UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended: Commission file number: 0-23691
September 30, 1998
AUBRYN INTERNATIONAL, INC.
(IMMEDIATE PREDECESSOR NAME: SOUTHWEST INDUSTRIAL PRODUCTS, INC.)
(Exact name of small business issuer as specified in its charter)
MINNESOTA 411853992
- --------- ---------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1152 N. MOUNTAIN AVE., SUITE 210, UPLAND, CA. 91786
- ----------------------------------------------------
(Address of principal executive offices)
(909) 946-1708
------------------------------------------------
(Issuer's telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 12,681,697 shares of common
stock, no par value, issued and outstanding at January 29, 1999.
Transitional Small Business Disclosure Format (check one): Yes No x
----- -----
1
<PAGE>
AUBRYN INTERNATIONAL, INC.
FOR THE QUARTER ENDED
SEPTEMBER 30, 1998
INDEX
PART I. - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Balance Sheet as of September 30, 1998 and 3
December 31, 1997 (Audited Aubryn pre-merger)
Statement of Operations for the three months 5
Ended September 30, 1998.
Statement of Cash Flows for the three months 6
Ended September 30, 1998
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis 10
of Financial Condition and results of Operation.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
2
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
AUBRYN INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(Unaudited)
Cash $ 48,435
Accounts Receivable $ 1,967,267
Inventory 4,326,394
Other Current Assets 599,817
------------
TOTAL CURRENT ASSETS $ 6,941,913
Property and Equipment, less
accumulated depreciation $ 151,530. 6,665,101
Goodwill, less accumulated
amortization of $ 43,693. 1,004,926
Other Assets 477,405
-----------
TOTAL ASSETS $15,089,345
Accounts Payable $ 464,104
Notes Payable 318,048
Notes Payable-Stockholders 277,896
Mortgage Payable 2,016,032
Accrued Expenses 2,372,414
-----------
TOTAL CURRENT LIABILITIES $ 5,448,494
Minority Interest (630,233)
STOCKHOLDERS' EQUITY
Preferred Stock, Auth.100,000,000
issued 500,000 class C and
300,000 class D outstanding $ 7,432,551
Common Stock, 200,000,000 authorized
12,605,697 issued and outstanding 3,724,916
Accumulated Deficit (886,383)
-----------
Total Stockholders' Equity $10,271,084
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $15,089,345
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
AUBRYN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,1997 (Aubryn Pre-merger)
ASSETS
1997
Audited Aubryn Prev.
Current Assets $1,985,669
Property and Equipment - Net $3,981,668
Other Assets $1,527,619
----------
Total Assets $9,316,088
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities $4,096,666
Long Term Liabilities $ 25,059
Stockholders' Equity $6,003,735
----------
Total Liabilities and Stockholders' Equity $9,316,088
==========
4
<PAGE>
AUBRYN INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
1998
Sales, Net of Returns and Discounts $ 295,102
Cost of Goods Sold $ 245,196
----------
Gross Profit $ 49,906
Expenses:
Selling, General and Administrative $ 290,420
Depreciation and Amortization $ 77,073
Interest $ 60,919
Total Expenses $ 428,412
----------
Loss before Income taxes and Minority
Interest $ (378,506)
Minority Interest Loss $ 30,000
----------
Loss Before Income Taxes $ (348,506)
----------
Income Taxes $ 0
----------
Net Loss $ (348,506)
==========
Basic Net Loss Per Share of Common Stock ($0.04)
==========
Weighted Average Number of Shares Outstanding 8,396,473
(Basic and diluted)
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
AUBRYN INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS PERIOD ENDED SEPTEMBER 30, 1998
(UNAUDITED)
1998
Cash Flows from Operating Activities
Net Loss $ (348,506)
Adjustments to Reconcile Net Loss to Net
Cash Provided by :
Minority Loss $ 30,000
Depreciation and Amortization $ 77,073
Accounts Receivable $(1,814,927)
Inventory $(4,026,394)
Other Current Assets $ (599,817)
Accounts Payable $ 389,104
Accrued Expenses $ 2,222,414
Other Assets $ (477,405)
-----------
Net Cash Used by Operating Activities $(4,548,458)
Cash Flows from Investing Activities
Property and Equipment Purchases $(5,709,094)
Minority Interest $ (660,233)
Decrease in Goodwill $ 438,147
Net Cash Used in Investing Activities $(5,931,180)
-----------
Cash Flows from Financing Activities
Proceeds from Issuance of Common Stock $ 3,677,416
Proceeds from Issuance of Preferred Stock $ 6,750,000
Mortgage Payable $ 2,016,032
Notes Payable $ 318,048
Notes Payable-Shareholders $ 277,896
Assumption of Long-term debt. $(2,516,819
-----------
Net Cash Provided by Financing Activities $10,513,073
Increase (Decrease) in Cash and Cash Equivalents $ 33,435
Balance, Beginning of Period $ 15,000
-----------
Balance, End of Period $ 48,435
===========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
AUBRYN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - ORGANIZATION AND ACCOUNTING POLICIES
ORGANIZATION:
On August 17, 1998, pursuant to the terms of an agreement and plan of merger
(the agreement), Southwest Industrial Products, Inc. ( the Company), issued
approximately 7,783,000 shares of its common stock one for one in exchange for
all of the issued and outstanding common shares of Aubryn International Ltd.,
(Aubryn), a Nevada corporation. Additionally, the Company issued 500,000 shares
of Class C preferred stock and 300,000 shares of Class D preferred stock one for
one in exchange for all of the issued and outstanding preferred stock of Aubryn.
Immediately after the merger, the Company changed its name to Aubryn
International, Inc. In accordance with the terms of the agreement, immediately
after the merger, all of the assets and liabilities of the Company existing
immediately before the merger were spun off in exchange for 1,500,000 shares of
a newly formed privately-held company. The merger is more fully described on the
Schedule 14A filed with the Securities and Exchanges Commission on July 6th,
1998.
BASIS OF PRESENTATION:
The accompanying unaudited interim consolidated financial statements include the
accounts of the Company and its wholly and majority-owned subsidiaries, and have
been prepared by the Company in accordance with generally accepted accounting
principles. All material inter-company balances and transactions have been
eliminated. In the opinion of management, these unaudited interim consolidated
financial statements contain all adjustments necessary for a fair presentation
of the Company's financial position, results of operations, and cash flows at
the dates and for the periods indicated. Such adjustments are of a normal
recurring nature, necessary to present fairly these interim consolidated
financial statements. Certain information and footnote disclosure normally
included in consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
Results for the interim period are not necessarily indicative of the results
that may be expected for the entire year.
ACCOUNTING POLICIES:
INVENTORY:
Inventory is stated at the lower of cost or market. Cost is
determined by the first-in, first-out method. Inventory consists of
undeveloped land, residential condominiums currently under
construction, and shoes.
PROPERTY AND EQUIPMENT:
7
<PAGE>
Property and equipment is stated at cost, significant renewals or
betterments are capitalized, maintenance and repairs are expensed as
incurred.
Depreciation is calculated using the straight-line method over the
respective assets' estimated useful lives which range from 5-20
years.
GOODWILL:
Goodwill is being amortized over a 20-year period.
REVENUE RECOGNITION:
The Company recognizes sales of shoes when they are shipped to
customers, sales of residential condominiums are recognized upon the
close of escrow and the transfer of title, and the sales of extended
warranties will be recognized ratably over the term of the warranty
when payment has been received and the policy issued.
NOTE 2 - PREFERRED STOCK
The Company is authorized to issue 100,000,000 shares of preferred stock. The
Company has outstanding 500,000 shares of Class C preferred shares, 250,000
shares are convertible at a price of $7.00 per share two years after September
28, 1997 and 250,000 shares are convertible at a price of $7.00 per share four
years after September 28,1997. If the price of the common stock is less that $
7.00 per share at the time of conversion, the holder shall receive additional
shares to make up the difference. The Company has outstanding 300,000 shares of
Class D preferred shares, 250,000 shares are convertible one year after April 1,
1998 at a price of $10.00 per share, and 50,000 shares are convertible eighteen
months after April 1, 1998 and at a price of $15.00 per share. If the price of
the common stock is less than the conversion price at the time of conversion,
the holder shall receive additional shares to make up the difference. The
Company does have the option to extend all of the Class D stock conversion
period by one year at company option instead of issuing additional shares.
NOTE 3 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share (Statement 128).
Statement 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
convertible securities.
The calculation of basic loss per share is based on the weighted average number
of common shares outstanding during the period. Diluted loss per share is the
same as the basic loss per share as the assumed conversion of the convertible
preferred stock issues would be antidilutive; that is, they would decrease the
calculated loss per share.
8
<PAGE>
NOTE 4 - SUBSEQUENT EVENT
On December 19, 1998 the Board of Directors of the Company voted to distribute
on a tax free basis to the Company's shareholders, on a pro rata basis, the
Company's ownership of the Mexican Real Estate Division, subject to shareholder
and governmental approvals and filings. This distribution would include the
following conditions: (a) shareholders of record date 12-31-98; (b) existing
Aubryn shareholders will receive 1 share in new entity for each 100 of Aubryn;
(c) legal expenses borne equally by both parties;(d) Mexican Directors
resignation upon completion;(e) transfer agent and certificate expense by
Aubryn; (f) Aubryn to receive back 500,000 Class C preferred shares from Mexican
partner; (g) condominium in Tower C to Aubryn; (i) 60,000 shares from Harris
Group to be gifted and split between Flores Family and Ledgard Family; (j)
remaining insider shares in new entity to be restricted for 1 year. The spin off
would allow shareholders to own shares in both operations and provide the
Mexican division and its management an independent approach to enhance its
assets and fulfill its separate capital requirements. The Mexican division
assets will be transferred to the new entity upon completion of the transaction
and this entity shall become public and reporting.
9
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the un-audited
Consolidated Financial Statements and related notes thereto, included elsewhere
in this Form 10-QSB.
MERGER
As discussed in the Notes to the Consolidated Financial Statements
included in this quarterly report, the Company underwent a substantial change in
ownership, management, assets and business strategy, all effective August 17,
1998. These significant changes occurred as a result of the acquisition of
Aubryn (via Merger) and certain related transactions, pursuant to a definitive
Agreement Plan and of Merger. For financial reporting purposes, the Merger is
accounted as a reverse acquisition of Southwest by Aubryn. The historical
Consolidated Financial Statements are those of Aubryn, and management's
discussion and analysis of financial condition and results of operations
presented herein relate to Aubryn. Both reflect the acquisition of Aubryn net
assets (existing immediately prior to the Merger) at fair value, using purchase
accounting, on August 17, 1998, as required by generally accepted accounting
principles.
GENERAL
The Company is a development stage company, which was the result of a
merger ("Merger") of Aubryn International Ltd. ("Aubryn") into Southwest
Industrial Products, Inc. ("Southwest'). The Company's activities and operations
are in three main areas: automobile service warranties, shoe manufacturing and
distribution, and condominium development and sales. The merger of Aubryn into
Southwest was effective on August 17, 1998; and, accordingly, year to year
comparisons have been omitted from this discussion and deemed not meaningful
inasmuch as the Southwest operations and balance sheet no longer comprise a
significant part of the Company. References to the Company herein as of a date
prior to the Merger refer to Aubryn, except where noted otherwise or is obvious
from context.
The Company, during this third quarter, has experienced start up losses
that can be attributed to the failure of investors to provide the anticipated
required funding in a timely manner. Had this funding occurred on September 15,
1998 as originally scheduled the Company would have had no problem meeting the
Company objectives. The cash position increased from $15,000 on June 30,1998 to
$48,435 on September 30, 1998. The Company's accounts receivable from its Muro
shoe operation are at $177,266 as of September 30, 1998 and as of November 30,
1998 stood at $484,302. The current ratio is 1.27 to 1 but is heavily weighted
in two categories, namely, inventory and rEceivables. Failure to turn and
collect on each could have a significant effect on liquidity. The overall loss
is $348,506 for the period ending September 30, 1998 primarily due to the
Company's lack of funding for marketing and the inability to close
10
<PAGE>
on the pending sales held in escrows. Release of title and completion of a tower
is required before these sales held in escrow can be closed. Management has had
all of the footwear operational personnel in place since September 1, 1998 and
has lost sales within the footwear division because the Company lacked the
financial resources to fulfill potential shoe orders.
Management's goals for the Company's three distinct operating divisions
are, if given the capital necessary to meet objectives, to expand the Automotive
Division in China, develop more lines within the Footwear Division, and provide
independent capital for the Real Estate Division operations. The Automotive
Division has a license to provide extended automobile warranties in Wuhan, Hubei
province and throughout China. The Automotive Division also provides technical
training to outside personnel, auto repair service, and in the future, possibly
automobile sales. Warranty sales began in 1998, and automobile training classes
and service repair also began operations during 1998. The Company is currently
the only industry provider in Wuhan, and it is unaware of any other auto
warranty providers in China. It took the Company three years to secure all of
the requisite licenses and permits (plus additional time to get the operation up
and running), and this may prove to be a barrier to entry for other entrants.
This meshes nicely with the other operations, providing a trained labor force
for the Wuhan auto repair and inspection facilities, and helping to foster the
overall growth of the automobile market in China. Various Chinese government
entities subsidize much of the tuition for many of the students, and the
training of the labor force is an important element in Chinese policy for
economic growth. Management believes it will be able to take advantage of these
governmental policies and the Company's concepts will be well suited to other of
the more economically advancing areas of China.
The Company's Footwear Division has a 95% interest in Wuhan Central
China Rubber Product Company, a joint venture in Wuhan, China, which operates
Everlasting International Shoe Company. The Wuhan facility was acquired out of a
Chinese bankruptcy, and is mechanically being upgraded and repaired, and workers
are being trained. This facility produced over 700,000 pairs of shoes in its
last year of operation (1996) and would be capable of producing much more with
additional investment and sales outlets. The Company also acquired rights to the
Muro shoe brand, and has manufacturing relationships in Mexico. The Company is
also leasing warehousing and systems facilities in California. The Company is
likely to need capital, both for fixed equipment, facility investment, and for
working capital to support an anticipated incipient dramatic growth in its
footwear revenues. Again, management notes that timing and availability of
capital is crucial to meet these opportunities for faster growth.
As the Company experience with both the footwear and auto warranty
operations are not long, management views its earnings and revenue projections
as highly tenuous until the funding programs are fully activated. While the
conditions for the footwear operations appear favorable, the developing
operations infrastructure under Aubryn's auspices is not yet seasoned, even
though primary management in each division has collectively over 25 years
experience in their field.
11
<PAGE>
BUSINESS HISTORY
BUSINESS SUMMARY
Aubryn International, Ltd. was originally a Nevada corporation prior to
its merger with Southwest Industrial Products, Inc. which became effective
August 17, 1998. The Company's prior history is available on the Schedule14A
filed with the Securities and Exchange Commission describing the Merger. The
Company is a diversified company that operates within three distinct
industries--footwear, automotive, and real estate. The Company's management
continues to develop each of its three divisions into self supporting entities
with the ability to expand and address the individual concerns of each division
as their development permits.
The Company's Automotive Division, as the only company offering auto
warranty products in China, intends to remain the leader in providing auto
warranty and insurance products to the people of China. The Company is dedicated
to building successful long-term relationships through marketing alliances and
agency agreements with existing insurance companies who currently sell all types
of automobile insurance. By using the existing sales agent base of these
companies, the Company can bring its products to market in the institutional
sectors and through current Chinese partners without having to incur the capital
outlay for hiring personnel. Additionally, the Company intends to pursue the
acquisition possibilities of acquiring certain US based warranty sales
organizations. These acquisitions, management believes, will strengthen
operations in this Division both from the income and financing aspects.
The Company's mission in its Footwear Division is to be a leader within
the footwear industry providing innovative trend setting designs and styles. The
Company has established its shoe manufacturing plant in China, which it believes
to be one step ahead of the existing Chinese footwear companies, by providing
American quality control plus maintaining a shoe design staff on-site, within
China.
The Company's Real Estate Division continues to take advantage of the
growing consumer market demanding quality condominium and residential properties
along the Baja Mexico coastline between Rosarito and Ensenada. These properties
afford the buyer the chance of acquiring secured title to mortgage capable
properties.
COMPANY BACKGROUND INFORMATION
The Company announced its intent in July 1993 to establish a
Sino-American joint venture to primarily offer warranties on new vehicles sold
in China, along with service inspection centers to take advantage of growing
demand in China. In March 1996 the Company signed its final licensing agreements
with three joint ventures to open offices in Wuhan, Shanghai, and Hong Kong.
Between the period from May 1997 thru March 1998, the Company has both shipped
and purchased almost one million dollars worth of diagnostic and high tech
service equipment for the Wuhan center. The Company opened its first service and
training center in late February 1998 and depending on the capitalization
programs intends on opening the Shanghai and Hong Kong offices during the first
two months of next year.
12
<PAGE>
The Company entered into an agreement to purchase 50% of the equity
rights to Costa Bella Club condominiums, and residential development sites in La
Jolla Cove, and Todos Santos, all located in Rosarito, Baja California in
September 1997 and closed the deal in November 1997. The Costa Bella Club is a
condominium development with Tower A completed, Tower B under construction and
involves a planned Tower C and D. Tower B contains 29 units with living space of
approximately 48,760 square feet. There are five models that range in size from
936 to 2,809 square feet. All have ocean views and the resort has a pool, spa,
and full clubhouse on the cliffs. Rosarito is about 45 minutes south of San
Diego. It is on the beach and features golf, fishing, whale watching, hiking and
horseback riding. The complex is just one mile south of the new Fox Studios
where the motion picture "Titanic" was filmed. The capital for the completion of
Tower B has already been raised and completion is expected before the end of
this year. The Company has over $850,000 in receivables from Tower A which is
collectable upon clearance of title. The Company's Real Estate Division has 11
units in escrow in Tower B awaiting closing subject to title clearance, and
totaling approximately $2 million in sales which cannot be booked until Tower
B's completion.( slated for late January or February 1999)
The Company opened its Footwear Division based in China on May 8, 1998
by purchasing a 95% interest in a footwear manufacturing facility in Wuhan,
China from the government. The manufacturing facility sits on approximately 10
acres of grounds with over 300,000 square foot of building space and houses four
footwear assembly lines. The Company has finalized the interviewing of the
approximately 1000 employees for the manufacturing facility, and is finalizing
clean up and servicing of the plant. It is anticipated that the first sample
runs of the plant should begin before the end of first quarter 1999. The
Division purchased the licensing rights for distribution in the U.S. and Canada
for MURO shoes and anticipates signing two other distribution agreements during
first quarter 1999. The Company intends on closing three manufacturing contracts
for its China plant with three major shoe companies well known in the United
States during first quarter 1999. The Company will distribute its products to
retail accounts in the United States through a combination of independent
distributors, licensees and subsidiaries. All of the Company's product lines
will be sold both in the US and China. The Muro license developed almost $
200,000 in sales from the period from May 15, 1998 through August 16, 1998 with
only half of the operational staff in place. Management's option with respect to
the Muro Licensing, in the event capital needs are not met, would be to allow
Muro Mexico to deal directly with sales staff to maintain customer loyalty until
such time as capital levels reach those necessary to continue with overhead
requirements. This occurred prior to the Merger and would have expanded further
had capital commitments been timely honored.
From August 18th through November 30th , 1998 the Company has booked sales of
its Muro products amounting to approximately $630,000 and has sales orders
outstanding waiting delivery totaling an additional almost $560,000. As a result
of the merger with Southwest, none of Aubryn's business from January 1,1998 to
August 16, 1998 (pre-Merger) is reflected the unaudited Consolidated Financial
Statements and related notes thereto, included elsewhere in this Form 10-QSB.
13
<PAGE>
RESULTS OF OPERATIONS
The merger of Aubryn into Southwest was effective on August 17, 1998;
and, accordingly, year to year comparisons have been omitted from this
discussion and deemed not meaningful inasmuch as the Southwest operations and
balance sheet no longer comprise a significant part of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company had earlier entered into certain funding commitments, which
were to have occurred within 30 days after the Merger. These commitments would
have provided the Company with the necessary capital required to fulfill its
expansion plans. Because of the changes in the market price of the Company
common stock which occurred during September 1998, the funding group did not
meet their commitment to the Company. Management was therefore forced to seek
alternative sources for expansion capital. Until the recent commitment for new
sources of capital described below, management had doubt about its ability to
meet future expenditures and obligations necessary to fully develop Company
business opportunities.
Management is in final negotiation with a potential "Financial
Guarantor" willing to provide approximately $5 million solely for the Automotive
and Footwear divisions. The "Financial Guarantor" has already provided a
Performance Bond, which the Company can utilize to provide the interim capital
prior to the first funding from a Financial Guaranty Bond scheduled to fund
during late February to early March 1999. The scheduled funding releases will
provide these two divisions the necessary capital to meet the demands of their
business plan for 1999. Management is currently making interim capital loans
through private investors on short-term periods to meet the Company's needs for
the first two months of 1999, which will be subsequently paid by operations and
the Performance Bond funding, if any.
The Company is currently in negotiations to acquire two U.S. based
warranty sales organizations that could bring in the additional revenue required
to fulfill Company expansion plans. These acquisitions would help create an
additional financing tool that management believes would help operational needs.
As a result of new requirements within the insurance warranty business
in China, management felt the need to modify its joint venture operations there
and on December 13, 1998 signed an agreement with Shanghai Baolong Group Co.
Ltd. This new JV modification brings the Company experienced Chinese management
into the local operations to enhance the profitability of the division.
The Mexican Real Estate division has consistently competed with the
other two divisions for funding operations. In late 1998 management accepted the
investment from an outside investor to provide the capital ($800,000) necessary
to complete construction of Tower B in its Costa Bella condominium project. This
arrangement resulted in a reduction of Company profit potential for that tower
by 50%. Management believes that the eventual ability of this division to
function independently could benefit both Company and shareholders alike if they
allowed this
14
<PAGE>
entity the opportunity to attract the necessary funding for continued growth. On
December 19, 1998 the Board of Directors of the Company voted to distribute, on
a tax free basis, their ownership in the Mexican Real Estate Division to the
Company's shareholders under the following conditions, subject to shareholder
and governmental approvals and filings: (a) shareholders record date of
12-31-98; (b) equivalent to existing Aubryn shares 1 to 100; (c) legal expenses
borne equally by both parties; (d) Mexican Director resignations upon
completion; (e) transfer agent and certificates expense by Aubryn; (f) Aubryn
Preferred shares to Mexican side cancelled; (g) condominium in Tower C to
Aubryn; (h) 60,000 shares of Harris group to be gifted to Flores family and
Ledgard family equally split; (i) all remaining insider shares restricted for 1
year. The spin off would allow shareholders to own shares in both operations and
provide the Mexican division and its management an independent approach to
enhance its assets and fulfill its separate capital requirements. Management
wishes to maximize the value of the Aubryn shareholders interest in the Mexican
assets and the new entity shall become a reporting public company. The Mexican
Division assets will be transferred to the new entity upon completion of the
transaction, with all required approvals. The Mexican Real Estate assets as
shown upon acquisition were stated based on appraisals and at the value ascribed
to the preferred stock granted for same.
YEAR 2000 ISSUE
The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips that store the year portion of the
date as just two digits (e.g., "98" for 1998). Systems using this two-digit
approach will not be able to determine whether "00" represents the year 2000 or
1900. The problem, if not corrected, will make those systems fail altogether or,
even worse, allow them to generate incorrect calculations causing a disruption
of normal operations.
The Company has conducted a review of and will continue to review,
identify, and resolve Year 2000 issues associated either with the Company's
internal systems or the products and services sold by the Company. As part of
this effort, the Company is communicating with its main suppliers of any
products or services regarding the Year 2000 status of such products or
services. The Company is testing and identifying all of its internal systems and
expects to complete modifications, if any are necessary, by mid-1999. Throughout
1999 the Company expects to complete implementation of any needed Year 2000
modifications to its information systems. The Company uses a PC-based hardware
configuration with widely utilized, accepted and supported software productions
for its basic operating and office support functions. None of the software
applications utilized by the Company were developed internally and all have been
acquired and routinely updated since 1996. Based on reviews and inquiries
conducted by Company personnel and on representations by software vendors, the
Company believes its primary software applications are Year 2000 compliant.
Accordingly, the Company does not expect to incur any material costs to modify,
upgrade or replace its basic business systems over and above ongoing
requirements to expand systems, as required by growth and operations. However,
the Company is not able, nor does it possess the technical expertise, to conduct
a comprehensive review of programs and systems purchased from and supported by
third parties; and, therefore, the Company cannot guarantee that it will not
incur problems with such software and business applications.
15
<PAGE>
The Company's total cost relating to these activities has not been and
is not expected to be material to the Company's financial position, results of
operations, or cash flows. The Company believes that necessary modifications
will be made on a timely basis. The Company does not expect Year 2000 issues to
have a material impact on its internal operations; however, there can be no
assurance that there will not be a delay to, or increased costs associated with,
the implementation of such modifications, or that the Company's suppliers will
adequately prepare for the Year 2000 issue. It is possible that any such delays,
increased costs, or supplier failures could have a material adverse impact on
the Company's operations and financial results by, for example, impacting the
Company's ability to deliver products or services to its customers or to receive
timely and accurate payments from its customers. The Company expects in mid-1999
to finalize its assessment and contingency planning for potential operational or
performance problems related to Year 2000 issues with its information systems.
The Company intends to take additional steps to determine year 2000 readiness of
third parties and to implement additional procedures it deems necessary to
account for and take actions necessary to minimize potential problems resulting
from third party customers and suppliers outside the control of the Company.
As none of the Company's products distributed by the Company fall into
the category of technical products which would be effected by the Year 2000
issues, the areas where the Company is focusing its efforts involve operating
systems, communication systems, delivery systems, and any of those as it relates
to supplier products. The Company's only products issues involve supply or
inventory control, and any delivery problems, which would be solved with
corrections to internal operating and inventory controls.
The Company believes that none of its current products have Year 2000
issues, which will cause problems to its customers. The only issues, which could
be affected, would be those created by supply and inventory controls, which the
Company feels, will be addressed by mid-year 1999.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-QSB may be deemed to contain certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements other than statements of historical facts included in
this report including, without limitation, statements concerning the Company's
business strategy, plans, objectives and beliefs of management for future
operations are forward-looking statements. Although the Company believes the
expectations and beliefs reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Forward-looking statements are not guarantees of future
performance and actual results, developments and business decisions may differ
from those envisioned by such forward-looking statements. Any forward-looking
statements involve risks and uncertainties, including but not limited to risk of
product demand, market acceptance, economic conditions, competitive products and
pricing, difficulties in product development, commercialization and technology,
and other risks detailed in this filing and in the Company's most recent Form
10-SB and Schedule 14A filings. Although the Company believes it has the product
offerings and resources for continuing success, future
16
<PAGE>
revenue and margin trends cannot be reliably predicted. Factors external to the
Company can result in volatility of the Company's common stock price. Because of
the foregoing factors, recent trends are not necessarily reliable indicators of
future stock prices or financial performance.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES.
(a) Effective upon the August 17, 1998 merger between Southwest and Aubryn
("Merger"), a 6 to 1 reverse split-up of the common shares held by
Southwest shareholders reduced the number of outstanding common shares from
27,539,319 to 4,589,887.
(b) The Company has issued the following unregistered securities since August
17, 1998:
(1) On August 17, 1998, pursuant to the Merger, Aubryn shareholders, in
consideration for all the outstanding Aubryn shares were issued 7,783,304
common shares.
(2) On August 17, 1998, pursuant to the Merger, the Company issued 500,000
shares of Class C preferred stock to Saul Flores Guerrero (Inversiones
Turisticas).
(3) On August 17, 1998, pursuant to the Merger, the Company issued 300,000
shares of Class D preferred stock to Proton Technologies Co.
(4) On September 16, 1998, the Company issued 128,000 shares of common stock to
Saul Flores Guerrero and 72,000 shares of common stock to Jack Vickery in
consideration of the terms of the Agreement and Plan of Merger dated
September 28, 1997 between Aubryn and Saul Flores Guerrero et al.
(5) On September 21, 1998 the Company issued 20,000 shares of common stock to
Bruce Degler in consideration of $40,000 cash ($2.00 per share).
Additionally, the Company issued 20,000 shares of common stock to Ted
Connolly for $50,000 cash (at $2.50 per share). No commissions or
underwriting discount was paid in connection with the sale of the
securities.
(6) On November 6, 1998, the Company issued 65,000 shares of common stock to
Mayer Preger in consideration of marketing services.
17
<PAGE>
(7) On September 16, 1998, the Company issued 10,000 shares of common stock to
James Baker in consideration of marketing services.
(8) On October 5, 1998, the Company issued 1,000 shares of common stock to
David L. Shade in consideration of legal services.
(9) On October 14, 1998, the Company issued 10,000 shares of common stock to
Fred Smith in consideration of investor relations services.
In each of the issuances described above, the issuance did not involve a
public offering of securities, no general soliciting or advertising was involved
in connection with the offering and the purchasers took for investment only and
not with a view to distribution of the securities. The securities were issued in
reliance upon the registration exemption contained in Section 4(2) of the
Securities Act of 1933, as amended (the "Act").
ITEM 3. DEFAULTS BY THE COMPANY UPON ITS SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On July 29, 1998 a special meeting of shareholders of the Company was
held to consider and act upon the following matters:
a. A reverse stock split of 1 common share for 6 common shares.
b. The merger of the Company with Aubryn International, Ltd., a
Nevada corporation.
c. Change the name of the Company from Southwest Industrial
Products, Inc. to Aubryn International, Inc.
Proxies for the meeting were solicited pursuant to Regulation 14A under the
Exchange Act and the foregoing matters were fully described in an accompanying
proxy statement (filed with the Securities and Exchange Commission as part of
Schedule 14A). All the shareholders of record at the close of business on July
1, 1998 were entitled to vote at the meeting. Each of the above items was
approved by a vote of over 90% of the outstanding shares
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
18
<PAGE>
(a) Exhibits---None
(b) Reports on Form 8-K---None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on behalf by the
undersigned, thereunto duly authorized.
AUBRYN INTERNATIONAL, INC.
By: /s/ R. Bruce Harris
--------------------------------
President and Chief Executive
Officer
Date: 2-8-99
-------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jul-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 48,435
<SECURITIES> 0
<RECEIVABLES> 1,967,267
<ALLOWANCES> 0
<INVENTORY> 4,326,394
<CURRENT-ASSETS> 6,941,913
<PP&E> 6,665,101
<DEPRECIATION> 151,530
<TOTAL-ASSETS> 15,089,345
<CURRENT-LIABILITIES> 5,448,494
<BONDS> 0
<COMMON> 3,724,916
<OTHER-SE> 0
0
7,432,551
<TOTAL-LIABILITY-AND-EQUITY> 15,089,345
<SALES> 295,102
<TOTAL-REVENUES> 295,102
<CGS> 245,196
<TOTAL-COSTS> 245,196
<OTHER-EXPENSES> 290,420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,919
<INCOME-PRETAX> (348,506)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (348,506)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
