<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the quarterly period ended March 31, 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 No X
----- -----
As of May 19, 1999, the Company had 14,118,751 shares of common stock issued
and outstanding.
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
------------------------------------
INDEX
<TABLE>
<CAPTION>
Page
----
PART I: FINANCIAL INFORMATION
<S> <C>
Item 1 -- Financial statements
Consolidated Condensed Balance Sheets (unaudited)
- December 31, 1998 and March 31, 1999 3-4
Consolidated Condensed Statements of Income (unaudited)
- Three months ended March 31, 1998 and 1999 5
Consolidated Condensed Statements of Cash Flows (unaudited)
- Three months ended March 31, 1998 and 1999 6
Notes to Consolidated Condensed Financial Statements
(unaudited)
- Three months ended March 31, 1998 and 1999 7-16
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-28
Item 3 -- Quantitative and Qualitative Disclosure about
Market Risk 29
PART II: OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K 30
SIGNATURES 31
EXHIBIT 11 Computation of Earnings Per Common Share 32-33
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1 - Financial Statements
--------------------
<TABLE>
<CAPTION>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF DECEMBER 31, 1998 AND MARCH 31, 1999
(Amounts in thousands, except number
of shares and per share data)
12/31/98 3/31/99
-------- -------
Notes RMB US$ RMB US$
----- --- ---
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Unrestricted cash and bank balances 19,075 2,298 3,867 466
Accounts receivable, net 468,075 56,396 523,133 63,028
Notes receivable 2,440 294 1,910 230
Inventories, net 4 572,176 68,937 544,051 65,548
Other receivables 26,720 3,219 36,464 4,393
Due from related companies, net 205,216 24,724 198,028 23,859
--------- -------- ---------- -------
Total current assets 1,293,702 155,868 1,307,453 157,524
Fixed assets 559,245 67,379 541,900 65,289
Net assets of discontinued operation 5 42,798 5,156 43,082 5,191
Deferred asset 9,553 1,151 9,553 1,151
--------- -------- ---------- -------
Total assets 1,905,298 229,554 1,901,988 229,155
========= ======== ========== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short term bank loans 516,232 62,197 514,376 61,973
Long term bank loans, current portion 156,113 18,809 156,113 18,809
Accounts payable 193,195 23,276 170,611 20,556
Accrued liabilities and other payables 122,431 14,751 164,908 19,868
Short term obligations under capital leases 20,933 2,522 21,378 2,576
Secured promissory note 6 24,900 3,000 24,900 3,000
Income tax payable 50,358 6,068 64,965 7,827
Taxes other than income 30,417 3,664 28,682 3,456
Other loans 7 117,239 14,125 116,020 13,978
--------- -------- ---------- -------
Total current liabilities 1,231,818 148,412 1,261,953 152,043
Long term obligations under capital leases 47,550 5,729 42,036 5,064
Minority interests 330,409 39,808 318,117 38,327
--------- -------- ---------- -------
1,609,777 193,949 1,622,106 195,434
</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 MARCH 31, 1999 (UNAUDITED) (CONTINUED)
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
12/31/98 3/31/99
-------------------- ----------------------
RMB US$ RMB US$
--------- -------- ---------- -------
<S> <C> <C> <C> <C>
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 (11,972) (1,442)
--------- -------- ---------- -------
Total shareholders' equity 295,521 35,605 279,882 33,721
--------- -------- ---------- -------
Total liabilities and shareholders' equity 1,905,298 229,554 1,901,988 229,155
========= ======== ========== =======
</TABLE>
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 ENDED MARCH 31, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1998 1998 1999 1999
Notes RMB US$ RMB US$
----- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Net sales to
-Third parties 81,327 9,798 106,852 12,873
-Related parties 8,457 1,019 6,488 782
------- ------- ------- -------
89,784 10,817 113,340 13,655
Cost of sales (65,641) ( 7,908) (108,921) (13,123)
------- ------- ------- -------
Gross profit 24,143 2,909 4,419 532
Selling, general and
Administrative expense
- Third parties (13,570) ( 1,634) (14,473) (1,743)
- Related parties ( 818) ( 99) ( 1,517) (183)
------- ------- ------- -------
(14,388) ( 1,733) (15,990) (1,926)
Interest expenses, net
- Third parties (17,974) (2,166) (11,765) (1,417)
- Related parties ( 1,552) (187) ( 4,141) ( 499)
------- ------- ------- -------
(19,526) (2,353) (15,906) (1,916)
------- ------- ------- -------
Operating loss before minority
interests ( 9,771) ( 1,177) (27,477) ( 3,310)
Minority interests 1,765 213 12,292 1,481
------- ------- ------- -------
Net loss from continuing operation ( 8,006) ( 964) (15,185) (1,829)
Net loss from discontinued operation,
net of income taxes of nil and RMB386
for the period ended December 31, 1998
and 1999, respectively ( 961) ( 116) ( 454) ( 55)
------- ------- ------- -------
( 8,967) ( 1,080) (15,639) ( 1,884)
======= ======= ======= =======
Loss per common share: 2
- Basic loss from continuing
operations ( 0.63) (0.08) (1.08) (0.13)
======= ======= ======= =======
- Basic net loss (0.71) (0.09) (1.11) (0.13)
======= ======= ======= =======
- Diluted loss from continuing
operations (0.63) (0.08) (1.08) (0.13)
======= ======= ======= =======
- Diluted net loss (0.71) (0.09) (1.11) (0.13)
======= ======= ======= =======
Number of shares outstanding 2
- Basic 12,700,142 12,700,142 14,118,751 14,118,751
========== ========== ========== ==========
- Diluted 12,700,142 12,700,142 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 THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1998 1999 1999
RMB US$ RMB US$
--- --- ---
<S> <C> <C> <C> <C>
Cash flows from operation activities
Net income / (loss) (8,967) (1,080) (15,639) ( 1,884)
Adjustments to reconcile income to net
Cash provided by (used in) operating
activities
Minority interests (1,765) ( 213) (12,292) ( 1,481)
Share of net loss from discountined
operation (net of tax) 961 116 454 55
Depreciation 19,206 2,314 19,459 2,344
Amortization of present value discount
on deferred asset 1,210 146 - -
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivables 2,552 307 (55,058) ( 6,632)
Notes receivable 3,550 428 530 64
Inventories (40,258) (4,850) 28,125 3,389
Other receivables (14,996) (1,807) ( 9,744) ( 1,174)
Due from related companies (16,212) (1,953) 7,188 865
Increase (decrease) in liabilities:
Accounts payable ( 9,095) (1,096) (27,653) ( 3,331)
Accrued liabilites and other payables 36,210 4,363 42,477 5,117
Income tax payable (10,996) (1,325) 14,607 1,759
Tax other than income 14,985 1,805 ( 1,735) ( 208)
-------- ------- ------- -------
Net cash provided by (used in) operating
activities from continuing operations (23,615) (2,845) (9,281) (1,117)
Cash flows from investing activities:
Advances to subsidiary proposed for
disposal ( 331) ( 40) ( 738) ( 90)
Additions to fixed assets ( 3,579) ( 431) ( 2,114) ( 254)
--------- -------- --------- --------
Net cash used in investing activities ( 3,910) ( 471) ( 2,852) ( 344)
-------- ------- -------- -------
Cash flows from financing activities:
Net decrease in bank loans ( 719) ( 87) ( 1,856) ( 224)
Repayment of other loans - - ( 1,219) ( 147)
-------- ------- -------- -------
Net cash provided by financing activities ( 719) ( 87) ( 3,075) ( 371)
-------- ------- -------- -------
Net decrease in cash and cash equivalents ( 28,244) ( 3,403) ( 15,208) ( 1,832)
Cash and cash equivalents, at beginning of
period 62,423 7,521 19,075 2,298
-------- ------- -------- -------
Cash and cash equivalents, at end of period 34,179 4,118 3,867 466
======== ====== ====== =====
Non-cash transaction:
Financing of lease arrangements 5,244 632 5,069 611
===== ==== ===== ====
</TABLE>
The accompanying notes form antegral 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 ENDED MARCH 31, 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, the CFIUS investigation was terminated.
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 MARCH 31, 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 March 31,
1999, the results of operations for the three months ended March 31, 1998 and
1999, and the changes in cash flows for the three months ended March 31, 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 Company's 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 amounts
for the three months ended March 31, 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 ENDED MARCH 31, 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 Januray 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 three months ended March 31, 1998 and 1999 was
lower than the exercise prices. The warrants expired on June 30, 1998.
The diluted loss per share for the three months ended March 31, 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 Covertible 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 three months ended March 31, 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 amounts 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 ENDED MARCH 31, 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 amounts 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 March 31, 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 March 31, 1999 or at any other certain rate
on March 31, 1999.
4. INVENTORIES
Inventories consist of the following at December 31, 1998 and March 31,
1999:
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
RMB US$ RMB US$
--- --- --- ---
<S> <C> <C> <C> <C>
Raw materials 148,470 17,888 121,069 14,587
Work-in-progress 140,238 16,896 185,744 22,378
Finished goods 419,668 50,562 373,438 44,992
-------- ------- -------- -------
708,376 85,346 680,251 81,957
Less: Allowance for obsolescence (136,200) (16,409) (136,200) (16,409)
-------- ------- -------- -------
Inventories, net 572,176 68,937 544,051 65,548
======== ======= ======== =======
</TABLE>
5. DISCONTINUED OPERATION
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
RMB US$ RMB US$
--- --- --- ---
<S> <C> <C> <C> <C>
Cost of investment 28,288 3,408 28,288 3,408
Share of accumulated losses of the
unconsolidated subsidiary (15,160) (1,826) (15,614) (1,881)
------- ------ ------- ------
Net carrying value 13,128 1,582 12,674 1,527
Due from the unconsolidated subsidiary 29,670 3,574 30,408 3,664
------- ------ ------- ------
42,798 5,156 43,082 5,191
======= ====== ======= ======
</TABLE>
10
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
5. DISCONTINUED OPERATION ( continud )
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 infulence 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 the trustee'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 March 31, 1999 were as follows:
11
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
5. DISCONTINUED OPERATION (continued)
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- ---------------
RMB US$ RMB US$
--- --- --- ---
<S> <C> <C> <C> <C>
Cash and bank balance 3,724 449 5,170 623
Inventories 11,208 1,350 12,881 1,552
Account receivables 8,061 971 5,303 639
Prepayment, deposit and other receivables 301 36 1,286 155
------- ------ ------- ------
Current assets 23,294 2,806 24,640 2,969
Property, plant and equipment, net 13,150 1,584 12,890 1,553
Goodwill * 9,928 1,196 9,928 1,196
Long term investment 428 52 8 1
------- ------ ------- ------
46,800 5,638 47,466 5,719
------- ------ ------- ------
Account payable ( 717) ( 86) ( 806) ( 97)
Other payable (3,229) ( 389) (3,594) ( 433)
Taxes other than income ( 56) ( 6) 16 2
Due to holding company (29,670) (3,575) (30,408) (3,664)
------- ------- -------- ------
Current liabilities (33,672) (4,056) (34,792) (4,192)
------- ------- -------- ------
Net assets 13,128 1,582 12,674 1,527
======= ====== ======= ======
* Goodwill of Southwest Products comprised:
Cost 10,760 1,296 10,760 1,296
Less : Amortization ( 832) ( 100) ( 832) ( 100)
------- ------ ------- ------
9,928 1,196 9,928 1,196
====== ====== ====== ======
</TABLE>
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, 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 convertible 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 ENDED MARCH 31, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
6. SECURED PROMISSORY NOTE (continued)
<TABLE>
<CAPTION>
Payment Period Amount
-------------- ------
<S> <C>
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
</TABLE>
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 ENDED MARCH 31, 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 constitues troubled debt
restructuring under Statement of Financial Accounting Standards No. 15
"Accounting by Debtors and Creditors for Troubled Debt Resturcturings" ("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 Instatlment 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
resturcturing 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 ENDED MARCH 31, 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:
<TABLE>
<CAPTION>
RMB
<S> <C>
Payable in year ending March 31,
- 2000 23,078
- 2001 32,785
- 2002 60,157
-------
116,020
=======
</TABLE>
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 unconditionaly and irrevocably gurantees 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 Asian 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.
Tianjing Development Holdings Limited is a company listed in the Hong Kong
Stock Exchage. The market value of the pledged shares was RMB4,521 at March
31, 1999
China Bearing has failed to make three 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 and (iii) principal of $29 and interest of $101 due as of May 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. The directors
15
<PAGE>
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 results 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 on its accounts receivable, which
had an adverse impact on Harbin Bearing and the Company's first quarter 1999
results.
Unless otherwise indicated in this Item 2, all RMB and U.S. Dollar amounts
except per share information are expressed in thousands ( '000).
RESULTS OF OPERATION
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 March 31,
1998 and 1999.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------
1998 1999
---- ----
RMB % RMB %
----------- -------- --------- ------
<S> <C> <C> <C> <C>
Net sales 89,784 100.0 113,340 100
Cost of sales (65,641) (73.1) (108,921) (96.1)
-------- ------ -------- -----
Gross profit 24,143 26.9 4,419 3.9
Selling expenses (3,364) (3.7) (5,880) (5.2)
General and administrative expenses (11,024) (12.3) (10,110) (8.9)
Interest expenses (19,526) (21.7) (15,906) (14.0)
-------- ------ -------- -----
Operating loss before minority interests (9,771) (10.8) (27,477) (24.2)
Minority interests 1,765 2.0 12,292 10.8
-------- ------ -------- -----
Net loss from continuing operations (8,006) (8.8) (15,185) (13.4)
Net loss from discontinued operations (961) (1.1) ( 454) (0.4)
-------- ------ -------- -----
(8,967) (9.9) (15,639) (13.8)
======== ====== ======== =====
</TABLE>
17
<PAGE>
Net Sales
---------
Net sales for the Company from continuing operations for the three
months ended March 31, 1999 increased by RMB 23,556 or 26.2% to RMB
113,340, as compared to RMB 89,784 for the three months ended March 31,
1998. The increase in net sales for the period ended March 31 1999 was
primarily attribuable to a certain number of back log orders which were
delivered and recorded as sales in the first quarter of 1999 rather than
the last quarter of 1998 due to the Company's tighten credit policy to
customers in view of the adverse market condition in China.
Cost of Sales/Gross Profit
--------------------------
Cost of sales for the Company from continuing operations for the
three months ended March 31, 1999 increased by RMB 43,280 or 65.9% to RMB
108,921 as compared to RMB 65,641 for the three months ended March 31,
1998. The cost of sales for the three months ended March 31, 1999 and 1998
was calculated using the gross profit method by reference to average annual
gross profit ratios.
The Company's gross profit from continuing operations for the three
months ended March 31, 1999 decreased by RMB 19,724 or 81.7% to RMB 4,149
as compared to RMB 24,143 for the three months ended March 31, 1998. Gross
profit as a percentage of revenue also decreased from 26.9% for the three
months ended March 31, 1998 to 3.9% for three months ended March 31, 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 three months 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 in order to maintain its market share.
Selling Expenses
----------------
Selling expenses for the Company from continuing operations for the
three months ended March 31, 1999 increased by RMB 2,516 or 74.8% to RMB
5,880 as compared to RMB 3,364 for the three months ended March 31, 1998.
The major reasons for the increase in selling expenses were:-
(a) the increase in payment of royalty and government taxes which were
increased in line with the incease in sales.
(b) the increase in other selling expenses for marketing of its products
and for providing 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 three months ended March 31, 1999 decreased by RMB 914
or 8.3% to RMB 10,110 as compared to RMB 11,024 for the three months ended
March 31, 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
-----------------
18
<PAGE>
Interest expenses for the Company from continuing operations for the
three months ended March 31, 1999 decreased by RMB 3,620 or 18.5% to RMB
15,906 as compared to RMB 19,526 for the three months ended March 31, 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.
Net loss from continuing operations
-----------------------------------
As a result of the aforementioned factors, net loss from continuing
operations increased by RMB 7,179 or 89.7% to RMB 15,185 for the three
months ended March 31, 1999 as compared to RMB 8,006 for the three months
ended March 31, 1998.
Net loss from discontinued operations
-------------------------------------
The Company's net loss from discontinued operations decreased by RMB
507 or 52.8% to RMB 454 for the three months ended March 31, 1999 as
compared to RMB 961 for the three months ended March 31, 1998. This
improvement resulted primarily from increased sales.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Operating activities
Net cash used in operating activities from continuing operation was RMB
9,281 for the three months ended March 31, 1999, as compared to net cash used in
operating activities from continuing operations of RMB 23,615 for the period
ended March 31, 1998. The decrease use of cash in operating activities from
continuing operations is primarily due to the decrease in inventory levels of
the Company. The Company's net working capital decreased by RMB 16,384 at March
31, 1999 to RMB 45,500 as compared to RMB 61,844 at December 31, 1998, and RMB
295,005 at March 31, 1998 and the Company's current ratio at March 31, 1999 was
1.04:1 as compared to 1.05:1 at December 31, 1998 and 1.28:1 at March 31, 1998.
Investing activities
Capital expenditures for the three months ended March 31, 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 facitlities in 1999. As of March 31,
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 three months ended March 31, 1999, the net
decrease in bank loans (after deducting repayment) was RMB 1,856. 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 to 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.
20
<PAGE>
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
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 three 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
and (iii) principal of $29 and interest of $101 due as of May 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:
21
<PAGE>
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
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 operaitons 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 responeses from several investors who have expressed interest in
acquiring Southwest Products. The directors estimate the sale of Southwest
Products will be completed in mid 1999.
(b) Negotiation under the Settlement Agreement
The Company is currently conducting negotiations with the Investors
under the Settlment 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.
22
<PAGE>
(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.
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 sucessful 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 3.0%
deflation in prices for the three months ended March 31,1999 (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 first 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 March 31, 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
23
<PAGE>
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 those systems are Year 2000 compliant. The
Company intends 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 Produts.
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.
24
<PAGE>
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 and
all information contained in this Quarterly Report with respect to Southwest
Products for the period ended March 31, 1998, and all information contained in
this Quarterly Report with respect to Southwest Products for any period
subsequent to December 31, 1998 has been obtained through the trustee and the
Company cannot verify the accuracy and completeness of the information for any
period subsequently to 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.
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 installment 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.
25
<PAGE>
Substantial Leverage; Inadequacy of Earnings to Cover Fixed Charges
As at March 31, 1999, the Company has, on a consolidated basis, total
indebtedness of approximately RMB 811,409 (US$ 97,760), resulting in a ratio of
debt to total capitalization of 2.91:1 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 first quarter of 1999, the Company's earnings
were inadequate to cover fixed charges by approximately RMB 131,205 (U.S.
$15,807) (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
first 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
first quarter of 1999. Thus, for this calculation, the first quarter of 1999 net
loss was simply added to the first 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 net loss from
continuing operation and negative cash flow from continuing operations of RMB
15,185 and RMB 9,281 for the period ended March 31, 1999, and RMB 8,006 and RMB
23,615 for the period ended March 31, 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 financings. 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
26
<PAGE>
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, 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.
27
<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 of these trends could also impair the Company's liquidity.
28
<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 first 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 $1,606, $3,066 and $5,620 decrease in consolidated stockholders' equity and an
$90, $171 and $314 decrease in net loss as of March 31 1999. The same
hypothetical movements would have resulted in an RMB 1,450, RMB 2,900 and RMB
9,801 increase in the amount of debt service payable by the Company under the
Settlement Agreement in the first 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 March 31, 1999 was RMB
514,376 with an effective interest rate of 7.9% per annum. The total amount of
long-term bank loans outstanding as of March 31, 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.
29
<PAGE>
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
There are no material developments.
Item 2 Changes in Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
China Bearing has failed to make three 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 and (iii) principal of $29 and interest of $101 due as of
May 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 which would
include a revised repayment schedule upon the disposal of Southwest
Products can be reached with the investors in due course, no assurance
can be given as to when or if such negotiation will result in a
rsolution that is favorable to the Company.
Item 4 Submission of Matters to a Vote of Security Holders
On May 6, 1999, Asean Capital Limited, holding 8,739,900 shares of
Common Stock of the Company and 36 shares of Series A Convertible
Preferred Stock of the Company, resolved, pursuant to written consents
of shareholders of the Company without a meeting (i) to remove Mr.
William Mckay as a director of the Company effective as of May 6, 1999;
and (ii) to amend Article III, Section 2 of the Company's By-laws by
deleting it in its entirety and replacing it with the following
provision:
"The Board of Directors shall consist of a minimum of three (3) and
a maximum of seven (7) members. However, the minimum number of directors
may be reduced to a minimum of one (1) director if there is only (1)
shareholder or two (2) directors if there are only two (2) shareholders.
The exact number shall be determined from time to time by resoluction of
the Board of Directors. Until otherwise determined by such resolution,
the Board of Directors shall consist of four (4) members."
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 March 31, 1999: None
30
<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: By: /s/ Gunter Gao
----------------
Gunter Gao
Chairman, President and
Chief Executive Officer
Date: By: /s/ (Roger) Li Yuen Fai
------------------------
(Roger) Li Yuen Fai
Vice President and
Chief Financial Officer
(Principal Financial Officer)
31
<PAGE>
EXHIBIT 11
----------
SUNBASE ASIA, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1999
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1998 1999 1999
RMB US$ RMB US$
--- --- --- ---
<S> <C> <C> <C> <C>
BASIC
Net loss from continuing operations (8,006) (964) (15,185) (1,829)
Net loss from discontinued operation,
net of income taxes of nil and RMB386
for the period ended March 31,
1998 and 1999, respectively (961) (116) (454) (55)
---------- ---------- ---------- ----------
(8,967) (1,080) (15,639) (1,884)
========== ========== ========== ==========
Weighted average number of shares of
Common stock outstanding:
Shares of common stock outstanding 12,700,142 12,700,142 14,118,751 14,118,751
========== ========== ========== ==========
Net loss per common share:
Loss from continuing operation (0.63) (0.08) (1.08) (0.13)
========== ========== ========= ==========
Net loss (0.71) (0.09) (1.11) (0.13)
========== ========== ========= ==========
</TABLE>
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1999
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1998 1999 1999
RMB US$ RMB US$
--- --- --- ---
<S> <C> <C> <C> <C>
DILUTED
Net loss from continuing operation (8,006) (964) (15,185) (1,829)
Net loss from discontinued operations,
Net of income taxes of Nil and RMB386
For the period ended March 31,
1998 and 1999, respectively (961) (116) (454) (55)
------- ----- ------- ------
(8,967) (1,080) (15,639) (1,884)
======= ===== ======= ======
Weighted average number of shares of
Common stock outstanding:
Shares of common stock outstanding 12,700,142 12,700,142 14,118,751 14,118,751
Shares of common stock issuable
Assuming conversion of the
Convertible Preferred Stock
- Series A - - - -
- Series B - - - -
Shares of common 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 12,700,142 12,700,142 14,118,751 14,118,751
========== ========== ========== ==========
Net loss per common share:
Net loss from continuing operation (0.63) (0.08) (1.08) (0.13)
========== ========== ========== ==========
Net loss (0.71) (0.09) (1.11) (0.13)
========== ========== ========== ==========
</TABLE>
<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 THREE MONTHS PERIOD ENDED MARCH 31, 1999,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 466
<SECURITIES> 0
<RECEIVABLES> 91,510
<ALLOWANCES> 0
<INVENTORY> 65,548
<CURRENT-ASSETS> 157,524
<PP&E> 65,289
<DEPRECIATION> 0
<TOTAL-ASSETS> 229,155
<CURRENT-LIABILITIES> 152,043
<BONDS> 0
0
5,365
<COMMON> 14
<OTHER-SE> 29,784
<TOTAL-LIABILITY-AND-EQUITY> 229,155
<SALES> 13,655
<TOTAL-REVENUES> 13,655
<CGS> 13,123
<TOTAL-COSTS> 13,123
<OTHER-EXPENSES> 1,926
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,916
<INCOME-PRETAX> (1,829)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,829)
<DISCONTINUED> (55)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,884)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
