UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to _________
Commission file number: 000-33123
China Automotive Systems, Inc.
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 33-0885775
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
No. 1 Henglong Road, Yu Qiao Development Zone
Shashi District, Jing Zhou City, Hubei Province
People's Republic of China
----------------------------------------------------
(Address of principal executive offices)
Issuer's telephone number: (86) 716-8329196
Not Applicable
---------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of June 30, 2004, the Company had 22,574,542 shares of common stock
issued and outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Documents incorporated by reference: None.
CHINA AUTOMOTIVE SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2004 (Unaudited) and
December 31, 2003
Condensed Consolidated Statements of Operations (Unaudited) - Three
Months and Six Months Ended June 30, 2004 and 2003
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited) - Three Months and Six Months Ended June 30, 2004 and 2003
Condensed Consolidated Statements of Cash Flows (Unaudited) - Six
Months Ended June 30, 2004 and 2003
Notes to Condensed Consolidated Financial Statements (Unaudited) -
Three Months and Six Months Ended June 30, 2004 and 2003
Item 2. Management's Discussion and Analysis or Plan of Operation
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
China Automotive Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, December 31,
2004 2003
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 16,542,174 $ 10,730,882
Pledged cash deposits 1,550,455 1,272,067
Accounts and notes receivable,
including $1,381,525 and
$1,248,328 from related
parties at June 30, 2004
and December 31, 2003,
respectively, net of an
allowance for doubtful
accounts of $3,134,667 and
$2,757,374 at June 30, 2004
and December 31, 2003,
respectively 29,679,361 38,680,011
Advance payments, including
$643,769 and $1,513,973
to related parties at
June 30, 2004 and
December 31, 2003,
respectively, net of an
allowance for doubtful
accounts of $191,364 10,565,144 9,980,367
Inventories 14,820,569 10,229,422
------------- -------------
Total current assets 73,157,703 70,892,749
------------- -------------
Property, plant and equipment 32,793,599 28,050,079
Less: Accumulated depreciation (6,886,687) (5,700,023)
------------- -------------
25,906,912 22,350,056
------------- -------------
Intangible assets, net 178,596 218,639
Other receivables, including
$489,607 and $1,472,758
from related parties at
June 30, 2004 and December
31, 2003, respectively, net
of an allowance for doubtful
accounts of $1,118,299 and
$1,053,047 at June 30, 2004
and December 31, 2003,
respectively 2,446,059 2,313,017
Long-term investments 72,289 72,289
------------- -------------
Total assets $ 101,761,559 $ 95,846,750
============= =============
(continued)
3
China Automotive Systems, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (continued)
June 30, December 31,
2004 2003
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans $ 14,216,867 $ 9,638,554
Accounts and notes payable,
including $613,669 and
$1,175,006 to related parties
at June 30, 2004 and December
31, 2003, respectively 27,157,239 23,017,221
Customer deposits 1,252,516 907,519
Accrued payroll and related costs 2,281,986 1,173,576
Accrued expenses and other payables 3,788,175 1,992,207
Accrued pension costs 1,984,823 1,516,649
Liability related to acquisition of
joint venture assets -- 1,204,819
Taxes payable 4,755,816 6,268,803
Amounts due to shareholders/directors 564,913 5,229,281
------------ ------------
Total current liabilities 56,002,335 50,948,629
------------ ------------
Long-term liabilities 196,547 196,547
Minority interests 17,319,856 18,686,712
Stockholders' equity:
Preferred stock, $0.0001 par value -
Authorized - 20,000,000 shares
Issued and outstanding - None -- --
Common stock, $0.0001 par value -
Authorized - 80,000,000 shares
Issued and Outstanding -
22,574,542 shares at June 30,
2004 and December 31, 2003 2,257 2,257
Additional paid-in capital 18,789,793 18,779,880
Retained earnings -
Appropriated 4,225,222 3,775,254
Unappropriated 5,222,580 3,461,621
Foreign currency translation gain
(loss) 2,969 (4,150)
------------ ------------
Total stockholders' equity 28,242,821 26,014,862
------------ ------------
Total liabilities and stockholders'
equity $101,761,559 $ 95,846,750
============ ============
See accompanying notes to condensed consolidated financial statements.
4
China Automotive Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended June 30,
------------------------------
2004 2003
------------ ------------
(Restated -
Note 12)
Net sales, including $372,454
and $1,259,934 to related parties
in 2004 and 2003, respectively $ 16,249,817 $ 12,733,793
Cost of sales, including $362,182
and $1,038,835 purchased from
related parties in 2004 and
2003, respectively 9,476,427 7,047,257
------------ ------------
Gross profit 6,773,390 5,686,536
------------ ------------
Costs and expenses:
Selling 878,922 375,535
General and administrative 2,480,948 1,802,424
Depreciation and amortization 132,231 80,956
------------ ------------
Total costs and expenses 3,492,101 2,258,915
------------ ------------
Income from operations 3,281,289 3,427,621
------------ ------------
Other income (expense):
Other non-operating income 326,600 109,445
Financial expenses (260,714) (63,554)
------------ ------------
Other income, net 65,886 45,891
------------ ------------
Income before income taxes 3,347,175 3,473,512
Income taxes 452,988 534,803
------------ ------------
Income before minority interest 2,894,187 2,938,709
Minority interests 1,088,829 1,428,357
------------ ------------
Net income $ 1,805,358 $ 1,510,352
============ ============
Net income per common share -
Basic $ 0.08 $ 0.07
Diluted $ 0.08 $ 0.07
Weighted average number of
common shares outstanding -
Basic 22,574,542 22,015,000
Diluted 22,574,542 22,490,450
See accompanying notes to condensed consolidated financial statements.
5
China Automotive Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
Six Months Ended June 30,
------------------------------
2004 2003
------------ ------------
(Restated -
Note 12)
Net sales, including $657,523
and $2,015,000 to related parties
in 2004 and 2003, respectively $ 29,083,573 $ 23,835,864
Cost of sales, including $756,358
and $1,606,549 purchased from
related parties in 2004 and
2003, respectively 17,722,177 12,949,367
------------ ------------
Gross profit 11,361,396 10,886,497
------------ ------------
Costs and expenses:
Selling 1,287,356 655,326
General and administrative 4,666,020 3,516,767
Depreciation and amortization 250,615 165,295
Stock-based compensation -- 1,300,000
------------ ------------
Total costs and expenses 6,203,991 5,637,388
------------ ------------
Income from operations 5,157,405 5,249,109
------------ ------------
Other income (expense):
Other non-operating income 445,433 347,921
Financial expenses (345,602) (122,659)
------------ ------------
Other income, net 99,831 225,262
------------ ------------
Income before income taxes 5,257,236 5,474,371
Income taxes 765,388 980,331
------------ ------------
Income before minority interest 4,491,848 4,494,040
Minority interests 1,672,701 3,017,786
------------ ------------
Net income $ 2,819,147 $ 1,476,254
============ ============
Net income per common share -
Basic $ 0.12 $ 0.07
Diluted $ 0.12 $ 0.07
Weighted average number of
common shares outstanding -
Basic 22,574,542 21,648,083
Diluted 22,574,542 21,971,592
See accompanying notes to condensed consolidated financial statements.
6
China Automotive Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three Months Ended June 30,
---------------------------
2004 2003
---------- ----------
(Restated -
Note 12)
Net income $1,805,358 $1,510,352
Other comprehensive income (loss):
Foreign currency translation gain 2,934 --
---------- ----------
Comprehensive income $1,808,292 $1,510,352
========== ==========
China Automotive Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Six Months Ended June 30,
---------------------------
2004 2003
---------- ----------
(Restated -
Note 12)
Net income $2,819,147 $1,476,254
Other comprehensive income (loss):
Foreign currency translation gain 7,119 --
---------- ----------
Comprehensive income $2,826,266 $1,476,254
========== ==========
See accompanying notes to condensed consolidated financial statements.
7
China Automotive Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30,
------------------------------
2004 2003
------------ ------------
(Restated -
Note 12)
Cash flows from operating activities:
Net income $ 2,819,147 $ 1,476,254
Adjustments to reconcile net income
to net cash provided by operating
activities:
Minority interests 1,672,701 3,017,786
Issuance of warrants to consultants -- 1,300,000
Depreciation and amortization 1,233,824 930,567
Other operating adjustments (1,010,255) 450,403
Changes in operating assets and
liabilities:
(Increase) decrease in:
Pledged deposits (278,388) (1,367,589)
Accounts receivable 9,000,650 (5,180,083)
Advance payments (584,777) (1,347,549)
Inventories (4,591,147) (1,017,596)
Increase (decrease) in:
Accounts and notes payable 4,140,018 3,642,923
Customer deposits 344,997 (262,458)
Accrued payroll and related
costs 1,108,410 (173,259)
Accrued expenses and other
payables 1,795,968 335,405
Accrued pension costs 468,174 386,199
Taxes payable (1,512,987) (521,202)
------------ ------------
Net cash provided by operating activities 14,606,335 1,669,801
------------ ------------
Cash flows from investing activities:
(Increase) decrease in other
receivables (133,042) 739,084
Cash paid to acquire fixed assets (4,743,520) (1,126,170)
------------ ------------
Net cash used in investing activities (4,876,562) (387,086)
------------ ------------
(continued)
8
China Automotive Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
Six Months Ended June 30,
------------------------------
2004 2003
------------ ------------
(Restated -
Note 12)
Cash flows from financing activities:
Proceeds from bank loans, net $ 4,578,313 $ 4,819,277
Dividends paid (4,469,379) (5,555,819)
Increase (decrease) in amounts due to
shareholders/directors (4,664,368) 1,569,068
Contributions to capital by minority
interest holders 1,841,772 --
Decrease in liability related to
acquisition of joint venture assets (1,204,819) --
------------ ------------
Net cash provided by (used in)
financing activities (3,918,481) 832,526
------------ ------------
Cash and cash equivalents:
Net increase 5,811,292 2,115,241
At beginning of period 10,730,882 --
Adjustment as a result of change
to consolidation accounting
from equity accounting
effective January 1, 2003 -- 5,618,436
------------ ------------
At end of period $ 16,542,174 $ 7,733,677
============ ============
Supplemental Disclosure of Non-Cash
Investing and Financing Activities:
Adjustment as a result of change
to consolidation accounting
from equity accounting
effective January 1, 2003 $ -- $ (279,863)
Cancellation of dividends
previously declared -- 17,167,000
Shares of common stock
retained by public
shareholders in March
2003 recapitalization -- 110
Issuance of warrants to consultants -- 1,300,000
See accompanying notes to condensed consolidated financial statements.
9
China Automotive Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months and Six Months Ended June 30, 2004 and 2003
1. Organization and Basis of Presentation
Organization - Effective March 5, 2003, Visions-In-Glass, Inc., a United States
public company incorporated in the State of Delaware ("Visions"), entered into a
Share Exchange Agreement to acquire 100% of the shareholder interest in Great
Genesis Holding Limited, a company incorporated on January 3, 2003 under The
Companies Ordinance in Hong Kong as a limited liability company ("Great
Genesis"), as a result of which Great Genesis became a wholly-owned subsidiary
of Visions. At the closing, the old directors and officers of Visions resigned,
and new directors and officers were appointed. Visions subsequently changed its
name to China Automotive Systems, Inc.
China Automotive Systems, Inc., including, when the context so requires, its
subsidiaries and the subsidiaries' interests in the Sino-foreign joint ventures
described below, is referred to herein as the "Company". The Company, through
its Sino-foreign joint ventures described below, is engaged in the manufacture
and sale of automotive systems and components in the People's Republic of China
(the "PRC" or "China") as described below.
Ji Long Enterprise Investment Limited was incorporated on October 8, 1992 under
the Companies Ordinance in Hong Kong as a limited liability company ("Ji Long").
Ji Long is an investment holding company. Effective March 4, 2003, all of the
shareholders of Ji Long exchanged their 100% shareholder interest for a 100%
shareholder interest in Great Genesis, as a result of which Ji Long became a
wholly-owned subsidiary of Great Genesis.
In exchange for the acquisition of 100% of the shareholder interest in Great
Genesis, the shareholders of Great Genesis were issued 20,914,250 shares of
common stock of Visions. In addition, the shareholders of Great Genesis paid
$250,000 to the former officer, director and controlling shareholder of Visions
for the cancellation of 17,424,750 shares of common stock, and have agreed to
pay an additional $70,000, subject to certain conditions.
The acquisition of Great Genesis by the Company was accounted for as a
recapitalization of Great Genesis, pursuant to which the accounting basis of
Great Genesis continued unchanged subsequent to the transaction date.
Accordingly, the pre-transaction financial statements of Great Genesis are the
historical financial statements of the Company.
Ji Long owns the following aggregate net interests in five Sino-foreign joint
ventures organized in the PRC as of June 30, 2004:
Percentage
Name of Entity Interest
--------------------------- --------------
Jingzhou Henglong Automotive Parts
Co. Limited ("Henglong") 42.0%
Shashi Jiulong Power Steering Co.
Limited ("Jiulong") 81.0%
Shenyang Jinbei Henglong Automotive
Steering System Co. Limited ("Shenyang") 70.0%
Zhejiang Henglong & Vie Pump-Manu Co.
Limited ("Zhejiang") 51.0%
Jingzhou Henglong Fulida Textile Co., Ltd.
("Jingzhou") 51.0%
10
Henglong and Jiulong are mainly engaged in the production of rack and pinion
power steering gears and integral ball and nut power steering gears for cars,
light and heavy-duty vehicles. Shenyang and Zhejiang were established in 2002
and are focused on power steering parts and power steering pumps. Jingzhou was
formed in 2003 to produce environmental textiles and raw materials. At present,
Henglong, Jiulong, Shenyang and Zhejiang are the main revenue-generating
entities.
At December 31, 2002, the investors in Shenyang were Ji Long, Henglong,
Shengyang Automotive Industry Investment Corporation and Shenyang Jinbei
Automotive Industry Co., Ltd. On December 12, 2002, according to a decision made
at the meeting of the board of directors, 30% of the stock rights in Shenyang
held by Henglong were to be transferred to Ji Long, and 17% of the stock rights
in Shenyang held by Shenyang Automotive Industry Investment Corporation were to
be transferred to Shenyang Jinbei Automotive Industry Co., Ltd. On January 8,
2003, Ji Long and Henglong signed an agreement for the transfer of stock rights,
which was approved by the applicable PRC authorities on May 22, 2003. As of
December 31, 2002, the Company owned 25% of Shenyang directly and 12.6% of
Shenyang indirectly through its ownership in Henglong, for a combined ownership
of 37.6%. As of December 31, 2003, the Company owned 55% of Shenyang directly.
The Company accounted for this increase in ownership in Shenyang from January 1,
2003, with an appropriate adjustment to the minority interest. On April 8, 2004,
according to a decision made at the meeting of the board of directors,
Shenyang's registered capital and total capital was increased from $5,421,687
(RMB45,000,000) to $8,132,530 (RMB67,500,000); the Chinese investor was changed
from Shenyang Jinbei Automotive Industry Co., Ltd. to Shenyang Jinbei Automotive
Company Limited. The shareholder transfer and capital increase, along with the
newly signed Joint Venture Agreement and Articles of Incorporation, have been
approved by the applicable PRC authorities. Accordingly, Shenyang's registered
capital is now $8,132,530 (RMB67,500,000), including $5,692,771 (RMB47,250,000)
from the Company, which is 70% of the total registered capital, and $2,439,759
(RMB20,250,000) from Shenyang Jinbei Automotive Company Limited, which is 30% of
the total registered capital. The increase in capital of $2,710,843
(RMB22,500,000) has been injected into Shenyang.
Jingzhou was formed in February 2003 to produce environmental textiles and raw
materials, and is owned 51% by Ji Long and 49% by Cixi City Fulida Synthetic
Fibre Co., Ltd. As the minority interest partner has the right to participate in
management, the Company accounted for its interest in this Sino-foreign joint
venture under the equity method of accounting through September 30, 2003. As a
result of the execution of an "Act in Concert" Agreement for Jingzhou during the
three months ended December 31, 2003, the Company consolidated Jingzhou as of
December 31, 2003 and for the year then ended.
Basis of Presentation - The accompanying condensed consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries and Sino-foreign joint ventures (except for Jingzhou in 2003) for
the three months and six months ended June 30, 2004 and 2003. All significant
inter-company accounts and transactions have been eliminated in consolidation.
The condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America.
11
During early 2003, the Directors of the Company and the other joint venturers in
the Company's Sino-foreign joint ventures (except for Jingzhou) executed "Act in
Concert" agreements, resulting in the Company having voting control in such
Sino-foreign joint ventures. The Company is in the process of making application
to the relevant PRC authorities for their approval to effect this change through
amendments to the respective joint venture agreements. Consequently, effective
January 1, 2003, the Company changed from equity accounting to consolidation
accounting for its investments in Sino-foreign joint ventures (except for
Jingzhou). Prior to January 1, 2003, the Company used the equity method pursuant
to Emerging Issues Task Force Issue No. 96-16, which states that if a minority
joint venture partner has the right to participate in management, the majority
joint venture partner is required to account for its interest in the joint
venture under the equity method of accounting.
In May 2003, Henglong outsourced to Jiulong the production of an integral power
steering system. Jiulong sells the related finished product to Henglong, which
then sells the product to third parties. All intercompany profit is eliminated
on consolidation. The transferred profit due to this transaction has been
recorded in the interest account of minority shareholders according to their
investment ratios since that date.
Foreign Currencies - The Company maintains its books and records in Renminbi
("RMB"), the currency of the PRC, its functional currency. Translation of
amounts into United States dollars ("US$") has been made at the rate of RMB8.30
to US$1.00.
Foreign currency transactions in RMB are reflected using the temporal method.
Under this method, all monetary items are translated into the functional
currency at the rate of exchange prevailing at the balance sheet date.
Non-monetary items are translated at historical rates. Income and expenses are
translated at the rate in effect on the transaction dates. Transaction gains and
losses, if any, are included in the determination of net income (loss) for the
period.
In translating the financial statements of the Company from its functional
currency into its reporting currency in United States dollars, balance sheet
accounts are translated using the closing exchange rate in effect at the balance
sheet date and income and expense accounts are translated using an average
exchange rate prevailing during the reporting period. Adjustments resulting from
the translation, if any, are included in cumulative other comprehensive income
(loss) in stockholders' equity.
The RMB is not readily convertible into United States dollars or other foreign
currencies. The foreign exchange rate between the United States dollar and the
RMB has been stable at approximately 1RMB to US$0.1205 for the last few years.
No representation is made that the RMB amounts could have been, or could be,
converted into United States dollars at that rate or at any other rate.
12
Comments - The accompanying interim condensed consolidated financial statements
are unaudited, but in the opinion of management of the Company, contain all
adjustments, which include normal recurring adjustments, necessary to present
fairly the financial position at June 30, 2004, the results of operations for
the three months and six months ended June 30, 2004 and 2003, and cash flows for
the six months ended June 30, 2004 and 2003. The consolidated balance sheet as
of December 31, 2003 is derived from the Company's audited financial statements.
Certain information and footnote disclosures normally included in financial
statements that have been prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although management of
the Company believes that the disclosures contained in these financial
statements are adequate to make the information presented therein not
misleading. For further information, refer to the financial statements and the
notes thereto included in the Company's Annual Report on Form 10-KSB, as filed
with the Securities and Exchange Commission.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The results of operations for the three months and six months ended June 30,
2004 are not necessarily indicative of the results of operations to be expected
for the full fiscal year ending December 31, 2004.
Income (Loss) Per Share - Basic income (loss) per share is calculated by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted income per share is calculated assuming
the issuance of common shares, if dilutive, resulting from the exercise of
warrants. Income per common share calculations for the six months ended June 30,
2003 reflect the retroactive restatement of the shareholders' equity section to
reflect the March 2003 recapitalization. The Company had potentially dilutive
securities consisting of warrants to purchase 550,375 shares of common stock
exercisable at $1.20 per share outstanding at June 30, 2003. The Company did not
have any potentially dilutive securities outstanding at June 30, 2004.
The Company effected a 3.5 to 1 forward split of its outstanding shares of
common stock during March 2003, prior to the transaction with Great Genesis
described above. Unless otherwise indicated, all share and per share amounts
presented herein have been adjusted to reflect the forward stock split.
Stock-Based Compensation - The Company may periodically issue shares of common
stock for services rendered or for financing costs. Such shares are valued based
on the market price on the transaction date.
13
The Company may periodically issue stock options and warrants to employees and
non-employees in non-capital raising transactions for services and for financing
costs.
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation", which establishes a fair value
method of accounting for stock-based compensation plans.
The provisions of SFAS No. 123 allow companies to either record an expense in
the financial statements to reflect the estimated fair value of stock options or
warrants to employees, or to continue to follow the intrinsic value method set
forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", but to disclose on an annual basis the pro forma effect on
net income (loss) and net income (loss) per common share had the fair value of
the stock options and warrants been recorded in the financial statements. SFAS
No. 123 was amended by SFAS No. 148, which now requires companies to disclose in
interim financial statements the pro forma effect on net income (loss) and net
income (loss) per common hare of the estimated fair market value of stock
options or warrants issued to employees. The Company has elected to continue to
account for stock-based compensation plans utilizing the intrinsic value method.
Accordingly, compensation cost for stock options and warrants is measured as the
excess, if any, of the fair market price of the Company's common stock at the
date of grant above the amount an employee must pay to acquire the common stock.
In accordance with SFAS No. 123, the cost of stock options and warrants issued
to non-employees is measured at the grant date based on the fair value of the
award. The fair value of the stock-based award is determined using the
Black-Scholes option pricing model. The resulting amount is charged to expense
on the straight-line basis over the period in which the Company expects to
receive benefit, which is generally the vesting period.
Pro Forma Financial Disclosure - Since the Company has not issued any stock
options to employees, no pro forma financial disclosure has been presented.
Comprehensive Income (Loss) - The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting
and display of comprehensive income, its components and accumulated balances in
a full set of general purpose financial statements. SFAS No. 130 defines
comprehensive income (loss) to include all changes in equity except those
resulting from investments by owners and distributions to owners, including
adjustments to minimum pension liabilities, accumulated foreign currency
translation, and unrealized gains or losses on marketable securities.
The Company's only component of other comprehensive income (loss) is foreign
currency translation gain of $2,934 and $7,119 for the three months and six
months ended June 30, 2004. This amount has been recorded as a separate
component of stockholders' equity.
14
Reclassifications - Certain reclassifications have been made to the 2003
financial statements to conform to the 2004 presentation.
2. Certain Significant Risks and Uncertainties
The Company is subject to the consideration and risks of operating in the PRC.
These include risks associated with the political and economic environment,
foreign currency exchange and the legal system in the PRC.
The economy of PRC differs significantly from the economies of the "western"
industrialized nations in such respects as structure, level of development,
gross national product, growth rate, capital reinvestment, resource allocation,
self-sufficiency, rate of inflation and balance of payments position, among
others. Only recently has the PRC government encouraged substantial private
economic activities. The Chinese economy has experienced significant growth in
the past several years, but such growth has been uneven among various sectors of
the economy and geographic regions. Actions by the PRC government to control
inflation have significantly restrained economic expansion in the recent past.
Similar actions by the PRC government in the future could have a significant
adverse effect on economic conditions in PRC.
Many laws and regulations dealing with economic matters in general and foreign
investment in particular have been enacted in the PRC. However, the PRC still
does not have a comprehensive system of laws, and enforcement of existing laws
may be uncertain and sporadic.
The Company's operating assets and primary sources of income and cash flows are
the interests of its subsidiaries in Sino-foreign joint ventures in the PRC. The
PRC economy has, for many years, been a centrally-planned economy, operating on
the basis of annual, five-year and ten-year state plans adopted by central PRC
governmental authorities, which set out national production and development
targets. The PRC government has been pursuing economic reforms since it first
adopted its "open-door" policy in 1978. There is no assurance that the PRC
government will continue to pursue economic reforms or that there will not be
any significant change in its economic or other policies, particularly in the
event of any change in the political leadership of, or the political, economic
or social conditions in, the PRC. There is also no assurance that the Company
will not be adversely affected by any such change in governmental policies or
any unfavorable change in the political, economic or social conditions, the laws
or regulations, or the rate or method of taxation in the PRC.
As many of the economic reforms which have been or are being implemented by the
PRC government are unprecedented or experimental, they may be subject to
adjustment or refinement, which may have adverse effects on the Company.
Further, through state plans and other economic and fiscal measures such as the
lever of exchange rate, it remains possible for the PRC government to exert
significant influence on the PRC economy.
15
The Company's financial instruments that are exposed to concentration of credit
risk consist primarily of cash and cash equivalents, and accounts receivable
from customers. Cash and cash equivalents are maintained with major banks in the
PRC. The Company's business activity is with customers in the PRC. The Company
periodically performs credit analysis and monitors the financial condition of
its clients in order to minimize credit risk.
Any devaluation of the Renminbi (RMB) against the United States dollar would
consequently have adverse effects on the Company's financial performance and
asset values when measured in terms of the United States dollar. Should the RMB
significantly devalue against the United States dollar, such devaluation could
have a material adverse effect on the Company's earnings and the foreign
currency equivalent of such earnings. The Company does not hedge its RMB -
United States dollar exchange rate exposure.
On January 1, 1994, the PRC government introduced a single rate of exchange as
quoted daily by the People's Bank of China (the "Unified Exchange Rate"). No
representation is made that the RMB amounts have been, or could be, converted
into US$ at that rate. This quotation of exchange rates does not imply free
convertibility of RMB to 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 rate quoted
by the People's Bank of China. Approval of foreign currency payments by the
People's Bank of China or other institutions requires submitting a payment
application form together with suppliers' invoices, shipping documents and
signed contracts.
3. Recent Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses the diverse accounting practices for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company adopted SFAS No. 143 effective
January 1, 2003. The adoption of SFAS No. 143 did not have a significant effect
on the Company's financial statement presentation or disclosures.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS No. 44 regarding transition to the
Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS No. 145 related to classification of debt extinguishments are
effective for fiscal years beginning after May 15, 2002. The adoption of SFAS
No. 145 did not have a significant effect on the Company's financial statement
presentation or disclosures.
16
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. Such costs covered by
SFAS No. 146 include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. SFAS No. 146 replaces the previous
accounting guidance provided by the EITF No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. The adoption of SFAS No. 146 did not have a significant effect on the
Company's financial statement presentation or disclosures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years beginning after December 15,
2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. The adoption of SFAS No. 148 did not have a significant effect on the
Company's financial statement presentation or disclosures.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies under what circumstances a contract with initial investments meets the
characteristics of a derivative and when a derivative contains a financing
component. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have a significant
effect on the Company's financial statement presentation or disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that an issue classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. SFAS No. 150 is to be
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of SFAS No.
150 and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The adoption of SFAS No. 150 did not have a
significant effect on the Company's financial statement presentation or
disclosures.
17
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company implemented
the disclosure provisions of FIN 45 in its December 31, 2002 consolidated
financial statements, and the measurement and recording provisions of FIN 45
effective January 1, 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements",
relating to consolidation of certain entities. In December 2003, the FASB issued
a revised version of FIN 46 ("FIN 46R") that replaced the original FIN 46. FIN
46R requires identification of a company's participation in variable interest
entities ("VIEs"), which are defined as entities with a level of invested equity
that is not sufficient to fund future activities to permit it to operate on a
standalone basis. For entities identified as a VIE, FIN 46R sets forth a model
to evaluate potential consolidation based on an assessment of which party to the
VIE (if any) bears a majority of the exposure to its expected losses, or stands
to gain from a majority of its expected returns. FIN 46R also sets forth certain
disclosures regarding interests in VIEs that are deemed significant, even if
consolidation is not required. The Company is not currently participating in, or
invested in any VIEs, as defined in FIN 46R. The implementation of the
provisions of FIN 46R in 2003 did not have a significant effect on the Company's
consolidated financial statement presentation or disclosures.
4. Inventories
Inventories at June 30, 2004 (Unaudited) and December 31, 2003 consisted of the
following:
June 30, December 31,
2004 2003
------------ ------------
Raw materials $ 4,661,535 $ 3,622,369
Work-in-process 2,508,955 2,110,612
Finished goods 8,152,262 4,808,434
------------ ------------
15,322,752 10,541,415
Less: provision for loss (502,183) (311,993)
------------ ------------
$ 14,820,569 $ 10,229,422
============ ============
18
5. Liability Related to Acquisition of Joint Venture Assets
In conjunction with the formation of the Jingzhou Sino-foreign joint venture in
February 2003, the Company purchased certain operating assets from an unrelated
entity and had a remaining liability outstanding of $1,204,819 at December 31,
2003. The Company paid this obligation during the six months ended June 30,
2004.
6. Amounts Due to Shareholders/Directors
The activity in the amounts due to shareholders/directors for the six months
ended June 30, 2004 is as follows:
Balance, December 31, 2003 $ 5,229,281
Cash advances from shareholders 2,664,289
Cash disbursements to shareholders (7,328,657)
-----------
Balance, June 30, 2004 $ 564,913
===========
At June 30, 2004 and December 31, 2003, the amounts due to
shareholders/directors were unsecured, interest-free and repayable on demand.
During the three months ended March 31, 2003, amounts due to
shareholders/directors aggregating $17,167,000 were cancelled. This transaction
was accounted for as a contribution to capital.
7. Minority Interests
During the three months and six months ended June 30, 2004, minority interest
holders contributed $280,561 and $1,841,772, respectively, of capital to the
Company's Sino-foreign joint ventures, which has been shown as an increase in
the liability to minority interests in the accompanying balance sheet at June
30, 2004.
8. Stockholders' Equity
During March 2003, in conjunction with the transaction with Great Genesis
described at Note 1, the Company effected a 3.5 to 1 forward split of its
outstanding shares of common stock, thus increasing the 5,293,000 shares of
common stock outstanding at that time to 18,525,500 shares, of which 17,424,750
shares were then returned to the Company and cancelled.
19
During March 2003, in conjunction with the transaction with Great Genesis
described at Note 1, the Company issued common stock purchase warrants to three
consultants to acquire an aggregate of 550,375 shares of common stock,
exercisable for a period of one year at $1.20 per share. The aggregate fair
value of these warrants, calculated pursuant to the Black-Scholes option-pricing
model, was estimated to be $1,300,000, and was charged to operations during the
six months ended June 30, 2003.
As of June 30, 2004, the Company did not have any stock options outstanding, and
had not adopted a stock option plan.
9. Income Taxes
The Company's Sino-foreign joint ventures registered in the PRC are subject to
state and local income taxes within the PRC at the applicable tax rate on the
taxable income as reported in their PRC statutory financial statements in
accordance with the relevant income tax laws applicable to foreign enterprises.
Two of the Company's Sino-foreign joint ventures, Henglong and Jiulong, were
subject to a tax rate of 15% during 2003, and are also subject to a tax rate of
15% during 2004. Shenyang, were subject to a two-year tax holiday commencing
with the first profit-making year which were entitled by Sino-foreign joint
ventures in accordance with the relevant income tax laws. Year 2004 is the
second profit-making year of Shenyang. The tax rate for the Company's two other
subsidiaries, Zhejiang and Jingzhou, has not been ratified.
No provision for Hong Kong profits tax has been made as Ji Long and Great
Genesis are investment holding companies and did not have any assessable profits
in Hong Kong in 2003.
10. Significant Concentrations and Related Party Transactions
The Company grants credit to its customers, generally on an open account basis.
The Company's customers are all located in the PRC.
During the three months ended June 30, 2004, the Company's ten largest customers
accounted for 68.0% of the Company's consolidated net sales, with two customers
accounting for in excess of 10% of consolidated net sales, with 16.8% and 16.7%
of consolidated net sales, or an aggregate of 33.5% of consolidated net sales.
At June 30, 2004, approximately 22.9% of accounts receivable were from trade
transactions with the aforementioned two customers.
During the six months ended June 30, 2004, the Company's ten largest customers
accounted for 66.5% of the Company's consolidated net sales, with two customers
accounting for in excess of 10% of consolidated net sales, with 20.2% and 15.3%
of consolidated sales, or an aggregate of 35.5% of consolidated net sales. At
June 30, 2004, approximately 22.9% of accounts receivable were from trade
transactions with the aforementioned two customers.
During the three months ended June 30, 2003, the Company's ten largest customers
accounted for 79.5% of the Company's consolidated net sales, with two customers
accounting for in excess of 10% of consolidated net sales, with 25.7% and 14.3%
of consolidated net sales, or an aggregate of 40.0% of consolidated net sales.
At June 30, 2004, approximately 28.6% of accounts receivable were from trade
transactions with the aforementioned two customers.
20
During the six months ended June 30, 2003, the Company's ten largest customers
accounted for 77.1% of the Company's consolidated net sales, with two customers
accounting for in excess of 10% of consolidated net sales, with 26.0% and 12.0%
of consolidated sales, or an aggregate of 38.0% of consolidated net sales. At
June 30, 2003, approximately 28.6% of accounts receivable were from trade
transactions with the aforementioned two customers.
During the three months ended June 30, 2004 and 2003, sales to related parties
aggregated $372,454 and $1,259,934, respectively.
During the six months ended June 30, 2004 and 2003, sales to related parties
aggregated $657,523 and $2,015,000, respectively.
During the three months ended June 30, 2004 and 2003, purchases from related
parties aggregated $362,182 and $1,038,835, respectively.
During the six months ended June 30, 2004 and 2003, purchases from related
parties aggregated $756,358 and $1,606,549, respectively.
11. Related Party Transactions
Effective August 2, 2003, the Company entered into a five-year License and
Technical Assistance Agreement (the "Agreement") with Sino-American, Inc.
("Sino-American"), a United States company controlled by the Company's Chairman
and controlling shareholder. The Agreement provided for total payments of
$6,000,000 to enable Sino-American to purchase technical assistance and
equipment for use in the Company's business operations in China. During November
2003, $2,000,000 was paid by the Company to Sino-American, which was classified
as advance payments in the consolidated balance sheets at June 30, 2004 and
December 31, 2003, net of amounts expended through such dates.
This agreement also allowed the Company to transfer funds from China to the
United States to fund normal corporate general and administrative expenses.
21
Through June 30, 2004, Sino-American had paid, on behalf of or for the benefit
of the Company, a total of $1,690,090, including a $250,000 initial investment
in a joint venture with an unrelated party, $255,000 for equipment and $180,000
for software to unrelated third parties, $250,000 to the Company's Chairman and
controlling shareholder as reimbursement for costs incurred by him related to
the March 2003 recapitalization, and $755,090 for selling, general and
administrative expenses for the benefit of or on behalf of the Company. As this
Agreement was terminated effective April 1, 2004, the unexpended funds were
repaid to the Company subsequent to that date or continue to be used to pay
normal operating expenses on behalf of the Company. The $250,000 reimbursement
to the Chairman and controlling shareholder was recorded as a charge to
operations during the three months ended March 31, 2003.
During the three months and six months ended June 30, 2004 and 2003, the joint
ventures entered into related party transactions with companies with common
directors as shown below:
Three Months Ended June 30,
--------------------------------
2004 2003
---------- ----------
Sales
- received $ -- $ --
- receivable 372,454 1,259,934
Purchases
- paid -- 747,835
- payable 362,182 291,000
Six Months Ended June 30,
--------------------------------
2004 2003
---------- ----------
Sales
- received $ -- $ 720,000
- receivable 657,523 1,295,000
Purchases
- paid 142,689 1,315,549
- payable 613,669 291,000
These transactions were consummated under similar terms as those with the
Company's customers and suppliers.
22
12. Restatement
In conjunction with the Company's audit of its consolidated financial statements
for the year ended December 31, 2003, the Company conducted a review of its 2002
financial statements, as a result of which restated its balance sheet at
December 31, 2002 and the 2003 interim periods. A summary of the effect of these
adjustments with respect to the statement of operations for the three months and
six months ended June 30, 2003 is as follows:
Three months ended June 30, 2003:
Net income, as reported $ 626,000
Add: Costs and expenses
properly recorded in 2002, net 884,352
-----------
Net income, as revised $ 1,510,352
===========
Net income per common share -
basic and diluted - as reported $ 0.03
Add: Costs and expenses
properly recorded in 2002, net 0.04
-----------
Net income per common share -
basic and diluted - as adjusted $ 0.07
===========
Weighted average common shares
outstanding -
Basic 22,015,000
Diluted 22,490,450
Six months ended June 30, 2003:
Net income, as reported $ 818,000
Add: costs and expenses
properly recorded during 2002, net 658,254
-----------
Net income, as revised $ 1,476,254
===========
Net income per common share -
basic and diluted - as reported $ 0.04
Add: Costs and expenses
properly recorded in 2002, net 0.03
-----------
Net income per common share -
basic and diluted - as adjusted $ 0.07
===========
Weighted average common shares
outstanding -
Basic 21,648,083
Diluted 21,971,592
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Quarterly Report on Form 10-QSB for the quarterly period ended June 30,
2004 contains "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, including statements that include the
words "believes", "expects", "anticipates", or similar expressions. These
forward-looking statements include, but are not limited to, statements
concerning the Company's expectations regarding its working capital
requirements, financing requirements, business prospects, and other statements
of expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical
facts. The forward-looking statements in this Quarterly Report on Form 10-QSB
for the quarterly period ended June 30, 2004 involve known and unknown risks,
uncertainties and other factors that could cause the actual results, performance
or achievements of the Company to differ materially from those expressed in or
implied by the forward-looking statements contained herein.
General Overview:
Effective March 5, 2003, Visions-In-Glass, Inc., a United States public company
incorporated in the State of Delaware ("Visions"), entered into a Share Exchange
Agreement to acquire 100% of the shareholder interest in Great Genesis Holding
Limited, a company incorporated on January 3, 2003 under The Companies Ordinance
in Hong Kong as a limited liability company ("Great Genesis"), as a result of
which Great Genesis became a wholly-owned subsidiary of Visions. At the closing,
the old directors and officers of Visions resigned, and new directors and
officers were appointed. Visions subsequently changed its name to China
Automotive Systems, Inc.
China Automotive Systems, Inc., including, when the context so requires, its
subsidiaries and the subsidiaries' interests in the Sino-foreign joint ventures
described below, is referred to herein as the "Company". The Company, through
its Sino-foreign joint ventures described below, is engaged in the manufacture
and sale of automotive systems and components in the People's Republic of China
(the "PRC" or "China") as described below.
Ji Long Enterprise Investment Limited was incorporated on October 8, 1992 under
the Companies Ordinance in Hong Kong as a limited liability company ("Ji Long").
Ji Long is an investment holding company. Effective March 4, 2003, all of the
shareholders of Ji Long exchanged their 100% shareholder interest for a 100%
shareholder interest in Great Genesis, as a result of which Ji Long became a
wholly-owned subsidiary of Great Genesis.
In exchange for the acquisition of 100% of the shareholder interest in Great
Genesis, the shareholders of Great Genesis were issued 20,914,250 shares of
common stock of Visions. In addition, the shareholders of Great Genesis paid
$250,000 to the former officer, director and controlling shareholder of Visions
for the cancellation of 17,424,750 shares of common stock, and have agreed to
pay an additional $70,000, subject to certain conditions.
The acquisition of Great Genesis by the Company was accounted for as a
recapitalization of Great Genesis, pursuant to which the accounting basis of
Great Genesis continued unchanged subsequent to the transaction date.
Accordingly, the pre-transaction financial statements of Great Genesis are the
historical financial statements of the Company.
24
Ji Long owns the following aggregate net interests in five Sino-foreign joint
ventures organized in the PRC as of June 30, 2004:
Percentage
Name of Entity Interest
-------------------- ----------
Jingzhou Henglong Automotive Parts
Co. Limited ("Henglong") 42.0%
Shashi Jiulong Power Steering Co.
Limited ("Jiulong") 81.0%
Shenyang Jinbei Henglong Automotive
Steering System Co. Limited ("Shenyang") 70.0%
Zhejiang Henglong & Vie Pump-Manu Co.
Limited ("Zhejiang") 51.0%
Jingzhou Henglong Fulida Textile Co., Ltd.
("Jingzhou") 51.0%
Henglong and Jiulong are mainly engaged in the production of rack and pinion
power steering gears and integral ball and nut power steering gears for cars,
light and heavy-duty vehicles. Shenyang and Zhejiang were established in 2002
and are focused on power steering parts and power steering pumps. Jingzhou was
formed in 2003 to produce environmental textiles and raw materials. At present,
Henglong, Jiulong and Shenyang and Zhejiang are the main revenue-generating
entities.
At December 31, 2002, the investors in Shenyang were Ji Long, Henglong,
Shengyang Automotive Industry Investment Corporation and Shenyang Jinbei
Automotive Industry Co., Ltd. On December 12, 2002, according to a decision made
at the meeting of the board of directors, 30% of the stock rights in Shenyang
held by Henglong were to be transferred to Ji Long, and 17% of the stock rights
in Shenyang held by Shenyang Automotive Industry Investment Corporation were to
be transferred to Shenyang Jinbei Automotive Industry Co., Ltd. On January 8,
2003, Ji Long and Henglong signed an agreement for the transfer of stock rights,
which was approved by the applicable PRC authorities on May 22, 2003. As of
December 31, 2002, the Company owned 25% of Shenyang directly and 12.6% of
Shenyang indirectly through its ownership in Henglong, for a combined ownership
of 37.6%. As of December 31, 2003, the Company owned 55% of Shenyang directly.
The Company accounted for this increase in ownership in Shenyang from January 1,
2003, with an appropriate adjustment to the minority interest. On April 8, 2004,
according to a decision made at the meeting of the board of directors,
Shenyang's registered capital and total capital was increased from $5,421,687
(RMB45,000,000) to $8,132,530 (RMB67,500,000); the Chinese investor was changed
from Shenyang Jinbei Automotive Industry Co., Ltd. to Shenyang Jinbei Automotive
Company Limited. The shareholder transfer and capital increase, along with the
newly signed Joint Venture Agreement and Articles of Incorporation, have been
approved by the applicable PRC authorities. Accordingly, Shenyang's registered
capital is now $8,132,530 (RMB67,500,000), including $5,692,771 (RMB47,250,000)
from the Company, which is 70% of the total registered capital, and $2,439,759
(RMB20,250,000) from Shenyang Jinbei Automotive Company Limited, which is 30% of
the total registered capital. The increase in capital of $2,710,843
(RMB22,500,000) has been injected into Shenyang.
Jingzhou was formed in February 2003 to produce environmental textiles and raw
materials, and is owned 51% by Ji Long and 49% by Cixi City Fulida Synthetic
Fibre Co., Ltd. As the minority interest partner has the right to participate in
management, the Company accounted for its interest in this Sino-foreign joint
venture under the equity method of accounting through September 30, 2003. As a
result of the execution of an "Act in Concert" Agreement for Jingzhou during the
three months ended December 31, 2003, the Company consolidated Jingzhou as of
December 31, 2003 and for the year then ended.
During early 2003, the Directors of the Company and the other joint venturers in
the Company's Sino-foreign joint ventures (except for Jingzhou) executed "Act in
Concert" agreements, resulting in the Company having voting control in such
Sino-foreign joint ventures. The Company is in the process of making application
to the relevant PRC authorities for their approval to effect this change through
amendments to the respective joint venture agreements. Consequently, effective
January 1, 2003, the Company changed from equity accounting to consolidation
accounting for its investments in Sino-foreign joint ventures (except for
Jingzhou). Prior to January 1, 2003, the Company used the equity method pursuant
to Emerging Issues Task Force Issue No. 96-16, which states that if a minority
joint venture partner has the right to participate in management, the majority
joint venture partner is required to account for its interest in the joint
venture under the equity method of accounting.
In May 2003, Henglong outsourced to Jiulong the production of an integral power
steering system. Jiulong sells the related finished product to Henglong, which
then sells the product to third parties. All intercompany profit is eliminated
on consolidation. The transferred profit due to this transaction has been
recorded in the interest account of minority shareholders according to their
investment ratios since that date.
25
Critical Accounting Policies:
The Company prepares its condensed consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the use of
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amount of revenues and expenses
during the reporting period. Management periodically evaluates the estimates and
judgments made. Management bases its estimates and judgments on historical
experience and on various factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates as a result of
different assumptions or conditions.
Minority interests refer to the percentage of the owner's equity of a subsidiary
owned by those investors other than the parent company. Minority interests in
the condensed consolidated financial statements means the percentage of the
Company's net assets owned by shareholders of the Company's Sino-foreign joint
ventures other than the Company, according to their respective investment
ratios.
The following critical accounting policies affect the more significant judgments
and estimates used in the preparation of the Company's consolidated financial
statements.
Revenues:
The Company recognizes revenue when the significant risks and rewards of
ownership have been transferred to the customer pursuant to PRC law, including
factors such as when persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable, sales and value added tax
laws have been complied with, and collectibility is probable. The Company
recognizes product sales generally at the time the product is shipped.
Concurrent with the recognition of revenue, the Company reduces revenue for
estimated product returns. Shipping and handling costs are included in cost of
goods sold. Revenue is presented net of any sales tax and value added tax.
Accounts Receivable:
In order to determine the value of the Company's accounts receivable, the
Company records a provision for doubtful accounts to cover estimated credit
losses. Management reviews and adjusts this allowance periodically based on
historical experience and its evaluation of the collectibility of outstanding
accounts receivable. The Company evaluates the credit risk of its customers
utilizing historical data and estimates of future performance.
Inventories:
Inventories are stated at the lower of cost or net realizable value. Cost is
calculated on the moving-average basis and includes all costs to acquire and
other costs incurred in bring the inventories to their present location and
condition. The Company evaluates the net realizable value of its inventories on
a regular basis and records a provision for loss to reduce the computed
moving-average cost if it exceeds the net realizable value.
Income Taxes:
The Company records a tax provision to reflect the expected tax payable on
taxable income for the period, using tax rates enacted or substantially enacted
at the balance sheet date, and any adjustment to tax payable in respect of
previous periods.
Impairment of Long-Lived Assets:
The Company's long-lived assets consist of property and equipment and certain
intangible assets. In assessing the impairment of such assets, the Company
periodically makes assumptions regarding the estimated future cash flows and
other factors to determine the fair value of the respective assets. If these
estimates or the related assumptions indicate that the carrying amount may not
be recoverable, the Company records impairment charges for these assets at such
time.
26
Results of Operations:
Three Months Ended June 30, 2004 and 2003:
Net Sales. Net sales were $16,249,817 for the three months ended June 30, 2004,
as compared to $12,733,793 for the three months ended June 30, 2003, an increase
of $3,516,024 or 27.6%. The increase in sales in 2004 as compared to 2003 was a
result of several factors.
In the first half of 2003, the SARS virus spread through most of China, which
had a substantial negative impact on consumer spending and, in particular,
automobile sales in China during the nine months ended September 30, 2003. As a
parts supplier to the automobile industry, the Company's sales were also
affected. As a result, during the three months ended June 30, 2003, the sales of
the Company's Henlong, Jiulong and Shenyang Sino-foreign joint ventures were
below expected levels.
During the latter part of 2003, the Company expanded its product lines, which
the Company believes contributed to sales increases during 2004 at its Jiulong
and Shenyang Sino-foreign joint ventures.
During the three months ended June 30, 2003, the Zhejiang and Jingzhou
Sino-foreign joint ventures were in the initial development stage, and were
primarily engaged in preparations to begin production. Sustained production and
sales commenced during the three months ended December 31, 2003. Incremental net
sales from these two joint ventures in 2004 as compared to 2003 were
approximately $2,200,000, while net sales from the Henglong, Jiulong and
Shenyang Sino-foreign joint ventures increased by an aggregate of approximately
$1,300,000 or 10.6% as compared to 2003, resulting in a net increase in sales of
approximately $3,500,000 or 27.6% in 2004 as compared to 2003.
Gross Profit. Gross profit was $6,773,390 or 41.6% of net sales for the three
months ended June 30, 2004, which was 6.6% higher than the expected gross profit
margin of 35% of net sales for 2004. For the three months ended March 31, 2003,
gross profit was $5,686,536 or 44.7% of net sales.
The decrease in the gross profit in 2004 was consistent with the Company's
expectations regarding the impact of rising raw material costs in the latter
part of 2003, which the Company anticipated would cause gross profit margins to
decrease by approximately 10% during 2004, to 35% of net sales. The reason that
the gross profit margin for the three months ended June 30, 2004 was 6.6% higher
than expected was a result of the PRC government enhancing macroeconomic
adjustment controls beginning in April 2004 and the banks tightening the
creation of new credit. As the PRC's overheated economy cooled down, the prices
of primary industrial raw materials fell (for example, the price of steel and
iron fell 10% as compared with early 2004).
The Company intends to attempt to reduce costs and at the same time continue to
improve the quality of its products. The Company believes that high quality
products will not only enable the Company to maintain its gross profit margins,
but can also reduce production losses and after-sale service requirements.
The Company also intends to increase its investment in advanced production
equipment to improve manufacturing efficiency, while at the same time reducing
labor costs. During the year ended December 31, 2003, labor costs accounted for
approximately 10% of net sales. Through expanded use of numerical control
machines and automatic assembly lines, the Company anticipates reducing labor
costs to less than 8% of net sales by the end of 2004.
27
The Company also intends to optimize product design and its production
organization to reduce the consumption of raw materials. During the year ended
December 31, 2003, raw material costs accounted for approximately 40% of net
sales. During the three months ended March 31, 2004, the price of steel, the
Company's primary raw material, increased by approximately 20%. During the three
months ended June 30, 2004, the price of steel decreased by approximately 10%.
The Company estimates that the average price increase of steel during 2004 will
be 15%. The Company will attempt to enhance the processes that control
production and optimize the structural design of its products, with the
objective being to decrease the use of raw materials and direct material costs
up to 3% of net sales. Combined with the above-mentioned two factors and the PRC
government's macroeconomic adjustments to control policy beginning in April
2004, the expected increase in direct material costs to 52% of net sales in 2004
has been revised downward to approximately 45%.
Selling. Selling expenses were $878,992 for the three months ended June 30,
2004, as compared to $375,535 for the three months ended June 30, 2003, an
increase of $503,387 or 134%, due to an increased level of operations in 2004
and increased transportation costs due to government imposed limits on the
amount of weight that automobiles can carry. The major components of selling
expenses are salaries and wages, supplies, travel, transportation, sales service
costs, rent, office expenses and advertising.
General and Administrative. General and administrative expenses were $2,480,948
for the three months ended June 30, 2004, as compared to $1,802,424 for the
three months ended June 30, 2003, an increase of $678,524 or 37.6%, primarily as
a result of an increased level of business activity and the costs of operating a
public company. The major components of general and administrative expenses are
salaries and wages, travel, office, supplies, repairs and labor-related costs.
Depreciation and Amortization. Depreciation and amortization, excluding
depreciation and amortization included in cost of sales, was $132,231 for the
three months ended June 30, 2004, as compared to $80,956 for the three months
ended June 30, 2003, an increase of $51,275 or 63.3%, as a result of increases
to property, plant and equipment.
Income from Operations. Income from operations was $3,281,289 for the three
months ended June 30, 2004, as compared to $3,427,621 for the three months ended
June 30, 2003, a decrease of $146,332 or 4.3%, consisting primarily of an
increase in gross profit of $1,086,854 or 19.1% and an increase in selling,
general and administrative expenses of $1,181,911 or 54.3%.
Other Non-Operating Income. Other non-operating income was $326,600 for the
three months ended June 30, 2004, as compared to $109,445 for the three months
ended June 30, 2003, an increase of $217,155 or 198.4%, as a result of the
disposal of unsaleable inventory that Henglong and Jiulong had produced in prior
years.
Financial Expenses. Financial expenses were $260,714 for the three months ended
June 30, 2004, as compared to $63,554 for the three months ended June 30, 2003,
an increase of $197,160 or 310.2%, as a result of increased interest-bearing
debt due to an increased level of business activity.
Income before Income Taxes. Income before income taxes was $3,347,175 for the
three months ended June 30, 2004, as compared to $3,473,512 for the three months
ended June 30, 2003, a decrease of $126,337 or 3.6%, consisting of a decrease in
income from operations of $146,332 or 4.2%, and an increase in other
non-operating income of $217,155 or 198.4%, and an increase in financial
expenses of $197,160 or 310.2%.
Income Taxes. Income tax expense was $452,988 for the three months ended June
30, 2004, as compared to $534,803 for the three months ended June 30, 2003, a
decrease of $81,815 or 15.3%. As a result of two of the Company's Sino-foreign
joint ventures, Shenyang and Zhejiang, still being entitled to a tax holiday,
their contribution to income before income taxes accounted for 26.7% in 2004 as
compared to14.4% in 2003.
28
Income before Minority Interest. Income before minority interest was $2,894,187
for the three months ended June 30, 2004, as compared to $2,938,709 for the
three months ended June 30, 2003, a decrease of $44,522 or 1.5%, consisting of a
decrease in income before income taxes of $126,337 or 3.6%, and a decrease in
income taxes of $81,815 or 15.3%.
Minority Interests. The Company recorded minority interests' share in the
earnings of the Sino-foreign joint ventures aggregating $1,088,829 for the three
months ended June 30, 2004, as compared to $1,428,357 for the three months ended
June 30, 2003, a decrease of $339,528 or 23.8%.
The Company owns varying equity interests in five Sino-foreign joint ventures
through which it conducts its operations, all of which were consolidated in 2004
and 2003. The Company records the minority interests' share in the earnings of
the respective Sino-foreign joint ventures for each period. Since the Company
does not own the same equity interest in each Sino-foreign joint venture, a
comparison of the Company's consolidated results of operations for different
periods can be significantly affected by the performance mix of the individual
joint ventures. The minority interests' aggregate share in the earnings of the
Sino-foreign joint ventures decreased in 2004 as compared to 2003 primarily as a
result of a decrease in net income from Henglong, a 42%-owned Sino-foreign joint
venture, and an increase in net income from Jiulong, an 81%-owned Sino-foreign
joint venture.
Net Income. Net income was $1,805,358 for the three months ended June 30, 2004,
as compared to a net income of $1,510,352 for the three months ended June 30,
2003, an increase of $295,006 or19.5%, consisting of a decrease in income before
minority interest of $44,522 or 1.5%, and a decrease in minority interests of
$339,528 or 23.8%.
Six Months Ended June 30, 2004 and 2003:
Net sales. Net sales were $29,083,573 for the six months ended June 30, 2004, as
compared to $23,835,864 for the six months ended June 30, 2003, an increase of
$5,247,709 or 22%.
Gross Profit. Gross profit was $11,361,369 or 39.1% of net sales for the six
months ended June 30, 2004, which was 4.1% higher than the expected gross profit
of 35% of net sales in 2004, as compared to $10,886,497 or 45.7% of net sales
for the six months ended June 30, 2003.
Selling. Selling expenses were $1,287,356 for the six months ended June 30,
2004, as compared to $655,326 for the six months ended June 30, 2003, an
increase of $632,030 or 96.4%. The major components of selling expenses are
salaries and wages, supplies, travel, transportation, sales service costs, rent,
office expenses and advertising.
General and Administrative. General and administrative expenses were $4,666,020
for the six months ended June 30, 2004, as compared to $3,516,767 for the six
months ended June 30, 2003, an increase of $1,149,253 or 32.7%, primarily as a
result of an increased level of business activity and the costs of operating a
public company. The major components of general and administrative expenses are
salaries and wages, travel, office, supplies, repairs and labor-related costs.
Depreciation and Amortization. Depreciation and amortization, excluding
depreciation and amortization included in cost of sales, was $250,615 for the
six months ended June 30, 2004, as compared to $165,295 for the six months ended
June 30, 2003, an increase of $85,320 or 51.6%, as a result of increases to
property, plant and equipment.
29
Stock-Based Compensation. During March 2003, in conjunction with the transaction
with Great Genesis described above, the Company issued common stock purchase
warrants to three consultants to acquire an aggregated of 550,375 shares of
common stock, exercisable for a period of one year at $1.20 per share. The
aggregated fair value of these warrants, calculated pursuant to the
Black-Scholes option-pricing model, was estimated to be $1,300,000, which was
charged to operations during the six months ended June 30, 2003.
Income from Operations. Income from operations was $5,157,405 for the six months
ended June 30, 2004, as compared to $5,249,109 for the six months ended June 30,
2003, a decrease of $91,704 or 1.7%.
Other Non-Operating Income. Other non-operating income was $445,433 for the six
months ended June 30, 2004, as compared to $347,921 for the six months ended
June 30, 2003, an increase of $97,512 or 28%.
Financial Expenses. Financial expenses were $345,602 for the six months ended
June 30, 2004, as compared to $122,659 for the six months ended June 30, 2003,
an increase of $222,943 or 181.8%, as a result of increased interest-bearing
debt due to an increased level of business activity.
Income before Income Taxes. Income before income taxes was $5,257,236 for the
six months ended June 30, 2004, as compared to $5,474,371 for the six months
ended June 30, 2003, a decrease of $217,135 or 4%.
Income Taxes. Income tax expense was $765,388 for the six months ended June 30,
2004, as compared to $980,331 for the six months ended June 30, 2003, a decrease
of $214,943 or 21.9%.
Income before Minority Interest. Income before minority interest was $4,491,848
for the six months ended June 30, 2004, close to $4,494,040 for the six months
ended June 30, 2003.
Minority Interests. The Company recorded minority interests' share in the
earnings of the Sino-foreign joint ventures aggregating $1,672,701 for the six
months ended June 30, 2004, as compared to $3,017,786 for the six months ended
June 30, 2003, a decrease of $1,345,085 or 44.6%.
Net Income. Net income was $2,819,147 for the six months ended June 30, 2004, as
compared to a net income of $1,476,254 for the six months ended June 30, 2003,
an increase of $1,342,893 or 91%.
Financial Condition - June 30, 2004:
Liquidity and Capital Resources:
The Company has relied primarily on cash flow from operations, bank loans and
advances and investments from its shareholders for its capital requirements
since inception.
30
Operating. The Company's operations providing net cash of $14,606,335 for the
six months ended June 30, 2004, as compared to providing net cash of $1,669,801
for the six months ended June 30, 2003. The Company's operations provided
increased cash in 2004 as compared to 2003 primarily as a result of increased
cash flow from the collection of accounts receivable.
At June 30, 2004, cash and cash equivalents were $16,542,174, as compared to
$10,730,882 at December 31, 2003. Working capital was $17,155,368 at June 30,
2004, as compared to $19,944,120 at December 31, 2003, reflecting current ratios
of 1.31:1 and 1.39:1, respectively.
The Company anticipates that its working capital resources are adequate to fund
anticipated costs and expenditures through the remainder of the year ending
December 31, 2004.
Investing. During the six months ended June 30, 2004, the Company expended
$4,876,562 in investing activities, consisting of an increase in other
receivables of $133,042 and payments to acquire fixed assets of $4,743,520.
During the six months ended June 30, 2003, the Company expended $387,068 in
investing activities, consisting of a decrease in other receivables of $739,084
and payments to acquire fixed assets of $1,126,170.
Financing. During the six months ended June 30, 2004, the Company expended
$3,918,481 in financing activities, consisting of the proceeds from bank loans
of $4,578,313 and contributions to capital by minority interest holders of
$1,841,772, less dividends paid of $4,469,379, a decrease in amount due to
shareholder/directors of $4,664,368 and a decrease in liability related to the
acquisition of joint venture assets of $1,204,819. During the six months ended
June 30, 2003, the Company generated $832,526 from financing activities,
consisting of proceeds from bank loans of $4,819,277 and advances from
shareholders/directors of $1,569,068, less dividends paid of $5,555,819.
During the six months ended June 30, 2003, amounts due to shareholders/directors
aggregating $17,167,000 were cancelled. This transaction was accounted for as a
contribution to capital.
Advances from shareholders/directors have been used to fund the Company's
investments in joint ventures.
Off-Balance Sheet Arrangements:
At June 30, 2004, the Company did not have any transactions, obligations or
relationships that could be considered off-balance sheet arrangements.
Commitments and Contingencies:
The Company has the following material contractual obligations and capital
expenditure commitments:
During October 2003, Henglong, one of the Company's Sino-foreign joint ventures,
signed an agreement with the management council of Wuhu Science and Technology
Zone to invest $10,000,000 to develop an industrial enterprise to carry out
automobile component projects related to power steering systems. The agreement
does not specify a time limit. The Company plans to invest in phases over a five
year period. The Company plans to invest approximately $870,000 in the first
phase to acquire land rights, which will be completed during 2004. The Company
advanced approximately $435,000 during 2003 pursuant to the agreement under the
first phase. This new plant is expected to service a large vehicle manufacturer
in Wuhu at reduced transportation and storage costs.
During March 2003, Henglong signed a purchase and construction agreement with
Wuhan Huazhong Shuguang Software Park Co., Ltd. for $4,820,000 to design and
construct a software research and development facility. This facility will
design software and other products for the automobile. The Company paid
$2,421,300 during 2003. According to the agreement, the Company will pay an
additional $952,900 during 2004 and pay off the remaining $1,445,800 after it
receives a license for the right to use the land and a building property
certificate. This new software research and development facility will be located
in an area of Hubei Province that contains ten well-known universities and a
large vehicle manufacturer.
31
On October 29, 2001, Henglong entered into a ten year license agreement with
Bishop Steering Technology Limited ("Bishop"), an Australian company engaged in
the design of power steering systems. Pursuant to the agreement, Henglong is
obligated to pay Bishop an annual technical assistance fee of approximately
$200,000 per year during the first two years of the agreement and $110,000 per
year during the remaining eight years of the agreement, and a royalty to be
determined.
On July 21, 2003, Henglong entered into a five year license and technical
assistance agreement with Namyang Industrial Co. Ltd. ("Namyang"), a Korean
company engaged in the manufacture of steering columns and universal joint
assemblies for automobiles. Pursuant to the agreement, Henglong paid Namyang an
initial payment of $100,000 and is further obligated to pay a royalty of 3% of
the sales price of products sold that include the licensed technology.
On October 20, 2003, Henglong entered into a contract to purchase a land use
right relating to parcel of land for $3,680,000 and paid a $361,000 deposit.
This transaction is expected to close in 2004.
On October 5, 2003, Henglong entered into a letter of intent for a joint venture
with Advanced Custom Sensors, Inc. to develop a sensor production facility in
Wuhan, China. Pursuant to the letter of intent, Henglong will be responsible for
initial loans and payments of $500,000, payable in two installments of $250,000,
to be used for the development of related products, the training of personnel,
and other operating costs. The first payment of $250,000 was made on February
12, 2004. The Company expects to make the second payment of $250,000 during
2004.
Inflation and Currency Matters:
In the most recent decade, the Chinese economy has experienced periods of rapid
economic growth as well as relatively high rates of inflation, which in turn has
resulted in the periodic adoption by the Chinese government of various
corrective measures designed to regulate growth and contain inflation. The
success of the Company depends in substantial part on the continued growth and
development of the Chinese economy.
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. The Company conducts virtually all of its business
in China and, accordingly, the sale of its products is settled primarily in RMB.
As a result, devaluation or currency fluctuation of the RMB against the USD
would adversely affect the Company's financial performance when measured in USD.
Although prior to 1994 the RMB experienced significant devaluation against the
USD, the RMB has remained fairly stable since then. In addition, the RMB is not
freely convertible into foreign currencies, and the ability to convert the RMB
is subject to the availability of foreign currencies. Effective December 1,
1998, all foreign exchange transactions involving the RMB must take place
through authorized banks or financial institutions in China at the prevailing
exchange rates quoted by the People's Bank of China.
As China has recently been admitted as a member of the World Trade Organization,
the central government of China is expected to adopt a more rigorous approach to
partially deregulate currency conversion restrictions, which may in turn
increase the exchange rate fluctuation of the RMB. Should there be any major
change in the central government's currency policies, the Company does not
believe that such an action would have a detrimental effect on the Company's
operations, since the Company conducts virtually all of its business in China,
and the sale of its products is settled in RMB.
Although prior to 1994 the RMB experienced significant devaluation against the
USD, the RMB has remained fairly stable since then. The exchange rate was
approximately US$1.00 to RMB 8.30 at December 31, 2002 and 2003.
32
Quantitative and Qualitative Disclosures about Market Risk:
The Company does not have any market risk with respect to such factors as
commodity prices, equity prices, and other market changes that affect market
risk sensitive investments. A 10 point basis change in the Company's average
debt interest rate would not have a material effect on the Company's results of
operations.
With respect to foreign currency exchange rates, the Company does not believe
that a devaluation or fluctuation of the RMB against the USD would have a
detrimental effect on the Company's operations, since the Company conducts
virtually all of its business in China, and the sale of its products and the
purchase of raw materials and services are settled in RMB. The effect of a
devaluation or fluctuation of the RMB against the USD would affect the Company's
results of operations, financial position and cash flows, when presented in USD
(based on a current exchange rate) as compared to RMB.
As the Company's debt obligations are primarily short-term in nature, with fixed
interest rates, the Company does not have any risk from an increase in market
interest rates. However, to the extent that the Company arranges new borrowings
in the future, an increase in market interest rates would cause a commensurate
increase in the interest expense related to such borrowings.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the reports filed under the Exchange Act of 1934 is accumulated and
communicated to management, including its principal executive and financial
officers, as appropriate, to allow timely decisions regarding required
disclosure.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including its principal executive and
financial officers, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based upon and as of the date of that evaluation, the Company's
principal executive and financial officers concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports the Company files and submits under the
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
(b) Changes in Internal Controls
There were no changes in the Company's internal controls or in other factors
that could have significantly affected those controls subsequent to the date of
the Company's most recent evaluation.
33
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this report
is set forth in the Index to Exhibits, which immediately
precedes such exhibits, and is incorporated herein by
reference.
(b) Reports on Form 8-K
Three Months Ended June 30, 2004: None
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHINA AUTOMOTIVE SYSTEMS, INC.
------------------------------
(Registrant)
DATE: August 13, 2004 By: /s/ HANLIN CHEN
-----------------------------
Hanlin Chen
President and Chief
Executive Officer
DATE: August 13, 2004 By: /s/ DAMING HU
----------------------------
Daming Hu
Chief Financial Officer
34
INDEX TO EXHIBITS
Exhibit
Number Description of Document
------- ---------------------------------
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 - Hanlin Chen
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 - Daming Hu
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
35