-----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, Jvs/9TuOuxDmJPRzmWgTiZVKuhJnKHbPxP7TWOIuiUsMApDYROclXMR4pnNzxvfN 0IANR8FG/46Ast6mKbmwsA== 0000950109-99-002909.txt : 19990816 0000950109-99-002909.hdr.sgml : 19990816 ACCESSION NUMBER: 0000950109-99-002909 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99687030 BUSINESS ADDRESS: STREET 1: 19/F FIRST PACIFIC BANK CENTRE STREET 2: 51-57 GLOUCESTER ROAD CITY: WANCHAI HONG KONG STATE: K3 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 June 30, 1999. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to ------- ------- Commission File No. 0-3132 SUNBASE ASIA, INC. (Exact name of Registrant as specified in its charter) Nevada 94-1612110 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 19/F, First Pacific Bank Centre 51-57 Gloucester Road Wanchai, Hong Kong (Address of principal executive offices) Registrant's telephone number, including area code: (852) 2865-1511 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of June 30, 1999, the Company had 14,118,751 shares of common stock issued and outstanding. 1 SUNBASE ASIA, INC. AND SUBSIDIARIES ----------------------------------- INDEX
Page ---- PART I: FINANCIAL INFORMATION Item 1 -- Financial statements Consolidated Condensed Balance Sheets (unaudited) - December 31, 1998 and June 30, 1999 3-4 Consolidated Condensed Statements of Income (unaudited) - Three months and six months ended June 30, 1998 and 1999 5 Consolidated Condensed Statements of Cash Flow (unaudited) - Six months ended June 30,1998 and 1999 6 Notes to Consolidated Condensed Financial Statements (unaudited) - Three months and six months ended June 30, 1998 and 1999 7-16 Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations 17-26 Item 3 -- Quantitative and Qualitative Disclosure about Market Risk 27-31 PART II: OTHER INFORMATION Item 6 - - Exhibits and Reports on Form 8-K 32 SIGNATURES 33 EXHIBIT 11 Computation of Earnings Per Common Share 34-35
2 PART I. FINANCIAL INFORMATION ITEM 1 - Financial Statements -------------------- SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) AS OF DECEMBER 31, 1998 AND JUNE 30, 1999 (Amounts in thousands, except number of shares and per share data)
12/31/98 6/30/99 -------------- ---------- Notes RMB US$ RMB US$ ----- --- --- --- --- ASSETS Current assets Unrestricted cash and bank balances 19,075 2,298 4,783 576 Accounts receivable, net 468,075 56,396 530,413 63,905 Notes receivable 2,440 294 725 87 Inventories, net 4 572,176 68,937 582,028 70,124 Other receivables 26,720 3,219 38,514 4,640 Due from related companies 205,216 24,724 196,688 23,697 --------- -------- ---------- ------- Total current assets 1,293,702 155,868 1,353,151 163,029 Fixed assets 559,245 67,379 524,995 63,253 Net assets of discontinued operations 5 42,798 5,156 30,880 3,720 Deferred asset 9,553 1,151 8,745 1,054 --------- -------- ---------- ------- Total assets 1,905,298 229,554 1,917,771 231,056 ========= ======== ========== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short term bank loans 516,232 62,197 514,182 61,949 Long term bank loans, current portion 156,113 18,809 156,113 18,809 Accounts payable 141,616 17,062 142,782 17,203 Accrued liabilities and other payables 122,431 14,751 193,690 23,336 Short term obligations under capital leases 20,933 2,522 21,834 2,631 Secured promissory note 6 24,900 3,000 24,900 3,000 Income tax payable 50,358 6,068 70,036 8,438 Taxes other than income 30,417 3,664 28,682 3,456 Due to related companies 51,579 6,214 51,876 6,250 Other loans 7 117,239 14,125 116,151 13,994 --------- -------- ---------- ------- Total current liabilities 1,231,818 148,412 1,320,246 159,066 Long term obligations under capital leases 47,550 5,729 36,403 4,386 Minority interests 330,409 39,808 307,192 37,011 --------- -------- ---------- ------- 1,609,777 193,949 1,663,841 200,463
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, 1998 AND JUNE 30, 1999 (UNAUDITED) (CONTINUED) (Amounts in thousands, except number of shares and per share data) 12/31/98 6/30/99 ------------------- --------------------- RMB US$ RMB US$ --- --- --- --- Shareholders' equity: Common Stock, par value US$ 0.001 each, 50,000,000 shares authorized; 14,118,751 (1998: 13,652,084) shares issued, 115 14 119 14 and fully paid up 466,667 shares issuable on debt restructuring 2,905 350 - - Preferred Stock, par value US$ 0.001 each, 25,000,000 shares authorized; Convertible Preferred Stock - Series A; 36 shares issued and outstanding 44,533 5,365 44,533 5,365 Contributed surplus 215,052 25,910 217,953 26,260 Reserves 28,002 3,374 28,002 3,374 Accumulated other comprehensive income 1,247 150 1,247 150 Retained earnings 3,667 442 (37,924) (4,570) --------- -------- ---------- ------- Total shareholders' equity 295,521 35,605 253,930 30,593 --------- -------- ---------- ------- Total liabilities and shareholders' equity 1,905,298 229,554 1,917,771 231,056 ========= ======== ========== ======= The accompanying notes form an integral part of these consolidated condensed financial statements. 4 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (Amounts in thousands, except number of shares and per share data)
Six Months Ended June 30, Three Months Ended June 30, ----------------------------------------- --------------------------------------- 1998 1999 1999 1998 1999 1999 Notes RMB RMB US$ RMB RMB US$ ----- ---- ----- ---- ----- ---- ----- Net sales to - third parties 217,175 208,570 25,129 135,868 101,718 12,255 - related parties 21,996 13,184 1,588 13,539 6,696 807 ---------- ---------- ---------- ----------- ---------- ---------- 239,171 221,754 26,717 149,407 108,414 13,062 Cost of sales (174,858) (213,107) (25,675) (110,391) (104,186) (12,552) ---------- ---------- ---------- ----------- ---------- ---------- Gross profit 64,313 8,647 1,042 39,016 4,228 510 Selling, general and administrative expenses - third parties (22,732) (28,534) (3,438) (7,447) (14,061) (1,695) - related parties (9,014) (3,583) (432) (8,196) (2,066) (249) ---------- ---------- ---------- ----------- ---------- ---------- (31,746) (32,117) (3,870) (15,643) (16,127) (1,944) Interest expense, net - third parties (34,308) (24,534) (2,956) (16,451) (12,769) (1,539) - related parties (3,587) (4,141) (499) (2,035) - - ---------- ---------- ---------- ----------- ---------- ---------- (37,895) (28,675) (3,455) (18,486) (12,769) (1,539) ---------- ---------- ---------- ----------- ---------- ---------- Operating income / (loss) before minority interests (5,328) (52,145) (6,283) 4,887 (24,668) (2,973) Minority interests (2,565) 23,217 2,797 (4,331) 10,925 1,316 ---------- ---------- ---------- ----------- ---------- ---------- Net income / (loss) from Continuing operation (7,893) (28,928) (3,486) 556 (13,743) (1,657) Net loss from discontinued operation, net of income taxes (1,501) (12,663) (1,526) (984) (12,209) (1,471) ---------- ---------- ---------- ----------- ---------- ---------- Net loss (9,394) (41,591) (5,012) (428) (25,952) (3,128) ========== ========== ========== =========== ========== ========== Income per common share 2 - Basic income / (loss) from continuing operation (0.61) (2.05) (0.25) 0.04 (0.97) (0.12) ========== ========== ========== =========== ========== ========== - Basic net loss (0.72) (2.95) (0.35) (0.03) (1.84) (0.22) ========== ========== ========== =========== ========== ========== - Diluted income / (loss) from continuing operation (0.61) (2.05) (0.25) 0.04 (0.97) (0.12) ========== ========== ========== =========== ========== ========== - Diluted net loss (0.72) (2.95) (0.35) (0.03) (1.84) (0.22) ========== ========== ========== =========== ========== ========== Number of shares outstanding 2 - Basic 13,032,215 14,118,751 14,118,751 13,360,637 14,118,751 14,118,751 ========== ========== ========== =========== ========== ========== - Diluted 13,032,215 14,118,751 14,118,751 13,360,637 14,118,751 14,118,751 ========== ========== ========== =========== ========== ==========
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 SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (Amounts in thousands) Six Months Ended June 30, ---------------------------------- 1998 1998 1999 1999 RMB US$ RMB US$ ---- ---- ---- ---- Cash flows from operating activities: Net income (9,395) (1,132) (41,591) (5,012) Adjustments to reconcile income to net cash used in operating activities: Minority interests 2,565 309 (23,217) (2,797) Depreciation 32,956 3,971 36,364 4,381 Share of net loss from discontinued operation 1,501 181 12,663 1,526 Amortization of present value discount on deferred asset 2,421 292 808 97 Changes in operating assets and liabilities- (Increase) decrease in assets: Accounts receivable 45,736 5,510 (62,338) (7,509) Notes receivable 2,010 242 1,715 207 Inventories (94,326) (11,365) (9,852) (1,187) Other receivables (29,255) (3,525) (11,794) (1,421) Due from related companies (26,400) (3,181) 8,528 1,027 Increase (decrease) in liabilities: Accounts payable 5,069 611 1,166 141 Notes payable 2,350 283 - - Accrued liabilities and other payables 10,308 1,242 71,259 8,585 Income tax payable (11,262) (1,357) 19,678 2,370 Taxes other than income 23,129 2,787 (1,735) (208) Due to related companies 637 77 (9,949) (1,198) ---------- -------- ---------- --------- Net cash used in operating activities from Continuing operation (41,956) (5,055) (8,295) (998) ---------- -------- ---------- --------- Cash flows from investing activities: Advances to subsidiaries proposed for disposal (1,998) (241) (745) (90) Additions to fixed assets (2,677) (323) (2,114) (255) ---------- -------- ---------- --------- Net cash used in investing activities (4,675) (564) (2,859) (345) ---------- -------- ---------- ---------- Cash flows from financing activities: Net increase / (decrease) in bank loans 22,531 2,715 (3,138) (379) ---------- -------- ---------- --------- Net cash provided by financing activities 22,531 2,715 (3,138) (379) ---------- -------- ---------- --------- Net decrease in cash and cash equivalents (24,100) (2,904) (14,292) (1,722) Cash and cash equivalents, at beginning of period 62,423 7,521 19,075 2,298 ---------- -------- ---------- --------- Cash and cash equivalents, at end of period 38,323 4,617 4,783 576 ========== ======== ========== ========= Non-cash transaction: Financing of lease arrangements 10,004 1,205 10,246 1,234 ========== ======== ========== ========= The accompanying notes form an integral part of these consolidated condensed financial statements. 6 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (Amounts in thousands, except number of shares and per share data) 1. GENERAL Sunbase Asia, Inc., a Nevada Corporation ("the Company"), is engaged in the design, manufacture and distribution of a broad range of bearing products. The Company acquired 100% of the issued share capital of China Bearing Holdings Limited ("China Bearing") on December 2, 1994 pursuant to a Share Exchange Agreement with Asean Capital Limited in exchange for 10,261,000 shares of common stock. The transaction has been treated as a recapitalization of China Bearing with China Bearing as the acquirer (reverse acquisition). The historical financial statements prior to December 2, 1994 are those of China Bearing. The Company owns, through various subsidiaries and joint venture interests, a 51.43% indirect ownership in Harbin Bearing Company Limited ("Harbin Bearing"), a joint stock limited company organized under the law of the PRC. Harbin Bearing is located in Harbin, the PRC, and has been in business since 1950. Harbin Bearing manufactures a wide variety of bearings in the PRC for use in commercial industrial and aerospace applications that are sold primary in the PRC and certain western countries, including the United States. On January 16, 1996 (effective December 29, 1995), the Company acquired Smith Acquisition Company, Inc. dba Southwest Products Company ("Southwest Products"), a bearing manufacturing company located in Los Angeles County, California, that has been in business since 1945. Southwest Products manufactures precision spherical bearings that are sold primarily to the aerospace and commercial aviation industries. Its major customers are located in the United States. As a result of the acquisition of Southwest Products, the Committee on Foreign Investment in the United States ("CFIUS"), an inter-agency committee of the United States Government, began an investigation of the Company to determine if the ownership of Southwest Products by the Company would pose any threat to the national security interests of the United States. In December 1998, the Company voluntarily agreed to divest Southwest Products and, pending such disposition, placed its ownership interest in Southwest Products into an irrevocable trust. An independent trustee acceptable to the U.S. Department of Defense was appointed to oversee the operations of Southwest Products to insure Southwest Product's compliance with all U.S. laws and regulations and to work with the Company's Board of Directors to actively pursue a suitable buyer. In light of the Company's decision to appoint a trustee pending the sale of Southwest Products. At the time of creation of the trust, all "foreign persons" within the meaning of 31 C.F.R. (S)800.213 who were serving as officers and/or directors of Southwest Products tendered their resignations. In addition, in order to further implement the separation of the Company and Southwest Products, CFIUS required, as part of its agreement that William McKay no longer serve as an officer and director of the Company. On May 6, 1999, William McKay was removed as a director by the Company's majority shareholder and as President and Chief Executive Officer of the Company by the Company's board of directors. Gunter Gao was named as the replacement President and Chief Executive Officer of the Company. Except under very limited circumstances, the Company can not exercise any control or influence over the business or management of Southwest Products and has no access to visit or obtain information from Southwest Products without prior trustee approval. 7 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1999 (Amounts in thousands, except number of shares and per share data) 1. GENERAL (continued) In acquiring Southwest Products, the Company expected to benefit from its technical and marketing capabilities, including leveraging such capabilities to improve the competitive position of Harbin Bearing in China and internationally. However, under the terms of the trust into which the Company deposited its ownership interest in Southwest Products, the Company is not permitted access to these capabilities, which has had a significant impact on the Company's growth plans. The Company is currently reevaluating its business strategy, which may involve restructuring to reduce operating expenses, seeking an alliance with a strategic partner, reorganizing the Company's operations and/or divesting the Company's bearing manufacturing assets in China to diversify into other lines of business. In this regard, the Company is considering the retention of an investment banking firm to assist in the development and evaluation of future strategic initiatives. 2. BASIS OF PRESENTATION The accompanying consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. All material intercompany accounts and transactions were eliminated on consolidation. The accompanying consolidated condensed financial statements are unaudited but, in the opinion of the management of the Company, contain all adjustments, necessary to present fairly the financial position at June 30, 1999, the results of operations for the three months and six months ended June 30, 1998 and 1999, and the changes in cash flows for the six months ended June 30, 1998 and 1999. These adjustments are of a normal recurring nature. The consolidated balance sheet as of December 31, 1999, is derived from the Company's audited financial statements. Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although management of the Company believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading. For further information, refer to the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 1998 as filed with the Securities and Exchange Commission. In 1997, the Financial Accounting Standards Board issued Statement No.128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share for the six months ended June 30, 1998 and 1999 have been presented and, where appropriate, restated to conform to SFAS 128 requirements. . 8 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (Amounts in thousands, except number of shares and per share data) 2. BASIS OF PRESENTATION (continued) In 1998, the Financial Accounting Standards Board issued Statement No.133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The Company expects to adopt the new statement effective January 1, 2000. The statement will require the Group to recognize all derivatives on the balance sheet at fair value. The Company has not yet determined what the effect of SFAS 133 will be on the earnings and financial position of the Company. The exercise of outstanding warrants is not included as part of the assumption in the calculation of diluted earnings per share as the share price of the Company for the six months ended June 30, 1998 and 1999 was lower than the exercise prices. The warrants were expired on June 30, 1998. The diluted loss per share for the six months ended June 30, 1999 is the same as the basic loss per share as there was an antidilution effect which reduces the loss per share. The calculation which resulted in such an antidilution was based on the assumptions that the conversion rights under the Convertible Debentures had been fully exercised, at the adjusted exercise price as stated in note 7, and the redemption of preferred shares, both on January 1, 1998. The results of operations for the six months ended June 30, 1999 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 1999. 3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE The RMB is not freely convertible into foreign currencies. Effective from January 1, 1994, a single rate of exchange is quoted daily by the People's Bank of China (the "Unified Exchange Rate"). However, the unification of the exchange rates does not imply convertibility of RMB into US$ or other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People's Bank of China. In preparing the consolidated financial statements, the financial statements of the Company are measured using Renminbi ("RMB") as the functional currency. All foreign currency transactions are translated into RMB using the applicable floating rates of exchange quoted by the People's Bank of China prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies have been translated into RMB using the unified exchange rate prevailing at the balance sheet dates. The resulting exchange gains or losses have been credited or charged to the statements of income for the periods in which they occur. The Company's share capital is denominated in United States dollars (US$) and the reporting currency is the RMB. For financial reporting purposes, the US$ share capital have been translated into RMB at the applicable rates prevailing on the transaction dates. 9 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (Amounts in thousands, except number of shares and per share data) 3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE (continued) For financial reporting purposes, translation of from RMB into US$ for the convenience of the reader has been made at the exchange rate quoted by the People's Bank of China on June 30, 1999 of US$ 1.00 = RMB 8.3. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rate on June 30, 1999 or at any other certain rate on June 30, 1999. 4. INVENTORIES Inventories consist of the following at December 31, 1998 and June 30, 1999: December 31, 1998 June 30, 1999 ------------------ ------------- RMB US$ RMB US$ ---- --- --- --- Raw materials 148,470 17,888 128,132 15,438 Work-in-progress 140,238 16,896 196,579 23,684 Finished goods 419,668 50,562 393,517 47,411 -------- -------- -------- ------- 708,376 85,346 718,228 86,533 Less: Allowance for obsolescence (136,200) (16,409) (136,200) (16,409) -------- -------- -------- ------- Inventories, net 572,176 68,937 582,028 70,124 ======== ======== ======== ======= 5. DISCONTINUED OPERATION December 31, 1998 June 30, 1999 ------------------ -------------- RMB US$ RMB US$ ---- --- --- --- Cost of investment 28,288 3,408 28,288 3,408 Share of accumulated losses of the unconsolidated subsidiary (15,160) (1,826) (27,822) (3,352) ------- ------- ------- ------ Net carrying value 13,128 1,582 466 56 Due from the unconsolidated subsidiary 29,670 3,574 30,414 3,664 ------- ------- ------- ------ 42,798 5,156 30,880 3,720 ======= ======= ======= ====== 10 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (Amounts in thousands, except number of shares and per share data) 5. DISCONTINUED OPERATION ( continued ) As stated in Note 1, the Company appointed a U.S. citizen as the trustee of the Company to manage Southwest Products, pursuant to a Voting Trust Agreement. The Voting Trust Agreement also provides that the trustee will not accept direction from the Company and will not permit the Company to exercise any control or influence over the business or management of Southwest Products. All visits or requests for information to Southwest Products by the Company must be submitted to the Trustee in advance and receive theTrustee's approval. In addition, all "foreign persons" within the meaning of 31 C.F.R. (S)800.213 serving as officers and/or directors of Southwest Products tendered their resignations pursuant to the terms of the Voting Trust Agreement. The proposal for the sale of Southwest Products decided by the Company also gave rise to the disposal of a segment of a business in accordance with the APB30. The segment that was held for disposal was all identified as the net assets of Southwest Products. The net assets of Southwest Products at December 31, 1998 and June 30, 1999 were as follows: 11 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (Amounts in thousands, except number of shares and per share data) 5. DISCONTINUED OPERATION (continued) December 31, 1998 June 30, 1999 ----------------- ---------------- RMB US$ RMB US$ --- --- --- --- Cash and bank balance 3,724 449 3,395 409 Inventories 11,208 1,350 13,488 1,625 Account receivables 8,061 971 4,922 593 Prepayment, deposit and other receivables 301 36 1,029 124 -------- -------- --------- -------- Current assets 23,294 2,806 22,834 2,751 Property, plant and equipment, net 13,150 1,584 12,483 1,504 Goodwill * 9,928 1,196 - - Long term investment 428 52 8 1 -------- -------- --------- -------- 46,800 5,638 35,325 4,256 -------- -------- --------- --------- Account payable (717) (87) (614) (74) Other payable (3,229) (388) (3,823) (461) Taxes other than income (56) (7) (8) (1) Due to holding company (29,670) (3,575) (30,414) (3,664) -------- -------- --------- -------- Current liabilities (33,672) (4,057) (34,859) (4,200) -------- -------- --------- -------- Net assets 13,128 1,581 466 56 ======== ======== ========= ======== * Goodwill of Southwest comprised: Cost 10,760 1,296 10,760 1,296 Less : Amortization (832) (100) (10,760) (1,296) -------- -------- --------- -------- 9,928 1,196 - - ======== ======== ========= ======== 6. SECURED PROMISSORY NOTE A promissory note for US$ 5,000 (RMB 41,600) (the "Promissory Note") was issued to Asean Capital Limited ("Asean") in connection with the Share Exchange Agreement and is secured by a continuing security interest in all of the Company's right, title and interest in the outstanding capital stock of its wholly-owned subsidiary's China Bearing. The Promissory Note is denominated and repayable in full in United States dollars, and bears interest at 8% per annum. In connection with the issuance of convertible debentures described at Note 7, Asean agreed that for so long as any of the debentures are outstanding, no amounts are to be repaid on the Promissory Note unless there is sufficient working capital and the repayment is made in accordance with the following schedule:- 12 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (Amounts in thousands, except number of shares and per share data) 6. SECURED PROMISSORY NOTE (continued) Payment Period Amount -------------- ------ August 1, 1996 to July 31, 1997 up to US$ 2,000 plus accrued interest August 1, 1997 to July 31, 1998 up to US$ 1,500 plus accrued interest August 1, 1998 to July 31, 1999 up to US$ 1,500 plus accrued interest In accordance with this schedule, a principal payment of US$ 2,000 (RMB 16,700) was made on the Promissory Note on September 10, 1996. As a result of the Company's current financial position, the directors do not expect to make any other repayments in the foreseeable future. 7. CONVERTIBLE DEBENTURES AND OTHER LOANS Pursuant to a Subscription Agreement dated August 2, 1996, (the "Subscription Agreement"), among China Bearing, Asean Capital Limited, China International Bearing Holdings Limited, the Company and Southwest Products (collectively, the "Sunbase Group"); Glory Mansion Limited, Wardley China Investment Trust, MC Private Equity Partners Asia Limited and Chine Investissement 2000 (collectively the "Investors"), on August 23, 1996, China Bearing issued an aggregate of US$ 11,500,000 principal amount of Convertible Debentures (the "Convertible Debentures") to the Investors. Unless the Convertible Debentures have been converted, the Convertible Debentures are due and payable in August, 1999 (the "Maturity Date"). The Convertible Debentures bear interest at the rate of the higher of (i) 5% per annum (net of withholding tax, if applicable) and (ii) such percentage of the dividend yield calculated by reference to dividing the annual dividend declared per share of Common Stock of the Company by the Conversion Price (as hereinafter defined). Interest is payable quarterly. The Investors have the right to convert at any time, in whole or in part of the principal amount of the Convertible Debentures into shares of the Common Stock of the Company. The Conversion Price (the "Conversion Price") was initially US$5.00 per share, subject to adjustment for (a) change in par value of the Common Stock, (b) issuance of shares by way of capitalization of profits or reserves, (c) capital distributions, (d) rights offering at a price which is less than the lower of the then market price or Conversion Price, (e) issuance of derivative securities where the total consideration per share initially received is less than the lower of the then market price or Conversion Price, (f) issuance of shares at a price per share which is less than the lower of the then market price or the Conversion Price, and (g) if the cumulative audited earnings per common share for any two consecutive fiscal years commencing with the fiscal year ended December 31, 1996 and ending with the fiscal year ending December 31, 1998 are less than the specified projection of cumulative earnings per common share for such periods. Due to the Company's failure to achieve the projected cumulative audited earnings per common share of US $1.79 for the two years ended December 31, 1997, the Conversion Price has been adjusted to US$1.84 per share pursuant to the terms of the Subscription Agreement. 13 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (Amounts in thousands, except number of shares and per share data) 7. CONVERTIBLE DEBENTURES AND OTHER LOANS (continued) The Convertible Debentures are required to be redeemed on the Maturity Date at its principal amount outstanding together with any accrued but unpaid interest together with an amount that would enable the Investors to yield an aggregate internal rate of return of 12% per annum on the cost of their investment. In addition, if any of the events of default specified in the Convertible Debentures occur, the Convertible Debenture are automatically due and payable at the principal amount outstanding together with accrued interest and an amount that would enable the Investors to yield an aggregate internal rate of return on their investment of 19.75% per annum. Events of default include the delisting of the shares from NASDAQ or its suspension thereof; default in performance after failure to cure after notice; failure to pay principal or interest; failure to pay indebtedness for borrowed money; bankruptcy, insolvency or unsatisfied judgment; failure to achieve earning per common share of at least US$0.55 for fiscal years commencing January 1, 1996; and accounts receivable reaching a certain level in relationship to net sales. The obligations of China Bearing under the Subscription Agreement are guaranteed by the other members of the Sunbase Group. Due to the failure of the Company to achieve the required minimum earnings per common share of U.S.$0.55 in 1997, an event of default occurred. As a result, interest was being accrued at the rate of 19.75% per annum. Pursuant to a Settlement Agreement reached in October 16, 1998 with the investors, the investors agreed not to demand the immediate repayment of the Convertible Debentures. In addition, the aggregate principal amount of the Convertible Debentures (plus simple interest at a rate of 12.375% per annum until July 22, 1998 less interest paid) was restructured as a loan in an aggregate principal amount of U.S. $13,173. The debt, which carries a simple interest rate of 10% per annum, is required to be repaid over a period of three years ending on July 23, 2001. The modification of terms of the debts thus constitutes troubled debt restructuring under Statement of Financial Accounting Standards No. 15 " Accounting by Debtors and Creditors for Troubled Debt Restructuring" ("FAS 15"). Under FAS 15, a debtor shall account for a troubled debt restructuring, when there is modification of terms of the debts, at the carrying amount of the payable at the time of the restructuring unless the carrying amount exceeds the total future cash payments specified by the new terms. The principal balance of the Instalment Loan was restated to the face value of the Convertible Debenture together with any unpaid interest expenses calculated at the rate of 19.75% as entitled in the Subscription Agreement, after adjusting the fair value of the common stocks issuable on debt restructuring. The fair value of the common stocks issuable on debt restructuring was RMB 2,905, being the market value of the Company's trading stocks at October 16, 1998. Thereafter, the interest expenses of the Instalment Loan was charged to the profit and loss account on a discounted basis. 14 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (Amounts in thousands, except number of shares and per share data) 7. CONVERTIBLE DEBENTURES AND OTHER LOANS (continued) The maturity of the Instalment Loan was as follows: RMB Payable in year ending June 30, - 2000 23,209 - 2001 32,785 - 2002 60,157 ------ 116,151 ======= The Instalment Loan bears an effective interest of 5.6% per annum and is repayable with a repayment schedule as set out in the Settlement Agreement. As part of the settlement, the Company also issued 466,667 shares of Common Stock to the investors, which are not transferable for a period of three years and the members of the Sunbase Group agreed that 50% of any public market funds raised by the Company or its subsidiaries will be applied immediately towards discharging the then outstanding debt and interest accrued thereon. The obligations of China Bearing under the Settlement Agreement are guaranteed by other members of the Sunbase Group on an at least pari passu basis with the guarantors' other present and future unsecured and unsubordinated obligations. Pursuant to an undertaking as a supplement to the Settlement Agreement, Asean Capital unconditionally and irrevocably guarantees and undertakes to each of the Debenture Holders that for so long as any of the obligations of the Group under the Settlement Agreement remain outstanding the full due and punctual payment of all sums now or subsequently payable under the Settlement Agreement by China Bearing and agrees to perform or procure the performance of such payment obligations of China Bearing. Pursuant to the Settlement Agreement, the holding company of Asean Capital, Sunbase International Holdings Limited ("Sunbase International") undertakes to each of the Debenture Holders that Sunbase International shall not reduce its current issued beneficial shareholdings (being 100%) in the share capital of Asean Capital. In addition, one of the subsidiaries of Sunbase International, Extensive Resources Limited ("ERL") further granted a charge over 1,000,000 issued shares in the capital of Tianjing Development Holdings Limited held by ERL in favour of the trustee for and on behalf of the Debenture Holders. Tianjin Development Holdings Limited is a company listed in the Hong Kong Stock Exchange. The market value of the pledged shares was RMB6,413 at June 30, 1999 China Bearing has failed to make five scheduled payments under the Settlement Agreement: (i) principal of $831 and interest of $109 due as of March 23, 1999, (ii) principal of $28 and interest of $102 due as of April 23, 1999, (iii) principal of $29 and interest of $101 due as of May 23, 1999, (iv) principal of $29 and interest of $101 due as of June 23, 1999, and (v) principal of $29 and interest of $101 due as of July 23, 1999. As a result, there currently exists an event of default under the Settlement Agreement, and the investors are entitled to accelerate the entire principal amount outstanding together with any accrued but unpaid interest under the Settlement Agreement, and to call upon the guarantees by the other members of the Sunbase Group. The Company, China Bearing and the other members of the Sunbase Group are currently in negotiations with the investors 15 regarding these events of default. The directors believe that a workable solution which would include a revised repayment schedule upon the disposal of Southwest Products can be made with the creditors in due course. As a result of the default, the Instalment Loan was classified as current. 16 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- OVERVIEW The Company owns, through various subsidiaries and joint venture interests, a 51.43% indirect ownership in Harbin Bearing. Harbin Bearing manufactures a wide variety of bearings in the PRC for use in commercial, industrial and aerospace applications that are sold primarily in the PRC and certain western countries, including the United States. On January 16, 1996, the Company acquired Southwest Products, which manufactures precision spherical bearings that are sold primarily to the aerospace and commercial aviation industries. The acquisition of Southwest Products has been accounted for under the purchase method of accounting, and the result for Southwest Products have been included in the Company's consolidated results of operations since January 1, 1996. However, as a result of the arrangement with CFIUS to place Southwest Products under trusteeship of the trustee by which Sunbase shall divest Southwest Products, the operations of Southwest Products are treated as discontinued operations in the Company's 1999 consolidated financial statements. As a result of the adverse market conditions in China which existed as a result of the general financial turmoil which affected Asia in 1997 and 1998, and which continues to affect Asia in 1999, the funds designated to Chinese stated-owned enterprises, which included customers of Harbin Bearing, became even less available than in previous years. As a result, it became increasingly more difficult for Harbin Bearing to collect with accounts receivable, which had an adverse impact on Harbin Bearing and the Company's second quarter 1999 results. Unless otherwise indicated in the Item 2, all RMB and U.S. Dollar except per share information are expressed in thousands ( '000). RESULTS OF OPERATION Three Months Ended June 30, 1998 and 1999: The following table sets forth certain unaudited operating data (in RMB and as a percentage of the Company's sales) for the three months ended June 30, 1998 and 1999. Three Months Ended June 30, ------------------------------------------- 1998 1999 ------- ---------- RMB % RMB % ----------- ------- ----------- -------- Sales 149,407 100.0 108,414 100.0 Cost of sales (110,391) (73.9) (104,186) (96.1) -------- ----- -------- ------ Gross profit 39,016 26.1 4,228 3.9 Selling expenses ( 2,557) ( 1.7) ( 2,764) ( 2.5) General and administrative expenses ( 13,086) ( 8.7) ( 13,363) ( 12.3) Interest expenses ( 18,486) (12.4) ( 12,769) ( 11.8) -------- ----- -------- ------ Operating income / (loss) before minority interests 4,887 3.3 ( 24,668) ( 22.7) Minority interests ( 4,331) ( 2.9) 10,925 10.0 -------- ----- -------- ------ Net income / (loss) from Continuing operation 556 0.4 ( 13,743) (12.7) Net loss from discontinued operation, net of taxes ( 984) ( 0.7) ( 12,209) (11.3) -------- ----- -------- ------ Net loss ( 428) ( 0.3) ( 25,952) ( 24.0) ======== ===== ======== ====== 17 Sales ----- Sales for the three months ended June 30, 1998 decreased by RMB 40,993 or 27.4% to RMB 108,414 as compared to RMB 149,407 for the three months ended June 30, 1998. The decrease in sales were due to the persisting adverse market condition in the PRC, and the stringent control on capital expenditure of PRC state-owned enterprises, which resulted the prolonged low level in market demand. Increasing competition within the PRC bearing industry by the small-scale bearing factories is another factor which causes the continuous low level of sales for the three months ended June 30, 1999. Cost of Sales/Gross Profit -------------------------- Cost of sales for the three months ended June 30, 1999 decreased by RMB 6,205 to RMB 104,186 as compared to RMB 110,391 for the three months ended June 30, 1998. The cost of sales for the three months ended June 30, 1999 and 1998 was calculated using the gross profit method by reference to average annual gross profit ratios after taking the consideration of certain proportion of products of which they have no gross profit margin. The Company's gross profit from continuing operations for the three months ended June 30, 1999 decreased from RMB 39,016 for the three months ended June 30, 1998 to RMB 4,228, a decrease of RMB 34,788, or 89.2%. Gross profit as a percentage of revenue also decreased from 26.1% for the three months ended June 30, 1998 to 3.9% for three months ended June 30, 1999. The significant decrease in gross profit was mainly attributable to the adverse market conditions in the PRC, which led to a plunge in units of bearings produced for the period ended June 30, 1999. In addition, in response to the continuous decrease in the market selling price of bearings due to keen competition, the Company was forced to lower its selling price for certain bearings below its cost in order to maintain its market share. Selling Expenses ---------------- Selling expenses for the three months ended June 30, 1999 slightly increased by RMB 207 or 8% to RMB 2,764 as compared to RMB 2,557 for the three months ended June 30, 1998. The slightly increase in selling expenses was due to the increase in traveling expenses by sales personnel for debt collection and development of new customers. General and Administrative Expenses ----------------------------------- General and Administrative Expenses for the Company from continuing operations for the three months ended June 30, 1999 increased by RMB 277 or 2.1% to RMB 13,363 as compared to RMB 13,086 for the three months ended June 30, 1998. The slightly increase was primarily caused by the increase in staff benefits. Interest Expenses ----------------- Interest Expenses for the three months ended June 30, 1999 decreased by RMB 5,717 or 30.9% to RMB 12,769 as compared to RMB 18,486 for the three months ended June 30, 1998. The decrease in interest expense was primarily attributable to the decrease in interest payments after the execution of the Settlement Agreement signed on October 16, 1998. 18 Net loss from continuing operations ----------------------------------- As a result of the aforementioned factors, net loss from continuing operations increased by RMB 14,299 to RMB 13,743 for the three months ended June 30, 1999 as compared to a net income of RMB 556 for the three months ended June 30, 1998. Net loss from discontinued operations ------------------------------------- The Company's net loss from discontinued operations increased by RMB 11,225 to RMB 12,209 for the three months ended June 30, 1999 as compared to RMB 984 for the three months ended June 30, 1998. This increase in net loss was primarily attributable to the written off of goodwill. 19 Six Months Ended June 30, 1998 and 1999: The following table sets forth certain unaudited operating data (in RMB and as a percentage of the Company's sales) for the six months ended June 30, 1998 and 1999. Six Months Ended June 30, ------------------------------------------ 1998 1999 ---- ---- RMB % RMB % ----------- ------- ----------- ------- Sales 239,171 100.0 221,754 100.0 Cost of sales (174,858) (73.1) (213,107) (96.1) -------- ----- -------- ----- Gross profit 64,313 26.9 8,647 3.9 Selling expenses ( 6,281) ( 2.7) ( 8,644) ( 3.9) General and administrative expenses ( 25,465) (10.6) ( 23,473) (10.6) Interest expenses ( 37,895) (15.8) ( 28,675) (12.9) -------- ----- -------- ----- Operating loss before minority Interests ( 5,328) ( 2.2) ( 52,145) (23.5) Minority interests ( 2,565) ( 1.1) 23,217 (10.5) -------- ----- -------- ----- Net loss from continuing operation ( 7,893) ( 3.3) ( 28,928) (13.0) Net loss from discontinued operation, net of taxes ( 1,501) ( 0.6) ( 12,663) ( 5.7) -------- ----- -------- ----- Net loss (9,394) ( 3.9) ( 41,591) (18.7) ======== ===== ======== ===== Net Sales --------- Net sales for the Company from continuing operations for the six months ended June 30, 1999 slightly decreased by RMB 17,417 or 7.3% to RMB 221,754, as compared to RMB 239,171 for the six months ended June 30, 1998. The decrease in net sales for the period ended June 30 1999 was primarily attributable to the persisting adverse market conditions in China. This market conditions resulted that the Company has adopted a tighten control on its credit policy made to customers, therefore, the sales level cannot be boosted up in order to reduce the associated credit risk to the Company. Cost of Sales/Gross Profit -------------------------- Cost of sales for the Company from continuing operations for the six months ended June 30, 1999 increased to RMB 213,107 as compared to RMB 174,858 for the six months ended June 30, 1998. The cost of sales for the six months ended June 30, 1999 and 1998 was calculated using the gross profit method by reference to average annual gross profit ratios after taking the consideration of certain proportion of products of which they have no gross profit margin. The Company's gross profit from continuing operations for the six months ended June 30, 1999 decreased from RMB 64,313 for the six months ended June 30, 1998 to RMB 8,647 , a decrease of RMB 55,666, or 86.6%. Gross profit as a percentage of revenue also decreased from 26.9% for the six months ended June 30, 1998 to 3.9% for six months ended June 30, 1999. The significant decrease in gross profit was mainly attributable to the adverse market conditions in the PRC, which led to a plunge in units of bearings produced for the period ended 1999. In addition, in response to the continuous decrease in the market selling price of bearings due to keen competition, the Company was forced to lower its selling price for certain bearings below its cost 20 in order to maintain its market share. Selling Expenses ---------------- Selling expenses for the Company from continuing operations for the six months ended June 30, 1999 increased by RMB 2,363 or 37.6% to RMB 8,644 as compared to RMB 6,281 for the six months ended June 30, 1998. The major reasons for the increase in selling expenses was attributed to the increase in other selling expenses for marketing of its products and for providing a better services to its customers in order to maintain its market share and competitiveness in China. General and Administrative Expenses ----------------------------------- General and Administrative Expenses for the Company from continuing operations for the six months ended June 30, 1999 decreased by RMB 1,992 or 7.8% to RMB 23,473 as compared to RMB 25,465 for the six months ended June 30, 1998. The decrease was as a result of the Company adopted stronger control on its overhead and implement certain cost-cutting measures in order to improve its profitability and competitiveness. Interest Expenses ----------------- Interest Expenses for the six months ended June 30, 1999 decreased by RMB 9,220 or 24.3% to RMB 28,675 as compared to RMB 37,895 for the six months ended June 30, 1998. The decrease in interest expense was primarily attributable to the decrease in interest payments after the execution of the Settlement Agreement signed on October 16, 1998 and decrease in interest payment due to the gradually reduction of interest rate in mainland China. Net loss from continuing operations ----------------------------------- As a result of the aforementioned factors, net loss from continuing operations increased by RMB 21,035 to RMB 28,928 for the six months ended June 30, 1999 as compared to RMB 7,893 for the six months ended June 30, 1998. Net loss from discontinued operations ------------------------------------- The Company's net loss from discontinued operations increased by RMB 11,162 to RMB 12,663 for the six months ended June 30, 1999 as compared to RMB 1,501 for the six months ended June 30, 1998. This deterioration of result was primarily attributable to the written off of goodwill. 21 LIQUIDITY AND CAPITAL RESOURCES Operating activities Net cash used in operating activities from continuing operation was RMB 8,295 for the period ended June 30, 1999, as compared to net cash used in operating activities from continuing operations of RMB 41,956 for the period ended June 30, 1998. The decrease use of cash in operating activities is primarily due to the decrease in inventories level of the Company. The Company's net working capital decreased by RMB 28,979 at June 30, 1999 to RMB 32,905 as compared to RMB 61,844 at December 31, 1998, and the Companys current ratio at June 30, 1999 was 1.03:1 as compared to 1.05:1 at December 31, 1998 and 1.29:1 at June 30, 1998. Investing activities Capital expenditures for the six months ended June 30, 1999 of RMB 2,114 consisted of cost relating to the renovation of existing facilities and equipment, and were financed by internally generated funds, short-term and long term bank loans. The Company does not expect to spend more than the minimum required to maintain its equipment and facilities in 1999. As of June 30, 1999, the Company had no outstanding capital expenditure commitments. There are no other material capital expenditures expected in the near future. Financing activities The Company has historically relied on both short-term and long-term bank loans from Chinese banks to support its operating requirements. Short-term bank loans, which have terms ranging from three months to six months, are utilized to finance operating requirements and capital requirements and are renewed on a revolving basis. Long-term bank loans are utilized to fund capital expansion projects. During the six months ended June 30, 1999, the net decrease in bank loans (after deducting repayment) was RMB 3,138. The Company believes that it will be able to continue to maintain and expand its bank borrowings under its current lending arrangements. In order to finance the Company's continuing operating and capital requirements, the Company has in the past evaluated, and is also currently evaluating, both debt and equity financing opportunities. During June 1996, the Company in a private placement sold 1,000,000 shares of common stock at U.S. $5.00 per share, generating net proceeds of U.S. $4,347 (RMB 36,085). In August 1996, China Bearings issued U.S.$11.5 million aggregate principal amount of the Convertible Debentures to three investors. The Convertible Debentures were convertible, at the option of the holders, in whole or in part, at any time into shares of Common Stock of the Company. The conversion price (the "Conversion Price") was initially U.S. $5.00 per share, subject to adjustment for (a) a change in par value of the Common Stock, (b) the issuance of shares by way of capitalization of profits or reserves, (c) capital distributions, (d) a rights offering at a price which is less than the lower of the then market price of the Common Stock or the Conversion Price, (e) the issuance of derivative securities where the total consideration per share initially received is less than the lower of the then market price of the Common Stock or the Conversion Price, (f) the issuance of shares at a price per share which is less than the lower of the then market price of the Common Stock or the Conversion Price and (g) if the cumulative audited earnings per common share for any two consecutive fiscal years commencing with the fiscal year ended December 31, 1996 and ending with the fiscal year ending December 31, 1998 are less than the specified projection of cumulative earnings per common share for such period. Due the Company's failure to achieve the projected cumulative audited earnings per common share of U.S.$1.79 for the two years ended December 31, 1997, the Conversion Price was adjusted to U.S.$1.84 per share pursuant to the terms of the Subscription Agreement. Unless earlier converted, the Convertible Debentures matured in August 1999. Interest accrued at a rate equal to the higher of (i) 5% per annum (net of withholding tax, if applicable) and (ii) the percentage of the dividend yield calculated by dividing the annual dividend declared per share of Common Stock of the Company by the Conversion Price. Interest on the Convertible Debentures was 22 payable quarterly. At maturity, the Convertible Debentures were required to be redeemed at a redemption price equal to the principal amount then outstanding plus any accrued but unpaid interest, together with an amount sufficient to enable the holders to receive an aggregate internal rate of return of 12% per annum on the cost of their investment. In addition, if any of the events of default specified in the Subscription Agreement occurred, the Convertible Debentures become automatically due and payable at the principal amount outstanding together with accrued and unpaid interest and an amount that would enable the Investors to yield an aggregate internal rate of return on their investment of 19.75% per annum. Events of default included breach of covenants after failure to cure after notice, failure to pay principal or interest, failure to pay indebtedness for borrowed money, certain events of bankruptcy or insolvency, judgement defaults, failure to achieve earnings per common share of at least U.S. $0.55 for each fiscal year commencing January 1, 1996, accounts receivable reaching a certain level in relationship to net sales and delisting or suspension of trading of the Company's Common Stock from Nasdaq. Due to the failure of the Company to achieve the required minimum earnings per common share of U.S.$0.55 in 1997, an event of default occurred. As a result, interest accrued at the default rate of 19.75% per annum. Pursuant to a Settlement Agreement reached in October 1998 with the investors, the investors agreed not to demand the immediate repayment of the Convertible Debentures. In addition, the aggregate principal amount of the Convertible Debentures (plus simple interest at a rate of 12.375% per annum until July 22, 1998 less interest paid) was restructured as a loan in an aggregate principal amount of U.S. $13,173. The debt, which carries a simple interest rate of 10% per annum, is required to be repaid over a period of three years ending on July 23, 2001. As part of the settlement, the Company also issued 466,667 shares of Common Stock to the investors, which are not transferable for a period of three years. The members of the Sunbase Group agreed that 50% of any public market funds raised by the Company or its subsidiaries would be applied immediately towards discharging the then outstanding debt and interest accrued thereon. The obligations of China Bearing under the Settlement Agreement are guaranteed by other members of the Sunbase Group on an at least pari passu basis with the guarantors' other present and future unsecured and unsubordinated obligations. China Bearing has failed to make five scheduled payments under the Settlement Agreement: (i) principal of $831 and interest of $109 due as of March 23, 1999, (ii) principal of $28 and interest of $102 due as of April 23, 1999, (iii) principal of $29 and interest of $101 due as of May 23, 1999, (iv) principal of $29 and interest of $101 due as of June 23, 1999, and (v) ) principal of $29 and interest of $101 due as of July 23, 1999. As a result, there currently exists an event of default under the Settlement Agreement, and the investors are entitled to accelerate the entire principal amount outstanding together with any accrued but unpaid interest under the Settlement Agreement, and to call upon the guarantees by the other members of the Sunbase Group. The Company, China Bearing and the other members of the Sunbase Group are currently in negotiations with the investors regarding these events of default. While the Company believes that a workable solution can be reached with the investors in due course, no assurance can be given as to when or if such negotiations will result in a resolution that is favorable to the Company. In connection with the acquisition by the Company of its interest in Harbin Bearing from Asean Capital, in addition to shares of Common Stock issued by the Company to Asean Capital, the Company issued a promissory note for U.S. $5,000 (RMB 41,600) (the "Promissory Note"). The Promissory Note is secured by a continuing security interest in all of the Company's right, title and interest in the outstanding capital stock of its wholly-owned subsidiary, China Bearing. The Promissory Note is denominated and repayable in full in U.S. dollars, and bears interest at a rate of 8% per annum. In connection with the issuance of the Convertible Debentures, Asean Capital agreed that for so long as any of the Convertible Debentures are outstanding, no amounts may be repaid by the Company on the Promissory Note unless there is sufficient working capital and the repayment is made in accordance with the following schedule: Payment Period Amount - -------------- ----------- August 1, 1996 to July 31, 1997 up to U.S.$2,000 plus accrued interest August 1, 1997 to July 31, 1998 up to U.S.$1,500 plus accrued interest 23 August 1, 1998 to July 31, 1999 up to U.S.$1,500 plus accrued interest In accordance with this schedule, a principal payment of U.S.$2,000 (RMB 16,700) was made in September 1996. As a result of the Company's current financial position, the directors do not expect to make any other repayments in the foreseeable future. The financial condition of the Company raises substantial doubt about the Company's ability to continue as an independent going concern. The description of the business, financial condition and results of operations of the Company contained in this Quarterly Report, however, have been prepared on a going concern basis. They do not include any adjustments that might result from the outcome of the uncertainty relating to the Company's ability to continue as a going concern, including, without limitation, adjustments to the carrying value of assets and liabilities or the classification of liabilities that would be necessary if the Company were not considered to be a going concern. Such adjustments would have a material adverse effect on the Company's financing condition. The directors have adopted the following measures to improve the financial position, cash flow, profitability and operations of the Company: (a) Proposal for the sale of Southwest Products Pursuant to a resolution dated December 16, 1998, the board of directors decided to dispose Southwest Products and began to seek potential investors through the appointment of a trustee. Currently, the Company has received responses from several investors who have expressed interest in acquiring Southwest Products. (b) Negotiation under the Settlement Agreement The Company is currently conducting negotiations with the investors under the Settlement Agreement in relation to the event of default in repayment of the amounts due under the Settlement Agreement since March 1999. The directors believe that a workable solution, which would include a revised repayment schedule upon the disposal of Southwest Products, can be made with the Investors in due course. (c) Renewal of PRC bank loans In the past, the Company has been allowed by the PRC bankers to roll over the loans due for repayment. Accordingly, the directors believe that the existing bank loans will be renewed in the forthcoming year. (d) Operational and improved profitability measures The directors are in the process of implementing certain measures designed to further restore the Company's financial strength. Such measures include, iner-alia: i) the rationalisation of overheads which comprises certain cost cutting measures; ii) the revision of its pricing policy to boost sales; iii) active negotiations with existing and new bankers for new banking facilities; iv) tighter credit controls over debt collections; v) active negotiations with existing raw material suppliers to obtain a long credit terms; and vi) the exploration of new clientele in other provinces in the PRC. (e) Restructuring of the Company The directors are in the process of evaluating the Company's business strategy which may involve an alliance with a strategic partner, reorganisation of the Company's operations and/or divestiture of its bearing manufacturing assets in the PRC. 24 In the opinion of the directors, in light of the measures completed to date together with the expected results of other measures in progress, it is reasonable to expect that the Company will be able to ease its liquidity problem in the near future. The management have dedicated their efforts to reviving the operations of the Company by eliminating, to the extent possible, all the factors leading up to the deterioration of its performance in the past. After taking into account the existing banking facilities, expected net proceeds from the disposal of Southwest Products and subject to the successful negotiation with the investors under the Settlement Agreement to reach a workable solution, the directors believe that the Company will have sufficient working capital for its current requirements for a period of one year after the balance sheet date. In this regards, the financial statements have been prepared on a going concern basis. INFLATION / DEFLATION AND CURRENCY MATTERS In recent years, the Chinese economy has experienced periods of rapid economic growth as well as high rates of inflation, which in turn has resulted in periodic adoption by the Chinese government of various corrective measures designed to regulate growth and contain inflation. Since 1998, the general inflation rate in the PRC was under control, with the PRC experiencing a 3.2% deflation in prices in May 1999 (1998: minus 2.6%). Since 1993, the Chinese government has implemented and maintained an economic program designed to control inflation, which has resulted in the tightening of working capital available to Chinese business enterprises. The success of the Company depends in substantial part on the continued growth and development of the Chinese economy. The Company continually monitors the effects of inflation and deflation. In view of the change in market conditions and increased competition, the Company in an inflationary market may be unable to raise its prices to shift a portion of the inflated costs to customers, and the Company in a deflationary market may be forced to lower its prices to maintain competitive prices. The price of bearing steel, the major raw material used by the Company, remained fairly stable during 1996, 1997, 1998 and the second quarter of 1999. Foreign operations are subject to certain risks inherent in conducting business abroad, including price and currency exchange controls, and fluctuations in the relative value of currencies. Changes in the relative value of currencies occur periodically and may, in certain instances, materially affect the Company's results of operations. Although the Company has export ambitions, historically, substantially all of the Company's sales have been domestic and settled in RMB. Moreover, historically, substantially all of the Company's costs have been incurred in RMB. It is possible, however, that the revenue/cost profile of the Company could change in the future, and if it does, then it is possible that a devaluation of the RMB against the U.S. Dollar could have a material adverse effect upon the results of operations. Currently, all of the Company's bank debts are denominated in RMB. However, the Company has indebtedness in respect of the Convertible Debentures that is denominated in U.S. dollars, so that a devaluation of the RMB against the U.S. Dollar could have a material adverse effect upon the Company's financial position. Although prior to 1994 the RMB experienced significant devaluation against the U.S. Dollar, the RMB has remained fairly stable from 1994 to present. The unified exchange rate was U.S.$1.00 to RMB 8.45 at December 31, 1994, RMB 8.32 at December 31, 1995, RMB 8.3 at December 31, 1996, RMB 8.3 at December 31, 1997, RMB 8.3 at December 31, 1998 and RMB 8.3 at June 30, 1999. The People's Bank of China has declared its intention not to devalue the RMB. However, it is possible that competitive pressures resulting from the significant devaluation of other Asian currencies will ultimately force the Government of China to reconsider its position on devaluation of the RMB. YEAR 2000 COMPLIANCE The Company has completed an assessment of its non-information technology systems, and believes based on that assessment that these systems do not contain any elements that are susceptible to Year 2000 problems. Based on recent assessments of its information technology systems, the Company has determined that some portions of its information processing systems, particularly the mainframe computer used by Southwest Products, will require modification or replacement in order to ensure that 25 those systems are Year 2000 compliant. The Company is in the process to replace these information processing systems, but does not believe that the cost of such replacement will be material. The Company believes that Southwest Products will assume the cost of modifying or replacing the information processing systems used by Southwest Products, including the mainframe computer used by Southwest Products. The time for completion of the installation of the new mainframe system is scheduled on last quarter of 1999. The Company has also asked each of its third-party suppliers and vendors to confirm that they are Year 2000 compliant. Substantially all of the Company's suppliers and vendors have indicated that they expect to be Year 2000 compliant or that they do not anticipate that they are susceptible to Year 2000 problems. Most of Harbin Bearing's suppliers and vendors in China perform their operations and data recording manually without the use of computers or other information technology systems. As a result, the Company does not anticipate any Year 2000 problems from its suppliers and vendors in China. 26 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates and foreign currency exchange rates, which could affect its future results of operations and financial condition. The Company manages its exposure to these risks through its regular operating and financing activities. Currently, the Company is unable to hedge its RMB-hard currency exchange risks due to restrictions imposed by the government of the PRC which prevent financial institutions to engage in foreign currency transactions offering forward exchange contracts with respect to the RMB. Foreign Currency Risk Although the Company has export ambitions, historically, substantially all of the Company's sales have been domestic and settled in RMB. Moreover, historically, substantially all of the Company's costs have been incurred in RMB. Thus, the functional currency of Harbin Bearing and the Company's other PRC subsidiaries is the RMB. It is possible, however, that the revenue/cost profile of the Company could change in the future, and if it does, then it is possible that a devaluation of the RMB against the U.S. Dollar could have a material adverse effect upon the results of operations. Currently, all of the Company's bank debts are denominated in RMB. However, the Company has indebtedness under the Settlement Agreement (and under the Convertible Debentures and Subscription Agreement in the event a satisfactory settlement can not be made pursuant to default under the Settlement Agreement) that is denominated in U.S. dollars, so that a devaluation of the RMB against the U.S. Dollar could have a material adverse effect upon the Company's financial position. As a result of the foregoing factors, the Company is subject to risk from fluctuations in the value of the RMB relative to the U.S. dollar. The RMB is translated into U.S. dollars in consolidation, and will result in cumulative translation adjustments which are included in other comprehensive income (loss). For the second quarter of 1999, the potential effect on other comprehensive income (loss) resulting from a hypothetical 5%, 10% and 20% weakening in the quoted RMB rate against the U.S. dollar would have resulted in a $1,457, $2,781 and $5,099 decrease in consolidated stockholders' equity and an $239, $456 and $835 decrease in net loss in June 30 1999. The same hypothetical movements would have resulted in an RMB 5,808, RMB 11,615 and RMB 23,230 increase in the amount of debt service payable by the Company under the Settlement Agreement in the second quarter of 1999. Actual results may differ. Interest Rate Risk The Company's bank loans are all fixed rate and denominated in RMB. Fixed rates range between 7.6% per annum and 9.5% per annum for short-term loans, and between 3.7% per annum and 15.12% per annum for long-term loans. The total amount of short-term bank loans outstanding as of June 30, 1999 was RMB 514,182 with an effective interest rate of 7.9% per annum. The total amount of long-term bank loans outstanding as of June 30, 1999 was RMB 156,113, with an effective interest rate of 8.4% per annum. In addition, the Company has indebtedness under the Settlement Agreement (and under the Convertible Debentures and Subscription Agreement in the event a satisfactory settlement can not be made pursuant to default under the Settlement Agreement) at fixed rates of interest. As such, the Company is exposed to interest rate risk on its long-term bank loans and in respect of its indebtedness under the Settlement Agreement (or Convertible Debentures and Subscription Agreement). Given banking practices in the PRC, the Company believes that it will be able to refinance its long-term bank loans at market rates whenever they drop significantly below the fixed rates specified on its long-term bank loans. At present, the Company believes that the risk of a significant drop in relevant market interest rates during the term of the debt under the Settlement Agreement is remote; however, the Company may consider entering into hedge transactions if such a risk is perceived to increase. 27 ITEM 4 - FACTORS THAT MAY AFFECT FUTURE RESULTS Foreign Investment Matters Pursuant to the terms of the trusteeship which holds the Company's interest in Southwest Products, except under very limited circumstances, the Company can not exercise any control or influence over the business or management of Southwest Products and has no access to visit or obtain information from Southwest Products without prior trustee approval. As a result, the Company lost its control over Southwest Products since December 31, 1998. In addition, in acquiring Southwest Products, the Company expected to benefit from its technical and marketing capabilities, including leveraging such capabilities to improve the competitive position of Harbin Bearing in China and internationally. However, the terms of the trusteeship have inhibited the Company's ability to do so, which has had a significant impact on the Company's growth plans. The Company is currently reevaluating its business strategy, which may involve restructuring to reduce operating expenses, seeking an alliance with a strategic partner, reorganizing the Company's operations and/or divesting the Company's bearing manufacturing assets in China to diversify into other lines of business. However, no assurance can be given as to whether or when the Company will be able to successfully pursue any of these alternatives. The Company is currently conducting a review to determine if any claims may be brought by the Company against any party involved in its acquisition of Southwest Products as a result of the CFIUS investigation. However, no assurance can be given that any such claims by the Company would fully reimburse it for any loss it might realize upon a divestiture of Southwest Products. ITAR Regulations For the duration of the Voting Trust Agreement, Southwest Products is subject to a temporary export licensing regime which requires all export sales or other overseas transfers of Southwest Products' products or technology to be reviewed and approved in advance by the DTC. Under this regime, the Company can not obtain access to Southwest Products' products, technology or facilities without prior written approval from the U.S. government. Nasdaq De-Listing In February 1999, the Company's Common Stock was delisted from Nasdaq. After its delisting from Nasdaq, the Common Stock traded on the Bulletin Board. However, since May 20, 1999, the Company's Common Stock has not been trading on the Bulletin Board because there are currently no market makers making a market in the Common Stock and the Company is not current with its public information requirements. The Company is making efforts to become current in its public information requirements but no assurance can be given as to when trading in the Company's Common Stock on the Bulletin Board will resume or, if resumed, as to the market that will develop for the Common Stock or the prices at which it will trade. The Company appointed one of the market makers to process the necessary work for the Company to become re-listing in Nasdaq, and the work for the Company to be re-listing was in progress. Potential Acceleration of Amounts due under the Settlement Agreement As a result of the failure by China Bearing to make three payments due under the Instalment provisions of the Settlement Agreement, the holders of the Convertible Debentures have the right to accelerate the payment of all amounts due under the Settlement Agreement, as well as the right to exercise all other remedies available to them under the subscription agreement pursuant to which the Convertible Debentures were purchased. While the Company believes that an equitable resolution may be reached with the holders of this indebtedness no assurances can be given in this regard and any acceleration would have a severe negative effect on the liquidity of the Company. 28 Substantial Leverage; Inadequacy of Earnings to Cover Fixed Charges As at June 30, 1999, the Company has, on a consolidated basis, total indebtedness of approximately RMB 811,346 (US$ 97,752) as at June 30, 1999, resulting in a ratio of debt to total capitalization of 3.1:1 at that date. Substantially all of such indebtedness is denominated in RMB. The Company will require substantial cash flow to meet its repayment obligations on its indebtedness, as well as on any future additional indebtedness it may incur. In the second quarter of 1999, the Company's earnings were inadequate to cover fixed charges by approximately RMB 145,817 (U.S. $17,568) (Note: For purposes of this calculation, the term "fixed charges" means the total amount of debt service (principal and interest) due under the Convertible Debentures, as modified by the Settlement Agreement, during the second quarter of 1999. The Promissory Note issued to Asean Capital did not appear to be meaningful for purposes of this calculation because the Promissory Note is subordinated to the Convertible Debentures and was issued to a related party. The term "earnings" means net loss from continued operations during the second quarter of 1999. Thus, for this calculation, the second quarter of 1999 net loss was simply added to the second quarter of 1999 debt service under the Convertible Debentures, as modified by the Settlement Agreement.) The ability of the Company to make scheduled interest payments on, and retire at maturity the principal of, its indebtedness is dependent on the Company's future performance. However, the Company experienced operating losses and negative cash flow from operations of RMB 41,591 and RMB 14,292 for the period ended June 30, 1999; RMB 9,394 and RMB 24,100 for the period ended June 30, 1998, respectively. The Company expects that net losses may continue for the foreseeable future in view of the current economic situation in China and many other factors beyond its control. In addition, the Convertible Debentures and the Settlement Agreement impose significant operating and financial restrictions on the Company. Such restrictions limit the Company's ability to create liens and its use of the proceeds from certain asset sales. These factors may make the Company more vulnerable to economic and industry downturns, limit its ability to obtain additional financing to fund future working capital requirements, capital expenditures or other general corporate purposes, and reduce its flexibility in responding to changing business or economic conditions or to a substantial decline in operating results. The Company may require substantial additional funds in the event it fails to meet its projected operating results or its needs exceed its projected capital requirements. The Company's future sources of financing may include equity and debt financing. Accordingly, the Company may be required to refinance a substantial portion of its indebtedness since cash flow from operations may be inadequate to meet payment obligations arising from its long term indebtedness. There can be no assurance that the Company will be able to raise necessary debt and/or equity proceeds to meet these debt obligations or that the Company will have requisite access to capital markets on acceptable terms. Ability of the Company to Continue as a Going Concern The financial condition of the Company raises substantial doubt about the Company's ability to continue as an independent going concern. The description of the business, financial condition and results of operations of the Company set forth herein, and in the Company's financial statements included herein, however, have been prepared on a going concern basis. They do not include any adjustments that might result from the outcome of the uncertainty relating to the Company's ability to continue as a going concern, including, without limitation, adjustments to the carrying value of assets and liabilities or the classification of liabilities that would be necessary if the Company were not considered to be a going concern. Such adjustments would have a material adverse effect on the Company's reported financial condition. Potential Changes in the Economy of China The economy of the PRC has experienced significant growth in the past decade. Much of this growth has been a result of governmental policies which have encouraged substantial private economic activity. The continuation of growth in China is now subject to a number of uncertainties including, without limitation, a continuation of governmental policies favoring private enterprise, 29 continued success in maintaining a moderate rate of inflation, the ability of China to remain competitive with other Asian countries that have experienced significant devaluation of their currencies during the past two years, resolution of liquidity problems affecting the Chinese banking system and economy as a whole and the maintenance of uninterrupted trading relationships with the United States and other major trading partners. In the event that negative developments in these or other areas result in a slowdown or decline in the economy of China, it is likely that the future results of operations of the Company will be adversely effected. Political and Regulatory Considerations in China Although the government of China has been pursuing economic reform policies for over a decade, there can be no assurances that such policies will continue. Any change in such policies could have a substantial adverse effect on the economic growth of China which would likely diminish the market for the Company's products in China. Moreover, changes in the laws or regulations governing business operations, restrictions on foreign ownership of Chinese companies, exchange controls, changes in the tax laws or restrictions on the repatriation of profits could be imposed in a manner which would result in negative consequences to the Company and its interest in Harbin. Failure to Qualify Harbin Bearings to Automotive and Aerospace Quality Standards; Ability to Remain Competitive with Multinational Manufacturers. To date Harbin Bearing has been unable to establish procedures that would enable it to qualify to international quality standards, generally accepted automotive quality standards or aerospace quality standards. Such failure has resulted in Harbin Bearing's inability to capture orders from the U.S. automotive and aerospace industries. The international bearing industry is extremely competitive. Although the Company's main competitors are Eastern European manufacturers and manufacturers located in China, to a lesser extent, the Company also competes with companies such as Svenska Kugellager Fabriken, Fisher Aktien Gesellschast, New Technology Network, NSK, Timken, Torrington- Fafnir and Nippon Miniature Bearing, who dominate this market. The Company had hoped that its acquisition of Southwest Products would not only allow it to access the U.S. bearing market, but also allow it to implement U.S. manufacturing methods and quality control procedures at Harbin Bearing to develop new products and meet the stringent requirements of many non-PRC OEMs. By doing so, the Company expected to increase its penetration of the international bearing market. As a result of the Company's decision to dispose of Southwest Products in response to the CFIUS investigation, however, the Company has suspended indefinitely its plan to enable Harbin Bearing to meet these international standards. Failure to qualify Harbin Bearing to these standards is expected to constrain the Company's future growth. The Company's products may become obsolete as a result of new technologies or new developments affecting the bearing industry. The Company's ability to remain competitive depends in significant part on its ability to anticipate and stay abreast of new technological developments, fund research and development, introduce new products and retain key personnel for these functions. Some of the Company's competitors have substantially greater resources available for these purposes. To the extent that the Company does not generate adequate cash flow or obtain other financing to fund product development, the Company's competitive, including by positioning will probably be adversely effected, which may result in a loss of sales or lower productivity. Southwest Products Company Environmental Issues Southwest Products occupies property that has been the subject of environmental remediation mandated by the County of Los Angeles. Remediation took place in 1993 and again in 1997. Employees of the lessor for the property have informed Southwest Products that the remediation has been successfully completed and that the lessor has received approval from the State of California for the remediation that has been conducted. Southwest Products does not believe that it has any liability regarding this issue. However, no assurance can be given in this regard. 30 Impact of the Turmoil in Asian Markets The turmoil in Asian markets may affect the political and economic policies in China and the continued deterioration of the Asian market coupled with the liquidity restraints imposed in China could adversely affect the Company's operations and the collectability of its accounts receivable. Continuation ofthese trends could also impair the Company's liquidity. 31 PART II. OTHER INFORMATION Item 1 Legal Proceedings No Material Developments Item 2 Changes in Securities None Item 3 Defaults upon Senior Securities China Bearing has failed to make five scheduled payments under the Settlement Agreement: (i) principal of $831 and interest of $109 due as of March 23, 1999, (ii) principal of $28 and interest of $102 due as of April 23, 1999, (iii) principal of $29 and interest of $101 due as of May 23, 1999, (iv) principal of $29 and interest of $101 due as of June 23, 1999, and (v)) principal of $29 and interest of $101 due as of July 23, 1999. As a result, there currently exists an event of default under the Settlement Agreement, and the investors are entitled to accelerate the entire principal amount outstanding together with any accrued but unpaid interest under the Settlement Agreement, and to call upon the guarantees by the other members of the Sunbase Group. The Company, China Bearing and the other members of the Sunbase Group are currently in negotiations with the investors regarding these events of default. While the Company believes that a workable solution can be reached with the investors in due course, no assurance can be given as to when or if such negotiations will result in a resolution that is favorable to the Company. Item 4 Submission of Matters to a Vote of Security Holders None Item 5 Other Information None Item 6 Exhibits and Reports on Form 8-K (a) Exhibits: 11 Computation of Earnings per common share 27 Financial Data Schedule (b) Reports on Form 8-K: Three months ended June 30, 1999: None 1 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Sunbase Asia, Inc. ------------------ (Registrant) Date: August 13, 1999 By: /s/ Gunter Gao -------------- Gunter Gao Chairman, President and Chief Executive Officer Date: August 13, 1999 By: /s/ (Roger) Li Yuen Fai ----------------------- (Roger) Li Yuen Fai Vice President and Chief Financial Officer (Principal Financial Officer) 2 EX-11 2 COMPUTATION OF EARNINGS PER COMMON SHARE EXHIBIT 11 ---------- SUNBASE ASIA, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (Amounts in thousands, except number of shares and per share data)
Six Months Ended June 30, Three Months Ended June 30, ------------------------- --------------------------- 1998 1999 1999 1998 1999 1999 RMB RMB US$ RMB RMB US$ ----------- ----------- ----------- ----------- ----------- ----------- BASIC Net income / (loss) from continuing operations (7,893) (28,928) (3,486) 556 (13,743) (1,657) Net loss from discontinued operation, net of income taxes (1,501) (12,663) (1,526) (984) (12,209) (1,471) ---------- ---------- ---------- ----------- ---------- ---------- (9,394) (41,591) (5,012) (428) (25,952) (3,128) ========== ========== ========== =========== ========== ========== Weighted average number of shares of common stock outstanding : Share of common stock outstanding 13,032,215 14,118,751 14,118,751 13,360,637 14,118,751 14,118,751 ========== ========== ========== =========== ========== ========== Net loss per common share : Loss from continuing operation (0.61) (2.05) (0.25) 0.04 (0.97) (0.12) ========== ========== ========== =========== ========== ========== Net loss (0.72) (2.95) (0.35) (0.03) (1.84) (0.22) ========== ========== ========== =========== ========== ==========
1 SUNBASE ASIA, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (Amounts in thousands, except number of shares and per share data)
Six Months Ended June 30, Three Months Ended June 30, ------------------------- -------------------------- 1998 1999 1999 1998 1999 1999 RMB RMB US$ RMB RMB US$ ----------- ----------- ----------- ----------- ----------- ----------- DILUTED Net income/ (loss) from continuing operation (7,893) (28,928) (3,486) 556 (13,743) (1,657) Net loss from discontinued operations, net of income taxes (1,501) (12,663) (1,526) (984) (12,209) (1,471) ---------- ---------- ---------- ----------- ---------- ---------- Net loss (9,394) (41,591) (5,012) (428) (25,952) (3,128) ========== ========== ========== =========== ========== ========== Weighted average number of shares of common stock outstanding: Share of common stock outstanding on January 1 12,700,142 14,118,751 14,118,751 12,700,142 14,118,751 14,118,751 Conversion of Series B Preferred Share 332,071 - - 660,493 - - Share issued as a result of rounding from reverse stock split 2 - - 2 - - ---------- ---------- ---------- ----------- ---------- ---------- Weighted average number of shares of common stock outstanding 13,032,215 14,118,751 14,118,751 13,360,637 14,118,751 14,118,751
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 13,032,215 14,118,751 14,118,751 13,360,637 14,118,751 14,118,751 ========== ========== ========== ========== ========== ========== Net loss per common share: Net income / (loss) from continuing operation (0.61) (2.05) (0.25) 0.04 (0.97) (0.12) ========== ========== ========== ========== ========== ========== Net loss (0.72) (2.95) (0.35) (0.03) (1.84) (0.22) ========== ========== ========== ========== ========== ==========
2 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 SIX MONTHS PERIOD ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 576 0 92,329 0 70,124 163,029 63,253 0 231,056 159,066 0 0 5,365 14 29,784 231,056 26,717 26,717 25,675 25,675 3,870 0 3,455 (6,283) 0 (6,283) (1,526) 0 0 (5,012) (0.25) (0.35)
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