<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, 1998.
[ ] 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, 1998, the Company had 12,700,142 shares of common stock issued
and outstanding.
Total sequentially numbered pages in this document: 21.
1
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
-----------------------------------
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1-- Financial statements
Consolidated Condensed Balance Sheets (unaudited)
- December 31, 1997 and March 31, 1998 [3-4]
Consolidated Condensed Statements of Income (unaudited)
- Three months ended March 31, 1997 and 1998 [5]
Consolidated Condensed Statements of Cash Flows (unaudited)
- Three months ended March 31, 1997 and 1998 [6]
Notes to Consolidated Condensed Financial Statements (unaudited)
- Three months ended March 31, 1997 and 1998 [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, 1997 AND MARCH 31, 1998
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
12/31/97 3/31/98
-------------------- --------------------
Notes RMB US$ RMB US$
----- --- --- --- ---
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and bank balances 39,343 4,740 12,261 1,477
Deposits with a financial institution 23,750 2,861 23,750 2,861
Accounts receivable, net 480,400 57,880 477,224 57,497
Notes receivable 6,190 746 2,640 318
Inventories, net 4 477,217 57,496 518,342 62,451
Other receivables 40,330 4,859 56,108 6,760
Due from related companies 300,023 36,147 316,235 38,101
--------- -------- ---------- -------
Total current assets 1,367,253 164,729 1,406,560 169,465
Fixed assets 631,812 76,122 614,751 74,066
Deferred asset 14,383 1,733 13,173 1,587
Long term investments 1,012 122 1,012 122
Goodwill 10,760 1,296 10,554 1,272
--------- -------- ---------- -------
Total assets 2,025,220 244,002 2,046,050 246,512
========= ======== ========== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short term bank loans 435,403 52,458 434,332 52,329
Long term bank loans, current portion 140,772 16,960 140,773 16,960
Accounts payable 115,646 13,933 116,505 14,037
Accrued liabilities and other payables 131,536 15,848 168,445 20,296
Short term obligations under capital leases 20,441 2,463 20,586 2,480
Short term portion of
secured promissory note 5 12,450 1,500 12,450 1,500
Income tax payable 50,392 6,071 39,396 4,747
Taxes other than income 38,972 4,696 54,002 6,506
Due to related companies 18,730 2,257 14,804 1,784
Convertible debentures 6 95,450 11,500 95,450 11,500
--------- -------- ---------- -------
Total current liabilities 1,059,792 127,686 1,096,743 132,139
Long term bank loans 4,005 483 4,005 483
Long term obligations under capital leases 68,483 8,251 63,094 7,601
Long term portion of secured promissory note 5 12,450 1,500 12,450 1,500
Minority interests 441,490 53,192 439,725 52,979
--------- -------- ---------- -------
1,586,220 191,112 1,616,017 194,702
</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, 1997 AND MARCH 31, 1998 (UNAUDITED) (CONTINUED)
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
12/31/97 3/31/98
-------------------- --------------------
RMB US$ RMB US$
--------- -------- ---------- -------
<S> <C> <C> <C> <C>
Shareholders' equity:
Common Stock, par value US$ 0.001 each,
50,000,000 shares authorized;
12,700,142 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 27,971 3,370 27,971 3,370
Retained earnings 150,082 18,081 141,115 17,001
--------- -------- ---------- -------
Total shareholders' equity 439,000 52,890 430,033 51,810
--------- -------- ---------- -------
Total liabilities and shareholders' equity 2,025,220 244,002 2,046,050 246,512
========= ======== ========== =======
</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, 1997 AND 1998
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------
1997 1998 1998
Notes RMB RMB US$
----- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales to
- Third parties 138,146 91,739 11,053
- Related parties 103,071 8,457 1,019
----------- ----------- -----------
241,217 100,196 12,072
Cost of sales (147,368) (73,458) (8,851)
----------- ----------- -----------
Gross profit 93,849 26,738 3,221
Selling, general and
administrative expenses
- Third parties (16,549) (16,015) (1,930)
- Related parties (12,492) (818) (98)
----------- ----------- -----------
(29,041) (16,833) (2,028)
Interest expense, net
- Third parties (15,431) (19,085) (2,299)
- Related parties (2,246) (1,552) (187)
----------- ----------- -----------
(17,677) (20,637) (2,486)
----------- ----------- -----------
Income / (loss) before income taxes 47,131 (10,732) (1, 293)
Provision for income taxes:
- Current (8,052) - -
- Deferred - - -
----------- ----------- -----------
Income/ (loss) before minority
interests 39,079 (10,732) (1,293)
Minority interests (22,161) 1,765 213
----------- ----------- -----------
Net income / (loss) 16,918 (8,967) (1,080)
=========== =========== ===========
Earnings / (loss )per share 2
-Basic 1.33 (0.71) (0.09)
=========== =========== ===========
-Diluted 1.02 (0.71) (0.09)
=========== =========== ===========
Number of shares outstanding 2
- Basic 12,700,109 12,700,142 12,700,142
=========== =========== ===========
- Diluted 19,280,109 12,700,142 12,700,142
=========== =========== ===========
</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, 1997 AND MARCH 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1997 1998 1998
RMB RMB US$
--- --- ---
<S> <C> <C> <C>
Cash flows from operating activities:
Net income / (loss) 16,918 (8,967) (1,080)
Adjustments to reconcile income/(loss) to net
cash provided by (used in) operating activities:
Minority interests 22,161 (1,765) (213)
Depreciation 17,792 19,206 2,314
Loss on disposal of fixed assets 583 - -
Amortization of goodwill 207 206 24
Amortization of present value discount
on deferred asset (195) 1,210 146
Amortization of deferred debenture issue expense 418 - -
Changes in operating assets and liabilities-
(Increase) decrease in assets:
Accounts receivable (52,971) 3,176 383
Notes receivable 12,477 3,550 428
Inventories 8,822 (41,125) (4,955)
Other receivables (14,681) (15,778) (1,901)
Due from related companies (90,075) (16,212) (1,954)
Increase (decrease) in liabilities:
Accounts payable (20,472) 859 104
Accrued liabilities and other payables 47,452 36,909 4,448
Income tax payable 10,698 (10,996) (1,324)
Taxes other than income 26,104 15,030 1,810
Due to related companies (383) (9,170) (1,106)
--------- --------- ---------
Net cash used in operating activities (15,145) (23,867) (2,876)
Cash flows from investing activities:
Proceeds from disposal of fixed assets 133 - -
Additions to fixed assets (7,786) (2,145) (258)
--------- --------- ---------
Net cash used in investing activities (7,653) (2,145) (258)
--------- --------- ---------
Cash flows from financing activities:
Net increase in bank loans and
net cash provided by financing activities 5,398 (1,070) (129)
--------- --------- ---------
Net decrease in cash and cash equivalents (17,400) (27,082) (3,263)
Cash and cash equivalents, at beginning of period 87,428 63,093 7,601
--------- --------- ---------
Cash and cash equivalents, at end of period 70,028 36,011 4,338
========= ========= =========
Non-cash transaction:
Financing of lease arrangements 4,550 5,244 633
========= ========= =========
</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, 1997 AND 1998
(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 51.43% indirect ownership in Harbin Bearing Company Limited
("Harbin Bearing"), a joint stock limited company organized under the law 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 that
are sold primary 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,
1998, the results of operations for the three months ended March 31, 1997 and
1998, and the changes in cash flows for the three months ended March 31, 1997
and 1998. 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, 1997 AND 1998
(Amounts in thousands, except number of shares and per share data)
2. BASIS OF PRESENTATION (continued)
The consolidated balance sheet as of December 31, 1997, 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, 1997 as filed with the Securities and Exchange
Commission.
In 1997, the Financial Accounting Standards Board issued Statement
No.128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts
for the three months ended March 31, 1997 and 1998 have been presented and,
where appropriate, restated to conform to SFAS 128 requirements.
The diluted loss per share for the three months ended March 31,
1998 is the same as the basic loss per share as there was an anti-dilution
effect which reduces the loss per share. The calculation which resulted in
such an anti-dilution was based on the assumptions that the conversion rights
under the Convertible Debentures had been fully exercised, at the adjusted
exercise price as stated in note 6, and the redemption of preferred shares,
both on January 1, 1998. On this basis, the net income calculated by adding
back the interest expenses on the Convertible Debentures net of income tax is
RMB 4,713. As a result of the aforesaid, an anti-dilution effect was
resulted and therefore the diluted loss per share was the same as the basic
loss per share.
The results of operations for the three months ended March 31, 1998
are not necessarily indicative of the results of operations to be expected
for the full fiscal year ending December 31, 1998.
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.
8
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(Amounts in thousands, except number of shares and per share data)
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, 1998 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, 1998 or at any other certain rate
on March 31, 1998.
4. INVENTORIES
Inventories consist of the following at December 31, 1997 and March
31, 1998:
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
------------------ -----------------
RMB US$ RMB US$
------- ------- ------- -------
<S> <C> <C> <C> <C>
Raw materials 92,039 11,089 95,212 11,471
Work-in-progress 141,214 17,014 90,510 10,905
Finished goods 282,634 34,052 371,290 44,734
-------- -------- -------- -------
515,887 62,155 557,012 67,110
Less: Allowance for obsolescence (38,670) (4,659) (38,670) (4,659)
-------- -------- -------- -------
Inventories, net 477,217 57,496 518,342 62,451
======== ======== ======== =======
</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:-
9
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Payment Period Amount
- -------------- ------
<S> <C>
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
</TABLE>
Pursuant to the above described repayment schedule, a principal
payment of US$ 2,012 (RMB 16,700) was made on the Note on September 10, 1996.
The directors do not envisage any other repayments being made in the
foreseeable future.
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")
was initially US$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 ended 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. Due to the Company's failure to achieve the projected cumulative
audited earnings per common share of US$1.79 for the two years ended December
31, 1997, the Conversion Price has been adjusted to US$1.84 per share
pursuant to the terms of the Subscription Agreement.
10
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(Amounts in thousands, except number of shares and per share data)
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 Debentures 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 US$0.55 for fiscal years
commencing January 1, 1996; and accounts receivable reaching a certain level
in relationship to net sales.
The obligations of China Bearing under the Subscription Agreement
are guaranteed by the other members of the Sunbase Group.
Due to the failure of the Company in achieving the defined earnings
per common share of US$0.55 in 1997, an event of default occurred. Although
the Convertible Debentures bear an interest charge at the rate of 5% per
annum, interest was being accrued at the rate of 19.75% per annum to provide
for the condition of the default.
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 51.43% 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 ('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,
1997 and 1998.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1998
---- ----
RMB % RMB %
----------- ------ ----------- -------
<S> <C> <C> <C> <C>
Sales 241,217 100.0 100,196 100.0
Cost of sales (147,368) (61.1) (73,458) 73.3
-------- ----- -------- ------
Gross profit 93,849 38.9 26,738 26.7
Selling expenses (5,831) (2.4) (4,043) (4.0)
General and administrative expenses (23,210) (9.7) (12,790) (12.8)
Interest expenses (17,677) (7.3) (20,637) (20.6)
-------- ----- -------- ------
Income before income taxes 47,131 19.5 (10,732) (10.7)
Provision for income taxes (8,052) (3.3) - -
-------- ----- -------- ------
Income before minority interests 39,079 16.2 (10,732) (10.7)
Minority interests (22,161) (9.2) 1,765 1.8
-------- ----- -------- ------
Net income 16,918 7.0 (8,967) (8.9)
======== ===== ======== ======
</TABLE>
12
<PAGE>
Sales
-----
Sales for the three months ended March 31, 1998 decreased by RMB
141,021 or 58.5% to RMB 100,196, as compared to RMB 241,217 for the three
months ended March 31, 1997. The decrease in sales was due to adverse
market conditions in the PRC primarily due to the financial crises in Asia.
Competition for the limited sales orders in the bearing market became
greater in 1998 and there were no material price increases from the prior
twelve month period. The Company has responded to such conditions by
enhancing its credit review procedures and restricting sales to customers
where collectability was uncertain.
Sales for Harbin Bearing for the three months ended March 31, 1998
decreased by RMB 141,295 or 61% to RMB 89,784 as compared to RMB 231,079
for the three months ended March 31, 1997. The decrease was partially
offset by an increase in sales for Southwest Products by RMB 274 or 2.7% to
RMB 10,412 for the three months ended March 31, 1998 as compared to RMB
10,138 for the three months ended March 31, 1997.
Cost of Sales/Gross Profit
--------------------------
Cost of sales for the three months ended March 31, 1998 decreased to
RMB 73,458 as compared to RMB 147,368 for the three months ended March 31,
1997. The cost of sales for Harbin Bearing for the three months ended March
31, 1998 and 1997 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, 1998 and 1997 was calculated
on an actual cost basis.
Gross profit decreased by RMB 67,111 or 71.5% for the three months
ended March 31, 1998 as compared to the three months ended March 31, 1997.
The decrease in gross profit was mainly attributable to the decrease in
sales caused by adverse market conditions in the PRC, which led to a plunge
in units of bearings produced in 1998. The decrease in production output
and an under-utilization of machinery and equipment capacity resulted in an
increase in overhead absorption by each unit produced and an increase in
the unit cost of goods sold. Also, there was no material change in selling
prices during the two periods under review.
Selling Expenses
----------------
Selling expenses for the three months ended March 31, 1998 decreased
by RMB 1,788 or 30.7% to RMB 4,043 as compared to RMB 5,831 for the three
months ended March 31, 1997. The major reason for the decrease in selling
expenses was due to a reduction in payment of royalty and government taxes
by RMB 2,700. The decrease was partially offset by an increase in
traveling expense of RMB 1,000 mainly incurred for the collection of
accounts receivable.
13
<PAGE>
General and Administrative Expenses
-----------------------------------
General and Administrative Expenses for the three months ended March
31, 1998 decreased by RMB 10,420 or 44.9% to RMB 12,790 as compared to RMB
23,210 for the three months ended March 31, 1997. Significant factors
affecting the change in general and administrative expenses between 1997
and 1998 are as follows:
a. A provision for management fee of RMB 5,265 was made in Harbin
Bearing for the three months ended March 31, 1997. No such
provision was made for the three months ended March 31, 1998.
b. A reduction in property tax by RMB 1,062 for the three months
ended March 31, 1998 as compared to the three months ended March
31, 1997.
Interest Expenses
-----------------
Interest Expenses for the three months ended March 31, 1998
increased by RMB 2,960 or 16.7% to RMB 20,637 as compared to RMB 17,677 for
the three months ended March 31, 1997. The increase in interest expense
was primarily attributable to the increase in bank loans and the surge in
Convertible Debentures interest. The amount of Convertible Debentures
interest charged for the three months ended March 31, 1998 was RMB 4,713 as
compared to RMB 2,864 for the three months ended March 31, 1997. The rise
in Convertible Debentures interest was due to an increase in the interest
accrual rate from 12% to 19.75% per annum as a result of the Company's
default on a condition of the Subscription Agreement governing the
Convertible Debentures
Net Income
----------
As a result of the aforementioned factors, net income decreased by
RMB 25,885 to a net loss of RMB 8,967 for the three months ended March 31,
1998 as compared to a net income of RMB 16,918 for the three months ended
March 31, 1997.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
For the three months ended March 31, 1998, the Company's operations
utilized cash resources of RMB 23,867, as compared to RMB 15,145 for the three
months ended March 31, 1997. The Company's net working capital increased by RMB
2,355 at March 31, 1998 to RMB 309,817 as compared to RMB 307,461 at December
31, 1997, and the Company's current ratio at March 31, 1998 was 1.28:1 as
compared to 1.29:1 at December 31, 1997 and 1.53:1 at March 31, 1997.
Accounts receivable decreased by RMB 3,176 or 0.7% to RMB 477,224 at March
31, 1998, as compared to RMB 480,400 at December 31, 1997. The decrease in
accounts receivable for the three months ended March 31, 1998 as compared to an
increase in accounts receivable of RMB 52,971 for the three months ended March
31, 1997 was due to tightening of credit control.
INVESTING ACTIVITIES
Capital expenditures for the three months ended March 31, 1998 of RMB
2,145 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 expansion
projects. During the three months ended March 31, 1998, the net decrease in
bank loans (after deducting repayment) was RMB 1,070. The Company 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") was
initially US$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 ended 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. Due to the Company's failure to achieve the
projected cumulative audited earnings per common share of US$1.79 for the two
years ended December 31, 1997, the Conversion Price has been adjusted to US$1.84
per share pursuant to the terms of the Subscription Agreement.
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 Debentures 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 US $0.55 for fiscal years commencing January 1, 1996;
and accounts receivable reaching a certain level in relationship to net sales.
The obligations of China Bearing under the Subscription Agreement are
guaranteed by the other members of the Sunbase Group.
Due to the failure of the Company in achieving the defined earnings per
common share of U.S.$0.55 in 1997, an event of default occurred. Although the
Convertible Debentures bear an interest charge at the rate of 5% per annum,
interest was being accrued at the rate of 19.75% per annum to provide for the
condition of the default.
In view of the inability of the Company and the guarantors to satisfy an
immediate redemption of the Convertible Debentures, the Company intends to
conduct negotiations with the Investors and will seek a rescheduling of the
redemption payment. The Company believes that a workable solution could be made
with the Investors in due course. No assurance can be given that such
negotiations will result in a resolution that is favorable to the Company.
A promissory note for US$5,012 (RMB 41,600) (the "Note") was issued to
Asean Capital Limited ("Asean") in connection with the Share Exchange Agreement
and is secured by a continuing security interest in all of the Company's title
and interest in the outstanding capital stock of its wholly-owned subsidiary
China Bearing. The Note is denominated in and is repayable in full in United
States dollars, and bears interest at 8% per annum.
In connection with the issuance of Convertible Debentures described at
above, Asean has undertaken that for so long as any of the Convertible
Debentures are outstanding, no amounts are to be repaid on the Note unless there
is sufficient working capital and the repayment is made in accordance with the
following schedule:-
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Payment Period Amount
- -------------- ------
August 1, 1996 to July 31, 1997 up to US$ 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
</TABLE>
Pursuant to the above described repayment schedule, a principal payment
of US$2,012 (RMB 16,700) was made on the Note on September 10, 1996. The
directors do not envisage any other repayments being made in the foreseeable
future.
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, are adequate to finance the Company's operating and
debt service requirements for the foreseeable future. Nevertheless, due to the
recent financial turmoil in Asia and the default on the Convertible Debentures,
management will cautiously and closely monitor the funding position of the
Company.
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, 1998, 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. In view of the
change in market conditions and increased competition, the Company may unable 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 1997 and 1998. 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, RMB 8.3 at December 31, 1997
and RMB 8.3 at March 31, 1998.
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, 1998: 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 21, 1997 By: /s/ William McKay
-----------------
William McKay
Chief Executive Officer and
President
(Duly Authorized Officer)
Date: May 21, 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, 1997 AND 1998
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1998 1998
RMB RMB US$
---------- ---------- ----------
<S> <C> <C> <C>
BASIC
Net income / (loss), as reported 16,918 (8,967) (1,080)
========== ========== ==========
Weighted average number of shares of
common stock outstanding:
Shares of common stock outstanding 12,700,109 12,700,142 12,700,142
========== ========== ==========
Earnings / (loss) per share 1.33 (0.71) (0.09)
========== ========== ==========
</TABLE>
20
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1998 1998
RMB RMB US$
---------- ---------- ----------
<S> <C> <C> <C>
DILUTED
Net income / (loss), as reported 16,918 (8,967) (1, 080)
Add after tax interest expense applicable
to Convertible Debentures 2,839 - -
---------- ---------- ----------
Net income / (loss), as adjusted 19,757 (8,967) (1, 080)
========== ========== ==========
Weighted average number of shares of
common stock outstanding:
Shares of common stock outstanding 12,700,109 12,700,142 12,700,142
Shares of common stock issuable
assuming conversion of the
Convertible Preferred Stock
- Series A 3,600,000 - -
- Series B 680,000 - -
Shares of common stock issuable
assuming conversion of the
Convertible Debentures on
August 23, 1996 2,300,000 - -
Total weighted average number of ---------- ---------- ----------
shares of common stock and
common stock equivalents
outstanding 19,280,109 12,700,142 12,700,142
========== ========== ==========
Earnings / (loss) per share 1.02 (0.71) (0.09)
========== ========== ==========
</TABLE>
21
<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 RERORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31,
1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 4,338
<SECURITIES> 0
<RECEIVABLES> 102,676
<ALLOWANCES> 0
<INVENTORY> 62,451
<CURRENT-ASSETS> 169,465
<PP&E> 74,066
<DEPRECIATION> 0
<TOTAL-ASSETS> 246,512
<CURRENT-LIABILITIES> 132,139
<BONDS> 0
0
8,773
<COMMON> 13
<OTHER-SE> 43,024
<TOTAL-LIABILITY-AND-EQUITY> 246,512
<SALES> 12,072
<TOTAL-REVENUES> 12,072
<CGS> 8,851
<TOTAL-COSTS> 8,851
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,486
<INCOME-PRETAX> (1,293)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,080)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,080)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
