<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT of 1934
For the quarterly period ended June 30, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
------- -------
Commission File No. 0-3132
SUNBASE ASIA, INC.
(Exact name of Registrant as specified in its charter)
Nevada 94-1612110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of June 30, 1999, the Company had 14,118,751 shares of common stock issued
and outstanding.
1
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
-----------------------------------
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1 -- Financial statements
Consolidated Condensed Balance Sheets (unaudited)
- December 31, 1998 and June 30, 1999 3-4
Consolidated Condensed Statements of Income (unaudited)
- Three months and six months ended June 30, 1998 and 1999 5
Consolidated Condensed Statements of Cash Flow (unaudited)
- Six months ended June 30,1998 and 1999 6
Notes to Consolidated Condensed Financial Statements (unaudited)
- Three months and six months ended June 30, 1998 and 1999 7-16
Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations 17-26
Item 3 -- Quantitative and Qualitative Disclosure about Market Risk 27-31
PART II: OTHER INFORMATION
Item 6 - - Exhibits and Reports on Form 8-K 32
SIGNATURES 33
EXHIBIT 11 Computation of Earnings Per Common Share 34-35
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements
--------------------
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF DECEMBER 31, 1998 AND JUNE 30, 1999
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
12/31/98 6/30/99
-------------- ----------
Notes RMB US$ RMB US$
----- --- --- --- ---
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Unrestricted cash and bank
balances 19,075 2,298 4,783 576
Accounts receivable, net 468,075 56,396 530,413 63,905
Notes receivable 2,440 294 725 87
Inventories, net 4 572,176 68,937 582,028 70,124
Other receivables 26,720 3,219 38,514 4,640
Due from related companies 205,216 24,724 196,688 23,697
--------- -------- ---------- -------
Total current assets 1,293,702 155,868 1,353,151 163,029
Fixed assets 559,245 67,379 524,995 63,253
Net assets of discontinued
operations 5 42,798 5,156 30,880 3,720
Deferred asset 9,553 1,151 8,745 1,054
--------- -------- ---------- -------
Total assets 1,905,298 229,554 1,917,771 231,056
========= ======== ========== =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities
Short term bank loans 516,232 62,197 514,182 61,949
Long term bank loans,
current portion 156,113 18,809 156,113 18,809
Accounts payable 141,616 17,062 142,782 17,203
Accrued liabilities and
other payables 122,431 14,751 193,690 23,336
Short term obligations
under capital leases 20,933 2,522 21,834 2,631
Secured promissory note 6 24,900 3,000 24,900 3,000
Income tax payable 50,358 6,068 70,036 8,438
Taxes other than income 30,417 3,664 28,682 3,456
Due to related companies 51,579 6,214 51,876 6,250
Other loans 7 117,239 14,125 116,151 13,994
--------- -------- ---------- -------
Total current liabilities 1,231,818 148,412 1,320,246 159,066
Long term obligations under
capital leases 47,550 5,729 36,403 4,386
Minority interests 330,409 39,808 307,192 37,011
--------- -------- ---------- -------
1,609,777 193,949 1,663,841 200,463
</TABLE>
Continued/...
The accompanying notes form an integral part of these consolidated condensed
financial statements.
3
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND JUNE 30, 1999 (UNAUDITED) (CONTINUED)
(Amounts in thousands, except number
of shares and per share data)
12/31/98 6/30/99
------------------- ---------------------
RMB US$ RMB US$
--- --- --- ---
Shareholders' equity:
Common Stock, par value US$ 0.001
each,
50,000,000 shares authorized;
14,118,751 (1998: 13,652,084)
shares issued, 115 14 119 14
and fully paid up
466,667 shares issuable on
debt restructuring 2,905 350 - -
Preferred Stock, par value US$
0.001 each,
25,000,000 shares authorized;
Convertible Preferred
Stock - Series A;
36 shares issued and
outstanding 44,533 5,365 44,533 5,365
Contributed surplus 215,052 25,910 217,953 26,260
Reserves 28,002 3,374 28,002 3,374
Accumulated other comprehensive
income 1,247 150 1,247 150
Retained earnings 3,667 442 (37,924) (4,570)
--------- -------- ---------- -------
Total shareholders' equity 295,521 35,605 253,930 30,593
--------- -------- ---------- -------
Total liabilities and
shareholders' equity 1,905,298 229,554 1,917,771 231,056
========= ======== ========== =======
The accompanying notes form an integral part of these consolidated condensed
financial statements.
4
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
----------------------------------------- ---------------------------------------
1998 1999 1999 1998 1999 1999
Notes RMB RMB US$ RMB RMB US$
----- ---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales to
- third parties 217,175 208,570 25,129 135,868 101,718 12,255
- related parties 21,996 13,184 1,588 13,539 6,696 807
---------- ---------- ---------- ----------- ---------- ----------
239,171 221,754 26,717 149,407 108,414 13,062
Cost of sales (174,858) (213,107) (25,675) (110,391) (104,186) (12,552)
---------- ---------- ---------- ----------- ---------- ----------
Gross profit 64,313 8,647 1,042 39,016 4,228 510
Selling, general and
administrative expenses
- third parties (22,732) (28,534) (3,438) (7,447) (14,061) (1,695)
- related parties (9,014) (3,583) (432) (8,196) (2,066) (249)
---------- ---------- ---------- ----------- ---------- ----------
(31,746) (32,117) (3,870) (15,643) (16,127) (1,944)
Interest expense, net
- third parties (34,308) (24,534) (2,956) (16,451) (12,769) (1,539)
- related parties (3,587) (4,141) (499) (2,035) - -
---------- ---------- ---------- ----------- ---------- ----------
(37,895) (28,675) (3,455) (18,486) (12,769) (1,539)
---------- ---------- ---------- ----------- ---------- ----------
Operating income / (loss)
before minority interests (5,328) (52,145) (6,283) 4,887 (24,668) (2,973)
Minority interests (2,565) 23,217 2,797 (4,331) 10,925 1,316
---------- ---------- ---------- ----------- ---------- ----------
Net income / (loss) from
Continuing operation (7,893) (28,928) (3,486) 556 (13,743) (1,657)
Net loss from discontinued
operation, net of income taxes (1,501) (12,663) (1,526) (984) (12,209) (1,471)
---------- ---------- ---------- ----------- ---------- ----------
Net loss (9,394) (41,591) (5,012) (428) (25,952) (3,128)
========== ========== ========== =========== ========== ==========
Income per common share 2
- Basic income / (loss) from
continuing operation (0.61) (2.05) (0.25) 0.04 (0.97) (0.12)
========== ========== ========== =========== ========== ==========
- Basic net loss (0.72) (2.95) (0.35) (0.03) (1.84) (0.22)
========== ========== ========== =========== ========== ==========
- Diluted income / (loss) from
continuing operation (0.61) (2.05) (0.25) 0.04 (0.97) (0.12)
========== ========== ========== =========== ========== ==========
- Diluted net loss (0.72) (2.95) (0.35) (0.03) (1.84) (0.22)
========== ========== ========== =========== ========== ==========
Number of shares outstanding 2
- Basic 13,032,215 14,118,751 14,118,751 13,360,637 14,118,751 14,118,751
========== ========== ========== =========== ========== ==========
- Diluted 13,032,215 14,118,751 14,118,751 13,360,637 14,118,751 14,118,751
========== ========== ========== =========== ========== ==========
</TABLE>
The accompanying notes form an integral part of these consolidated condensed
financial statements.
5
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(Amounts in thousands)
Six Months Ended June 30,
----------------------------------
1998 1998 1999 1999
RMB US$ RMB US$
---- ---- ---- ----
Cash flows from operating
activities:
Net income (9,395) (1,132) (41,591) (5,012)
Adjustments to reconcile
income to net cash used in
operating activities:
Minority interests 2,565 309 (23,217) (2,797)
Depreciation 32,956 3,971 36,364 4,381
Share of net loss from
discontinued operation 1,501 181 12,663 1,526
Amortization of present
value discount on deferred
asset 2,421 292 808 97
Changes in operating
assets and liabilities-
(Increase) decrease in
assets:
Accounts receivable 45,736 5,510 (62,338) (7,509)
Notes receivable 2,010 242 1,715 207
Inventories (94,326) (11,365) (9,852) (1,187)
Other receivables (29,255) (3,525) (11,794) (1,421)
Due from related
companies (26,400) (3,181) 8,528 1,027
Increase (decrease) in
liabilities:
Accounts payable 5,069 611 1,166 141
Notes payable 2,350 283 - -
Accrued liabilities
and other payables 10,308 1,242 71,259 8,585
Income tax payable (11,262) (1,357) 19,678 2,370
Taxes other than income 23,129 2,787 (1,735) (208)
Due to related
companies 637 77 (9,949) (1,198)
---------- -------- ---------- ---------
Net cash used in operating
activities from
Continuing operation (41,956) (5,055) (8,295) (998)
---------- -------- ---------- ---------
Cash flows from investing
activities:
Advances to subsidiaries
proposed for disposal (1,998) (241) (745) (90)
Additions to fixed assets (2,677) (323) (2,114) (255)
---------- -------- ---------- ---------
Net cash used in investing
activities (4,675) (564) (2,859) (345)
---------- -------- ---------- ----------
Cash flows from financing
activities:
Net increase /
(decrease) in bank
loans 22,531 2,715 (3,138) (379)
---------- -------- ---------- ---------
Net cash provided by
financing activities 22,531 2,715 (3,138) (379)
---------- -------- ---------- ---------
Net decrease in cash and
cash equivalents (24,100) (2,904) (14,292) (1,722)
Cash and cash equivalents,
at beginning of period 62,423 7,521 19,075 2,298
---------- -------- ---------- ---------
Cash and cash equivalents,
at end of period 38,323 4,617 4,783 576
========== ======== ========== =========
Non-cash transaction:
Financing of lease
arrangements 10,004 1,205 10,246 1,234
========== ======== ========== =========
The accompanying notes form an integral part of these consolidated condensed
financial statements.
6
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
1. GENERAL
Sunbase Asia, Inc., a Nevada Corporation ("the Company"), is engaged in
the design, manufacture and distribution of a broad range of bearing
products.
The Company acquired 100% of the issued share capital of China Bearing
Holdings Limited ("China Bearing") on December 2, 1994 pursuant to a Share
Exchange Agreement with Asean Capital Limited in exchange for 10,261,000
shares of common stock. The transaction has been treated as a
recapitalization of China Bearing with China Bearing as the acquirer (reverse
acquisition). The historical financial statements prior to December 2, 1994
are those of China Bearing.
The Company owns, through various subsidiaries and joint venture
interests, a 51.43% indirect ownership in Harbin Bearing Company Limited
("Harbin Bearing"), a joint stock limited company organized under the law of
the PRC. Harbin Bearing is located in Harbin, the PRC, and has been in
business since 1950. Harbin Bearing manufactures a wide variety of bearings
in the PRC for use in commercial industrial and aerospace applications that
are sold primary in the PRC and certain western countries, including the
United States.
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
manufactures precision spherical bearings that are sold primarily to the
aerospace and commercial aviation industries. Its major customers are located
in the United States.
As a result of the acquisition of Southwest Products, the Committee on
Foreign Investment in the United States ("CFIUS"), an inter-agency committee
of the United States Government, began an investigation of the Company to
determine if the ownership of Southwest Products by the Company would pose
any threat to the national security interests of the United States. In
December 1998, the Company voluntarily agreed to divest Southwest Products
and, pending such disposition, placed its ownership interest in Southwest
Products into an irrevocable trust. An independent trustee acceptable to the
U.S. Department of Defense was appointed to oversee the operations of
Southwest Products to insure Southwest Product's compliance with all U.S.
laws and regulations and to work with the Company's Board of Directors to
actively pursue a suitable buyer. In light of the Company's decision to
appoint a trustee pending the sale of Southwest Products.
At the time of creation of the trust, all "foreign persons" within the
meaning of 31 C.F.R. (S)800.213 who were serving as officers and/or directors
of Southwest Products tendered their resignations. In addition, in order to
further implement the separation of the Company and Southwest Products, CFIUS
required, as part of its agreement that William McKay no longer serve as an
officer and director of the Company. On May 6, 1999, William McKay was
removed as a director by the Company's majority shareholder and as President
and Chief Executive Officer of the Company by the Company's board of
directors. Gunter Gao was named as the replacement President and Chief
Executive Officer of the Company. Except under very limited circumstances,
the Company can not exercise any control or influence over the business or
management of Southwest Products and has no access to visit or obtain
information from Southwest Products without prior trustee approval.
7
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
1. GENERAL (continued)
In acquiring Southwest Products, the Company expected to benefit from its
technical and marketing capabilities, including leveraging such capabilities
to improve the competitive position of Harbin Bearing in China and
internationally. However, under the terms of the trust into which the Company
deposited its ownership interest in Southwest Products, the Company is not
permitted access to these capabilities, which has had a significant impact on
the Company's growth plans. The Company is currently reevaluating its
business strategy, which may involve restructuring to reduce operating
expenses, seeking an alliance with a strategic partner, reorganizing the
Company's operations and/or divesting the Company's bearing manufacturing
assets in China to diversify into other lines of business. In this regard,
the Company is considering the retention of an investment banking firm to
assist in the development and evaluation of future strategic initiatives.
2. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America. All material intercompany accounts and transactions
were eliminated on consolidation.
The accompanying consolidated condensed financial statements are unaudited
but, in the opinion of the management of the Company, contain all
adjustments, necessary to present fairly the financial position at June 30,
1999, the results of operations for the three months and six months ended
June 30, 1998 and 1999, and the changes in cash flows for the six months
ended June 30, 1998 and 1999. These adjustments are of a normal recurring
nature.
The consolidated balance sheet as of December 31, 1999, is derived from
the Company's audited financial statements. Certain information and footnote
disclosures normally included in financial statements that have been prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities
and Exchange Commission, although management of the Company believes that the
disclosures contained in these financial statements are adequate to make the
information presented therein not misleading. For further information, refer
to the consolidated financial statements and notes thereto included in the
Companys Annual Report on Form 10-K for the fiscal year ended December 31,
1998 as filed with the Securities and Exchange Commission.
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 for the six
months ended June 30, 1998 and 1999 have been presented and, where
appropriate, restated to conform to SFAS 128 requirements.
.
8
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
2. BASIS OF PRESENTATION (continued)
In 1998, the Financial Accounting Standards Board issued Statement No.133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
The Company expects to adopt the new statement effective January 1, 2000. The
statement will require the Group to recognize all derivatives on the balance
sheet at fair value. The Company has not yet determined what the effect of
SFAS 133 will be on the earnings and financial position of the Company.
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 the six months ended June 30, 1998 and 1999 was
lower than the exercise prices. The warrants were expired on June 30, 1998.
The diluted loss per share for the six months ended June 30, 1999 is the
same as the basic loss per share as there was an antidilution effect which
reduces the loss per share. The calculation which resulted in such an
antidilution 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 7, and the redemption of preferred shares, both on
January 1, 1998.
The results of operations for the six months ended June 30, 1999 are not
necessarily indicative of the results of operations to be expected for the
full fiscal year ending December 31, 1999.
3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE
The RMB is not freely convertible into foreign currencies.
Effective from January 1, 1994, a single rate of exchange is quoted daily
by the People's Bank of China (the "Unified Exchange Rate"). However, the
unification of the exchange rates does not imply convertibility of RMB into
US$ or other foreign currencies. All foreign exchange transactions continue
to take place either through the Bank of China or other banks authorized to
buy and sell foreign currencies at the exchange rates quoted by the People's
Bank of China.
In preparing the consolidated financial statements, the financial
statements of the Company are measured using Renminbi ("RMB") as the
functional currency. All foreign currency transactions are translated into
RMB using 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 have been translated into
RMB using the unified exchange rate prevailing at the balance sheet dates.
The resulting exchange gains or losses have been credited or charged to the
statements of income for the periods in which they occur.
The Company's share capital is denominated in United States dollars (US$)
and the reporting currency is the RMB. For financial reporting purposes, the
US$ share capital have been translated into RMB at the applicable rates
prevailing on the transaction dates.
9
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE (continued)
For financial reporting purposes, translation of from RMB into US$
for the convenience of the reader has been made at the exchange rate quoted
by the People's Bank of China on June 30, 1999 of US$ 1.00 = RMB 8.3. No
representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rate on June 30, 1999 or at any other certain rate
on June 30, 1999.
4. INVENTORIES
Inventories consist of the following at December 31, 1998 and June
30, 1999:
December 31, 1998 June 30, 1999
------------------ -------------
RMB US$ RMB US$
---- --- --- ---
Raw materials 148,470 17,888 128,132 15,438
Work-in-progress 140,238 16,896 196,579 23,684
Finished goods 419,668 50,562 393,517 47,411
-------- -------- -------- -------
708,376 85,346 718,228 86,533
Less: Allowance for obsolescence (136,200) (16,409) (136,200) (16,409)
-------- -------- -------- -------
Inventories, net 572,176 68,937 582,028 70,124
======== ======== ======== =======
5. DISCONTINUED OPERATION
December 31, 1998 June 30, 1999
------------------ --------------
RMB US$ RMB US$
---- --- --- ---
Cost of investment 28,288 3,408 28,288 3,408
Share of accumulated losses
of the unconsolidated
subsidiary (15,160) (1,826) (27,822) (3,352)
------- ------- ------- ------
Net carrying value 13,128 1,582 466 56
Due from the unconsolidated
subsidiary 29,670 3,574 30,414 3,664
------- ------- ------- ------
42,798 5,156 30,880 3,720
======= ======= ======= ======
10
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
5. DISCONTINUED OPERATION ( continued )
As stated in Note 1, the Company appointed a U.S. citizen as the trustee
of the Company to manage Southwest Products, pursuant to a Voting Trust
Agreement. The Voting Trust Agreement also provides that the trustee will not
accept direction from the Company and will not permit the Company to exercise
any control or influence over the business or management of Southwest
Products. All visits or requests for information to Southwest Products by the
Company must be submitted to the Trustee in advance and receive theTrustee's
approval. In addition, all "foreign persons" within the meaning of 31 C.F.R.
(S)800.213 serving as officers and/or directors of Southwest Products
tendered their resignations pursuant to the terms of the Voting Trust
Agreement.
The proposal for the sale of Southwest Products decided by the Company
also gave rise to the disposal of a segment of a business in accordance with
the APB30. The segment that was held for disposal was all identified as the
net assets of Southwest Products. The net assets of Southwest Products at
December 31, 1998 and June 30, 1999 were as follows:
11
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
5. DISCONTINUED OPERATION (continued)
December 31, 1998 June 30, 1999
----------------- ----------------
RMB US$ RMB US$
--- --- --- ---
Cash and bank balance 3,724 449 3,395 409
Inventories 11,208 1,350 13,488 1,625
Account receivables 8,061 971 4,922 593
Prepayment, deposit and
other receivables 301 36 1,029 124
-------- -------- --------- --------
Current assets 23,294 2,806 22,834 2,751
Property, plant and
equipment, net 13,150 1,584 12,483 1,504
Goodwill * 9,928 1,196 - -
Long term investment 428 52 8 1
-------- -------- --------- --------
46,800 5,638 35,325 4,256
-------- -------- --------- ---------
Account payable (717) (87) (614) (74)
Other payable (3,229) (388) (3,823) (461)
Taxes other than income (56) (7) (8) (1)
Due to holding company (29,670) (3,575) (30,414) (3,664)
-------- -------- --------- --------
Current liabilities (33,672) (4,057) (34,859) (4,200)
-------- -------- --------- --------
Net assets 13,128 1,581 466 56
======== ======== ========= ========
* Goodwill of Southwest comprised:
Cost 10,760 1,296 10,760 1,296
Less : Amortization (832) (100) (10,760) (1,296)
-------- -------- --------- --------
9,928 1,196 - -
======== ======== ========= ========
6. SECURED PROMISSORY NOTE
A promissory note for US$ 5,000 (RMB 41,600) (the "Promissory Note") was
issued to Asean Capital Limited ("Asean") in connection with the Share
Exchange Agreement and is secured by a continuing security interest in all of
the Company's right, title and interest in the outstanding capital stock of
its wholly-owned subsidiary's China Bearing. The Promissory Note is
denominated and repayable in full in United States dollars, and bears
interest at 8% per annum.
In connection with the issuance of convertible debentures described at
Note 7, Asean agreed that for so long as any of the debentures are
outstanding, no amounts are to be repaid on the Promissory Note unless there
is sufficient working capital and the repayment is made in accordance with
the following schedule:-
12
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
6. SECURED PROMISSORY NOTE (continued)
Payment Period Amount
-------------- ------
August 1, 1996 to July 31, 1997 up to US$ 2,000 plus accrued interest
August 1, 1997 to July 31, 1998 up to US$ 1,500 plus accrued interest
August 1, 1998 to July 31, 1999 up to US$ 1,500 plus accrued interest
In accordance with this schedule, a principal payment of US$ 2,000 (RMB
16,700) was made on the Promissory Note on September 10, 1996. As a result of
the Company's current financial position, the directors do not expect to make
any other repayments in the foreseeable future.
7. CONVERTIBLE DEBENTURES AND OTHER LOANS
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 Chine
Investissement 2000 (collectively the "Investors"), on August 23, 1996, China
Bearing issued an aggregate of US$ 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 rate of the higher of (i) 5% per annum (net
of withholding tax, if applicable) and (ii) such 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 hereinafter
defined). Interest is payable quarterly.
The Investors have the right to convert at any time, in whole or in 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 US$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
periods. Due to the Company's failure to achieve the projected cumulative
audited earnings per common share of US $1.79 for the two years ended
December 31, 1997, the Conversion Price has been adjusted to US$1.84 per
share pursuant to the terms of the Subscription Agreement.
13
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
7. CONVERTIBLE DEBENTURES AND OTHER LOANS (continued)
The Convertible Debentures are required to be redeemed on the
Maturity Date at its 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 Convertible Debentures occur, the Convertible Debenture are automatically
due and payable at the principal amount outstanding together with 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 the delisting of the shares from NASDAQ or its suspension
thereof; default in performance after failure to cure after notice; failure
to pay principal or interest; failure to pay indebtedness for borrowed money;
bankruptcy, insolvency or unsatisfied judgment; failure to achieve earning
per common share of at least US$0.55 for fiscal years 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 other members of the Sunbase Group.
Due to the failure of the Company to achieve the required minimum
earnings per common share of U.S.$0.55 in 1997, an event of default occurred.
As a result, interest was being accrued at the rate of 19.75% per annum.
Pursuant to a Settlement Agreement reached in October 16, 1998 with the
investors, the investors agreed not to demand the immediate repayment of the
Convertible Debentures. In addition, the aggregate principal amount of the
Convertible Debentures (plus simple interest at a rate of 12.375% per annum
until July 22, 1998 less interest paid) was restructured as a loan in an
aggregate principal amount of U.S. $13,173. The debt, which carries a simple
interest rate of 10% per annum, is required to be repaid over a period of
three years ending on July 23, 2001.
The modification of terms of the debts thus constitutes troubled debt
restructuring under Statement of Financial Accounting Standards No. 15 "
Accounting by Debtors and Creditors for Troubled Debt Restructuring" ("FAS
15"). Under FAS 15, a debtor shall account for a troubled debt restructuring,
when there is modification of terms of the debts, at the carrying amount of
the payable at the time of the restructuring unless the carrying amount
exceeds the total future cash payments specified by the new terms.
The principal balance of the Instalment Loan was restated to the face
value of the Convertible Debenture together with any unpaid interest expenses
calculated at the rate of 19.75% as entitled in the Subscription Agreement,
after adjusting the fair value of the common stocks issuable on debt
restructuring. The fair value of the common stocks issuable on debt
restructuring was RMB 2,905, being the market value of the Company's trading
stocks at October 16, 1998. Thereafter, the interest expenses of the
Instalment Loan was charged to the profit and loss account on a discounted
basis.
14
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
7. CONVERTIBLE DEBENTURES AND OTHER LOANS (continued)
The maturity of the Instalment Loan was as follows:
RMB
Payable in year ending June 30,
- 2000 23,209
- 2001 32,785
- 2002 60,157
------
116,151
=======
The Instalment Loan bears an effective interest of 5.6% per annum and is
repayable with a repayment schedule as set out in the Settlement Agreement.
As part of the settlement, the Company also issued 466,667 shares of
Common Stock to the investors, which are not transferable for a period of
three years and the members of the Sunbase Group agreed that 50% of any
public market funds raised by the Company or its subsidiaries will be applied
immediately towards discharging the then outstanding debt and interest
accrued thereon.
The obligations of China Bearing under the Settlement Agreement are
guaranteed by other members of the Sunbase Group on an at least pari passu
basis with the guarantors' other present and future unsecured and
unsubordinated obligations.
Pursuant to an undertaking as a supplement to the Settlement Agreement,
Asean Capital unconditionally and irrevocably guarantees and undertakes to
each of the Debenture Holders that for so long as any of the obligations of
the Group under the Settlement Agreement remain outstanding the full due and
punctual payment of all sums now or subsequently payable under the Settlement
Agreement by China Bearing and agrees to perform or procure the performance
of such payment obligations of China Bearing. Pursuant to the Settlement
Agreement, the holding company of Asean Capital, Sunbase International
Holdings Limited ("Sunbase International") undertakes to each of the
Debenture Holders that Sunbase International shall not reduce its current
issued beneficial shareholdings (being 100%) in the share capital of Asean
Capital. In addition, one of the subsidiaries of Sunbase International,
Extensive Resources Limited ("ERL") further granted a charge over 1,000,000
issued shares in the capital of Tianjing Development Holdings Limited held by
ERL in favour of the trustee for and on behalf of the Debenture Holders.
Tianjin Development Holdings Limited is a company listed in the Hong Kong
Stock Exchange. The market value of the pledged shares was RMB6,413 at June
30, 1999
China Bearing has failed to make five scheduled payments under the
Settlement Agreement: (i) principal of $831 and interest of $109 due as of
March 23, 1999, (ii) principal of $28 and interest of $102 due as of April
23, 1999, (iii) principal of $29 and interest of $101 due as of May 23, 1999,
(iv) principal of $29 and interest of $101 due as of June 23, 1999, and (v)
principal of $29 and interest of $101 due as of July 23, 1999. As a result,
there currently exists an event of default under the Settlement Agreement,
and the investors are entitled to accelerate the entire principal amount
outstanding together with any accrued but unpaid interest under the
Settlement Agreement, and to call upon the guarantees by the other members of
the Sunbase Group. The Company, China Bearing and the other members of the
Sunbase Group are currently in negotiations with the investors
15
<PAGE>
regarding these events of default. The directors believe that a workable
solution which would include a revised repayment schedule upon the disposal
of Southwest Products can be made with the creditors in due course. As a
result of the default, the Instalment Loan was classified as current.
16
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of 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 the PRC for use in commercial, industrial and aerospace
applications that are sold primarily in the PRC and certain western countries,
including the United States. On January 16, 1996, 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, and the result for Southwest Products have been
included in the Company's consolidated results of operations since January 1,
1996. However, as a result of the arrangement with CFIUS to place Southwest
Products under trusteeship of the trustee by which Sunbase shall divest
Southwest Products, the operations of Southwest Products are treated as
discontinued operations in the Company's 1999 consolidated financial statements.
As a result of the adverse market conditions in China which existed as a
result of the general financial turmoil which affected Asia in 1997 and 1998,
and which continues to affect Asia in 1999, the funds designated to Chinese
stated-owned enterprises, which included customers of Harbin Bearing, became
even less available than in previous years. As a result, it became increasingly
more difficult for Harbin Bearing to collect with accounts receivable, which had
an adverse impact on Harbin Bearing and the Company's second quarter 1999
results.
Unless otherwise indicated in the Item 2, all RMB and U.S. Dollar except per
share information are expressed in thousands ( '000).
RESULTS OF OPERATION
Three Months Ended June 30, 1998 and 1999:
The following table sets forth certain unaudited operating data (in RMB and
as a percentage of the Company's sales) for the three months ended June 30, 1998
and 1999.
Three Months Ended June 30,
-------------------------------------------
1998 1999
------- ----------
RMB % RMB %
----------- ------- ----------- --------
Sales 149,407 100.0 108,414 100.0
Cost of sales (110,391) (73.9) (104,186) (96.1)
-------- ----- -------- ------
Gross profit 39,016 26.1 4,228 3.9
Selling expenses ( 2,557) ( 1.7) ( 2,764) ( 2.5)
General and administrative
expenses ( 13,086) ( 8.7) ( 13,363) ( 12.3)
Interest expenses ( 18,486) (12.4) ( 12,769) ( 11.8)
-------- ----- -------- ------
Operating income / (loss)
before
minority interests 4,887 3.3 ( 24,668) ( 22.7)
Minority interests ( 4,331) ( 2.9) 10,925 10.0
-------- ----- -------- ------
Net income / (loss) from
Continuing operation 556 0.4 ( 13,743) (12.7)
Net loss from discontinued
operation, net of taxes ( 984) ( 0.7) ( 12,209) (11.3)
-------- ----- -------- ------
Net loss ( 428) ( 0.3) ( 25,952) ( 24.0)
======== ===== ======== ======
17
<PAGE>
Sales
-----
Sales for the three months ended June 30, 1998 decreased by RMB 40,993 or
27.4% to RMB 108,414 as compared to RMB 149,407 for the three months ended
June 30, 1998. The decrease in sales were due to the persisting adverse
market condition in the PRC, and the stringent control on capital expenditure
of PRC state-owned enterprises, which resulted the prolonged low level in
market demand. Increasing competition within the PRC bearing industry by the
small-scale bearing factories is another factor which causes the continuous
low level of sales for the three months ended June 30, 1999.
Cost of Sales/Gross Profit
--------------------------
Cost of sales for the three months ended June 30, 1999 decreased by RMB
6,205 to RMB 104,186 as compared to RMB 110,391 for the three months ended
June 30, 1998. The cost of sales for the three months ended June 30, 1999 and
1998 was calculated using the gross profit method by reference to average
annual gross profit ratios after taking the consideration of certain
proportion of products of which they have no gross profit margin.
The Company's gross profit from continuing operations for the three months
ended June 30, 1999 decreased from RMB 39,016 for the three months ended June
30, 1998 to RMB 4,228, a decrease of RMB 34,788, or 89.2%. Gross profit as a
percentage of revenue also decreased from 26.1% for the three months ended
June 30, 1998 to 3.9% for three months ended June 30, 1999. The significant
decrease in gross profit was mainly attributable to the adverse market
conditions in the PRC, which led to a plunge in units of bearings produced
for the period ended June 30, 1999. In addition, in response to the
continuous decrease in the market selling price of bearings due to keen
competition, the Company was forced to lower its selling price for certain
bearings below its cost in order to maintain its market share.
Selling Expenses
----------------
Selling expenses for the three months ended June 30, 1999 slightly
increased by RMB 207 or 8% to RMB 2,764 as compared to RMB 2,557 for the
three months ended June 30, 1998. The slightly increase in selling expenses
was due to the increase in traveling expenses by sales personnel for debt
collection and development of new customers.
General and Administrative Expenses
-----------------------------------
General and Administrative Expenses for the Company from continuing
operations for the three months ended June 30, 1999 increased by RMB 277 or
2.1% to RMB 13,363 as compared to RMB 13,086 for the three months ended June
30, 1998. The slightly increase was primarily caused by the increase in staff
benefits.
Interest Expenses
-----------------
Interest Expenses for the three months ended June 30, 1999 decreased by
RMB 5,717 or 30.9% to RMB 12,769 as compared to RMB 18,486 for the three
months ended June 30, 1998. The decrease in interest expense was primarily
attributable to the decrease in interest payments after the execution of the
Settlement Agreement signed on October 16, 1998.
18
<PAGE>
Net loss from continuing operations
-----------------------------------
As a result of the aforementioned factors, net loss from continuing
operations increased by RMB 14,299 to RMB 13,743 for the three months ended
June 30, 1999 as compared to a net income of RMB 556 for the three months
ended June 30, 1998.
Net loss from discontinued operations
-------------------------------------
The Company's net loss from discontinued operations increased by RMB
11,225 to RMB 12,209 for the three months ended June 30, 1999 as compared to
RMB 984 for the three months ended June 30, 1998. This increase in net loss
was primarily attributable to the written off of goodwill.
19
<PAGE>
Six Months Ended June 30, 1998 and 1999:
The following table sets forth certain unaudited operating data (in RMB
and as a percentage of the Company's sales) for the six months ended June 30,
1998 and 1999.
Six Months Ended June 30,
------------------------------------------
1998 1999
---- ----
RMB % RMB %
----------- ------- ----------- -------
Sales 239,171 100.0 221,754 100.0
Cost of sales (174,858) (73.1) (213,107) (96.1)
-------- ----- -------- -----
Gross profit 64,313 26.9 8,647 3.9
Selling expenses ( 6,281) ( 2.7) ( 8,644) ( 3.9)
General and administrative
expenses ( 25,465) (10.6) ( 23,473) (10.6)
Interest expenses ( 37,895) (15.8) ( 28,675) (12.9)
-------- ----- -------- -----
Operating loss before minority
Interests ( 5,328) ( 2.2) ( 52,145) (23.5)
Minority interests ( 2,565) ( 1.1) 23,217 (10.5)
-------- ----- -------- -----
Net loss from continuing
operation ( 7,893) ( 3.3) ( 28,928) (13.0)
Net loss from discontinued
operation, net of taxes ( 1,501) ( 0.6) ( 12,663) ( 5.7)
-------- ----- -------- -----
Net loss (9,394) ( 3.9) ( 41,591) (18.7)
======== ===== ======== =====
Net Sales
---------
Net sales for the Company from continuing operations for the six months
ended June 30, 1999 slightly decreased by RMB 17,417 or 7.3% to RMB
221,754, as compared to RMB 239,171 for the six months ended June 30,
1998. The decrease in net sales for the period ended June 30 1999 was
primarily attributable to the persisting adverse market conditions in
China. This market conditions resulted that the Company has adopted a
tighten control on its credit policy made to customers, therefore, the
sales level cannot be boosted up in order to reduce the associated credit
risk to the Company.
Cost of Sales/Gross Profit
--------------------------
Cost of sales for the Company from continuing operations for the six
months ended June 30, 1999 increased to RMB 213,107 as compared to RMB
174,858 for the six months ended June 30, 1998. The cost of sales for the
six months ended June 30, 1999 and 1998 was calculated using the gross
profit method by reference to average annual gross profit ratios after
taking the consideration of certain proportion of products of which they
have no gross profit margin.
The Company's gross profit from continuing operations for the six
months ended June 30, 1999 decreased from RMB 64,313 for the six months
ended June 30, 1998 to RMB 8,647 , a decrease of RMB 55,666, or 86.6%.
Gross profit as a percentage of revenue also decreased from 26.9% for the
six months ended June 30, 1998 to 3.9% for six months ended June 30, 1999.
The significant decrease in gross profit was mainly attributable to the
adverse market conditions in the PRC, which led to a plunge in units of
bearings produced for the period ended 1999. In addition, in response to
the continuous decrease in the market selling price of bearings due to
keen competition, the Company was forced to lower its selling price for
certain bearings below its cost
20
<PAGE>
in order to maintain its market share.
Selling Expenses
----------------
Selling expenses for the Company from continuing operations for the six
months ended June 30, 1999 increased by RMB 2,363 or 37.6% to RMB 8,644 as
compared to RMB 6,281 for the six months ended June 30, 1998. The major
reasons for the increase in selling expenses was attributed to the
increase in other selling expenses for marketing of its products and for
providing a better services to its customers in order to maintain its
market share and competitiveness in China.
General and Administrative Expenses
-----------------------------------
General and Administrative Expenses for the Company from continuing
operations for the six months ended June 30, 1999 decreased by RMB 1,992
or 7.8% to RMB 23,473 as compared to RMB 25,465 for the six months ended
June 30, 1998. The decrease was as a result of the Company adopted
stronger control on its overhead and implement certain cost-cutting
measures in order to improve its profitability and competitiveness.
Interest Expenses
-----------------
Interest Expenses for the six months ended June 30, 1999 decreased by
RMB 9,220 or 24.3% to RMB 28,675 as compared to RMB 37,895 for the six
months ended June 30, 1998. The decrease in interest expense was primarily
attributable to the decrease in interest payments after the execution of
the Settlement Agreement signed on October 16, 1998 and decrease in
interest payment due to the gradually reduction of interest rate in
mainland China.
Net loss from continuing operations
-----------------------------------
As a result of the aforementioned factors, net loss from continuing
operations increased by RMB 21,035 to RMB 28,928 for the six months ended
June 30, 1999 as compared to RMB 7,893 for the six months ended June 30,
1998.
Net loss from discontinued operations
-------------------------------------
The Company's net loss from discontinued operations increased by RMB
11,162 to RMB 12,663 for the six months ended June 30, 1999 as compared to
RMB 1,501 for the six months ended June 30, 1998. This deterioration of
result was primarily attributable to the written off of goodwill.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Operating activities
Net cash used in operating activities from continuing operation was RMB 8,295
for the period ended June 30, 1999, as compared to net cash used in operating
activities from continuing operations of RMB 41,956 for the period ended June
30, 1998. The decrease use of cash in operating activities is primarily due to
the decrease in inventories level of the Company. The Company's net working
capital decreased by RMB 28,979 at June 30, 1999 to RMB 32,905 as compared to
RMB 61,844 at December 31, 1998, and the Companys current ratio at June 30, 1999
was 1.03:1 as compared to 1.05:1 at December 31, 1998 and 1.29:1 at June 30,
1998.
Investing activities
Capital expenditures for the six months ended June 30, 1999 of RMB 2,114
consisted of cost relating to the renovation of existing facilities and
equipment, and were financed by internally generated funds, short-term and long
term bank loans. The Company does not expect to spend more than the minimum
required to maintain its equipment and facilities in 1999. As of June 30, 1999,
the Company had no outstanding capital expenditure commitments. There are no
other material capital expenditures expected in the near future.
Financing activities
The Company has historically relied on both short-term and long-term bank
loans from Chinese banks to support its operating requirements. Short-term bank
loans, which have terms ranging from three months to six months, are utilized to
finance operating requirements and capital requirements and are renewed on a
revolving basis. Long-term bank loans are utilized to fund capital expansion
projects. During the six months ended June 30, 1999, the net decrease in bank
loans (after deducting repayment) was RMB 3,138. The Company believes that it
will be able to continue to maintain and expand its bank borrowings under its
current lending arrangements.
In order to finance the Company's continuing operating and capital
requirements, the Company has in the past evaluated, and is also currently
evaluating, both debt and equity financing opportunities. During June 1996, the
Company in a private placement 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).
In August 1996, China Bearings issued U.S.$11.5 million aggregate principal
amount of the Convertible Debentures to three investors. The Convertible
Debentures were convertible, at the option of the holders, in whole or in part,
at any time into shares of Common Stock of the Company. The conversion price
(the "Conversion Price") was initially U.S. $5.00 per share, subject to
adjustment for (a) a change in par value of the Common Stock, (b) the issuance
of shares by way of capitalization of profits or reserves, (c) capital
distributions, (d) a rights offering at a price which is less than the lower of
the then market price of the Common Stock or the Conversion Price, (e) the
issuance of derivative securities where the total consideration per share
initially received is less than the lower of the then market price of the Common
Stock or the Conversion Price, (f) the issuance of shares at a price per share
which is less than the lower of the then market price of the Common Stock or the
Conversion Price and (g) if the cumulative audited earnings per common share for
any two consecutive fiscal years commencing with the fiscal year ended December
31, 1996 and ending with the fiscal year ending December 31, 1998 are less than
the specified projection of cumulative earnings per common share for such
period. Due the Company's failure to achieve the projected cumulative audited
earnings per common share of U.S.$1.79 for the two years ended December 31,
1997, the Conversion Price was adjusted to U.S.$1.84 per share pursuant to the
terms of the Subscription Agreement.
Unless earlier converted, the Convertible Debentures matured in August 1999.
Interest accrued at a rate equal to the higher of (i) 5% per annum (net of
withholding tax, if applicable) and (ii) the percentage of the dividend yield
calculated by dividing the annual dividend declared per share of Common Stock of
the Company by the Conversion Price. Interest on the Convertible Debentures was
22
<PAGE>
payable quarterly.
At maturity, the Convertible Debentures were required to be redeemed at a
redemption price equal to the principal amount then outstanding plus any accrued
but unpaid interest, together with an amount sufficient to enable the holders to
receive an aggregate internal rate of return of 12% per annum on the cost of
their investment. In addition, if any of the events of default specified in the
Subscription Agreement occurred, the Convertible Debentures become automatically
due and payable at the principal amount outstanding together with accrued and
unpaid interest and an amount that would enable the Investors to yield an
aggregate internal rate of return on their investment of 19.75% per annum.
Events of default included breach of covenants after failure to cure after
notice, failure to pay principal or interest, failure to pay indebtedness for
borrowed money, certain events of bankruptcy or insolvency, judgement defaults,
failure to achieve earnings per common share of at least U.S. $0.55 for each
fiscal year commencing January 1, 1996, accounts receivable reaching a certain
level in relationship to net sales and delisting or suspension of trading of the
Company's Common Stock from Nasdaq.
Due to the failure of the Company to achieve the required minimum earnings
per common share of U.S.$0.55 in 1997, an event of default occurred. As a
result, interest accrued at the default rate of 19.75% per annum. Pursuant to a
Settlement Agreement reached in October 1998 with the investors, the investors
agreed not to demand the immediate repayment of the Convertible Debentures. In
addition, the aggregate principal amount of the Convertible Debentures (plus
simple interest at a rate of 12.375% per annum until July 22, 1998 less interest
paid) was restructured as a loan in an aggregate principal amount of U.S.
$13,173. The debt, which carries a simple interest rate of 10% per annum, is
required to be repaid over a period of three years ending on July 23, 2001. As
part of the settlement, the Company also issued 466,667 shares of Common Stock
to the investors, which are not transferable for a period of three years. The
members of the Sunbase Group agreed that 50% of any public market funds raised
by the Company or its subsidiaries would be applied immediately towards
discharging the then outstanding debt and interest accrued thereon. The
obligations of China Bearing under the Settlement Agreement are guaranteed by
other members of the Sunbase Group on an at least pari passu basis with the
guarantors' other present and future unsecured and unsubordinated obligations.
China Bearing has failed to make five scheduled payments under the Settlement
Agreement: (i) principal of $831 and interest of $109 due as of March 23, 1999,
(ii) principal of $28 and interest of $102 due as of April 23, 1999, (iii)
principal of $29 and interest of $101 due as of May 23, 1999, (iv) principal of
$29 and interest of $101 due as of June 23, 1999, and (v) ) principal of $29 and
interest of $101 due as of July 23, 1999. As a result, there currently exists an
event of default under the Settlement Agreement, and the investors are entitled
to accelerate the entire principal amount outstanding together with any accrued
but unpaid interest under the Settlement Agreement, and to call upon the
guarantees by the other members of the Sunbase Group. The Company, China Bearing
and the other members of the Sunbase Group are currently in negotiations with
the investors regarding these events of default. While the Company believes that
a workable solution can be reached with the investors in due course, no
assurance can be given as to when or if such negotiations will result in a
resolution that is favorable to the Company.
In connection with the acquisition by the Company of its interest in Harbin
Bearing from Asean Capital, in addition to shares of Common Stock issued by the
Company to Asean Capital, the Company issued a promissory note for U.S. $5,000
(RMB 41,600) (the "Promissory Note"). The Promissory Note is secured by a
continuing security interest in all of the Company's right, title and interest
in the outstanding capital stock of its wholly-owned subsidiary, China Bearing.
The Promissory Note is denominated and repayable in full in U.S. dollars, and
bears interest at a rate of 8% per annum. In connection with the issuance of the
Convertible Debentures, Asean Capital agreed that for so long as any of the
Convertible Debentures are outstanding, no amounts may be repaid by the Company
on the Promissory Note unless there is sufficient working capital and the
repayment is made in accordance with the following schedule:
Payment Period Amount
- -------------- -----------
August 1, 1996 to July 31, 1997 up to U.S.$2,000 plus accrued interest
August 1, 1997 to July 31, 1998 up to U.S.$1,500 plus accrued interest
23
<PAGE>
August 1, 1998 to July 31, 1999 up to U.S.$1,500 plus accrued interest
In accordance with this schedule, a principal payment of U.S.$2,000 (RMB
16,700) was made in September 1996. As a result of the Company's current
financial position, the directors do not expect to make any other repayments in
the foreseeable future.
The financial condition of the Company raises substantial doubt about the
Company's ability to continue as an independent going concern. The description
of the business, financial condition and results of operations of the Company
contained in this Quarterly Report, however, have been prepared on a going
concern basis. They do not include any adjustments that might result from the
outcome of the uncertainty relating to the Company's ability to continue as a
going concern, including, without limitation, adjustments to the carrying value
of assets and liabilities or the classification of liabilities that would be
necessary if the Company were not considered to be a going concern. Such
adjustments would have a material adverse effect on the Company's financing
condition.
The directors have adopted the following measures to improve the financial
position, cash flow, profitability and operations of the Company:
(a) Proposal for the sale of Southwest Products
Pursuant to a resolution dated December 16, 1998, the board of directors
decided to dispose Southwest Products and began to seek potential investors
through the appointment of a trustee. Currently, the Company has received
responses from several investors who have expressed interest in acquiring
Southwest Products.
(b) Negotiation under the Settlement Agreement
The Company is currently conducting negotiations with the investors under the
Settlement Agreement in relation to the event of default in repayment of the
amounts due under the Settlement Agreement since March 1999. The directors
believe that a workable solution, which would include a revised repayment
schedule upon the disposal of Southwest Products, can be made with the Investors
in due course.
(c) Renewal of PRC bank loans
In the past, the Company has been allowed by the PRC bankers to roll over the
loans due for repayment. Accordingly, the directors believe that the existing
bank loans will be renewed in the forthcoming year.
(d) Operational and improved profitability measures
The directors are in the process of implementing certain measures designed to
further restore the Company's financial strength. Such measures include,
iner-alia:
i) the rationalisation of overheads which comprises certain cost cutting
measures;
ii) the revision of its pricing policy to boost sales;
iii) active negotiations with existing and new bankers for new banking
facilities;
iv) tighter credit controls over debt collections;
v) active negotiations with existing raw material suppliers to obtain a
long credit terms; and
vi) the exploration of new clientele in other provinces in the PRC.
(e) Restructuring of the Company
The directors are in the process of evaluating the Company's business
strategy which may involve an alliance with a strategic partner, reorganisation
of the Company's operations and/or divestiture of its bearing manufacturing
assets in the PRC.
24
<PAGE>
In the opinion of the directors, in light of the measures completed to date
together with the expected results of other measures in progress, it is
reasonable to expect that the Company will be able to ease its liquidity problem
in the near future. The management have dedicated their efforts to reviving the
operations of the Company by eliminating, to the extent possible, all the
factors leading up to the deterioration of its performance in the past. After
taking into account the existing banking facilities, expected net proceeds from
the disposal of Southwest Products and subject to the successful negotiation
with the investors under the Settlement Agreement to reach a workable solution,
the directors believe that the Company will have sufficient working capital for
its current requirements for a period of one year after the balance sheet date.
In this regards, the financial statements have been prepared on a going concern
basis.
INFLATION / DEFLATION 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. Since 1998, the general
inflation rate in the PRC was under control, with the PRC experiencing a 3.2%
deflation in prices in May 1999 (1998: minus 2.6%). Since 1993, the Chinese
government has implemented and maintained an economic program designed to
control inflation, which has 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 and deflation. In
view of the change in market conditions and increased competition, the Company
in an inflationary market may be unable to raise its prices to shift a portion
of the inflated costs to customers, and the Company in a deflationary market may
be forced to lower its prices to maintain competitive prices. The price of
bearing steel, the major raw material used by the Company, remained fairly
stable during 1996, 1997, 1998 and the second quarter of 1999.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. Changes in the relative value
of currencies occur periodically and may, in certain instances, materially
affect the Company's results of operations.
Although the Company has export ambitions, historically, substantially all of
the Company's sales have been domestic and settled in RMB. Moreover,
historically, substantially all of the Company's costs have been incurred in
RMB. It is possible, however, that the revenue/cost profile of the Company could
change in the future, and if it does, then it is possible that a devaluation of
the RMB against the U.S. Dollar could have a material adverse effect upon the
results of operations. Currently, all of the Company's bank debts are
denominated in RMB. However, the Company has indebtedness in respect of the
Convertible Debentures that is denominated in U.S. dollars, so that a
devaluation of the RMB against the U.S. Dollar could have a material adverse
effect upon the Company's financial position. Although prior to 1994 the RMB
experienced significant devaluation against the U.S. Dollar, the RMB has
remained fairly stable from 1994 to present. The unified exchange rate was
U.S.$1.00 to RMB 8.45 at December 31, 1994, RMB 8.32 at December 31, 1995, RMB
8.3 at December 31, 1996, RMB 8.3 at December 31, 1997, RMB 8.3 at December 31,
1998 and RMB 8.3 at June 30, 1999. The People's Bank of China has declared its
intention not to devalue the RMB. However, it is possible that competitive
pressures resulting from the significant devaluation of other Asian currencies
will ultimately force the Government of China to reconsider its position on
devaluation of the RMB.
YEAR 2000 COMPLIANCE
The Company has completed an assessment of its non-information technology
systems, and believes based on that assessment that these systems do not contain
any elements that are susceptible to Year 2000 problems. Based on recent
assessments of its information technology systems, the Company has determined
that some portions of its information processing systems, particularly the
mainframe computer used by Southwest Products, will require modification or
replacement in order to ensure that
25
<PAGE>
those systems are Year 2000 compliant. The Company is in the process to replace
these information processing systems, but does not believe that the cost of such
replacement will be material. The Company believes that Southwest Products will
assume the cost of modifying or replacing the information processing systems
used by Southwest Products, including the mainframe computer used by Southwest
Products. The time for completion of the installation of the new mainframe
system is scheduled on last quarter of 1999.
The Company has also asked each of its third-party suppliers and vendors to
confirm that they are Year 2000 compliant. Substantially all of the Company's
suppliers and vendors have indicated that they expect to be Year 2000 compliant
or that they do not anticipate that they are susceptible to Year 2000 problems.
Most of Harbin Bearing's suppliers and vendors in China perform their operations
and data recording manually without the use of computers or other information
technology systems. As a result, the Company does not anticipate any Year 2000
problems from its suppliers and vendors in China.
26
<PAGE>
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates and
foreign currency exchange rates, which could affect its future results of
operations and financial condition. The Company manages its exposure to these
risks through its regular operating and financing activities. Currently, the
Company is unable to hedge its RMB-hard currency exchange risks due to
restrictions imposed by the government of the PRC which prevent financial
institutions to engage in foreign currency transactions offering forward
exchange contracts with respect to the RMB.
Foreign Currency Risk
Although the Company has export ambitions, historically, substantially all of
the Company's sales have been domestic and settled in RMB. Moreover,
historically, substantially all of the Company's costs have been incurred in
RMB. Thus, the functional currency of Harbin Bearing and the Company's other PRC
subsidiaries is the RMB. It is possible, however, that the revenue/cost profile
of the Company could change in the future, and if it does, then it is possible
that a devaluation of the RMB against the U.S. Dollar could have a material
adverse effect upon the results of operations.
Currently, all of the Company's bank debts are denominated in RMB. However,
the Company has indebtedness under the Settlement Agreement (and under the
Convertible Debentures and Subscription Agreement in the event a satisfactory
settlement can not be made pursuant to default under the Settlement Agreement)
that is denominated in U.S. dollars, so that a devaluation of the RMB against
the U.S. Dollar could have a material adverse effect upon the Company's
financial position.
As a result of the foregoing factors, the Company is subject to risk from
fluctuations in the value of the RMB relative to the U.S. dollar.
The RMB is translated into U.S. dollars in consolidation, and will result in
cumulative translation adjustments which are included in other comprehensive
income (loss). For the second quarter of 1999, the potential effect on other
comprehensive income (loss) resulting from a hypothetical 5%, 10% and 20%
weakening in the quoted RMB rate against the U.S. dollar would have resulted in
a $1,457, $2,781 and $5,099 decrease in consolidated stockholders' equity and an
$239, $456 and $835 decrease in net loss in June 30 1999. The same hypothetical
movements would have resulted in an RMB 5,808, RMB 11,615 and RMB 23,230
increase in the amount of debt service payable by the Company under the
Settlement Agreement in the second quarter of 1999. Actual results may differ.
Interest Rate Risk
The Company's bank loans are all fixed rate and denominated in RMB. Fixed
rates range between 7.6% per annum and 9.5% per annum for short-term loans, and
between 3.7% per annum and 15.12% per annum for long-term loans. The total
amount of short-term bank loans outstanding as of June 30, 1999 was RMB 514,182
with an effective interest rate of 7.9% per annum. The total amount of long-term
bank loans outstanding as of June 30, 1999 was RMB 156,113, with an effective
interest rate of 8.4% per annum. In addition, the Company has indebtedness under
the Settlement Agreement (and under the Convertible Debentures and Subscription
Agreement in the event a satisfactory settlement can not be made pursuant to
default under the Settlement Agreement) at fixed rates of interest. As such, the
Company is exposed to interest rate risk on its long-term bank loans and in
respect of its indebtedness under the Settlement Agreement (or Convertible
Debentures and Subscription Agreement). Given banking practices in the PRC, the
Company believes that it will be able to refinance its long-term bank loans at
market rates whenever they drop significantly below the fixed rates specified on
its long-term bank loans. At present, the Company believes that the risk of a
significant drop in relevant market interest rates during the term of the debt
under the Settlement Agreement is remote; however, the Company may consider
entering into hedge transactions if such a risk is perceived to increase.
27
<PAGE>
ITEM 4 - FACTORS THAT MAY AFFECT FUTURE RESULTS
Foreign Investment Matters
Pursuant to the terms of the trusteeship which holds the Company's interest
in Southwest Products, except under very limited circumstances, the Company can
not exercise any control or influence over the business or management of
Southwest Products and has no access to visit or obtain information from
Southwest Products without prior trustee approval. As a result, the Company lost
its control over Southwest Products since December 31, 1998.
In addition, in acquiring Southwest Products, the Company expected to benefit
from its technical and marketing capabilities, including leveraging such
capabilities to improve the competitive position of Harbin Bearing in China and
internationally. However, the terms of the trusteeship have inhibited the
Company's ability to do so, which has had a significant impact on the Company's
growth plans. The Company is currently reevaluating its business strategy, which
may involve restructuring to reduce operating expenses, seeking an alliance with
a strategic partner, reorganizing the Company's operations and/or divesting the
Company's bearing manufacturing assets in China to diversify into other lines of
business. However, no assurance can be given as to whether or when the Company
will be able to successfully pursue any of these alternatives.
The Company is currently conducting a review to determine if any claims may
be brought by the Company against any party involved in its acquisition of
Southwest Products as a result of the CFIUS investigation. 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 Products.
ITAR Regulations
For the duration of the Voting Trust Agreement, Southwest Products is subject
to a temporary export licensing regime which requires all export sales or other
overseas transfers of Southwest Products' products or technology to be reviewed
and approved in advance by the DTC. Under this regime, the Company can not
obtain access to Southwest Products' products, technology or facilities without
prior written approval from the U.S. government.
Nasdaq De-Listing
In February 1999, the Company's Common Stock was delisted from Nasdaq. After
its delisting from Nasdaq, the Common Stock traded on the Bulletin Board.
However, since May 20, 1999, the Company's Common Stock has not been trading on
the Bulletin Board because there are currently no market makers making a market
in the Common Stock and the Company is not current with its public information
requirements. The Company is making efforts to become current in its public
information requirements but no assurance can be given as to when trading in the
Company's Common Stock on the Bulletin Board will resume or, if resumed, as to
the market that will develop for the Common Stock or the prices at which it will
trade. The Company appointed one of the market makers to process the necessary
work for the Company to become re-listing in Nasdaq, and the work for the
Company to be re-listing was in progress.
Potential Acceleration of Amounts due under the Settlement Agreement
As a result of the failure by China Bearing to make three payments due under
the Instalment provisions of the Settlement Agreement, the holders of the
Convertible Debentures have the right to accelerate the payment of all amounts
due under the Settlement Agreement, as well as the right to exercise all other
remedies available to them under the subscription agreement pursuant to which
the Convertible Debentures were purchased. While the Company believes that an
equitable resolution may be reached with the holders of this indebtedness no
assurances can be given in this regard and any acceleration would have a severe
negative effect on the liquidity of the Company.
28
<PAGE>
Substantial Leverage; Inadequacy of Earnings to Cover Fixed Charges
As at June 30, 1999, the Company has, on a consolidated basis, total
indebtedness of approximately RMB 811,346 (US$ 97,752) as at June 30, 1999,
resulting in a ratio of debt to total capitalization of 3.1:1 at that date.
Substantially all of such indebtedness is denominated in RMB.
The Company will require substantial cash flow to meet its repayment
obligations on its indebtedness, as well as on any future additional
indebtedness it may incur. In the second quarter of 1999, the Company's earnings
were inadequate to cover fixed charges by approximately RMB 145,817 (U.S.
$17,568) (Note: For purposes of this calculation, the term "fixed charges" means
the total amount of debt service (principal and interest) due under the
Convertible Debentures, as modified by the Settlement Agreement, during the
second quarter of 1999. The Promissory Note issued to Asean Capital did not
appear to be meaningful for purposes of this calculation because the Promissory
Note is subordinated to the Convertible Debentures and was issued to a related
party. The term "earnings" means net loss from continued operations during the
second quarter of 1999. Thus, for this calculation, the second quarter of 1999
net loss was simply added to the second quarter of 1999 debt service under the
Convertible Debentures, as modified by the Settlement Agreement.)
The ability of the Company to make scheduled interest payments on, and retire
at maturity the principal of, its indebtedness is dependent on the Company's
future performance. However, the Company experienced operating losses and
negative cash flow from operations of RMB 41,591 and RMB 14,292 for the period
ended June 30, 1999; RMB 9,394 and RMB 24,100 for the period ended June 30,
1998, respectively. The Company expects that net losses may continue for the
foreseeable future in view of the current economic situation in China and many
other factors beyond its control. In addition, the Convertible Debentures and
the Settlement Agreement impose significant operating and financial restrictions
on the Company. Such restrictions limit the Company's ability to create liens
and its use of the proceeds from certain asset sales. These factors may make the
Company more vulnerable to economic and industry downturns, limit its ability to
obtain additional financing to fund future working capital requirements, capital
expenditures or other general corporate purposes, and reduce its flexibility in
responding to changing business or economic conditions or to a substantial
decline in operating results.
The Company may require substantial additional funds in the event it fails to
meet its projected operating results or its needs exceed its projected capital
requirements. The Company's future sources of financing may include equity and
debt financing. Accordingly, the Company may be required to refinance a
substantial portion of its indebtedness since cash flow from operations may be
inadequate to meet payment obligations arising from its long term indebtedness.
There can be no assurance that the Company will be able to raise necessary debt
and/or equity proceeds to meet these debt obligations or that the Company will
have requisite access to capital markets on acceptable terms.
Ability of the Company to Continue as a Going Concern
The financial condition of the Company raises substantial doubt about the
Company's ability to continue as an independent going concern. The description
of the business, financial condition and results of operations of the Company
set forth herein, and in the Company's financial statements included herein,
however, have been prepared on a going concern basis. They do not include any
adjustments that might result from the outcome of the uncertainty relating to
the Company's ability to continue as a going concern, including, without
limitation, adjustments to the carrying value of assets and liabilities or the
classification of liabilities that would be necessary if the Company were not
considered to be a going concern. Such adjustments would have a material adverse
effect on the Company's reported financial condition.
Potential Changes in the Economy of China
The economy of the PRC has experienced significant growth in the past decade.
Much of this growth has been a result of governmental policies which have
encouraged substantial private economic activity. The continuation of growth in
China is now subject to a number of uncertainties including, without limitation,
a continuation of governmental policies favoring private enterprise,
29
<PAGE>
continued success in maintaining a moderate rate of inflation, the ability of
China to remain competitive with other Asian countries that have experienced
significant devaluation of their currencies during the past two years,
resolution of liquidity problems affecting the Chinese banking system and
economy as a whole and the maintenance of uninterrupted trading relationships
with the United States and other major trading partners. In the event that
negative developments in these or other areas result in a slowdown or decline in
the economy of China, it is likely that the future results of operations of the
Company will be adversely effected.
Political and Regulatory Considerations in China
Although the government of China has been pursuing economic reform policies
for over a decade, there can be no assurances that such policies will continue.
Any change in such policies could have a substantial adverse effect on the
economic growth of China which would likely diminish the market for the
Company's products in China. Moreover, changes in the laws or regulations
governing business operations, restrictions on foreign ownership of Chinese
companies, exchange controls, changes in the tax laws or restrictions on the
repatriation of profits could be imposed in a manner which would result in
negative consequences to the Company and its interest in Harbin.
Failure to Qualify Harbin Bearings to Automotive and Aerospace Quality
Standards; Ability to Remain Competitive with Multinational Manufacturers.
To date Harbin Bearing has been unable to establish procedures that would
enable it to qualify to international quality standards, generally accepted
automotive quality standards or aerospace quality standards. Such failure has
resulted in Harbin Bearing's inability to capture orders from the U.S.
automotive and aerospace industries. The international bearing industry is
extremely competitive. Although the Company's main competitors are Eastern
European manufacturers and manufacturers located in China, to a lesser extent,
the Company also competes with companies such as Svenska Kugellager Fabriken,
Fisher Aktien Gesellschast, New Technology Network, NSK, Timken, Torrington-
Fafnir and Nippon Miniature Bearing, who dominate this market. The Company had
hoped that its acquisition of Southwest Products would not only allow it to
access the U.S. bearing market, but also allow it to implement U.S.
manufacturing methods and quality control procedures at Harbin Bearing to
develop new products and meet the stringent requirements of many non-PRC OEMs.
By doing so, the Company expected to increase its penetration of the
international bearing market. As a result of the Company's decision to dispose
of Southwest Products in response to the CFIUS investigation, however, the
Company has suspended indefinitely its plan to enable Harbin Bearing to meet
these international standards. Failure to qualify Harbin Bearing to these
standards is expected to constrain the Company's future growth.
The Company's products may become obsolete as a result of new technologies or
new developments affecting the bearing industry. The Company's ability to remain
competitive depends in significant part on its ability to anticipate and stay
abreast of new technological developments, fund research and development,
introduce new products and retain key personnel for these functions. Some of the
Company's competitors have substantially greater resources available for these
purposes. To the extent that the Company does not generate adequate cash flow or
obtain other financing to fund product development, the Company's competitive,
including by positioning will probably be adversely effected, which may result
in a loss of sales or lower productivity.
Southwest Products Company Environmental Issues
Southwest Products 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 Products that the remediation has been successfully
completed and that the lessor has received approval from the State of California
for the remediation that has been conducted. Southwest Products does not believe
that it has any liability regarding this issue. However, no assurance can be
given in this regard.
30
<PAGE>
Impact of the Turmoil in Asian Markets
The turmoil in Asian markets may affect the political and economic policies
in China and the continued deterioration of the Asian market coupled with the
liquidity restraints imposed in China could adversely affect the Company's
operations and the collectability of its accounts receivable. Continuation
ofthese trends could also impair the Company's liquidity.
31
<PAGE>
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
No Material Developments
Item 2 Changes in Securities
None
Item 3 Defaults upon Senior Securities
China Bearing has failed to make five scheduled payments under the
Settlement Agreement: (i) principal of $831 and interest of $109 due as
of March 23, 1999, (ii) principal of $28 and interest of $102 due as of
April 23, 1999, (iii) principal of $29 and interest of $101 due as of
May 23, 1999, (iv) principal of $29 and interest of $101 due as of June
23, 1999, and (v)) principal of $29 and interest of $101 due as of July
23, 1999. As a result, there currently exists an event of default under
the Settlement Agreement, and the investors are entitled to accelerate
the entire principal amount outstanding together with any accrued but
unpaid interest under the Settlement Agreement, and to call upon the
guarantees by the other members of the Sunbase Group. The Company,
China Bearing and the other members of the Sunbase Group are currently
in negotiations with the investors regarding these events of default.
While the Company believes that a workable solution can be reached with
the investors in due course, no assurance can be given as to when or if
such negotiations will result in a resolution that is favorable to the
Company.
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Computation of Earnings per common share
27 Financial Data Schedule
(b) Reports on Form 8-K:
Three months ended June 30, 1999: None
1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sunbase Asia, Inc.
------------------
(Registrant)
Date: August 13, 1999 By: /s/ Gunter Gao
--------------
Gunter Gao
Chairman, President and
Chief Executive Officer
Date: August 13, 1999 By: /s/ (Roger) Li Yuen Fai
-----------------------
(Roger) Li Yuen Fai
Vice President and
Chief Financial Officer
(Principal Financial Officer)
2
<PAGE>
EXHIBIT 11
----------
SUNBASE ASIA, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
1998 1999 1999 1998 1999 1999
RMB RMB US$ RMB RMB US$
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BASIC
Net income / (loss) from continuing operations (7,893) (28,928) (3,486) 556 (13,743) (1,657)
Net loss from discontinued operation,
net of income taxes (1,501) (12,663) (1,526) (984) (12,209) (1,471)
---------- ---------- ---------- ----------- ---------- ----------
(9,394) (41,591) (5,012) (428) (25,952) (3,128)
========== ========== ========== =========== ========== ==========
Weighted average number of
shares of common stock outstanding :
Share of common stock outstanding 13,032,215 14,118,751 14,118,751 13,360,637 14,118,751 14,118,751
========== ========== ========== =========== ========== ==========
Net loss per common share :
Loss from continuing operation (0.61) (2.05) (0.25) 0.04 (0.97) (0.12)
========== ========== ========== =========== ========== ==========
Net loss (0.72) (2.95) (0.35) (0.03) (1.84) (0.22)
========== ========== ========== =========== ========== ==========
</TABLE>
1
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- --------------------------
1998 1999 1999 1998 1999 1999
RMB RMB US$ RMB RMB US$
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
DILUTED
Net income/ (loss) from continuing operation (7,893) (28,928) (3,486) 556 (13,743) (1,657)
Net loss from discontinued operations,
net of income taxes (1,501) (12,663) (1,526) (984) (12,209) (1,471)
---------- ---------- ---------- ----------- ---------- ----------
Net loss (9,394) (41,591) (5,012) (428) (25,952) (3,128)
========== ========== ========== =========== ========== ==========
Weighted average number of shares
of common stock outstanding:
Share of common stock
outstanding on January 1 12,700,142 14,118,751 14,118,751 12,700,142 14,118,751 14,118,751
Conversion of Series B Preferred
Share 332,071 - - 660,493 - -
Share issued as a result of rounding
from reverse stock split 2 - - 2 - -
---------- ---------- ---------- ----------- ---------- ----------
Weighted average number of
shares of common stock outstanding 13,032,215 14,118,751 14,118,751 13,360,637 14,118,751 14,118,751
</TABLE>
Shares of common stock
issuable assuming conversion of
the Convertible Preferred Stock
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- Series A - - - - - -
- Series B - - - - - -
Shares of common stock issuable
assuming conversion of the
Convertible Debentures on
August 23, 1996 - - - - - -
---------- ---------- ---------- ----------- ---------- ----------
Total weighted average number of
shares of common stock and
common stock equivalents
outstanding 13,032,215 14,118,751 14,118,751 13,360,637 14,118,751 14,118,751
========== ========== ========== ========== ========== ==========
Net loss per common share:
Net income / (loss) from continuing operation (0.61) (2.05) (0.25) 0.04 (0.97) (0.12)
========== ========== ========== ========== ========== ==========
Net loss (0.72) (2.95) (0.35) (0.03) (1.84) (0.22)
========== ========== ========== ========== ========== ==========
</TABLE>
2
<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
QUARTERLY REPORT ON FORM 10-Q FOR THE SIX MONTHS PERIOD ENDED JUNE 30, 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 576
<SECURITIES> 0
<RECEIVABLES> 92,329
<ALLOWANCES> 0
<INVENTORY> 70,124
<CURRENT-ASSETS> 163,029
<PP&E> 63,253
<DEPRECIATION> 0
<TOTAL-ASSETS> 231,056
<CURRENT-LIABILITIES> 159,066
<BONDS> 0
0
5,365
<COMMON> 14
<OTHER-SE> 29,784
<TOTAL-LIABILITY-AND-EQUITY> 231,056
<SALES> 26,717
<TOTAL-REVENUES> 26,717
<CGS> 25,675
<TOTAL-COSTS> 25,675
<OTHER-EXPENSES> 3,870
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,455
<INCOME-PRETAX> (6,283)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,283)
<DISCONTINUED> (1,526)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,012)
<EPS-BASIC> (0.25)
<EPS-DILUTED> (0.35)
</TABLE>
