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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________________ to _________________.
Commission File Number: 0-3132
SUNBASE ASIA, INC.
(Exact Name of Registrant as specified in its charter)
Nevada 94-1612110
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
19/F, First Pacific Bank Centre
51-57 Gloucester Road
Wanchai, Hong Kong
(Address of principal executive offices)
Registrant's telephone number, including area code: (852) 2865-1511
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock
Indicate by check mark whether the Registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [_] No[X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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As of March 31, 1998, 12,700,142 shares of Common Stock were outstanding.
The aggregate market value of the outstanding stock of the Registrant held by
non-affiliates on March 31, 1998 was $11,795,226.
Documents incorporated by reference: None
The total number of pages in this report is 88. The exhibit index is
located on pages 83 through 86.
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PART I.
ITEM 1. BUSINESS.
This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. Actual results of the Company could differ
materially from those statements. Factors that could cause or contribute to
such differences include, but are not limited to, those factors discussed under
the heading "FACTORS THAT MAY AFFECT FUTURE RESULTS" in ITEM 7 and elsewhere in
this Report.
SUNBASE ASIA
Sunbase Asia, Inc., a Nevada corporation (the "Company", which term shall
include, when the context so requires, its subsidiaries and affiliates), is
engaged in the design, manufacture and distribution of a broad range of bearing
products in the People's Republic of China ("China" or the "PRC"), the United
States ("U.S."), Europe, Asia, South America and Africa.
Harbin Bearing Company, Ltd. ("Harbin Bearing"), a majority-owned
subsidiary of Sunbase Asia, is located in Harbin, China, and has been in
business since 1950. Harbin Bearing has approximately 12,500 employees and
operates out of facilities occupying in excess of two million square feet.
Harbin Bearing is one of the five largest manufacturers of bearings in China in
terms of sales revenue.
Harbin Bearing manufactures and distributes a wide variety of precision and
commercial-grade rolling element bearings in sizes ranging from 10 mm to 1,000
mm (internal diameter). Rolling-element bearings use small metal balls or
cylinders to facilitate rotation with minimal friction and are typically used in
vehicles, aircraft, appliances, machine tools, and virtually any product that
contains rotating or revolving parts. Precision bearings are bearings that are
produced to more exacting dimensional tolerances and to higher performance
characteristics than standard commercial bearings. The manufacturing process
for precision bearings generally requires the labor of highly skilled mechanics
and the use of sophisticated machine tools.
On January 16, 1996 (effective December 29, 1995), the Company acquired
Smith Acquisition Company, Inc. dba Southwest Products Company ("Southwest
Products"), a bearing manufacturing company located in Los Angeles County,
California, that has been in business since 1945. Southwest Products is an
engineering-intensive company that designs and manufactures high-precision plain
spherical bearings, rod-end bearings, bushings and push-pull controls for U.S.,
European and Asian aerospace and high technology commercial applications and the
U.S. military. Spherical bearings are "ball and socket" mechanisms that allow
for motion in three dimensions and which move loads from one plane to another.
For flight critical applications, a spherical bearing must have extremely
precise tolerances and it must be able to endure heavy loads without failure.
Over 90% of Harbin Bearing's sales are made to the Original Equipment
Manufacturers ("OEMs") and replacement markets in China. Based on low
production costs in China and the on-going worldwide demand for bearings,
management intends to develop a substantial export business to complement the
Company's strong domestic position in the Chinese markets. Historically, Harbin
Bearing's export sales have been made through trade intermediaries and by
receiving customer orders that are placed directly to its offices in China.
Subject to compliance
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with U.S. export controls, Southwest Products will provide engineering and
technical support to Harbin Bearing, and will market and distribute Harbin
Bearing products internationally, focusing on exports of the products to the
U.S. In addition, subject to compliance with U.S. export controls, Southwest
Products will assist Harbin Bearing in implementing U.S. manufacturing methods,
improving quality control procedures and in developing new products at Harbin
Bearing's facilities in China. See ITEM 7, "FACTORS THAT MAY AFFECT FUTURE
RESULTS."
The following diagram shows the corporate structure of the Company and its
affiliated companies as of December 31, 1997:
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-------------------------------------
SUNBASE ASIA, INC.
Common Stock trades on NASDAQ
(Nevada Corporation)
-------------------------------------
100% 100%
- ----------------------------------- =====================================
CHINA BEARING SOUTHWEST
HOLDINGS LIMITED PRODUCTS
(Bermuda Holding Company) COMPANY
- ----------------------------------- (California corporation)
100% OPERATING COMPANY
- ----------------------------------- =====================================
CHINA INTERNATIONAL
BEARING HOLDINGS
LIMITED
(Hong Kong Holding Company)
- -----------------------------------
99% 99.9%
- --------------------- ----------------------
HARBIN SUNBASE HARBIN XINHENGLI
DEVELOPMENT DEVELOPMENT
COMPANY LIMITED COMPANY LIMITED
(PRC JV Holdings Co.) (PRC JV Holdings Co.)
- --------------------- ----------------------
10% 41.57%
===============================================
HARBIN BEARING COMPANY, LTD
(PRC Joint Stock Company)
OPERATING COMPANY
(note A)
===============================================
(A) Sunbase Asia's effective ownership in Harbin Bearing is 51.43%.
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COMPETITION
Harbin Bearing's main competitors can be categorized into three principal
groups: (i) a few very large national bearing manufacturers in China with a wide
range of products; (ii) small local Chinese bearing production facilities that
compete on a local basis by manufacturing small-sized, commodity-type bearings;
and (iii) non-Chinese bearing manufacturers. Competition is principally based
upon pricing considerations.
Chinese Competition
In China, there are five major bearing manufacturers. In terms of revenue
reported by bearing manufacturers in China for 1996, the top five are Wafangdian
Bearing Company Limited, Luoyang Bearing Group, Northwest Bearing Joint Stock
Company, Harbin Bearing and Xiangyang Bearing Joint Stock Company. The balance
of the PRC bearing industry is fragmented, comprised of a larger number of
smaller bearing companies producing mostly lower grade bearings often on a local
basis for use mostly as replacement bearings in the electrical appliance and
agricultural equipment industries.
PRC bearing manufacturers are often unable to produce bearings of such a
high precision, consistency and durability as those produced by the leading
multinational manufacturers. Contributory factors include the lower levels of
capital expenditure in the PRC bearing industry, the greater labor intensive
production processes and the relative lack of operational skills and training.
According to a PRC bearing industry journal, local production is able to satisfy
about 70 % of domestic demand in terms of type of products and 90 % in terms of
quantity. Therefore, there is a surplus demand in China for certain higher
grade bearings, especially in the road transport and railway sectors. In 1996,
the PRC imported about $200 million of bearings (according to the China National
Bearing Industry Association) in order to help satisfy the demand for higher
grade bearings (including wheel hub bearing units for passenger vehicles and
high-speed railway bearings) not generally available from PRC manufacturers, an
increase of over some 250 % from 1990. This has led the PRC authorities to
encourage foreign investment in higher grade bearing manufacturers and to demand
a halt to approvals of foreign investment supporting the production of lower
grade bearings.
Bearings imported into the PRC are currently subjected to import tariffs
ranging from 10 % to 17 %. If the PRC becomes a signatory of the World Trade
Organization, the import tariff may be phased out, thus potentially increasing
competition by foreign manufacturers. The PRC bearing industry's export target
for the year 2000 is $350-400 million, including targets of $150 million to the
U.S., $100 million to South East Asia and $100 million to Western Europe.
It is estimated by the Chinese National Bearing Industry Association that
about 900 million units of bearings were produced in 1995. Under the Ninth
Five-Year Plan (1996-2000) a target bearing output of 1.2 to 1.3 billion units
has been set. Pursuant to this Plan, the industry will establish priorities for
developing bearings for motor vehicles, railway passenger trains, freight cars,
engineering and agricultural machinery, metallurgy, mining, petrochemical
machinery, machine tools, electric motors, bearings for export and high-
efficiency special bearing equipment.
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The potential for growth in the PRC bearing industry will be
substantially dependent upon the performance of the PRC industrial sector and
the economy in general. Since 1978, China has been pursuing economic reform
policies in an effort to improve its industrial sector and revitalize its
economy. Nevertheless, due to the recent financial crises hitting Asia, the
central PRC government has implemented various policies to minimize the adverse
effects upon the PRC economy. Such policies include closer supervision of the
PRC banking system and tighter control over capital expenditures by PRC
enterprises. These policies indirectly resulted in greater competition and will
continue to have an adverse and significant impact on the performance of PRC
bearing manufacturers.
Competition in International Markets
Worldwide sales of bearings are estimated at $40-45 billion, with
approximately 75 % of the consumption within North America, Western Europe and
Japan. The industry is extremely competitive. Although Harbin Bearing's main
competitors are Eastern European manufacturers and manufacturers located in
China, to a lesser extent, Harbin Bearing also competes with companies, such as
Svenska Kugellager Fabriken (SKF), Fisher Aktien Gesellschast (FAG), New
Technology Network (NTN), NSK, Timken, Torrington-Fafnir and Nippon Miniature
Bearing (MINEBEA), who dominate this market. Management believes in the long
term that, Harbin Bearing's competitive position should be enhanced to the
extent Southwest Products is able to assist Harbin Bearing, in implementing U.S.
manufacturing methods and quality control procedures and in developing new
products may enhance Harbin Bearing's general competitive position. In addition,
Harbin Bearing may be able to compete in market segments that demand products
with higher precision levels and may more effectively penetrate those market
segments that utilize commodity-type bearings. See ITEM 7, "FACTORS THAT MAY
AFFECT FUTURE RESULTS".
HARBIN BEARING
Harbin Bearing presently produces a wide range of bearings, ranging from
10mm to 1000mm (internal diameter). Harbin Bearing specializes in the
manufacture of precision bearings and has the capability of manufacturing more
than 5,000 of the approximately 6,000 different specifications of bearings that
are available in China today. Harbin Bearing produces seven major types of
bearings: deep-groove ball bearings, self-aligning ball bearings, cylindrical
rolling bearings, angular-contact ball bearings, tapered rolling bearings,
thrust ball bearings and linear-motion ball bearings. Each of such bearings are
manufactured in micro, small, medium and large sizes. In 1997, deep-groove
bearings comprised approximately 57.8 % of Harbin Bearing's sales in revenue.
Harbin Bearing specializes in and is the largest manufacturer of precision
bearings in China.
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Sales and Marketing
The major end-users of Harbin Bearing's products are manufacturers of
electrical machinery, machine tools, mining and extraction machinery,
automobiles, motorcycles, household appliances and aircraft and aerospace
equipment. In 1997, approximately 30 % of Harbin Bearing's sales were made to
OEMs in the machinery, transportation and electrical equipment industries
representing, respectively, approximately 50 %, 7 % and 30 % of its total sales
to OEMs. The remaining 13 % of sales were made to miscellaneous categories of
OEM customers. Approximately 70 % of Harbin Bearing's sales in 1997 were made
to distributors. Sales to related parties accounted for RMB 171,373,000 or 23.0
% in 1997, RMB 232,338,000 or 25.9 % in 1996 and RMB 103,111,000 or 15.3 % in
1995. These related parties are owned by the Harbin Municipal Government.
Harbin Bearing has 11 sales offices in major cities in China, including
Beijing, Shanghai and Guangzhou. These sales offices are established
strategically for the purpose of increasing market share as well as widening the
channel of sales. All sales are coordinated through Harbin Bearing's
headquarters in Harbin, including sales to local distributors and transportation
industries, overseas agents, and domestic import and export companies. As of
December 31, 1997, Harbin Bearing's sales force consists of 126 sales personnel
and 236 support personnel who are responsible for product promotion, marketing,
after-sales services and technical support. Harbin Bearing sells its bearings
in China and abroad under the "HRB" trademark.
Harbin Bearing delivers its bearings by rail, truck, ocean freight and
airfreight. Deliveries by truck are increasing due to improved highway networks
and conditions. This substantially shortens delivery time over delivery by
rail. Harbin Bearing leases trucks from Harbin Precision Machinery
Manufacturing Company, which are used mostly for short-haul deliveries. See
ITEM 13, "CERTAIN RELATIONSHIPS AND TRANSACTIONS".
Due to the adverse market conditions in the PRC as influenced by the
financial turmoil in Asia, Harbin Bearing has further enhanced its credit review
procedures and has limited sales to customers where timely revenue collection
could not be ascertained. Management believes the difficult market conditions
will not improve in the foreseeable future. Management will continue to
cautiously monitor sales in order to avoid sales that could produce negative
growth for the year ahead. See ITEM 7, "FACTORS THAT MAY AFFECT FUTURE RESULTS".
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Manufacturing/Engineering/New Product Development
In the face of greater competition in the bearing industry, Harbin Bearing
has been endeavoring to improve productivity and quality so as to control and
reduce manufacturing cost in order to become more competitive. Harbin Bearing
manufactures its products primarily for customer's specific orders. As far as
the U.S. aerospace and automotive markets are concerned, Harbin Bearing has
committed to consistently manufacture products with the quality required by
these OEMs. Nevertheless, the original schedule for the implementation of
system improvements to meet the various worldwide recognizable manufacturing
standards such as ISO 9000 and QS 9000, the automotive quality standard at the
Harbin Bearing facility has been extended for another two years to the year
2001. Any assistance from the U.S. in meeting such standards may be subject to
U.S. export controls. Attainment of these quality control standards is a pre-
requisite to compete for bidding from U.S. aerospace and automotive
manufacturers. See ITEM 7, "FACTORS THAT MAY AFFECT FUTURE RESULTS."
Raw Materials
The principal raw materials used by Harbin Bearing to manufacture bearings
are carbon steel and stainless steel rod, wire and tubing. These steels are
specialized alloys designed for hardness, durability and resistance to rust. A
small amount of copper and aluminum tubing and rods are also used to produce
seals, cages and other ancillary bearing components. Harbin Bearing sources
most of its bearing steel directly from four domestic mills located in
Heilongjiang Province, Liaoning Province and Shanghai.
In January 1993, the Chinese government lifted price controls on steel
products and, as a result, the price of bearing steel in 1993 increased by more
than 35.2% based on 1992 prices. The price of bearing steel in China is now
approximately the same as the international price of bearing steel and has
remained at approximately US$660.00 per ton since the end of 1993. Harbin
Bearing believes that its sources of bearing steel are stable and, consistent
with industry practice in China, has not entered into any long-term supply
contracts for bearing steel. Harbin Bearing generally maintains a raw material
inventory sufficient for approximately 45 days of production. Railroad tracks
leading directly to two of Harbin Bearing's raw material warehouses are used
exclusively to transport raw materials, such as bearing steel, to Harbin
Bearing.
Workforce
As of December 31, 1997, Harbin Bearing employed approximately 12,500 full-
time personnel in the following areas: executive and administrative (650), sales
and service (500), manufacturing and production (11,050), and research and
development (300). Management believes that, in general, its relationship with
the employees is good.
The Harbin Municipal Government promulgated regulations which provide for
the establishment of a pension fund program to which both employer and employees
must contribute. Commencing with the second half of 1996, Harbin Bearing was
required to contribute monthly an amount equivalent to 22 % of its employees'
aggregate monthly income, and each employee was required to contribute each
month an amount that is equivalent to 3 % of such employee's monthly income.
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All of the employees of Harbin Bearing are members of a trade union. To
date, Harbin Bearing has not been subject to any strikes or other significant
labor disputes and is not a party to any collective bargaining agreements.
Harbin Bearing presently recruits graduates of the Harbin Bearing Technical
Institute and universities all over China and provides ongoing training for its
management and production employees in the form of a series of training
seminars.
SOUTHWEST PRODUCTS COMPANY
Southwest Products, which has operated continuously since 1945, is located
in a 5,110 square meter facility in Irwindale, California. Southwest Products
designs, engineers and manufactures custom, short-order spherical bearing
products, such as high-precision spherical bearings, rod-end bearings, bushings
and push-pull controls, for aerospace, aviation, military and high tech
commercial applications. Southwest Products employs 60 full-time personnel in
the following areas: executive and administrative (5); sales and service (5);
manufacturing (37) and engineering, research and development (13). The average
length of employee tenure at Southwest Products is in excess of nine years.
Southwest Products specializes in the design and manufacture of spherical
bearings for use in extremely demanding and flight-critical applications. Such
bearings meet unique load and tolerance requirements and are known as
"Specials." Southwest Products produces small orders of custom bearings, the
sales price of which typically includes the cost of product design, engineering
and development. Southwest Products is respected worldwide for its ability to
engineer and produce precision bearings, which are used in the Space Shuttle,
commercial jet aircraft, military aircraft (including the B-2 Stealth Bomber, F-
117 Stealthfighter, F-15, F-16, F-18 and C-17), submarines, (Los Angeles Class,
Seawolf and Centurion), and nuclear power plants. Southwest Products' bearings
are used by Northrop Grumman, Lockheed Martin, NASA, all U.S. military services,
Mitsubishi Heavy Industries, Korean Heavy Industries (Hanjun), Fluor Daniel,
General Electric, Westinghouse, General Dynamics, Textron Marine, Ingalls
Shipbuilding and Newport News Shipbuilding. Southwest Products' bearings have
been used by NASA in all manned space programs since the launch of Mercury and
are used in most NASA orbiters, including Viking, Magellan and Galileo.
Sales and Marketing
Growth by Southwest Products is expected to come from sales of products for
which Southwest Products is already qualified and from sales of new products for
which Southwest Products must obtain qualification.
Southwest Products believes that it presently has the most rapid delivery
turnaround in the bearing industry, some six weeks shorter than the nearest
competition and twelve weeks shorter than the industry average. The commercial
aerospace industry continues to experience growth. Due to this growth and the
downsizing that has occurred at many bearing manufacturers during the past few
years, many spherical bearing manufacturers are unable to deliver products to
the OEMs within acceptable time frames. Southwest Products has taken advantage
of its position as the leader in terms of quick delivery with expedite fees for
accelerated deliveries.
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Southwest Products Proprietary Technology
Southwest Products manufactures both metal-on-metal bearings and self-
lubricating bearings, based on Southwest Products' design and OEM
specifications. Self-lubricating bearings are lined with either Dyflon or
Kentlon, which are both proprietary liner systems of Southwest Products.
Kentlon is qualified by the U.S. Navy to Mil-B-81820, Mil-B-81934 and Mil-B-
81935. It is used in military aircraft, tanks, ground support equipment,
commercial aircraft, space vehicles, launch and payload systems and in the oil
refinery, automotive and heavy manufacturing industries. Dyflon is one of only
two liner systems that is moldable and machineable that also performs
successfully when fully submersed in water. Accordingly, in addition to the
uses described above for Kentlon, Dyflon-lined parts are used in submarines,
surface ships and nuclear power plants.
Although Southwest Products has federally registered its trademarks
"Dyflon" and "Kentlon," Southwest Products has chosen not to patent its various
technologies because the specific formula and methods for manufacturing Dyflon
and Kentlon would then become a matter of public record.
Shanghai Joint Venture
In 1991, principals of Southwest Products met with principals of Hong Xing
Bearing Company ("HXBC") to discuss the establishment of a joint venture between
Southwest Products and HXBC that would manufacture standard spherical bearings
in Shanghai, PRC. Such a joint venture would assist Southwest Products in
effectively penetrating the market for non- specialized bearings (standards
market) by improving Southwest Products' international cost competitiveness.
In late 1992, Southwest Products and HXBC signed a Technology Transfer
Agreement through which Southwest Products licensed technology to the Shanghai
Joint Venture and was to manage the Shanghai Joint Venture's manufacturing
activities. Because the types of bearings covered by the Technology Transfer
Agreement are restricted commodities covered by the U.S. Export Administration
Regulations Commerce Control List, the transfer of technology relating to such
bearings was subject to Southwest Products receiving from the U.S. Department of
Commerce a Validated Export License ("License"), which permits the technology to
be transferred by Southwest Products to the PRC, subject to specified
conditions. The License was issued in February 1994 and expired in February of
1996; the Company has not yet attempted to renew the License. At this time the
Company is unsure as to whether the U.S. Department of Commerce would renew the
License.
Additionally, the Company believes that HXBC has not complied with the
terms of the Technology Transfer Agreement due to HXBC's failure to purchase
requisite technology and machinery and equipment either from or through
Southwest Products. Therefore, the Shanghai Joint Venture has not been fully
capitalized. Additionally, due to this failure to fully capitalize the Joint
Venture, the Company believes that the Shanghai Municipal government may not
extend the Joint Venture License issued by the municipal government. Without an
extension of the Joint Venture License, the Joint Venture would not be permitted
to operate.
Accordingly, the Joint Venture is not currently conducting any operations
and the Company has no present plans to initiate Joint Venture operations.
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OPERATING IN CHINA
Because the production operations of the Company are based to a substantial
extent in China, the Company is subject to rules and restrictions governing
China's legal and economic system as well as general economic and political
conditions in the country. These include the following:
Political and Economic Matters. Under its current leadership, the Chinese
government has been pursuing economic reform policies, which include the
encouragement of private economic activity and greater economic
decentralization. There can be no assurance, however, that the Chinese
government will continue to pursue such policies, or that such policies will be
successful if pursued. Changes in policies made by the Chinese government may
result in new laws, regulations, or the interpretation thereof, confiscatory
taxation, restrictions on imports, currency devaluation or the expropriation of
private enterprises which may, in turn, adversely affect the Company.
Furthermore, business operations in China can become subject to the risk of
nationalization, which could result in the total loss of investments in China.
Finally, economic development may be limited by the imposition of austerity
measures intended to reduce inflation, the inadequate development of an
infrastructure, and the potential unavailability of adequate power and water,
transportation, communication networks, raw materials and parts.
Legal System. The PRC's legal system is a civil law system based on written
statutes. Unlike the common law system in the United States, decided legal
cases in the PRC have little value as precedents. Furthermore, the PRC does not
have a well-developed body of laws governing foreign investment enterprises.
Definitive regulations and policies with respect to such matters as the
permissible percentage of foreign investment and permissible rates of equity
returns have not yet been published, statements regarding these evolving
policies have been conflicting, and any such policies, as administered, are
likely to be subject to broad interpretation and modification, perhaps on a
case-by-case basis. As the legal system in the PRC develops with respect to
such new forms of enterprise, foreign investors may be adversely affected by new
laws, changes in existing laws (or interpretation thereof) and the preemption of
provincial or local laws by national laws. Some of the Company's operations in
China are subject to administrative review and approval by various national and
local agencies of the PRC government. Although management believes that the
Company's operations are currently in compliance with applicable administrative
requirements, there is no assurance that administrative approvals, when
necessary or advisable, will be forthcoming. In addition, although China has
promulgated an administrative law permitting appeal to the courts with respect
to certain administrative actions, this law appears largely untested in the
context of administrative approvals.
Inflation/Economic Policies. In recent years, the Chinese economy has
experienced periods of rapid growth and high rates of inflation, which have,
from time to time, led to the adoption by the PRC government of various
corrective measures designed to regulate growth and control inflation. In 1995,
China's overall inflation rate (retail price index) was some 15%, compared to 21
% in 1994 and 13% in 1993. However, after the implementation of strict monetary
policies, the inflation rates were 6% and 8 % in 1996 and 1997 respectively.
High inflation has in the past and may in the future cause the PRC government to
impose controls on prices, or to take other actions which could inhibit economic
activity in China, which in turn could affect demand for the Company's products.
In view of the change in market conditions and greater competition, Harbin
Bearing may unable to increase its selling prices to shift a portion of its
inflated costs to its customers. The price of bearing steel, the major raw
material used by Harbin Bearing,
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remained fairly stable from 1994 to 1997 and the only major impact of inflation
on Harbin Bearing's costs was on the cost of labor (due to the rising level of
compensation of Harbin Bearing's employees).
Foreign Exchange Control and Exchange rate Risks. Prior to January 1, 1994 the
PRC had two exchange rates: the Official Rate and the Swap Centre Rate. On
January 1, 1994 this dual foreign exchange system was abolished. The control on
the purchase of foreign exchange is being relaxed. Pursuant to the PRC Foreign
Exchange Control Regulations which came into effect on April 1, 1996,
enterprises which require foreign exchange for current account transactions
(such as trading activities) may purchase foreign exchange from designated banks
subject to production of relevant supporting documents. The Administrative
Regulations on the Settlement, Sale and Payment of Foreign Exchange, which came
into force on July 1, 1996, set out the procedures for the purchase, sale and
settlement of foreign exchange for current account transactions. In addition,
these Regulations provide that foreign exchange required for the payment of
dividends that are payable in foreign currencies under applicable regulations
may be purchased from designated foreign exchange banks subject to the payment
of taxes on such dividends and upon presentation of board resolutions
authorizing the distribution of profits or dividends of the company concerned.
Despite the relaxation of foreign exchange control over current account
transactions, the approval of the State Administration for Foreign Exchange
("SAFE") is still required before a PRC enterprise may borrow in a foreign
currency, provide any foreign exchange guarantee, make any investment outside
the PRC or enter into any other capital account transaction which involves the
purchase of foreign exchange. In general, all organizations and individuals
within the PRC, including foreign investment enterprises ("FIEs"), are required
to sell their foreign exchange earnings to designated banks in the PRC. FIEs,
however, are permitted to retain a certain percentage of their foreign exchange
earnings and the sums retained may be deposited into foreign exchange bank
accounts maintained with designated banks.
Despite the relaxation of foreign exchange control over current account
transactions, Renminbi remains a currency which is not freely convertible into
other currencies. There can be no assurance that shortages of foreign currency
at the swap centres or designated banks will not restrict the Company's ability
to obtain sufficient foreign currency to pay dividends to the shareholders of
the Company or to meet other foreign currency requirements or that the Renminbi
will not be subject to further devaluation. Currently, the Company is unable to
hedge its U.S. Dollar-Renminbi exchange rate exposure in China because no
financial institutions are authorized to engage in foreign currency transactions
offering forward exchange contracts with respect to the RMB.
ORGANIZATION OF THE COMPANY
Harbin Bearing was the successor to the manufacturing operations of Harbin
Bearing General Factory (the "Bearing Factory"), a Chinese state-owned
enterprise established in 1950. Harbin Bearing was established in 1993 as a
joint stock limited company. Pursuant to an agreement between the Bearing
Factory and Harbin Bearing, the bearing manufacturing and sales business
together with certain assets and liabilities of the Bearing Factory were
transferred to Harbin Bearing (the "Restructuring"). Certain other assets and
liabilities were transferred to Harbin Precision Machinery Manufacturing Company
("Harbin Precision") and certain ancillary operations were transferred to Harbin
Bearing Holdings Company ("Harbin Holdings"). Harbin Holdings and Harbin
Precision are affiliates of the Harbin Municipal Government.
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As part of the Restructuring, Sunbase International (Holdings) Ltd.
("Sunbase International"), a Hong Kong corporation, through a series of
affiliated entities, acquired an effective ownership interest of 51.43 % in
Harbin Bearing. Substantially all of the remaining interests in Harbin Bearing
were and continue to be owned by the employees of Harbin Bearing (approximately
15 %) and Harbin Holdings.
In December 1994, the Company (which was then called Pan American
Industries, Inc.) acquired a 51.43 % effective interest in Harbin Bearing by
issuing to Asean Capital Limited ("Asean Capital") newly issued shares
representing a controlling interest in the Company. All of the outstanding
capital stock of Asean Capital is currently owned by Sunbase International.
See ITEM 13, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
ITEM 2. PROPERTIES.
HARBIN BEARING
Harbin Bearing operates twelve finished product plants and thirteen
auxiliary plants. With the exception of a newly relocated finished product
plant in Daowaiqu of Limin Trade Development Zone, all of the Company's plants
are located in four plant compounds in Harbin.
The Harbin branch of the Office of the State Asset Administration Bureau
has granted Harbin Holdings the right to use the properties where Harbin
Bearing's production and other facilities are located. The site is
approximately 540,000 square meters of which production facilities occupy
approximately 290,000 square meters. Harbin Holdings has entered into a lease
agreement with the Company for use of its buildings for five years commencing
January 1, 1994. See ITEM 13, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
SOUTHWEST PRODUCTS
Southwest Products leases a 5,110 square meter facility in Irwindale,
California on a month to month basis at a monthly rent of $14,000.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Foreign Investment Matters
The Company is currently holding discussions with the Committee on Foreign
Investment in the United States ("CFIUS"), an inter-agency committee of the
United States Government, with respect to the Company's acquisition in January
1996 of Southwest Products Company ("Southwest"). CFIUS is conducting a review
to determine if the ownership of Southwest by the Company poses a potential
threat to the national security interests of the United States. If CFIUS
determines that such a threat may exist, then it may recommend to the President
of the United States that he order divestiture of Southwest by the Company.
Alternatively, CFIUS may take no action or may propose that certain measures be
taken by the Company to protect the national security interests of the United
States as a condition of the Company continuing to own Southwest. At this time,
it is premature to evaluate the likelihood of any action by CFIUS with respect
to this matter.
If the Company is required to divest its ownership of Southwest or
significant restrictions on its ownership are imposed, the Company believes it
has certain claims which it may bring against certain of its professional
advisors who assisted it in connection with its acquisition of Southwest.
However, no assurance can be given that any such claims by the Company would
fully reimburse it for any loss it might realize upon a divestiture of Southwest
or as a result of the imposition of conditions on its ownership.
ITAR Regulations
In December 1997, Southwest registered with the Office of Defense Trade
Controls of the Department of State ("DTC") as a manufacturer of defense
articles subject to regulation under the International Traffic in Arms
Regulations ("ITAR"). Southwest had not previously been registered with DTC,
although it appears that such registration was required. Southwest is currently
reviewing its export history to determine if any of its exports may have been in
violation of ITAR. In this regard, the Company is making voluntary disclosure
to DTC and is cooperating fully with DTC in seeking to bring Southwest into full
compliance with ITAR.
If it is determined that Southwest violated ITAR in the past, it could be
subjected to a variety of civil or criminal penalties. At this time, no
proceedings related to any alleged non-compliance by Southwest with ITAR have
been instituted or threatened. The Company believes that if any such
proceedings are instituted, any sanctions which might be imposed would take into
account the inadvertent nature of violations of ITAR by Southwest, if any, as
well as the Company's voluntary disclosure to DTC with respect to this matter.
However, no assurance can be given as to the outcome of any such proceedings.
Employee Claim
In 1996 the Company's subsidiary, Southwest Products, was a defendant in a
lawsuit with an employee. The lawsuit was settled out of court in 1997.
Except as disclosed above, the Company is not a party to, nor any of its
property is subject to any material legal proceedings.
15
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following matters, which are described in greater detail in the
Company's proxy statement, were submitted to a vote of the Company's security
holders (shareholder's of record of the Company's voting stock at the close of
business on October 15, 1997) at the Company's annual meeting held on December
15, 1997:
1. To elect a board of seven directors to serve until the next annual
meeting of the Company's shareholders and until their successors have
been elected and qualified;
2. To ratify the appointment of Ernst & Young as the Company's independent
auditors for the year ending December 31, 1997; and
3. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The following are the results of votes cast as reported at the Company's
annual meeting on December 15, 1997.
<TABLE>
<CAPTION>
Proposal #1 Election of Directors For Withheld
- ----------- --------------------- --- --------
<S> <C> <C> <C>
Gunter Gao 9,016,420 0
Billy Kan 9,016,420 0
William McKay 8,990,420 26,000
Philip Yuen 9,016,420 0
Ho Cho Hing (Franco) 9,016,420 0
Li Yuen Fai (Roger) 9,016,420 0
George Raffini 9,016,420 0
Proposal #2 To ratify Ernst & Young as the Company's independent
- ----------- auditors for year 1997.
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
9,016,420 0 0
</TABLE>
16
<PAGE>
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Commencing on February 9, 1996, the Company's Common Stock began
trading on the National Market of NASDAQ under the symbol ASIA and changed
symbol to SNBS effective January 30, 1998. Prior thereto, the Common Stock was
listed for trading on the NASDAQ's Electronic Bulletin Board (the "Bulletin
Board") and on the Pink Sheets.
The following tables set forth the high and low closing prices of the
Company's Common Stock on NASDAQ or the Bulletin Board. Such prices reflect
prices between dealers in securities and do not include any retail markup,
markdown or commission and may not necessarily represent actual transactions.
There was no established trading market for the Company's Common Stock during
fiscal 1994.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Fiscal 1996
- -----------
Quarter Ended March 31, 1996 7 7/8 6 1/32
Quarter Ended June 30, 1996 8 6 1/2
Quarter Ended September 30, 1996 7 3/4 6 1/8
Quarter Ended December 31, 1996 8 4 3/4
<CAPTION>
High Low
Fiscal 1997
- -----------
<S> <C> <C>
Quarter Ended March 31, 1997 7 1/16 4 1/4
Quarter Ended June 30, 1997 6 1/2 4 1/4
Quarter Ended September 30, 1997 6 3 5/8
Quarter Ended December 31, 1997 3 7/8 2 7/8
</TABLE>
The approximate number of record security holders of the Common Stock
at December 31, 1998 was 1,641.
The Company has paid no cash dividends on its Common Stock and has no
present intention of paying cash dividends in the foreseeable future. Pursuant
to the Convertible Debenture Agreement, no dividend payments can be made on a
share of Common Stock that is greater than 20% of the Company's audited earnings
per share (excluding any extraordinary item). It is the present policy of the
Board of Directors to retain all earnings to provide for the growth of the
Company. Payment of cash dividends in the future will depend upon, among other
things, future cash flow and requirements for capital improvements.
Applicable Chinese laws and regulations provide that a joint stock
company (such as Harbin Bearing) cannot distribute its after-tax earnings and
profits made in a fiscal year unless the losses of the previous years have been
made up and certain funds retained. A joint stock company is required by
applicable Company Law to reserve 10 % of its after-tax earnings and profits as
the mandatory retained fund and 5 % of its after-tax earnings and profits as the
public welfare fund. The joint stock company does not have to reserve for the
mandatory retained fund
17
<PAGE>
if the amount of such fund has reached 50 % of the company's registered capital.
For 1997, Harbin Bearing contributed 10 % and 5 %, respectively, of after-tax
profits as determined under Chinese accounting principles for such purposes.
Distribution of dividends by Harbin Bearing to its shareholders are required to
be in proportion to each shareholder's percentage interest in Harbin Bearing.
In addition, distribution of dividends by Harbin Bearing will be paid to its
shareholders of record, which include the joint venture partners. Applicable
Chinese laws and regulations require that, before a Sino-foreign equity joint
venture (such as the joint venture partners) distributes dividends, it must: (1)
satisfy all tax liabilities; (2) provide for losses in previous years; and (3)
make allocations of capital to its official surplus accumulation fund and public
welfare fund. The Company indirectly owns 99 % and 99.9 % of the two joint
venture partners and, therefore, approximately 1.1 % of distributions received
by such partners will be paid to the Chinese parties of these joint ventures.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data (expressed in thousands) have been
derived from the audited financial statements of the Company for the years ended
December 31, 1995, 1996 and 1997. All U.S. dollar amounts have been converted
from Renminbi based on the exchange rate on December 31, 1997 of U.S. $1.00 to
each RMB 8.30 as quoted at the People's Bank of China.
<TABLE>
<CAPTION>
OPERATING DATA
1995 1996 1997 1997
RMB RMB RMB US$
<S> <C> <C> <C> <C>
Net sales 672,359 889,706 741,696 89,361
Cost of sales (380,279) (546,918) (506,946) (61,076)
Provisions on inventories (1,098) (1,415) (33,255) (4,007)
Gross profit 290,982 341,373 201,495 24,278
Selling, general and
administrative expense (110,375) (115,174) (89,117) (10,737)
Interest expense, net (48,446) (57,173) (70,925) (8,545)
Provisions on accounts receivable (2,627) (3,998) (17,040) (2,053)
Other income - 16,640 - -
Income before income taxes 129,534 181,668 24,413 2,943
Provision for income taxes (20,472) (27,792) (7,591) (915)
Income before minority interests 109,062 153,876 16,822 2,028
Minority interests (54,967) (77,342) (21,006) (2,531)
Net income/(loss) 54,095 76,534 (4,184) (503)
<CAPTION>
BALANCE SHEET
1995 1996 1997 1997
RMB RMB RMB US$
<S> <C> <C> <C> <C>
Current assets 1,032,600 1,181,609 1,367,253 164,729
Working capital 306,288 404,618 307,461 37,043
Long-term debts 218,383 231,824 84,938 10,234
Minority interests 343,142 420,484 441,490 53,192
Shareholders' equity 330,565 443,184 439,000 52,890
Total assets 1,618,402 1,872,483 2,025,220 244,002
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS CONDITION AND RESULTS OF OF
FINANCIAL OPERATIONS
OVERVIEW
The Company owns, through various subsidiaries and joint venture interests,
a 51.43 % indirect ownership in Harbin Bearing. Harbin Bearing manufactures a
wide variety of bearings in China for use in commercial, industrial and
aerospace applications that are sold primarily in China and certain western
countries, including the U.S. On January 16, 1996 (effective December 29,
1995), the Company acquired Southwest Products, which manufactures precision
spherical bearings that are sold primarily to the aerospace and commercial
aviation industries. The acquisition of Southwest Products has been accounted
for under the purchase method of accounting. The results of Southwest Products
have been included in the Company's consolidated results of operations
commencing January 1, 1996.
As a result of adverse market conditions in China primarily due to the
financial crises in Asia, especially during the last quarter of 1997, the funds
designated to Chinese stated-owned enterprises became even less available than
in previous years and resulted in greater competition in the bearing industry.
Under these circumstances, the operations of Harbin Bearing were adversely
affected this year.
Unless specifically stated in this ITEM 7, all RMB and U.S. Dollar amounts
except per share information are in the thousands ('000).
19
<PAGE>
RESULTS OF OPERATIONS
RESULTS FOR 1997 COMPARED TO 1996
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996
RMB RMB
--- ---
<S> <C> <C>
Net sales 741,696 889,706
Cost of sales (506,946) (546,918)
Provisions on inventories (33,255) (1,415)
--------- --------
Gross profit 201,495 341,373
Gross profit percentage 27.2% 38.4%
Selling expenses (19,520) (25,412)
General and administrative expenses (69,597) (89,762)
Interest expense (70,925) (57,173)
Provisions on accounts receivable (17,040) (3,998)
Other income - 16,640
--------- --------
Income before income taxes 24,413 181,668
Provision for income taxes (7,591) (27,792)
--------- --------
Income before minority interests 16,822 153,876
Minority interests (21,006) (77,342)
--------- --------
Net (loss)/income (4,184) 76,534
========= ========
</TABLE>
NET SALES
Sales for the year ended December 31, 1997 decreased by RMB 148,010 or
16.6% to RMB 741,696 as compared to RMB 889,706 for the year ended December 31,
1996. The decrease in sales was due to the Company's continuing efforts to
adjust to tightening credit conditions in the PRC. The Company has responded to
such conditions by enhancing its credit review procedures and restricting sales
to customers where collectability was uncertain. Moreover, stringent controls
on capital expenditures by PRC enterprises by the Chinese government have also
caused a decrease in the demand for the Company's products, which are used as
components in machinery and equipment. Competition for the limited sales orders
in the bearing market became greater in 1997. During 1997, there were no
material price increases from the prior twelve month period.
Sales for Harbin Bearing for the year ended December 31, 1997 decreased by
RMB 156,784 or 18.4% to RMB 697,282 as compared to RMB 854,066 for the year
ended December 31, 1996. The decrease was partially offset by an increase in
sales for Southwest Products by RMB 8,774 or 24.6% to RMB 44,414 for the year
ended December 31, 1997 as compared to RMB 35,640 for the year ended December
31, 1996.
20
<PAGE>
COST OF SALES/PROVISIONS ON INVENTORIES/GROSS PROFIT
Cost of sales for the year ended December 31, 1997 decreased to RMB 506,946
as compared to RMB 546,918 for the year ended December 31, 1996.
Gross profit decreased by RMB 139,878 or 41.0% in 1997 as compared to 1996.
Gross profit as a percentage of revenue also decreased from 38.4% in 1996 to
27.2% in 1997. The decrease in gross profit was mainly attributable to the
decrease in sales caused by adverse market conditions in the PRC, which led to
a plunge in units of bearings produced in 1997. The decrease in production
output and an under-utilization of machinery and equipment capacity resulted in
an increase in overhead absorption by each unit produced and an increase in the
unit cost of goods sold. Also, there was no material change in selling prices
during 1997 as compared to 1996. Furthermore, an additional provision for
obsolete and slow moving inventory totalling RMB 33,255 was made in 1997, an
increase of RMB 31,840 over that in 1996.
SELLING EXPENSES
Selling expenses for the year ended December 31, 1997 decreased by RMB
5,892 or 23.2% to RMB 19,520 as compared to RMB 25,412 for the year ended
December 31, 1996. Selling expenses as a percentage of revenues improved
slightly from 2.8% for 1996 to 2.6% for 1997. The decrease in selling expenses
was primarily attributable to the decrease in royalty costs, packing expenses
and government taxes in China as a result of the decrease in sales output.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased by RMB 20,165 or 22.5% in
1997 as compared to 1996. General and administrative expenses as a percentage
of revenues decreased from 10.1% to 9.4%. The decrease in general and
administrative expenses was mainly attributable to tighter control over
expenditures in view of the adverse market conditions.
INTEREST EXPENSE
Interest expense for the year ended December 31, 1997 increased by RMB
13,752 or 24.1% as compared to 1996. The increase in interest expense was
attributable to the increase in bank loans during 1997 as compared to 1996 and
the surge in Convertible Debentures interest. These increases were partially
offset by an increase in interest income. The total amount of Convertible
Debentures interest charged in 1997 was RMB 21,921 whereas the amount was RMB
4,078 in 1996. The substantial rise was due to a full year of convertible
debenture interest for 1997 as compared to a charge of four months for 1996 and
the increase in the interest accrual rate from 12% to 19.75% per annum (amounted
to RMB 10,480) due to the Company's default on a condition of the Subscription
Agreement governing the Convertible Debentures.
PROVISIONS ON ACCOUNTS RECEIVABLE
An increase in provision for bad debts for Harbin Bearing of RMB 17,040 in
1997 as compared to RMB 3,998 in 1996 was made to provide for the slow recovery
of accounts receivable. The Company believes that the current economic
situation in Asia will continue into the immediate future and the Company
expects to continue to encounter difficulties in accounts receivable
collections.
21
<PAGE>
OTHER INCOME
Last year other income was a gain on the sale of a short term investment in
a subsidiary by China Bearing to a third party, which amounted to RMB 16.6
million. The only asset of the subsidiary was a residential property in Hong
Kong, which was purchased in 1996.
Net Income
As a result of the aforementioned factors, net income decreased by RMB
80,718 or 105.5% to the net loss of RMB 4,184 for the year ended December 31,
1997 as compared to a net income of RMB 76,534 for the year ended December 31,
1996.
22
<PAGE>
RESULTS FOR 1996 COMPARED TO 1995
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1996 1995
RMB RMB
--- ---
<S> <C> <C>
Net sales 889,706 672,359
Cost of sales (546,918) (380,279)
Provisions on inventories (1,415) (1,098)
--------- ---------
Gross profit 341,373 290,982
Gross profit percentage 38.4% 43.3%
Selling expenses (25,412) (18,942)
General and administrative expenses (89,762) (91,433)
Interest expense (57,173) (48,446)
Provisions on accounts receivable (3,998) (2,627)
Other income 16,640 -
--------- ---------
Income before income taxes 181,668 129,534
Provision for income taxes (27,792) (20,472)
--------- ---------
Income before minority interests 153,876 109,062
Minority interests (77,342) (54,967)
--------- ---------
Net income 76,534 54,095
========= =========
</TABLE>
NET SALES
Sales (including RMB 35,640 from Southwest Products) for the year ended
December 31, 1996 increased by RMB 217,347 or 32.3% as compared to the year
ended December 31, 1995. Excluding the Southwest Products operations, sales
increased by RMB 181,707 or 27.0% for the year ended December 31, 1996 as
compared to a 6.6% decrease for the year ended December 31, 1995. The increase
was due to:
a. An increase in the domestic (Chinese) demand for bearings primarily in
the automobile, motorcycle and machine-tooling industries. The
Company continued its efforts to shift its product mix from small and
medium sized bearings to higher margin medium and large sized
bearings. This change has improved operational efficiency and
established tighter credit control.
b. A large sales order that was entered into with a major distributor in
1995, which is also a related party beneficially owned by the Harbin
Municipal Government, was delivered in 1996 and therefore accounted
for as a sale in 1996.
23
<PAGE>
COST OF SALES/GROSS PROFIT
Cost of sales (including RMB 26,529 from Southwest Products) for the year
ended December 31, 1996 increased to RMB 546,918 as compared to RMB 380,279 for
the year ended December 31, 1995.
Gross profit increased by RMB 50,391 or 17.3% in 1996 compared to 1995.
The increase in gross profit was attributable to the increase in sales. Gross
profit as a percentage of revenue decreased from 43.3% in 1995 to 38.4% in 1996.
The gross profit margin for 1995 was reported as 43.3% but would have been only
39.2% of revenue had there not been certain year end adjustments principally
relating to the reversal of the inventory provision for obsolete inventories
sold in 1995.
SELLING EXPENSES
Selling expenses (including RMB 4,855 from Southwest Products) for the year
ended December 31, 1996 increased by RMB 6,470 or 34.2% to RMB 25,412 as
compared to RMB 18,942 for the year ended December 31, 1995. The increase in
selling expenses was primarily attributable to the inclusion of Southwest
Products selling expenses in 1996 and the increase in royalty costs and
government taxes in China as a result of the increase in sales. Selling
expenses as a percentage of revenue remained constant at a rate of 2.8%.
GENERAL AND ADMINISTRATIVE EXPENSES
General and Administrative expenses (including RMB 10,490 from Southwest
Products) decreased by RMB 1,671 or 1.8% in 1996 as compared to 1995. General
and Administrative expenses as a percentage of revenues decreased from 13.6% to
10.1%. The decrease in General and Administrative expenses of RMB 12,161 after
excluding RMB 10,490 from Southwest was mainly attributable to:
a. A decrease in staff salaries, staff benefits and related insurance of
RMB5,258 as compared to 1995.
b. A decrease in compensation expense relating to the voluntary early
retirement program at Harbin Bearing of RMB 5,173 (RMB 6,133 in 1995
to RMB 960 in 1996).
INTEREST EXPENSE
Interest expense (including RMB 3,039 from Southwest Products) for the year
ended December 31, 1996 increased by RMB 8,727 or 18% as compared to 1995. The
increase in interest expense was attributable to the inclusion of Southwest
Products interest expense in 1996, the increase in the principal amount of bank
loans during 1996 as compared to 1995 and the inclusion of RMB 4,078 of
Convertible Debenture interest calculated at the rate of 12% per annum since
August 23, 1996.
OTHER INCOME
This represents a gain on the sale of a short term investment in a
subsidiary by China Bearing to a third party, which amounted to RMB 16.6
million. The only asset of the subsidiary was a residential property in Hong
Kong, which was purchased during 1996.
24
<PAGE>
NET INCOME
As a result of the aforementioned factors, including the consolidation of
Southwest Products operations effective January 1, 1996, net income increased by
RMB 22,439 or 41.5% to RMB 76,534 for the year ended December 31, 1996 as
compared to RMB 54,095 for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
The Company's operations consumed cash resources of RMB 39,593 in 1997 as
compared to RMB 105,768 generated from operating activities in 1996. The
decrease in cash generated from operating activities was a result of the
unsatisfactory market conditions which led to a decrease in sales and the slower
recovery of trade receivables from customers whose businesses, in general, were
not satisfactory in 1997.
As of December 31, 1997, the Company's working capital had decreased to RMB
307,461 as compared to RMB 404,618 at December 31, 1996. Working capital at
December 31, 1995 was RMB 306,288. The Company's current ratio was 1.29:1 as of
December 31, 1997, 1.52:1 at December 31, 1996 and 1.42:1 at December 31, 1995.
INVESTING ACTIVITIES
Capital expenditures for 1997 of RMB 48,281 consisted of costs relating to
the construction of new plant and machinery and renovation of existing
facilities and equipment. They were financed primarily by internally generated
funds, short-term and long-term bank loans.
As of December 31, 1997, the Company had no outstanding capital expenditure
commitments (December 31, 1996, RMB 32,448; December 31, 1995, RMB 46,027).
FINANCING ACTIVITIES
The Company has historically relied on both short-term and long-term bank
loans from Chinese banks to support its operating and capital requirements.
Short-term bank loans, which have terms ranging from three months to six months,
are utilized to finance both operating and capital requirements and are renewed
on a revolving basis. Long-term bank loans are utilized to fund capital
expansion projects. During the year 1997, the net increase in bank loans (after
deducting repayments) was RMB 87,692, which were utilized to fund the operations
and a portion of capital expenditures. The Company believes that it will be
able to continue to maintain and expand its bank borrowings under existing terms
and conditions.
In order to finance the Company's continuing operating and capital
requirements, the Company has evaluated both debt and equity financing
opportunities. During June 1996, the Company sold 1,000,000 shares of common
stock at U.S. $5.00 per share, generating net proceeds of U.S. $4,347 (RMB
36,085).
25
<PAGE>
Pursuant to a Subscription Agreement dated August 2, 1996, (the
Subscription Agreement), among China Bearing, Asean Capital Limited, China
International Bearing Holdings Limited, the Company and Southwest Products
(collectively, the Sunbase Group); Glory Mansion Limited, Wardley China
Investment Trust, MC Private Equity Partners Asia Limited and China
Investissement 2000 (collectively the Investors), on August 23, 1996, China
Bearing issued an aggregate of U.S. $11,500,000 principal amount of Convertible
Debentures (the Convertible Debentures) to the Investors. Unless the
Convertible Debentures have been converted, the Convertible Debentures are due
and payable in August, 1999 (the Maturity Date). The Convertible Debentures
bear interest at the higher rate of (i) 5% annum (net of withholding tax, if
applicable) and (ii) the percentage of the dividend yield calculated by
reference to dividing the annual dividend declared per share of Common Stock of
the Company by the Conversion Price (as herein defined). Interest is payable
quarterly.
The Investors have the right to convert at any time the whole or any part
of the principal amount of the Convertible Debentures into shares of the Common
Stock of the Company. The Conversion Price (the Conversion Price) was initially
U.S. $5.00 per share, subject to adjustment for (a) change in par value of the
Common Stock, (b) issuance of shares by way of capitalization of profits or
reserves, (c) capital distributions, (d) rights offering at a price which is
less than the lower of the then market price or Conversion Price, (e) issuance
of derivative securities where the total consideration per share initially
received is less than the lower of the then market price or Conversion Price,
(f) issuance of shares at a price per share which is less than the lower of the
then market price or the Conversion Price and (g) if the cumulative audited
earnings per common share for any two consecutive fiscal years commencing with
the fiscal year ended December 31, 1996 and ending with the fiscal year ending
December 31, 1998 are less than the specified projection of cumulative earnings
per common share for such period. Due the Company's failure to achieve the
projected cumulative audited earnings per common share of U.S.$1.79 for the two
years ended December 31, 1997, the Conversion Price has been adjusted to U.S.$
1.84 per share pursuant to the terms of the Subscription Agreement.
The Convertible Debentures are required to be redeemed on the Maturity Date
at the principal amount outstanding together with any accrued but unpaid
interest together with an amount that would enable the Investors to yield an
aggregate internal rate of return of 12% per annum on the cost of their
investment. In addition, if any of the events of default specified in the
Subscription Agreement occurs, the Convertible Debentures are automatically due
and payable at the principal amount outstanding together with the accrued
interest and an amount that would enable the Investors to yield an aggregate
internal rate of return on their investment of 19.75% per annum. Events of
default include breach of covenants after failure to cure after notice; failure
to pay principal or interest; failure to pay indebtedness for borrowed money;
bankruptcy, insolvency or unsatisfied judgements; failure to achieve earnings
per common share of at least U.S. $0.55 for each fiscal year commencing January
1, 1996; and accounts receivable reaching a certain level in relationship to
net sales.
The obligations of China Bearing under the Subscription Agreement are
guaranteed by the Company, Asean Capital Limited, China International Bearing
Holdings Limited and Southwest Products.
26
<PAGE>
Due to the failure of the Company in achieving the defined earnings per
common share of U.S.$0.55 in 1997, an event of default had occurred Although
the Convertible Debentures bear an interest charge at the rate of 5 % per annum,
interest was being accrued at the rate of 19.75 % per annum to provide for the
condition of the default. The outstanding Convertible Debentures have been
classified as current liabilities as of December 31, 1997.
In view of the inability of the Company and the guarantors to satisfy an
immediate redemption of the Convertible Debentures, the Company intends to
conduct negotiations with the Investors and will seek a rescheduling of the
redemption payment. The Company believes that a workable solution could be made
with the Investors in due course. No assurance can be given that such
negotiations will result in a resolution that is favorable to the Company. See
ITEM 7, "FACTORS THAT MAY AFFECT FUTURE RESULTS."
A promissory note for U.S. $5,012 (RMB 41,600) (the Note) was issued to
Asean Capital Limited (Asean) in connection with the Share Exchange Agreement
(See ITEM 1. "ORGANIZATION OF COMPANY") and is secured by a continuing security
interest in all of the Company's title and interest in outstanding capital stock
of its wholly-owned subsidiary China Bearing. The Note is denominated in and is
repayable in full in U.S. dollars, and bears interest at 8 % per annum.
In connection with the issuance of convertible debentures Asean has
undertaken that for so long as any of the debentures are outstanding, no amounts
are to be repaid on the Note unless there is sufficient working capital and the
repayment is made in accordance with the following schedule:
Payment Period Amount
- -------------- ------
August 1, 1996 to July 31, 1997 up to U.S.$2,000,000 plus accrued interest
August 1, 1997 to July 31, 1998 up to U.S.$1,500,000 plus accrued interest
August 1, 1998 to July 31, 1999 up to U.S.$1,500,000 plus accrued interest
Pursuant to the above described repayment schedule, a principal payment of
U.S.$2,010 (RMB 16,700) was made on September 10, 1996. The directors do not
envisage any other repayments being made in the foreseeable future.
The Company anticipates that its cash flow from operations, combined with
cash and cash equivalents, bank lines of credit and other external sources of
debt and equity financing, should be adequate to finance the Company's operating
and debt service requirements for the foreseeable future. Nevertheless, due to
the recent financial turmoil in Asia and the default on the Convertible
Debentures, management will cautiously and closely monitor the funding position
of the Company.
Inflation and Currency Matters
In recent years, the Chinese economy has experienced periods of rapid
economic growth as well as high rates of inflation, which in turn has resulted
in periodic adoption by the Chinese government of various corrective measures
designed to regulate growth and contain inflation. During the year ended
December 31, 1997, the general inflation rate in the PRC was under control and
was below 10 % on an average basis. Since 1993, the Chinese government has
implemented and maintained an economic program designed to control inflation,
which has
27
<PAGE>
resulted in the tightening of working capital available to Chinese business
enterprises. The success of the Company depends in substantial part on the
continued growth and development of the Chinese economy.
The Company continually monitors the effects of inflation. In view of the
change in market conditions and increased competition, the Company may be unable
to raise its prices to shift a portion of the inflated costs to the customers.
The price of bearing steel, the major raw material used by the Company, remained
fairly stable during 1996 and 1997. The major impact of inflation was on labor
cost due to increases in employee wages. However, the Company could manage to
offset the effects of inflation through improved operational efficiency.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. Changes in the relative value
of currencies occur periodically and may, in certain instances, materially
affect the Company's results of operations.
The Company conducts most of its business in China and, accordingly, the
sale of its products is settled primarily in RMB. As a result, devaluation of
the RMB against the U.S. Dollar, could have a material adverse effect upon the
results of operations and financial position of the Company. Although prior to
1994 the RMB experienced significant devaluation against the U.S. Dollar, the
RMB has remained fairly stable from 1994 to present. The unified exchange rate
was U.S. $1.00 to RMB 8.65 at December 31, 1993, RMB 8.45 at December 31, 1994,
RMB 8.32 at December 31, 1995, RMB 8.3 at December 31, 1996 and RMB 8.3 at
December 31, 1997. The People's Bank of China has declared its intention not to
devalue the RMB. However, it is possible that competitive pressures resulting
from the significant devaluation of other Asian currencies will ultimately force
the Government of China to reconsider its position on devaluation of the RMB.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Liquidity
The Company's operations used cash resources of RMB 39,593 in 1997 as
compared to RMB 105,768 generated from operating activities in 1996. In
addition, during 1997, the net increase in bank loans was RMB 87,692 and the
increase in accounts receivable-trade was RMB 183,649. The economic conditions
in Asia and liquidity constraints in China may adversely affect the Company's
operations and the collectability of its accounts receivable. Continuation of
these trends could impair the Company's liquidity.
Accounts Receivable
Accounts receivable-trade increased by RMB 183,649 or 55.4% in 1997. The
balance in the allowance for doubtful accounts also increased by RMB 17,040 or
95.1%. As credit remains tight in China, collection of outstanding accounts
receivable may become more difficult. The Company has further enhanced its
credit review procedures and has limited its sales to customers where
collectability was uncertain. The Company is unable to predict how the current
economic conditions and the credit tightening policy of the Chinese government
will effect the Company's collection of accounts receivable.
28
<PAGE>
Potential Acceleration of Convertible Debentures
The Company's failure to earn U.S. $0.55 per share in 1997 constitutes a default
under the Subscription Agreement of which U.S. $11,500 is outstanding. As a
result, the holders of the Convertible Debentures have a right to accelerate the
payment of all amounts due under the Subscription Agreement. The Company
believes that an equitable resolution may be reached with the holders of the
Convertible Debentures. However, no asurances can be given in this regard and
any acceleration would have a severe negative effect on the liquidity of the
Company.
Potential Changes in the Economy of China
The economy of the People's Republic of China has experienced significant
growth in the past decade. Much of this growth has been a result of
governmental policies which have encouraged substantial private economic
activity. The continuation of growth in China is now subject to a number of
uncertainties including, without limitation, a continuation of governmental
policies favoring private enterprise (see below), continued success in
maintaining a moderate rate of inflation, the ability of China to remain
competitive with other Asian countries that have experienced significant
devaluation of their currencies during the past year, resolution of liquidity
problems affecting the Chinese banking system and economy as a whole and the
maintenance of uninterrupted trading relationships with the United States and
other major trading partners. In the event that negative developments in these
or other areas result in a slowdown or decline in the economy of China, then it
is likely that the future results of operations of the Company will be adversely
effected.
Political and Regulatory Considerations in China
Although the government of China has been pursuing economic reform policies
for over a decade, there can be no assurances that such policies will continue.
Any change in such policies could have a substantial adverse effect on the
economic growth of China which would likely diminish the market for the
Company's products in China. Moreover, changes in the laws or regulations
governing business operations, restrictions on foreign ownership of Chinese
companies, exchange controls, changes in the tax laws or restrictions on the
repatriation of profits could be imposed in a manner which would result in
negative consequences to the Company and its interest in Harbin.
U.S. Regulatory Matters
The Committee on Foreign Investment in the United States ("CFIUS") is
currently reviewing the Company's acquisition of Southwest Products in 1996 and
the Company is currently in discussions with the Department of State regarding
compliance with the International Traffic in Arms Regulation ("ITAR"). As a
result of these proceedings, adverse actions could be taken against the Company
including, without limitation, an order requiring it to divest Southwest,
imposition of restrictions on the Company's access to technology from Southwest
or civil or criminal sanctions for alleged violations of ITAR. At this time, it
is premature to assess the potential outcome of these proceedings or the
consequences, if any, for the Company and its future operations.
29
<PAGE>
Failure to Qualify HRB to Automotive and Aerospace Quality Standards
To date Harbin Bearing has been unable to establish procedures that would
enable it to qualify to international quality standards, generally accepted
automotive quality standards or aerospace quality standards. Such failure has
resulted in Harbin Bearing's inability to capture orders from the U.S.
automotive and aerospace industries. At present, the Company's has temporarily
suspended the active program at Harbin Bearing that would enable Harbin Bearing
to qualify to these standards. If the program is not restarted, it is unlikely
that Harbin Bearing would be in a position to capture any significant orders
from either the U.S. automotive or aerospace sectors. The Company does not
anticipate completing such a program until the year 2001. Failure to qualify
Harbin Bearing will constrain the Company's future growth.
Ability to Remain Competitive
The Company's ability to remain competitive depends in significant part on
its ability to fund research and development, introduce new products and retain
key personnel for these functions. Some of the Company's competitors have
substantially greater resources available for these purposes. To the extent
that the Company does not generate adequate cash flow or obtain other financing
to fund product development, the Company's competitive position will probably be
adversely effected, which may result in a loss of sales or lower productivity.
Risk of Technological Obsolecense
The Company's products may become obsolete as a result of new technologies
or new developments affecting the bearing industry. The Company's ability to
remain competitive will depend to a large extent upon its ability to anticipate
and stay abreast of new technological developments. Some of the Company's
competitors outside China have substantially greater resources dedicated to
product development activities. Any failure of the Company to maintain its
technological edge could result in reduced sales and profitability.
Southwest Products Company Environmental Issues
Southwest occupies property that has been the subject of environmental
remediation mandated by the County of Los Angeles. Remediation took place in
1993 and again in 1997. Employees of the lessor for the property have informed
Southwest that they believe that the remediation has been successfully completed
and that the lessor anticipates getting approval from the State of California
for the remediation that has been conducted. Employees for the lessor have
indicated that they expect that as a result of the approval this environmental
issue will be finally and favorably resolved. Southwest does not believe that
it has any liability regarding this issue. However, no assurance can be given
in this regard.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are set forth on page 43.
30
<PAGE>
Certain unaudited quarterly financial information is set forth in the
following table:
<TABLE>
<CAPTION>
Net Gross Net Net
Sales Profit Income Income
Per Share
(Thousands of RMB, except per share data.)
(Exchange rate at 12/31/97: RMB 8.30 to $1)
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
1997
First Quarter 241,217 93,849 16,918 1.00
Second Quarter 244,626 96,169 17,778 1.05
Third Quarter 160,823 62,551 10,076 0.59
Fourth Quarter 95,030 (51,074) (48,956) (2.88)
<CAPTION>
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
1996
First Quarter 216,080 83,191 16,065 1.00
Second Quarter 249,609 96,581 16,817 1.04
Third Quarter 259,271 100,438 21,034 1.23
Fourth Quarter 164,746 61,163 22,618 1.31
</TABLE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable
31
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A DIRECTORS
The Board of Directors of the Company is comprised of only one class. The
Company's current directors are listed below. The Directors are elected to
serve until the following annual shareholders' meeting.
<TABLE>
<CAPTION>
Name Age First Elected
- ---- --- -------------
<S> <C> <C>
Gunter Gao 42 1994
Billy Kan 46 1996
William McKay 43 1996
(Roger) Li Yuen Fai 37 1994
George Raffini 41 1996
Philip Yuen 61 1996
(Franco) Ho Cho Hing resigned as a director of the Company effective from
January 1, 1998.
B. EXECUTIVE OFFICERS
<CAPTION>
Name Age Office First Elected
- ---- --- ------ -------------
<S> <C> <C> <C>
Gunter Gao 42 Chairman 1994
Billy Kan 46 Vice Chairman 1996
William McKay 43 Chief Executive 1996
Officer and President
(Roger) Li Yuen Fai 37 Vice President and 1994
Chief Financial Officer
(Davis) Lai Kwan Fai 34 Corporate Secretary 1996
</TABLE>
GUNTER GAO, CHAIRMAN AND DIRECTOR, 42. Mr. Gao, a Hong Kong businessman who has
extensive business experience in China, is the Chairman of the Board and a
principal of Sunbase International, which indirectly owns a controlling position
in Sunbase Asia. Sunbase International has various industrial holdings in
China, in industries such as aviation, transportation, cement, steel and retail.
Mr. Gao is also the Chairman of the Board of Sunbase Asia. Mr. Gao is
responsible for the overall strategy of the Company. Mr. Gao is actively and
directly involved in all operational and strategic transactions. During the
1980's, Mr. Gao engaged in trading and investment activities in industries such
as food, timber, real estate, coal and textiles. Based on his success in these
activities and with the support of several banks in China, Mr. Gao has turned
Sunbase International into a leading China industrial company. Mr. Gao is
currently a member of the Chinese People's Political Consultative Conference.
Mr. Gao is the youngest member of the congress and is widely respected for his
contributions to the country's development. Mr. Gao's strong reputation in China
has enabled Sunbase International to engage in and complete many difficult
transactions, including acquiring a majority interest in Harbin Bearing and
obtaining a license to create an airline in China. Now known as Northern Swan
Airlines, this airline enjoys international prominence and the financial support
of the Bank of China and the People's Construction Bank of China. Mr. Gao serves
as a Senior Economic
32
<PAGE>
Advisor to several Chinese municipal and provincial governments, including the
governments of Tianjin, Hebei, Shaanxi, Xinjiang and Harbin. In addition, Mr.
Gao is the deputy director of the Sino-Foreign Entrepreneurs Cooperative
Committee.
BILLY KAN, VICE CHAIRMAN AND DIRECTOR, 46. Mr. Kan has been the Vice Chairman
and a director of Sunbase Asia since the beginning of 1996 and the Chairman of
the Board of Southwest Products since 1996. Mr. Kan reports to the Board of
Directors and serves as the communications and support link in various parts of
the world, while maintaining overall control of the Company's operations. Mr.
Kan holds a Bachelor of Science Degree from the University of East Anglia, an
United Kingdom university, and is a member of The Institute of Chartered
Accountants in England & Wales as well as the Hong Kong Society of Accountants.
Prior to joining Sunbase International, Mr. Kan held many directorships and
senior management positions in a wide range of professions and industries
including banking, retailing, manufacturing, property, investment and corporate
consulting.
WILLIAM MCKAY, CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR, 43. Mr. McKay
has been the Chief Executive Officer, President and a Director of Sunbase Asia
since 1996 and has been a Director and President of Southwest Products since
1991. Prior to becoming President of Southwest Products, he was Southwest
Products' General Manager since 1986. Mr. McKay has substantial experience in
conducting business in China. Mr. McKay is responsible for the day-to-day
operations of the Company in such areas of product development, marketing and
general operations. Prior to joining Southwest Products, Mr. McKay practiced
law, specializing in the areas of business and real estate. Mr. McKay holds a
Juris Doctorate Degree, Master in Business Administration and Bachelor of Arts
Degree with a major in History and minor in International Relations from the
University of Southern California.
(ROGER) LI YUEN FAI, CHIEF FINANCIAL OFFICER, VICE-PRESIDENT AND DIRECTOR, 37.
Mr. Li has been the Chief Financial Officer and a Director of Sunbase Asia since
1994. From 1990 to 1991 he was compliance manager of Hong Kong Securities
Clearing Company Limited. Mr. Li was employed by Coopers & Lybrand in Hong Kong
from 1980 to 1990 (his most recent position was audit manager) and was a partner
in a Hong Kong accounting firm from 1992 to 1993.
GEORGE RAFFINI, DIRECTOR, 41. Mr. Raffini is the Managing Director of HSBC
Private Equity Management Limited with responsibility for managing the
investment process for projects and regional private equity investment funds
with total capital under management of over $500 million. Mr. Raffini received
his Bachelor of Science Degree from The American University, a diploma in
Political and Economic Affairs from the Institut D' etudes Politiques, Paris,
France, a Master Degree in International Affairs from Columbia University and a
MBA from Harvard University. Mr. Raffini is the nominee of certain of the
investors of the Convertible Debentures.
PHILIP YUEN, DIRECTOR, 61. Mr. Yuen is a solicitor of the Supreme Court of Hong
Kong. He became a practicing solicitor in 1962 and founded the solicitors' firm
of Yung, Yu, Yuen & Co. in 1965. He is currently the managing partner of his
firm. He has over 30 years experience in legal practice. Mr. Yuen has been a
member of The National Committee of the Chinese People's Political Consultative
Conference since 1983 and has been a member of the China International Economic
and Trade Arbitration Commission for the past 16 years. Mr. Yuen has
established extensive relationships with businesses in the PRC and is also a
non-executive
33
<PAGE>
director of Tsingtao Brewery Company Limited, Henderson Development Company
Limited, Henderson (China) Investment Company Limited and Melbourne Enterprises
Limited, all of which are listed on The Stock Exchange of Hong Kong Limited.
KEY MANAGEMENT
ZHANG ZHENG BIN, GENERAL MANAGER, 50. Mr. Zhang was appointed the General
Manager of Harbin Bearing in 1997 and is responsible for the day-to-day
operations as well as sales and marketing of Harbin Bearing. Mr. Zhang has been
a high ranking employee of Harbin Bearing for over 11 years in a variety of
senior management positions. Mr. Zhang holds a degree in Engineering from
Harbin Polytechnic University.
(CHARLIE) TANG CHAK LAM, ASSISTANT TO THE CHIEF FINANCIAL OFFICER, 36. Mr. Tang
has been the assistant to the Chief Financial Officer since November 1996. Mr.
Tang is a fellow member of the Association of Chartered Certified Accountants
and a certified public accountant in Hong Kong. Prior to joining Sunbase Asia,
Mr. Tang was the head of accounting and finance of the China division of the
Lippo Group, a large conglomerate listed on The Stock Exchange of Hong Kong
Limited. Mr. Tang also has extensive audit experience and was employed by
Coopers & Lybrand for more than 8 years.
(HARRIS) LAU KWOK KEI, CHIEF ACCOUNTING OFFICER, 33. Mr. Lau has been the Chief
Accounting Officer of Sunbase Asia since February 1998. Mr. Lau has over 7
years of work experience in the accounting and auditing profession and was
previously employed by the international accounting firm of Deloitte Touche
Tohmatsu from 1995 to 1997.
TODD STOCKBAUER, CHIEF FINANCIAL OFFICER, 35. Mr. Stockbauer has been employed
as the Chief Financial Officer of Southwest Products since 1991 and directs its
financial and administrative operations. Prior to 1991, he was employed in the
public accounting sector, specializing in bankruptcy, litigation support and
business turnarounds. Mr. Stockbauer holds a Bachelor of Arts Degree in
Business and Economics with an emphasis in Accounting from the University of
California at Santa Barbara and is a Certified Public Accountant in the State of
California.
JOHN LEONIAK, CHIEF ENGINEER, 61. Mr. Leoniak has been the Chief Engineer at
Southwest Products since 1991. As Chief Engineer, Mr. Leoniak supervises
Southwest Products' engineering. Prior to joining Southwest Products, Mr.
Leoniak was employed by Grumman Aircraft Systems as the head of its Landing
Gear, Armament, Carrier Suitability and Survivability Group. Mr. Leoniak has
contributed to the writing of various US Navy manufacturing specifications,
including MIL-B-8942, MIL-B-81820, MIL-B-81819 and MIL-STD-1599. Mr. Leoniak
holds a Bachelor of Science Degree in Mechanical Engineering from the
Polytechnic Institute of Brooklyn.
(DAVIS) LAI KWAN FAI, CORPORATE SECRETARY, 34. Mr. Lai has been the Corporate
Secretary of Sunbase Asia since 1996. Mr. Lai holds a Master of Arts Degree in
Economics and Finance from the University of Leeds in the United Kingdom.
34
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
MANAGEMENT COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation for
services in all capacities paid or accrued for the fiscal years indicated by the
Company to its Chief Executive Officer and the only other executive officer
whose compensation exceeded U.S.$100,000 in 1997:
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------------
Name Long-
Principal All other Term
Position Year Salary Bonus Compensation Compensation
- --------- ---- ------ ----- ------------ ------------
(US$) (US$) (US$) (US$)
<S> <C> <C> <C> <C> <C>
B.Kan/ 1997 209,677 - - -
Vice Chairman, 1996 111,804 - - -
Director 1995 - - - -
W.R.McKay/ 1997 285,000 - 651 -
CEO, President, 1996 284,327 - 1,181 -
Director 1995 - - - -
</TABLE>
OPTION GRANTS IN 1997
No stock options were granted in 1997.
AGGREGATE OPTION EXERCISES IN 1997 AND OPTION VALUES AS OF DECEMBER 31, 1997
The value of options exercised by the named executive officers in 1997 and
the value of unexercised options at December 31, 1997 are set forth below:
<TABLE>
<CAPTION>
Number of Value of
Exercisable/ Exercisable/
Unexercised Unexercised
Options at In-the-Money
12/31/97 Options at
Shares 12/31/97
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- ---- -------- -------- ------------- -------------
<S> <C> <C> <C> <C>
B. Kan 0 0 400,000 / 0 /
0 0 200,000
W. R. McKay 0 0 160,000 / 0 /
0 0 640,000
</TABLE>
35
<PAGE>
The value of unexercised in-the-money options is determined by using the
difference between the exercise price and the average bid price at December 31,
1997.
STOCK OPTION PLAN
On January 2, 1996, the Company's Board of Directors adopted the 1995
Sunbase Asia, Inc. Stock Option Plan (the "Plan"). The Plan permits the grant
of options to purchase an aggregate of up to 2,500,000 Shares of the Common
Stock of the Company. Under the Plan, incentive stock options and non-qualified
stock options may be issued. Eligible participants under the Plan are those
individuals and entities that the stock option committee of the Company (the
"Committee") in its discretion determines should be awarded such incentives
given the best interests of the Company; provided, however, that incentive stock
options may only be granted to employees of the Company and its affiliates. The
Committee has the power to determine the price, terms and vesting schedule of
the options granted, subject to the express provisions of the Plan. All
incentive stock options will have option exercise prices per option share not
less than the fair market value of a share of the Common Stock on the date the
option is granted, except that in the case of incentive stock options granted to
any person possessing more than 10 % of the total combined voting power of all
classes of stock of the Company or any affiliate of the Company, the price shall
not be less than 110 % of such fair market value. The Plan terminates on the
earlier of that date on which no additional shares of Common Stock are available
for issuance under the Plan or January 2, 2006.
In connection with an employment agreement entered into by and between the
Company and William R. McKay on January 16, 1996, and pursuant to the Plan, the
Company granted Mr. McKay the option to purchase an aggregate of up to 800,000
shares of Common Stock of the Company. The option is intended by the Company
and Mr. McKay to be, and will be treated as, an incentive stock option. The
options granted to Mr. McKay vest at the rate of 160,000 shares per each full
year of Mr. McKay's employment under the Agreement. Mr. McKay may exercise the
options that have vested and purchase shares of the Common Stock of the Company
at the following prices:
<TABLE>
<CAPTION>
Exercise Price of
Full Years of Options that Vest
Employment After Each Such Year
---------- --------------------
<S> <C>
One $ 6.65
Two $ 7.75
Three $ 9.25
Four $10.75
Five $12.75
</TABLE>
All unexercised options will expire on that date which is six years after
the date on which such options have vested.
36
<PAGE>
On July 1, 1996, the Compensation Committee of the Company granted stock options
to the following individuals on the following terms:
<TABLE>
<CAPTION>
Exercise Price/Share Number of Shares per
Option Holder Vesting Schedule (U.S.) Option Rights
- ------------- ---------------- ------ -------------
<S> <C> <C> <C>
Billy Kan January 16, 1996 6.375 200,000
January 16, 1997 6.375 200,000
January 16, 1998 6.375 200,000
-------
600,000
-------
Roger Li January 16, 1996 6.375 200,000
January 16, 1997 6.375 200,000
January 16, 1998 6.375 200,000
-------
600,000
-------
Dickens Chang January 16, 1996 6.375 15,000
January 16, 1997 6.375 15,000
January 16, 1998 6.375 20,000
-------
50,000
-------
</TABLE>
Mr. Dickens Chang terminated employment with the Company on February 28, 1998.
In accordance with the terms of his options granted, all unexercised options and
unvested options of Mr. Chang expired automatically.
EMPLOYMENT AGREEMENTS
On January 16, 1996, Sunbase Asia and Southwest Products entered into an
employment agreement with William R. McKay (the "Agreement") pursuant to which
Mr. McKay is employed to serve as President and Chief Executive Officer of
Southwest Products and as President and Chief Executive Officer of Sunbase Asia
for a term of five years. Under the terms of the Agreement, Mr. McKay will be
paid an annual base salary of $285,000. The base salary may be increased or
decreased (to a minimum of $225,000), based upon an annual review of Mr. McKay's
performance. In addition to the base salary, the Board of Directors of Sunbase
Asia may, at its sole discretion, pay Mr. McKay a bonus for any particular year
of his employment. On January 16, 1996, in connection with the execution of the
Agreement, Sunbase Asia, Southwest Products and Mr. McKay entered into a
Confidentiality and Non-Competition Agreement pursuant to which Mr. McKay agrees
to keep certain information of Sunbase Asia, Southwest Products and their
affiliates confidential, and is prohibited from competing with Sunbase Asia,
Southwest Products and their affiliates during the term of the Agreement.
37
<PAGE>
Pursuant to the terms of an Employment Agreement between the Company and
Mr. Kan dated August 1, 1996, Mr. Kan is employed as the Vice Chairman of the
Board of Directors or such other capacity of an equivalent status as the Company
may reasonably require. The term of the employment commenced August 1, 1996 and
continues until terminated by either party giving to the other not less than 12
months prior notice. Mr. Kan's duties include the development, marketing and
promotion of the products of the Company as may be required by the Board of
Directors. Mr. Kan is to exercise such powers and functions and perform such
duties in relation to the business of the Company as may from time to time be
assigned to him by the Board. Mr. Kan will be paid a salary of HK$ 1,625,000
per annum subject to review by the Board on an annual basis. Mr. Kan is also
entitled to stock options. See "Management Compensation - Stock Options Plan".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 31, 1998, the stock ownership
of all persons known to own beneficially five % (5%) or more of the equity
securities of the Company, and all directors and officers of the Company and its
affiliates, individually and as a group. Each person has sole voting and
investment power over the shares indicated, except as noted.
<TABLE>
<CAPTION>
Equity Ownership Voting Rights
---------------- -------------
Amount of Percent Amount of Percent
Name and Beneficial of Beneficial of
Address Ownership (1) Class (2) Ownership (1) Class (3)
- -------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Asean Capital 12,339,900 (4) 72.7% 26,739,900 (5) 85.2%
Gunter Gao 12,339,900 (4)(6) 72.7% 26,739,900 (5)(6) 85.2%
Chairman and Director
Glory Mansion Limited ("GML") 3,260,870 (7) 16.1% 3,260,870 (7) 9.4%
Wardley China Investment
Trust ("Wardley") 1,086,960 (8) 6.0% 1,086,960 (8) 3.4%
Private Equity
Management BVI Limited 3,260,870 (9) 6.1% 3,260,870 (9) 9.4%
Billy Kan
Vice Chairman and Director 620,000 (10) 3.5% 620,000 (10) 1.9%
William McKay
Chief Executive Officer,
President and Director 328,500 (11) 1.9% 328,500 (11) 1.0%
Li Yuen Fai (Roger)
Chief Financial Officer,
Vice President and Director 600,000 (12) 3.4% 600,000 (12) 1.9%
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Lai Kwan Fai (Davis)
Corporate Secretary * * * *
Philip Yuen * * * *
Director
George Raffini (13) * * * *
Director
Sunbase International 12,339,900 (14) 72.7% 26,739,900 (14) 85.2%
(Holdings) Limited
The New China Hong Kong
Limited 1,371,100 8.1% 1,371,100 4.4%
All directors and executive 13,888,400 (17) 75.0% 28,288,400 (17) 85.9%
officers of the Company as
a Group, 7 persons
</TABLE>
_________________________
* less than 1 percent
(1) As used in this table, "beneficial ownership" means the sole or shared
power to vote, or to direct the voting of, a security, or the sole or
shared investment power with respect to a security (i.e., the power to
dispose of, or to direct the disposition of a security).
(2) This percentage is determined on the basis of 16,980,142 shares of Common
Stock calculated as follows: (a) 12,700,142 shares outstanding; (b)
3,600,000 shares issuable upon conversion of the Series A Preferred Stock
and (c) 680,000 shares issuable upon conversion of the Series B Preferred
Stock, plus, with respect to each named person, the number of shares of
Common Stock, if any, which person has the right to exercise or otherwise
acquire within sixty days, but otherwise excludes shares of Common Stock
issuable pursuant to conversion of the Convertible Debentures, warrants
and options.
(3) This percentage is determined on the basis of an aggregate of 31,380,142
voting rights calculated as follows: (a) 12,700,142 rights from Common
stock outstanding; (b) 18,000,000 rights from the Series A Preferred
Stock; and (c) 680,000 rights from the Series B Preferred Stock, plus,
with respect to each named person, the number of shares of Common Stock,
if any, which such person has the right to exercise or otherwise acquire
within sixty days, but otherwise excludes shares of Common Stock issuable
pursuant to conversion of the Convertible Debentures, warrants and
options.
(4) Consists of 8,739,900 outstanding shares of Common Stock and 3,600,000
shares of Common Stock issuable upon the conversion of the Series A
Preferred Stock.
(5) Consists of 8,739,900 voting rights held by way of Asean Capital's
ownership of 8,739,900 shares of Common Stock and 18,000,000 voting rights
held by way of Asean Capital's ownership of 36 shares of Series A
Preferred Stock. Pursuant to the terms of the Convertible Debentures,
Asean Capital is prohibited from exercising the super majority votes of
the Series A Preferred Stock.
39
<PAGE>
(6) Includes shares of Sunbase Asia Common Stock and Series A Preferred Stock
beneficially owned by Gunter Gao and Linda Yang, husband and wife, by way
of the ownership by each of Mr. Gao and Ms. Yang of 50% of the capital
stock of Sunbase International, which in turn owns all of the capital
stock of Asean Capital. Each of Ms. Yang and Mr. Gao disclaims beneficial
ownership of the shares held by the other, although their ownership has
been aggregated for purposes of this table.
(7) Consists of shares issuable upon conversion of the Convertible Debentures
at an initial exercise price of $1.84 per share. GML is the record owner
of $6,000,000 in principal amount of Convertible Debentures.
(8) Consists of shares issuable upon conversion of the Convertible Debentures
at an initial exercise price of $1.84 per share. Wardley is the record
owner of $2,000,000 in principal amount of Convertible Debentures.
(9) PEM, as the general partner of the HSBC Private Equity Fund, L.P.("HSBC"),
the parent of GML, shares voting power and has sole investment power over
shares of Common Stock issuable to GML upon conversion of the Convertible
Debentures.
(10) Includes 600,000 shares of Common Stock issuable upon exercise of
currently exercisable stock options granted to Mr. Kan, See "Management
Stock Option Plan."
(11) Includes 320,000 shares of Common Stock issuable upon exercise of
currently exercisable stock options granted to Mr. McKay (See "Management
Stock Option Plan"), but does not include any shares issuable upon
conversion of 18 shares of Series B Preferred Stock owned by Mr. McKay.
(12) Consists of 600,000 shares of Common Stock issuable upon exercise of
currently exercisable stock options granted to Mr. Li. See "Management
Stock Option Plan.".
(13) Does not include any shares issuable upon conversion of the Convertible
Debentures owed by GML and Wardley. Mr. Raffini is an employee of HSBC and
the nominee of GML and Wardley to the Board of Directors.
(14) Consists of 8,739,000 outstanding shares of Common Stock and 3,600,000
shares of Common Stock issuable upon conversion of the Series A Preferred
Stock owned by Asean Capital, of which Sunbase International owns 100%.
(15) Consists of 8,739,000 voting rights held by way of Asean Capital ownership
of 8,739,000 shares of Common Stock and 18,000,000 voting rights held by
way of Asean Capital's ownership of 36 shares of Series A Preferred Stock.
(16) See (4), (5), (6), (10), (11), (12), and (13) above
(17) The address of Dr. Gao and Messrs, Kan, Li, and Lai is 19/F. First Pacific
Bank Centre, 51-57 Gloucester Road, Wanchai, Hong Kong. The address of
GML, Wardley, PEM and Mr. Raffini is 3 Garden Road, Hong Kong. The address
of New China Hong Kong is 25/F. Bank of China Tower, 1 Garden Road, Hong
Kong. The address of Mr. Yuen is 11/F., Wing Lung Bank Building., 45 Des
Voeus Road, Hong Kong. The address of Mr. McKay is 2240 Buena Vista,
Irwindale, California 91010.
40
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As discussed above (See ITEM 1 "BUSINESS ORGANIZATION OF THE COMPANY"), an
effective 51.43 % in Harbin Bearing was acquired at the end of 1993 by the
affiliates of Sunbase International. This was accomplished by the acquisition
by China Bearing Holdings Limited ("China Bearing") of China International
Bearing (Holdings) Limited ("China International"). China International was
incorporated to act as the holding company of two Sino-foreign joint venture
companies which in turn were formed to acquire in the aggregate a 51.57 %
interest in Harbin Bearing. China International has a 99.9 % equity interest in
one of the joint venture companies and a 99 % equity interest in the other,
which in turn hold a 41.57 % and 10 % interest, respectively, in Harbin Bearing
(See, "Organizational Chart"). The aggregate cash consideration contributed by
the joint venture companies was RMB 232.1 million which was principally financed
by an interest free loan from Sunbase International to China International (the
"Sunbase Loan"). China International in turn made equity contributions and
loans to the two joint venture companies.
In April 1994, New China Hong Kong acquired from Sunbase International 10 %
of the outstanding stock of China Bearing and 10 % of the Sunbase Loan. The
Sunbase Loan was later assigned to China Bearing, and China Bearing assumed the
Sunbase Loan for a consideration of the same amount payable to it by China
International. The obligations under the Sunbase Loan were extinguished by
Sunbase International and New China Hong Kong, and the amount thereof was
treated as a contribution of cash to China Bearing and credited to its
contributed surplus account. Thereafter, the shares of China Bearing owned by
Sunbase International and New China Hong Kong were transferred to Asean Capital,
in which Sunbase International presently owns all of the capital stock. As set
forth above, in December 1994, Asean Capital transferred all of its interest in
China Bearing to the Company.
Harbin Bearing and Harbin Precision have entered into leases (the "Ancillary
Transport Equipment Lease" and the "Manufacturing Machinery Lease"), covering
all equipment and assets of the Bearing Factory relating to the bearing
operations which were not contributed to the Company in the Restructuring. The
Leases cover cars, trucks, machinery and equipment used in manufacturing, office
administration and power generation and provide for total annual payments of RMB
27,183,000 (US$ 3,267,000). At the expiration of the two leases in December 31,
1998 and December 31, 2001, respectively, Harbin Bearing has the right to either
renew the Leases or acquire the equipment.
Harbin Bearing and Harbin Holdings have entered into a lease covering plants
and buildings used in Harbin Bearing's business which were not contributed to
Harbin Bearing in the restructuring (the "Plant Lease"). The Plant Lease
provides for annual rent payments of RMB 3,751,000 (US$ 452,000). At the
expiration of the lease on December 31, 1998, Harbin Bearing has the right to
extend the lease at market rent for another five years.
Harbin Holdings and Harbin Bearing have entered into a lease providing for
the use of land by Harbin Bearing at RMB 2,508,000 (US$ 302,000) per annum,
effective January 1, 1994 subject to future adjustments in accordance with
changes in government fees.
As a result of the Restructuring, Harbin Holdings owns the rights to the
trademark "HRB." Pursuant to an exclusive and perpetual trademark license
agreement, Harbin Holdings has granted Harbin Bearing the exclusive and
perpetual right to use the "HRB" trademark on its
41
<PAGE>
products and marketing materials. The royalty on the trademark license
agreement is 0.5 % of annual sales from 1994 to 2003 and 0.3 % from 2004 to
2013.
Pursuant to the Restructuring, Harbin Holdings assumed responsibilities of
the pension payments of all employees of the Bearing Factory who retired or left
the Bearing Factory prior to the Restructuring. Harbin Bearing and Harbin
Holdings have entered into an agreement (the "Pension Agreement") relating to
pension arrangements after the Restructuring. The Pension Agreement provides
that Harbin Bearing may satisfy the statutory requirement to pay an amount equal
to 20 % (22 % effective July 1, 1996) of annual wages to the municipal
government to fund future pension obligations of its existing employees, by
making such payments to Harbin Holdings as representative of the municipal
government of Harbin, and Harbin Holdings agrees to be responsible for all
pension obligations to employees of Harbin Bearing who retire or leave after the
Restructuring.
Subsequent to December 31, 1993, Harbin Bearing and Harbin Holdings entered
into a management and administrative service agreement. The agreement provides
for the payment by Harbin Bearing of an annual fee of RMB 17,160,000
(approximately US$ 2,049,000) in connection with services for medical, heating,
education and other staff-related benefits provided by Harbin Holdings for a
term of three years. The costs of these services were previously fully paid by
the Bearing Factory and have now been superseded by the above agreement. The
fees are subject to an annual 10 % inflation adjustment. The management and
administrative service agreement was expired on December 31, 1996.
Agreements were also entered into by Harbin Bearing with the two joint
venture holding companies of Harbin Bearing in respect of general management
services to be provided by the joint venture companies from January 1, 1994 to
December 31, 1996 at an annual fee of RMB 150,000 (U.S.$18,000) payable to each
of the joint venture companies.
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
SUNBASE ASIA, INC. AND SUBSIDIARIES:
Report of Independent Auditors 44
Consolidated Balance Sheets as of December 31, 1996 45-46
and December 31, 1997
Consolidated Statements of Income for the years ended
December 31, 1995, December 31, 1996 and December 31, 1997 47-48
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, December 31, 1996 and December 31, 1997 49-51
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1995,
December 31, 1996 and December 31, 1997 52
Notes to Consolidated Financial Statements 53-82
</TABLE>
43
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Sunbase Asia, Inc.
We have audited the accompanying consolidated balance sheets of Sunbase
Asia, Inc. and its subsidiaries as of December 31, 1997 and 1996 and the related
statements of income, cash flows and changes in shareholders' equity for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sunbase Asia,
Inc. and its subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and cash flows for each of the three years in the
period ended December 31, 1997, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Ernst & Young
Hong Kong
13 May 1998
44
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996
AND DECEMBER 31, 1997
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 1996 1997 1997
RMB RMB US$
--- --- ---
<S> <C> <C> <C> <C>
ASSETS
Current assets
Unrestricted cash and bank balances 48,489 39,343 4,830
Deposit with a financial institution 23,750 23,750 2,771
Restricted cash and bank balance 5 15,189 - -
Accounts receivable, net 6 313,791 480,400 57,880
Notes receivable 15,212 6,190 746
Inventories, net 7 476,409 477,217 57,496
Other receivables 70,075 40,330 4,859
Receivable from disposal of an investment 13,419 - -
Due from related companies 24 205,275 300,023 36,147
--------- --------- -------
Total current assets 1,181,609 1,367,253 164,729
Fixed assets 8 656,071 631,812 76,122
Deferred assets 9 22,204 14,383 1,733
Long term investments 10 1,012 1,012 122
Goodwill 11 11,587 10,760 1,296
--------- --------- -------
Total assets 1,872,483 2,025,220 244,002
========= ========= =======
</TABLE>
continued/...
The accompanying notes form an integral part of these
consolidated financial statements.
45
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1996,
AND DECEMBER 31, 1997 (continued)
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 1996 1997 1997
RMB RMB US$
--- --- ---
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short term bank loans 12 358,847 435,403 52,458
Long term bank loans, current portion 16 98,641 140,772 16,960
Accounts payable 151,971 115,646 13,933
Notes payable 2,800 - -
Interest payable on convertible debentures 15 2,882 20,035 2,414
Accrued liabilities and other payables 52,662 111,501 13,434
Short term obligations under capital leases 13 18,788 20,441 2,463
Secured promissory note 1,14 12,450 12,450 1,500
Income tax payable 4 38,368 50,392 6,071
Taxes other than income 25,225 38,972 4,696
Due to related companies 14,357 18,730 2,257
Convertible debentures 15 - 95,450 11,500
--------- --------- -------
Total current liabilities 776,991 1,059,792 127,686
Long term bank loans 16 35,000 4,005 483
Long term obligations under capital leases 13 88,924 68,483 8,251
Secured promissory note 1,14 12,450 12,450 1,500
Convertible debentures 15 95,450 - -
Minority interests 420,484 441,490 53,192
--------- --------- -------
1,429,299 1,586,220 191,112
Shareholders' equity:
Common Stock, par value US$0.001 each,
50,000,000 shares authorized;
12,700,142 (1996: 12,700,109) issued,
and fully paid-up 19 107 107 13
Preferred Stock, par value US$0.001 each,
25,000,000 shares authorized;
Convertible Preferred Stock
- Series A; 36 shares issued
and outstanding 1,19 44,533 44,533 5,365
Convertible Preferred Stock
- Series B; 6,800 shares issued
and outstanding 1 28,288 28,288 3,408
Contributed surplus 19 188,019 188,019 22,653
Reserves 20 27,866 27,971 3,370
Retained earnings 154,371 150,082 18,081
--------- --------- -------
Total shareholders' equity 443,184 439,000 52,890
--------- --------- -------
Total liabilities and shareholders' equity 1,872,483 2,025,220 244,002
========= ========= =======
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
46
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, DECEMBER 31, 1996
AND DECEMBER 31, 1997
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 1995 1996 1997 1997
RMB RMB RMB US$
--- --- --- ---
<S> <C> <C> <C> <C> <C>
Net sales to
- third parties 24 569,248 657,368 570,323 68,714
- related parties 23 103,111 232,338 171,373 20,647
------- ------- ------- ------
672,359 889,706 741,696 89,361
Cost of sales
- third parties 24 (365,564) (530,373) (491,153) (59,173)
- related parties 23 (14,715) (16,545) (15,793) (1,903)
------- ------- ------- ------
24 (380,279) (546,918) (506,946) (61,076)
Provisions on inventories (1,098) (1,415) (33,255) (4,007)
------- ------- ------- ------
Gross profit 290,982 341,373 201,495 24,278
Selling, general and administrative
expenses
- third parties (83,908) (85,027) (82,244) (9,909)
- related parties 23 (26,467) (30,147) (6,873) (828)
------- ------- ------- ------
(110,375) (115,174) (89,117) (10,737)
Interest expense
- third parties (33,816) (44,354) (60,655) (7,308)
- related parties 23 (14,630) (12,819) (10,270) (1,237)
------- ------- ------- ------
(48,446) (57,173) (70,925) (8,545)
Provisions on accounts receivable (2,627) (3,998) (17,040) (2,053)
Other income 21 - 16,640 - -
------- ------- ------- ------
Income before income taxes 129,534 181,668 24,413 2,943
</TABLE>
continued/...
The accompanying notes form an integral part of these
consolidated financial statements
47
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, DECEMBER 31, 1996
AND DECEMBER 31, 1997
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 1995 1996 1997 1997
RMB RMB RMB US$
--- --- --- ---
<S> <C> <C> <C> <C> <C>
Income before income taxes (continued) 129,534 181,668 24,413 2,943
Provision for income taxes: 4
- Current (20,472) (27,792) (7,591) (915)
- Deferred - - - -
------ ------- ------ ------
(20,472) (27,792) (7,591) (915)
------ ------- ------ ------
Income before minority interests 109,062 153,876 (16,822 2,028
Minority interests (54,967) (77,342) (21,006) (2,531)
------ ------- ------ ------
Net income/(loss) 54,095 76,534 (4,184) (503)
======= ======= ====== ======
Net income/(loss) per common share:
Basic 17 4.62 6.24 (0.33) (0.04)
======= ======= ====== ======
Diluted 17 3.54 4.62 (0.33) (0.04)
======= ======= ====== ======
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
48
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, DECEMBER 31, 1996
AND DECEMBER 31, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
1995 1996 1997 1997
RMB RMB RMB US$
--- --- --- ---
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss) 54,095 76,534 ( 4,184) ( 503)
Adjustments to reconcile income to net
cash provided by operating activities:
Minority interests 54,967 77,342 21,006 2,531
Depreciation 44,447 62,872 70,738 8,521
Loss/(gain) on disposal of fixed assets 4,829 ( 670) 1,283 155
Amortization of goodwill - 847 827 100
Exchange difference on secured-
promissory note ( 650) - - -
Amortization of present value discount
on deferred asset ( 783) ( 783) ( 783) ( 94)
Amortization of deferred debenture issue
expenses - 446 1,318 159
Decrease/(increase) in assets:
Accounts receivable ( 1,312) ( 49,605) ( 166,609) ( 20,074)
Notes receivable ( 107,824) 10,544 9,022 1,087
Inventories ( 25,756) 588 ( 808) ( 97)
Prepaid VAT ( 40,429) 40,429 - -
Other receivables ( 21,086) ( 12,866) 29,745 3,584
Due from related companies 32,994 ( 20,310) ( 56,657) ( 6,826)
Increase/(decrease) in liabilities:
Accounts payable ( 41,836) 35,766 ( 36,325) ( 4,377)
Notes payable 4,000 ( 12,827) ( 2,800) ( 337)
Interest payable on convertible debentures - 2,882 17,153 2,067
Accrued liabilities and other payables 40,531 ( 37,446) 58,839 7,089
Income tax payable ( 3,468) 32,494 12,024 1,448
Taxes other than income ( 2,592) 25,225 21,033 2,533
Due to related companies ( 34,854) ( 114,567) ( 14,415) ( 1,737)
Due to shareholders 2,350 ( 11,127) - -
------ ------- ------ ------
Net cash provided by/(used in) operating
activities ( 42,377) 105,768 ( 39,593) ( 4,771)
</TABLE>
continued/...
The accompanying notes form an integral part of these
consolidated financial statements.
49
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, DECEMBER 31, 1996
AND DECEMBER 31, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
1995 1996 1997 1997
Notes RMB RMB RMB US$
--- --- --- ---
<S> <C> <C> <C> <C> <C>
Cash flows from investing activities:
Purchase of a subsidiary 1,22 ( 731) - - -
Increase in deposit with a
financial institution ( 23,750) - - -
Increase/(decrease) restricted
bank deposit - ( 15,189) 15,189 1,830
Disposal of long term investments 5,561 426 - -
Proceeds from disposal of fixed assets 115 3,243 525 63
Additions of goodwill - ( 290) - -
Additions to fixed assets ( 92,571) ( 167,430) ( 48,287) ( 5,818)
Receivable from disposal of
an investment - ( 13,419) 13,419 1,617
Increase in due from related companies - ( 47,886) ( 38,091) ( 4,589)
------- ------- ------ ------
Net cash used in investing activities ( 111,376) ( 240,545) ( 57,245) ( 6,897)
------- ------- ------ ------
Cash flows from financing activities:
Proceeds from short term bank loans 518,573 701,710 665,373 9,224
Repayment of short term bank loans ( 468,838) ( 597,988) ( 588,817) -
Repayment of other loans - ( 33,810) - -
Repayment of secured promissory note - ( 16,700) - -
Proceeds from issuance of convertible
debentures - 95,450 - -
Proceeds from sales of common stock,
net of costs - 36,085 - -
Proceeds from long term bank loans 54,289 1,283 11,136 1,342
Repayment of long term bank loans ( 12,043) - - -
Advance from/(repayment to) shareholders 3,320 ( 6,225) - -
Debenture issue expense - ( 3,733) - -
------- ------- ------ ------
Net cash provided by financing activities 95,301 176,072 87,692 10,566
------- ------- ------ ------
Net increase/(decrease) in cash and
cash equivalents ( 34,702) 41,295 ( 9,146) ( 1,102)
Cash and cash equivalents, at beginning
of year 41,896 7,194 48,489 5,932
------- ------- ------ ------
Cash and cash equivalents, at end of year 7,194 48,489 39,343 4,830
======= ======= ====== ======
</TABLE>
continued/...
The accompanying notes form an integral part of these
consolidated financial statements.
50
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, DECEMBER 31, 1996
AND DECEMBER 31, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
1995 1996 1997 1997
Notes RMB RMB RMB US$
--- --- --- ---
<S> <C> <C> <C> <C>
Income taxes paid 15,953 - - -
Interest paid
(net of amounts capitalized) 35,186 51,835 64,748 7,801
Non-cash transactions:
Financing lease arrangements 15,873 17,270 18,788 2,263
Purchase of a subsidiary by issue
of convertible stock 28,288 - - -
====== ====== ====== =====
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
51
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, DECEMBER 31, 1996
AND DECEMBER 31, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
Common Preferred Contributed Retained
stock stock surplus Reserves earnings Total
Series A Series B
RMB RMB RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994 99 44,533 - 151,942 13,011 38,597 248,182
New issue (note 1) - - 28,288 - - - 28,288
Net income - - - - - 54,095 54,095
Appropriation to reserves
(note 20) - - - - 12,255 ( 12,255) -
--- ------ ------ ------- ------ ------- -------
Balance at December 31,
1995 99 44,533 28,288 151,942 25,266 80,437 330,565
New issue (note 1) 8 - - 36,077 - - 36,085
Net income - - - - - 76,534 76,534
Appropriation to reserves
(note 20) - - - - 2,600 ( 2,600) -
--- ------ ------ ------- ------ ------- -------
Balance at December 31,
1996 107 44,533 28,288 188,019 27,866 154,371 443,184
Net loss - - - - - ( 4,184) ( 4,184)
Appropriation to reserves
(note 20) - - - - 105 ( 105) -
--- ------ ------ ------- ------ ------- -------
Balance at December 31,
1997 107 44,533 28,288 188,019 27,971 150,082 439,000
=== ====== ====== ======= ====== ======= =======
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
52
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Sunbase Asia, Inc. ("the Company") entered into a share exchange
agreement ("Share Exchange Agreement") with Asean Capital Limited ("Asean
Capital") on December 2, 1994. Pursuant to the Share Exchange Agreement
and certain subsequent changes thereto, as agreed between the Company and
Asean Capital, and further to a board resolution of the Company on March
31, 1995, the Company issued 10,261,000 common stock shares, 36 shares of
Series A convertible preferred stock and a US$5 million secured promissory
note to Asean Capital in exchange for the entire issued share capital of
China Bearing Holdings Limited ("China Bearing"). This transaction has been
treated as a recapitalization of China Bearing with China Bearing as the
acquirer (reverse acquisition).
The Series A convertible preferred stock is convertible at the option
of the holder at a conversion rate of 100,000 common stock shares per
Series A share. As preferred shares, they also carry 500,000 votes per
share and are entitled to the same dividend as the common stock
shareholders on the basis as if the preferred shares had been converted to
common stock shares at the conversion rate as noted above.
The total number of common stock shares outstanding subsequent to this
arrangement was 11,700,063. In 1997, 33 (1996: 46) common stock shares
were issued from a reverse stock split.
China Bearing is a holding company which was established to acquire a
100% interest in China International Bearing (Holdings) Company Limited
("China International"). China International was incorporated in Hong Kong
as the holding company of Harbin Xinhengli Development Co. Ltd. ("Harbin
Xinhengli") and Harbin Sunbase Development Co. Ltd. ("Harbin Sunbase"),
Sino-foreign equity joint ventures in the People's Republic of China
("China" or the "PRC") established to acquire, in aggregate, a 51.6%
interest in Harbin Bearing Company Limited ("Harbin Bearing") which is a
joint stock limited company established in China under the Trial Measures
on Share Companies and the Opinion on the Standardization of Joint Stock
Companies promulgated by the State Council of China and the successor to
the manufacturing operations of Harbin Bearing General Factory, a Chinese
state-owned enterprise established in 1950.
On December 29, 1995, the Company entered into a reorganization
agreement ("Reorganization Agreement") with Southwest Products Company
("Southwest"), a company incorporated in the United States of America, and
the shareholders of Southwest for the acquisition of 100% of the issued
common stock of Southwest.
Pursuant to the Reorganization Agreement, a wholly-owned subsidiary
of the Company was incorporated for the purpose of merging with Southwest
pursuant to a separate merger agreement. In connection with the merger,
the Company issued an aggregate of 6,800 shares of Series B convertible
53
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
preferred stock ("Series B stock") to the then shareholders of Southwest or
their designates. At the option of the Series B stockholders, the stock
may be redeemed at US$500 per Series B share by the Company from the
proceeds of the next permanent equity offering, the net proceeds of which
will be designated for such redemption. Any shares not so redeemed will
automatically be converted into common stock shares at the rate of 100
common stock shares per Series B stock. If the aforesaid public offering
or the redemption are not effected within two years from the date of issue
of the Series B stock, the stock will automatically be converted into
common stock at the rate of 100 common stock shares per Series B stock
after expiry of the two-year period. As preferred shares, the shares carry
100 votes per share and are entitled to the same dividend as the common
shareholders on the basis as if the preferred shares had been converted to
common stock shares at the conversion rate as noted above.
This transaction has been treated as a business combination and is
accounted for under the purchase method of accounting. However, since the
acquisition was consummated on December 31, 1995, the results of Southwest
for the year then ended have not been consolidated into the Company in
1995.
Southwest is a manufacturer of spherical bearings and supplies its
products to the aerospace, commercial aviation and other industries around
the world. Its major customers are in the United States of America.
Southwest also has an interest in a Shanghai Joint Venture.
The following unaudited pro forma consolidated financial information
for the years ended December 31, 1995 are prepared on the basis as if the
acquisition of Southwest by the Company had occurred prior to January 1,
1996.
The following pro forma consolidated financial information has been
prepared for comparative purposes only and does not purport to indicate the
results of operations which would actually have occurred had the
acquisition and the reorganization been in effect on January 1, 1995 or
which may occur in the future.
<TABLE>
<CAPTION>
Year ended
December 31,
1995
RMB
(unaudited)
<S> <C>
Net sales 708,658
Net income 58,003
Pro forma earnings per common share:
Basic 4.96
Diluted 3.79
</TABLE>
54
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
2. BASIS OF PRESENTATION
These consolidated financial statements incorporate the results of
operations of the Company and its subsidiaries (hereinafter referred to as
the "Group") for the three year period ended December 31, 1997, except for
Southwest, the acquisition of which was completed on December 31, 1995.
All material intra-group transactions and balances have been eliminated on
consolidation.
The consolidated financial statements were prepared in accordance
with U.S. GAAP. This basis of accounting differs from that used in the
statutory and management accounts of Harbin Bearing which were prepared in
accordance with the accounting principles and the relevant financial
regulations applicable to joint stock enterprises as established by the
Ministry of Finance of China ("PRC GAAP").
The principal adjustments made to conform the statutory accounts
of Harbin Bearing to U.S. GAAP included the following:
. Revenue recognition;
. Provision for doubtful accounts receivable;
. Provision for inventory obsolescence;
. Valuation of inventories;
. Accounting of assets financed under capital leases as assets of the
Company together with the corresponding liabilities; and
. Deferred taxation.
The financial information has been prepared in Renminbi (RMB), the
national currency of China. Solely for the convenience of the reader,
certain elements of these financial statements have been translated into
United States dollars prevailing at the People's Bank of China on December
31, 1997 which was US$1.00 = RMB8.30. No representation is made that the
Renminbi amounts could have been, or could be, converted into United States
dollars at that rate or any other certain rate on December 31, 1997.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and bank balances
Cash and bank balances include cash on hand and demand deposits with
banks with an original maturity of three months or less.
55
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(b) Inventories
Inventories are stated at the lower of cost, on a first-in, first-out
basis, or market value. Work in progress and finished goods include direct
materials, direct labor and an attributable proportion of production
overheads.
(c) Fixed assets and depreciation
Property, machinery and equipment are stated at cost less accumulated
depreciation. Depreciation of property, machinery and equipment is
computed using the straight-line method over the assets' estimated useful
lives. The estimated useful lives of property, machinery and equipment are
as follows:
Buildings 20 years
Machinery and equipment 8-10 years
Motor vehicles 3-5 years
Furniture, fixtures and office equipment 5 years
(d) Construction in progress
Construction in progress represents factory buildings, plant and
machinery and other fixed assets under construction and is stated at cost.
Cost comprises direct costs of construction as well as interest charges on
borrowed funds. Capitalization of interest charges ceases when an asset is
ready for its intended use. Construction in progress is transferred to
fixed assets upon commissioning when it is capable of producing saleable
output on a commercial basis, notwithstanding any delays in the issue of
the relevant commissioning certificates by the appropriate PRC authorities.
No depreciation is provided on construction in progress until the
asset is completed and put into productive use.
(e) Income taxes
The income taxes reflect the accounting standards in Statement of
Financial Accounting Standards No.109, "Accounting for Income Taxes".
56
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(f) Foreign currency translation
Foreign currency transactions are translated into Renminbi at the
applicable floating rates of exchange quoted by the People's Bank of China,
prevailing at the dates of the transactions. Monetary assets and
liabilities denominated in foreign currencies are translated into Renminbi
using the applicable exchange rates prevailing at the balance sheet date.
The Company's share capital is denominated in United States dollars and the
reporting currency is Renminbi. For financial reporting purposes the
United States dollars share capital amounts have been translated into
Renminbi at the applicable rates prevailing on the dates of receipt.
(g) Capital leases
Leases that transfer substantially all the rewards and risks of
ownership of assets to the Group, other than legal title, are accounted for
as capital leases. At the inception of a capital lease, the cost of the
leased asset is capitalized at the present value of the minimum lease
payments and recorded together with the obligation, excluding the interest
element, to reflect the purchase and financing. Assets held under capital
leases are included in fixed assets and depreciated over the estimated
useful lives of the assets. The finance costs of such leases are charged
to the profit and loss account so as to provide a constant periodic rate
over the lease terms.
Leases where substantially all the rewards and risks of ownership of
assets remain with the leasing company are accounted for as operating
leases. Rentals applicable to such operating leases are charged to the
profit and loss account on the straight-line basis over the lease terms.
(h) Goodwill
Goodwill represents the excess of the consideration paid for the
purchase of a subsidiary over the fair value of the net assets of
businesses acquired and is being amortized over a fifteen year period. The
carrying value of goodwill is assessed on an on-going basis.
(i) Stock Options
As the Company has elected to follow the accounting method under
APB25, accounting for stock based compensation is based on the intrinsic
value method. The compensation cost to record is based on the difference
between the fair value of the share and the exercise price at the time both
the number of options the employee is entitled to receive and the exercise
price is known. This compensation cost is recognized over the period the
employee performs the related services.
57
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(j) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
(k) Impact of recently issued accounting standard
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), to establish new rules for the
reporting and display of comprehensive income and its components. However,
adoption of SFAS 130 in 1998 will have no impact on the Company's
consolidated net income or shareholders' equity.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), to
establish standards for the way public business enterprises report
information about operating segments. The Company has not completed the
assessment of SFAS No. 131. However, it is considered that additional
disclosure is not applicable as the Group only operates in the business of
manufacturing and sales of ball bearings. SFAS 131 is effective for
financial statements for fiscal year beginning after December 15, 1997 and
will be adopted in 1998.
4. INCOME TAXES
Sunbase Asia, Inc. was incorporated in the State of Nevada in the
United States of America. The Company is subject to U.S. federal tax on
its income. Nevada does not impose any tax on corporations organized under
its laws.
Southwest was incorporated in the State of California in the United
States of America and is subject to U.S. federal tax on its income.
China Bearing was incorporated under the laws of Bermuda and, under
current Bermudan law, is not subject to tax on income or on capital gains.
China International was incorporated under the Hong Kong Companies
Ordinance and under the current Hong Kong tax law, any income arising in
and deriving from businesses carried on in Hong Kong will be subject to
tax. No tax will be charged on dividends received and capital gains earned.
Harbin Xinhengli and Harbin Sunbase are subject to Chinese income
taxes at the applicable tax rates of 30% for Sino-foreign equity joint
venture enterprises. Dividend income by China Bearing from the joint
venture enterprises received is exempt from any Chinese income taxes.
58
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
4. INCOME TAXES (continued)
The applicable tax rate for joint stock limited enterprises in
China is 33% which is levied on the taxable income as reported in the
statutory accounts adjusted for taxation in accordance with the relevant
income tax laws applicable to joint stock limited enterprises. Income of
Harbin Bearing, being a joint stock limited company registered in the
Special Economic and Technological Development Zone in the Municipal City
of Harbin, is normally subject to a maximum income tax rate of 20%.
Pursuant to the same income tax basis applicable to the Special Economic
and Technological Development Zone, Harbin Bearing has been designated a
high technology production enterprise and is entitled to a special income
tax rate of 15%.
The Company has undertaken not to require China Bearing to make
any distribution of dividends and the directors of Harbin Xinhengli and
Harbin Sunbase have decided not to distribute any dividend income related
to income earned for the year received from Harbin Bearing outside of
China. As a result, deferred income taxes have not been accrued in the
financial statements in respect of income distributions. The undistributed
earnings of the Chinese subsidiaries of the Group amounted to RMB210,425 at
December 31, 1997. The determination of the amount of the deferred income
tax liability is not practicable.
The reconciliation of the effective income tax rates based on
income before income taxes stated in the consolidated statement of income
to the statutory income tax rate in China applicable to the Company's major
operating subsidiary is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996 1997
<S> <C> <C> <C>
Effect of
- statutory tax rate 15.0% 15.0% 15.0%
Permanent difference 0.8% 0.3% 16.0%
---- ---- ----
15.8% 15.3% 31.0%
==== ==== ====
</TABLE>
The permanent differences arise from losses generated by the
subsidiaries which are exempted from tax.
At December 31, 1997, Southwest had unutilized pre-acquisition net
operating losses of RMB2,025 (US$244) ((1996: RMB3,071 US$370)). Pursuant
to Internal Revenue Code Section 382 of the United States of America (IRC
Section 382), the annual utilization of pre-acquisition net operating
losses' carry forwards is limited to approximately RMB1,627 (US$196)
((1996: RMB1,627 US$196)). No deferred tax asset was recognized on these
pre-acquisition losses in the allocation of the purchase price. In
addition, Southwest has post-acquisition net operating losses of RMB15,148
(US$1,825) ((1996: RMB11,620 US$1,400)) generated from domestic sources,
expiring through 2010, which is not subject to IRC Section 382 limitation.
The deferred tax asset of RMB5,901 (US$711) ((1996: RMB2,639 US$318))
arising from such net operating losses has not been provided for in the
financial statements.
59
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
5. RESTRICTED CASH AND BANK BALANCE
At December 31,1997, there were no restricted cash and bank balances
held by the Group. At December 31, 1996, a United States dollars time
deposit US$1,830 (RMB15,189) was pledged to a bank to secure banking
facilities granted to the Group.
6. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
Accounts receivable comprise:
December 31,
1996 1997
RMB RMB
Accounts receivable - trade 331,716 515,365
Less: Allowance for doubtful debts ( 17,925) ( 34,965)
------- -------
Accounts receivable, net 313,791 480,400
======= =======
<CAPTION>
December 31,
1995 1996 1997
RMB RMB RMB
<S> <C> <C> <C>
Movement of allowance for doubtful debts
Balance as at January 1, 11,300 13,927 17,925
Provided during the year 2,627 3,998 17,040
------ ------ ------
13,927 17,925 34,965
Less: Allowance utilized during the year - - -
------ ------ ------
Balance as at December 31, 13,927 17,925 34,965
====== ====== ======
</TABLE>
60
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
7. INVENTORIES
Inventories comprise:
<TABLE>
<CAPTION>
December 31,
1996 1997
RMB RMB
<S> <C> <C>
Raw materials 102,856 92,039
Work in progress 121,847 141,214
Finished goods 257,121 282,634
------- -------
481,824 515,887
Less: Provision (5,415) (38,670)
------- -------
Inventories, net 476,409 477,217
======= =======
<CAPTION>
December 31,
1995 1996 1997
RMB RMB RMB
<S> <C> <C> <C>
Movement of inventory provision
Balance as at January 1, 19,016 4,309 5,415
Provided during the year 1,098 1,415 33,255
Obsolete inventories sold during the year (15,805) (309) -
------ ----- ------
Balance as at December 31, 4,309 5,415 38,670
====== ===== ======
</TABLE>
61
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
8. FIXED ASSETS
<TABLE>
<CAPTION>
December 31,
1996 1997
RMB RMB
<S> <C> <C>
Buildings 71,151 71,151
Machinery and equipment 492,493 576,892
Motor vehicles 18,650 18,249
Furniture, fixtures and office equipment 6,553 24,283
Construction in progress 206,433 147,298
------- -------
795,280 837,873
Less: Accumulated depreciation (139,209) (206,061)
------- -------
656,071 631,812
======= =======
</TABLE>
The total amount of interest capitalized during the year and included
in the above fixed assets is RMB18,207 (1996: RMB19,473 and 1995:
RMB10,411).
The Group's buildings are located in the PRC and the land on which the
Group's buildings are situated is State-owned.
The gross amounts of assets recorded under capital leases and the
accumulated depreciation are analyzed as follows:
<TABLE>
<CAPTION>
1996 1997
RMB RMB
<S> <C> <C>
Machinery and equipment 150,337 150,337
Motor vehicles 4,181 4,181
Furniture, fixtures and office equipment 927 927
------- -------
155,445 155,445
Less: Accumulated depreciation (61,114) (80,091)
------- -------
94,331 75,354
======= =======
</TABLE>
62
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
9. DEFERRED ASSETS
<TABLE>
<CAPTION>
December 31,
1996 1997
RMB RMB
<S> <C> <C>
Deferred valued added tax ("VAT") receivable 38,860 38,860
Less: Offset against VAT payable (18,378) (25,664)
------ ------
20,482 13,196
Less: Present value discount (1,565) (782)
------ ------
18,917 12,414
------ ------
Deferred debenture issue expenses 3,733 3,733
Less: Amortization (446) (1,764)
------ ------
3,287 1,969
------ ------
22,204 14,383
====== ======
</TABLE>
Deferred VAT receivable arose from the introduction of the new PRC VAT
system on January 1, 1994. This asset was calculated and accounted for in
accordance with governmental directive by applying the 14% VAT rate to
certain inventory values as at December 31, 1993, with the effect of
reducing the value of certain opening inventories of Harbin Bearing as at
January 1, 1994 by the same amount. A detailed directive regarding the
utilization of the deferred VAT receivable was issued in May 1995 by the
Ministry of Finance and the State General Tax Bureau pursuant to which the
Group is permitted to offset the balance of RMB38,860 against its VAT
payable within a period of five years starting from January 1, 1995.
Accordingly, a discount has been applied using Harbin Bearing's average
borrowing rate over the estimated period of recovery.
Deferred debenture issue expenses represented costs incurred for the
issue of convertible debentures on August 23, 1996. The total amount of
deferred expenses incurred of RMB3,733 are being amortized over the terms
of the debentures of three years.
10. LONG TERM INVESTMENTS
Long term investments are stated at cost and represent
investments in unlisted treasury bonds issued by the Chinese Government.
The investments bear interest ranging from 3% to 8% per annum and are
redeemable on maturity or otherwise prior thereto as advised by the
government.
63
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
11. GOODWILL
Goodwill comprised:
<TABLE>
<CAPTION>
1996 1997
RMB RMB
<S> <C> <C>
Balance at beginning of year 12,144 11,587
Addition 290 -
------ ------
12,434 11,587
Less: Amortization (847) (827)
------ ------
11,587 10,760
====== ======
</TABLE>
The goodwill arose as a result of the acquisition of Southwest on December
31, 1995. The addition in 1996 represented a legal fee in respect of the
acquisition completed in 1995.
12. SHORT TERM BANK LOANS
The short term bank loans bear interest at a weighted average rate of
12.5% and 10.824% per annum for the years ended December 31, 1996 and 1997,
respectively, and are repayable within one year.
13. OBLIGATIONS AND COMMITMENTS
(a) Obligations under capital leases
Harbin Bearing leases machinery and equipment, furniture, fixtures and
office equipment and motor vehicles from Harbin Precision Machinery
Manufacturing Company ("Harbin Precision"), a company wholly-owned by
Harbin Bearing Holdings Company ("Harbin Holdings"), a separately
established enterprise under the supervision and control of the Machine
Bureau, which received 33.3% of the new shares of Harbin Bearing. These
leases are accounted for as capital leases which have lease terms ranging
from five years to eight years.
64
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
13. OBLIGATIONS AND COMMITMENTS (continued)
The lease obligations for the machinery and equipment, furniture,
fixtures and office equipment and motor vehicles have an implicit annual
interest rate at 8.46%. The scheduled non-cancelable future minimum lease
payments as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
December 31,
1997
RMB
<S> <C>
Year ending December 31,
1998 27,183
1999 25,927
2000 25,927
2001 25,927
------
Total minimum lease payments 104,964
Less: Amount representing interest (16,040)
------
Present value of minimum lease payments 88,924
Less: Current portion (20,441)
------
68,483
======
(b) Obligations under operating leases
Non-cancelable operating leases commitments payable in the five years are as
follows:
<CAPTION>
December 31,
1997
RMB
<S> <C>
Year ending December 31,
1998 6,259
1999 2,508
2000 2,508
2001 2,508
2002 2,508
-----
16,291
======
</TABLE>
The lease rentals recorded as expenses in respect of operating leases
during the year amounted to RMB6,259 (1996:RMB6,259; 1995: RMB6,259).
65
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
13. OBLIGATIONS AND COMMITMENTS (continued)
The Company has an option to extend the terms of the current operating
lease in respect of the buildings which will expire on December 31, 1998,
for another five years at market rent. The current annual rental of the
building is RMB3,751 (US$452).
As of December 31, 1997, the Group had no outstanding commitments for
capital expenditure.
14. SECURED PROMISSORY NOTE
The secured promissory note (the "Note") was issued in 1995 to Asean
Capital in connection with the Share Exchange Agreement as detailed in Note
1 and was secured by a continuing security interest in and to all of the
Company's title and interest in the outstanding capital stock of China
Bearing.
The Note is denominated in United States dollars and bears interest at
8% per annum.
Pursuant to a subscription agreement dated August 2, 1996 entered into
between the Company, certain of its subsidiaries, the convertible
debentures holders and Asean Capital (the "Subscription Agreement") as more
fully described in Note 15 below, Asean Capital has made an irrevocable and
unconditional undertaking that it will not demand repayment of the Note
unless the Company has sufficient cash flows for working capital, debt
repayment and capital expenditure for the ensuing twelve month period and
the repayment will only be made according to the repayment schedule defined
in the Subscription Agreement. (RMB24,900 (US$3,000)) is repayable in two
installments during the twelve month periods ending July 31, 1998 and July
31, 1999. No repayment was made in the current year.
15. CONVERTIBLE DEBENTURES
These represent US$11,500 convertible debentures ("Convertible
Debentures") issued by China Bearing to certain institutional investors on
August 23, 1996 pursuant to a Subscription Agreement dated August 2, 1996.
Unless the Convertible Debentures have been converted, they are due and
payable in August 1999 (the "Maturity Date"). The investors have the right
to convert at any time, in whole or in part, the principal amount of the
debenture into 2,300,000 shares of the common stock of the Company based on
the initial conversion price (the "Conversion Price") of US$5.00 per share,
subject to certain adjustments in relation to the capital structure,
changes to profits and reserves of the Company.
66
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
15. CONVERTIBLE DEBENTURES (continued)
Pursuant to one of the conditions set out in the Subscription
Agreement, if and whenever the cumulative audited earnings per share, the
calculation of which is defined in the Subscription Agreement (the "defined
EPS"), for any two consecutive financial years from year ended December 31,
1996 to 1998 are less than the corresponding management's projection of
cumulative EPS for such years as set out in the Subscription Agreement, the
Conversion Price shall be adjusted in accordance with the formula as stated
in the Subscription Agreement. In the current year, due to the Company's
failure to achieve the projected cumulative EPS of US$1.79 for the two
years ended 31 December 1997, the Conversion Price has been adjusted to
US$1.84 per share.
The Convertible Debentures bear interest at the rate of the higher of
(i) 5% per annum (net of withholding tax, if applicable) and (ii) the
percentage of the dividend yield calculated by reference to dividing the
annual dividend declared per share of common stock of the Company by the
Conversion Price.
The Convertible Debentures are required to be redeemed on the Maturity
Date at their principal amount then outstanding together with any accrued
but unpaid interest together with an amount that would enable the investors
to yield an aggregate internal rate of return ("IRR") of 12% per annum on
the cost of their investment. As a result, interest has been accrued in
the financial statements for the year ended December 31, 1996 at the rate
of 12% per annum.
Pursuant to the Subscription Agreement, in the event that an
adjustment of the Conversion Price as described above occurs, and such
adjustment would result in the number of shares that would have been issued
to the investors in aggregate had conversion immediately taken place to
exceed 20% of the total issued share capital of the Company (including also
for this purpose such number of shares that would have been issued upon
conversion of all of the Convertible Debentures), that portion of the
Convertible Debenture(s) representing the excess of such shares over such
20% ("the Excess") shall, at the option of the relevant investors, be
redeemed by the Company at its principal amount outstanding together with
any accrued but unpaid interest calculated up to and including the date of
payment together with an amount that would enable the investors to yield in
aggregate an IRR of 19.75% per annum.
In the occurrence of any event of default as defined in the
Subscription Agreement, the Convertible Debentures shall automatically
become immediately due and payable in full by the Company at its principal
amount outstanding together with the accrued but unpaid interest together
with an amount that would enable the investors to yield an aggregate IRR on
their investment of 19.75% per annum unless the Company shall have received
a notice from any of the investors to specify the number of Convertible
Debentures that they wish to redeem, in which case the amount payable shall
only be limited to the specified amount. Due to the failure of the Company
to achieve the defined EPS of US$0.55 in the current year, being an event
of default stipulated in the Subscription Agreement, although the
Convertible Debentures bear a face rate of interest of 5% per annum
interest is accrued on these Convertible Debentures at the rate of 19.75%
per annum from the date of inception up to December 31, 1997 and the
outstanding amount of Convertible Debentures has been classified as current
liabilities as at December 31, 1997.
67
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
15. CONVERTIBLE DEBENTURES (continued)
The obligations of China Bearing under the Convertible Debentures are
guaranteed by the Company, Asean Capital Limited, China International
Bearing Holding Limited and Southwest Products Company (hereinafter
collectively referred to as the "Guarantors"). The Guarantors have given
certain negative pledges over the creation of securities interest for as
long as any of the Convertible Debentures remain outstanding.
16. LONG TERM BANK LOANS
Long term bank loans are principally loans borrowed to finance the
construction in progress. The loans are unsecured, bear fixed interest
rates ranging from 3.7% to 9.25% per annum. Current portion of the loans,
repayable in 1998, together with the overdue portion of the current portion
of the long term loans carried forward from last year, are included in
current liabilities. The long term portion of the loans are repayable in
1999.
17. NUMBER OF SHARES/EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts
for all periods have been presented and, where appropriate, restated to
conform to SFAS 128 requirements.
The exercise of outstanding warrants is not included as part of the
assumption in the calculation of diluted earnings per share as the share
price of the Company for all periods ended December 31, 1995, 1996 and 1997
was lower than the exercise prices.
68
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
17. NUMBER OF SHARES/EARNINGS PER SHARE (continued)
The computations of basic and diluted earnings/loss per shares are as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996 1997
RMB RMB RMB
<S> <C> <C> <C>
Basic
Net income/(loss), as reported 54,095 76,534 (4,184)
========== ========== ==========
Weighted average number of
common shares outstanding:
Share of common shares outstanding
on January 1, 11,700,063 11,700,063 12,700,109
Shares issued as a result of reverse
stock split - 46 33
1,000,000 common shares issued on
June 10, 1996 - 558,904 -
---------- ---------- ----------
Total weighted average number of common
shares outstanding 11,700,063 12,259,013 12,700,142
========== ========== ==========
Earnings/(loss) per share 4.62 6.24 (0.33)
========== ========== ==========
</TABLE>
69
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996 1997
RMB RMB RMB
<S> <C> <C> <C>
Diluted
Net income/(loss), as reported 54,095 76,534 (4,184)
Add after tax interest expenses
applicable to Convertible Debentures - 4,078 -
---------- ---------- ----------
54,095 80,612 (4,184)
========== ========== ==========
Weighted average number of
common shares outstanding:
Share of common shares outstanding
on January 1, 11,700,063 11,700,063 12,700,109
Shares issued as a result of reverse
stock split - 46 33
1,000,000 common shares issued on
June 10, 1996 - 558,904 -
---------- ---------- ----------
Total weighted average number of
common shares outstanding 11,700,063 12,259,013 12,700,142
Common share issuable assuming
conversion of the Convertible
Preferred Shares
Series A 3,600,000 3,600,000 -
Series B - 680,000 -
Common shares issuable assuming
conversion of the Convertible
Debentures on August 23,1996 - 812,876 -
Common shares issuable assuming
exercise of stock options, reduced
by the number of shares which could
have been purchased with the proceeds
from exercise of such stock options - 102,017 -
---------- ---------- ----------
Total weighted average number of
common shares and common shares
equivalents outstanding 15,300,063 17,453,906 12,700,142
========== ========== ==========
Earnings per share 3.54 4.62 (0.33)
========== ========== ==========
</TABLE>
70
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
17. NUMBER OF SHARES/EARNINGS PER SHARE (continued)
The diluted loss per share for 1997 is the same as the basic loss per share
as there was an anti-dilution effect which reduces the loss per share. The
calculation which resulted in such an anti-dilution was based on the
assumptions that the conversion rights under the Convertible Debentures had
been fully exercised, at the adjusted exercise price as stated in note 15,
and the redemption of preferred shares, both on January 1, 1997. On this
basis, the net income calculated by adding back the interest expenses on
the Convertible Debentures net of income tax is RMB17,746. As a result of
the aforesaid, an anti-dilution effect was resulted and therefore the
diluted loss per share was the same as the basic loss per share.
18. FOREIGN CURRENCY EXCHANGE
The Chinese government imposes control over its foreign currency.
Renminbi, the official currency in China, is not freely convertible. Prior
to December 31, 1993, all foreign exchange transactions involving Renminbi
had to be undertaken either through the Bank of China or other institutions
authorized to buy and sell foreign exchange or at a swap center. The
exchange rates used for transactions through the Bank of China and other
authorized banks were set by the government from time to time whereas the
exchange rates available at a swap center were determined largely by supply
and demand.
On January 1, 1994, the People's Bank of China introduced a
managed floating exchange rate system based on the market supply and demand
and proposed to establish a unified foreign exchange interbank market
amongst designated banks. In place of the official rate and the swap
center rate, the People's Bank of China publishes a daily exchange rate for
Renminbi based on the previous day's dealings in the interbank market.
However, the unification of exchange rates does not imply the
full convertibility of Renminbi into United States dollars or other foreign
currencies. Payments for imported materials and the remittance of earnings
outside of China are subject to the availability of foreign currency which
is dependent on the foreign currency denominated earnings of the entity or
allocated to the Company by the government at official exchange rates or
otherwise arranged through a swap center with government approval. Approval
for exchange at the exchange center is granted to enterprises in China for
valid reasons such as purchases of imported goods and the remittance of
earnings. While the conversion of Renminbi into United States dollars or
other foreign currencies can generally be effected at the exchange center,
there is no guarantee that it can be effected at all times.
19. CONTRIBUTED SURPLUS
The respective features of common stock and convertible preferred
stock are detailed in Note 1 to the financial statements.
71
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
19. CONTRIBUTED SURPLUS (continued)
On June 10, 1996, the Company issued an additional 1,000,000 shares
of common stock with a par value of RMB 0.0083 (US$0.001) at RMB 41.5
(US$5.00) per share. Total share premium on the new issue of shares
amounted to RMB36,077 after deducting the direct expenses arising on the
issue of these shares of RMB5,415 from the gross premium of RMB41,492.
20. DISTRIBUTION OF PROFITS AND APPROPRIATIONS TO RESERVES
According to the relevant laws and regulations for joint stock
limited enterprises and Harbin Bearing's articles of association, the
distribution of profits by Harbin Bearing is based on the profits as
reported in its statutory accounts prepared under PRC GAAP after the
following allocations and appropriations:
(a) making up any accumulated losses;
(b) transferring 10% of its profit after taxation to the statutory
surplus reserve;
(c) transferring 5% to 10% of its profit after taxation to a
collective welfare fund; and
(d) transferring a certain amount of its profit after taxation to a
discretionary surplus reserve.
The following appropriations were made and are further described
below:
<TABLE>
<CAPTION>
Year ended December 31,
1995 1996 1997
RMB RMB RMB
<S> <C> <C> <C>
Statutory surplus reserve 8,170 1,733 70
Collective welfare fund 4,085 867 35
------ ----- ---
12,255 2,600 105
====== ===== ===
</TABLE>
The collective welfare fund must be used for capital expenditure on
staff welfare facilities. Such facilities are for staff use, but are owned
by Harbin Bearing.
The distributable retained earnings of the Group as of December 31,
1997, after taking into account the above restrictions and appropriations
and based on the PRC statutory accounts of Harbin Bearing, amounted to
RMB73,260.
The reserves retained in the Chinese subsidiaries of the Group
amounted to RMB27,971 (1996: RMB27,866).
72
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
21. OTHER INCOME
In 1996, other income represented a gain on the sale of investment in
a subsidiary by China Bearing to a third party amounting to RMB16.6
million. The only asset of the subsidiary was a residential property in
Hong Kong which was purchased during that year. No such income was earned
in 1997.
22. NOTE TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Purchase of a subsidiary
December 31, 1995
RMB
<S> <C>
Net assets acquired:
Cash and bank balance 18
Accounts receivable 1,690
Inventories 7,718
Other receivables 487
Fixed assets 29,611
Accounts payable ( 6,188)
Notes payable (11,627)
Accrued liabilities ( 4,816)
-------
16,893
Goodwill 12,144
-------
29,037
-------
Satisfied by:
Shares issued 28,288
Current account 749
-------
29,037
=======
</TABLE>
73
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
23. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
During the year, the Group had transactions with a number of related
parties. The major related party transactions are summarized as follows
and described in further detail below:
<TABLE>
<CAPTION>
Year ended December 31,
Nature of transactions Notes 1995 1996 1997
RMB RMB RMB RMB
<S> <C> <C> <C> <C>
Revenue:
Sales of products (a) 103,111 232,338 171,373
Interest income (b) - - 2,547
======= ======= =======
Capital expenditure:
Leases of equipment capital payments (c) 15,873 17,270 18,788
Leases of buildings (d) 3,751 3,751 3,751
Land use rights (e) 2,508 2,508 2,508
======= ======= =======
Expenses:
Management and administrative services (f) 19,126 21,705 -
Trademark royalty fees (g) 3,362 4,306 2,924
Pension and retirement plan expenses (h) 18,394 20,681 19,742
Finance charges on leases of equipment (c) 11,310 9,914 8,395
Interest on promissory note (i) 3,320 2,905 1,875
======= ======= =======
</TABLE>
(a) Significant sales to related companies
Harbin Bearing made sales of RMB91,287 (1996: RMB14,549; 1995: RMB42,855)
and RMB80,086 (1996: RMB203,442; 1995: RMB40,257) to Harbin Bearing Import
& Export Company ("HBIE") and Xin Dadi Mechanical and Electrical Equipment
Company ("Xin Dadi"), related companies owned by the Harbin Municipal
Government, respectively, during the current year. As at December 31,
1997, the amounts of trade receivables from HBIE, Xin Dadi and other
related companies included in the amounts due from related companies were
as follows.
<TABLE>
<CAPTION>
1996 1997
RMB RMB
<S> <C> <C>
HBIE 49,792 127,365
Xin Dadi 107,597 86,681
------- -------
157,389 214,046
======= =======
</TABLE>
74
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
23. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
(b) Advances to related companies
Apart from the trade receivable balances due from related companies as
disclosed in note 23(a) above, advances which are non-trading in nature
were made to other related companies as at December 31, 1997, as follows:
<TABLE>
<CAPTION>
1996 1997
RMB RMB
<S> <C> <C>
Sunbase Resources Limited ("Sunbase Resources") - 38,824
Sunbase Construction and Development 45,450 45,450
Harbin Precision 1,150 1,150
Other related companies 1,286 553
------ ------
47,886 85,977
====== ======
</TABLE>
Sunbase Resources is a related company of the Group in which the directors
and/or shareholders have a beneficial interest. Sunbase Construction and
Development is a joint venture established in the PRC of which Sunbase
International Holding Limited, another related Company of the Group, has
equity interests. Other related companies are owned by the Harbin
Municipal Government.
The above balances are unsecured, repayable within one year and interest-
free except for the balance due from Sunbase International. Pursuant to an
agreement dated 1 January 1997 between the Company and Sunbase Resources,
interest was charged on the average balance at a rate of 10% per annum.
Total income earned in respect of such balances was RMB2,547 for the year
ended December 31, 1997.
(c) Leases of equipment
Harbin Bearing has entered into an eight year lease agreement with Harbin
Precision to lease machinery and equipment and a five year lease agreement
with Harbin Precision to lease motor vehicles, furniture, fixtures and
equipment related to the business at an initial annual rental of RMB25,927
(US$3,124) and RMB1,256 (US$151), from January 1, 1994 to December 31, 2001
and from January 1, 1994 to December 31, 1998, respectively. Options to
extend the leases and to purchase the leased assets have been granted to
Harbin Bearing upon expiry of the initial leases. All these leases are
treated as capital leases.
(d) Leases of buildings
Harbin Bearing has entered into a five year lease agreement with Harbin
Precision to lease buildings related to the operation of Harbin Bearing
with effect from January 1, 1994 at an initial annual rental of RMB3,751
(US$452). The initial lease will expire on December 31, 1998 and Harbin
Bearing has been granted an option to extend the lease at market rent for
another five years. This lease is treated as an operating lease.
75
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
23. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
(e) Land use rights
The municipal government has allocated to Harbin Holdings the right to use
the parcels of land on which Harbin Bearing's operations are conducted.
Harbin Holdings has agreed to lease the land on which the main factory is
situated to Harbin Bearing in return for an initial annual rental of
RMB2,508 (US$302) effective from January 1, 1994 subject to future
adjustments in accordance with changes in the government fees.
(f) Management and administrative services agreements
In 1994, Harbin Bearing and Harbin Holdings entered into a management and
administrative services agreement. The agreement provides for the payment
by Harbin Bearing of an annual fee of RMB18,876 and RMB20,764 for the
financial years ended December 31, 1995 and 1996 respectively in connection
with services for medical, heating, education and other staff-related
benefits provided by Harbin Holdings for a term of three years. The fees
are subject to an annual 10% inflation adjustment. In 1997, no such fees
were paid as the agreement expired in December 31, 1996.
Agreements were also entered into by Harbin Bearing with Harbin Xinhengli
and Harbin Sunbase, in respect of general management services to be
provided by the joint ventures from January 1, 1994 to December 31, 1996 at
an annual fee of RMB150 (US$18) payable to each of the joint ventures.
An agreement was entered into between China Bearing and Sunbase
International, in respect of general management and administrative services
at an annual fee of RMB250 (US$30) for the year ended 1995. No such
management fees were paid for the year ended December 31, 1996 and 1997.
In addition, China Bearing is to reimburse Sunbase International for
administrative services rendered on behalf of China Bearing at cost. The
Company paid a total amount of RMB Nil (1996: RMB941) to Sunbase
International (Holdings) Limited ("Sunbase International") for a
reimbursement of the expenses incurred on the Company's behalf.
(g) Trademark license
Pursuant to a trademark license agreement, Harbin Holdings has granted
Harbin Bearing the right to use the "HRB" trademark. Harbin Bearing is
required to pay a royalty cost calculated on an annual basis at 0.5% of the
net sales of Harbin Bearing effective from January 1, 1994 to December 31,
2003 and at 0.3% of the net sales from January 1, 2004 to December 31,
2013. The trademark license can be transferred to Harbin Bearing
thereafter upon mutual agreement between the two parties and subject to the
relevant laws in China.
The trademark royalty paid by Harbin Bearing during 1995, 1996 and 1997
amounted to RMB3,362, RMB4,306, RMB2,924, respectively.
76
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
23. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
(h) Pension and retirement plan
Pursuant to an agreement on December 31, 1993, Harbin Bearing is required
to make an annual payment to Harbin Holdings as its contribution to the
pension scheme for all staff retiring after December 28, 1993. Such annual
payment is based on the standard contribution as required by government
regulations calculated at 20% of salary up to the period ended June 30,
1996 and at 22% with effective from July 1, 1996. Harbin Holdings is then
responsible for the entire pension payment to staff who have retired after
December 28, 1993. Harbin Holdings has undertaken to bear all pension
payments to staff who have retired before December 28, 1993. This
agreement was entered into on the condition that no compulsory rules and
regulations are implemented by the government such that Harbin Bearing has
to be directly responsible for any pension payments.
The contributions to the pension scheme made by Harbin Bearing in 1995,
1996 and 1997 amounted to RMB18,394, RMB20,681 and RMB19,742, respectively.
(i) Interest on promissory note
As described further in Note 1, in consideration for the purchase of its
interest in China Bearing, the Company issued common shares and preferred
shares to, and assumed vendor financing from Asean Capital Limited. The
vendor financing provided by Asean Capital was in the form of a US$5,000
secured promissory note which is secured on the shares of China Bearing
(See Note 14). For the year ended 1996, US$2,000 was repaid and interest
was payable on the remaining balance of US$3,000.
The promissory note was issued to Asean Capital in connection with the
Share Exchange Agreement as detailed in Note 1 and bears interest at 8% per
annum.
Management expects that the arrangements detailed in (b), (c) and (d)
above will be renewed after the initial contract term.
24. OPERATIONS WITH STATE-OWNED ENTERPRISES
Harbin Bearing is owned as to 33% by Harbin Holdings which is a
separately established enterprise controlled by and under the
administration of the Harbin Municipal Government. Substantially all of the
business undertaken by Harbin Bearing during the year has been effected
with State-owned enterprises in China and on such terms as determined by
the relevant Chinese authorities.
77
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
25. FINANCIAL INSTRUMENTS
The carrying amount of the Company's cash and bank balances
approximates their fair value because of the short maturity of those
instruments.
The fair value of the Group's bank borrowings based on the interest
rates currently available for borrowings with similar terms and average
maturities approximates the carrying amount of these bank borrowings. The
fair value of the secured promissory note and the convertible debentures
are not determinable.
26. SEGMENT DATA
The Group mainly operates in the ball bearing industry in China
through Harbin Bearing, its 51% subsidiary, which generated 100% of the
Group's net sales in 1995. During 1996 and 1997, the Group also operated
in the ball bearing industry in the United States of America through
Southwest Products, its wholly-owned subsidiary, which generated less than
10% of the Group's net sales in these years.
27. CONCENTRATION OF RISK
Concentration of credit risk:
Financial instruments that are potentially subject the Group to a
significant concentration of credit risk consist principally of cash
deposits, trade receivables and amounts due from related companies.
(a) Cash deposits
The Group places its cash deposits with various PRC State-owned
financial institutions.
(b) Trade receivables
The Company manufactures and sells general and precision ball bearings
to diversified industries in China. The Company has long standing
relationships with most of its customers and generally does not require
collateral. There is no concentration of receivables in any one specific
industry except for the outstanding receivable balances with two related
companies, HBIE and Xin Dadi which have receivable balances of RMB127,365
and RMB86,681, respectively, as at December 31, 1997.
78
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
27. CONCENTRATION OF RISK (continued)
(c) Current vulnerability due to certain concentrations:
The Group's operating assets and primary source of income and cash
flow is its interest in its subsidiaries in the PRC. The value of the
Group's interest in these subsidiaries may be adversely affected by
significant political, economic and social uncertainties in the PRC.
Although the PRC government has been pursuing economic reform policies for
the past 18 years, no assurance can be given that the PRC government will
continue to pursue such policies or that such policies may not be
significantly altered, especially in the event of a change in leadership,
social or political disruption or unforeseen circumstances affecting the
PRC's political, economic and social life. There is also no guarantee that
the PRC government's pursuit of economic reforms will be consistent or
effective.
28. FOREIGN INVESTMENTS MATTERS
The Company is currently holding discussions with the Committee on
Foreign Investment in the United States ("CFIUS"), an inter-agency
committee of the United States Government, with respect to the Company's
acquisition in January 1996 of Southwest Products Company ("Southwest").
CFIUS is conducting a review to determine if the ownership of Southwest by
the Company poses a potential threat to the national security interests of
the United States. If CFIUS determines that such a threat may exist, then
it may recommend to the President of the United States that he order
divestiture of Southwest by the Company. Alternatively, CFIUS may take no
action or may propose that certain measures be taken by the Company to
protect the national security interests of the United States as a condition
of the Company continuing to own Southwest. At this time, it is premature
to evaluate the likelihood of any action by CFIUS with respect to this
matter.
If the Company is required to divest its ownership of Southwest or
significant restrictions are imposed, the Company believes it has certain
claims which it may bring against certain of its professional advisors who
assisted it in connection with its acquisition of Southwest. However, no
assurance can be given that any such claims by the Company would fully
reimburse it for any loss it might realize upon a divestiture of Southwest
or as a result of the imposition of conditions on its ownership.
79
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
29. STOCK OPTION PLAN
On January 2, 1996, the Company's Board of Directors adopted a stock
option plan (the "Plan"). The Plan permits the directors to grant options
to purchase an aggregate of up to 2,500,000 shares of the common stock of
the Company.
All incentive stock options have option exercise prices per option
share not less than the fair market value of a share of the common stock on
the date the option is granted, except that the exercise price of 160,000
options granted to an executive, was lower than the market value of the
common stock on the date the option was granted. If in case of incentive
stock options granted to any person possessing more that 10% of the total
combined voting power of all classes of stock of the Company or any
affiliate of the Company, the price may not be less than 110% of such fair
market value. The Plan terminates on the earlier of either the date on
which no additional shares of common stock are available for issuance under
the Plan, or January 2, 2006.
On July 1, 1996, the Compensation Committee of the Company granted
1,250,000 stock options to three executives, including two directors of the
Company, on the following terms:
<TABLE>
<CAPTION>
Exercise price/Share Number of Shares
Vesting schedule US$ per option rights
---------------- --- -----------------
<S> <C> <C>
January 16, 1996 6.375 415,000
January 16, 1997 6.375 415,000
January 16, 1998 6.375 420,000
--------
1,250,000
=========
</TABLE>
80
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
29. STOCK OPTION PLAN (continued)
Pursuant to the Plan and in accordance with the provisions of an
employment agreement entered into between the Company and a director, the
Company granted, on January 16, 1996, the option to purchase an aggregate
of up to 800,000 shares of common stock of the Company. The option is
intended by the Company and the beneficiary to be, and will be treated as,
an incentive stock option. The beneficiary may exercise the options that
have vested and purchase shares of the common stock as follows:
<TABLE>
<CAPTION>
Exercise price
of the option vest Number of
after each such year shares
Vesting schedule US$ exercisable
---------------- --- -----------
<S> <C> <C>
January 16, 1997 6.65 160,000
January 16, 1998 7.75 160,000
January 16, 1999 9.25 160,000
January 16, 2000 10.75 160,000
January 16, 2001 12.45 160,000
----- --------
800,000
========
</TABLE>
As at December 31, 1997, none of the vested options have been
exercised. Subsequent to the balance sheet date, the options granted to
one of the Company's executives were withdrawn as that employee terminated
his employment with the Company at that date.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the date of grant in 1996: Interest rate
on United States treasury bonds; no dividend yield; volatility factors of
the expected market price of the company's common stock of 87%; and a
weighted-average expected life of the options of 3 to 5 years.
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require of the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock options.
81
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
29. STOCK OPTION PLAN (continued)
For the purposes of pro forma disclosures, the estimated fair value of
the options is amortized to write off the amount over the options' vesting
period. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997
RMB RMB
<S> <C> <C>
Pro forma net income/(loss) 24,828 ( 69,270)
====== ========
Pro forma earnings/(loss) per share:
Basic 2.03 ( 5.45)
====== ========
Diluted 1.41 ( 5.45)
====== ========
</TABLE>
The Company's stock option activities and related information for the years
ended December 31, 1996 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
Exercise Exercise
Options price Options price
US$ US$
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year - - 2,050,000 6.967
Granted 2,050,000 6.967* - -
Exercised - - - -
Forfeited - - - -
---------- -------- ---------- -------
Outstanding at end of year 2,050,000 6.967 2,050,000 6.967
========== ======== ========== =======
</TABLE>
* Exercise price was presented at the weighted average basis after discounting
such future price.
30. SERIES A WARRANTS
The Company has outstanding 10,392,167 Series A Warrants (the
"Warrants") in issue, which are stand alone instruments and are not
attached to other financial instruments. These Warrants are issued without
a consideration. The warrant holders are entitled to exchange 70 Warrants
for one share of common stock at an exercise price of US$175. No such
rights have been exercised during the year. The Warrants expire on June
30, 1998.
82
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following financial statements and exhibits are filed with
and as a part of this Report.
<TABLE>
<CAPTION>
Page No.(s)
-----------
(1) Financial Statements
--------------------
<S> <C> <C>
Index to Financial Statements 43
Report of Independent Auditors 44
Consolidated Balance Sheets as of 45-46
December 31, 1996 and December 31, 1997
Consolidated Statements of Income for the 47-48
years ended December 31, 1995,
December 31, 1996 and December 31, 1997
Consolidated Statements of Cash Flows for the 49-51
years ended December 31, 1995
December 31, 1996 and December 31, 1997
Consolidated Statements of Changes in 52
Shareholders' Equity for the years ended
December 31, 1995, December 31, 1996 and
December 31, 1997
Notes to Consolidated Financial Statements 53-82
</TABLE>
(2) Exhibits
Exhibit No. Description of Document Page No.(s)
- ----------- ----------------------- -----------
(a) Exhibits. The following exhibits of the Company are included herein.
(2) Plan of acquisition, reorganization, arrangement, liquidation
or succession.
2.1 Share Exchange Agreement, dated
December 2, 1994, between the Company,
Valley Financial, Inc., Wayne Crumpley
and China Bearing Holdings, Ltd. and
Asean Capital Limited, a subsidiary of
Sunbase International. (1)
2.2 Asset Transfer and Assumption Agreement dated December 16, 1994,
between the Company and Valley Financial Corporation. (I)
83
<PAGE>
(3) Certificates of Incorporation and Bylaws
3.1 Nevada Articles of Incorporation. (1)
3.2 Articles of Merger (1)
3.3 Amended and Restated Certificate of
Designation for Series A Convertible
Preferred Stock. (1)
3.4 Secured Promissory Note in favor of Asean
Capital Limited. (2)
3.5 Third Amended and Restated Certificate of
Designation for Series B Preferred Stock. (4)
(10) Material contracts
10.1 Agreement between the Company and New
China Hong Kong with respect to the Sale
and Purchase of shares of China Bearing,
together with the Deed of Novation. (3)
10.2 Memorandum and Articles of Association
of China International. (3)
10.3 Joint Venture Contract between China
International and Harbin Hazhou Bearing
Distributing Company with respect to
Harbin Sunbase. (3)
10.4 Joint Venture Contract between China
International and Harbin Bearing Everising
Construction and Development Ltd. with
respect to Harbin Xinhengli. (3)
10.5 Amended Articles of Association of Harbin
Sunbase. (3)
10.6 Articles of Association of Harbin
Xinhengli. (3)
10.7 Articles of Association of Harbin
Bearing. (3)
10.8 Agreement between Harbin Sunbase and
Harbin Bearing with respect to the
provision of financial management
services to Harbin Bearing. (3)
10.9 Agreement between Harbin Xinhengli and
Harbin Bearing with respect to the
provisions of sales and marketing services
84
<PAGE>
to Harbin Bearing. (3)
10.10 Pension Fund Aggregation Agreement
between Harbin Bearing and Harbin
Holdings with respect to pension
payments for existing employees. (3)
10.11 Trademark Licensing Agreement between
Harbin Bearing and Harbin Holdings with
respect to the "HRB" trademark. (3)
10.12 Service Agreement between Harbin Holdings
and Harbin Bearing. (3)
10.13 Land Use Right Lease Agreement between
Harbin Holdings and Harbin Bearing. (3)
10.14 Power Supply and Manufacturing Equipment
Lease Agreement between Harbin Precision
and Harbin Bearing. (3)
10.15 Plant Buildings Lease Agreement between
Harbin Precision and Harbin Bearing. (3)
10.16 Ancillary and Transportation Equipment
Lease Agreement between Harbin Precision
and Harbin Bearing. (3)
10.17 Agreement and Plan of Reorganization and
Merger dated as of December 29, 1995
among the Company, Southwest Products
and the shareholders of Southwest
Products. (4)
10.18 Employment Agreement dated as of
January 16, 1996 between the Company,
Southwest Products and William McKay. (4)
10.19 1995 Stock Option Plan. (5)
10.20 Form of Registration Rights Agreement
relating to the Private Placement Shares. (5)
10.21 Employment Agreement dated as of
August 1, 1996 between the Company
and Billy Kan. (5)
10.22 Subscription Agreement (together with
Form of Debentures and Guaranty) dated
August 2, 1996 among China Bearing,
Asean Capital, China International Bearing
Holdings Limited, the Company, Southwest
Products, Glory Mansion, Wardley China
Investment Trust, MC Private Equity
Partners Asia Limited and Chine Investissement 2000 (5)
21 Subsidiaries of the Company
27 Financial Data Schedule
85
<PAGE>
(1) Filed with the Company's Form 8-K, dated December 22, 1994 and
incorporated herein.
(2) Filed with the Company's Form 8-K/A, dated December 22, 1994 and
incorporated by reference herein.
(3) Filed with the Company's Form 10-K, dated March 3, 1995 and
incorporated by reference herein.
(4) Filed with the Company's Form 10-K, dated May 3, 1996 and incorporated
by reference herein.
(5) Filed with the Company's Form S-1, dated October 23, 1996 and
incorporated by reference herein.
(6) Filed with the Company's Form 10-K, dated April 4, 1997 and
incorporated by reference herein.
86
<PAGE>
SIGNATURES
In accordance with Section 13 of 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Sunbase Asia, Inc.
Date: May 15, 1998 By: /s/ William McKay
--------------------------------------
William McKay, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: May 13, 1998 By: /s/ Gunter Gao
--------------------------------------
Gunter Gao, Chairman
Date: May 13, 1998 By: /s/ Billy Kan
--------------------------------------
Billy Kan, Vice Chairman, Director
Date: May 15, 1998 By: /s/ William McKay
--------------------------------------
William McKay, Chief Executive
Officer, President and Director
Date: May 13, 1998 By: /s/ (Roger) Li Yuen Fai
--------------------------------------
(Roger) Li Yuen Fai, Vice President,
Chief Financial Officer and Director
Date: By: /s/
--------------------------------------
George Raffini, Director
Date: May 13, 1998 By: /s/ Philip Yuen
--------------------------------------
Philip Yuen, Director
Date: May 13, 1998 By: /s/ Harris Lau
--------------------------------------
Harris Lau, Chief Accounting Officer
87
<PAGE>
EXHIBIT 21
The Company's subsidiaries are:
<TABLE>
<CAPTION>
Effective
Percentage
Name of Subsidiary Ownership Place of Incorporation
- ------------------ ----------- ----------------------
<S> <C> <C>
CHINA BEARING 100% Bermuda
HOLDINGS LIMITED
CHINA INTERNATIONAL 100% Hong Kong
BEARING HOLDINGS LIMITED
HARBIN SUNBASE 99% People's Republic of China
DEVELOPMENT COMPANY
LIMITED
HARBIN XINHENGLI 99.9% People's Republic of China
DEVELOPMENT
COMPANY LIMITED
HARBIN BEARING 51.43% People's Republic of China
COMPANY LIMITED
SMITH ACQUISITION COMPANY, 100% California
INC. dba SOUTHWEST PRODUCTS
COMPANY
</TABLE>
88
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE ANNUAL PERIOD ENDED DECEMBER 31, 1997,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,601
<SECURITIES> 0
<RECEIVABLES> 99,632
<ALLOWANCES> 0
<INVENTORY> 57,496
<CURRENT-ASSETS> 164,729
<PP&E> 76,122
<DEPRECIATION> 0
<TOTAL-ASSETS> 244,002
<CURRENT-LIABILITIES> 127,686
<BONDS> 0
0
8,773
<COMMON> 13
<OTHER-SE> 44,104
<TOTAL-LIABILITY-AND-EQUITY> 244,002
<SALES> 89,361
<TOTAL-REVENUES> 89,361
<CGS> 65,083
<TOTAL-COSTS> 65,083
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,545
<INCOME-PRETAX> 2,943
<INCOME-TAX> 915
<INCOME-CONTINUING> (503)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (503)
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
