<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission File Number 0-3132
------
SUNBASE ASIA, INC.
---------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 94-1612110
------------------------------ ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
19/F, First Pacific Bank Centre
51-57 Gloucester Road
Wanchai, Hong Kong
--------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (852) 2865-1511
---------------
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of July 31, 1996, the Company had 12,700,104 shares of common stock issued
and outstanding.
Total sequentially numbered pages in this document: 20.
1
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
-----------------------------------
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<S> <C>
Item 1 Financial Statements
Consolidated Condensed Balance Sheets (unaudited)
- December 31, 1995 and June 30, 1996
Consolidated Condensed Statements of Income
(unaudited) -
Three months and six months ended June 30, 1995
and 1996
Consolidated Condensed Statements of Cash Flows
(unaudited) -
Six months ended June 30, 1995 and 1996
Notes to Consolidated Condensed Financial
Statements (unaudited) -
Three months and six months ended June 30, 1995
and 1996
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 11 Computation of Earnings per Common Share
</TABLE>
2
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, 1995 AND JUNE 30, 1996
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
------------------- --------------------
Notes RMB US$ RMB US$
----- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and bank balances 30,944 3,719 44,301 5,325
Accounts receivable, net 264,186 31,753 511,804 61,515
Notes receivable 25,756 3,096 28,701 3,450
Inventories, net 4 476,997 57,331 443,213 53,271
Prepaid VAT 40,429 4,859 - -
Other receivables 57,209 6,876 71,497 8,593
Due from related companies 137,079 16,476 89,470 10,754
--------- ------- ---------- -------
Total current assets 1,032,600 124,110 1,188,986 142,908
Fixed assets 554,086 66,597 575,969 69,227
Deferred asset 18,134 2,180 16,704 2,008
Long term investments 1,438 173 1,012 122
Goodwill 12,144 1,460 12,130 1,458
--------- ------- ---------- -------
Total assets 1,618,402 194,520 1,794,801 215,723
========= ======= ========== =======
</TABLE>
(Continued)
3
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (continued)
DECEMBER 31, 1995 AND JUNE 30, 1996
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
------------------- -----------------------
Notes RMB US$ RMB US$
----- --- --- --- ---
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short term bank loans 276,813 33,271 393,569 47,304
Accounts payable 116,205 13,967 156,112 18,764
Notes payable 15,627 1,878 18,597 2,235
Accrued liabilities and other payables 90,108 10,831 74,348 8,936
Short term obligations under capital leases 17,269 2,075 18,013 2,165
Other loans 33,810 4,064 - -
Secured promissory note 5 41,600 5,000 41,600 5,000
Income tax payable 5,874 706 22,577 2,714
Tax other than income - - 2,793 336
Due to related companies 111,654 13,420 115,150 13,840
Due to shareholders 17,352 2,086 14,498 1,743
--------- ------- --------- -------
Total current liabilities 726,312 87,298 857,257 103,037
Long term bank loans 110,670 13,302 57,270 6,884
Long term obligations under capital leases 107,713 12,946 98,516 11,841
Minority interests 343,142 41,243 382,831 46,013
--------- ------- --------- -------
1,287,837 154,789 1,395,874 167,775
--------- ------- --------- -------
Shareholders' equity:
Common Stock, par value US$0.001 each,
50,000,000 shares authorized;
12,700,104 shares (1995 - 11,700,104 shares)
issued, and fully paid up 6 99 12 107 13
Preferred Stock, par value US$0.001 each,
25,000,000 shares authorized;
Convertible Preferred Stock - Series A;
36 shares issued and outstanding 44,533 5,352 44,533 5,353
Convertible Preferred Stock - Series B;
6,800 shares issued and outstanding 28,288 3,400 28,288 3,400
Contributed surplus 151,942 18,262 187,414 22,525
Reserves 25,266 3,037 25,266 3,037
Retained earnings 80,437 9,668 113,319 13,620
--------- ------- --------- -------
Total shareholders' equity 330,565 39,731 398,927 47,948
--------- ------- --------- -------
Total liabilities and shareholders' equity 1,618,402 194,520 1,794,801 215,723
========= ======= ========= =======
</TABLE>
The accompanying notes form an integral part of these consolidated condensed
financial statements.
4
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
1995 1996 1996 1995 1996 1996
Notes RMB RMB US$ RMB RMB US$
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales
-third parties 371,921 436,073 52,412 206,778 231,381 27,810
-related parties 62,912 29,616 3,560 29,201 18,228 2,191
---------- ---------- ---------- ---------- ---------- ----------
434,833 465,689 55,972 235,979 249,609 30,001
Cost of sales (265,683) (285,917) (34,365) (143,587) (153,028) (18,393)
---------- ---------- ---------- ---------- ---------- ----------
Gross profit 169,150 179,772 21,607 92,392 96,581 11,608
---------- ---------- ---------- ---------- ---------- ----------
Selling, general and
administrative expenses
- third parties (31,224) (40,288) (4,842) (16,650) (23,025) (2,768)
- related parties (19,821) (22,071) (2,653) (9,976) (11,111) (1,335)
---------- ---------- ---------- ---------- ---------- ----------
(51,045) (62,359) (7,495) (26,626) (34,136) (4,103)
---------- ---------- ---------- ---------- ---------- ----------
Interest expense
- third parties (17,767) (25,282) (3,038) (4,670) (13,926) (1,674)
- related parties (5,822) (5,139) (618) (2,870) (2,525) (303)
---------- ---------- ---------- ---------- ---------- ----------
(23,589) (30,421) (3,656) (7,540) (16,451) (1,977)
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes 94,516 86,992 10,456 58,226 45,994 5,528
Provision for income taxes
- Current (14,499) (14,420) (1,733) (8,888) (7,775) (935)
---------- ---------- ---------- ---------- ---------- ----------
Income before minority 80,017 72,572 8,723 49,338 38,219 4,593
interests
Minority interests (39,907) (39,690) (4,771) (24,466) (21,402) (2,572)
---------- ---------- ---------- ---------- ---------- ----------
Net income 40,110 32,882 3,952 24,872 16,817 2,021
========== ========== ========== ========== ========== ==========
Earnings per common share 2 2.62 2.04 .25 1.62 1.04 .13
========== ========== ========== ========== ========== ==========
Number of shares outstanding 2 15,300,104 16,089,994 16,089,994 15,300,104 16,199,884 16,199,884
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes form an integral part of these consolidated condensed
financial statements.
5
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1995 1996 1996
Notes RMB RMB US$
----- ----- ----- -----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income 40,110 32,882 3,952
Adjustments to reconcile net income to net cash
used in operating activities:
Minority interests 39,907 39,690 4,771
Depreciation 22,220 28,151 3,383
Loss on disposal of fixed assets 969 - -
Amortization of goodwill - 14 2
Others (463) 1,429 172
Changes in operating assets
and liabilities -
(Increase) decrease in assets:
Accounts receivable (189,291) (247,618) (29,762)
Notes receivable (26,744) (2,945) (354)
Inventories 80,276 33,784 4,060
Prepaid VAT - 40,429 4,859
Other receivables (30,811) (14,288) (1,717)
Due from related companies 38,925 47,609 5,722
Increase (decrease) in liabilities:
Accounts payable (45,865) 39,907 4,797
Notes payable 15,225 2,970 357
Accrued liabilities and other payables 41,363 (15,760) (1,894)
Income tax payable 6,737 16,703 2,008
Taxes other than income 22,855 2,793 336
Due to related companies (19,247) (4,957) (596)
Due to shareholders (1,340) (2,854) (343)
-------- -------- -------
Net cash used in operating activities (5,174) (2,061) (247)
-------- -------- -------
Cash flows from investing activities:
Disposal of long term investments - 426 51
Proceeds from disposal of fixed assets 274 - -
Additions to fixed assets (35,966) (50,034) (6,014)
-------- -------- -------
Net cash used in investing activities (35,692) (49,608) (5,963)
-------- -------- -------
Cash flows from financing activities:
Net increase in bank loans 21,471 63,356 7,615
Repayment of other loans - (33,810) (4,064)
Proceeds from sale of common stock, net of costs 6 35,480 4,265
-------- -------- -------
Net cash provided by financing activities 21,471 65,026 7,816
-------- -------- -------
Net increase (decrease) in cash and cash equivalents (19,395) 13,357 1,606
Cash and cash equivalents, at beginning of period 65,646 30,944 3,719
-------- -------- -------
Cash and cash equivalents, at end of period 46,251 44,301 5,325
======== ======== =======
Non-cash transaction:
Financing of lease arrangements 7,769 8,453 1,016
======== ======== =======
</TABLE>
The accompanying notes form an integral part of these consolidated condensed
financial statements.
6
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
1. ORGANIZATION
Sunbase Asia, Inc. (the "Company") acquired 100% of the issued share
capital of China Bearing Holdings Limited ("China Bearing") on December 2,
1994 pursuant to a Share Exchange Agreement with Asean Capital Limited in
exchange for 10,261,000 shares of common stock. The transaction has been
treated as a recapitalization of China Bearing with China Bearing as the
acquirer (reverse acquisition). The historical financial statements prior
to December 2, 1994 are those of China Bearing.
The Company is a Nevada corporation which owns, through various
subsidiaries and joint venture interests, a 51.4% indirect ownership
interest in Harbin Bearing Company Limited, a joint stock limited company
organized under the law of the People's Republic of China ("Harbin
Bearing"). Harbin Bearing manufactures a wide variety of bearings in China
for use in commercial, industrial and aerospace applications that are sold
primarily in China and certain western countries, including the United
States.
On January 16, 1996 (effective December 29, 1995), the Company acquired
Smith Acquisition Company, Inc. dba Southwest Products Company
("Southwest") in exchange for 6,800 shares of Series B convertible
preferred stock with a stated value of US$ 500 per share. The Series B
convertible preferred stock is convertible into 680,000 shares of common
stock. The acquisition of Southwest has been accounted for under the
purchase method of accounting, and was recorded as of December 31, 1995.
The results of operations of Southwest have been consolidated into the
Company's consolidated results of operations commencing January 1, 1996.
Southwest manufactures precision spherical bearings that are sold primarily
to the aerospace and commercial aviation industries. Its major customers
are located in the United States.
The following unaudited pro forma financial information for the three
months and six months ended June 30, 1995 is prepared on the basis as if
the acquisition of Southwest had occurred on January 1, 1995, and includes
pro forma depreciation and amortization resulting from the increase to
reflect the fair value of assets and the goodwill arising from the
acquisition of Southwest. The unaudited pro forma financial information
has been prepared for comparative purposes only and does not purport to
represent the results of operations which would actually have occurred had
the acquisition of Southwest been in effect on January 1, 1995, or which
may occur in the future.
7
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED) (continued)
THREE MONTHS ENDED JUNE 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
1. ORGANIZATION (continued)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1995 June 30, 1995
RMB RMB
------------------ ----------------
<S> <C> <C>
Net sales 245,147 454,541
Net income 22,674 36,069
Earnings per common share 1.42 2.26
</TABLE>
2. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States. All material intercompany accounts and transactions were
eliminated on consolidation.
The accompanying consolidated condensed financial statements are
unaudited but, in the opinion of the management of the Company, contain all
adjustments necessary to present fairly the financial position at June 30,
1996, the results of operations for the three months and six months ended
June 30, 1995 and 1996, and the changes in cash flows for the six months
ended June 30, 1995 and 1996. These adjustments are of a normal recurring
nature. The consolidated balance sheet as of December 31, 1995 is derived
from the Company's audited financial statements. Certain information and
footnote disclosures normally included in financial statements that have
been prepared in accordance with generally accepted accounting principals
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission, although management of the Company
believes that the disclosures contained in these financial statements are
adequate to make the information presented therein not misleading. For
further information, refer to the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, as filed with the Securities and
Exchange Commission.
The earnings per common share for the three months and six months ended
June 30, 1995 and 1996 have been calculated using the weighted average
number of shares of common stock and common stock equivalents outstanding
during each respective period, and assumes that all outstanding shares of
convertible
8
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED) (continued)
THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
2. BASIS OF PRESENTATION (continued)
preferred stock have been converted into common stock. Included in the
calculation for 1996 are the preferred shares issued in conjunction with
the Southwest acquisition, which was recorded as of December 31, 1995, and
the 1,000,000 shares of common stock issued on June 10, 1996.
The results of operations for the three months and six months ended
June 30, 1996 are not necessarily indicative of the results of operations
to be expected for the full fiscal year ending December 31, 1996.
3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE
In preparing the consolidated financial statements, the financial
statements of the Company are measured using Renminbi ("RMB") as the
functional currency. All foreign currency transactions are translated into
RMB using the applicable floating rates of exchange quoted by the People's
Bank of China prevailing at the dates of the transactions. Monetary assets
and liabilities denominated in foreign currencies have been translated into
RMB using the applicable exchange rates prevailing at the balance sheet
dates. The resulting exchange gains or losses have been credited or
charged to the statements of income for the periods in which they occur.
The Company's share capital is denominated in United States dollars (US$)
and the reporting currency is the RMB. For financial reporting purposes,
the US$ share capital amounts have been translated into RMB at the
applicable rates prevailing on the transaction dates.
For financial reporting purposes, translation of amounts from RMB into
US$ for the convenience of the reader has been made at the exchange rate
quoted by the People's Bank of China on June 30, 1996, of US$ 1.00 = RMB
8.32. No representation is made that the RMB amounts could have been, or
could be, converted into US$ at that rate on June 30, 1996 or at any other
certain rate on June 30, 1996.
9
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED) (continued)
THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
4. INVENTORIES
Inventories consist of the following at December 31, 1995 and June 30,
1996:
<TABLE>
<CAPTION>
December 31, 1995 June 30, 1996
----------------- ----------------
RMB US$ US$ RMB
------ ----- ----- -----
<S> <C> <C> <C> <C>
Raw materials 105,132 12,636 107,483 12,919
Work-in-progress 104,697 12,584 117,837 14,163
Finished goods 271,477 32,629 222,384 26,729
------- ------ ------- ------
481,306 57,849 447,704 53,811
Less: Allowance for
obsolescence (4,309) (518) (4,491) (540)
------- ------ ------- ------
Inventories, net
476,997 57,331 443,213 53,271
======= ====== ======= ======
</TABLE>
5. SECURED PROMISSORY NOTE
A promissory note (the "Note") was issued to Asean Capital Limited
("Asean") in connection with the Share Exchange Agreement and is secured by
a continuing security interest in all of the Company's title and interest
in the outstanding capital stock of its wholly-owned subsidiary, China
Bearing. The Note is denominated in United States dollars, is repayable in
full in United States dollars on December 31, 1996 and bears interest at 8%
per annum.
6. SALE OF COMMON STOCK
On June 10, 1996, the Company sold 1,000,000 shares of common stock at
US$ 5.00 per share, which generated net proceeds of US$ 4,265 (RMB 35,480).
The Company has agreed to promptly file a registration statement with the
U.S. Securities and Exchange Commission to register the shares of common
stock.
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company owns, through various subsidiaries and joint venture
interests, a 51.4% indirect ownership interest in Harbin Bearing. Harbin
Bearing manufactures a wide variety of bearings in China for use in
commercial, industrial and aerospace applications that are sold primarily
in China and certain western countries, including the United States. On
January 16, 1996 (effective December 29, 1995), the Company acquired
Southwest, which manufactures precision spherical bearings that are sold
primarily to the aerospace and commercial aviation industries. The
acquisition of Southwest has been accounted for under the purchase method
of accounting. The results of operations of Southwest have been
consolidated into the Company's consolidated results of operations
commencing January 1, 1996.
Unless specifically stated, all amounts are in thousands (RMB '000).
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1995 AND 1996:
The following table sets forth certain unaudited operating data (in RMB
and as a percentage of the Company's sales) for the three months ended June
30, 1995 and 1996.
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1995 1996
---- ----
RMB % RMB %
--- --- --- ---
<S> <C> <C> <C> <C>
Sales 235,979 100.0 249,609 100.0
Cost of sales (143,587) (60.8) (153,028) (61.3)
------- ----- -------- -----
Gross profit 92,392 39.2 96,581 38.7
Selling expenses (4,650) (2.0) (6,165) (2.5)
General and administrative expenses (21,976) (9.3) (27,971) (11.2)
Interest expense (7,540) (3.2) (16,451) (6.6)
------- ----- -------- -----
Income before income taxes 58,226 24.7 45,994 18.4
Provision for income taxes (8,888) (3.8) (7,775) (3.1)
------- ----- -------- -----
Income before minority interests 49,338 20.9 38,219 15.3
Minority interests (24,466) (10.4) (21,402) (8.6)
------- ----- -------- -----
Net income 24,872 10.5 16,817 6.7
======= ===== ======== =====
</TABLE>
11
<PAGE>
Sales
-----
Sales (including RMB 7,155 from Southwest) for the three months ended
June 30, 1996 increased by RMB 13,630 or 5.8% to RMB 249,609, as compared
to RMB 235,979 for the three months ended June 30, 1995. Excluding
Southwest's operations, sales increased by RMB 6,475 or 2.7% for the three
months ended June 30, 1996 as compared to the three months ended June 30,
1995. The rate at which sales had been growing has slowed in 1996 as
compared to 1995 as a result of the Company's efforts beginning in the
latter part of 1995 to consolidate the distribution of its products in
China by shifting smaller OEM accounts to certain large distributors (see
"LIQUIDITY AND CAPITAL RESOURCES - OPERATING ACTIVITIES").
Cost of Sales/Gross Profit
--------------------------
Cost of sales (including RMB 5,616 from Southwest) for the three months
ended June 30, 1996 increased to RMB 153,028 as compared to RMB 143,587 for
the three months ended June 30, 1995. The cost of sales for Harbin Bearing
for the three months ended June 30, 1996 and 1995 was calculated using the
gross profit method by reference to average annual gross profit ratios.
The cost of sales for Southwest for the three months ended June 30, 1996
was calculated based on actual cost.
Gross profit increased by RMB 4,189 or 4.5% for the three months ended
June 30, 1996 as compared to the three months ended June 30, 1995. The
increase in gross profit was attributable to the increase in sales. Gross
profit as a percentage of sales decreased to 38.7% in 1996 from 39.2% in
1995 due to Southwest's lower gross margin of 21.5%.
Selling Expenses
----------------
Selling expenses (including RMB 1,495 from Southwest) for the three
months ended June 30, 1996 increased by RMB 1,515 or 32.6% to RMB 6,165 as
compared to RMB 4,650 for the three months ended June 30, 1995. The
increase in selling expenses was primarily attributable to the
consolidation of Southwest's selling expenses in 1996. Selling expenses as
a percentage of sales increased from 2.0% in 1995 to 2.5% in 1996.
General and Administrative Expenses
-----------------------------------
General and administrative expenses (including RMB 2,351 from
Southwest) for the three months ended June 30, 1996 increased by RMB 5,995
or 27.3% to RMB 27,971 as compared to RMB 21,976 for the three months ended
June 30, 1995. General and administrative expenses as a percentage of sales
increased to 11.2% in 1996 from 9.3% in 1995. The increase in general and
administrative expenses was primarily attributable to:
12
<PAGE>
a. The consolidation of Southwest's general and administrative expenses
of RMB 2,351.
b. An increase in the management fee of RMB 908 payable to Harbin
Bearing Holdings Company as a result of a 10% inflation adjustment.
c. An aggregate cash discount of RMB 6,507 which was granted during the
three months ended June 30, 1996 as incentives to customers for early
settlement of debt in order to accelerate cash collections. No such cash
discount was granted during the three months ended June 30, 1995.
d. A decrease in compensation expense of RMB 1,871 related to the
voluntary early retirement program at Harbin Bearing.
Interest Expense
----------------
Interest expense (including RMB 732 from Southwest) for the three
months ended June 30, 1996 increased by RMB 8,911 or 118.2% to RMB 16,451
as compared to RMB 7,540 for the three months ended June 30, 1995. The
increase in interest expense was attributable to the overaccrual of
interest expense of RMB 4,750 during the three months ended March 31, 1995
which was subsequently reversed during the three months ended June 30,
1995. Excluding the effect from the reversal of the overaccrual, interest
expense increased by RMB 4,161 or 33.9% as a result of an increase in
principal amount of bank loans during the three months ended June 30, 1996
as compared to the three months ended June 30, 1995, and the 1.3% increase
in the interest rate on new short term bank loans effective July 1, 1995.
Net Income
----------
As a result of the aforementioned factors, including the consolidation
of Southwest's operations effective January 1, 1996, net income decreased
by RMB 8,055 or 32.4% to RMB 16,817 for the three months ended June 30,
1996 as compared to RMB 24,872 for the three months ended June 30, 1995.
13
<PAGE>
SIX MONTHS ENDED JUNE 30, 1995 AND 1996:
The following table sets forth certain unaudited operating data (in RMB
and as a percentage of the Company's sales) for the six months ended June
30, 1995 and 1996.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------
1995 1996
--------------------- ----------------------
RMB % RMB %
------- ----- ------- ----
<S> <C> <C> <C> <C>
Sales 434,833 100.0 465,689 100.0
Cost of sales (265,683) (61.1) (285,917) (61.4)
------- ----- ------- ----
Gross profit 169,150 38.9 179,772 38.6
Selling expenses (9,753) (2.3) (12,371) (2.7)
General and administrative expenses (41,292) (9.5) (49,988)
Interest expense (23,589) (5.4) (30,421) (6.5)
Income before income taxes 94,516 21.7 86,992 18.7
Provision for income taxes (14,499) (3.3) (14,420) (3.1)
------- ----- ------- ----
Income before minority interests 80,017 18.4 72,572 15.6
Minority interests (39,907) (9.2) (39,690) (8.5)
------- ----- ------- ----
Net income 40,110 9.2 32,882 7.1
======= ===== ======= ====
</TABLE>
Sales
-----
Sales (including RMB 16,073 from Southwest) for the six months ended
June 30, 1996 increased by RMB 30,856 or 7.1% as compared to the six months
ended June 30, 1995. Excluding Southwest's operations, sales increased by
RMB 14,783 or 3.4% for the six months ended June 30, 1996 as compared to
the six months ended June 30, 1995. The rate at which sales had been
growing has slowed in 1996 as compared to 1995 as a result of the Company's
efforts beginning in the latter part of 1995 to consolidate the
distribution of its products in China by shifting smaller OEM accounts to
certain large distributors (see "LIQUIDITY AND CAPITAL RESOURCES -
OPERATING ACTIVITIES").
Cost of Sales/Gross Profit
--------------------------
Cost of sales (including RMB 12,550 from Southwest) for the six months
ended June 30, 1996 increased to RMB 285,917 as compared to RMB 265,683 for
the six months ended June 30, 1995. The cost of sales for Harbin Bearing
for the six months ended June 30, 1996 and 1995 was calculated using the
gross profit method by reference to average annual gross profit ratios. The
cost of sales for
14
<PAGE>
Southwest for the six months ended June 30, 1996 was calculated based on
actual cost.
Gross profit increased by RMB 10,662 or 6.3% for the six months ended
June 30, 1996 as compared to the six months ended June 30, 1995. The
increase in gross profit was attributable to the increase in sales. Gross
profit as a percentage of sales decreased to 38.6% in 1996 from 38.9% in
1995 due to Southwest's lower gross margin of 21.9%.
Selling Expenses
----------------
Selling expenses (including RMB 2,501 from Southwest) for the six
months ended June 30, 1996 increased by RMB 2,618 or 26.8% to RMB 12,371 as
compared to RMB 9,753 for the six months ended June 30, 1995. The increase
in selling expenses was primarily attributable to the consolidation of
Southwest's selling expenses in 1996. Selling expenses as a percentage of
sales increased from 2.3% in 1995 to 2.7% in 1996.
General and Administrative Expenses
-----------------------------------
General and administrative expenses (including RMB 4,370 from
Southwest) for the six months ended June 30, 1996 increased by RMB 8,696 or
21.1% to RMB 49,988 as compared to RMB 41,292 for the six months ended June
30, 1995. General and administrative expenses as a percentage of sales
increased to 10.7% in 1996 from 9.5% in 1995. The increase in general and
administrative expenses was mainly attributable to:
a. The consolidation of Southwest's general and administrative expenses
of RMB 4,370.
b. An increase in the management fee of RMB 1,816 payable to Harbin
Bearing Holdings Company as a result of a 10% inflation adjustment.
c. An aggregate cash discount of RMB 6,507 which was granted during the
six months ended June 30, 1996 as incentives to customers for early
settlement of debt in order to accelerate the cash collections. No such
cash discount was granted during the six months ended June 30, 1995.
d. A decrease in compensation expense of RMB 3,939 related to the
voluntary early retirement program at Harbin Bearing.
Interest Expense
----------------
Interest expense (including RMB 1,380 from Southwest) for the six
months ended June 30, 1996 increased by RMB 6,832 or 29.0% to RMB 30,421 as
compared to RMB 23,589 for the six months ended June 30, 1995. The increase
in interest expense was attributable to an increase in principal amount of
bank
15
<PAGE>
loans during the six months ended June 30, 1996 as compared to the six
months ended June 30, 1995, and the 1.3% increase in the interest rate on
new short term bank loans effective July 1, 1995.
Net Income
----------
As a result of the aforementioned factors, including the consolidation
of Southwest's operations effective January 1, 1996, net income decreased
by RMB 7,228 or 18.0% to RMB 32,882 for the six months ended June 30, 1996
as compared to RMB 40,110 for the six months ended June 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
For the six months ended June 30, 1996, the Company's operations
utilized cash resources of RMB 2,061, as compared to RMB 5,174 for the six
months ended June 30, 1995. The Company's net working capital increased by
RMB 25,441 at June 30, 1996, to RMB 331,729, as compared to RMB 306,288 at
December 31, 1995, and the Company's current ratio at June 30, 1996 was
1.36:1, as compared to 1.42:1 at December 31, 1995 and 1.47:1 at June 30,
1995.
During the latter part of 1995, the Company began to consolidate the
distribution of its products in China by shifting smaller OEM accounts to
designated large distributors. The Company has granted extended credit
terms to such distributors to facilitate this transition, which the Company
expects to continue at least through the remainder of 1996. This new
marketing strategy is expected to reduce marketing costs and credit risk.
The Company's accounts receivable increased by RMB 247,618 or 93.7% to
RMB 511,804 at June 30, 1996, as compared to RMB 264,186 at December 31,
1995. The increase in accounts receivable for the six months ended June 30,
1996 is consistent with the increase in accounts receivable of RMB 189,291
or 63.5% for the six months ended June 30, 1995. Also contributing to the
increase in accounts receivable during the six months ended June 30, 1996
was the granting of extended credit terms to designated large distributors
and the slowdown in accounts receivable collections from the Company's
previous smaller OEM accounts.
Offsetting, in part, the effect of the increase in accounts receivable,
accounts payable increased by RMB 39,907 or 34.3% to RMB 156,112 at June
30, 1996, as compared to RMB 116,205 at December 31, 1995. In addition,
due from related companies decreased by RMB 47,609 or 34.7% to RMB 89,470
at June 30, 1996, as compared to RMB 137,079 at December 31, 1995, and
prepaid VAT of RMB 40,429 at December 31, 1995 was completely utilized
during the six months ended June 30, 1996.
INVESTING ACTIVITIES
16
<PAGE>
Capital expenditures for the six months ended June 30, 1996 of RMB
50,034 consisted of costs relating to the construction of new plant and
buildings and the renovation of existing facilities and equipment, and were
financed by bank loans and the sale of common stock. The Company
anticipates that additional capital expenditures for the remainder of 1996
will not exceed RMB 10,000.
FINANCING ACTIVITIES
The Company has historically relied on both long and short term bank
loans from Chinese banks to support its operating and capital requirements.
Short term bank loans have terms ranging from three months to six months,
are utilized to finance both operating and capital requirements, and are
reviewed on a revolving basis. Long term bank loans are utilized to fund
capital expansion projects. During the six months ended June 30, 1996, the
net increase in bank loans (after deducting repayments) was RMB 63,356,
which was utilized to fund the repayment of other loans of RMB 33,810 and
operations and capital expenditures. The Company believes that it will be
able to continue to maintain and expand its bank borrowings under existing
terms and conditions.
In order to finance the Company's continuing operating and capital
requirements, the Company has been evaluating both debt and equity
financing opportunities. During June 1996, the Company sold 1,000,000
shares of common stock at US $5.00 per share, generating net proceeds of
US$ 4,265 (RMB 35,480). In addition, the Company has entered into a
subscription agreement for a financing consisting of US$ 11,500 (RMB
95,680) aggregate principal amount of convertible subordinated debentures
that is scheduled for completion during August 1996. However, there can be
no assurances that this financing will ultimately be completed.
The Company anticipates that its cash flows from operations, combined
with cash and cash equivalents, bank lines of credit and other external
sources of debt and equity financing, and the proceeds from the June 1996
sale of the 1,000,000 shares of common stock, are adequate to finance the
Company's operating and debt service requirements for the foreseeable
future.
INFLATION AND CURRENCY MATTERS
In recent years, the Chinese economy has experienced periods of rapid
economic growth as well as high rates of inflation, which in turn has
resulted in the periodic adoption by the Chinese government of various
corrective measures designed to regulate growth and contain inflation.
During the six months ended June 30, 1996, the general inflation rate in
China was in excess of 10% on an annualized basis. Since 1993, the Chinese
government has implemented and maintained an economic program designed to
control inflation, which has resulted in the tightening of working capital
available to Chinese business enterprises. The success of the Company
depends in substantial part on the continued growth and development of the
Chinese economy.
17
<PAGE>
The Company continually monitors the effects of inflation. The Company
is generally able to raise its prices to shift a portion of the inflated
costs to its customers. The price of bearing steel, the major raw material
used by the Company, remained fairly stable during 1995 and 1996. The major
impact of inflation was on labor costs due to increases in employee wages.
However, the Company has generally managed to offset the effects of
inflation through improved operational efficiency.
Foreign operations are subject to certain risks inherent in conduction
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. Changes in the relative
value of currencies occur periodically and may, in certain instances,
materially affect the Company's results of operations.
The Company conducts most of its business in China and, accordingly,
the sale of its products are settled primarily in RMB. As a result,
continued devaluation of the RMB against the USD will adversely affect its
financial performance when measured in USD, and may have material adverse
effects upon the results of operations and financial position of the
Company. Although prior to 1994 the RMB experienced significant devaluation
against the USD, the RMB has remained fairly stable from 1994 to present.
The unified exchange rate was US$1.00 to RMB 8.65 at December 31, 1993, RMB
8.45 at December 31, 1994, RMB 8.32 at December 31, 1995, and RMB 8.32 at
June 30, 1996.
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Computation of Earnings per Common Share
27 Financial Data Schedule
(b) Reports on Form 8-K:
Three months ended June 30, 1996: None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Sunbase Asia, Inc.
-----------------
(Registrant)
Date: August 19, 1996 By: /s/ WILLIAM McKAY
----------------------------------
William McKay
Chief Executive Officer and President
(Duly Authorized Officer)
Date: August 19, 1996 By: /s/ (ROGER) LI YUEN FAI
-------------------------------
(Roger) Li Yuen Fai
Vice President and Chief Financial
Officer
(Chief Financial Officer)
19
<PAGE>
EXHIBIT 11
----------
SUNBASE ASIA, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
---------------------------------------- -----------------------------------------
1995 1996 1996 1995 1996 1996
RMB RMB US$ RMB RMB US$
---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income 40,110 32,882 3,952 24,872 16,817 2,021
========== ========== ========== ========== ========== =========
Weighted average shares of
common stock outstanding:
Shares of common stock
outstanding on January 1,
1996 11,700,104 11,700,104 11,700,104 11,700,104 11,700,104 11,700,104
1,000,000 shares of common
stock issued on June 10,
1996 - 109,890 109,890 - 219,780 219,780
---------- ---------- ---------- ---------- ---------- ----------
Total weighted average shares
of common stock outstanding 11,700,104 11,809,994 11,809,994 11,700,104 11,919,884 11,919,884
Shares of common stock
issuable if the Convertible
Preferred Stock were
converted at the beginning
of each respective fiscal year
- -Series A 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000 3,600,000
- -Series B - 680,000 680,000 - 680,000 680,000
---------- ---------- ---------- ---------- ---------- ----------
Total weighted average shares
of common stock and
common stock equivalents 15,300,104 16,089,994 16,089,994 15,300,104 16,199,884 16,199,884
========== ========== ========== ========== ========== ==========
Earnings per common share 2.62 2.04 .25 1.62 1.04 .13
========== ========== ========== ========== ========== ==========
</TABLE>
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated condensed financial statements contained in the Company's
quarterly report on Form 10-Q for the quarterly period ended June 30, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,325,000
<SECURITIES> 0
<RECEIVABLES> 61,515,000
<ALLOWANCES> 0
<INVENTORY> 53,271,000
<CURRENT-ASSETS> 142,908,000
<PP&E> 69,227,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 215,723,000
<CURRENT-LIABILITIES> 103,037,000
<BONDS> 18,725,000
0
8,753,000
<COMMON> 13,000
<OTHER-SE> 39,182,000
<TOTAL-LIABILITY-AND-EQUITY> 215,723,000
<SALES> 55,972,000
<TOTAL-REVENUES> 55,972,000
<CGS> 34,365,000
<TOTAL-COSTS> 34,365,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,656,000
<INCOME-PRETAX> 10,456,000
<INCOME-TAX> 1,733,000
<INCOME-CONTINUING> 3,952,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,952,000
<EPS-PRIMARY> .25
<EPS-DILUTED> 0
</TABLE>
