UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 000-32053
INDUSTRIES INTERNATIONAL, INCORPORATED
(Exact name of registrant as specified in its charter)
Nevada 87-0522115
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
4/F Wondial Building, Keji South 6 Road
Shenzhen High-Tech Industrial Park, Shennan Road
Shenzhen, China
(Address of principal executive offices)
(Zip Code)
011-86-755-26520839
(Registrant's telephone number including area code)
N/A
(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 Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ]. No [X]
The Registrant had 61,260,748 shares of common stock, par value $0.01 per share,
issued and outstanding as of May 16, 2003.
INDUSTRIES INTERNATIONAL, INCORPORATED
INDEX
PAGE
PART I NUMBER
Item 1 - Financial Information
Condensed Consolidated Statements of Operations - Three Months Ended
March 31, 2002 and 2003 F-1
Condensed Consolidated Balance Sheets - December 31 2002 and March 31, 2003 F-2
Condensed Consolidated Statements of Cash Flows - Three Months Ended
March 31, 2002 and 2003 F-3
Notes to the Condensed Consolidated Financial Statements F-4
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 1
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 7
Item 4 - Controls and Procedures 7
PART II
Item 1 - Legal Proceedings 7
Item 2 - Changes in Securities and Use of Proceeds 7
Item 3 - Defaults Upon Senior Securities 7
Item 4 - Submission of Matters to a Vote of Security Holders 7
Item 5 - Other Information 7
Item 6 - Exhibits and Reports on Form 8-K 8
Signature Page
INDUSTRIAL INTERNATIONAL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
(amount in thousands, except per share data)
(Unaudited)
FOR THREE MONTHS ENDED MARCH 31,
------------------------------------------------
2002 2003 2003
RMB RMB USD
OPERATING REVENUES
Net sales 60,373 54,913 6,642
Rental income 2,040 240 29
------------- -------------- -------------
Total operating revenues 62,413 55,153 6,671
------------- -------------- -------------
OPERATING EXPENSES
Manufacturing and other costs of sales 45,153 42,402 5,129
Sales and marketing 3,034 2,211 267
General and administrative 3,110 2,429 294
Research and development 1,649 1,677 203
Depreciation and amortization 881 921 111
Other operating costs and expenses 18 780 94
------------- -------------- -------------
Total operating expenses 53,845 50,420 6,098
------------- -------------- -------------
OPERATING INCOME 8,568 4,733 573
Interest expenses (2,916) (1,482) (179)
Other income, net 637 97 12
------------- -------------- -------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 6,289 3,348 406
Provision for income taxes (484) (356) (43)
------------- -------------- -------------
INCOME BEFORE MINORITY INTEREST 5,805 2,992 363
Minority interest in income of consolidated subsidiaries (2,256) (1,479) (179)
------------- -------------- -------------
NET INCOME 3,549 1,513 184
============= ============== =============
Earnings per share:
Basic weighted average number of common stock outstanding 56,264 63,981 63,981
============= ============== =============
Basic net income per common stock 0.063 0.024 0.003
============= ============== =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-1
INDUSTRIAL INTERNATIONAL, INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
--------------------------------------------------------------------------------
(amount in thousands, except per share data)
(Unaudited)
December 31, March 31,
---------------- -----------------------------
2002 2003 2003
Note RMB RMB USD
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 59,619 56,191 6,797
Marketable securities 9 12,603 12,650 1,530
Accounts receivable, net of allowance for uncollectible
of Rmb 4,435 and Rmb 3,827 67,949 64,913 7,852
Due from related parties, director and employees 44,301 43,381 5,248
Inventories 10 19,657 32,486 3,930
Plant and equipment held for sales receivable - 58,850 7,119
Plant and equipment held for sales 64,644 - -
Prepaid expenses and other current assets 18,393 15,078 1,823
---------------- ------------- ------------
Total current assets 287,166 283,549 34,299
Property, plant and equipment, net 11 53,160 50,606 6,121
---------------- ------------- ------------
Total assets 340,326 334,155 40,420
================ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Debts maturing within one year 115,025 114,025 13,792
Accounts payable - trade 21,161 21,387 2,587
Other payable 44,800 44,800 5,419
Tax payable 8,669 2,135 258
Accrued expenses and other accrued liabilities 14,346 12,579 1,521
---------------- ------------- ------------
Total current liabilities 204,001 194,926 23,577
---------------- ------------- ------------
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 62,496 63,976 7,739
---------------- ------------- ------------
STOCKHOLDERS' EQUITY:
Common stock 4 & 7 4,663 5,077 614
Additional paid-in capital 4,437 3,890 471
Dedicated reserves 15,457 15,887 1,923
Retained earnings 49,962 51,045 6,174
Accumulated other comprehensive loss 6 (690) (646) (78)
---------------- ------------- ------------
Total stockholders' equity 73,829 75,253 9,104
---------------- ------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 340,326 334,155 40,420
================ ============= ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-2
INDUSTRIAL INTERNATIONAL, INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
FOR THREE MONTHS ENDED MARCH 31,
---------------------------------------
2002 2003 2003
Note RMB RMB USD
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME 3,549 1,513 184
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,415 2,552 308
Minority interest in income of consolidated subsidiaries 2,256 1,479 179
Changes in assets and liabilities:
Accounts receivable, net (5,685) 3,036 367
Inventories, net 11,466 (12,829) (1,551)
Due from related parties, directors and employees 5,299 920 111
Plant and equipment held for sales receivable - 5,794 701
Prepaid expenses and other current assets (8,477) 3,315 401
Accounts payable (8,280) 226 27
Due to related parties and director (3,621) (1,298) (157)
Tax payable (980) (6,534) (791)
Accrued expenses and other accrued liabilities 387 (602) (73)
----------- ----------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 329 (2,428) (294)
CASH FLOWS USED IN FINANCING ACTIVITIES
Repayments of short-term debts (162) (1,000) (121)
----------- ----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 167 (3,428) (415)
CASH AND CASH EQUIVALENTS, BEGINNING OF FISCAL PERIOD 78,144 59,619 7,212
----------- ----------- ---------
CASH AND CASH EQUIVALENTS, END OF FISCAL PERIOD 78,311 56,191 6,797
=========== =========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the fiscal
period for:
Interest 2,916 1,482 179
=========== =========== =========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Recapitalization 7 - 1,243 150
=========== =========== =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-3
INDUSTRIES INTERNATIONAL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Industries International, Incorporated (the Company), a Nevada
corporation, was incorporated under the laws of the state of Nevada on
January 11, 1991. The Company was organized originally for the purpose
of proposing, planning and developing a golf course in either the
Moapa area or Overton Valley area in Nevada.
As described in Note 4 below, prior to the reorganization with Broad
Faith Limited ("BFL") on February 10, 2003, the Company was a
development stage company, which, other than a proposed golf course
project in Nevada, had no operations. In the first quarter of the 2003
fiscal year, after capitalization, the Company, which is now based
in Shenzhen, China, is engaged in the development, production and
distribution throughout China of communications terminal products,
mainly corded and cordless telephones which are sold under the
trademark, Wondial (TM). As a result, the Company exited the
development stage in the quarter ended March 31, 2003.
In this report, the Company and its subsidiaries are referred as
"Group".
2. PREPARATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
as of March 31, 2003 and for the three-month periods ended March 31,
2002 and 2003, have been prepared based upon Securities and Exchange
Commission ("SEC") rules that permit reduced disclosure for interim
periods and include, in the opinion of management, all adjustments
(consisting of normal recurring adjustments and reclassifications)
necessary to present fairly the financial position, results of
operations and cash flows as of March 31, 2003 and for all periods
presented.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America ("USA") have been
condensed or omitted. These condensed consolidated financial statements
should be read in conjunction with the audited financial statements and
notes thereto incorporated by reference in the Company's Form 10-KSB
for the year ended December 31, 2002 and the Form 8-K/A for the
information of BFL filed on April 14, 2003 and April 22, 2003
respectively. The Company's historical financial information is no
longer relevant. The results of operations for the three-month periods
ended March 31, 2002 and 2003 are not necessarily indicative of the
operating results to be expected for the full year. Certain amounts in
prior periods' financial statements and related notes have been
reclassified to conform to the 2003 presentation.
The condensed consolidated financial statements and accompanying notes
are presented in Renminbi and prepared in conformity with accounting
principles generally accepted in the USA ("USGAAP") which requires
management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
For the convenience of the readers of these consolidated financial
statements, translation of amounts from Renminbi (Rmb) into United
F-4
INDUSTRIES INTERNATIONAL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
States dollars (USD) has been made at the exchange rate of Rmb 1.00 =
USD0.12096. No representation is made that the Renminbi amounts could
have been or could be converted into the United States dollars at the
rates or at any other rates on March 31, 2003.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, the Group adopted Statement of Financial
Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting
and reporting for costs associated with exit or disposal activities.
SFAS No. 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred.
The adoption of SFAS 146 did not have a material impact on the Group's
operating results or financial position.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN No. 46"). FIN No.
46 applies to variable interest entities created after January 31, 2003
and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds an interest that it acquired
before February 1, 2003. The Group currently has no interests in
variable interest entities, and therefore does not expect adoption of
FIN No. 46 to have an impact on its consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". The SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. Subject to certain exception, this statement is
effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003 and all
provisions of this Statement should be applied prospectively. The Group
had no derivative instruments outstanding and the adoption of SFAS No.
149 has no impact on the Group's consolidated financial statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". The SFAS No.150 improves the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
equity and requires that those instruments be classified as liabilities
in statements of financial position. In addition to its requirements
for the classification and measurement of financial instruments in its
scope, SFAS No. 150 also requires disclosures about alternative ways of
settling the instruments and the capital structure of entities, all of
whose shares are mandatorily redeemable. Most of the guidance in SFAS
No. 150 is effective for all 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.
The Group had no financial instruments outstanding and the adoption of
SFAS No. 150 has no impact on the Group's consolidated financial
statement.
F-5
INDUSTRIES INTERNATIONAL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
4. REORGANIZATION
On February 10, 2003, the Company entered into an Amended and Restated
Agreement and Plan of Share Exchange. For accounting purposes, the
transaction has been treated as a recapitalization of BFL with the
Company being the legal survivor and BFL being the accounting survivor
and the operating entity. The SEC staff's Training Manual (Division of
Corporate Finance - Accounting Disclosure Rules and Practices)
indicates that these transactions are considered as capital
transactions in substance rather than business combinations. That is,
the historical financial statements prior to February 10, 2003 are
those of BFL, even though they were labeled as those of the Company.
Retained earnings of the accounting survivor, BFL, is carried forward
after the recapitalization. Operations prior to the recapitalization
are those of the accounting survivor, BFL. Earnings per share for
periods prior to the recapitalization are restated to reflect the
equivalent number of shares. Upon completion of the transaction, the
financial statements become those of the operating company, with
adjustments to reflect the changes in equity structure and receipt of
the assets/liabilities of the public shell, the Company. Following the
recapitalization, the Company held 100% of the issued and outstanding
shares of BFL and BFL became a wholly-owned subsidiary of the Company.
The recapitalization transaction was effected by an exchange of stock
under which the sole stockholder of BFL, Mr. Tsui Kit, had
exchanged all of the outstanding shares (2 shares) of BFL for
56,263,888 new shares of the Company. As a result of the transaction,
BFL became a wholly owned subsidiary of the Company, and Mr. Tsui Kit
(and/or his designees) became the principal stockholder of the Company
owning approximately 92% of the outstanding stock in INDI.
On February 10, 2003, Mr. Tusi Kit was issued an aggregate of
15,003,140 shares of common stock of the Company, which shares
represented approximately 75% of the total then issued and outstanding
shares of the Company. The Company would also increase the number of
authorized shares from 20,000,000 to at least 100,000,000 and would
issue an additional 41,260,748 shares to Mr. Tsui Kit (and/or his
designees) to complete the merger.
As described in Note 16 below, in May 2003, the number of authorized
shares was increased to 500,000,000 and additional 41,260,748 shares
were issued to Mr. Tsui Kit (and/or his designees) whose percentage
ownership in the Company was then increased from 75% to approximately
92%.
F-6
INDUSTRIES INTERNATIONAL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
5. EARNINGS PER SHARE
Basic earnings per common share is based on the weighted-average number
of common shares outstanding during each period as restated as a result
of the recapitalization, as described in Notes 4 and 7.
The Company had no common equivalent shares with a dilutive effect for
any period presented, therefore basic and diluted loss per share are
the same. The 56,263,888 shares , in connection with the
recapitalization, as described in Notes 4 and 7, were included in the
computation of earnings per share as if outstanding at the beginning of
each period presented. As described in Notes 4 and 7, in accordance
with the SEC staff's Training Manual (Division of Corporate Finance -
Accounting Disclosure Rules and Practices), 4,996,860 shares, being the
outstanding stock of the Company as of February 10, 2003, were treated
as issued on February 10, 2003 for the historical net monetary
liability of the Company before recapitalization.
6. COMPREHENSIVE INCOME
Total comprehensive income and its components are as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------------------
2002 2003 2003
RMB RMB USD
Net income 3,549 1,513 184
Other comprehensive (loss) income:
Net unrealizable (loss) income on marketable securities (303) 44 5
----------- ---------- ----------
Total comprehensive income 3,246 1,557 189
=========== ========== ==========
As of December 31, 2002 and March 31, 2003, the component of
accumulated other comprehensive income is accumulated net unrealizable
loss on marketable securities.
7. STOCKHOLDERS' EQUITY
As of December 31, 2002 and March 31, 2003, the authorized capital of
the Company is USD200 divided into 20,000,000 shares of common stock,
par value US dollar 0.01 par value, with one vote for each share.
As described in Note 4 above, for a recapitalization, the transaction
is considered as equivalent to the issuance of stock by the operating
company for the net monetary liabilities of the Company, accompanied by
a recapitalization of the operating company.
The historical stockholders' equity of the accounting acquirer, BFL,
prior to the merger should be retroactively restated for the equivalent
number of shares received in the merger, i.e., 28,131,944 shares of its
common stock, par value United States dollar 0.01 per share, in
exchange for each share of Broad Faith's common stock, par value United
States dollar 1.00 per share, issued and outstanding on the date of the
consummation of the exchange. Any difference in par value of the
issuer's stock, the Company shares, US dollar 0.01 a share and
acquirer's stock, BFL shares, US one dollar a share offset to
additional paid-in capital.
F-7
INDUSTRIES INTERNATIONAL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
7. STOCKHOLDERS' EQUITY (CONTINUED)
Further, 4,996,860 shares, represented by the outstanding shares of the
Company before recapitalization, were issued and offset against the
additional paid-in capital, for the historical book value of net
monetary liability of the Company before recapitalization, USD 16, in
the first quarter of fiscal year 2003.
As a result of the recapitalization, the total issued and outstanding
common stocks of the Company used in these consolidated financial
statements are 56,263,888 and 61,260,748 as of December 31, 2002 and
March 31, 2003 respectively.
There was no dividend declared during the first quarter of fiscal year
2003.
8. PENDING BUSINESS COMBINATION
On March 10, 2003, the Company entered into an agreement to purchase
all issued and outstanding shares of Li Sun Power International Limited
("LSP") from Mr. Tsui Kit, who is the majority stockholder of the
Company as well as the Chief Executive Officer and a director of the
Company. By acquiring the capital stock of LSP, the Company will become
the beneficial owner of LSP's approximately 72.83% interest in Wuhan
Lixing Power Sources Company Limited ("WLPS"), a leading lithium and
lithium-ion battery manufacturer in China.
The acquisition is expected to close in May 2003. The consideration for
the acquisition will be six times LSP's audited net profit after tax
for the year ended December 31, 2002. It is expected that the
consideration will be approximately USD 15-20 million. The Company will
pay Mr. Tsui Kit 50% of the consideration in cash or, if enough cash is
not available, in restricted common stock of the Company, and the
remaining 50% in restricted common stock of the Company.
9. MARKETABLE SECURITIES
The aggregate cost, gross unrealized gain and losses and fair value
pertaining to available-for-sales securities are as follows:
December 31, March 31,
-------------- ------------------------
2002 2003 2003
RMB RMB USD
Cost 12,971 12,971 1,569
Gross unrealized gain - 47 6
Gross unrealized losses (368) (368) (45)
-------------- ---------- ----------
Fair value 12,603 12,650 1,530
============== ========== ==========
F-8
INDUSTRIES INTERNATIONAL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
10. INVENTORIES
Inventories comprise the follows:
December 31, March 31,
---------------- ----------------------
2002 2003 2003
RMB RMB USD
Raw materials 15,796 21,130 2,556
Work-in-progress 1,131 3,755 454
Finished goods 2,730 7,601 920
---------------- -------- -----------
19,657 32,486 3,930
================ =========== ==========
11. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment is summarized as follows:
Estimated useful life December 31, March 31,
(in years)
---------------- -------------------------
2002 2003 2003
RMB RMB USD
Buildings 35 28,324 31,166 3,769
Moulds 3 - 5 18,913 18,913 2,288
Plant and machinery 5 - 10 21,707 21,707 2,625
Electronic equipment 5 11,219 11,219 1,357
Motor vehicles 5 - 8 5,023 5,023 608
---------------- ----------- ----------
85,186 88,028 10,647
Accumulated depreciation (32,026) (37,422) (4,526)
---------------- ----------- ----------
53,160 50,606 6,121
================ =========== ==========
12. BANKING FACILITIES
As of December 31, 2002 and March 31, 2003, the Group is still in
negotiations with a banker to further extend its outstanding bank
borrowings of Rmb 46,000 which have been already been falling due since
last fiscal year 2002. The Group does not anticipate that future
borrowings will be limited. There are no significant commitment fess or
requirements for compensating balances associated with any lines of
credit. The Group has paid bank interests on schedule and believes that
the outstanding bank borrowings will be extended in the near future.
F-9
INDUSTRIES INTERNATIONAL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
13. TAXATION
The Company and its subsidiaries are subject to income taxes on an
entity basis on income arising in or derived from the tax jurisdictions
in which each entity is domiciled
As of December 31, 2002, the Company had a net operating loss
carryforward for income tax reporting purposes of approximately USD 475
that might be offset against future taxable income. Current tax laws
limit the amount of loss available to be offset against future taxable
income when a substantial change in ownership occurs. Therefore,
following the recapitalization as mentioned before, the amount
available to offset future taxable income might be limited. No tax
benefit has been reported in the financial statements, because the
Company believes there is more likely than not the carry-forwards will
be limited. Accordingly, the potential tax benefits of the loss
carry-forwards are offset by a valuation allowance of the same amount.
No provision for withholding or United States federal or state income
taxes or tax benefits on the undistributed earnings and/or losses of
the Company's subsidiaries has been provided as the earnings of these
subsidiaries, in the opinion of the management, will be reinvested
indefinitely. Determination of the amount of unrecognized deferred
taxes on these earnings is not practical, however, unrecognized foreign
tax credits would be available to reduce a portion of the tax
liability.
Among the Company's subsidiaries, BFL, is not liable for income taxes.
The China subsidiaries comprise a 95% held sino-foreign equity joint
venture and 68.7288% incorporated limited company. The major operating
subsidiary is subject to income taxes at a rate of 15% and is entitled
to be exempted from income tax for two years starting from the year
profits are first made, followed by a 50% exemption for the next eight
years. During the first quarter of fiscal year 2003, the tax holiday in
respect of the exemption of value added tax for any products produced
and sold within the Shenzhen Special Economic Zone of China has been
abolished.
F-10
INDUSTRIES INTERNATIONAL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(amount in thousands)
(Unaudited)
14. EQUITY INCENTIVE PLAN
The Company has an Equity Incentive Plan (the "Plan") which was
approved by the Company's board of directors and stockholders on
February 28, 2003 and April 7, 2003 respectively. The Plan is intended
to provide incentives to attract, retain and motivate both eligible
employees and directors of the Company, as well as consultants,
advisors and independent contractors who provide valuable services to
the Company (any such person hereinafter called a "Participant").
The Plan will be administered by the board or by a committee of the
board. Within certain limits, the administrator of the Plan, whether
the board or a committee thereof, will be authorized to select eligible
Participants to receive awards under the Plan, determine the number of
shares included in such awards, determine the form, term, vesting,
exercisability, and required payment, if any, of such awards, and to
make any other determinations necessary or useful for the
administration of the Plan. The administrator of the Plan may issue
options with an exercise price equal to or above 85% of the market
price of our common stock at the date of issuance, except that (i)
Incentive Stock Options must have an exercise price equal to or above
the market price as of the date of issuance, and (ii) options issued to
Participants who beneficially own at least 10% of the Company's issued
and outstanding common stock must have an exercise price equal to or
above 110% of the market price on the date of issuance. The
administrator of the Plan may set any period of time, up to ten years,
for the expiration of options, except that options issued to
Participants who beneficially own at least 10% of our issued and
outstanding common stock must expire within five years from the date of
issuance. Options granted under the Plan can only be exercised by
delivery to the administrator of an exercise agreement in a form
approved by the administrator.
Initially, 15,000,000 shares of the Company's common stock are reserved
for issuance under the Plan. Under the Plan, awards may consist of
grants of options to purchase our common stock (either Incentive Stock
Options (for eligible persons) or Non-Qualified Stock Options, as each
is defined in the Internal Revenue Code), grants of restricted common
stock, or grants of common stock.
As of May 16, 2003, there were no grants of incentive stock options to,
or exercises of incentive stock options by, any executive officer under
the Plan.
15. COMMITMENTS
There was neither new operating lease agreement signed nor material
outstanding capital commitments since last fiscal year 2002.
16. SUBSEQUENT EVENT
On April 10, 2003, the Company amended and restated its Articles of
Incorporation to authorize 500,000,000 shares of common stock and
10,000,000 shares of preferred stock. In May 2003, additional
41,260,748 shares are issued to Mr. Tsui Kit to complete the merger.
On May 12, 2003, the board of directors of the Company approved and
declared a one-for-four reverse split of the Company's common stock,
par value $0.01 per share. The reverse stock split shall become
effective on June 2, 2003.
F-11
PART 1 - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is qualified by, and should be
read in conjunction with, our unaudited interim condensed consolidated financial
statements and the notes thereto included in Item 1 of this Quarterly Report on
Form 10-Q.
When the words "we", "our" or "the Company" are used in this Quarterly
Report on Form 10-Q, they refer to Industries International, Incorporated and
its subsidiary, Shenzhen Kexuntong Industrial Co., Ltd., a joint venture company
incorporated in China, which is owned 95% by Industries International,
Incorporated, and which, in turn, owns 68.73% of Shenzhen Wonderland
Communication Science and Technology Co., Ltd. ("Wonderland"), a company
incorporated in China.
In addition to historical information, this Quarterly Report contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and is thus
prospective. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited
to, competitive pressures, changing economic conditions in China which would
negatively impact the availability of money for discretionary spending, the loss
of the services of Dr. Kit Tsui, our Chief Executive Officer, those factors
discussed below and other factors, some of which will be outside the control of
the Company. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should refer to and carefully review the information in
future documents the Company files with the Securities and Exchange Commission.
Prior to the reorganization with Broad Faith Limited ("Broad Faith")
described below, we had no operations and no revenues for the fiscal year ended
December 31, 2002.
Pursuant to an Amended and Restated Agreement and Plan of Share
Exchange dated as of February 10, 2003 (the "Exchange Agreement") by and among
us, certain of our stockholders who held a majority of our issued and
outstanding common stock, Broad Faith and Dr. Kit Tsui, an individual who was
the sole stockholder of Broad Faith, we agreed to issue to Dr. Tsui 28,131,944
shares of our common stock, par value $0.01 per share, in exchange for each
share of Broad Faith's common stock, par value $1.00 per share, issued and
outstanding on the date of the consummation of the exchange. At the closing, we
acquired all of the issued and outstanding shares of Broad Faith common stock
and Broad Faith became our wholly-owned subsidiary.
As part of our obligations under the Exchange Agreement, we were
required to increase our authorized capital stock to at least 100,000,000 shares
and to issue to Dr. Tsui (and/or to his designees) an additional 41,260,748
shares. Pursuant to the Exchange Agreement, on the closing date a change of
control occurred. Our three officers resigned and our directors appointed Dr.
Tsui as the Chairman of our Board and Chief Executive Officer and Mr. Weijiang
Yu as our President. On the closing dated our directors resigned and, in
conjunction with their resignations and pursuant to the Exchange Agreement,
appointed Dr. Tsui, Mr. Yu and Mr. Zhiyong Xu as our new Board of Directors. On
February 14, 2003, the Board of Directors appointed Mr. Xu as our Secretary and
Ms. Guoqiong Yu as our Chief Financial Officer and Treasurer. On April 10, 2003
we amended and restated our Articles of Incorporation to authorize 500,000,000
shares of common stock and 10,000,000 shares of preferred stock. As of May 16,
2003, an additional 41,260,748 shares were issued to Dr. Tsui.
As reorganized, we are based in Shenzhen, China and we are engaged in
the development, production and distribution throughout China of communications
terminal products, mainly corded and cordless telephones which are sold under
the trademark Wondial(TM).
RESULTS OF OPERATIONS
Under accounting principles generally accepted in the United States,
the transaction made pursuant to the Exchange Agreement has been treated as a
recapitalization of Broad Faith Limited with Industries International,
Incorporated being the legal survivor and Broad Faith Limited being the
accounting survivor and the operating entity. For reporting purposes, the
historical financial statements prior to February 10, 2003, the transaction
date, are those of Broad Faith Limited, even though they were labeled as those
of Industries International, Incorporated. Therefore, retained earnings of Broad
Faith Limited is carried forward after the transaction. Operations prior to the
exchange are those of Broad Faith Limited. Earnings per share for the period
prior to the exchange are restated to reflect the equivalent number of shares.
Upon completion of the exchange, the financial statements became those of the
operating company, Broad Faith Limited, with adjustments to reflect the changes
in equity structure and receipt of the assets and liabilities of Industries
International, Incorporated.
The results of operations for the three months ended March 31, 2002 and
2003 are as follows.
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------- -----------------
2002 2003 % OF CHANGE
USD'000 USD'000
OPERATING REVENUE
Net Sales 7,303 6,642 (9.05%)
Manufacturing and other costs of sales (5,462) (5,129) (6.10%)
---------------- -----------------
Gross Profit 1,841 1,513 (17.82%)
Rental income 247 29 (88.26%)
--
---------------- -----------------
2,088 1,542 (26.14%)
OPERATING EXPENSES
Sales and marketing 367 267 (27.25%)
General and administrative 376 294 (21.81%)
Research and development 199 203 2.01%
Depreciation and amortization 107 111 3.74%
Other operating costs and expenses 2 94 4600%
---------------- -----------------
OPERATING INCOME 1,037 573 (44.74%)
Interest expenses (353) (179) (49.29%)
Other income, net 77 12 (84.42%)
---------------- -----------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 761 406 (46.65%)
Provision for income taxes (59) (43) (27.12%)
---------------- -----------------
INCOME BEFORE MINORITY INTEREST 702 363 (48.29%)
Minority interest of income of combined affiliates (273) (179) (34.43%)
---------------- -----------------
NET INCOME 429 184 (57.11%)
================ ================= -----------------
Revenues
2
We recorded approximately $6,671,000 in operating revenues during the
quarter ended March 31, 2003. Our revenues were derived principally from sales
of our products, although we also recorded $29,000 of rental income from
equipment leases we entered into with certain of our OEM partners. Our gross
profit for the quarter ended March 31, 2003 was approximately $1,513,000. Our
net income for the quarter ended March 31, 2003 was approximately $184,000.
Our net income was adversely affected during the quarter ended March
31, 2003 by the decision of the government of Shenzhen to suspend a preferential
tax policy that resulted in our payment of approximately $160,000 in Value Added
Tax.
Operating Expenses
Total operating expenses for the period ended March 31, 2003 were
approximately $6,098,000. Manufacturing and other costs of sales accounted for
approximately $5,129,000 or approximately 84.11% of our total operating
expenses. Our general and administrative expenses totaled approximately $294,000
for the quarter ended March 31, 2003 and consisted of salaries, employee
benefits, travel expenses and office expenses. During the quarter ended March
31, 2003 we spent approximately $203,000 for research and development costs
related to the development of our 2.4 GHz cordless telephone and our 900 MHz
telephone as well as for technical upgrades for our original products.
In 2003, the Company decreased advertisement expenses by $45,000. In
the same year, the Company reinforced product quality control which attributed
to repair expense by $28,600.
We also spent approximately $150,000 in fees and expenses, including
legal and accounting fees, relating to the share exchange transaction that we
entered into on February 10, 2003.
Interest Expense and Other Income, Net
Interest expense and other income, net totaled approximately $179,000
and $12,000, respectively, for the quarter ended March 31, 2003. Interest
expenses related to interest paid on our bank loans. Other income, net was
comprised of interest on our bank deposits.
The Company paid down a loan in the second half of 2002, therefore
interest expense in the first quarter of 2003 decreased by $174,000 compared
with the first quarter of 2002.
Minority Interest
We recorded $179,000 of income attributable to our minority
interests in Shenzhen Kexuntong Industrial Co., Ltd. and in Shenzhen Wonderland
Communication Science and Technology Co., Ltd. We own 95% and 68.73%,
respectively, of these two entities.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have financed our operations with cash from our operating
3
activities and bank loans totaling approximately $13.8 million. Our bank line of
credit, totaling approximately $5,560,000, was due to be paid on December 31,
2002. We are currently in negotiations with the bank to extend our line of
credit. During these negotiations, we have continued to make the monthly
payments required pursuant to our agreement with the bank. The bank has not made
a demand that the line of credit be repaid. We expect to successfully
renegotiate the terms of our line of credit.
Other than negotiations relating to the extension of our line of
credit, we know of no demands, commitments, events or uncertainties that will
result in or that are reasonably likely to result in our liquidity increasing or
decreasing in any material way.
Cash and cash equivalents for the quarter ended March 31, 2003 totaled
approximately $6,797,000 and were used to fund operations.
We have invested in marketable securities. During the quarter ended
March 31, 2003, the value of our marketable securities increased by $6,000, from
$1,524,000 on December 31, 2002 to $1,530,000. Our marketable securities
represent approximately 4.46% of our current assets.
As of March 31, 2003, the Company had a current ratio of 1.45, net
working capital of $10.7 million and net equity of $9.1 million.
The Company has not made any material commitments for capital
expenditures since the end of its last fiscal year, December 31, 2002.
During the quarter ended March 31, 2003, our net cash and cash
equivalents decreased by approximately $415,000, from approximately $7,212,000
at the beginning of the quarter to $6,797,000 at the end of the quarter, a
decrease of approximately 5.75%. This change was mainly attributable to an
increase in cash of approximately $1,000,000 received as a partial payment from
our sale of certain equipment and a decrease in cash of approximately $1,400,000
for the purchase of inventory to allow us to meet our production schedule after
the long Chinese New Year holiday.
Net cash used in operating activities during the quarter ended March
31, 2003 totaled approximately $294,000. Our primary use of cash was for the
purchase of inventory and for the payment of the Value Added Tax that was
imposed as a result of the decision of the government of Shenzhen to suspend a
preferential tax policy.
Cash used in financing activities for the quarter ended March 31, 2003
totaled approximately $121,000, representing repayment of short-term debt.
We used cash to pay interest of approximately $179,000 during the
quarter ended March 31, 2003.
FINANCIAL CONDITION
Other than as described above under the section titled "Liquidity and
Capital Resources", on a recapitalization basis, there were no material changes
in financial condition from the end of the preceding fiscal year to March 31,
2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
4
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, expenses, and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
The following discussion addresses our critical accounting policies,
which are those that require management's most difficult and subjective
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
Revenue Recognition
Net sales represent the invoiced value of goods, net of value-added tax
("VAT"), returns and sales incentives. The Company, through its major
subsidiary, makes sales to distributors in first-tier distribution channels.
These distributors then arrange to sell products to second-tier distribution
channels or directly to consumers. The Company generally recognizes product
revenue when persuasive evidence of an arrangement exists, delivery has
occurred, fee is fixed or determinable, and collectibility is probable. The
Company's policy is to include handling costs incurred for finished goods, which
are not significant, in the sales and marketing expenses. The Company does not
accrue for warranty costs, sales returns and other allowances based on its
experience.
Income Taxes
Provision for income and other related taxes has been provided in
accordance with the tax rates and laws in effect in the People's Republic of
China.
The Company did not carry on any business and does not maintain any
branch office in the United States of America. No provision for withholding or
U.S. federal income taxes or tax benefits on the undistributed earnings and/or
losses of its subsidiaries has been provided as the earnings of the Company, in
the opinion of the management, will be reinvested indefinitely.
Income tax expense is computed based on pre-tax income included in the
combined statement of operations. Income taxes have been provided, using the
liability method, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and tax bases assets and liabilities and their
reported amounts. The tax consequences of those differences are classified as
current or non-current based upon the classification of the related assets or
liabilities in the combined financial statements.
Marketable Equity Securities
Equity securities designated as available-for-sale, whose fair values
are readily determinable, are carried at fair value with unrealized gains or
losses included are a component of accumulated other comprehensive income.
Equity securities classified as trading securities as carried at fair value with
unrealized gains or losses included in income. Realized gains and losses are
determined on the average cost method and reflected in income.
Property, Plant and Equipment
Property, plant and equipment is stated at original cost less
accumulated depreciation and amortization.
5
The cost of an asset comprises its purchase price and any directly
attributable costs of bringing the asset to its present working condition and
location for its intended use. Expenditures incurred after the assets have been
put into operation, such as repairs and maintenance, overhaul and minor renewals
and betterments, are normally charged to operating expenses in the period in
which they are incurred. In situations where it can be clearly demonstrated that
the expenditure has resulted in an increase in the future economic benefits
expected to be obtained from the use of the assets, the expenditure is
capitalized.
When assets are sold or retired, their costs and accumulated
depreciation are eliminated from the combined financial statements and any gain
or loss resulting from their disposal is recognized in the year of disposition
as an element of other income, net.
Depreciation is provided to write off the cost of property, plant and
equipment using straight-line method at rates based on their estimated useful
lives of assets from the date on which they become fully operational and after
taking into account their estimated residual values.
Accounting for the Impairment of Long-lived Assets
The long-lived assets held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. It is reasonably possible that
these assets could become impaired as a result of technology or other industry
changes. Determination of recoverability of assets to be held and used is by
comparing the carrying amount of an asset to future net undiscounted cash flows
to be generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
Foreign Currency Translation
The Company considers Renminbi as its functional currency as a
substantial portion of the Company's business activities are based in Renminbi.
Transactions in currencies other than functional currency during the
year are translated into the functional currency at the applicable rates of
exchange prevailing at the time of the transactions. Monetary assets and
liabilities denominated in currencies other than functional currency are
translated into functional currency at the applicable rates of exchange in
effect at the balance sheet date. Exchange gains and losses are dealt with in
the combined statement of operation.
For the convenience of the readers of these combined financial
statements, translation of amounts from Renminbi (Rmb) into United States
dollars (USD) has been made at the exchange rate of Rmb 1.00 = USD0.12096. No
representation is made that the Renminbi amounts could have been or could be
converted into the United States dollars at the rates or at any other rates on
March 31, 2003.
Comprehensive Income
The Company has reported all changes in equity during a period reported
in the combined financial statements for the period in which they are
recognized. Comprehensive income consists of net incomes, the net unrealized
gains or losses on available-for-sale marketable securities, foreign currency
translation adjustments, minimum pension liability adjustments and unrealized
gains and losses on financial instruments qualifying for hedge accounting and is
presented in the Combined Statement of Stockholders' Equity and Comprehensive
Income. For the Company, such items consist primarily of unrealized gains and
losses on marketable equity investments. The Company has disclosed comprehensive
income, which encompasses net income in the changes in stockholders' equity.
6
PART 1 - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Our operations are located in China and most of our sales revenues are
earned in China, therefore we are not exposed to risks relating to fluctuating
currencies or exchange rates. As of March 31, 2003, our bank debt earned
interest at a fixed rate.
PART 1 - ITEM 4 CONTROLS AND PROCEDURES
Within 90 days of the date of this report an evaluation was performed
under the supervision and with the participation of our management, including
the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, our management, including the Chief
Executive Officer and the Chief Financial Officer, concluded that our disclosure
controls and procedures were effective as of that date. There have been no
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to that date.
PART II - ITEM 1 LEGAL PROCEEDINGS
Not Applicable
PART II - ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
As of May 16, 2003, we issued 56,263,888 shares pursuant to the terms
of an Amended and Restated Agreement and Plan of Share Exchange described in
Form 8-K filed on February 10, 2003. The shares were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
PART II - ITEM 3 DEFAULTS UPON SENIOR SECURITIES
Not Applicable
PART II - ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Not applicable
PART II - ITEM 5 OTHER INFORMATION
Not Applicable
7
PART II - ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
2. Amended and Restated Agreement and Plan of Share Exchange by and among
Broad Faith Limited, a British Virgin Islands Corporation, and the Sole
Stockholder of Broad Faith Limited on the one hand, and Industries
International, Inc., a Nevada corporation and Certain Stockholders of
Industries International, Inc., on the other hand dated February 10,
2003.(1)
3.1 Articles of Incorporation(2)
3.2 By-laws, as amended(2)
99 Certification pursuant to 18 U.S.C. .Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002(3)
---------------------
(1) Incorporated by reference from the Company's Current Report on Form 8-K, as
filed on February 12, 2003.
(2) Incorporated by reference from the Company's Annual Report on Form 10-KSB
for the year ended December 31, 2002, as filed on April 14, 2003.
(3) Filed herewith.
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated May 19, 2003
INDUSTRIES INTERNATIONAL, INCORPORATED
By: /s/ Dr. Kit Tsui
-------------------------------------
Dr. Kit Tsui, Chief Executive Officer
INDUSTRIES INTERNATIONAL, INCORPORATED
By: /s/ Guoqiong Yu
-------------------------------------
Guoqiong Yu, Chief Financial Officer
9
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
I, Dr. Kit Tsui,, certify that::
1. I have reviewed this quarterly report on Form 10-Q of Industries
International, Incorporated;
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 officers 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 officers 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; and
6. The Registrant's other certifying officers 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 our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: May 19, 2003
/s/ Dr. Kit Tsui
--------------------
Dr. Kit Tsui
10
CERTIFICATION BY CHIEF FINANCIAL OFFICER
I, Guoqiong Yu, certify that::
1. I have reviewed this quarterly report on Form 10-Q of Industries
International, Incorporated;
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 officers 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:
d) 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;
e) 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
f) 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 officers 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; and
6. The Registrant's other certifying officers 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 our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 19, 2003
/s/ Guoqiong Yu
-----------------
Guoqiong Yu
11