<PAGE>
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 March 31, 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 March 31, 1997, the Company had 12,700,109 shares of common stock issued
and outstanding.
<PAGE>
SUNBASE ASIA , INC. AND SUBSIDIARIES
------------------------------------
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1 -- Financial statements
Consolidated Condensed Balance Sheets (unaudited)
- December 31, 1996 and March 31, 1997 3-4
Consolidated Condensed Statements of Income (unaudited)
- Three months ended March 31, 1996 and 1997 5
Consolidated Condensed Statements of Cash Flows (unaudited)
- Three months ended March 31, 1996 and 1997 6
Notes to Consolidated Condensed Financial Statements
(unaudited)
- Three months ended March 31, 1996 and 1997 7-11
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-17
PART II: OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT 11 Computation of Earnings Per Common Share 20-21
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
--------------------
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AS OF DECEMBER 31, 1996 AND MARCH 31, 1997
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
12/31/96 3/31/97
-------------------- --------------------
Notes RMB US$ RMB US$
----- --- --- --- ---
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and bank balances 87,428 10,533 70,028 8,437
Accounts receivable, net 313,791 37,806 366,762 44,188
Notes receivable 15,212 1,833 2,735 329
Inventories, net 4 476,409 57,399 467,587 56,336
Other receivables 70,075 8,442 84,756 10,212
Receivable from disposal
of an investment 13,419 1,617 13,419 1,617
Due from related companies 205,275 24,732 295,350 35,584
--------- -------- ---------- -------
Total current assets 1,181,609 142,362 1,300,637 156,703
Fixed assets 656,071 79,045 645,349 77,753
Deferred asset 22,204 2,675 21,981 2,648
Long term investments 1,012 122 1,012 122
Goodwill 11,587 1,396 11,380 1,371
--------- -------- ---------- -------
Total assets 1,872,483 225,600 1,980,359 238,597
========= ======== ========== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short term bank loans 358,847 43,235 369,075 44,467
Long term bank loans, current portion 98,641 11,884 93,811 11,303
Accounts payable 151,971 18,310 131,999 15,903
Notes payable 2,800 337 2,300 277
Accrued liabilities and other payables 55,544 6,692 102,996 12,409
Short term obligations under capital leases 18,788 2,264 19,188 2,312
Short term portion of
secured promissory note 5 12,450 1,500 12,450 1,500
Income tax payable 38,368 4,623 49,066 5,912
Taxes other than income 25,225 3,038 51,329 6,184
Due to related companies 14,357 1,730 18,524 2,232
--------- -------- ---------- -------
Total current liabilities 776,991 93,613 850,738 102,499
Long term bank loans 35,000 4,217 35,000 4,217
Long term obligations under capital leases 88,924 10,714 83,974 10,117
Long term portion of secured promissory note 5 12,450 1,500 12,450 1,500
Convertible debentures 6 95,450 11,500 95,450 11,500
Minority interests 420,484 50,661 442,645 53,331
--------- -------- ---------- -------
1,429,299 172,205 1,520,257 183,164
</TABLE>
Continued/...
The accompanying notes form an integral part of these consolidated condensed
financial statements.
3
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND MARCH 31, 1997 (UNAUDITED) (CONTINUED)
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
12/31/96 3/31/97
-------------------- --------------------
RMB US$ RMB US$
--- --- --- ---
<S> <C> <C> <C> <C>
Shareholders' equity:
Common Stock, par value US$ 0.001 each,
50,000,000 shares authorized;
12,700,109 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 5,365 44,533 5,365
Convertible Preferred Stock - Series B;
6,800 shares issued and outstanding 28,288 3,408 28,288 3,408
Contributed surplus 188,019 22,653 188,019 22,653
Reserves 27,866 3,357 27,866 3,357
Retained earnings 154,371 18,599 171,289 20,637
--------- ------- ---------- -------
Total shareholders' equity 443,184 53,395 460,102 55,433
--------- ------- ---------- -------
Total liabilities and shareholders' equity 1,872,483 225,600 1,980,359 238,597
========= ======= ========== =======
</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)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------
1996 1997 1997
Notes RMB RMB US$
----- -------------- -------------- ---------------
<S> <C> <C> <C>
Net sales to
- Third parties 203,432 138,146 16,644
- Related parties 12,648 103,071 12,418
---------- ---------- ----------
216,080 241,217 29,062
Cost of sales ( 132,889) ( 147,368) ( 17,755)
---------- ---------- ----------
Gross profit 83,191 93,849 11,307
Selling, general and
administrative expenses
- Third parties ( 17,263) ( 16,549) ( 1,994)
- Related parties ( 10,960) ( 12,492) ( 1,505)
---------- ---------- ----------
( 28,223) ( 29,041) ( 3,499)
Interest expense, net
- Third parties ( 11,356) ( 15,431) ( 1,859)
- Related parties ( 2,614) ( 2,246) ( 271)
---------- ---------- ----------
( 13,970) ( 17,677) ( 2,130)
---------- ---------- ----------
Income before income taxes 40,998 47,131 5,678
Provision for income taxes:
- Current ( 6,645) ( 8,052) ( 970)
- Deferred - - -
---------- ---------- ----------
Income before minority interests 34,353 39,079 4,708
Minority interests ( 18,288) ( 22,161) ( 2,670)
---------- ---------- ----------
Net income 16,065 16,918 2,038
========== ========== ==========
Earnings per common share 2
- Primary 1.00 1.00 0.12
========== ========== ==========
- Fully diluted 1.00 1.02 0.12
========== ========== ==========
Number of shares outstanding 2, 7
- Primary 15,980,063 16,980,109 16,980,109
========== ========== ==========
- Fully diluted 15,980,063 19,280,109 19,280,109
========== ========== ==========
</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)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------
1996 1997 1997
RMB RMB US$
--- --- ---
<S> <C> <C> <C>
Cash flows from operating activities:
Net income 16,065 16,918 2,038
Adjustments to reconcile income to net
cash provided by (used in) operating activities:
Minority interests 18,288 22,161 2,670
Depreciation 15,771 17,792 2,144
Loss on disposal of fixed assets - 583 70
Amortization of goodwill 188 207 25
Exchange difference on secured promissory note 50 - -
Amortization of present value discount
on deferred asset 715 ( 195) ( 23)
Amortization of deferred debenture issue expense - 418 50
Changes in operating assets and liabilities-
(Increase) decrease in assets:
Accounts receivable ( 132,884) ( 52,971) ( 6,382)
Notes receivable 11,452 12,477 1,504
Inventories 16,009 8,822 1,063
Prepaid VAT 24,256 - -
Other receivables ( 14,093) ( 14,681) ( 1,770)
Due from related companies ( 48,014) ( 90,075) ( 10,852)
Increase (decrease) in liabilities:
Accounts payable 21,397 ( 19,972) ( 2,407)
Notes payable ( 655) ( 500) ( 60)
Accrued liabilities and other payables ( 13,861) 47,452 5,717
Income tax payable 8,348 10,698 1,289
Taxes other than income - 26,104 3,146
Due to related companies 77,600 ( 383) ( 47)
Due to shareholders 2,652 - -
-------- -------- -------
Net cash provided by (used in) operating activities 3,284 ( 15,145) ( 1,825)
Cash flows from investing activities:
Disposal of long term investments 426 - -
Proceeds from disposal of fixed assets - 133 16
Additions to fixed assets ( 20,476) ( 7,786) ( 938)
-------- -------- -------
Net cash used in investing activities ( 20,050) ( 7,653) ( 922)
-------- -------- -------
Cash flows from financing activities:
Net increase in bank loans 43,776 5,398 651
Repayment of other loans ( 33,810) - -
-------- -------- -------
Net cash provided by financing activities 9,966 5,398 651
-------- -------- -------
Net decrease in cash and cash equivalents ( 6,800) ( 17,400) ( 2,096)
Cash and cash equivalents, at beginning of period 30,944 87,428 10,533
-------- -------- -------
Cash and cash equivalents, at end of period 24,144 70,028 8,437
======== ======== =======
Non-cash transaction:
Financing of lease arrangements 4,182 4,550 549
======== ======== =======
</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)
FOR THE THREE MONTHS ENDED MARCH 31, 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 March 31,
1997, the results of operations for the three months ended March 31, 1996 and
1997, and the changes in cash flows for the three months ended March 31, 1996
and 1997. These adjustments are of a normal recurring nature.
7
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 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 ended March 31, 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 ended March 31, 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 March 31, 1997 of US$ 1.00 = RMB 8.3.
No representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rate on March 31, 1997 or at any other certain rate
on March 31, 1997.
8
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 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 March 31,
1997:
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1997
----------------- --------------
RMB US$ RMB US$
--- --- --- ---
<S> <C> <C> <C> <C>
Raw materials 102,856 12,392 78,299 9,434
Work-in-progress 121,847 14,680 129,159 15,561
Finished goods 257,121 30,979 265,959 32,043
------- -------- ------- ------
481,824 58,051 473,417 57,038
Less: Allowance for obsolescence ( 5,415) ( 652) ( 5,830) ( 702)
------- -------- ------- ------
Inventories, net 476,409 57,399 467,587 56,336
======= ======== ======= ======
</TABLE>
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
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 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
of 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 its principal amount outstanding together with any accrued but unpaid
interest together with an amount that would enable the Investors to yield 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 Debenture are automatically due
and payable at the principal amount outstanding together with accrued
interest and an amount that would enable the Investors to yield 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 its suspension
thereof; 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 earning
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.
10
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(Amounts in thousands, except number of shares and per share data)
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). On October 23, 1996, the Company filed a
registration statement with the Securities and Exchange Commission to
register the resale of the Private Placement Shares.
11
<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 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
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 March 31,
1996 and 1997.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1997
---- ----
RMB % RMB %
--- - --- -
<S> <C> <C> <C> <C>
Sales 216,080 100.0 241,217 100.0
Cost of sales ( 132,889) ( 61.5) ( 147,368) ( 61.1)
--------- ------ ---------- ------
Gross profit 83,191 38.5 93,849 38.9
Selling expenses ( 6,206) ( 2.9) ( 5,831) ( 2.4)
General and administrative expenses ( 22,017) ( 10.2) ( 23,210) ( 9.7)
Interest expenses ( 13,970) ( 6.5) ( 17,677) ( 7.3)
--------- ------ ---------- ------
Income before income taxes 40,998 18.9 47,131 19.5
Provision for income taxes ( 6,645) ( 3.1) ( 8,052) ( 3.3)
--------- ------ ---------- ------
Income before minority interests 34,353 15.8 39,079 16.2
Minority interests ( 18,288) ( 8.4) ( 22,161) ( 9.2)
--------- ------ ---------- ------
Net income 16,065 7.4 16,918 7.0
========= ====== ========= ======
</TABLE>
12
<PAGE>
Sales
-----
Sales for the three months ended March 31, 1997 increased by RMB
25,137 or 11.6% to RMB 241,217, as compared to RMB 216,080 for the three
months ended March 31, 1996. The increase in sales was due to:
i) An increase in the domestic (Chinese) sales demand for bearings
primarily in the automobile, motorcycle and machine-tooling industries.
Sales for Harbin Bearing for the three months ended March 31, 1997
increased by RMB 23,917 or 11.5% to RMB 231,079 as compared to RMB 207,162
for the three months ended March 31, 1996.
ii) An increase in sales for Southwest Products by RMB 1,220 or
13.7% to RMB 10,138 for the three months ended March 31, 1997 as compared
to RMB 8,918 for the three months ended March 31, 1996.
Cost of Sales/Gross Profit
--------------------------
Cost of sales for the three months ended March 31, 1997 increased to
RMB 147,368 as compared to RMB 132,889 for the three months ended March 31,
1996. The cost of sales for Harbin Bearing for the three months ended
March 31, 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 March 31, 1997 and 1996 was
calculated on an actual cost basis.
Gross profit increased by RMB 10,658 or 12.8% for the three months
ended March 31, 1997 as compared to the three months ended March 31, 1996.
The increase in gross profit was attributable to the increase in sales.
Gross profit as a percentage of sales increased slightly to 38.9% in 1997
from 38.5% in 1996 due to different 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 March 31, 1997 decreased
by RMB 375 or 6% to RMB 5,831 as compared to RMB 6,206 for the three months
ended March 31, 1996. Although royalty costs and government taxes in the
PRC increased following the surge 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 2.9% in 1996 to 2.4% in 1997.
13
<PAGE>
General and Administrative Expenses
- -----------------------------------
General and administrative expenses for the three months ended March
31, 1997 increased by RMB 1,193 or 5.4% to RMB 23,210 as compared to RMB
22,017 for the three months ended March 31, 1996. General and
administrative expenses as a percentage of sales decreased to 9.7% in 1997
from 10.2% in 1996. Significant factors affecting the change in general
and administrative expenses between 1996 and 1997 are as follows:
a. An increase in staff costs by RMB 643 associated with the U.S.
engineering program at Harbin Bearing that began in October 1996.
b. A loss on the disposal of fixed assets of RMB 583 for the three
months ended March 31, 1997 whereas no gain or loss on the disposal of
fixed assets was recorded during the three months ended March 31, 1996.
Interest Expense
----------------
Interest expense for the three months ended March 31, 1997 increased
by RMB 3,707 or 26.5% to RMB 17,677 as compared to RMB 13,970 for the three
months ended March 31, 1996. The increase in interest expense was
primarily attributable to the inclusion of RMB 2,839 of Convertible
Debenture interest calculated at the rate of 12% per annum since August 23,
1996 and the increase in principal amount of bank loans during the three
months ended March 31, 1997 as compared to the three months ended March 31,
1996.
Net Income
----------
As a result of the aforementioned factors, net income increased by
RMB 853 or 5.3% to RMB 16,918 for the three months ended March 31, 1997 as
compared to RMB 16,065 for the three months ended March 31, 1996.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
For the three months ended March 31, 1997, the Company's operations
utilized cash resources of RMB 15,145, as compared to RMB 3,284 generated for
the three months ended March 31, 1996. The Company's net working capital
increased by RMB 45,281 at March 31, 1997 to RMB 449,899 as compared to RMB
404,618 at December 31, 1996, and the Company's current ratio at March 31, 1997
was 1.53:1 as compared to 1.52:1 at December 31, 1996 and 1.32:1 at March 31,
1996.
Accounts receivable increased by RMB 52,971 or 17% to RMB 366,762 at March
31, 1997, as compared to RMB 313,791 at December 31, 1996. The increase in
accounts receivable for the three months ended March 31, 1997 is comparable with
the increase in accounts receivable of RMB 132,884 or 50% to RMB 397,070 for the
three months ended March 31, 1996.
Due from related companies increased by RMB 90,075 during the three months
ended March 31, 1997 as a result of the increase in trade receivable relating to
sales to related companies.
INVESTING ACTIVITIES
Capital expenditures for the three months ended March 31, 1997 of RMB
7,786 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, short-term and long-term bank loans.
There are no other material capital expenditures expected in the near future.
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 three months ended March 31, 1997, the net increase in
bank loans (after deducting repayment) was RMB 5,398, 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 capital requirements. Southwest Products believes
that it 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.
15
<PAGE>
The Investors have the right to convert at any time the whole or any part
of 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 its principal amount outstanding together with any accrued but unpaid
interest together with an amount that would enable the Investors to yield 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 Debenture are automatically due
and payable at the principal amount outstanding together with accrued interest
and an amount that would enable the Investors to yield 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 its suspension thereof;
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 earning 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 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.
16
<PAGE>
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 three
months ended March 31, 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 inflated costs to
the 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 labor cost due to increases in employees 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 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$, could have a material adverse effect upon the results
of operations and financial position of the Company. Although prior to 1994 the
RMB experienced significant devaluation against the US$, 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 8.3 at March 31, 1997.
17
<PAGE>
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 March 31, 1997: 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: May 13, 1997 By: /s/ William McKay
-------------------------------------
William McKay
Chief Executive Officer and
President
(Duly Authorized Officer)
Date: May 13, 1997 By: /s/ (Roger) Li Yuen Fai
-------------------------------------
(Roger) Li Yuen Fai
Vice President and
Chief Financial Officer
(Principal Financial Officer)
19
<PAGE>
EXHIBIT 11
----------
SUNBASE ASIA, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1997 1997
RMB RMB US$
--- --- ---
<S> <C> <C> <C>
PRIMARY
Net income, as reported 16,065 16,918 2,038
========== ========== ==========
Weighted average number of shares
of common stock outstanding:
Shares of common stock outstanding 11,700,063 12,700,109 12,700,109
Shares of common stock
issuable assuming conversion of
the Convertible Preferred Stock
- Series A 3,600,000 3,600,000 3,600,000
- Series B 680,000 680,000 680,000
Shares of common stock issuable
assuming exercise of stock options,
reduced by the number of shares
which could have been purchased
with the proceeds from exercise of
such stock options - - -
---------- ---------- ----------
Total weighted average number of
shares of common stock and
common stock equivalents
outstanding 15,980,063 16,980,109 16,980,109
========== ========== ==========
Earnings per common share
- Primary 1.00 1.00 0.12
========== ========== ==========
</TABLE>
20
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1997 1997
RMB RMB US$
--- --- ---
<S> <C> <C> <C>
FULLY DILUTED
Net income, as reported 16,065 16,918 2,038
Add after tax interest expense applicable
to Convertible Debentures - 2,839 342
---------- ---------- ----------
Net income, as adjusted 16,065 19,757 2,380
========== ========== ==========
Weighted average number of shares of
common stock outstanding:
Shares of common stock outstanding 11,700,063 12,700,109 12,700,109
Shares of common stock issuable
assuming conversion of the
Convertible Preferred Stock
- Series A 3,600,000 3,600,000 3,600,000
- Series B 680,000 680,000 680,000
Shares of common stock issuable
assuming conversion of the
Convertible Debentures on
August 23, 1996 - 2,300,000 2,300,000
Shares of common stock issuable
assuming exercise of stock options,
reduced by the number of shares
which could have been purchased
with the proceeds from exercise of
such stock options - - -
---------- ---------- ----------
Total weighted average number of
shares of common stock and
common stock equivalents
outstanding 15,980,063 19,280,109 19,280,109
========== ========== ==========
Earnings per common share
- Fully diluted 1.00 1.02 0.12
========== ========== ==========
</TABLE>
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTACTED FROM THE UNAUDITED
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 8,437
<SECURITIES> 0
<RECEIVABLES> 44,517
<ALLOWANCES> 0
<INVENTORY> 56,336
<CURRENT-ASSETS> 156,703
<PP&E> 77,753
<DEPRECIATION> 0
<TOTAL-ASSETS> 238,597
<CURRENT-LIABILITIES> 102,499
<BONDS> 25,834
0
8,773
<COMMON> 13
<OTHER-SE> 46,647
<TOTAL-LIABILITY-AND-EQUITY> 238,597
<SALES> 29,062
<TOTAL-REVENUES> 29,062
<CGS> 17,755
<TOTAL-COSTS> 17,755
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,130
<INCOME-PRETAX> 5,678
<INCOME-TAX> 970
<INCOME-CONTINUING> 2,038
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,038
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
