UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the quarterly period ended March 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the transition period from ________ to _________
Commission file number: 000-33123
China Automotive Systems, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 33-0885775
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
No. 1, Henglong Road, Yu Qiao Development Zone
Shashi District, Jingzhou City, Hubei Province
People's Republic of China
-----------------------------------------------
(Address of principal executive offices)
Issuer's telephone number: 0716-8324631
Visions-in-Glass, Inc.
9521 21st Street SE
Calgary, Alberta, Canada T2C 4B1
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(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of March 31, 2003, the Company had 22,015,000 shares of common stock
issued and outstanding.
Documents incorporated by reference: None.
1
CHINA AUTOMOTIVE SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2003 (Unaudited) and
December 31, 2002
Condensed Consolidated Statements of Operations (Unaudited) - Three
Months Ended March 31, 2003 and 2002
Condensed Consolidated Statements of Cash Flows (Unaudited) - Three
Months Ended March 31, 2003 and 2002
Notes to Condensed Consolidated Financial Statements (Unaudited) -
Three Months Ended March 31, 2003 and 2002
Item 2. Management's Discussion and Analysis or Plan of Operation
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATION
2
CHINA AUTOMOTIVE SYSTEMS, INC.
Consolidated Balance Sheets
March 31, 2003 (Unaudited) and December 31, 2002
(Expressed in Thousands of US Dollars)
March 31, December 31,
2003 2002
$ $
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents 9,638 --
Accounts receivable 23,345 --
Deposits, prepayments and other receivables 15,012 --
Inventories 10,256 --
Amounts due from shareholders/directors 3,197 --
-------------- --------------
61,448 --
EQUITY INVESTMENTS IN JOINT VENTURES
-- 20,329
PROPERTY, PLANT AND EQUIPMENT, NET 14,833 --
INTANGIBLE ASSETS 774 --
OTHER FINANCIAL ASSETS 1,725 --
-------------- --------------
78,780 20,329
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
3
CHINA AUTOMOTIVE SYSTEMS, INC.
Consolidated Balance Sheets
March 31, 2003 (Unaudited) and December 31, 2002
(Expressed in Thousands of US Dollars)
March 31, December 31,
2003 2002
$ $
(Unaudited)
LIABILITIES
CURRENT LIABILITIES
Short-term borrowings 4,832 --
Accounts payable and accrued expenses 21,267 --
Other payables 5,650 --
Taxation payable 5,367 --
Amounts due to shareholders/directors -- 14,826
------------ ------------
37,116 14,826
LONG-TERM BORROWINGS 199 --
------------ ------------
37,315 14,826
------------ ------------
MINORITY INTEREST 16,286 --
------------ ------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK - Authorized, issued and fully paid 1 1
ADDITIONAL PAID-IN CAPITAL 19,716 194
ACCUMULATED OTHER COMPREHENSIVE LOSS (3) --
RETAINED EARNINGS (DEFICIT) - appropriated 6,942 5,308
- unappropriated (1,477) --
------------ ------------
5,465 5,308
------------ ------------
25,179 5,503
------------ ------------
78,780 20,329
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
4
CHINA AUTOMOTIVE SYSTEMS, INC.
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended March 31, 2003 and 2002
(Expressed in Thousands of US Dollars)
2003 2002
$ $
NET SALES 11,131 --
Cost of sales 6,150 --
----------- -----------
GROSS PROFIT 4,981 --
EXPENSES
Administrative, selling and general expenses 1,649 --
Stock compensation 1,300 --
----------- -----------
2,949 --
PROFIT FROM OPERATIONS 2,032 --
OTHER INCOME
Equity income of joint ventures -- 478
Other non-operating income 125 --
Financial expenses (59) --
----------- -----------
66 478
----------- -----------
PROFIT BEFORE INCOME TAX 2,098 478
INCOME TAXES 447 --
----------- -----------
PROFIT BEFORE MINORITY INTEREST 1,651 478
MINORITY INTEREST 1,459 --
----------- -----------
NET PROFIT 192 478
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC (in exact number) 21,244,475 20,914,250
=========== ===========
BASIC EARNINGS PER SHARE (in exact number) 0.009 0.023
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING,
DILUTED (in exact number) 21,616,350 20,914,250
=========== ===========
DILUTED EARNINGS PER SHARE (in exact number) 0.009 0.023
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
CHINA AUTOMOTIVE SYSTEMS, INC.
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2003 and 2002
(Expressed in Thousands of US Dollars)
2003 2002
$ $
OPERATING ACTIVITIES
Net profit 192 478
Equity income of joint ventures -- (478)
Minority shareholders' interests 1,459 --
Issuance of warrants to consultants 1,300 --
Depreciation of fixed assets 297 --
Amortization of intangible assets 22 --
Gain on disposal of fixed assets, intangible
assets and other long-term assets (11) --
Increase in inventories (908) --
Decrease (Increase) in operating receivables (166) 216
Increase in operating payables and accrued
expenses 1,621 --
---------- ----------
Net cash provided by operating activities 3,806 216
---------- ----------
INVESTING ACTIVITIES
Net cash received from disposal of fixed assets,
intangible assets and other long-term assets 26 --
Cash paid to acquire fixed assets, intangible assets
and other long term assets (663) --
Cash paid for investment -- (2,470)
---------- ----------
Net cash used in investing activities (637) (2,470)
---------- ----------
FINANCING ACTIVITIES
Proceeds from borrowings 1,200 --
Cash payments for interest and dividends (366) --
Increase in due from directors/shareholders -- 2,254
---------- ----------
Net cash provided by financing activities 834 2,254
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,003 --
Cash and cash equivalents at the beginning of period,
as a result of change from equity accounting to
consolidation accounting as at January 1, 2003 5,635 --
---------- ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD 9,638 --
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
6
China Automotive Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended March 31, 2003 and 2002
1. Organization and Basis of Presentation
Organization - Effective March 5, 2003, Visions-In-Glass, Inc., a United States
public company incorporated in the State of Delaware ("Visions"), entered into a
Share Exchange Agreement to acquire 100% of the shareholder interest in Great
Genesis Holding Limited, a company incorporated on January 3, 2003 under The
Companies Ordinance in Hong Kong as a limited liability company ("Great
Genesis"), as a result of which Great Genesis became a wholly-owned subsidiary
of Visions. At the closing, the old directors and officers of Visions resigned,
and new directors and officers were appointed. Visions subsequently changed its
name to China Automotive Systems, Inc.
China Automotive Systems, Inc., including, when the context so requires, its
subsidiaries and the subsidiaries' interests in the sino-foreign joint ventures
described below, is referred to herein as the "Company".
Ji Long Enterprise Investment Limited was incorporated on October 8, 1992 under
the Companies Ordinance in Hong Kong as a limited liability company ("Ji Long").
Ji Long is an investment holding company. Effective March 4, 2003, all of the
shareholders of Ji Long exchanged their 100% shareholder interest for a 100%
shareholder interest in Great Genesis, as a result of which Ji Long became a
wholly-owned subsidiary of Great Genesis.
In exchange for the acquisition of 100% of the shareholder interest in Great
Genesis, the shareholders of Great Genesis were issued 20,914,250 shares of
common stock of Visions. In addition, the shareholders of Great Genesis paid
$250,000 to the former officer, director and controlling shareholder of Visions
for the cancellation of 17,424,750 shares of common stock (see Note 5), and have
agreed to pay an additional $70,000, subject to certain conditions.
The acquisition of Great Genesis by the Company was accounted for as a
recapitalization of Great Genesis, pursuant to which the accounting basis of
Great Genesis continued unchanged subsequent to the transaction date.
Accordingly, the pre-transaction financial statements of Great Genesis are the
historical financial statements of the Company.
Jilong owns the following aggregate net interests in four sino-foreign joint
ventures organized in the People's Republic of China as of and for the three
months ended March 31, 2003:
Percentage
Name of Entity Interest
-------------- --------
Jingzhou Henglong Automotive Parts
Co. Limited ("Henglong") 42.0%
Shashi Jiulong Power Steering Co.
Limited ("Jiulong") 81.0%
Shenyang Jinbei Henglong Automotive
Steering System Co. Limited ("Shenyang") 37.6%
Zhejiang Henglong & Vie Pump-Manu Co.
Limited ("Zhejiang") 51.0%
7
At December 31, 2002, the investors in Shenyang were Jilong, Henglong, Shengyang
Automotor Industry Investment Corporation and Shenyang Jinbei Automotor Industry
Co., Ltd. On December 12, 2002, according to a decision made at the meeting of
the board of directors, 30% of the stock rights in Shenyang held by Henglong
were to be transferred to Jilong, and 17% of the stock rights in Shenyang held
by Shenyang Automotor Industry Investment Corporation were to be transferred to
Shenyang Jinbei Automotor Industry Co., Ltd. On January 8, 2003, Jilong and
Henglong signed an agreement for the transfer of stock rights, which the Company
expects will be completed within approximately six months, pending approval by
the applicable authorities in the People's Republic of China. The Company
currently owns 25% of Shenyang directly and 12.6% of Shenyang indirectly through
its ownership in Henglong, for a combined ownership of 37.6%. Upon approval of
the above transaction by the applicable authorities in the People's Republic of
China, the Company will own 55.0% of Shenyang directly. The Company will account
for this increase in ownership in Shenyang from the date of approval by the
applicable authorities in the People's Republic of China.
Basis of Presentation - For the three months ended March 31, 2003, 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, 2002, the accompanying condensed financial
statements include the accounts of the Company, with the Company's investments
in sino-foreign joint ventures recorded under the equity method of accounting.
All significant intercompany 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.
During the three months ended March 31, 2003, the Company and all other joint
venturers in the four sino-foreign joint ventures agreed to change the joint
venture agreements, resulting in the Company having voting control in the four
sino-foreign joint ventures. Consequently, effective January 1, 2003, the
Company changed from equity accounting to consolidation accounting for its
investments in sino-foreign joint ventures for the three months ended March 31,
2003. Prior to January 1, 2003, the Company used the equity method pursuant to
Emerging Issues Task Force Issue No. 96-16, which states that if a minority
joint venture partner has the right to participate in management, the majority
joint venture partner is required to account for its interest in the joint
venture under the equity method of accounting.
The Company effected a 3.5 to 1 forward split of its outstanding shares of
common stock during March 2003, prior to the transaction with Great Genesis
described above. Unless otherwise indicated, all share and per share amounts
presented herein have been adjusted to reflect the forward stock split.
Foreign Currencies - The Company maintains its books and records in Hong Kong
Dollars ("HK Dollars"), its functional currency, and the joint ventures maintain
their books and records in Renminbi ("RMB"), the currency of the People's
Republic of China. Translation of amounts in United States dollars ("US$") has
been made at the single fixed rate of exchange of US$1.00 to 7.8 HK Dollars and
the translation of amounts in HK Dollars has been made at an approximate rate of
1 HK Dollar to 1.06 RMB.
Foreign currency transactions, in HK Dollars and RMB, are reflected using the
temporal method. Under this method, all monetary items are translated into the
functional currency at the rate of exchange prevailing at the balance sheet
date. Non-monetary items are translated at historical rates. Income and expenses
are translated at the rate in effect on the transaction dates. Transaction gains
and losses, if any, are included in the determination of net income (loss) for
the period.
8
In translating the financial statements of the Company from its functional
currency into its reporting currency in United States dollars, balance sheet
accounts are translated using the closing exchange rate in effect at the balance
sheet date and income and expense accounts are translated using an average
exchange rate prevailing during the reporting period. Adjustments resulting from
the translation, if any, are included in cumulative other comprehensive income
in stockholders' equity.
The RMB is not readily convertible into United States dollars or other foreign
currencies. The foreign exchange rate between the United States dollar and the
RMB is approximately 1 RMB to US$0.1205, since inception through March 31, 2003.
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 at March 31, 2003, the results of operations for
the three months ended March 31, 2003 and 2002, and cash flows for the three
months ended March 31, 2003 and 2002. The consolidated balance sheet as of
December 31, 2002 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 Current Report on Form 8-K/A dated May
19, 2003, 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, 2003 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2003.
Business - The Company, through its four sino-foreign joint ventures,
manufactures power steering systems and/or related products for different
segments of the automobile industry in China.
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 stock options and warrants. The
Company had potentially dilutive securities consisting of warrants to purchase
550,375 shares of common stock outstanding at March 31, 2003.
Comprehensive Income (Loss) - Since the Company had no items of comprehensive
income (loss) during the three months ended March 31, 2003 and 2002, a statement
of comprehensive income (loss) is not presented.
Stock-Based Compensation - The Company accounts for stock options and warrants
issued to consultants using the fair value method in accordance with Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Under the fair value method, compensation cost
is measured based on the value of the award and is recognized over the service
period. The Company continues to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", in accounting for stock options
9
and warrants issued to employees and non-employee directors. Pro forma
disclosures of the effect on net income (loss) and net income (loss) per common
share, as if the Company had accounted for stock options and warrants issued to
employees and non-employee directors under the fair value method prescribed by
SFAS No. 123, are estimated on the grant date using the Black-Scholes option
pricing model. The Company had not issued any stock options or warrants to
employees or non-employee directors during the three months ended March 31, 2003
or 2002.
2. Certain Significant Risks and Uncertainties
The Company is subject to the consideration and risks of operating in the
People's Republic of China (the "PRC"). These include risks associated with the
political and economic environment, foreign currency exchange and the legal
system in the PRC.
The economy of PRC differs significantly from the economies of the "western"
industrialized nations in such respects as structure, level of development,
gross national product, growth rate, capital reinvestment, resource allocation,
self-sufficiency, rate of inflation and balance of payments position, among
others. Only recently has the PRC government encouraged substantial private
economic activities. The Chinese economy has experienced significant growth in
the past several years, but such growth has been uneven among various sectors of
the economy and geographic regions. Actions by the PRC government to control
inflation have significantly restrained economic expansion in the recent past.
Similar actions by the PRC government in the future could have a significant
adverse effect on economic conditions in PRC.
Many laws and regulations dealing with economic matters in general and foreign
investment in particular have been enacted in the PRC. However, the PRC still
does not have a comprehensive system of laws, and enforcement of existing laws
may be uncertain and sporadic.
Any devaluation of the Renminbi (RMB) against the United States dollar would
consequently have adverse effects on the Company's financial performance and
asset values when measured in terms of the United States dollar. Should the RMB
significantly devalue against the United States dollar, such devaluation could
have a material adverse effect on the Company's earnings and the foreign
currency equivalent of such earnings. The Company does not hedge its RMB -
United States dollar exchange rate exposure.
On January 1, 1994, the PRC government introduced a single rate of exchange as
quoted daily by the People's Bank of China (the "Unified Exchange Rate"). No
representation is made that the RMB amounts have been, or could be, converted
into US$ at that rate. This quotation of exchange rates does not imply free
convertibility of RMB to other foreign currencies. All foreign exchange
transactions continue to take place either through the Bank of China or other
banks authorized to buy and sell foreign currencies at the exchange rate quoted
by the People's Bank of China. Approval of foreign currency payments by the
People's Bank of China or other institutions requires submitting a payment
application form together with suppliers' invoices, shipping documents and
signed contracts.
10
3. Inventories
Inventories at March 31, 2003 (unaudited) consisted of the following:
Raw materials $ 1,726,000
Work-in-process 1,138,000
Finished goods 7,392,000
-----------
$10,256,000
===========
4. Amounts Due to Shareholders/Directors
During the three months ended March 31, 2003, amounts due to
shareholders/directors aggregating approximately $17,167,000 including dividends
declared during such period of $2,481,000 were cancelled. This transaction was
accounted for as a contribution to capital.
5. Stockholders' Equity
During March 2003, prior to 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 17,242,750 shares were then returned
to the Company and cancelled.
During March 2003, in conjunction with the transaction with Great Genesis
described at Note 1, the Company issued common stock purchase warrants to three
consultants to acquire an aggregate of 550,375 shares of common stock,
exercisable for a period of one year at $1.20 per share. The aggregate fair
value of these warrants, calculated pursuant to the Black-Scholes option pricing
model, was estimated to be $1,300,000 which was charged to operations at March
31, 2003.
6. Income Taxes
The Company's sino-foreign joint ventures are subject to income taxes based on
income arising in or derived from the People's Republic of China, generally at
an effective tax rate of 15%.
7. Recently Issued Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 addresses the diverse accounting practices for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company adopted SFAS No. 143 effective
January 1, 2003. The adoption of SFAS No. 143 did not have a significant effect
on the Company's financial statement presentation or disclosures.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. Such costs covered by
SFAS No. 146 include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. SFAS No. 146 replaces the previous
11
accounting guidance provided by the EITF No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. The Company does not anticipate that the adoption of SFAS No. 146 will
have a significant impact on the Company's financial statement presentation or
disclosures.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Acquisitions of Financial Institutions, Except Transactions Between or
More Mutual Enterprises". The Company does not expect that SFAS No. 147 will
have any effect on its financial statement presentation or disclosures.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years beginning after December 15,
2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. The Company does not anticipate that the adoption of SFAS No. 148 will
have a significant impact on the Company's financial statement presentation or
disclosures.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 clarifies disclosures
that are required to be made for certain guarantees and establishes a
requirement to record a liability at fair value for certain guarantees at the
time of the guarantee's issuance. The disclosure requirements of FIN No. 45 have
been applied in the Company's financial statements at December 31, 2002. The
requirement to record a liability applies to guarantees issued or modified after
December 31, 2002. The Company adopted the measurement and recording provisions
of FIN No. 45 prospectively beginning January 1, 2003.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB 51". FIN No. 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 No. 46 are required to be implemented for any variable
interest entity created on or after January 31, 2003. In addition, FIN No. 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. FIN No. 46 is effective for
the Company on January 31, 2003, and is not expected to have a significant
impact on the Company's financial statement presentation or disclosures.
12
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-QSB for the quarterly period ended March 31,
2003 contains "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, including statements that include the
words "believes", "expects", "anticipates", or similar expressions. These
forward-looking statements include, but are not limited to, statements
concerning the Company's expectations regarding its working capital
requirements, financing requirements, business prospects, and other statements
of expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical
facts. The forward-looking statements in this Quarterly Report on Form 10-QSB
for the quarterly period ended March 31, 2003 involve known and unknown risks,
uncertainties and other factors that could cause the actual results, performance
or achievements of the Company to differ materially from those expressed in or
implied by the forward-looking statements contained herein.
General Overview:
Effective March 5, 2003, Visions-In-Glass, Inc., a United States public company
incorporated in the State of Delaware ("Visions"), entered into a Share Exchange
Agreement to acquire 100% of the shareholder interest in Great Genesis Holding
Limited, a company incorporated on January 3, 2003 under The Companies Ordinance
in Hong Kong as a limited liability company ("Great Genesis"), as a result of
which Great Genesis became a wholly-owned subsidiary of Visions. At the closing,
the old directors and officers of Visions resigned, and new directors and
officers were appointed. Visions subsequently changed its name to China
Automotive Systems, Inc.
China Automotive Systems, Inc., including, when the context so requires, its
subsidiaries and the subsidiaries' interests in the sino-foreign joint ventures
described below, is referred to herein as the "Company".
Ji Long Enterprise Investment Limited was incorporated on October 8, 1992 under
the Companies Ordinance in Hong Kong as a limited liability company ("Ji Long").
Ji Long is an investment holding company. Effective March 4, 2003, all of the
shareholders of Ji Long exchanged their 100% shareholder interest for a 100%
shareholder interest in Great Genesis, as a result of which Ji Long became a
wholly-owned subsidiary of Great Genesis.
In exchange for the acquisition of 100% of the shareholder interest in Great
Genesis, the shareholders of Great Genesis were issued 20,914,250 shares of
common stock of Visions. In addition, the shareholders of Great Genesis paid
$250,000 to the former officer, director and controlling shareholder of Visions
for the cancellation of 17,424,750 shares of common stock, and have agreed to
pay an additional $70,000, subject to certain conditions.
The acquisition of Great Genesis by the Company was accounted for as a
recapitalization of Great Genesis, pursuant to which the accounting basis of
Great Genesis continued unchanged subsequent to the transaction date.
Accordingly, the pre-transaction financial statements of Great Genesis are the
historical financial statements of the Company.
Jilong owns the following aggregate net interests in four sino-foreign joint
ventures organized in the People's Republic of China as of and for the three
months ended March 31, 2003:
13
Percentage
Name of Entity Interest
-------------- --------
Jingzhou Henglong Automotive Parts
Co. Limited ("Henglong") 42.0%
Shashi Jiulong Power Steering Co.
Limited ("Jiulong") 81.0%
Shenyang Jinbei Henglong Automotive
Steering System Co. Limited ("Shenyang") 37.6%
Zhejiang Henglong & Vie Pump-Manu Co.
Limited ("Zhejiang") 51.0%
At December 31, 2002, the investors in Shenyang were Jilong, Henglong, Shengyang
Automotor Industry Investment Corporation and Shenyang Jinbei Automotor Industry
Co., Ltd. On December 12, 2002, according to a decision made at the meeting of
the board of directors, 30% of the stock rights in Shenyang held by Henglong
were to be transferred to Jilong, and 17% of the stock rights in Shenyang held
by Shenyang Automotor Industry Investment Corporation were to be transferred to
Shenyang Jinbei Automotor Industry Co., Ltd. On January 8, 2003, Jilong and
Henglong signed an agreement for the transfer of stock rights, which the Company
expects will be completed within approximately six months, pending approval by
the applicable authorities in the People's Republic of China. The Company
currently owns 25% of Shenyang directly and 12.6% of Shenyang indirectly through
its ownership in Henglong, for a combined ownership of 37.6%. Upon approval of
the above transaction by the applicable authorities in the People's Republic of
China, the Company will own 55.0% of Shenyang directly. The Company will account
for this increase in ownership in Shenyang from the date of approval by the
applicable authorities in the People's Republic of China.
For the three months ended March 31, 2003, the 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, 2002, the condensed financial statements include the accounts of the
Company, with the Company's investments in joint ventures recorded under the
equity method of accounting. All significant intercompany 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.
During the three months ended March 31, 2003, the Company and all other joint
venturers in the four sino-foreign joint ventures agreed to change the joint
venture agreements, resulting in the Company having voting control in the four
sino-foreign joint ventures. Consequently, effective January 1, 2003, the
Company changed from equity accounting to consolidation accounting for its
investments in sino-foreign joint ventures for the three months ended March 31,
2003. Prior to January 1, 2003, the Company used the equity method pursuant to
Emerging Issues Task Force Issue No. 96-16, which states that if a minority
joint venture partner has the right to participate in management, the majority
joint venture partner is required to account for its interest in the joint
venture under the equity method of accounting.
Critical Accounting Policies:
The Company prepared its condensed consolidated financial statements in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the use of estimates and
14
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.
Results of Operations:
The Company's sino-foreign joint ventures are presented on a consolidated basis
for the three months ended March 31, 2003, as compared to the equity method of
accounting for the three months ended March 31, 2002. Accordingly, the results
of operations for the three months ended March 31, 2003 are not comparable to
the three months ended March 31, 2002.
Three Months Ended March 31, 2003 and 2002:
Net Sales. Net sales for the three months ended March 31, 2002 were $11,131,000.
Gross Profit. Gross profit for the three months ended March 31, 2003 was
$4,981,000 or 44.7% of net sales.
Administrative, Selling and General Expenses. Administrative, selling and
general expenses were $1,649,000 for the three months ended March 31, 2003.
Stock Compensation. During March 2003, in conjunction with the transaction with
Great Genesis described above, the Company issued common stock purchase warrants
to three consultants to acquire an aggregate of 550,375 shares of common stock,
exercisable for a period of one year at $1.20 per share. The aggregate fair
value of these warrants, calculated pursuant to the Black-Scholes option pricing
model, was estimated to be $1,300,000, which was charged to operations at March
31, 2003.
Profit From Operations. Profit from operations was $2,032,000 for the three
months ended March 31, 2003. Excluding the non-cash charge of $1,300,000 related
to the issuance of warrants in March 2003, profit from operations would have
been $3,332,000 for the three months ended March 31, 2003.
Equity in Income of Joint Ventures. The Company recorded equity in income of
joint ventures aggregating $478,000 for the three months ended March 31, 2002,
reflecting the Company's proportionate share of each sino-foreign joint
venture's earnings.
Other Non-Operating Income. Other non-operating income was $125,000 for the
three months ended March 31, 2003.
Financial Expenses. Financial expenses were $59,000 for the three months ended
March 31, 2002.
Profit Before Income Taxes. Profit before income taxes was $2,098,000 for the
three months ended March 31, 2003, as compared to $478,000 for the three months
ended March 31, 2002.
Income Taxes. Income taxes were $447,000 for the three months ended March 31,
2003.
Profit Before Minority Interest. Profit before Minority Interest was $1,651,000
for the three months ended March 31, 2003, as compared to $478,000 for the three
months ended March, 31, 2002. Excluding the non-cash charge of $1,300,000
relating to the issuance of warrants in March 2003, profit before minority
interest would have been $2,951,000 for the three months ended March 31, 2003.
15
Minority Interest. The Company recorded the minority interest's share in each
sino-foreign joint venture's earnings aggregating $1,459,000 for the three
months ended March 31, 2003.
Net Profit. Net profit was $192,000 for the three months ended March 31, 2003,
as compared to $478,000 for the three months ended March 31, 2002.
Financial Condition - March 31, 2003:
Liquidity and Capital Resources:
Operating. The Company's operations provided cash of $3,806,000 for the three
months ended March 31, 2003. At March 31, 2003, cash and cash equivalents were
$9,638,000. Working capital was $24,332,000 at March 31, 2003, reflecting a
current ratio of 1.66:1.
During the three months ended March 31, 2003, amounts due to
shareholders/directors aggregating approximately $17,167,000, including
dividends declared during such period of $2,481,000 were cancelled. This
transaction was accounted for as a contribution to capital.
The Company anticipates that its working capital resources are adequate to fund
anticipated costs and expenses through the remainder of the year ending December
31, 2003.
Investing. During the three months ended March 31, 2003, the Company used
$637,000 in investing activities, primarily to acquire fixed, intangible and
other long-term assets. During the three months ended March 31, 2002, the
Company $2,470,000 to fund investments in sino-foreign joint ventures.
Financing. During the three months ended March 31, 2003, the Company generated
$834,000 from financing activities, as compared to $2,254,000 for the three
months ended March 31, 2002. During the three months ended March 31, 2003, the
Company borrowed $1,200,000, and utilized $366,000 for the payment of interest
and dividends. During the three months ended March 31, 2002, the
directors/shareholders advanced $2,254,000 to fund the operations of the
Company.
16
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in the reports filed or submitted under the Exchange
Act of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the reports filed under the Exchange Act of 1934 is accumulated and
communicated to the Company's management, including its principal executive and
financial officers, as appropriate, to allow timely decisions regarding required
disclosure.
Within the 90 days prior to the filing of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including its principal executive and financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based upon and as of the date of that evaluation, the Company's
principal executive and financial officer 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 as and when
required.
(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.
17
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURIITES AND USE OF PROCEEDS
(c) Effective March 5, 2003, the Company issued an aggregate of 20,914,250
shares of common stock to the shareholders of Great Genesis as described in
Part I, Item 2. The Company also issued warrants to purchase an aggregate
of 550,375 shares of common stock exercisable for a period of one year at
$1.20 per share to three consultants in conjunction with the transaction
with Great Genesis. All securities were issued under an exemption from the
registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
A list of exhibits required to be filed as part of this report is set forth
in the Index to Exhibits, which immediately precedes such exhibits, and is
incorporated herein by reference.
(b) Reports on Form 8-K
Three Months Ended March 31, 2003:
The Company filed Current Reports on Form 8-K and Form 8-K/A on March 20,
2003 and March 21, 2003, respectively, to report the acquisition of Great
Genesis Holding Limited and the appointment of new directors and officers.
The Company filed a Current Report on Form 8-K on May 8, 2003 to report a
change in independent accountants.
The Company filed a Current Report on Form 8-K/A on May 19, 2003 to provide
the audited financial statements of Great Genesis Holding Limited.
18
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 21, 2003 By: /s/ Hanlin Chen
-----------------------
Hanlin Chen
Chief Executive Officer
and President
DATE: May 21, 2003 By: /s/ Daming Hu
-----------------------
Daming Hu
Chief Financial Officer
19
CERTIFICATION
I, Hanlin Chen, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of China Automotive
Systems, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of my most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 21, 2003 By: /s/ HANLIN CHEN
-----------------------
Hanlin Chen
Chief Executive Officer
and President
20
CERTIFICATION
I, Daming Hu, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of China Automotive
Systems, Inc.
2 Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of my most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 21, 2003 By: /s/ DAMING HU
-----------------------
Daming Hu
Chief Financial Officer
21
INDEX TO EXHIBITS
Exhibit
Number Description of Document
------ -----------------------
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
22