-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IsFlxTpPLISqHEzsY9FBQVHWGaxSgwmR2WJOD1fp8ght9Jh7E7sxKHtJIZIVVaig fBivcrsw2CxxmrwpOgS6wg== /in/edgar/work/0001021408-00-003755/0001021408-00-003755.txt : 20001122 0001021408-00-003755.hdr.sgml : 20001122 ACCESSION NUMBER: 0001021408-00-003755 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNBASE ASIA INC CENTRAL INDEX KEY: 0000095626 STANDARD INDUSTRIAL CLASSIFICATION: [1311 ] IRS NUMBER: 941612110 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-03132 FILM NUMBER: 774289 BUSINESS ADDRESS: STREET 1: 19/F FIRST PACIFIC BANK CENTRE STREET 2: 51-57 GLOUCESTER ROAD CITY: WANCHAI HONG KONG STATE: K3 ZIP: 91017-1028 BUSINESS PHONE: 8183580181 MAIL ADDRESS: STREET 1: P O BOX 2600 CITY: BAKERSFIELD STATE: CA ZIP: 93303 FORMER COMPANY: FORMER CONFORMED NAME: PAN AMERICAN INDUSTRIES INC DATE OF NAME CHANGE: 19941216 FORMER COMPANY: FORMER CONFORMED NAME: PAN AMERICAN ENERGY CORPORATION DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SUPREME OIL & GAS CORP DATE OF NAME CHANGE: 19901029 10-Q 1 0001.txt FORM 10-Q 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 September 30, 2000. [ ] 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) 28/F, China Merchants Tower, Shun Tak Centre, 168-200 Connaught Road Central, 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 No X ----- ----- As of November 14, 2000, the Company had 14,118,867 shares of common stock issued and outstanding. 1 SUNBASE ASIA, INC. AND SUBSIDIARIES -----------------------------------
Page ---- INDEX PART I: FINANCIAL INFORMATION Item 1 -- Financial statements Consolidated Condensed Balance Sheets (unaudited) - December 31, 1999 and September 30, 2000 3-4 Consolidated Condensed Statements of Income (unaudited) - Three months and Nine months ended September 30, 1999 and 2000 5 Consolidated Condensed Statements of Cash Flows (unaudited) - Six months ended September 30, 1999 and 2000 6 Notes to Consolidated Condensed Financial Statements (unaudited) - Three months and Nine months ended September 30, 1999 and 2000 7-16 Item 2 -- Management's Discussion and Analysis of 17-28 Financial Condition and Results of Operations Item 3 -- Quantitative and Qualitative Disclosures about Market Risk 29 PART II: OTHER INFORMATION Item 6 -- Exhibits and Reports on Form 8-K 30 SIGNATURES 31 EXHIBIT 11 Computation of Earnings Per Common Share 32-33
2 PART I. FINANCIAL INFORMATION ITEM 1 - Financial Statements -------------------- SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) AS OF DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 (Amounts in thousands, except number of shares and per share data)
12/31/99 9/30/00 Notes RMB US$ RMB US$ --------- --------- --------- --------- ASSETS Current assets Unrestricted cash and bank balances 8,420 1,018 2,604 315 Accounts receivable, net 380,986 46,040 401,347 48,501 Notes receivable 2,148 259 50 6 Inventories, net 4 448,121 54,153 460,754 55,680 Other receivables 25,848 3,123 78,093 9,437 Due from related companies 192,589 23,273 212,803 25,717 --------- --------- --------- --------- Total current assets 1,058,112 127,866 1,155,651 139,656 Fixed assets 486,665 58,811 441,095 53,304 Net assets of discontinued operations 5 26,193 3,165 - - --------- --------- --------- --------- Total assets 1,570,970 189,842 1,596,746 192,960 ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short term bank loans 575,652 69,565 595,012 71,905 Installment Loan, current portion 115,797 13,993 93,036 11,243 Interest payable on Installment Loan 4,102 496 7,706 931 Long term bank loans, current portion 168,974 20,420 81,025 9,792 Accounts payable 138,840 16,778 171,739 20,754 Accrued liabilities and other payables 178,916 21,621 344,422 41,622 Short term obligations under capital leases 22,774 2,752 22,774 2,752 Secured promissory note 6 24,825 3,000 24,825 3,000 Income tax payable 40,703 4,918 65,984 7,973 Taxes other than income 75,140 9,081 78,101 9,438 Due to related companies 83,762 10,123 36,340 4,392
3 --------- --------- --------- --------- Total current liabilities 1,429,485 172,747 1,520,964 183,802 Long term obligations under capital leases 24,777 2,994 13,390 1,618 Minority interests 97,596 11,794 72,244 8,731 --------- --------- --------- --------- 1,551,858 187,535 1,606,598 194,151
Continued/... The accompanying notes form an integral part of these consolidated condensed financial statements. 4 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS AS OF DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 (UNAUDITED) (CONTINUED) (Amounts in thousands, except number of shares and per share data)
12/31/99 9/30/00 ----------------------------- ------------------------- RMB US$ RMB US$ ------------ ----------- ----------- ---------- Shareholders' equity: Common Stock, par value US$ 0.001 each, 50,000,000 shares authorized; 14,118,867 (1999: 14,118,751) shares 119 14 119 14 issued, and fully paid-up Preferred Stock, par value US$ 0.001 each, 25,000,000 shares authorized; Convertible Preferred Stock - Series A; 36 shares issued and outstanding 44,533 5,381 44,533 5,381 Contributed surplus 217,953 26,338 217,953 26,338 Reserves 28,052 3,389 28,052 3,389 Accumulated other comprehensive income 1,377 166 986 122 Accumulated losses (272,922) (32,981) (301,495) (36,435) ------------ ----------- ----------- ---------- Total shareholders' equity 19,112 2,307 (9,852) (1,191) ------------ ----------- ----------- ---------- Total liabilities and shareholders' equity 1,570,970 189,842 1,596,746 192,960 ============ =========== =========== ==========
The accompanying notes form an integral part of these consolidated condensed financial statements. 5 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 (Amounts in thousands, except number of shares and per share data)
Nine Months Ended September 30, Three Months Ended September 30, 1999 2000 2000 1999 2000 2000 Notes RMB RMB US$ RMB RMB US$ ----------- ---------- ---------- ---------- ---------- ---------- Net sales to - Third parties 315,324 398,929 48,209 106,754 127,940 15,461 - Related parties 19,932 35,129 4,245 6,748 8,342 1,008 ----------- ---------- ---------- ---------- ---------- ---------- 335,256 434,058 52,454 113,502 136,282 16,469 Cost of sales (322,184) (403,920) (48,812) (109,077) (124,240) (15,014) ----------- ---------- ---------- ---------- ---------- ---------- Gross profit 13,072 30,138 3,642 4,425 12,042 1,455 Selling, general and Administrative expenses - Third parties (99,296) (54,943) (6,640) (70,762) (17,809) (2,152) - Related parties (86,941) (2,110) (255) (83,358) (703) (85) ----------- ---------- ---------- ---------- ---------- ---------- (186,237) (57,053) (6,895) (154,120) (18,512) (2,237) Interest expenses, net - Third parties (37,785) (35,179) (4,251) (13,251) (11,098) (1,342) - Related parties (4,745) 5,948 719 (604) - - ----------- ---------- ---------- ---------- ---------- ---------- (42,530) (29,231) (3,532) (13,855) (11,098) (1,342) Net other income/(expenses) - 2,221 268 - 267 32 ----------- ---------- ---------- ---------- ---------- ---------- - 2,221 268 - 267 32 Operating income / (loss) before Minority Interests (215,695) (53,925) (6,517) (163,550) (17,301) (2,092) Minority interests 102,257 25,352 3,063 79,040 6,907 835 ----------- ---------- ---------- ---------- ---------- ---------- Net income / (loss) from Continuing operation (113,438) (28,573) (3,454) (84,510) (10,394) (1,257) Net loss from discontinued Operation, net of income taxes (16,568) - - (3,905) - - ----------- ---------- ---------- ---------- ---------- ---------- Net income / (loss) (130,006) (28,573) (3,454) (88,415) (10,394) (1,257) =========== ========== ========== ========== ========== ========== Income per common share 2 - Basic income / (loss) from Continuing operation (8.03) (2.02) (0.24) (5.99) (0.74) (0.089) =========== ========== ========== ========== ========== ========== - Basic net income / (loss) (9.21) (2.02) (0.24) (6.26) (0.74) (0.089) =========== ========== ========== ========== ========== ========== - Diluted income / (loss) from continuing operation (8.03) (2.02) (0.24) (5.99) (0.74) (0.089) =========== ========== ========== ========== ========== ========== - Diluted net income / (loss) (9.21) (2.02) (0.24) (6.26) (0.74) (0.089) =========== ========== ========== ========== ========== ========== Number of shares outstanding : 2 - Basic 14,118,751 14,118,867 14,118,867 14,118,751 14,118,867 14,118,867 =========== ========== ========== ========== ========== ========== - Diluted 14,118,751 14,118,867 14,118,867 14,118,751 14,118,867 14,118,867 =========== ========== ========== ========== ========== ==========
The accompanying notes form an integral part of these consolidated condensed financial statements. 6 SUNBASE ASIA, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 (Amounts in thousand)
Nine Months Ended September 30 ------------------------------------------ 1999 1999 2000 2000 RMB US$ RMB US$ ------- ------ ------- ------ Cash flows from operating activities: Net loss (130,006) (15,665) (28,573) (3,454) Adjustments to reconcile income to net cash used in operating activities: Minority interests (102,257) (12,320) (25,352) (3,063) Depreciation 50,282 6,058 57,532 6,952 Share of net loss from discontinued operation 16,568 1,996 - - Amortization of present value discount on deferred asset 1,319 159 - - Loss on disposal of fixed assets - - 399 48 Write-back of loss on disposal of - - (1,405) (170) subsidiary under trust Changes in operating assets and liabilities- (Increase) decrease in assets: Accounts receivable (21,676) (2,610) (20,361) (2,461) Notes receivable 2,403 290 2,098 253 Inventories (10,369) (1,249) (12,633) (1,527) Other receivables (14,544) (1,753) (52,245) (6,314) Due from related companies 87,913 10,592 (20,214) (2,444) Increase (decrease) in liabilities: Accounts payable (9,447) (1,138) 32,899 3,976 Accrued liabilities and other payables 87,006 10,482 66,170 7,997 Income tax payable 27,892 3,360 25,281 3,055 Taxes other than income (1,735) (208) 2,961 357 Due to related companies (16,408) (1,976) (47,422) (5,731) ---------- --------- ----------- ---------- Net cash (used in) provided by operating Activities from Continuing operation (33,059) (3,982) (20,865) (2,526) ---------- --------- ----------- --------- Cash flows from investing activities: Advances to subsidiaries proposed for Disposal (1,385) (167) - - Additions to fixed assets (2,114) (255) (12,418) (1,500) ---------- --------- ---------- -------- Net cash used in investing activities (3,499) (422) (12,418) (1,500) ---------- --------- ---------- -------- Cash flows from financing activities: Repayment on installment loan - - (22,761) (2,750) Interest payable on installment loan - - 3,604 435 Net sale proceeds on disposal of subsidiary under trust - - 27,598 3,335 Sale proceeds on disposal of fixed assets - - 57 7 Net increase in bank loans 55,542 6,691 19,360 2,340 --------- -------- ---------- -------- Net cash provided by financing 55,542 6,691 27,858 3,367 activities --------- -------- ---------- -------- Net increase / (decrease) in cash and cash equivalents 18,984 2,287 (5,425) (659) Translation difference - - (391) (44) Cash and cash equivalents, at beginning of period 19,075 2,298 8,420 1,018 ---------- -------- --------- -------- Cash and cash equivalents, at end of period 38,059 4,585 2,604 315 ========== ======== ========= ======== Non-cash transaction: Financing of lease arrangements 15,532 1,871 19,755 2,389 ========== ======== ========= ========
7 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 (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. 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 primarily in the PRC and certain western countries, including the United States. 8 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 (Amounts in thousands, except number of shares and per share data) 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 balances 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 as at September 30, 2000, the results of operations for the nine months ended September 30, 1999 and 2000, and the changes in cash flows for the nine months ended September 30, 1999 and 2000 respectively. These adjustments are of a normal recurring nature. The consolidated balance sheet as of December 31, 1999, 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 the 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, please 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, 1999 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 nine months ended September 30, 1999 and 2000 have been presented and, where appropriate, restated to conform to SFAS 128 requirements. 9 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 (Amounts in thousands, except number of shares and per share data) 2. BASIS OF PRESENTATION (continued) The exercise of outstanding warrants is not included as part of the assumption in the calculation of diluted earnings per share as the share price of the Company for the nine months ended September 30, 1999 and 2000 was lower than the exercise prices. The diluted loss per share for the nine months ended September 30, 2000 is the same as the basic loss per share as there was an antidilution effect which reduces the loss per share. The calculation which resulted in such an antidilution was based on the assumptions that the conversion rights under the Covertible Debentures had been fully exercised, at the adjusted exercise price as stated in note 7, and the redemption of preferred shares, both on January 1, 1998. The results of operations for the nine months ended September 30, 2000 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2000. 3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE The RMB is not freely convertible into foreign currencies. Effective from January 1, 1994, a single rate of exchange is quoted daily by the People's Bank of China (the "Unified Exchange Rate"). However, the unification of the exchange rates does not imply convertibility of RMB into US$ or other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People's Bank of China. 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. 10 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND 2000 (Amounts in thousands, except number of shares and per share data) 3. FOREIGN CURRENCY TRANSLATION AND EXCHANGE (continued) 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 September 30, 2000 of US$ 1.00 = RMB 8.275. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rate on September 30, 2000 or at any other certain rate on September 30, 2000. 4. INVENTORIES Inventories consist of the following at December 31, 1999 and September 30, 2000:
December 31, 1999 September 30, 2000 ----------------- ----------------------- RMB US$ RMB US$ ------ ---- ----- ---- Raw materials 120,515 14,564 97,078 11,731 Work-in-progress 126,888 15,334 81,883 9,895 Finished goods 412,018 49,790 493,093 59,589 ---------- --------- ---------- ---------- 659,421 79,688 672,054 81,215 Less: Allowance for obsolescence (211,300) (25,535) (211,300) (25,535) ---------- ---------- ---------- ---------- Inventories, net 448,121 54,153 460,754 55,680 ========== ========== ========== ==========
11 5. DISCONTINUED OPERATIONS
December 31, 1999 September 30, 2000 ------------------ ----------------------- RMB US$ RMB US$ ------ ---- ------- ---- Cost of investment 28,288 3,418 - - Share of accumulated losses of the unconsolidated subsidiary (33,834) (4,088) - - ---------- ---------- ---------- ---------- Net carrying value (5,546) (670) - - Due from the unconsolidated subsidiary 31,739 3,835 - - ---------- ---------- ---------- ---------- 26,193 3,165 - - ========== ========== ========== ==========
12 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 (Amounts in thousands, except number of shares and per share data) 5. DISCONTINUED OPERATIONS (continued) The net assets of Southwest Products at December 31, 1999 and September 30, 2000 were as follows:-
December 31 September 30 ----------- ------------ 1999 1999 2000 2000 RMB US$ RMB US$ ------- ------- ------- ------- Cash and bank balances 1,248 151 - - Inventories 16,819 2,033 - - Accounts receivables 3,413 412 - - Prepayment, deposit and other receivables 199 24 - - ------- ------- ------- ------- Current assets 21,679 2,620 - - Property, plant and equipment, net 11,849 1,432 - - Goodwill * - - - - Long term investment 151 18 - - ------- ------- ------- ------- 33,679 4,070 - - ------- ------- ------- ------- Accounts payable ( 2,225) ( 269) - - Other payables ( 5,178) ( 626) - - Taxes other than income ( 76) ( 10) - - Income taxes (7) - Due to holding company (31,739) (3,835) - - ------- ------- ------- ------- Current liabilities (39,225) (4,740) - - ------- ------- ------- ------- Net assets/(deficieny in assets) ( 5,546) ( 670) - - ======= ======= ======= ======= * Goodwill of Southwest Products comprised: Cost 10,760 1,300 - - Less : Amortization ( 832) ( 101) - - Less : Write-off ( 9,928) ( 1,199) - - ------- ------- ------- ------- - - - - ======= ======= ======= =======
13 6. SECURED PROMISSORY NOTE A promissory note for US$ 5,000 (RMB 41,600) (the "Promissory Note") was issued in 1995 to Asean Capital Limited ("Asean") in connection with the Share Exchange Agreement and was secured by a continuing security interest in all of the Company's right, title and interest in the outstanding capital stock of its wholly-owned subsidiary China Bearing. The Promissory Note is denominated and repayable in full in United States dollars. In connection with the issuance of Convertible Debentures described at Note 7, Asean agreed that for so long as any of the Convertible Debentures are outstanding, no amounts are to be repaid on the Promissory 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 In accordance with this schedule, a principal payment of US$ 2,000 (RMB 16,700) was made on the Promissory Note on September 10, 1996. As a result of the Company's current financial position, the directors do not expect to make any other repayments in the foreseeable future. 7. CONVERTIBLE DEBENTURES AND INSTALLMENT LOAN 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 principal amount of convertible debentures (the "Convertible Debentures") to the Investors. Unless the Convertible Debentures were 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) the 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. 14 7. CONVERTIBLE DEBENTURES AND INSTALLMENT LOAN (continued) 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") 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. 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 ("IRR") of 12% per annum on the cost of their investment. However, due to the occurrence of certain events of default, as defined in the Subscription Agreement in 1997, the Convertible Debentures shall automatically become immediately due and payable in full by the Company at the principal amount outstanding together with accrued but unpaid interest together with an amount that would enable the Investors to yield an aggregate IRR 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 relation to net sales. Due to the failure of the Company to achieve the required minimum earnings per common share of US$0.55 in 1997, an event of default occurred. As a result, interest was being accrued at the rate of 19.75% per annum. Pursuant to a Settlement Agreement reached in October 16, 1998 with the Debenture Holders, the Debenture Holders agreed not to demand the immediate repayment of the Convertible Debentures. In addition, the aggregate principal amount of the Convertible Debentures (plus simple interest at a rate of 12.375% per annum until July 22, 1998 less interest paid) was restructured as a Installment Loan in an aggregate principal amount of US $13,173. The debt, which carries a simple interest rate of 10% per annum, is required to be repaid over a period of three years ending on July 23, 2001. As part of the settlement, the Company also issued 466,667 shares of Common Stock to the Debenture Holders, which are not transferable for a period of three years. The members of the Sunbase Group agreed that 50% of any public market 15 funds raised by the Company or its subsidiaries will be applied immediately towards discharging the then outstanding debt and interest accrued thereon. 16 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 (Amounts in thousands, except number of shares and per share data) The obligations of China Bearing under the Settlement Agreement are guaranteed by other members of the Sunbase Group on an at least pari passu basis with the guarantors' other present and future unsecured and unsubordinated obligations. This modification of terms of the debts thus constitutes troubled debt restructuring under Statement of Financial Accounting Standards No. 15 "Accounting by Debtors and Creditors for Troubled Debt Restructuring" ("FAS 15"). Under FAS 15, a debtor shall account for a troubled debt restructuring, when there is modification of terms of the debts, at the carrying amount of the payable at the time of the restructuring unless the carrying amount exceeds the total future cash payments specified by the new terms. The principal balance of the Installment Loan was restated to the face value together with any unpaid interest expenses calculated at the rate of 19.75% as entitled in the Subscription Agreement, after adjusting the fair value of the common stocks issuable on debt restructuring. The fair value of the common stocks issuable on debt restructuring was RMB 2,905, being the market value of the Company's trading stocks at October 16, 1998. Thereafter, the interest expenses of the Installment Loan was charged to the profit and loss account on a discounted basis. The Installment Loan bears an effective interest of 5.6% per annum and is repayable with a repayment schedule as set out in the Settlement Agreement. Pursuant to an undertaking as a supplement to the Settlement Agreement, Asean Capital unconditionally and irrevocably guarantees and undertakes to each of the Debenture Holders that for so long as any of the obligations of the Company under the Settlement Agreement remain outstanding the full due and punctual payment of all sums now or subsequently payable under the Settlement Agreement by China Bearing and agrees to perform or procure the performance of such payment obligations of China Bearing. Pursuant to the Settlement Agreement, the holding company of Asean Capital, Sunbase International Holdings Limited ("Sunbase International") undertakes to each of the Debenture Holders that Sunbase International shall not reduce its current issued beneficial shareholdings (being 100%) in the share capital of Asean Capital. In addition, one of the subsidiaries of Sunbase International, Extensive Resources Limited ("ERL") further granted a charge over 1,000,000 issued shares in the capital of Tianjing Development Holdings Limited held by ERL in favour of the trustee for and on behalf of the Debenture Holders. Tianjing Development Holdings Limited is a company listed in the Hong Kong Stock Exchange. The market value of the pledged shares was RMB 2,525 at September 30, 2000. 17 The maturity of the Installment Loan was as follows: Payable in period ending RMB - September 30, 2000 26,294 - July 23, 2001 66,742 ------ 93,036 ====== 18 SUNBASE ASIA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 (Amounts in thousands, except number of shares and per share data) 7. CONVERTIBLE DEBENTURES AND INSTALLMENT LOAN (continued) Since March 1999, default in repayment has been noted and, in accordance with the Settlement Agreement, the creditors of the Installment Loan are entitled to accelerate repayment of the principal amount outstanding together with the unpaid interest. Accordingly, the unpaid balance of the Installment Loan was classified as a current liability as at September 30, 2000. On March 1, 2000, the same parties of the Settlement Agreement further entered into a supplemental agreement (the "Supplemental Agreement") stating that (i) the Company shall, upon the receipt of the proceeds from the sale of Southwest Products pursuant to the Stock Purchase Agreement, repay US$2,600 for the partial settlement of the overdue portion of the Installment Loan; (ii) the creditors requested that the remaining portion of the overdue installments shall be immediately due but agreed not to demand immediate settlement of the undue portion which shall remain at the original repayment schedule, as set out in the Settlement Agreement; (iii) one of the guarantors, ERL agreed to grant a new charge on certain pledged listed shares, in favor of the trustee of the Debenture Holders; and (iv) the guarantee from Southwest Products shall be released upon the settlement of US$2,600. On April 28, 2000, the sale of Southwest Products was completed. A payment of US$2,600 was made for the partial settlement of the overdue portion of the Installment Loan and the guarantee from Southwest Products was released by the creditors. 19 ITEM 2 - Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- OVERVIEW The Company continued to face difficulties in the first to third quarter of 2000 brought forward from the fourth quarter of 1999. Among these difficulties are the continued weakening demand for bearings in the PRC, the inability to recover debts due from state owned enterprises customers, and severe competitions in the bearing industry and continuing excessive production capacity in the industry. The aforesaid factors collectively contributed to the persisting adverse financial results in the third quarter of 2000. However, we can, when comparing with the fourth quarter of 1999 and the first and second quarter of 2000, the third quarter of 2000 noted improvement. This improvement was mainly caused by the general economic improvement in the PRC. For instance, the deflation situation has improved from 3% in 1999 to 2% in the third quarter of 2000. We hope that the situation will continue to improve with the government's stimulation policies on the economy in the past eighteen months to take effect. Unless otherwise indicated in this Item 2, all RMB and U.S. Dollar amounts except per share information are expressed in thousands ( '000). RESULTS OF OPERATION Three months ended September 30, 1999 and 2000: 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 September 30, 1999 and 2000. 20
Three Months Ended September 30, --------------------------------------- 1999 2000 RMB % RMB % --- --- --- --- Sales 113,502 100.0 136,282 100.0 Cost of Sales (109,077) (96.1) (124,240) (91.2) ----------- ----------- ----------- ----------- Gross Profit 4,425 3.9 12,042 8.8 Selling expenses (2,848) (2.5) (3,407) (2.5) General and administrative expenses (151,272) (133.3) (15,105) (11.1) Interest expenses (13,855) (12.2) (11,098) (8.1) Net other income - - 267 0.2 ----------- ----------- ----------- ----------- Operation loss before minority interests (163,550) (144.1) (17,301) (12.7) Minority interests 79,040 69.6 6,907 5.1 ----------- ----------- ----------- ----------- Net income / (loss) from continuing Operation (84,510) (74.5) (10,394) (7.6) Net loss from discontinued operation, net of income taxes (3,905) (3.4) - - ----------- ----------- ----------- ----------- Net income / (loss) (88,415) (77.9) (10,394) (7.6) =========== =========== =========== ===========
21 Net Sales - --------- Sales for the three months ended September 30, 2000 increased by RMB 22,780 or 20% to RMB 136,282 as compared to RMB 113,502 for the three months ended September 30, 1999. The increase in net sales for the three months ended September 30, 2000 was due to the improvement of market condition and the Company's marketing effort for its existing and new customers. Cost of Sales/Gross Profit - -------------------------- Cost of sales for the three months ended September 30, 2000 increased by RMB 15,163 to RMB 124,240 as compared to RMB 109,077 for the three months ended September 30,1999. The cost of sales for the three months ended September 30, 2000 and 1999 was calculated using the gross profit method by reference to average annual gross profit ratios after taking the consideration of certain proportion of products of which they have no gross profit margin. The Company's gross profit from continuing operations for the three months ended September 30, 2000 increased from RMB 4,425 for the three months ended September 30, 1999 to RMB 12,042, an increase of RMB 7,617, or 172%. Gross profit as a percentage of revenue also increased from 3.9% for the three months ended September 30, 1999 to 8.8% for three months ended September 30, 2000. The increase in gross profit was mainly attributed to the improvement in profit margin on new products. Gross profit is calculated on gross profit method by reference to average annual gross profit ratio after taking the consideration of certain proportion of products of which they have no gross profit margin and the gross profit margin on new products. Selling Expenses - ---------------- Selling expenses for the three months ended September 30, 2000 slightly increased by RMB 559 or 19.6% to RMB 3,407 as compared to RMB 2,848 for the three months ended September 30, 1999. The slightly increase in selling expenses was due to the increase in travelling expenses by sales personnel for debt collection and development of new customers. General and Administrative Expenses - ----------------------------------- General and administrative expenses for the Company from continuing operations for the three months ended September 30, 2000 decreased by RMB 136,167 or 90% to RMB 15,105 as compared to RMB 151,272 for the three months ended September 30, 1999. The decrease was primarily caused by the significant decrease in provision for absolute stocks. 22 Interest Expenses - ----------------- Interest expenses for the three months ended September 30, 2000 decreased by RMB 2,757 or 19.9% to RMB 11,098 as compared to RMB 13,855 for the three months ended September 30, 1999. The decrease in interest expense was primarily attributable to the decrease in bank loans as compared to third quarter of 1999 and reduction in interest rate in the PRC. Net loss from continuing operations - ----------------------------------- As a result of the aforementioned factors, net loss from continuing operations decreased by RMB 74,116 to RMB 10,394 for the three months ended September 30, 2000 as compared to a net loss RMB 84,510 for the three months ended September 30, 1999. 23 Nine Months Ended September 30, 1999 and 2000: The following table sets forth certain unaudited operating data (in RMB and as a percentage of the Company's sales) for the nine months ended September 30, 1999 and 2000.
Nine Months Ended September 30, -------------------------------------- 1999 2000 RMB % RMB % ------- ----- ------- ----- Sales 335,256 100.0 434,058 100% Cost of Sales (322,184) (96.1) (403,920) (93.1) ----------- -------- ---------- -------- Gross Profit 13,072 3.9 30,138 6.9 Selling expenses (11,492) (3.4) (13,890) (3.2) General and administrative expenses (174,745) (52.1) (43,163) (9.9) Interest expenses (42,530) (12.7) (29,231) (6.7) Net other income - - 2,221 0.5 ----------- -------- ---------- -------- Operation loss before minority interests (215,695) (64.3) (53,925) (12.4) Minority interests 102,257 30.5 25,352 5.8 ----------- -------- ---------- -------- Net loss from continuing operation (113,438) (33.8) (28,573) (6.6) Net loss from discontinued operation, net of income taxes (16,568) (5.0) - - ----------- -------- ---------- -------- Net loss (130,006) (38.8) (28,573) (6.6) =========== ======== ========== ========
Net Sale - -------- Net sales for the Company from continuing operations for the nine months ended September 30, 2000 increased by RMB 98,802 or 29.5% to RMB 434,058, as compared to RMB 335,256 for the nine months ended September 30, 1999. The increase in net sales for the period ended September 30, 2000 was primarily attributable to the improvement of market condition and the Company's marketing effort for its existing and new customers. 24 Cost of Sales / Gross Profit - ---------------------------- Cost of sales for the Company from continuing operations for the nine months ended September 30, 2000 increased to RMB 403,920 as compared to RMB 322,184 for the nine months ended September 30, 1999. The cost of sales for the nine months ended September 30, 2000 and 1999 was calculated using the gross profit method by reference to average annual gross profit ratios after taking the consideration of certain proportion of products of which they have no gross profit margin. The Company's gross profit from continuing operations for the nine months ended September 30 1999, increased from RMB 13,072 for the nine months ended September 30, 1999 to RMB 30,138, an increase of RMB 17,066 or 130%. Gross Profit as a percentage of revenue also increased from 3.9% for the nine months ended September 30, 1999 to 6.9% for nine months ended September 30, 2000. The increase in gross profit was mainly attributed to the improvement in profit margin on new products. Gross profit is calculated on gross profit method by reference to average annual gross profit ratios after taking the consideration of certain proportion of products of which they have no gross profit margin and the gross profit margin on new products. Selling Expenses - ---------------- Selling expenses for the Company from continuing operations for the nine months ended September 30, 2000 increased by RMB 2,398 or 20.9% to RMB 13,890 as compared to RMB 11,492 for the nine months ended September 30, 1999. The major reasons for the increase in selling expenses was attributed to the increase in travelling expenses by sales personnel for debt collection. General and Administrative Expenses - ----------------------------------- General and administrative expenses for the Company from continuing operations for the nine months ended September 30, 2000 decreased by RMB 131,582 or 75.3% to RMB 43,163 as compared to RMB 174,745 for the nine months ended September 30, 1999. The decrease was mainly caused by the significant decrease in provision for absolute stocks. 25 Interest Expenses - ----------------- Interest expenses for the nine months ended September 30, 2000 decreased by RMB 13,299 or 31.3% to RMB 29,231 as compared to RMB 42,530 for the nine months ended September 30, 1999. The decrease in interest expense was primarily attributable to the decrease in bank loans as compared to 1999 and reduction in interest rate in the PRC. Net Other Income - ---------------- Net other income for the nine months ended September 30, 2000 increased significantly to RMB 2,221 as compared to RMB NIL for the nine months ended September 30, 1999. The increase was mainly caused by the write-back of provision of loss on disposal of Subsidiary under trust. Net loss from continuing operations - ----------------------------------- As a result of the aforementioned factors, net loss from continuing operations decreased by RMB 84,865 to RMB 28,573 for the nine months ended September 30, 2000 as compared to RMB 113,438 for the nine months ended September 30, 1999. 26 LIQUIDITY AND CAPITAL RESOURCES Operating activities Net cash used by operating activities from continuing operations was RMB 20,865 for the period ended September 30, 2000, as compared to RMB 33,059 for the period ended September 30, 1999. The decrease in net cash used by operating activities from continuing operations is primarily due to the reduction in net loss during the period. Investing activities Capital expenditure for the period ended September 30, 2000 of RMB 12,418 consisted of cost relating to the renovation of existing facilities and equipment, and were financed by internally generated funds, short-term and long term bank loans. The Company does not expect to spend more than the minimum required to maintain its equipment and facilities in 2000. As of September 30, 2000, the Company had no outstanding capital expenditure commitments. There were no other material capital expenditures expected in the near future. Financing activities The Company has historically relied on both short-term and long-term bank loans from Chinese banks to support its operating requirements. Short-term bank loans, which have terms ranging from three months to six months, are utilized to finance operating requirements and capital requirements and are renewed on a revolving basis. Long-term bank loans are utilized to fund capital expansion projects. During the period ended September 30, 2000, the net increase in bank loans (after deducting repayment) was RMB 19,360. The Company believes that it will be able to continue to maintain and expand its bank borrowings under its current lending arrangements. On April 28, 2000, an amount of RMB 27,598 was repaid as partial settlement of the overdue portion on the installment loan. The financing on such repayment was made by sale of Southwest Products. In August 1996, China Bearings issued U.S.$11.5 million aggregate principal amount of the Convertible Debentures to three investors. The Convertible Debentures were convertible, at the option of the holders, in whole or in part, at any time into shares of Common Stock of the Company. The conversion price (the "Conversion Price") was initially US$5.00 per share, subject to adjustment for (a) a change in par value of the Common Stock, (b) the issuance of shares by way of capitalization of profits or reserves, (c) capital distributions, (d) a rights offering at a price which is less than the lower of the then market price of the Common Stock or the Conversion Price, (e) the issuance of derivative securities where the total consideration per share initially received is less than the lower of the then market price of the Common Stock or the Conversion Price, (f) the issuance of shares at a price per share which is less than the lower of the then market price of the Common Stock 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 27 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 was adjusted to US$1.84 per share pursuant to the terms of the Subscription Agreement. Unless earlier converted, the Convertible Debentures matured in August 1999. Interest accrued at a rate equal to the higher of (i) 5% per annum (net of withholding tax, if applicable) and (ii) the percentage of the dividend yield calculated by dividing the annual dividend declared per share of Common Stock of the Company by the Conversion Price. Interest on the Convertible Debentures was payable quarterly. At maturity, the Convertible Debentures were required to be redeemed at a redemption price equal to the principal amount then outstanding plus any accrued but unpaid interest, together with an amount sufficient to enable the Debenture Holders to receive 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 Subscription Agreement occurred, the Convertible Debentures become automatically due and payable at the principal amount outstanding together with accrued and unpaid interest and an amount that would enable the Debenture Holders to yield an aggregate internal rate of return on their investment of 19.75% per annum. Events of default included breach of covenants after failure to cure after notice, failure to pay principal or interest, failure to pay indebtedness for borrowed money, certain events of bankruptcy or insolvency, judgement defaults, failure to achieve earnings per common share of at least US $0.55 for each fiscal year commencing January 1, 1996, accounts receivable reaching a certain level in relationship to net sales and delisting or suspension of trading of the Company's Common Stock from Nasdaq. Due to the failure of the Company to achieve the required minimum earnings per common share of US$0.55 in 1997, an event of default occurred. As a result, interest accrued at the default rate of 19.75% per annum. Pursuant to a Settlement Agreement reached in October 1998 with the Investors, the Investors agreed not to demand the immediate repayment of the Convertible Debentures. In addition, the aggregate principal amount of the Convertible Debentures (plus simple interest at a rate of 12.375% per annum until July 22, 1998 less interest paid) was restructured as a Installment Loan in an aggregate principal amount of US$13,173. The debt, which carries a simple interest rate of 10% per annum, is required to be repaid over a period of three years ending on July 23, 2001. As part of the settlement, the Company also issued 466,667 shares of Common Stock to the Investors, which are not transferable for a period of three years. The members of the Sunbase Group agreed that 50% of any public market funds raised by the Company or its subsidiaries would be applied immediately towards discharging the then outstanding debt and interest accrued thereon. The obligations of China Bearing under the Settlement Agreement are guaranteed by other members of the Sunbase Group on an at least pari passu basis with the guarantors' other present and future unsecured and unsubordinated obligations. On March 1, 2000, the Company entered into a supplemental agreement to the Settlement Agreement ("Supplemental Agreement") with the Creditors. Pursuant to the Supplemental Agreement, the Company promised, upon the receipt of the consideration from the sale of 28 Southwest Products, to pay US$2,600 as partial settlement of the overdue portion of the Installment Loan and the Creditors agreed that the remaining undue portion of the convertible Debentures is repayable on the schedule originally set out in the Settlement Agreement. China Bearing has failed to make the scheduled monthly payments under the Settlement Agreement since March 23, 1999. Upon the completion of Southwest Product's sale on April 28, 2000, a payment of $2,600 was made as partial settlement of outstanding debt under the Settlement Agreement. After the payment, the total amount of overdue principal and interest as of September 30, 2000 are $7,092 and $1,296 respectively. The Company, China Bearing and the other members of the Sunbase International will continue to seek further equitable resolution with the Debenture Holders regarding these amounts. While the Company believes that a workable soultion can be reached with the Debenture Holders in due course, no assurance can be given as to when or if such negotiations will result in a resolution that is favorable to the Company. In connection with the acquisition by the Company of its interest in Harbin Bearing from Asean Capital, in addition to shares of Common Stock issued by the Company to Asean Capital, the Company issued a promissory note for US $5,000 (RMB 41,600) (the "Promissory Note"). The Promissory Note is secured by a continuing security interest in all of the Company's right, title and interest in the outstanding capital stock of its wholly-owned subsidiary, China Bearing. The Promissory Note is denominated and repayable in full in US dollars, and bears interest at a rate of 8% per annum. In connection with the issuance of the Convertible Debentures, Asean Capital agreed that for so long as any of the Convertible Debentures are outstanding, no amounts may be repaid by the Company on the Promissory 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 In accordance with this schedule, a principal payment of US$2,000 (RMB 16,700) was made in September 1996. As a result of the Company's current financial position, the directors do not expect to make any other repayments in the foreseeable future. The financial condition of the Company raises substantial doubt about the Company's ability to continue as an independent going concern. The description of the business, financial condition and results of operations of the Company contained in this Quarterly Report, however, have been prepared on a going concern basis. They do not include any adjustments that might result from the outcome of the uncertainty relating to the Company's ability to continue as a going concern, including, without limitation, adjustments to the carrying value of assets and liabilities or the classification of liabilities that would be necessary if the Company were not considered to be a going concern. Such adjustments would have a material adverse effect on the Company's financing condition. 29 See Note 2 to the Company's 1999 consolidated financial statements for a description of the company's plans to maintain liquidity and obtain financing. INFLATION / DEFLATION AND CURRENCY MATTERS In recent years, the Chinese economy has experienced periods of rapid economic growth and high rates of inflation, which have from time to time, led to the adoption by the Chinese government of various corrective measures designed to regulate growth and control inflation. Since 1998, the general inflation rate in the PRC was under control, with the PRC experiencing a 2.1% deflation in prices for the period ended September 30, 2000 (1999: minus 3.0%). 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 and deflation. In view of the change in market conditions and increased competition, the Company in an inflationary market may be unable to raise its prices to shift a portion of the inflated costs to customers, and the Company in a deflationary market may be forced to lower its prices to maintain competitive prices. The price of bearing steel, the major raw material used by the Company, remained fairly stable during , 1998, 1999 and the first to third quarter of 2000. 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. Although the Company has export ambitions, historically, substantially all of the Company's sales from businesses that it continues to own and operate have been domestic and settled in RMB. Moreover, historically, substantially all of the Company's costs from businesses that it continues to own and operate have been incurred in RMB. It is possible, however, that the revenue/cost profile of the Company could change in the future, and if it does, then it is possible that a devaluation of the RMB against the US Dollar could have a material adverse effect upon the results of operations. Currently, all of the Company's bank debts are denominated in RMB. However, the Company has indebtedness in respect of the Convertible Debentures that is denominated in US dollars, so that a devaluation of the RMB against the US Dollar could have a material adverse effect upon the Company's financial position. Although prior to 1994 the RMB experienced significant devaluation against the US Dollar, the RMB has remained fairly stable from 1994 to present. The unified exchange rate was US$1.00 to RMB 8.32 at December 31, 1995, RMB 8.3 at December 31, 1996, RMB 8.3 at December 31, 1997, RMB 8.3 at December 31, 1998, RMB 8.275 at December 31, 1999, RMB 8.275 at March 31, 2000, RMB 8.275 at June 30, 2000 and RMB 8.275 at September 30, 2000. The People's Bank of China has declared its intention not to devalue the RMB. However, it is possible that competitive pressures resulting from the significant devaluation 30 of other Asian currencies will ultimately force the Government of China to reconsider its position on devaluation of the RMB. FACTORS THAT MAY AFFECT FUTURE RESULTS Nasdaq De-Listing In February 1999, the Company's Common Stock was delisted from Nasdaq. After its delisting from Nasdaq, the Common Stock traded on the Bulletin Board. Between May 20, 1999 and October 26, 1999 the Company's Common Stock did not trade on the Bulletin Board because there were no market makers making a market in the Common Stock and the Company was not current with its public information requirements. Potential Acceleration of Amounts due under the Settlement Agreement As a result of the failure by China Bearing to make scheduled monthly payments due under the installment provisions of the Settlement Agreement, the Debenture Holders have the right to accelerate the payment of all amounts due under the Settlement Agreement, as well as the right to exercise all other remedies available to them under the Subscription Agreement pursuant to which the Convertible Debentures were purchased. While the Company believes that an equitable resolution may be reached with the Debenture Holders of this indebtedness no assurances can be given in this regard and any acceleration would have a severe negative effect on the liquidity of the Company. Substantial Leverage; Inadequacy of Earnings to Cover Fixed Charges As at September 30, 2000, the Company has, on a consolidated basis, total indebtedness of approximately RMB 769,073 (US$ 92,940), and shareholders' deficit of RMB 9,852 (US$ 1,191) at that date. Substantially all of such indebtedness is denominated in RMB. The Company will require substantial cash flow to meet its repayment obligations on its indebtedness, as well as on any future additional indebtedness it may incur. In the first to third quarter of 2000, the Company's earnings were inadequate to cover fixed charges by approximately RMB 121,609 (US $14,697) (Note: For purposes of this calculation, the term "fixed charges" means the total amount of debt service (principal and interest) due under the Convertible Debentures, as modified by the Settlement Agreement, during the first and second quarter of 2000. The Promissory Note issued to Asean Capital did not appear to be meaningful for purposes of this calculation because the Promissory Note is subordinated to the Convertible Debentures and was issued to a related party. The term "earnings" means net loss from continued operations during the first to third quarter of 2000. Thus, for this calculation, the first to third quarter of 2000 net loss was simply added to the first to third quarter of 2000 debt service under the Convertible Debentures, as modified by the Settlement Agreement.) 31 The ability of the Company to make scheduled interest payments on, and retire at maturity the principal of, its indebtedness is dependent on the Company's future performance. However, the Company experienced operating losses and negative cash flow from continuing operations of RMB 53,925 and RMB 20,865 for the period ended September 30, 2000; RMB 215,695 and RMB 33,059 for the period ended September 30, 1999, respectively. The Company expects that net losses may continue for the foreseeable future in view of the current economic situation in China and many other factors beyond its control. In addition, the Convertible Debentures and the Settlement Agreement impose significant operating and financial restrictions on the Company. Such restrictions limit the Company's ability to create liens and its use of the proceeds from certain asset sales. These factors may make the Company more vulnerable to economic and industry downturns, limit its ability to obtain additional financing to fund future working capital requirements, capital expenditures or other general corporate purposes, and reduce its flexibility in responding to changing business or economic conditions or to a substantial decline in operating results. The Company may require substantial additional funds in the event it fails to meet its projected operating results or its needs exceed its projected capital requirements. The Company's future sources of financing may include equity and debt financing. Accordingly, the Company may be required to refinance a substantial portion of its indebtedness since cash flow from operations may be inadequate to meet payment obligations arising from its long-term indebtedness. There can be no assurance that the Company will be able to raise necessary debt and/or equity proceeds to meet these debt obligations or that the Company will have requisite access to capital markets on acceptable terms. Ability of the Company to Continue as a Going Concern The financial condition of the Company raises substantial doubt about the Company's ability to continue as an independent going concern. The description of the business, financial condition and results of operations of the Company set forth herein, and in the Company's financial statements included herein, however, have been prepared on a going concern basis. They do not include any adjustments that might result from the outcome of the uncertainty relating to the Company's ability to continue as a going concern, including, without limitation, adjustments to the carrying value of assets and liabilities or the classification of liabilities that would be necessary if the Company were not considered to be a going concern. Such adjustments would have a material adverse effect on the Company's reported financial condition. Potential Changes in the Economy of China The economy of the PRC has experienced significant growth in the past decade. Much of this growth has been a result of governmental policies which have encouraged substantial private economic activity. The continuation of growth in China is now subject to a number of uncertainties including, without limitation, a continuation of governmental policies favoring private enterprise, continued success in maintaining a moderate rate of inflation, the ability of China to remain competitive with other Asian countries that have experienced significant devaluation of their currencies during the past two years, resolution of liquidity problems affecting 32 the Chinese banking system and economy as a whole and the maintenance of uninterrupted trading relationships with the United States and other major trading partners. In the event that negative developments in these or other areas result in a slowdown or decline in the economy of China, it is likely that the future results of operations of the Company will be adversely effected. Political and Regulatory Considerations in China Although the government of China has been pursuing economic reform policies for over a decade, there can be no assurances that such policies will continue. Any change in such policies could have a substantial adverse effect on the economic growth of China which would likely diminish the market for the Company's products in China. Moreover, changes in the laws or regulations governing business operations, restrictions on foreign ownership of Chinese companies, exchange controls, changes in the tax laws or restrictions on the repatriation of profits could be imposed in a manner which would result in negative consequences to the Company and its interest in Harbin. Failure to Qualify Harbin Bearings to Automotive and Aerospace Quality Standards; Ability to Remain Competitive with Multinational Manufacturers. To date Harbin Bearing has been unable to establish procedures that would enable it to qualify to international quality standards, generally accepted automotive quality standards or aerospace quality standards. Such failure has resulted in Harbin Bearing's inability to capture orders from the U.S. automotive and aerospace industries. The international bearing industry is extremely competitive. Although the Company's main competitors are Eastern European manufacturers and manufacturers located in China, to a lesser extent, the Company also competes with companies such as Svenska Kugellager Fabriken, Fisher Aktien Gesellschast, New Technology Network, NSK, Timken, Torrington- Fafnir and Nippon Miniature Bearing, who dominate this market. The Company had hoped that its acquisition of Southwest Products would not only allow it to access the U.S. bearing market, but also allow it to implement U.S. manufacturing methods and quality control procedures at Harbin Bearing to develop new products and meet the stringent requirements of many non-PRC OEMs. By doing so, the Company expected to increase its penetration of the international bearing market. As a result of the Company's decision to dispose of Southwest Products in response to the CFIUS investigation, however, the Company has suspended indefinitely its plan to enable Harbin Bearing to meet these international standards. Failure to qualify Harbin Bearing to these standards is expected to constrain the Company's future growth. The Company's products may become obsolete as a result of new technologies or new developments affecting the bearing industry. The Company's ability to remain competitive depends in significant part on its ability to anticipate and stay abreast of new technological developments, fund research and development, introduce new products and retain key personnel for these functions. Some of the Company's competitors have substantially greater resources available for these purposes. To the extent that the Company does not generate adequate cash flow or obtain other financing to fund product development, the Company's competitive, including by positioning will probably be adversely effected, which may result in a loss of sales or lower productivity. 33 Impact of the Turmoil in Asian Markets The turmoil in Asian markets may affect the political and economic policies in China and the continued deterioration of the Asian market coupled with the liquidity restraints imposed in China could adversely affect the Company's operations and the collectability of its accounts receivable. Continuation of these trends could also impair the Company's liquidity. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates and foreign currency exchange rates, which could affect its future results of operations and financial condition. The Company manages its exposure to these risks through its regular operating and financing activities. Currently, the Company is unable to hedge its RMB-hard currency exchange risks due to restrictions imposed by the government of the PRC which prevent financial institutions to engage in foreign currency transactions offering forward exchange contracts with respect to the RMB. Foreign Currency Risk Although the Company has export ambitions, historically, substantially all of the Company's sales from businesses that it continues to own and operate have been domestic and settled in RMB. Moreover, historically, substantially all of the Company's costs from businesses that it continues to own and operate have been incurred in RMB. Thus, the functional currency of Harbin Bearing and the Company's other PRC subsidiaries is the RMB. It is possible, however, that the revenue/cost profile of the Company could change in the future, and if it does, then it is possible that a devaluation of the RMB against the US Dollar could have a material adverse effect upon the results of operations. Currently, all of the Company's bank debts are denominated in RMB. However, the Company has indebtedness under the Settlement Agreement (and under the Convertible Debentures and Subscription Agreement in the event a satisfactory settlement can not be made pursuant to default under the Settlement Agreement) that is denominated in US dollars, so that a devaluation of the RMB against the US Dollar could have a material adverse effect upon the Company's financial position. As a result of the foregoing factors, the Company is subject to risk from fluctuations in the value of the RMB relative to the US dollar. The RMB is translated into U.S. dollars in consolidation, and will result in cumulative translation adjustments which are included in other comprehensive income (loss). For the first to third quarter of 2000, the potential effect on other comprehensive income (loss) resulting from a hypothetical 5%, 10% and 20% weakening in the quoted RMB rate against the U.S. dollar would have resulted in a $56, $108 and $198 increase in consolidated stockholders' deficit and a $164, 34 $314 and $576 decrease in net loss as of September 30, 2000. The same hypothetical movements would have resulted in an RMB 4,652, RMB 9,304 and RMB 18,607 increase in the amount of debt service payable by the Company under the Settlement Agreement in the first to third quarter of 2000. Actual results may differ. Interest Rate Risk The Company's bank loans are all fixed rate and denominated in RMB. Fixed rates range between 6.435% per annum and 9.24% per annum for short-term loans, and between 3.7% per annum and 15.12% per annum for long-term loans. The total amount of short-term bank loans outstanding as of September 30, 2000 was RMB 595,012 with an effective interest rate of 8.085% per annum. The total amount of long-term bank loans outstanding as of September 30, 2000 was RMB 81,025, with an effective interest rate of 8.4% per annum. In addition, the Company has indebtedness of RMB 93,036 and accrued interest payable of RMB 7,706 under the Settlement Agreement (and under the Convertible Debentures and Subscription Agreement in the event a satisfactory settlement can not be made pursuant to default under the Settlement Agreement) at fixed rates of interest. As such, the Company is exposed to interest rate risk on its long-term bank loans and in respect of its indebtedness under the Settlement Agreement (or Convertible Debentures and Subscription Agreement). Given banking practices in the PRC, the Company believes that it will be able to refinance its long-term bank loans at market rates whenever they drop significantly below the fixed rates specified on its long-term bank loans. At present, the Company believes that the risk of a significant drop in relevant market interest rates during the term of the debt under the Settlement Agreement is remote; however, the Company may consider entering into hedge transactions if such a risk is perceived to increase. 35 PART II. OTHER INFORMATION Item 1 Legal Proceedings There are no material developments. Item 2 Changes in Securities and Use of Proceeds None Item 3 Defaults Upon Senior Securities China Bearing has failed to make the scheduled monthly payments under the Settlement Agreement since March 23, 1999. Upon the completion of Southwest Products' sale on April 28, 2000, a payment of US$2,600 was made as partial settlement of outstanding debt under the Settlement Agreement. After the payment, the total amount of overdue principal and interest as of September 30, 2000 are US$7,092 and US$1,296 respectively. The Company, China Bearing and the other members of the Sunbase International will continue to seek further equitable resolution with the Debenture Holders regarding these amounts. While the company believes that a workable solution can be reached with Debenture Holders in due course, no assurance can be given as to when or if such negotiations will result in a resolution that is favorable to the Company. Item 4 Submission of Matters to a Vote of Security Holders None Item 5 Other Information None Item 6 Exhibits and Reports on Form 8-K (a) Exhibits: 11 Computation of Earnings per common share 27 Financial Data Schedule (b) Reports on Form 8-K: None 36 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUNBASE ASIA INC. ----------------- (Registrant) Date: November 20, 2000 By: /s/ Gunter Gao ------------------- Gunter Gao Chairman, President and Chief Executive Officer Date: November 20, 2000 By: /s/ (Roger) Li Yuen Fai ---------------------------- (Roger) Li Yuen Fai Vice President and Chief Financial Officer (Principal Financial Officer) 37 EX-11 2 0002.txt COMPUTATION OF EARNINGS PER COMMON SHARE EXHIBIT 11 ---------- SUNBASE ASIA, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 and 2000 (Amounts in thousands, except number of shares and per share data)
Nine Months Ended September 30 Three Months Ended September 30 ------------------------------ ------------------------------- 1999 2000 2000 1999 2000 2000 RMB RMB US$ RMB RMB US$ ---- ---- ---- ---- ---- ---- BASIC Net income/(loss) from continuing operations (113,438) (28,573) (3,454) (84,510) (10,394) (1,257) Net loss from discontinued operations, net of income taxes (16,568) - - (3,905) - - ---------- ---------- --------- ---------- --------- -------- (130,006) (28,573) (3,454) (88,415) (10,394) (1,257) ========== ========== ========= ========== ========= ======== Weighted average number of shares of Common Stock outstanding: Shares of common stock outstanding 14,118,751 14,118,867 14,118,867 14,118,751 14,118,867 14,118,867 ========== ========== ========== ========== ========== ========== Loss per common share: Basic and diluted income/(loss) from continuing operations (8.03) (2.02) (0.24) (5.99) (0.74) (0.089) ===== ===== ===== ===== ===== ===== Basic and diluted Net income /(loss) (9.21) (2.02) (0.24) (6.26) (0.74) (0.089) ===== ===== ===== ===== ===== =====
1 COMPUTATION OF EARNINGS PER COMMON SHARE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 and 2000 (Amounts in thousands, except number of shares and per share data) Weighted average number of shares of Common stock outstanding: Shares of common stock outstanding 14,118,751 14,118,751 14,118,751 14,118,751 14,118,751 14,118,751 Shares of common stock issuable Assuming conversion of the Convertible Preferred Stock - Series A - - - - - - - Series B - - - - - - Shares of common issuable assuming conversion of the convertible debentures on August 23, 1996 - - - - - - Share issued as a result of reverse stock split - 116 116 - 116 116 ---------- ---------- ---------- ---------- ---------- ---------- Total weighted average number of shares of common stock and common stock equivalents outstanding 14,118,751 14,118,867 14,118,867 14,118,751 14,118,867 14,118,867 ========== ========== ========== ========== ========== ==========
2 EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
5 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 NINE MONTHS ENDED SEPTEMBER 30, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 315 0 83,661 0 55,680 139,656 53,304 0 192,960 183,802 0 0 5,381 14 (6,586) 192,960 52,454 52,454 48,812 48,812 6,627 0 3,532 (6,517) 0 (3,454) 0 0 0 (3,454) (0.24) (0.24)
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