Unassociated Document


     Execution
      Version

    
 

     

    Indicative
      Financing Term Sheet 

     

    by
      Citadel Equity Fund Ltd.

     

    Merrill
      Lynch International

     

    and

     

    Harbin
      Electric, Inc.

    


     

    Date
      of Agreement: August 2, 2006

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    Execution
      Version

     

    Harbin
      Electric - New Senior Secured Notes + Warrants

     

    Indicative
      for Discussion - Terms of New Senior Secured Notes and Warrants (“Term
      Sheet”)

     

    Currency
      denomination in U.S. Dollars ($) 

    
      	 	 	 
	
              Issuer

            	 	
              Harbin
                Electric, Inc. (U.S. public ticker symbol HRBN), a U.S. public company
                with operations based in Harbin, China (“Harbin”, “Issuer,” “HoldCo,” or
                the “Company”) and common stock traded on the U.S. OTC market.
                

            
	 	 	 
	
              Guarantors

            	 	
              Advanced
                Electric Motors Inc., a Delaware corporation, and all of the Issuer’s
                existing and future subsidiaries, other than subsidiaries domiciled
                in the
                PRC. Advanced Electric Motors Inc. is currently the only subsidiary
                of the
                Issuer not domiciled in the PRC.

            
	 	 	 
	
              Offerees
                

            	 	
              Citadel
                Equity Fund Ltd. or its affiliates (collectively, “Citadel”), and Merrill
                Lynch International or its affiliates (excluding the Placement Agent)
                (collectively, “Merrill Lynch”).

            
	 	 	 
	
              Placement
                Agent

            	 	
              Merrill
                Lynch Far East

            
	 	 	 
	
              New
                Notes Offered 

            	 	
              Senior
                Secured Notes (the “Notes”) issued under an indenture (the “Indenture”) to
                be entered into between Issuer, the Guarantors and the Trustee for
                the
                Notes. The Notes issued to Citadel are referred to herein as the
“2012
                Notes” and the Notes issued to Merrill Lynch are referred to herein as the
                “2010 Notes”.

            
	 	 	 
	
              Issue
                Format

            	 	
              Regulation
                S

            
	 	 	 
	
              Ratings

            	 	
              Not
                rated

            
	 	 	 
	
              Listing

            	 	
              None

            
	 	 	 
	
              Clearing
                System

            	 	
              Euroclear/Clearstream

            
	 	 	 
	
              Use
                of Proceeds 

            	 	
              General
                working capital, capital expenditure on core businesses and acquisitions
                of Harbin Taifu Auto Co., Ltd. and one rotary motor
                manufacturer.

            
	 	 	 
	
              Principal
                Amount of Issue 

            	 	
              $50.0MM
                aggregate principal amount (“Principal Amount”) of Notes. Face Value of
                Notes to be $1,000 (“Face Value”) per Note. Initial issue price will be at
                100.0% of Principal Amount (“Initial Issue Price”).

               

              Citadel
                to subscribe to $38.0MM of Principal Amount (the “Citadel Amount”).
                

               

              Merrill
                Lynch to subscribe to $12.00MM of Principal Amount (the “ML
                Amount”).

            


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

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              Maturity
                of the 2012 Notes

            	 	
              Maturity
                of the 2012 Notes on the date 6 years from date of issue (no later
                than 14
                August, 2012) (“Date of Issue”).

               

              Amortizing
                principal repayment schedule (“Prepayment Schedule”) as follows: $2.4MM of
                Principal Amount at year 3.0, $3.8MM of Principal Amount at year
                3.5,
                $9.9MM of Principal Amount at year 4.0, $9.9MM of Principal Amount
                at year
                4.5, $4.0MM at year 5.0, $4.0MM at year 5.5, and $4.0MM at year 6.0.
                

               

              Continuously
                puttable by the holders of the 2012 Notes for cash at 100% of Principal
                Amount beginning on the date 5.0 years from date of issuance plus
                accrued and unpaid interest, if any, to the put date. 

            
	 	 	 
	
              Maturity
                of the 2010 Notes

            	 	
              Maturity
                of the 2010 Notes on the date 4 years from the Date of Issue.

               

              Prepayment
                Schedule as follows: $2MM of Principal Amount at year 1.5, 2, 2.5,
                3, 3.5
                and 4. 

            
	 	 	 
	
              Optional
                Redemption on the 2012 Notes

            	 	
              On
                or after the first year anniversary of the Date of Issue, the Company
                may
                redeem all of the outstanding principal amount of the 2012 Notes
                at a
                redemption price (expressed as percentages of the principal amount)
                set
                forth below plus accrued an unpaid interest on the 2012 Notes redeemed,
                to
                the applicable redemption date:

            	 	 	 
	 	 	 	 
	
               

            	 	
              
                Year

              

            	
              Percentage

            
	 	 	 	 
	
               

            	 	
              
                2

              

            	
              106

            
	 	 	 	 
	
               

            	 	
              
                3

              

            	
              104.5

            
	 	 	 	 
	
               

            	 	
              
                4

              

            	
              103

            
	 	 	 	 
	
               

            	 	
              
                5

              

            	
              101.5

            
	 	 	 	 
	
               

            	 	
              
                6

              

            	
              100

            
	 	 	 


    

     

    
      
        
        

      

      
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              Optional
                Redemption on the 2010 Notes

            	 	
              On
                or after the first year anniversary of the Date of Issue, the Company
                may
                redeem all of the outstanding principal amount of the 2010 Notes
                at a
                redemption price (expressed as percentages of the principal amount)
                set
                forth below plus accrued an unpaid interest on the 2010 Notes redeemed,
                to
                the applicable redemption date:

            	 	 	 
	 	 	 	 
	
               

            	 	
              
                Year

              

            	
              Percentage

            
	 	 	 
	
               

            	 	
              
                2

              

            	
              106

            
	 	 	 
	
               

            	 	
              
                3

              

            	
              103

            
	 	 	 
	
               

            	 	
              
                4

              

            	
              100

            
	 	 	 
	
              Coupon
                on the 2012 Notes

            	 	
              Floating
                cash coupon (“Cash Coupon”) on the 2012 Notes of LIBOR + 335bps per annum,
                paid semi-annually in cash in arrears, with the LIBOR rate reset
                semi-annually.

            
	 	 	 
	
              Coupon
                on the 2010 Notes

            	 	
              Cash
                Coupon on the 2010 Notes of LIBOR + 475bps per annum, paid semi-annually
                in cash in arrears, with the LIBOR rate reset
                semi-annually.

            
	 	 	 
	
              “Step-up”
                on Coupon on the Notes

            	 	
              Cash
                Coupon’s margin on the Notes will step up permanently by 200bps if there
                is no NASDAQ Capital Markets (f/k/a Small Cap Market) or NASDAQ Global
                Market (f/k/a National Market) public listing for the Issuer by 1
                July,
                2007 (“Step Trigger Date”). 

               

              If
                there is no NASDAQ Capital Markets (f/k/a Small Cap Market) or NASDAQ
                Global Market (f/k/a National Market) public listing by April 1,
                2007, the
                Company must pay a $750K liquidated damages amount within 7 days
                payable
                pro-rata by Principal Amount held at such date by then current holders
                of
                the Notes (“Holders”).

               

              In
                addition, if there is no NASDAQ Capital Markets (f/k/a Small Cap
                Market)
                or NASDAQ Global Market (f/k/a National Market) public listing by
                the Step
                Trigger Date, the Company must pay a $1.5MM liquidated damages amount
                within 7 days payable pro-rata by Principal Amount held at the Step
                Trigger Date by then current
                Holders.

            


    

     

    
      
        
        

      

      
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              Detachable
                Equity Warrants to the 2012 Notes

            	 	
              Concurrent
                with the issue of the 2012 Notes, the Company shall issue to Citadel
                fully
                detachable warrants on Harbin common stock with maturity 6-years
                from Date
                of Issue (“Warrant Maturity Date”). The warrants will be exercisable at
                the option of the warrant holders beginning on the Date of Issue
                through
                the Warrant Maturity Date. At Date of Issue, the warrants shall be
                granted
                in two tranches (the “First Warrant Tranche” and “Second Warrant
                Tranche”). 

               

              The
                per warrant strike price of the First Warrant Tranche shall be equal
                to
                the lower of (i) $8.50 or (ii) 90% of the 7 day volume-weighted average
                trading price of the issuer’s Common Stock immediately prior to the date
                hereof (“First Warrant Tranche Strike Price”). Quantity of the First
                Warrant Tranche warrants shall be calculated based upon 45% of the
                Citadel
                Amount (e.g., 45% of the Citadel Amount divided by the First Warrant
                Tranche Strike Price).

               

              The
                per warrant strike price of the Second Warrant Tranche shall be equal
                to
                the lower of (i) $11.50 or (ii) 125% of the 7 day volume-weighted
                average
                trading price of the Issuer’s Common Stock immediately prior to the date
                hereof (“Second Warrant Tranche Strike Price”). Quantity of the Second
                Warrant Tranche warrants shall be calculated based upon 15% of the
                Citadel
                Amount (e.g,. 15% of the Citadel Amount divided by the Second Warrant
                Tranche Strike Price).

            


    

     

    
      	 	 	
              For
                the life of the 2012 Notes, both the First Warrant Tranche Strike
                Price
                and the Second Warrant Tranche Strike Price shall be fully-adjusted
                following any and all share dilution events, except for options issued
                pursuant to the Company’s employee option plan (in such amount not to
                exceed (i) 450,000 shares for the period commencing on the Date of
                Issue
                through the remainder of 2006 and (ii) 300,000 shares per year for
                any
                subsequent year) and shares issued in connection with the acquisition
                of
                Harbin Taifu Auto Co., Ltd. (in an amount not to exceed 750,000 shares)
                (collectively, the “Permitted Issuances”). Adjustment shall be 100%
                directly proportional to dilution on outstanding common stock shares
                at
                Date of Issue.

            
	 	 	 
	
              Detachable
                Equity Warrants to the 2010 Notes

            	 	
              Concurrent
                with the issue of the 2010 Notes, the Company shall grant to Merrill
                Lynch
                fully detachable warrants on Harbin common stock with maturity 3
                -years
                from Date of Issue (“Alternative Warrant Maturity Date”).

               

              The
                warrants will be exercisable at the option of the warrant holders
                beginning on the Date of Issue through the Alternative Warrant Maturity
                Date. 

               

              The
                per warrant strike price of the warrants shall be equal to the First
                Warrant Tranche Strike Price. Quantity of the warrants shall be calculated
                based upon 50.00% of the ML Amount (e.g., 50.00% of the ML Amount
                divided
                by the First Warrant Tranche Strike Price).

               

               

            


    

    
       

      
        
          
          

        

        
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              For
                the life of the warrants, the First Warrant Tranche Strike Price
                shall be
                fully-adjusted following any and all share dilution events except
                for
                Permitted Issuances. Adjustment shall be 100% directly proportional
                to
                dilution on outstanding common stock shares at Date of Issue.
                

            
	 	 	 
	
              Equity
                Registration Rights

            	 	
              To
                provide that the underlying warrant shares will be fully tradeable,
                unrestricted and unlegended, the Issuer will file a shelf registration
                statement as soon as reasonably practicable after the Date of Issue,
                covering the resale of the warrant shares. The Issuer will agree
                to use
                its reasonable best efforts to cause the registration statement to
                be
                declared effective as soon as reasonably practical after the initial
                filing and to remain effective, subject to certain exceptions, during
                the
                life of warrants.

               

              If
                there is no effective registration statement within 150 days following
                the
                Date of Issue, the Company must pay a $250K liquidated damages amount
                within 7 days payable pro-rata to the then current holders of the
                warrants
                for each month until the registration statement becomes
                effective.

            
	 	 	 
	
              Ranking
                

            	 	
              The
                Notes shall rank as first priority, unsubordinated, senior secured
                obligations of indebtedness of the Issuer. The Notes will rank senior
                in
                right of payment to all existing and future indebtedness of the
                HoldCo.

            
	 	 	 
	
              Guaranty
                and Collateral 

            	 	
              The
                Guarantors will guarantee the Notes on a senior secured
                basis.

               

              The
                Notes and the guarantee by the Guarantors shall be secured by a pledge
                of
                (i) all share capital in the Guarantors and (ii) non-PRC loans by
                the
                Company or the Guarantors. 

               

              At
                any time during the life of the Notes, to the extent (i) PRC law
                may
                change or dictate a change to permit a creation of a lien or priority
                interest on the intellectual property and fixed assets of the Company
                and
                its subsidiaries without prior approval by the PRC authorities and
                (ii)
                such property and assets are not subject to collateral arrangements
                on the
                date of such change of PRC law, the Company will be under obligation
                to
                secure the Notes by a first priority lien and interest on the intellectual
                property and fixed assets of the Company or its subsidiaries, including
                the Company’s or its subsidiaries’ patents. To the extent the property and
                assets of the PRC operating company are subject to collateral arrangements
                with a third party on the date of such change of PRC law, the Company
                will
                be under obligation to secure the Notes by a second priority lien
                and
                interest on the intellectual property and fixed assets of the PRC
                operating company.

            


    

     

    
      
        
        

      

      
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              Board
                Representation

            	 	
              At
                the option of Citadel, Citadel can appoint up to 2 directors (“Directors”)
                to the Issuer’s Board of Directors during the full tenure of the Notes.
                The Directors who are appointed by Citadel must be required to resign
                upon
                repayment in full and whose tenure should not exceed the term of
                the
                Notes. Telephone conference will be a permissible way for a Director
                to
                attend a Board Meeting. Collectively, this is intended to create
                no delay
                in the Board voting process in the event of Board Meeting absence
                by any
                of the Directors appointed by Citadel. 

            
	 	 	 
	
              Change
                in Control

            	 	
              Optional
                redemption at holder's option upon a Change in Control payable in
                cash at
                a price equal to 102.5% of then outstanding Principal Amount thereof,
                plus
                accrued and unpaid interest, if any, to the date of redemption. The
                Company must notify the then Holders within 7 calendar days of learning
                of
                such Change in Control. 

               

              The
                life and terms of the Detachable Warrants shall not be affected upon
                Change in Control but for full adjustment to the strike price and
                reference common stock (of the Company or of the Acquiring
                Party).

            
	 	 	 
	
              Covenants

            	 	
              The
                indenture governing the Notes will contain customary covenants that,
                among
                other things, requires:

            


    

    
      
         

        
          	
                   

                	 	
                   ·

                	
                  Limitations
                    on the consolidated group’s ability to incur additional Indebtedness,
                    subject to exception for the PRC operating company to obtain
                    working
                    capital loans not to exceed $3 million;

                
	 	 	 	 
	 	 	
                  ·

                	
                  Maintain
                    minimum net worth; 

                
	 	 	 	 
	 	 	
                  ·

                	
                  Limitations
                    to declare dividends on its capital stock or purchase
                    or redeem capital stock;

                
	 	 	 	 
	 	 	
                  ·

                	
                  Limitations
                    to make investments or other specified restricted
                    payments on non-major businesses;

                
	 	 	 	 
	 	 	
                  ·

                	
                  Limitations
                    to guarantee indebtedness;

                
	 	 	 	 
	 	 	
                  
                    ·

                  

                	
                  Limitations
                    to enter into transactions with equity holders or
                    affiliates;

                
	 	 	 	 
	 	 	
                  
                    ·

                  

                	
                  Limitations
                    to change business;

                
	 	 	 	
                   

                
	 	 	
                  
                    ·

                  

                	
                  Limitations
                    to create any
                    lien;

                


        

         

      

    

     

    
      
        
        

      

      
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                 ·

              	
                Ensure
                  subsidiary dividends; 

              
	 	 	 	 
	 	 	
                ·

              	
                Limitations
                  to sell assets;

              
	 	 	 	 
	 	 	
                ·

              	
                Limitations
                  to effect a consolidation or merger;


              
	 	 	 	 
	 	 	
                ·

              	
                Limitations
                  on annual capital expenditures; and

              
	 	 	 	 
	 	 	
                ·

              	
                Maintenance
                  test of EBITDA to Interest Expense and Debt to
                  EBITDA.

              


      

       

    

    
      	 	 	
              Yang
                Tian Fu shall enter into an employment non-competition agreement
                for the
                life of the Notes.

               

              No
                cash or special dividends will be allowed for the life of the
                Notes.

               

              All
                future indebtedness at the HoldCo and the Guarantor level will be
                junior
                and subordinated in ranking and in right of payment to the
                Notes.

            


    

     

    
      	
              Certain
                Conditions

            	 	
               1)

            	
              Citadel
                agrees to participate in principal size no less than $38.0MM aggregate
                principal amount of the 2012 Notes and Merrill Lynch agrees to participate
                in principal size of no less than $12.0MM aggregate principal amount
                of
                the 2010 Notes.

            
	 	 	 	 
	 	 	
              2)

            	
              Full
                definitive legal documentation for funding and issuance of the
                Notes, including a Purchase Agreement and other related agreements
                (on the
                terms and conditions set forth in the Term Sheet) must be signed
                and
                executed (“Deal Closing”) by 14 August, 2006 unless extended by agreement
                of the Offerees and the Issuer, provided that in any event such extension
                shall not exceed 31 August 2006. The definitive legal documentation
                will
                contain customary representations and warranties, including
                representations by the Company that its SEC filings comply with SEC
                requirements and do not contain a material misstatement or material
                omission, and contain indemnification provisions covering breaches
                of such
                representations and warranties.

            
	 	 	 	 
	 	 	
              3)

            	
              Settlement
                and final funding to occur within five business days
                following the Date of Issue. 

            
	 	 	 	 
	 	 	
              4)

            	
              Any
                required Company approvals and third parties’
                consents/approvals will be sought, delivered, and effected no later
                than
                14 August, 2006 unless extended by the Offerees. 

            
	 	 	 	 
	 	 	
              5)

            	
              Offerees
                and Holders shall be granted full preemptive rights during the term
                of the
                Notes for all future share placements/sales and any equity-linked
                debt
                issues. 

            


    

     

    
      
        
        

      

      
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                  6)

                	
                  No
                    material change in share capital or shares outstanding from time
                    of
                    signature of the Final Term Sheet through the Date of Issue.
                    

                
	 	 	 	 
	 	 	
                  7)

                	
                  Other
                    customary and reasonable conditions including, but not limited
                    to,
                    satisfactory due diligence (“Due Diligence”), satisfactory legal
                    documentation, customary legal opinions (as discussed between
                    counsel for
                    each of the Company, the Placement Agent and Citadel), no material
                    adverse
                    change, etc.

                
	 	 	 	 
	 	 	
                  8)

                	
                  Merrill
                    Lynch International shall have received all necessary
                    internal approvals;

                
	 	 	 	 
	 	 	
                  9)

                	
                  The
                    Company agrees to facilitate timely execution of due diligence
                    investigation. Offerees intend to complete due diligence investigation
                    by
                    13 August, 2006. 

                
	 	 	 	 
	 	 	
                  10)

                	
                  The
                    Company agrees to disclose sufficient deal related information
                    within 1
                    calendar day of Deal Closing or, if later, the next business
                    day following
                    the clearance of the U.S. deal announcement of Harbin relating
                    to the
                    issue of the Notes.

                
	 	 	 	 
	 	 	
                  11)

                	
                  Within
                    120 days of Date of Issue, the Company agrees to use all
                    reasonable best efforts to appoint a new full-time qualified,
                    English-speaking and familiar with U.S. capital markets senior
                    financial
                    officer to the Company. Citadel will have the option to veto
                    any candidate
                    for the senior financial officer position, and Citadel’s written approval
                    is required for appointment. For every 120 days that pass from
                    date of the
                    issue in which the new senior financial officer position is not
                    filled,
                    Company will be liable to pay a $1.2MM liquidated damages amount
                    to the
                    Holders of the Notes (on a pro rata basis) within 5 business
                    days of the
                    passage of the respect 120-day period. Citadel agrees to use
                    its
                    reasonable best efforts to facilitate timely appointment of a
                    senior
                    financial officer according to these terms.

                
	 	 	 	 
	 	 	
                  12)

                	
                  Beginning
                    no later than Date of Issue and as soon as practicable,
                    the Company will begin the process of fully transitioning its
                    accountant
                    firm to one of the top fifteen internationally recognized accounting
                    firms
                    listed on Schedule
                    1
                    attached hereto (“Replacement Accounting Firm”). If by 1 March, 2007, the
                    Replacement Accounting Firm has not been appointed, Company will
                    be liable
                    to pay a $2.5MM liquidated damages amount to the Holders of the
                    Notes (on
                    a pro rata basis). Beginning on 1 January, 2007, for every full
                    fiscal
                    year that passes in which a top fifteen international accounting
                    firm is
                    not the primary accounting firm and auditor for the entire fiscal
                    year
                    during the term of the Notes, the Company shall be liable to
                    pay a $2.5MM
                    liquidated damages amount to the Holders of the Notes (on a pro
                    rata
                    basis) on 7 January of the subsequent year.
                    

                


        

         

      

    

    
      
        
        

      

      
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                    13)

                  	
                    During
                      the period beginning from signature of this document (“Final Term Sheet
                      Execution”) until funding of the Notes, the Company agrees not to pursue
                      or discuss any capital raising activities in excess of
                      $2.0MM.

                  
	 	 	 	 
	 	 	
                    14)

                  	
                    The
                      Company agrees to a right of refusal made available to the
                      Offerees for a
                      period of 6.0 months subsequent to date of the signing of this
                      Term Sheet
                      allowing the Offerees to legally refuse any capital raising
                      transactions
                      in excess of $2.0MM (“Right of Refusal”). The Offerees will release the
                      Company of its Right of Refusal at time of Deal Closing. In
                      the event of a
                      Company Break (as defined below), the Offerees’ Right of Refusal persists
                      in full. 

                  
	 	 	 	 
	 	 	
                    15)

                  	
                    Each
                      party will be responsible for its own costs and
                      expenses.

                  
	 	 	 	 
	 	 	
                    16)

                  	
                    Offerees
                      and the Company shall work together in good faith to
                      effectuate Deal Closing as soon as practicable.

                  
	 	 	 	 
	 	 	
                    17)

                  	
                    The
                      Company and its legal and investment banking advisors (collectively,
                      the
                      “Advisors”) shall make all reasonable best efforts to effect, produce,
                      and
                      comply with the above Conditions. Likewise, Offerees agree
                      to make all
                      reasonable best efforts to effect, produce, and fund Deal Closing.
                      

                  
	 	 	 	 
	 	 	
                    18)

                  	
                    Under
                      all conditions, any Company Break (as defined below) or
                      breach by the Company of its obligations under this Term Sheet
                      shall
                      result in the Company being liable to pay a cash break-up fee
                      (“Company
                      Break-up Fee”) equal to 7.5% of the Principal Amount, payable to Offerees
                      (on a pro rata basis) within 7 days of the date of Company
                      Break or
                      breach. “Company Break” shall be defined as any action, event or decision
                      of the Company that prevents any of the Company’s obligations or
                      agreements contained in this Term Sheet from being performed
                      or
                      consummated. 

                  


          

           

        

      

    

    
      
        
        

      

      
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                      19)

                    	
                      Likewise,
                        any Offeree Break (as defined below) or breach by an Offeree
                        of its
                        obligations under this Term Sheet shall result in such Offeree
                        being
                        liable to pay a cash break-up free (“Offeree Break-up Fee”) equal to the
                        product of (i) 7.5% of Principal Amount multiplied by (ii)
                        such Offeree’s
                        pro rata investment portion of the Principal Amount, payable
                        to the
                        Company within 7 days of the Offeree Break or breach. “Offeree Break”
                        shall be defined as any action, event or decision of an Offeree
                        that
                        prevents any of such Offeree’s obligations or agreements contained in this
                        Term Sheet from being performed or consummated; it being
                        understood that
                        the Offerees’ obligations hereunder are several and not joint; provided,
                        however, that notwithstanding the foregoing or anything to
                        the contrary
                        contained elsewhere herein, an allowable exception to the
                        Offeree Break
                        shall be permitted based upon (i) Offeree’s discovery during its due
                        diligence investigation of any material information of the
                        Company not
                        previously disclosed to the Offeree by the Company prior
                        to the date of
                        this Term Sheet, (ii) any reasonably material discrepancy
                        found during the
                        Offeree’s due diligence investigation, or (iii)
                        any material misstatement or omission by the Company in its
                        audited
                        financial statements or SEC reports (each an “Allowable Exception” and
                        collectively, the “Allowable Exceptions”). Under any Allowable Exception,
                        the Offerees will not be liable for any Offeree Break-up
                        Fee.

                    
	 	 	 	 
	 	 	
                      20)

                    	
                      Under
                        any Company Break or breach, the Company will still be bound
                        by the
                        agreements set forth in paragraphs #14, 15, and 18 of “Certain Conditions”
                        above. 

                    
	 	 	 	 
	 	 	
                      21)

                    	
                      Prior
                        to making any public disclosures or filings as may be
                        required by law with respect to the transactions contemplated
                        herein, the
                        Company shall provide the Offerees (and its counsel) with
                        a reasonable
                        opportunity to review and comment on such public disclosure
                        documents and
                        consider in good faith any comments received by Offerees
                        (or its
                        counsel).

                    
	 	 	 	 
	 	 	
                      22)

                    	
                      Under
                        all conditions, any change in the trading price of the shares
                        of the Company’s common stock (“Change in Trading Price of Shares”) shall
                        not be allowed as an exception to any of the above commitments
                        and
                        Conditions. The Company and the Offerees commit in full good
                        faith
                        execution of this Term Sheet in the timeline set forth in
                        the conditions
                        above regardless of Change in Trading Price of Shares.
                        

                    


            

             

          

        

      

    

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

      Execution
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                      23)

                    	
                      Except
                        as otherwise provided herein, neither party may assign its
                        rights
                        hereunder to any other party without the prior written consent
                        of the
                        other party.

                    
	 	 	 	 
	 	 	
                      24)

                    	
                      This
                        Term Sheet shall be legally binding on the Company and the
                        Offerees.
                        

                    
	 	 	 	 
	 	 	
                      25)

                    	
                      This
                        Term Sheet (and the definitive legal documents) shall be
                        governed and construed by the laws of New York. The parties
                        submit to the
                        non-exclusive jurisdiction of the U.S. federal or New York
                        state
                        court.

                    


            

             

          

        

      

    

    
      	
              Expiration 

            	 	
              This
                Term Sheet expires at 11:59 pm (California time) on August 2, 2006
                if not
                accepted by the Company by that
                date.

            


    

    


    
      
        
        

      

      
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      Please
        confirm, by executing a copy of this Term Sheet, that you agree to the
        foregoing.


      


      Signed
        and Agreed:
        /s/
        Tianfu
        Yang                                   
    

      Harbin
        Electric, Inc.

      By:
        Tianfu Yang, Chairman &
CEO                                      
  

      duly
        authorised for and on behalf of Harbin Electric, Inc.

      


      Dated:  
        August 2,
        2006                                                         


      


      Signed
        and Agreed:
        /s/
        Andrew
        Fong                                
   

      Citadel
        Equity Fund Ltd.

      By:
        Citadel Limited Partnership, its Portfolio Manager

      By:
        Citadel Investment Group, L.L.C., its General Partner

      By:
        Andrew Fong, Authorized Signatory

      


      Dated:
        August 2,
        2006                                                            


      


      Signed
        and Agreed:
        /s/
        Kevin
        Tham                                     
 

      By:___________________________________________    

      Merrill
        Lynch International 

      By:
        Kevin
        Tham, Director - Credit Trading, Debt Markets

      


      Dated:
        August 2,
        2006                                                             


    

           

    


    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    Execution
      Version

     

    Schedule
      1

    


    List
      of Top 15 Accounting Firms


    
      
        	
                1.

              	
                PricewaterhouseCoopers

              
	
                2.

              	
                Deloitte
                  Touche Tohmatsu

              
	
                3.

              	
                Ernst
                  & Young

              
	
                4.

              	
                KPMG

              
	
                5.

              	
                BDO
                  International

              
	
                6.

              	
                Grant
                  Thornton International

              
	
                7.

              	
                RSM
                  International

              
	
                8.

              	
                Baker
                  Tilly International

              
	
                9.

              	
                Horwath
                  International

              
	
                10.

              	
                Moores
                  Rowland International

              
	
                11.

              	
                Nexia
                  International

              
	
                12.

              	
                PKF
                  International

              
	
                13.

              	
                Moore
                  Stephens International

              
	
                14.

              	
                HLB
                  International

              
	
                15.

              	
                Kreston
                  International