UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2005
[ ] 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 registrant 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) 716-832-9196
Issuer's fax number: (86) 716-832-9298
Not Applicable
---------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by a check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of March 31, 2005, the Company had 22,574,542 shares of common stock
issued and outstanding.
1
CHINA AUTOMOTIVE SYSTEMS, INC.
INDEX
<Table>
<Caption>
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2005 (Unaudited) and
December 31, 2004 3
Condensed Consolidated Statements of Operations (Unaudited) - Three Months
Ended March 31, 2005 and 2004 5
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited) - Three Months Ended March 31, 2005 and 2004 7
Condensed Consolidated Statements of Cash Flows (Unaudited) - Three Months
Ended March 31, 2005 and 2004 8
Notes to Condensed Consolidated Financial Statements (Unaudited) - Three
Months Ended March 31, 2005 and 2004 10
Item 2. Management's Discussion and Analysis or Plan of Operation 26
Item 3. Quantitative And Qualitative Disclosures About Market Risk 37
Item 4. Controls and Procedures 37
PART II. OTHER INFORMATION
Item 6. Exhibits 37
SIGNATURES 38
</Table>
2
China Automotive Systems, Inc.
Condensed Consolidated Balance Sheets
PART 1 - Financial Information
Item 1. Financial Statements.
---------------------
March 31, December 31,
2005 2004
-------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 12,972,439 $ 11,164,639
Pledged cash deposits 2,726,453 1,842,536
Accounts and notes receivable, including
$1,309,864 and $982,722 from related parties
at March 31, 2005 and December 31, 2004,
respectively, net of an allowance for doubtful
accounts of $2,979,196 and $2,944,990 at
March 31, 2005 and December 31, 2004,
respectively 35,674,082 37,632,603
Advance payments, including $498,971 and
$433,724 to related parties at March 31,
2005 and December 31, 2004, respectively 5,457,879 3,886,406
Inventories 12,424,054 12,507,910
------------- ------------
Total current assets 69,254,907 67,034,094
------------- ------------
Long-term Assets:
Property, plant and equipment 44,105,615 43,552,725
Less: Accumulated depreciation (8,633,639) (7,609,101)
------------- ------------
35,471,976 35,943,624
------------- ------------
Intangible assets, net 434,467 392,552
Other receivables, including $1,192,448 and
$974,815 from related parties at March
31, 2005 and December 31, 2004, respectively,
net of an allowance for doubtful accounts
of $989,781 and $930,425 at March
31, 2005 and December 31, 2004, respectively 2,126,984 2,044,086
Long-term investments 72,289 72,289
------------- ------------
Total assets $ 107,360,623 $105,486,645
============= ============
3
China Automotive Systems, Inc.
Condensed Consolidated Balance Sheets (continued)
March 31, December 31,
2005 2004
------------ -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans $ 16,024,096 $ 13,614,458
Accounts and notes payable,
including $508,236 and
$522,754 to related parties
at March 31, 2005 and December
31, 2004, respectively 27,663,757 28,518,720
Customer deposits 282,453 227,389
Accrued payroll and related costs 1,370,312 1,370,576
Accrued expenses and other payables 3,591,286 5,005,525
Accrued pension costs 2,690,199 2,438,971
Taxes payable 4,080,229 3,814,746
Amounts due to shareholders/directors 647,199 589,594
------------ ------------
Total current liabilities 56,349,531 55,579,979
------------ ------------
Long-term liabilities:
Advances payable 196,222 196,378
------------ ------------
Minority interests 17,810,237 17,571,838
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 March 31,
2005 and December 31, 2004 2,257 2,257
Additional paid-in capital 18,003,168 18,003,168
Retained earnings-
Appropriated 4,396,339 4,396,339
Unappropriated 10,599,809 9,733,626
Foreign currency translation gain 3,060 3,060
------------ ------------
Total stockholders' equity 33,004,633 32,138,450
------------ ------------
Total liabilities and stockholders'
equity $107,360,623 $105,486,645
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
China Automotive Systems, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31,
--------------------------------
2005 2004
------------ ------------
Net sales from continuing operations,
including $454,925 and $285,069
to related parties in 2005 and 2004,
respectively $ 13,976,450 $ 11,391,716
Cost of sales, including $405,756
and $394,176 purchased from
related parties in 2005 and
2004, respectively 8,946,109 6,831,898
------------ ------------
Gross profit 5,030,341 4,559,818
------------ ------------
Costs and expenses:
Selling 674,068 409,406
General and administrative 2,562,151 2,127,479
Depreciation and amortization 180,664 115,706
------------ ------------
Total costs and expenses 3,416,883 2,652,591
------------ ------------
Income from operations 1,613,458 1,907,227
------------ ------------
Other income (expense):
Other non-operating income 25,319 118,833
Financial expenses (283,233) (84,805)
------------ ------------
Other income (loss), net (257,914) 34,028
------------ ------------
Income before income taxes 1,355,544 1,941,255
Income taxes 250,962 312,400
------------ ------------
Income before minority interest 1,104,582 1,628,855
Minority interests 238,399 599,157
------------ ------------
Income from continuing operations 866,183 1,029,698
Loss from discontinued operations (Note 15) -- (15,909)
------------ ------------
Net income $ 866,183 $ 1,013,789
============ ============
Net income per common share -
Basic and diluted from continuing
Operations $ 0.04 $ 0.05
Basic and diluted from discontinued
Operations $ 0.00 $ (0.01)
------------ ------------
Basic $ 0.04 $ 0.04
============ ============
Diluted $ 0.04 $ 0.04
============ ============
5
Weighted average number of
common shares outstanding -
Basic 22,574,542 22,574,542
Diluted 22,597,042 22,574,542
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
China Automotive Systems, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
Three Months Ended March 31,
------------------------------
2005 2004
---------- ----------
Net income $ 866,183 $1,013,789
Other comprehensive income:
Foreign currency translation gain -- 4,185
---------- ----------
Comprehensive income $ 866,183 $1,017,974
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
China Automotive Systems, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31,
------------------------------
2005 2004
----------- ------------
Cash flows from operating activities:
Net income from continuing operations $ 866,183 $ 1,029,698
Adjustments to reconcile net income from
continuing operations to net cash provided
by operating activities:
Minority interests 238,399 599,157
Depreciation and amortization 1,058,241 754,143
Allowance for doubtful accounts 93,561 340,696
Other operating adjustments -- 4,185
Changes in operating assets and
liabilities:
(Increase) decrease in:
Pledged deposits (883,917) (260,536)
Accounts and notes receivable 1,924,315 (997,461)
Advance payments (1,571,473) (2,333,516)
Inventories 83,856 (2,408,789)
Increase (decrease) in:
Accounts and notes payable (854,963) 1,960,357
Customer deposits 55,064 42,559
Accrued payroll and related costs (264) (80,481)
Accrued expenses and other payables (626,918) 609,085
Accrued pension costs 251,228 219,145
Taxes payable 265,483 (754,127)
Advances payable (156) --
----------- ------------
Net cash provided by (used in) operating activities
from continuing operations 898,639 (1,275,885)
Net cash provided by operating activities from
discontinued operations (Note 15) -- 133,137
----------- ------------
Net cash provided by operating activities 898,639 (1,142,748)
----------- ------------
Cash flows from investing activities:
(Increase) decrease in other receivables (142,253) (1,004,054)
Cash paid to acquire property, plant and equipment (552,890) (1,394,735)
Cash paid to acquire intangible assets (75,618) --
(Increase) decrease in investments -- (626,506)
----------- ------------
Net cash used in investing activities
from continuing operations (770,761) (3,025,295)
Net cash provided by investing activities
from discontinued operations (Note 15) -- 602,139
----------- ------------
Net cash used in investing activities (770,761) (2,423,156)
----------- ------------
8
China Automotive Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
Three Months Ended March 31,
------------------------------
2005 2004
----------- ------------
Cash flows from financing activities:
Proceeds from bank loans, net 2,409,638 3,975,904
Dividends paid to minority interest
holders of joint-ventures (787,321) --
Increase in amounts due to
shareholders/directors 57,605 2,664,289
Contributions to capital by minority
interest holders -- 982,898
----------- ------------
Net cash provided by financing activities
from continuing operations 1,679,922 7,623,091
Net cash used in financing activities
from discontinued operations (Note 15) -- (626,506)
----------- ------------
Net cash provided by financing activities 1,679,922 6,996,585
----------- ------------
Net increase of cash and cash equivalents 1,807,800 3,430,681
Net increase of cash and cash equivalents
from discontinued operations (Note 15) -- 108,770
----------- ------------
Cash and cash equivalents:
Net increase 1,807,800 3,321,911
At beginning of period 11,164,639 10,678,868
----------- ------------
At end of period $12,972,439 $ 14,000,779
=========== ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
China Automotive Systems, Inc.
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31,
------------------------------
2005 2004
----------- ------------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ 281,676 $ 105,869
=========== ============
Cash paid for income taxes $ 215,500 $ 459,508
=========== ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
9
China Automotive Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended March 31, 2005 and 2004
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 former 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 and $70,000 to the former officer, director and controlling shareholder
of Visions for the cancellation of 17,424,750 shares of common stock in 2003 and
2004, respectively, for a total amount of $320,000.
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 remained 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 four Sino-foreign joint
ventures (Jingzhou was sold in August 2004) organized in the PRC:
Name of Entity Percentage of Interest
- -------------- ------------------------------
March 31 March 31
2005 2004
----------- ------------
Jingzhou Henglong Automotive Parts
Co. Limited ("Henglong") 44.5% 42.0%
Shashi Jiulong Power Steering Co.
Limited ("Jiulong") 81.0% 81.0%
Shenyang Jinbei Henglong Automotive
Steering System Co. Limited ("Shenyang") 70.0% 55.0%
Zhejiang Henglong & Vie Pump-Manu Co.
Limited ("Zhejiang") 51.0% 51.0%
10
Jingzhou Henglong Fulida Textile Co., Ltd.
("Jingzhou") -- 51.0%
On December 31, 2003, the Company owned 55% of Shenyang. On April 8, 2004, the
board of directors approved an increase in Shenyang's registered capital and
total capital 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, were 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 contributed to
Shenyang.
Jingzhou was formed in February, 2003 to produce environmental textiles and raw
materials, and was owned 51% by Ji Long. Effective August 31, 2004, in order to
concentrate on its main products, namely steering and automotive parts, the
Company disposed of its 51% interest in Jingzhou by entering into an equity
exchange agreement (the "Exchange Agreement") with Hubei Wanlong Investment Co.,
Ltd. ("HBWL") controlled by Mr. Hanlin Chen, the Company's Chairman. Pursuant to
the Exchange Agreement, the 51% equity interest in Jingzhou owned by Ji Long was
exchanged for 2.5% of HBWL's equity interest in Henglong based on their
respective fair market values as determined by an independent appraisal firm.
The difference between the fair value and the book value resulting from the
disposition of the joint venture interest in Jingzhou was debited to additional
paid-in capital. With respect to consideration paid by the Company in excess of
its Chairman's basis for his investment, such excess has been charged to
additional paid-in capital as a distribution to the Chairman, resulting in the
acquired 2.5% equity interest in Henglong being recorded by the Company at the
Chairman's original cost basis. The Company paid approximately $90,000 to HBWL
in conjunction with this transaction.
The divested non-core business of Jingzhou has been treated as a discontinued
operation under SFAS No. 144. Jingzhou's results of operation and related
charges have been reclassified as discontinued operations in the Company's
consolidated statements of operations. The Company's prior financial statements
have been restated to reflect the discontinued operation of Jingzhou (see Note
15).
Henglong, established in 1997, and Jiulong, established in 1993, 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.
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 for the three months ended March
31, 2005 and 2004. 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.
Foreign Currencies - The Company maintains its books and records in Renminbi
("RMB"), the currency of the PRC, its functional currency. Foreign currency
transactions 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
11
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. Translation of amounts into United States dollars ("US$") has been made
at the rate of RMB8.30 to US$1.00.
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 1 RMB 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.
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, the results of operations and cash flows for the
three months ended March 31, 2005 and 2004.
The consolidated balance sheet as of December 31, 2004 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-KSBA, 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 ended March 31, 2005 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2005.
Income Per Share - Basic income per share is calculated by dividing net income
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. The Company had
potentially dilutive securities consisting of options to purchase 22,500 shares
of common stock to three independent directors at $4.50 per share over a period
of two years.
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.
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
12
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 share 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.
Comprehensive Income - 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
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.
For the three months ended March 31, 2005, the Company has not recorded any
other comprehensive income. For the three months ended March 31, 2004, the
Company's only component of other comprehensive income is foreign currency
translation gain of $4,185. This amount has been recorded as a separate
component of stockholders' equity.
Reclassifications - Certain reclassifications have been made to the financial
statements for the three months ended March 31, 2004 to reflect the discontinued
operation of Jingzhou (see Note 15).
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 the PRC differs significantly from the economies of the "western"
industrialized nations in 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 the 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
13
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
level of exchange rate, it remains possible for the PRC government to exert
significant influence on the PRC economy.
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 RMB against the United States dollar would 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 submission of a payment
application form together with suppliers' invoices, shipping documents and
signed contracts.
3. RECENT ACCOUNTING PRONOUNCEMENTS
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 issuer 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
14
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.
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 (and Interpretation of ARB No. 51)" ("FIN 46"). FIN
46 requires that the primary beneficiary in a variable interest entity
consolidate the entity even if the primary beneficiary does not have a majority
voting interest. The consolidation requirements of FIN 46 are required to be
implemented for any variable interest entity created on or after January 31,
2003. In addition, FIN 46 requires disclosure of information regarding
guarantees or exposures to loss relating to any variable interest entity
existing prior to January 31, 2003 in financial statements issued after January
31, 2003. The implementation of the provisions of FIN 46 effective January 31,
2003 did not have a significant effect on the Company's consolidated financial
statement presentation or disclosures.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an Amendment
of ARB No. 43, Chapter 4." This statement amends Accounting Research Bulletin
No.43, Chapter 4, to clarify those abnormal amounts of idle facility expense,
freight handling costs and materials (spoilage) should be recognized as current
period charges. In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of this statement are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal
years beginning after November 23,2004. The provision of Statement No.151 should
be applied prospectively. The adoption of this accounting principle is not
expected to have a material impact on the Company's financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment (Revised
2004)." This statement replaces FAS No.123, "Accounting for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees." This statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
The adoption of the statement will result in the expensing of the fair value of
stock options granted to employees in the basic financial statements.
Previously, we elected to only disclose the impact of expensing the fair value
of stock options in the notes of the financial statements. The statement is
effective for the quarters commencing after June 15, 2005.
The statement applies to new equity awards and to equity awards modified,
repurchased, or canceled. After the effective date. Additionally, compensation
cost for the portion of awards for which the requisite service has not been
rendered that are outstanding as of the effective date shall be recognized as
the requisite service is rendered on or after the effective date. The
compensation cost for that portion of awards shall be based on the grant-date
fair value of those awards as calculated from the pro forma disclosures under
Statement No. 123. Charges to the grant-date fair value of equity awards granted
before the effective date of this statement are precluded. The compensation cost
of those earlier awards shall be attributed to periods beginning on or after the
effective date of this statement using the attribution method that was used
under Statement No. 123, except that the method of recognizing forfeitures only
as they occur shall not be continued. Any unearned or deferred compensation
(contra-equity accounts) related to those earlier awards
15
shall be eliminated against the appropriate equity accounts. Additionally,
common stock purchased pursuant to stock options granted under our employee
stock purchase plan will be expensed based upon the fair market value of the
stock option. The statement also allows for a modified version of retrospective
application to periods before the effective date. Modified retrospective
application may be applied either (a) to all prior years for which Statement No.
123 was effective or (b) only to prior interim periods in the year of initial
adoption. An entity that chooses to apply the modified retrospective method to
all prior years for which Statement No. 123 was effective shall adjust financial
statements for prior periods to give effect to the fair-value-based method of
accounting for awards granted, modified, or settled in cash in fiscal years
beginning after December 15, 1994, on a basis consistent with the pro forma
disclosures required for those periods by Statement No. 123. Accordingly,
compensation cost and the related tax effects will be recognized in those
financial statements as though they had been accounted for under Statement No.
123. Changes to amounts as originally measured on a pro forma basis are
precluded. The adoption of FAS No. 123R is not expected to have a material
impact on our financial position and results of operation.
In December 2004, the FASB issued FASB Statement No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, The guidance in APB
Option No. 29, "Accounting for Nonmoneary Transactions", is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that opinion, however,
included certain exceptions to that principle. This statement amends APB Opinion
No. 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets to nonmonetary assets that do not have commercial substance.
The provisions of this Statement are effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of the
provisions of FAS 153 is not expected to have a material impact on our financial
position or results of operations.
In October 2004, the American Jobs Creation Act of 2004 (the "AJCA") was passed.
The AJCA provides a deduction for income from qualified domestic production
activities which will be phased in from 2005 through 2010. In return, the AJCA
also provides for a two-year phase-out of the existing extra-territorial income
exclusion for foreign sales that was viewed to be inconsisitent with
international trade protocols by the European Union. In December 2004, the FASB
issued FASB Staff Position No. FAS 109-1 ("FAS 109-1"), "Application of FASB
Statement No. 109, "Accounting for Income Taxes," to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004." The AJCA introduces a special tax deduction on qualified production
activities. FAS 109-1 clarifies that this tax deduction should be accounted for
as a special tax deduction in accordance with Statement 109. As such, the
special deduction has no effect on deferred tax assets and liabilities existing
at the enactment date. Rather, the impact of this deduction will be reported in
the same period in which the deduction is claimed in our tax return. The
adoption of AJCA is not expected to have a material impact on our financial
position and results of operation.
In June 2004, the FASB issued Emerging Issues Task Force Issue No. 02-14 ("EITF
02-14"), "Whether an Investor Should Apply the Equity Method of Accounting to
Investments Other Than Common Stock." EITF 02-14 addresses whether the equity
method of accounting applies when an investor does not have an investment in
voting common stock of an investee but exercises significant influence through
other means. EITF 02-14 states that an investor should only apply the equity
method of accounting when it has investments in either common stock or
in-substance common stock of a corporation, provided that the investor has the
ability to exercise significant influence over the operating and financial
policies of the investee. The accounting provisions of EITF 02-14 are effective
for reporting periods beginning after September 15, 2004. We do not expect the
adoption of EITF 02-14 to have a material impact on our consolidated financial
position, results of operations or cash flows.
In March 2004, the FASB issued EITF Issue No. 03-1 ("EITF 03-1"), "The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments"
which provided new guidance for assessing impairment losses on investments.
Additionally, EITF 03-1 includes new disclosure requirements for investments
that are deemed to be temporarily impaired. In September 2004, the FASB delayed
the accounting provisions of EITF 03-1; however the disclosure requirements
16
remain effective for annual periods ending after June 15, 2004. We will evaluate
the impact of EITF 03-1 once final guidance is issued.
17
4. ACCOUNTS RECEIVABLE
The Company's accounts receivable at March 31, 2005 (unaudited) and December 31,
2004 are summarized as follows:
March 31 December 31
2005 2004
------------ -----------
Accounts receivable $ 29,255,937 $28,440,608
Bills receivable 9,397,341 12,136,985
Less: allowance for doubtful accounts (2,979,196) (2,944,990)
------------ -----------
$ 35,674,082 $37,632,603
============ ===========
5. OTHER RECEIVABLES
Other receivables consist of amounts advanced to both related and unrelated
parties, primarily as unsecured demand loans, with no stated interest rate or
due date. At March 31, 2005, other receivables totaled $2,126,984, including
$1,192,448 to related parties, net of an allowance for doubtful accounts of
$989,781. The allowance for doubtful accounts included $393,407 made to an
investee of Jiulong.
At December 31, 2004, other receivables totaled $2,044,086, including $974,815
to related parties, net of an allowance for doubtful accounts of $930,425. The
allowance for doubtful accounts included $472,843 made to an investee of
Jiulong.
In 1997, Jiulong, one of the Company's Sino-foreign joint ventures, made an
investment to establish an auto sales company named Jingzhou Jiulong Machinery
and Electronic Material Co., Ltd. ("JL Material") together with a partner,
Jingzhou Jiulong Machinery and Electronic Manufacturing Co., Ltd. Jiulong
contributed and owned 20% of JL Material's total registered capital of
$1,204,819 (the equivalent of RMB10,000,000). During the six-year period from
1997 through 2002, Jiulong sold vehicles to JL Material on credit and JL
Material made the payments to Jiulong according to the terms of their agreement.
Since JL Material was experiencing financial difficulties, the Company recorded
in 2004 a full allowance of $472,843 to the account due from JL Material. During
three months ended March 31,2005, the Company collected receivable from JL
Material of $79,436 and recorded a decrease in allowance for doubtful accounts.
The Company terminated the above mentioned agreement with JL Material during
2003.
With the exception of other receivables from JL Material, the Company believes
that all other receivables are collectible, as the related parties are in good
financial conditions and are paying their payables to Company pursuant to the
terms of their respective contracts.
18
6. INVENTORIES
Inventories at March 31, 2005 (Unaudited) and December 31, 2004 consisted of the
following:
March 31, December 31,
2005 2004
------------ ------------
Raw materials $ 3,308,456 $ 3,868,859
Work-in-process 2,244,605 2,049,963
Finished goods 7,260,704 6,817,372
------------ ------------
12,813,765 12,736,194
Less: provision for loss (389,711) (228,284)
------------ ------------
$ 12,424,054 $ 12,507,910
============ ============
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at March 31, 2005 (unaudited) and December 31,
2004 are summarized as follows:
March 31 December 31
2005 2004
------------ ------------
Land use rights and buildings $ 11,664,976 $ 13,232,650
Machinery and equipment 22,309,663 20,425,269
Electronic equipment 1,575,847 1,694,587
Motor vehicles 2,083,578 2,083,578
Construction in progress 6,471,551 6,116,641
------------ ------------
44,105,615 43,552,725
Less: Accumulated depreciation (8,633,639) (7,609,101)
------------ ------------
$ 35,471,976 $ 35,943,624
============ ============
8. INTANGIBLE ASSETS
The activity in the Company's intangible asset account at March 31, 2005
(unaudited) and December 31, 2004 are summarized as follows:
March 31 December 31
2005 2004
--------- -----------
Balance at beginning of year, $ 392,552 $ 218,639
Add: Additions during the year -
Management software license -- 158,159
Mapping design software license -- 72,289
Information system software 75,618 --
--------- -----------
468,170 449,087
Less: Amortization for the year (33,703) (56,535)
--------- -----------
Balance at end of year $ 434,467 $ 392,552
========= ===========
19
9. ACCOUNTS PAYABLE
Accounts payable at March 31, 2005 (unaudited) and December 31, 2004 are
summarized as follows:
March 31 December 31
2005 2004
------------- ------------
Accounts payable $ 13,576,362 $ 15,358,250
Notes payable 14,087,395 13,160,470
------------- ------------
$ 27,663,757 $ 28,518,720
============= ============
Notes payable represent accounts payable in the form of bills of exchange whose
acceptances and settlements are handled by banks.
The Company has pledged cash deposits, notes receivable and certain plant and
machinery to secure trade financing granted by banks.
10. BANK LOANS
At March 31, 2005, the Company through its Sino-foreign joint ventures had
outstanding fixed-rate short-term bank loans of $16,024,096, consisting of
$10,240,964 guaranteed mutually by the Sino-foreign joint ventures and
$5,783,132 mortgaged with some of the plant and equipment of the Company. The
weighted average interest rate for the three months ended March 31, 2005 was
5.24% per annum.
At December 31, 2004, the Company through its Sino-foreign joint ventures had
outstanding fixed-rate short-term bank loans of $13,614,458. The weighted
average interest rate for the year ended December 31, 2004 was 4.98% per annum.
Jiulong, one of the Company's joint ventures, provided Henglong, another of the
Company's joint ventures, with loan guarantees covering bank loans of
$3,012,000. Henglong provided Jiulong with loan guarantees covering bank loans
of $6,627,000. The remaining balance of the bank loan of $3,976,000 was
mortgaged with some of the plant and equipment of the Company.
11. AMOUNTS DUE TO SHAREHOLDERS/DIRECTORS
The activity in the amounts due to shareholders/directors for the three months
ended March 31, 2005 (unaudited) is as follows:
Balance, December 31, 2004 $ 589,594
Cash advances from shareholders 57,605
----------
Balance, March 31, 2005 $ 647,199
==========
At March 31, 2005 and December 31, 2004, the amounts due to
shareholders/directors were unsecured, interest-free and repayable on demand.
12. MINORITY INTERESTS
The activities in respect of the amounts of the minority interests' equity
during the three months ended March 31, 2005 (unaudited) are summarized as
follows:
20
Balance, December 31, 2004 $ 17,571,838
Minority interests' equity income 238,399
------------
Balance, March 31, 2005 $ 17,810,237
============
13. STOCKHOLDERS' EQUITY
During March 2003, 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.
During March 2003, in connection 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.
During March 2003, 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. Effective December 31,
2003, these warrants were exercised on a cashless basis, resulting in the
issuance of 509,856 shares of common stock.
During September 2003, the Company sold 49,686 shares of common stock in a
private transaction to three investors at approximate fair value of $3.20 per
share for net proceeds of $159,000.
In July 2004, the Company adopted a stock option plan. The stock option plan
provides for the issuance, to the Company's officers, directors, management and
employees, of options to purchase shares of the Company's common stock. On July
21, 2004, the Company issued options to purchase 7,500 shares of common stock to
each of its three independent directors. Such stock options vest immediately
upon grant and are exercisable at $4.50 per share over a period of two years.
The exercise price represents an 11.11% premium from the fair market value based
on the grant date of the stock options.
14. INCOME TAXES
The Company's Sino-foreign joint ventures are subject to PRC state and local
income taxes 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 invested enterprises. In accordance with the
Income Tax Law of the PRC for Enterprises with Foreign Investments and Foreign
Enterprises, enterprises with foreign investments and foreign enterprises
meeting certain criteria are entitled to full exemption from income tax for the
first two years and a 50% reduction for the next three years, commencing from
the first profit-making year after offsetting all tax losses carried forward
from the previous five years. Two of the Company's Sino-foreign joint ventures,
Henglong and Jiulong, were subject to a tax rate of 15% during 2004 and 2005.
Shenyang was entitled to and was certified for, a two-year tax holiday
commencing in 2003, the first profit-making year. Therefore Shenyang was income
tax exempted in 2004 and is subject to a tax rate of 7.5% in 2005. The tax rate
for Zhejiang has not yet been approved by tax authorities, but in accordance
with the relevant income tax laws as mentioned above, Zhejiang is also entitled
to two-year tax exemption in 2004, its first profit-making year, and 2005, its
second profit-making year.
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 during three months ended March 31, 2005 and 2004.
15. DISCONTINUED OPERATIONS
21
Effective August 31, 2004, in order to concentrate on its main products, namely
steering and automotive parts, the Company disposed of its 51% interest in
Jingzhou by entering into an equity exchange agreement (the "Exchange
Agreement") with Hubei Wanlong Investment Co., Ltd ("HBWL"), which is controlled
by Mr. Chen Hanlin, the Chairman of the Company. Pursuant to the Exchange
Agreement, the 51% equity interest in Jingzhou owned by Ji Long was exchanged
for 2.5% of HBWL's equity interests in Henglong based on their respective fair
market values as determined by an independent appraisal firm. Accordingly,
effective August 31, 2004, the Company did not own Jingzhou's equity.
The disposal of Jingzhou was accounted for as discontinued operations according
to SFAS No. 144. Financial statements of prior period have been changed to
reflect the discontinued operation of Jingzhou. The financial position and
operating results of Jingzhou for the three months ended March 31, 2004 are
summarized as follows:
(1) Assets and liabilities of discontinued operations as of March 31,2003
March 31,
2004
----------
ASSETS
Current assets:
Cash and cash equivalents $ 160,783
Advance payments 31,982
Inventories 517,537
----------
Total current assets 710,302
----------
Property, plant and equipment 2,321,092
Less: Accumulated depreciation (114,704)
----------
2,206,388
----------
Other receivable 15,697
----------
Total assets 2,932,387
==========
Current liabilities:
Accounts and notes payable 85,036
Customer deposits 117,252
Accrued payroll and related costs 10,434
Accrued expenses and other payables 616,772
Taxes payable (25,474)
----------
Total current liabilities $ 804,020
----------
Net assets $2,128,367
==========
22
(2) Statements of operation from discontinued operations for the three months
ended March 31, 2004:
Three months ended March 31, 2004
---------------------------------
Net sales $1,442,040
Cost of sales 1,413,852
----------
Gross profit 28,188
----------
Costs and expenses
Selling, general and administrative 56,621
Depreciation and amortization 2,678
----------
Total costs and expenses 59,299
----------
Income (loss) from operations (31,111)
----------
Other income (expenses):
Other non-operating income --
Financial expenses (83)
----------
Other income (loss), net (83)
----------
(Loss) before income taxes (31,194)
Income taxes --
----------
(Loss) before minority interest (31,194)
Minority interest (loss) from
discontinued operation (15,285)
----------
Net (loss) from discontinued operations $ (15,909)
==========
The net loss of discontinued operations of $15,909 from Jingzhou during three
months ended March 31, 2004 has been reclassified as net loss from discontinued
operations.
(3)Statement of cash flows from discontinued operations for the three months
ended March 31, 2004:
Three months ended March 31, 2004
---------------------------------
Cash flows from operating activities:
Net loss from discontinued operations $(15,909)
Adjustments required to reconcile income from
discontinued operations to net cash provided by
operating activities
Minority interests (15,285)
Depreciation and amortization 39,795
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts and notes receivable 12,180
Advance payments 299,844
Inventories 86,625
23
Increase (decrease) in:
Accounts and notes payable (3,241)
Customer deposits (137,792)
Accrued payroll and related costs 5,047
Accrued expenses and other payables (164,572)
Taxes payable 26,445
----------
Net cash provided by operating activities 133,137
----------
Cash flow from investing activities:
(Increase) in other receivables (11,885)
Cash paid to acquire fixed assets (12,482)
Cash received in investing activities 626,506
----------
Net cash provided in investing activities 602,139
----------
Cash flows from financing activities:
Contributions to capital by minority
interest holders 578,313
(Decrease) in liability related to acquisition
of joint venture assets (1,204,819)
----------
Net cash used in financing activities (626,506)
----------
Cash and cash equivalents from discontinued
operations:
Net increase 108,770
At beginning of year 52,014
----------
At end of period $ 160,784
==========
The cash flows from Jingzhou have been reclassified as net cash flows provided
by operation activities from discontinued operations of $133,137; net cash
provided by investing activities from discontinued operations of $602,139; and
net cash used in financing activities from discontinued operations of $626,506.
The net cash provided during three months ended March 31, 2004 have been
classified as net increase of cash and cash equivalents from discontinued
operations of $108,770.
16. 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 March 31, 2005, the Company's ten largest
customers accounted for 73.5% of the Company's consolidated net sales, with
three customers individually accounting for more than 10% of consolidated net
sales, i.e. 16.1%, 14.7% and 14.4% individually, or an aggregate of 45.2%. At
March 31, 2005, approximately 32.5% of accounts receivable were from trade
transactions with the aforementioned three customers.
During the three months ended March 31, 2004, the Company's ten largest
customers accounted for 64.6% of the Company's consolidated net sales, with two
customers individually accounting for more than 10% of consolidated net sales,
i.e. 24.6% and 13.4% of consolidated net sales, or an aggregate of 38.0%. At
March 31, 2004, approximately 28% of accounts receivable were from trade
transactions with the aforementioned two customers.
24
During the three months ended March 31, 2005 and 2004, sales to related parties
aggregated to $454,925 and $285,069, respectively.
During the three months ended March 31, 2005 and 2004, purchases from related
parties aggregated to $405,756 and $394,176, respectively.
25
17. RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2005 and 2004, the joint ventures
entered into related party transactions with companies with common directors as
shown below:
Three Months Ended March 31,
-----------------------------
2005 2004
------------ ------------
Sales
- - received $ -- $ 81,271
- - receivable 454,925 203,798
Purchases
- - paid 14,518 --
- - payable 391,238 394,176
18. Subsequent Event
On April 12,2005, one of the subsidiary companies, Great Genesis entered into a
joint-venture agreement with Shanghai Hongxi Investment Inc. ("Hongxi"), Sensor
System Solution Inc. ("Sensor") to establish a joint venture - Universal Sensor
Application Inc. ("USAI") in the Wuhan East Lake development zone. Hubei is
engaged to produce and sell sensor modules. The registered capital of the joint
venture will be US$ 10 million. Great Genesis and Hongxi will invest US$ 6
million and 1 million, respectively, with cash and land and building. They
accounted for 60% and 10% of the total registered capital, respectively. Sensor
will invest US$ 3 million in technology, accounting for 30% of the total
registered capital. The registered capital is required to be paid in three
installments within one year after signing of the joint venture agreement (April
12,2005).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005
contains "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended. Generally, the words "believes",
"anticipates," "may," "will," "should," "expect," "intend," "estimate,"
"continue," and similar expressions or the negative thereof or comparable
terminology are intended to identify forward-looking statements which 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. Such statements are subject to certain
risks and uncertainties, including the matters set forth in this Quarterly
Report or other reports or documents the Company files with the Securities and
Exchange Commission from time to time, which could cause actual results or
outcomes to differ materially from those projected. Undue reliance should not be
placed on these forward-looking statements which speak only as of the date
hereof. The Company undertakes no obligation to update these forward-looking
statements.
In addition, the forward-looking statements in this Quarterly Report on Form
10-Q 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. These factors include, without limitation, risks related to
the demand for the Company's products, product liability and warranty claims,
labor disputes or shortage, dependence on key customers and suppliers,
competition, political climate of the PRC, doing business in the PRC,
unfavorable changes in the economic or social conditions
26
of the PRC or in counties where the Company sells its products, changes in the
laws or regulations applicable to the Company's business, increase in tax rates,
currency fluctuations, interest rate risk, availability and price fluctuations
of raw materials, and volatility of earnings.
GENERAL OVERVIEW:
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 and $70,000 to the former officer, director and controlling shareholder
of Visions for the cancellation of 17,424,750 shares of common stock in 2003 and
2004, respectively, for a total amount of $320,000.
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 four Sino-foreign joint
ventures (Jingzhou was sold in August 2004) organized in the PRC:
Percentage Interest ended March 31
----------------------------------
Name of Entity 2005 2004
- -------------- -------- --------
Jingzhou Henglong Automotive Parts
Co. Limited ("Henglong") 44.5% 42.0%
Shashi Jiulong Power Steering Co.
Limited ("Jiulong") 81.0% 81.0%
Shenyang Jinbei Henglong Automotive
Steering System Co. Limited ("Shenyang") 70.0% 55.0%
Zhejiang Henglong & Vie Pump-Manu Co.
Limited ("Zhejiang") 51.0% 51.0%
27
Jingzhou Henglong Fulida Textile Co., Ltd.
("Jingzhou") -- 51.0%
On December 31, 2003, the Company owned 55% of Shenyang. On April 8, 2004, the
board of directors approved an increase in Shenyang's registered capital and
total capital 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, were 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 contributed to
Shenyang.
Jingzhou was formed in February 2003 to produce environmental textiles and raw
materials, and was owned 51% by Ji Long. Effective August 31, 2004, in order to
concentrate on its main products, namely steering and automotive parts, the
Company disposed of its 51% interest in Jingzhou by entering into an equity
exchange agreement (the "Exchange Agreement") with Hubei Wanlong Investment Co.,
Ltd. ("Hubei Wanlong"), controlled by Mr. Hanlin Chen, the Company's Chairman.
Pursuant to the Exchange Agreement, the 51% equity interest in Jingzhou owned by
Ji Long was exchanged for 2.5% of Hubei Wanlong's equity interest in Henglong
based on their respective fair market values as determined by an independent
appraisal firm. The difference between the fair value and the book value
resulting from the disposition of the joint venture interest in Jingzhou was
debited to additional paid-in capital. With respect to consideration paid by the
Company in excess of its Chairman's basis for his investment, such excess has
been charged to additional paid-in capital as a distribution to the Chairman,
resulting in the acquired 2.5% equity interest in Henglong being recorded by the
Company at the Chairman's original cost basis. The Company paid approximately
$90,000 to Hubei Wanlong in conjunction with this transaction.
The divested non-core business of Jingzhou has been treated as a discontinued
operation under SFAS No. 144. Jingzhou's results of operation and related
charges have been reclassified as discontinued operations in the Company's
consolidated statements of operations. The Company's prior financial statements
have been restated to reflect the discontinued operation of Jingzhou (see Note
15).
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.
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
28
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 condensed 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 an allowance 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 bringing 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.
RESULTS OF OPERATIONS FROM CONTINUED OPERATIONS:
Three Months Ended March 31,2005 and 2004:
NET SALES:
Net sales were $13,976,450 for the three months ended March 31,2005, as compared
to $11,391,716 for the three months ended March 31,2004, an increase of
$2,584,734 or 22.7%. The increase in sales in 2005 as compared to 2004 was a
result of several factors.
29
(1) Most importantly, the increase of sales of steering gears for trucks. In
2005, the Chinese government continued its macroeconomic adjustment and
control measures implemented in 2004. The light-duty vehicle and car
market continued to be weak in 2005. The Company's sales of steering gears
for light-duty vehicles and cars also suffered. The management continued
the market focus adjustments initiated in 2004, and shifted the Company's
priorities to truck related products. Contribution of sales of heavy-duty
vehicle customers Dongfeng Auto Group and Shanxi Heavy Auto Co., two of
the new heavy-duty vehicle customers added in 2004, rose to 16.1% and 5.5%
in 2005 from 10.9% and 2.8% in 2004. Overall, the contribution of sales of
steering gears for trucks to the Company's consolidated net sales rose
64.4%, from aggregated 27.7% in 2004 to an aggregate 37.7% in the quarter
ended March 31, 2005.
(2) The expansion of production capability of its Sino-foreign joint ventures.
The Company began a project to improve its production capability in 2003,
with good results in 2005. The current production capability has reached
600,000 sets in the first quarter of 2005 as compared to only 300,000 sets
in the first quarter of 2004, an increase of 9.5% in net sales on a
comparable basis due to the increase in production capability of these
Sino-foreign joint ventures.
GROSS PROFIT
For the three months ended March 31, 2005, the gross profit increased by
$470,523 to $5,030,341 for the three months ended March 31, 2005, from
$4,559,818 for the three months ended March 31, 2004. The increase in sales
contributed to an increase of $1,161,197 in gross profit; the decrease in the
unit cost resulted in an increase of $216,970 in gross profit, which was partly
offset by the decrease in selling price resulted in a decrease of $907,644 in
gross profit.
Gross margin was 36% in the first quarter of 2005, a decrease of 4% from 40% in
the same period of 2004. The decrease reflects a decrease in selling price which
was only partly offset by a cost decrease during the first quarter of 2005. The
decrease in gross margin was consistent with the Company's anticipation that the
sales price would fall approximately by 5%-10% during 2005. The Company plans to
take the following measures in the remaining 9 months of 2005 to reduce costs to
meet its target of 35% gross margin.
1. Reduce the labor cost. The advanced production equipment which the Company
purchased in 2003 has performed well for nearly a year. In 2005, the Company
will modify the standard labor hours based on the new equipment to reduce the
labor cost. The Company estimates that with the application of new equipment and
controlled standard labor hours, the labor cost will be reduced by 2%.
2. Reduce the cost of raw materials. In 2005, the Company plans to control cost
of raw materials with two measures: First, volume purchase of major raw
materials will be made through a bidding process; for purchases of other smaller
quantities of non major materials, "target price" will be set to guide such
purchases. Second, the technology department was asked to re-evaluate the
product structure and production techniques, so as to optimize product design,
to reduce the weight of component parts and wastage in the process of
production, and to eventually reduce the cost of raw materials. It is estimated
that these measures will reduce the cost of materials by 4%.
3. Reduce the manufacturing expenses. The Company will re-examine the headcount
of non-operative employees in workshops and lay off 20% of them gradually in
2005. At the same time, the Company will set "targets" to control the
manufacturing overhead. It is estimated that the manufacturing overhead would be
reduced by 2% through these measures.
SELLING EXPENSES:
Selling expenses were $674,068 for the three months ended March 31, 2005, as
compared to $409,406 for the same period of 2004, an increase of $264,662 or
64.6%. The increase in the first quarter of 2005 was mainly due to the
following:
30
(1) The increase in provision for market development project: At the beginning
of 2005, the Company began to strengthen its market development and
instituted a policy on the establishment of a fund for the provision for
market development expenditures. Hence, the Company recorded $198,000 of
provision for market development expenses in the first quarter of 2005,
while there was no such item in the same period of 2004.
(2) The after-sale expenses were $111,123 for the three months ended March
31,2005, as compared to $31,544 for the same period of 2004, an increase
of $79,597 or 252.3%, because nearly all automobile manufacturers
introduced a policy requiring the automotive parts suppliers to pay a
"three warranties" service charge during 2005, while the service charge
had not been generally introduced in 2004.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $2,562,151 for the three months ended
March 31,2005, as compared to $2,127,479 for the same period of 2004, an
increase of $434,672 or 20.4%.
Significant expense items that increased on a comparable basis were supplies,
labor insurances, inventory reserve, warranty and product improvement costs.
Significant expense item that decreased on a comparable basis was provision for
bad debts. They are explained as follows:
(1) Supplies expense was $206,468 in the first quarter of 2005, as compared to
$88,498 for the same period of 2004, an increase of $117,970 or 133.3%.
The increase is due to increased use of imported equipment in the first
quarter of 2005 which led to the increase in consumption of special tools.
(2) Labor insurance costs amounted to $311,160 in the first quarter of 2005,
as compared to $239,774 for the same period of 2004, an increase of
$71,386 or 29.8%. The increase is due to employee medical expenses and new
labor accident insurance costs during the first quarter of 2005.
(3) Inventory reserve of $113,850 in the first quarter of 2005, as compared to
no such item in 2004.
(4) Warranty provision was $125,788 in the first quarter of 2005, as compared
to $25,667 for the same period of 2004, an increase of $100,121 or 390.1%.
Based on its assessment, the Company increased the rate of warranty
provision to 0.9% to the net sales in the first quarter of 2005, from 0.2%
for the same period of 2004.
(5) Product improvement costs amount to $357,709 in the first quarter of 2005,
as compared to $216,528 for the same period of 2004, an increase of
$141,181 or 65.2%, as a result of product design improvement activities to
maintain or enhance its competitive edge.
(6) Provision for bad debts was $93,561 in the first quarter of 2005, as
compared to $340,696 for the same period of 2004, a decrease of $247,135.
Certain items of special provisions for accounts receivable recorded in
2004 were received in the first quarter of 2005. The Company recorded them
as a decrease in the provision for bad debts for the first quarter of
2005.
DEPRECIATION AND AMORTIZATION EXPENSE.
For the three months ended March 31, 2005, the depreciation and amortization
expenses excluded those recorded in cost of sales were $180,664, as compared to
$115,706 for the three months ended March 31, 2004, an increase of $64,958 or
56.1%, as a result of addition of property, plant and equipment after the first
quarter of 2004.
INCOME FROM OPERATIONS
Income from operations was $1,613,458 for the three months ended March 31, 2005,
as compared to $1,907,227 for the three months ended March 31, 2004, a decrease
of $293,769, as a result of an
31
increase of $470,523 or 10.3% in gross profit and an increase of $764,292 or
28.8% in operating expenses.
Other Non-Operating Income
Other non-operating income was $25,319 for the three months ended March 31,
2005, as compared to $118,833 for the three months ended March 31, 2004, a
decrease of $93,514 or 78.7%, as a result of a decrease materials sold in the
first quarter of 2005.
FINANCIAL EXPENSES
Financial expenses were $283,233 for the three months ended March 31, 2005, as
compared to $84,805 for the three months ended March 31, 2004, an increase of
$198,428, as a result of an increase of interest-bearing debts.
INCOME BEFORE INCOME TAXES
Income before income taxes was $1,355,544 for the three months ended March 31,
2005, as compared to $1,941,255 for the three months ended March 31, 2004, a
decrease of $585,711 or 30.2%, as a result of a decrease in income from
operations of $293,769 or 15.4%, and a decrease in other non-operating income of
$93,514 or 78.7%, and an increase in financial expenses of $198,428 or 234.0%.
INCOME TAXES
Income taxes expense was $250,962 for the three months ended March 31, 2005, as
compared to $312,400 for the three months ended March 31, 2004, a decrease of
$61,438 or 19.7%, primarily as a result decreased income before income taxes.
INCOME BEFORE MINORITY INTEREST
Income before minority interest was $1,104,582 for the three months ended March
31, 2005, as compared to $1,628,855 for the three months ended March 31, 2004, a
decrease of $524,273 or 32.2%, as a result of a decrease in income before income
taxes of $585,711 or 30.2%, and a decrease in income taxes of $61,438 or 19.7%.
MINORITY INTERESTS
Minority interests in the earnings of the Sino-foreign joint ventures amount to
$238,399 for the three months ended March 31, 2005, as compared to $599,157 for
the three months ended March 31, 2004, a decrease of $360,758 or 60.2%.
The Company owns varying equity interests in four Sino-foreign joint ventures
through which it conducts its operations, all of which were consolidated in 2005
and 2004. Since the Company does not own the same equity interest in each
Sino-foreign joint venture and in each of the periods presented as disclosed in
Note 2, a comparison of the Company's consolidated results of operations, and
hence the minority interests in them for different periods can be significantly
affected by the performance mix of the individual joint ventures. The decrease
of minority interests in the earnings of the Sino-foreign joint ventures in 2005
as compared to 2004 is primarily due to a decrease in net income from Henglong,
and an increase in net income from Jiulong.
NET INCOME
Net income was $866,183 for the three months ended March 31, 2005, as compared
to a net income of $1,029,698 for the three months ended March 31, 2004, a
decrease of $163,515 or 15.9%, as a result of a decrease in income before
minority interest of $524,273 or 32.2%, and a decrease in minority interest of
$360,758 or 60.2%.
32
FINANCIAL CONDITIONS FROM CONTINUED OPERATIONS-FOR THE THREE MONTHS ENDED MARCH
31,2005 AND 2004
LIQUIDITY AND CAPITAL RESOURCES:
The Company has relied primarily on cash flow from operation, bank loans,
advances and investments from shareholders for its capital requirements.
OPERATIONS
Net cash provided by operating activities was $898,639 for the three months
ended March 31, 2005, as compared to net cash used in operating activities of
$1,275,885 for the three months ended March 31, 2004, an increase of cash inflow
of $2,174,524 primarily as a result of the following:
For the first quarter of 2005, cash flow provided by sales of products was
$2,256,384, as compared to $2,727,879 for the first quarter of 2004, a decrease
of $471,495 as a result of decreased gross profit.
Compared to the same period of 2004, the timing of receipts and/or payments of
various operating assets and liabilities resulted in the increase of cash
inflows of $2,646,019.
As of March 31, 2005, cash and cash equivalents were $12,972,439, and working
capital was $12,905,376. As of December 31, 2004, cash and cash equivalents were
$11,164,639, and working capital were $11,454,115, reflecting a current ratio of
1.23:1 and 1.21:1 at March 31, 2005 and December 31, 2004, respectively.
The Company intends to finance its operating costs and expenses for the
remaining period of 2005 by the following ways.
1. Raise capital from institutional investors. The Company would like to raise
up to $15 million to $30 million in new equity over the balance of the year.
There can be no assurance that the Company will be successful in these efforts.
2. Loans by banks. The Company's Sino-foreign joint-ventures have good credit
records with Chinese banks. In 2005, the Bank of China, China Construction Bank,
and China Industrial & Commercial Bank have approved lines of credit of
$12,048,192 (equivalent of RMB100,000,000), $8,433,735 (equivalent of
RMB70,000,000) and $2,409,639 (equivalent of RMB20,000,000), respectively to the
Company.
3. Reduce capital investment activities to meet working capital requirements.
The Company has invested $25,600,000 from the beginning of 2003 to March 31,2005
to enlarge its production lines. The current production capacity has reached the
objective of annual production of 600,000 sets of automotive steering gears.
During the remaining period of 2005, the Company will reduce its investment
activities appropriately to meet its working capital requirements.
INVESTING. During the three months ended March 31, 2005, the Company expended
$770,761 in investment activities, including an increase in other receivables of
$142,253 and payment of $552,890 to acquire property, plant and equipment and
$75,618 to acquire intangible assets. During the three months ended March 31,
2004, the Company expended $3,025,295 in investment activities, including an
increase in other receivable of $1,004,054, and payments of $1,394,735 to
acquire property, plant and equipment, and an investment of $626,506 in
Jingzhou.
FINANCING. During the three months ended March 31, 2005, cash generated in
activities of $1,679,922 consisted of the proceeds from bank loans of
$2,409,638, advances from shareholders/directors of
33
$57,635, offset by dividend payments to minority shareholders of $787,321.
During the three months ended March 31, 2004, cash generated in financing
activities of $7,623,091, consisted of the proceeds from bank loans of
$3,975,904, advances from shareholders/directors of $2,664,289 and contributions
to capital by minority interest holders of $982,898.
OFF-BALANCE SHEET ARRANGEMENTS
At March 31, 2005 and 2004, the Company did not have any transactions,
obligations or relationships that could be considered off-balance sheet
arrangements.
SUBSEQUENT EVENT
On April 12,2005, one of the subsidiary companies, Great Genesis entered into a
joint-venture agreement with Shanghai Hongxi Investment Inc. ("Hongxi"), Sensor
System Solution Inc. ("Sensor") to establish a joint venture - Universal Sensor
Application Inc. ("USAI") in the Wuhan East Lake development zone. Hubei is
engaged to produce and sell sensor modules. The registered capital of the joint
venture will be US$ 10 million. Great Genesis and Hongxi will invest US$ 6
million and 1 million, respectively, with cash and land and building. They
accounted for 60% and 10% of the total registered capital, respectively. Sensor
will invest US$ 3 million in technology, accounting for 30% of the total
registered capital. The registered capital is required to be paid in three
installments within one year after signing of the joint venture agreement (April
12,2005).
34
COMMITMENTS AND CONTINGENCIES:
The Company has the following material contractual obligations and capital
expenditure commitments:
Date Parties involved Description of Commitments and Contingencies
- ------------------ --------------------------- --------------------------------------------
October 30, 2001 Henglong Ten year license agreement for
& the design of power steering systems.
Bishop Steering Technology
Limited ("Bishop"), an Henglong is obligated to pay Bishop a
Australian company approximately technical assistance fee of
$200,000 per year during the first two
years and $110,000 per year during the
remaining eight years of the agreement.
March 2003 Henglong Purchase and construction agreement to
& design and construct a software research and
Wuhan Huazhong Shuguang development facility.
Software Park Co., Ltd.
Total value $4,820,000.
The Company paid $2,421,300 during 2003.
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. As
of March 31,2005, the Company has paid
$4,128,096 based on the construction
progress, and $691,904 remains
outstanding
July 21, 2003 Henglong Five year license and technical assistance
& agreement. Henglong paid Namyang an initial
Namyang Industrial Co. Ltd. payment of $100,000 and is further obligated
("Namyang"), a Korean to pay a royalty of 3% of the sales price of
manufacturer of steering products sold, which includes the licensed
assemblies for automobiles columns and universal joint technology.
October 2003 Henglong Invest $10,000,000 to develop an
& industrial enterprise to carry out
Wuhu Science and Technology automobile component projects related to
Zone 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 use rights.
The Company advanced approximately
$435,000 during 2003 pursuant to the
agreement under the first phase. The
second phase of investment was delayed
because the local Government did not
complete its water and electricity
supply system on time. This new
35
plant is expected to service a large
vehicle manufacturer in Wuhu at reduced
transportation and storage costs.
October 5, 2003 Henglong Letter of intent for a joint venture to
& develop a sensor production facility.
Advanced Custom Sensors,
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 paid $45,000 on August
31, 2004 based on the development
progress. The Company expects to pay the
remaining $205,000 in 2005.
March to December, Henglong & some Have entered into some equipment
2004 equipment manufacturers contracts with total value approximately
$4,720,000. Henglong has paid $1,740,000
during 2004, and will pay off the
remaining $2,980,000 during 2005. During
the three months ended March 31,2005,
the Company has paid $1,712,317 based on
the construction progress, and
$1,267,683 remains outstanding
March to December Jiulong & some Have entered into some equipment
2004 equipment manufacturers contracts with total value of
approximately $2,750,000. Jiulong has
paid $1,020,000 during 2004, and will
pay off the remaining $1,730,000 during
2005. During the three months ended
March 31,2005, the Company has paid
$98,797 based on the construction
progress, and $1,631,203 remains
outstanding
INFLATION AND CURRENCY MATTERS:
In the most recent decade, the Chinese economy has experienced periods of rapid
economic growth as well as relatively high rates of inflation, which in turn has
resulted in the periodic adoption by the Chinese government of various
corrective measures designed to regulate growth and contain inflation.
Foreign operations are subject to certain risks inherent in conducting business
abroad, including price and currency exchange controls, and fluctuations in the
relative value of currencies. The Company conducts virtually all of its business
in China and, accordingly, the sale of its products is settled primarily in RMB.
As a result, devaluation or currency fluctuation of the RMB against the US$
would adversely affect the Company's financial performance when measured in US$.
Although prior to 1994 the RMB experienced significant devaluation against the
US$, 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.
36
ITEM 3. 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 basis point 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 US dollar 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 US$ would affect the Company's
results of operations, financial position and cash flows, when presented in US$
(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 4. 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.
PART II. OTHER INFORMATION
ITEM 6. 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.
37
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: May 5, 2005 By: /s/ HANLIN CHEN
-----------------------------
Hanlin Chen
President and Chief
Executive Officer
DATE: May 5, 2005 By: /s/ DAMING HU
----------------------------
Daming Hu
Chief Financial Officer
38
INDEX TO EXHIBITS
Exhibit
Number Description of Document
- ------- ---------------------------------
10.1 Joint Venture Agreement, dated April 12, 2005 between [CHINESE
CHARACTER] and Sensor System Solutions, Inc. to set up Universal
Sensor Application, Inc.*
10.2 Constitutions of Universal Sensor Application, Inc., dated April 12,
2005*
10.3 Technology Transfer Contract between [CHINESE CHARACTER], Sensor
System Solutions, Inc. and Hongkong Great Genesis Group Co., LTD*
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*
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 - Hanlin Chen*
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 - Daming Hu*
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* Filed herewith
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