UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT of 1934
For the quarterly period ended June 30, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from__________________to____________________
Commission File No. 0-3132
SUNBASE ASIA, INC.
(Exact name of Registrant as specified in its charter)
Nevada 94-1612110
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
19/F, First Pacific Bank Centre
51-57 Gloucester Road
Wanchai, Hong Kong
(Address of principal executive offices)
Registrant's telephone number, including area code: (852) 2865-1511
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of June 30, 1997, the Company had 12,700,140 shares of common stock issued
and outstanding.
SUNBASE ASIA , INC. AND SUBSIDIARIES
------------------------------------
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1 -- Financial statements
Consolidated Condensed Balance Sheets (unaudited)
- December 31, 1996 and June 30, 1997 3-4
Consolidated Condensed Statements of Income (unaudited)
- Three months and six months ended
June 30, 1996 and 1997 5
Consolidated Condensed Statements of Cash Flows (unaudited)
- Six months ended
June 30, 1996 and 1997 6
Notes to Consolidated Condensed Financial Statements
(unaudited)
- Three months and six months ended
June 30, 1996 and 1997 7-11
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-19
PART II: OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K 20
SIGNATURES 21
EXHIBIT 11 Computation of Earnings Per Common Share 22-23
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
--------------------
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF DECEMBER 31, 1996 AND JUNE 30, 1997
(Amounts in thousands, except number
of shares and per share data)
12/31/96 6/30/97
--------------- --------------
Notes RMB US$ RMB US$
----- --- --- --- ---
ASSETS
Current assets
Cash and bank balances 87,428 10,546 71,237 8,593
Accounts receivable, net 313,791 37,852 364,552 43,975
Notes receivable 15,212 1,835 11,379 1,373
Inventories, net 4 476,409 57,468 452,746 54,613
Other receivables 70,075 8,453 92,779 11,192
Receivable from disposal
of an investment 13,419 1,618 13,419 1,618
Due from related companies 205,275 24,762 417,138 50,318
--------- ------- --------- -------
Total current assets 1,181,609 142,534 1,423,250 171,682
Fixed assets 656,071 79,140 633,232 76,385
Deferred asset 22,204 2,678 21,874 2,639
Long term investments 1,012 122 1,012 122
Goodwill 11,587 1,398 11,160 1,346
--------- ------- --------- -------
Total assets 1,872,483 225,872 2,090,528 252,174
========= ======= ========= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short term bank loans 358,847 43,286 380,213 45,864
Long term bank loans, current portion 98,641 11,899 106,171 12,807
Accounts payable 151,971 18,332 132,240 15,952
Notes payable 2,800 338 10,900 1,315
Accrued liabilities and other payables 55,544 6,700 108,188 13,050
Short term obligations under capital leases 18,788 2,266 19,597 2,364
Short term portion of
secured promissory note 5 12,450 1,502 12,435 1,500
Income tax payable 38,368 4,628 59,067 7,125
Taxes other than income 25,225 3,043 77,401 9,337
Due to related companies 14,357 1,732 32,992 3,979
--------- ------- --------- -------
Total current liabilities 776,991 93,726 939,204 113,293
Long term bank loans 35,000 4,222 23,000 2,774
Long term obligations under capital leases 88,924 10,726 78,919 9,520
Long term portion of secured promissory note 5 12,450 1,502 12,435 1,500
Convertible debentures 6 95,450 11,514 95,335 11,500
Minority interests 420,484 50,722 463,755 55,942
--------- ------- --------- -------
1,429,299 172,412 1,612,648 194,529
Continued/...
The accompanying notes form an integral part of these
consolidated condensed financial statements.
3
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND JUNE 30, 1997 (UNAUDITED) (CONTINUED)
(Amounts in thousands, except number
of shares and per share data)
12/31/96 6/30/97
-------------- --------------
RMB US$ RMB US$
--- --- --- ---
Shareholders' equity:
Common Stock, par value US$ 0.001 each,
50,000,000 shares authorized;
12,700,140 shares issued, and fully paid up 107 13 107 13
Preferred Stock, par value US$ 0.001 each,
25,000,000 shares authorized;
Convertible Preferred Stock - Series A;
36 shares issued and outstanding 44,533 5,372 44,533 5,372
Convertible Preferred Stock - Series B;
6,800 shares issued and outstanding 28,288 3,412 28,288 3,412
Contributed surplus 188,019 22,680 188,019 22,680
Reserves 27,866 3,361 27,866 3,361
Retained earnings 154,371 18,622 189,067 22,807
--------- ------- ---------- -------
Total shareholders' equity 443,184 53,460 477,880 57,645
--------- ------- ---------- -------
Total liabilities and shareholders' equity 1,872,483 225,872 2,090,528 252,174
========= ======= ========== =======
The accompanying notes form an integral part of these
consolidated condensed financial statements.
4
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(Amounts in thousands, except number of shares and per share data)
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
1996 1997 1997 1996 1997 1997
Notes RMB RMB US$ RMB RMB US$
----- --- --- --- --- --- ---
Net sales to
-Third parties 436,073 269,524 32,512 231,381 131,378 15,848
- Related parties 29,616 216,319 26,094 18,228 113,248 13,660
---------- ---------- ---------- ---------- ---------- ----------
465,689 485,843 58,606 249,609 244,626 29,508
Cost of sales (285,917) (295,825) (35,685) (153,028) (148,457) (17,908)
---------- ---------- ---------- ---------- ---------- ----------
Gross profit 179,772 190,018 22,921 96,581 96,169 11,600
Selling, general and
administrative expenses
-Third parties (40,288) (35,282) (4,256) (23,025) (18,733) (2,260)
- Related parties (22,071) (24,946) (3,009) (11,111) (12,454) (1,502)
---------- ---------- ---------- ---------- ---------- ----------
(62,359) (60,228) (7,265) (34,136) (31,187) (3,762)
Interest expense, net
- Third parties (25,282) (31,705) (3,824) (13,926) (16,274) (1,963)
- Related parties (5,139) (4,395) (530) (2,525) (2,149) (259)
---------- ---------- ---------- ---------- ---------- ----------
(30,421) (36,100) (4,354) (16,451) (18,423) (2,222)
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes 86,992 93,690 11,302 45,994 46,559 5,616
Provision for income taxes
- Current (14,420) (15,723) (1,897) (7,775) (7,671) (925)
- Deferred - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Income before minority interests 72,572 77,967 9,405 38,219 38,888 4,691
Minority interests (39,690) (43,271) (5,220) (21,402) (21,110) (2,546)
---------- ---------- ---------- ---------- ---------- ----------
Net income 32,882 34,696 4,185 16,817 17,778 2,145
========== ========== ========== ========== ========== ==========
Earnings per common share 2
- Primary 2.04 2.04 0.25 1.04 1.05 0.13
========== ========== ========== ========== ========== ==========
- Fully Diluted 2.04 2.10 0.25 1.04 1.07 0.13
========== ========== ========== ========== ========== ==========
Number of shares outstanding 2
- Primary 16,089,994 16,980,140 16,980,140 16,199,884 16,980,140 16,980,140
========== ========== ========== ========== ========== ==========
- Fully Diluted 16,089,994 19,280,140 19,280,140 16,199,884 19,280,140 19,280,140
========== ========== ========== ========== ========== ==========
The accompanying notes form an integral part of these
consolidated condensed financial statements.
5
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(Amounts in thousands)
Six Months Ended June 30,
------------------------------------
1996 1997 1997
RMB RMB US$
--- --- ---
Cash flows from operating activities:
Net income 32,882 34,696 4,185
Adjustments to reconcile income to net
cash provided by (used in) operating activities:
Minority interests 39,690 43,271 5,220
Depreciation 28,151 35,736 4,311
Loss on disposal of fixed assets - 582 70
Amortization of goodwill 14 427 52
Exchange difference on secured promissory
note and convertible debentures - (145) (17)
Amortization of present value discount
on deferred asset - (391) (47)
Amortization of deferred debenture issue expense - 721 87
Others 1,429 - -
Changes in operating assets and liabilities-
(Increase) decrease in assets:
Accounts receivable (247,618) (50,761) (6,123)
Notes receivable (2,945) 3,833 462
Inventories 33,784 23,663 2,854
Prepaid VAT 40,429 - -
Other receivables (14,288) (22,704) (2,739)
Due from related companies 47,609 (211,863) (25,557)
Increase (decrease) in liabilities:
Accounts payable 39,907 (19,731) (2,380)
Notes payable 2,970 8,100 977
Accrued liabilities and other payables (15,760) 52,644 6,350
Income tax payable 16,703 20,699 2,497
Taxes other than income 2,793 52,176 6,294
Due to related companies (4,957) 9,439 1,139
Due to shareholders (2,854) - -
-------- -------- -------
Net cash used in operating activities (2,061) (19,608) (2,365)
-------- -------- -------
Cash flows from investing activities:
Disposal of long term investment 426 - -
Proceeds from disposal of fixed assets - (134) (16)
Additions to fixed assets (50,034) (13,345) (1,610)
-------- -------- -------
Net cash used in investing activities (49,608) (13,479) (1,626)
-------- -------- -------
Cash flows from financing activities:
Net increase in bank loans 63,356 16,896 2,038
Repayment of other loans (33,810) - -
Proceeds from sale of common stock, net of costs 35,480 - -
-------- -------- -------
Net cash provided by financing activities 65,026 16,896 2,038
Net increase (decrease) in cash and cash equivalents 13,357 (16,191) (1,953)
Cash and cash equivalents, at beginning of period 30,944 87,428 10,546
-------- -------- -------
Cash and cash equivalents, at end of period 44,301 71,237 8,593
======== ======== =======
Non-cash transaction:
Financing of lease arrangement 8,453 4,395 530
======== ======== =======
The accompanying notes form an integral part of these
consolidated condensed financial statements.
6
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1996 AND 1997
(Amounts in thousands, except number of shares and per share data)
1. GENERAL
Sunbase Asia, Inc., a Nevada Corporation ("the Company"), is engaged in
the design, manufacture and distribution of a broad range of bearing products
in the People's Republic of China ("PRC") and certain western countries,
including the United States.
The Company acquired 100% of the issued share capital of China Bearing
Holdings Limited ("China Bearing") on December 2, 1994 pursuant to a Share
Exchange Agreement with Asean Capital Limited in exchange for 10,261,000
shares of common stock. The transaction has been treated as a
recapitalization of China Bearing with China Bearing as the acquirer (reverse
acquisition). The historical financial statements prior to December 2, 1994
are those of China Bearing.
The Company owns, through various subsidiaries and joint venture
interests, a 51.4% indirect ownership in Harbin Bearing Company Limited
("Harbin Bearing"), a joint stock limited company organized under the laws of
the PRC. Harbin Bearing is located in Harbin, the PRC, and has been in
business since 1950. Harbin Bearing manufactures a wide variety of bearings
in the PRC for use in commercial, industrial and aerospace applications and
are sold primarily in the PRC and certain western countries, including the
United States.
On January 16, 1996 (effective December 29, 1995), the Company acquired
Smith Acquisition Company, Inc. dba Southwest Products Company ("Southwest
Products"), a bearing manufacturing company located in Los Angeles County,
California, that has been in business since 1945. Southwest Products
manufactures precision spherical bearings that are sold primarily to the
aerospace and commercial aviation industries. Its major customers are
located in the United States.
2. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America. All material intercompany accounts and
transactions were eliminated on consolidation.
The accompanying consolidated condensed financial statements are
unaudited but, in the opinion of the management of the Company, contain all
adjustments, necessary to present fairly the financial position at June 30,
1997, the results of operations for the three months and six months ended
June 30, 1996 and 1997, and the changes in cash flows for the six months
ended June 30, 1996 and 1997. These adjustments are of a normal recurring
nature.
7
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1996 AND 1997
(Amounts in thousands, except number of shares and per share data)
2. BASIS OF PRESENTATION (continued)
The consolidated balance sheet as of December 31, 1996, is derived from
the Company's audited financial statements. Certain information and footnote
disclosures normally included in financial statements that have been prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities
and Exchange Commission, although management of the Company believes that the
disclosures contained in these financial statements are adequate to make the
information presented therein not misleading. For further information, refer
to the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996 as filed with the Securities and Exchange Commission.
For the three months and six months ended June 30, 1996 and 1997,
primary earnings per common share have been calculated using the weighted
average number of shares of common stock and common stock equivalents
outstanding during the respective periods. Common stock equivalents consist
of convertible preferred stock and outstanding stock options. The
computation of fully diluted earnings per share, where appropriate, assumes
the full conversion of the Convertible Debentures and the elimination of the
related after tax interest expense effective August 23, 1996.
The results of operations for the three months and six months ended June
30, 1997 are not necessarily indicative of the results of operations to be
expected for the full fiscal year ending December 31, 1997.
3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE
In preparing the consolidated financial statements, the financial
statements of the Company are measured using Renminbi ("RMB") as the
functional currency. All foreign currency transactions are translated into
RMB using the applicable floating rates of exchange quoted by the People's
Bank of China prevailing at the dates of the transactions. Monetary assets
and liabilities denominated in foreign currencies have been translated into
RMB using the unified exchange rate prevailing at the balance sheet dates.
The resulting exchange gains or losses have been credited or charged to the
statements of income for the periods in which they occur.
The Company's share capital is denominated in United States dollars
(US$) and the reporting currency is the RMB. For financial reporting
purposes, the US$ share capital amounts have been translated into RMB at the
applicable rates prevailing on the transaction dates.
For financial reporting purposes, translation of amounts from RMB into
US$ for the convenience of the reader has been made at the exchange rate
quoted by the People's Bank of China on June 30, 1997 of US$ 1.00 = RMB 8.29.
No representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rate on June 30, 1997 or at any other certain rate
on June 30, 1997.
8
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1996 AND 1997
(Amounts in thousands, except number of shares and per share data)
4. INVENTORIES
Inventories consist of the following at December 31, 1996 and June 30,
1997:
December 31, 1996 June 30, 1997
----------------- -------------
RMB US$ RMB US$
Raw materials 102,856 12,407 87,105 10,507
Work-in-progress 121,847 14,698 132,498 15,983
Finished goods 257,121 31,016 239,180 28,852
------- ------- ------- ------
481,824 58,121 458,783 55,342
Less: Allowance for obsolescence (5,415) (653) (6,037) (729)
------- ------- ------- ------
Inventories, net 476,409 57,468 452,746 54,613
======= ======= ======= ======
5. SECURED PROMISSORY NOTE
A promissory note for US$ 5,012 (RMB 41,600) (the "Note") was issued to
Asean Capital Limited ("Asean") in connection with the Share Exchange
Agreement and is secured by a continuing security interest in all of the
Company's title and interest in the outstanding capital stock of its wholly-
owned subsidiary China Bearing. The Note is denominated in and is repayable
in full in United States dollars, and bears interest at 8% per annum.
In connection with the issuance of convertible debentures described at
Note 6, Asean has undertaken that for so long as any of the debentures are
outstanding, no amounts are to be repaid on the Note unless there is
sufficient working capital and the repayment is made in accordance with the
following schedule:
Payment Period Amount
-------------- ------
August 1, 1996 to July 31, 1997 up to US$ 2,000 plus accrued interest
August 1, 1997 to July 31, 1998 up to US$ 1,500 plus accrued interest
August 1, 1998 to July 31, 1999 up to US$ 1,500 plus accrued interest
Pursuant to the above described repayment schedule, a principal payment
of US$ 2,012 (RMB 16,700) plus accrued interest was made on the Note on
September 10, 1996.
9
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1996 AND 1997
(Amounts in thousands, except number of shares and per share data)
6. CONVERTIBLE DEBENTURES
Pursuant to a Subscription Agreement dated August 2, 1996, (the
"Subscription Agreement"), among China Bearing, Asean Capital Limited, China
International Bearing Holdings Limited, the Company and Southwest Products
(collectively, the "Sunbase Group"); Glory Mansion Limited, Wardley China
Investment Trust, MC Private Equity Partners Asia Limited and Chine
Investissement 2000 (collectively the "Investors"), on August 23, 1996, China
Bearing issued an aggregate of US$ 11,500,000 principal amount of Convertible
Debentures (the "Convertible Debentures") to the Investors. Unless the
Convertible Debentures have been converted, the Convertible Debentures are
due and payable in August, 1999 (the "Maturity Date"). The Convertible
Debentures bear interest at the rate of the higher of (i) 5% per annum (net
of withholding tax, if applicable) and (ii) such percentage of the dividend
yield calculated by reference to dividing the annual dividend declared per
share of Common Stock of the Company by the Conversion Price (as hereinafter
defined). Interest is payable quarterly.
The Investors have the right to convert at any time, in whole or in part
the principal amount of the Convertible Debentures into shares of the Common
Stock of the Company. The Conversion Price (the "Conversion Price") is
initially $5.00 per share, subject to adjustment for (a) change in par value
of the Common Stock, (b) issuance of shares by way of capitalization of
profits or reserves, (c) capital distributions, (d) rights offering at a
price which is less than the lower of the then market price or Conversion
Price, (e) issuance of derivative securities where the total consideration
per share initially received is less than the lower of the then market price
or Conversion Price, (f) issuance of shares at a price per share which is
less than the lower of the then market price or the Conversion Price, and (g)
if the cumulative audited earnings per common share for any two consecutive
fiscal years commencing with the fiscal year ending December 31, 1996 and
ending with the fiscal year ending December 31, 1998 are less than the
specified projection of cumulative earnings per common share for such
periods.
The Convertible Debentures are required to be redeemed on the Maturity
Date at the principal amount outstanding together with any accrued but unpaid
interest together with an amount that would enable the Investors to realize
an aggregate internal rate of return of 12% per annum on the cost of their
investment. In addition, if any of the events of default specified in the
Convertible Debentures occur, the Convertible Debentures are automatically
due and payable at the principal amount outstanding together with accrued
interest and an amount that would enable the Investors to realize an
aggregate internal rate of return on their investment of 19.75% per annum.
Events of default include the delisting of the shares from NASDAQ or
suspension from trading on NASDAQ; default in performance after failure to
cure after notice; failure to pay principal or interest; failure to pay
indebtedness for borrowed money; bankruptcy, insolvency or unsatisfied
judgment; failure to achieve earnings per common share of at least $.55 for
fiscal years commencing January 1, 1996; and accounts receivable reaching a
certain level in relationship to net sales.
10
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1997
(Amounts in thousands, except number of shares and per share data)
6. CONVERTIBLE DEBENTURES (continued)
As a result of the foregoing, although the Convertible Debentures bear
interest at the rate of 5% per annum, interest is accrued at the rate of 12%
per annum.
The obligations of China Bearing under the Convertible Debentures are
guaranteed by the other members of the Sunbase Group.
7. SALE OF COMMON STOCK
On June 10, 1996, the Company sold 1,000,000 shares of common stock (the
"Private Placement Shares") at US$5.00 per share, which generated net
proceeds of US$ 4,347 (RMB 36,077). Such shares have been registered for
resale with the Securities and Exchange Commission.
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
OVERVIEW
The Company owns, through various subsidiaries and joint venture
interests, a 51.4% indirect ownership interest in Harbin Bearing. Harbin
Bearing manufactures a wide variety of bearings in the PRC for use in
commercial, industrial and aerospace applications that are sold primarily in the
PRC and certain western countries, including the United States. On January 16,
1996 (effective December 29, 1995), the Company acquired Southwest Products,
which manufactures precision spherical bearings that are sold primarily to the
aerospace and commercial aviation industries. The acquisition of Southwest
Products has been accounted for under the purchase method of accounting. The
results of Southwest Products have been consolidated into the Company's
consolidated results of operations commencing January 1, 1996.
Unless specifically stated, all amounts are in thousands (RMB '000).
RESULTS OF OPERATION
THREE MONTHS ENDED JUNE 30, 1996 AND 1997:
The following table sets forth certain unaudited operating data (in RMB
and as a percentage of the Company's sales) for the three months ended June 30,
1996 and 1997.
Three Months Ended June 30,
---------------------------
1996 1997
---- ----
RMB % RMB %
--- --- --- ---
Sales 249,609 100.0 244,626 100.0
Cost of sales (153,028) (61.3) (148,457) (60.7)
-------- ----- -------- -----
Gross profit 96,581 38.7 96,169 39.3
Selling expenses (6,165) (2.5) (6,115) (2.5)
General and administrative expenses (27,971) (11.2) (25,072) (10.3)
Interest expenses (16,451) (6.6) (18,423) (7.5)
-------- ----- -------- -----
Income before income taxes 45,994 18.4 46,559 19.0
Provision for income taxes (7,775) (3.1) (7,671) (3.1)
-------- ----- -------- -----
Income before minority interests 38,219 15.3 38,888 15.9
Minority interests (21,402) (8.6) (21,110) (8.6)
-------- ----- -------- -----
Net income 16,817 6.7 17,778 7.3
======== ===== ======== =====
12
Sales
-----
Sales for the three months ended June 30, 1997 decreased by RMB
4,983 or 2% to RMB 244,626, as compared to RMB 249,609 for the three months
ended June 30, 1996. The decrease in sales was a result of the Company's
efforts to adjust to tightened credit conditions in China. The Company has
responded to such conditions by enhancing its credit review procedures and
limiting sales to customers where collectability was uncertain.
Sales for Harbin Bearing for the three months ended June 30, 1997
decreased by RMB 9,113 or 3.9% to RMB 233,342 as compared to RMB 242,455
for the three months ended June 30, 1996. However, this decrease was
partially offset by an increase in sales for Southwest Products by RMB
4,130 or 57.7% to RMB 11,284 for the three months ended June 30, 1997 as
compared to RMB 7,154 for the three months ended June 30, 1996.
Cost of Sales/Gross Profit
--------------------------
Cost of sales for the three months ended June 30, 1997 decreased to
RMB 148,457 as compared to RMB 153,028 for the three months ended June 30,
1996. The cost of sales for Harbin Bearing for the three months ended June
30, 1997 and 1996 was calculated using the gross profit method by reference
to average annual gross profit ratios. The cost of sales for Southwest
Products for the three months ended June 30, 1997 and 1996 was calculated
on an actual basis.
Gross profit decreased by RMB 412 or 0.4% for the three months ended
June 30, 1997 as compared to the three months ended June 30, 1996. The
decrease in gross profit was attributable to the decrease in sales. Gross
profit as a percentage of sales increased slightly to 39.3% in 1997 from
38.7% in 1996 primarily due to a change in product mix from small and
medium sized bearings to higher margin medium and large sized bearings.
Selling Expenses
----------------
Selling expenses for the three months ended June 30, 1997 decreased
by RMB 50 or 0.8% to RMB 6,115 as compared to RMB 6,165 for the three
months ended June 30, 1996. The decrease in selling expenses was due from
the decrease in sales.
13
General and Administrative Expenses
- -----------------------------------
General and administrative expenses for the three months ended June
30, 1997 decreased by RMB 2,899 or 10.4% to RMB 25,072 as compared to RMB
27,971 for the three months ended June 30, 1996. General and administrative
expenses as a percentage of sales decreased to 10.3% in 1997 from 11.2% in
1996.
The decrease was primarily due to an aggregate cash discount of RMB
6,507 which was granted during the three months ended June 30, 1996 as an
incentive to customers for early settlement of debt in order to accelerate
cash collections. No such cash discount was granted during the three
months ended June 30, 1997.
The above decrease was then offset by the following increases:
a. An increase in staff costs of RMB 743 associated with the U.S.
engineering program at Harbin Bearing, which began in October 1996.
b. An increase in the general provision for doubtful accounts of
RMB 2,000 during the three months ended June 30, 1997.
c. An increase in administrative staff costs by RMB 912 as a result
of increased compensation paid to employees.
Interest Expense
----------------
Interest expense for the three months ended June 30, 1997 increased
by RMB 1,972 or 12% to RMB 18,423 as compared to RMB 16,451 for the three
months ended June 30, 1996. The increase in interest expense was primarily
attributable to the inclusion of RMB 2,885 of Convertible Debenture
interest calculated at the rate of 12% per annum. The interest from
Convertible Debentures, which began on August 23, 1996, was offset by a
0.08% decrease in the interest rate on new short term bank loans also
effective on August 23, 1996.
Net Income
----------
As a result of the aforementioned factors, net income increased by
RMB 961 or 5.7% to RMB 17,778 for the three months ended June 30, 1997 as
compared to RMB 16,817 for the three months ended June 30, 1996.
14
SIX MONTHS ENDED JUNE 30, 1996 AND 1997:
The following table sets forth certain unaudited operating data (in RMB
and as a percentage of the Company's sales) for the six months ended June 30,
1996 and 1997.
Six Months Ended June 30,
-------------------------
1996 1997
---- ----
RMB % RMB %
--- --- --- ---
Sales 465,689 100.0 485,843 100.0
Cost of sales (285,917) (61.4) (295,825) (60.9)
-------- ----- -------- -----
Gross profit 179,772 38.6 190,018 39.1
Selling expenses (12,371) (2.7) (11,946) (2.5)
General and administrative expenses (49,988) (10.7) (48,282) (9.9)
Interest expenses (30,421) (6.5) (36,100) (7.4)
-------- ----- -------- -----
Income before income taxes 86,992 18.7 93,690 19.3
Provision for income taxes (14,420) (3.1) (15,723) (3.2)
-------- ----- -------- -----
Income before minority interests 72,572 15.6 77,967 16.1
Minority interests (39,690) (8.5) (43,271) (8.9)
-------- ----- -------- -----
Net income 32,882 7.1 34,696 7.2
======== ===== ======== =====
Sales
-----
Sales for the six months ended June 30, 1997 increased by RMB 20,154
or 4.3% to RMB 485,843 as compared to RMB 465,689 for the six months ended
June 30, 1996. The increase in sales was due to:
An overall increase in the domestic (Chinese) quantity demand for
bearings primarily in the automobile and machine tooling industries in the
first quarter. This was offset as a result of the Company's efforts to
adjust to tightened credit conditions in China. The Company has responded
to such conditions by enhancing its credit review procedures and limiting
sales to customers where collectability was uncertain.
Sales for Harbin bearing for the six months ended June 30, 1997
increased by RMB 14,805 or 3.3% to RMB 464,421 as compared to RMB 449,616
for the six months ended June 30,1996. This increase was further enhanced
by an increase in sales by Southwest Products in the amount of RMB 5,439
or 33.3% to RMB 21,422 for the six months ended June 30, 1997 as compared
to RMB 16,073 for the six months ended June 30, 1996.
Cost of Sales\Gross Profit
--------------------------
Cost of sales for the six months ended June 30, 1997 increased to
RMB 295,825 as compared to RMB 285,917 for the six months ended June 30,
1996. The cost of sales for Harbin
15
Bearings for the six months ended June 30, 1997 and 1996 were calculated
using the gross profit method by reference to average annual gross profit
ratios. The cost of sales for Southwest Products for the six months ended
June 30, 1997 and 1996 was calculated on an actual cost basis.
Gross profit increased by RMB 10,246 or 5.7% for the six months
ended June 30, 1997 as compared to the six months ended June 30, 1996. The
increase in gross profit was attributable to the increase in sales. Gross
profit as a percentage of sales increased to 39.1% in 1997 from 38.6% in
1996 due to the change in product mix from small and medium sized bearings
to higher margin medium and large sized bearings.
Selling Expenses
----------------
Selling expenses for the six months ended June 30, 1997 decreased by
RMB 425 or 3.4% to RMB 11,946 as compared to RMB 12,371 for the six months
ended June 30, 1996. Although royalty costs and government taxes in the
PRC increased following the increase in sales, the overall selling expenses
decreased as a result of the successful charge back of certain marketing
and transportation costs to customers. Selling expenses as a percentage of
sales decreased from 2.7% in 1996 to 2.5% in 1997.
General and Administrative Expenses
-----------------------------------
General and administrative expenses for the six months ended June
30, 1997 decreased by RMB 1,706 or 3.4% to RMB 48,282 as compared to RMB
49,988 for the six months ended June 30, 1996. General and administrative
expenses as a percentage of sales decreased to 9.9% in 1997 from 10.7% in
1996. Significant factors affecting the change in general and
administrative expenses between 1996 and 1997 were as follows:
a. An increase in staff costs of RMB 1,385 associated with the U.S.
engineering program at Harbin Bearing, which began in October 1996.
b. An aggregate cash discount of RMB 6,507, which was granted during
the six months ended June 30, 1996 as incentive to customers for early
settlement of debt in order to accelerate cash collections. No such
discount was granted during the six months ended June 30, 1997.
c. An increase in the general provision for doubtful accounts of RMB
2,000 during the six months ended June 30, 1997.
d. A management fee payable to the Sunbase International of RMB
2,281 for the six months ended June 30, 1997 where no such fee was paid
during the six months ended June 30, 1996. This management fee was for
rent, utilities, and other administrative costs born by the parent.
e. A loss on the disposal of fixed assets of RMB 582 for the six
months ended June 30, 1997 whereas no gain or loss on the disposal of fixed
assets was recorded during the six months ended June 30, 1996.
f. An increase in property tax of RMB 1,062 in the six months ended
June 30, 1997 as a result of an increase in fixed assets. No such tax was
paid during the six months ended June 30, 1996.
g. An increase in administrative staff costs by RMB 1,647 as a
result of increased
16
compensation paid to workers.
Interest Expense
----------------
Interest expense for the six months ended June 30, 1997 increased by
RMB 5,679 or 18.7% to RMB 36,100 as compared to RMB 30,421 for the six
months ended June 30, 1996. The increase in interest expense was primarily
attributable to the inclusion of RMB 5,724 of Convertible Debenture
interest calculated at the rate of 12% per annum, which began on August 23,
1996.
Net Income
----------
As a result of the aforementioned factors, net income increased by
RMB 1,814 or 5.5% to RMB 34,696 for the six months ended June 30, 1997 as
compared to RMB 32,882 for the six months ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
For the six months ended June 30, 1997, the Company's operations utilized
cash resources of RMB 19,608, as compared to RMB 2,061 utilized for the six
months ended June 30, 1996. The Company's net working capital increased by RMB
79,428 at June 30, 1997 to RMB 484,046 as compared to RMB 404,618 at December
31, 1996, and the Company's current ratio at June 30, 1997 was 1.52:1 as
compared to 1.52:1 at December 31, 1996 and 1.39:1 at June 30, 1996.
Accounts receivable increased by RMB 50,761 or 16.2% to RMB 364,552 at
June 30, 1997, as compared to RMB 313,791 at December 31, 1996. Due from
related companies also increased by RMB 211,863 during the six months ended June
30, 1997. Both increases are mainly a result of credit terms granted on sales
made in the period.
INVESTING ACTIVITIES
Capital expenditures for the six months ended June 30, 1997 of RMB 13,345
consisted of costs relating to the construction of new plant and buildings, and
the renovation of existing facilities and equipment, and were financed by
internally generated funds, as well as short-term and long-term bank loans.
There are no other material capital expenditures expected in the near future.
There is also no dividend restriction on any bank loans.
FINANCING ACTIVITIES
The Company has historically relied on both long and short term bank loans
from Chinese banks to support its operating and capital requirements. Short
term bank loans have terms ranging from three months to six months, are utilized
to finance both operating and capital requirements, and are renewed on a
revolving basis. Long term bank loans are utilized to fund capital expansions
projects. During the six months ended June 30, 1997, the net increase in bank
loans (after deducting repayment) was RMB 16,896, which was utilized to fund
capital expenditures. The Company believes that it will be able to continue to
maintain and expand its bank borrowings under existing terms and conditions.
Southwest Products has relied upon a revolving accounts receivable line
of credit to supplement its
17
capital requirements. The Company believes that Southwest Products will be able
to continue to maintain and expand its bank borrowings under existing terms and
conditions.
Pursuant to a Subscription Agreement dated August 2, 1996, (the
"Subscription Agreement"), among China Bearing, Asean Capital Limited, China
International Bearing Holdings Limited, the Company and Southwest Products
(collectively, the "Sunbase Group"); Glory Mansion Limited, Wardley China
Investment Trust, MC Private Equity Partners Asia Limited and Chine
Investissement 2000 (collectively the "Investors"), on August 23, 1996, China
Bearing issued an aggregate of US$ 11,500,000 principal amount of Convertible
Debentures (the "Convertible Debentures") to the Investors. Unless the
Convertible Debentures have been converted, the Convertible Debentures are due
and payable in August, 1999 (the "Maturity Date"). The Convertible Debentures
bear interest at the rate of the higher of (i) 5% per annum (net of withholding
tax, if applicable) and (ii) such percentage of the dividend yield calculated by
reference to dividing the annual dividend declared per share of Common Stock of
the Company by the Conversion Price (as hereinafter defined). Interest is
payable quarterly.
The Investors have the right to convert at any time the whole or any part
the principal amount of the Convertible Debentures into shares of the Common
Stock of the Company. The Conversion Price (the "Conversion Price") is
initially $5.00 per share, subject to adjustment for (a) change in par value of
the Common Stock, (b) issuance of shares by way of capitalization of profits or
reserves, (c) capital distributions, (d) rights offering at a price which is
less than the lower of the then market price or Conversion Price, (e) issuance
of derivative securities where the total consideration per share initially
received is less than the lower of the then market price or Conversion Price,
(f) issuance of shares at a price per share which is less than the lower of the
then market price or the Conversion Price, and (g) if the cumulative audited
earnings per common share for any two consecutive fiscal years commencing with
the fiscal year ending December 31, 1996 and ending with the fiscal year ending
December 31, 1998 are less than the specified projection of cumulative earnings
per common share for such period.
The Convertible Debentures are required to be redeemed on the Maturity
Date at the principal amount outstanding together with any accrued but unpaid
interest together with an amount that would enable the Investors to realize an
aggregate internal rate of return of 12% per annum on the cost of their
investment. In addition, if any of the events of default specified in the
Convertible Debentures occurs, the Convertible Debentures are automatically due
and payable at the principal amount outstanding together with accrued interest
and an amount that would enable the Investors to realize an aggregate internal
rate of return on their investment of 19.75% per annum. Events of default
include the delisting of the shares from NASDAQ or suspension from trading on
NASDAQ; default in performance after failure to cure after notice; failure to
pay principal or interest; failure to pay indebtedness for borrowed money;
bankruptcy, insolvency or unsatisfied judgments; failure to achieve earnings per
common share of at least $.55 for fiscal years commencing January 1, 1996; and
accounts receivable reaching a certain level in relationship to net sales.
As a result of the foregoing, although the Convertible Debentures bear
interest at the rate of 5% per annum, interest is accrued at the rate of 12% per
annum.
The obligations of China Bearing under the Convertible Debentures are
guaranteed by the other members of the Sunbase Group.
A promissory note for US$ 5,012 (RMB 41,600) (the "Note") was issued to
Asean Capital Limited ("Asean") in connection with the Share Exchange Agreement
and is secured by a continuing security interest in all of the Company's title
and interest in the outstanding capital stock of its wholly-owned subsidiary
China Bearing. The Note is denominated in and is repayable in full in United
States dollars, and bears interest at 8% per annum.
In connection with the issuance of convertible debentures described at
above, Asean has undertaken
18
that for so long as any of the debentures are outstanding, no amounts are to be
repaid on the Note unless there is sufficient working capital and the repayment
is made in accordance with the following schedule:
Payment Period Amount
- -------------- ------
August 1, 1996 to July 31, 1997 up to US$ 2,000 plus accrued interest
August 1, 1997 to July 31, 1998 up to US$ 1,500 plus accrued interest
August 1, 1998 to July 31, 1999 up to US$ 1,500 plus accrued interest
Pursuant to the above described repayment schedule, a principal payment of
US$ 2,012 (RMB 16,700) plus accrued interest was made on the Note on September
10, 1996.
The Company anticipates that its cash flows from operations, combined with
cash and cash equivalents, bank lines of credit and other external sources of
debt and equity financing, and the proceeds from the June 1996 sale of the
1,000,000 shares of common stock and the August 1996 issuance of the Convertible
Debentures, are adequate to finance the Company's operating and debt service
requirements for the foreseeable future.
INFLATION AND CURRENCY MATTERS
In recent years, the Chinese economy has experienced periods of rapid
economic growth as well as high rates of inflation, which in turn has resulted
in the periodic adoption by the Chinese government of various corrective
measures designed to regulate growth and contain inflation. During the six
months ended June 30, 1997, the general inflation rate in the PRC was under
control and was below 10% on an average basis. Since 1993, the Chinese
government has implemented and maintained an economic program designed to
control inflation, which has resulted in the tightening of working capital
available to Chinese business enterprises. The success of the Company depends
in substantial part on the continued growth and development of the Chinese
economy.
The Company continually monitors the effects of inflation. The Company is
generally able to raise its prices to shift a portion of the costs of inflation
to its customers. The price of bearing steel, the major raw material used by
the Company, remained fairly stable during 1996 and 1997. The major impact of
inflation was on labors cost due to increases in employees wages. However, the
Company has generally managed to offset the effects of inflation through
improved operating efficiencies.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. Changes in the relative value
of currencies occur periodically and may, in certain instances, materially
affect the Company's results of operations.
The Company conducts most of its business in the PRC and, accordingly, the
sale of its products is settled primarily in RMB. As a result, devaluation of
the RMB against the US$, could have a material adverse effect upon the results
of operations and financial position of the Company as measured in US$.
Although prior to 1994 the RMB experienced significant devaluation against the
US$, the RMB has remained fairly stable from 1994 to present. The unified
exchange rate was US$ 1.00 to RMB 8.65 at December 31, 1993, RMB 8.45 at
December 31, 1994, RMB 8.32 at December 31, 1995, RMB 8.3 at December 31, 1996
and RMB 8.29 at June 30, 1997.
19
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
No Material Developments
Item 2 Changes in Securities
None
Item 3 Defaults upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Computation of Earnings per common share
27 Financial Data Schedule
(b) Reports on Form 8-K:
Three months ended June 30, 1997: None
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sunbase Asia, Inc.
------------------
(Registrant)
Date: August 13, 1997 By: /s/ William McKay
-----------------
William McKay
Chief Executive Officer and
President
(Duly Authorized Officer)
Date: August 13, 1997 By: /s/ (Roger) Li Yuen Fai
-----------------------
(Roger) Li Yuen Fai
Vice President and
Chief Financial Officer
(Principal Financial Officer)
21