<PAGE>
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
<PAGE>
SUNBASE ASIA, INC. AND SUBSIDIARIES
-----------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</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, 1999 AND SEPTEMBER 30, 2000
(Amounts in thousands, except number
of shares and per share data)
<TABLE>
<CAPTION>
12/31/99 9/30/00
Notes RMB US$ RMB US$
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
--------- --------- --------- ---------
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
</TABLE>
Continued/...
The accompanying notes form an integral part of these consolidated condensed
financial statements.
4
<PAGE>
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)
<TABLE>
<CAPTION>
12/31/99 9/30/00
----------------------------- -------------------------
RMB US$ RMB US$
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
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
============ =========== =========== ==========
</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 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)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
1999 2000 2000 1999 2000 2000
Notes RMB RMB US$ RMB RMB US$
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
=========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes form an integral part of these consolidated condensed
financial statements.
6
<PAGE>
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)
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------------------
1999 1999 2000 2000
RMB US$ RMB US$
------- ------ ------- ------
<S> <C> <C> <C> <C>
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
========== ======== ========= ========
</TABLE>
7
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
----------------- -----------------------
RMB US$ RMB US$
------ ---- ----- ----
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
</TABLE>
11
<PAGE>
5. DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
December 31, 1999 September 30, 2000
------------------ -----------------------
RMB US$ RMB US$
------ ---- ------- ----
<S> <C> <C> <C> <C>
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 - -
========== ========== ========== ==========
</TABLE>
12
<PAGE>
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:-
<TABLE>
<CAPTION>
December 31 September 30
----------- ------------
<S> <C> <C> <C> <C>
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) - -
------- ------- ------- -------
- - - -
======= ======= ======= =======
</TABLE>
13
<PAGE>
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
<PAGE>
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
<PAGE>
funds raised by the Company or its subsidiaries will be applied immediately
towards discharging the then outstanding debt and interest accrued thereon.
16
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------------
1999 2000
RMB % RMB %
--- --- --- ---
<S> <C> <C> <C> <C>
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)
=========== =========== =========== ===========
</TABLE>
21
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------------
1999 2000
RMB % RMB %
------- ----- ------- -----
<S> <C> <C> <C> <C>
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)
=========== ======== ========== ========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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$1.00 to RMB
8.32 at December 31, 1995, RMB 8.3 at December 31, 1996, RMB 8.3 at December 31,
1997, RMB 8.3 at December 31, 1998, RMB 8.275 at December 31, 1999, RMB 8.275 at
March 31, 2000, RMB 8.275 at June 30, 2000 and RMB 8.275 at September 30, 2000.
The People's Bank of China has declared its intention not to devalue the RMB.
However, it is possible that competitive pressures resulting from the
significant devaluation
30
<PAGE>
of other Asian currencies will ultimately force the Government of China to
reconsider its position on devaluation of the RMB.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Nasdaq De-Listing
In February 1999, the Company's Common Stock was delisted from Nasdaq. After
its delisting from Nasdaq, the Common Stock traded on the Bulletin Board.
Between May 20, 1999 and October 26, 1999 the Company's Common Stock did not
trade on the Bulletin Board because there were no market makers making a market
in the Common Stock and the Company was not current with its public information
requirements.
Potential Acceleration of Amounts due under the Settlement Agreement
As a result of the failure by China Bearing to make scheduled monthly payments
due under the installment provisions of the Settlement Agreement, the Debenture
Holders have the right to accelerate the payment of all amounts due under the
Settlement Agreement, as well as the right to exercise all other remedies
available to them under the Subscription Agreement pursuant to which the
Convertible Debentures were purchased. While the Company believes that an
equitable resolution may be reached with the Debenture Holders of this
indebtedness no assurances can be given in this regard and any acceleration
would have a severe negative effect on the liquidity of the Company.
Substantial Leverage; Inadequacy of Earnings to Cover Fixed Charges
As at September 30, 2000, the Company has, on a consolidated basis, total
indebtedness of approximately RMB 769,073 (US$ 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
<PAGE>
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
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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.
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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,
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$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.
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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
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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
