-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N1Yc/j+QvjdAQrCROUSNSS9e5HD0lIfiBRF2bkHVX6zZUnic0BlkeXuTPJVAxRqZ pba9XiElT3Bzlaqzqh9wtQ== 0000898430-98-004144.txt : 19981120 0000898430-98-004144.hdr.sgml : 19981120 ACCESSION NUMBER: 0000898430-98-004144 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNBASE ASIA INC CENTRAL INDEX KEY: 0000095626 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 941612110 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-03132 FILM NUMBER: 98755321 BUSINESS ADDRESS: STREET 1: PO BOS 1028 CITY: MONROVIA STATE: CA ZIP: 91017-1028 BUSINESS PHONE: 8183580181 MAIL ADDRESS: STREET 1: P O BOX 2600 CITY: BAKERSFIELD STATE: CA ZIP: 93303 FORMER COMPANY: FORMER CONFORMED NAME: PAN AMERICAN INDUSTRIES INC DATE OF NAME CHANGE: 19941216 FORMER COMPANY: FORMER CONFORMED NAME: PAN AMERICAN ENERGY CORPORATION DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SUPREME OIL & GAS CORP DATE OF NAME CHANGE: 19901029 10-Q 1 FORM 10-Q 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, 1998. [ ] 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, 1998, the Company had 13,576,116 shares of common stock issued and outstanding. 1 SUNBASE ASIA , INC. AND SUBSIDIARIES ------------------------------------ INDEX
Page ---- PART I: FINANCIAL INFORMATION Item 1 -- Financial statements Consolidated Condensed Balance Sheets (unaudited) - December 31, 1997 and September 30, 1998 3-4 Consolidated Condensed Statements of Income (unaudited) - Three months and nine months ended September 30, 1997 and 1998 5 Consolidated Condensed Statements of Cash Flows (unaudited) -Nine months ended September 30, 1997 and 1998 6 Notes to Consolidated Condensed Financial Statements (unaudited) - Three months and nine months ended September 30, 1997 and 1998 7-12 Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations 13-21 Item 3 -- Factors that may Affect Future Results 22-23 PART II: OTHER INFORMATION Item 6 -- Exhibits and Reports on Form 8-K 24 SIGNATURES 25 EXHIBIT 11 Computation of Earnings Per Common Share 26-27
2 PART I. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS -------------------- SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) AS OF DECEMBER 31, 1997 AND SEPTEMBER 30, 1998 (Amounts in thousands, except number of shares and per share data)
12/31/97 9/30/98 -------------------- -------------------- Notes RMB US$ RMB US$ ----- --- --- --- --- ASSETS Current assets Cash and bank balances 39,343 4,740 15,503 1,868 Deposits with a financial institution 23,750 2,861 - - Accounts receivable, net 480,400 57,880 459,611 55,375 Notes receivable 6,190 746 1,085 131 Inventories, net 4 477,217 57,496 630,252 75,934 Other receivables 40,330 4,859 82,960 9,995 Due from related companies 300,023 36,147 316,090 38,083 --------- -------- ---------- ------- Total current assets 1,367,253 164,729 1,505,501 181,386 Fixed assets 631,812 76,122 585,691 70,565 Deferred asset 14,383 1,733 12,152 1,464 Long term investments 1,012 122 1,012 122 Goodwill 10,760 1,296 10,135 1,221 --------- -------- ---------- ------- Total assets 2,025,220 244,002 2,114,491 254,758 ========= ======== ========== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short term bank loans 435,403 52,458 452,953 54,573 Long term bank loans, current portion 140,772 16,960 140,772 16,960 Accounts payable 115,646 13,933 145,453 17,524 Accrued liabilities and other payables 131,536 15,848 212,251 25,572 Short term obligations under capital leases 20,441 2,463 20,806 2,507 Short term portion of secured promissory note 5 12,450 1,500 24,900 3,000 Income tax payable 50,392 6,071 39,104 4,711 Taxes other than income 38,972 4,696 65,288 7,866 Due to related companies 18,730 2,257 22,292 2,686 Convertible debentures 6 95,450 11,500 95,450 11,500 --------- -------- ---------- ------- Total current liabilities 1,059,792 127,686 1,219,269 146,899 Long term bank loans 4,005 483 4,005 483 Long term obligations under capital leases 68,483 8,251 52,949 6,380 Long term portion of secured promissory note 5 12,450 1,500 - - Minority interests 441,490 53,192 429,360 51,730 --------- -------- ---------- ------- 1,586,220 191,112 1,705,583 205,492
Continued/... The accompanying notes form an integral part of these consolidated condensed financial statements. 3 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND SEPTEMBER 30, 1998 (UNAUDITED) (CONTINUED) (Amounts in thousands, except number of shares and per share data)
12/31/97 9/30/98 --------------- -------------- RMB US$ RMB US$ --- --- --- --- Shareholders' equity: Common Stock, par value US$ 0.001 each, 50,000,000 shares authorized; 13,576,116 (12,700,142 - 1997) shares issued, and fully paid up 107 13 116 14 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 Convertible Preferred Stock - Series B; 765 (6,800 - 1997) shares issued and outstanding 7 28,288 3,408 3,179 383 Contributed surplus 188,019 22,653 213,119 25,677 Reserves 27,971 3,370 27,971 3,370 Retained earnings 150,082 18,081 119,990 14,457 --------- -------- ---------- ------- Total shareholders' equity 439,000 52,890 408,908 49,266 --------- -------- ---------- ------- Total liabilities and shareholders' equity 2,025,220 244,002 2,114,491 254,758 ========= ======== ========== =======
The accompanying notes form an integral part of these consolidated condensed financial statements. 4 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (Amounts in thousands, except number of shares and per share data)
Nine Months Ended September 30, Three Months Ended September 30, --------------------------------------- -------------------------------------- 1997 1998 1998 1997 1998 1998 Notes RMB RMB US $RMB RMB US$ ----- ---- ---- ----- ---- ----- ---- Net sales to - third parties 427,571 346,675 41,768 158,047 108,059 13,019 - related parties 219,095 31,958 3,850 2,776 9,962 1,200 ---------- ---------- ---------- ---------- ---------- ---------- 646,666 378,633 45,618 160,823 118,021 14,219 Cost of sales (394,097) (276,254) (33,284) (98,272) (85,837) (10,342) ---------- ---------- ---------- ---------- ---------- ---------- Gross profit 252,569 102,379 12,334 62,551 32,184 3,877 Selling, general and administrative expenses - third parties (49,614) (66,970) (8,069) (14,332) (38,832) (4,679) - related parties (33,693) (15,341) (1,848) (8,747) (6,327) (762) ---------- ---------- ---------- ---------- ---------- ---------- (83,307) (82,311) (9,917) (23,079) (45,159) (5,441) Interest expense, net - third parties (43,431) (56,463) (6,802) (11,726) (20,287) (2,444) - related parties (6,446) (5,220) (629) (2,051) (1,633) (196) ---------- ---------- ---------- ---------- ---------- ---------- (49,877) (61,683) (7,431) (13,777) (21,920) (2,640) ---------- ---------- ---------- ---------- ---------- ---------- Income/(Loss)before income taxes 119,385 (41,615) (5,014) 25,695 (34,895) (4,204) Provision for income taxes: - Current (19,885) (607) (73) (4,162) (498) (60) - Deferred - - - - - - ---------- ---------- ---------- ---------- ---------- ---------- Income/(Loss) before minority interests 99,500 (42,222) (5,087) 21,533 (35,393) (4,264) Minority interests (54,728) 12,130 1,461 (11,457) 14,695 1,769 ---------- ---------- ---------- ---------- ---------- ---------- Net income/(loss) 44,772 (30,092) (3,626) 10,076 (20,698) (2,495) ========== ========== ========== ========== ========== ========== Earnings per common share 2 - Basic 3.53 (2.28) (0.27) 0.79 (1.53) (0.18) ========== ========== ========== ========== ========== ========== - Diluted 2.77 (2.28) (0.27) 0.67 (1.53) (0.18) ========== ========== ========== ========== ========== ========== Number of shares outstanding 2 - Basic 12,700,141 13,215,509 13,215,509 12,700,141 13,576,116 13,576,116 ========== ========== ========== ========== ========== ========== - Diluted 19,280,141 13,215,509 13,215,509 19,280,141 13,576,116 13,576,116 ========== ========== ========== ========== ========== ==========
The accompanying notes form an integral part of these consolidated condensed financial statements. 5 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (Amounts in thousands)
Nine Months Ended September 30, --------------------------------- 1997 1998 1998 RMB RMB US$ ---- ----- ----- Cash flows from operating activities: Net income (loss) 44,772 (30,092) (3,626) Adjustments to reconcile income to net cash used in operating activities: Minority interests 54,728 (12,130) (1,462) Depreciation 53,170 48,798 5,879 Loss on disposal of fixed assets 582 - - Amortization of goodwill 633 625 75 Exchange difference on secured promissory note and convertible debentures (145) - - Amortization of present value discount on deferred asset (587) 2,231 269 Amortization of deferred debenture issue expense 1,021 - - Changes in operating assets and liabilities- (Increase) decrease in assets: Accounts receivable (64,070) 20,789 2,505 Notes receivable 8,747 5,105 615 Inventories (12,832) (153,035) (18,438) Other receivables (27,112) (42,630) (5,136) Receivable from disposal of an investment 13,419 - - Due from related companies (200,012) (16,067) (1,936) Increase (decrease) in liabilities Accounts payable (26,653) 29,807 3,593 Accrued liabilities and other payables 44,573 80,715 9,724 Secured Promissory Note - 12,450 1,500 Income tax payable 25,696 (11,288) (1,360) Taxes other than income 56,760 26,316 3,170 Due to related companies 6,100 (11,607) (1,398) -------- -------- -------- Net cash used in operating activities (21,210) (50,013) (6,026) -------- -------- -------- Cash flows from investing activities: Proceeds from disposal of fixed assets (134) - - Additions to fixed assets (35,147) (2,677) (322) -------- -------- -------- Net cash used in investing activities (35,281) (2,677) (322) -------- -------- -------- Cash flows from financing activities: Net increase in bank loans 19,329 17,550 2,115 Secured Promissory Note - (12,450) (1,500) -------- -------- -------- Net cash provided by financing activities 19,329 5,100 615 -------- -------- -------- Net decrease in cash and cash equivalents (37,162) (47,590) (5,733) Cash and cash equivalents, at beginning of period 87,428 63,093 7,601 -------- -------- -------- Cash and cash equivalents, at end of period 50,266 15,503 1,868 ======== ======== ======== Non-cash transaction: Financing of lease arrangements 6,446 15,169 1,827 ======== ======== ========
The accompanying notes form an integral part of these consolidated condensed financial statements. 6 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (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 in the People's Republic of China ("PRC") and certain western countries, including the United States. 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 51.4% 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 and 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. 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, 1998, the results of operations for the three months and nine months ended September 30, 1997 and 1998, and the changes in cash flows for the nine months ended September 30, 1997 and 1998. These adjustments are of a normal recurring nature. 7 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (Amounts in thousands, except number of shares and per share data) 2. BASIS OF PRESENTATION (continued) The consolidated balance sheet as of December 31, 1997, is derived from the Company's audited financial statements. Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although management of the Company believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading. For further information, refer to the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 1997 as filed with the Securities and Exchange Commission. In 1997, the Financial Accounting Standards Board issued Statement No.128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for the three months and nine months ended September 30, 1997 and 1998 have been presented and, where appropriate, restated to conform to SFAS 128 requirements. The diluted loss per share for the three months and nine months ended September 30, 1998 is the same as the basic loss per share as there was an anti-dilution effect, which reduces the loss per share. The calculation which resulted in such an anti-dilution was based on the assumptions that the conversion rights under the Convertible Debentures had been fully exercised, at the adjusted exercise price as stated in note 6, and the redemption of preferred shares, both on January 1, 1998. On this basis, the net income calculated by adding back the interest expenses on the Convertible Debentures net of income tax is RMB 4,713 and RMB 14,139 respectively, for the three months and nine months ended September 30, 1998. As a result of the aforesaid, an anti-dilution effect was resulted and therefore the diluted loss per share was the same as the basic loss per share. The results of operations for the three months and nine months ended September 30, 1998 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 1998. 3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE 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. 8 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (Amounts in thousands, except number of shares and per share data) 3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE (continued) The Company's share capital is denominated in United States dollars (US$) and the reporting currency is the RMB. For financial reporting purposes, the US$ share capital amounts have been translated into RMB at the applicable rates prevailing on the transaction dates. For financial reporting purposes, translation of amounts from RMB into US$ for the convenience of the reader has been made at the exchange rate quoted by the People's Bank of China on September 30, 1998 of US$ 1.00 = RMB 8.30. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rate on September 30, 1998 or at any other certain rate on September 30, 1998. 4. INVENTORIES Inventories consist of the following at December 31, 1997 and September 30, 1998:
December 31, 1997 September 30, 1998 ----------------- ------------------ RMB RMB US$ RMB US$ - ----------------------------------- --- --- --- --- Raw materials 92,039 11,089 117,472 14,153 Work-in-progress 141,214 17,014 186,097 22,422 Finished goods 282,634 34,052 365,353 44,018 -------- -------- -------- ------- 515,887 62,155 668,922 80,593 Less: Allowance for obsolescence (38,670) (4,659) (38,670) (4,659) -------- -------- -------- ------- Inventories, net 477,217 57,496 630,252 75,934 ======== ======== ======== =======
5. SECURED PROMISSORY NOTE A promissory note for US$ 5,012 (RMB 41,600) (the "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 title and interest in the outstanding capital stock of its wholly- owned subsidiary China Bearing. The Note is denominated in and is 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 6, Asean has undertaken that for so long as any of the debentures are outstanding, no amounts are to be repaid on the Note unless there is sufficient working capital and the repayment is made in accordance with the following schedule: 9 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (Amounts in thousands, except number of shares and per share data) 5. 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 Pursuant to the above described repayment schedule, a principal payment of US$ 2,012 (RMB 16,700) was made on the Note on September 10, 1996. The directors do not envisage any other repayments being made in the foreseeable future. 6. CONVERTIBLE DEBENTURES 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, the principal amount of the Convertible Debentures into shares of the Common Stock of the Company. The Conversion Price (the "Conversion Price") was initially $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. 10 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (Amounts in thousands, except number of shares and per share data) 6. CONVERTIBLE DEBENTURES (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 Debentures 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 $.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 in achieving the defined earnings per common share of US $0.55 in 1997, an event of default had occurred. Although the Convertible Debentures bear an interest charge at the rate of 5% per annum, interest was being accrued at the rate of 19.75% per annum to provide for the condition of default. Pursuant to a Settlement Agreement, dated October 16, 1998,(the "Settlement Agreement") among China Bearing, Asean Capital Limited, China International Bearing Holdings Limited, the Company, Southwest Products (collectively, the "Default Parties") and the Investors, the Investors have agreed not to demand the immediate repayment of the Convertible Debentures and accrued interest. from the Default Parties for the event of default under the Subscription Agreement. Under the Settlement Agreement, the Convertible Debentures, together with accrued interest at a simple interest rate of 12.375% per annum until July 22, 1998 less interest paid, have been restructured into a debt at a principal amount of US$13,173,490. The debt, which carries a simple interest rate of 10% per annum, shall be repaid, according to the repayment schedule stipulated in the Settlement Agreement, over a period of three years ending on July 23, 2001. In connection with the Settlement Agreement, the Company has agreed to issue to the Investors 466,667 shares of common stock with a three-year legend. In addition, the Default Parties jointly and severally undertake that 50% of any public market funds raised by the Company or its subsidiaries shall 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. 11 7. CONVERTIBLE PREFERRED STOCK - SERIES B During April and May 1998, the Series B Convertible Preferred stock was converted to common stock of Sunbase Asia, Inc. The shares, originally issued to the former Southwest Products Company shareholders, were converted at the rate as agreed upon in the Sunbase Asia, Inc.\Southwest Products Company purchase agreement. Although all of the Series B Convertible Preferred stock was eligible for conversion, as of September 30, 1998, not all of the Series B Convertible Preferred stock was converted. 12 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 51.4% 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 (effective December 29, 1995), the Company acquired Southwest Products, which manufactures precision spherical bearings that are sold primarily to the aerospace and commercial aviation industries. The acquisition of Southwest Products has been accounted for under the purchase method of accounting. The results of Southwest Products have been consolidated into the Company's consolidated results of operations commencing January 1, 1996. Unless specifically stated, all amounts are in thousands ('000). RESULTS OF OPERATION THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998: 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, 1997 and 1998.
Three Months Ended September 30, ------------------------------------------- 1997 1998 ---- ---- RMB % RMB % --- --- --- --- Sales 160,823 100.0 118,021 100.0 Cost of sales (98,272) (61.1) (85,837) (72.7) ------- ----- -------- ----- Gross profit 62,551 38.9 32,184 27.3 Selling expenses ( 4,619) (2.9) (2,773) (2.3) General and administrative expenses (18,460) (11.5) (42,386) (35.9) Interest expenses (13,777) (8.6) (21,920) (18.6) ------- ----- -------- ----- Income before income taxes 25,695 15.9 (34,895) (29.5) Provision for income taxes (4,162) (2.6) (498) (0.4) ------- ----- -------- ----- Income before minority interests 21,533 13.3 (35,393) (29.9) Minority interests (11,457) (7.1) 14,695 12.4 ------- ----- -------- ----- Net income/(loss) 10,076 6.2 (20,698) (17.5) ======= ===== ======== =====
13 Sales - ----- Sales for the three months ended September 30, 1998 decreased by RMB 42,802 or 26.6% to RMB 118,021 as compared to RMB 160,823 for the three months ended September 30, 1997. The decrease in sales was due to adverse market conditions in the PRC primarily due to the financial crisis in Asia. Moreover, stringent control on capital expenditures of PRC enterprises by the government has caused the decrease in demand and thus the sales of the Company's products, which are components of machinery and equipment. Competition within the PRC bearing industry increased in 1998 for the limited sales orders in the bearing market. In addition, there were no material price increases from the prior twelve-month period. Sales for Harbin Bearing for the three months ended September 30, 1998 decreased by RMB 41,525 or 27.9% to RMB 107,183 as compared to RMB 148,708 for the three months ended September 30, 1997. The decrease was mainly caused by the decrease in domestic demand for bearings in the PRC. Cost of Sales/Gross Profit - -------------------------- Cost of sales for the three months ended September 30, 1998 decreased to RMB 85,837 as compared to RMB 98,272 for the three months ended September 30, 1997. The cost of sales for Harbin Bearing for the three months ended September 30, 1998 and 1997 was calculated using the gross profit method by reference to average annual gross profit ratios. The cost of sales for Southwest Products for the three months ended September 30, 1998 and 1997 was calculated on an actual cost basis. Gross profit decreased by RMB 30,367 or 48.5% to RMB 32,184 for the three months ended September 30, 1998 as compared to RMB 62,551 for the three months ended September 30, 1997. The decrease in gross profit was mainly attributable to the decrease in sales caused by the adverse market conditions in the PRC, which led to a plunge in units of bearings produced in 1998. This resulted in production inefficiency and an under-utilization of machinery and equipment capacity causing an increase in overhead absorbed by each unit produced and thus the unit cost of goods sold. Also, there was no material change in selling prices during the two periods under review. Selling Expenses - ---------------- Selling Expenses for the three months ended September 30, 1998 decreased by RMB 1,846 or 40% to RMB 2,773 as compared to RMB 4,619 for the three months ended September 30, 1997. The decrease in selling expenses was due to the decrease in sales. General and Administrative Expenses - ----------------------------------- General and Administrative Expenses for the three months ended September 30, 1998 increased by RMB 23,926 or 129.6% to RMB 42,386 as compared to RMB 18,460 for the three months ended September 30, 1997. The significant increase in general and administrative expenses was caused by a specific provision made for deposits with a Chinese financial institution, in the amount of RMB 23,750, during the period ended September 30, 1998. The provision was required due to liquidity problems of the Chinese financial institution. The Company considers that the possibility of recovering the deposits is remote and therefore, the full amount of RMB 23,750 was reserved for. 14 Interest Expense - ---------------- Interest Expense for the three months ended September 30, 1998 increased by RMB 8,143 or 59.1% to RMB 21,920 as compared to RMB 13,777 for the three months ended September 30, 1997. The increase in interest expense was primarily attributable to the increase in Convertible Debentures interest and the increase in average bank loans during the period. The rise in Convertible Debentures interest was due to an increase in the interest accrual rate from 12% to 19.75% per annum as a result of the Company's default on a condition of the Subscription Agreement governing the Convertible Debentures. Had the Settlement Agreement mentioned in Note 6 been executed, the interest expense for the three months ended September 30, 1998 and 1997 would have decreased by RMB 1,865 and increased by RMB 89, respectively. Net Income - ---------- As a result of the aforementioned factors, net income decreased by RMB 30,774 or 305% to a loss of RMB 20,698 for the three months ended September 30, 1998 as compared to a net income of RMB 10,076 for the three months ended September 30, 1997. Had the Settlement Agreement mentioned in Note 6 been executed, the net loss for the three months ended September 30, 1998 and the net income for the three months ended September 30, 1997 would have been adjusted to RMB 18,833 and RMB 9,987, respectively. 15 NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998: 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, 1997 and 1998.
Nine Months Ended September 30, ------------------------------------------- 1997 1998 ---- ---- RMB % RMB % --- --- --- --- Sales 646,666 100.0 378,633 100.0 Cost of sales (394,097) (60.9) (276,254) (73.0) -------- ----- -------- ------ Gross profit 252,569 39.1 102,379 27.0 Selling expenses (16,565) (2.6) (10,915) (2.9) General and administrative expenses (66,742) (10.3) (71,396) (18.9) Interest expenses (49,877) (7.7) (61,683) (16.3) -------- ----- -------- ------ Income (loss)/before income taxes 119,385 18.5 (41,615) (11.1) Provision for income taxes (19,885) (3.1) (607) (0) -------- ----- -------- ------ Income (loss)/before minority interests 99,500 15.4 (42,222) (11.1) Minority interests (54,728) (8.5) 12,130 3.2 -------- ----- -------- ------ Net income/(loss) 44,772 6.9 (30,092) (7.9) ======== ===== ======== ======
Sales - ----- Sales for the nine months ended September 30, 1998 decreased by RMB 268,033 or 41.4% to RMB 378,633 as compared to RMB 646,666 for the nine months ended September 30, 1997. The decrease in sales was due to adverse market conditions in the PRC primarily due to the financial crisis in Asia. Moreover, stringent control on capital expenditure of PRC enterprises by the government has caused the decrease in demand and thus the sales of the Company's products, which are components of machinery and equipment. Competition within the PRC bearing industry increased in 1998 for the limited sales orders in the bearing market. In addition there were no material price increases from the prior twelve-month period. Sales for Harbin Bearing for the nine months ended September 30, 1998 decreased by RMB 266,776 or 43.5% to RMB 346,354 as compared to RMB 613,130 for the nine months ended September 30, 1997. This decrease was mainly caused by the decrease in domestic demand for bearings in the PRC. Cost of Sales/Gross Profit - -------------------------- Cost of sales for the nine months ended September 30, 1998 decreased to RMB 276,254 as compared to RMB 394,097 for the nine months ended September 30, 1997. The cost of sales for Harbin Bearing for the nine months ended September 30, 1998 and 1997 was calculated using the gross profit method by reference to average annual gross profit ratios. The cost of sales for Southwest Products for the nine months ended September 30, 1998 and 1997 was calculated on an actual cost basis. 16 Gross profit decreased by RMB 150,190 or 59.5% for the nine months ended September 30, 1998 as compared to the nine months ended September 30, 1997. The decrease in gross profit was mainly attributable to the decrease in sales caused by the adverse market conditions in the PRC, which led to a plunge in units of bearings produced in 1998. This resulted in production inefficiency and an under-utilization of machinery and equipment capacity causing an increase in overhead absorbed by each unit produced and thus the unit cost of goods sold. Also, there was no material change in selling prices during the two periods under review. Selling Expenses - ---------------- Selling Expenses for the nine months ended September 30, 1997 decreased by RMB 5,650 or 34.1% to RMB 10,915 as compared to RMB 16,565 for the nine months ended September 30, 1997. The significant factors affecting the change in selling expenses between the nine months ended September 30, 1998 and 1997 were as follows: a. A decrease in royalty paid of RMB 1,333 for the nine months ended September 30, 1998 as compared to the nine months ended September 30, 1997. b. A decrease in government tax paid of RMB 2,885 during the nine months ended September 30, 1998 as compared to the nine months ended September 30, 1997. General and Administrative Expenses - ----------------------------------- General and Administrative Expenses for the nine months ended September 30, 1998 increased by RMB 4,654 or 7% to RMB 71,396 as compared to RMB 66,742 for the nine months ended September 30, 1997. The significant factors affecting the change in general and administration expenses between the nine months ended September 30, 1998 and 1997 were as follows: a. A provision for management fees of RMB 15,790 was made at Harbin Bearing for the nine months ended September 30, 1997. No such provision was made for the nine months ended September 30, 1998. b. A general provision for doubtful accounts of RMB 2,000 was made at Harbin Bearing for the nine months ended September 30, 1997. No such provision was made for the nine months ended September 30, 1998. c. A decrease in staff costs of RMB 1,385 associated with the U.S. engineering program at Harbin Bearing. These Expenses were discontinued in the third quarter of 1997. d. A specific provision was made for deposits with a Chinese financial institution in the amount of RMB 23,750 during the period ended September 30, 1998. The provision was required due to liquidity problems of the financial institution. The Company considers the possibility of recovering the deposits is remote and therefore, the full amount of RMB 23,750 was reserved for. Interest Expense - ---------------- Interest Expense for the nine months ended September 30, 1998 increased by RMB 11,806 or 23.7% to RMB 61,683 as compared to RMB 49,877 for the nine months ended September 30, 1997. The increase in interest expense was primarily attributable to the increase in Convertible Debentures interest and the increase in average bank loans during the period. The rise in Convertible Debentures interest was due to an increase in the interest accrual rate from 12% to 19.75% per annum 17 as a result of the Company's default on a condition of the Subscription Agreement governing the Convertible Debentures. Had the Settlement Agreement mentioned in Note 6 been executed, the interest expense for the nine months ended September 30, 1998 and 1997 would have decreased by RMB 5,385 and increased by RMB 267, respectively. Net Income - ---------- As a result of the aforementioned factors, net income decreased by RMB 74,864 or 167% to a net loss of RMB 30,092 for the nine months ended September 30, 1998 as compared to a net income of RMB 44,772 for the nine months ended September 30, 1997. Had the Settlement Agreement mentioned in Note 6 been executed, the net loss for the nine months ended September 30, 1998 and the net income for the nine months ended September 30, 1997 would have been adjusted to RMB 24,707 and RMB 44,505, respectively. 18 LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES For the nine months ended September 30, 1998, the Company's operations utilized cash resources of RMB 50,013 as compared to RMB 21,210 utilized for the nine months ended September 30, 1997. The Company's net working capital decreased by RMB 21,229 at September 30, 1998 to RMB 286,232 as compared to RMB 307,461 at December 31, 1997 and the Company's current ratio at September 30, 1998 was 1.23:1 as compared to 1.29:1 at December 31, 1997 and 1.54:1 at September 30, 1997. Accounts receivable decreased by RMB 20,789 or 4.3% to RMB 459,611 at September 30, 1998, as compared to RMB 480,400 at December 31, 1997. Due from related companies increased by RMB 16,067 during the nine months ended September 30, 1998. The net decrease was mainly due to tight control in credit and review procedures by limiting sales to customers where collectability was uncertain in the period. INVESTING ACTIVITIES Capital expenditures for the nine months ended September 30, 1998 of RMB 2,677 related to renovation of existing facilities and equipment and were financed by internally generated funds, as well as short-term and long-term bank loans. There are no other material capital expenditures expected in the near future. FINANCING ACTIVITIES The Company has historically relied on both long and short term bank loans from Chinese banks to support its operating and capital requirements. Short-term bank loans have terms ranging from three months to six months, are utilized to finance both operating and capital requirements, and are renewed on a revolving basis. Long-term bank loans are utilized to fund capital expansion projects. During the nine months ended September 30, 1998, the net increase in bank loans (after deducting repayment) was RMB 17,550. The Company believes that it will be able to continue to maintain and expand its bank borrowings under existing terms and conditions. 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 any part, the principal amount of the Convertible Debentures into shares of the Common Stock of the Company. The Conversion Price (the "Conversion Price") was initially $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 19 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 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. 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 occurs, the Convertible Debentures 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 judgments; failure to achieve earning per common share of at least $.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 in achieving the defined earnings per common share of U.S. $0.55 in 1997, an event of default had occurred. Although the Convertible Debentures bear an interest charge at the rate of 5% per annum, interest was being accrued at the rate of 19.75% per annum to provide for the condition of the default. Pursuant to a Settlement Agreement, dated October 16, 1998, (the "Settlement Agreement") among China Bearing, Asean Capital Limited, China International Bearing Holdings Limited, the Company, Southwest Products (collectively, the "Default Parties"), and the Investors, the Investors have agreed not to demand the immediate repayment of the Convertible Debentures and accrued interest from the Default Parties for the event of default under the Subscription Agreement. Under the Settlement Agreement, the Convertible Debentures, together with accrued interest at a simple interest rate of 12.375% per annum until July 22, 1998 less interest paid, have been restructured into a debt at a principal amount of US$13,173,490. The debt, which carries a simple interest rate of 10% per annum, shall be repaid according to the repayment schedule stipulated in the Settlement Agreement over a period of three years ending on July 23, 2001. In connection with the Settlement Agreement, the Company has agreed to issue to the Investors 466,667 shares of common stock with a three-year legend. In addition, the Default Parties jointly and severally undertake that 50% of any public market funds raised by the Company or its subsidiaries shall be applied immediately towards discharging the then outstanding debt and interest accrued thereon. The obligations of China Bearing under the Settlement Agreement are guaranteed by other members of the Sunbase Group. A promissory note for US$ 5,012 (RMB 41,600) (the "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 title and interest in the outstanding capital stock of its wholly-owned subsidiary China Bearing. The Note is denominated in and is repayable in full in United States dollars, and bears interest at 8% per annum. In connection with the issuance of Convertible Debentures described at above, Asean has undertaken that for so long as any of the Convertible Debentures are outstanding, no amounts are to be repaid 20 on the Note unless there is sufficient working capital and the repayment is made in accordance with the following schedule:- Payment Period Amount -------------- ------ August 1, 1996 to July 31, 1997 up to 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 Pursuant to the above described repayment schedule, a principal payment of US$ 2,012 (RMB 16,700) was made on the Note on September 10, 1996. The directors do not envisage any other repayments being made in the foreseeable future. The Company anticipates that its cash flows from operations, combined with cash and cash equivalents, bank lines of credit and other external sources of debt and equity financing, are adequate to finance the Company's operating and debt service requirements for the foreseeable future. Nevertheless, due to the recent financial turmoil in Asia, management will cautiously and closely monitor the funding position of the Company. INFLATION AND CURRENCY MATTERS In recent years, the Chinese economy has experienced periods of rapid economic growth as well as high rates of inflation, which in turn has resulted in the periodic adoption by the Chinese government of various corrective measures designed to regulate growth and contain inflation. During the nine months ended September 30, 1998, the general inflation rate in the PRC was under control and was below 10% on an average basis. Since 1993, the Chinese government has implemented and maintained an economic program designed to control inflation, which has 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. The Company is generally able to raise its prices to shift a portion of the inflated costs to the customers. However, the Company must also take into account market conditions and competition and may not, in all circumstances, be able to raise prices to offset increased costs to the Company. The price of bearing steel, the major raw material used by the Company, remained fairly stable during 1997 and 1998. The major impact of inflation was on labor cost due to increases in employee's wages. However, the Company has generally managed to offset the effects of inflation through improved operational efficiency. Foreign operations are subject to certain risks inherent in conducting business abroad, including price and currency exchange controls, and fluctuations in the relative value of currencies. Changes in the relative value of currencies occur periodically and may, in certain instances, materially affect the Company's results of operations. The Company conducts most of its business in the PRC and, accordingly, the sale of its products is settled primarily in RMB. As a result, devaluation of the RMB against the US$, could have a material adverse effect upon the results of operations and financial position of the Company. Although prior to 1994 the RMB experienced significant devaluation against the US$, the RMB has remained fairly stable from 1994 to present. The unified exchange rate was US$ 1.00 to RMB 8.65 at December 31, 1993, RMB 8.45 at December 31, 1994, RMB 8.32 at December 31, 1995, RMB 8.3 at December 31, 1996, RMB 8.29 at September 30, 1997, RMB 8.3 for December 31, 1997 and September 30, 1998. 21 ITEM 3. FACTORS THAT MAY AFFECT FUTURE RESULTS FOREIGN INVESTMENT MATTERS The Company is currently being investigated by the Committee on Foreign Investment in the United States ("CFIUS"), an inter-agency committee of the United States Government, with respect to the Company's acquisition on January 1996 of Southwest Products Company ("Southwest"). CFIUS is in the second phase of conducting a review to determine if the ownership of Southwest by the Company poses a threat to the national security interests of the United States. This investigation will conclude on December 17, 1998. At the conclusion of the investigation, CFIUS will prepare a report and recommendation to the President of the United States. If CFIUS determines that such a threat may exist, then it may recommend to the President of the United States that he order a divestiture of Southwest by the Company. Alternatively, CFIUS may take no action or may propose that certain measures be taken by the Company to protect the national security interests of the United States as a condition of the Company continuing to own Southwest. At this time, it is premature to evaluate the likelihood of any action by CFIUS with respect to this matter. If the Company is require to divest its ownership of Southwest or significant restrictions on its ownership are imposed, the Company believes it has certain claims which it may bring against certain of its professional advisors who assisted it in connection with its acquisition of Southwest. However, no assurance can be given that any such claims by the Company would fully reimburse it for any loss it might realize upon a divestiture of Southwest or as a result of the imposition of conditions on its ownership. ITAR REGULATIONS In December 1997, Southwest registered with the Office of Defense Trade Controls of the Department of State ("DTC") as a manufacturer of defense articles subject to regulation under the International Traffic in Arms Regulations ("ITAR"). Southwest had not previously been registered with DTC, although it appears that such registration was required. Southwest is currently reviewing its export history to determine if any of its exports may have been in violation of ITAR. If it is determined that Southwest violated ITAR in the past, it could be subjected to a variety of civil or criminal penalties. At this time, no proceedings related to any alleged non-compliance by Southwest with ITAR have been instituted or threatened. The Company believes that if any such proceedings are instituted, any sanctions which might be imposed would take into account the inadvertent nature of the violations of ITAR by Southwest, if any, as well as Southwest's voluntary disclosure to DTC with respect to this matter. However, no assurance can be given as to the outcome of any such proceedings. NASDAQ NOTIFICATION The Company has received notice from the NASDAQ National Market System for failure to meet the minimum acceptable level of a $5,000,000 market value of the public float and for failure to meet the minimum continuing closing price of the stock of $1.00. The Company has requested a written hearing with NASDAQ to review the potential delisting. The hearing is scheduled for December 10, 1998 and if NASDAQ decides on a delisting of the Company's shares, the delisting will take place immediately following the hearing. The 22 Company has no assurance of a favorable outcome for the Company at the hearing. In the event that the Company's stock is delisted from trading on NASDAQ NMS, trading will be moved to the Bulletin Board. LIQUIDITY The Company's operations used cash resources of RMB 50,013 for the nine months ended September 30, 1998 as compared to RMB 21,210 for the nine months ended September 30, 1997. In addition, during the nine months ended September 30, 1998, the net increase in bank loans was RMB 17,550. However, accounts receivable trade decreased by 20,789 in the same period. The economic conditions is Asia and liquidity constraints in China may continue to adversely affect the Company's operations and collectability of its accounts receivable. Continuation of these trends could impair the Company's liquidity. ACCOUNTS RECEIVABLE Although accounts receivable trade decreased by RMB 20,789 or 4.3% during the nine months ended September 30, 1998, credit remains tight in China and collection of outstanding accounts receivable remains difficult. The Company has continued to enhance its credit review procedures and continues to limit its sales to customers where collectability remains uncertain. The Company is unable to predict how the current economic conditions and the credit tightening policy of the Chinese government will effect the Company's collection of accounts receivable. FAILURE TO QUALIFY HRB TO AUTOMOTIVE AND AEROSPACE QUALITY STANDARDS To date Harbin Bearing has been unable to establish procedures that would enable it to qualify to international quality standards, generally accepted automotive quality standards or aerospace quality standards. Such failure has resulted in Harbin Bearing's inability to capture orders from the U.S. automotive and aerospace industries. At present, the Company has temporarily suspended the active program at Harbin Bearing that would enable Harbin Bearing to qualify to these standards. If the program is not restarted, it is unlikely that Harbin Bearing would be in a position to capture any significant orders from either the U.S. automotive or aerospace sectors. Restarting of the program will first require a review of and approval by appropriate agencies within the United States Federal Government. There is no certainty that the U.S. Government will allow such a program to be commenced. Failure to qualify Harbin Bearing will constrain the Company's future growth. ABILITY TO REMAIN COMPETITIVE The Company's ability to remain competitive depends in significant part on its ability and willingness to fund research and development, introduce new products and retain key personnel for these functions. Some of the Company's competitors have substantially greater resources available for these purposes. To the extent that the Company does not fund product development, the Company's competitive position will probably be adversely effected, which may result in a loss of sales or lower productivity. 23 PART II. OTHER INFORMATION Item 1 Legal Proceedings No material developments Item 2 Changes in Securities None Item 3 Defaults upon Senior Securities None 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, 1998: None 24 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 19, 1998 By: /s/ William McKay -------------------------------- William McKay Chief Executive Officer and President (Duly Authorized Officer) Date: November 19, 1998 By: /s/ (Roger) Li Yuen Fai -------------------------------- (Roger) Li Yuen Fai Vice President and Chief Financial Officer (Principal Financial Officer) 25 EX-11 2 COMPUTATION OF EARNINGS PER COMMON SHARE EXHIBIT 11 ---------- SUNBASE ASIA, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (Amounts in thousands, except number of shares and per share data)
Nine Months Ended September 30, Three Months Ended September 30, ------------------------------ -------------------------------- 1997 1998 1998 1997 1998 1998 RMB RMB US$ RMB RMB US$ --- --- --- --- --- --- BASIC Net income (loss), as reported 44,772 (30,092) (3,626) 10,076 (20,698) (2,495) ======== ======== ======== ======== ======== ======== Weighted average number of shares of common stock outstanding: Share of common stock outstanding on January 1 12,700,109 12,700,142 12,700,142 12,700,109 12,700,142 12,700,142 Conversion of Series B Preferred Shares 515,364 515,364 875,971 875,971 Share issued as a result of rounding from reverse stock split 32 3 3 32 3 3 ---------- ---------- ---------- ----------- ---------- ---------- Weighted average number of shares of common stock and common stock outstanding 12,700,141 13,215,509 13,215,509 12,700,141 13,576,116 13,576,116 ========== ========== ========== ========== ========== ========== Earnings/(Loss) per common share 3.53 (2.28) (0.27) 0.79 (1.53) (0.18) ========== ========== ========== =========== ========== ==========
26 SUNBASE ASIA, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 (Amounts in thousands, except number of shares and per share data)
Nine Months Ended September 30. Three Months Ended September 30. ------------------------------- -------------------------------- 1997 1998 1998 1997 1998 1998 RMB RMB US$ RMB RMB US$ --- --- --- --- --- --- DILUTED Net income (loss), as reported 44,772 (30,092) (3,626) 10,076 (20,698) (2,495) Add after tax interest expense applicable to Convertible Debentures 8,584 - - 2,860 - - ---------- ---------- ----------- ---------- ---------- ---------- Net income, as adjusted 53,356 (30,092) (3,626) 12,936 (20,698) (2,495) ========== ========== ========== ========== ========== ========== Weighted average number of shares of common stock outstanding: Share of common stock outstanding on January 1 12,700,109 12,700,142 12,700,142 12,700,109 12,700,142 12,700,142 Conversion of Series B Preferred Shares 515,364 515,364 515,364 875,971 875,971 Share issued as a result of rounding from reverse stock split 32 3 3 32 3 3 ---------- ---------- ----------- ---------- ---------- ---------- Weighted average number of 12,700,141 13,215,509 13,215,509 12,700,141 13,576,116 13,576,116 shares of common stock outstanding Shares of common stock issuable assuming conversion of the Convertible Preferred Stock -Series A 3,600,000 - - 3,600,000 - - -Series B 680,000 - - 680,000 - - Shares of common stock issuable assuming conversion of the Convertible Debentures on August 23, 1996 2,300,000 - - 2,300,000 - - ---------- ---------- ----------- ---------- ---------- ---------- Total weighted average number of shares of common stock and common stock equivalents 19,280,141 13,215,509 13,215,509 19,280,141 13,576,116 13,576,116 outstanding ========== ========== ========== ========== ========== ========== Earnings/(Loss) per share 2.77 (2.28) (0.27) 0.67 (1.53) (0.18) ==== ==== ==== ==== ==== ====
27 EX-27 3 FINANCIAL DATA SCHEDULE
5 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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1,868 0 103,584 0 75,934 181,386 70,565 0 254,758 146,899 0 0 5,748 14 43,504 254,758 45,618 45,618 33,284 33,284 0 0 7,431 (5,014) (73) (5,087) 0 0 0 (3,626) (0.27) (0.27)
-----END PRIVACY-ENHANCED MESSAGE-----