<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 September 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 September 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 September 30, 1999 3-4
Consolidated Condensed Statements of Income (unaudited)
- Three months and nine months ended
September 30, 1998 and 1999 5
Consolidated Condensed Statements of Cash Flows (unaudited)
- Nine months ended September 30, 1998 and 1999 6
Notes to Consolidated Condensed Financial
Statements (unaudited)
- Three months and nine months ended
September 30, 1998 and 1999 7-15
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-25
Item 3 -- Quantitative and Qualitative Disclosure about
Market Risk 26-30
PART II: OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K 31
SIGNATURES 32
EXHIBIT 11 Computation of Earnings Per Common Share 33-34
</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 SEPTEMBER 30, 1999
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
12/31/98 9/30/99
----------------- -----------------
Notes RMB US$ RMB US$
----- --- --- --- ---
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Unrestricted cash and bank balances 19,075 2,298 38,059 4,585
Accounts receivable, net 468,075 56,396 489,751 59,006
Notes receivable 2,440 294 37 4
Inventories, net 4 572,176 68,937 582,545 70,186
Other receivables 26,720 3,219 41,264 4,972
Due from related companies 205,216 24,724 117,303 14,132
--------- ------- --------- -------
Total current assets 1,293,702 155,868 1,268,959 152,885
Fixed assets 559,245 67,379 511,077 61,576
Net assets of discontinued operations 5 42,798 5,156 27,615 3,327
Deferred asset 9,553 1,151 8,234 992
--------- ------- --------- -------
Total assets 1,905,298 229,554 1,815,885 218,780
========= ======= ========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short term bank loans 516,232 62,197 572,862 69,019
Long term bank loans, current portion 156,113 18,809 156,113 18,809
Accounts payable 141,616 17,062 132,169 15,924
Accrued liabilities and other payables 122,431 14,751 209,437 25,233
Short term obligations under capital leases 20,933 2,522 22,299 2,687
Secured promissory note 6 24,900 3,000 24,900 3,000
Income tax payable 50,358 6,068 78,250 9,428
Taxes other than income 30,417 3,664 28,682 3,456
Due to related companies 51,579 6,214 50,703 6,109
Other loans 7 117,239 14,125 116,151 13,994
--------- ------- --------- -------
Total current liabilities 1,231,818 148,412 1,391,566 167,659
Long term obligations under capital leases 47,550 5,729 30,652 3,693
Minority interests 330,409 39,808 228,152 27,488
--------- ------- --------- -------
1,609,777 193,949 1,650,370 198,840
</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 SEPTEMBER 30, 1999 (UNAUDITED) (CONTINUED)
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
12/31/98 9/30/99
--------------------- ---------------------
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: 13,576,116) shares issued, and fully paid up 115 14 119 14
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 (126,339) (15,223)
--------- -------- ---------- --------
Total shareholders' equity 295,521 35,605 165,515 19,940
--------- -------- ---------- --------
Total liabilities and shareholders' equity 1,905,298 229,554 1,815,885 218,780
========= ======== ========== ========
</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 AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- --------------------------------
1998 1999 1999 1998 1999 1999
Notes RMB RMB US$ RMB RMB US$
----- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales to
- third parties 314,396 315,324 37,991 97,221 106,754 12,862
- related parties 31,958 19,932 2,401 9,962 6,748 813
---------- ---------- ---------- ---------- ---------- ----------
346,354 335,256 40,392 107,183 113,502 13,675
Cost of sales (253,220) (322,184) (38,817) (78,361) (109,077) (13,142)
---------- ---------- ---------- ---------- ---------- ----------
Gross profit 93,134 13,072 1,575 28,822 4,425 533
Selling, general and
administrative expenses
- third parties (58,832) (99,296) (11,965) (36,101) (70,762) (8,527)
- related parties (15,341) (86,941) (10,475) (6,327) (83,358) (10,043)
---------- ---------- ---------- ---------- ---------- ----------
(74,173) (186,237) (22,440) (42,428) (154,120) (18,570)
Interest expense, net
- third parties (53,749) (37,785) (4,552) (19,442) (13,251) (1,596)
- related parties (5,220) (4,745) (572) (1,632) (604) (73)
---------- ---------- ---------- ---------- ---------- ----------
(58,969) (42,530) (5,124) (21,074) (13,855) (1,669)
---------- ---------- ---------- ---------- ---------- ----------
Operating loss
before minority interests (40,008) (215,695) (25,989) (34,680) (163,550) (19,706)
Minority interests 12,130 102,257 12,320 14,695 79,040 9,523
---------- ---------- ---------- ---------- ---------- ----------
Net loss from
continuing operation (27,878) (113,438) (13,669) (19,985) (84,510) (10,183)
Net loss from discontinued
operation, net of income
taxes (2,214) (16,568) (1,996) (713) (3,905) (470)
---------- ---------- ---------- ---------- ---------- ----------
Net loss (30,092) (130,006) (15,665) (20,698) (88,415) (10,653)
========== ========== ========== ========== ========== ==========
Loss per common share 2
- Basic loss from
continuing operation (2.11) (8.03) (0.97) (1.47) (5.99) (0.72)
========== ========== ========== ========== ========== ==========
- Basic net loss (2.28) (9.21) (1.11) (1.53) (6.26) (0.75)
========== ========== ========== ========== ========== ==========
- Diluted income / (loss)
from continuing
operation (2.11) (8.03) (0.97) (1.47) (5.99) (0.72)
========== ========== ========== ========== ========== ==========
- Diluted net loss (2.28) (9.21) (1.11) (1.53) (6.26) (0.75)
========== ========== ========== ========== ========== ==========
Number of shares outstanding 2
- Basic 13,215,509 14,118,751 14,118,751 13,576,116 14,118,751 14,118,751
========== ========== ========== ========== ========== ==========
- Diluted 13,215,509 14,118,751 14,118,751 13,576,116 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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
1998 1998 1999 1999
RMB US$ RMB US$
--- --- --- ---
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (30,092) (3,626) (130,006) (15,665)
Adjustments to reconcile income to net cash
used in operating activities:
Minority interests (12,130) (1,462) (102,257) (12,320)
Depreciation 43,882 5,287 50,282 6,058
Share of net loss from discontinued operation 2,214 267 16,568 1,996
Amortization of present value discount
on deferred asset 2,231 269 1,319 159
Changes in operating assets and liabilities-
(Increase) decrease in assets:
Accounts receivable 20,592 2,481 (21,676) (2,610)
Notes receivable 5,105 615 2,403 290
Inventories (151,235) (18,221) (10,369) (1,249)
Other receivables (42,779) (5,154) (14,544) (1,753)
Due from related companies (16,067) (1,936) 87,913 10,592
Increase (decrease) in liabilities:
Accounts payable 30,140 3,631 (9,447) (1,138)
Accrued liabilities and other payables 80,083 9,649 87,006 10,482
Income tax payable (11,405) (1,374) 27,892 3,360
Taxes other than income 26,391 3,179 (1,735) (208)
Due to related companies (11,061) (1,332) (16,408) (1,976)
-------- ------- -------- ------
Net cash used in operating activities from
Continuing operation (64,131) (7,727) (33,059) (3,982)
-------- ------- -------- ------
Cash flows from investing activities:
Advances to subsidiaries proposed for disposal (3,020) (364) (1,385) (167)
Additions to fixed assets (1,617) (195) (2,114) (255)
-------- ------- -------- ------
Net cash used in investing activities (4,637) (559) (3,499) (422)
-------- ------- -------- ------
Cash flows from financing activities:
Net increase in bank loans 17,901 2,157 55,542 6,691
-------- ------- -------- ------
Net cash provided by financing activities 17,901 2,157 55,542 6,691
-------- ------- -------- ------
Net (decrease)/increase in cash and cash equivalents (50,867) (6,129) 18,984 2,287
Cash and cash equivalents, at beginning of period 62,423 7,521 19,075 2,298
-------- ------- -------- ------
Cash and cash equivalents, at end of period 11,556 1,392 38,059 4,585
======== ======= ======== ======
Non-cash transaction:
Financing of lease arrangements 15,169 1,827 15,532 1,871
======== ======= ======== ======
</TABLE>
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 NINE MONTHS
ENDED SEPTEMBER 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. ss.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 SEPTEMBER 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
September 30, 1999, the results of operations for the three months and
nine months ended September 30, 1998 and 1999, and the changes in cash
flows for the nine months ended September 30, 1998 and 1999. These
adjustments are of a normal recurring nature.
The consolidated balance sheet as of December 31, 1998, 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 for the nine months ended September 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 NINE MONTHS
ENDED SEPTEMBER 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 NINE MONTHS
ENDED SEPTEMBER 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 September 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 September 30, 1999 or at
any other certain rate on September 30, 1999.
4. INVENTORIES
Inventories consist of the following at December 31, 1998 and
September 30, 1999:
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
----------------- ---------------------
RMB US$ RMB US$
--- --- --- ---
<S> <C> <C> <C> <C>
Raw materials 148,470 17,888 128,224 15,449
Work-in-progress 140,238 16,896 196,721 23,700
Finished goods 419,668 50,562 393,800 47,446
-------- ------- -------- -------
708,376 85,346 718,745 86,595
Less: Allowance for obsolescence (136,200) (16,409) (136,200) (16,409)
-------- ------- -------- -------
Inventories, net 572,176 68,937 582,545 70,186
======== ======= ======== =======
</TABLE>
5. DISCONTINUED OPERATION
<TABLE>
<CAPTION>
December 31, 1998 September 30, 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) (31,728) (3,823)
------- ------ ------- ------
Net carrying value 13,128 1,582 (3,440) (415)
Due from the unconsolidated subsidiary 29,670 3,574 31,055 3,742
------- ------ ------- ------
42,798 5,156 27,615 3,327
======= ====== ======= ======
</TABLE>
10
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND NINE MONTHS
ENDED SEPTEMBER 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 the Trustee's approval. In addition, all "foreign persons" within
the meaning of 31 C.F.R. ss.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 September 30, 1999 were as
follows:
11
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
5. DISCONTINUED OPERATION (continued)
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1999
----------------- --------------------
RMB US$ RMB US$
--- --- --- ---
<S> <C> <C> <C> <C>
Cash and bank balance 3,724 449 1,760 212
Inventories 11,208 1,350 14,725 1,774
Account receivables 8,061 971 3,735 450
Prepayment, deposit and other receivables 301 36 598 72
------- ------ ------- ------
Current assets 23,294 2,806 20,818 2,508
Property, plant and equipment, net 13,150 1,584 12,551 1,512
Goodwill * 9,928 1,196 - -
Long term investment 428 52 - -
------- ------ ------- ------
46,800 5,638 33,369 4,020
------- ------ ------- ------
Account payable (717) (87) (1,610) (194)
Other payable (3,229) (388) (4,136) (498)
Taxes other than income (56) (7) (8) (1)
Due to holding company (29,670) (3,574) (31,055) (3,742)
------- ------ ------- ------
Current liabilities (33,672) (4,056) (36,809) (4,435)
------- ------ ------- ------
Net assets / (liabilities) 13,128 1,582 (3,440) (415)
======= ====== ======= ======
* 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 - -
======= ====== ======= ======
</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'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 NINE MONTHS
ENDED SEPTEMBER 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 NINE MONTHS
ENDED SEPTEMBER 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 NINE MONTHS
ENDED SEPTEMBER 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 September 30,
- 2000 48,134
- 2001 68,017
-------
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 RMB4,600 at September 30, 1999
China Bearing has failed to make eight scheduled payments under
the Settlement Agreement. The total amount of principal and interest due
as of October 30, 1999 are $1,577 and $813 respectively. 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 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.
15
<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
third 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 September 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
September 30, 1998 and 1999.
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1998 1999
---- ----
RMB % RMB %
--- - --- -
<S> <C> <C> <C> <C>
Sales 107,183 100.0 113,502 100.0
Cost of sales (78,361) (73.1) (109,077) ( 96.1)
------- ----- -------- ------
Gross profit 28,822 26.9 4,425 3.9
Selling expenses (2,580) (2.4) (2,848) (2.5)
General and administrative expenses (39,848) (37.2) (151,272) (133.3)
Interest expenses (21,074) (19.7) (13,855) (12.2)
------- ----- -------- ------
Operating loss before
minority interests (34,680) (32.4) (163,550) (144.1)
Minority interests 14,695 13.7 79,040 69.6
------- ----- -------- ------
Net loss from
Continuing operation (19,985) 18.7 (84,510) (74.5)
Net loss from discontinued operation,
net of taxes (713) (0.6) (3,905) (3.4)
------- ----- -------- ------
Net loss (20,698) (19.3) (88,415) (77.9)
======= ===== ======== ======
</TABLE>
16
<PAGE>
Sales
-----
Sales for the three months ended September 30, 1999 increased by RMB
6,319 or 6.0% to RMB 113,502 as compared to RMB 107,183 for the three
months ended September 30, 1998. The increase in sales was mainly due to
the mild economic growth resulting by the continuous drop in interest rate
within PRC. However, the persisting competition within the PRC bearing
industry by the small-scale bearing factories leveled off certain portion
of the market recovery which resulted to a continuous low level of sales
for the three months ended September 30, 1999.
Cost of Sales/Gross Profit
--------------------------
Cost of sales for the three months ended September 30, 1999
increased by RMB 30,716 to RMB 109,077 as compared to RMB 78,361 for the
three months ended September 30, 1998. The cost of sales for the three
months ended September 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 September 30, 1999 decreased from RMB 28,822 for the three
months ended September 30, 1998 to RMB 4,425, a decrease of RMB 24,397, or
84.6%. Gross profit as a percentage of revenue also decreased from 26.9%
for the three months ended September 30, 1998 to 3.9% for three months
ended September 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 September
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 September 30, 1999
slightly increased by RMB 268 or 10.4% to RMB 2,848 as compared to RMB
2,580 for the three months ended September 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 September 30, 1999 increased by RMB
111,424 or 280% to RMB 151,272 as compared to RMB 39,848 for the three
months ended September 30, 1998. The significant increase was primarily
caused by the increase in general provision made for the accounts
receivable and amount due from related companies. Due to the prolonged
adverse market conditions and the repayment from debtors was slow,
management estimated that certain proportion of balances outstanding with
more than a year will become doubtful in recovery, therefore, an amount of
provision approximately RMB 140,000 was accounted for. In addition, the
specific provision made for the deposit with a Chinese financial
institution for the three months ended September 30 1998 was not necessary
to provided for the three months ended September 30, 1999.
17
<PAGE>
Interest Expenses
-----------------
Interest Expenses for the three months ended September 30, 1999
decreased by RMB 7,219 or 34.3% to RMB 13,855 as compared to RMB 21,074 for
the three months ended September 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.
Net loss from continuing operations
-----------------------------------
As a result of the aforementioned factors, net loss from continuing
operations increased by RMB 64,525 to RMB 84,510 for the three months
ended September 30, 1999 as compared to a net loss of RMB 19,985 for the
three months ended September 30, 1998.
Net loss from discontinued operations
-------------------------------------
The Company's net loss from discontinued operations increased by RMB
3,192 to RMB 3,905 for the three months ended September 30, 1999 as
compared to RMB 713 for the three months ended September 30, 1998. This
increase in net loss was primarily attributable to the written off of
goodwill.
18
<PAGE>
Nine Months Ended September 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 nine months ended September
30, 1998 and 1999.
Nine Months Ended September 30,
-------------------------------
1998 1999
---- ----
RMB % RMB %
--- -- --- --
Sales 346,354 100.0 335,256 100.0
Cost of sales (253,220) (73.1) (322,184) (96.1)
-------- ----- -------- -----
Gross profit 93,134 26.9 13,072 3.9
Selling expenses (8,860) (2.6) (11,492) (3.4)
General and administrative expenses (65,313) (18.9) (174,745) (52.1)
Interest expenses (58,969) (17.0) (42,530) (12.7)
-------- ----- -------- -----
Operating loss before minority
Interests (40,008) (11.6) (215,695) (64.3)
Minority interests 12,130 3.5 102,257 30.5
-------- ----- -------- -----
Net loss from continuing operation (27,878) (8.1) (113,438) (33.8)
Net loss from discontinued operation,
net of taxes (2,214) (0.6) (16,568) (5.0)
-------- ----- -------- -----
Net loss (30,092) (8.7) (130,006) (38.8)
======== ===== ======== =====
Net Sales
---------
Net sales for the Company from continuing operations for the nine
months ended September 30, 1999 slightly decreased by RMB 11,098 or 3.2% to
RMB 335,256, as compared to RMB 346,354 for the nine months ended September
30, 1998. The decrease in net sales for the period ended September 30 1999
was primarily attributable to the persisting adverse market conditions in
China in the first six months of 1999. 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
nine months ended September 30, 1999 increased to RMB 322,184 as compared to
RMB 253,220 for the nine months ended September 30, 1998. The cost of sales
for the nine months ended September 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 nine
months ended September 30, 1999 decreased from RMB 93,134 for the nine months
ended September 30, 1998 to RMB 13,072, a decrease of RMB 80,062, or 86.0%.
Gross profit as a percentage of revenue also decreased from 26.9% for the
nine months ended June 30, 1998 to 3.9% for nine months ended September 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
19
<PAGE>
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
nine months ended September 30, 1999 increased by RMB 2,632 or 29.7% to RMB
11,492 as compared to RMB 8,860 for the nine months ended September 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 nine months ended September 30, 1999 increased by RMB
109,432 or 168% to RMB 174,745 as compared to RMB 65,313 for the nine
months ended September 30, 1998. The significant increase was primarily
caused by the increase in general provision made for the accounts
receivable and amount due from related companies. Due to the prolonged
adverse market conditions and the repayment from debtors was slow,
management estimated that certain proportion of balances outstanding with
more than a year will become doubtful in recovery, therefore, an amount of
provision approximately RMB 140,000 was accounted for. In addition, the
Company adopted stronger control on its overhead and implement certain
cost-cutting measures in order to improve its profitability and
competitiveness which resulted to a leveling off of the increase in general
and administrative expenses for the nine months ended September 30, 1999.
Interest Expenses
-----------------
Interest Expenses for the nine months ended September 30, 1999
decreased by RMB 16,439 or 27.9% to RMB 42,530 as compared to RMB 58,969
for the nine months ended September 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 85,560 to RMB 113,438 for the nine months
ended September 30, 1999 as compared to RMB 27,878 for the nine months
ended September 30, 1998.
Net loss from discontinued operations
-------------------------------------
The Company's net loss from discontinued operations increased by RMB
14,354 to RMB 16,568 for the nine months ended September 30, 1999 as
compared to RMB 2,214 for the nine months ended September 30, 1998. This
deterioration of result were primarily attributable to the written off of
goodwill and the decrease in market demand as well.
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Operating activities
Net cash used in operating activities from continuing operation was
RMB 33,059 for the period ended September 30, 1999, as compared to net cash used
in operating activities from continuing operations of RMB 64,131 for the period
ended September 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 184,491 at September 30, 1999 to a
deficiency of RMB 122,607 as compared to RMB 61,884 at December 31, 1998, and
the Companys current ratio at September 30, 1999 was 0.91:1 as compared to
1.05:1 at December 31, 1998 and 1.23:1 at September 30, 1998.
Investing activities
Capital expenditures for the nine months ended September 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 September 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 nine months ended September 30, 1999, the net
increase in bank loans (after deducting repayment) was RMB 55,542. 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.
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
21
<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 eight scheduled payments under the
Settlement Agreement. The total amount of principal and interest due as of
October 31, 1999 are $1,577 and $ 813 respectively. 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
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
22
<PAGE>
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, inter-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.
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
23
<PAGE>
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 third 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 September 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, required
modification or replacement in order to ensure that those systems are Year 2000
compliant. The Company has already replaced these information processing
systems, and is now in the process of testing the reliability and accuracy for
the change over to Year 2000.
24
<PAGE>
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.
25
<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 third 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 $950, $1,813 and $3,324 decrease in consolidated stockholders' equity and
an $746, $1,424 and $2,611 decrease in net loss in September 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 third 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 September 30, 1999 was
RMB 572,862 with an effective interest rate of 7.9% per annum. The total amount
of long-term bank loans outstanding as of September 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.
26
<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. Nevertheless, the Company was successfully resumed trading in the
Company's Common Stock on the Bulletin Board on October 26, 1999.
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.
Substantial Leverage; Inadequacy of Earnings to Cover Fixed Charges
As at September 30, 1999, the Company has, on a consolidated basis,
total indebtedness of approximately RMB 845,126 (US$ 101,822) as at September
30, 1999, resulting in a ratio of debt to total
27
<PAGE>
capitalization of 6.9:1 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 third quarter of 1999, the Company's earnings
were inadequate to cover fixed charges by approximately RMB 246,895 (U.S.
$29,746) (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
third 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
third quarter of 1999. Thus, for this calculation, the third quarter of 1999
net loss was simply added to the third 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 215,695 and RMB 33,059 for the
period ended September 30, 1999; RMB 40,008 and RMB 64,131 for the period ended
September 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,
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
28
<PAGE>
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.
Impact of the Turmoil in Asian Markets
The turmoil in Asian markets may affect the political and economic
policies in China and the
29
<PAGE>
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.
30
<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 eight 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, (vi) principal of $29 and interest of $101 due
as of August 23, 1999, (vii) principal of $300 and interest of $100 due
as of September 23, 1999, (viii) principal of $$302 and interest of $98
due as of October 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 September 30, 1999: None
31
<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: November 18, 1999 By: /s/ Gunter Gao
------------------------------
Gunter Gao
Chairman, President and
Chief Executive Officer
Date: November 18, 1999 By: /s/ (Roger) Li Yuen Fai
------------------------------
(Roger) Li Yuen Fai
Vice President and
Chief Financial Officer
(Principal Financial Officer)
32
<PAGE>
EXHIBIT 11
----------
SUNBASE ASIA, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- --------------------------------
1998 1999 1999 1998 1999 1999
RMB RMB US$ RMB RMB US$
--- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
BASIC
Net loss from continuing operations (27,878) (113,438) (13,669) (19,985) (84,510) (10,183)
Net loss from discontinued operation,
net of income taxes (2,214) (16,568) (1,996) (713) (3,905) (470)
------- -------- ------- ------- -------- -------
(30,092) (130,006) (15,665) (20,698) (88,415) (10,653)
======= ======== ======= ======= ======== =======
Weighted average number of
shares of common stock outstanding:
Share of common stock outstanding 13,215,509 14,118,751 14,118,751 13,576,116 14,118,751 14,118,751
========== ========== ========== ========== ========== ==========
Net loss per common share:
Loss from continuing operation (2.11) (8.03) (0.97) (1.47) (5.99) (0.72)
======= ======== ======= ======= ======== =======
Net loss (2.28) (9.21) (1.11) (1.53) (6.26) (0.75)
======= ======== ======= ======= ======== =======
</TABLE>
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- --------------------------------
1998 1999 1999 1998 1999 1999
RMB RMB US$ RMB RMB US$
--- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
DILUTED
Net loss from continuing operation (27,878) (113,438) (13,669) (19,985) (84,510) (10,183)
Net loss from discontinued operations,
net of income taxes (2,214) (16,568) (1,996) (713) (3,905) (470)
------- -------- ------- ------- -------- -------
Net loss (30,092) (130,006) (15,665) (20,698) (88,415) (10,653)
======= ======== ======= ======= ======== =======
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 515,364 - - 875,971 - -
Share issued as a result of rounding
from reverse stock split 3 - - 3 - -
------- -------- ------- ------- -------- -------
Weighted average number of
shares of common stock outstanding 13,215,509 14,118,751 14,118,751 13,576,116 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 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 13,215,509 14,118,751 14,118,751 13,576,116 14,118,751 14,118,751
========== ========== ========== ========== ========== ==========
Net loss per common share:
Net loss from continuing operation (2.11) (8.03) (0.97) (1.47) (5.99) (0.72)
========== ========== ========== ========== ========== ==========
Net loss (2.28) (9.21) (1.11) (1.53) (6.26) (0.75)
========== ========== ========== ========== ========== ==========
</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 NINE MONTHS PERIOD ENDED SEPTEMBER 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> SEP-30-1999
<CASH> 4,585
<SECURITIES> 0
<RECEIVABLES> 78,114
<ALLOWANCES> 0
<INVENTORY> 70,186
<CURRENT-ASSETS> 152,885
<PP&E> 61,576
<DEPRECIATION> 0
<TOTAL-ASSETS> 218,780
<CURRENT-LIABILITIES> 167,659
<BONDS> 0
0
5,365
<COMMON> 14
<OTHER-SE> 29,784
<TOTAL-LIABILITY-AND-EQUITY> 218,780
<SALES> 40,392
<TOTAL-REVENUES> 40,392
<CGS> 38,817
<TOTAL-COSTS> 38,817
<OTHER-EXPENSES> 22,440
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,124
<INCOME-PRETAX> (25,989)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,989)
<DISCONTINUED> (1,996)
<EXTRAORDINARY> 0
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</TABLE>
