10-Q 1 asiafiber-10q.txt QUARTERLY REPORT U.S. SECURITIES 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 [x] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended: Commission File Number: March 31, 2002 1-8334 ASIA FIBER HOLDINGS LIMITED -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) DELAWARE 75-1071589 --------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) Room 2105, 21/F., West Tower Shun Tak Centre, 200 Connaught Road C. Sheung Wan, Hong Kong -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (852) 2810-6226 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) 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 filing requirements for the past 90 days. Yes X No --- --- The number of shares of Common Stock, par value $ .01 per share, outstanding as of March 31, 2002 is 25,321,319. Transitional Small Business Disclosure Format (check one): Yes No X ---- ---- ASIA FIBER HOLDINGS LTD. INDEX TO FORM 10-Q March 31, 2002

2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ASIA FIBER HOLDINGS LIMITED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (Amounts in thousands, except share and per share data) Three Months Ended March 31, --------------------------------- 2002 2001 2002 ------- ------- ------- Note RMB RMB US$ SALES 72,897 88,915 8,804 COST OF SALES* (73,301) (77,698) (8,853) ------- ------- ------- GROSS PROFIT/(LOSS) (404) 11,217 (49) SELLING AND ADMINISTRATIVE EXPENSES (5,859) (4,314) (708) FINANCIAL INCOME/, (EXPENSES) NET# (79) 1,039 (9) ------- ------- ------- INCOME/(LOSS) BEFORE INCOME TAXES (6,342) 7,942 (766) INCOME TAXES (598) (849) (72) ------- ------- ------- INCOME/(LOSS) BEFORE MINORITY INTERESTS (6,940) 7,093 (838) MINORITY INTERESTS 1,276 (2,553) 154 ------- ------- ------- NET INCOME/(LOSS) (5,664) 4,540 (684) ======= ======= ======= BASIC AND DILUTED EARNINGS/(LOSS) PER SHARE 2 (0.22) 0.18 (0.03) ======= ======= ======= *including: Raw materials purchased from related parties 71,150 52,685 8,593 Utility charges paid to related parties 8,113 4,530 980 Rental expenses for leasing of plant and machinery from related parties 1,126 251 136 #Interest income from - related party 3,300 3,939 399 - others 38 32 4 ------- ------- ------- Total interest income 3,338 3,971 403 Interest expenses (3,417) (2,932) (413) ------- ------- ------- Financial income/(expenses), net (79) 1,039 (10) ======= ======= ======= See notes to condensed consolidated financial statements. 3 ASIA FIBER HOLDINGS LIMITED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2002 AND DECEMBER 31, 2001 (Amounts in thousands, except share and per share data)

Translations of amounts from Renminbi (RMB) into United States Dollars (US$) for the convenience of the reader has been made at the unified exchange rate quoted by the People's Bank of China on March 31, 2002 of US$1.00 = RMB8.28. No representation is made that the Renminbi amounts could have been, or could be, converted into United States Dollars at that rate on March 31, 2002 or at any other certain rate. See notes to condensed consolidated financial statements. 4 ASIA FIBER HOLDINGS LIMITED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2002 (Amounts in thousands)

Translations of amounts from Renminbi (RMB) into United States Dollars (US$) for the convenience of the reader has been made at the unified exchange rate quoted by the People's Bank of China on March 31, 2002 of US$1.00 = RMB8.28. No representation is made that the Renminbi amounts could have been, or could be, converted into United States Dollars at that rate on March 31, 2002 or at any other certain rate. See notes to condensed consolidated financial statements. 5 ASIA FIBER HOLDINGS LIMITED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (Amounts in thousands)

See notes to condensed consolidated financial statements. 6 ASIA FIBER HOLDINGS LIMITED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Amounts in thousands) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2001. 2. EARNINGS/(LOSS) PER SHARE The calculation of earnings/(loss) per share is based on the weighted average number of ordinary shares outstanding during each of the periods ended March 31, 2001 and 2002, respectively.

3. INVENTORIES AND CONSUMABLE SUPPLIES INVENTORIES

4. AMOUNT DUE FROM A MINORITY JOINT VENTURE PARTNER During the quarter ended March 31, 2002, the minority joint venture partner made payments to the Company in the amount of RMB30,000 in cash, RMB40,657 in raw materials and RMB3,908 in utilities purchased on behalf of the Company. 7 5. FIXED ASSETS

During 2002, the Group sold certain machinery and equipment to HLG at net book value totaling RMB3,028. 6. BANK LOANS During 2002, the Group repaid two bank loans totaling RMB33,200. 8 7. SHAREHOLDERS' EQUITY Convertible Preferred Stock --------------------------- On December 21, 2001, the Company and GEM Global Yield Fund Ltd. (the "Purchaser") entered into a Convertible Preferred Stock Purchase Agreement (the "Preferred Stock Agreement"). Pursuant to the Preferred Stock Agreement, the Company will issue and sell to the Purchaser 20,000 Series C Preferred Stock (the "Preferred Stock") at the stated value of RMB828 (US$100) (the "Stated Value") per share, of RMB16,560 (US$2,000). The sale of the preferred stock will occur five days after a registration statement covering 9,875,000 shares of the Company's common stock is declared effective by the United States Securities and Exchange Commission ("SEC")("closing date"). The Preferred Stock is convertible into common shares of the Company at any time during and automatically converted at the end of the period of two and one half years commencing on the issuance date of the Preferred Stock. The conversion price for each share of the Preferred Stock is the lesser of (a) $4.00 or 125% of the average of the closing bid price per share of the common stock of the Company during the five trading days immediately preceding the closing date or (b) 100% of the average of the three lowest closing bid prices per share of the common stock of the Company during the thirty trading days immediately preceding the conversion date. The Preferred Stock may not be converted into common stock if the Purchaser and any affiliate would, as a result, beneficially own more than 4.99% of the issued and outstanding shares of common stock of the Company, however, the Purchaser may waive the 4.99% limitation upon 75 days prior written notice or upon an event of default. Any conversion shall be for a minimum stated value of $10 of the Preferred Stock. The Company will also grant the Purchaser a warrant to purchase 1,750,000 shares of common stock at US$.01 per share. The warrant is exercisable immediately after issuance and expires 30 months after grant. Unless previously converted, the Preferred Stock is redeemable at the sole option of the Company at a redemption price of 150% of the stated value of each share of the Preferred Stock plus accrued and unpaid dividends at anytime before two and one half years after the date of issuance. The Preferred Stock earns cumulative dividends (in cash or shares of common stock) at the rate of two percent per annum on the stated value. The Preferred Stock is ranked prior to the common stock for the distribution of assets upon liquidation, dissolution or winding up of the Company. The holders of the Preferred Stock have no voting power whatsoever, except as otherwise provided by the Delaware General Corporate Law ("DGCL"). The Preferred Stock Agreement requires that the Company register the shares underlying the Preferred Stock and the warrant within 90 days of the execution of the agreement and to use its best efforts to cause such registration statement to be declared effective within 150 days from the execution date of the agreement. If the registration statement is not declared effective by the specified date, the Company is required to pay 4% of the US$2,000 purchase price per month until the registration statement is declared effective. In addition, if the agreement is terminated for reasons specified therein, the Purchaser is entitled to receive a warrant to purchase 500,000 shares of the Company's common stock, exercisable immediately upon issuance through January 11, 2005 at US$0.01 per share, subject to adjustment. Pursuant to Rule 416(a) of the Securities Act of 1933, on February 12, 2002, the Company filed a Registration Statement on Form SB-2 to register 9,875,000 shares of common stock, the maximum number of shares underlying the Preferred Stock and the warrant. On February 12, 2002 the Company put 32,000,000 common shares in escrow as specified in the Convertible Preferred Stock Agreement. Common Stock and Warrants ------------------------- On December 27, 2001, the Company entered into a Financial Consulting Agreement (the "Consulting Agreement") with Wistow Holdings Ltd 9 ("Wistow"), a corporation domiciled in the British Virgin Islands. Pursuant to the Consulting Agreement, Wistow will act as a financial consultant to the Company for a period of three years commencing on December 27, 2001, and perform such duties as are normally associated with financial management services. In return, the Company issued to Wistow 440,000 shares of restricted common stock of the Company on January 24, 2002. Wistow has the right, exercisable at any time, to request that the Company register the shares. As of December 27, 2001, the closing market price of the common stock was RMB5.05 (US$0.61) per share, for a total fair value of RMB2,222 (US$268). During the three months ended March 31, 2002, the compensation costs associated with the issuance of the restricted stock charged to the profit and loss account amounted to RMB185 (US$22). On March 4, 2002, the Company entered into an Advisory Agreement (the "Advisory Agreement") with vFinance Investments, Inc. ("vFinance"). Pursuant to the Advisory Agreement, vFinance will assist the Company as its financial advisor through introductions to certain parties relevant to the Company's stock and market making activities for one year commencing on March 4, 2002. In return, the Company delivered to vFinance on March 4, 2002: i. A warrant to purchase 50,000 shares of the Company's common stock at US$1.00 per share, exercisable immediately and expiring six months after issuance; ii. A warrant to purchase 50,000 shares of the Company's common stock at US$1.00 per share, exercisable immediately and expiring five years after issuance; and iii. A warrant to purchase 2,000,000 shares of the Company's common stock at US$2.00 per share, exercisable immediately and expiring five years after issuance. Management estimates that the fair value of the warrants delivered to vFinance is approximately US$1,038. The fair value of the warrants is estimated using the Black-Scholes model and the following assumptions: interest free rates - 4.75% (warrants expiring within six months) and 5.08% (warrants expiring within five years); volatility - 265%; dividend rate - 0; expected life - six to sixty months. During the three months ended March 31, 2002, the compensation costs associated with the issuance of the warrants charged to the profit and loss account amounted to RMB716 (US$86). The Company is required to register the shares underlying the warrants by May 3, 2002. The exercise price of the warrants will decrease by 10%, for each thirty day period or portion thereof, if the Company fails to register the underlying shares within sixty days or cause the registration statement to be declared effective within 120 days from the date of exercise of the warrants by the warrants holders. The Company is making its best effort to register the shares underlying the warrants. The Company estimates that there are no material changes in the fair value of the warrants if the exercise price of the warrants is decreased by 10%. The exercise price of the warrants is also subject to certain adjustments under certain circumstances as detailed in the Advisory Agreement. As of March 31, 2002, the Company has not filed a registration statement for the shares underlying these warrants. 8. ACCUMULATED OTHER COMPREHENSIVE INCOME Total Comprehensive income/(loss) was (RMB5,667) and RMB4,548 for the three months ended March 31, 2002 and March 31. 2001, respectively. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION RESULTS OF OPERATIONS The following table shows the selected unaudited condensed consolidated income statement data of the Company and its subsidiaries for the three months ended March 31, 2002 and 2001. The data should be read in conjunction with the unaudited Condensed Consolidated Financial Statements of the Company and related notes thereto. The discussions below are presented in the Company's primary operating currency, which is the Renminbi Yuan ("RMB"). For information purposes only, the amounts may be translated into U.S. dollars at an exchange rate of $1.00 = RMB8.28, which represents the approximate single rate of exchange as quoted by the People's Bank of China on March 31, 2002. No representation is made that RMB amounts could have been, or could be, converted into U.S. dollars at that rate or any other rate. (Amounts in thousands) Three months ended March 31, ---------------------------- 2002 2001 RMB RMB Sales 72,897 88,915 Cost of sales (73,301) (77,698) ---------- ---------- Gross profit/(loss) (404) 11,217 Gross profit margin (%) (0.55) 12.6 Income/(loss) before income taxes (6,342) 7,942 Income taxes (598) (849) ---------- ---------- Income/(loss) before minority interests (6,940) 7,093 Minority interests 1,276 (2,553) ---------- ---------- Net income/(loss) (5,664) 4,540 ========== ========== SALES AND GROSS PROFIT MARGIN Total sales for the three months ended March 31, 2002 decreased by RMB16.0 million (US$1.9 million) or 18.0% to RMB72.9 million (US$8.8 million), compared to RMB88.9 million (US$10.7 million) for corresponding period in 2001. Although total sales volume increased by approximately 15% in 2002, the average unit selling price of polyester filament and polyester staple fiber decreased by approximately 37% and 22%, respectively. The cost of petroleum, being the major raw material of all ployester products decreased during 2002, which resulted in the decrease in the selling prices of polyester fiber products. The gross profit margin changed from 12.6% for the first quarter of 2001 to (0.55%) for the first quarter of 2002. Despite the decrease in cost of polyester chips during 2002, the decrease in selling prices of polyester fiber products, outweighed the decrease in cost of polyester chips, which resulted in a gross loss for the first quarter of 2002. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling and administrative expenses increased by RMB1.5 million (US$186,000) or 35.8% to RMB5.9 million (US$708,000) for the first quarter of 2002 from RMB4.3million (US$521,000) for the corresponding period in 2001. The increase was mainly due to amortization of prepaid consulting services provided by Wistow over 3 years and prepaid advisory services provided by vFinance over 1 year, starting from the first quarter of 2002, amounting to RMB901,000 (US$109,000), and the increase in legal and professional fees mainly in association with the intended issuance of convertible preferred stock amounting to approximately RMB280,000 (US$34,000) 11 FINANCIAL INCOME/(EXPENSES), NET Net financial expenses increased from a net income of RMB1.0 million (US$125,000) for the first quarter of 2001 to a net expenses of RMB79,000 (US$9,000). The increase in net financial expenses was mainly attributable to the decrease in interest income received on the amount due from Heilongjiang Longdi Group Co., Ltd., a 30% interest minority shareholder of Harbin Asibao Chemical Fiber Co. Limited ("Asibao"), offset by an increase in interest expense of approximately RMB500,000 (US$60,000) due to an increase in outstanding debt as compared to the first quarter of 2001. INCOME TAXES The Company, through Far Beyond, owns 70% interest in Asibao which is governed by the Income Tax Laws of the PRC. Being a Sino-foreign joint venture established in the Harbin Economic Development Zone and being awarded the status of "advanced technology enterprise", Asibao was exempted from income taxes for a period of three years commencing from its first profitable year and is entitled to a preferential income tax rate of 15% for the remaining years of the Joint Venture with a 50% reduction for three consecutive years commencing from its fourth profitable year. The years 2001 and 2002 are the sixth and seventh profitable years, respectively, and the income taxes are provided accordingly. Income taxes for 2001 mainly represented income taxes provided for the assessable profits of Asibao. Income taxes for 2000 represented the realization of deferred tax asset on temporary timing difference. LIQUIDITY AND CAPITAL RESOURCES The Company's and its subsidiaries' primary liquidity needs are to fund inventories and trade receivables and amount due from HLG, a minority joint venture partner and a major supplier of raw materials. The Company has financed its working capital requirements primarily through internally generated cash and bank borrowings. The Company had a working capital surplus of approximately RMB171.1 million (US$20.7 million) as of March 31, 2002 compared to that of approximately RMB160.5 million (US$19.4 million) as of December 31, 2001. Net cash used in operating activities for the three months ended March 31, 2002 was approximately RMB38.2 million (US$4.6 million), as compared to RMB38.0 million (US$4.6 million) for the corresponding period in 2001. Net cash flows from the Company's operating activities are attributable to the Company's results of operations and changes in operating assets and liabilities. In March 2002, the Company entered into an agreement where HLG agreed to settle RMB160 million (US$19.3 million) by offsetting the cost of our future purchases and utilities charges at a rate of RMB10 million per month for 16 months, commencing in March 2002. During the current period, HLG repaid cash in the amount of RMB30 million (US$3.6 million) to the Company and the Company repaid short-term bank borrowings in the amount of RMB33.2 million (US$4.0 million). During the current period, the inventories increased by RMB28.4 million (US$3.4 million), which was mainly financed by the advance from customers and the offsetting of purchase cost as mentioned above. There has been no other significant change in financial condition and liquidity since the fiscal year ended December 31, 2000. The Company believes that internally generated funds will be sufficient to satisfy its anticipated working capital needs for at least the next twelve months. 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds. On January 24, 2002 the Company issued 440,000 shares of Common Stock to Wistow Holdings Ltd. a consultant to the Company. On March 4, 2002 the Company issued a six-month warrant to purchase up to 50,000 shares of Common Stock at an excise price of $1.00 per share to vFinance Investments, Inc. a financial advisory to the Company. On March 4, 2002 the Company issued a five year warrant to purchase up to 50,000 shares of Common Stock at an excise price of $1.00 per share to vFinance Investments, Inc. a financial advisory to the Company. On March 4, 2002 the Company issued a five year warrant to purchase up to 2,000,000 shares of Common Stock at an excise price of $2,00 per share. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: None. 13 SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: May 20, 2002 ASIA FIBER HOLDINGS LIMITED By: ------------------------------------------------- Rui Min Zhao, President and Vice Chairman of the Board By: ------------------------------------------------- Feng Jie Liu, Chief Financial Officer and Director (principal financial and accounting officer) 14

ASIA FIBER HOLDINGS LTD 10-Q