-----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, BU19FNR6DhTA3rglmfPjeB/zeLqGJl4V+NfY53ZGYtbw6mZ/rT1XtTjvUnL273rr T6wAXEFFTrVBzts1rSZ1Cw== 0000898430-96-003971.txt : 19960928 0000898430-96-003971.hdr.sgml : 19960928 ACCESSION NUMBER: 0000898430-96-003971 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960820 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: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-03132 FILM NUMBER: 96618228 BUSINESS ADDRESS: STREET 1: 19 F FIRST PACIFIC BANK CENTERE STREET 2: 51-57 GLOUCESTER ROAD CITY: WANCHAI HONG KONG STATE: K3 BUSINESS PHONE: 01185228651511 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 PERIOD ENDING 6/30/96 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Commission File Number 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 --------------- Not Applicable - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) 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 July 31, 1996, the Company had 12,700,104 shares of common stock issued and outstanding. Total sequentially numbered pages in this document: 20. 1 SUNBASE ASIA, INC. AND SUBSIDIARIES ----------------------------------- INDEX
PART I FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Condensed Balance Sheets (unaudited) - December 31, 1995 and June 30, 1996 Consolidated Condensed Statements of Income (unaudited) - Three months and six months ended June 30, 1995 and 1996 Consolidated Condensed Statements of Cash Flows (unaudited) - Six months ended June 30, 1995 and 1996 Notes to Consolidated Condensed Financial Statements (unaudited) - Three months and six months ended June 30, 1995 and 1996 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations PART II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K SIGNATURES EXHIBIT 11 Computation of Earnings per Common Share
2 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) DECEMBER 31, 1995 AND JUNE 30, 1996 (Amounts in thousands, except number of shares and per share data)
December 31, 1995 June 30, 1996 ------------------- -------------------- Notes RMB US$ RMB US$ ----- ------- ------ ------- ------- ASSETS Current assets Cash and bank balances 30,944 3,719 44,301 5,325 Accounts receivable, net 264,186 31,753 511,804 61,515 Notes receivable 25,756 3,096 28,701 3,450 Inventories, net 4 476,997 57,331 443,213 53,271 Prepaid VAT 40,429 4,859 - - Other receivables 57,209 6,876 71,497 8,593 Due from related companies 137,079 16,476 89,470 10,754 --------- ------- ---------- ------- Total current assets 1,032,600 124,110 1,188,986 142,908 Fixed assets 554,086 66,597 575,969 69,227 Deferred asset 18,134 2,180 16,704 2,008 Long term investments 1,438 173 1,012 122 Goodwill 12,144 1,460 12,130 1,458 --------- ------- ---------- ------- Total assets 1,618,402 194,520 1,794,801 215,723 ========= ======= ========== =======
(Continued) 3 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (continued) DECEMBER 31, 1995 AND JUNE 30, 1996 (Amounts in thousands, except number of shares and per share data)
December 31, 1995 June 30, 1996 ------------------- ----------------------- Notes RMB US$ RMB US$ ----- --- --- --- --- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short term bank loans 276,813 33,271 393,569 47,304 Accounts payable 116,205 13,967 156,112 18,764 Notes payable 15,627 1,878 18,597 2,235 Accrued liabilities and other payables 90,108 10,831 74,348 8,936 Short term obligations under capital leases 17,269 2,075 18,013 2,165 Other loans 33,810 4,064 - - Secured promissory note 5 41,600 5,000 41,600 5,000 Income tax payable 5,874 706 22,577 2,714 Tax other than income - - 2,793 336 Due to related companies 111,654 13,420 115,150 13,840 Due to shareholders 17,352 2,086 14,498 1,743 --------- ------- --------- ------- Total current liabilities 726,312 87,298 857,257 103,037 Long term bank loans 110,670 13,302 57,270 6,884 Long term obligations under capital leases 107,713 12,946 98,516 11,841 Minority interests 343,142 41,243 382,831 46,013 --------- ------- --------- ------- 1,287,837 154,789 1,395,874 167,775 --------- ------- --------- ------- Shareholders' equity: Common Stock, par value US$0.001 each, 50,000,000 shares authorized; 12,700,104 shares (1995 - 11,700,104 shares) issued, and fully paid up 6 99 12 107 13 Preferred Stock, par value US$0.001 each, 25,000,000 shares authorized; Convertible Preferred Stock - Series A; 36 shares issued and outstanding 44,533 5,352 44,533 5,353 Convertible Preferred Stock - Series B; 6,800 shares issued and outstanding 28,288 3,400 28,288 3,400 Contributed surplus 151,942 18,262 187,414 22,525 Reserves 25,266 3,037 25,266 3,037 Retained earnings 80,437 9,668 113,319 13,620 --------- ------- --------- ------- Total shareholders' equity 330,565 39,731 398,927 47,948 --------- ------- --------- ------- Total liabilities and shareholders' equity 1,618,402 194,520 1,794,801 215,723 ========= ======= ========= =======
The accompanying notes form an integral part of these consolidated condensed financial statements. 4 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (Amounts in thousands, except number of shares and per share data)
Six Months Ended June 30, Three Months Ended June 30, ------------------------- --------------------------- 1995 1996 1996 1995 1996 1996 Notes RMB RMB US$ RMB RMB US$ ----- ----- ----- ----- ----- ----- ----- Net sales -third parties 371,921 436,073 52,412 206,778 231,381 27,810 -related parties 62,912 29,616 3,560 29,201 18,228 2,191 ---------- ---------- ---------- ---------- ---------- ---------- 434,833 465,689 55,972 235,979 249,609 30,001 Cost of sales (265,683) (285,917) (34,365) (143,587) (153,028) (18,393) ---------- ---------- ---------- ---------- ---------- ---------- Gross profit 169,150 179,772 21,607 92,392 96,581 11,608 ---------- ---------- ---------- ---------- ---------- ---------- Selling, general and administrative expenses - third parties (31,224) (40,288) (4,842) (16,650) (23,025) (2,768) - related parties (19,821) (22,071) (2,653) (9,976) (11,111) (1,335) ---------- ---------- ---------- ---------- ---------- ---------- (51,045) (62,359) (7,495) (26,626) (34,136) (4,103) ---------- ---------- ---------- ---------- ---------- ---------- Interest expense - third parties (17,767) (25,282) (3,038) (4,670) (13,926) (1,674) - related parties (5,822) (5,139) (618) (2,870) (2,525) (303) ---------- ---------- ---------- ---------- ---------- ---------- (23,589) (30,421) (3,656) (7,540) (16,451) (1,977) ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes 94,516 86,992 10,456 58,226 45,994 5,528 Provision for income taxes - Current (14,499) (14,420) (1,733) (8,888) (7,775) (935) ---------- ---------- ---------- ---------- ---------- ---------- Income before minority 80,017 72,572 8,723 49,338 38,219 4,593 interests Minority interests (39,907) (39,690) (4,771) (24,466) (21,402) (2,572) ---------- ---------- ---------- ---------- ---------- ---------- Net income 40,110 32,882 3,952 24,872 16,817 2,021 ========== ========== ========== ========== ========== ========== Earnings per common share 2 2.62 2.04 .25 1.62 1.04 .13 ========== ========== ========== ========== ========== ========== Number of shares outstanding 2 15,300,104 16,089,994 16,089,994 15,300,104 16,199,884 16,199,884 ========== ========== ========== ========== ========== ==========
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) SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (Amounts in thousands)
Six Months Ended June 30, ------------------------- 1995 1996 1996 Notes RMB RMB US$ ----- ----- ----- ----- Cash flows from operating activities: Net income 40,110 32,882 3,952 Adjustments to reconcile net income to net cash used in operating activities: Minority interests 39,907 39,690 4,771 Depreciation 22,220 28,151 3,383 Loss on disposal of fixed assets 969 - - Amortization of goodwill - 14 2 Others (463) 1,429 172 Changes in operating assets and liabilities - (Increase) decrease in assets: Accounts receivable (189,291) (247,618) (29,762) Notes receivable (26,744) (2,945) (354) Inventories 80,276 33,784 4,060 Prepaid VAT - 40,429 4,859 Other receivables (30,811) (14,288) (1,717) Due from related companies 38,925 47,609 5,722 Increase (decrease) in liabilities: Accounts payable (45,865) 39,907 4,797 Notes payable 15,225 2,970 357 Accrued liabilities and other payables 41,363 (15,760) (1,894) Income tax payable 6,737 16,703 2,008 Taxes other than income 22,855 2,793 336 Due to related companies (19,247) (4,957) (596) Due to shareholders (1,340) (2,854) (343) -------- -------- ------- Net cash used in operating activities (5,174) (2,061) (247) -------- -------- ------- Cash flows from investing activities: Disposal of long term investments - 426 51 Proceeds from disposal of fixed assets 274 - - Additions to fixed assets (35,966) (50,034) (6,014) -------- -------- ------- Net cash used in investing activities (35,692) (49,608) (5,963) -------- -------- ------- Cash flows from financing activities: Net increase in bank loans 21,471 63,356 7,615 Repayment of other loans - (33,810) (4,064) Proceeds from sale of common stock, net of costs 6 35,480 4,265 -------- -------- ------- Net cash provided by financing activities 21,471 65,026 7,816 -------- -------- ------- Net increase (decrease) in cash and cash equivalents (19,395) 13,357 1,606 Cash and cash equivalents, at beginning of period 65,646 30,944 3,719 -------- -------- ------- Cash and cash equivalents, at end of period 46,251 44,301 5,325 ======== ======== ======= Non-cash transaction: Financing of lease arrangements 7,769 8,453 1,016 ======== ======== =======
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) THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (Amounts in thousands, except number of shares and per share data) 1. ORGANIZATION Sunbase Asia, Inc. (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 is a Nevada corporation which owns, through various subsidiaries and joint venture interests, a 51.4% indirect ownership interest in Harbin Bearing Company Limited, a joint stock limited company organized under the law of the People's Republic of China ("Harbin Bearing"). Harbin Bearing manufactures a wide variety of bearings in China for use in commercial, industrial and aerospace applications that are sold primarily in China 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") in exchange for 6,800 shares of Series B convertible preferred stock with a stated value of US$ 500 per share. The Series B convertible preferred stock is convertible into 680,000 shares of common stock. The acquisition of Southwest has been accounted for under the purchase method of accounting, and was recorded as of December 31, 1995. The results of operations of Southwest have been consolidated into the Company's consolidated results of operations commencing January 1, 1996. Southwest manufactures precision spherical bearings that are sold primarily to the aerospace and commercial aviation industries. Its major customers are located in the United States. The following unaudited pro forma financial information for the three months and six months ended June 30, 1995 is prepared on the basis as if the acquisition of Southwest had occurred on January 1, 1995, and includes pro forma depreciation and amortization resulting from the increase to reflect the fair value of assets and the goodwill arising from the acquisition of Southwest. The unaudited pro forma financial information has been prepared for comparative purposes only and does not purport to represent the results of operations which would actually have occurred had the acquisition of Southwest been in effect on January 1, 1995, or which may occur in the future. 7 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (continued) THREE MONTHS ENDED JUNE 30, 1995 AND 1996 (Amounts in thousands, except number of shares and per share data) 1. ORGANIZATION (continued)
Three Months Ended Six Months Ended June 30, 1995 June 30, 1995 RMB RMB ------------------ ---------------- Net sales 245,147 454,541 Net income 22,674 36,069 Earnings per common share 1.42 2.26
2. BASIS OF PRESENTATION The accompanying consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States. 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, 1996, the results of operations for the three months and six months ended June 30, 1995 and 1996, and the changes in cash flows for the six months ended June 30, 1995 and 1996. These adjustments are of a normal recurring nature. The consolidated balance sheet as of December 31, 1995 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 principals 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, 1995, as filed with the Securities and Exchange Commission. The earnings per common share for the three months and six months ended June 30, 1995 and 1996 have been calculated using the weighted average number of shares of common stock and common stock equivalents outstanding during each respective period, and assumes that all outstanding shares of convertible 8 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (continued) THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (Amounts in thousands, except number of shares and per share data) 2. BASIS OF PRESENTATION (continued) preferred stock have been converted into common stock. Included in the calculation for 1996 are the preferred shares issued in conjunction with the Southwest acquisition, which was recorded as of December 31, 1995, and the 1,000,000 shares of common stock issued on June 10, 1996. The results of operations for the three months and six months ended June 30, 1996 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 1996. 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 applicable exchange rates 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 June 30, 1996, of US$ 1.00 = RMB 8.32. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate on June 30, 1996 or at any other certain rate on June 30, 1996. 9 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (continued) THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (Amounts in thousands, except number of shares and per share data) 4. INVENTORIES Inventories consist of the following at December 31, 1995 and June 30, 1996:
December 31, 1995 June 30, 1996 ----------------- ---------------- RMB US$ US$ RMB ------ ----- ----- ----- Raw materials 105,132 12,636 107,483 12,919 Work-in-progress 104,697 12,584 117,837 14,163 Finished goods 271,477 32,629 222,384 26,729 ------- ------ ------- ------ 481,306 57,849 447,704 53,811 Less: Allowance for obsolescence (4,309) (518) (4,491) (540) ------- ------ ------- ------ Inventories, net 476,997 57,331 443,213 53,271 ======= ====== ======= ======
5. SECURED PROMISSORY NOTE A promissory note (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 United States dollars, is repayable in full in United States dollars on December 31, 1996 and bears interest at 8% per annum. 6. SALE OF COMMON STOCK On June 10, 1996, the Company sold 1,000,000 shares of common stock at US$ 5.00 per share, which generated net proceeds of US$ 4,265 (RMB 35,480). The Company has agreed to promptly file a registration statement with the U.S. Securities and Exchange Commission to register the shares of common stock. 10 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 interest in Harbin Bearing. Harbin Bearing manufactures a wide variety of bearings in China for use in commercial, industrial and aerospace applications that are sold primarily in China and certain western countries, including the United States. On January 16, 1996 (effective December 29, 1995), the Company acquired Southwest, which manufactures precision spherical bearings that are sold primarily to the aerospace and commercial aviation industries. The acquisition of Southwest has been accounted for under the purchase method of accounting. The results of operations of Southwest 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 OPERATIONS THREE MONTHS ENDED JUNE 30, 1995 AND 1996: 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, 1995 and 1996.
Three Months Ended June 30, --------------------------- 1995 1996 ---- ---- RMB % RMB % --- --- --- --- Sales 235,979 100.0 249,609 100.0 Cost of sales (143,587) (60.8) (153,028) (61.3) ------- ----- -------- ----- Gross profit 92,392 39.2 96,581 38.7 Selling expenses (4,650) (2.0) (6,165) (2.5) General and administrative expenses (21,976) (9.3) (27,971) (11.2) Interest expense (7,540) (3.2) (16,451) (6.6) ------- ----- -------- ----- Income before income taxes 58,226 24.7 45,994 18.4 Provision for income taxes (8,888) (3.8) (7,775) (3.1) ------- ----- -------- ----- Income before minority interests 49,338 20.9 38,219 15.3 Minority interests (24,466) (10.4) (21,402) (8.6) ------- ----- -------- ----- Net income 24,872 10.5 16,817 6.7 ======= ===== ======== =====
11 Sales ----- Sales (including RMB 7,155 from Southwest) for the three months ended June 30, 1996 increased by RMB 13,630 or 5.8% to RMB 249,609, as compared to RMB 235,979 for the three months ended June 30, 1995. Excluding Southwest's operations, sales increased by RMB 6,475 or 2.7% for the three months ended June 30, 1996 as compared to the three months ended June 30, 1995. The rate at which sales had been growing has slowed in 1996 as compared to 1995 as a result of the Company's efforts beginning in the latter part of 1995 to consolidate the distribution of its products in China by shifting smaller OEM accounts to certain large distributors (see "LIQUIDITY AND CAPITAL RESOURCES - OPERATING ACTIVITIES"). Cost of Sales/Gross Profit -------------------------- Cost of sales (including RMB 5,616 from Southwest) for the three months ended June 30, 1996 increased to RMB 153,028 as compared to RMB 143,587 for the three months ended June 30, 1995. The cost of sales for Harbin Bearing for the three months ended June 30, 1996 and 1995 was calculated using the gross profit method by reference to average annual gross profit ratios. The cost of sales for Southwest for the three months ended June 30, 1996 was calculated based on actual cost. Gross profit increased by RMB 4,189 or 4.5% for the three months ended June 30, 1996 as compared to the three months ended June 30, 1995. The increase in gross profit was attributable to the increase in sales. Gross profit as a percentage of sales decreased to 38.7% in 1996 from 39.2% in 1995 due to Southwest's lower gross margin of 21.5%. Selling Expenses ---------------- Selling expenses (including RMB 1,495 from Southwest) for the three months ended June 30, 1996 increased by RMB 1,515 or 32.6% to RMB 6,165 as compared to RMB 4,650 for the three months ended June 30, 1995. The increase in selling expenses was primarily attributable to the consolidation of Southwest's selling expenses in 1996. Selling expenses as a percentage of sales increased from 2.0% in 1995 to 2.5% in 1996. General and Administrative Expenses ----------------------------------- General and administrative expenses (including RMB 2,351 from Southwest) for the three months ended June 30, 1996 increased by RMB 5,995 or 27.3% to RMB 27,971 as compared to RMB 21,976 for the three months ended June 30, 1995. General and administrative expenses as a percentage of sales increased to 11.2% in 1996 from 9.3% in 1995. The increase in general and administrative expenses was primarily attributable to: 12 a. The consolidation of Southwest's general and administrative expenses of RMB 2,351. b. An increase in the management fee of RMB 908 payable to Harbin Bearing Holdings Company as a result of a 10% inflation adjustment. c. An aggregate cash discount of RMB 6,507 which was granted during the three months ended June 30, 1996 as incentives to customers for early settlement of debt in order to accelerate cash collections. No such cash discount was granted during the three months ended June 30, 1995. d. A decrease in compensation expense of RMB 1,871 related to the voluntary early retirement program at Harbin Bearing. Interest Expense ---------------- Interest expense (including RMB 732 from Southwest) for the three months ended June 30, 1996 increased by RMB 8,911 or 118.2% to RMB 16,451 as compared to RMB 7,540 for the three months ended June 30, 1995. The increase in interest expense was attributable to the overaccrual of interest expense of RMB 4,750 during the three months ended March 31, 1995 which was subsequently reversed during the three months ended June 30, 1995. Excluding the effect from the reversal of the overaccrual, interest expense increased by RMB 4,161 or 33.9% as a result of an increase in principal amount of bank loans during the three months ended June 30, 1996 as compared to the three months ended June 30, 1995, and the 1.3% increase in the interest rate on new short term bank loans effective July 1, 1995. Net Income ---------- As a result of the aforementioned factors, including the consolidation of Southwest's operations effective January 1, 1996, net income decreased by RMB 8,055 or 32.4% to RMB 16,817 for the three months ended June 30, 1996 as compared to RMB 24,872 for the three months ended June 30, 1995. 13 SIX MONTHS ENDED JUNE 30, 1995 AND 1996: 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, 1995 and 1996.
Six Months Ended June 30, ----------------------------------------------- 1995 1996 --------------------- ---------------------- RMB % RMB % ------- ----- ------- ---- Sales 434,833 100.0 465,689 100.0 Cost of sales (265,683) (61.1) (285,917) (61.4) ------- ----- ------- ---- Gross profit 169,150 38.9 179,772 38.6 Selling expenses (9,753) (2.3) (12,371) (2.7) General and administrative expenses (41,292) (9.5) (49,988) Interest expense (23,589) (5.4) (30,421) (6.5) Income before income taxes 94,516 21.7 86,992 18.7 Provision for income taxes (14,499) (3.3) (14,420) (3.1) ------- ----- ------- ---- Income before minority interests 80,017 18.4 72,572 15.6 Minority interests (39,907) (9.2) (39,690) (8.5) ------- ----- ------- ---- Net income 40,110 9.2 32,882 7.1 ======= ===== ======= ====
Sales ----- Sales (including RMB 16,073 from Southwest) for the six months ended June 30, 1996 increased by RMB 30,856 or 7.1% as compared to the six months ended June 30, 1995. Excluding Southwest's operations, sales increased by RMB 14,783 or 3.4% for the six months ended June 30, 1996 as compared to the six months ended June 30, 1995. The rate at which sales had been growing has slowed in 1996 as compared to 1995 as a result of the Company's efforts beginning in the latter part of 1995 to consolidate the distribution of its products in China by shifting smaller OEM accounts to certain large distributors (see "LIQUIDITY AND CAPITAL RESOURCES - OPERATING ACTIVITIES"). Cost of Sales/Gross Profit -------------------------- Cost of sales (including RMB 12,550 from Southwest) for the six months ended June 30, 1996 increased to RMB 285,917 as compared to RMB 265,683 for the six months ended June 30, 1995. The cost of sales for Harbin Bearing for the six months ended June 30, 1996 and 1995 was calculated using the gross profit method by reference to average annual gross profit ratios. The cost of sales for 14 Southwest for the six months ended June 30, 1996 was calculated based on actual cost. Gross profit increased by RMB 10,662 or 6.3% for the six months ended June 30, 1996 as compared to the six months ended June 30, 1995. The increase in gross profit was attributable to the increase in sales. Gross profit as a percentage of sales decreased to 38.6% in 1996 from 38.9% in 1995 due to Southwest's lower gross margin of 21.9%. Selling Expenses ---------------- Selling expenses (including RMB 2,501 from Southwest) for the six months ended June 30, 1996 increased by RMB 2,618 or 26.8% to RMB 12,371 as compared to RMB 9,753 for the six months ended June 30, 1995. The increase in selling expenses was primarily attributable to the consolidation of Southwest's selling expenses in 1996. Selling expenses as a percentage of sales increased from 2.3% in 1995 to 2.7% in 1996. General and Administrative Expenses ----------------------------------- General and administrative expenses (including RMB 4,370 from Southwest) for the six months ended June 30, 1996 increased by RMB 8,696 or 21.1% to RMB 49,988 as compared to RMB 41,292 for the six months ended June 30, 1995. General and administrative expenses as a percentage of sales increased to 10.7% in 1996 from 9.5% in 1995. The increase in general and administrative expenses was mainly attributable to: a. The consolidation of Southwest's general and administrative expenses of RMB 4,370. b. An increase in the management fee of RMB 1,816 payable to Harbin Bearing Holdings Company as a result of a 10% inflation adjustment. c. An aggregate cash discount of RMB 6,507 which was granted during the six months ended June 30, 1996 as incentives to customers for early settlement of debt in order to accelerate the cash collections. No such cash discount was granted during the six months ended June 30, 1995. d. A decrease in compensation expense of RMB 3,939 related to the voluntary early retirement program at Harbin Bearing. Interest Expense ---------------- Interest expense (including RMB 1,380 from Southwest) for the six months ended June 30, 1996 increased by RMB 6,832 or 29.0% to RMB 30,421 as compared to RMB 23,589 for the six months ended June 30, 1995. The increase in interest expense was attributable to an increase in principal amount of bank 15 loans during the six months ended June 30, 1996 as compared to the six months ended June 30, 1995, and the 1.3% increase in the interest rate on new short term bank loans effective July 1, 1995. Net Income ---------- As a result of the aforementioned factors, including the consolidation of Southwest's operations effective January 1, 1996, net income decreased by RMB 7,228 or 18.0% to RMB 32,882 for the six months ended June 30, 1996 as compared to RMB 40,110 for the six months ended June 30, 1995. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES For the six months ended June 30, 1996, the Company's operations utilized cash resources of RMB 2,061, as compared to RMB 5,174 for the six months ended June 30, 1995. The Company's net working capital increased by RMB 25,441 at June 30, 1996, to RMB 331,729, as compared to RMB 306,288 at December 31, 1995, and the Company's current ratio at June 30, 1996 was 1.36:1, as compared to 1.42:1 at December 31, 1995 and 1.47:1 at June 30, 1995. During the latter part of 1995, the Company began to consolidate the distribution of its products in China by shifting smaller OEM accounts to designated large distributors. The Company has granted extended credit terms to such distributors to facilitate this transition, which the Company expects to continue at least through the remainder of 1996. This new marketing strategy is expected to reduce marketing costs and credit risk. The Company's accounts receivable increased by RMB 247,618 or 93.7% to RMB 511,804 at June 30, 1996, as compared to RMB 264,186 at December 31, 1995. The increase in accounts receivable for the six months ended June 30, 1996 is consistent with the increase in accounts receivable of RMB 189,291 or 63.5% for the six months ended June 30, 1995. Also contributing to the increase in accounts receivable during the six months ended June 30, 1996 was the granting of extended credit terms to designated large distributors and the slowdown in accounts receivable collections from the Company's previous smaller OEM accounts. Offsetting, in part, the effect of the increase in accounts receivable, accounts payable increased by RMB 39,907 or 34.3% to RMB 156,112 at June 30, 1996, as compared to RMB 116,205 at December 31, 1995. In addition, due from related companies decreased by RMB 47,609 or 34.7% to RMB 89,470 at June 30, 1996, as compared to RMB 137,079 at December 31, 1995, and prepaid VAT of RMB 40,429 at December 31, 1995 was completely utilized during the six months ended June 30, 1996. INVESTING ACTIVITIES 16 Capital expenditures for the six months ended June 30, 1996 of RMB 50,034 consisted of costs relating to the construction of new plant and buildings and the renovation of existing facilities and equipment, and were financed by bank loans and the sale of common stock. The Company anticipates that additional capital expenditures for the remainder of 1996 will not exceed RMB 10,000. 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 reviewed on a revolving basis. Long term bank loans are utilized to fund capital expansion projects. During the six months ended June 30, 1996, the net increase in bank loans (after deducting repayments) was RMB 63,356, which was utilized to fund the repayment of other loans of RMB 33,810 and operations and capital expenditures. The Company believes that it will be able to continue to maintain and expand its bank borrowings under existing terms and conditions. In order to finance the Company's continuing operating and capital requirements, the Company has been evaluating both debt and equity financing opportunities. During June 1996, the Company sold 1,000,000 shares of common stock at US $5.00 per share, generating net proceeds of US$ 4,265 (RMB 35,480). In addition, the Company has entered into a subscription agreement for a financing consisting of US$ 11,500 (RMB 95,680) aggregate principal amount of convertible subordinated debentures that is scheduled for completion during August 1996. However, there can be no assurances that this financing will ultimately be completed. 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, 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 six months ended June 30, 1996, the general inflation rate in China was in excess of 10% on an annualized 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. 17 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 its customers. The price of bearing steel, the major raw material used by the Company, remained fairly stable during 1995 and 1996. The major impact of inflation was on labor costs due to increases in employee 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 conduction 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 China and, accordingly, the sale of its products are settled primarily in RMB. As a result, continued devaluation of the RMB against the USD will adversely affect its financial performance when measured in USD, and may have material adverse effects upon the results of operations and financial position of the Company. Although prior to 1994 the RMB experienced significant devaluation against the USD, the RMB has remained fairly stable from 1994 to present. The unified exchange rate was US$1.00 to RMB 8.65 at December 31, 1993, RMB 8.45 at December 31, 1994, RMB 8.32 at December 31, 1995, and RMB 8.32 at June 30, 1996. PART II. OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K (a) Exhibits: 11 Computation of Earnings per Common Share 27 Financial Data Schedule (b) Reports on Form 8-K: Three months ended June 30, 1996: None 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Sunbase Asia, Inc. ----------------- (Registrant) Date: August 19, 1996 By: /s/ WILLIAM McKAY ---------------------------------- William McKay Chief Executive Officer and President (Duly Authorized Officer) Date: August 19, 1996 By: /s/ (ROGER) LI YUEN FAI ------------------------------- (Roger) Li Yuen Fai Vice President and Chief Financial Officer (Chief Financial Officer) 19 EX-11 2 EXHIBITS AND REPORTS ON FORM 8-K EXHIBIT 11 ---------- SUNBASE ASIA, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (Amounts in thousands, except number of shares and per share data)
Six Months Ended June 30, Three Months Ended June 30, ---------------------------------------- ----------------------------------------- 1995 1996 1996 1995 1996 1996 RMB RMB US$ RMB RMB US$ ---------- ---------- ---------- ---------- ---------- --------- Net income 40,110 32,882 3,952 24,872 16,817 2,021 ========== ========== ========== ========== ========== ========= Weighted average shares of common stock outstanding: Shares of common stock outstanding on January 1, 1996 11,700,104 11,700,104 11,700,104 11,700,104 11,700,104 11,700,104 1,000,000 shares of common stock issued on June 10, 1996 - 109,890 109,890 - 219,780 219,780 ---------- ---------- ---------- ---------- ---------- ---------- Total weighted average shares of common stock outstanding 11,700,104 11,809,994 11,809,994 11,700,104 11,919,884 11,919,884 Shares of common stock issuable if the Convertible Preferred Stock were converted at the beginning of each respective fiscal year - -Series A 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 - -Series B - 680,000 680,000 - 680,000 680,000 ---------- ---------- ---------- ---------- ---------- ---------- Total weighted average shares of common stock and common stock equivalents 15,300,104 16,089,994 16,089,994 15,300,104 16,199,884 16,199,884 ========== ========== ========== ========== ========== ========== Earnings per common share 2.62 2.04 .25 1.62 1.04 .13 ========== ========== ========== ========== ========== ==========
20 EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the unaudited consolidated condensed financial statements contained in the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 1996. 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 5,325,000 0 61,515,000 0 53,271,000 142,908,000 69,227,000 0 215,723,000 103,037,000 18,725,000 0 8,753,000 13,000 39,182,000 215,723,000 55,972,000 55,972,000 34,365,000 34,365,000 0 0 3,656,000 10,456,000 1,733,000 3,952,000 0 0 0 3,952,000 .25 0
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