Gibson Dunn to send revised draft transaction documents back to Mr. Tianfu Yang’s legal advisors, and requested Morgan Stanley and Lazard to jointly contact Goldman Sachs to discuss key economic terms of the joint proposal.
 
On May 9, 2011, Abax responded to Lazard’s diligence inquiries.

 
25

 
 
On May 10, 2011, representatives of Lazard met with Xiang Dong Yang (no relation to Mr. Tianfu Yang), the President & Managing Partner of Abax, for the purposes of conducting due diligence regarding Abax’s ability to finance the proposed transaction.
 
On May 10, 2011, representatives of Lazard and Morgan Stanley met telephonically with Goldman Sachs to continue discussing issues related to the financing of the proposed transaction, including the absence of certain documents related to the mezzanine financing, and the contrast between the valuation of the Company implied from management projections with the $24.00 per share price proposed by Mr. Tianfu Yang and Abax in the joint proposal.
 
Since the sources of funding for the proposed transaction were at that point completely determined, there was no opportunity, without substantially modifying the terms of that financing, to accommodate Baring’s right to invest up to 10% of the financing for such a transaction.   In order to eliminate the potential uncertainty this might entail, on May 10, 2011, Mr. Tianfu Yang and Baring executed a letter whereby Baring waived that right in exchange for Mr. Tianfu Yang personally undertaking to pay Baring $500,000 within 60 days after the completion of the acquisition of the Company.  The payment of this amount is at Mr. Tianfu Yang’s sole expense and does not affect the financial consequences of the proposed transaction for the Company or its stockholders.
 
On May 12, 2011, representatives of Lazard held a discussion with Abax regarding Abax providing a formal letter or memorandum to the Special Committee regarding Abax’s proposed financing for the proposed transaction.
 
On May 13, 2011, representatives of Gibson Dunn and Skadden Arps met telephonically to begin direct negotiations of the various open points in the merger agreement and related transaction documents.
 
On May 15, 2011, representatives of Lazard held a discussion with Abax regarding the formal letter or memorandum regarding Abax’s financing for the proposed transaction.
 
On May 17, 2011, Lazard received a letter from Abax regarding Abax’s proposed financing for the proposed transaction, which was shared with the Special Committee and Gibson Dunn.
 
As the materials provided through that date did not yet constitute a complete bid package due to the absence of commitment papers relating to the mezzanine financing, the Special Committee directed its independent legal and financial advisors to draft a letter to Mr. Tianfu Yang summarizing the negotiation process and highlighting the information needed for the purchaser group to complete the bid package, and expressing the Special Committee’s firm desire to work to resolve differences as quickly as possible, with a view toward signing definitive documents as quickly as practicable.
 
On May 19, 2011, representatives of Morgan Stanley and Lazard reviewed the Company’s first quarter financial results with Ms. Shue.
 
On May 19, 2011, representatives of Morgan Stanley, Lazard, and Goldman Sachs discussed the contrast between the valuation of the Company implied by the April 2011 Case with the $24.00 per share price proposed by Mr. Tianfu Yang and Abax in the joint proposal.  Without conveying a specific valuation number, in an attempt to obtain a higher price per share, the financial advisors to the Special Committee suggested that, based on the valuation of the Company implied by the April 2011 Case, a price in excess of $24.00 per share could be justified.  The representatives of Goldman Sachs, per Mr. Tianfu Yang’s instructions, indicated that Mr. Tianfu Yang and Abax had no intention of increasing the per share price offered in the joint proposal, and that there had in fact been discussion between Mr. Tianfu Yang and Abax regarding offering a price per share lower than $24.00.
 
Early morning on May 20, 2011, Gibson Dunn received a revised draft of the merger agreement from Skadden Arps.  That evening, Mr. Plowman forwarded the Special Committee’s letter described above to Mr. Tianfu Yang.
 
 
26

 
 
On May 25, 2011, at Mr. Tianfu Yang’s request, Mr. Tianfu Yang held a telephone call with representatives of Morgan Stanley and Lazard to provide an update on the Company’s business outlook, discussing the weakening economic conditions, including commodity and labor costs, and the fact that management believed the April 2011 Case no longer appropriately reflected management’s outlook.
 
Early morning on June 9, 2011, Mr. Plowman and Mr. Tianfu Yang held a call, with Ms. Shue serving as interpreter, to discuss the possible signing of the China Development Bank facility agreement to provide debt financing for the transaction.
 
On June 9, 2011, China Development Bank approved, and entered into, a loan facility agreement with Parent providing that, subject to the satisfaction of certain conditions precedent, China Development Bank would provide up to $400 million of debt financing for the acquisition of the Company’s outstanding shares not owned by members of the Buyer Group at the closing of the merger.
 
Later on June 9, 2011, Skadden Arps delivered to Gibson Dunn a list of open issues on the draft merger agreement and draft limited guarantee, which Gibson Dunn then provided to the Special Committee and its financial advisors.  In the open issues list, Mr. Tianfu Yang and Abax reaffirmed their $24.00 per share cash offer price, and proposed that the Company termination fee and Parent termination fee be set at $15 million each.  Representatives of Gibson Dunn, Skadden Arps, and Davis Polk & Wardwell LLP (“Davis Polk”), counsel to Abax, discussed the open issues later that day.  From that time through the execution of the merger agreement on June 19, 2011, representatives of Gibson Dunn, Skadden Arps, and Davis Polk negotiated the terms of the merger agreement and ancillary documentation through a series of calls and e-mails.  Among other things, the parties discussed and negotiated extensively the deal-protection related provisions of the merger agreement (including matching rights, the Parent termination fee, and the Company termination fee), as well as covenants related to Parent’s third party debt financing and each party’s termination rights.
 
On June 10, 2011, Davis Polk delivered to Gibson Dunn draft mezzanine financing documents, comprising a draft note purchase agreement and draft warrant agreement, thereby completing the Buyer Group’s package.  Gibson Dunn promptly provided the draft mezzanine financing documents to the Special Committee and its financial advisors.  At this point, the Special Committee was in receipt of a complete bid to acquire the outstanding shares of the Company, as requested in the Special Committee’s Phase II process letter dated March 21, 2011.
 
Also on June 10, 2011, Mr. Tianfu Yang and Abax amended their Schedule 13D on file with the SEC to disclose the executed China Development Bank loan facility agreement and to reiterate the $24.00 per share cash offer price.
 
Over the course of June 11 and 12, 2011, the members of the Special Committee, representatives of Lazard, representatives of Morgan Stanley, and representatives of Gibson Dunn discussed a response (the “Counter-Offer”) to the $24.00 per share cash offer price, $15 million Parent termination fee, and $15 million Company termination fee proposal delivered by Skadden Arps on June 9, 2011.  After consultation with its advisors, the Special Committee authorized Gibson Dunn to advise Skadden Arps of the Special Committee’s Counter-Offer of $24.50 cash per share and a $45 million Parent termination fee, and to accept the proposed Company termination fee.
 
On June 13, 2011, the Special Committee met telephonically with its independent legal and financial advisors to discuss the recent progress in the negotiations with Mr. Tianfu Yang and Abax, discuss the open issues list presented by Skadden Arps on June 9, 2011, and discuss further preliminary financial analyses by its financial advisors.  At the Special Committee’s request, these preliminary financial analyses included sensitivity analyses applied to the April 2011 Case to reflect the Special Committee’s views regarding the effects of increased labor costs in the PRC, higher raw material costs, higher R&D expenses, higher SG&A expenses, higher PRC tax rates, and a general slowdown in the PRC’s economy, including deceleration of industrial production, tightening of credit markets, and electricity shortages (the “Economic Factors).  The Special Committee had a lengthy discussion with the financial advisors regarding these analyses.

 
27

 
 
Representatives of Lazard and Morgan Stanley then left the Special Committee’s meeting and the Special Committee then discussed what guidance to provide its financial advisors with respect to sensitivity analysis inputs to be incorporated into their valuation analyses.  After considerable discussion, the Special Committee resolved to request that the financial advisors utilize a range of sensitivities to the April 2011 Case in their valuation work.  Specifically, the Special Committee requested that the financial advisors utilize a range of compounded annual growth rates of revenue from 2010 to 2015 of 10% to 15%, and a range of EBITDA margin compression/expansion of negative 4% to positive 1% over the same period, based on the Special Committee’s belief that, in light of the Economic Factors and its knowledge of the Company and its operations, these levels of annual growth rates of revenue and compression/expansion of EBITDA margins provided a more realistic estimate of the Company’s future prospects over the period in question.
 
At the June 13, 2011 meeting, the Special Committee also discussed the per share price offered by Mr. Tianfu Yang and Abax, and the proposed termination fees, considering, in turn, analyses of termination fees in recent transactions prepared by its financial advisors.  The Special Committee also discussed the Counter-Offer at length.  The Special Committee then unanimously ratified the Counter-Offer.
 
Early on the morning of June 15, 2011, Skadden Arps informed Gibson Dunn by e-mail that the Special Committee’s Counter-Offer of $24.50 per share had been rejected, and that the per share price of $24.00 previously offered by Mr. Tianfu Yang and Abax would not be increased.  No response was provided with respect to the Parent termination fee or Company termination fee at that time.
 
On June 17, 2011, the Special Committee met telephonically with its independent legal and financial advisors to discuss open points in the negotiations with Mr. Tianfu Yang and Abax, and potential responses.  The Special Committee then reviewed the negotiation process on termination fees, expressing dissatisfaction with the Parent termination fee offer from Mr. Tianfu Yang and Abax of $30 million.  After considerable deliberation, the Special Committee authorized Gibson Dunn to counter-offer with a Parent termination fee equal to $1 per share, or approximately $31,364,000, which counter-offer was rejected.
 
On June 18, 2011, Mr. Plowman held separate calls with each of Mr. Tianfu Yang and Mr. Xiang Dong Yang in which each communicated to Mr. Plowman a desire to conclude negotiations and enter into a definitive agreement.
 
On June 18, 2011, representatives of Gibson Dunn and Morgan Stanley met telephonically with senior bankers of China Development Bank to discuss the bank’s readiness to proceed with the proposed transaction.  The bank confirmed that it foresaw no obstacles to proceeding with providing financing for the transaction provided the conditions precedent in the facility agreement were met.
 
On June 18, 2011, the Special Committee’s independent legal and financial advisors met telephonically with Mr. Tianfu Yang to discuss certain due diligence and other matters.  The Special Committee’s advisors then communicated to the Special Committee the results of such call.
 
On June 19, 2011, representatives of Morgan Stanley, Lazard, and Gibson Dunn had a call with the Special Committee to discuss the final terms of the proposed transaction and present the financial advisors’ analysis.

 
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On June 19, 2011, the Special Committee met telephonically with its independent legal and financial advisors to consider the final terms of the merger agreement and its recommendation of the transaction to the full board of directors.  Representatives of Morgan Stanley reviewed with the Special Committee its financial analysis of the proposed transaction and delivered its oral opinion to the Special Committee to the effect that, as of the date of its opinion, and based on and subject to the assumptions, considerations, qualifications, and limitations set forth in the written opinion, the $24.00 per share cash price to be received by the holders of shares of Company common stock (other than the Buyer Group and their respective affiliates) was fair, from a financial point of view, to such holders (other than the Buyer Group and their respective affiliates).  Lazard then reviewed with the Special Committee its financial analysis of the proposed transaction and delivered its oral opinion to the Special Committee to the effect that, based on and subject to the limitations and assumptions set forth in the opinion as of the date of the opinion, the $24.00 per share cash price to be paid to the Company’s stockholders (other than Mr. Tianfu Yang, certain affiliates of Abax, and certain other members of the Buyer Group) was fair, from a financial point of view, to such stockholders.  Gibson Dunn then reviewed the history of the negotiations between the parties, and revisited the fiduciary duty obligations of the Special Committee. The Special Committee again discussed alternative transactions, including remaining independent, delisting the Company from NASDAQ and relisting on an Asian exchange, as well as a potential IPO of a Company subsidiary.  Remaining independent was rejected because the Special Committee believed the $24.00 per share cash purchase price offered by the Buyer Group was higher than what the Company’s stockholders could reasonably expect to achieve in the open market in the foreseeable future should a transaction with the Buyer Group not be consummated. The relisting and subsidiary IPO alternatives were both rejected because of the time and transaction costs which would be incurred, the execution risks associated with each, and the high degree of uncertainty regarding the value each would ultimately return to the stockholders if consummated.After considering, among other things, the factors discussed below in the section titled “Special Factors—Recommendation of the Special Committee and  Board of Directors and Their Reasons for the Merger,” and the financial analyses and opinions of Morgan Stanley and Lazard, the Special Committee determined that the merger is fair to and in the best interests of the Company and its unaffiliated stockholders, and unanimously approved resolutions recommending that the Company’s board of directors approve and declare advisable the merger agreement and the merger.
 
On June 19, 2011, representatives of Morgan Stanley, Lazard, and Gibson Dunn held a call with Professor Yunyue Ye to brief him on the terms of the proposed transaction and to present to him the same financial advisors’ analyses in Mandarin-Chinese that they had presented to the other members of the Special Committee in English.
 
Immediately following the conclusion of the Special Committee’s meeting and the separate meeting between Morgan Stanley, Lazard, Gibson Dunn, and Professor Ye, the full board of directors convened to consider the Special Committee’s recommendation.  After a quorum was established, Mr. Tianfu Yang and Ms. Gao recused themselves from the meeting, and Mr. Plowman discussed with the board the various factors which led to the Special Committee’s recommendation.  Representatives of Morgan Stanley and Lazard then reviewed with the board their respective financial analyses of the proposed transaction, and delivered their independent opinions to the Company’s board of directors to the effect that, as of the date of each opinion, and based on and subject to the assumptions, considerations, qualifications, and limitations set forth in their respective written opinions, the $24.00 per share cash price to be received by the holders of the shares of Company common stock (other than the Buyer Group and their respective affiliates) was fair, from a financial point of view, to such stockholders (other than the Buyer Group and their respective affiliates).  Each of Morgan Stanley and Lazard subsequently confirmed its oral opinion in an executed letter to the Special Committee.  Gibson Dunn then described in detail the material terms of the merger agreement to the Company’s board of directors.  Gibson Dunn directed the directors’ particular attention to material terms and conditions, including, but not limited to, the closing conditions and termination provisions.  After considering, among other things, the factors described below in the section titled “Special Factors—Recommendation of the Special Committee and Board of Directors and their Reasons for the Merger,” the financial analyses and opinions of Morgan Stanley and Lazard, the terms of the merger agreement and the recommendation of the Special Committee, the members of the Company’s board of directors unanimously determined that the merger was advisable, fair to and in the best interests of the Company’s unaffiliated stockholders, and unanimously approved resolutions approving the merger and recommending that the Company’s stockholders vote to approve the merger agreement.
 
Later on June 19, 2011, the Company, Mr. Tianfu Yang, and Abax caused the merger agreement and ancillary documents to be executed.

 
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On the morning of June 20, 2011, prior to the commencement of trading on NASDAQ, the Company issued a press release announcing the transaction and its entry into a definitive merger agreement.
 
Reasons for Length of Evaluation Process

The Company believes that the reasons for the length of time between receipt of Mr. Tianfu Yang’s acquisition proposal and the execution of the merger agreement were primarily the following:
 
 
·
several different parties involved with the transaction, including the advisors to the Special Committee, members of the Buyer Group and their advisors, and other potential bidders for the Company each conducted a lengthy due diligence process on the Company;
 
 
·
the Special Committee ran an extensive, lengthy, and deliberative auction process in connection with its evaluation of the potential acquisition;
 
 
·
Parent underwent a lengthy application and approval process in connection with its obtaining the requisite financing for the transaction; and
 
 
·
the Special Committee and the Buyer Group engaged in extensive negotiations with respect to the merger agreement.
 
Recommendation of the Special Committee and Board of Directors and Their Reasons for the Merger
 
Both the Special Committee and the Company’s board of directors believe, based on their consideration of the factors described below, that the merger and the merger agreement are fair, in terms of both substance and procedure, to the Company’s unaffiliated stockholders.  The Company’s purpose and reasons for undertaking the merger at this time are to enable the Company’s stockholders, other than Mr. Tianfu Yang, certain affiliates of Abax, and certain other members of the Buyer Group, to realize the value of their investment in the Company in cash.
 
The Special Committee
 
The Special Committee, acting with the advice and assistance of its independent legal and financial advisors, evaluated the proposed merger, including the terms and conditions of the merger agreement.  At a meeting on June 19, 2011, the Special Committee unanimously:
 
 
·
determined that the merger agreement and the transactions contemplated thereby, including the merger, are fair, both substantively and procedurally, to and in the best interests of the Company and its unaffiliated stockholders; and
 
 
·
approved resolutions recommending that the Company’s board of directors approve and declare advisable the merger agreement and the merger.
 
In the course of reaching its determination and making its recommendations, the Special Committee considered the following factors as being generally positive or favorable, each of which the Special Committee believed supported its determination and recommendations:
 
 
·
the current and historical market prices of the Company’s common stock, including the fact that the estimated merger consideration of $24.00 per share represents a premium of (i) approximately 20.24% over the closing price of $19.96 on October 8, 2010, the last trading day prior to the public announcement of the Yang-Baring proposal; (ii) approximately 38% over the Company’s volume weighted average price of $17.45 over the twelve-month period ended October 8, 2010; (iii) approximately 85% over the Company’s volume weighted average price of $12.95 over the 30-day period ended June 17, 2011, the last trading day prior to the execution of the merger agreement; (iv) approximately 60% over the Company’s volume weighted average price of $15.01 over the 90-day period ended June 17, 2011; and (v) approximately 186% over the closing price of $8.39 on June 17, 2011.  The Special Committee did not consider net book value because it does not believe that net book value reflects or has any meaningful impact on the market price of the Company common stock or the fair market value of the Company’s assets or business.  The Special Committee notes, however, that the merger consideration of $24.00 per share is higher than the net book value of the Company per diluted share of $13.78 as of March 31, 2011.  The Special Committee did not consider the Company’s liquidation value to be a relevant valuation method because it considers the Company to be a viable business and the trading history of the Company’s common stock to generally be an indication of its value as such.  The Special Committee also did not consider liquidation value in determining the fairness of the merger consideration to the Company’s unaffiliated stockholders because it believed the value of the Company’s assets that might be realized in a liquidation would be significantly less than the value represented by the aggregate merger consideration.  The Special Committee did not establish, and did not consider, a stand-alone going-concern value for the Company in determining the fairness of the merger consideration to the Company’s unaffiliated stockholders because of its belief that the going concern value of the Company is reflected in the trading history of the Company’s common stock, and that the offered merger consideration of $24.00 per share represents a premium to that value;
 
 
·
the presentation by each of Morgan Stanley and Lazard to the Special Committee on June 19, 2011 and the independent oral opinions delivered by each of Morgan Stanley and Lazard to the Special Committee and the Company’s board of directors, and subsequently confirmed in writing, to the effect that, as of the date of its opinion, and based on and subject to the assumptions, considerations, qualifications, and limitations set forth in their respective written opinions, the $24.00 per share cash price to be received by the holders of shares of Company common stock (other than the Buyer Group and their respective affiliates) was fair, from a financial point of view, to such holders (other than the Buyer Group and their respective affiliates) (during the consideration of which the Special Committee considered, but determined not to place weight on, the discounted cash flow analysis conducted by Lazard using the April 2011 Case, due to the Special Committee’s belief that the Sensitivity Case provided the best estimate of the Company’s future performance), as more fully described in the section titled “Special Factors—Opinion of Morgan Stanley & Co. LLC” beginning on page 35 and the section titled “Special Factors—Opinion of Lazard Frères & Co. LLC” beginning on page 41;
 
 
30

 
 
 
·
the fact that the Company’s stockholders other than Mr. Tianfu Yang, certain affiliates of Abax, and certain other members of the Buyer Group, will receive cash for their shares and will therefore have immediate liquidity and receive certain value for their shares;
 
 
·
the fact that the Buyer Group had, or would have concurrently with the signing of the merger agreement, executed agreements covering all of the financing necessary for the transaction;
 
 
·
the Special Committee’s consideration that the value of continuing as an independent public company would not be as valuable as the merger consideration being offered because of the potential risks and uncertainties associated with the future prospects of the Company, including the Economic Factors, uncertainties regarding the valuation of China-based U.S.-listed companies, and the compliance and other costs associated with being a U.S.-listed company, as well as the costs associated with complying with the regulatory requirements of U.S. governmental agencies, which (together with the compliance and other costs associated with being a U.S.-listed company, including listing fees, SEC filing fees, fees paid to auditors, legal counsel, investor relations advisors, and stock transfer agents, costs of purchasing directors’ and officers’ insurance, compensation paid to members of the Company’s board of directors, salaries and compensation paid to personnel performing financial statements consolidation, costs to prepare and disclose financial information in accordance with U.S. GAAP, compensation paid to executives conducting financial reporting, investor relations, and corporate secretary activities, travel costs related to conferences, road shows, and investors meetings, and other administrative costs such as office rent and phone charges ) are estimated in the aggregate to be approximately $4.5 million annually;
 
 
·
the belief by the Special Committee that, based on the thorough process undertaken by the Special Committee’s financial advisors to market the Company to other potential bidders, the per share merger consideration being offered was the most favorable price that could be obtained and that further negotiation ran the risk that Mr. Tianfu Yang and Abax might determine to offer an amount less than $24.00 per share, or abandon the transaction altogether, in which event the Company’s stockholders would lose the opportunity to accept the premium being offered;
 
 
·
the terms of the merger agreement, including:
 
 
o
the requirement that the merger agreement must be approved by the holders of a majority of the outstanding common stock of the Company, other than shares held by the Buyer Group or any affiliate of the Buyer Group;
 
 
o
the inclusion of provisions that permit the Company’s board of directors, under specified circumstances, to modify or withdraw its recommendation with respect to the merger agreement and the merger and respond to unsolicited expressions of interest in the Company to the extent the Special Committee believed in good faith that its fiduciary duty obligations required it to respond to those inquiries;
 
 
o
the agreement by members of the Buyer Group to vote their shares in favor of approval of the merger agreement at the special meeting; and
 
 
o
the other terms and conditions of the merger agreement, described in the section titled “The Merger Agreement” beginning on page 103 of this proxy statement, which the Special Committee, after consulting with its legal counsel, considered to be reasonable and consistent with precedents they deemed relevant;
 
 
·
the likelihood that the merger would be completed, and that it would be completed in a reasonably prompt time frame, based on the existence of the fully-executed facility agreement from China Development Bank as well as the fully-negotiated note purchase agreement providing for mezzanine financing from Abax to fund the merger consideration (in conjunction with Abax’s equity commitment letter), the fully-negotiated contribution agreement, the fully-negotiated voting support agreement, and the perceived financial and other commitments of each member of the Buyer Group to consummate the merger transactions, and the absence of any known significant regulatory hurdles;
 
 
·
the Buyer Group’s agreement in the merger agreement to use its reasonable best efforts to consummate the proposed merger;

 
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·
the fact that the Buyer Group’s obligation to complete the merger is not conditioned upon receipt of financing;
 
 
·
the fact that Parent and Merger Sub agreed to pay a $30 million termination fee if the merger agreement is terminated in certain circumstances, and the fact that Mr. Tianfu Yang and certain affiliates of Abax agreed to guarantee that payment obligation; and
 
 
·
the absence of significant regulatory approvals, including U.S. and PRC antitrust approvals, required in connection with the merger.
 
The Special Committee also considered a number of factors that are discussed below relating to the procedural safeguards that it believes were and are present to ensure the fairness of the merger. The Special Committee believes these factors support its determinations and recommendations and provide assurance of the procedural fairness of the merger to the Company’s unaffiliated stockholders:
 
 
·
the merger agreement must be approved by the affirmative vote of (i) the holders of at least a majority of the combined voting power of the outstanding common stock of the Company, and (ii) the holders of a majority of the combined voting power of the outstanding common stock of the Company, other than shares held by the Buyer Group or any affiliate of the Buyer Group, as discussed in the section titled “The Special Meeting—Vote Required,” on page 98;
 
 
·
the full and sole authority granted to the Special Committee in its charter to independently negotiate definitive agreements with respect to Mr. Tianfu Yang’s proposal;
 
 
·
the Special Committee consists solely of independent and disinterested directors.  The members of the Special Committee (i) are not and have never been employees of the Company or any of its subsidiaries (ii) are not and never have been affiliated with Abax or its affiliates (other than Mr. Plowman, who served as a director of certain Abax affiliates until the Special Committee learned that Abax was a potential bidder at which time he immediately tendered his resignation), and (iii) have no financial interest in the merger that is different from that of the Company’s unaffiliated stockholders;
 
 
·
the Special Committee held numerous meetings and met regularly to discuss and evaluate Mr. Tianfu Yang’s proposal, and was advised by independent financial and legal advisors, and each member of the Special Committee was actively engaged in the process on a continuous and regular basis;
 
 
·
the Special Committee retained and received the advice of Morgan Stanley and Lazard as its independent financial advisors;
 
 
·
the Special Committee’s view that it had structured and negotiated the compensation arrangement of its financial advisor, Morgan Stanley, so as to provide enhanced economic incentives to achieve an outcome that benefits the unaffiliated stockholders of the Company.  The Special Committee did so by negotiating a fee structure with Morgan Stanley which provides Morgan Stanley with increased compensation (both in amount and as a percentage of aggregate transaction value) for any per share purchase price in excess of $24.00 per share;
 
 
·
the independent opinions, dated June 19, 2011, of Morgan Stanley and Lazard to the Special Committee and the Company’s board of directors as described above and as more fully described in the section titled “Special Factors—Opinion of Morgan Stanley & Co. LLC” beginning on page 35 and in the section titled “Special Factors—Opinion of Lazard Frères & Co. LLC” beginning on page 41; and
 
 
32

 
 
 
·
the recognition by the Special Committee that it had no obligation to recommend the approval of the merger or any other transaction.
 
In the course of reaching its determinations and making its recommendations, the Special Committee also considered the following risks and other factors concerning the merger agreement and the merger as being generally negative or unfavorable:
 
 
·
Mr. Tianfu Yang and Abax would not agree to a proposed increase in the merger consideration or a reverse termination fee higher than $30 million;
 
 
·
the lack of alternatives available to the Company other than to reject the proposed transaction and remain a U.S.-listed company given (i) Mr. Tianfu Yang’s position that he is unwilling to sell his shares of Company common stock or accept a non-controlling role in the Company after any transaction, which position was articulated in multiple conversations between Mr. Tianfu Yang and the Special Committee, and between Mr. Tianfu Yang and the Special Committee’s financial advisors, as well as in his SEC Schedule 13D that he filed on October 12, 2010, (ii) the Special Committee’s belief that a transaction which did not involve Mr. Tianfu Yang could not be successful, given his history with the Company, his central role to the Company’s business, his leadership regarding strategic direction, and his strong relationships with the Company’s customer base, and (iii) that each other bidder had indicated it was interested in pursuing a transaction only if Mr. Tianfu Yang continued in his role with the Company;
 
 
·
the fact that the Company’s stockholders, other than Mr. Tianfu Yang, certain affiliates of Abax, and the other members of the Buyer Group, will have no ongoing equity participation in the Company following the merger, and that such stockholders will cease to participate in the Company’s future earnings or growth, if any, and will not participate in any potential future sale of the Company to a third party or any potential recapitalization which could include a dividend to stockholders;
 
 
·
that the Buyer Group could realize significant returns on their indirect equity investments in the surviving corporation following the merger;
 
 
·
the possibility that the Buyer Group could sell some or all of the Company following the merger to one or more purchasers at a valuation higher than that being paid in the merger;
 
 
·
the possibility that the Buyer Group could relist the Company following the merger on an Asian exchange (such as the Hong Kong exchange) after satisfying applicable listing requirements, at a valuation higher than that being paid in the merger, in light of recent highly-publicized accounting and other issues affecting certain China-based companies, the fact that comparable companies trade at higher multiples on Asian exchanges, and that investors in Asia might have a greater understanding and appreciation of the Company’s business prospects given their proximity to its operations;
 
 
·
the fact that members of the Buyer Group (other than certain affiliates of Abax) were not making any additional equity investment in order to complete the merger;
 
 
·
the risk of incurring substantial expenses related to the merger, including in connection with any litigation that might result;
 
 
·
the risk that, while the merger is expected to be completed, there can be no assurance that all conditions to the parties’ obligations to complete the merger will be satisfied, and as a result, it is possible that the merger may not be completed even if approved by the Company’s stockholders and the majority of the Company’s unaffiliated stockholders; and
 
 
·
the risks and costs to the Company if the merger does not close, including the diversion of management and employee attention and the potential effect of that diversion on the Company’s business.

 
33

 
 
The Special Committee considered and expressly adopted the financial analyses and the opinions of Morgan Stanley and Lazard, among other factors considered, in reaching its determination as to the fairness of the transactions contemplated by the merger agreement.  These analyses, including a discussion of the sensitivity analyses, are summarized below in the sections titled “Special Factors—Opinion of Morgan Stanley & Co. LLC” beginning on page 35 and “Special Factors—Opinion of Lazard Frères & Co. LLC” beginning on page 41.  As part of making its determination regarding the fairness of the merger, the Special Committee concluded the incorporation of the sensitivity analyses into Morgan Stanley’s and Lazard’s valuation analyses was a reasonable basis for assessing the Company’s value in light of recent negative economic conditions, and their likely impact on the business and valuation of the Company.  The Special Committee also considered, but did not place any specific weight on, the Other Public Company Benchmarks-Trading Analysis conducted by Lazard.
 
The foregoing discussion of the information and factors considered by the Special Committee is not intended to be exhaustive, but includes the material factors considered by the Special Committee. In view of the wide variety of factors considered by the Special Committee in evaluating the merger agreement and the merger, the Special Committee did not find it practicable, and did not attempt, to quantify, rank or otherwise assign relative weights to the foregoing factors in reaching its conclusion. In addition, individual members of the Special Committee may have given different weights to different factors and may have viewed some factors more positively or negatively than others. The Special Committee’s determinations and recommendations described above were based upon the totality of the information considered.
 
Position of the Board of Directors as to Fairness of the Merger and Recommendation of the Board
 
The Company’s board of directors believes that the merger and the merger agreement are both substantively and procedurally fair to the Company’s unaffiliated stockholders.
 
In reaching these determinations, our board of directors considered and adopted:
 
 
·
the Special Committee’s analysis, conclusions, and unanimous determination that the merger agreement, the merger and the other transactions contemplated by the merger agreement were fair, both substantively and procedurally, and advisable to and in the best interest of the Company and its unaffiliated stockholders; and
 
 
·
the Special Committee’s unanimous recommendation that the board of directors adopt and approve the merger agreement, submit the merger agreement to the Company’s stockholders for approval at a meeting of the Company’s stockholders, and recommend that the stockholders vote for the approval of the merger agreement and the consummation of the merger and other transactions contemplated by the merger agreement.
 
In making this determination, the Company board also considered a number of other factors, including the following material factors:
 
 
·
the Special Committee’s having retained and received advice from its independent financial and legal advisors;
 
 
·
the Special Committee consists solely of independent and disinterested directors.  The members of the Special Committee (i) are not and have never been employees of the Company or any of its subsidiaries, (ii) are not and have never been affiliated with Abax or its affiliates (other than Mr. Plowman, who served as a director of certain Abax affiliates until the Special Committee learned that Abax was a potential bidder at which time he immediately tendered his resignation), and (iii) have no financial interest in the merger that is different from that of the Company’s unaffiliated stockholders;
 
 
·
the process undertaken by the Special Committee and its advisors in connection with evaluating the proposed merger, as described above in the section titled “Special Factors—Background of the Merger” beginning on page 13;
 
 
·
the independent opinions, dated June 19, 2011, of Morgan Stanley and Lazard to the Special Committee and the Company’s board of directors as described above and as more fully described in the sections titled “Special Factors—Opinion of Morgan Stanley & Co. LLC” beginning on page 35 and “Special Factors—Opinion of Lazard Frères & Co. LLC” beginning on page 41; and
 
 
34

 
 
 
·
their own views that the value of continuing as an independent public company would not be as valuable as the merger consideration being offered because of the potential risks and uncertainties associated with the future prospects of the Company, including the Economic Factors, uncertainties regarding the valuation of China-based U.S.-listed companies, and the compliance and other costs associated with being a U.S.-listed company, as well as the costs associated with complying with the regulatory requirements of U.S. governmental agencies, which (together with the compliance and other costs associated with being a U.S.-listed company, including listing fees, SEC filing fees, fees paid to auditors, legal counsel, investor relations advisors, and stock transfer agents, costs of purchasing directors’ and officers’ insurance, compensation paid to members of the Company’s board of directors, salaries and compensation paid to personnel performing financial statements consolidation, costs to prepare and disclose financial information in accordance with U.S. GAAP, compensation paid to executives conducting financial reporting, investor relations, and corporate secretary activities, travel costs related to conferences, road shows, and investors meetings, and other administrative costs such as office rent and phone charges ) are estimated in the aggregate to be approximately $4.5 million annually.
 
The foregoing discussion of the information and factors considered by the Company’s board of directors is not intended to be exhaustive, but includes the material factors considered by the Company’s board of directors, including the substantive and procedural factors considered by the Special Committee discussed above.  In view of the wide variety of factors considered by the Company’s board of directors in evaluating the merger agreement and the merger, the Company’s board of directors did not find it practicable, and did not attempt, to quantify, rank or otherwise assign relative weights to the foregoing factors in reaching its conclusion.  In addition, individual members of the Company’s board of directors may have given different weights to different factors and may have viewed some factors more positively or negatively than others.  The Company’s board of directors (with Mr. Tianfu Yang and Ms. Lanxiang Gao having recused themselves) approved the merger agreement and unanimously recommends that the stockholders of the Company approve the merger agreement based upon the totality of the information presented to, and considered by, it.
 
Other than as described in this proxy statement, the Company’s board of directors is not aware of any firm offers by any other person during the prior two years for a merger or consolidation of the Company with another company, the sale or transfer of all or substantially all of the Company’s assets or a purchase of the Company’s securities that would enable such person to exercise control of the Company.
 
Our board of directors recommends that you vote “FOR” the proposal to approve the merger agreement, “FOR” the proposal to approve, on a non-binding advisory basis, the golden parachute compensation that may be payable to the Company’s named executive officers in connection with the merger, and “FOR” the adjournment or postponement of the special meeting in order to take such actions as our board of directors determines are necessary or appropriate, including to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to approve the merger agreement.
 
Opinion of Morgan Stanley & Co. LLC
 
The Special Committee retained Morgan Stanley to act as its financial advisor and to provide it with financial advisory services and a financial opinion in connection with the potential merger.  Morgan Stanley is an internationally recognized financial services firm that, among other things, is regularly engaged in the investment banking business, including the valuation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, private placements and other corporate purposes.  The Special Committee selected Morgan Stanley to act as its financial advisor based on Morgan Stanley’s qualifications, expertise and reputation and its knowledge of the business and affairs of the Company.  At the meeting of the Special Committee on June 19, 2011, Morgan Stanley rendered its oral opinion, subsequently confirmed in writing, that as of June 19, 2011, and based on and subject to the assumptions, considerations, qualifications and limitations set forth in the written opinion, the $24.00 per share cash merger consideration to be received by the holders of shares of Company common stock (other than the Buyer Group and their respective affiliates) pursuant to the merger agreement was fair from a financial point of view to such holders (other than the Buyer Group and their respective affiliates).
 
 
35

 
 
The full text of Morgan Stanley’s opinion, dated as of June 19, 2011, is attached as Annex F to this proxy statement.  You are encouraged to, and should, read the opinion in its entirety for a discussion of the assumptions made, procedures followed, factors considered and limitations of the review undertaken by Morgan Stanley in rendering such opinion.  This summary is qualified in its entirety by reference to the full text of such opinion.  Morgan Stanley’s opinion is directed to the Special Committee and the board of directors of the Company and addresses only the fairness, as of the date of the opinion and from a financial point of view, of the $24.00 per share cash merger consideration to be received by the holders of shares of Company common stock (other than the Buyer Group and their respective affiliates).  Morgan Stanley’s opinion did not in any manner address any other aspects of the merger. Morgan Stanley expressed no opinion or recommendation to the stockholders of the Company as to how to vote at the special meeting to be held in connection with the merger.
 
In connection with rendering its opinion, Morgan Stanley, among other things:
 
 
·
reviewed certain publicly available financial statements and other business and financial information of the Company;
 
 
·
reviewed certain internal financial statements and other financial and operating data concerning the Company;
 
 
·
reviewed certain financial projections prepared by the management of the Company, which we refer to as the April 2011 Case (see “Special Factors—Managements Projected Financial Information—Updated Financial Projections—April 2011 Case” beginning on page 53), as well as certain sensitivity adjustments thereto prepared at the direction of the Special Committee, which we refer to as the Sensitivity Ranges (see “Special Factors—Managements Projected Financial Information—Updated Financial Projections—Sensitivity Case” beginning on page 56);
 
 
·
discussed the past and current operations and financial condition and the prospects of the Company with senior executives of the Company;
 
 
·
reviewed the reported prices and trading activity for the Company common stock;
 
 
·
reviewed the financial terms, to the extent publicly available, of certain comparable acquisition transactions;
 
 
·
compared the financial performance of the Company and the prices and trading activity of the Company common stock with that of certain other publicly-traded companies comparable with the Company and its securities;
 
 
·
participated in certain discussions and negotiations among representatives of the Special Committee, the Buyer Group, and their financial and legal advisors;
 
 
·
reviewed the report prepared by Ernst & Young for the Special Committee dated February 8, 2011;
 
 
·
reviewed the merger agreement, a draft voting support agreement dated June 19, 2011, a draft contribution agreement dated June 19, 2011, the facility agreement dated June 9, 2011 between Parent and China Development Bank, a draft note purchase agreement dated June 19, 2011 between Holdco and Abax Emerald Ltd., and certain related documents; and
 
 
·
performed such other analyses, reviewed such other information and considered such other factors as  Morgan Stanley deemed appropriate.

 
36

 
 
In arriving at its opinion, Morgan Stanley assumed and relied upon, without independent verification, the accuracy and completeness of the information that was publicly available or supplied or otherwise made available to Morgan Stanley by the Company, and formed a substantial basis for its opinion. With respect to the April 2011 Case, Morgan Stanley assumed that they had been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of the Company of the future financial performance of the Company.  With respect to the Sensitivity Ranges, Morgan Stanley assumed that they had been reasonably prepared on bases reflecting the best currently available estimates and judgments of the Special Committee of the future financial performance of the Company.  In addition, Morgan Stanley assumed that the merger will be consummated in accordance with the terms set forth in the merger agreement without any waiver, amendment or delay of any terms or conditions, including, among other things, that (i) the Buyer Group will obtain financing in accordance with the terms set forth in the facility agreement and note purchase agreement, and (ii) the transactions and actions contemplated by the contribution agreement and voting support agreement will be consummated in accordance with each of their terms.  Morgan Stanley also assumed that in connection with the receipt of all the necessary governmental, regulatory or other approvals and consents required for the proposed merger, no delays, limitations, conditions or restrictions would be imposed that would have a material adverse effect on the contemplated benefits expected to be derived in the proposed merger.
 
Morgan Stanley is not a legal, tax, accounting or regulatory advisor.  Morgan Stanley is a financial advisor only and relied upon, without independent verification, the assessment of the Company and its legal, tax, accounting and regulatory advisors with respect to legal, tax, accounting and regulatory matters.  Morgan Stanley expressed no opinion with respect to the fairness of the amount or nature of the compensation to any of the Company’s officers, directors or employees, or any class of such persons, relative to the consideration to be received by the holders of shares of Company common stock in the merger.  Morgan Stanley’s opinion did not address the fairness of any consideration to be received by members of the Buyer Group pursuant to the merger agreement or the contribution agreement.  Morgan Stanley’s opinion did not address the relative merits of the merger as compared to any other alternative business transaction, or other alternatives, or whether or not such alternatives could be achieved or were available.  Morgan Stanley did not make any independent valuation or appraisal of the assets or liabilities of the Company, nor was Morgan Stanley furnished with any such valuations or appraisals.  Morgan Stanley is not a legal expert, and, for purposes of its analysis, Morgan Stanley did not make any assessment of the status of any outstanding litigation involving the Buyer Group and the Company and excluded the effects of any such litigation in its analysis.  Morgan Stanley’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Morgan Stanley as of, the date of its opinion.  Events occurring after the date of the opinion may affect the opinion and the assumptions used in preparing it, and Morgan Stanley did not assume any obligation to update, revise or reaffirm the opinion.  Morgan Stanley’s opinion was approved by a committee of Morgan Stanley investment banking and other professionals in accordance with its customary practice.
 
The following is a summary of the material financial analyses performed by Morgan Stanley in connection with the preparation of its opinion. Some of these summaries of financial analyses include information presented in tabular format. In order to fully understand the financial analyses used by Morgan Stanley, the tables must be read together with the text of each summary.  The tables alone do not constitute a complete description of the financial analyses. Furthermore, mathematical analysis (such as determining the average or median) is not in itself a meaningful method of using the data referred to below.

 
37

 
 
Historical Share Price Analysis
 
Morgan Stanley reviewed the range of closing prices of the shares of Company common stock for various periods listed in the table below and observed the following:
Period
 
Share Price Range
(rounded to the nearest whole dollar)
     
52 weeks prior to June 14, 2011
 
$13 (as of June 6, 2011) -
$25 (as of October 11, 2010)
     
From October 11, 2010 (one trading day after the date of the written acquisition proposal from Mr. Tianfu Yang and Baring) until November 22, 2010 (one trading day prior to the date of announcement of receipt of a letter from Mr. Tianfu Yang relating to termination of the consortium agreement between Mr. Tianfu Yang and Baring)
 
$19 (as of November 19, 2010) -
$25 (as of October 11, 2010)
     
From November 23, 2010 (the date of announcement of receipt of a letter from Mr. Tianfu Yang relating to termination of the consortium agreement between Mr. Tianfu Yang and Baring) until June 14, 2011
 
$13 (as of June 6, 2011) -
$22 (as of April 1, 2011)
     
From June 10, 2011 (one trading day after the date of filing of Schedule 13D by Mr. Tianfu Yang disclosing the execution of the facility agreement) until June 14, 2011
  
$15 (as of June 13, 2011) -
$17 (as of June 10, 2011)
 
Morgan Stanley noted that the $24.00 per share cash merger consideration reflected a 56%, 20%, and 46% premium to the Company common stock closing price as of June 14, 2011 (four trading days prior to the announcement of the execution of the merger agreement), October 8, 2010 (one trading day prior to the date of the written acquisition proposal from Mr. Tianfu Yang and Baring to the Company) and September 10, 2010 (four weeks prior to the date of the written proposal from Mr. Tianfu Yang and Baring to the Company proposing an acquisition of the Company), respectively.  Morgan Stanley also observed that the $24.00 per share cash merger consideration reflected a 38% premium to the volume weighted average price of the Company common stock of $17.43 per share for the period from November 23, 2010 (the date of announcement of receipt of a letter from Mr. Tianfu Yang relating to termination of the consortium agreement between Mr. Tianfu Yang and Baring) until June 14, 2011.
 
Discounted Analyst Price Target
 
Morgan Stanley reviewed selected public market trading price targets for the Company common stock prepared and published by three equity research analysts that published or confirmed price targets for the Company.  These targets reflect each analyst’s estimate of the future public market trading price of the Company common stock at the time the price target was published and are not discounted to reflect present values.
 
As of October 8, 2010 (one trading day prior to the date of the written acquisition proposal from Mr. Tianfu Yang and Baring to the Company), the three selected equity analysts published undiscounted price targets for the Company common stock of $24, $28 and $33 per share, respectively.  Morgan Stanley noted that these three price targets implied a median undiscounted share price of $28.00 per share. Discounting these analyst price targets for the Company at an estimated cost of equity capital for the Company of 11.5% implied a median present value price of $26.00 per share as of October 8, 2010.
 
As of June 14, 2011, only two of the three selected equity research analysts reviewed by Morgan Stanley continued to cover the Company, and their most recent published reports implied a median, undiscounted price per share for the Company common stock of $24.00 per share. Discounting these analyst price targets for the Company at an estimated cost of equity capital for the Company of 11.5% implied a median present value price of $22.00 per share as of June 14, 2011. For the purpose of this analysis, Morgan Stanley selected, based on its professional judgment, a 9.9% to 13.2% cost of equity range, and used 11.5% as the estimated cost of equity.

 
38

 
 
The public market trading price targets published by securities research analysts do not necessarily reflect current market trading prices for the Company common stock and these estimates are subject to uncertainties, including the future financial performance of the Company and future financial market conditions.
 
Discounted Equity Value Analysis
 
Morgan Stanley performed a discounted equity value analysis, which is designed to imply a range of future values of the Company common stock as a function of the Company’s estimated future earnings and its forward price-earnings multiples. The resulting range of values was subsequently discounted to arrive at a present value for the Company’s stock price.
 
To calculate a range of discounted equity values for the Company common stock, in each of the Sensitivity Ranges, Morgan Stanley multiplied the estimated 2012 calendar year earnings by a price-earnings ratio of 6.0x to derive a hypothetical future value per share.  Morgan Stanley then discounted this future value per share by an estimated cost of equity capital for the Company of 11.5%, implying a price range of $16 to $19 per share of Company common stock. Based on its professional judgment, Morgan Stanley selected a 9.9% to 13.2% cost of equity range, and used 11.5% as the estimated cost of equity for purposes of this analysis.  For the price-earnings ratio, Morgan Stanley selected, based on its professional judgment, a 5.5x to 6.5x range, and used 6.0x as the price-earnings ratio for purposes of this analysis as it is the midpoint of that range.
 
Precedent Premium Analysis in Affiliate Transactions
 
Morgan Stanley reviewed and compared the proposed premium payable in the merger to corresponding publicly available premiums paid in completed affiliate transactions globally between January 2005 and June 2011, with transaction values of greater than $100 million and in which the acquiror’s initial beneficial ownership was equal to or greater than 30% (excluding real estate and financial services transactions and transactions with negative premium or premium equal to or greater than 100%).  Based on the analysis of the premiums associated with those constituting the 40th and 60th percentile of such precedent transactions, Morgan Stanley applied an indicative premium range of between 17% and 27%.  Morgan Stanley applied this premium range to the closing prices of shares of Company common stock as of and for the periods indicated in the table below to imply ranges of per share values, as reflected in the following table:
 
   
As of September 10, 2010
   
As of May 17, 2011
 
   
Share
Price
   
Implied Values
per Share
   
Share
Price
   
Implied Values
per Share
 
40th to 60th Percentile of Premium to Stock Price Four Weeks Prior to Announcement Date
  $ 16.49     $ 19 - $21     $ 17.30     $ 20 - $22  
 
No target company utilized in the selected precedent premium range analysis is identical to the Company, nor is any precedent transaction utilized identical to the transactions contemplated by the merger agreement.  In evaluating the transactions listed above, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Company, such as the impact of competition on the business of the Company or the industry generally, industry growth and the absence of any adverse material change in the financial condition and prospects of the Company or the industry or in the financial markets in general. Mathematical analysis, such as determining the average or median, is not in itself a meaningful method of using comparable transaction data.

 
39

 
 
Discounted Cash Flow Analysis
 
Morgan Stanley performed a discounted cash flow analysis as of March 31, 2011, which is an analysis of the net present value of the projected unlevered free cash flows of the Company and a terminal value using the forward exit multiple method.  The forward exit multiple was defined as the ratio of current market capitalization plus total debt plus minority interests less cash and cash equivalents (“Aggregate Value”), to earnings before interest, taxes, depreciation and amortization (“EBITDA”) based on the financial projections of the Company’s management. Please see “Special Factors—Managements Projected Financial Information” beginning on page 48. Morgan Stanley analyzed the Company’s business using the Sensitivity Ranges for the calendar years 2010 through 2015.  In each of the Sensitivity Ranges, the terminal value was calculated by applying forward EBITDA exit multiples to the calendar year 2015 estimated EBITDA.  Based on a discount rate of 10.5% applied to the unlevered free cash flows from March 31, 2011 to December 31, 2014 and to the terminal value, based on a forward EBITDA exit multiple of 4.0x to the calendar year 2015 estimated EBITDA, the discounted cash flow analysis implied a range of $16 per share to $25 per share of Company common stock. For the discount rate, Morgan Stanley selected, based on its professional judgment, a 9.0% to 12.0% weighted average cost of capital range, and used 10.5% as the discount rate for purposes of this analysis as it is the midpoint of that range.  For the forward EBITDA exit multiple, Morgan Stanley selected, based on its professional judgment, a 3.5x to 4.5x forward EBITDA exit multiple range, and used 4.0x as the forward EBITDA exit multiple for purposes of this analysis, as it is the midpoint of that range.
 
General
 
In connection with the review of the merger by the Special Committee, Morgan Stanley performed a variety of financial and comparative analyses for purposes of rendering its opinion.  The preparation of a financial opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description.  In arriving at its opinion, Morgan Stanley considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor considered by it.  Morgan Stanley believes that the summary provided and the analyses described above must be considered as a whole and that selecting portions of these analyses, without considering all of them, would create an incomplete view of the process underlying its analyses and opinion.  In addition, Morgan Stanley may have given various analyses and factors more or less weight than other analyses and factors and may have deemed various assumptions more or less probable than other assumptions, so that the range of valuations resulting from any particular analysis described above should therefore not be taken to be Morgan Stanley’s view of the actual value of the Company.
 
In performing its analyses, Morgan Stanley made numerous judgments and assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Company.  Any estimates contained in Morgan Stanley’s analysis are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by these estimates.  The analyses performed were prepared solely as a part of Morgan Stanley’s analysis of the fairness from a financial point of view of the $24.00 per share cash merger consideration to be received by the holders of shares of Company common stock (other than the Buyer Group and their respective affiliates) pursuant to the merger agreement as of the date of the opinion and were conducted in connection with the delivery by Morgan Stanley of its opinion dated June 19, 2011 to the Special Committee of the board of directors and the board of directors of the Company. Morgan Stanley’s analyses do not purport to be appraisals or to reflect the prices at which shares might actually trade.  The $24.00 per share cash merger consideration to be received by the Company’s stockholders pursuant to the merger agreement was determined through arm’s-length negotiations among the Special Committee, on the one hand, and the Buyer Group, on the other hand, and was recommended by the Special Committee for approval by the board of directors of the Company and was approved by the Company’s board of directors.  Morgan Stanley provided advice to the Special Committee during these negotiations.  Morgan Stanley did not, however, recommend any specific consideration to the Special Committee or that any specific consideration constituted the only appropriate consideration for the merger.  Morgan Stanley’s opinion and its presentation to the Special Committee was one of many factors taken into consideration by the Special Committee in deciding to recommend, and by the board of directors of the Company in deciding to approve the merger agreement.  Consequently, the analyses as described above should not be viewed as determinative of the opinion of the Special Committee with respect to the consideration to be received by the Company’s stockholders pursuant to the merger agreement or of whether the Special Committee would have been willing to agree to a different consideration.  The foregoing summary describes the material analyses performed by Morgan Stanley but does not purport to be a complete description of the analyses performed by Morgan Stanley.
 
 
40

 
 
Morgan Stanley is a global financial services firm engaged in the securities, investment management and individual wealth management businesses.  Morgan Stanley’s securities business is engaged in securities underwriting, trading and brokerage activities, foreign exchange, commodities and derivatives trading, prime brokerage, as well as providing investment banking, financing and financial advisory services.  Morgan Stanley, its affiliates, directors and officers may at any time invest on a principal basis or manage funds that invest, hold long or short positions, finance positions, and may trade or otherwise structure and effect transactions, for their own account or the accounts of its customers, in debt or equity securities or loans of the Company, the Buyer Group and its affiliates, or any other company, or any currency or commodity, that may be involved in the merger, or any related derivative instrument.  As of the date of its opinion, affiliates of Morgan Stanley & Co. LLC had an investment of approximately $48 million of proprietary funds in investment funds administered by affiliates of Abax and Abax Global Capital China Ltd, and held a 19.99% passive ownership stake in each of Abax and Abax Global Capital China Ltd., and in the two years prior to the date of the opinion, Morgan Stanley has not provided or received any compensation from Abax and such affiliates or the Company and its affiliates (other than as a financial advisor to the Special Committee) in connection with the provision of any financial advisory or financing services.  Furthermore, Morgan Stanley may seek to provide financial advisory and financing services to the Company and the Buyer Group in the future and would expect to receive fees for the rendering of these services.
 
Under the terms of its engagement letter, Morgan Stanley provided the Special Committee with financial advisory services and a financial opinion in connection with the merger, and as compensation for its services in connection with the merger, the Company has agreed to pay Morgan Stanley a fee of approximately $6.4 million, $750,000 of which was paid to Morgan Stanley as a retainer at the signing of the engagement letter, $1.375 million of which became payable to Morgan Stanley upon delivery of Morgan Stanley’s opinion and the remainder of which will be payable to Morgan Stanley upon the consummation of the merger. The Company has also agreed to reimburse Morgan Stanley for certain expenses incurred by Morgan Stanley, including fees of outside legal counsel, and to indemnify Morgan Stanley and related parties against certain liabilities and expenses arising out of Morgan Stanley’s engagement.
 
Other Presentations by Morgan Stanley

In addition to the final financial presentation made to the Special Committee on June 19, 2011 that is described above, Morgan Stanley also gave presentations to the Special Committee during meetings held on May 2 and June 13, 2011.  None of these other presentations by Morgan Stanley, alone or together, constituted an opinion of Morgan Stanley with respect to the fairness, from a financial point of view, of the $24.00 per share cash merger consideration.  The analyses contained within these other presentations were based on information that was available as of the dates of the respective presentations and on Morgan Stanley’s preliminary working assumptions at those times.  The contents of these presentations are summarized below:
 
 
·
On May 2, 2011, Morgan Stanley met with the Special Committee to provide an update on the process and market conditions and to discuss preliminary observations regarding financial data with respect to the Company and transaction alternatives.  The presentation included information regarding Morgan Stanley’s preliminary market analyses, including an overview of the Company’s share price performance over time, preliminary observations relating to the Company’s recent financial performance and Wall Street research analyst estimates, as well as those of selected peer companies.  Morgan Stanley also provided an overview of potential strategic buyers or merger partners and reviewed perspectives on the Special Committee’s options and decision points.
 
 
·
At the June 13, 2011 meeting, Morgan Stanley presented background information regarding the factors impacting the Company’s financial performance and preliminary observations relating to the Company’s financial performance and Wall Street research analyst estimates.  At the Special Committee’s request, these preliminary financial analyses included sensitivity analyses applied to the April 2011 Case to reflect the effects of increased labor costs in the PRC, higher raw material costs, higher R&D expenses, higher SG&A expenses, higher PRC tax rates, and a general slowdown in the PRC’s economy, including deceleration of industrial production, tightening of credit markets, and electricity shortages.  As part of this presentation, Morgan Stanley reviewed its preliminary observations about the Company’s financial performance based on certain metrics, including revenue, EBITDA and earnings per share.
 
The financial analyses contained in these other presentations were based on market, economic, and other conditions as they existed as of such dates as well as other information that was available and Morgan Stanley’s preliminary working assumptions at those times.  Except as described above, the methodologies and types of financial analyses conducted by Morgan Stanley throughout its engagement as financial advisor to the Special Committee were substantially similar to the methodologies and types of financial analyses contained in the final financial presentation given to the Special Committee on June 19, 2011.  However, the results of the financial analyses contained in these other presentations occasionally differed due to changes in management’s projections, the terms of the offer, and market and economic conditions.  In addition, throughout its engagement, Morgan Stanley continued to refine various aspects of its financial analyses with the respect to the Company over time.  The other presentations described above were in each case preliminary and did not reflect the final transaction structure or price that the Special Committee considered on June 19, 2011.  These other presentations were therefore superseded by the presentation that Morgan Stanley made to the Special Committee on June 19, 2011 before giving its opinion, which is described above.

The presentations of Morgan Stanley summarized above will be made available for inspection and copying at the principal executive offices of the Company during regular business hours by any interested Company stockholder or its representative who has been designated in writing. In addition, copies of the Morgan Stanley presentations are attached as exhibits (c)(5) and (c)(7) to the statement on Schedule 13E-3 filed by the Company and the filing persons listed thereon with the SEC on August 12, 2011.
 
Opinion of Lazard Frères & Co. LLC
 
On June 19, 2011, at a meeting of the Special Committee of the board of directors of the Company to evaluate the merger agreement, Lazard rendered its oral opinion, subsequently confirmed in writing (the “Lazard Opinion”), that based upon and subject to the assumptions, procedures, factors, limitations and qualifications set forth in such opinion, the per share merger consideration to be paid to holders of Harbin common stock (other than shares owned by Mr. Tianfu Yang, certain affiliates of Abax, and certain other members of the Buyer Group) in the merger was fair, from a financial point of view, to such holders.

 
41

 
 
The full text of the Lazard Opinion is attached as Annex G to this proxy statement and is incorporated into this proxy statement by reference. The description of the Lazard Opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of the Lazard Opinion set forth as Annex G.  Stockholders are urged to read the Lazard Opinion in its entirety for a description of the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Lazard in connection with the opinion. Lazard’s written opinion is for the benefit of the Special Committee and the board of directors and only addresses the fairness to the holders of the Company common stock of the consideration to be paid to such holders (other than with respect to shares owned by Mr. Tianfu Yang, certain affiliates of Abax, and certain other members of the Buyer Group) in the merger from a financial point of view as of the date of the opinion. Lazard’s written opinion does not address the relative merits of the merger as compared to other business strategies or transactions that might be available with respect to the Company or the underlying business decision by the Company to engage in the merger, and is not intended to and does not constitute a recommendation to any holder of the Company common stock as to how such holder should vote with respect to the merger or any matter relating thereto. The Lazard Opinion is necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to Lazard as of, the date of the Lazard Opinion. Lazard assumed no responsibility for updating or revising its opinion based on circumstances or events occurring after the date of the opinion. The following is only a summary of the Lazard Opinion. You are urged to read the entire opinion.
 
In connection with its opinion, Lazard:
 
 
·
reviewed the financial terms and conditions of a draft of the merger agreement dated June 18, 2011;
 
 
·
reviewed certain publicly available historical business and financial information relating to the Company (including the press release issued by the Company on June 17, 2011);
 
 
·
reviewed various financial forecasts and other data provided to Lazard by the management of the Company relating to the business of the Company, as well as modifications to such forecasts as directed by the Special Committee (described below) (see “Special Factors—Management’s Projected Financial Information—Updated Financial Projections—April 2011 Case” beginning on page 53 and “Special Factors—Management’s Projected Financial Information—Updated Financial Projections—Sensitivity Case” beginning on page 56);
 
 
·
held discussions with members of the senior management of the Company with respect to the business and prospects of the Company;
 
 
·
reviewed public information with respect to certain other companies in lines of business Lazard believed to be generally relevant in evaluating the business of the Company;
 
 
·
reviewed historical stock prices and trading volumes of the Company common stock;
 
 
·
reviewed the report, dated February 8, 2011, prepared for the Special Committee by Ernst & Young; and
 
 
·
conducted such other financial studies, analyses and investigations as Lazard deemed appropriate.
 
Lazard assumed and relied upon the accuracy and completeness of the foregoing information, without independent verification of such information. Lazard did not conduct any independent valuation or appraisal of any of the assets or liabilities (contingent or otherwise) of the Company, or concerning the solvency or fair value of the Company, and Lazard was not furnished with any such valuation or appraisal. The Special Committee directed Lazard, based on its assessment of the uncertainty and risks associated with the most recent forecasts prepared by the Company’s management, which we refer to as the April 2011 Case (see “Special Factors—Management’s Projected Financial Information—Updated Financial Projections—April 2011 Case” beginning on page 53), to utilize various sensitivity ranges, which we refer to as the Sensitivity Ranges (see “Special Factors—Management’s Projected Financial Information—Updated Financial Projections—Sensitivity Case” beginning on page 56), with respect to the April 2011 Case for purposes of its opinion. Lazard assumed, with the consent of the Special Committee, that the forecasts and the modifications thereto have been reasonably prepared in good faith and the forecasts, as modified by the Sensitivity Ranges utilized in Lazard’s analyses, reflect the best currently available estimates and judgments as to the future financial performance of the Company. Lazard assumed no responsibility for and expressed no view as to any such forecasts or the assumptions on which they are based. With respect to an analysis of the financial terms of any business combinations involving comparable companies in similar lines of business, Lazard ultimately concluded that there were no such precedent transactions relevant to its analysis.

 
42

 
 
In rendering its opinion, Lazard assumed, with the consent of the Special Committee, that the representations and warranties set forth in the merger agreement were accurate and complete and that the transaction (and any related transactions) would be consummated on the terms described in the merger agreement (and any related agreements), without any waiver or modification of any material terms or conditions.  Representatives of the Company advised Lazard, and Lazard assumed, that the merger agreement, when executed, would conform to the draft reviewed by it in all material respects.  Lazard further notes that Holdco, Parent, and their lenders (and other financing providers) executed and delivered definitive agreements with respect to the financing required to consummate the merger and Lazard assumed that financing necessary to fund the transaction will be provided pursuant thereto.  Lazard also assumed, with the consent of the Company, that obtaining the necessary governmental, regulatory or third party approvals and consents for the merger will not have an adverse effect on the Company or the merger.  Lazard did not express any opinion as to any tax or other consequences that might result from the merger.  Lazard made no independent investigation of, and its opinion did not address any legal, tax, regulatory or accounting matters, as to which Lazard understood that the Special Committee obtained such advice as it deemed necessary from qualified professionals.  Lazard expressed no view or opinion as to any terms or other aspects (other than the merger consideration to the extent expressly specified in the Lazard opinion) of the merger, including, without limitation, the form or structure of the merger or any agreements or arrangements entered into in connection with, or contemplated by, the merger (including, without limitation, the contribution agreement or the voting support agreements to be entered into by officers, directors, employees and certain stockholders of the Company).  In addition, Lazard expressed no view or opinion as to the fairness of the amount or nature of, or any other aspects relating to, the compensation to any officers, directors or employees of any parties to the merger, or class of such persons, relative to the merger consideration or otherwise.
 
The Lazard Opinion is necessarily based on economic, monetary, market, and other conditions as in effect on, and the information made available to Lazard as of, the date thereof. Lazard assumed and relied upon the assurances of the management of the Company that they were not aware of any relevant information that had been omitted or that remained undisclosed to Lazard.  Lazard assumes no responsibility for updating or revising its opinion based on circumstances or events occurring after the date thereof.  Lazard did not, and does not, express any opinion as to the price at which shares of Company common stock may trade at any time subsequent to the announcement of the merger. Although Lazard understands that the Special Committee’s other financial advisor has solicited indications of interest from third parties, Lazard was not authorized to, and it did not, solicit indications of interest from third parties regarding a potential transaction with the Company, nor was it requested to consider, and its opinion did not address, the relative merits of the merger as compared to any other transaction or business strategy in which the Company might engage or the merits of the underlying decision by the Company to approve the merger.
 
The following is a brief summary of the material financial and comparative analyses that Lazard deemed appropriate for this type of transaction and that were performed by Lazard in connection with rendering its opinion as well as analyses that were presented to the Special Committee for informational purposes only but were not material to the rendering of the Lazard Opinion. The summary of Lazard’s analyses described below is not a complete description of the analyses underlying the Lazard Opinion. The preparation of a fairness opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances, and, therefore, is not readily susceptible to summary description. In arriving at its opinion, Lazard considered the results of all of the analyses and did not attribute any particular weight to any factor or analysis considered by it; rather, Lazard made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of the analyses.

 
43

 
 
In its analyses, Lazard considered industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Company. No company or business used in Lazard’s analyses as a comparison is identical to the Company, and an evaluation of the results of those analyses is not entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial, operating, and geographical characteristics and other factors that could affect the public trading or other values of the companies analyzed. The estimates contained in Lazard’s analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, the estimates used in, and the results derived from, Lazard’s analyses are inherently subject to substantial uncertainty.
 
The financial analyses summarized below include information presented in tabular format. In order to fully understand Lazard’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Lazard’s financial analyses.
 
Summary of the Valuation of the Company
 
Public Company Benchmarks
 
Lazard reviewed and analyzed selected public companies that it viewed as generally relevant in evaluating the Company. In performing these analyses, Lazard reviewed and analyzed publicly available financial information relating to the selected public companies, and compared such information to the corresponding information for the Company. Specifically, Lazard compared the Company to the following public companies (the “Selected Companies”):
 
U.S.-Listed, China-Based Industrial Companies
 
 
·
A-Power Energy Generation Systems, Ltd.
 
 
·
China Automotive Systems Inc.
 
 
·
China Fire & Security Group, Inc.
 
 
·
China Valves Technology, Inc.
 
 
·
Fushi Copperweld, Inc.
 
 
·
Hollysys Automation Technologies, Ltd.
 
 
·
SORL Auto Parts, Inc.

 
44

 
 
Although none of the Selected Companies is directly comparable to the Company, the companies included are U.S.-listed, China-based companies with operations and/or other criteria, such as lines of business, markets, business risks, growth prospects, maturity of business and size and scale of business that, for purposes of analysis, Lazard considered generally relevant in evaluating the Company.
 
Based on equity analysts’ estimates and other public information, Lazard reviewed, among other things, the enterprise value of each of the Selected Companies as a multiple of such company’s projected earnings before interest, taxes, depreciation and amortization, or EBITDA, for the calendar year ending December 31, 2011. A company’s enterprise value is equal to its short and long term debt plus the market value of its common equity and the value of any preferred stock (at liquidation value), minus its cash and cash equivalents. Lazard also reviewed the stock price of each of the Selected Companies as a multiple of its projected earnings for the calendar year ending December 31, 2011.
 
The results of the analyses were as follows:
 
( $ in millions, except per share data)
                       
Selected Company
 
Enterprise Value
(as of 6/17/11)
   
Stock Price
(as of 6/17/11)
   
Enterprise Value/EBITDA
CY 2011E
   
Price/EPS
CY 2011E
 
A-Power Energy Generation Systems, Ltd.(a)
 
$
28
   
$
1.85
   
NA
   
NA
 
China Automotive Systems, Inc. (a)
 
$
271
   
$
7.02
     
3.8
x
   
5.7
x
China Fire & Security Group, Inc. (b)
 
$
154
   
$
6.26
     
7.5
x
   
11.4
x
China Valves Technology, Inc.
 
$
93
   
$
3.12
     
1.4
x
   
2.5
x
Fushi Copperweld, Inc.
 
$
45
   
$
4.53
     
0.6
x
   
3.9
x
Hollysys Automation Technologies, Ltd.
 
$
489
   
$
9.82
     
8.3
x
   
11.7
x
SORL Auto Parts, Inc.
 
$
97
   
$
3.70
     
2.8
x
   
3.3
x
 
Mean
   
4.1
x
   
6.4
x
Median
   
3.3
x
   
4.8
x
Note:
Where applicable, EBITDA and net debt are adjusted to reflect a company’s attributable portion of a joint venture.  Projections are based upon I/B/E/S consensus estimates.  In-the-money outstanding stock options are treated using the treasury stock method.  All in-the-money convertible debt is assumed to convert into additional shares.  Completed debt or equity issuances and acquisitions or corporate divestitures post-filing are adjusted accordingly.
 
(a)
Most recent quarterly filing is as of September 30, 2010.
 
(b)
Represents unaffected price as of March 4, 2011.
 
Based on the foregoing calculations and Lazards professional judgment, Lazard applied EBITDA multiples of 3.0x to 4.5x to the Company’s 2011 estimated EBITDA to calculate an implied equity value per share range, in each case using the April 2011 Case and the Sensitivity Ranges.  The results of the analyses implied an equity value per share range for the Company of $13.88 to 20.24 using the April 2011 Case and $12.89 to $19.58 using the Sensitivity Ranges.
 
Based on the foregoing calculations and Lazards professional judgment, Lazard applied earnings multiples of 4.5x to 6.5x to the Company’s 2011 estimated earnings to calculate an implied equity value per share range, in each case using the April 2011 Case and the Sensitivity Ranges. The results of the analyses implied an equity value per share range for Harbin of $13.97 to 20.12 using the April 2011 Case and $12.90 to $19.43 using the Sensitivity Ranges.
 
Discounted Cash Flow Analysis
 
Based on the April 2011 Case and the Sensitivity Ranges, Lazard performed a discounted cash flow analysis of the Company to calculate the estimated present value of the stand-alone, unlevered, after-tax free cash flows that the Company could generate during the fiscal years ending December 31, 2011 through 2015. Lazard also calculated terminal values for the Company by applying a revenue exit multiple range, based on its professional judgment, of 3.5x to 5.0x to the Company’s estimated EBITDA provided by the April 2011 Case and by the Sensitivity Ranges for its fiscal year ending December 31, 2015. The stand-alone, unlevered, after-tax free cash flows and terminal values were discounted to present value using discount rates ranging from 13.0% to 15.0%, which were based on a weighted average cost of capital analysis of the Selected Companies. The results of these analyses implied an equity value per share range for the Company of $24.87 to $34.68 using the April 2011 Case and $14.74 to $28.01 using the Sensitivity Ranges.
 
Additional Analyses of the Company
 
The analyses and data described below were presented by Lazard to the Special Committee for informational purposes only, because they were not relied on by Lazard in determining the fairness of the merger consideration to be paid to the Company's stockholders in the merger.

 
45

 
 
Other Public Company Benchmarks – Trading Analysis
 
Lazard also reviewed and analyzed other selected public companies as potentially relevant to the Company. In performing these analyses, Lazard reviewed and analyzed publicly available financial information relating to the selected companies and compared such information to the corresponding information for the Company. Specifically, Lazard compared the Company to the following public companies:
 
U.S.-Listed, U.S.-Based Motor Companies
 
 
·
Altra Holdings, Inc.
 
 
·
AO Smith Corp.
 
 
·
Franklin Electric Co. Inc.
 
 
·
Regal Beloit Corporation;
 
HK-Listed, China-Based Industrials
 
 
·
Zhuzhou Csr Times Electric
 
 
·
China High Speed Transmission
 
 
·
Haitian International
 
 
·
Boer Power Holdings Ltd.
 
 
·
Tianneng Power International
 
 
·
Changfeng Axle China Co.
 
 
·
Sun King Power Electronics
 
 
·
Zhejiang Shibao Co. Ltd.
 
 
·
Greens Holdings Ltd.
 
 
·
China Titans Energy Technology
 
Based on equity analysts’ estimates and other public information, Lazard reviewed, among other things, the enterprise value of each company above as a multiple of such company’s projected EBITDA for the calendar year ending December 31, 2011.
 
The results of the analyses were as follows:

 
46

 
 
   
Enterprise Value / EBITDA - CY 2011
 
   
U.S. Listed Companies
   
HK Listed Companies
 
Median
    8.3 x     6.7 x
Mean
    8.6 x     7.9 x
 
Based on the foregoing, Lazard applied EBITDA multiples of 7.5x to 9.5x (for the U.S.-Listed Companies) and 6.0x to 8.0x (for the HK-Listed Companies) to the Company’s 2011 estimated EBITDA to calculate an implied equity value per share range, in each case using the management projections set forth in the April 2011 Case and the Sensitivity Ranges directed by the Special Committee.  With respect to the U.S.-Listed Companies, the results of the analyses implied an equity value per share range for the Company of $32.92 to $41.38 using the April 2011 Case and $30.47 to $39.99 using the Sensitivity Ranges.  With respect to the HK-Listed Companies, the results of the analyses implied an equity value per share range for the Company of $26.58 to $35.04 using the April 2011 Case and $24.62 to $33.87 using the Sensitivity Ranges.
 
Leveraged Buyout Analysis
 
Lazard performed an analysis of the equity return that an acquiror would theoretically receive if the Company were acquired in a going private transaction. For purposes of this analysis, Lazard used the projections set forth in the April 2011 Case and the Sensitivity Ranges. This analysis assumed a range of exit multiples of 3.5x to 5.0x of the last twelve months EBITDA, and a range of equity returns of 20% to 30%.  Using this analysis, Lazard derived a range of implied per share prices for the Company common stock of $20.70 to $30.21 using the April 2011 Case and $15.29 to $25.36 using the Sensitivity Ranges.
 
52-Week Trading Range
 
Lazard reviewed the historical price performance of the Company common stock for the 52-week period ending June 17, 2011. During this period, the closing price of the Company common stock ranged from approximately $6.98 per share to $23.41 per share.
 
Premiums Paid Analysis
 
Lazard performed a premiums paid analysis based on premiums paid in certain U.S. public merger and acquisition transactions in the past 48 months involving target companies with a transaction value between $250 million and $2 billion and between $500 million and $1.5 billion.
 
The implied premiums in this analysis were calculated by comparing the per share acquisition price to the target company’s (i) closing share price one day prior to announcement, (ii) average closing share price for the one-week period prior to announcement, and (iii) average closing share price for the one-month period prior to announcement. The median of premiums ranged from 27.2% to 38.7% and the mean of premiums ranged from 30.9% to 50.0%.
 
Lazard applied a 30.0% to 40.0% range of premiums to the share price for the Company as of October 1, 2010.  Lazard viewed October 1, 2010 as a significant date in its analysis because in Lazard’s view it was the last day that the stock was unaffected by the subsequent public announcement of Mr. Tianfu Yang’s and Baring’s offer for the Company. The results of the analyses implied an equity value per share range for Harbin common stock of $23.10 to $24.88.

 
47

 
 
Miscellaneous
 
As described above, the Lazard opinion was one of many factors taken into consideration by the Special Committee and the board of directors in making the determination to approve the merger agreement. Consequently, the analyses described above should not be viewed as determinative of the opinion of the Special Committee and the board of directors.  The per share merger consideration was determined through extensive arms-length negotiations between the Company and the Buyer Group and was approved by the Special Committee and the board of directors. Lazard provided advice to the Company during these negotiations. Lazard did not, however, recommend any specific amount of consideration to the Special Committee or board or that any specific merger consideration constituted the only appropriate consideration for the merger.
 
Pursuant to a letter agreement dated April 19, 2011, the Company engaged Lazard to act as one of its financial advisors in connection with evaluating the merger proposed by Mr. Tianfu Yang.  Pursuant to the terms of this engagement letter, Harbin agreed to pay Lazard an aggregate fee of $2.25 million, of which $250,000 was payable upon execution of the engagement letter, $1 million was payable upon Lazard’s rendering of its opinion and $1 million will be payable upon the consummation of the merger. In addition, the Company has agreed to reimburse Lazard’s reasonable expenses, including expenses of legal counsel, in connection with this engagement and to indemnify Lazard and related persons against various liabilities, including certain liabilities under the U.S. federal securities laws.
 
Lazard, as part of its investment banking business, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements, going-private transactions, and valuations for estate, corporate and other purposes. In the ordinary course of their respective business, Lazard and LFCM Holdings LLC (an entity indirectly owned in large part by managing directors of Lazard) and their respective affiliates may actively trade securities of the Company and its affiliates and affiliates of the Parent for their own accounts and for the accounts of their customers and, accordingly, may at any time hold a long or short position in such securities and may also trade and hold securities on behalf of the Company and its affiliates and affiliates of the Parent. Lazard and/or LFCM Holdings LLC may in the future provide investment banking services to affiliates and lenders of the Buyer Group and would expect to receive customary fees.  In the two years prior to the date of its opinion, Lazard has not provided or received compensation from the Company and its affiliates (other than as a financial advisor to the Special Committee) in connection with the provision of any financial advisory or financing services.
 
Lazard is an internationally-recognized investment banking firm providing a full range of financial advisory and securities services. Lazard was selected to act as investment banker to the Company because of its qualifications, expertise, and reputation in investment banking and mergers and acquisitions.
 
Other Presentations by Lazard

In addition to the final financial presentation made to the Special Committee on June 19, 2011 that is described above, Lazard also gave presentations to the Special Committee during meetings held on May 2 and June 13, 2011.  Neither of these other presentations by Lazard, alone or together, constitutes an opinion of Lazard with respect to the fairness, from a financial point of view, of the $24.00 cash per share merger consideration.

The analyses contained within these other presentations were based on information that was available as of the dates of the respective presentations, including management projections and on Lazard’s preliminary working assumptions at those times.  The contents of these presentations are summarized below:
 
 
·
On May 2, 2011, Lazard presented to the Special Committee its initial, preliminary observations with respect to valuation of the Company in response to the joint proposal made by Mr. Tianfu Yang and Abax of $24.00 per share for all of the outstanding shares of the Company’s common stock.  In its presentation, Lazard provided its preliminary observations of management projections in the April 2011 Case, the Company’s recent financial performance and Wall Street research analyst estimates.  The presentation also included preliminary valuation analyses which included analyses of other U.S.-listed, China-based companies, a discounted cash flow analysis, as well as, for informational purposes only, analyses of U.S.-listed, U.S.-based motor companies and Hong Kong-listed, China-based industrials companies, a leveraged buyout analysis, the 52-week trading range of the Company’s stock, analyst price target range of the Company’s stock and a premiums paid analysis.
 
 
·
On June 13, 2011, Lazard presented to the Special Committee an analysis of the Company’s recent performance, and comparisons of such performance to Wall Street research analyst estimates and management projections in the April 2011 Case and the November 2010 Case.  Lazard also reviewed recent economic conditions in China and potential impacts on the Company’s business.  Lazard then presented a range of sensitivities to management projections in the April 2011 case and discussed with the Special Committee its views on the achievability of such projections.
 
The financial analyses contained in these other presentations were based on management projections in the April 2011 Case and the November 2010 Case, and market, economic, and other conditions as they existed as of such dates as well as other information that was available and Lazard’s preliminary working assumptions at those times.  Except as described above, the methodologies and types of financial analyses conducted by Lazard throughout its engagement as financial advisor to the Special Committee were substantially similar to the methodologies and types of financial analyses contained in the final financial presentation given to the Special Committee on June 19, 2011.  However, the results of the financial analyses contained in these other presentations occasionally differed due to changes in the underlying projections, and market and economic conditions. In addition, throughout its engagement, Lazard continued to refine various aspects of its financial analyses with respect to the Company over time.  The other presentations described above were preliminary and did not reflect the final transaction structure that the Special Committee considered on June 19, 2011.  These other presentations were therefore superseded by the presentation that Lazard made to the Special Committee on June 19, 2011 before giving its oral opinion, subsequently confirmed in writing, that, as of that date, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth therein, the $24.00 cash per share merger consideration to be paid to the holders of shares of Company common stock (other than with respect to shares owned by Mr. Tianfu Yang, certain affiliates of Abax, and certain other members of the Buyer Group) pursuant to the merger agreement was fair, from a financial point of view, to such holders, which is described above.

The presentations of Lazard summarized above will be made available for inspection and copying at the principal executive offices of the Company during regular business hours by any interested Company stockholder or its representative who has been designated in writing.  In addition, copies of the Lazard presentations are attached as exhibits (c)(6) and (c)(8) to the statement on Schedule 13E-3 filed by the Company and the filing persons listed thereon with the SEC on August 12, 2011.
 
Management’s Projected Financial Information
 
As part of its process, the Special Committee requested that the Company’s management team prepare long-term financial projections for the Company.  The Company does not, as a matter of course, create multi-year projections for submission to the Company’s board of directors or that are customarily relied on by the investor or financial community.  The November 2010 Case was provided by the Company’s management to the Special Committee on or about November 27, 2010, and is reproduced below.  The November 2010 Case was revised and updated by the Company’s management in April 2011 and the resulting April 2011 Case was delivered to the Special Committee on April 6, 2011, and is reproduced below.

 
48

 
 
At the direction of the Special Committee, the Special Committee’s independent financial advisors applied the Sensitivity Ranges (i.e., sensitivity adjustments to management’s projections based on the Special Committee’s assessment of the uncertainty and risks associated with those projections) to the April 2011 Case.  The Sensitivity Ranges reflected the Special Committee’s views regarding the effects of, among other things, increased labor costs in the PRC, higher raw material costs, higher R&D expenses, higher SG&A expenses, higher PRC tax rates, and a general slowdown in the PRC’s economy, including deceleration of industrial production, tightening of credit markets, and electricity shortages (the “Market Challenges”), on the Company’s business.  The resulting Sensitivity Case, presented as ranges of values derived by applying the Sensitivity Ranges to the April 2011 Case, is summarized below.
 
The November 2010 Case, the April 2011 Case, and the Sensitivity Case are being included in this document not to influence your decision whether to vote for or against the proposal to approve the merger agreement, but because (i) all of such projected financial information was available to the Special Committee, Morgan Stanley, and Lazard, (ii) the November 2010 Case and the April 2011 Case were available to Mr. Tianfu Yang,  and Abax, and (iii) the November 2010 Case was available to all bidders that participated in the Special Committee’s process and also signed a non-disclosure agreement.  Projections of these types are based on estimates and assumptions that are inherently subject to significant economic, industry, and competitive uncertainties and contingencies, all of which are difficult to predict and many of which are beyond the Company’s control.  Because the projections cover multiple years, such information by its nature becomes less reliable with each successive year.  Accordingly, there can be no assurance that the projected results will be realized or that actual results would not significantly vary from projected results.  In light of the uncertainties inherent in forward-looking information of any kind, we caution against placing undue reliance on any of the information summarized below.
 
For information concerning the variety of factors which may cause the future financial results of the Company to materially vary from such projected results, see “Cautionary Statement Regarding Forward-Looking Information” on page 89.  The Company does not intend to update or revise any of the financial projections included herein to reflect circumstances existing after the date such projections were prepared or to reflect the occurrence of any particular events.  None of the financial projections included in the November 2010 Case, the April 2011 Case, or the Sensitivity Case should be viewed as a representation by the Company, the Special Committee, or any of their respective advisors or representatives that the forecasts reflected therein will be achieved.
 
The financial projections included in the November 2010 Case, the April 2011 Case, and the Sensitivity Case were prepared solely for internal use in connection with the proposed merger and not for publication or with a view of complying with the published guidelines of the SEC regarding projections or with guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information.  The projected financial information included in this proxy statement has been prepared by, and is the responsibility of, the Company’s management.  The Company’s independent registered public accounting firm, Frazer Frost, LLP, has neither examined, compiled, nor performed any procedures with respect to the accompanying projected financial information and, accordingly, Frazer Frost, LLP does not express an opinion or any other form of assurance with respect thereto.  The Frazer Frost, LLP report incorporated by reference in this proxy statement relates to the Company’s historical financial information.  The Frazer Frost, LLP report does not extend to the projected financial information and should not be read to do so.  The projected financial information was prepared for use in connection with the proposed merger but does not reflect any predicted effect of the proposed merger on the Company.  There can be no assurance that the assumptions made in preparing the projections summarized below will prove accurate, and the future financial results of the Company as summarized below may differ materially from those reflected in such projections.

 
49

 
 
Financial Projections—November 2010 Case
 
At the request of the Special Committee, the Company’s management provided the November 2010 Case to the Special Committee on or about November 27, 2010, as follows:
 
Projected Consolidated Financial data—November 2010 Case
(provided on or about November 27, 2010)
 
Harbin Electric, Inc.
Income Statement
US$MM

   
2007A
   
2008A
   
2009A
   
2010E
   
2011E
   
2012E
   
2013E
   
2014E
   
2015E
 
Revenue
    65.4       120.8       223.2       429.6       577.6       719.4       842.4       986.7       1,156.0  
Linear Motors and Related Systems
    36.6       49.5       60.7       78.7       94.1       112.9       129.8       149.3       171.7  
Specialty Micro-Motors
    18.3       33.8       41.6       62.0       79.4       95.3       109.6       126.0       144.9  
Weihai
    -       27.8       72.2       93.0       132.3       171.9       206.3       247.6       297.1  
Xi'an
    -       -       44.1       187.4       260.5       325.6       381.0       445.7       521.5  
Others
    10.5       9.7       4.7       8.5       11.4       13.7       15.7       18.1       20.8  
Cost of Sales
    (33.0 )     (73.3 )     (146.6 )     (291.4 )     (380.9 )     (474.0 )     (554.4 )     (648.4 )     (759.6 )
Gross Profit
    32.4       47.5       76.6       138.2       196.7       245.4       288.1       338.3       396.4  
Linear Motors and Related Systems
    19.0       26.7       36.0       48.6       58.3       70.0       81.1       93.3       108.2  
Specialty Micro-Motors
    8.1       13.5       16.3       21.5       31.3       38.6       43.8       51.9       58.0  
Weihai
    -       3.1       8.1       10.8       19.3       27.5       34.2       41.1       50.5  
Xi'an
    -       -       13.9       54.0       83.4       104.2       123.0       145.3       172.1  
Others
    5.3       4.3       2.2       3.4       4.5       5.1       5.8       6.7       7.7  
R&D
    (1.1 )     (1.2 )     (2.1 )     (4.3 )     (9.2 )     (11.5 )     (13.5 )     (15.8 )     (18.5 )
SG&A
    (7.7 )     (11.9 )     (18.7 )     (34.4 )     (43.5 )     (46.8 )     (51.4 )     (60.2 )     (68.2 )
Income from Operations
    23.7       34.4       55.8       99.5       144.0       187.1       223.2       262.4       309.7  
Other Expenses
    (6.8 )     (4.5 )     (24.9 )     0.1       (0.7 )     1.2       3.9       6.3       9.9  
Other (income) expenses, net
    (0.2 )     1.6       5.5       3.9       -       -       -       -       -  
Interest expense, net
    (6.6 )     (6.1 )     (12.3 )     (4.3 )     (0.7 )     1.2       3.9       6.3       9.9  
Amortization of debt discount
    (4.5 )     (4.5 )     (10.9 )     (1.4 )     -       -       -       -       -  
Amortization of debt issuance costs
    (0.5 )     (0.5 )     (1.3 )     (0.4 )     -       -       -       -       -  
Interest expense
    (3.4 )     (1.5 )     (0.9 )     (3.2 )     (1.7 )     (0.9 )     -       -       -  
Interest earned on cash deposits
    1.9       0.8       0.9       0.9       1.0       2.1       3.9       6.3       9.9  
Foreign currency transaction loss (gain)
    (0.1 )     (0.4 )     (0.1 )     (0.2 )     -       -       -       -       -  
Loss on cross currency hedge settlement
    -       -       (9.0 )     -       -       -       -       -       -  
Gain on debt repurchase
    -       -       4.2       -       -       -       -       -       -  
Change in fair value of warrant
    -       -       (13.2 )     1.1       -       -       -       -       -  
Loss from disposal of subdivision
    -       -       -       (0.6 )     -       -       -       -       -  
Income Before Provision for Income Taxes
    16.9       29.9       30.9       99.7       143.3       188.3       227.1       268.6       319.7  
Provision for Income Tax
    -       (4.5 )     (7.8 )     (14.6 )     (24.4 )     (32.0 )     (38.6 )     (45.7 )     (54.3 )
Net Income
    16.9       25.4       23.1       85.1       118.9       156.3       188.5       223.0       265.3  
Minority Interests
    -       -       3.5       2.3       -       -       -       -       -  
Net Income to Equity Holders
    16.9       25.4       19.6       82.7       118.9       156.3       188.5       223.0       265.3  
Dividends
                    -       -       -       -       -       -       -  
Basic TSO
                            32.0       32.0       32.0       32.0       32.0       32.0  
Diluted TSO
                            32.0       32.0       32.0       32.0       32.0       32.0  
 
 
50

 
 
Harbin Electric, Inc.
Balance Sheet
US$MM

   
2007A
   
2008A
   
2009A
   
2010E
   
2011E
   
2012E
   
2013E
   
2014E
   
2015E
 
ASSETS
                                                     
CURRENT ASSETS:
                                                     
Cash and cash equivalents
    45.5       48.4       92.9       30.2       28.6       98.8       145.6       256.8       386.0  
Restricted cash
    -       0.5       3.5       3.8       5.1       6.4       7.4       8.7       10.2  
Notes receivable
    -       1.5       1.1       2.1       2.9       3.6       4.2       4.9       5.7  
Accounts receivable, net
    23.2       30.3       93.3       99.1       133.2       165.9       194.3       227.6       266.6  
Inventories
    2.6       22.0       74.9       81.1       106.0       132.0       154.3       180.5       211.5  
Other receivables & prepaid expenses
    0.3       0.2       5.8       4.0       5.4       6.7       7.8       9.2       10.8  
Advances on inventory purchases
    1.8       3.5       11.7       13.3       17.4       21.7       25.4       29.7       34.8  
Total Current Assets
    73.4       106.4       283.3       233.7       298.7       435.0       539.1       717.4       925.6  
PLANT AND EQUIPMENT, net
    23.9       94.9       156.4       220.9       282.6       314.0       352.3       398.8       455.2  
OTHER ASSETS:
                                                                       
Debt issuance costs, net
    2.2       1.7       0.4       -       -       -       -       -       -  
Advances on non-current assets
    25.7       12.3       13.7       22.5       22.5       22.5       22.5       22.5       22.5  
Goodwill
    -       12.3       54.1