-----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, AB7wypGEYlKeZRc4q6LCV611iSp9NpXiUZnETWFG62SSq8zxXz5FPtBqf4ml17Fz +O2wwFaS7d+yaKSsye85/A== 0000898430-97-002058.txt : 19970514 0000898430-97-002058.hdr.sgml : 19970514 ACCESSION NUMBER: 0000898430-97-002058 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-03132 FILM NUMBER: 97602774 BUSINESS ADDRESS: STREET 1: 19 F FIRST PACIFIC BANK CENTERE STREET 2: 51-57 GLOUCESTER ROAD CITY: WANCHAI HONG KONG STATE: K3 ZIP: 93303 BUSINESS PHONE: 0118522865 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 QUARTERLY REPORT FOR THE PERIOD ENDED 3/31/97 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 March 31, 1997. [ ] 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 March 31, 1997, the Company had 12,700,109 shares of common stock issued and outstanding. SUNBASE ASIA , INC. AND SUBSIDIARIES ------------------------------------ INDEX
PAGE ---- PART I: FINANCIAL INFORMATION Item 1 -- Financial statements Consolidated Condensed Balance Sheets (unaudited) - December 31, 1996 and March 31, 1997 3-4 Consolidated Condensed Statements of Income (unaudited) - Three months ended March 31, 1996 and 1997 5 Consolidated Condensed Statements of Cash Flows (unaudited) - Three months ended March 31, 1996 and 1997 6 Notes to Consolidated Condensed Financial Statements (unaudited) - Three months ended March 31, 1996 and 1997 7-11 Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations 12-17 PART II: OTHER INFORMATION Item 6 -- Exhibits and Reports on Form 8-K 18 SIGNATURES 19 EXHIBIT 11 Computation of Earnings Per Common Share 20-21
2 PART I. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS -------------------- SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) AS OF DECEMBER 31, 1996 AND MARCH 31, 1997 (Amounts in thousands, except number of shares and per share data)
12/31/96 3/31/97 -------------------- -------------------- Notes RMB US$ RMB US$ ----- --- --- --- --- ASSETS Current assets Cash and bank balances 87,428 10,533 70,028 8,437 Accounts receivable, net 313,791 37,806 366,762 44,188 Notes receivable 15,212 1,833 2,735 329 Inventories, net 4 476,409 57,399 467,587 56,336 Other receivables 70,075 8,442 84,756 10,212 Receivable from disposal of an investment 13,419 1,617 13,419 1,617 Due from related companies 205,275 24,732 295,350 35,584 --------- -------- ---------- ------- Total current assets 1,181,609 142,362 1,300,637 156,703 Fixed assets 656,071 79,045 645,349 77,753 Deferred asset 22,204 2,675 21,981 2,648 Long term investments 1,012 122 1,012 122 Goodwill 11,587 1,396 11,380 1,371 --------- -------- ---------- ------- Total assets 1,872,483 225,600 1,980,359 238,597 ========= ======== ========== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short term bank loans 358,847 43,235 369,075 44,467 Long term bank loans, current portion 98,641 11,884 93,811 11,303 Accounts payable 151,971 18,310 131,999 15,903 Notes payable 2,800 337 2,300 277 Accrued liabilities and other payables 55,544 6,692 102,996 12,409 Short term obligations under capital leases 18,788 2,264 19,188 2,312 Short term portion of secured promissory note 5 12,450 1,500 12,450 1,500 Income tax payable 38,368 4,623 49,066 5,912 Taxes other than income 25,225 3,038 51,329 6,184 Due to related companies 14,357 1,730 18,524 2,232 --------- -------- ---------- ------- Total current liabilities 776,991 93,613 850,738 102,499 Long term bank loans 35,000 4,217 35,000 4,217 Long term obligations under capital leases 88,924 10,714 83,974 10,117 Long term portion of secured promissory note 5 12,450 1,500 12,450 1,500 Convertible debentures 6 95,450 11,500 95,450 11,500 Minority interests 420,484 50,661 442,645 53,331 --------- -------- ---------- ------- 1,429,299 172,205 1,520,257 183,164
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, 1996 AND MARCH 31, 1997 (UNAUDITED) (CONTINUED) (Amounts in thousands, except number of shares and per share data)
12/31/96 3/31/97 -------------------- -------------------- RMB US$ RMB US$ --- --- --- --- Shareholders' equity: Common Stock, par value US$ 0.001 each, 50,000,000 shares authorized; 12,700,109 shares issued, and fully paid up 107 13 107 13 Preferred Stock, par value US$ 0.001 each, 25,000,000 shares authorized; Convertible Preferred Stock - Series A; 36 shares issued and outstanding 44,533 5,365 44,533 5,365 Convertible Preferred Stock - Series B; 6,800 shares issued and outstanding 28,288 3,408 28,288 3,408 Contributed surplus 188,019 22,653 188,019 22,653 Reserves 27,866 3,357 27,866 3,357 Retained earnings 154,371 18,599 171,289 20,637 --------- ------- ---------- ------- Total shareholders' equity 443,184 53,395 460,102 55,433 --------- ------- ---------- ------- Total liabilities and shareholders' equity 1,872,483 225,600 1,980,359 238,597 ========= ======= ========== =======
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 ENDED MARCH 31, 1996 AND 1997 (Amounts in thousands, except number of shares and per share data)
Three Months Ended March 31, ------------------------------------------------- 1996 1997 1997 Notes RMB RMB US$ ----- -------------- -------------- --------------- Net sales to - Third parties 203,432 138,146 16,644 - Related parties 12,648 103,071 12,418 ---------- ---------- ---------- 216,080 241,217 29,062 Cost of sales ( 132,889) ( 147,368) ( 17,755) ---------- ---------- ---------- Gross profit 83,191 93,849 11,307 Selling, general and administrative expenses - Third parties ( 17,263) ( 16,549) ( 1,994) - Related parties ( 10,960) ( 12,492) ( 1,505) ---------- ---------- ---------- ( 28,223) ( 29,041) ( 3,499) Interest expense, net - Third parties ( 11,356) ( 15,431) ( 1,859) - Related parties ( 2,614) ( 2,246) ( 271) ---------- ---------- ---------- ( 13,970) ( 17,677) ( 2,130) ---------- ---------- ---------- Income before income taxes 40,998 47,131 5,678 Provision for income taxes: - Current ( 6,645) ( 8,052) ( 970) - Deferred - - - ---------- ---------- ---------- Income before minority interests 34,353 39,079 4,708 Minority interests ( 18,288) ( 22,161) ( 2,670) ---------- ---------- ---------- Net income 16,065 16,918 2,038 ========== ========== ========== Earnings per common share 2 - Primary 1.00 1.00 0.12 ========== ========== ========== - Fully diluted 1.00 1.02 0.12 ========== ========== ========== Number of shares outstanding 2, 7 - Primary 15,980,063 16,980,109 16,980,109 ========== ========== ========== - Fully diluted 15,980,063 19,280,109 19,280,109 ========== ========== ==========
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 THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997 (Amounts in thousands)
Three Months Ended March 31, ----------------------------------------- 1996 1997 1997 RMB RMB US$ --- --- --- Cash flows from operating activities: Net income 16,065 16,918 2,038 Adjustments to reconcile income to net cash provided by (used in) operating activities: Minority interests 18,288 22,161 2,670 Depreciation 15,771 17,792 2,144 Loss on disposal of fixed assets - 583 70 Amortization of goodwill 188 207 25 Exchange difference on secured promissory note 50 - - Amortization of present value discount on deferred asset 715 ( 195) ( 23) Amortization of deferred debenture issue expense - 418 50 Changes in operating assets and liabilities- (Increase) decrease in assets: Accounts receivable ( 132,884) ( 52,971) ( 6,382) Notes receivable 11,452 12,477 1,504 Inventories 16,009 8,822 1,063 Prepaid VAT 24,256 - - Other receivables ( 14,093) ( 14,681) ( 1,770) Due from related companies ( 48,014) ( 90,075) ( 10,852) Increase (decrease) in liabilities: Accounts payable 21,397 ( 19,972) ( 2,407) Notes payable ( 655) ( 500) ( 60) Accrued liabilities and other payables ( 13,861) 47,452 5,717 Income tax payable 8,348 10,698 1,289 Taxes other than income - 26,104 3,146 Due to related companies 77,600 ( 383) ( 47) Due to shareholders 2,652 - - -------- -------- ------- Net cash provided by (used in) operating activities 3,284 ( 15,145) ( 1,825) Cash flows from investing activities: Disposal of long term investments 426 - - Proceeds from disposal of fixed assets - 133 16 Additions to fixed assets ( 20,476) ( 7,786) ( 938) -------- -------- ------- Net cash used in investing activities ( 20,050) ( 7,653) ( 922) -------- -------- ------- Cash flows from financing activities: Net increase in bank loans 43,776 5,398 651 Repayment of other loans ( 33,810) - - -------- -------- ------- Net cash provided by financing activities 9,966 5,398 651 -------- -------- ------- Net decrease in cash and cash equivalents ( 6,800) ( 17,400) ( 2,096) Cash and cash equivalents, at beginning of period 30,944 87,428 10,533 -------- -------- ------- Cash and cash equivalents, at end of period 24,144 70,028 8,437 ======== ======== ======= Non-cash transaction: Financing of lease arrangements 4,182 4,550 549 ======== ======== =======
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 ENDED MARCH 31, 1996 AND 1997 (Amounts in thousands, except number of shares and per share data) 1. GENERAL Sunbase Asia, Inc., a Nevada Corporation ("the Company"), is engaged in the design, manufacture and distribution of a broad range of bearing products in the People's Republic of China ("PRC") and certain western countries, including the United States. The Company acquired 100% of the issued share capital of China Bearing Holdings Limited ("China Bearing") on December 2, 1994 pursuant to a Share Exchange Agreement with Asean Capital Limited in exchange for 10,261,000 shares of common stock. The transaction has been treated as a recapitalization of China Bearing with China Bearing as the acquirer (reverse acquisition). The historical financial statements prior to December 2, 1994 are those of China Bearing. The Company owns, through various subsidiaries and joint venture interests, a 51.4% indirect ownership in Harbin Bearing Company Limited ("Harbin Bearing"), a joint stock limited company organized under the laws of the PRC. Harbin Bearing is located in Harbin, the PRC, and has been in business since 1950. Harbin Bearing manufactures a wide variety of bearings in the PRC for use in commercial, industrial and aerospace applications and are sold primarily in the PRC and certain western countries, including the United States. On January 16, 1996 (effective December 29, 1995), the Company acquired Smith Acquisition Company, Inc. dba Southwest Products Company ("Southwest Products"), a bearing manufacturing company located in Los Angeles County, California, that has been in business since 1945. Southwest Products manufactures precision spherical bearings that are sold primarily to the aerospace and commercial aviation industries. Its major customers are located in the United States. 2. BASIS OF PRESENTATION The accompanying consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America. All material intercompany accounts and transactions were eliminated on consolidation. The accompanying consolidated condensed financial statements are unaudited but, in the opinion of the management of the Company, contain all adjustments, necessary to present fairly the financial position at March 31, 1997, the results of operations for the three months ended March 31, 1996 and 1997, and the changes in cash flows for the three months ended March 31, 1996 and 1997. These adjustments are of a normal recurring nature. 7 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 (Amounts in thousands, except number of shares and per share data) 2. BASIS OF PRESENTATION (continued) The consolidated balance sheet as of December 31, 1996, is derived from the Company's audited financial statements. Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although management of the Company believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 as filed with the Securities and Exchange Commission. For the three months ended March 31, 1996 and 1997, primary earnings per common share have been calculated using the weighted average number of shares of common stock and common stock equivalents outstanding during the respective periods. Common stock equivalents consist of convertible preferred stock and outstanding stock options. The computation of fully diluted earnings per share, where appropriate, assumes the full conversion of the Convertible Debentures and the elimination of the related after tax interest expense effective August 23, 1996. The results of operations for the three months ended March 31, 1997 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 1997. 3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE In preparing the consolidated financial statements, the financial statements of the Company are measured using Renminbi ("RMB") as the functional currency. All foreign currency transactions are translated into RMB using the applicable floating rates of exchange quoted by the People's Bank of China prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies have been translated into RMB using the unified exchange rate prevailing at the balance sheet dates. The resulting exchange gains or losses have been credited or charged to the statements of income for the periods in which they occur. The Company's share capital is denominated in United States dollars (US$) and the reporting currency is the RMB. For financial reporting purposes, the US$ share capital amounts have been translated into RMB at the applicable rates prevailing on the transaction dates. For financial reporting purposes, translation of amounts from RMB into US$ for the convenience of the reader has been made at the exchange rate quoted by the People's Bank of China on March 31, 1997 of US$ 1.00 = RMB 8.3. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rate on March 31, 1997 or at any other certain rate on March 31, 1997. 8 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 (Amounts in thousands, except number of shares and per share data) 4. INVENTORIES Inventories consist of the following at December 31, 1996 and March 31, 1997:
December 31, 1996 March 31, 1997 ----------------- -------------- RMB US$ RMB US$ --- --- --- --- Raw materials 102,856 12,392 78,299 9,434 Work-in-progress 121,847 14,680 129,159 15,561 Finished goods 257,121 30,979 265,959 32,043 ------- -------- ------- ------ 481,824 58,051 473,417 57,038 Less: Allowance for obsolescence ( 5,415) ( 652) ( 5,830) ( 702) ------- -------- ------- ------ Inventories, net 476,409 57,399 467,587 56,336 ======= ======== ======= ======
5. SECURED PROMISSORY NOTE A promissory note for US$ 5,012 (RMB 41,600) (the "Note") was issued to Asean Capital Limited ("Asean") in connection with the Share Exchange Agreement and is secured by a continuing security interest in all of the Company's title and interest in the outstanding capital stock of its wholly- owned subsidiary China Bearing. The Note is denominated in and is repayable in full in United States dollars, and bears interest at 8% per annum. In connection with the issuance of convertible debentures described at Note 6, Asean has undertaken that for so long as any of the debentures are outstanding, no amounts are to be repaid on the Note unless there is sufficient working capital and the repayment is made in accordance with the following schedule:- Payment Period Amount -------------- ------ August 1, 1996 to July 31, 1997 up to US$ 2,000 plus accrued interest August 1, 1997 to July 31, 1998 up to US$ 1,500 plus accrued interest August 1, 1998 to July 31, 1999 up to US$ 1,500 plus accrued interest Pursuant to the above described repayment schedule, a principal payment of US$ 2,012 (RMB 16,700) plus accrued interest was made on the Note on September 10, 1996. 9 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 (Amounts in thousands, except number of shares and per share data) 6. CONVERTIBLE DEBENTURES Pursuant to a Subscription Agreement dated August 2, 1996, (the "Subscription Agreement"), among China Bearing, Asean Capital Limited, China International Bearing Holdings Limited, the Company and Southwest Products (collectively, the "Sunbase Group"); Glory Mansion Limited, Wardley China Investment Trust, MC Private Equity Partners Asia Limited and Chine Investissement 2000 (collectively the "Investors"), on August 23, 1996, China Bearing issued an aggregate of US$ 11,500,000 principal amount of Convertible Debentures (the "Convertible Debentures") to the Investors. Unless the Convertible Debentures have been converted, the Convertible Debentures are due and payable in August, 1999 (the "Maturity Date"). The Convertible Debentures bear interest at the rate of the higher of (i) 5% per annum (net of withholding tax, if applicable) and (ii) such percentage of the dividend yield calculated by reference to dividing the annual dividend declared per share of Common Stock of the Company by the Conversion Price (as hereinafter defined). Interest is payable quarterly. The Investors have the right to convert at any time, in whole or in part of the principal amount of the Convertible Debentures into shares of the Common Stock of the Company. The Conversion Price (the "Conversion Price") is initially $5.00 per share, subject to adjustment for (a) change in par value of the Common Stock, (b) issuance of shares by way of capitalization of profits or reserves, (c) capital distributions, (d) rights offering at a price which is less than the lower of the then market price or Conversion Price, (e) issuance of derivative securities where the total consideration per share initially received is less than the lower of the then market price or Conversion Price, (f) issuance of shares at a price per share which is less than the lower of the then market price or the Conversion Price, and (g) if the cumulative audited earnings per common share for any two consecutive fiscal years commencing with the fiscal year ending 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. 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 $.55 for fiscal years commencing January 1, 1996; and accounts receivable reaching a certain level in relationship to net sales. As a result of the foregoing, although the Convertible Debentures bear interest at the rate of 5% per annum, interest is accrued at the rate of 12% per annum. The obligations of China Bearing under the Convertible Debentures are guaranteed by the other members of the Sunbase Group. 10 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 (Amounts in thousands, except number of shares and per share data) 7. SALE OF COMMON STOCK On June 10, 1996, the Company sold 1,000,000 shares of common stock (the "Private Placement Shares") at US$5.00 per share, which generated net proceeds of US$ 4,347 (RMB 36,077). On October 23, 1996, the Company filed a registration statement with the Securities and Exchange Commission to register the resale of the Private Placement Shares. 11 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS ------------- OVERVIEW The Company owns, through various subsidiaries and joint venture interests, a 51.4% indirect ownership in Harbin Bearing. Harbin Bearing manufactures a wide variety of bearings in the PRC for use in commercial, industrial and aerospace applications that are sold primarily in the PRC and certain western countries, including the United States. On January 16, 1996 (effective December 29, 1995), the Company acquired Southwest Products, which manufactures precision spherical bearings that are sold primarily to the aerospace and commercial aviation industries. The acquisition of Southwest Products has been accounted for under the purchase method of accounting. The results of Southwest Products have been consolidated into the Company's consolidated results of operations commencing January 1, 1996. Unless specifically stated, all amounts are in thousands (RMB '000). RESULTS OF OPERATION The following table sets forth certain unaudited operating data (in RMB and as a percentage of the Company's sales) for the three months ended March 31, 1996 and 1997.
Three Months Ended March 31, ---------------------------- 1996 1997 ---- ---- RMB % RMB % --- - --- - Sales 216,080 100.0 241,217 100.0 Cost of sales ( 132,889) ( 61.5) ( 147,368) ( 61.1) --------- ------ ---------- ------ Gross profit 83,191 38.5 93,849 38.9 Selling expenses ( 6,206) ( 2.9) ( 5,831) ( 2.4) General and administrative expenses ( 22,017) ( 10.2) ( 23,210) ( 9.7) Interest expenses ( 13,970) ( 6.5) ( 17,677) ( 7.3) --------- ------ ---------- ------ Income before income taxes 40,998 18.9 47,131 19.5 Provision for income taxes ( 6,645) ( 3.1) ( 8,052) ( 3.3) --------- ------ ---------- ------ Income before minority interests 34,353 15.8 39,079 16.2 Minority interests ( 18,288) ( 8.4) ( 22,161) ( 9.2) --------- ------ ---------- ------ Net income 16,065 7.4 16,918 7.0 ========= ====== ========= ======
12 Sales ----- Sales for the three months ended March 31, 1997 increased by RMB 25,137 or 11.6% to RMB 241,217, as compared to RMB 216,080 for the three months ended March 31, 1996. The increase in sales was due to: i) An increase in the domestic (Chinese) sales demand for bearings primarily in the automobile, motorcycle and machine-tooling industries. Sales for Harbin Bearing for the three months ended March 31, 1997 increased by RMB 23,917 or 11.5% to RMB 231,079 as compared to RMB 207,162 for the three months ended March 31, 1996. ii) An increase in sales for Southwest Products by RMB 1,220 or 13.7% to RMB 10,138 for the three months ended March 31, 1997 as compared to RMB 8,918 for the three months ended March 31, 1996. Cost of Sales/Gross Profit -------------------------- Cost of sales for the three months ended March 31, 1997 increased to RMB 147,368 as compared to RMB 132,889 for the three months ended March 31, 1996. The cost of sales for Harbin Bearing for the three months ended March 31, 1997 and 1996 was calculated using the gross profit method by reference to average annual gross profit ratios. The cost of sales for Southwest Products for the three months ended March 31, 1997 and 1996 was calculated on an actual cost basis. Gross profit increased by RMB 10,658 or 12.8% for the three months ended March 31, 1997 as compared to the three months ended March 31, 1996. The increase in gross profit was attributable to the increase in sales. Gross profit as a percentage of sales increased slightly to 38.9% in 1997 from 38.5% in 1996 due to different product mix from small and medium sized bearings to higher margin medium and large sized bearings. Selling Expenses ---------------- Selling expenses for the three months ended March 31, 1997 decreased by RMB 375 or 6% to RMB 5,831 as compared to RMB 6,206 for the three months ended March 31, 1996. Although royalty costs and government taxes in the PRC increased following the surge in sales, the overall selling expenses decreased as a result of the successful charge back of certain marketing and transportation costs to customers. Selling expenses as a percentage of sales decreased from 2.9% in 1996 to 2.4% in 1997. 13 General and Administrative Expenses - ----------------------------------- General and administrative expenses for the three months ended March 31, 1997 increased by RMB 1,193 or 5.4% to RMB 23,210 as compared to RMB 22,017 for the three months ended March 31, 1996. General and administrative expenses as a percentage of sales decreased to 9.7% in 1997 from 10.2% in 1996. Significant factors affecting the change in general and administrative expenses between 1996 and 1997 are as follows: a. An increase in staff costs by RMB 643 associated with the U.S. engineering program at Harbin Bearing that began in October 1996. b. A loss on the disposal of fixed assets of RMB 583 for the three months ended March 31, 1997 whereas no gain or loss on the disposal of fixed assets was recorded during the three months ended March 31, 1996. Interest Expense ---------------- Interest expense for the three months ended March 31, 1997 increased by RMB 3,707 or 26.5% to RMB 17,677 as compared to RMB 13,970 for the three months ended March 31, 1996. The increase in interest expense was primarily attributable to the inclusion of RMB 2,839 of Convertible Debenture interest calculated at the rate of 12% per annum since August 23, 1996 and the increase in principal amount of bank loans during the three months ended March 31, 1997 as compared to the three months ended March 31, 1996. Net Income ---------- As a result of the aforementioned factors, net income increased by RMB 853 or 5.3% to RMB 16,918 for the three months ended March 31, 1997 as compared to RMB 16,065 for the three months ended March 31, 1996. 14 LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES For the three months ended March 31, 1997, the Company's operations utilized cash resources of RMB 15,145, as compared to RMB 3,284 generated for the three months ended March 31, 1996. The Company's net working capital increased by RMB 45,281 at March 31, 1997 to RMB 449,899 as compared to RMB 404,618 at December 31, 1996, and the Company's current ratio at March 31, 1997 was 1.53:1 as compared to 1.52:1 at December 31, 1996 and 1.32:1 at March 31, 1996. Accounts receivable increased by RMB 52,971 or 17% to RMB 366,762 at March 31, 1997, as compared to RMB 313,791 at December 31, 1996. The increase in accounts receivable for the three months ended March 31, 1997 is comparable with the increase in accounts receivable of RMB 132,884 or 50% to RMB 397,070 for the three months ended March 31, 1996. Due from related companies increased by RMB 90,075 during the three months ended March 31, 1997 as a result of the increase in trade receivable relating to sales to related companies. INVESTING ACTIVITIES Capital expenditures for the three months ended March 31, 1997 of RMB 7,786 consisted of costs relating to the construction of new plant and buildings, and the renovation of existing facilities and equipment, and were financed by internally generated funds, short-term and long-term bank loans. There are no other material capital expenditures expected in the near future. FINANCING ACTIVITIES The Company has historically relied on both long and short term bank loans from Chinese banks to support its operating and capital requirements. Short term bank loans have terms ranging from three months to six months, are utilized to finance both operating and capital requirements, and are renewed on a revolving basis. Long term bank loans are utilized to fund capital expansions projects. During the three months ended March 31, 1997, the net increase in bank loans (after deducting repayment) was RMB 5,398, which was utilized to fund capital expenditures. The Company believes that it will be able to continue to maintain and expand its bank borrowings under existing terms and conditions. Southwest Products has relied upon a revolving accounts receivable line of credit to supplement its capital requirements. Southwest Products believes that it will be able to continue to maintain and expand its bank borrowings under existing terms and conditions. Pursuant to a Subscription Agreement dated August 2, 1996, (the "Subscription Agreement"), among China Bearing, Asean Capital Limited, China International Bearing Holdings Limited, the Company and Southwest Products (collectively, the "Sunbase Group"); Glory Mansion Limited, Wardley China Investment Trust, MC Private Equity Partners Asia Limited and Chine Investissement 2000 (collectively the "Investors"), on August 23, 1996, China Bearing issued an aggregate of US$ 11,500,000 principal amount of Convertible Debentures (the "Convertible Debentures") to the Investors. Unless the Convertible Debentures have been converted, the Convertible Debentures are due and payable in August, 1999 (the "Maturity Date"). The Convertible Debentures bear interest at the rate of the higher of (i) 5% per annum (net of withholding tax, if applicable) and (ii) such percentage of the dividend yield calculated by reference to dividing the annual dividend declared per share of Common Stock of the Company by the Conversion Price (as hereinafter defined). Interest is payable quarterly. 15 The Investors have the right to convert at any time the whole or any part of the principal amount of the Convertible Debentures into shares of the Common Stock of the Company. The Conversion Price (the "Conversion Price") is initially $5.00 per share, subject to adjustment for (a) change in par value of the Common Stock, (b) issuance of shares by way of capitalization of profits or reserves, (c) capital distributions, (d) rights offering at a price which is less than the lower of the then market price or Conversion Price, (e) issuance of derivative securities where the total consideration per share initially received is less than the lower of the then market price or Conversion Price, (f) issuance of shares at a price per share which is less than the lower of the then market price or the Conversion Price, and (g) if the cumulative audited earnings per common share for any two consecutive fiscal years commencing with the fiscal year ending 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. The Convertible Debentures are required to be redeemed on the Maturity Date at its principal amount outstanding together with any accrued but unpaid interest together with an amount that would enable the Investors to yield an aggregate internal rate of return of 12% per annum on the cost of their investment. In addition, if any of the events of default specified in the Convertible Debentures occurs, the Convertible 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 judgments; failure to achieve earning per common share of at least $.55 for fiscal years commencing January 1, 1996; and accounts receivable reaching a certain level in relationship to net sales. As a result of the foregoing, although the Convertible Debentures bear interest at the rate of 5% per annum, interest is accrued at the rate of 12% per annum. The obligations of China Bearing under the Convertible Debentures are guaranteed by the other members of the Sunbase Group. A promissory note for US$ 5,012 (RMB 41,600) (the "Note") was issued to Asean Capital Limited ("Asean") in connection with the Share Exchange Agreement and is secured by a continuing security interest in all of the Company's title and interest in the outstanding capital stock of its wholly-owned subsidiary China Bearing. The Note is denominated in and is repayable in full in United States dollars, and bears interest at 8% per annum. In connection with the issuance of convertible debentures described at above, Asean has undertaken that for so long as any of the debentures are outstanding, no amounts are to be repaid on the Note unless there is sufficient working capital and the repayment is made in accordance with the following schedule:- Payment Period Amount - -------------- ------ August 1, 1996 to July 31, 1997 up to US$ 2,000 plus accrued interest August 1, 1997 to July 31, 1998 up to US$ 1,500 plus accrued interest August 1, 1998 to July 31, 1999 up to US$ 1,500 plus accrued interest Pursuant to the above described repayment schedule, a principal payment of US$ 2,012 (RMB 16,700) plus accrued interest was made on the Note on September 10, 1996. 16 The Company anticipates that its cash flows from operations, combined with cash and cash equivalents, bank lines of credit and other external sources of debt and equity financing, and the proceeds from the June 1996 sale of the 1,000,000 shares of common stock and the August 1996 issuance of the Convertible Debentures, are adequate to finance the Company's operating and debt service requirements for the foreseeable future. INFLATION AND CURRENCY MATTERS In recent years, the Chinese economy has experienced periods of rapid economic growth as well as high rates of inflation, which in turn has resulted in the periodic adoption by the Chinese government of various corrective measures designed to regulate growth and contain inflation. During the three months ended March 31, 1997, the general inflation rate in the PRC was under control and was below 10% on an average basis. Since 1993, the Chinese government has implemented and maintained an economic program designed to control inflation, which has resulted in the tightening of working capital available to Chinese business enterprises. The success of the Company depends in substantial part on the continued growth and development of the Chinese economy. The Company continually monitors the effects of inflation. The Company is generally able to raise its prices to shift a portion of the inflated costs to the customers. The price of bearing steel, the major raw material used by the Company, remained fairly stable during 1996 and 1997. The major impact of inflation was on labor cost due to increases in employees wages. However, the Company has generally managed to offset the effects of inflation through improved operational efficiency. Foreign operations are subject to certain risks inherent in conducting business abroad, including price and currency exchange controls, and fluctuations in the relative value of currencies. Changes in the relative value of currencies occur periodically and may, in certain instances, materially affect the Company's results of operations. The Company conducts most of its business in the PRC and, accordingly, the sale of its products is settled primarily in RMB. As a result, devaluation of the RMB against the US$, could have a material adverse effect upon the results of operations and financial position of the Company. Although prior to 1994 the RMB experienced significant devaluation against the US$, the RMB has remained fairly stable from 1994 to present. The unified exchange rate was US$ 1.00 to RMB 8.65 at December 31, 1993, RMB 8.45 at December 31, 1994, RMB 8.32 at December 31, 1995, RMB 8.3 at December 31, 1996 and RMB 8.3 at March 31, 1997. 17 PART II. OTHER INFORMATION Item 1 Legal Proceedings No Material Developments Item 2 Changes in Securities None Item 3 Defaults upon Senior Securities None Item 4 Submission of Matters to a Vote of Security Holders None Item 5 Other Information None Item 6 Exhibits and Reports on Form 8-K (a) Exhibits: 11 Computation of Earnings per common share 27 Financial Data Schedule (b) Reports on Form 8-K: Three months ended March 31, 1997: None 18 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: May 13, 1997 By: /s/ William McKay ------------------------------------- William McKay Chief Executive Officer and President (Duly Authorized Officer) Date: May 13, 1997 By: /s/ (Roger) Li Yuen Fai ------------------------------------- (Roger) Li Yuen Fai Vice President and Chief Financial Officer (Principal Financial Officer) 19 EX-11 2 COMPUTATION OF EARNINGS PER COMMON SHARE EXHIBIT 11 ---------- SUNBASE ASIA, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 (Amounts in thousands, except number of shares and per share data)
Three Months Ended March 31, ---------------------------- 1996 1997 1997 RMB RMB US$ --- --- --- PRIMARY Net income, as reported 16,065 16,918 2,038 ========== ========== ========== Weighted average number of shares of common stock outstanding: Shares of common stock outstanding 11,700,063 12,700,109 12,700,109 Shares of common stock issuable assuming conversion of the Convertible Preferred Stock - Series A 3,600,000 3,600,000 3,600,000 - Series B 680,000 680,000 680,000 Shares of common stock issuable assuming exercise of stock options, reduced by the number of shares which could have been purchased with the proceeds from exercise of such stock options - - - ---------- ---------- ---------- Total weighted average number of shares of common stock and common stock equivalents outstanding 15,980,063 16,980,109 16,980,109 ========== ========== ========== Earnings per common share - Primary 1.00 1.00 0.12 ========== ========== ==========
20 SUNBASE ASIA, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE THREE MONTHS ENDED MARCH 31, 1996 AND 1997 (Amounts in thousands, except number of shares and per share data)
Three Months Ended March 31, ---------------------------- 1996 1997 1997 RMB RMB US$ --- --- --- FULLY DILUTED Net income, as reported 16,065 16,918 2,038 Add after tax interest expense applicable to Convertible Debentures - 2,839 342 ---------- ---------- ---------- Net income, as adjusted 16,065 19,757 2,380 ========== ========== ========== Weighted average number of shares of common stock outstanding: Shares of common stock outstanding 11,700,063 12,700,109 12,700,109 Shares of common stock issuable assuming conversion of the Convertible Preferred Stock - Series A 3,600,000 3,600,000 3,600,000 - Series B 680,000 680,000 680,000 Shares of common stock issuable assuming conversion of the Convertible Debentures on August 23, 1996 - 2,300,000 2,300,000 Shares of common stock issuable assuming exercise of stock options, reduced by the number of shares which could have been purchased with the proceeds from exercise of such stock options - - - ---------- ---------- ---------- Total weighted average number of shares of common stock and common stock equivalents outstanding 15,980,063 19,280,109 19,280,109 ========== ========== ========== Earnings per common share - Fully diluted 1.00 1.02 0.12 ========== ========== ==========
21 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTACTED FROM THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 8,437 0 44,517 0 56,336 156,703 77,753 0 238,597 102,499 25,834 0 8,773 13 46,647 238,597 29,062 29,062 17,755 17,755 0 0 2,130 5,678 970 2,038 0 0 0 2,038 0.12 0.12
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