U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
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
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock
Indicate by check mark whether the Registrant: (1) 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 15, 1996, 11,700,063 shares of Common Stock were outstanding.
The aggregate market value of the outstanding stock of the Registrant held by
non-affiliates on March 15, 1996 was $11,520,707.
Documents incorporated by reference: Certain exhibits are incorporated by
reference to the Registrant's Form 8-K dated December 22, 1994, the Registrant's
Form 8-K/A dated December 22, 1994 and the Company's Form 10-K dated March 3,
1995.
The total number of pages in this report is 255. The exhibit index is
located on pages 39 through 42.
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PART I.
Item 1. BUSINESS.
General
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Sunbase Asia, Inc., a Nevada corporation (the "Company," which term
shall include, when the context so requires, its subsidiaries and affiliates),
is engaged in the design, manufacture and distribution of a broad range of
bearing products in the People's Republic of China ("China" or the "PRC"), the
United States ("US"), Europe, Asia, South America and Africa. The Company's
subsidiary in China, Harbin Bearing Company, Ltd. ("Harbin Bearing"), employs
approximately 13,000 personnel. Harbin Bearing is the largest precision bearing
manufacturer and the third largest bearing manufacturer overall in China.
Harbin Bearing produces a wide variety of precision and commercial-grade,
rolling-element bearings in sizes ranging from 10mm to 1000mm (internal
diameter). Rolling-element bearings use small metal balls or cylinders to
facilitate rotation with minimal friction and are typically used in vehicles,
aircraft, appliances, machine tools, general machinery and virtually any product
that contains rotating or revolving parts.
On January 16, 1996 (effective December 29, 1995), the Company
acquired Southwest Products Company ("Southwest Products"), an engineering-
intensive company that produces precision spherical bearings for US, European
and Asian aerospace and high tech commercial applications and the US military.
Precision bearings are bearings that are produced to more exacting dimensional
tolerances and to higher performance characteristics than standard commercial
bearings. The manufacturing process for precision bearings generally requires
the labor of highly-skilled machinists and the use of sophisticated machine
tools. Southwest Products recently established a joint venture company in
Shanghai, China (the "Shanghai Joint Venture") that will begin production in
1996 of a line of precision grade, high-profit-margin spherical bearings
primarily for distribution to international aircraft original equipment
manufacturers (OEMs) that have major "offset" commitments to purchase made-in-
China parts.
Over 90% of Harbin Bearing's sales are made to the OEM and replacement
markets in China. Based on low production costs in China and the on-going
world-wide demand for bearings, management has been increasing Harbin Bearing's
efficiency and production output with the intent of creating a substantial
export business to complement the Company's strong domestic position in the
Chinese markets. Historically, Harbin Bearing export sales have been made
through trade intermediaries and by receiving customer orders that are placed
directly to its offices in China. Southwest Products will provide engineering
and technical support, and will market and distribute Harbin Bearing products
internationally, focusing on exports of the products to the US. In addition,
Southwest Products will assist Harbin Bearing in implementing US manufacturing
methods, improving quality control procedures and in developing new products at
Harbin Bearing's facilities in China.
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The Company's overall plan is to combine the management style,
technology, quality control and production methods found in the West with low-
cost Chinese manufacturing capacity so as to become a major international
designer, manufacturer and distributor of bearing products.
The following diagram shows the corporate structure of the Company and
its affiliated entities.
[CHART APPEARS HERE]
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HARBIN BEARING
Harbin Bearing presently produces a wide range of bearings, ranging
from 10mm to 1000mm (internal diameter). Harbin Bearing specializes in the
manufacture of precision bearings and has the capability of manufacturing more
than 5,000 of the approximately 6,000 different specifications of bearings that
are available in China today. Harbin Bearing produces seven major types of
bearings: deep-groove ball bearings, self-aligning ball bearings, cylindrical
rolling bearings, angular-contact ball bearings, tapered rolling bearings,
thrust ball bearings and linear-motion ball bearings. Each of such bearings are
manufactured in micro, small, medium and large sizes. In 1995, deep-groove
bearings comprised approximately 75% of Harbin Bearing's sales in units, and
approximately 43% of sales in revenue.
Based on increasing demand and profit opportunities, Harbin Bearing
increased its production of all sizes and grades of cylindrical rolling bearings
and angular-contact ball bearings, (particularly in medium sizes and precision
grades). In order to enhance the profitability for deep-groove ball bearings,
Harbin Bearing has shifted its production mix of such bearings by increasing its
production of medium-sized deep-groove ball bearings (especially in precision
grades). The shift in production to medium-sized and precision grade bearings
has enabled Harbin Bearing to expand its customer base, improve its profit
margins, and meet the demand of many of its existing PRC customers for a full
line of bearings. In addition, Harbin Bearing plans to increase its production
of high-speed angular-contact and precision angular-contact ball bearings and to
generally improve the quality of its non-precision bearings so they meet ISO
standards.
Harbin Bearing has recently expanded its product line to include self-
aligning roller bearings. Self-aligning roller bearings are used predominantly
in mining and extraction machinery. Management believes that based on the PRC
government's policy of developing its mining and extraction industry, the demand
for self-aligning roller bearings will likely remain strong in the near future.
Harbin Bearing has also recently expanded its product line to include
railway freight car bearings (Harbin Bearing is currently the leading supplier
of railway passenger car bearings in China). Management believes that demand
for railway freight car bearings is growing rapidly and that demand for such
bearings will remain strong. Pursuant to the Strategic Plan, Harbin Bearing has
installed certain equipment which has enabled Harbin Bearing to commence the
production of railway freight car bearings and increase its production of
railway passenger car bearings.
Marketing
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The major end-users of Harbin Bearing's products are manufacturers of
electrical machinery, machine tools, mining and extraction machinery,
automobiles, motorcycles, household appliances and aircraft and aerospace
equipment. In 1995, approximately 32% of Harbin Bearing's sales were made to
OEMs in the machinery, transportation and electrical equipment
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industries representing, respectively, approximately 28%, 30% and 35% of its
total sales to OEMs. The remaining 7% of sales were made to miscellaneous
categories of OEM customers. Approximately 68% of Harbin Bearing's sales in
1995 were made to distributors.
Harbin Bearing has 18 sales offices in major cities in China,
including Beijing, Shanghai and Guangzhou. All sales are coordinated through
Harbin Bearing's headquarters in Harbin, including sales to local distributors
and transportation industries, overseas agents, and domestic import and export
companies. Harbin Bearing's sales force consists of 152 sales personnel and 288
support personnel who are responsible for product promotion, marketing,
aftermarket services and technical support. Harbin Bearing sells its bearings
in China and abroad under the "HRB" trademark.
Harbin Bearing's products are considered to be the highest grade
inside of China and medium-grade in world-wide markets. Harbin Bearing's
pricing is considered to be very competitive in the international market. In
1994, the US was Harbin Bearing's largest export market, accounting for
approximately 60% of total export sales. It is the Company's intention to
increase Harbin Bearing's export sales to the US, Europe and certain developing
countries in South America and Southeast Asia.
Harbin Bearing delivers its bearings by rail (approximately 80% of
Harbin Bearing's domestic deliveries are made by rail), truck, ocean freight and
air freight. Harbin Bearing leases trucks from Harbin Precision Machinery
Manufacturing Company which are used mostly for short-haul deliveries. See ITEM
13, "CERTAIN RELATIONSHIPS AND TRANSACTIONS." Bearings which are exported are
generally shipped by ocean freight.
Chinese Bearing Industry
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Based on the Ministry of Machinery & Industry's 1993 Annual Report,
China's aggregate domestic demand for bearings in 1995 was expected to be
approximately 900 million units, representing an average annual increase of
approximately 17% based on China's aggregate demand of 560 million units in
1992. Prior to 1989, under China's planned economy, the production, pricing and
sales of bearings were fixed by the Chinese government. Beginning in 1988,
demand for bearings exceeded the available supply, particularly for small and
medium-sized bearings. Beginning in 1989, in connection with the implementation
of economic reform measures undertaken by the Chinese government, production
quotas and raw material subsidies were abolished. By 1991, competition among
manufacturers of low-quality, small and medium-sized bearings had increased.
This competition created an excess supply of such bearings and resulted in a
decrease of profit margins. In July 1992, all price controls on bearing prices
were removed. Even though supply still generally exceeds demand for small and
medium-sized bearings in the low end market, demand continues to be strong for
higher-quality small and medium-sized bearings used in the automobile,
motorcycle, agricultural, electrical appliance and machinery industries.
Overall, demand for bearings used in large agricultural machinery, mineral and
extraction machinery and electric generating equipment, and demand for
precision, special-purpose, large and extra-large-sized bearings continued to
grow through 1995.
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Competition
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Chinese Competition
Harbin Bearing's main competitors can be separated into three
principal groups: (i) two nationwide domestic bearing manufacturers with wide
product lines; (ii) small bearing production facilities which compete on a local
basis by manufacturing small-sized, commodity-type bearings; and (iii) foreign
bearing manufacturers. Harbin Bearing, Wafangdian Bearing Factory and Luoyang
Bearing Factory are the three largest bearing manufacturers in China, based on
1994 sales. The combined sales revenues of these three manufacturers accounted
for 30% of the US $1.09 billion of total sales revenue of China's bearing
industry (figures are approximate). By comparison, the aggregate sales revenue
of the fourth, fifth and sixth largest Chinese bearing manufacturers accounted
for only approximately 9.5% of the total sales revenue of China's bearing
industry. Wafangdian Bearing Factory does not produce high-precision aerospace-
quality rolling-element bearings, a market in which Harbin Bearing has a 70%
domestic share (the remaining 30% market share is split among Luoyang Bearing
Factory and Hongshan Bearing Factory). Luoyang Bearing Factory and Wafangdian
Bearing Factory produce nine of the ten classified types of bearings in China in
a full range of sizes. Wafangdian Bearing Factory, like Harbin Bearing,
produces a full line of rolling-element bearings, but it does not produce a full
series of sizes of bearings for the majority of its product line. Luoyang
Bearing Factory only produces large-size rolling-element bearings. In addition
to the manufacturers described above, there are approximately 270 other
manufacturers of ball bearings in China, including a number of small bearing
factories in China, located mainly in the coastal and southeastern provinces,
that were established after 1988 when demand for small-sized bearings greatly
exceeded the available supply. The bearings manufactured by these small
factories are generally of lower quality and are used mostly as replacement
bearings in the electrical appliance and agricultural equipment industry.
Harbin Bearing's other significant domestic competitors are mostly
manufacturers that specialize in certain types of bearings, such as Hongshan
Bearing Factory and Shanghai Micro Bearing Factory. Hongshan Bearing Factory,
located in Guizhou, produces mainly lower-rated precision bearings. Shanghai
Micro Bearing Factory produces almost exclusively small-sized deep-groove ball
bearings.
Chinese Competition from Imports
Foreign bearing manufacturers are able to supply types and grades of
bearings which are not available from Chinese domestic suppliers, particularly
precision bearings of the highest durability and quality. Imported foreign
bearings are generally higher in quality than Chinese-manufactured bearings, but
are also priced higher due to China's low production costs and the assessment on
imported bearings of a 15% or 20% import tariff. The 15% import tariff applies
to bearings imported from countries that have established a tax treaty with
China and the 20% import tariff applies to imports from other countries. Some
foreign bearing manufacturers have established bearing manufacturing facilities
in China, typically through joint ventures with
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local bearing manufacturers. Such ventures, if successful, would likely
increase competition for Harbin Bearing in the higher-quality and precision-
bearing market segments.
Competition in International Markets
In the international bearing markets, Harbin Bearing's main
competitors are Eastern European manufacturers and manufacturers located in
China. To a lesser extent, Harbin Bearing also competes with large
international bearing manufacturers such as SKF, FAG and NTN. Management
believes that the assistance of Southwest Products in implementing US
manufacturing methods and quality control procedures and in developing new
products, Harbin Bearing's general competitive position will be substantially
improved. In addition, Harbin Bearing will be able to compete in market
segments that demand products with higher precision levels and will more
effectively penetrate those market segments that utilize commodity-type
bearings.
Leading industrial countries such as the US, Japan and countries in
Europe impose import tariffs on bearings. For example, the US import tariff for
bearings is 9% for ball bearings and 5% for cylindrical bearings.
Raw Materials
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The principal raw materials used by Harbin Bearing to manufacture
bearings are carbon steel and stainless steel rod, wire and tubing. These
steels are specialized alloys designed for hardness, durability and resistance
to rust. A small amount of copper and aluminum tubing and rods are also used to
produce seals, cages and other ancillary bearing components. Harbin Bearing
sources most of its bearing steel directly from four domestic mills located in
Heilongjiang Province, Liaoning Province and Shanghai. Harbin Bearing imported
less than 1% of its raw materials in 1995.
In January 1993, the Chinese government lifted price controls on steel
products and, as a result, the price of bearing steel in 1993 increased by more
than 35.2% based on 1992 prices. The price of bearing steel in China is now
approximately the same as the international price of bearing steel and has
remained at approximately US $660.00 per ton since the end of 1993. Harbin
Bearing believes that its sources of bearing steel are stable and, consistent
with industry practice in China, has not entered into any long-term supply
contracts for bearing steel. Harbin Bearing generally maintains a raw material
inventory sufficient for approximately one-and-a-half months of production.
Railroad tracks leading directly to two of Harbin Bearing's raw material
warehouses are used exclusively to transport raw materials, such as bearing
steel, to Harbin Bearing.
In the future, Harbin Bearing intends to purchase bearing steel from
South Korea and other countries. South Korean steel is price-competitive and is
much higher quality than most Chinese steel. Accordingly, the use of South
Korean steel will improve the quality of
8
Harbin Bearing's products while reducing the amount of products that are
scrapped due to the use of lower-quality steel.
Workforce
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As of January 16, 1996, Harbin Bearing employs approximately 13,000
full-time personnel in the following areas: executive and administrative (658),
sales and service (507), manufacturing and production (11,492), and research and
development (319). Management believes that in general, its employee relations
are good. Harbin Bearing has recently begun to enter into employment contracts
with all of its employees. The use of such employment contracts is an example
of the steps Harbin Bearing is taking to raise its workforce productivity and
efficiency.
Harbin Bearing has begun to revise its compensation system to provide
incentives to employees by linking productivity with compensation. Part of the
revised compensation system was instituted in May 1994, and governs the wages of
production employees. Depending on actual productivity, which is determined
according to unit output and standard labor hours, a production employee may be
paid more or less than the average wage. Harbin Bearing has also revised its
compensation system with respect to its sales personnel. Harbin Bearing sets a
monthly sales target for each sales office and each salesman. If the target is
reached, the sales personnel will receive a bonus in addition to basic wages and
allowances. In 1995, the total labor cost of Harbin Bearing comprised
approximately 15% of total production costs.
The Harbin Municipal Government promulgated regulations that were
effective January 1994, which provide for the establishment of a pension fund
program to which both employer and employee must contribute. Harbin Bearing is
required to contribute a monthly amount equivalent to 20% of its employees'
aggregate monthly income, and each employee is required to contribute a monthly
amount that is equivalent to 2% of such employees' monthly income.
All of the employees of Harbin Bearing are members of a trade union.
To date, Harbin Bearing has not been subject to any strikes or other significant
labor disputes and is not a party to any collective bargaining agreements.
Harbin Bearing presently recruits graduates of the Harbin Bearing
Technical Institute and universities all over China and provides ongoing
training for its management and production employees in the form of a series of
training seminars.
SOUTHWEST PRODUCTS COMPANY
Southwest Products, located at a 55,000 square foot facility in
Irwindale, California, designs, engineers and manufactures custom, short-order
spherical bearing products, such as high-precision spherical bearings, rod-end
bearings, bushings and push-pull controls, for aerospace and high tech
commercial applications. Southwest Products employs 58 full-time
9
personnel in the following areas: executive and administrative (5); sales and
service (5); manufacturing (35) and engineering, research and development (13).
The average length of employee tenure at Southwest Products is in excess of
eight years.
Southwest Products specializes in the design and manufacture of
spherical bearings for use in extremely demanding and flight-critical
applications. Such bearings meet unique load and tolerance requirements and are
known as "Specials." Southwest Products produces small orders of custom
bearings, the sales price of which typically includes the cost of product
design, engineering and development. Southwest Products is respected worldwide
for its ability to engineer and produce precision bearings, which are used in
the Space Shuttle, commercial jet aircraft (Boeing and McDonnell Douglas),
military aircraft (including the B-2 Stealth Bomber, F-117 Stealthfighter, F-15,
F-16, C-17 and F-18), submarines, (Los Angeles Class, Ohio Class, Seawolf and
Centurion), and nuclear power plants. Southwest Products' bearings are used by
Northrop Grumman, Lockheed Martin, NASA, all US military services, Mitsubishi
Heavy Industries, Korean Heavy Industries (Hanjun), Fluor Daniel, General
Electric, Westinghouse, General Dynamics, Textron Marine, Ingalls Shipbuilding
and Newport News Shipbuilding. Southwest Products' bearings have been used by
NASA in all manned space programs since the launch of Mercury and are used in
most NASA orbiters, including Viking, Magellan and Galileo.
Southwest Products has operated continuously since it was established
in 1945. The assets of Southwest Products were purchased during a Chapter 11
bankruptcy proceeding in 1991 by an investment group led by James McN. Stancill,
a distinguished author and professor of finance at the University of Southern
California. The investment group developed a plan for Southwest Products
pursuant to which it would increase its production and sales of higher-volume
standard spherical bearings. Standard spherical bearings rely on technology
that is similar to the technology used to produce Specials, but require less
sophisticated design and manufacturing methods. Standards are produced and used
in substantially greater volume than Specials, and price and delivery are the
primary competitive factors. Generally, Standards are ordered in large
quantities for delivery over a number of years, whereas Specials are usually
ordered in very small quantities. Typically, Standards sell for about $25 per
unit while Specials sell for over $150 per unit. Certain Specials sell for
$25,000 per unit or more.
To facilitate its entrance into the Standards market, Southwest
Products has been developing its production capacity for standard spherical
bearings at the Shanghai Southwest Bearing Company, Ltd. Joint Venture
("Shanghai Joint Venture") and has contributed to the Shanghai Joint Venture
certain proprietary technology, engineering assistance, technical support,
training and plant management. The Shanghai Joint Venture partner has
contributed the plant (which is now operational), equipment and general labor
force. Upon completion of the transfer of certain technology (expected to be
completed by May of 1996), Southwest Products will have a 28% interest in the
Shanghai Joint Venture and the exclusive right to purchase up to 100% of the
Shanghai Joint Venture's production, with the exclusive rights to distribute all
of the Shanghai Joint Venture's products that are exported from China.
Southwest Products also has the right to appoint the General Manager, manage the
day-to-day operations and establish the long-term plans of the Shanghai Joint
Venture. Southwest Products has commenced the training of the Shanghai
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Joint Venture workforce and has completed the production of product prototypes.
Qualification testing to ensure that the products of the Shanghai Joint Venture
meet US Navy standards has begun, and commercial production is expected to
commence in the fall of 1996. See "Shanghai Joint Venture."
Southwest Products' Proprietary Technology
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Southwest Products manufactures both metal-on-metal bearings and self-
lubricating bearings, based on Southwest Products' design and on OEM
specifications. Self-lubricating bearings are lined with either Dyflon or
Kentlon, which are both proprietary liner systems of Southwest Products.
Kentlon is qualified by the United States Navy to Mil-B-81820, Mil-B-81934 and
Mil-B-81935. It is used in military aircraft, tanks, ground support equipment,
commercial aircraft, space vehicles, launch and payload systems and in the oil
refinery, automotive and heavy manufacturing industries. Dyflon is one of only
two liner systems in existence that is moldable and machineable that also
performs successfully when fully submersed in water. Accordingly, in addition
to the uses described above for Kentlon, Dyflon-lined parts are used in
submarines, surface ships and nuclear power plants.
Although Southwest Products has federally registered its trademarks
"Dyflon" and "Kentlon," Southwest Products has chosen not to patent its various
technologies because the specific formulae and methods for manufacturing Dyflon
and Kentlon would then become a matter of public record.
SHANGHAI JOINT VENTURE
In 1991, principals of Southwest Products met with principals of Hong
Xing Bearing Company ("HXBC") to discuss the establishment of a joint venture
between Southwest Products and HXBC that would manufacture standard spherical
bearings in Shanghai, PRC. Such a joint venture would assist Southwest Products
in effectively penetrating the Standards market by improving Southwest Products'
international cost competitiveness.
In late 1992, Southwest Products and HXBC signed a Technology Transfer
Agreement pursuant to which Southwest Products licenses technology to the
Shanghai Joint Venture and manages the Shanghai Joint Venture's manufacturing
activities. Because the types of bearings covered by the Technology Transfer
Agreement are restricted commodities covered by the US Export Administration
Regulations Commerce Control List, the transfer of technology relating to such
bearings was subject to Southwest Products receiving from the United States
Department of Commerce a Validated Export License ("License"), which permits the
technology to be transferred by Southwest Products to the PRC. The License was
issued in February 1994 after being reviewed and approved by the US Department
of Defense. To management's knowledge, Southwest Products is the only company
in the US to possess such a license.
Immediately following the issuance of the License, Southwest Products
and HXBC entered into a Joint Venture Agreement, thereby forming the Shanghai
Southwest Bearing
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Company, Ltd. Joint Venture, the main objective of which is to manufacture
standard spherical bearings primarily for sale outside the PRC. The transfer of
technology commenced in mid-1994 and the formal training by Southwest Products
of Chinese manufacturing personnel commenced in March 1995. The Shanghai Joint
Venture will employ 57 personnel in the following areas: executive, management
and administration (5), sales and service (2), manufacturing (40), product
quality and control (8), and engineering and research and development (2). The
Shanghai Joint Venture ordered new machinery and equipment for its facility in
mid-1994, most of which is already installed. The Shanghai Joint Venture is
located at a new 35,000 square foot facility and has the option to expand its
operation into an additional 50,000 square feet. The qualification of the
Shanghai Joint Venture's bearing prototypes by the United States Navy to the
Navy's Mil-B-81820, Mil-B-81934 and Mil-B-81935 standards will enable the
Shanghai Joint Venture to sell such bearings to substantially all international
users of such bearings. The worldwide annual market for bearings employing Mil-
B-81820 qualified liners is in excess of $400,000,000. Southwest Products will
supervise all aspects of the qualification process and anticipates that such
bearing prototypes will be qualified by summer 1996.
At present, the Boeing Commercial Airplane Group, McDonnell Douglas
Corporation and Airbus Industries have "offset" agreements with the PRC under
which these OEMs have committed to purchase equipment and parts from Chinese
producers for use on commercial aircraft as an "offset" to China's substantial
purchases of jet aircraft. Due to shortages of high-quality Chinese-made
aircraft parts, these OEMs have not been able to purchase a sufficient volume of
products from China at competitive prices to satisfy their purchase requirements
under the offset program. Although the Shanghai Joint Venture cannot sell its
products to these OEMs until the product prototypes have been qualified by the
US Navy, management and Boeing and McDonnell Douglas have engaged in preliminary
discussions regarding purchase of the Shanghai Joint Venture's products which,
management believes, will likely lead to sales of such products to these OEMs.
OPERATING IN CHINA
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Because the production operations of the Company are based to a
substantial extent in China, the Company (through Harbin Bearing and the
Shanghai Joint Venture) is subject to rules and restrictions governing China's
legal and economic system as well as general economic and political conditions
in that country. These include the following:
POLITICAL AND ECONOMIC MATTERS. Under its current leadership, the Chinese
government has been pursuing economic reform policies, which include the
encouragement of private economic activity and greater economic
decentralization. There can be no assurance, however, that the Chinese
government will continue to pursue such policies, or that such policies will be
successful if pursued. Changes in policies made by the Chinese government may
result in new laws, regulations, or the interpretation thereof, confiscatory
taxation, restrictions on imports, currency devaluations or the expropriation of
private enterprise which may, in turn, adversely affect the Company.
Furthermore, business operations in China can become subject to the risk of
nationalization, which could result in the total loss of investments in China.
Finally, economic
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development may be limited by the imposition of austerity measures intended to
reduce inflation, the inadequate development of an infrastructure, and the
potential unavailability of adequate power and water, transportation,
communication networks, raw materials and parts.
LEGAL SYSTEM. The PRC's legal system is a civil law system based on written
statutes. Unlike the common law system in the United States, decided legal
cases in the PRC have little value as precedents. Furthermore, the PRC does not
have a well-developed body of laws governing foreign investment enterprises.
Definitive regulations and policies with respect to such matters as the
permissible percentage of foreign investment and permissible rates of equity
returns have not yet been published, statements regarding these evolving
policies have been conflicting, and any such policies, as administered, are
likely to be subject to broad interpretation and modification, perhaps on a
case-by-case basis. As the legal system in the PRC develops with respect to
such new forms of enterprise, foreign investors may be adversely affected by new
laws, changes in existing laws (or interpretation thereof) and the preemption of
provincial or local laws by national laws. Some of the Company's operations in
China are subject to administrative review and approval by various national and
local agencies of the PRC government. Although management believes that the
Company's operations are currently in compliance with applicable administrative
requirements, there is no assurance that administrative approvals, when
necessary or advisable, will be forthcoming. In addition, although China has
promulgated an administrative law permitting appeal to the courts with respect
to certain administrative actions, this law appears largely untested in the
context of administrative approvals.
INFLATION/ECONOMIC POLICIES. In recent years, the Chinese economy has
experienced periods of rapid growth and high rates of inflation, which have,
from time to time, led to the adoption by the PRC government of various
corrective measures designed to regulate growth and contain inflation. In 1995,
China's overall inflation rate was estimated to be 14.8%, compared to 21.4% in
1994 and 13.2% in 1993. High inflation has in the past and may in the future
cause the PRC government to impose controls on prices, or to take other action
which could inhibit economic activity in China, which in turn could affect
demand for the Company's products. The Company carefully monitors the effects
of inflation on its performance in China, and Harbin Bearing is usually able to
increase its selling prices to shift a portion of its inflated costs to its
customers. The price of bearing steel, the major raw material used by Harbin
Bearing, remained fairly stable during 1994 and 1995 and the only major impact
of inflation on Harbin Bearing's costs was on the cost of labor (due to the
rising level of compensation of Harbin Bearing's employees). Due to economies
of scale and improved control of Harbin Bearing's production costs, management
believes that an increased inflation rate would have a favorable impact on its
market position, as smaller bearing manufacturers in China would have greater
difficulties in dealing with the effects of increasing inflation.
FOREIGN CURRENCY EXCHANGE. The Renminbi ("Rmb"), the currency of China, is not
a freely convertible currency. Both conversion of Rmb into foreign currencies
and the remittance of Rmb abroad are subject to PRC government approval. The
Company earns the majority of its revenues, and incurs the majority of its
costs, in Rmb. Prior to January 1, 1994, Rmb that were earned within the PRC
were not freely convertible into foreign currencies except with government
13
permission, at rates determined in place at swap centers, where the exchange
rates often differed substantially from the official rates quoted by the
People's Bank of China (the "PBOC"). On January 1, 1994, the official exchange
rate was abolished pursuant to a Notice (the "PBOC Notice") of the PBOC and a
new managed floating rate system was implemented. This new rate system
effectively replaced the dual exchange rate system with a unitary exchange rate
system. All future foreign currency exchange transactions are to be conducted
through a unified interbank foreign exchange trading market based upon rates set
by the PBOC. According to the PBOC Notice, enterprises operating in the PRC may
no longer sell their products in the PRC for foreign currency; all sales of
goods and services in the PRC must now be priced and paid for in Rmb. Domestic
enterprises are required to sell all of their foreign exchange revenues to the
authorized foreign exchange banks in the PRC and may obtain foreign currency for
expenditures only upon SAEC approval. However, Sino-foreign equity joint
ventures, such as the Shanghai Joint Venture, as foreign investment enterprises,
are not required to sell their foreign exchange revenues to such banks. Although
the China Foreign Exchange Center and the new rate system were fully established
as of April 1994, as of May 1, 1996, the swap centers have remained in
existence.
VOLATILITY OF EXCHANGE RATES. The January 1, 1994 establishment of the unitary
exchange rate system produced a significant devaluation of the Rmb, resulting in
the US Dollar-Rmb exchange rate increasing from $1.00 to Rmb 5.7 to
approximately $1.00 to Rmb 8.7. The US Dollar-Rmb exchange rate has been
relatively stable since January 1, 1994 and the exchange rate quoted by the PBOC
on December 31, 1995 was $1.00 to Rmb 8.32. However, the US Dollar-Rmb exchange
rate may vary in the future and, as in 1993, the US Dollar-Rmb exchange rate
could become volatile. Any devaluation of the Rmb against the US Dollar will
have an adverse effect upon the US Dollar equivalent of the Company's net income
and will increase the effective cost of any foreign currency expenses and
liabilities, including any distributions to the shareholders of the Company
which are to be made in US Dollars. Currently, the Company is unable to hedge
its US Dollar-Rmb exchange rate exposure in China because neither the PBOC nor
any other financial institution authorized to engage in foreign currency
transactions offers forward exchange contracts with respect to Rmb.
ORGANIZATION OF THE COMPANY
---------------------------
Harbin Bearing was the successor to the manufacturing operations of
Harbin Bearing General Factory (the "Bearing Factory"), a Chinese state-owned
enterprise established in 1950. Harbin Bearing was established in 1993 as a
joint stock limited company. Pursuant to an agreement between the Bearing
Factory and Harbin Bearing, the bearing manufacturing and sales business
together with certain assets and liabilities of the Bearing Factory were
transferred to Harbin Bearing (the "Restructuring"). Certain other assets and
liabilities were transferred to Harbin Precision Machinery Manufacturing Company
("Harbin Precision") and certain ancillary operations were transferred to Harbin
Bearing Holdings Company ("Harbin Holdings"). Harbin Holdings and Harbin
Precision were and are affiliates of the Harbin Municipal Government.
14
As part of the Restructuring, Sunbase International (Holdings) Ltd.
("Sunbase International"), a Hong Kong corporation, through a series of
affiliated entities, acquired an effective ownership interest in Harbin Bearing
of 51.4%. Substantially all of the remaining interests in Harbin Bearing were
and continue to be owned by the employees of Harbin Bearing (approximately 15%)
and Harbin Holdings. After the acquisition of the controlling interest in
Harbin Bearing, Sunbase International implemented various programs to strengthen
the business and operations of Harbin Bearing. These programs resulted in a
shift in product mix to larger, higher margin bearings which, in turn, increased
profitability. The work force was reduced approximately 25% with minimal
negative effects on production. Incentive-based pay programs and western-style
accounting and reporting systems were implemented to further strengthen and
improve Harbin Bearing's business and operations.
In December 1994, the Company (which was then called Pan American
Industries, Inc.) acquired a 51.4% effective interest in Harbin Bearing by
issuing to Asean Capital Limited ("Asean Capital") newly issued shares
representing a controlling interest in the Company. Asean Capital was, and is,
owned 90% by Sunbase International and 10% by an unrelated company, New China
Hong Kong Capital Ltd. ("New China Hong Kong"). See ITEM 13, "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
15
ITEM 2. PROPERTIES.
Harbin Bearing
- --------------
Harbin Bearing operates twelve finished product plants and seventeen
auxiliary plants. With the exception of a finished product plant in Wucangzian,
all of the Company's plants are located in four plant compounds in Harbin.
Harbin Bearing plans to relocate the Wucangzian finished product plant, now
located approximately 260 kilometers from the main site, to a new facility
currently under construction approximately 17 kilometers from the main site.
The Company believes the costs associated with the relocation to be
approximately RMB 27 million.
The Harbin branch office of the State Asset Administration Bureau has
granted Harbin Holdings the right to use the properties where Harbin Bearing's
production and other facilities, which include the Wucangzian finished product
plant and the four plant compounds. The site is approximately 540,000 km/(2)/
of which production facilities occupy approximately 290,000 km/(2)/ square
meters. Harbin Holdings has entered into a lease agreement with the Company for
use of its buildings for five years. See Item 13, "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
Southwest Products
- ------------------
Southwest Products leases a 55,000 square foot facility in Irwindale,
California on a month to month basis at a monthly rent of $14,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property subject to, any
pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1995.
16
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Commencing on February 9, 1996, the Company's Common Stock began trading
on the National Market of NASDAQ under the symbol ASIA. Prior thereto, the
Common Stock was listed for trading on the NASDAQ's Electronic Bulletin Board
(the "Bulletin Board") and on the Pink Sheets.
The following tables set forth the high and low closing prices of the
Company's Common Stock on NASDAQ or the Bulletin Board. Such prices reflect
prices between dealers in securities and do not include any retail markup,
markdown or commission and may not necessarily represent actual transactions.
There was no established trading market for the Company's Common Stock during
fiscal 1994.
High Low
------ -----
Fiscal 1995
-----------
Quarter Ended March 31, 1995 3 2
Quarter Ended June 30, 1995 5 1/2 2
Quarter Ended September 30, 1995 5 1/4 2
Quarter Ended December 31, 1995 6 4 1/2
Fiscal 1996
-----------
Quarter Ended March 31, 1996 6-1/32 7-7/8
The approximate number of record security holders of the Common Stock at
March 15, 1996 was 1,700.
The Company has paid no cash dividends on its Common Stock and has no
present intention of paying cash dividends in the foreseeable future. It is the
present policy of the Board of Directors to retain all earnings to provide for
the growth of the Company. Payment of cash dividends in the future will depend
upon, among other things, future cash flow and requirements for capital
improvements.
Applicable Chinese laws and regulations provide that a joint stock
company (such as Harbin Bearing) cannot distribute its after-tax earnings and
profits made in a fiscal year unless
17
the losses of the previous years have been made up and certain funds retained.
A joint stock company is required by applicable Company Law to reserve 10% of
its after-tax earnings and profits as the mandatory retained fund and 5% of its
after-tax earnings and profits as the public welfare fund. The joint stock
company does not have to reserve for the mandatory retained fund if the amount
of such fund has reached 50% of the company's registered capital. For 1994,
Harbin Bearing contributed 10% and 5%, respectively, of after-tax profits as
determined under Chinese accounting principles for such purposes. Distributions
of dividends by Harbin Bearing to its shareholders are required to be in
proportion to each shareholder's percentage interest in the Harbin Bearing.
All distributions by Harbin Bearing will be paid to its shareholders of
record, which include the joint venture partners. Applicable Chinese laws and
regulations require that, before a Sino-foreign equity joint venture (such as
the joint venture partners) distributes dividends, it must: (1) satisfy all tax
liabilities; (2) provide for losses in previous years; and (3) make allocations
of capital to its official surplus accumulation fund and public welfare fund.
The Company indirectly owns 99% and 99.9% of the two joint venture partners and,
therefore, approximately 1.1% of distributions received by such partners will be
paid to the Chinese parties of these joint ventures.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data (expressed in thousands) have been
derived from the audited financial statements of Harbin Bearing General Factory
for the year ended December 31, 1993 and the audited financial statements of the
Company for the years ended December 31, 1994 and 1995. All U.S. dollar amounts
have been converted from Renminbi based on the exchange rate on December 31,
1995 of $1.00 US to each RMB 8.32 as quoted at the People's Bank of China. Due
to the reorganization of the Harbin Bearing General Factory on January 1, 1994,
the 1993 financial information was prepared on a pro-forma basis as if the
acquisition of China Bearing and Harbin Bearing had occurred on January 1, 1993.
18
OPERATING DATA
PROFORMA
1993 1994 1995 1995
RMB RMB RMB US$
Net sales 687,064 719,842 672,359 80,812
Cost of sales (439,417) (441,854) (381,377) (45,838)
Gross profit 247,647 277,988 290,982 34,974
Selling, general and
administrative expense. (91,197) (95,218) (113,002) (13,582)
Interest expense, net (40,638) (43,446) (48,446) (5,822)
Foreign exchange gain/loss - 725 - -
Reorganization expenses (7,307) (7,307) - -
Income before income taxes 108,505 132,742 129,534 15,570
Provision for income taxes (16,700) (22,687) (20,472) (2,461)
Income before minority
interests 91,805 110,055 109,062 13,109
Minority interests (50,495) (58,447) (54,967) (6,607)
Net income 41,310 51,608 54,095 6,502
BALANCE SHEET
PROFORMA
1993 1994 1995 1995
RMB RMB RMB US$
Current Assets 580,412 893,994 1,032,600 124,110
Working Capital 256,004 247,990 306,288 36,812
Long-Term Debt 216,915 235,656 218,383 26,248
Minority Interests 229,728 288,175 343,142 41,243
Shareholders' Equity 189,267 248,182 330,565 39,731
Total Assets 960,318 1,418,017 1,618,402 194,520
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
- --------
The Company owns, through various subsidiaries and joint venture
interests, a 51.4% indirect ownership in Harbin Bearing, which develops and
manufactures bearings in China and sells bearings in China as well as western
countries, including the United States.
The Company produces seven types of bearings: deep groove ball
bearings, self-aligning bearings, cylindrical roller bearings, angular contact
ball bearings, tapered roller bearings, thrust bearings and linear-motion ball
bearings, with a focus on medium and large sized bearings which have a
relatively higher profit margin. During the year, 92 new bearing products were
introduced. These new bearing products are mainly medium and large sized self-
aligning ball bearings and angular contact ball bearings which are used for
motor vehicles and machine-tools applications, respectively.
The Company raised the selling price of all bearing products effective
July 1, 1995 by an average of 3-5% in order to cover increasing costs, as
compared to July 1, 1994 when there was a sales price increase of 5-8%.
In the last quarter of 1995, the Company changed its marketing
strategy by shifting smaller OEM accounts to designated distributors in order to
reduce marketing costs and credit risks.
Effective December 29, 1995, the Company acquired Southwest Products
Company ("Southwest Products") which is a small but strategically-positioned,
engineering-intensive company that produces precision spherical bearings for US,
European and Asian aerospace and high tech commercial applications and the US
military. Southwest Products recently established a joint venture company in
Shanghai, China (the "Shanghai Joint Venture") that is expected to begin
production in the second half of 1996 of a line of precision-grade, high-profit-
margin spherical bearings primarily for distribution to international aircraft
original equipment manufacturers ("OEMs") that have major "offset" commitments
to purchase made-in-China parts. The acquisition of Southwest Products has been
treated as a business combination and is accounted for under the purchase method
of accounting. However, since the acquisition was deemed to have been
consummated on December 29, 1995, the results of Southwest Products have not
been consolidated into the Company and will be included in the Company's
consolidated results of operations from January 1, 1996. The assets and
liabilities of Southwest Products have been incorporated into the consolidated
balance sheet of the Group at December 31, 1995.
After acquiring Southwest Products, the management of the Company has
developed a Strategic Plan to foster future growth. The Strategic Plan has
three main objectives:
20
1. To increase export sales of Harbin Bearing's products in the US
by selling its products through Southwest Products' distribution network, and by
changing its export product mix to meet the demands of the international
marketplace.
2. To transfer US manufacturing and product development expertise
and technology from Southwest Products to Harbin Bearing to increase production,
efficiency and product quality.
3. To achieve rapid growth of the Shanghai Joint Venture by
targeting customers with "offset" commitments to purchase made-in-China parts.
Unless specifically stated, all amounts in this Management's
Discussion and Analysis are in thousands (RMB000).
21
RESULTS OF OPERATIONS
- ---------------------
RESULTS FOR 1995 COMPARED TO 1994
Year ended Year ended
December 31, December 31,
1995 1994
RMB RMB
------------ ------------
Net sales 672,359 719,842
Cost of sales (381,377) (441,854)
-------- --------
Gross Profit 290,982 277,988
Gross Profit percentage 43.3% 38.6%
Selling expenses (18,942) (20,471)
General and Administrative
expenses (94,060) (74,747)
Interest Expense (48,446) (42,721)
Reorganization Expenses - (7,307)
-------- --------
Income Before Income Taxes 129,534 132,742
Provision for Income Taxes (20,472) (22,687)
-------- --------
Income Before Minority
Interests 109,062 110,055
Minority Interests (54,967) (58,447)
-------- --------
Net Income 54,095 51,608
======== ========
NET SALES
- ---------
Net sales decreased by RMB 47,483 or 6.6% in 1995 as compared to 1994. The
decrease was mainly due to the change in the Company's marketing strategy in
order to further enhance its credit control on sales in the last quarter of 1995
whereby a contracted sales order was entered into with a major distributor,
which is a related party beneficially owned by the Harbin Municipal Government.
Delivery was not made in respect of this transaction at December 31, 1995 and
thus this sale was not recognized in the Financial Statements. However, in
anticipation of this transaction, the Company reduced the delivery of its
products to other customers. As a result of the aforementioned contracted sales
order in the last quarter of 1995, the net reported sales in the last quarter of
1995 was RMB 21,289.
22
Throughout 1995, the Company continued to adjust its product mix by shifting
from small and medium sized bearings to higher margin medium and large sized
bearings in order to improve profitability and to cope with the growth in market
demand on these new products.
GROSS PROFIT
- ------------
Gross profit increased by RMB 12,994 or 4.7% in 1995 as compared to
1994. Gross profit as a percentage of revenue increased from 38.6% in 1994 to
43.3% in 1995. The increase in gross profit was mainly attributable to the
effect of the sales mix change to higher-margin products, the improved
operational efficiency and a reduction in purchase price of major raw materials.
In previous quarters in 1995, cost of sales was calculated with
reference to the average gross profit ratio for 1994, being 38.6% on revenue.
The average gross profit ratio for 1995 of 43.3% on revenue was computed from
actual results throughout the year after taking into account various year-end
closing inventory adjustments such as a write-back of obsolete inventories sold
during the year which amounted to RMB 15,805 and adjustment to reflect under
absorption of labor and overhead of approximately RMB 4,700. The gross profit
margin for 1995 would have been only 39.2% on revenue if no account was taken of
the year end adjustments on closing inventories.
SELLING EXPENSES
- ----------------
Selling expenses decreased by RMB 1,529 or 7.5% in 1995 as compared to
1994. The decrease was in line with the decrease in sales this year. Selling
expenses as a percentage of revenue has remained constant at a rate of 2.8%.
GENERAL AND ADMINISTRATIVE EXPENSES
- -----------------------------------
General and Administrative expenses increased by RMB 19,313 or 25.8%
in 1995 as compared to 1994. General and Administrative expenses as a
percentage of revenues increased from 10.4% to 14.0%. The increase in General
and Administrative expenses was mainly attributable to:
a. An increase in staff wages and welfare costs of RMB 7,550 as a
result of increments given to the staff this year.
b. There was a loss of RMB 4,829 on disposal of fixed assets as
compared to a gain on disposal of fixed assets of RMB 1,087 in 1994.
23
c. A cash discount of RMB 6,490 was granted in 1995 for incentives to
customers for early settlement of debt in order to accelerate the cash
collection. In 1995, an additional bad debt provision of RMB 2,627 was provided
(1994: RMB 11,300) on certain aged debt.
d. An increase in management fee of RMB 1,716 payable to Harbin
Bearing Holdings Company as a result of a 10% inflation adjustment.
e. An increase in insurance premium paid of RMB 1,979 on the increase
in assets.
INTEREST EXPENSE
- ----------------
Interest Expense increased by RMB 5,725 or 13.4% in 1995 as compared
to 1994. The increase was attributable to interest expense of 8% related to a
US$ 5,000 promissory note issued on December 30, 1994 and to a 1.3% increase in
interest rate on increased amounts of short-term bank loans effective July 1,
1995.
REORGANIZATION EXPENSES
- -----------------------
There was no similar charges in 1995 of the one time reorganization
expenses in 1994 which were incurred in connection with the acquisition of China
Bearing Holdings Limited.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
OPERATING ACTIVITIES
- --------------------
The Company utilized cash in operating activities of RMB 39,057 in
1995 as compared to RMB 86,312 used in operating activities in 1994. The
decrease in cash used in operating activities was mainly due to net improvements
in cash settlements from accounts receivable. The Company continues to
strengthen the enforcement of credit controls and the acceleration of cash
collections.
As of December 31, 1995, the Company's working capital had increased
to RMB 306,288 as compared to RMB 247,990 at December 31, 1994. The Company's
current ratio was 1.42:1 as of December 31, 1995 as compared to 1.38:1 at
December 31, 1994.
24
INVESTING ACTIVITIES
- --------------------
As of December 31, 1995, the Company had outstanding capital
expenditure commitments of RMB 46,027 (December 31, 1994: RMB 91,500). These
capital commitments are expected to be funded through December 1996.
Total capital expenditure for 1995 were RMB 92,571 and were mainly for
construction of new plant, buildings and renovating existing facilities and
equipment. They were financed primarily by internally generated funds and
short-term and long-term bank loans (see below).
FINANCING ACTIVITIES
- --------------------
The Company relies on both short-term and long-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, and are reviewed
on a revolving basis. During the year of 1995, new short-term bank loans (after
deducting repayment of previous loans) totaled RMB 49,735. The net proceeds
from short-term bank loans in 1995 were mainly utilized to fund capital
expansion projects.
Long-term bank loans have terms ranging from 2 to 4 years and are
utilized for funding capital expansion projects. During the year 1995, new
long-term bank loans after deducting repayment of previous loans totaled RMB
42,246.
The Company believes that it will be able to continue to maintain and
expand its bank borrowings under existing terms and conditions. The Company
believes that cash flow from operations, combined with cash and bank balances
and bank borrowings, will provide sufficient cash flow to finance internal
growth, capital projects and debt service requirements for the foreseeable
future.
EFFECT OF INFLATION
- -------------------
In China, the general inflation rate continued to be in excess of 10%
during the year 1995 but it is expected that the Chinese government will
continue to make substantial efforts to curb inflation over the near term.
During the last quarter of 1995, the inflation growth rate has begun to slow
down.
The Company constantly monitors the effects of inflation. In general,
the Company is able to raise its selling prices to shift a portion of the
inflated costs to the customers. The price of the major raw material used by
the Company (bearing steel) remained fairly stable during 1994 and 1995. The
major impact of inflation on cost was from labor costs due to
25
increases in employees wages. However, the improved operational efficiency, as
reflected by the increased gross profit ratio during the year of 1995, managed
to offset the effects of inflation.
RESULTS FOR ACTUAL 1994 COMPARED TO PROFORMA 1993
Actual Proforma
Year ended Year ended
December 31, December 31,
1994 1993
RMB RMB
------------ ------------
Sales 719,842 711,420
Sales Tax - (24,356)
-------- --------
Net sales 719,842 687,064
Cost of sales (441,854) (439,417)
-------- --------
Gross Profit 277,988 247,647
Gross Profit percentage 38.6% 36.0%
Selling Expenses (20,471) (14,765)
General and Administrative
expenses (74,747) (76,432)
Interest Expense (42,721) (40,638)
Reorganization Expenses (7,307) (7,307)
-------- --------
Income Before Income Taxes
and Minority Interests 132,742 108,505
======== ========
The above pro forma results for the year ended December 31, 1993 were
prepared on the basis as if the reorganization of Harbin Bearing General Factory
and the acquisition of China Bearing and the Company had occurred on January 1,
1993 which are extracted from the Unaudited Proforma Consolidated Statement of
Income for the year ended December 31, 1993 after giving effect to the proforma
adjustments described in further detail in the aforesaid Proforma Financial
Statements.
The proforma results of operations have been prepared for comparative
purposes only and do not purport to indicate the results of operation which
would actually have incurred had the acquisition been in effect on January 1,
1993 or which may occur in the future.
26
SALES
- -----
Sales increased by RMB 8,422 or 1.2% in 1994 compared to 1993. The
increase in sales was mainly due to general sales price increases.
GROSS PROFIT
- ------------
Gross profit increased by 12.3% or RMB 30,341 in 1994 compared to
1993. Gross profit as a percentage of revenue increased to 38.6% in 1994 from
34.8% in 1993, primarily due to the slight increase in general sales price and
the effect of the sales mix change to higher margin products and the change in
VAT system in China effective January 1, 1994.
SELLING EXPENSES
- ----------------
Selling expenses increased by 38.6% or RMB 5,706 in 1994 compared to
1993 which was mainly due to an increase in government taxes of RMB 7,651. This
was offset by a decrease in transportation expenses of RMB 1,500 in 1994
compared to 1993 as a result of the passing of its transportation costs directly
to certain customers arising from the introduction of the new VAT system in
China.
GENERAL AND ADMINISTRATION EXPENSES
- -----------------------------------
General and Administrative expenses decreased by 2.2% or RMB 1,685 in
1994 compared to 1993. General and Administrative expenses as a percentage of
revenues decreased from 10.7% to 10.4%. Although there was a large decrease in
the bad debt provision of RMB 17,000, this decrease was however largely offset
by a one-time formation expense of RMB 2,637 and special compensation payments
to workers for early retirement totalling RMB 7,243 in 1994. This was offset by
having no gain on disposal of fixed assets, whereas a gain was recorded in 1993
for RMB 4,700.
INTEREST EXPENSE
- ----------------
Interest expense increased 5.1% or RMB 2,083 in 1994 compared to 1993
which was mainly due to an increase in interest rates during 1994.
REORGANIZATION EXPENSES
- -----------------------
On a proforma basis, the one time reorganization expenses in
connection with the acquisition of China Bearing Holdings Limited were assumed
to be incurred on January 1, 1993.
27
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's overall cash position decreased by RMB 101,000 in 1994 from 1993.
The cash used in operating activities decreased from RMB 87,500 in 1993 to RMB
86,300 in 1994. The cash was mainly used to finance accounts receivable. In
1994, cash used in investing activities amounted to RMB 153,000 compared to RMB
26,000 in 1993. The increase was attributable to the investment in new
equipment and construction of a new plant in order to cope with the future
expansion. Cash from financing activities was decreased from RMB 266,500 in
1993 to RMB 138,300 in 1994. In 1994, the cash received was mainly in the form
of loans to finance working capital and capital projects whereas in 1993, the
cash from financing was mainly arising from equity financing for the joint
venture and employees' stock comprised RMB 300,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and exhibits are listed at Item 14 "Exhibits,
Financial Statement Schedules and Reports on Form 8-K".
Certain unaudited quarterly financial information is set forth in the
following table:
Net
Net Gross Net Income
Sales Profit Income Per Share
(Thousands of RMB, except per share data)
(Exchange Rate at 12/31/95: 8:32 RMB to $1)
1995 RMB RMB RMB RMB
First Quarter 198,854 76,758 15,328 1.00
Second Quarter 235,979 92,392 24,872 1.62
Third Quarter 216,237 84,336 18,846 1.23
Fourth Quarter 21,289 37,496 (4,861) (0.31)
1994
First Quarter 182,677 66,312 12,360 0.81
Second Quarter 208,362 80,259 21,715 1.42
Third Quarter 198,321 81,158 15,925 1.04
Fourth Quarter 130,482 50,259 1,608 0.1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not Applicable.
28
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
A. Directors
---------
The Board of Directors of the Company is comprised of only one class.
The Company's current directors are listed below. The Directors are elected to
serve until the following annual shareholders' meeting.
Name Age First Elected
- ---- --- -------------
Gunter Gao 40 1994
Billy Kan 43 1996
William McKay 41 1996
(Roger) Li Yuen Fai 35 1994
Linda Yang 35 1994
(Franco) Ho Cho Hing 43 1994
B. Executive Officers
------------------
The Company's current executive officers are listed below. Executive
officers are elected to serve until the following annual meeting of the
Company's Board of Directors:
Name Age Office First Elected
- ---- --- ------ -------------
Gunter Gao 40 Chairman 1994
William McKay 41 Chief Executive 1996
Officer and
President
(Roger) Li Yuen Fai 35 Vice President and 1994
Chief Financial Officer
(Dickens) Chang
Shing Yam 29 Chief Accounting 1995
Officer
(John) Chong Chi Yeung 28 Corporate Secretary 1995
GUNTER GAO, CHAIRMAN AND DIRECTOR, 40. Mr. Gao, a Hong Kong businessman who has
extensive business experience in China, is the Chairman of the Board and a
principal of Sunbase International, which indirectly owns a controlling position
in Sunbase Asia. Sunbase International has various industrial holdings in
China, in industries such as aviation, transportation, cement,
29
steel and retail. Mr. Gao is also the Chairman of the Board of Sunbase Asia.
Mr. Gao is responsible for the general strategy of the Company and maintains
overall control of the Company's operations. Mr. Gao is actively and directly
involved in all operational and strategic issues that require his experience and
expertise in handling a wide variety of Chinese business transactions. During
the 1980s, Mr. Gao engaged in trading and investment activities in industries
such as food, timber, real estate, coal and textiles. Based on his success in
these activities and with the support of several banks in China, Mr. Gao has
turned Sunbase International into a leading China industrial company. Mr. Gao
is currently a member of China's congress, known as the People's Political
Consultative Conference. Mr. Gao is the youngest member of the congress and is
widely respected for his contributions to the country's development. Mr. Gao's
strong reputation in China has enabled Sunbase International to engage in and
complete many difficult transactions, including acquiring a majority interest in
Harbin Bearing and obtaining a license to create an airline in China. Now known
as Northern Swan Airlines, this airline enjoys international prominence and the
financial support of the Bank of China and the People's Construction Bank of
China. Mr. Gao serves as a Senior Economic Advisor to several Chinese municipal
and provincial governments, including the governments of Tianjin, Hebei,
Xinjiang and Harbin. In addition, Mr. Gao is the deputy director of the Sino-
Foreign Entrepreneurs Cooperative Committee.
BILLY KAN, DIRECTOR, 43. Mr. Kan has been a director of Sunbase Asia since the
beginning of 1996. In his capacity at Sunbase International, Mr. Kan reports
directly to its Board of Directors and serves as the communications and support
link in various parts of the world. Mr. Kan holds a Bachelor of Science Degree
from the University of East Anglia, a United Kingdom university, and is a member
of The Institute of Chartered Accountants in England & Wales as well as the Hong
Kong Society of Accountants. Prior to joining Sunbase International, Mr. Kan
held many directorships and senior management positions in a wide range of
professions and industries including banking, retailing, manufacturing,
property, investment and corporate consulting.
WILLIAM MCKAY, CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR, 41. Mr. McKay
has recently been elected as the Chief Executive Officer, President and a
Director of Sunbase Asia, and has been a Director and President of Southwest
Products since 1991. Prior to becoming President of Southwest Products, he was
Southwest Products' General Manager since 1986. Mr. McKay has substantial
experience in conducting business with China, and is very familiar with Sino-
American joint venture law and policies. Mr. McKay was instrumental in
establishing the joint venture between Southwest Products and Shanghai Hong Xing
Bearing Factory. Mr. McKay is responsible for the day-to-day operations of, and
the long-term planning for, the Company in the areas of product development,
marketing, financing and general operations. Prior to jointing Southwest
Products, Mr. McKay practiced law, specializing in the areas of business and
real estate. Mr. McKay holds a Juris Doctorate Degree, Masters in Business
Administration and Bachelor of Arts degree with a major in History and minor in
International Relations from the University of Southern California.
(ROGER) LI YUEN FAI, GROUP FINANCIAL CONTROLLER, CHIEF FINANCIAL OFFICER, VICE-
PRESIDENT AND DIRECTOR, 35. Mr. Li has been the Group Financial Controller of
Sunbase International since
30
1994. He has been the Chief Financial Officer and a Director of Sunbase Asia
since 1995 and has recently been elected as the Vice-President of Sunbase Asia.
From 1990 to 1991 he was compliance manager of Hong Kong Securities Clearing
Company Limited. Mr. Li was employed by Coopers & Lybrand in Hong Kong from
1980 to 1990 (his most recent position was audit manager) and was a partner in a
Hong Kong accounting firm from 1992 to 1993.
LINDA YANG, DIRECTOR, 35. Ms. Yang has been the Executive Director and a
principal of Sunbase International since 1989. Ms. Yang was a co-founder of
Sunbase International, has extensive experience in China business operations and
holds a degree from a Chinese university. She is the wife of Gunter Gao.
(FRANCO) HO CHO HING, DIRECTOR, 43. Mr. Ho has been a Director of the New China
Hong Kong Group since 1993, and a Director of Sunbase Asia since 1995. Mr. Ho
is also a registered investment advisor with the Securities and Futures
Commission in Hong Kong. Mr. Ho held executive positions with Trenomics
Securities Limited (1981 to 1983), Shun Loong Bear Stearns Asia Limited (1985 to
1988) and Best Securities Company (1991 to 1993).
KEY MANAGEMENT
MR. MA JI BO, GENERAL MANAGER, 57. Mr. Ma is the General Manager of Harbin
Bearing and is responsible for the day-to-day operations of Harbin Bearing as
well as strategic planning in the areas of marketing, product development and
general operations. Mr. Ma has made significant contributions relating to the
design and manufacture of a broad range of Harbin Bearing's products. Mr. Ma
has been awarded various provincial and national Chinese awards for scientific
and technological progress in the Chinese bearing industry and holds a degree in
rocket science from Northwest China Engineering University.
MR. MEI HAI YOU, DEPUTY GENERAL MANAGER, 59. Mr. Mei is the Deputy General
Manager of Harbin Bearing where he has been employed for 35 years. Mr. Mei is
the head of Harbin Bearing's manufacturing operations and has extensive
experience in the fields of research and development, product development and
manufacturing engineering. Mr. Mei is the author of a number of works on
mechanical engineering and bearings and holds a degree in mechanical engineering
from Harbin Polytechnic University.
MR. ZHANG ZHENG BIN, DEPUTY GENERAL MANAGER, 50. Mr. Zhang has been employed by
Harbin Bearing as Deputy General Manager of Sales and Marketing for 10 years.
Mr. Zhang has extensive contacts in the Chinese engineering community and has
proven very effective at penetrating existing markets and developing new markets
for Harbin Bearing. Mr. Zhang holds a degree in engineering from Harbin
Polytechnic University.
(DICKENS) CHANG SHING YAM, ASSISTANT MANAGER AND CHIEF ACCOUNTING OFFICER, 29.
Since 1994, Mr. Chang has been the Assistant Manager of Finance of Sunbase
International and has been the Chief Accounting Officer of Sunbase Asia since
1995. Mr. Chang was employed by
31
the international accounting firm of Ernst & Young in Hong Kong from 1989 to
1994, most recently as audit manager.
TODD STOCKBAUER, FINANCE MANAGER, 33. Mr. Stockbauer has been employed as the
Finance Manager of Southwest Products since 1991 and directs its financial and
administrative operations. Prior to 1991, he was employed in the public
accounting sector, specializing in bankruptcy, litigation support and business
turnarounds. Mr. Stockbauer holds a Bachelor of Arts degree in business and
economics from the University of California at Santa Barbara with an emphasis in
accounting, and is a Certified Public Accountant in the State of California.
ERNST RENEZEDER, DIRECTOR OF MANUFACTURING, 59. Mr. Renezeder has been the
Director of Manufacturing at Southwest Products since 1992. Mr. Renezeder has
over 24 years experience in manufacturing, engineering, management, and product
research and development. Mr. Renezeder holds a Bachelor of Science degree in
Molding and Foundry, which is equivalent to a Bachelor of Science in
manufacturing engineering with an emphasis in mechanical engineering.
JOHN LEONIAK, CHIEF ENGINEER, 59. Mr. Leoniak has been the Chief Engineer at
Southwest Products since 1991. As Chief Engineer, Mr. Leoniak supervises
Southwest Products' engineering and research and development. Prior to joining
Southwest Products, Mr. Leoniak was employed by Grumman Aircraft Systems as the
head of its Landing Gear, Armament, Carrier Suitability and Survivability Group.
Mr. Leoniak has contributed to the writing of various US Navy manufacturing
specifications, including MIL-B-8942, MIL-B-81820, MIL-B-81819 and MIL-STD-1599.
Mr. Leoniak holds a Bachelor of Science in mechanical engineering from the
Polytechnic Institute of Brooklyn.
PETER WANG, QUALITY CONTROL MANAGER, 35. Mr. Wang has been the Quality Control
Manager of Southwest Products since 1993 where he supervises the Quality Control
and Inspection Departments. Prior to joining Southwest Products, Mr. Wang held
positions as a mechanical engineer and a senior quality engineer. Mr. Wang has
extensive experience in quality and statistical process control, is fluent in
Mandarin and holds a Master of Science degree in mechanical engineering from
North Carolina A&T State University and a Bachelor of Science degree in physics
from Lenoir Rhyne College.
32
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- -------------------------------------------------
Based solely on a review of Forms 3 and 4 and amendments thereto
furnished to the Company during its most recent fiscal year and certain written
representations, no persons who were either a director, officer, beneficial
owner of more than 10% of the Company's common stock, failed to file on a timely
basis reports required by Section 16(a) of the Exchange Act during the most
recent fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
MANAGEMENT COMPENSATION
No compensation was earned by or awarded to any of the Company's
officers or directors in 1995. In 1995, in connection with a Management and
Services Agreement between China Bearing Holdings Limited and Sunbase
International, Sunbase International provided to the Company and its affiliates
office space and equipment, administrative services and the services of Mr. Gao
and other employees of Sunbase International (such as Ms. Yang, Mr. Li and Mr.
Chang). In consideration of the provision of such services, China Bearing
Holdings Limited paid Sunbase International a total of US $30,000 plus certain
out-of-pocket expenses such as travel and entertainment. See ITEM 13 "CERTAIN
RELATIONSHIPS AND TRANSACTIONS." Based on the foregoing, no executive officer
of the Company received compensation of US $100,000 or more from the Company.
STOCK OPTION PLAN
On January 2, 1996, the Company's Board of Directors adopted the 1995
Sunbase Asia, Inc. Stock Option Plan (the "Plan"). The Plan permits the grant
of options to purchase an aggregate of up to 2,500,000 Shares of the Common
Stock of the Company. Under the Plan, incentive stock options and non-qualified
stock options may be issued. Eligible participants under the Plan are those
individuals and entities that the stock option committee of the Company (the
"Committee") in its discretion determines should be awarded such incentives
given the best interests of the Company; provided, however, that incentive stock
options may only be granted to employees of the Company and its affiliates. The
Committee has the power to determine the price, terms and vesting schedule of
the options granted, subject to the express provisions of the Plan. All
incentive stock options will have option exercise prices per option share not
less than the fair market value of a share of the Common Stock on the date the
option is granted, except that in the case of incentive stock options granted to
any person possessing more than 10% of the total combined voting power of all
classes of stock of the Company or any affiliate of the Company, the price shall
not be less than 110% of such fair market value. The Plan terminates on the
earlier of that date on which no additional shares of Common Stock are available
for issuance under the Plan or January 2, 2006.
In connection with an employment agreement entered into by and between
the Company and William R. McKay on January 16, 1996, and pursuant to the Plan,
the Company
33
granted Mr. McKay the option to purchase an aggregate of up to 800,000 shares of
Common Stock of the Company. The option is intended by the Company and Mr.
McKay to be, and will be treated as, an incentive stock option. The options
granted to Mr. McKay vest at the rate of 160,000 shares per each full year of
Mr. McKay's employment under the Agreement. Mr. McKay may exercise the options
that have vested and purchase shares of the Common Stock of the Company at the
following prices:
Exercise Price of
Full Years of Options that Vest
Employment After Each Such Year
----------- --------------------
One $ 6.65
Two $ 7.75
Three $ 9.25
Four $10.75
Five $12.75
All unexercised options will expire on that date which is six years
after the date on which such options have vested.
EMPLOYMENT AGREEMENT
On January 16, 1996, Sunbase Asia and Southwest Products entered into
an employment agreement with William R. McKay (the "Agreement") pursuant to
which Mr. McKay is employed to serve as President and Chief Executive Officer of
Southwest Products and as President and Chief Executive Officer of Sunbase Asia.
Under the terms of the Agreement, Mr. McKay will be paid an annual base salary
of $285,000. The base salary may be increased or decreased (to a minimum of
$225,000), based upon an annual review of Mr. McKay's performance. In addition
to the base salary, the Board of Directors of Sunbase Asia may, at its sole
discretion, pay Mr. McKay a bonus for any particular year of his employment. On
January 16, 1996, in connection with the execution of the Agreement, Sunbase
Asia, Southwest Products and Mr. McKay entered into a Confidentiality and Non-
Competition Agreement pursuant to which Mr. McKay agrees to keep certain
information of Sunbase Asia, Southwest Products and their affiliates
confidential, and is prohibited from competing with Sunbase Asia, Southwest
Products and their affiliates.
34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of March 15, 1996, the stock
ownership of all persons known to own beneficially five percent (5%) or more of
the equity securities of the Company, and all directors and officers of the
Company and its affiliates, individually and as a group. Each person has sole
voting and investment power over the shares indicated, except as noted.
Equity Ownership Voting Rights
---------------- -------------
Amount of Percent Amount of
Name and Beneficial of Beneficial
Address Ownership/(1)/ Class/(2)/ Ownership/(1)/ Percent
- -------- -------------------- ------------ ---------------- --------
Asean Capital 13,711,000/(3)/ 85.80% 28,111,000/(4)/ 92.53%
Gunter Gao 13,711,000/(2) (5)/ 77.22% 25,299,900/(4)/ 83.28%
Chairman and Director
Linda Yang 13,711,000/(2) (5)/ 77.22% 25,299,900/(4)/ 83.28%
Director
William McKay/(6)/ - - - -
Chief Executive Officer,
President and Director
Li Yuen Fai (Roger) - - - -
Chief Financial Officer,
Vice President and Director
Dickens Chang - - - -
Chief Accounting Officer
Billy Kan - - - -
Director
Ho Cho Hing (Franco) - - - -
Director
Sunbase International 13,711,000 77.22% 25,299,900 83.28%
(Holdings) Limited/(7)/
All directors and officers 13,711,000 85.80% 28,111,000 92.50%
of the Company as a Group/(8)/
_________________________
* less than 1 percent
(1) As used in this table, "beneficial ownership" means the sole or shared
power to vote, or to direct the voting of, a security, or the sole or share
investment power with respect to a security (i.e., the power to dispose of,
or to direct the disposition of a security).
(2) Based on 15,980,063 shares of Common Stock outstanding on a fully-diluted
basis calculated as follows: (a) 11,700,063 shares outstanding; (b)
3,600,000 shares issuable upon conversion of the Series A Preferred Stock
and (c) 680,000 shares issuable upon conversion of the Series B Preferred
Stock.
35
(3) Includes 10,111,000 outstanding shares of Common Stock and 3,600,000 shares
of Common Stock issuable upon conversion of the Series A Preferred Stock.
(4) Includes 10,111,000 voting rights held by way of Asean Capital's ownership
of 10,111,000 shares of Common Stock and 18,000,000 voting rights held by
way of Asean Capital's ownership of 36 shares of the Series A Preferred
Stock.
(5) Includes shares of Sunbase Common Stock and Preferred Stock beneficially
owned by Gunter Gao and Linda Yang, husband and wife, by way of the
ownership by each of Mr. Gao and Ms. Yang of 50% of the capital stock of
Sunbase International, which in turn owns 90% of the capital stock of Asean
Capital. Each of Ms. Yang and Mr. Gao disclaims beneficial ownership of
the shares held by the other, although their ownership has been aggregated
for purposes of this table.
(6) Does not include 800,000 shares of Common Stock issuable upon exercise of
the stock options granted to Mr. McKay. See "Stock Option Plan."
(7) Consists of 10,111,000 outstanding shares of Common Stock and 3,600,000
shares of Common Stock issuable upon conversion of the Series A Preferred
Stock owned by Asean Capital, of which Sunbase International owns 90%.
(8) Consists of shares beneficially owned by Gunter Gao and Linda Yang.
36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As discussed above (See ITEM 1 "BUSINESS ORGANIZATION OF THE COMPANY"),
an effective 51.4% in Harbin Bearing was acquired at the end of 1993 by then
affiliates of Sunbase International. This was accomplished by the acquisition
by China Bearing Holdings Limited ("China Bearing") of China International
Bearing (Holdings) Limited ("China International"). China International was
incorporated to act as the holding company of two Sino-foreign joint venture
companies which in turn were formed to acquire in the aggregate a 51.6% interest
in Harbin Bearing. China International has a 99.9% equity interest in one of
the joint venture companies and a 99% equity interest in the other, which in
turn hold a 41.6% and 10% interest, respectively, in Harbin Bearing (See,
"Organizational Chart"). The aggregate cash consideration contributed by the
joint venture companies was Rmb 232.1 million which was principally financed by
an interest free loan from Sunbase International to China International (the
"Sunbase Loan"). China International in turn made equity contributions and
loans to the two joint venture companies.
In April 1994, New China Hong Kong acquired from Sunbase International
10% of the outstanding stock of China Bearing and 10% of the Sunbase Loan. The
Sunbase Loan was later assigned to China Bearing, and China Bearing assumed the
Sunbase Loan for a consideration of the same amount payable to it by China
International. The obligations under the Sunbase Loan were extinguished by
Sunbase International and New China Hong Kong, and the amount thereof was
treated as a contribution of cash to China Bearing and credited to its
contributed surplus account. Thereafter, the shares of China Bearing owned by
Sunbase International and New China Hong Kong were transferred to Asean Capital,
in which Sunbase International and New China Hong Kong own 90% and 10%,
respectively. As set forth above, in December 1994, Asean Capital transferred
all of its interest in China Bearing to the Company.
Pursuant to a Management Services Agreement between Sunbase
International and China Bearing dated January 1, 1994, Sunbase International
agreed to provide China Bearing and its affiliates, including the Company,
advice and consultation, including strategic management, business planning and
development services, accounting and financial service, human resource service,
sales and marketing service and such additional services as may be agreed upon
for an annual fee of US $30,000. China Bearing is also obligated to reimburse
Sunbase International for its direct out-of-pocket costs incurred in providing
the management services. The Agreement's term was two years and it expired on
December 31, 1995.
Harbin Bearing and Harbin Precision have entered into leases (the
"Ancillary Transport Equipment Lease" and the "Manufacturing Machinery Lease"),
covering all equipment and assets of the Bearing Factory relating to the bearing
operations which were not contributed to the Company in the Restructuring. The
Leases cover cars, trucks, machinery and equipment used in manufacturing, office
administration and power generation and provide for total annual payments of US
$3,267,000. At the expiration of the two Leases in December 31, 1998 and
December 31, 2001, respectively, Harbin Bearing has the right to either renew
the Leases or acquire the equipment.
37
Harbin Bearing and Harbin Holdings have entered into a lease covering
plants and buildings used in Harbin Bearing business which were not contributed
to Harbin Bearing in the Restructuring (the "Plant Lease"). The Plant Lease
provides for annual rent payments of US $451,000. At the expiration of the
lease on December 31, 1998, Harbin Bearing has the right to extend the lease at
market rent for another five years.
Harbin Holdings and Harbin Bearing have entered into a lease providing
for the use of land by Harbin Bearing at US $301,000 per annum.
As a result of the Restructuring, Harbin Holdings owns the rights to the
trademark "HRB." Pursuant to an exclusive and perpetual trademark license
agreement, Harbin Holdings has granted Harbin Bearing the exclusive and
perpetual right to use the "HRB" trademark on its products and marketing
materials. The royalty on the trademark license agreement is 0.5% of annual
sales from 1994 to 2003 and 0.3% from 2004 to 2013.
Pursuant to the Restructuring, Harbin Holdings assumed responsibilities
of the pension payments of all employees of the Bearing Factory who retired or
left the Bearing Factory prior to the Restructuring. Harbin Bearing and Harbin
Holdings have entered into an agreement (the "Pension Agreement") relating to
pension arrangements after the Restructuring. The Pension Agreement provides
that Harbin Bearing may satisfy the statutory requirement to pay an amount equal
to 20% of annual wages to the municipal government to fund future pension
obligations of its existing employees, by making such payments to Harbin
Holdings as representative of the municipal government of Harbin, and Harbin
Holdings agrees to be responsible for all pension obligations to employees of
Harbin Bearing who retire or leave after the Restructuring.
Subsequent to December 31, 1993, Harbin Bearing and Harbin Holdings
entered into a management and administrative services agreement. The agreement
provides for the payment by Harbin Bearing of an annual fee of Rmb 17,160,000
(approximately US $2,049,000) in connection with services for medical, heating,
education and other staff-related benefits provided by Harbin Holdings for a
term of three years. The costs of these services were previously fully paid by
the Bearing Factory and have now been superseded by the above agreement. The
fees are subject to an annual 10% inflation adjustment.
Agreements were also entered into by Harbin Bearing with the two joint
venture holding companies of Harbin Bearing in respect of general management
services to be provided by the joint venture companies from January 1, 1994 to
December 31, 1995 at an annual fee of Rmb 150,000 (US $18,000) payable to each
of the joint venture companies.
38
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following financial statements and exhibits are filed with and as a
part of this Report.
Page No.(s)
-----------
(1) Financial Statements.
--------------------
Index to Financial Statements 46
Report of Independent Auditors 47
Consolidated Balance Sheets as of
December 31, 1994 and December 31, 1995 48
Consolidated Statements of Income for the years
ending December 31, 1994 and December 31, 1995 50
Consolidated Statements of Cash Flows for the years
ending December 31, 1994 and December 31, 1995 51
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1994 and
December 31, 1995 53
Notes to Consolidated Financial Statements 54
(2) Exhibits
Exhibit No. Description of Document Page No.(s)
----------- ----------------------- -----------
(a) Exhibits. The following exhibits of the Company are
included herein.
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession.
39
2.1 Share Exchange Agreement, dated December
2, 1994, between the Company, Valley
Financial, Inc., Wayne Crumpley and China
Bearing Holdings, Ltd. and Asean Capital
Limited, a subsidiary of Sunbase
Intentional./(1)/
2.2 Asset Transfer and Assumption Agreement
dated December 16, 1994, between the
Company and Valley Financial
Corporation./(1)/
(3) Certificates of Incorporation and Bylaws
3.1 Nevada Articles of Incorporation./(1)/
3.2 Articles of Merger./(1)/
3.3 Amended and Restated Certificate of
Designation for Series A Convertible
Preferred Stock./(1)/
3.4 Secured Promissory Note in favor of Asean
Capital Limited./(2)/
3.5 Third Amended and Restated Certificate of 75
Designation for Series B Preferred Stock
(10) Material contracts
10.1 Agreement between the Company and New
China Hong Kong with respect to the Sale
and Purchase of shares of China Bearing,
together with the Deed of Novation./(3)/
10.2 Memorandum and Articles of Association of
China International./(3)/
10.3 Joint Venture Contract between China
International and Harbin Hazhou Bearing
Distributing Company with respect to Harbin
Sunbase./(3)/
40
10.4 Joint Venture Contract between China
Intentional and Harbin Bearing Everising
Construction and Development Ltd. with
respect to Harbin Xinhengli./(3)/
10.5 Amended Articles of Association of Harbin
Sunbase./(3)/
10.6 Articles of Association of Harbin
Xinhengli./(3)/
10.7 Articles of Association of Harbin Bearing./(3)/
10.8 Agreement between Harbin Sunbase and
Harbin Bearing with respect to the provision
of financial management services to Harbin
Bearing./(3)/
10.9 Agreement between Harbin Xinhengli and
Harbin Bearing with respect to the
provisions of sales and marketing services to
Harbin Bearing./(3)/
10.10 Pension Fund Aggregation Agreement
Harbin Bearing and Harbin Holdings with
respect to pension payments for existing
employees./(3)/
10.11 Trademark Licensing Agreement between
Harbin Bearing and Harbin Holdings with
respect to the "HRB" trademark./(3)/
10.12 Service Agreement between Harbin Holdings
and Harbin Bearing./(3)/
10.13 Land Use Right Lease Agreement between
Harbin Holdings and Harbin Bearing./(3)/
10.14 Power Supply and Manufacturing Equipment
Lease Agreement between Harbin Precision
and Harbin Bearing./(3)/
10.15 Plant Buildings Lease Agreement between
Harbin Precision and Harbin Bearing./(3)/
41
10.16 Ancillary and Transport Equipment Lease
Agreement between Harbin Precision and
Harbin Bearing./(3)/
10.17 Know-How Contract dated December 18, 84
1992 between Southwest Products and
Shanghai Hong Xing Bearing Factory.
10.18 Contract for Joint Ventures dated March 21, 124
1994 between Southwest Products and
Shanghai Hong Xing Bearing Factory.
10.19 Articles of Association for Joint Venture 158
dated March 21, 1994 relating to the
Shanghai Joint Venture.
10.20 Agreement and Plan of Reorganization and 190
Merger dated as of December 29, 1995
among the Company, Southwest Products
and the shareholders of Southwest Products.
10.21 Employment Agreement dated as of January 232
16, 1996 between the Company, Southwest
Products and William McKay.
10.22 1995 Stock Option Plan. 245
_____________
(1) Filed with the Company's Form 8-K, dated December 22, 1994 and incorporated
herein.
(2) Filed with the Company's Form 8-K/A, dated December 22, 1994 and
incorporated by reference herein.
(3) Filed with the Company's Form 10-K dated March 3, 1995 and incorporated by
reference herein.
22 The Company's subsidiaries are:
Effective
Percentage
Name of Subsidiary Ownership Place of Incorporation
- --------------------------- ---------- -------------------------
CHINA BEARING 100% Bermuda Holding Company
HOLDINGS LIMITED
CHINA INTERNATIONAL 100% Hong Kong Holding Company
BEARING HOLDINGS LIMITED
42
HARBIN SUNBASE 99% PRC JV Holding Co.
DEVELOPMENT COMPANY
LIMITED
HARBIN XINHENGLI 99.90% PRC JV Holding Co.
DEVELOPMENT
COMPANY LIMITED
HARBIN BEARING 51.4% PRC Joint Stock Company
COMPANY, LTD.
SOUTHWEST PRODUCTS 100% California Corporation
COMPANY
SHANGHAI SOUTHWEST 28% PRC Joint Venture
BEARING COMPANY
COMPANY
______________
(b) No Reports on Form 8-K were filed during or related to the last quarter of
1995.
43
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Sunbase Asia, Inc.
Date: May 3, 1996 By: /s/ William McKay
------------------------
William McKay, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: May 3, 1996 By: /s/ Gunter Gao
------------------------
Gunter Gao, Chairman
Date: May 3, 1996 By: /s/ Billy Kan
------------------------
Billy Kan, Director
Date: May 3, 1996 By: /s/ William McKay
------------------------
William McKay, Chief Executive
Officer, President and Director
Date: May 3, 1996 By: /s/ Roger Li
------------------------
(Roger) Li Yuen Fai, Vice
President and Chief Financial
Officer and Director
Date: May 3, 1996 By: /s/ Linda Yang
------------------------
Linda Yang, Director
Date: May 3, 1996 By: /s/ Franco Ho Cho Hing
------------------------
(Franco) Ho Cho Hing, Director
Date: May 3, 1996 By: /s/ Dickens Chang
------------------------
(Dickens) Change Shing Yam, Chief
Accounting Officer
44
Financial Statements
SUNBASE ASIA, INC. AND SUBSIDIARIES
ERNST & YOUNG
HONG KONG
INDEX TO FINANCIAL STATEMENTS
Page
----
SUNBASE ASIA, INC. AND SUBSIDIARIES:
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1994 F-3 - 4
and December 31, 1995
Consolidated Statements of Income F-5
for the years ended December 31, 1994 and December 31, 1995
Consolidated Statements of Cash Flows F-6 - 7
for the years ended December 31, 1994 and December 31, 1995
Consolidated Statements of Changes in Shareholders' F-8
Equity for the years ended December 31, 1994
and December 31, 1995
Notes to Consolidated Financial Statements F-9 - 29
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Sunbase Asia, Inc.
We have audited the accompanying consolidated balance sheets of Sunbase
Asia, Inc. and its subsidiaries as of December 31, 1995 and 1994 and the
related statements of income, cash flows and changes in shareholders'
equity for each of the years in the two-year period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Sunbase Asia, Inc. and its subsidiaries at December 31, 1995 and 1994, and
the consolidated results of their operations and cash flows for each of the
years in the two-year period ended December 31, 1995, in conformity with
accounting principles generally accepted in the United States of America.
ERNST & YOUNG
Hong Kong
April 5, 1996
F-2
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1994
AND DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTES 1994 1995 1995
RMB RMB US$
--------- --------- -------
ASSETS
Current assets
Cash and bank balances 65,646 30,944 3,719
Accounts receivable, net 5 261,184 264,186 31,753
Notes receivable -- 25,756 3,096
Inventories, net 6 361,455 476,997 57,331
Prepaid VAT -- 40,429 4,859
Other receivables 35,636 57,209 6,876
Due from related companies 23 170,073 137,079 16,476
--------- --------- -------
Total current assets 893,994 1,032,600 124,110
Fixed Assets 7 481,295 554,086 66,597
Deferred asset 8 35,729 18,134 2,180
Long term investments 9 6,999 1,438 173
Goodwill 10 -- 12,144 1,460
--------- --------- -------
Total assets 1,418,017 1,618,402 194,520
========= ========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short term bank loans 11 227,078 276,813 33,271
Accounts payable 151,853 116,205 13,967
Notes payable 12 -- 15,627 1,878
Accrued liabilities and other 44,761 90,108 10,831
payables
Short term obligations under 13 15,873 17,269 2,075
capital leases
Other loans 14 33,810 33,810 4,064
Secured promissory note 1,15 -- 41,600 5,000
Income tax payable 4 9,342 5,874 706
Taxes other than income 20,970 -- --
Due to related companies 130,635 111,654 13,420
Due to shareholders 11,682 17,352 2,086
--------- --------- -------
Total current liabilities 646,004 726,312 87,298
Long term bank loans 16 68,424 110,670 13,302
Long term obligations 13 124,982 107,713 12,946
under capital leases
Secured promissory note 1,15 42,250 -- --
Minority interests 288,175 343,142 41,243
--------- --------- -------
1,169,835 1,287,837 154,789
Obligations and commitments 13 -- -- --
Continued on next page
The accompanying notes form an integral part of these
consolidated financial statements
F-3
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1994
AND DECEMBER 31, 1995 (continued)
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTES 1994 1995 1995
RMB RMB US$
--------- --------- -------
Shareholders' equity:
Common Stock, par value US$0.001 each, 19 99 99 12
50,000,000 shares authorized;
11,700,063 issued, and fully paid up
Preferred Stock, par value US$0.001
each, 25,000,000 shares authorized,
Convertible Preferred Stock -
Series A;
36 shares issued and outstanding 1, 19 44,533 44,533 5,352
Convertible Preferred Stock -
Series B;
6,800 shares issued and outstanding
(1994: Nil issued) 1 - 28,288 3,400
Contributed surplus 19 151,942 151,942 18,262
Reserves 20 13,011 25,266 3,037
Retained earnings 38,597 80,437 9,668
--------- --------- -------
Total shareholders' equity 248,182 330,565 39,731
--------- --------- -------
Total liabilities and shareholders' 1,418,017 1,618,402 194,520
equity ========= ========= =======
The accompanying notes form an integral part of these
consolidated financial statements
F-4
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
NOTES 1994 1995 1995
RMB RMB US$
----------- ----------- -----------
Net Sales to
- third parties 655,848 569,248 68,419
- related parties 23 63,994 103,111 12,393
---------- ---------- ----------
719,842 672,359 80,812
Cost of sales (441,854) (381,377) (45,838)
---------- ---------- ----------
Gross profit 277,988 290,982 34,974
Selling, general and
administrative expenses
- third parties (57,434) (71,820) (8,632)
- related parties 23 (37,784) (41,182) (4,950)
---------- ---------- ----------
(95,218) (113,002) (13,582)
Interest expense
- third parties (30,128) (37,136) (4,463)
- related parties 23 (12,593) (11,310) (1,359)
---------- ---------- ----------
(42,721) (48,446) (5,822)
Reorganization expenses 21 (7,307) -- --
---------- ---------- ----------
Income before income taxes 132,742 129,534 15,570
Provision for income taxes: 4
- Current (19,087) (20,472) (2,461)
- Deferred (3,600) -- --
---------- ---------- ----------
(22,687) (20,472) (2,461)
---------- ---------- ----------
Income before minority interests 110,055 109,062 13,109
Minority interests (58,447) (54,967) (6,607)
---------- ---------- ----------
Net income 51,608 54,095 6,502
========== ========== ==========
Earnings per common share 17 3.37 3.54 0.42
========== ========== ==========
Numbers of shares outstanding 17 15,300,063 15,300,063 15,300,063
========== ========== ==========
The accompanying notes form an integral part of these
consolidated financial statements
F-5
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
NOTES 1994 1995 1995
RMB RMB US$
--------- --------- --------
Cash flows from operating
activities:
Net income 51,608 54,095 6,502
Adjustments to reconcile income
to net cash provided by
operating activities:
Minority interests 58,447 54,967 6,606
Depreciation 44,562 44,447 5,342
Loss on disposal of fixed assets -- 4,829 580
Exchange difference on secured
promissory note -- (650) (78)
Reorganization expenses 7,307 -- --
Others 1,226 17,595 2,115
(Increase) decrease in assets:
Accounts receivable (261,184) (1,312) (157)
Inventories (80,457) (107,824) (12,960)
Notes receivable -- (25,756) (3,096)
Prepaid VAT -- (40,429) (4,859)
Other receivables 32,372 (21,086) (2,534)
Due from related companies (157,118) 32,994 3,965
Deferred tax asset 3,600 -- --
Increase (decrease) in
liabilities:
Accounts payable 34,947 (41,836) (5,028)
Notes payable -- 4,000 481
Accrued liabilities and other
payables 18,361 40,531 4,872
Income tax payable 9,342 (3,468) (417)
Taxes other than income 20,970 (20,970) (2,520)
Due to related companies 129,031 (34,854) (4,189)
Due to shareholders 674 5,670 681
-------- -------- -------
Net cash used in operating
activities (86,312) (39,057) (4,694)
Cash flows from investing
activities:
Purchase of a subsidiary 22 -- (731) (88)
Disposal of long term investments 263 5,561 668
Proceeds from disposal of fixed
assets -- 115 14
Additions to fixed assets (153,213) (92,571) (11,126)
-------- -------- -------
Net cash used in investing
activities (152,950) (87,626) (10,532)
(Continued on next page)
The accompanying notes form an integral part of these
consolidated financial statements.
F-6
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1995
(continued)
(AMOUNTS IN THOUSANDS)
1994 1995 1995
RMB RMB US$
--- --- ---
Cash flows from financing
activities:
Proceeds from short term bank
loans 440,213 518,573 62,328
Repayment of short term bank
loans (360,344) (468,838) (56,351)
Redemption of debentures (10,000) -- --
Proceeds from long term bank
loans 68,424 54,289 6,525
Repayment of long term bank loans -- (12,043) (1,447)
-------- -------- -------
Net cash provided by financing
activities 138,293 91,981 11,055
-------- -------- -------
Net decrease in cash and cash
equivalents (100,969) (34,702) (4,171)
Cash and cash equivalents, at
beginning of year 166,615 65,646 7,890
-------- -------- -------
Cash and cash equivalents, at end
of year 65,646 30,944 3,719
======== ======== =======
Income taxes paid 10,920 15,953 1,917
Interest paid (net of amount
capitalized) 30,856 35,186 4,229
Non-cash transactions:
Financing lease arrangements 14,590 15,873 1,908
Purchase of a subsidiary by issue
of convertible stock -- 28,288 3,400
======== ======== =======
The accompanying notes form an integral part of these
consolidated financial statements.
F-7
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
Common Preferred Contributed Retained
Stock stock Surplus Reserves earnings
Series A Series B
RMB RMB RMB RMB RMB RMB
Balance at
December 31, 1993
(note 1) 99 44,533 -- 144,635 -- --
Reorganization expenses
(note 21) -- -- -- 7,307 -- --
Net income -- -- -- -- -- 51,608
Appropriation to
reserves (note 20) -- -- -- -- 13,011 (13,011)
-- ------ ------- ------- ------ -------
Balance at
December 31, 1994 99 44,533 -- 151,942 13,011 38,597
New issue (note 1) -- -- 28,288 -- -- --
Net income -- -- -- -- -- 54,095
Appropriation to
reserves (note 20) -- -- -- -- 12,255 (12,255)
-- ------ ------- ------- ------ -------
Balance at
December 31, 1995 99 44,533 28,288 151,942 25,266 80,437
== ====== ====== ======= ====== ======
The accompanying notes form an integral part of these
consolidated financial statements.
F-8
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Sunbase Asia, Inc. ("the Company") entered into a share exchange
agreement ("Share Exchange Agreement") with Asean Capital Limited ("Asean
Capital") on December 2, 1994. Pursuant to the agreement and certain subsequent
changes thereto, as agreed between the Company and Asean Capital, and further to
a board resolution of the Company on March 31, 1995, the Company issued
10,261,000 common stock shares, 36 shares of Series A convertible preferred
stock and a US$5 million secured promissory note to Asean Capital in exchange
for the entire issued share capital of China Bearing Holdings Limited ("China
Bearing").
The Series A convertible preferred stock is convertible at the option
of the holder at a conversion rate of 100,000 common stock shares per Series A
share. As preferred shares, they also carry 500,000 votes per share and are
entitled to the same dividend as the common stock shareholders on the basis as
if the preferred shares had been converted to common stock shares at the
conversion rate as noted above.
The total number of common stock shares outstanding subsequent to this
arrangement was 11,700,063. For the purpose of these financial statements, the
Share Exchange Agreement and all subsequent amendments thereto were deemed to be
effected as of December 31, 1993.
This 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.
China Bearing is a holding company which was establishing to acquire a
100% interest in China International Bearing (Holdings) Company Limited ("China
International"), a company then wholly-owned by Sunbase International (Holdings)
Limited ("Sunbase International"), at a nominal consideration of HK$0.002 on
March 8, 1994. China International was incorporated in Hong Kong on June 23,
1993 to act as the holding company of Harbin Xinhengli Development Co. Ltd.
("Harbin Xinhengli") and Harbin Sunbase Development Co. Ltd. ("Harbin Sunbase"),
Sino-foreign equity joint ventures in the People's Republic of China ("China" or
the "PRC") established on September 18, 1993 and January 28, 1993, respectively,
and to acquire, in aggregate, a 51.6% interest in Harbin Bearing Company Limited
("Harbin Bearing"). China International has a 99.9% equity interest in Harbin
Xinhengli and a 99.0% equity interest in Harbin Sunbase, which hold 41.6% and
10.0%, equity interests in Harbin Bearing. The aggregate cash consideration
contributed by Harbin Xinhengli and Harbin Sunbase to Harbin Bearing was RMB
232.1 million for the acquisitions of the 51.6% interest in Harbin Bearing.
Harbin Bearing is the successor to the manufacturing operations of
Harbin Bearing General Factory (the "Predecessor" or "Bearing Factory"), a
Chinese state-owned enterprise established in 1950. In connection with the
restructuring of the Predecessor, Harbin Bearing was established on December 28,
1993 as a joint stock limited company under the Trial Measures on Share
Companies and the Opinion on the Standardization of Joint Stock Companies
promulgated by the State Council of China.
F-9
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)
Pursuant to an agreement between the Predecessor and Harbin Bearing,
the ball bearing manufacturing and sales businesses, together with certain
assets and liabilities, were transferred to Harbin Bearing. Certain other
assets and liabilities relating to the bearing business were transferred to
Harbin Precision Machinery Manufacturing Company ("Harbin Precision"), and
certain ancillary operations, businesses, facilities used to provide community
services to employees of the factory and their families in Harbin were
transferred to Harbin Bearing Holdings Company ("Harbin Holdings").
However, certain assets such as accounts receivable and construction
in progress and certain liabilities such as the long term bank loan were not
transferred to Harbin Bearing. Harbin Bearing will account for all new sales
and subsequent collections effective from January 1, 1994 and assist the
Predecessor in the collection of its outstanding accounts receivable prior to
the reorganization. This service will be provided at no cost.
Harbin Holdings is a separately established enterprise controlled by
and under the administration of the Harbin Municipal Government and the
industrial oversight of the Machine Bureau. Harbin Precision is wholly-owned by
Harbin Holdings. Harbin Holdings received 33.3% of the new shares of Harbin
Bearing in consideration for the net assets transferred thereto from the
Predecessor.
Details of the equity capital of Harbin Bearing are as follows:
Contribution
to Registered Ownership
Capital Percentage
RMB' million
Harbin Xinhengli and Harbin Sunbase 232.1 51.6%
Harbin Holdings (in the form of assets) 150.0 33.3%
Current employees of Harbin Bearing
and others (in cash) 67.9 15.1%
----- -----
450.0 100.0%
===== =====
The assets acquired and the liabilities assumed by Harbin Bearing from the
Predecessor were revalued on December 31, 1993 at the then respective fair
values which included certain fixed assets revalued by the State Administration
of Assets Bureau. The book value of the net assets so transferred was RMB
150,000. After giving effect to the principal adjustments in conformity with
accounting principles generally accepted in the United States of America ("U.S.
GAAP") as explained in Note 2 below, the fair value of the net assets
transferred to Harbin Bearing from the Predecessor was RMB 173,118. The total
fair value of the net assets of Harbin Bearing after taking into account the
cash received from the other investors totalled RMB 473,118.
China International completed its acquisition of an effective interest
of 51.4% interest in Harbin Bearing through Harbin Xinhengli and Harbin Sunbase
on December 28, 1993. Harbin Holdings together with
F-10
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)
some individual investors retained 48.4% and the remaining 0.2% which was
held by the joint venture partners of Harbin Xinhengli and Harbin Sunbase.
The following unaudited pro forma information for the years ended
December 31, 1994 and 1993 has been prepared on the basis as if the acquisition
of China Bearing and Harbin Bearing had occurred on January 1, 1993.
The pro forma results for the year ended December 31, 1994 presented
below are prepared after giving effect to the following pro forma adjustments:
(a) Interest expense in respect of the US$5 million secured
promissory note issued pursuant to the restructuring as detailed above; and
(b) reversal of the reorganization expenses which had already been
reflected in the pro forma results for the year ended December 31, 1993 on
the basis as if the reorganization was completed on January 1, 1993.
The pro forma results of operations have been prepared for comparative
purposes only and do not purport to indicate the results of operations which
would actually have occurred had the acquisitions been in effect on January 1,
1993 or which may occur in the future.
Year ended
December 31,
1993 1994
RMB RMB
(unaudited)
Net sales 687,064 719,842
Net income 41,310 55,563
Earnings per common stock share 2.70 3.63
On December 29, 1995, the Company entered into a reorganization
agreement ("Reorganization Agreement") with Southwest Products Company
("Southwest") and the shareholders of Southwest for the acquisition of 100%
of the issued common stock of Southwest.
Pursuant to the Reorganization Agreement, a wholly-owned subsidiary
of the Company was incorporated for the purpose of merging with Southwest
pursuant to a separate merger agreement. In connection with the merger,
the Company issued an aggregate of 6,800 shares of Series B convertible
preferred stock ("Series B stock") to the then shareholders of Southwest or
their designates. At the option of the Series B stockholders, the stock
may be redeemed at US$500 per Series B share by the Company from the
proceeds of the next permanent equity offering, the net proceeds of which
will be designated for such redemption. Any shares not so redeemed will
automatically be converted into common stock shares at the rate of 100
common stock shares per Series B stock. If the aforesaid public offering
or the redemption are
F-11
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)
not effected within two years from date of issue of the Series B stock, the
stock will automatically be converted into common stock at the rate of 100
common stock shares per Series B stock. As preferred shares, the shares carry
100 votes per share and are entitled to the same dividend as the common
shareholders on the basis as if the preferred shares had been converted to
common stock shares at the conversion rate as noted above.
This transaction has been treated as a business combination and is
accounted for under the purchase method of accounting. However, since the
acquisition was consummated on December 31, 1995, the results of Southwest for
the year then ended have not been consolidated into the Company but will accrue
to the Company from January 1, 1996.
Southwest is a manufacturer of spherical bearings and supplies its
products to the aerospace, commercial aviation and other industries around the
world. Its major customers are in the United States of America. Southwest also
has an interest in a Shanghai Joint Venture. As a result of a lack of
information available with respect to the financial condition of the Shanghai
Joint Venture, management of the Company was unable to determine the fair value
of the 28% equity interest in the Shanghai Joint Venture owned by Southwest.
Accordingly, the Company did not allocate any portion of the Southwest purchase
consideration to the investment in the Shanghai Joint Venture at December 31,
1995. The Company is attempting to obtain additional information, and to the
extent that such additional information is obtained during 1996, the Company may
subsequently determine to reallocate a portion of the purchase consideration to
the investment in the Shanghai Joint Venture, with a commensurate reduction to
goodwill. Such reallocation, if it occurs, would not have a material effect on
the consolidated results of operations or financial position of the Company.
The following unaudited pro forma information for the years ended
December 31, 1995 and 1994 are prepared on the basis as if the acquisition of
Southwest and China Bearing by the Company had occurred on January 1, 1994. The
unaudited pro forma information for the year ended December 31, 1994 is
presented after taking into account the effect of the following pro forma
adjustments in respect of the acquisition of China Bearing and Southwest by the
Company:
(a) interest expense in respect of the US$5 million secured
promissory note issued pursuant to the restructuring of the Company for the
acquisition of China Bearing;
(b) reversal of the reorganization expenses incurred for the
aforesaid restructuring as if the reorganization were completed on January
1, 1993; and
(c) amortization of goodwill and the effect of the increment of
fair values on assets arising from acquisition of Southwest.
The following pro forma financial information has been prepared for
comparative purposes only and do not purport to indicate the results of
operations which would actually have occurred had the
F-12
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)
acquisitions and the reorganization been in effect on January 1, 1994 or which
may occur in the future.
Year ended
December 31,
1994 1995
RMB RMB
(unaudited)
Net sales 755,234 708,658
Net income 67,463 58,003
Pro forma earnings per common share 4.22 3.63
2. BASIS OF PRESENTATION
The Company's first operating subsidiary, Harbin Bearing, was formed
on December 28, 1993 and commenced operations on January 1, 1994. Accordingly,
no consolidated statements of income and cash flows were prepared for the year
ended December 31, 1993.
These consolidated financial statements incorporate the results of
operations of the Company and its subsidiaries (hereinafter referred to as the
"Group") on the basis that the Group with all its present components had been so
constituted during the two-year period ended December 31, 1995, except for
Southwest, the acquisition of which was completed on December 31, 1995. These
financial statements include the fair value of the net assets of Southwest at
December 31, 1995. All material intra group transactions and balances have been
eliminated on consolidation.
The consolidated financial statements were prepared in accordance with
U.S. GAAP. This basis of accounting differs from that used in the statutory and
management accounts of Harbin Bearing which were prepared in accordance with the
accounting principles and the relevant financial regulations applicable to joint
stock enterprises as established by the Ministry of Finance of China ("PRC
GAAP").
The principal adjustments made to conform the statutory accounts of
Harbin Bearing to U.S. GAAP included the following:
. Revenue recognition;
. Provision for doubtful accounts receivable;
. Provision for inventory obsolescence;
. Valuation of inventories;
. Accounting of assets financed under capital leases as assets
of the Company together with the corresponding liabilities;
and
. Deferred taxation.
F-13
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
2. BASIS OF PRESENTATION (Continued)
The financial information has been prepared in Renminbi (RMB), the
national currency of China. Solely for the convenience of the reader,
certain elements of these financial statements have been translated into
United States dollars prevailing at the People's Bank of China on December
31, 1995 which was US$1.00 = RMB8.32. No representation is made that the
Renminbi amounts could have been, or could be, converted into United States
dollars at that rate or any other certain rate on December 31, 1995.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and bank balances
Cash and bank balances include cash on hand and demand deposits
with banks with an original maturity of three months or less. None of the
Group's cash is restricted as to withdrawal or use.
(b) Inventories
Inventories are stated at the lower of cost, on a first-in, first-
out basis, or market. Work-in-progress and finished goods include direct
materials, direct labor and an attributable proportion of production
overheads.
(c) Fixed assets and depreciation
Property, machinery and equipment are stated at cost less
accumulated depreciation. Depreciation of property, machinery and
equipment is computed using the straight-line method over the assets'
estimated useful lives. The estimated useful lives of property, machinery
and equipment are as follows:
Buildings 20 years
Machinery and equipment 8-10 years
Motor vehicles 3 years
Furniture, fixtures and office equipment 5 years
(d) Construction in progress
Construction in progress represents factory buildings, plant and
machinery and other fixed assets under construction and is stated at cost.
Cost comprises direct costs of construction as well as interest charges on
borrowed funds. Capitalization of interest charges ceases when an asset is
ready for its intended use. Construction in progress is transferred to
fixed assets upon commissioning when it is capable of producing saleable
output on a commercial basis, notwithstanding any delays in the issue of
the relevant commissioning certificates by the appropriate PRC authorities.
No depreciation is provided on construction in progress until the
asset is completed and put into productive use.
F-14
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) Income taxes
The income taxes reflect the accounting standards in Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes".
(f) Foreign currency translation
Foreign currency transactions are translated into Renminbi at 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 are translated into Renminbi
using the applicable exchange rates prevailing at the balance sheet date.
The Company's share capital is denominated in United States Dollars
and the reporting currency is Renminbi. For financial reporting purposes
the United States Dollars share capital amounts have been translated into
Renminbi at the applicable rates prevailing on the dates of receipt.
(g) Capital leases
Leases that transfer substantially all the rewards and risks of
ownership of assets to the Group, other than legal title, are accounted for
as capital leases. At the inception of a capital lease, the cost of the
leased asset is capitalized at the present value of the minimum lease
payments and recorded together with the obligation, excluding the interest
element, to reflect the purchase and financing. Assets held under capital
leases are included in fixed assets and depreciated over the estimated
useful lives of the assets. The finance costs of such leases are charged
to the profit and loss account so as to provide a constant periodic rate
over the lease terms.
Leases where substantially all the rewards and risks of ownership
of assets remain with the leasing company are accounted for as operating
leases. Rentals applicable to such operating leases are charged to the
profit and loss account on the straight-line basis over the lease terms.
(h) Goodwill
Goodwill represents the excess of the consideration paid for the
purchase of a subsidiary over the fair value of the net assets of
businesses acquired and are being amortized over a 15-year period. The
carrying value of goodwill is assessed on an ongoing basis. The
measurement of possible impairment is based primarily on the ability to
recover the balance of the goodwill from expected future operating cash
flows on an undiscounted basis of the entity acquired. If the review
indicates goodwill may be impaired, the carrying value of the goodwill is
reduced.
(i) Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
F-15
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
4. INCOME TAXES
Sunbase Asia, Inc. was incorporated in the State of Nevada in the
United States of America. The Company is subject to U.S. federal tax on
its income. Nevada does not impose any tax on corporations organized under
its laws.
Southwest was incorporated in the State of California in the United
States of America and is subject to U.S. federal tax on its income.
China Bearing was incorporated under the laws of Bermuda and, under
current Bermudan law, is not subject to tax on income or on capital gains.
China Bearing has received an undertaking from the Ministry of Finance of
Bermuda pursuant to the provisions of the Exempted Undertakings Tax
Protection Act, 1966, as amended, that in the event that Bermuda enacts any
legislation imposing tax computed on profits or income, including any
dividend or capital gains withholding tax, or computed on any capital
asset, gain or appreciation, or any tax in the nature of estate duty or
inheritance tax, then the imposition of any such tax shall not be
applicable to China Bearing or to any of its operations or the shares,
debentures or other obligations of China Bearing, until March 28, 2016.
This undertaking is not to be construed so as to (i) prevent the
application of any such tax or duty to such persons as are ordinarily
resident in Bermuda; or (ii) prevent the application of any tax payable in
accordance with the provision of the Land Tax Act, 1967 or otherwise
payable in relation to any land leased to China Bearing in Bermuda.
China International was incorporated under the Hong Kong Companies
Ordinance and under the current Hong Kong tax law, any income arising in
and deriving from businesses carried on in Hong Kong will be subject to
tax. No tax will be charged on dividends received and capital gains
earned.
Harbin Xinhengli and Harbin Sunbase are subject to Chinese income
taxes at the applicable tax rates of 30% for Sino-foreign equity joint
venture enterprises. Dividend income received is exempt from any Chinese
income taxes.
The applicable tax rate for joint stock limited enterprises in
China is 33% which is levied on the taxable income as reported in the
statutory accounts adjusted for taxation in accordance with the relevant
income tax laws applicable to joint stock limited enterprises. Harbin
Bearing, being a joint stock limited company registered in the Special
Economic and Technological Development Zone in the Municipal City of
Harbin, will normally be subject to a maximum income tax rate of 20%.
Pursuant to the same income tax basis applicable to the Special Economic
and Technological Development Zone, Harbin Bearing has been designated a
high technology production enterprise and is entitled to a special income
tax rate of 15%.
F-16
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
4. INCOME TAXES (Continued)
The Company has undertaken not to require China Bearing to make any
distribution of dividends and the directors of Harbin Xinhengli and Harbin
Sunbase have decided not to distribute any dividend income related to
income earned for the year received from Harbin Bearing outside of China.
As a result, deferred income taxes have not been accrued in the financial
statements in respect of income distributions. The determination of the
amount of the unrecognized deferred tax liability for temporary differences
related to such investments in foreign subsidiaries is not practicable.
The reconciliation of the effective income tax rates based on
income before income taxes stated in the consolidated statement of income
to the statutory income tax rate in China applicable to the Company's only
operating subsidiary is as follows:
Year ended
December 31,
1994 1995
Effect of
- Statutory tax rate 15.0% 15.0%
Permanent difference 2.0% 0.8%
---- ----
17.0% 15.8%
==== ====
5. ACCOUNTS RECEIVABLE
Accounts receivable comprise:
December 31,
1994 1995
RMB RMB
Accounts receivable - trade 272,484 278,113
Less: Allowance for doubtful debts (11,300) (13,927)
------- --------
Accounts receivable, net 261,184 264,186
======= ========
Movement of allowance for doubtful debts
Balance as at January 1, - 11,300
Provided during the year 11,300 2,627
------- --------
Balance as at December 31, 11,300 13,927
======= ========
The accounts receivable of the Predecessor were not transferred to
Harbin Bearing as part of the reorganization on formation of Harbin Bearing
on December 28, 1993. However, Harbin Bearing will account for new sales
and subsequent collections effective from January 1, 1994 and assist the
Predecessor in the collection of its accounts receivable prior to the
reorganization.
F-17
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
6. INVENTORIES
Inventories comprise:
December 31,
1994 1995
RMB RMB
Raw materials 122,684 105,132
Work-in-progress 87,839 104,697
Finished goods 169,948 271,477
-------- --------
380,471 481,306
Less: Allowance for obsolescence (19,016) (4,309)
-------- --------
Inventories, net 361,455 476,997
======== ========
Movement of allowance for obsolescence
Balance as at January 1, 23,857 19,016
Provided during the year - 1,098
Obsolete inventories sold during
the year (4,841) (15,805)
-------- --------
Balance as at December 31, 19,016 4,309
======== ========
7. FIXED ASSETS
December 31,
1994 1995
RMB RMB
Buildings 71,644 68,725
Machinery and equipment 283,748 402,390
Motor vehicles 16,970 16,712
Furniture, fixtures and office equipment 4,240 5,110
Construction in progress 149,255 141,757
------- -------
525,857 634,694
Less: Accumulated depreciation (44,562) (80,608)
------- -------
481,295 554,086
======= =======
Total amount of interest capitalized during the year and included
in the above fixed assets are RMB 10,411 (1994: RMB 1,334).
The Group's buildings are located in PRC and the land on which the
Group's buildings are situated is State-owned.
F-18
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
7. FIXED ASSETS (Continued)
The gross amounts of assets recorded under capital leases and the
accumulated depreciation thereon are analyzed as follows:
1994 1995
RMB RMB
Machinery and equipment 150,337 150,337
Motor vehicles 4,181 4,181
Furniture, fixtures and office
equipment 927 927
-------- --------
155,445 155,445
Less: Accumulated depreciation (20,371) (40,742)
-------- --------
135,074 114,703
======== ========
8. DEFERRED ASSET
December 31,
1994 1995
RMB RMB
Deferred asset comprises:
Deferred valued added tax ("VAT")
receivable 38,860 20,482
Less: Present value discount ( 3,131) ( 2,348)
-------- --------
35,729 18,134
======== ========
This represents the deemed VAT receivable arising from the
introduction of the new PRC VAT system on January 1, 1994. This asset was
calculated and accounted for in accordance with governmental directions by
applying the 14% VAT rate to certain inventory values as at December 31,
1993, with the effect of reducing the value of certain opening inventory of
Harbin Bearing as at January 1, 1994 by the same amount. A detailed
directive regarding the utilization of the deferred VAT receivable was
issued in May 1995 by the Ministry of Finance and the State General Tax
Bureau pursuant to which the Group will be permitted to offset the balance
of RMB38,860 against its VAT payable within a period of five years starting
from January 1, 1995. Accordingly, a discount has been applied using Harbin
Bearing's average rate of borrowing over the estimated period of recovery.
9. LONG TERM INVESTMENTS
Long term investments are stated at cost and represent investments
in treasury bonds issued by the Chinese Government. The investments bear
interest ranging from 3% to 8% per annum and are redeemable on maturity or
otherwise prior thereto as advised by the government.
The long term investments were pledged as one element of the
security to the Group's bankers to secure a short term bank loan of RMB
418.4 million which was utilized to the extent of RMB 358 million. Other
collateral includes the Group's fixed assets of RMB 137,782 and a third
party guarantee from Harbin Holdings.
F-19
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
10. GOODWILL
The goodwill arises as a result of the acquisition of Southwest on
December 31, 1995. Nor amortization was provided during the year as the
acquisition was completed on December 31, 1995.
11. SHORT TERM BANK LOANS
The short term bank loans bear interest at a weighted average rate
of 14% and 11% per annum for the years ended December 31, 1995 and 1994,
respectively, and are repayable within one year.
12. NOTES PAYABLE
Included in the total amount was an amount of RMB 11,627 which
represents a long term note payable to a bank. The Group is in the process
of refinancing the note and accordingly the amount has been classified
under current liabilities.
13. OBLIGATIONS AND COMMITMENTS
(a) Obligations under capital leases
Harbin Bearing leases machinery and equipment, furniture, fixtures
and office equipment and motor vehicles from Harbin Precision, a company
wholly-owned by Harbin Holdings, a separately established enterprise under
the supervision and control of the Machine Bureau, which received 33.3% of
the new shares of Harbin Bearing. These leases are accounted for as
capital leases which have lease terms ranging from five years to eight
years.
The lease obligations for the machinery and equipment, furniture,
fixtures and office equipment and motor vehicles have an implicit annual
interest rate at 8.46%. The scheduled future minimum lease payments as of
December 31, 1995 were as follows:
December 31,
1995
RMB
Year ending December 31,
1996 27,183
1997 27,183
1998 27,183
1999 25,927
2000 25,927
2001 25,927
--------
Total minimum lease payments 159,330
Less: Amount representing interest (34,348)
--------
Present value of minimum lease payments 124,982
Less: Current portion (17,269)
--------
107,713
========
F-20
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
13. OBLIGATIONS AND COMMITMENTS(Continued)
The lease rentals incurred during the year amounted to RMB27,183
(1994: RMB27,183), out of which RMB 11,310 (1994: RMB12,593) was the
interest portion.
(b) Other commitments
As of December 31, 1995, the Group had outstanding commitment for
capital expenditure of RMB 46,027 (US$5,532) (1994: RMB 91,500 (US$10,919))
and outstanding operating lease commitments expiring in 1998 in respect of
buildings of approximately RMB 11,254 (US$ 1,353) (1994: RMB 15,004
(US$1,790)).
14. OTHER LOANS
The loans are due to the employees of Harbin Bearing, are unsecured
and bear interest at 15% per annum. The loans, together with the
accumulated interest, were repaid in full subsequent to December 31, 1995.
15. SECURED PROMISSORY NOTE
The secured promissory note (the "Note") was issued to Asean
Capital Limited in connection with the Share Exchange Agreement as detailed
in Note 1 and is secured by a continuing security interest in and to all of
the Company's title and interest in the outstanding capital stock of China
Bearing. The carrying value of the net assets of China Bearing represents
all the consolidated net assets of the Company before taking into account
the carrying value of the Note, the consolidated net assets of Southwest of
RMB 16,144 and the goodwill arising on acquisition of Southwest of RMB
12,144.
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.
16. LONG TERM BANK LOANS
The long term bank loans are principally loans borrowed to finance
the construction in progress. The loans bear interest ranging from 3.7% to
9.25% per annum and are not repayable within one year.
17. NUMBER OF SHARES/EARNINGS PER SHARE
As detailed in Note 1 to the financial statements, the Company
issued new shares in consideration for the acquisition of its interest in
Southwest. The earnings per common stock share for the years ended December
31, 1994 and 1995, which excludes the results of Southwest, is calculated
using the common stock and common stock equivalents, after assuming that
all convertible preferred stocks except those issued in
F-21
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
17. NUMBER OF SHARES/EARNINGS PER SHARE (Continued)
connection with the acquisition of Southwest, have been converted into
common stock, as if these shares had been outstanding throughout all
periods presented. The pro forma earnings per common share for the years
ended December 31, 1994 and 1995, which includes the results of Southwest,
as stated in Note 1, is calculated by including all the convertible
preferred stocks.
18. FOREIGN CURRENCY EXCHANGE
The Chinese government imposes control over its foreign currency.
Renminbi, the official currency in China, is not freely convertible. Prior
to December 31, 1993, all foreign exchange transactions involving Renminbi
had to be undertaken either through the Bank of China or other institutions
authorized to buy and sell foreign exchange or at a swap center. The
exchange rates used for transactions through the Bank of China and other
authorized banks were set by the government from time to time whereas the
exchange rates available at a swap center were determined largely by supply
and demand.
On January 1, 1994, the People's Bank of China introduced a managed
floating exchange rate system based on the market supply and demand and
proposed to establish a unified foreign exchange inter-bank market amongst
designated banks. In place of the official rate and the swap centre rate,
the People's Bank of China publishes a daily exchange rate for Renminbi
based on the previous day's dealings in the inter-bank market. It is
expected that swap centres will be phased out in due course.
However, the unification of exchange rates does not imply the full
convertibility of Renminbi into United States dollars or other foreign
currencies. Payment for imported materials and the remittance of earnings
outside of China are subject to the availability of foreign currency which
is dependent on the foreign currency denominated earnings of the entity or
allocated to the Company by the government at official exchange rates or
otherwise arranged through a swap center with government approval. Approval
for exchange at the exchange centre is granted to enterprises in China for
valid reasons such as purchases of imported goods and the remittance of
earnings. While conversion of Renminbi into United States dollars or other
foreign currencies can generally be effected at the exchange centre, there
is no guarantee that it can be effected at all times.
19. CONTRIBUTED SURPLUS
As part of the reorganization of Sunbase Asia, Inc. on December 2,
1994 as detailed in Note 1 above, the entire share capital and contributed
surplus of China Bearing were acquired by Sunbase Asia, Inc. The
consideration for the shares in China Bearing on the basis that the
reorganization took place on December 31, 1993 was as follows:
F-22
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
19. CONTRIBUTED SURPLUS (Continued)
RMB U.S.$
Common stock, paid up capital 99 12
Convertible preferred stock 44,533 5,314
Promissory note 42,250 5,042
Contributed surplus 144,635 17,260
------- ------
Net asset value of China Bearing
at December 31, 1993 231,517 27,628
======= ======
The net assets of China Bearing were allocated first to the legal
paid up capital at the par value of US$0.001 per share of 11,700,063
shares. The amount of net assets allocated to the convertible preferred
stock was based on the total equivalent common shares attributable to the
preferred stock. The remaining net assets were allocated to the
contributed surplus. As more fully explained in note 21, reorganization
expenses of RMB 7,307 were credited to contributed surplus pursuant to the
Share Exchange Agreement in 1994.
20. DISTRIBUTIONS OF PROFIT AND APPROPRIATIONS TO RESERVES
According to the relevant laws and regulations for joint stock
limited enterprises and Harbin Bearing's articles of association, the
distribution of profit by Harbin Bearing is based on the profits as
reported in the statutory accounts after the following allocations and
appropriations:
(a) making up any accumulated losses;
(b) transferring 10% of its profit after taxation, measured under
PRC accounting standards, to the statutory surplus reserve;
(c) transferring 5% to 10% of its profit after taxation, measured
under PRC accounting standards, to a collective welfare fund;
and
(d) transferring a certain amount of its profit after taxation
measured under PRC accounting standards to a discretionary
surplus reserve.
The following appropriations were made and are further described
below:
Year ended
December 31,
1994 1995
RMB RMB
Statutory surplus reserve 8,674 8,170
Collective welfare fund 4,337 4,085
------ ------
13,011 12,255
====== ======
F-23
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
20. DISTRIBUTIONS OF PROFIT AND APPROPRIATIONS TO RESERVES (Continued)
The collective welfare fund must be used for capital expenditure on
staff welfare facilities and cannot be used to finance staff welfare
expenses. Such facilities for staff were and are owned by Harbin Bearing.
The distributable retained earnings of the Group as of December 31,
1995, after taking into account of the above restrictions and
appropriations and based on the PRC statutory accounts of Harbin Bearing,
amounted to RMB 73,591.
21. REORGANIZATION EXPENSES
The amount represents expenses related to the cost of the minority-
owned 1,439,063 common stock (the "Shares") valued at the pro-rated net
asset value of the Company on December 2, 1994, which approximated the fair
value, pursuant to the Share Exchange Agreement detailed in Note 1, after
accounting for relevant discounts relating to minority interest and the
trading restrictions of the Shares. The value assigned to these shares is
considered a cost of the restructuring of the Company and is charged to
income and credited to contributed surplus. The proforma earnings per
common stock for the year ended December 31, 1994 after excluding such non-
recurring reorganization expenses is RMB 3.85.
22. NOTE TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
Purchase of a subsidiary
December 31,
1995
RMB
Net assets acquired:
Cash and bank balance 18
Accounts receivable 1,690
Inventories 7,718
Other receivables 487
Fixed assets 29,611
Accounts payable ( 6,188)
Notes payable ( 11,627)
Accrued liabilities ( 4,816)
--------
16,893
Goodwill 12,144
--------
29,037
========
Satisfied by:
Shares issued 28,288
Current account 749
--------
29,037
========
F-24
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
23. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
During the year, the Group had transactions with several related
parties. The major related party transactions are summarized as follows
and described in further detail below:
Year ended December 31,
Nature of transactions Notes 1994 1995
RMB RMB
Revenue:
Sales of products (a) 63,994 103,111
Leases of equipment
Capital payments (b) 14,590 15,873
Expenses:
Leases of equipment
Finance charges (b) 12,593 11,310
Leases of buildings (c) 3,751 3,751
Land use rights (d) 2,508 2,508
Management and
administrative services (e) 17,416 19,126
Trademark royalty fees (f) 3,599 3,362
Pension and retirement
plan expenses (g) 16,769 18,394
(a) Significant sales to related companies
Harbin Bearing made sales of RMB 42,855 (1994: RMB 46,578) and RMB
40,257 (1994: RMB 7,832) to Harbin Bearing Import & Export Company
("HBIE") and Xin Dadi Mechanical and Electrical Equipment Company
("Xin Dadi"), related companies owned by the Harbin Municipal
Government, respectively, during the current year. As at December
31, 1995, the amounts of trade receivables from HBIE and Xin Dadi
included under due from related companies were RMB 65,520 (1994:
RMB 54,496) and RMB Nil (1994: RMB 9,164), respectively. An amount
due to Xin Dadi is included in due to related companies as at
December 31, 1995 at RMB 105,171, representing advance payment
received in respect of future sales.
(b) Leases of equipment
Harbin Bearing has entered into an eight year lease agreement with
Harbin Precision to lease machinery and equipment and a five year
lease agreement with Harbin Precision to lease motor vehicles,
furniture, fixtures and equipment related to the business at an
initial annual rental of RMB 25,927 (US$3,116) and RMB 1,256
(US$151), respectively, from January 1, 1994 to December 31, 2001
and from January 1, 1994 to December 31, 1998, respectively.
F-25
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
23. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (Continued)
(c) Leases of Buildings
Options to extend the leases and to purchase the leased assets have
been granted to Harbin Bearing upon expiring of the initial
leases. All these leases are treated as capital leases.
Harbin Bearing has entered into a five year lease agreement with
Harbin Precision to lease buildings related to the operation of
Harbin Bearing with effect from January 1, 1994 at an initial
annual rental of RMB 3,751 (US$451). The initial lease will expire
on December 31, 1998 and Harbin Bearing has been granted an option
to extend the lease at market rent for another five years. This
lease is treated as an operating lease.
(d) Land use rights
The municipal government has allocated to Harbin Holdings the right
to use the parcels of land on which Harbin Bearing's operations are
conducted. Harbin Holdings has agreed to lease the land on which
the main factory is situated to Harbin Bearing in return for an
initial annual rental of RMB 2,508 (US$301) effective from January
1, 1994 subject to future adjustments in accordance with changes in
government fees.
(e) Management and administrative services agreements
In 1994, Harbin Bearing and Harbin Holdings entered into a
management and administrative services agreement. The agreement
provides for the payment by Harbin Bearing of an annual fee of RMB
18,876 (US$2,269) (1994: RMB 17,160) in connection with services
for medical, heating, education and other staff-related benefits
provided by Harbin Holdings for a term of three years. The fees
are subject to an annual 10% inflation adjustment. The costs of
these services were previously fully paid by the Predecessor and
have now been superseded by the above agreement.
Agreements were also entered into by Harbin Bearing with Harbin
Xinhengli and Harbin Sunbase, respectively, in respect of general
management services to be provided by the joint ventures from
January 1, 1994 to December 31, 1995 at an annual fee of RMB 150
(US$18) payable to each of the joint ventures.
An agreement was entered into between China Bearing and Sunbase
International, a majority shareholder of the Company, in respect of
general management and administrative services at an annual fee of
RMB 250 (US$30). In addition, China Bearing is to reimburse
Sunbase International for administrative services rendered on
behalf of China Bearing at cost. No additional administrative
services were rendered by Sunbase International in the current
year.
(f) Trademark license
Pursuant to a trademark license agreement, Harbin Holdings has
granted Harbin Bearing the right to use the "HRB" trademark.
Harbin Bearing is required to pay a royalty cost calculated on
F-26
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
23. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (Continued)
(f) Trademark license (Continued)
an annual basis at 0.5% of the net sales of Harbin Bearing
effective from January 1, 1994 to December 31, 2003 and at 0.3% of
the net sales from January 1, 2004 to December 31, 2013. The
trademark license can be transferred to Harbin Bearing thereafter
upon mutual agreement between the two parties subject to the
relevant laws in China.
The trademark royalty paid by Harbin Bearing during the current
year amounted to RMB 3,362 (1994: RMB 3,599).
(g) Pension and retirement plan
Pursuant to an agreement on December 31, 1993, Harbin Bearing will
make an annual payment to Harbin Holdings as its contribution to
the pension scheme for all staff retiring after December 28, 1993.
Such annual payment should be made based on the standard
contribution as required by government regulations calculated at
20% of salary. Harbin Holdings is then responsible for the entire
pension payment to staff who have retired after December 28, 1993.
Harbin Holdings has undertaken to bear all pension payments to
staff who have retired before December 28, 1993. This agreement
will only be effective on the condition that no compulsory rules
and regulations are implemented in the future such that Harbin
Bearing has to be directly responsible for any pension payments.
The contribution to the pension scheme made by Harbin Bearing in
the current year amounted to RMB 18,394 (1994: RMB 16,769).
Management expects that the arrangements detailed in (b), (c) and
(d) above will be renewed after the initial contract term.
As described further in Note 1, the Company, in consideration for
the purchase of its interest in China Bearing, exchanged common stock
shares, preferred shares and assumed vendor financing from Asean Capital
Limited. The vendor financing provided from Asean Capital is in the form of
US$5,000 secured promissory note secured on the shares of China Bearing
(see Note 15).
A significant portion of the business undertaken by Harbin Bearing
during the year has been effected with State-owned enterprises in China and
on such terms as determined by the relevant Chinese authorities.
24. FINANCIAL INSTRUMENTS
The carrying amount of the Company's cash and bank balances
approximates their fair value because of the short maturity of those
instruments. The carrying amounts of the Company's borrowings
approximate their fair value based on the borrowing rates currently
available for borrowings with similar terms and average maturities.
F-27
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
25. SEGMENT DATA
The Company operates mainly in the ball bearing industry in China,
consequently, no segment reporting disclosures are required.
26. CONCENTRATION OF RISK
Concentration of credit risk:
Financial instruments that potentially subject the Group to a
significant concentration of credit risk consist principally of cash
deposits, trade receivables and amounts due from related companies.
(a) Cash deposits
The Group places its cash deposits with various PRC State-owned
financial institutions.
(b) Trade receivables
The Company manufactures and sells general and precision ball
bearings in diversified industries in China. The Company has long
standing relationships with most of its customers and generally does
not require collateral. There is no concentration of receivables in
any one specific industry except for the outstanding receivable balance
with a distributor, HBIE, which has a receivable balance of RMB 65,520
as at December 31, 1995.
Current vulnerability due to certain concentrations:
The Group's operating assets and primary source of income and cash
flow is its interest in its subsidiary in the PRC. The value of the
Group's interest in this subsidiary may be adversely affected by
significant political, economic and social uncertainties in the PRC.
Although the PRC government has been pursuing economic reform policies
for the past 17 years, no assurance can be given that the PRC
government will continue to pursue such policies or that such policies
may not be significantly altered, especially in the event of a change
in leadership, social or political disruption or unforeseen
circumstances affecting the PRC's political, economic and social life.
There is also no guarantee that the PRC government's pursuit of
economic reforms will be consistent or effective.
27. SUBSEQUENT EVENT
On January 2, 1996, the Company's board of directors adopted a
stock option plan (the "Plan"). The Plan permits the directors to grant
options to purchase an aggregate of up to 2,500,000 shares of the
common stock of the Company. All incentive stock options will have
option exercise prices per option share not less than the fair market
value of a share of the common stock on the date the option is granted,
except that in the case of incentive stock options granted to any
person possessing more than 10% of the total combined voting power of
all classes of stock of the Company or any
F-28
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
27. SUBSEQUENT EVENT (Continued)
affiliate of the Company, the price shall not be less than 110% of such
fair market value. The Plan terminates on the earlier of the date on
which no additional shares of common stock are available for issuance
under the Plan or January 2, 2006.
F-29