-----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, Wzb9EQQCnxKil9vCHVnay0BmQwQl4T3cyWw4SbYBBmQR7PXZWOwaNdqGaONHfHH/ eF0PXwh90D9mRfXPTitCKw== 0000898430-98-002111.txt : 19980525 0000898430-98-002111.hdr.sgml : 19980525 ACCESSION NUMBER: 0000898430-98-002111 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980522 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: SEC FILE NUMBER: 000-03132 FILM NUMBER: 98630359 BUSINESS ADDRESS: STREET 1: PO BOS 1028 CITY: MONROVIA STATE: CA ZIP: 91017-1028 BUSINESS PHONE: 8183580181 MAIL ADDRESS: STREET 1: P O BOX 2600 CITY: BAKERSFIELD STATE: CA ZIP: 93303 FORMER COMPANY: FORMER CONFORMED NAME: PAN AMERICAN INDUSTRIES INC DATE OF NAME CHANGE: 19941216 FORMER COMPANY: FORMER CONFORMED NAME: PAN AMERICAN ENERGY CORPORATION DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SUPREME OIL & GAS CORP DATE OF NAME CHANGE: 19901029 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 For the quarterly period ended March 31, 1998. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to ----------------- -------------------- Commission File No. 0-3132 SUNBASE ASIA, INC. (Exact name of Registrant as specified in its charter) Nevada 94-1612110 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 19/F, First Pacific Bank Centre 51-57 Gloucester Road Wanchai, Hong Kong (Address of principal executive offices) Registrant's telephone number, including area code: (852) 2865-1511 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of March 31, 1998, the Company had 12,700,142 shares of common stock issued and outstanding. Total sequentially numbered pages in this document: 21. 1 SUNBASE ASIA, INC. AND SUBSIDIARIES ----------------------------------- INDEX
Page ---- PART I: FINANCIAL INFORMATION Item 1-- Financial statements Consolidated Condensed Balance Sheets (unaudited) - December 31, 1997 and March 31, 1998 [3-4] Consolidated Condensed Statements of Income (unaudited) - Three months ended March 31, 1997 and 1998 [5] Consolidated Condensed Statements of Cash Flows (unaudited) - Three months ended March 31, 1997 and 1998 [6] Notes to Consolidated Condensed Financial Statements (unaudited) - Three months ended March 31, 1997 and 1998 [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, 1997 AND MARCH 31, 1998 (Amounts in thousands, except number of shares and per share data)
12/31/97 3/31/98 -------------------- -------------------- Notes RMB US$ RMB US$ ----- --- --- --- --- ASSETS Current assets Cash and bank balances 39,343 4,740 12,261 1,477 Deposits with a financial institution 23,750 2,861 23,750 2,861 Accounts receivable, net 480,400 57,880 477,224 57,497 Notes receivable 6,190 746 2,640 318 Inventories, net 4 477,217 57,496 518,342 62,451 Other receivables 40,330 4,859 56,108 6,760 Due from related companies 300,023 36,147 316,235 38,101 --------- -------- ---------- ------- Total current assets 1,367,253 164,729 1,406,560 169,465 Fixed assets 631,812 76,122 614,751 74,066 Deferred asset 14,383 1,733 13,173 1,587 Long term investments 1,012 122 1,012 122 Goodwill 10,760 1,296 10,554 1,272 --------- -------- ---------- ------- Total assets 2,025,220 244,002 2,046,050 246,512 ========= ======== ========== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short term bank loans 435,403 52,458 434,332 52,329 Long term bank loans, current portion 140,772 16,960 140,773 16,960 Accounts payable 115,646 13,933 116,505 14,037 Accrued liabilities and other payables 131,536 15,848 168,445 20,296 Short term obligations under capital leases 20,441 2,463 20,586 2,480 Short term portion of secured promissory note 5 12,450 1,500 12,450 1,500 Income tax payable 50,392 6,071 39,396 4,747 Taxes other than income 38,972 4,696 54,002 6,506 Due to related companies 18,730 2,257 14,804 1,784 Convertible debentures 6 95,450 11,500 95,450 11,500 --------- -------- ---------- ------- Total current liabilities 1,059,792 127,686 1,096,743 132,139 Long term bank loans 4,005 483 4,005 483 Long term obligations under capital leases 68,483 8,251 63,094 7,601 Long term portion of secured promissory note 5 12,450 1,500 12,450 1,500 Minority interests 441,490 53,192 439,725 52,979 --------- -------- ---------- ------- 1,586,220 191,112 1,616,017 194,702
Continued/... The accompanying notes form an integral part of these consolidated condensed financial statements. 3 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED) (CONTINUED) (Amounts in thousands, except number of shares and per share data)
12/31/97 3/31/98 -------------------- -------------------- RMB US$ RMB US$ --------- -------- ---------- ------- Shareholders' equity: Common Stock, par value US$ 0.001 each, 50,000,000 shares authorized; 12,700,142 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 27,971 3,370 27,971 3,370 Retained earnings 150,082 18,081 141,115 17,001 --------- -------- ---------- ------- Total shareholders' equity 439,000 52,890 430,033 51,810 --------- -------- ---------- ------- Total liabilities and shareholders' equity 2,025,220 244,002 2,046,050 246,512 ========= ======== ========== =======
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, 1997 AND 1998 (Amounts in thousands, except number of shares and per share data)
Three Months Ended March 31, -------------------------------------------- 1997 1998 1998 Notes RMB RMB US$ ----- ----------- ----------- ----------- Net sales to - Third parties 138,146 91,739 11,053 - Related parties 103,071 8,457 1,019 ----------- ----------- ----------- 241,217 100,196 12,072 Cost of sales (147,368) (73,458) (8,851) ----------- ----------- ----------- Gross profit 93,849 26,738 3,221 Selling, general and administrative expenses - Third parties (16,549) (16,015) (1,930) - Related parties (12,492) (818) (98) ----------- ----------- ----------- (29,041) (16,833) (2,028) Interest expense, net - Third parties (15,431) (19,085) (2,299) - Related parties (2,246) (1,552) (187) ----------- ----------- ----------- (17,677) (20,637) (2,486) ----------- ----------- ----------- Income / (loss) before income taxes 47,131 (10,732) (1, 293) Provision for income taxes: - Current (8,052) - - - Deferred - - - ----------- ----------- ----------- Income/ (loss) before minority interests 39,079 (10,732) (1,293) Minority interests (22,161) 1,765 213 ----------- ----------- ----------- Net income / (loss) 16,918 (8,967) (1,080) =========== =========== =========== Earnings / (loss )per share 2 -Basic 1.33 (0.71) (0.09) =========== =========== =========== -Diluted 1.02 (0.71) (0.09) =========== =========== =========== Number of shares outstanding 2 - Basic 12,700,109 12,700,142 12,700,142 =========== =========== =========== - Diluted 19,280,109 12,700,142 12,700,142 =========== =========== ===========
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, 1997 AND MARCH 31, 1998 (Amounts in thousands)
Three Months Ended March 31, --------------------------------------- 1997 1998 1998 RMB RMB US$ --- --- --- Cash flows from operating activities: Net income / (loss) 16,918 (8,967) (1,080) Adjustments to reconcile income/(loss) to net cash provided by (used in) operating activities: Minority interests 22,161 (1,765) (213) Depreciation 17,792 19,206 2,314 Loss on disposal of fixed assets 583 - - Amortization of goodwill 207 206 24 Amortization of present value discount on deferred asset (195) 1,210 146 Amortization of deferred debenture issue expense 418 - - Changes in operating assets and liabilities- (Increase) decrease in assets: Accounts receivable (52,971) 3,176 383 Notes receivable 12,477 3,550 428 Inventories 8,822 (41,125) (4,955) Other receivables (14,681) (15,778) (1,901) Due from related companies (90,075) (16,212) (1,954) Increase (decrease) in liabilities: Accounts payable (20,472) 859 104 Accrued liabilities and other payables 47,452 36,909 4,448 Income tax payable 10,698 (10,996) (1,324) Taxes other than income 26,104 15,030 1,810 Due to related companies (383) (9,170) (1,106) --------- --------- --------- Net cash used in operating activities (15,145) (23,867) (2,876) Cash flows from investing activities: Proceeds from disposal of fixed assets 133 - - Additions to fixed assets (7,786) (2,145) (258) --------- --------- --------- Net cash used in investing activities (7,653) (2,145) (258) --------- --------- --------- Cash flows from financing activities: Net increase in bank loans and net cash provided by financing activities 5,398 (1,070) (129) --------- --------- --------- Net decrease in cash and cash equivalents (17,400) (27,082) (3,263) Cash and cash equivalents, at beginning of period 87,428 63,093 7,601 --------- --------- --------- Cash and cash equivalents, at end of period 70,028 36,011 4,338 ========= ========= ========= Non-cash transaction: Financing of lease arrangements 4,550 5,244 633 ========= ========= =========
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, 1997 AND 1998 (Amounts in thousands, except number of shares and per share data) 1. GENERAL Sunbase Asia, Inc., a Nevada Corporation ("the Company"), is engaged in the design, manufacture and distribution of a broad range of bearing products in the People's Republic of China ("PRC") and certain western countries, including the United States. The Company acquired 100% of the issued share capital of China Bearing Holdings Limited ("China Bearing") on December 2, 1994 pursuant to a Share Exchange Agreement with Asean Capital Limited in exchange for 10,261,000 shares of common stock. The transaction has been treated as a recapitalization of China Bearing with China Bearing as the acquirer (reverse acquisition). The historical financial statements prior to December 2, 1994 are those of China Bearing. The Company owns, through various subsidiaries and joint venture interests, a 51.43% 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. 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, 1998, the results of operations for the three months ended March 31, 1997 and 1998, and the changes in cash flows for the three months ended March 31, 1997 and 1998. These adjustments are of a normal recurring nature. 7 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (Amounts in thousands, except number of shares and per share data) 2. BASIS OF PRESENTATION (continued) The consolidated balance sheet as of December 31, 1997, is derived from the Company's audited financial statements. Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although management of the Company believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 as filed with the Securities and Exchange Commission. In 1997, the Financial Accounting Standards Board issued Statement No.128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for the three months ended March 31, 1997 and 1998 have been presented and, where appropriate, restated to conform to SFAS 128 requirements. The diluted loss per share for the three months ended March 31, 1998 is the same as the basic loss per share as there was an anti-dilution effect which reduces the loss per share. The calculation which resulted in such an anti-dilution was based on the assumptions that the conversion rights under the Convertible Debentures had been fully exercised, at the adjusted exercise price as stated in note 6, and the redemption of preferred shares, both on January 1, 1998. On this basis, the net income calculated by adding back the interest expenses on the Convertible Debentures net of income tax is RMB 4,713. As a result of the aforesaid, an anti-dilution effect was resulted and therefore the diluted loss per share was the same as the basic loss per share. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 1998. 3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE In preparing the consolidated financial statements, the financial statements of the Company are measured using Renminbi ("RMB") as the functional currency. All foreign currency transactions are translated into RMB using the applicable floating rates of exchange quoted by the People's Bank of China prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies have been translated into RMB using the unified exchange rate prevailing at the balance sheet dates. The resulting exchange gains or losses have been credited or charged to the statements of income for the periods in which they occur. 8 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (Amounts in thousands, except number of shares and per share data) 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, 1998 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, 1998 or at any other certain rate on March 31, 1998. 4. INVENTORIES Inventories consist of the following at December 31, 1997 and March 31, 1998:
December 31, 1997 March 31, 1998 ------------------ ----------------- RMB US$ RMB US$ ------- ------- ------- ------- Raw materials 92,039 11,089 95,212 11,471 Work-in-progress 141,214 17,014 90,510 10,905 Finished goods 282,634 34,052 371,290 44,734 -------- -------- -------- ------- 515,887 62,155 557,012 67,110 Less: Allowance for obsolescence (38,670) (4,659) (38,670) (4,659) -------- -------- -------- ------- Inventories, net 477,217 57,496 518,342 62,451 ======== ======== ======== =======
5. SECURED PROMISSORY NOTE A promissory note for US$ 5,012 (RMB 41,600) (the "Note") was issued to Asean Capital Limited ("Asean") in connection with the Share Exchange Agreement and is secured by a continuing security interest in all of the Company's title and interest in the outstanding capital stock of its wholly-owned subsidiary China Bearing. The Note is denominated in and is repayable in full in United States dollars, and bears interest at 8% per annum. In connection with the issuance of convertible debentures described at Note 6, Asean has undertaken that for so long as any of the debentures are outstanding, no amounts are to be repaid on the Note unless there is sufficient working capital and the repayment is made in accordance with the following schedule:- 9 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (Amounts in thousands, except number of shares and per share data)
Payment Period Amount - -------------- ------ August 1, 1996 to July 31, 1997 up to US$ 2,000 plus accrued interest August 1, 1997 to July 31, 1998 up to US$ 1,500 plus accrued interest August 1, 1998 to July 31, 1999 up to US$ 1,500 plus accrued interest
Pursuant to the above described repayment schedule, a principal payment of US$ 2,012 (RMB 16,700) was made on the Note on September 10, 1996. The directors do not envisage any other repayments being made in the foreseeable future. 6. CONVERTIBLE DEBENTURES Pursuant to a Subscription Agreement dated August 2, 1996, (the "Subscription Agreement"), among China Bearing, Asean Capital Limited, China International Bearing Holdings Limited, the Company and Southwest Products (collectively, the "Sunbase Group"); Glory Mansion Limited, Wardley China Investment Trust, MC Private Equity Partners Asia Limited and Chine Investissement 2000 (collectively the "Investors"), on August 23, 1996, China Bearing issued an aggregate of US$ 11,500,000 principal amount of Convertible Debentures (the "Convertible Debentures") to the Investors. Unless the Convertible Debentures have been converted, the Convertible Debentures are due and payable in August, 1999 (the "Maturity Date"). The Convertible Debentures bear interest at the rate of the higher of (i) 5% per annum (net of withholding tax, if applicable) and (ii) such percentage of the dividend yield calculated by reference to dividing the annual dividend declared per share of Common Stock of the Company by the Conversion Price (as hereinafter defined). Interest is payable quarterly. The Investors have the right to convert at any time, in whole or in part, the principal amount of the Convertible Debentures into shares of the Common Stock of the Company. The Conversion Price (the "Conversion Price") was initially 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. 10 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (Amounts in thousands, except number of shares and per share data) The Convertible Debentures are required to be redeemed on the Maturity Date at its principal amount outstanding together with any accrued but unpaid interest together with an amount that would enable the Investors to yield an aggregate internal rate of return of 12% per annum on the cost of their investment. In addition, if any of the events of default specified in the Convertible Debentures occur, the Convertible Debentures are automatically due and payable at the principal amount outstanding together with accrued interest and an amount that would enable the Investors to yield an aggregate internal rate of return on their investment of 19.75% per annum. Events of default include the delisting of the shares from NASDAQ or its suspension thereof; default in performance after failure to cure after notice; failure to pay principal or interest; failure to pay indebtedness for borrowed money; bankruptcy, insolvency or unsatisfied judgment; failure to achieve earning per common share of at least 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 in achieving the defined earnings per common share of US$0.55 in 1997, an event of default occurred. Although the Convertible Debentures bear an interest charge at the rate of 5% per annum, interest was being accrued at the rate of 19.75% per annum to provide for the condition of the default. 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 51.43% 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 (effective December 29, 1995), the Company acquired Southwest Products, which manufactures precision spherical bearings that are sold primarily to the aerospace and commercial aviation industries. The acquisition of Southwest Products has been accounted for under the purchase method of accounting. The results of Southwest Products have been consolidated into the Company's consolidated results of operations commencing January 1, 1996. Unless specifically stated, all amounts are in thousands ('000). RESULTS OF OPERATION 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, 1997 and 1998.
Three Months Ended March 31, ---------------------------- 1997 1998 ---- ---- RMB % RMB % ----------- ------ ----------- ------- Sales 241,217 100.0 100,196 100.0 Cost of sales (147,368) (61.1) (73,458) 73.3 -------- ----- -------- ------ Gross profit 93,849 38.9 26,738 26.7 Selling expenses (5,831) (2.4) (4,043) (4.0) General and administrative expenses (23,210) (9.7) (12,790) (12.8) Interest expenses (17,677) (7.3) (20,637) (20.6) -------- ----- -------- ------ Income before income taxes 47,131 19.5 (10,732) (10.7) Provision for income taxes (8,052) (3.3) - - -------- ----- -------- ------ Income before minority interests 39,079 16.2 (10,732) (10.7) Minority interests (22,161) (9.2) 1,765 1.8 -------- ----- -------- ------ Net income 16,918 7.0 (8,967) (8.9) ======== ===== ======== ======
12 Sales ----- Sales for the three months ended March 31, 1998 decreased by RMB 141,021 or 58.5% to RMB 100,196, as compared to RMB 241,217 for the three months ended March 31, 1997. The decrease in sales was due to adverse market conditions in the PRC primarily due to the financial crises in Asia. Competition for the limited sales orders in the bearing market became greater in 1998 and there were no material price increases from the prior twelve month period. The Company has responded to such conditions by enhancing its credit review procedures and restricting sales to customers where collectability was uncertain. Sales for Harbin Bearing for the three months ended March 31, 1998 decreased by RMB 141,295 or 61% to RMB 89,784 as compared to RMB 231,079 for the three months ended March 31, 1997. The decrease was partially offset by an increase in sales for Southwest Products by RMB 274 or 2.7% to RMB 10,412 for the three months ended March 31, 1998 as compared to RMB 10,138 for the three months ended March 31, 1997. Cost of Sales/Gross Profit -------------------------- Cost of sales for the three months ended March 31, 1998 decreased to RMB 73,458 as compared to RMB 147,368 for the three months ended March 31, 1997. The cost of sales for Harbin Bearing for the three months ended March 31, 1998 and 1997 was calculated using the gross profit method by reference to average annual gross profit ratios. The cost of sales for Southwest Products for the three months ended March 31, 1998 and 1997 was calculated on an actual cost basis. Gross profit decreased by RMB 67,111 or 71.5% for the three months ended March 31, 1998 as compared to the three months ended March 31, 1997. The decrease in gross profit was mainly attributable to the decrease in sales caused by adverse market conditions in the PRC, which led to a plunge in units of bearings produced in 1998. The decrease in production output and an under-utilization of machinery and equipment capacity resulted in an increase in overhead absorption by each unit produced and an increase in the unit cost of goods sold. Also, there was no material change in selling prices during the two periods under review. Selling Expenses ---------------- Selling expenses for the three months ended March 31, 1998 decreased by RMB 1,788 or 30.7% to RMB 4,043 as compared to RMB 5,831 for the three months ended March 31, 1997. The major reason for the decrease in selling expenses was due to a reduction in payment of royalty and government taxes by RMB 2,700. The decrease was partially offset by an increase in traveling expense of RMB 1,000 mainly incurred for the collection of accounts receivable. 13 General and Administrative Expenses ----------------------------------- General and Administrative Expenses for the three months ended March 31, 1998 decreased by RMB 10,420 or 44.9% to RMB 12,790 as compared to RMB 23,210 for the three months ended March 31, 1997. Significant factors affecting the change in general and administrative expenses between 1997 and 1998 are as follows: a. A provision for management fee of RMB 5,265 was made in Harbin Bearing for the three months ended March 31, 1997. No such provision was made for the three months ended March 31, 1998. b. A reduction in property tax by RMB 1,062 for the three months ended March 31, 1998 as compared to the three months ended March 31, 1997. Interest Expenses ----------------- Interest Expenses for the three months ended March 31, 1998 increased by RMB 2,960 or 16.7% to RMB 20,637 as compared to RMB 17,677 for the three months ended March 31, 1997. The increase in interest expense was primarily attributable to the increase in bank loans and the surge in Convertible Debentures interest. The amount of Convertible Debentures interest charged for the three months ended March 31, 1998 was RMB 4,713 as compared to RMB 2,864 for the three months ended March 31, 1997. The rise in Convertible Debentures interest was due to an increase in the interest accrual rate from 12% to 19.75% per annum as a result of the Company's default on a condition of the Subscription Agreement governing the Convertible Debentures Net Income ---------- As a result of the aforementioned factors, net income decreased by RMB 25,885 to a net loss of RMB 8,967 for the three months ended March 31, 1998 as compared to a net income of RMB 16,918 for the three months ended March 31, 1997. 14 LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES For the three months ended March 31, 1998, the Company's operations utilized cash resources of RMB 23,867, as compared to RMB 15,145 for the three months ended March 31, 1997. The Company's net working capital increased by RMB 2,355 at March 31, 1998 to RMB 309,817 as compared to RMB 307,461 at December 31, 1997, and the Company's current ratio at March 31, 1998 was 1.28:1 as compared to 1.29:1 at December 31, 1997 and 1.53:1 at March 31, 1997. Accounts receivable decreased by RMB 3,176 or 0.7% to RMB 477,224 at March 31, 1998, as compared to RMB 480,400 at December 31, 1997. The decrease in accounts receivable for the three months ended March 31, 1998 as compared to an increase in accounts receivable of RMB 52,971 for the three months ended March 31, 1997 was due to tightening of credit control. INVESTING ACTIVITIES Capital expenditures for the three months ended March 31, 1998 of RMB 2,145 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 expansion projects. During the three months ended March 31, 1998, the net decrease in bank loans (after deducting repayment) was RMB 1,070. The Company believes that it will be able to continue to maintain and expand its bank borrowings under existing terms and conditions. Pursuant to a Subscription Agreement dated August 2, 1996, (the "Subscription Agreement"), among China Bearing, Asean Capital Limited, China International Bearing Holdings Limited, the Company and Southwest Products (collectively, the "Sunbase Group"); Glory Mansion Limited, Wardley China Investment Trust, MC Private Equity Partners Asia Limited and Chine Investissement 2000 (collectively the "Investors"), on August 23, 1996, China Bearing issued an aggregate of US$11,500,000 principal amount of Convertible Debentures (the "Convertible Debentures") to the Investors. Unless the Convertible Debentures have been converted, the Convertible Debentures are due and payable in August, 1999 (the "Maturity Date"). The Convertible Debentures bear interest at the rate of the higher of (i) 5% per annum (net of withholding tax, if applicable) and (ii) such percentage of the dividend yield calculated by reference to dividing the annual dividend declared per share of Common Stock of the Company by the Conversion Price (as hereinafter defined). Interest is payable quarterly. 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") 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 period. Due to the Company's failure to achieve the projected cumulative audited earnings per common share of US$1.79 for the two years ended December 31, 1997, the Conversion Price has been adjusted to US$1.84 per share pursuant to the terms of the Subscription Agreement. The Convertible Debentures are required to be redeemed on the Maturity Date at its principal amount outstanding together with any accrued but unpaid interest together with an amount that would enable the Investors to yield an aggregate internal rate of return of 12% per annum on the cost of their investment. In addition, if any of the events of default specified in the Convertible Debentures occur, the Convertible Debentures are automatically due and payable at the principal amount outstanding together with accrued interest and an amount that would enable the Investors to yield an aggregate internal rate of return on their investment of 19.75% per annum. Events of default include the delisting of the shares from NASDAQ or its suspension thereof; default in performance after failure to cure after notice; failure to pay principal or interest; failure to pay indebtedness for borrowed money; bankruptcy, insolvency or unsatisfied judgments; 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 in achieving the defined earnings per common share of U.S.$0.55 in 1997, an event of default occurred. Although the Convertible Debentures bear an interest charge at the rate of 5% per annum, interest was being accrued at the rate of 19.75% per annum to provide for the condition of the default. In view of the inability of the Company and the guarantors to satisfy an immediate redemption of the Convertible Debentures, the Company intends to conduct negotiations with the Investors and will seek a rescheduling of the redemption payment. The Company believes that a workable solution could be made with the Investors in due course. No assurance can be given that such negotiations will result in a resolution that is favorable to the Company. A promissory note for US$5,012 (RMB 41,600) (the "Note") was issued to Asean Capital Limited ("Asean") in connection with the Share Exchange Agreement and is secured by a continuing security interest in all of the Company's title and interest in the outstanding capital stock of its wholly-owned subsidiary China Bearing. The Note is denominated in and is repayable in full in United States dollars, and bears interest at 8% per annum. In connection with the issuance of Convertible Debentures described at above, Asean has undertaken that for so long as any of the Convertible Debentures are outstanding, no amounts are to be repaid on the Note unless there is sufficient working capital and the repayment is made in accordance with the following schedule:- 16
Payment Period Amount - -------------- ------ August 1, 1996 to July 31, 1997 up to US$ 2,000 plus accrued interest August 1, 1997 to July 31, 1998 up to US$ 1,500 plus accrued interest August 1, 1998 to July 31, 1999 up to US$ 1,500 plus accrued interest
Pursuant to the above described repayment schedule, a principal payment of US$2,012 (RMB 16,700) was made on the Note on September 10, 1996. The directors do not envisage any other repayments being made in the foreseeable future. The Company anticipates that its cash flows from operations, combined with cash and cash equivalents, bank lines of credit and other external sources of debt and equity financing, are adequate to finance the Company's operating and debt service requirements for the foreseeable future. Nevertheless, due to the recent financial turmoil in Asia and the default on the Convertible Debentures, management will cautiously and closely monitor the funding position of the Company. INFLATION AND CURRENCY MATTERS In recent years, the Chinese economy has experienced periods of rapid economic growth as well as high rates of inflation, which in turn has resulted in the periodic adoption by the Chinese government of various corrective measures designed to regulate growth and contain inflation. During the three months ended March 31, 1998, the general inflation rate in the PRC was under control and was below 10% on an average basis. Since 1993, the Chinese government has implemented and maintained an economic program designed to control inflation, which has resulted in the tightening of working capital available to Chinese business enterprises. The success of the Company depends in substantial part on the continued growth and development of the Chinese economy. The Company continually monitors the effects of inflation. In view of the change in market conditions and increased competition, the Company may unable 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 1997 and 1998. 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, RMB 8.3 at December 31, 1997 and RMB 8.3 at March 31, 1998. 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, 1998: 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 21, 1997 By: /s/ William McKay ----------------- William McKay Chief Executive Officer and President (Duly Authorized Officer) Date: May 21, 1997 By: /s/ (Roger) Li Yuen Fai ----------------------- (Roger) Li Yuen Fai Vice President and Chief Financial Officer (Principal Financial Officer) 19 EXHIBIT 11 ---------- SUNBASE ASIA, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (Amounts in thousands, except number of shares and per share data)
Three Months Ended March 31, ---------------------------- 1997 1998 1998 RMB RMB US$ ---------- ---------- ---------- BASIC Net income / (loss), as reported 16,918 (8,967) (1,080) ========== ========== ========== Weighted average number of shares of common stock outstanding: Shares of common stock outstanding 12,700,109 12,700,142 12,700,142 ========== ========== ========== Earnings / (loss) per share 1.33 (0.71) (0.09) ========== ========== ==========
20 SUNBASE ASIA, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (Amounts in thousands, except number of shares and per share data)
Three Months Ended March 31, ---------------------------- 1997 1998 1998 RMB RMB US$ ---------- ---------- ---------- DILUTED Net income / (loss), as reported 16,918 (8,967) (1, 080) Add after tax interest expense applicable to Convertible Debentures 2,839 - - ---------- ---------- ---------- Net income / (loss), as adjusted 19,757 (8,967) (1, 080) ========== ========== ========== Weighted average number of shares of common stock outstanding: Shares of common stock outstanding 12,700,109 12,700,142 12,700,142 Shares of common stock issuable assuming conversion of the Convertible Preferred Stock - Series A 3,600,000 - - - Series B 680,000 - - Shares of common stock issuable assuming conversion of the Convertible Debentures on August 23, 1996 2,300,000 - - Total weighted average number of ---------- ---------- ---------- shares of common stock and common stock equivalents outstanding 19,280,109 12,700,142 12,700,142 ========== ========== ========== Earnings / (loss) per share 1.02 (0.71) (0.09) ========== ========== ==========
21 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY RERORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 4,338 0 102,676 0 62,451 169,465 74,066 0 246,512 132,139 0 0 8,773 13 43,024 246,512 12,072 12,072 8,851 8,851 0 0 2,486 (1,293) 0 (1,080) 0 0 0 (1,080) (0.09) (0.09)
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