-----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, Bl4EzalvOj2V+r5CZlTI3+/DGfDrlkh6gtDiGLEU0VOKADu8Y5gTgd53bJWTuVGb 5kMpmzjx4CxZjMqkb8y6EA== 0000898430-97-003403.txt : 19970814 0000898430-97-003403.hdr.sgml : 19970814 ACCESSION NUMBER: 0000898430-97-003403 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 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: 97659251 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 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 For the quarterly period ended June 30, 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 June 30, 1997, the Company had 12,700,140 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 June 30, 1997 3-4 Consolidated Condensed Statements of Income (unaudited) - Three months and six months ended June 30, 1996 and 1997 5 Consolidated Condensed Statements of Cash Flows (unaudited) - Six months ended June 30, 1996 and 1997 6 Notes to Consolidated Condensed Financial Statements (unaudited) - Three months and six months ended June 30, 1996 and 1997 7-11 Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations 12-19 PART II: OTHER INFORMATION Item 6 -- Exhibits and Reports on Form 8-K 20 SIGNATURES 21 EXHIBIT 11 Computation of Earnings Per Common Share 22-23
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 JUNE 30, 1997 (Amounts in thousands, except number of shares and per share data)
12/31/96 6/30/97 --------------- -------------- Notes RMB US$ RMB US$ ----- --- --- --- --- ASSETS Current assets Cash and bank balances 87,428 10,546 71,237 8,593 Accounts receivable, net 313,791 37,852 364,552 43,975 Notes receivable 15,212 1,835 11,379 1,373 Inventories, net 4 476,409 57,468 452,746 54,613 Other receivables 70,075 8,453 92,779 11,192 Receivable from disposal of an investment 13,419 1,618 13,419 1,618 Due from related companies 205,275 24,762 417,138 50,318 --------- ------- --------- ------- Total current assets 1,181,609 142,534 1,423,250 171,682 Fixed assets 656,071 79,140 633,232 76,385 Deferred asset 22,204 2,678 21,874 2,639 Long term investments 1,012 122 1,012 122 Goodwill 11,587 1,398 11,160 1,346 --------- ------- --------- ------- Total assets 1,872,483 225,872 2,090,528 252,174 ========= ======= ========= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short term bank loans 358,847 43,286 380,213 45,864 Long term bank loans, current portion 98,641 11,899 106,171 12,807 Accounts payable 151,971 18,332 132,240 15,952 Notes payable 2,800 338 10,900 1,315 Accrued liabilities and other payables 55,544 6,700 108,188 13,050 Short term obligations under capital leases 18,788 2,266 19,597 2,364 Short term portion of secured promissory note 5 12,450 1,502 12,435 1,500 Income tax payable 38,368 4,628 59,067 7,125 Taxes other than income 25,225 3,043 77,401 9,337 Due to related companies 14,357 1,732 32,992 3,979 --------- ------- --------- ------- Total current liabilities 776,991 93,726 939,204 113,293 Long term bank loans 35,000 4,222 23,000 2,774 Long term obligations under capital leases 88,924 10,726 78,919 9,520 Long term portion of secured promissory note 5 12,450 1,502 12,435 1,500 Convertible debentures 6 95,450 11,514 95,335 11,500 Minority interests 420,484 50,722 463,755 55,942 --------- ------- --------- ------- 1,429,299 172,412 1,612,648 194,529
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 JUNE 30, 1997 (UNAUDITED) (CONTINUED) (Amounts in thousands, except number of shares and per share data)
12/31/96 6/30/97 -------------- -------------- RMB US$ RMB US$ --- --- --- --- Shareholders' equity: Common Stock, par value US$ 0.001 each, 50,000,000 shares authorized; 12,700,140 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 5,372 44,533 5,372 Convertible Preferred Stock - Series B; 6,800 shares issued and outstanding 28,288 3,412 28,288 3,412 Contributed surplus 188,019 22,680 188,019 22,680 Reserves 27,866 3,361 27,866 3,361 Retained earnings 154,371 18,622 189,067 22,807 --------- ------- ---------- ------- Total shareholders' equity 443,184 53,460 477,880 57,645 --------- ------- ---------- ------- Total liabilities and shareholders' equity 1,872,483 225,872 2,090,528 252,174 ========= ======= ========== =======
The accompanying notes form an integral part of these consolidated condensed financial statements. 4 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (Amounts in thousands, except number of shares and per share data)
Six Months Ended June 30, Three Months Ended June 30, ------------------------- --------------------------- 1996 1997 1997 1996 1997 1997 Notes RMB RMB US$ RMB RMB US$ ----- --- --- --- --- --- --- Net sales to -Third parties 436,073 269,524 32,512 231,381 131,378 15,848 - Related parties 29,616 216,319 26,094 18,228 113,248 13,660 ---------- ---------- ---------- ---------- ---------- ---------- 465,689 485,843 58,606 249,609 244,626 29,508 Cost of sales (285,917) (295,825) (35,685) (153,028) (148,457) (17,908) ---------- ---------- ---------- ---------- ---------- ---------- Gross profit 179,772 190,018 22,921 96,581 96,169 11,600 Selling, general and administrative expenses -Third parties (40,288) (35,282) (4,256) (23,025) (18,733) (2,260) - Related parties (22,071) (24,946) (3,009) (11,111) (12,454) (1,502) ---------- ---------- ---------- ---------- ---------- ---------- (62,359) (60,228) (7,265) (34,136) (31,187) (3,762) Interest expense, net - Third parties (25,282) (31,705) (3,824) (13,926) (16,274) (1,963) - Related parties (5,139) (4,395) (530) (2,525) (2,149) (259) ---------- ---------- ---------- ---------- ---------- ---------- (30,421) (36,100) (4,354) (16,451) (18,423) (2,222) ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes 86,992 93,690 11,302 45,994 46,559 5,616 Provision for income taxes - Current (14,420) (15,723) (1,897) (7,775) (7,671) (925) - Deferred - - - - - - ---------- ---------- ---------- ---------- ---------- ---------- Income before minority interests 72,572 77,967 9,405 38,219 38,888 4,691 Minority interests (39,690) (43,271) (5,220) (21,402) (21,110) (2,546) ---------- ---------- ---------- ---------- ---------- ---------- Net income 32,882 34,696 4,185 16,817 17,778 2,145 ========== ========== ========== ========== ========== ========== Earnings per common share 2 - Primary 2.04 2.04 0.25 1.04 1.05 0.13 ========== ========== ========== ========== ========== ========== - Fully Diluted 2.04 2.10 0.25 1.04 1.07 0.13 ========== ========== ========== ========== ========== ========== Number of shares outstanding 2 - Primary 16,089,994 16,980,140 16,980,140 16,199,884 16,980,140 16,980,140 ========== ========== ========== ========== ========== ========== - Fully Diluted 16,089,994 19,280,140 19,280,140 16,199,884 19,280,140 19,280,140 ========== ========== ========== ========== ========== ==========
The accompanying notes form an integral part of these consolidated condensed financial statements. 5 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (Amounts in thousands)
Six Months Ended June 30, ------------------------------------ 1996 1997 1997 RMB RMB US$ --- --- --- Cash flows from operating activities: Net income 32,882 34,696 4,185 Adjustments to reconcile income to net cash provided by (used in) operating activities: Minority interests 39,690 43,271 5,220 Depreciation 28,151 35,736 4,311 Loss on disposal of fixed assets - 582 70 Amortization of goodwill 14 427 52 Exchange difference on secured promissory note and convertible debentures - (145) (17) Amortization of present value discount on deferred asset - (391) (47) Amortization of deferred debenture issue expense - 721 87 Others 1,429 - - Changes in operating assets and liabilities- (Increase) decrease in assets: Accounts receivable (247,618) (50,761) (6,123) Notes receivable (2,945) 3,833 462 Inventories 33,784 23,663 2,854 Prepaid VAT 40,429 - - Other receivables (14,288) (22,704) (2,739) Due from related companies 47,609 (211,863) (25,557) Increase (decrease) in liabilities: Accounts payable 39,907 (19,731) (2,380) Notes payable 2,970 8,100 977 Accrued liabilities and other payables (15,760) 52,644 6,350 Income tax payable 16,703 20,699 2,497 Taxes other than income 2,793 52,176 6,294 Due to related companies (4,957) 9,439 1,139 Due to shareholders (2,854) - - -------- -------- ------- Net cash used in operating activities (2,061) (19,608) (2,365) -------- -------- ------- Cash flows from investing activities: Disposal of long term investment 426 - - Proceeds from disposal of fixed assets - (134) (16) Additions to fixed assets (50,034) (13,345) (1,610) -------- -------- ------- Net cash used in investing activities (49,608) (13,479) (1,626) -------- -------- ------- Cash flows from financing activities: Net increase in bank loans 63,356 16,896 2,038 Repayment of other loans (33,810) - - Proceeds from sale of common stock, net of costs 35,480 - - -------- -------- ------- Net cash provided by financing activities 65,026 16,896 2,038 Net increase (decrease) in cash and cash equivalents 13,357 (16,191) (1,953) Cash and cash equivalents, at beginning of period 30,944 87,428 10,546 -------- -------- ------- Cash and cash equivalents, at end of period 44,301 71,237 8,593 ======== ======== ======= Non-cash transaction: Financing of lease arrangement 8,453 4,395 530 ======== ======== =======
The accompanying notes form an integral part of these consolidated condensed financial statements. 6 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 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 June 30, 1997, the results of operations for the three months and six months ended June 30, 1996 and 1997, and the changes in cash flows for the six months ended June 30, 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 AND SIX MONTHS ENDED JUNE 30, 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 and six months ended June 30, 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 and six months ended June 30, 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 June 30, 1997 of US$ 1.00 = RMB 8.29. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rate on June 30, 1997 or at any other certain rate on June 30, 1997. 8 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 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 June 30, 1997:
December 31, 1996 June 30, 1997 ----------------- ------------- RMB US$ RMB US$ Raw materials 102,856 12,407 87,105 10,507 Work-in-progress 121,847 14,698 132,498 15,983 Finished goods 257,121 31,016 239,180 28,852 ------- ------- ------- ------ 481,824 58,121 458,783 55,342 Less: Allowance for obsolescence (5,415) (653) (6,037) (729) ------- ------- ------- ------ Inventories, net 476,409 57,468 452,746 54,613 ======= ======= ======= ======
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 AND SIX MONTHS ENDED JUNE 30, 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 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 the principal amount outstanding together with any accrued but unpaid interest together with an amount that would enable the Investors to realize 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 realize 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 suspension from trading on NASDAQ; 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 earnings 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. 10 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 (Amounts in thousands, except number of shares and per share data) 6. CONVERTIBLE DEBENTURES (continued) 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. 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). Such shares have been registered for resale with the Securities and Exchange Commission. 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 interest 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 THREE MONTHS ENDED JUNE 30, 1996 AND 1997: 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, 1996 and 1997.
Three Months Ended June 30, --------------------------- 1996 1997 ---- ---- RMB % RMB % --- --- --- --- Sales 249,609 100.0 244,626 100.0 Cost of sales (153,028) (61.3) (148,457) (60.7) -------- ----- -------- ----- Gross profit 96,581 38.7 96,169 39.3 Selling expenses (6,165) (2.5) (6,115) (2.5) General and administrative expenses (27,971) (11.2) (25,072) (10.3) Interest expenses (16,451) (6.6) (18,423) (7.5) -------- ----- -------- ----- Income before income taxes 45,994 18.4 46,559 19.0 Provision for income taxes (7,775) (3.1) (7,671) (3.1) -------- ----- -------- ----- Income before minority interests 38,219 15.3 38,888 15.9 Minority interests (21,402) (8.6) (21,110) (8.6) -------- ----- -------- ----- Net income 16,817 6.7 17,778 7.3 ======== ===== ======== =====
12 Sales ----- Sales for the three months ended June 30, 1997 decreased by RMB 4,983 or 2% to RMB 244,626, as compared to RMB 249,609 for the three months ended June 30, 1996. The decrease in sales was a result of the Company's efforts to adjust to tightened credit conditions in China. The Company has responded to such conditions by enhancing its credit review procedures and limiting sales to customers where collectability was uncertain. Sales for Harbin Bearing for the three months ended June 30, 1997 decreased by RMB 9,113 or 3.9% to RMB 233,342 as compared to RMB 242,455 for the three months ended June 30, 1996. However, this decrease was partially offset by an increase in sales for Southwest Products by RMB 4,130 or 57.7% to RMB 11,284 for the three months ended June 30, 1997 as compared to RMB 7,154 for the three months ended June 30, 1996. Cost of Sales/Gross Profit -------------------------- Cost of sales for the three months ended June 30, 1997 decreased to RMB 148,457 as compared to RMB 153,028 for the three months ended June 30, 1996. The cost of sales for Harbin Bearing for the three months ended June 30, 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 June 30, 1997 and 1996 was calculated on an actual basis. Gross profit decreased by RMB 412 or 0.4% for the three months ended June 30, 1997 as compared to the three months ended June 30, 1996. The decrease in gross profit was attributable to the decrease in sales. Gross profit as a percentage of sales increased slightly to 39.3% in 1997 from 38.7% in 1996 primarily due to a change in 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 June 30, 1997 decreased by RMB 50 or 0.8% to RMB 6,115 as compared to RMB 6,165 for the three months ended June 30, 1996. The decrease in selling expenses was due from the decrease in sales. 13 General and Administrative Expenses - ----------------------------------- General and administrative expenses for the three months ended June 30, 1997 decreased by RMB 2,899 or 10.4% to RMB 25,072 as compared to RMB 27,971 for the three months ended June 30, 1996. General and administrative expenses as a percentage of sales decreased to 10.3% in 1997 from 11.2% in 1996. The decrease was primarily due to an aggregate cash discount of RMB 6,507 which was granted during the three months ended June 30, 1996 as an incentive 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, 1997. The above decrease was then offset by the following increases: a. An increase in staff costs of RMB 743 associated with the U.S. engineering program at Harbin Bearing, which began in October 1996. b. An increase in the general provision for doubtful accounts of RMB 2,000 during the three months ended June 30, 1997. c. An increase in administrative staff costs by RMB 912 as a result of increased compensation paid to employees. Interest Expense ---------------- Interest expense for the three months ended June 30, 1997 increased by RMB 1,972 or 12% to RMB 18,423 as compared to RMB 16,451 for the three months ended June 30, 1996. The increase in interest expense was primarily attributable to the inclusion of RMB 2,885 of Convertible Debenture interest calculated at the rate of 12% per annum. The interest from Convertible Debentures, which began on August 23, 1996, was offset by a 0.08% decrease in the interest rate on new short term bank loans also effective on August 23, 1996. Net Income ---------- As a result of the aforementioned factors, net income increased by RMB 961 or 5.7% to RMB 17,778 for the three months ended June 30, 1997 as compared to RMB 16,817 for the three months ended June 30, 1996. 14 SIX MONTHS ENDED JUNE 30, 1996 AND 1997: 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, 1996 and 1997.
Six Months Ended June 30, ------------------------- 1996 1997 ---- ---- RMB % RMB % --- --- --- --- Sales 465,689 100.0 485,843 100.0 Cost of sales (285,917) (61.4) (295,825) (60.9) -------- ----- -------- ----- Gross profit 179,772 38.6 190,018 39.1 Selling expenses (12,371) (2.7) (11,946) (2.5) General and administrative expenses (49,988) (10.7) (48,282) (9.9) Interest expenses (30,421) (6.5) (36,100) (7.4) -------- ----- -------- ----- Income before income taxes 86,992 18.7 93,690 19.3 Provision for income taxes (14,420) (3.1) (15,723) (3.2) -------- ----- -------- ----- Income before minority interests 72,572 15.6 77,967 16.1 Minority interests (39,690) (8.5) (43,271) (8.9) -------- ----- -------- ----- Net income 32,882 7.1 34,696 7.2 ======== ===== ======== =====
Sales ----- Sales for the six months ended June 30, 1997 increased by RMB 20,154 or 4.3% to RMB 485,843 as compared to RMB 465,689 for the six months ended June 30, 1996. The increase in sales was due to: An overall increase in the domestic (Chinese) quantity demand for bearings primarily in the automobile and machine tooling industries in the first quarter. This was offset as a result of the Company's efforts to adjust to tightened credit conditions in China. The Company has responded to such conditions by enhancing its credit review procedures and limiting sales to customers where collectability was uncertain. Sales for Harbin bearing for the six months ended June 30, 1997 increased by RMB 14,805 or 3.3% to RMB 464,421 as compared to RMB 449,616 for the six months ended June 30,1996. This increase was further enhanced by an increase in sales by Southwest Products in the amount of RMB 5,439 or 33.3% to RMB 21,422 for the six months ended June 30, 1997 as compared to RMB 16,073 for the six months ended June 30, 1996. Cost of Sales\Gross Profit -------------------------- Cost of sales for the six months ended June 30, 1997 increased to RMB 295,825 as compared to RMB 285,917 for the six months ended June 30, 1996. The cost of sales for Harbin 15 Bearings for the six months ended June 30, 1997 and 1996 were calculated using the gross profit method by reference to average annual gross profit ratios. The cost of sales for Southwest Products for the six months ended June 30, 1997 and 1996 was calculated on an actual cost basis. Gross profit increased by RMB 10,246 or 5.7% for the six months ended June 30, 1997 as compared to the six months ended June 30, 1996. The increase in gross profit was attributable to the increase in sales. Gross profit as a percentage of sales increased to 39.1% in 1997 from 38.6% in 1996 due to the change in product mix from small and medium sized bearings to higher margin medium and large sized bearings. Selling Expenses ---------------- Selling expenses for the six months ended June 30, 1997 decreased by RMB 425 or 3.4% to RMB 11,946 as compared to RMB 12,371 for the six months ended June 30, 1996. Although royalty costs and government taxes in the PRC increased following the increase 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 2.7% in 1996 to 2.5% in 1997. General and Administrative Expenses ----------------------------------- General and administrative expenses for the six months ended June 30, 1997 decreased by RMB 1,706 or 3.4% to RMB 48,282 as compared to RMB 49,988 for the six months ended June 30, 1996. General and administrative expenses as a percentage of sales decreased to 9.9% in 1997 from 10.7% in 1996. Significant factors affecting the change in general and administrative expenses between 1996 and 1997 were as follows: a. An increase in staff costs of RMB 1,385 associated with the U.S. engineering program at Harbin Bearing, which began in October 1996. b. An aggregate cash discount of RMB 6,507, which was granted during the six months ended June 30, 1996 as incentive to customers for early settlement of debt in order to accelerate cash collections. No such discount was granted during the six months ended June 30, 1997. c. An increase in the general provision for doubtful accounts of RMB 2,000 during the six months ended June 30, 1997. d. A management fee payable to the Sunbase International of RMB 2,281 for the six months ended June 30, 1997 where no such fee was paid during the six months ended June 30, 1996. This management fee was for rent, utilities, and other administrative costs born by the parent. e. A loss on the disposal of fixed assets of RMB 582 for the six months ended June 30, 1997 whereas no gain or loss on the disposal of fixed assets was recorded during the six months ended June 30, 1996. f. An increase in property tax of RMB 1,062 in the six months ended June 30, 1997 as a result of an increase in fixed assets. No such tax was paid during the six months ended June 30, 1996. g. An increase in administrative staff costs by RMB 1,647 as a result of increased 16 compensation paid to workers. Interest Expense ---------------- Interest expense for the six months ended June 30, 1997 increased by RMB 5,679 or 18.7% to RMB 36,100 as compared to RMB 30,421 for the six months ended June 30, 1996. The increase in interest expense was primarily attributable to the inclusion of RMB 5,724 of Convertible Debenture interest calculated at the rate of 12% per annum, which began on August 23, 1996. Net Income ---------- As a result of the aforementioned factors, net income increased by RMB 1,814 or 5.5% to RMB 34,696 for the six months ended June 30, 1997 as compared to RMB 32,882 for the six months ended June 30, 1996. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES For the six months ended June 30, 1997, the Company's operations utilized cash resources of RMB 19,608, as compared to RMB 2,061 utilized for the six months ended June 30, 1996. The Company's net working capital increased by RMB 79,428 at June 30, 1997 to RMB 484,046 as compared to RMB 404,618 at December 31, 1996, and the Company's current ratio at June 30, 1997 was 1.52:1 as compared to 1.52:1 at December 31, 1996 and 1.39:1 at June 30, 1996. Accounts receivable increased by RMB 50,761 or 16.2% to RMB 364,552 at June 30, 1997, as compared to RMB 313,791 at December 31, 1996. Due from related companies also increased by RMB 211,863 during the six months ended June 30, 1997. Both increases are mainly a result of credit terms granted on sales made in the period. INVESTING ACTIVITIES Capital expenditures for the six months ended June 30, 1997 of RMB 13,345 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, as well as short-term and long-term bank loans. There are no other material capital expenditures expected in the near future. There is also no dividend restriction on any bank loans. 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 six months ended June 30, 1997, the net increase in bank loans (after deducting repayment) was RMB 16,896, 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 17 capital requirements. The Company believes that Southwest Products will be able to continue to maintain and expand its bank borrowings under existing terms and conditions. Pursuant to a Subscription Agreement dated August 2, 1996, (the "Subscription Agreement"), among China Bearing, Asean Capital Limited, China International Bearing Holdings Limited, the Company and Southwest Products (collectively, the "Sunbase Group"); Glory Mansion Limited, Wardley China Investment Trust, MC Private Equity Partners Asia Limited and Chine Investissement 2000 (collectively the "Investors"), on August 23, 1996, China Bearing issued an aggregate of US$ 11,500,000 principal amount of Convertible Debentures (the "Convertible Debentures") to the Investors. Unless the Convertible Debentures have been converted, the Convertible Debentures are due and payable in August, 1999 (the "Maturity Date"). The Convertible Debentures bear interest at the rate of the higher of (i) 5% per annum (net of withholding tax, if applicable) and (ii) such percentage of the dividend yield calculated by reference to dividing the annual dividend declared per share of Common Stock of the Company by the Conversion Price (as hereinafter defined). Interest is payable quarterly. The Investors have the right to convert at any time the whole or any part the principal amount of the Convertible Debentures into shares of the Common Stock of the Company. The Conversion Price (the "Conversion Price") 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 the principal amount outstanding together with any accrued but unpaid interest together with an amount that would enable the Investors to realize an aggregate internal rate of return of 12% per annum on the cost of their investment. In addition, if any of the events of default specified in the Convertible Debentures occurs, the Convertible Debentures are automatically due and payable at the principal amount outstanding together with accrued interest and an amount that would enable the Investors to realize 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 suspension from trading on NASDAQ; 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 earnings 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 18 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. 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 six months ended June 30, 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 costs of inflation to its 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 labors cost due to increases in employees wages. However, the Company has generally managed to offset the effects of inflation through improved operating efficiencies. 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$, could have a material adverse effect upon the results of operations and financial position of the Company as measured in US$. 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 8.29 at June 30, 1997. 19 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 June 30, 1997: None 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Sunbase Asia, Inc. ------------------ (Registrant) Date: August 13, 1997 By: /s/ William McKay ----------------- William McKay Chief Executive Officer and President (Duly Authorized Officer) Date: August 13, 1997 By: /s/ (Roger) Li Yuen Fai ----------------------- (Roger) Li Yuen Fai Vice President and Chief Financial Officer (Principal Financial Officer) 21 EX-11 2 COMPUTATION OF EARNINGS EXHIBIT 11 ---------- SUNBASE ASIA, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (Amounts in thousands, except number of shares and per share data)
Six Months Ended June 30, Three Months Ended June 30, ------------------------- --------------------------- 1996 1997 1997 1996 1997 1997 RMB RMB US$ RMB RMB US$ --- --- --- --- --- --- PRIMARY Net income, as reported 32,882 34,696 4,185 16,817 17,778 2,145 ========== ========== ========== ========== ========== ========== Weighted average number of shares of common stock outstanding: Shares of common stock outstanding on January 1 11,700,063 12,700,109 12,700,109 11,700,063 12,700,109 12,700,109 Shares issued as a result of rounding from reverse stock split 41 31 31 41 31 31 1,000,000 shares of common stock issued on June 10, 1996 109,890 - - 219,780 - - ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of shares of common stock outstanding 11,809,994 12,700,140 12,700,140 11,919,884 12,700,140 12,700,140 Shares of common stock issuable assuming conversion of the Convertible Preferred Stock - Series A 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 - Series B 680,000 680,000 680,000 680,000 680,000 680,000 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 16,089,994 16,980,140 16,980,140 16,199,884 16,980,140 16,980,140 ========== ========== ========== ========== ========== ========== Earnings per common share - Primary 2.04 2.04 0.25 1.04 1.05 0.13 ========== ========== ========== ========== ========== ==========
22 SUNBASE ASIA, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (Amounts in thousands, except number of shares and per share data)
Six Months Ended June 30, Three Months Ended June 30, ------------------------- --------------------------- 1996 1997 1997 1996 1997 1997 RMB RMB US$ RMB RMB US$ --- --- --- --- --- --- FULLY DILUTED Net income, as reported 32,882 34,696 4,185 16,817 17,778 2,145 Add after tax interest expense applicable to Convertible Debentures - 5,724 690 - 2,885 348 ---------- ---------- ---------- ---------- ---------- ---------- Net income, as adjusted 32,882 40,420 4,875 16,817 20,663 2,493 ========== ========== ========== ========== ========== ========== Weighted average number of shares of common stock outstanding: Shares of common stock outstanding on January 1 11,700,063 12,700,109 12,700,109 11,700,063 12,700,109 12,700,109 Shares issued as a result of rounding from reverse stock split 41 31 31 41 31 31 1,000,000 shares of common stock issued on June 10, 1996 109,890 - - 219,780 - - ---------- ---------- ---------- ---------- ---------- ---------- Weighted average number of shares of common stock outstanding 11,809,994 12,700,140 12,700,140 11,919,884 12,700,140 12,700,140 Shares of common stock issuable assuming conversion of the Convertible Preferred Stock - Series A 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 - Series B 680,000 680,000 680,000 680,000 680,000 680,000 Shares of common stock issuable assuming conversion of the Convertible Debentures on August 23, 1996 - 2,300,000 2,300,000 - 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 16,089,994 19,280,140 19,280,140 16,199,884 19,280,140 19,280,140 ========== ========== ========== ========== ========== ========== Earnings per common share - Fully Diluted 2.04 2.10 0.25 1.04 1.07 0.13 ========== ========== ========== ========== ========== ==========
23 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, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 8,593 0 108,476 0 54,613 171,682 76,385 0 252,174 113,293 0 0 8,784 13 48,848 252,174 58,606 58,606 35,685 35,685 0 0 4,354 11,302 1,897 4,185 0 0 0 4,185 0.25 0.25
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