UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1 to
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 2007
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to ____________
Commission File Number: 001-33648
WONDER AUTO TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Nevada | 88-0495105 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
No. 16 Yulu Street
Taihe District, Jinzhou City, Liaoning Province
People’s Republic of China, 121013
(Address of principal executive office and zip code)
(86) 416-2661186
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, Par Value $0.0001 | NASDAQ Global Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of June 30, 2007, there were 23,959,994 shares of the Registrant’s common stock outstanding and the aggregate market value of such shares held by non-affiliates of the Registrant’s common stock (based upon the average bid and asked price of such shares as reported on the Over-the-Counter Bulletin Board) was approximately $46 million. Shares of the Registrant’s common stock held by each executive officer and director have been excluded in that such persons may be deemed to be affiliates of the Registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
EXPLANATORY NOTE
This Amendment No. 1 to the Annual Report on Form 10-K for the year ended December 31, 2007 of Wonder Auto Technology, Inc. (the “Company”) is being filed in response to comments by the Staff of the Securities and Exchange Commission (the “SEC”) in connection with its review of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the SEC on February 20, 2008 (the “Original Filing”).
The Original Filing is being amended to: (1) record a compensation charge relating to the performance of obligations of two shareholders of the Company under the make good escrow agreement with certain investors that was entered into in connection with the Company’s private placement transaction occurred in June 2006; (2) re-classify restricted cash which was used as collateral support for the Company’s bills payable as cash flows from financing activities instead of cash flows from investing activities (see below for more details); (3) revise Item 7 “Managements Discussion and Analysis of Financial Condition and Results of Operations” to reflect the changes above; (4) use the scaled disclosure rules applicable to a smaller reporting company, such as revisions to Item 6, Item 7A and Item 11 because the Company was a smaller reporting company as defined by Item 10 of Regulations S-K for the fiscal year ended December 31, 2007; and (5) expand disclosures under “Summary of significant accounting policies – Government Grant” of Note 4 to the Company’s audited consolidated financial statements for the years ended December 31, 2007 and 2006 to clarify that certain government grant received by the Company was unconditional, non-refundable and without any restrictions on usage at the time of grant to and receipt by the Company.
On March 20, 2009, the Company’s management and audit committee concluded that its consolidated financial statements as of and for the year ended December 31, 2007 could no longer be relied upon due to the reasons discussed herein.
Compensation Charge
In connection with the Company’s private placement which closed in June 2006, two of the Company’s shareholders Choice Inspire Limited (“CIL”) and Empower Century Limited (“ECL”) pledged and deposited into escrow 3,300,000 shares of the Company’s common stock pursuant to a “make good” escrow agreement with the private placement investors. Under the “make good” escrow agreement, the pledged shares were deliverable to the investors, on a pro rata basis, if the Company did not meet certain minimum net income thresholds during the fiscal years 2006 and 2007, but would be released back to CIL and ECL if the net income thresholds were achieved. The Company achieved its net income thresholds for both 2006 and 2007.
On February 8, 2007 and February 2, 2008, stockholders of CIL and ECL transferred their right to receive the 3,300,000 shares in escrow for no consideration to Xiangdong Gao who ultimately received the escrowed shares. Upon consideration of the SEC’s comments, after consultation with its independent auditor, the Company’s management and audit committee have determined to recognize a non-cash compensation expense for the shares released from the escrow in 2006 and 2007. Accordingly, the aggregate fair value of the shares at the respective date when performance goal was met, $7,507,500 and $18,265,500, has been accounted for as stock-based compensation in 2006 and 2007, respectively.
Re-classification of Restricted Cash
The Company originally accounted for restricted cash, which was used as collateral support for the Company’s bills payable undertaken by banks, as cash flows from investing activities. In response to the SEC’s comments, the Company has restated its consolidated financial statements for the years ended December 31, 2006 and 2007 to re-classify such increases and decreases in restricted cash as cash flows from financing activities in its financial statements.
For purposes of this Form 10-K/A, and in accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, each item of the Original Filing that was affected by the restatement has been amended and restated in its entirety. Unless otherwise indicated, this report speaks only as of the date of the Original Filing. No attempt has been made in this Form 10-K/A to update other disclosures presented in the Original Filing. This Form 10-K/A does not reflect events occurring after the date of the Original Filing or modify or update those disclosures, including the exhibits to Original Filing affected by subsequent events; however, this Form 10-K/A includes as exhibits 31.1, 31.2, 32.1 and 32.2 new certifications by the Company’s Chief Executive Officer and Chief Financial Officer.
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WONDER AUTO TECHNOLOGY, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2007
TABLE OF CONTENTS
Number | Page | |
PART I | ||
Item 1. | Business | 1 |
Item 1A. | Risk Factors | 16 |
Item 2. | Properties | 38 |
Item 3. | Legal Proceedings | 39 |
Item 4. | Submission of Matters to a Vote of Security Holders | 39 |
PART II | ||
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 40 |
Item 6. | Selected Financial Data | 41 |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 41 |
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | 56 |
Item 8. | Financial Statements and Supplementary Data | 56 |
Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 57 |
Item 9A | Controls and procedures | 57 |
Item 9B | Other Information | 58 |
PART III | ||
Item 10. | Directors and Executive Officers of the Registrant | 59 |
Item 11. | Executive Compensation | 63 |
Item 12. | Security Ownership of Certain Beneficial Owners and Management | 66 |
Item 13. | Certain Relationships and Related Transactions | 67 |
Item 14. | Principal Accountant Fees and Services | 67 |
PART IV | ||
Item 15. | Exhibits and Financial Statement Schedules | 69 |
Use of Term
Except as otherwise indicated by the context, references in this report to “Company,” “WATG,” “we,” “us” and “our” are references to the combined business of Wonder Auto Technology, Inc. and its consolidated subsidiaries. References to “Wonder Auto” are references to Wonder Auto Limited and its subsidiaries. References to “Halla” are references to Jinzhou Halla Electrical Equipment Co., Ltd. References to “Hanhua” are references to “Jinzhou Hanhua Electrical System Co., Ltd.” References to “China” and “PRC” are references to “People’s Republic of China.” References to “BVI” are references to “British Virgin Islands.” References to “RMB” are to Renminbi, the legal currency of China, and all references to “$” are to the legal currency of the United States.
Forward-Looking Statements
Certain statements contained in this report under “Item 1—Business,” “Item 3—Legal Proceedings,” “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Item 10—Directors, Executive Officers and Corporate Governance” and “Item 11—Executive Compensation” including, without limitation, those concerning our liquidity and capital resources, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning our operations; economic performance; financial condition; management forecasts; efficiencies, cost savings and opportunities to increase productivity and profitability; income and margins; liquidity; anticipated growth; economies of scale; the economy; future economic performance; our ability to maintain profitability during adverse economic cycles and unfavorable external events; future acquisitions and dispositions; litigation; potential and contingent liabilities; management’s plans; taxes; and refinancing of existing debt. Because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. These statements may be preceded by, followed by or include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions.
Forward-looking statements are not guarantees of performance and by their nature are subject to inherent risks and uncertainties. We caution you therefore that you should not rely on these forward-looking statements. You should understand the risks and uncertainties discussed in “Item 1A—Risk Factors” and elsewhere in this report, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements.
Any forward-looking information contained in this report speaks only as of the date of the report. Factors or events may emerge from time to time and it is not possible for us to predict all of them. We undertake no obligation to update or revise any forward-looking statements to reflect new information, changed circumstances or unanticipated events.
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PART I
ITEM 1. | BUSINESS. |
Overview
We are a leading manufacturer of automotive electrical parts in China, specifically, alternators and starters. We have been producing alternators and starters in China since 1997. In 2006, we ranked second in sales revenue in the PRC market for automobile alternators and starters according to a report issued by the Automotive Electrical Component Commission of the China Automotive Society.
We design, develop, manufacture and market our products for use in a variety of automobiles. We offer over 150 different models of alternators and over 70 different models of starters. Most of our products are used in domestic original equipment manufacturing, or OEM, market. In addition, we have begun to manufacture and sell rectifier and regulator products for use in alternators as well as various rods and shafts for use in shock absorbers, alternators and starters.
We sell our products to automakers, engine manufacturers and, increasingly, auto parts suppliers. Our customers are based primarily in China and include Beijing Daimler Chrysler, Beijing Hyundai Motor Company, Chery Automobile Co., Ltd., Dongfeng Yueda Kia Motors Co., Ltd., Zhejiang Geely Automobile Parts Purchasing Co., Ltd., Harbin Dongan Automotive Engine Manufacturing Co., Ltd., Shenyang Aerospace Mitsubishi Motors Engine Manufacturing Co., Ltd. and Tianjin FAW Xiali Automobile Co., Ltd. We are increasing exports of our products to the international market, which we believe will further enhance our brand and reputation as a provider of high quality automotive electrical parts. Our manufacturing facilities are located in Jinzhou, China.
Until our acquisition of Wonder Auto in June 2006, our operations were limited and our business strategy and ownership changed several times as a result of several acquisitions of our stock that are discussed in the section below entitled “Our Corporate History.”
The following chart reflects our organizational structure as of the date of this Annual Report.
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(1) Holding company with no active business operations.
(2) We acquired a 50.0% ownership interest in Jinzhou Dongwoo in August 2006, which until November 17, 2006 was accounted for under the equity method. On November 18, 2006, we acquired control of Jinzhou Dongwoo’s board of directors and it has been our consolidated subsidiary since that date.
(3) In connection with its organization in September 2006, we held a 20.4% ownership interest in Jinzhou Wanyou, which until April 2007 was accounted for under the equity method. Jinzhou Wanyou became our wholly-owned subsidiary after we acquired, through our intermediate holding companies, the remaining 79.6% of Jinzhou Wanyou from its other two shareholders under two separate agreements in April 2007.
Our Corporate History
We were incorporated on June 8, 2000 in the State of Nevada as MGCC Investment Strategies Inc. On August 25, 2006, we amended our Articles of Incorporation and changed our name into Wonder Auto Technology, Inc. From inception until March 16, 2004, WATG’s primary business strategy was to provide corporate finance consulting and management advisory services to emerging companies. During this period, WATG had no sustained business operations.
On March 16, 2004, MyTop purchased 1,025,000 shares of the common stock of WATG existing shareholders thereby becoming the owner of approximately 96% of the issued and outstanding capital stock of WATG. After the stock acquisition, MyTop intended for WATG to engage in business of developing hi-tech product manufacturing and services including, digital precision machinery product, telecommunication products, and other hi-tech products and services through the acquisition of interests in one or more entities currently operating in these fields. MyTop entered into informal discussions with potential acquisition targets in China, but no agreements were reached.
On August 1, 2005, MyTop changed its name to Hisonic International, Inc. and continued to own approximately 96% of the issued and outstanding capital stock of WATG.
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On December 19, 2005, Hisonic, as the principal stockholder of WATG, entered into a stock purchase agreement with HFI, pursuant to which Hisonic sold 1,000,000 shares of the common stock of WATG to HFI for $300,000. As a result, HFI became the owner of approximately 86.4% of the issued and outstanding common stock of WATG.
In connection with the sale of common stock to HFI, Timothy P. Halter was elected as WATG’s Chairman of the Board, President, Chief Financial Officer and Secretary and WATG affected a 20-for-1 reverse stock split in February 2006.
From the date of HFI’s stock acquisition until the reverse acquisition of Wonder Auto on June 22, 2006, discussed in the next section, WATG engaged in no active operations.
Background and History of Wonder Auto and its Operating Subsidiaries
Wonder Auto was incorporated in British Virgin Islands in March 2004. Its wholly owned subsidiary Man Do Auto Technology Co. Ltd. was incorporated under the law of British Virgin Islands in 2003. Neither Wonder Auto nor Man Do Auto Technology Co. Ltd. has any active business operations other than their ownership of Halla, which is the primary company that manufactures our products. Halla was incorporated in March 1996 with a registered capital of $12 million. Over the years, Halla went through several ownership changes and is now 61% owned by Wonder Auto and 39% owned by Man Do Auto Technology Co. Ltd.
Acquisition of Wonder Auto and Related Financing
On June 22, 2006, Wonder Auto completed a private placement pursuant to which Wonder Auto issued to certain accredited investors 45.277236 shares of its common stock for $12,000,000, such shares were subsequently exchanged for 3,899,996 shares of the common stock of WATG in connection with the reverse acquisition transaction as discussed below.
In connection with the private placement, Wonder Auto’s two stockholders, Choice Inspire Limited and Empower Century Limited, entered into an escrow agreement with the private placement investors. Pursuant to the escrow agreement, such stockholders agreed to certain “make good” provisions. In the escrow agreement, Wonder Auto Limited established minimum net income thresholds of $8,140,000 for the fiscal year ending December 31, 2006 and $12,713,760 for the fiscal year ending December 31, 2007. Choice Inspire Limited and Empower Century Limited deposited a total of 3,300,000 shares, to be equitably adjusted for stock splits, stock dividends and similar adjustments, of the common stock of WATG into escrow with Securities Transfer Corporation under the escrow agreement. If the 2006 net income threshold is not achieved, then the escrow agent must deliver 1,650,000 of such shares to the investors on a pro rata basis (based upon the total number of shares purchased by the investors in connection with the private placement transaction) and if the 2007 net income threshold is not achieved, the escrow agent must deliver the second 1,650,000 shares to the investors on a pro rata basis. However, only those private placement investors who remain our stockholders at the time the escrow shares become deliverable are entitled to their pro rata portion of such escrow shares.
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In addition, on June 22, 2006, Empower Century Limited transferred 30.184824 shares of the common stock of Wonder Auto Limited to certain accredited investors in exchange for $8,000,000. Such shares were subsequently exchanged for 2,599,998 shares of the common stock of WATG in connection with the reverse acquisition transaction as discussed below.
On June 22, 2006, we also completed a reverse acquisition transaction with Wonder Auto Limited whereby we issued to the stockholders of Wonder Auto Limited 21,127,194 shares of our common stock in exchange for all of the issued and outstanding capital stock of Wonder Auto Limited. Wonder Auto Limited thereby became our wholly owned subsidiary and the former stockholders of Wonder Auto Limited became our controlling stockholders.
Upon the closing of the reverse acquisition, Timothy Halter submitted his resignation letter pursuant to which he resigned from all offices of WATG that he held and from his position as our director that became effective in July 2006. Qingjie Zhao was appointed to the board of the directors at the effective time of the resignation of Timothy Halter. In addition, our executive officers were replaced by the Wonder Auto executive officers upon the closing of the reverse acquisition as indicated in more detail below.
Our Products and Market Presence
We mainly engage in the design, development, manufacture and sale of automotive electrical parts, specifically, alternators and starters in the PRC through our wholly owned subsidiary, Halla. We primarily manufacture and sell two types of automotive electrical components: alternators and starters.
· | Alternators. An alternator is part of a car engine’s electrical system which is connected to the engine belt of a vehicle and converts mechanical energy into electricity to recharge the battery. The battery, in turn, provides power to all electrical devices in the vehicle, such as the radio, power steering, headlights and windshield wipers. We have developed, manufactured and sold five series of alternators, which are represented by different sizes and output rates, in over 150 models. Our alternators’ current electrical current flows range in size and output from 65A to 115A. Larger alternators, as determined by their diameters, have more electrical field coils and can produce stronger currents. Our alternators have dual integrated fans and built-in integrated circuit regulators. Our alternators are designed to produce high outputs while remaining small and lightweight. The size and weight parameters result in the improved cooling performance of integrated fans and higher output from the integrated circuit regulators. |
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· | Starters. A starter is part of a car engine’s starting system, along with the starter solenoid. At ignition, the starter solenoid is activated and provides power for the starter. The starter then spins the engine a few revolutions to begin the internal combustion process. The starters produced by our company are known as planetary type starters. These starters are small and lightweight due to their high speed motors combined with speed reduction systems. We produce five series of starters in terms of diameters (ø), namely ø70, ø74, ø76, ø81, ø90 and ø100, which produce between 0.85kW to 5.5kW of power. |
The table below shows our main product lines:
Alternator | Diameter of Stator Power | 114mm 65A | 118mm 75A | 128mm 85A | 135mm 90A | 142mm 115A | |
5 series with over 150 models | |||||||
Starter | Diameter of Shell Power | Φ70 0.85KW | Φ74 | Φ76 | Φ81 | Φ90 | Φ100 |
5 series with over 70 models | 0.9KW 1.2KW 1.4KW 3.2KW 2.5KW 5.0-5.5KW |
Our products are suitable for use in various types of automobiles. The sales of alternators and starters for use in cars with displacement ranging from 1.6L to 2.5L, which accounted for approximately 72% of our total sales in 2007. In terms of the market for our products, the OEM market accounts for about 85%, the replacement market accounts for approximately 5% and export accounts for approximately 10%.
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We strive to produce high quality products and have established a quality control system to ensure that we achieve this goal. We have obtained the ISO9002, QS9000, and TS 16949 certificates for our quality management system.
Our Industry
Overview of Global Auto Industry
According to statistics published by the PRC China Automotive Newspaper, global sales of automobiles in 2007 exceeded 40 million units. This 2007 sales figure represents approximately 9% average growth over 2006. Different regions recorded different growth rates in 2006 with the U.S. and Western European markets recording slight gains and the Mercosur countries, Central and Eastern Europe and the Asian markets showing strong growth. We believe that global competition from the emerging markets has put pressure on the mature auto markets and will shift automobile production to areas with lower production cost, such as China and other developing countries.
Overview of Chinese Auto Industry
In China, the total output of autos in China reached 8.9 million units in 2007, representing a 22.0 % increase over 2006 according to the according to China Association of Automobile Manufacturers. Based on the unit sales volume in 2006, China is the third largest automaker in the world, following the United States which produced approximately 16 million units, and Japan which produced approximately 11.5 million units during the same period. (Source: China Association of Automobile Manufacturers). We believe that the global automotive industry is focusing closely on China as nearly all global automobile manufacturers are now represented there.
We believe China’s auto industry will continue to grow. According to the research report published by Nomura Research Institute on April 10, 2006, the auto sales volume in China is expected to reach 10.08 million units in 2010. The sustained growth of the auto industry in China is mainly driven by the following factors:
· | GDP Per Capita of China has risen to the critical point for auto ownership. The PRC’s GDP per capita in 2005 was $1700, a 9.9% increase as compared to that in 2004, and is approaching the critical vehicle ownership level of $2,000. The GDP per capital in some more developed areas, such as Shanghai and Beijing, reached over $5000 in 2005 according to the National Bureau of Statistics of China. The rising GDP per capita indicates the increase of purchasing power, which, combined with a fall in automobile prices, will lead to a higher private automobile ownership. |
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· | Huge population but low saturation level in China. Despite the fact that private vehicle ownership has continually increased over the past 10 years, the average auto ownership in China is only 19 per 1000 inhabitants which is very low as compared to the world average of 125 per 1000 inhabitants according to a Deutsche Bank research study issued on January 6, 2006 (780 in US, 500 in EU, 568 in Japan, 588 in Germany, 313 in South Korea and 198 in Russian Federation in 2004). The PRC National Commerce Department predicted that the auto ownership in China will increase to 40 per 1000 inhabitants by 2010. |
· | Dramatic increase of the urbanization rate. According to the National Bureau of Statistics of China, the urbanization rate in China grew from 26% in 1990 to 43% in 2003, an increase of 65%. More people moving to the cities will lead to a rising demand for car ownership. |
· | Growth of highway infrastructure. The statistics of the PRC Ministry of Communication shows that the total length of expressways and class I-IV highways in China increased from 1.07 million km in 1998 to 1.9 million km in 2005, a growth of 77.6%. The growth of highway infrastructure will benefit the Chinese auto industry. |
· | Favorable governmental policies. As explained in more details below, the Chinese government adopted a number of legislative measures to facilitate the development of the Chinese automotive industry. |
Overview of Chinese Auto Parts Industry
Due to the high growth of the auto industry, the Chinese auto parts industry has experienced rapid growth over the past several years. According to CCID Consulting, a professional market research and management consulting company, the sales of auto parts industry reached $68.77 billion in 2005, up 26.13% from $54.52 billion in 2004.
The auto parts industry is generally divided into three segments: OEM market, replacement market and export market, which accounted for approximately 67.94%, 18.55% and 13.51% of the market share in 2005, respectively, according to the statistics of CCID Consulting.
In 2005, the sales of auto parts in the OEM market and replacement market were about $46.72 billion and $12.76 billion, up 21.63% and 23.29% from the previous year, respectively. Since the number of China’s automobiles has reached 32 million by the end of 2005 and is expected to increase in the future, we believe the replacement market will become more and more important for auto parts manufacturers. Export of auto parts is also a dynamic part of the auto parts industry in China. The export sales of auto parts were about $9.29 billion in 2005, an increase of 61.28% over 2004. Currently, China is the fourth largest exporter of auto parts in the world, following Mexico, Canada and Japan. Although China’s auto parts export volume is still relatively small as compared to some developed markets, it has been growing at an annual rate of more than 60% between 2002 and 2005. (Source: CCID Consulting)
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According to China Association of Social Economic System, the total sales of auto parts industry will reach $175 billion by 2010, representing a compounded annual growth rate of 20.54% between 2005 and 2010. We believe that China’s auto parts industry will maintain its high growth momentum due to several important factors. First, the growth of auto industry will lay a solid foundation for growth in the OEM auto parts industry. Second, the increased levels of car ownership by Chinese residents will also lead to the growth of the replacement part market. In addition, in order to achieve cost reduction, it is the growing tendency on the part of Chinese and international auto manufacturers to reduce cost by sourcing components directly from low cost manufacturing regions, such as China. Many view this development as prompting increased demand for the low cost and high quality products provided by Chinese leading automotive parts manufacturers. We believe that the regulatory measures recently adopted by the Chinese government will also contribute to the growth in demand for Chinese auto part products. The Measures for the Administration of Import of Automobile Components and Parts Featuring Complete Vehicles issued by the National Development and Reform Commission of the PRC Ministry of Finance and the Ministry of Commerce encourages automakers to use parts manufactured by local Chinese auto parts manufacturers. Pursuant to this regulation which becomes effective on July 1, 2006, the Chinese government will charge automakers a tariff up to 25% if more than 40% of the components and parts of an automobile are imported.
Our Intellectual Property
We currently have the following issued patents.
Patent | Patent Type | Patent No. | Expiration Date | Country | ||||
Configuration of End Bearing Bracket of Starter | Utility Model | ZL03212000.1 | March 16, 2013 | China | ||||
Speed Reduction Gear to Start Electromotor | Utility Model | ZL032119992 | March 16, 2013 | China | ||||
Auto AC Electricity Generator | Utility Model | ZL03211998.4 | March 16, 2013 | China | ||||
Rotor of Auto AC electricity generator | Utility Model | ZL03212001.X | March 16, 2013 | China | ||||
Starter Hull Connection and Location Configuration | Utility Model | ZL200320105993.6 | December 9, 2013 | China |
We have filed 32 patent applications with the Patent Office of the State Intellectual Property Office of China which are pending approval.
We have registered the trademark for the logo with the Trademark office of the State Administration for Industry and Commerce of China. We use our trademark for the sales and marketing of our products. Our trademark expires in April 2010.
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In 2004, we signed a licensing agreement with a well-known Japanese automotive component manufacturer pursuant to which the Japanese manufacturer granted us a license to use its patented technologies to manufacture and sell certain alternators and starters on a non-assignable and non-exclusive basis. The license agreement has a three-year effective term which expired in September 2007. We are under a contractual obligation to keep the identity of our Japanese licensor confidential. Both parties agreed to renew the licensing agreement in the near future.
Our Internal and Strategic Research and Development Efforts
Overview
We believe that the development of new products and production methodologies is critical to our success. We currently operate two research and development centers, each performing different research and development activities. Our first research and development center is located at our headquarters in Jinzhou, Liaoning Province of China. In June 2004, we set up a new center in Beijing, China. As of December 2007, we have 71 research and development personnel, ten of them are experts we hired from South Korea, 53 of them hold bachelor degrees from Chinese universities.
Through our research and development centers, we are able to accommodate joint development programs with our OEM customers. As a result, we are often invited by our customers to jointly develop new engines and manage the development program tailored to our customers’ specific requirements. In 2007, we had 31 joint development programs (17 for alternators and 14 for starters) used in popular models of sedans. These OEM customers include XiaLi, Chery, South Korea Doosan and Beijing Benz DaimlerChrysler. Upon the successful completion of the joint development project, we often become the supplier of the developed products. In the past three years, we were engaged as the supplier in approximately 78.0% of the successful joint development projects.
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Although the top five alternator and starter manufacturers in China all have joint-development capacities, we believe that we have an advantage over our competitors because our development period is about three months shorter than our competitors due to our dedicated R&D resources.
Strategic Alliance with Hivron
In addition to our own research and development capabilities, we have entered into a strategic alliance with Hivron, a South Korean company which has specialized in the design and manufacturing of microchips since 2002. Through this strategic alliance, we are able to access South Korean expertise and actively participate in the research and development of technologies that are critical to our products. During the past three years of this strategic alliance with Hivron, we have jointly conducted research to develop microchips for use in our alternator rectifiers and regulators. This strategic alliance is important to our business because it provides us source of microchips that are suitable for our alternators from PRC manufacturers.
Under the terms of our June 7, 2004 long-term strategic cooperation agreement, Hivron will design and manufacture microchips according to our specifications and then sell these chips to our designated suppliers. Hivron is obligated to sell these chips at competitive prices and cannot sell chips developed pursuant to this agreement to our competitors. In return, we will provide specifications and information on our new products to Hivron and instruct our rectifier and regulator suppliers to purchase chips from Hivron.
Strategic Alliance with Japanese automotive component manufacturer
In 2004, we entered into a licensing agreement with a well-known Japanese automotive component manufacturer which has three-year effective term. Under the terms of the licensing agreement, we license the technology and products developed by our Japanese licensor for a period of three years, ending in September 2007. Both parties agreed to renew the licensing agreement in the near future. Through this licensing agreement, we are able to integrate patented Japanese technologies into our alternators and starters. We can also produce and sell products that are more suitable for Japanese vehicles utilizing this technology. In return, we pay a royalty of 0.55% of net sales revenue from the sales of the products that incorporate the licensed technology. The licensor retains ownership of all intellectual property licensed under the agreement. For the year ended December 31, 2007, sales of the licensed products amounted to approximately $27.7 million and the amount of royalties paid was approximately $ 0.3 million. We are under a contractual obligation to keep the identity of our Japanese licensor confidential.
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Research and Development Expenses
For the fiscal years ended December 31, 2005, 2006 and 2007, our research and development expenses for “new products development”, representing salaries of personnel and other costs incurred for research and development of potential new products, were $477,225, $500,347 and $534,503, respectively. The amount incurred for acquisition of equipments for research and development use and for routine and ongoing efforts to refine existing products were approximately $1.0 million, $1.1 million and $ 3.0 million, representing approximately 2.53%, 2.06% and 3.0% of our sales for those years, respectively.
Our Sales and Marketing Efforts
We market our products directly to our customers though our sales department which, as of December 2007, consisted of 27 employees. Each member of our sales department receives one month of training in both the business and technical aspects that they will need to perform their job functions. In addition, we periodically provide continuing training for our sales personnel. Members of our sales department generate sales leads by contacting auto manufacturers directly and by attending industry trade shows and exhibitions. Since we have established our status as one of the leading suppliers of alternators and starters, our clients may also contact us for new projects. Although most of our business is developed by direct personal contact and referrals from our customers, we also advertise our products in industry trade journals and other industry media.
In order to attract international customers, we also attend international trade shows, such as the automobile shows in Hanover, Frankfurt and Las Vegas, to raise our brand recognition and promote our products to the international market. We started selling our products directly to foreign customers in 2003. In both 2003 and 2004, our overseas sales accounted for less than 1% of our total sales. In 2007, our overseas sales increased to approximately 9.6% of the total sales. We have opened a sale office in Detroit USA to facilitate our efforts to enter the North American markets in September 2007. Our sales and marketing department also performs customer service functions. We also employ outside representatives whose primary function is to understand our customers’ needs and promote services that best meet their requirements. These representatives also help our customers resolve installation problems and provide general customer service. As of December 2007, we had eight representatives stationed at different major customers.
Raw Materials for our Products and our Supplier Arrangements
Nature of the raw materials used in our products.
The raw materials we use to produce our starters and alternators fall into four general categories: metal parts, semiconductors, chemical and packaging materials. The prices of these raw materials are determined based upon prevailing market conditions, supply and demand. Supply and demand for these raw materials is generally affected by the cyclical nature of the automobile industry as well as the auto parts industry itself and the characteristic over/under capacity of these industries. Supply and demand is also affected by macroeconomic conditions in China, including levels of consumer disposable income and spending patterns.
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Our Suppliers and Supplier Arrangements .
We purchase the majority of the raw materials from suppliers located in China. If we continue to see improvement in the quality of domestically produced parts, we intend to increase our use of these local suppliers in order to take advantage of the lower costs. We believe that utilizing local suppliers also provides us with other benefits because we are able to supervise local suppliers, we can easily provide technical training and our technical department can also provide technical improvement suggestions to them.
We use a dual supplier system to source the raw materials that we use in our products and we maintain absolute exclusive supplier arrangements, relatively exclusive supplier arrangements and non-exclusive supplier arrangements. About 70% of all of the raw materials that we use to manufacture our products are purchased from a handful of select suppliers. These select or primary suppliers consist of both local Chinese manufacturers and foreign manufacturers based in South Korea and Japan, including NMB, NSK, NTN, KBC, Pacific Metal and Suzhou Techno System, etc. Our priority suppliers have long-term relationships with us, but we do not rely on them exclusively. Instead, as part of our dual vendor system, we also purchase about 30% of the total raw materials that we need to produce our products from other vendors. As a result, if our priority suppliers cannot supply us for any reasons, we are able to rely on these other suppliers to satisfy our raw material requirements. All of our suppliers must meet our quality standards and delivery requirements consistently in order to remain on our approved supplier list. We require local suppliers within 300 km of our production facility to deliver goods within six hours from the time when orders are placed. If a supplier is repeatedly late in deliveries, it is removed from our approved supplier list. We have entered into written agreements with our major suppliers and these agreements generally have a one-year term. The terms and nature of our arrangements with suppliers are as follows:
· | Absolute Exclusive Supplier Arrangements. Under the exclusive supplier arrangements, our suppliers are obligated to provide all of their products to us and cannot sell any of their products to any third party in the Chinese automotive electrical equipment industry. In 2006, we had absolute exclusive supplier arrangements with three vendors, Jinzhou HanHua Electrical Equipment Co., Ltd., JinZhou ChangZe Precision Machinery Plant and JinZhou DongYou Precision Technology. These suppliers provided us with approximately 6.5% of the materials used in our products. |
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· | Relatively Exclusive Supplier Arrangements. Under the relatively exclusive supplier arrangements, our suppliers cannot provide any of their products made based on the specifications provided by us to any other automotive electrical equipment manufactures in PRC. In 2005, we had relatively exclusive supplier arrangements with 31 vendors who supplied us with approximately 67.4% of the materials used in our products. |
· | Non-Exclusive Supplier Arrangement. Under this arrangement, there is no restriction on the vendors’ ability to sell their products to other parties. In 2005, we had non-exclusive supplier arrangements with 12 vendors who supplied us with approximately 26.1% of the materials used in our products. |
These flexible sourcing arrangements are designed to provide sourcing stability for us and promote competition among our suppliers. We believe our supplier arrangements incentivize suppliers to provide to us technologically advanced and high quality products. We systematically assess our vendors to determine whether they should remain as select vendors, be promoted to select vendors or be demoted to the other vendor category.
We typically purchase the raw materials that we use to produce our products from our suppliers on credit. Credit terms usually permit payment up to 90 days following the delivery of the raw materials. When we purchase raw materials from Chinese suppliers, we are able to pay in Chinese Yuan Renminbi. When we purchase raw materials from foreign suppliers, we usually pay in U.S. Dollars. Our account payables above six months accounted for 0.22%, 0.06% and 1.75% of our total account payables in 2005, 2006 and 2007, respectively.
Our top ten suppliers in 2007 .
The following table provides information regarding our top 10 suppliers of products and services during 2007.
TOP TEN SUPPLIERS IN 2007
Rank | Supplier | Location | Material | Percentage of total materials cost | |||||
1 | Jinzhou Dongwoo Precision Co., Ltd. | Jinzhou, Liaoning | Rectifier, adjustor | 23.57 | % | ||||
2 | Jinzhou Hanhua Electrical System Co. | Jinzhou, Liaoning | Armature | 11.91 | % | ||||
3 | Yingkou Die-Casting Products Co., Ltd. | Yingkou, Liaoning | Preoperculum, postoperculum | 11.07 | % | ||||
4 | Tianjin Jingda Rea Special Enameled Wire Co. Ltd. | Tianjin | Copper wire | 8.13 | % | ||||
5 | Tianjin Zhaohe Enameled Wire Co. Ltd. | Tianjin | Copper wire | 7.89 | % | ||||
Top 5 Suppliers (total) | 62.56 | % | |||||||
6 | Zhejiang Huanfang Auto Electrical Appliance Co. Ltd. | Yuhuan, Zhejiang | Solenoid switch | 6.79 | % | ||||
7 | Jinzhou Changze Precision Machinery Manufacturing Company | Jinzhou, Liaoning | Axis, Lundell motor, belt pulley | 6.52 | % | ||||
8 | Yuhuan Putian Isolator Co. Ltd. | Yuhuan, Zhejiang | Isolator, P axis, gear ring | 6.23 | % | ||||
9 | SWT | Seoul, Korea | Bearing, fine powder, alnico, standard element | 5.79 | % | ||||
10 | Jinzhou Motor Vehicle Parts Manufacturing Company | Jinzhou, Liaoning | Enclosure, belt pulley, denoise ring, bearing cap | 4.32 | % |
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Our Major Customers
Large automobile manufacturers and automotive engine suppliers are our primary and most desirable customers. Our customers include Beijing Hyundai, Dongfeng Yueda Kia Motors, Daimler Chrysler, SAIC GM WuLing, Chery, Geely, Tianjin XiaLi Automobile Co. and Shenyang Aerospace Mitsubishi Motors Engine Manufacturing Co. We have also entered into technical cooperation agreements or letters of intent with new OEM customers, including Shanghai GM, Fiat, Nan King MG, Beijing Benz, South Korea Hyundai and Korean Doosan. The number of our clients has increased about 194% in the past five years. As we continue to build sales in the domestic market, we intend to grow by developing overseas sales. We focus on maintaining long-term relationships with our customers. We have enjoyed recurring orders from most of our customers for periods of four to ten years. Our typical contract has a one-year term and is usually renewable.
The following table shows the revenues generated and percentage of total revenues received from our ten largest customers during the years ended December 31, 2007 and 2006:
TOP TEN CUSTOMERS IN 2007
Rank | Clients Name | Sales (US$) | % | ||||
1 | Harbin Dongan Automotive Engine Co., Ltd. | 16,657,632 | 17.7 | % | |||
2 | Shenyang Aerospace Mitsubishi Motors Engine Manufacturing Co. Ltd. | 15,691,636 | 16. 7 | % | |||
3 | Beijing MOBIS Auto Parts and Components Co., Ltd. | 13,971,225 | 14.8 | % | |||
4 | Shenyang Xinguang Huachen Auto Engine Co., Ltd. | 5,216,132 | 5.5 | % | |||
5 | Tianjin Automotive Xia Li Co. Ltd Internal Combustion Engine Manufacturing Branch Co. | 5,086,864 | 5.4 | % | |||
6 | Dongfeng Yueda Kia Motors Co., Ltd. | 4,350,341 | 4.6 | % | |||
7 | Mianyang Xinchen Engine Co. Ltd | 3,774,014 | 3.8 | % | |||
8 | Jiangsu MOBIS Auto Parts and Components Co., Ltd. | 3,557,786 | 3.8 | % | |||
9 | SAIC CHERY AUTOMOBILE CO, LTD | 3,566,207 | 3.8 | % | |||
10 | SWT | 2,939,739 | 3.1 | % |
TOP TEN CUSTOMERS IN 2006
Rank | Clients Name | Sales (US$) | % | ||||
1 | Beijing Hyundai Motor Company | 13,686,791 | 19.0 | % | |||
2 | Shenyang Aerospace Mitsubishi Motors Engine Manufacturing Co. Ltd. | 12,837,338 | 17.8 | % | |||
3 | Harbin Dongan Mitsubishi | 5,770,801 | 8.0 | % | |||
4 | Tianjin Automotive Xia Li Co. Ltd | 4,359,671 | 6.0 | % | |||
5 | Shenyang Xinguang Huachen Auto Engine Co., Ltd. | 4,108,985 | 5.7 | % | |||
6 | Mianyang Xinchen Engine Co. Ltd | 3,540,831 | 4.9 | % | |||
7 | Chery Automobile Co., Ltd. | 3,445,774 | 4.8 | % | |||
8 | Harbin Dongan Automotive Engine Manufacturing Co., Ltd. | 3,279,274 | 4.6 | % | |||
9 | Dongfeng Yueda Kia Motors Co., Ltd. | 2,416,288 | 3.4 | % | |||
10 | SWT | 2,473,582 | 3.4 | % |
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Our Competition
The automobile parts market in China is very competitive. We compete based upon the price and quality of our products, product availability and customer service. There are approximately 10 major competitors in this market trying to sell the same products that we sell to the same group of target customers. Our primary competitors are located in China and include Shanghai Valeo Automotive Electrical Systems Co. Ltd., Hubei Shendian Auto Motor Co., Ltd. And Zhongqi Changdian Co., Ltd.
With China’s entry into the WTO and China’s agreement to lift its protections to infant industries, we believe that competition will increase in the China auto parts industry segment. Our primary international competitors include VALEO (France), BOSCH (German), RAMY (U.S.), Mitsubishi Motor (Japan) and Denso (Japan). Some of our competitors have greater financial resources, larger staff, and more established market recognition in both domestic Chinese and international markets than we have.
Regulation
Because our operating subsidiary Halla is located in PRC, we are regulated by the national and local laws of PRC.
There is no private ownership of land in China and all land ownership is held by the government of the PRC, its agencies and collectives. Land use rights can be obtained from the government for a period up to 70 years, and are typically renewable. Land use rights can be transferred upon approval by the land administrative authorities of the PRC (State Land Administration Bureau) upon payment of the required land transfer fee. We have received the necessary land use right certificate for the 42,169 square meters of land located at No. 16 Yulu Street, Jinzhou High Technology Industrial Park, Jinzhou, China. See “OUR BUSINESS - Our Facilities” for more details.
In addition, we are also subject to PRC’s foreign currency regulations. The PRC government has control over Renminbi reserves through, among other things, direct regulation of the conversion or Renminbi into other foreign currencies. Although foreign currencies which are required for “current account” transactions can be bought freely at authorized Chinese banks, the proper procedural requirements prescribed by Chinese law must be met. At the same time, Chinese companies are also required to sell their foreign exchange earnings to authorized Chinese banks and the purchase of foreign currencies for capital account transactions still requires prior approval of the Chinese government.
We do not face any significant government regulation of in connection with the production of our products. We do not require any special government permits to produce our products other than those permits that are required of all corporations in China.
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Our Employees
As of December 31, 2007, we employed 513 full-time employees.
Our Chinese subsidiary has trade unions which protect employees’ rights, aim to assist in the fulfillment of our economic objectives, encourage employee participation in management decisions and assist in mediating disputes between us and union members. We believe that we maintain a satisfactory working relationship with our employees and we have not experienced any significant labor disputes or any difficulty in recruiting staff for our operations.
As required by applicable Chinese law, we have entered into employment contracts with all of our officers, managers and employees.
Our employees in China participate in a state pension scheme organized by Chinese municipal and provincial governments. We are required to contribute to the scheme at the rates of 24% of the average monthly salary. The compensation expenses related to this scheme was $681,944, $490,519 and $417,824 for the fiscal year 2007, 2006 and 2005, respectively.
In addition, we are required by Chinese law to cover employees in China with various types of social insurance. We have purchased social insurance for all of our employees.
ITEM 1A. RISK FACTORS
RISKS RELATED TO OUR BUSINESS
If we fail to effectively expand our operations and capacity to satisfy demand for our products, our results of operations and business prospects could be impaired.
Our future success depends on our ability to expand our business to address growth in demand for our alternator and starter products. We are currently in the process of constructing new production lines which began full production in December 2007, resulting in total production capacity for alternators and starters of approximately 2.2 million and 1.8 million units, respectively. Our ability to add production capacity and increase output is subject to significant risks and uncertainties, including:
· | the availability of additional funding to build manufacturing facilities and purchase components, accessories and other raw materials on favorable terms or at all; |
· | our management and minimization of delays and cost overruns caused by problems with our equipment vendors, suppliers and third-party manufacturers; and |
· | our receipt of any necessary government approvals or permits that may be required to expand our operations in a timely manner or at all. |
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Our rapid expansion could significantly strain our resources, management and operational infrastructure which could impair our ability to meet increased demand for our products and hurt our business results.
To accommodate our anticipated growth, we will need to expend capital resources and dedicate personnel to implement and upgrade our accounting, operational and internal management systems and enhance our record keeping and contract tracking system. Such measures will require us to dedicate additional financial resources and personnel to optimize our operational infrastructure and to recruit more personnel to train and manage our growing employee base. If we cannot successfully implement these measures efficiently and cost-effectively, we will be unable to satisfy the demand for our products, which will impair our revenue growth and hurt our overall financial performance.
If we fail to accurately project market demand for our products, our business expansion plan could be jeopardized and our financial condition and results of operations will suffer.
Based primarily on our projected increases in our sales volume and growth in the size of the automotive market in China, we plan to increase our annual manufacturing capacity to meet an expected increase in demand for our products. If actual customer orders are less than our projected market demand, we will likely suffer overcapacity problems and may have to leave capacity idle, which may reduce our overall profitability and hurt our financial condition and results of operations.
We derive most of our sales revenue from sales of our products in China. The continued development of our business depends, in large part, on continued growth in the automotive industry, especially in China. Although China’s automotive industry has grown rapidly in the past, it may not continue to grow at the same growth rate in the future or at all. However, the developments in our industry are, to a large extent, outside of our control and any reduced demand for automotive parts products and services, any other downturn or other adverse changes in China’s automotive industry could severely harm our business.
Our business is capital intensive and our growth strategy may require additional capital which may not be available on favorable terms or at all.
We believe that our current cash and cash flow from operations and the proceeds raised from the sale of our stock to the selling stockholders in December 2007 will be sufficient to meet our present and reasonably anticipated cash needs. We may, however, require additional cash resources due to changed business conditions, implementation of our strategy to expand our manufacturing capacity or other investments or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
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Due to our rapid growth in recent years, our past results may not be indicative of our future performance so evaluating our business and prospects may be difficult.
Our business has grown and evolved rapidly in recent years as demonstrated by our growth in sales revenue from approximately $48.1 million in 2005 to $102.1 million in 2007. We may not be able to achieve similar growth in future periods, and our historical operating results may not provide a meaningful basis for evaluating our business, financial performance and prospects. Moreover, our ability to achieve satisfactory manufacturing results at higher volumes is unproven. Therefore, you should not rely on our past results or our historical rate of growth as an indication of our future performance.
We face risks associated with future investments or acquisitions.
An important element of our growth strategy is to invest in or acquire businesses that will enable us, among other things, to expand the products we offer to our existing target customer base, lower our costs for raw materials and components and capitalize on opportunities to expand into new markets. Within the past two years, we acquired controlling interests in two complementary businesses, Jinzhou Dongwoo and Jinzhou Wanyou, which we expect to contribute to our future growth. In the future, we may be unable to identify other suitable investment or acquisition candidates or may be unable to make these investments or acquisitions on commercially reasonable terms, if at all.
If we complete an investment or acquisition, we may not realize the anticipated benefits from the transaction. Integrating an acquired business is distracting and time consuming, as well as a potentially expensive process. We are currently in the process of integrating our operations with the operations of Jinzhou Dongwoo and Jinzhou Wanyou. The successful integration of these companies and any other acquired businesses require us to:
· | integrate and retain key management, sales, research and development, production and other personnel; |
· | incorporate the acquired products or capabilities into our offerings from an engineering, sales and marketing perspective; |
· | coordinate research and development efforts; |
· | integrate and support pre-existing supplier, distribution and customer relationships; and |
· | consolidate duplicate facilities and functions and combine back office accounting, order processing and support functions. |
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Geographic distance between business operations, the compatibility of the technologies and operations being integrated and the disparate corporate cultures being combined also present significant challenges.
Acquired businesses are likely to have different standards, controls, contracts, procedures and policies, making it more difficult to implement and harmonize company-wide financial, accounting, billing, information and other systems. Our focus on integrating operations may also distract attention from our day-to-day business and may disrupt key research and development, marketing or sales efforts. If we cannot overcome these challenges, we may not realize actual benefits from past and future acquisitions, which will impair our overall business results.
Our acquisition strategy also depends on our ability to obtain necessary government approvals, as described under “—Risks Related to Doing Business in China— We may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations which became effective on September 8, 2006.”
Any interruption in our production processes could impair our financial performance and negatively affect our brand.
We manufacture or assemble our products at our facilities in Jinzhou, China. Our manufacturing operations are complicated and integrated, involving the coordination of raw material and component sourcing from third parties, internal production processes and external distribution processes. While these operations are modified on a regular basis in an effort to improve manufacturing and distribution efficiency and flexibility, we may experience difficulties in coordinating the various aspects of our manufacturing processes, thereby causing downtime and delays. We have also been steadily increasing our production capacity and have limited experience operating at these higher production volume levels. In addition, we may encounter interruption in our manufacturing processes due to a catastrophic loss or events beyond our control, such as fires, explosions, labor disturbances or violent weather conditions. Any interruptions in our production or capabilities at our facilities could result in our inability to produce our products, which would reduce our sales revenue and earnings for the affected period. If there is a stoppage in production at any of our facilities, even if only temporary, or delays in delivery times to our customers, our business and reputation could be severely affected. Any significant delays in deliveries to our customers could lead to increased returns or cancellations and cause us to lose future sales. We currently do not have business interruption insurance to offset these potential losses, delays and risks so a material interruption of our business operations could severely damage our business.
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Part of our strategy involves the development of new products, and if we fail to timely develop new products or we incorrectly gauge the potential market for new products, our financial results will be adversely affected.
We plan to utilize our in-house research and development capabilities to develop new products that could become new sources of revenue for us in the future and help us to diversify our revenue base. Our future research and development efforts will be focused on expanding our product offering beyond alternators and starters into other similar products and components for different applications, such as hub motors for electric bicycles and electric vehicles. If we fail to timely develop new products or if we miscalculate market demand for new products that we develop, we may not be able to grow our sales revenue at expected growth rates and may incur expenses relating to the development of new products that are not offset by sufficient sales revenue generated by these new products.
Exporting our products outside of China is a core component of our overall growth strategy, which could subject us to various economic, political, regulatory, legal and foreign exchange risks.
We currently sell most of our products in China. Our overseas sales accounted for 1.4% ,4.8% and 9.6% of our total sales in 2005, 2006 and 2007, respectively. We plan to selectively enter international markets in which an opportunity to sell our products has been identified. The marketing, distribution and sale of our products overseas expose us to a number of risks, including:
· | fluctuations in currency exchange rates; |
· | difficulty in designing products that are compatible with product standards in foreign countries; |
· | greater difficulty in accounts receivable collection; |
· | increased marketing and sales costs; |
· | difficulty and costs of compliance with foreign regulatory requirements and different commercial and legal requirements; |
· | an inability to obtain, maintain or enforce intellectual property rights in foreign countries; |
· | changes to import and export regulations, including quotas, tariffs and other trade barriers, delays or difficulties in obtaining export and import licenses, repatriation controls on foreign earnings and currency conversion restrictions; and |
· | difficulty in engaging and retaining distributors and agents who are knowledgeable about, and can function effectively in, overseas markets. |
If we cannot effectively manage these risks, our ability to conduct or expand our business abroad would be impaired, which may in turn hamper our business, financial condition and prospects.
If we cannot keep pace with market changes and produce automotive parts with new technologies in a timely and cost-efficient manner to meet our customers’ requirements and preferences, the growth and success of our business will be hindered.
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The automotive parts market in China is characterized by increasing demand for new and advanced technologies, evolving industry standards, intense competition and wide fluctuations in product supply and demand. If we cannot keep pace with market changes and produce automotive parts incorporating new technologies in a timely and cost-efficient manner to meet our customers’ requirements and preferences, the growth and success of our business will suffer.
From time to time, new products, product enhancements or technologies may replace or shorten the life cycles of our products or cause our customers to defer purchases of our existing products. Shorter product life cycles may require us to invest more in developing and designing new products and to introduce new products more rapidly, which may increase our costs of product development and decrease our profitability. In addition, we may not be able to make such additional investments and any additional investments we make in new product development and introductions may not be successful.
Even if we develop and introduce new products, their market acceptance is not assured and depends on:
· | the perceived advantages of our new products over existing competing products; |
· | our ability to attract vehicle manufacturers who are currently using our competitors’ products; |
· | product cost relative to performance; and |
· | the level of customer service available to support new products. |
Therefore, commercial acceptance by customers of our products may not occur at our expected rate or level, and we may not be able to successfully adapt existing products to effectively and economically meet customer demand, thus impairing the return from our investments. We may also be required under applicable accounting standards to recognize a charge for the impairment of assets to the extent our existing products become uncompetitive or obsolete or if any new products fail to achieve commercial acceptance. Any such charge may jeopardize our ability to operate profitably.
Failure to adequately protect our intellectual property rights may undermine our competitive position, and litigation to protect our intellectual property rights may be costly.
We strive to strengthen and differentiate our product portfolio by developing new and innovative products and product improvements. As a result, we believe that the protection of our intellectual property will become increasingly important to our business. Implementation and enforcement of intellectual property-related laws in China has historically been lacking due primarily to ambiguities in PRC intellectual property law. Accordingly, protection of intellectual property and proprietary rights in China may not be as effective as in the United States or other countries. Currently, we hold PRC utility patents that relate to various product configurations and product components and have 32 pending PRC patent applications. We will continue to rely on a combination of patents, trade secrets, trademarks and copyrights to provide protection in this regard, but this protection may be inadequate. For example, our pending or future patent applications may not be approved or, if allowed, they may not be of sufficient strength or scope. As a result, third parties may use the technologies and proprietary processes that we have developed and compete with us, which could negatively affect any competitive advantage we enjoy, dilute our brand and harm our operating results.
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In addition, policing the unauthorized use of our proprietary technology can be difficult and expensive. Litigation may be necessary to enforce our intellectual property rights and given the relative unpredictability of China’s legal system and potential difficulties enforcing a court judgment in China, there is no guarantee litigation would result in an outcome favorable to us. Furthermore, any such litigation may be costly and may divert management attention away from our core business. An adverse determination in any lawsuit involving our intellectual property is likely to jeopardize our business prospects and reputation. We have no insurance coverage against litigation costs so we would be forced to bear all litigation costs if we cannot recover them from other parties. All of the foregoing factors could harm our business and financial condition.
We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely against us, could disrupt our business and subject us to significant liability to third parties.
Our success largely depends on our ability to use and develop our technology, know-how and product designs without infringing upon the intellectual property rights of third parties. We may be subject to litigation involving claims of patent infringement or violation of other intellectual property rights of third parties. The holders of patents and other intellectual property rights potentially relevant to our product offerings may be unknown to us or may otherwise make it difficult for us to acquire a license on commercially acceptable terms.
Wonder Auto Group Limited, a Hong Kong company controlled by Mr. Qingjie Zhao, our Chairman, Chief Executive Officer and President, has registered the “ ” trademark in Hong Kong. Jinzhou Wonder Auto Suspension System Co., Ltd. Has registered the trademarks “ ” and “ ” in China. An independent third party entity has registered the “Halla” trademark in China. We currently do not sell any products or services using the marks similar to the trademarks registered by Jinzhou Wonder Auto Suspension System Co., Ltd. Or “Halla” trademarks. We have entered into an agreement with Jinzhou Wonder Auto Suspension System Co., Ltd. Under this agreement, Jinzhou Wonder Auto Suspension System Co., Ltd. Has agreed not to bring any legal action against us for using the mark “ ” in China. However, we cannot assure you that this agreement will be enforced or that no action will be brought against us based on our use of “ ”.
There may also be technologies licensed to and relied on by us that are subject to infringement or other corresponding allegations or claims by others which could damage our ability to rely on such technologies. In addition, although we endeavor to ensure that companies that work with us possess appropriate intellectual property rights or licenses, we cannot fully avoid the risks of intellectual property rights infringement created by suppliers of components used in our products or by companies with which we work in cooperative research and development activities.
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Our current or potential competitors, many of which have substantial resources and have made substantial investments in competing technologies, may have obtained or may obtain patents that will prevent, limit or interfere with our ability to make, use or sell our products in China or other countries. The defense of intellectual property claims, including patent infringement suits, and related legal and administrative proceedings can be both costly and time consuming, and may significantly divert the efforts and resources of our technical and management personnel. Furthermore, an adverse determination in any such litigation or proceeding to which we may become a party could cause us to:
· | pay damage awards; |
· | seek licenses from third parties; |
· | pay additional ongoing royalties, which could decrease our profit margins; |
· | redesign our products; or |
· | be restricted by injunctions. |
These factors could effectively prevent us from pursuing some or all of our business objectives and result in our customers or potential customers deferring, canceling or limiting their purchase or use of our products, which could have a material adverse effect on our financial condition and results of operations.
We rely on certain technologies licensed to us from third parties and the loss of these licenses or failure to renew such licenses on a timely basis could interrupt our production and have a material adverse impact on our business.
We rely on certain technologies licensed to us from third parties for manufacturing our products. Through our licensing arrangements, we are able to integrate third party technologies into our alternators and starters. We can also produce and sell products that are more suitable for specific types of vehicles utilizing these licensed technologies. If certain licenses are terminated, or not timely renewed, the production of our products using the licensed technologies would be disrupted and our business and financial condition could be damaged.
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If we fail to maintain or improve our market position or respond successfully to changes in the competitive landscape, our business and results of operations will suffer.
Our competition includes a number of global and PRC-based manufacturers and distributors that produce and sell products similar to ours. We compete primarily on the basis of quality, technological innovation and price. Our main competitors include Shanghai Valeo Automotive Electrical Systems Co., Ltd., a joint venture of Shanghai Auto Industrial Group and Valeo Group, Hubei Shendian Auto Motor Co., Ltd., a joint venture of Hubei Shendian Auto Electrical Equipment Co., Ltd. And Remy International, Inc., Bosch Group, Mitsubishi Motors Corporation and Denso Corporation. Many of our competitors have longer operating histories, greater name recognition, larger global market share, access to larger customer bases and significantly greater economies of scale, as well as greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. As a result of these competitive pressures and expected increases in competition, we may price our products lower than our competitors in order to maintain market share. Any lower pricing may negatively affect our profit margins. If we fail to maintain or improve our market position and respond successfully to changes in the competitive landscape, our business and results of operations may suffer.
A large percentage of our sales revenue is derived from sales to a limited number of customers, and our business will suffer if sales to these customers decline.
A significant portion of our sales revenue historically has been derived from a limited number of customers. Five customers—Beijing Hyundai Motor Company, Shenyang Aerospace Mitsubishi Motors Engine Manufacturing Co. Ltd., Harbin Dongan Automotive Engine Manufacturing Co. Ltd., Tianjin FAW Xiali Automotive Co., Ltd. And Shenyang Xinguang Huachen Automotive Engine Co., Ltd.—accounted for approximately 55.8% of our sales in 2006 and 60% in 2007.Any significant reduction in demand for vehicles manufactured by any of these major customers and any decrease in their demand for our products could harm our sales and business operations. The loss of one or more of these customers could damage our business, financial condition and results of operations.
If we cannot obtain sufficient raw materials and components at a reasonable cost, our ability to produce and market our products, and thus our business, could suffer.
We purchase raw materials and component parts for our products from various suppliers located primarily in Asia, most of which are located in China and a few of which are located in South Korea. The raw materials and component parts that we use are mainly divided into four categories: metal parts, semiconductors, chemicals and packaging materials. The majority of our raw materials and components are purchased from suppliers in China, including Jinzhou Dongwoo, a company in which we hold a 50% equity interest and control the board of directors, Jinzhou Hanhua Electrical Systems Co., Ltd., Tianjin Jingda Rea Special Enamelled Wire Co., Ltd., Yingkou Die-Casting Products Co., Ltd. And foreign manufacturers based in South Korea, such as SW-Tech Corporation. Purchases from our five largest raw materials and component parts suppliers accounted for approximately 62.56% in 2007. We may experience a shortage in the supply of certain raw materials and components in the future, and if any such shortage occurs, our manufacturing capabilities and operating results of operations could be negatively affected. If any supplier is unwilling or unable to provide us with high-quality raw materials and components in required quantities and at acceptable costs, we may not be able to find alternative sources on satisfactory terms in a timely manner, or at all. In addition, some of our suppliers may fail to meet qualifications and standards required by our customers now or in the future, which could impact our ability to source raw materials and components. Our inability to find or develop alternative supply sources could result in delays or reductions in manufacturing and product shipments. Moreover, these suppliers may delay shipments or supply us with inferior quality raw materials and components that may adversely impact the performance of our products. The prices of raw materials and components needed for our products could also increase, and we may not be able to pass these price increases on to our customers. If any of these events occur, our competitive position, reputation and business could suffer.
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If our customers and/or the ultimate consumers of the vehicles that use our products successfully assert product liability claims against us due to defects in our products, our operating results may suffer and our reputation may be harmed.
Our products are used primarily in small engine passenger vehicles. Significant property damage, personal injuries and even death can result from malfunctioning vehicles. If our products are not properly designed, built or installed or if people are injured because of our products, we could be subject to claims for damages based on theories of product liability and other legal theories. The costs and resources to defend such claims could be substantial and, if such claims are successful, we could be responsible for paying some or all of the damages. We have maintained product liability insurance only for products manufactured by Jinzhou Wanyou, which are sold in the United States and Canada. Negative publicity from such claims may also damage our reputation, regardless of whether such claims are successful. Any of these consequences resulting from defects in our products would hurt our operating results and, in turn, the value of our common stock.
Our products may become subject to recall in the event of defects or other performance related issues.
Like many other participants in the automotive industry, we are at risk for product recall costs which are costs incurred when, either voluntarily or involuntarily, a product is recalled through a formal campaign to solicit the return of specific products due to a known or suspected performance defect. Costs typically include the cost of the product, part or component being replaced, the cost of the recall borne by our customers and labor to remove and replace the defective part or component. Our products have not been the subject of an open recall. If a recall decision is made, we will need to estimate the cost of the recall and record a charge to earnings in that period. In making this estimate, judgment is required as to the quantity or volume to be recalled, the total cost of the recall campaign, the ultimate negotiated sharing of the cost between us and the customer and, in some cases, the extent to which the supplier of the part or component will share in the recall cost. As a result, these estimates are subject to change. Excessive recall costs or our failure to adequately estimate these costs may negatively affect our operating results.
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Our business may adversely change due to the cyclical nature of the automotive industry.
Our financial performance depends, in large part, on the varying conditions in the automotive markets that we serve. The volume of automobile production in Asia, North America, Europe and the rest of the world has fluctuated, sometimes significantly, from year to year, and such fluctuations give rise to fluctuations in demand for our products. These fluctuations in demand in the automotive industry often are in response to overall economic conditions but are also a reaction to certain external factors, such as changes in interest rate levels, vehicle manufacturer incentive programs, changes in fuel costs, consumer spending and confidence and environmental issues. If the automotive market experiences a downturn, our results of operations and business will suffer.
We depend heavily on key personnel, and loss of key employees and senior management could harm our business.
Our future business and results of operations depend in significant part upon the continued contributions of our key technical and senior management personnel, including Qingjie Zhao, our Chairman, Chief Executive Officer and President, Meirong Yuan, our Chief Financial Officer and Treasurer, Yuncong Ma, our Chief Operating Officer, Seuk Jun Kim, our Vice President of New Product Development, Yuguo Zhao, our Vice President of Sales and Marketing and Yongdong Liu, our Vice President of Production. They also depend in significant part upon our ability to attract and retain additional qualified management, technical, marketing and sales and support personnel for our operations. If we lose a key employee, if a key employee fails to perform in his or her current position or if we are not able to attract and retain skilled employees as needed, our business could suffer. Turnover in our senior management could significantly deplete institutional knowledge held by our existing senior management team and impair our operations.
In addition, if any of these key personnel joins a competitor or forms a competing company, we may lose some of our customers. We have entered into confidentiality and non-competition agreements with all of these key personnel. However, if any disputes arise between these key personnel and us, it is not clear, in light of uncertainties associated with the PRC legal system, what the court decisions will be and the extent to which these court decisions could be enforced in China, where all of these key personnel reside and hold some of their assets. See “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.”
Certain of our existing stockholders have substantial influence over our company, and their interests may not be aligned with the interests of our other stockholders.
Mr. Qingjie Zhao, our Chairman, Chief Executive Officer and President, is the beneficial owner of approximately 20.8% of our common stock. As a result, he has significant influence over our business, including decisions regarding mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other significant corporate actions. This concentration of ownership may also have the effect of discouraging, delaying or preventing a future change of control, which could deprive our stockholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our shares.
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Mr. Qingjie Zhao’s association with other businesses could impede his ability to devote ample time to our business and could pose conflicts of interest.
Mr. Qingjie Zhao, our Chairman, Chief Executive Officer and President, is the beneficial owner of 20.8% of our common stock, serves as an executive director and is a 10.4% owner of China Wonder Limited, a company listed on the Alternative Investment Market of the London Stock Exchange, which is principally engaged in the manufacture and sale of specialty packaging machinery to the PRC pharmaceutical market. He also serves as an executive director and is an 11.0% owner of Jinzhou Jinheng Automotive Safety System Co., Ltd., a company listed on the Hong Kong Growth Enterprise Market, which is principally engaged in the manufacture and sale of automotive airbag safety systems in China. Mr. Zhao devotes most of his business time to our affairs and the remainder of his business time to the affairs of other companies. Mr. Zhao’s decision-making responsibilities for these three companies are similar in the areas of public relations, management of human resources, risk management and strategic planning. As a result, conflicts of interest may arise from time to time. We will attempt to resolve any such conflicts of interest in our favor. Additionally, even though Mr. Zhao is accountable to us and our stockholders as a fiduciary, which requires that he exercise good faith and due care in handling our affairs, his existing responsibilities to other entities may limit the amount of time he can spend on our affairs.
Problems with product quality or product performance could result in a decrease in customers and revenue, unexpected expenses and loss of market share.
Our operating results depend, in part, on our ability to deliver quality products on a timely and cost-effective basis. As our products become more advanced, it may become more difficult to maintain our quality standards. If we experience deterioration in the performance or quality of any of our products, it could result in delays in shipments, cancellations of orders or customer returns and complaints, loss of goodwill and harm to our brand and reputation. Furthermore, our products are used together with components and in motor vehicles that have been developed and maintained by third parties, and when a problem occurs, it may be difficult to identify the source of the problem. In addition, some automobile parts and components may not be fully compatible with our products and may not meet our or our customers’ quality, safety, security or other standards. The use by customers of our products with incompatible or otherwise substandard components is largely outside of our control and could result in malfunctions or defects in our products and result in harm to our brand. These problems may lead to a decrease in customers and revenue, harm to our brand, unexpected expenses, loss of market share, the incurrence of significant warranty and repair costs, diversion of the attention of our engineering personnel from our product development efforts, customer relation problems or loss of customers, any one of which could materially adversely affect our business.
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Environmental claims or failure to comply with any present or future environmental regulations may require us to spend additional funds and may harm our results of operations.
We are subject to environmental, health and safety laws and regulations that affect our operations, facilities and products in each of the jurisdictions in which we operate. We believe that we are in compliance with all material environmental, health and safety laws and regulations related to our products, operations and business activities. Although we have not suffered material environmental claims in the past, the failure to comply with any present or future regulations could result in the assessment of damages or imposition of fines against us, suspension of production, cessation of our operations or even criminal sanctions. New regulations could also require us to acquire costly equipment or to incur other significant expenses. Our failure to control the use of, or adequately restrict the discharge of, hazardous substances could subject us to potentially significant monetary damages and fines or suspension of our business operations, which could cause damage to our business.
We have limited insurance coverage and do not carry any business interruption insurance, third-party liability insurance for our manufacturing facilities or insurance that covers the risk of loss of our products in shipment.
Operation of our facilities involves many risks, including equipment failures, natural disasters, industrial accidents, power outages, labor disturbances and other business interruptions. Furthermore, if any of our products are faulty, then we may become subject to product liability claims or we may have to engage in a product recall. We do not carry any business interruption insurance, product recall or third-party liability insurance for our manufacturing facilities or with respect to our products to cover claims pertaining to personal injury or property or environmental damage arising from defaults with our products, product recalls, accidents on our property or damage relating to our operations. We have obtained product liability insurance only for products manufactured by Jinzhou Wanyou which are sold to customers in the United States and Canada. Therefore, our existing insurance coverage may not be sufficient to cover all risks associated with our business. As a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our business, financial condition and results of operations.
Furthermore, under the shipping terms of some of our customer contracts, we bear the risk of loss in shipment of our products. We do not insure this risk. While we believe that the shipping companies that we use carry adequate insurance or are sufficiently solvent to cover any loss in shipment, there can be no assurance that we will be adequately reimbursed upon the loss of a significant shipment of our products.
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The discontinuation of the preferential tax treatment currently available to our PRC subsidiaries could materially adversely affect our results of operations.
Foreign invested enterprises, or FIEs, established in the PRC are generally subject to an enterprise income tax, or EIT, rate of 33.0%, which includes a 30.0% state income tax and a 3.0% local income tax. FIEs established in Coastal Open Economic Zones, Special Economic Zones or Economic and Technical Development Zones, such as our PRC subsidiaries, are subject to an EIT rate of 27.0%, which is comprised of a 24.0% state income tax and a 3.0% local income tax. Under the income tax law and the related implementing rules, FIEs engaging in manufacturing businesses with a term of operation exceeding ten years may, subject to approval from local taxation authorities, be entitled to a two-year tax exemption from PRC EIT starting from the year they become profitable and a 50.0% tax reduction for the three years thereafter.
Our subsidiaries Jinzhou Halla, Jinzhou Dongwoo and Jinzhou Wanyou are subject to PRC EIT at a rate of 27.0% of assessable profits, consisting of a 24.0% national tax and a 3.0% local tax. As approved by the relevant PRC tax authority, Jinzhou Halla and Jinzhou Dongwoo were entitled to a two-year exemption from EIT followed by a 50.0% tax exemption for the next three years, commencing from the first cumulative profit-making year in the fiscal financial year. The tax holiday of Jinzhou Halla commenced in 2001, and Jinzhou Halla was subject to a tax rate of 13.5% for 2003, 2004 and 2005. Furthermore, Jinzhou Halla, as an FIE, is engaged in an advanced technology industry and has been approved to enjoy a further 50.0% tax exemption for 2006, 2007 and 2008. The tax holiday of Jinzhou Dongwoo commenced in 2004. Jinzhou Dongwoo was subject to a tax rate of 13.5% for 2006 and is expected to be subject to a tax rate of 13.5% for 2007 and 2008. Finally, Jinzhou Wanyou, is entitled to a two-year EIT exemption for 2007 and 2008 and will receive a 50.0% EIT reduction for 2009, 2010 and 2011, assuming that Jinzhou Wanyou is profitable for each of these years.
In addition, Jinzhou Halla and Jinzhou Dongwoo, being FIEs, were entitled to two other special tax concessions. First, an amount equal to 40.0% of the qualifying domestic capital expenditures (as defined and approved under the relevant PRC income tax rule) can be used as an offset against the excess of the current year’s EIT over the prior year’s EIT. Second, an amount equivalent to 50.0% of the current year’s domestic development expenses can be used as an offset against EIT. These two tax concessions, if unutilized, can be carried forward for five years.
If this preferential tax treatment is discontinued by the tax authorities or is eliminated due to future changes in PRC tax laws, rules or regulations, our PRC operating subsidiaries may cease to enjoy the aforementioned tax benefits. If that were to occur, our PRC operating subsidiaries would thereafter be subject to a 27.0% standard EIT rate under the current tax laws through 2007 and up to a 25.0% rate from January 1, 2008 under the new tax law described below, which would significantly increase our effective tax rate and materially adversely affect our operating results.
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On March 16, 2007, the National People’s Congress of China passed the new EIT Law, which will take effect as of January 1, 2008. Under the new EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a resident enterprise and will normally be subject to EIT at the rate of 25.0% on its global income. The new EIT Law, however, does not define the term “de facto management bodies.” If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our global income will be subject to PRC income tax at a tax rate of 25.0%. In addition, under the new EIT Law, dividends from our PRC subsidiaries to us will be subject to a withholding tax. The rate of the withholding tax has not yet been finalized, pending promulgation of implementing regulations. Furthermore, the ultimate tax rate will be determined by treaty between China and the tax residence of the holder of the PRC subsidiaries. We are actively monitoring the proposed withholding tax and are evaluating appropriate organizational changes to minimize the corresponding tax impact. The new EIT Law imposes a unified income tax rate of 25.0% on all domestic-invested enterprises and FIEs, such as our PRC operating subsidiaries, unless they qualify under certain limited exceptions, but the EIT Law permits companies to continue to enjoy their existing preferential tax treatments until such treatments expire in accordance with their current terms. We expect details of the transitional arrangement for the five-year period from January 1, 2008 to December 31, 2012 applicable to enterprises approved for establishment prior to March 16, 2007 to be set out in more detailed implementing rules to be adopted in the future. Any increase in our effective tax rate as a result of the above may adversely affect our operating results. However, details regarding implementation of this new law are expected to be provided in the form of one or more implementing regulations to be promulgated by the PRC government, and the timing of the issuance of such implementing regulations is currently unclear.
We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have the operating effectiveness of our internal controls attested to by our independent auditors.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, the SEC adopted rules requiring public companies to include a report of management on the company’s internal controls over financial reporting in their annual reports, including Form 10-K. We are subject to this requirement commencing with our fiscal year ending December 31, 2007 and a report of our management is included under Item 9A of this Annual Report on Form 10-K. In addition, SOX 404 requires the independent registered public accounting firm auditing a company’s financial statements to also attest to and report on the operating effectiveness of such company’s internal controls. However, this annual report does not include an attestation report because under the current law, we will not be subject to these requirements until our annual report for the fiscal year ending December 31, 2009. We can provide no assurance that we will comply with all of the requirements imposed thereby. There can be no assurance that we will receive a positive attestation from our independent auditors. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent auditors with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements.
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We can provide no assurance that we will be in compliance with all of the requirements imposed by SOX 404 or that we will receive a positive attestation from our independent auditors. In the event we identify significant deficiencies or material weaknesses in our internal controls that we cannot remediate in a timely manner or we are unable to receive a positive attestation from our independent auditors with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements.
Our holding company structure may hinder the payment of dividends.
Wonder Auto Technology, Inc. has no direct business operations, other than its ownership of our subsidiaries. While we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us due to restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions as discussed below. If future dividends are paid in Renminbi, fluctuations in the exchange rate for the conversion of Renminbi into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars.
PRC regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after tax profits according to PRC accounting standards and regulations to fund certain reserve funds. Currently, our subsidiaries in China are the only sources of sales revenue or investment holdings for the payment of dividends. If they do not accumulate sufficient profits under PRC accounting standards and regulations to first fund certain reserve funds as required by PRC accounting standards, we will be unable to pay any dividends.
In addition, under the new EIT Law to be effective in January 2008, dividends from our PRC subsidiaries to us will be subject to a withholding tax. The rate of the withholding tax has not yet been finalized, pending promulgation of implementing regulations. Furthermore, the ultimate tax rate will be determined by treaty between China and the tax residence of the holder of the PRC subsidiary. We are monitoring the proposed withholding tax and are evaluating appropriate organizational changes to minimize the corresponding tax impact.
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RISKS RELATED TO DOING BUSINESS IN CHINA
Adverse changes in political and economic policies of the PRC government could impede the overall economic growth of China, which could reduce the demand for our products and damage our business.
We conduct substantially all of our operations and generate most of our revenue in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. The PRC economy differs from the economies of most developed countries in many respects, including:
· | the higher level of government involvement; |
· | the early stage of development of the market-oriented sector of the economy; |
· | the rapid growth rate; |
· | the higher level of control over foreign exchange; and |
· | the allocation of resources. |
As the PRC economy has been transitioning from a planned economy to a more market-oriented economy, the PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. While these measures may benefit the overall PRC economy, they may also have a negative effect on us.
Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government continues to exercise significant control over economic growth in China through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways.
Any adverse change in the economic conditions or government policies in China could have a material adverse effect on the overall economic growth and the level of automotive investments and expenditures in China, which in turn could lead to a reduction in demand for our products and consequently have a material adverse effect on our business and prospects.
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Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.
We conduct substantially all of our business through our operating subsidiaries in China. Our operating subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference, but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. In addition, all of our executive officers and all but two of our directors are residents of China and not of the United States, and substantially all the assets of these persons are located outside the United States. As a result, it could be difficult for investors to effect service of process in the United States or to enforce a judgment obtained in the United States against our Chinese officers, directors and subsidiaries.
The PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
Restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively.
Most of our sales revenue and expenses are denominated in Renminbi. Under PRC law, the Renminbi is currently convertible under the “current account,” which includes dividends and trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans. Currently, our PRC operating subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us, without the approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies in the future. Since a significant amount of our future revenue will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in Renminbi to fund our business activities outside China that are denominated in foreign currencies.
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Foreign exchange transactions by PRC operating subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC government authorities, including SAFE. In particular, if our PRC operating subsidiaries borrow foreign currency through loans from us or foreign lenders, these loans must be registered with SAFE, and if we finance the subsidiaries by means of additional capital contributions, these capital contributions must be approved by certain government authorities, including the Ministry of Commerce, or their respective local counterparts. These limitations could affect our PRC operating subsidiaries’ ability to obtain foreign exchange through debt or equity financing.
Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us or otherwise materially adversely affect us.
In October 2005, SAFE issued a public notice, the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China, or the SAFE Notice, which requires PRC residents to register with the competent local SAFE branch before using onshore assets or equity interests held by them to establish offshore special purpose companies, or SPVs, for the purpose of overseas equity financing. Under the SAFE Notice, such PRC residents must also file amendments to their registration in connection with any increase or decrease of capital, transfer of shares, mergers and acquisitions, equity investment or creation of any security interest in any assets located in China to guarantee offshore obligations. Moreover, if the SPVs were established and owned the onshore assets or equity interests before the implementation date of the SAFE Notice, a retroactive SAFE registration is required to have been completed before March 31, 2006. If any PRC resident stockholder of any SPV fails to make the required SAFE registration and amended registration, the PRC subsidiaries of that SPV may be prohibited from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV. Failure to comply with the SAFE registration and amendment requirements described above could also result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
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We believe our stockholders who are PRC residents as defined in the SAFE Notice have registered with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC subsidiaries. However, we cannot provide any assurances that their existing registrations have fully complied with, and they have made all necessary amendments to their registration to fully comply with, all applicable registrations or approvals required by the SAFE Notice. Moreover, because of uncertainty over how the SAFE Notice will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. For example, our present and prospective PRC subsidiaries’ ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with the SAFE Notice by our PRC resident beneficial holders. In addition, such PRC residents may not always be able to complete the necessary registration procedures required by the SAFE Notice. We also have little control over either our present or prospective direct or indirect stockholders or the outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident stockholders to comply with the SAFE Notice, if SAFE requires it, could subject these PRC resident beneficial holders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.
We may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations which became effective on September 8, 2006.
The recent PRC Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors also governs the approval process by which a PRC company may participate in an acquisition of assets or equity interests. Depending on the structure of the transaction, the new regulation will require the PRC parties to make a series of applications and supplemental applications to the government agencies. In some instances, the application process may require the presentation of economic data concerning a transaction, including appraisals of the target business and evaluations of the acquirer, which are designed to allow the government to assess the transaction. The regulations also prohibit a transaction at an acquisition price obviously lower than the appraised value of the PRC business or assets and in certain transaction structures, require that consideration must be paid within defined periods, generally not in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Government approvals will have expiration dates by which a transaction must be completed and reported to the government agencies. Compliance with the new regulations is likely to be more time consuming and expensive than in the past and the government can now exert more control over the combination of two businesses. Accordingly, due to the new regulation, our ability to engage in business combination transactions has become significantly more complicated, time consuming and expensive, and we may not be able to negotiate a business combination transaction that is acceptable to our stockholders or sufficiently protect their interests in a business combination transaction.
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Fluctuations in exchange rates could adversely affect our business and the value of our securities.
The value of our common stock will be indirectly affected by the foreign exchange rate between U.S. dollars and the Renminbi and between those currencies and other currencies in which our sales may be denominated. Because substantially all of our earnings and cash assets are denominated in Renminbi and the financial results are reported in U.S. dollar, appreciation or depreciation in the value of the Renminbi relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Since July 2005, the Renminbi has no longer been pegged to the U.S. dollar. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future the PRC authorities may lift restrictions on fluctuations in the Renminbi exchange rate and lessen intervention in the foreign exchange market.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currencies.
Currently, some of our raw materials, components and major equipment are imported. In the event that the U.S. dollars appreciate against Renminbi, our costs will increase. If we cannot pass the resulting cost increases on to our customers, our profitability and operating results will suffer. In addition, since our sales to international customers are growing rapidly, we are increasingly subject to the risk of foreign currency depreciation.
RISKS RELATED TO THE MARKET FOR OUR STOCK GENERALLY
The market price of our common stock is volatile, leading to the possibility of its value being depressed at a time when you want to sell your holdings.
The market price of our common stock is volatile, and this volatility may continue. For instance, between January 1, 2006 and December 31, 2007, the closing bid price of our common stock, as reported on the markets on which our securities have traded, ranged between $1.02 and $11.21. Numerous factors, many of which are beyond our control, may cause the market price of our common stock to fluctuate significantly. These factors include:
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· | expiration of lock-up agreements; |
· | our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of financial market analysts and investors; |
· | changes in financial estimates by us or by any securities analysts who might cover our stock; |
· | speculation about our business in the press or the investment community; |
· | significant developments relating to our relationships with our customers or suppliers; |
· | stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the automotive parts or automotive industry; |
· | customer demand for our products; |
· | investor perceptions of the automotive parts and automotive industries in general and our company in particular; |
· | the operating and stock performance of comparable companies; |
· | general economic conditions and trends; |
· | major catastrophic events; |
· | announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures; |
· | changes in accounting standards, policies, guidance, interpretation or principles; |
· | loss of external funding sources; |
· | sales of our common stock, including sales by our directors, officers or significant stockholders; and |
· | additions or departures of key personnel. |
Securities class action litigation is often instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs to us and divert our management’s attention and resources.
Moreover, securities markets may from time to time experience significant price and volume fluctuations for reasons unrelated to operating performance of particular companies. These market fluctuations may adversely affect the price of our common stock and other interests in our company at a time when you want to sell your interest in us.
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Future sales or perceived sales of our common stock could depress our stock price.
All of our executive officers and directors and certain of our stockholders are subject to certain lock-up agreements. Shares of common stock subject to these lock-up agreements will become eligible for sale in the public market upon expiration of these lock-up agreements, subject to limitations imposed by Rule 144 under the Securities Act (“Rule 144”), as amended. A substantial number of shares of our common stock held by our current stockholders are freely tradable. If the holders of these freely tradeable shares were to attempt to sell a substantial amount of their holdings at once, the market price of our common stock could decline. Moreover, the perceived risk of this potential dilution could cause stockholders to attempt to sell their shares and investors to short the stock, a practice in which an investor sells shares that he or she does not own at prevailing market prices, hoping to purchase shares later at a lower price to cover the sale. As each of these events would cause the number of shares of our common stock being offered for sale to increase, our common stock’s market price would likely further decline. All of these events could combine to make it very difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.
We do not intend to pay dividends on shares of our common stock for the foreseeable future.
Other than disclosed in our reports with the SEC, we have never declared or paid any cash dividends on shares of our common stock. We intend to retain any future earnings to fund the operation and expansion of our business and, therefore, we do not anticipate paying cash dividends on shares of our common stock in the foreseeable future.
Certain provisions of our Articles of Incorporation may make it more difficult for a third party to effect a change-of-control.
Our Articles of Incorporation authorizes the board of directors to issue up to 10,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the board of directors without further action by the stockholders. These terms may include preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of the board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock.
ITEM 2. | PROPERTIES |
All land in China is owned by the State. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes. In the case of land used for industrial purposes, the land use rights are granted for a period of up to 50 years. This period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations.
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We were granted land use rights from the Chinese government for 42,169 square meters of land located at No. 16 Yulu Street, Jinzhou High Technology Industrial Park, Jinzhou, China. The land use rights have a 30-year term and will expire on August 15, 2026. Our headquarters are located at this site. This site houses our office building, a research and development center, as well as our production facilities.
In addition to the land use rights, we also have ownership of eleven other properties. Two properties are located at No. 16 Yulu Street, two properties are located at Fuzhou Street, Taihe District of Jinzhou and the remaining seven are residential properties located at Huianli Guta District of Jinzhou. We have placed mortgages on the land and the four properties located at No. 16 Yulu Street and Fuzhou Street to secure certain bank loan from China Bank Jinzhou Branch for an amount up to RMB 50 million (approximately $6.25 million).
We also lease 169 square meters of office space at Wangjing Tower, No. 9 Zhong Huan Nan Lu, Wangjing, Chaoyang District, Beijing where our Beijing Representative Office is located. The lease has a 2-year term which runs from November 15, 2005 to January 31, 2008. The monthly rent is RMB 17,000.
We currently have established four alternator assembly lines and four starter assembly lines. The total annual production capacity of these production lines is approximately 2.2 million units of alternators and 1.8 million units of starters, assuming two work shifts per day with eight hours each.
We currently work in two work shifts of eight hours, each to maximize the capabilities of our assembly lines. For each year from 2005 to 2007, the utilization rates of our alternator production lines were approximately 85%, 109% and 108% , respectively, while those of the starter production lines were approximately 140%, 74% and 86% respectively.
We believe that all our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business. We plan to utilize a portion of the $22.7 million that we raised in our private placement that closed in December 2007 to construct additional production lines to expand our production capacity for alternators and starters.
ITEM 3. | LEGAL PROCEEDINGS |
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of our security holders during the fourth quarter of 2007.
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PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Market for our Common Stock
Our common stock is quoted on the Nasdaq Global Market under the symbol “WATG.”
The following table sets forth, for the periods indicated, the high and low bid prices of our common stock. These prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. The high and low quotations for the first quarter and the third quarter of fiscal year 2006 have been adjusted for the above mentioned 20-for-1 reverse stock split and to give retroactive effect to the 2.448719-for-1 forward stock split, respectively.
Closing Bid Prices (1) | ||||||||
High | Low | |||||||
Year Ended December 31, 2007 | ||||||||
1 st Quarter | $ | 6.70 | $ | 5.12 | ||||
2 nd Quarter | 7.43 | 6.57 | ||||||
3 rd Quarter | 7.31 | 5.65 | ||||||
4 th Quarter | 10.16 | 7.61 | ||||||
Year Ended December 31, 2006 | ||||||||
1 st Quarter | $ | 1.40 | $ | 1.20 | ||||
2 nd Quarter | 2.65 | 1.25 | ||||||
3 rd Quarter | 4.80 | 3.00 | ||||||
4 th Quarter | 5.20 | 3.44 |
(1) The above tables set forth the range of high and low closing bid prices per share of our common stock as reported by www.quotemedia .com for the periods indicated.
Reports to Stockholders
We plan to furnish our stockholders with an annual report for each fiscal year ending December 31 containing financial statements audited by our independent certified public accountants. Additionally, we may, in our sole discretion, issue unaudited quarterly or other interim reports to our stockholders when we deem appropriate. We intend to maintain compliance with the periodic reporting requirements of the Exchange Act.
Approximate Number of Holders of Our Common Stock
On December 31, 2007, there were approximately 296 stockholders of record of our common stock.
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Dividend Policy
Other than the dividends declared or paid by our subsidiary Wonder Auto before the reverse acquisition transaction and the forward stock split as discussed above, we have never declared dividends or paid cash dividends. Our board of directors will make any future decisions regarding dividends. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends in the near future.
PART II
ITEM 6. | SELECTED FINANCIAL DATA. |
Not applicable.
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Overview
Wonder Auto Technology, Inc. is a Nevada holding company whose China-based operating subsidiaries, Jinzhou Halla, Jinzhou Dongwoo and Jinzhou Wanyou, are primarily engaged in designing, developing, manufacturing and selling automotive electrical parts in China, specifically alternators and starters. We have been producing alternators and starters in China since 1997. In 2006, we ranked second in sales revenue in China in the market for automobile alternators and starters. Our market share increased to 14.6% in 2007 from 13.9% in 2006. We believe our brand and our products are well recognized and respected in the automotive industry in China.
Most of our products are used in passenger cars, especially smaller engine vehicles with engine displacement below 1.6 liters. We offer over 150 different models of alternators and over 70 different models of starters. In addition, we have begun to manufacture and sell rectifier and regulator products for use in alternators as well as various rods and shafts for use in shock absorbers, alternators and starters.
We sell our products to automakers, engine manufacturers and, increasingly, auto parts suppliers, based primarily in China, and we are increasingly exporting our products to the international market. Our primary focus during 2006 and 2007 has been to increase sales of our alternator and starter products. We have experienced significant growth in sales revenue resulting primarily from increasing demand for our products, larger orders from our key customers, and expansion of our production capacity. We are also increasing exports to international markets.
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To capitalize on the increased demand for our products, we have undertaken significant capital expansion and capital improvement efforts, utilizing most of the net proceeds received from our equity financing in 2006 to expand and enhance our manufacturing capabilities. In 2006 and early 2007, we also made two strategic acquisitions of suppliers, Jinzhou Dongwoo and Jinzhou Wanyou, which reduced our cost of raw materials and components. In addition, a large portion of Jinzhou Wanyou’s products are sold to third parties which has helped expand our customer base and product offerings.
As of December 31, 2007, we had 513 employees working at our four alternator assembly lines and four starter assembly lines. The total annual production capacity of these production lines is approximately 2.2 million units of alternators and 1.8 million units of starters. Our assembly lines operate on two eight-hour shifts per day over a five-day work week. Full utilization of our assembly lines is defined on this basis, and overtime production may result in utilization rates exceeding 100%. The utilization rates of our alternator production lines in 2005, 2006 and 2007 were approximately 85%, 109% and 108%,respectively, while those of the starter production lines were approximately 140%, 74% and 86%, respectively.
In April 2007, we expanded our product mix by acquiring Jinzhou Wanyou, a manufacturer of shock absorber rods, vibration dampers and rotary axles for automotive alternators and starters. We expect our revenue to continue to grow in future periods as a result of contributions by Jinzhou Wanyou, expected growth in China’s auto parts industry, the increased demand for small engine automobiles, a friendly regulatory environment and our plans to increase the level of our exports.
On January 1, 2008, we acquired 50% of Jinzhou Hanhua Electrical System Co., Ltd., a manufacturer of armature for automotive starters. The acquisition of Hanhua will further boost our competitive strength.
Principal Factors Affecting Our Financial Performance
We believe that the following factors will continue to affect our financial performance:
Growth of China’s automobile industry. China is now the second largest auto market in the world. According to the China Association of Automobile Manufacturers, the output of automobiles in China in 2007 reached 8.9 million units, including 6.4 million passenger cars, representing a 22.0% increase over 2006. We believe that the significant level of automobile ownership in China and the increasing number of automobile sales will increase the size of the automotive aftermarket, the need for replacement parts and the overall demand for our products.
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Fluctuations in raw material and components costs. Our operations require substantial amounts of a variety of raw materials and components. Some raw materials and components, especially copper wire, have been susceptible to fluctuations in price and availability. Significant increases in the prices of our raw materials and components have a direct and negative impact on our gross margin. We attempt to offset disadvantageous price fluctuations in raw materials and components by sourcing large quantities to achieve economies of scale, by reducing the consumption of raw material per unit and component per unit through research and development and by focusing on suppliers within close proximity to our facilities. We have also acquired a 50.0% ownership interest in Jinzhou Dongwoo, one of our primary suppliers, to reduce our raw material and component costs. Ultimately, we may be required to raise finished product prices in order to recover higher raw material and component costs and maintain our profit margin.
PRC regulations promoting the use of domestically manufactured auto parts and components. Effective on July 1, 2006, the National Development and Reform Commission, the PRC Ministry of Finance and the Ministry of Commerce adopted a regulation encouraging automakers to use parts manufactured by local Chinese auto parts manufacturers. This regulation imposes on automakers a tariff of up to 25% if more than 60% of the price of the components and parts of an automobile manufactured in China are imported. We believe that this regulation will continue to have a positive impact on the sales of our products.
Increase in exports. We plan to expand sales of our products to foreign markets. In 2007, our sales to foreign customers reached $9.7 million, or approximately 9.6% of our total sales, with the majority of our foreign sales being made to customers in South Korea, Turkey and the United States. Our acquisition of Jinzhou Wanyou contributed to increased exports of our products. In 2007, Jinzhou Wanyou’s total sales to foreign markets were approximately $4.8 million, accounting for approximately 57.5% of its total sales.
Expansion of our production capacity. Expansion of our production capacity is needed to satisfy increased demand for our products. Our utilization rate for our alternator and starter production lines in 2007 was approximately 108% and 86%, respectively. In order to increase our production capacity, we must make capital investments that improve the efficiency and capacity of our manufacturing facilities and equipment. We may need to build additional production lines to satisfy the projected demand for our products.
Taxation
United States
Wonder Auto Technology, Inc. is subject to United States tax at a tax rate of 34%. No provision for the US federal income taxes has been made as the Company had no taxable income for the reporting period.
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BVI
Wonder Auto Limited was incorporated in the BVI and, under the current laws of the BVI, are not subject to income taxes.
PRC
FIEs established in the PRC are generally subject to an EIT rate of 33.0%, which includes a 30.0% state income tax and a 3.0% local income tax. FIEs established in Coastal Open Economic Zones, Special Economic Zones or Economic and Technical Development Zones, such as our PRC subsidiaries, are subject to an EIT rate of 27.0%, which is comprised of a 24.0% state income tax and a 3.0% local income tax.
Under the income tax law and the related implementing rules, FIEs engaging in manufacturing businesses with a term of operation exceeding ten years may, subject to approval from local taxation authorities, be entitled to a two-year tax exemption from PRC EIT starting from the year they become profitable and a 50% tax reduction for the three years thereafter.
Our subsidiaries Jinzhou Halla, Jinzhou Dongwoo and Jinzhou Wanyou are subject to PRC EIT at a rate of 27.0% of assessable profits, consisting of a 24.0% national tax and a 3.0% local tax. As approved by the relevant PRC tax authority, Jinzhou Halla and Jinzhou Dongwoo were entitled to a two-year exemption from EIT followed by a 50.0% tax exemption for the next three years, commencing from the first cumulative profit-making year in the fiscal financial year. The tax holiday of Jinzhou Halla commenced in 2001, and Jinzhou Halla was subject to a tax rate of 13.5% for 2003, 2004 and 2005. Furthermore, Jinzhou Halla, as an FIE, is engaged in an advanced technology industry and has been approved to enjoy a further 50.0% tax exemption for 2006, 2007 and 2008. The tax holiday of Jinzhou Dongwoo commenced in 2004. Jinzhou Dongwoo was subject to a tax rate of 13.5% for 2006, 13.5% for 2007 and is expected to be subject to a tax rate of 13.5% for 2008. Finally, Jinzhou Wanyou, is entitled to a two-year EIT exemption for 2007 and 2008 and will receive a 50.0% EIT reduction for 2009, 2010 and 2011, assuming that Jinzhou Wanyou is profitable for each of these years.
In addition, Jinzhou Halla, Jinzhou Dongwoo and Jinzhou Wanyou, being FIEs, were entitled to a special tax concession which allows an amount equal to 40.0% of the qualifying domestic capital expenditures (as defined and approved under the relevant PRC income tax rule) to be used as an offset against the excess of the current year’s EIT over the prior year’s EIT. Jinzhou Hall and Jinzhou Dongwoo also were entitled to another special tax concession, an amount equivalent to 50.0% of the current year’s domestic development expenses can be used as an offset against EIT. These two tax concessions, if unutilized in a particular year, can be carried forward for five years.
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On March 16, 2007, the National People’s Congress of China passed the new EIT Law, which took effect on January 1, 2008. Under the new EIT Law, an enterprise established outside of China with "de facto management bodies" within China is considered a resident enterprise and will normally be subject to EIT at the rate of 25.0% on its global income. The new EIT Law, however, does not define the term "de facto management bodies." If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our global income will be subject to PRC income tax at a tax rate of 25.0%. In addition, under the new EIT Law, dividends from our PRC subsidiaries to us will be subject to a withholding tax. The rate of the withholding tax has not yet been finalized, pending promulgation of implementing regulations. Furthermore, the ultimate tax rate will be determined by treaty between China and the tax residence of the holder of the PRC subsidiaries. We are actively monitoring the proposed withholding tax and are evaluating appropriate organizational changes to minimize the corresponding tax impact. The new EIT Law imposes a unified income tax rate of 25.0% on all domestic-invested enterprises and FIEs, such as our PRC operating subsidiaries, unless they qualify under certain limited exceptions, but the EIT Law permits companies to continue to enjoy their existing preferential tax treatments until such treatments expire in accordance with their current terms. We expect details of the transitional arrangement for the five-year period from January 1, 2008 to December 31, 2012 applicable to enterprises established prior to March 16, 2007 to be set out in more detailed implementing rules in the future. Any increase in our effective tax rate as a result of the above rules may adversely affect our operating results. However, details regarding implementation of this new law are expected to be provided in the form of one or more implementing regulations to be promulgated by the PRC government, and the timing of the issuance of such implementing regulations is currently unclear.
Results of Operations
The following tables set forth key components of our results of operations for the periods indicated, in dollars and as a percentage of revenue.
Year Ended December 31, | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
(in thousands) | ||||||||||||
Sales revenue | $ | 48,063 | $ | 72,150 | $ | 102,084 | ||||||
Cost of sales | 35,963 | 57,342 | 76,460 | |||||||||
Gross profit | 12,100 | 14,808 | 25,624 | |||||||||
Operating expenses | ||||||||||||
Administrative expenses | 1,155 | 1,918 | 3,565 | |||||||||
Research and development expenses | 824 | 948 | 1,136 | |||||||||
Selling expenses | 2,148 | 2,138 | 3,291 | |||||||||
Unusual charge – Make good provision | - | 7,508 | 18,266 | |||||||||
Total expenses | 4,128 | 12,511 | 26,258 | |||||||||
Other income | 137 | 357 | 287 | |||||||||
Government grants | 1,497 | - | - | |||||||||
Financial cost | 839 | 1,034 | 2,521 | |||||||||
Income (loss) before income taxes | 7,298 | 2,088 | (1,225 | ) | ||||||||
Income taxes | 897 | 1,270 | 1,389 | |||||||||
Minority interests | - | 102 | 1,137 | |||||||||
Net income (loss) | 6,401 | 716 | (3,750 | ) | ||||||||
As a Percentage of Sales Revenue | ||||||||||||
Sales revenue | 100 | % | 100 | % | 100 | % | ||||||
Cost of sales | 74.8 | % | 79.5 | % | 74.9 | % | ||||||
Gross profit | 25.2 | % | 20.5 | % | 25.1 | % | ||||||
Operating expenses | ||||||||||||
Administrative expenses | 2.4 | % | 2.7 | % | 3.5 | % | ||||||
Research and development expenses | 1.7 | % | 1.3 | % | 1.1 | % | ||||||
Selling expenses | 4.5 | % | 3.0 | % | 3.2 | % | ||||||
Unusual charge – Make good provision | - | % | 10.4 | % | 17.9 | % | ||||||
Total expenses | 8.6 | % | 17.3 | % | 25.7 | % | ||||||
Income (Loss) before income taxes | 15.2 | % | 2.9 | % | (1.2 | ) % | ||||||
Income taxes | 1.9 | % | 1.8 | % | 1.4 | % | ||||||
Minority interests | - | 0.1 | % | 1.1 | % | |||||||
Net income (loss) | 13.3 | % | 1.0 | % | (3.7 | ) % |
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Year Ended December 31, | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
(in thousands) | ||||||||||||
Components of Sales Revenue | ||||||||||||
Total sales revenue | $ | 48,063 | $ | 72,150 | $ | 102,084 | ||||||
Revenue by product or product line | ||||||||||||
Alternator | 30,118 | 45,216 | 59,790 | |||||||||
Starter | 17,945 | 26,934 | 35,014 | |||||||||
Rods and Shafts | - | - | 7,280 |
Comparison of 2007 and 2006
Sales Revenue. Sales revenue increased $29.9 million, or 41.5%, to $102.1 million in 2007 from $72.2 million in 2006. This increase was primarily attributable to increased market demand for our products in the small and medium-size engine passenger car market in China, spurred in part by government incentives, our expanded production capacity and increased sales to our existing customers. The robust growth in export sales also contributed to the revenue increase. Export sales accounted for 9.6% of the total sale in 2007, compared to 4.8% in 2006.
Cost of Sales. Our cost of sales increased $19.1 million to $76.5 million in 2007 from $57.3 million in 2006. As a percentage of sales revenue, the cost of sales decreased to 74.9% in 2007 from 79.5% in 2006. The increase in our cost of sales was a result of substantial increase in sales volume. However, the cost of sales decreased as a percentage of sales revenue because the Company adopted more efficient technology to decrease raw material consumption per unit product and that the large-scale production brought down production cost and cost of labor used per unit product.
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Gross Profit. Our gross profit increased $10.8 million to $25.6 million in 2007 from $14.8 million in 2006. Gross profit as a percentage of sales revenue was 25.1% in 2007, as compared to 20.5% in 2006. The increase in our gross profit as a percentage of sales revenue increased as a result of reduction of costs and raw material consumption per unit of production as a result of our research and development efforts. We have also increasingly focused our sales efforts on customers that place larger orders, which results in increased economies of scale in raw materials purchases.
Administrative Expenses. Our administrative expenses increased $1.7 million, or 85.9%, to $3.6 million in 2007 from $1.9 million in 2006. As a percentage of sales revenue, administrative expenses increased to 3.5% in 2007 from 2.7% in 2006. The increase was primarily attributable to expenses incurred in our financing activities in the United States, increased audit expenses, increased independent director expense, as well as increased expenses to improve internal control to comply with Sarbanes-Oxley Act.
Research and development costs. Our research and development costs, listed as a new line item under operating expenses starting from the first quarter of 2007, consists of amounts spent on developing new products and enhancing our existing products. Our research and development costs increased $188,295, or 19.9%, to $1.1million in 2007 from $947,702 in 2006. Such increase primarily attributable to the purchase of research and development equipment and hiring of new research and development personnel.
Selling Expenses. Our selling expenses increased to $3.3 million in 2007 from $2.1 million in 2006. As a percentage of sales revenue, our selling expenses increased to 3.2% in 2007 from 3.0% in 2006. This percentage increase was primarily attributable to increased after-sale service expenses, greater number of sales personnel and the resulting salary increase, as well as the rising transportation costs.
Unusual Charge – Make Good Provision.
In connection with the Company’s private placement which closed in June 2006, two of the Company’s shareholders Choice Inspire Limited (“CIL”) and Empower Century Limited (“ECL”) pledged and deposited into escrow 3,300,000 shares of the Company’s common stock pursuant to a “make good” escrow agreement with the private placement investors. Under the “make good” escrow agreement, the pledged shares were deliverable to the investors, on a pro rata basis, if the Company did not meet certain minimum net income thresholds during the fiscal years 2006 and 2007, but would be released back to CIL and ECL if the net income thresholds were achieved.
On February 8, 2007 and February 2, 2008, stockholders’ of CIL and ECL transferred their rights to receive the 3,300,000 shares in escrow for no consideration to Xiangdong Gao who ultimately received the escrowed shares. Per SFAS No. 123R, Accounting for Stock-Based Compensation, if the net income threshold is met, the shares will be released back to CIL and ECL and treated as an expense equal to the amount of the market value of the shares as of the date when the performance target was met. We achieved our net income thresholds for both 2006 and 2007, accordingly, we recognized a non-cash expense of $7.5 million and $18.3 million in 2006 and 2007, respectively.
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Total Expenses. Our total expenses increased $13.7 million to $26.3 million in 2007 from $12.5 million in 2006. As a percentage of sales revenue, our total expenses increased to 25.7% in 2007 from 17.3% in 2006. The increases in amount and percentage were mainly due to the increase of non-cash expenses related to the make good arrangement and other expenses as discussed above.
(Loss) Income Before Income Taxes. We incurred a $1.2 million loss before income tax as compared to $2.1 million income from operations before income taxes in 2006. Such decrease in income before income tax was mainly attributable to the non-cash expenses related to the make good arrangement as discussed above.
Net (Loss) Income. We incurred a net loss of $3.8 million in 2007 as compared to a net income of $716,046 in 2006. Such decrease was mainly attributable to the non-cash expenses related to the make good arrangement as discussed above.
Comparison of 2006 and 2005
Sales Revenue. Sales revenue increased $24.1 million, or 50.1%, to $72.2 million in 2006 from $48.1 million in 2005. This increase was mainly attributable to increased market demand for our products in the small and medium-size engine passenger car market in China spurred in part by government incentives, our expanded production capacity and increased sales to our existing customers.
Cost of Sales. Our cost of sales increased $21.4 million to $57.3 million in 2006 from $36.0 million in 2005. This increase is attributable to the rise in our cost of raw materials and components and the increase in total sales. As a percentage of sales revenue, the cost of sales increased to 79.5% in 2006 from 74.8% in 2005, primarily as a result of the increase in raw materials costs. The price of raw materials and components rose by 8.9% in 2006, which contributed to an increase of 8.2% in the overall cost of sales despite our relatively stable labor and manufacturing costs.
Gross Profit. As a result of the factors above, our gross profit increased $2.7 million to $14.8 million in 2006 from $12.1 million in 2005. Gross profit as a percentage of sales revenue was 20.5% in 2006, as compared to 25.2% in 2005.
Administrative Expenses. Our administrative expenses increased $762,439, or 66.0%, to $1.9 million in 2006 from $1.2 million in 2005. As a percentage of sales revenue, administrative expenses increased to 2.7% in 2006 from 2.4% in 2005. The increases in amount and percentage were primarily attributable to expenses incurred in connection with being a U.S. public reporting company.
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Selling Expenses. Our selling expenses remained steady at $2.1 million in 2005 and 2006. As a percentage of sales revenue, our selling expenses decreased to 3.0% in 2006 from 4.5% in 2005. This percentage decrease was primarily attributable to our utilization of more efficient controls, which stabilized our selling expenses, improved the quality of our products and resulted in less expenses related to repairs and replacements.
Unusual Charge – Make Good Provision. As discussed above, in connection with the make good arrangement, we recognized a non-cash expense of $7.5 million in 2006. We had no such expense in 2005.
Total Expenses. Our total expenses increased $8.4 million to $12.5 million in 2006 from $4.1 million in 2005. As a percentage of sales revenue, our total expenses increased to 17.3% in 2006 from 8.6% in 2005. The increases in amount and percentage s were primarily attributable to the non-cash expenses of $7.5 million related to make good arrangement recognized in 2006.
Income Before Income Taxes. Income from operations before taxes decreased $5.2 million, or 71.4%, to $2.1 million in 2006 from $7.3 million in 2005. Such decrease in income before income tax was mainly attributable to the $7.5 million non-cash expenses related to the make good arrangement as discussed above.
Net Income. Net income decreased $5.7 million, or 88.8%, to $716,046 in 2006 from $6.4 million in 2005. Such decrease was mainly attributable to the $7.5 million non-cash expenses related to the make good arrangement as discussed above.
Allowance for Doubtful Debts
Our trade receivables were $38.1 million as of December 31, 2007, an increase of $13.4 million, or 54.4%, from $24.7 million as of December 31, 2006. Our allowance for doubtful accounts totaled $37,071 as of December 31, 2007, a 15.3% increase from $32,150 as of December 31, 2006.
The increase of our trade receivables was mainly due to the increase in our sales revenue. Our policy is to generally account a trade receivable as a doubtful account only if it remains uncollected for more than one year. Our allowance for doubtful debts accounts for an insignificant portion of the receivable balance in spite of the increasing trade receivable balance throughout the reporting periods because almost all the outstanding debts were aged less than one year. Many of our customers have long business relationships with us and good settlement histories. In the absence of significant bad debt experience, we consider the existing provisioning policy as adequate.
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Business Segment Information
Our business operations can be categorized into three segments based on the type of products which we manufacture and sell, specifically alternators, starters, rods and shafts. Our alternator product line offerings are available in five series based on different sizes and output rates and come in over 150 models. Our starter product line offerings primarily consist of planetary type starters which are small and lightweight and come in over 70 models based on their size and power output. We started manufacturing shock absorbers in 2007 and targeted primarily to the international market outside China.
In 2007, our sales revenue from our alternator product line was $59.8 million, our sales revenue from our starter product line was $35.0 million and our sales from our rods and shafts product line was $7.3 million. Our starter product line has historically provided a higher profit margin than our alternator product line. We manufacture and sell both our alternators and starters using largely the same facilities, personnel and other resources. Among the three principal products, shock absorber production enjoyed the fastest growth rate and the highest gross profit rate, reaching approximately 25-28%.
Additional information regarding our alternator, starter and rods and shafts product lines can be found at Note 22 in our audited consolidated financial statements contained elsewhere in this statement.
Liquidity and Capital Resources
As of December 31, 2007, we had cash and cash equivalents of $26.1 million and restricted cash of $8.6 million. The following table provides detailed information about our net cash flow for all financial statements periods for 2005, 2006 and 2007.
Statement of Cash Flow
Years Ended December 31, | ||||||||||||
2005 | 2006 | 2007 | ||||||||||
(U.S. dollar in thousands) | ||||||||||||
Net cash provided by operating activities | $ | 11,439 | $ | 1,389 | $ | 12,170 | ||||||
Net cash used in investing activities | (2,099 | ) | (6,219 | ) | (24,566 | ) | ||||||
Net cash (used in) provided by financing activities | (6,952 | ) | 8,308 | 29,232 | ||||||||
Effect of foreign currency translation on cash and cash equivalents | 151 | 357 | 1,063 | |||||||||
Net cash flow | 2,539 | 3,835 | 17,899 |
Operating Activities
Net cash provided by operating activities was $12.2 million in 2007, as compared to $1.4 million net cash provided by operating activities in 2006. The increase was greatly due to increases in net income, accounts payable and inventories, but was partially offset by higher trade receivables and bill receivables.
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Net cash provided by operating activities during 2006 totaled $1.4 million, as compared to $11.4 million during 2005. The decrease was mainly due to higher accounts receivable and increased expenses related to servicing our higher sales volume in the 2006 fiscal year.
Investing Activities
Our main uses of cash for investing activities are for the acquisition of property, plant and equipment.
Net cash used in investing activities in 2007 was $24.6 million, as compared to $6.2 million in 2006. The increase of net cash used in investing activities was mainly attributable to the purchase of property, plant and equipment for $8 million and the acquisition of Jinzhou Wanyou for $14 million.
Net cash used in investing activities in 2006 was $6.2 million, as compared to $2.1 million in 2005. The increase was due to investments in fixed assets, the acquisition of Jinzhou Dongwoo for $5.8 million and an investment of $500,000 for a 20.4% in interest in Jinzhou Wanyou in 2006.
Financing Activities
Net cash provided by financing activities in 2007 totaled $29.2 million as compared to $8.3 million provided by financing activities in 2006. The increase in net cash is attributable to the receipt of $22.7 million through the issuance of stock in a private placement completed in December 2007, and the increase of $11.3 million net proceeds from bank loans.
Our debt to equity ratio was 35.6% as of December 31, 2007. We plan to maintain our debt to equity ratio below 50%, increase long-term loans, decrease short-term loans and increase the ratio of the borrowing in foreign currency to take advantage of the expected increase of the value of the Renminbi against the U.S. dollar.
Net cash provided by financing activities in 2006 totaled $8.3 million as compared to $7.0 million used in financing activities in 2005. The increase in net cash is attributable to the receipt of $10.1 million through the issuance of stock in a private placement completed in June 2006, net of offering expenses, and $876,985 from bank loans net of repayments which more than offset a $1.7 million dividend payment by Jinzhou Halla to its stockholders, Man Do and Wonder Auto Limited.
In December 2007, Wonder Auto Limited completed a private placement of its common shares to certain accredited investors for $25.9 million in gross proceeds, resulting in $22.7 million in net proceeds after payment of $3.2 million in offering expenses. We used approximately $6.5 million of the net proceeds to purchase research and development equipment, approximately $15.0 million to build new production lines, and the remaining as working capital.
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As of December 31, 2007, the maturities for our bank loans are as follows.
All amounts, other than percentages in millions of U.S. dollars
In millions of U.S. dollars
Banks | Amounts | Beginning | Ending | Duration | |||||
China Construction Bank | 2.7 | October 29,2007 | October 28,2008 | 1 year | |||||
China Construction Bank | 2.7 | August 3, 2007 | August 2, 2008 | 1 year | |||||
Bank of China | 4.1 | September 9,2007 | March 28,2008 | 6 months | |||||
Bank of China | 0.7 | September 23, 2007 | September 24, 2008 | 1 year | |||||
China construction Bank | 5.5 | April 12, 2007 | April 11,2009 | 2 years | |||||
DEG | 12.2 | February 12, 2007 | October 15, 2013 | 7 years | |||||
Total | 27.9 |
We believe that we maintain good relationships with the banks we deal with and our current available working capital, after receiving the aggregate proceeds of the capital raising activities and bank loans referenced above, should be adequate to sustain our operations at our current levels through at least the next twelve months.
Obligations Under Material Contracts
Below is a table setting forth our contractual obligations as of December 31, 2007:
All amounts in thousands of U.S. dollars
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
Long term debt obligations | 27,905 | 10,283 | 9,530 | 5,395 | 2,697 | |||||||||||||||
Capital commitment | 1,433 | 1,433 | - | - | - | |||||||||||||||
Operating lease obligations | 8 | 8 | - | - | - | |||||||||||||||
Purchase obligations | - | - | - | - | - | |||||||||||||||
Total | $ | 29,346 | $ | 11,724 | 9,530 | 5,395 | 2,697 |
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Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make assumptions, estimates and judgments that affect the amounts reported in the financial statements, including the notes thereto, and related disclosures of commitments and contingencies, if any. We consider our critical accounting policies to be those that require the more significant judgments and estimates in the preparation of financial statements, including the following:
· | Allowance for doubtful accounts. We establish an allowance for doubtful accounts based on our assessment of the collectibility of trade receivables. A considerable amount of judgment is required in assessing the amount of the allowance. Among other things, we consider the historical level of credit losses and apply percentages to aged receivable categories. We make judgments about the creditworthiness of each customer based on ongoing credit evaluations, and we monitor current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required. |
Based on the above assessment, during the reporting periods, we have established a general provisioning policy for an allowance equivalent to 100.0% of the gross amount of trade receivables due over one year. Additional specific provision is made against trade receivables aged less than one year to the extent which they are considered to be doubtful.
Bad debts are written off when identified. We extend unsecured credit to customers ranging from three to six months in the normal course of business. We do not accrue interest on trade accounts receivable.
Historically, losses from uncollectible accounts have not significantly deviated from our estimated allowance, and no significant additional bad debts have been written off directly to the profit and loss. This general provisioning policy has not changed in the past since establishment, and we consider the aforementioned general provisioning policy to be adequate and not too excessive and do not expect to change this established policy in the near future.
· | Inventories. Inventories are stated at the lower of cost or market. Cost is determined on a weighted average basis and includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition. In assessing the ultimate realization of inventories, we make judgments as to future demand requirements compared to current or committed inventory levels. Our reserve requirements generally increase as our projected demand requirements decrease due to market conditions and product life cycle changes. We estimate the demand requirements based on market conditions, forecasts prepared by our customers, sales contracts and orders in hand. |
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In addition, we estimate net realizable value based on intended use, current market value and inventory aging analyses. We write down the inventories for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventories and the estimated market value based upon assumptions about future demand and market conditions.
Based on the above assessment, we established a general 50.0% provision for inventories aged over one year.
Historically, the actual net realizable value has been close to our estimates.
· | Property, plant and equipment. Our property, plant and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. |
Depreciation is provided on a straight-line basis over the estimated useful life of an asset. The principal depreciation rates are as follows:
Annual rate | Residual value | |||||||
Buildings | 3 - 4.5 | % | 10 | % | ||||
Plant and machinery | 9 | % | 10 | % | ||||
Motor vehicles | 9 - 18 | % | 10 | % | ||||
Furniture, fixtures and equipment | 15 | % | 10 | % | ||||
Tools and equipment | 15 - 18 | % | 0 -10 | % | ||||
Leasehold improvements | 20 | % | 0 | % |
Construction in progress mainly represents expenditures in respect of our new offices and factories under construction. All direct costs relating to the acquisition or construction of our new office and factories are capitalized as construction in progress. No depreciation is provided in respect of construction in progress.
Maintenance or repairs are charged to expense as incurred. Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to income.
· | Revenue recognition. Revenue from sales of our products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are put into use by its customers, the sales price is fixed or determinable and collection is reasonably assured. |
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· | Warranty. It is our policy to provide after sales support by way of a warranty program. We provided warranties to certain customers with warranty periods ranging from two years or 50,000 kilometers to three years or 60,000 kilometers, whichever comes first. |
Based on past experience, we have established a policy of making a general provision for warranty such that the closing balance of this provision equals 1.5% of the relevant sales for the year.
Recently issued accounting pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). This interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year. The adoption of FIN 48 has no material effect on our financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157 Fair Value Measurement(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 shall be effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The provisions of this statement should be applied prospectively as of the beginning of the fiscal year in which SFAS 157 is initially applied, except in some circumstances where the statement shall be applied retrospectively. We are currently evaluating the effect, if any, of SFAS 157 on our financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with few exceptions. SFAS 159 also establishes presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. The requirements of SFAS 159 are effective for the 2008 fiscal year. We are in the process of evaluating this guidance and therefore have not yet determined the impact that SFAS 159 will have on our financial statements upon adoption.
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In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51”. SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective for the fiscal year beginning after December 15, 2008. The management is in the process of evaluating the impact that SFAS 160 will have on the Company’s financial statements upon adoption.
In December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”. SFAS 141 (Revised) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective for the fiscal year beginning after December 15, 2008. The management is in the process of evaluating the impact that SFAS 141 (Revised) will have on the Company’s financial statements upon adoption.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Seasonality
Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Not applicable.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA |
The full text of our audited consolidated financial statements as of December 31, 2007 and 2006 begins on page F-1 of this Annual Report on Form 10-K/A.
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
On June 22, 2006, concurrent with the change in control transaction discussed above, our Board of Directors elected to continue the existing relationship of our new subsidiary Wonder Auto with PKF Hong Kong, Certified Public Accountants and appointed PKF Hong Kong, Certified Public Accountants as our independent auditor. Additionally, concurrent with the decision to maintain our relationship with PKF Hong Kong, Certified Public Accountants, our Board of Directors approved the dismissal of Meyler & Company, LLC as our independent auditor.
No accountant’s report issued by Meyler & Company, LLC on the financial statements for either of the past two (2) years contained an adverse opinion or a disclaimer of opinion or was qualified or modified as to uncertainty, audit scope or accounting principles, except for a going concern opinion expressing substantial doubt about the ability of us to continue as a going concern.
During our two most recent fiscal years ended December 31, 2006 and 2005, there were no disagreements with Meyler & Company, LLC on any matter of accounting principles or practices, financial disclosure, or auditing scope or procedure. There were no reportable events, as described in Item 304(a)(1)(v) of Regulation S-K, during our two most recent fiscal years ended December 31, 2005 and 2004.
We furnished a copy of this disclosure to Meyler & Company, LLC and requested Meyler & Company, LLC to furnish us with a letter addressed to the Securities and Exchange Commission stating whether it agrees with the statements made by us herein in response to Item 304(a) of Regulation S-K and, if not, stating the respect in which it does not agree. A copy of the letter was filed by us as Exhibit 16.1 to our current report on Form 8-K, filed on June 23, 2006, as amended.
ITEM 9A. | CONTROLS AND PROCEDURES. |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2007. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2007, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were effective to satisfy the objectives for which they are intended.
Internal Controls Over Financial Reporting
Section 404 of the Sarbanes-Oxley Act of 2002 requires that management document and test the Company’s internal control over financial reporting and include in this Annual Report on Form 10-K a report on management’s assessment of the effectiveness of our internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting is effective, as of December 31, 2007.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Controls over Financial Reporting.
During the fiscal year ended December 31, 2007, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the fiscal year covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION. |
None.
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PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS OF AND CORPORATE GOVERNANCE |
Directors and Executive Officers
Set forth below are the names of our directors, officers and significant employees, their ages, all positions and offices that they hold with us, the period during which they have served as such, and their business experience During at least the last five years. The directors will serve until the next annual meeting of the stockholders or until their successors are elected or appointed and qualified. Executive officers will serve at the board’s discretion.
Name | Age | Position | ||
Qingjie Zhao | 50 | Chairman, Chief Executive Officer and President | ||
Meirong Yuan | 36 | Director, Chief Financial Officer and Treasurer | ||
Larry Goldman | 50 | Director | ||
David Murphy | 41 | Director | ||
Xingye Zhang | 81 | Director | ||
Yuncong Ma | 61 | Chief Operating Officer | ||
Seuk Jun Kim | 51 | Vice President of New Product Development | ||
Yuguo Zhao | 51 | Vice President of Sales and Marketing | ||
Yongdong Liu | 38 | Vice President of Production |
Qingjie Zhao . Mr. Zhao has been our Chief Executive Officer and President since June 22, 2006 and Chairman of our board since July 2006. Mr. Zhao joined our subsidiary, Jinzhou Halla, as its Chairman in October 1997. Mr. Zhao is also currently an executive director and 10.4% owner of China Wonder Limited, a company listed on the Alternative Investment Market of the London Stock Exchange, which is principally engaged in the manufacture and sale of specialty packaging machinery to the PRC pharmaceutical market, and an executive director and 11.0% owner of Jinzhou Jinheng Automotive Safety System Co., Ltd., which is principally engaged in the manufacture and sale of automotive airbag safety systems in China. Our company, China Wonder Limited and Jinzhou Jinheng Automotive Safety System Co., Ltd. Do not directly compete with each other, and there were no related party transactions between our Company and the other two companies as of the date of this report. Mr. Zhao devotes most of his business time to our affairs and the remainder of business time to the affairs of other companies. Mr. Zhao’s decision making responsibilities for these three companies are similar in the areas of public relations, management of human resources, risk management and strategic planning. Mr. Zhao graduated from the Liaoning Industry Academy in 1982. He thereafter became a faculty member at the Liaoning University of Technology from 1982 to 1989. After leaving his post at the Liaoning University of Technology, Mr. Zhao joined Jinzhou Shock Absorber Co., which is principally engaged in the manufacture and sale of suspension systems for automobiles, in January 1989 as an engineer and the head of the research department. He became its Chief Executive Officer in 1991 and remained in that position until 1997.
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Larry Goldman. Mr. Goldman has been our director since March 2007. Mr. Goldman is a Certified Public Accountant, with over 20 years of auditing, consulting and technical SEC reporting experience. Mr. Goldman currently works as a consultant, helping both US and Chinese public companies listed in the US with various SEC reporting and US GAAP reporting issues. Mr. Goldman was recently the Chief Financial Officer and Treasurer of Thorium Power Ltd. (OTCBB: THPW.OB). Prior to joining Thorium Power, Ltd., Mr. Goldman also worked as the Chief Financial Officer, Treasurer and Vice President of Finance of WinWin Gaming, Inc. Prior to joining WinWin in October 2004, Mr. Goldman was an audit partner at Livingston Wachtell & Co., LLP and had been with that CPA firm for approximately 19 years. Mr. Goldman is also an independent director and audit committee chairman of Winner Medical Group Inc. (OTCBB: WMDG.OB), a China based manufacturer of medical disposable products and surgical dressings. Mr. Goldman has extensive experience in both auditing and consulting with Chinese public companies, working in the Asian marketplace since 2000 and he frequently travels to China. He currently provides various CFO consulting and SEC reporting support to approximately five other Chinese companies listed in the United States.
David Murphy. Mr. Murphy has been our director since March 2007. Since June 2005, Mr. Murphy has served as the head of China Micro Economic Research at CLSA Asia Pacific Markets, a special unit dedicated to grassroots economic research in China and gathering local economic information from around China for rapid delivery to overseas based funds and corporate clients. From December 2000 to November 2004, Mr. Murphy worked as a correspondent for the Far Eastern Economic Review and the Wall Street Journal where he covered China and Mongolia focusing mainly on business and economic stories.
Xingye Zhang. Mr. Zhang become our director in July 2007. Mr. Zhang has served as the honorary Chairman of the China Automotive Engineering Association since September 2001. From January 1992 to September 2001, Mr. Zhang served as the Chairman of the China Automotive Engineering Association. Prior to that, Mr. Zhang was the Chairman of the board of directors of Hong Kong Huashengchang Automobile Corporation, the Vice Chairman of the board of directors of Hong Kong Huashengchang Machinery Co., Ltd. And Vice Chairman and Vice President of China Automobile Industry Corporation. Mr. Zhang also worked in government as the deputy chief of the Automobile Bureau of the Chinese No. 1 Ministry of Machinery. Mr. Zhang graduated from the Department of Machinery at Tianjin Beiyang University in 1951 and is a senior engineer with a rank of professor.
Meirong Yuan. Mr. Yuan became our Chief Financial Officer and Treasurer on June 22, 2006 and our director on March 2007. He has been the Vice President of Jinzhou Wonder Industrial Co., Ltd. Since June 2005. Mr. Yuan also served as a director of Jinzhou Halla Electrical Equipment Co., Ltd. since January 2002. From July 2003 to June 2005, Mr. Yuan served as the Vice President of Shenzhen Luante Asphalt Advanced Technology Co. Ltd. and was in charge of accounting and finance. Between October 2000 and October 2001, Mr. Yuan studied at ISMA Center in England. Mr. Yuan is a CPA in China and has a Ph.D. in management from South California University for Professional Study.
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Yuncong Ma. Mr. Ma became our Chief Operating Officer on June 22, 2006. He has been the General Manager of our subsidiary Jinzhou Halla since 1997 and is responsible for Jinzhou Halla’s overall operations. He has over 30 years of production experience and over 16 years of management experience in the automotive industry. Mr. Ma graduated from the Harbin Institute of Technology in 1970 specializing in machine crafting. After graduation, Mr. Ma worked for Jinzhou Huaguang Electron Tube Factory from 1970 to 1989. During that time, he worked in various posts in its production, technology and corporate structuring departments and was promoted to the post of Production Manager in 1984. Mr. Ma joined Jinzhou Shock Absorber Co., Ltd. in 1989 as its Chief Engineer and Vice Factory Manager.
Seuk Jun Kim. Mr. Kim became our Vice President of New Product Development in February 2007. From June 2006 to February 2007, Mr. Kim served as our Vice President for Research and Development. Mr. Kim joined Jinzhou Halla in October 1997 and has served as its Vice President of Research and Development since January 2005. Mr. Kim is responsible for Jinzhou Halla’s research and development and quality control functions. In 1981, Mr. Kim graduated from Pohang University of Science and Technology in Korea with a bachelor’s degree in automotive electrical engineering. Prior to formally joining Jinzhou Halla in 1997, Mr. Kim worked at the Korea Qingzhou Electrical Machinery Factory where he was in charge of technical support.
Yuguo Zhao. Mr. Zhao became our Vice President of Sales and Marketing on June 22, 2006, and he has been the Head of our Sales and Marketing Group since June 1996 when he joined us. He became an Assistant General Manager in January 2005. Mr. Zhao is responsible for our sales and after-sales operations. In 1979, Mr. Zhao graduated from the Jinzhou Agriculture Academy, formerly known as Jinzhou Agriculture Automotive School. Between 1980 and 1996, he worked for Jinzhou Electrical as its Production Department Manager, Chief of Production and Chief of Operations, among other posts.
Yongdong Liu. Mr. Liu became our Vice President of Production on June 22, 2006, and he has been the Head of Production of Jinzhou Halla since May 2001 and an Assistant General Manager of Jinzhou Halla since January 2005. Mr. Liu oversees our production, purchasing, human resources and administration functions. Mr. Liu graduated from the Suzhou Institute of Silk Textile Technology with a degree in weaving mechanical design in 1992. Between 1992 and 1996, Mr. Liu worked in Jinzhou Electrical and was responsible for its production technologies. He joined us in June 1996 as a division head in the production department.
There are no agreements or understandings for any of our executive officers or directors to resign at the request of another person, and no officer or director is acting on behalf of nor will any of them act at the direction of any other person.
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Board Composition and Meetings of the Board of Directors
The Board of Directors is currently composed of five members: Qingjie Zhao, Meirong Yuan, Larry Goldman, Xingye Zhang and David Murphy. All actions of the Board of Directors require the approval of a majority of the directors in attendance at a meeting at which a quorum is present. Through December 31, 2007, our Board of Directors met in person twice and acted by written consent 9 times.
Committees
Our board of directors currently has three standing committees which perform various duties on behalf of and report to the board of directors: (i) audit committee, (ii) compensation committee and (iii) governance and nominating committee. Each of the three standing committees is comprised entirely of independent directors. From time to time, the board of directors may establish other committees.
Audit Committee and Audit Committee Financial Expert
Our audit committee consists of three members: Larry Goldman, David Murphy and Xingye Zhang, each of whom is "independent" as that term is defined under the Nasdaq Marketplace Rules. Our audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. Mr. Goldman serves as our audit committee financial expert as that term is defined by the applicable SEC rules.
Independent Directors
Larry Goldman, David Murphy and Xingye Zhang are "independent" as that term is defined under the Nasdaq Marketplace Rules.
Policy Regarding Board Attendance
Our directors are expected to attend Board meetings as frequently as necessary to properly discharge their responsibilities and to spend the time needed to prepare for each such meeting. Our directors are expected to attend annual meetings of stockholders, but we do not have a formal policy requiring them to do so.
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Director Compensation
In 2007, we entered into independent director’s Contracts and Indemnification Agreements with each of the independent directors. Under the terms of the independent director’s contracts, Mr. Goldman is entitled to $50,000, Mr. Murphy is entitled to $40,000 and Mr. Zhang is entitled to $40,000 as annual compensation for the services to be provided by them as independent directors, and as chairpersons of various board committees, as applicable. Mr. Goldman’s compensation is greater because he has greater responsibilities as the Audit Committee Chairman. Under the terms of the Indemnification Agreements, we agreed to indemnify the independent directors against expenses, judgments, fines, penalties or other amounts actually and reasonably incurred by the independent directors in connection with any proceeding if the independent director acted in good faith and in our best interests. It is our practice to reimburse our directors for reasonable travel expenses related to attendance at board of directors and committee meetings.
The compensation paid to Mr. Zhao and Mr. Yuan, our named executive officers who also serve on our board of directors, is reported in the Summary Compensation Table below. They do not receive any additional compensation for their service as directors.
Family Relationships
There are no family relationships among our directors or officers.
Code of Ethics
In June 2006, we amended our code of business conduct and ethics and expanded the scope of the code of business conduct and ethics to cover the conduct of our business by all employees, officers and directors. We intend to maintain the highest standards of ethical business practices and compliance with all laws and regulations applicable to our business, including those relating to doing business outside the United States.
ITEM 11. | EXECUTIVE COMPENSATION |
Summary Compensation Table
The following table sets forth information concerning all compensation awarded to, earned by or paid to our Chief Executive Officer for services during the last two fiscal years in all capacities to us, our subsidiaries and predecessors. No other executive officer received compensation of $100,000 or more for the year ended December 31, 2007.
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Annual Compensation | |||||||||||
Name And Principal Position | Year | Salary ($) | Total ($) | ||||||||
Qingjie Zhao | 2007 | 90,000 | 90,000 | ||||||||
Chairman, CEO and President | 2006 | 52,500 | 52,500 |
Employment Contracts
On June 22, 2006, our subsidiary, Wonder Auto Limited, entered into an employment agreement with Mr. Zhao, which was amended on July 2, 2007. Under the employment agreement, as amended, Mr. Zhao is entitled to an annual salary of $90,000. The employment agreement does not provide severance or change of control benefits. Mr. Zhao is subject to customary confidentiality and non-competition covenants as provided in the employment agreement.
Retirement Benefits
Currently, we do not provide any employees, including our named executive officers any company sponsored retirement benefits other than a state pension scheme in which all of our employees in China participate.
Payment Upon Termination or Change-in Control
The Company does not have change-in-control arrangements with any of its executive officers, and the Company is not obligated to pay severance or other enhanced benefits to executive officers upon termination of their employment.
Director Compensation - 2007
The following table sets forth information concerning all compensation paid to our non-employee directors for services rendered in all capacities for the year ended December 31, 2007.
Name | Fees Earned or Paid in Cash ($) | Total Compensation ($) | ||||||
Larry Goldman | 50,000 | 50,000 | ||||||
David Murphy | 40,000 | 40,000 | ||||||
Xingye Zhang | 40,000 | 40,000 |
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In 2007, we entered into agreements with each of the independent directors. Under the terms of the agreements, Mr. Goldman is entitled to $50,000, Mr. Murphy is entitled to $40,000 and Mr. Zhang is entitled to $40,000 as annual compensation for their service as independent directors, and as chairpersons of various board committees, as applicable. Mr. Goldman’s compensation is greater because he has greater responsibilities as the Audit Committee Chairman. Under the terms of the agreements, the independent directors are entitled to indemnification for expenses, judgments, fines, penalties or other amounts actually and reasonably incurred by the independent directors in connection with any proceeding if the independent director acted in good faith and in our best interests. The Company also reimburses our directors for reasonable travel expenses related to attendance at board and committee meetings.
Limitation of Liability and Indemnification of Officers and Directors
Our bylaws provide for the indemnification of our present and prior directors and officers or any person who may have served at our request as a director or officer of another corporation in which we own shares of capital stock or of which we are a creditor, against expenses actually and necessarily incurred by them in connection with the defense of any actions, suits or proceedings in which they, or any of them, are made parties, or a party, by reason of being or having been director(s) or officer(s) of us or of such other corporation, in the absence of negligence or misconduct in the performance of their duties. This indemnification policy could result in substantial expenditure by us, which we may be unable to recoup.
Insofar as indemnification by us for liabilities arising under the Securities Exchange Act of 1934, as amended, may be permitted to our directors, officers and controlling persons pursuant to provisions of the Articles of Incorporation and Bylaws, or otherwise, we have been advised that in the opinion of the SEC, such indemnification is against public policy and is, therefore, unenforceable. In the event that a claim for indemnification by such director, officer or controlling person of us in the successful defense of any action, suit or proceeding is asserted by such director, officer or controlling person in connection with the securities being offered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
At the present time, there is no pending litigation or proceeding involving a director, officer, employee or other agent of ours in which indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding which may result in a claim for such indemnification.
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ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
The following table sets forth certain information with respect to the beneficial ownership of our common stock as of December 31, 2007 for (a) each of our directors, (b) each of our executive officers, (c) each stockholder known to be the beneficial owner of more than 5% of any class of the our voting securities, and (d) all directors and executive officers as a group. Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934 and does not necessarily bear on the economic incidents of ownership or the rights to transfer the shares described below. Unless otherwise indicated, (a) each stockholder has sole voting power and dispositive power with respect to the indicated shares and (b) the address of each stockholder who is a director or executive officer is c/o Wonder Auto Technology, Inc., No. 16, Yulu Street, Taihe District, Jinzhou City, Liaoning, People’s Republic of China, 121013.
Name and Address of Beneficial Owner | Amount of Beneficial Ownership (1) | Percent of Class | ||||||
Executive Officers and Directors | ||||||||
Qingjie Zhao (2) | 7 ,113,650 | 26 .4 | % | |||||
Over 5% Beneficial Owners | ||||||||
Choice Inspire Limited (3) | 9 ,732,900 | 28 .4 | % | |||||
Empower Century Limited | 1,542,112 | 5.7 | % | |||||
Xiangdong Gao | 1,650,000 | 6.1 | % | |||||
Lili Niu | 1,490,181 | 5.5 | % | |||||
Selling Stockholder | ||||||||
All officers and directors as a group (9 people) | 7 ,113,650 | 26 .4 | % |
(1) | As of December 31, 2007, there were 26,959,994 shares of our common stock outstanding. |
(2) | Including 7,113,650 shares owned by Choice Inspire Limited of which Mr. Zhao is a 73.09% stockholder and chairman as of December 31, 2007. |
(3) | Qingjie Zhao, our CEO, President and director, owns 73.09% of Choice Inspire Limited as of December 31, 2007. |
66
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS; AND DIRECTOR INDEPENDENCE. |
During 2007, the Company purchased raw materials of $184,690 from a stockholder Jinzhou Wonder Auto Suspension System Co., Ltd ("JWAS"). The Company also sold finished goods of $169,928 and $82,251 to two stockholders, JWAS and Jinzhou Halla Electrical Equipment Co., Ltd. Respectively. All the purchase and sale transactions were conducted on an arm-length basis.
During 2007, the Company occupied part of factory and office premises and used production line facilities owned by JWAS under operating lease arrangement.
Director Independence Standards
Larry Goldman, David Murphy and Xingye Zhang are “independent” as that term is defined under the Nasdaq Marketplace Rules.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES. |
PKF, Certified Public Accountants, was the Company’s independent registered public accounting firm engaged to examine the Company’s consolidated financial statements for the fiscal year ended December 31, 2007 and 2006.
Fees for the fiscal years ended December 31, 2007 and 2006
The following is a summary of the fees billed to the Company by PKF, Certified Public Accountants. PKF, was the Company’s independent registered public accounting firm engaged to examine the Company’s consolidated financial statements for the fiscal year ended December 31, 2007 and 2006.
2007 | 2006 | |||||||
Audit fees (1) | $ | 156,749 | $ | 124,609 | ||||
Audit-related fees (2) | 41,130 | — | ||||||
Tax fees | — | — | ||||||
All other fees | — | — | ||||||
Total | 197,879 | 124,609 |
(1) | Consists of fees billed for the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements. |
(2) | Consists of assurance and related services that are reasonably related to the performance of the audit and reviews of our financial statements and are not included in “audit fees” in this table. The services provided by our accountants within this category consisted of advice relating to SEC matters. |
67
Board of Directors Pre-Approval Policies and Procedures
Since the establishment of Audit Committee in May 2007, our Board of Directors has adopted the policy to pre-approve audit and permissible non-audit services provided by our independent auditors.
68
PART IV
ITEM 15. | EXHIBITS, FINANCIAL STATEMENTS SCHEDULES |
(a) | The following documents are filed as part of this report: |
1) | Financial Statement are set forth beginning on page F-1 of the Report |
· | Report of Independent Registered Public Accounting Firm | F – 2 |
· | Consolidated Statement of Operations | F – 3 |
· | Consolidated Balance Sheets | F – 4 |
· | Consolidated Statement of Cash Flows | F – 6 |
· | Consolidated Statement of Stockholders’ Equity | F – 8 |
· | Notes to Consolidated Statements | F – 9 |
2) | Financial Statement Schedules: All Schedules are omitted because the information called for is not applicable, is not required, or because the financial information is set forth in the financial statements or notes thereto. |
3) | Exhibits |
Exhibit Index is hereby incorporated by reference.
69
Wonder Auto Technology, Inc.
Consolidated Financial Statements
(Stated in US dollars)
Wonder Auto Technology, Inc.
Consolidated Financial Statements
Index to Consolidated Financial Statements
Pages | ||
Report of Independent Registered Public Accounting Firm | 2 | |
Consolidated Statements of Operations and Comprehensive (Loss) Income | 3 | |
Consolidated Balance Sheets | 4 - 5 | |
Consolidated Statements of Cash Flows | 6 - 7 | |
Consolidated Statements of Stockholders’ Equity | 8 | |
Notes to Consolidated Financial Statements | 9 - 45 |
F - 1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Wonder Auto Technology, Inc.
We have audited the accompanying consolidated balance sheets of Wonder Auto Technology, Inc. (the “Company”) and its subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations and comprehensive (loss) income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3(iv), the Company has restated the accompanying consolidated financial statements as of December 31, 2007 and 2006.
PKF
Certified Public Accountants
Hong Kong, China
February 15, 2008 except for note 3(ii) and (iv), as to which the date is March 30, 2009
F - 2
Wonder Auto Technology, Inc.
Consolidated Statements of Operations and Comprehensive (Loss) Income
(Stated in US Dollars)
Years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Sales revenue | $ | 102,083,722 | $ | 72,150,483 | $ | 48,062,805 | ||||||
Cost of sales | (76,459,944 | ) | (57,342,201 | ) | (35,962,931 | ) | ||||||
Gross profit | 25,623,778 | 14,808,282 | 12,099,874 | |||||||||
Operating expenses | ||||||||||||
Administrative expenses | 3,565,332 | 1,917,817 | 1,155,378 | |||||||||
Research and development expenses | 1,135,997 | 947,702 | 824,184 | |||||||||
Selling expenses | 3,290,689 | 2,137,853 | 2,148,426 | |||||||||
Unusual charge - make good provision - Note 3(ii) | 18,265,500 | 7,507,500 | - | |||||||||
26,257,518 | 12,510,872 | 4,127,988 | ||||||||||
(Loss)/income from operations | (633,740 | ) | 2,297,410 | 7,971,886 | ||||||||
Interest income | 111,784 | 96,810 | 28,539 | |||||||||
Other income | 287,322 | 356,590 | 136,711 | |||||||||
Government grants - Note 4 | 1,496,547 | - | - | |||||||||
Finance costs - Note 5 | (2,520,805 | ) | (1,033,551 | ) | (838,954 | ) | ||||||
Equity in net income of unconsolidated affiliates - Note 4 | 34,147 | 371,005 | - | |||||||||
(Loss)/income before income taxes | (1,224,745 | ) | 2,088,264 | 7,298,182 | ||||||||
Income taxes - Note 6 | (1,389,008 | ) | (1,270,391 | ) | (897,256 | ) | ||||||
Minority interests - Note 7 | (1,136,694 | ) | (101,827 | ) | - | |||||||
Net (loss)/income | $ | (3,750,447 | ) | $ | 716,046 | $ | 6,400,926 | |||||
Other comprehensive income | ||||||||||||
Foreign currency translation adjustments | 2,969,894 | 1,007,468 | 420,086 | |||||||||
Total comprehensive (loss)/income | $ | (780,553 | ) | $ | 1,723,514 | $ | 6,821,012 | |||||
(Loss)/earnings per share: basic and diluted - Note 8 | $ | (0.16 | ) | $ | 0.03 | $ | 0.37 | |||||
Weighted average number of shares outstanding: | ||||||||||||
basic and diluted | 24,140,816 | 20,787,279 | 17,227,198 |
See Notes to Consolidated Financial Statements
F - 3
Wonder Auto Technology, Inc.
Consolidated Balance Sheets
(Stated in US Dollars)
As of December 31, | ||||||||
2007 | 2006 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 26,102,993 | $ | 8,203,699 | ||||
Restricted cash - Note 9 | 8,613,262 | 4,876,879 | ||||||
Trade receivables (net of allowance of doubtful accounts of $37,071 in 2007, $32,150 in 2006) | 38,124,411 | 24,696,982 | ||||||
Bills receivable | 11,766,478 | 3,098,314 | ||||||
Advances to staff | 314,964 | 238,310 | ||||||
Other receivables, prepayments and deposits - Note 10 | 1,320,483 | 1,015,899 | ||||||
Inventories - Note 11 | 12,634,786 | 13,689,374 | ||||||
Amount due from a related company - Note 17 | 74,822 | 69,561 | ||||||
Deferred taxes - Note 6 | 307,338 | 237,570 | ||||||
Total current assets | 99,259,537 | 56,126,588 | ||||||
Intangible assets - Note 12 | 16,873,051 | 4,250,800 | ||||||
Property, plant and equipment, net - Note 13 | 22,516,900 | 13,945,846 | ||||||
Land use right - Note 14 | 1,235,029 | 1,203,256 | ||||||
Deposit for acquisition of property, plant and equipment | 2,072,458 | 1,740,548 | ||||||
Investment in an unconsolidated affiliate - Note 4 | - | 527,627 | ||||||
Deferred taxes - Note 6 | 439,760 | 205,475 | ||||||
TOTAL ASSETS | $ | 142,396,735 | $ | 78,000,140 |
See Notes to Consolidated Financial Statements
F - 4
Wonder Auto Technology, Inc.
Consolidated Balance Sheets (Cont’d)
(Stated in US Dollars)
As of December 31, | ||||||||
2007 | 2006 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Current liabilities | ||||||||
Trade payables - Note 9 | $ | 12,726,989 | $ | 9,631,537 | ||||
Bills payable - Note 9 | 15,903,600 | 8,628,078 | ||||||
Other payables and accrued expenses - Note 15 | 2,413,140 | 3,121,533 | ||||||
Provision for warranty - Notes 4 and 16 | 1,124,655 | 1,049,344 | ||||||
Income tax payable | 666,589 | 398,768 | ||||||
Amount due to an unconsolidated affiliate - Note 17 | - | 37,492 | ||||||
Secured short-term bank loans - Note 18 | 10,282,500 | 14,326,831 | ||||||
Total current liabilities | 43,117,473 | 37,193,583 | ||||||
Secured long-term bank loans - Note 18 | 17,622,186 | - | ||||||
TOTAL LIABILITIES | 60,739,659 | 37,193,583 | ||||||
COMMITMENTS AND CONTINGENCIES - Note 19 | ||||||||
MINORITY INTERESTS - Note 4 | 3,214,683 | 2,579,572 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock: par value $0.0001 per share; authorized 10,000,000 shares in 2007 and 2006; none issued and outstanding | - | - | ||||||
Common stock: par value $0.0001 per share - Note 20 Authorized 90,000,000 shares in 2007 and 2006; issued and outstanding 26,959,994 shares in 2007 and 23,959,994 shares in 2006 | 2,696 | 2,396 | ||||||
Additional paid-in capital | 70,643,304 | 29,647,643 | ||||||
Statutory and other reserves - Note 21 | 4,857,660 | 3,148,265 | ||||||
Accumulated other comprehensive income | 4,422,032 | 1,452,138 | ||||||
Accumulated (deficit)/retained earnings | (1,483,299 | ) | 3,976,543 | |||||
TOTAL STOCKHOLDERS’ EQUITY | 78,442,393 | 38,226,985 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 142,396,735 | $ | 78,000,140 |
See Notes to Consolidated Financial Statements
F - 5
Wonder Auto Technology, Inc.
Consolidated Statements of Cash Flows
(Stated in US Dollars)
Years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net (loss)/income | $ | (3,750,447 | ) | $ | 716,046 | $ | 6,400,926 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation | 2,014,045 | 1,401,541 | 1,158,561 | |||||||||
Amortization of intangible assets and land use right | 90,712 | 29,652 | 26,587 | |||||||||
Deferred taxes | (263,993 | ) | (16,369 | ) | 857 | |||||||
Loss on disposal of property, plant and equipment | 20,255 | 79,527 | - | |||||||||
Gain on disposal of Man Do | (500 | ) | - | - | ||||||||
Provision/(Recovery of) for doubtful debts | 2,159 | (7,701 | ) | - | ||||||||
Provision/(Recovery of) for obsolete inventories | 39,115 | (52,470 | ) | (186,646 | ) | |||||||
Exchange loss on translation of monetary assets and liabilities | 532,738 | - | - | |||||||||
Equity in net income of an unconsolidated affiliate | (34,147 | ) | (371,005 | ) | - | |||||||
Increase in minority interests | 1,136,694 | 101,827 | - | |||||||||
Unusual charge - make good provision | 18,265,500 | 7,507,500 | - | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Trade receivables | (10,651,989 | ) | (5,493,345 | ) | (7,073,894 | ) | ||||||
Advances to staff | (57,203 | ) | (121,961 | ) | (59,923 | ) | ||||||
Bills receivable | (6,504,351 | ) | 1,536,869 | (73,117 | ) | |||||||
Other receivables, prepayments and deposits | 60,105 | (542,294 | ) | 156,547 | ||||||||
Inventories | 2,265,298 | (4,481,151 | ) | (415,127 | ) | |||||||
Trade payables | 2,554,508 | 460,403 | 5,288,135 | |||||||||
Bills payable | 5,110,761 | 601,360 | 5,729,402 | |||||||||
Amount due to an unconsolidated affiliate | - | 36,719 | - | |||||||||
Other payables and accrued expenses | 1,099,131 | (263,895 | ) | 340,742 | ||||||||
Provision for warranty | 6,124 | 102,845 | 76,155 | |||||||||
Income tax payable | 235,971 | 164,834 | 69,896 | |||||||||
Net cash flows provided by operating activities | 12,170,486 | 1,388,932 | 11,439,101 |
See Notes to Consolidated Financial Statements
F - 6
Wonder Auto Technology, Inc.
Consolidated Statements of Cash Flows (Cont’d)
(Stated in US Dollars)
Years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Cash flows from investing activities | ||||||||||||
Payments to acquire intangible assets | $ | (1,982 | ) | $ | (10,023 | ) | $ | - | ||||
Payments to acquire and for deposit for acquisition of property, plant and equipment | (8,023,761 | ) | (3,627,589 | ) | (2,062,891 | ) | ||||||
Proceeds from sales of property, plant and equipment | 25,803 | 73,169 | - | |||||||||
Payment to acquire marketable securities | - | (36,571 | ) | |||||||||
Proceeds from sales of marketable securities | - | 37,585 | - | |||||||||
Cash acquired from the RTO | - | 419 | - | |||||||||
Net cash paid to acquire Jinzhou Wanyou - Notes 1 and 4 | (14,146,485 | ) | (500,000 | ) | - | |||||||
Net cash paid to acquire Jinzhou Dongwoo - Notes 1 and 4 | (2,420,000 | ) | (2,192,669 | ) | - | |||||||
Cash inflow from disposal of Man Do - Note 1 | 500 | - | - | |||||||||
Net cash flows used in investing activities | (24,565,925 | ) | (6,219,108 | ) | (2,099,462 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Repayment to a stockholder | - | (5,149 | ) | - | ||||||||
Amount due from a related company | - | (68,128 | ) | - | ||||||||
Increase in restricted cash | (3,736,383 | ) | (917,757 | ) | (2,963,170 | ) | ||||||
Dividend paid to stockholders | - | (1,719,985 | ) | (6,958,197 | ) | |||||||
Dividend paid to Winning - Note 4 | (343,934 | ) | - | - | ||||||||
Dividend paid to minority stockholders | (743,240 | ) | - | - | ||||||||
Proceeds from bank loans | 29,486,379 | 17,573,649 | 12,386,355 | |||||||||
Repayment of bank loans | (18,161,716 | ) | (16,696,664 | ) | (9,416,624 | ) | ||||||
Net proceed from issue of shares | 22,730,461 | 10,142,020 | - | |||||||||
Net cash flows provided by / (used in) financing activities | 29,231,567 | 8,307,986 | (6,951,636 | ) | ||||||||
Effect of foreign currency translation on cash and cash equivalents | 1,063,166 | 357,132 | 150,993 | |||||||||
Net increase in cash and cash equivalents | 17,899,294 | 3,834,942 | 2,538,996 | |||||||||
Cash and cash equivalents - beginning of year | 8,203,699 | 4,368,757 | 1,829,761 | |||||||||
Cash and cash equivalents - end of year | $ | 26,102,993 | $ | 8,203,699 | $ | 4,368,757 | ||||||
Supplemental disclosures for cash flow information: | ||||||||||||
Non-cash investing and financing activities: | ||||||||||||
Acquisition of Jinzhou Wanyou and Jinzhou Dongwoo - Note 4 | $ | 2,840,317 | $ | 4,932,841 | $ | - | ||||||
Cash paid for: | ||||||||||||
Interest | $ | 1,445,534 | $ | 807,693 | $ | 611,326 | ||||||
Income taxes | $ | 1,316,837 | $ | 1,121,927 | $ | 826,503 |
See Notes to Consolidated Financial Statements
F - 7
Wonder Auto Technology, Inc.
Consolidated Statements of Stockholders’ Equity
(Stated in US Dollars)
Accumulated | Retained | |||||||||||||||||||||||||||
Additional | Statutory | other | earnings/ | |||||||||||||||||||||||||
Common stock | paid-in | and other | comprehensive | accumulated | ||||||||||||||||||||||||
No. of shares | Amount | capital | reserves | income | (deficit) | Total | ||||||||||||||||||||||
Balance, January 1, 2005 | 17,227,198 | $ | 1,723 | $ | 11,998,377 | $ | 1,706,679 | $ | 24,584 | $ | 3,981,452 | $ | 17,712,815 | |||||||||||||||
Net income | - | - | - | - | - | 6,400,926 | 6,400,926 | |||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | 420,086 | - | 420,086 | |||||||||||||||||||||
Appropriation to reserves | - | - | - | 641,169 | - | (641,169 | ) | - | ||||||||||||||||||||
Dividend | - | - | - | - | - | (5,680,295 | ) | (5,680,295 | ) | |||||||||||||||||||
Balance, December 31, 2005 | 17,227,198 | 1,723 | 11,998,377 | 2,347,848 | 444,670 | 4,060,914 | 18,853,532 | |||||||||||||||||||||
Recapitalization | 2,832,800 | 283 | 136 | - | - | - | 419 | |||||||||||||||||||||
Share issued for proceeds of $12 million | 3,899,996 | 390 | 11,999,610 | - | - | - | 12,000,000 | |||||||||||||||||||||
Cost of raising capital | - | - | (1,857,980 | ) | - | - | - | (1,857,980 | ) | |||||||||||||||||||
Unusual charge - make good provision - Note 3(ii) | - | - | 7,507,500 | - | - | - | 7,507,500 | |||||||||||||||||||||
Net income, as restated | - | - | - | - | - | 716,046 | 716,046 | |||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | 1,007,468 | - | 1,007,468 | |||||||||||||||||||||
Appropriation to reserves | - | - | - | 800,417 | - | (800,417 | ) | - | ||||||||||||||||||||
Balance, December 31, 2006, as restated | 23,959,994 | $ | 2,396 | $ | 29,647,643 | $ | 3,148,265 | $ | 1,452,138 | $ | 3,976,543 | $ | 38,226,985 | |||||||||||||||
Balance, December 31, 2006, as previously reported | 23,959,994 | $ | 2,396 | $ | 22,140,143 | $ | 3,148,265 | $ | 1,452,138 | $ | 11,484,043 | $ | 38,226,985 | |||||||||||||||
Prior period adjustment | - | - | 7,507,500 | (7,507,500 | ) | - | ||||||||||||||||||||||
Balance, January 1, 2007, as restated | 23,959,994 | 2,396 | 29,647,643 | 3,148,265 | 1,452,138 | 3,976,543 | 38,226,985 | |||||||||||||||||||||
Share issued for proceeds of $25.95 million | 3,000,000 | 300 | 25,949,700 | - | - | - | 25,950,000 | |||||||||||||||||||||
Cost of raising capital | - | - | (3,219,539 | ) | - | - | - | (3,219,539 | ) | |||||||||||||||||||
Unusual charge - make good provision - Note 3(ii) | - | - | 18,265,500 | - | - | - | 18,265,500 | |||||||||||||||||||||
Net income, as restated | - | - | - | - | - | 1 | (3,750,447) | (3,750,447 | ) | |||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | 2,969,894 | - | 2,969,894 | |||||||||||||||||||||
Appropriation to reserves | - | - | - | 1,709,395 | - | (1,709,395 | ) | - | ||||||||||||||||||||
Balance, December 31, 2007 | 26,959,994 | $ | 2,696 | $ | 70,643,304 | $ | 4,857,660 | $ | 4,422,032 | $ | (1,483,299 | ) | $ | 78,442,393 |
See Notes to Consolidated Financial Statements
F - 8
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
1. | Corporate information |
Wonder Auto Technology, Inc. (the “Company”) was incorporated in the State of Nevada on June 8, 2000. The Company’s shares are quoted for trading on the Nasdaq Global Market in the United States.
Pursuant to that certain Share Exchange Agreement dated June 22, 2006, the Company acquired a 100% ownership interest in Wonder Auto Limited (“Wonder”), a limited company organized in the British Virgin Islands, in exchange for the issuance to Empower Century Limited and Choice Inspire Limited (collectively, “Wonder’s Former Stockholders”) of 14,627,200 shares (as adjusted for a 2.448719-for-1 forward stock split on July 26, 2006 (the “Forward Stock Split”)) of the Company’s common stock and 6,499,994 shares (as adjusted for the Forward Stock Split) to certain investors who invested $12 million into Wonder and purchased $8 million Wonder’s stock from Empower Century Limited immediately prior to such share exchange transaction.
The aforesaid share exchange transaction was completed on June 22, 2006 and thereafter Wonder became a wholly owned subsidiary of the Company and Wonder’s Former Stockholders became the majority stockholders of the Company. This transaction constituted a reverse takeover transaction (“RTO”).
Following the RTO, through Wonder, the Company indirectly owned Man Do Auto Technology Co., Ltd. (“Man Do”) and Jinzhou Halla Electrical Equipment Co., Ltd. (“Jinzhou Halla”). The entire issued and outstanding common stock of Man Do is directly held by Wonder. In respect of Jinzhou Halla, 61% of its common stock is directly held by Wonder and the remaining 39% is indirectly held by Wonder through Man Do.
Man Do declared a special interim dividend on September 30, 2007 by the way of distribution in specie of all assets and liabilities held by Man Do on that date. In order to rationalise the structure of the group, on the same date, Wonder entered into a Share Transfer Agreement with Xiangdong Gao, a beneficial stockholder of the Company, to transfer all of its shares in Man Do to Xiangdong Gao (the "Share Transfer") at a cash consideration of $500. Upon the completion of the Share Transfer on September 30, 2007. Wonder directly holds 100% of common stock of Jinzhou Halla.
F - 9
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
1. | Corporate information (Cont’d) |
On August 23, 2006, Wonder entered into a Share Purchase Agreement (the “Dongwoo Share Purchase Agreement”) with Winning International Development Limited (“Winning”), a British Virgin Islands limited company, which held 50% equity interest in Jinzhou Dongwoo Precision Co., Ltd. (“Jinzhou Dongwoo”). The remaining equity interest in Jinzhou Dongwoo is held 25% each by two independent third parties. Jinzhou Dongwoo was established in the People’s Republic of China (the “PRC”) and is a supplier of raw materials to Jinzhou Halla. The board of directors of Jinzhou Dongwoo consists of 5 members, three of which were nominated by Wonder while the other two shareholders of Jinzhou Dongwoo each nominated one of the remaining two board members. The board is the highest authority of Jinzhou Dongwoo and has power to make operating and financing decisions. Before November 18, 2006, valid board action required the approval of more than two-thirds of the board members (i.e. four board members or more). Based on the foregoing, the management of the Company was of the view that the Company had significant influence but not control over the operations of Jinzhou Dongwoo. On November 18, 2006, Jinzhou Dongwoo amended its Memorandum and Articles of Association to eliminate the supermajority requirement, such that valid board action now requires the approval of only more than a half of the board members. Accordingly, without any change in the composition of the board, the Company obtained control over Jinzhou Dongwoo as of November 18, 2006, and the results of operations and the financial position of Jinzhou Dongwoo have been consolidated with the Company since then.
On September 21, 2006, Jinzhou Halla together with two independent third parties established Jinzhou Wanyou Mechanical Parts Co., Ltd. (“Jinzhou Wanyou”) in the PRC. Jinzhou Halla contributed $0.5 million to its registered capital representing 20.41% equity interest thereon. Jinzhou Wanyou is principally engaged in manufacturing of shock absorber rods, vibration-dampers and rotary axles for automotive alternators and starters.
On April 2, 2007, Wonder and Jinzhou Halla acquired the remaining 79.59% equity interest in Jinzhou Wanyou in two separately negotiated equity purchase transactions between Wonder and Jinzhou Halla and the aforesaid two former equity owners of Jinzhou Wanyou. In the first transaction, Wonder entered into a Share Purchase Agreement (“Jinzhou Wanyou Share Purchase Agreement I”) with Hong Kong Friend Birch Limited, a Hong Kong corporation, which held 40.81% equity interest in Jinzhou Wanyou. In the second transaction, Jinzhou Halla entered another Share Purchase Agreement (“Jinzhou Wanyou Share Purchase Agreement II”) with Jinzhou Wonder Auto Suspension System Co., Ltd., which held 38.78% equity ownership in Jinzhou Wanyou. After the completion of these two equity purchase transactions, Jinzhou Wanyou became a wholly-owned subsidiary of the Company. More details and accounting treatment on the further investment in Jinzhou Wanyou are set forth in Note 4.
On September 24, 2007, Wonder and Jinzhou Halla established a subsidiary, Jinzhou Wonder Motor Co., Ltd. (“Wonder Motor”), in the PRC. Wonder and Jinzhou Halla contributed $1.1 million and $0.4 million to its registered capital representing 73.33% and 26.67% equity interest in Wonder Motor respectively. Wonder Motor is a development stage company and planning to be engaged in manufacturing and sales of motor and control systems for vehicles and other applications.
F - 10
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
1. | Corporate information (Cont’d) |
On September 24, 2007, Wonder established a wholly owned subsidiary, Jinzhou Wonder Auto Electrical Equipment Co., Ltd. (“Jinzhou Wonder”), in the PRC. Wonder contributed $0.5 million to its registered capital representing 100% equity interest thereon. Jinzhou Wonder is a development stage company and planning to be engaged in manufacturing and sales of auto aluminum for alternators, starters and other auto electrical components.
2. | Description of business |
Following the RTO, the Company commenced to be engaged in the design, development, manufacture and marketing of automotive electrical parts, specifically starters and alternators, in the PRC.
The products of the Company are suitable for use in a variety of automobiles. However, most of the Company’s products are used in passenger cars with smaller engines having displacement below 1.6 liters. The Company has also begun to manufacture and sell rectifier and regulator products for use in alternators as well as various rods and shafts for use in shock absorbers, alternators and starters.
The Company’s customers include automakers, engine manufacturers and, increasingly, auto parts suppliers. The Company also offers to its customers’ product design and development services for their new car models or automotive components based on customers’ specifications.
The raw materials used in the Company’s production are mainly divided into four categories, metal parts, semiconductors, chemicals and packaging materials.
3. | Basis of presentation |
(i) | Reorganization |
Pursuant to the Plan of Reorganization dated on June 22, 2006, the Company issued 21,127,194 shares as adjusted for Forward Stock Split of common stock, par value $0.0001 per share, to the stockholders of Wonder (17,227,198 shares as adjusted for Forward Stock Split to Wonder Former Stockholders and 3,899,996 shares as adjusted for Forward Stock Split to new investors), representing approximately 88.2% of the Company post-exchange issued and outstanding common stock, in exchange for 100% of the outstanding capital stock of Wonder.
The RTO has been accounted for as a recapitalization of the Company whereby the historical financial statements and operations of Wonder become the historical financial statements of the Company, with no adjustment to the carrying value of the assets and liabilities. The 2,832,800 shares as adjusted of the Company outstanding prior to the RTO are accounted for at $419 of net book value at the time of the RTO. The accompanying consolidated financial statements reflect the recapitalization of the stockholders equity as if the transaction occurred as of the beginning of the first period presented.
F - 11
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3. | Basis of presentation (Cont’d) |
(ii) | Make good arrangement |
On June 22, 2006, Wonder completed a private placement pursuant to which Wonder issued to certain accredited investors 45.277236 shares of its common stock for $12,000,000, such shares were subsequently exchanged for 3,899,996 shares as adjusted for Forward Stock Split on July 26, 2006 of the common stock of the Company in connection with the RTO.
In connection with the private placement, Wonder's two stockholders, Choice Inspire Limited (“CIL”) and Empower Century Limited (“ECL”) entered into an escrow agreement with the private placement investors. Pursuant to the escrow agreement, CIL and ECL agreed to certain “make good” provisions. In the escrow agreement, Wonder established minimum net income thresholds of $8,140,000 for the fiscal year ended December 31, 2006 and $12,713,760 for the fiscal year ended December 31, 2007. CIL and ECL deposited a total of 3,300,000 shares as adjusted for Forward Stock Split on July 26, 2006 of the Company’s common stock into escrow with Securities Transfer Corporation under the escrow agreement. If the 2006 net income threshold is not achieved, then the escrow agent must deliver the first tranche of 1,650,000 shares to the investors on a pro rata basis (based upon the total number of shares purchased by the investors in connection with the private placement transaction) and if the 2007 net income threshold is not achieved, the escrow agent must deliver the second tranche of 1,650,000 shares to the investors on a pro rata basis. However, only those private placement investors who remain our stockholders at the time the escrow shares become deliverable are entitled to their pro rata portion of such escrow shares.
On February 8, 2007 and February 2, 2008, stockholders of CIL and ECL resolved to surrender the right of entitlement to the first tranche and second tranche of 1,650,000 shares, respectively, totaling 3,300,000 shares, to Xiangdong Gao. On those two respective dates, two separate agreements were signed between CIL, ECL and Xiangdong Gao whereby both CIL and ECL agreed to give the right of the entitlement to the aforementioned escrowed shares to Xiangdong Gao as a gift (that is for no consideration). Xiangdong Gao is a beneficial stockholder of the Company.
For the purpose of determining whether or not the net income threshold (“NIT”) has been met, the return of any shares to CIL and ECL was not deemed an expense to the Company.
Excluding the make good provision of $18,265,500 and $7,507,500 for the years ended December 31, 2007 and 2006 respectively, the Company has achieved the 2007 and 2006 NIT.
Following the incorporation of the SEC comments as detailed in note 3(iv) below, the shares released back to CIL and ECL is recognized as an expense by reference to the market values of the shares as of the dates of the performance goals are met, i.e. December 31, 2007 and 2006. The total expenses recognized for the fiscal year 2007 and 2006 are $18,265,500 and $7,507,500 respectively. Such expenses are treated as an unusual item since it is deemed to be unusual in nature but may not be infrequent in occurrence.
F - 12
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3. | Basis of presentation (Cont’d) |
(iii) | Reclassification |
Certain prior year balances in the Consolidated Statements of Income and Comprehensive Income have been reclassified to conform to current year presentation. For the years ended December 31, 2005 and 2006, the Company reclassified $824,184 and $947,702 from cost of sales to research and development costs under operating expenses respectively. These reclassifications have no effect on net income as previously presented.
(iv) | Restatement |
The Company has restated the consolidated financial statements as of December 31, 2007 and 2006 in response to the comments from the United States Securities and Exchange Commission (the “SEC”) on (i) compensation charges arising from make good provision in connection with the release of escrow shares and (ii) classification of cash flows arising from movement in restricted cash.
(a) | Compensation charges arising from make good provision in connection with the release of escrow shares |
On February 2, 2008 and February 8, 2007, stockholders of CIL and ECL surrendered their rights of entitlement to the first tranche and second tranche of 1,650,000 shares, respectively, totaling 3,300,000 shares to Xiangdong Gao for no consideration. Following the achievement of 2006 net income threshold as detailed in note 3(ii). Xiangdong Gao maintained no relationship with the Company other than as a shareholder. The Company, therefore, relied upon guidance given in SEC Practice\08 SEC Staff Views - Current Issue Rulemaking Projects 11/16/98 and did not recognize compensation expenses in connection with the release of such escrow shares.
Upon consideration of SEC’s comments, the Company decided to recognize compensation expenses for the shares released from escrow, irrespective of whether CIL and ECL surrendered their rights of entitlement to Xiangdong Gao.
(b) | Classification of cash flow arising from movement in restricted cash |
Because the bank deposits placed with the bank as restricted cash carried interest, the management had considered the movement in restricted cash as investing activity even though they are pledged for bills payable.
The SEC expressed a view that the movement of restricted cash, which was used as collateral for the Company’s bills payable undertaken by bank, should been accounted for as cash flows from financing activities, instead of cash flows from investing activities. Upon consideration of SEC’s comments, the Company decided to re-classify the movement of restricted cash as cash flows from financing activities.
F - 13
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3. | Basis of presentation (Cont’d) |
(iv) | Restatement (Cont’d) |
The following table sets forth the financial impacts of the restatement on the Company.
Consolidated Statements of Operations and Comprehensive loss
For the fiscal year ended December 31, 2007
Impact on (a) | ||||||||||||
Previously | Increase | |||||||||||
Reported | (Decrease) | Restated | ||||||||||
Gross profit | $ | 25,623,778 | $ | - | $ | 25,623,778 | ||||||
Operating expenses | (7,992,018 | ) | (18,265,500 | ) | (26,257,518 | ) | ||||||
Income (loss) from operations | 17,631,760 | (18,265,500 | ) | (633,740 | ) | |||||||
Other operating expenses | (591,005 | ) | - | (591,005 | ) | |||||||
Income (loss) before income taxes | 17,040,755 | (18,265,500 | ) | (1,224,745 | ) | |||||||
Income taxes | (1,389,008 | ) | - | (1,389,008 | ) | |||||||
Minority interests | (1,136,694 | ) | - | (1,136,694 | ) | |||||||
Net income (loss) | $ | 14,515,053 | $ | (18,265,500 | ) | $ | (3,750,447 | ) | ||||
Other comprehensive income | ||||||||||||
Foreign currency translation adjustments | 2,969,894 | - | 2,969,894 | |||||||||
Total comprehensive income (loss) | $ | 17,484,947 | $ | (18,265,500 | ) | $ | (780,553 | ) | ||||
Earnings (loss) per share: | ||||||||||||
basic and diluted | $ | 0.60 | $ | (0.76 | ) | $ | (0.16 | ) | ||||
Weighted average number of shares outstanding: | ||||||||||||
basic and diluted | 24,140,816 | - | 24,140,816 |
F - 14
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3. | Basis of presentation (Cont’d) |
(iv) | Restatement (Cont’d) |
For the fiscal year ended December 31, 2006
Impact on (a) | ||||||||||||
Previously | Increase | |||||||||||
Reported | (Decrease) | Restated | ||||||||||
Gross profit | $ | 14,808,282 | $ | - | $ | 14,808,282 | ||||||
Operating expenses | (5,003,372 | ) | (7,507,500 | ) | (12,510,872 | ) | ||||||
Income from operations | 9,804,910 | (7,507,500 | ) | 2,297,410 | ||||||||
Other operating expenses | (209,146 | ) | - | (209,146 | ) | |||||||
Income before income taxes | 9,595,764 | (7,507,500 | ) | 2,088,264 | ||||||||
Income taxes | (1,270,391 | ) | - | (1,270,391 | ) | |||||||
Minority interests | (101,827 | ) | - | (101,827 | ) | |||||||
Net income | $ | 8,223,546 | $ | (7,507,500 | ) | $ | 716,046 | |||||
Other comprehensive income | ||||||||||||
Foreign currency translation adjustments | 1,007,468 | - | 1,007,468 | |||||||||
Total comprehensive income | $ | 9,231,014 | $ | (7,507,500 | ) | $ | 1,723,514 | |||||
Earnings per share: | ||||||||||||
basic and diluted | $ | 0.40 | $ | (0.37 | ) | $ | 0.03 | |||||
Weighted average number of shares outstanding: | ||||||||||||
basic and diluted | 20,787,279 | - | 20,787,279 |
Consolidated Balance Sheets
As of December 31, 2007
Impact on (a) | ||||||||||||
Previously | Increase | |||||||||||
Reported | (Decrease) | Restated | ||||||||||
Stockholders’ Equity | ||||||||||||
Common stock | $ | 2,696 | $ | - | $ | 2,696 | ||||||
Additional paid-in-capital | 44,870,304 | 25,773,000 | 70,643,304 | |||||||||
Statutory and other reserves | 4,857,660 | - | 4,857,660 | |||||||||
Accumulated other comprehensive income | 4,422,032 | - | 4,422,032 | |||||||||
Retained earnings | ||||||||||||
Accumulated (deficit) | 24,289,701 | (25,773,000 | ) | (1,483,299 | ) | |||||||
Total stockholders’ equity | $ | 78,442,393 | $ | - | $ | 78,442,393 |
F - 15
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3. | Basis of presentation (Cont’d) |
(iv) | Restatement (Cont’d) |
As of December 31, 2006
Impact on (a) | ||||||||||||
Previously | Increase | |||||||||||
Reported | (Decrease) | Restated | ||||||||||
Stockholders’ Equity | ||||||||||||
Common stock | $ | 2,396 | $ | - | $ | 2,396 | ||||||
Additional paid-in-capital | 22,140,143 | 7,507,500 | 29,647,643 | |||||||||
Statutory and other reserves | 3,148,265 | - | 3,148,265 | |||||||||
Accumulated other comprehensive income | 1,452,138 | - | 1,452,138 | |||||||||
Retained earnings | 11,484,043 | (7,507,500 | ) | 3,976,543 | ||||||||
Total stockholders’ equity | $ | 38,226,985 | $ | - | $ | 38,226,985 |
Consolidated Statements of Cash Flows
For the year ended December 31, 2007
Impact on (b) | ||||||||||||
Previously | Increase | |||||||||||
Reported | (Decrease) | Restated | ||||||||||
Net income (loss) | $ | 14,515,053 | $ | (18,265,500 | ) | $ | (3,750,447 | ) | ||||
Adjustments to reconcile net income to net cash provide by operating activities | (2,344,567 | ) | 18,265,500 | 15,920,933 | ||||||||
Net cash flows provided by operating activities | 12,170,486 | - | 12,170,486 | |||||||||
Net cash flows used in investing | (28,302,308 | ) | $ | 3,736,383 | (24,565,925 | ) | ||||||
Net cash flows provided by financing activities | 32,967,950 | (3,736,383 | ) | 29,231,567 | ||||||||
Effect of foreign currency translation on cash and cash equivalents | 1,063,166 | - | 1,063,166 | |||||||||
Net cash increase in cash and cash equivalents | 17,899,294 | - | 17,899,294 | |||||||||
Cash and cash equivalents - beginning of period | 8,203,699 | - | 8,203,699 | |||||||||
Cash and cash equivalents - end of period | $ | 26,102,993 | $ | - | $ | 26,102,993 |
F - 16
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3. | Basis of presentation (Cont’d) |
(iv) | Restatement (Cont’d) |
For the year ended December 31, 2006
Impact on (b) | ||||||||||||
Previously | Increase | |||||||||||
Reported | (Decrease) | Restated | ||||||||||
Net income | $ | 8,223,546 | $ | (7,507,500 | ) | $ | 716,046 | |||||
Adjustments to reconcile net income to net cash provided by operating activities | (6,834,614 | ) | 7,507,500 | 672,886 | ||||||||
Net cash flows provided by operating activities | 1,388,932 | - | 1,388,932 | |||||||||
Net cash flows used in Investing activities | (7,136,865 | ) | $ | 917,757 | (6,219,108 | ) | ||||||
Net cash flows provided by financing activities | 9,225,743 | (917,757 | ) | 8,307,986 | ||||||||
Effect of foreign currency translation on cash and cash equivalents | 357,132 | - | 357,132 | |||||||||
Net increase in cash and cash equivalents | 3,834,942 | - | 3,834,942 | |||||||||
Cash and cash equivalents - beginning of period | 4,368,757 | - | 4,368,757 | |||||||||
Cash and cash equivalents - end of period | $ | 8,203,699 | $ | - | $ | 8,203,699 |
F - 17
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies |
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
On April 2, 2007, Wonder and Jinzhou Halla acquired the remaining 79.59% equity interest in Jinzhou Wanyou in two separately negotiated equity purchase transactions between Wonder and Jinzhou Halla and two former equity owners of Jinzhou Wanyou. After the completion of these two equity purchase transactions, Jinzhou Wanyou became a wholly-owned subsidiary of the Company.
In the first transaction, Wonder acquired a 40.81% equity interest in Jinzhou Wanyou from Hong Kong Friend Birch Limited, a Hong Kong corporation, for a total cash consideration of up to $8.42 million pursuant to the Jinzhou Wanyou Share Purchase Agreement I dated April 2, 2007. Under the Jinzhou Wanyou Share Purchase Agreement I, the total cash consideration is scheduled to be paid by Wonder in three installments as follows. The first installment payment of $2.8 million and second installment of $1.41 million were made in June 2007 and December 2007 respectively. The final cash installment payment of $4.21 million will be paid if Jinzhou Wanyou achieves minimum net income of approximately $2.95 million (RMB 23 million) for the period from April 2, 2007 to April 1, 2008. If Jinzhou Wanyou fails to achieve the minimum net income threshold, the remaining $4.21 million payment will be proportionately reduced. Under the Jinzhou Wanyou Share Purchase Agreement I, no premium is payable by Wonder if Jinzhou Wanyou exceeds the net income target threshold. As of December 31, 2007, the final cash installment was included in the cost of acquisition as the management believed that, based on the net income of Jinzhou Wanyou for the period from April 2, 2007 to December 31, 2007, Jinzhou Wanyou will achieve the minimum net income threshold.
In the second transaction, Jinzhou Halla acquired a 38.78% equity ownership in Jinzhou Wanyou from Jinzhou Wonder Auto Suspension System Co., Ltd. for a total cash consideration of up to $8.0 million pursuant to the Jinzhou Wanyou Share Purchase Agreement II dated April 2, 2007. Under the Jinzhou Wanyou Share Purchase Agreement II, the total consideration will be paid in three installments. The first payment of $3.0 million was made in June 2007. The second $3.0 million cash installment will be paid if Jinzhou Wanyou achieves minimum net income of approximately $2.95 million (RMB 23 million) for the period from April 2, 2007 to April 1, 2008. As of December 31, 2007, the final cash installment was included in the cost of acquisition as the management believed that, based on the net income of Jinzhou Wanyou for the period from April 2, 2007 to December 31, 2007, Jinzhou Wanyou will achieve the minimum net income threshold. The remaining $2 million cash payment will be paid if Jinzhou Wanyou attains minimum net income of approximately $3.72 million (RMB 29 million) for the period from April 2, 2008 to April 1, 2009. In the case that Jinzhou Wanyou fails to achieve these net income thresholds, the corresponding payments will be proportionately reduced. Under the Jinzhou Wanyou Share Purchase Agreement II, no premium is payable by the Jinzhou Halla if Jinzhou Wanyou exceeds the net income target threshold.
F - 18
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Principles of consolidation (cont’d)
The financial position of Jinzhou Wanyou as of April 2, 2007 is as follows:
Fair value | ||||||||||||
adjustment | ||||||||||||
pursuant to | Fair market | |||||||||||
Carrying amount | SFAS 141 | value | ||||||||||
Cash and cash equivalents | $ | 273,515 | $ | 273,515 | ||||||||
Trade receivable, net | 562,107 | 562,107 | ||||||||||
Bills receivable | 64,592 | 64,592 | ||||||||||
Other receivable, prepayment and deposits | 192,696 | 192,696 | ||||||||||
Inventories | 224,421 | 224,421 | ||||||||||
Amount due from Jinzhou Halla | 694,267 | 694,267 | ||||||||||
Property, plant and equipment, net | 1,069,720 | 1,069,720 | ||||||||||
Deposit for acquisition of property, plant and equipment | 18,990 | 18,990 | ||||||||||
Intangible assets - customer contracts | - | $ | 49,053 | 49,053 | ||||||||
Trade payables | (293,537 | ) | (293,537 | ) | ||||||||
Other repayable and accrued expenses | (15,507 | ) | (15,507 | ) | ||||||||
Net assets | $ | 2,791,264 | $ | 2,840,317 | ||||||||
79.59% equity interest acquired | $ | 2,260,608 | ||||||||||
Goodwill | 12,159,392 | |||||||||||
Initial purchase price of acquisition | $ | 14,420,000 | ||||||||||
Satisfied by:- | ||||||||||||
Cash payment | $ | 14,420,000 | ||||||||||
Net cash paid to acquire Jinzhou Wanyou | $ | 14,146,485 |
As of December 31, 2007, the consolidated balance sheet includes a goodwill identified upon the acquisition of 79.59% equity interest in Jinzhou Wanyou amounting to $12.16 million which represents the excess of the initial purchase price of $14.42 million over the attributable share of fair value of acquired identifiable net assets of Jinzhou Wanyou of $2.26 million at the time of acquisition on April 2, 2007.
The above initial purchase price for Jinzhou Wanyou does not include the $2 million of contingent consideration pursuant to the Share Purchase Agreement II. The remaining consideration shall be payable upon Jinzhou Wanyou’s fulfillment of targeted net profits. The recognition and allocation of contingent consideration will be treated as additional purchase price and allocated to goodwill subsequently.
F - 19
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Principles of consolidation (cont’d)
Jinzhou Wanyou was incorporated on September 21, 2006 and commenced its business in the first quarter of 2007. The Company, with advice from an independent appraiser, has identified all assets acquired (including intangible assets which meets either the separability criterion or the contractual-legal criterion in accordance with SFAS No. 141R para. 3k) as of the date of acquisition with a conclusion that, except for the customer contracts, there were no any other significant identifiable intangible assets (such as trademark, patents and favorable or unfavorable lease arrangements) noted as the operating history of Jinzhou Wanyou is limited. The fair value of customer contracts acquired was determined by using estimated discounted net cash inflows from unfulfilled orders in accordance with the signed contracts with Jinzhou Wanyou’s customers.
The following unaudited pro forma financial information presents the combined results of operating of the Company with the operations of Jinzhou Wanyou for year ended December 31, 2007, as if the acquisition had occurred as of the beginning of fiscal year 2007:
(Unaudited) | ||||
Revenue | $ | 102,876,541 | ||
Net loss | $ | (3,617,290 | ) | |
Loss per share: basic and diluted | $ | (0.15 | ) |
This unaudited pro forma financial information is presented for informational purposes only. The unaudited pro forma financial information may not necessarily reflect the future results of operations or the results of operations would have been had the Company owned and operated this business as of the beginning of the period presented.
Goodwill
As of December 31, | ||||||||
2007 | 2006 | |||||||
Goodwill identified upon acquisition of:- | ||||||||
Jinzhou Dongwoo (i) | $ | 3,115,227 | $ | 2,771,293 | ||||
Jinzhou Wanyou (ii) | 12,159,392 | - | ||||||
$ | 15,274,619 | $ | 2,771,293 |
(i) | The amount represents a goodwill identified upon acquisition of Jinzhou Dongwoo amounting to $2.77 million which represents the excess of the purchase price of $4.85 million over the attributable share of fair value of acquired identifiable net assets of Jinzhou Dongwoo of $2.08 million at the time of acquisition on August 23, 2006. |
Pursuant to Wonder’s August 23, 2006 Dongwoo Share Purchase Agreement with Winning for the acquisition of a 50% equity interest of Jinzhou Dongwoo, all the 2005 distributable profit of Jinzhou Dongwoo shall be owned by the shareholders in Jinzhou Dongwoo before the signing date of the Dongwoo Share Purchase Agreement on condition that any distribution of such distributable profit to them will not cause any shortage of Jinzhou Dongwoo’s working capital.
F - 20
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Goodwill (cont’d)
On February 6, 2007, after considering the sufficiency of Jinzhou Dongwoo’s working capital, the board of the directors of Jinzhou Dongwoo declared a cash dividend to the former shareholders amounting to $0.68 million in respect of the fiscal year ended December 31, 2005. Pursuant to the Dongwoo Share Purchase Agreement, Winning was entitled to its portion of $0.34 million. Since it represents the distribution of pre-acquisition profits of Jinzhou Dongwoo, a corresponding upward adjustment to goodwill was made as an additional contingent consideration in the first quarter of 2007.
(ii) | The amount represents a goodwill identified upon the acquisition of 79.59% equity interest in Jinzhou Wanyou amounting to $12.16 million which represents the excess of the initial purchase price of $14.42 million over the attributable share of fair value of acquired identifiable net assets of Jinzhou Wanyou of $2.26 million at the time of acquisition on April 2, 2007. |
Minority interests
Minority interests resulted from the consolidation of 50% owned subsidiary, Jinzhou Dongwoo, as a result of the Company’s determination that it had acquired control over Jinzhou Dongwoo’s operations since November 2006.
Investment in an unconsolidated affiliate
The Company accounted for the 20.41% investment in Jinzhou Wanyou (an investment in which the Company exercised significant influence but did not control until April 2, 2007) using the equity method, under which the share of Jinzhou Wanyou’ net income was recognized in the period in which it is earned by Jinzhou Wanyou. As of December 31, 2006, the investment in unconsolidated affiliate of $0.53 million represented attributable share of the underlying net assets of Jinzhou Wanyou.
Use of estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of accounts receivable, inventories, deferred income taxes, provision for warranty and the estimation on useful lives of property, plant and equipment. Actual results could differ from those estimates.
F - 21
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and trade and bills receivables. As of December 31, 2007 and 2006, substantially all of the Company’s cash and cash equivalents and restricted cash were held by major financial institutions located in the PRC, which management believes are of high credit quality. With respect to trade and bills receivables, the Company extends credit based on an evaluation of the customer’s financial condition. The Company generally does not require collateral for trade receivables and maintains an allowance for doubtful accounts of trade receivables.
Regarding bills receivable, they are undertaken by the banks to honor the payments at maturity and the customers are required to place deposits with the banks equivalent to certain percentage of the bills amount as collateral. These bills receivable can be sold to any third party at a discount before maturity. The Company does not maintain allowance for bills receivable in the absence of bad debt experience and the payments are undertaken by the banks.
During the reporting periods, customers representing 10% or more of the Company’s consolidated sales are:-
Years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Beijing Hyundai Motor Company | $ | 13,971,225 | $ | 13,686,791 | $ | 6,926,159 | ||||||
Dongfeng Yueda Kia Motors Company Limited | 4,350,341 | 2,416,288 | 5,346,827 | |||||||||
Harbin Dongan Automotive Engine | ||||||||||||
Manufacturing Company Limited | 16,657,632 | 5,770,801 | 1,403,102 | |||||||||
Shenyang Aerospace Mitsubishi Motors | ||||||||||||
Engine Manufacturing Company Limited | 15,691,636 | 12,837,338 | 5,451,367 | |||||||||
$ | 50,670,834 | $ | 34,711,218 | $ | 19,127,455 |
Cash and cash equivalents
Cash and cash equivalents include all cash, deposits in banks and other highly liquid investments with initial maturities of three months or less to be cash equivalents. As of December 31, 2007 and 2006, almost all the cash and cash equivalents were denominated in Renminbi (“RMB”) and were placed with banks in the PRC. They are not freely convertible into foreign currencies and the remittance of these funds out of the PRC is subject to exchange control restrictions imposed by the PRC government. The remaining insignificant balance of cash and cash equivalents were denominated in Hong Kong dollars.
F - 22
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Allowance of doubtful accounts
The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectibility of trade receivables. A considerable amount of judgment is required in assessing the amount of the allowance, the Company considers the historical level of credit losses and applies percentages to aged receivable categories. The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required.
Based on the above assessment, during the reporting years, the management establishes the general provisioning policy to make allowance equivalent to 100% of gross amount of trade receivables due over 1 year. Additional specific provision is made against trade receivables aged less than 1 year to the extent which they are considered to be doubtful.
Bad debts are written off when identified. The Company extends unsecured credit to customers ranging from three to six months in the normal course of business. The Company does not accrue interest on trade accounts receivable.
Historically, losses from uncollectible accounts have not significantly deviated from the general allowance estimated by the management and no significant additional bad debts have been written off directly to the profit and loss. This general provisioning policy has not changed in the past since establishment and the management considers that the aforementioned general provisioning policy is adequate and not too excessive and does not expect to change this established policy in the near future.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on a weighted average basis and includes all expenditures incurred in bringing the goods to the point of sale and putting them in a saleable condition. In assessing the ultimate realization of inventories, the management makes judgments as to future demand requirements compared to current or committed inventory levels. Our reserve requirements generally increase as our projected demand requirements; decrease due to market conditions, product life cycle changes. The Company estimates the demand requirements based on market conditions, forecasts prepared by its customers, sales contracts and orders in hand.
In addition, the Company estimates net realizable value based on intended use, current market value and inventory ageing analyses. The Company writes down the inventories for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventories and the estimated market value based upon assumptions about future demand and market conditions.
F - 23
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Inventories (cont’d)
Based on the above assessment, the Company establishes a general provision to make a 50% provision for inventories aged over 1 year.
Historically, the actual net realizable value is close to the management estimation.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.
Depreciation is provided on straight-line basis over their estimated useful lives. The principal depreciation rates are as follows:-
Annual rate | Residual value | |||||||
Buildings | 3 - 4.5 | % | 10 | % | ||||
Plant and machinery | 9 | % | 10 | % | ||||
Motor vehicles | 9-18 | % | 10 | % | ||||
Furniture, fixtures and equipment | 15 | % | 10 | % | ||||
Tools and equipment | 15-18 | % | Nil to 10 | % | ||||
Leasehold improvements | 20 | % | Nil |
Construction in progress mainly represents expenditures in respect of the Company’s new offices and factories under construction. All direct costs relating to the acquisition or construction of the Company’s new office and factories are capitalized as construction in progress. No depreciation is provided in respect of construction in progress.
Maintenance or repairs are charged to expense as incurred. Upon sale or disposition, the applicable amounts of asset cost and accumulated depreciation are removed from the accounts and the net amount less proceeds from disposal is charged or credited to income.
Trademarks and patents
Trademarks and patents are stated at cost less accumulated amortization. Amortization is provided on a straight-line basis over their useful lives of 10 years granted from the relevant PRC authorities.
Know-how
Know-how is determined to have an indefinite useful life pursuant to the purchase contracts as detailed in note 12(a). It is not subject to amortization until its useful life is determined to be no longer indefinite.
Know-how is stated at cost of purchase less any identified impairment losses in the annual impairment test.
F - 24
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Land use right
Land use right is stated at cost less accumulated amortization. Amortization is provided using the straight-line method over the terms of the lease of 30 years obtained from the relevant PRC land authority.
Customer Contracts
Customer contracts are stated at cost less accumulated amortization. Amortization is provided on a straight-line basis over their estimated useful lives of 1 year from the date of acquisition.
Government grant
The Company received certain government grants from the relevant government authorities as an encouragement to the capitalization of the retained profits by the Company’s subsidiaries. Such government grant is unconditional, non-refundable and without any restrictions on usage at the time of grant to and receipt by the Company. Government grant is recognized as income at the time when the approval documents are obtained from the relevant government authorities and when they are received.
Impairment of long-lived assets
Long-lived assets are tested for impairment in accordance with SFAS No. 144 and Accounting Principles Board (“APB”) Opinion 18, Equity Method of Accounting for Investments in Common Stock, respectively. The Company periodically evaluates potential impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company recognizes impairment of long-lived assets and investment in an affiliate in the event that the net book values of such assets exceed the future undiscounted cashflows attributable to such assets. During the reporting periods, the Company has not identified any indicators that would require testing for impairment.
Capitalized interest
The interest cost associated with the major development and construction projects is capitalized and included in the cost of the project. When no debt is incurred specifically for a project, interest is capitalized on amounts expended on the project using weighted-average cost of the Company’s outstanding borrowings. Capitalization of interest ceases when the project is substantially complete or development activity is suspended for more than a brief period.
Revenue recognition
Revenue from sales of the Company’s products is recognized when the significant risks and rewards of ownership have been transferred to the buyer at the time when the products are put into use by its customers, the sales price is fixed or determinable and collection is reasonably assured.
F - 25
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Advertising, transportation, research and development expenses
Advertising, transportation and other product-related costs are charged to expense as incurred.
Research and development costs include expenditure incurred for “new product development expenses”, “investment in research and development equipment” and “other research and development expenses”.
The “new products development expenses” include salaries of personnel engaged and other costs incurred for research and development of potential new products. They are expensed to Statement of Operations when incurred.
“Investments in research and development equipment” represent payments for acquisition of equipment for research and development use. This equipment has other alterative future uses, such as usage in Testing Department. The equipment is capitalized as tangible asset when acquired and included under Non-current assets “Property, plant and equipment” in the Financial Statements. Depreciation is provided according to the depreciation rates of corresponding categories of Property, plant and equipment being capitalized and included.
“Other research and development expenses” represent payments for routine and ongoing efforts to refine existing products. These expenses are charged to Statement of Operations when incurred.
Advertising expenses amounting to $8,926, $16,137 and $15,992 for three years ended December 31, 2007, 2006 and 2005 respectively are included in selling expenses.
Transportation expenses amounted to $630,254, $464,838 and $342,805 for three years ended December 31, 2007, 2006 and 2005 respectively are included in selling expenses.
Research and development expenditure for each of three years in the year ended December 31, 2007 are as follow:-
Years ended December 31, | ||||||||||||||
Nature | Included in | 2007 | 2006 | 2005 | ||||||||||
New products development expenses | Operating expenses | $ | 534,503 | $ | 500,347 | $ | 477,225 | |||||||
Investments in research and development equipment | Property, plant and equipment | 2,388,867 | 611,615 | 645,925 | ||||||||||
Other research and development expenses | Operating expenses | 601,494 | 447,355 | 346,959 | ||||||||||
$ | 3,524,864 | $ | 1,559,317 | $ | 1,470,109 |
F - 26
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Warranty
It is the policy of the Company to provide after sales support by way of a warranty programme. The Company provided warranties to certain customers with warranty periods ranging from two years or 50,000 km to three years or 60,000 km, whichever comes first.
Based on the past experience, the Company sets up a policy of making a general provision for warranty such that the closing balance of this provision is equal to certain percentage of relevant sales during the reporting periods as follows :-
Year ended December 31, | % | |||
2007 | 1.5 | |||
2006 | 1.5 | |||
2005 | 2 |
Stock-based compensation
During the reporting periods, the Company did not make any stock-based compensation payments.
Income taxes
The Company uses the asset and liability method of accounting for income taxes pursuant to SFAS No. 109 “Accounting for Income Taxes”. Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing assets and liabilities and loss carryforwards and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Dividends
Dividends are recorded in Company’s financial statements in the period in which they are declared.
Off-balance sheet arrangements
The Company does not have any off-balance sheet arrangements.
Comprehensive income
The Company has adopted SFAS 130, “Reporting Comprehensive Income”, which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Components of comprehensive income (loss) include net income and foreign currency translation adjustments.
F - 27
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Foreign currency translation
The functional currency of the Company is RMB and RMB is not freely convertible into foreign currencies. The Company maintains its financial statements in the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet date. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
For financial reporting purposes, the financial statements of the Company which are prepared using the functional currency have been translated into United States dollars. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders’ equity. The exchange rates in effect at December 31, 2007, 2006 and 2005 were RMB1 for $0.1371, $0.1279 and $0.1239 respectively. There is no significant fluctuation in exchange rate for the conversion of RMB to US dollars after the balance sheet date.
Basic and diluted earnings per share
The Company reports basic earnings per share in accordance with SFAS No. 128, “Earnings Per Share”. Basic earnings per share is computed using the weighted average number of shares outstanding during the periods presented. The weighted average number of shares of the Company represents the common stock outstanding during the reporting periods.
Fair value of financial instruments
The carrying values of the Company’s financial instruments, including cash and cash equivalents, restricted cash, marketable securities, trade, bills and other receivables, deposits, dividend payable, trade, bills and other payables approximate their fair values due to the short-term maturity of such instruments. The carrying amounts of bank borrowings approximate their fair values because the applicable interest rates approximate current market rates.
It is management’s opinion that the Company is not exposed to significant interest, price or credit risks arising from these financial instruments.
In respect of foreign currency risk, the Company is exposed to this risk arising from import purchase transactions and recognized trade payables as they will affect the future operating results of the Company. The Company did not have any hedging transactions during the reporting periods. As the functional currency of the Company is RMB, the exchange difference on translation to US dollars for reporting purpose is taken to other comprehensive income.
F - 28
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Recently issued accounting pronouncements
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). This interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year. The adoption of FIN 48 has no material effect on our financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157 “Fair Value Measurement” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This Statement shall be effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The provisions of this statement should be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except in some circumstances where the statement shall be applied retrospectively. The adoption of SFAS 157 has no material effect on our financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with few exceptions. SFAS 159 also establishes presentation and disclosure requirements to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. The requirements of SFAS 159 are effective for our fiscal year beginning January 1, 2008. We are in the process of evaluating this guidance and therefore have not yet determined the impact that SFAS 159 will have on our financial statements upon adoption.
In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51”. SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective for the fiscal year beginning after December 15, 2008. The management is in the process of evaluating the impact that SFAS 160 will have on the Company’s financial statements upon adoption.
F - 29
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
Recently issued accounting pronouncements (cont’d)
In December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”. SFAS 141 (Revised) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective for the fiscal year beginning after December 15, 2008. The management is in the process of evaluating the impact that SFAS 141 (Revised) will have on the Company’s financial statements upon adoption.
5. | Finance costs |
Years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Interest expenses | $ | 1,627,063 | $ | 807,693 | $ | 611,326 | ||||||
Less: Interest capitalized | (131,287 | ) | - | - | ||||||||
Bills discounting charges | 821,321 | 170,851 | 186,103 | |||||||||
Bank charges and net exchange loss | 203,708 | 55,007 | 41,525 | |||||||||
$ | 2,520,805 | $ | 1,033,551 | $ | 838,954 |
6. | Income taxes |
United States
Wonder Auto Technology, Inc. is subject to the United States of America Tax law at tax rate of 34%. No provision for the US federal income taxes has been made as the Company had no taxable income for the reporting period.
BVI
Wonder was incorporated in the BVI and, under the current laws of the BVI, are not subject to income taxes.
F - 30
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
6. | Income taxes (Cont’d) |
PRC
Enterprise income tax (“EIT”) to Jinzhou Halla, Jinzhou Dongwoo and Jinzhou Wanyou in the PRC is charged at 27%, of which 24% is for national tax and 3% is for local tax, of the assessable profits. As approved by the relevant tax authority in the PRC, Jinzhou Halla, Jinzhou Dongwoo and Jinzhou Wanyou were entitled to two years’ exemption, from the first profit making calendar year of operations after offset of accumulated taxable losses, followed by a 50% tax reduction for the immediate next three calendar years (“tax holiday”). The tax holiday of Jinzhou Halla commenced in the fiscal financial year of 2001. Accordingly, Jinzhou Halla was subject to tax rate of 13.5% for 2003, 2004 and 2005. Furthermore, Jinzhou Halla, being a Foreign Investment Enterprise (“FIE”), engaged in an advanced technology industry, was approved to enjoy a further three years’ 50% tax reduction for 2006, 2007 and 2008. The tax holiday of Jinzhou Dongwoo commenced in the fiscal year 2004. Accordingly, Jinzhou Dongwoo was subject to tax rate of 13.5% for 2006, and we expect will be subject to a tax rate of 13.5% for 2007 and 2008. Jinzhou Wanyou has elected to commence the tax holiday in the fiscal year 2007. Accordingly, Jinzhou Wanyou will be exempted from EIT for 2007 and 2008 and thereafter entitled to a 50% reduction on EIT tax rate 13.5% for 2009, 2010 and 2011. Wonder Motor and Jinzhou Wonder is subject to a rate of 25%.
Jinzhou Halla, Jinzhou Dongwoo and Jinzhou Wanyou, as FIEs, were entitled to another special tax concession which allows an amount equivalent to 40% qualifying domestic capital expenditure as defined and approved under the relevant PRC income tax rule to be used as an offset against the excess of the current year’s EIT over the prior year’s EIT. Jinzhou Halla and Jinzhou Dongwoo were entitled to another special tax concession. An amount equivalent to 50% of the current year’s domestic development expenses can be used as an offset against EIT. These two tax concessions, if unutilized in a particular year, can be carried forward for five years.
F - 31
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
6. | Income taxes (Cont’d) |
PRC (cont’d)
The components of the provision (benefit) for income taxes from continuing operations are :-
Year ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Current taxes - PRC | $ | 1,653,001 | $ | 1,286,760 | $ | 896,399 | ||||||
Deferred taxes - PRC | (263,993 | ) | (16,369 | ) | 857 | |||||||
$ | 1,389,008 | $ | 1,270,391 | $ | 897,256 |
The effective income tax expenses differs from the PRC statutory income tax rate of 27% from continuing operations in the PRC as follows :-
Years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Provision for (loss) income taxes at PRC statutory income tax rate | $ | (330,681 | ) | $ | 522,066 | $ | 1,970,509 | |||||
Non-deductible items for tax | 5,058,702 | 2,094,875 | 31,817 | |||||||||
Income not subject to tax | (183,342 | ) | (108,558 | ) | (7,361 | ) | ||||||
Increase in deferred tax assets resulting resulting from a reduction of PRC enterprise income tax rate | (194,321 | ) | - | - | ||||||||
Tax holiday | (2,961,350 | ) | (1,254,192 | ) | (1,097,709 | ) | ||||||
Others | - | 16,200 | - | |||||||||
$ | 1,389,008 | $ | 1,270,391 | $ | 897,256 |
During the three years ended December 31, 2007, 2006 and 2005, the aggregate amounts of benefit from tax holiday were $2,961,350, $1,254,192 and $1,097,709 and the respective effective on earnings per share effect was $0.12, $0.06 and $0.06 respectively.
F - 32
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
6. | Income taxes (Cont’d) |
PRC (cont’d)
Deferred tax assets (liabilities) as of December 31, 2007 and 2006 are composed of the following :-
As of December 31, | ||||||||
2007 | 2006 | |||||||
PRC | ||||||||
Current deferred tax assets: | ||||||||
Allowance for doubtful debts | $ | 5,004 | $ | 4,340 | ||||
Provision for obsolete inventories | 21,107 | 17,168 | ||||||
Provision for warranty | 151,829 | 141,661 | ||||||
Accrued liabilities | 12,956 | 23,053 | ||||||
Unrealized profit | 49,296 | 51,348 | ||||||
Others | 67,146 | - | ||||||
$ | 307,338 | $ | 237,570 | |||||
United States | ||||||||
Non current deferred tax assets: | ||||||||
Tax losses | $ | 48,000 | $ | 48,000 | ||||
Valuation allowances | (48,000 | ) | (48,000 | ) | ||||
- | - | |||||||
PRC | ||||||||
Non current deferred tax assets (liabilities): | ||||||||
Depreciation of property, plant and equipment | 786,604 | 376,368 | ||||||
Amortization of land use right | - | 12,435 | ||||||
Amortization of know-how | (346,844 | ) | (183,328 | ) | ||||
439,760 | 205,475 | |||||||
$ | 439,760 | $ | 205,475 |
On March 16, 2007, the National People’s Congress approved the Corporate Income Tax Law of the People’s Republic of China (the “New CIT Law”). The new CIT Law reduces the corporate income tax rate from 33% to 25% with effect from January 1, 2008. The tax rate reduction will also impact the carrying value of deferred tax assets as a result of new tax rate.
As of December 31, 2007, the Company had net operating loss carried forward amounted to $140,612 in the United States which, if unutilized, will expire through to 2021.
7. | Minority Interests |
Minority interests on the consolidated statement of income and comprehensive income of $1,136,694 for the year ended December 31, 2007 represents the minority shareholders’ proportionate share of the net income of Jinzhou Dongwoo.
F - 33
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
8. | (Loss) earnings per share |
During the reporting periods, the Company had no dilutive instruments. Accordingly, the basic and diluted (loss)/earnings per share are the same.
The per share data reflects the recapitalization of stockholders’ equity as if the RTO occurred as of the beginning of the first period presented and has been adjusted for Forward Stock Split effected in July 2006.
9. | Restricted cash, bills and trade payables |
As of December 31, | ||||||||
2007 | 2006 | |||||||
Bank deposit held as collateral for import duty | $ | 548,400 | $ | 501,133 | ||||
Bank deposits held as collateral for bills payable | 8,064,862 | 4,375,746 | ||||||
$ | 8,613,262 | $ | 4,876,879 |
When the Company intends or is requested to settle its suppliers by issuance of bills, it is required to place deposits with banks equal to 50% of the bills amount at the time of issuance. These deposits will be used to settle the bills at maturity.
The Company is requested by certain of its suppliers to settle by issuance of bills for which the banks add their undertakings to guarantee their settlement at maturity. These bills are interest-free with maturity of three to six months from date of issuance. As security for the banks’ undertakings, the Company is required to deposit with such banks equal to 50% of the bills amount at the time of issuance and pay bank charges.
Trade payables represent trade creditors on open account. They are interest-free and unsecured. The normal credit term given by these suppliers to the Company ranges from one to three months.
The Company is entitled to exemption from import duty for importing fixed assets from overseas. As of December 31, 2006 and 2007, certain imported fixed assets were pledged to DEG - Deutsche Investitions - und Entwicklungsgesellschaft mbH (“DEG”), a Germany Bank, for a loan granted to Jinzhou Halla. Regarding the exemption from import duty, the Company is required by the tax authority to deposit an equal amount of import duty exempted in bank until the bank loan is fully settled.
F - 34
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
10. | Other receivables, prepayments and deposits |
As of December 31, | ||||||||
2007 | 2006 | |||||||
Value added tax and other tax recoverable | $ | 576,643 | $ | 193,318 | ||||
Other prepayments | 343,362 | 227,883 | ||||||
Advance to a third party - Note 10a | - | 358,171 | ||||||
Other receivables | 400,478 | 236,527 | ||||||
$ | 1,320,483 | $ | 1,015,899 |
Notes :-
(a) | The advance is interest-free, unsecured and repayable on demand. |
11. | Inventories |
As of December 31, | ||||||||
2007 | 2006 | |||||||
Raw materials | $ | 4,101,852 | $ | 3,957,527 | ||||
Work-in-progress | 665,959 | 450,545 | ||||||
Finished goods | 8,085,326 | 9,428,237 | ||||||
12,853,137 | 13,836,309 | |||||||
Provision for obsolete inventories | (218,351 | ) | (146,935 | ) | ||||
$ | 12,634,786 | $ | 13,689,374 |
Provision/(Recovery of) for obsolete inventories of $39,115, $(52,470) and $(186,646) were charged (credited) to operations during the years ended December 31, 2007, 2006 and 2005 respectively.
F - 35
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
12. | Intangible assets |
As of December 31, | ||||||||
2007 | 2006 | |||||||
Costs: | ||||||||
Goodwill - Note 4 | $ | 15,274,619 | $ | 2,771,293 | ||||
Customer contracts | 49,053 | - | ||||||
Know-how - Note (a) | 1,573,467 | 1,468,089 | ||||||
Trademarks and patents | 16,866 | 13,818 | ||||||
16,914,005 | 4,253,200 | |||||||
Accumulated amortization | (40,954 | ) | (2,400 | ) | ||||
Net | $ | 16,873,051 | $ | 4,250,800 |
Note:-
(a) | In March 1996, the Company entered into two contracts with the Korean Company (Note 4) to purchase two technical know-how in relation to product design, manufacturing and quality control of alternators and starters at a cash consideration of $1.36 million. This consideration was mutually agreed between Jinzhou Halla and the Korean Company. Under the terms of the contracts, the Company is able to use such know-how for unlimited period of time. |
Since its acquisition, no indicator of impairment was identified and accordingly it is stated at cost.
During the three years ended December 31, 2007, 2006 and 2005 amortization charge was $38,318, $769 and $342 respectively.
The estimated aggregate amortization expenses for customer contracts and trademarks and patents for the five succeeding years is as follows :-
Year | ||||
2008 | $ | 13,633 | ||
2009 | 1,370 | |||
2010 | 1,370 | |||
2011 | 1,370 | |||
2012 | 1,370 | |||
$ | 19,113 |
F - 36
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
13. | Property, plant and equipment, net |
As of December 31, | ||||||||
2007 | 2006 | |||||||
Costs: | ||||||||
Buildings | $ | 6,917,618 | $ | 5,850,903 | ||||
Plant and machinery | 20,105,152 | 13,457,393 | ||||||
Furniture, fixtures and equipment | 624,844 | 381,810 | ||||||
Tools and equipment | 1,617,317 | 1,196,095 | ||||||
Leasehold improvements | 299,868 | 151,848 | ||||||
Motor vehicles | 891,374 | 642,172 | ||||||
30,456,173 | 21,680,221 | |||||||
Accumulated depreciation | (10,462,764 | ) | (7,851,156 | ) | ||||
Construction in progress - Note 4 | 2,523,491 | 116,781 | ||||||
Net | $ | 22,516,900 | $ | 13,945,846 |
An analysis of buildings, plant and machinery pledged to banks for banking loans (Note 18a) is as follows :-
As of December 31, | ||||||||
2007 | 2006 | |||||||
Costs: | ||||||||
Buildings | $ | 4,217,977 | $ | 4,576,803 | ||||
Plant and machinery | 12,345,810 | - | ||||||
16,563,787 | 4,576,803 | |||||||
Accumulated depreciation | (8,350,795 | ) | (929,213 | ) | ||||
Net | $ | 8,212,992 | $ | 3,647,590 |
Years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Depreciation | $ | 1,188,589 | $ | 139,117 | $ | 348,473 |
(i) | During the reporting periods, depreciation is included in :- |
Years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Cost of sales and overheads of inventories | $ | 1,491,634 | $ | 1,255,390 | $ | 1,057,150 | ||||||
Other | 522,411 | 146,151 | 101,411 | |||||||||
$ | 2,014,045 | $ | 1,401,541 | $ | 1,158,561 |
During the years ended December 31, 2007 and 2006, property, plant and equipment with carrying amounts of $46,058 and $152,696 were disposed of at considerations of $25,803 and $73,169 resulting in losses of $20,255 and $79,527 respectively.
(ii) | Construction in Progress |
Construction in progress mainly comprises capital expenditure for construction of the Company’s new offices and factories.
F - 37
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
14. | Land use right |
As of December 31, | ||||||||
2007 | 2006 | |||||||
Land use right | $ | 1,571,021 | $ | 1,465,806 | ||||
Accumulated amortization | (335,992 | ) | (262,550 | ) | ||||
$ | 1,235,029 | $ | 1,203,256 |
The Company obtained the right from the relevant PRC land authority for a period of thirty years to use the land on which the office premises, production facilities and warehouse of the Company are situated. The land use right of carrying amount of $582,967 was pledged to a bank for the bank loans granted to the Company (Note 18b).
During the three years ended December 31, 2007, 2006 and 2005, amortization amounted to $52,394, $28,883 and $26,245 respectively.
The estimated aggregate amortization expenses for land use right for the five succeeding years is as follows :-
Year | ||||
2008 | $ | 52,394 | ||
2009 | 52,394 | |||
2010 | 52,394 | |||
2011 | 52,394 | |||
2012 | 52,394 | |||
$ | 261,970 |
15. | Other payables and accrued expenses |
As of December 31, | ||||||||
2007 | 2006 | |||||||
Accrued audit fee | $ | 95,970 | $ | 90,678 | ||||
Interest payable | 184,763 | - | ||||||
Other accrued expenses | 159,552 | 137,839 | ||||||
Other tax payable | 437,785 | 37,690 | ||||||
Payable for acquisition of property, plant and equipment | 827,172 | 133,275 | ||||||
Staff welfare payable - Note | 146,524 | 132,699 | ||||||
Payable for acquisition of Jinzhou Dongwoo - Note 4 | - | 2,420,000 | ||||||
Other payables | 561,374 | 169,352 | ||||||
$ | 2,413,140 | $ | 3,121,533 |
F - 38
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
15. | Other payables and accrued expenses (Cont’d) |
Note :-
Staff | welfare payable represents accrued staff medical, industry injury claims, labor and unemployment insurances. All of which are third parties insurance and the insurance premiums are based on certain percentage of salaries. The obligations of the Company are limited to those premiums contributed by the Company. |
16. | Provision for warranty |
As of December 31, | ||||||||
2007 | 2006 | |||||||
Balance, January 1 | $ | 1,049,344 | $ | 914,403 | ||||
Claims paid for the year | (1,362,636 | ) | (843,026 | ) | ||||
Additional provision for the year | 1,368,760 | 945,871 | ||||||
Translation adjustments | 69,187 | 32,096 | ||||||
Balance, December 31 | $ | 1,124,655 | $ | 1,049,344 |
17. | Amount due from a related company / to an unconsolidated affiliate |
The related company is controlled by certain of the Company’s stockholders which include Qingjie Zhao. These amounts are interest-free, unsecured and repayable on demand.
18. | Secured bank loans |
As of December 31, | ||||||||
2007 | 2006 | |||||||
Short-term loan, interest rates ranging from 5.67% to 6.84 % per annum | $ | 10,282,500 | $ | 14,326,831 | ||||
Long-term loan | ||||||||
- due 2009, interest charge at 6.57% per annum | 5,484,000 | - | ||||||
- due 2009 to 2013, interest charge at EURIBOR rate plus 2.85% per annum | 12,138,186 | - | ||||||
17,622,186 | - | |||||||
$ | 27,904,686 | $ | 14,326,831 |
As of December 31, 2007, the Company’s banking facilities are composed of the following :-
Amount | ||||||||||||
Facilities granted | Granted | Utilized | Unused | |||||||||
Secured bank loans | $ | 30,390,820 | $ | 27,904,686 | $ | 2,486,134 |
F - 39
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
18. | Secured bank loans (Cont’d) |
The above banking loans were secured by the following :-
(a) | Property, plant and equipment with carrying value of $8,212,992 respectively (Note 13); |
(b) | Land use right with carrying value of $582,967 (Note 14); |
(c) | Certain trade receivables of approximately $980,265 were factored to a bank with recourse as collateral under invoice discount agreement; |
(d) | Guarantees executed by a related company controlled by certain of the Company’s stockholders including Qingjie Zhao, Xiangdong Gao, Meina Zhang, Qing Lin, Yuquan Zhou, Chengyu Zhang and Chenye Zhang; and |
(e) | Guarantees executed by a related company controlled by the Company’s CEO and director Qingjie Zhao. |
During the reporting periods, there was no covenant requirement under the banking facilities granted to the Company.
19. | Commitments and contingencies |
a. | Capital commitment |
As of December 31, 2007, the Company had capital commitments amounting to $1,433,479 in respect of the acquisition of property, plant and equipment which were contracted for but not provided in the financial statements.
b. | Operating lease arrangement |
As of December 31, 2007, the Company had one non-cancelable operating lease for its warehouses. The leases will expire in 2010 and the expected payment is $7,728.
The rental expense relating to the operating leases was $2,840 and $1,302 for the two years ended December 31, 2007 and 2006 respectively.
F - 40
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
20. | Common stock |
On December 10, 2007, the Company entered into certain securities purchase agreements (collectively, the “Securities Purchase Agreement”) with certain accredited investors (collectively, the “Investors”). Under the Securities Purchase Agreement, the Company agreed to issue and sell to the Investors a total of 3,000,000 shares of the Company’s common stock at a price per share of $8.65, which represents approximately 11.1% of the issued and outstanding capital stock of the Company as of and immediately after consummation of the transactions contemplated by the Securities Purchase Agreement, for an aggregate purchase price of $25,950,000. The proceeds will be used for working capital and general corporate purposes. The transactions were completed on December 13, 2007.
In connection with Securities Purchase Agreement, the Company also entered into certain registration rights agreements (“collectively, the “Registration Rights Agreement”) with the Investors, pursuant to which, among other things, the Company agreed to register the Shares within a pre-defined period. Under the terms of the Registration Rights Agreement, the Company is obligated to file a registration statement (the “Registration Statement”) under the Securities Act of 1933 on Form S-3 covering the resale of the Shares issued to the Investors under the Securities Purchase Agreement. The Company is subject to registration delay penalty payments in the amounts prescribed by the Registration Rights Agreement if it is unable to file the Registration Statement or cause it to become effective or maintain its effectiveness as required by the Registration Rights Agreement. The Form S-3 has been filed by the Company as required by the Registration Rights Agreement.
21. | Statutory and other reserves |
The Company’s statutory and other reserves comprise statutory reserve and enterprise expansion fund of Jinzhou Halla, Jinzhou Dongwoo and Jinzhou Wanyou in the PRC.
As of December 31, | ||||||||
2007 | 2006 | |||||||
Statutory reserve | $ | 4,802,426 | $ | 3,093,031 | ||||
Enterprise expansion fund | 55,234 | 55,234 | ||||||
$ | 4,857,660 | $ | 3,148,265 |
Statutory reserve
Under PRC regulations, Jinzhou Halla, Jinzhou Dongwoo, Jinzhou Wanyou, Jinzhou Wonder and Wonder Motor may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC GAAP. In addition, these companies are required to set aside at least 10% of their after-tax net profits each year, if any, to fund the statutory reserves until the balance of the reserves reaches 50% of their registered capital. The statutory reserves are not distributable in the form of cash dividends to the Company and can be used to make up cumulative prior year losses.
F - 41
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
21. | Statutory and other reserves (Cont’d) |
Enterprise expansion fund
In accordance with the relevant laws and regulations of the PRC and articles of association of Jinzhou Halla, Jinzhou Dongwoo, Jinzhou Wanyou, Jinzhou Wonder and Wonder Motor, the appropriation of income to this fund is made in accordance with the recommendation of the board of directors of the respective company. Upon approval by the board, it can be used for future expansion or to increase registered capital.
22. | Defined contribution plan |
The Company and its qualified employees are each required to make contributions to the plan at the rates specified in the plan organized by the PRC municipal and provincial governments which covers pensions, unemployment and medical insurances, and staff housing fund. The only obligation of the Company with respect to retirement scheme is to make the required contributions under the plan. No forfeited contribution is available to reduce the contribution payable in the future years. The defined contribution plan contributions were charged to the consolidated statements of profit. The Company contributed $681,944, $490,519 and $417,824 for the year ended December 31, 2007, 2006 and 2005, respectively.
F - 42
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
23. | Segment information |
The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. Management, including the chief operating decision maker, reviews operating results solely by monthly revenue of alternator, starter and rods and shafts and operating results of the Company and, as such, the Company has determined that the Company has three operating segments as defined by SFAS 131, “Disclosures about Segments of an Enterprise and Related Information”: Alternator, starter and rods and shafts.
Alternators | Starters | Rods and shafts | Total | |||||||||||||||||||||||||||||||||||||||||||||
Years ended December 31 | Years ended December 31 | Years ended December 31 | Years ended December 31 | |||||||||||||||||||||||||||||||||||||||||||||
2007 | 2006 | 2005 | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||||||||||||||||||||||||||||||||
Revenue from external customers | $ | 59,790,042 | $ | 45,216,038 | $ | 30,118,341 | $ | 35,014,035 | $ | 26,934,445 | $ | 17,944,464 | $ | 7,279,645 | $ | - | $ | - | $ | 102,083,722 | $ | 72,150,483 | $ | 48,062,805 | ||||||||||||||||||||||||
Interest income | 57,177 | 41,954 | 17,844 | 31,463 | 24,154 | 10,632 | 16,631 | - | - | 105,271 | 66,108 | 28,476 | ||||||||||||||||||||||||||||||||||||
Interest expenses | 1,039,895 | 507,310 | 383,085 | 368,790 | 300,383 | 228,241 | - | - | - | 1,408,685 | 807,693 | 611,326 | ||||||||||||||||||||||||||||||||||||
Amortization | 42,945 | 19,295 | 16,661 | 10,977 | 10,357 | 9,926 | 36,790 | - | - | 90,712 | 29,652 | 26,587 | ||||||||||||||||||||||||||||||||||||
Depreciation | 1,619,077 | 1,174,059 | 963,870 | 294,740 | 227,482 | 194,691 | 100,228 | - | - | 2,014,045 | 1,401,541 | 1,158,561 | ||||||||||||||||||||||||||||||||||||
Segment profit | 11,103,589 | 4,835,128 | 3,904,964 | 4,560,488 | 4,818,079 | 3,384,753 | 1,822,949 | - | - | 17,487,026 | 9,653,207 | 7,289,717 | ||||||||||||||||||||||||||||||||||||
Segment assets | 79,027,844 | 54,860,505 | 35,053,650 | 37,624,611 | 22,308,718 | 16,990,104 | 23,278,939 | - | - | 139,931,394 | 77,169,223 | 52,043,754 | ||||||||||||||||||||||||||||||||||||
Expenditure for segment assets | $ | 5,732,146 | $ | 1,685,790 | $ | 1,292,607 | $ | 1,533,523 | $ | 1,951,822 | $ | 770,284 | $ | 754,133 | $ | - | $ | - | $ | 8,019,802 | $ | 3,637,612 | $ | 2,062,891 |
F - 43
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
23. | Segment information (Cont’d) |
A reconciliation is provided for unallocated amounts relating to corporate operations which is not included in the segment information.
Years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Total consolidated revenue | $ | 102,083,722 | $ | 72,150,483 | $ | 48,062,805 | ||||||
Total profit for reportable segments | $ | 17,487,026 | $ | 9,653,207 | $ | 7,289,717 | ||||||
Unallocated amounts relating to relating to operations: | ||||||||||||
Interest income | 6,513 | 30,702 | 63 | |||||||||
Other income | 16,203 | 18,418 | 9,753 | |||||||||
Other general expenses | (468,987 | ) | (106,563 | ) | (1,351 | ) | ||||||
Unusual charge - make good provision | (18,265,500 | ) | (7,507,500 | ) | - | |||||||
(Loss)/income before income taxes | $ | (1,224,745 | ) | $ | 2,088,264 | $ | 7,298,182 |
As of December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Assets | ||||||||||||
Total assets for reportable segments | $ | 139,931,394 | $ | 77,169,223 | $ | 52,043,754 | ||||||
Cash and cash equivalents | 2,421,363 | 830,917 | 9,008 | |||||||||
Marketable securities | - | - | 37,159 | |||||||||
Other receivables | 39,948 | - | - | |||||||||
Property, plant and equipment | 4,030 | - | - | |||||||||
$ | 142,396,735 | $ | 78,000,140 | $ | 52,089,921 |
All of the Company’s long-lived assets are located in the PRC. Geographic information about the revenues, which are classified based on the customers, is set out as follows :-
Years ended December 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
PRC | $ | 92,328,725 | $ | 68,686,842 | $ | 47,416,125 | ||||||
Others | 9,754,997 | 3,463,641 | 646,680 | |||||||||
Total | $ | 102,083,722 | $ | 72,150,483 | $ | 48,062,805 |
24. | Subsequent events |
(i) | On January 1, 2008, Wonder entered into an agreement with Winning pursuant to which Wonder agreed to acquire Winning’s 50% equity interest in Jinzhou Hanhua Electrical Systems Co., Ltd. (“Jinzhou Hanhua”) at a cash consideration of $4.08 million (RMB 29.75 million). Upon completion of the transaction, Jinzhou Hanhua is considered as a subsidiary of the Company as Wonder obtained control over Jinzhou Hanhua in January, 2008 by appointing more than half of members in the board of directors in accordance with Jinzhou Hanhua’s Memorandum and Articles of Association. |
F - 44
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
24. | Subsequent events (Cont’d) |
The consideration is scheduled to be paid by Wonder in two installments. The first installment of approximately $3.1 million (RMB 22.55 million) was fully paid by January 28, 2008. The second installment of approximately $0.98 million (RMB 7.2 million) will be paid if Jinzhou Hanhua achieves minimum net income of approximately $1.17 million (RMB 8.5 million) for the fiscal year ending 31 December 2008. If Jinzhou Hanhua fails to achieve the minimum net income threshold, the second installment will be proportionately reduced. No premium will be payable by Wonder if Jinzhou Hanhua exceeds the minimum net income threshold.
(ii) | February 2, 2008, stockholders of CIL and ECL resolved to surrender the right of entitlement to the second tranche of 1,650,000 shares placed with the escrow agent to Xiangdong Gao under the escrow agreement for the fiscal year ended December 31, 2007 respectively. On the same date, separate agreement was signed between CIL, ECL and Xiangdong Gao whereby both CIL and ECL have agreed to give the right of the entitlement to the aforementioned escrowed shares related to the fiscal year ended December 31, 2007 to Xiangdong Gao as a gift (that is for nil consideration). Xiangdong Gao is a beneficial stockholder of the Company. |
F - 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WONDER AUTO TECHNOLOGY, INC. | |
By: | /s/ Qingjie Zhao |
Qingjie Zhao | |
Chief Executive Officer | |
Date: March 30, 2009 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacities and on the dates indicated.
Each person whose signature appears below hereby authorizes Qingjie Zhao and Meirong Yuan, or any of them, as attorneys-in-fact to sign on his behalf, individually, and in each capacity stated below, and to file all amendments and/or supplements to this annual report on Form 10-K.
Signature | Capacity | Date | ||
/s/ Qingjie Zhao | President, Chief Executive Officer and Chairman | March 30, 2009 | ||
Qingjie Zhao | (Principal Executive Officer) | |||
/s/ Meirong Yuan | Chief Financial Officer and Director (Principal | March 30, 2009 | ||
Meirong Yuan | Financial Officer and Principal Accounting Officer) | |||
/s/ Larry Goldman | Director | |||
Larry Goldman | March 30, 2009 | |||
/s/ Xingye Zhang | Director | |||
Xingye Zhang | March 30, 2009 | |||
/s/ David Murphy | Director | |||
David Murphy | March 30, 2009 |
EXHIBIT INDEX
Exhibit No. | Description | |
2.1 | Share Exchange Agreement, dated June 22, 2006, among the Company, Wonder Auto Limited and its stockholders. [Incorporated by reference as Exhibit 2.1 to the Company’s current report on Form 8-K filed on June 22, 2006]. | |
2.2 | Stock Purchase Agreement, dated December 19, 2005, by and among the Company, Halter Financial Investments, L.P., Hisonic International, Inc. [Incorporated by reference as Exhibit 10.1 to Schedule 13D filed on December 21, 2005]. | |
3.1 | Articles of Incorporation of the Company as filed with the Secretary of State of Nevada, as amended to date. [Incorporated by reference as Exhibit 3.1 to the Company’s registration statement on Form SB-2 filed on December 11, 2001 in commission file number 333-74914]. | |
3.2 | Amended and Restated Bylaws of the Company. [Incorporated by reference as Exhibit 3.4 to the Company’s registration statement on Form SB-2 filed on December 11, 2001 in commission file number 333-74914]. | |
10.1 | Form of the Stock Purchase and Subscription Agreement, dated June 22, 2006. [Incorporated by reference as Exhibit 10.1 to the Company’s current report on Form 8-K filed on June 22, 2006]. | |
10.2 | Escrow Agreement, dated June 22, 2006, among the Company, Sterne Agee & Leach, Inc., Empower Century Limited, Choice Inspire Limited and Securities Transfer Corporation. [Incorporated by reference as Exhibit 10.2 to the Company’s current report on Form 8-K filed on June 22, 2006]. | |
10.3 | Escrow Agreement, dated June 22, 2006, by and among Wonder Auto Limited, Empower Century Limited, Thelen Reid & Priest LLP and certain purchasers. [Incorporated by reference as Exhibit 10.3 to the Company’s current report on Form 8-K filed on June 22, 2006]. | |
10.4 | Stock Purchase Agreement, dated April 28, 2004, between JinZhou Wonder Industry (Group) Co., Ltd and Wonder Auto Limited. [Incorporated by reference as Exhibit 10.4 to the Company’s current report on Form 8-K filed on June 22, 2006]. | |
10.5 | Technical Cooperation Agreement, dated July 25, 2003, between JinZhou Halla Electrical Equipment Co., Ltd and MEISTER (Korea) Company Limited. [Incorporated by reference as Exhibit 10.5 to the Company’s current report on Form 8-K filed on June 22, 2006]. | |
10.6 | Strategic Cooperation Agreement, dated June 7, 2004, between JinZhou Halla Electrical Equipment Co., Ltd. And HIVRON Inc. [Incorporated by reference as Exhibit 10.6 to the Company’s current report on Form 8-K filed on June 22, 2006]. | |
10.7 | Form of Purchase Contract with Supplier. [Incorporated by reference as Exhibit 10.7 to the Company’s current report on Form 8-K filed on June 22, 2006]. | |
10.8 | Equipment Purchase Agreement, dated January 1, 2006, between JinZhou Halla Electrical Equipment Co., Ltd. And Suzhou Tenuo Automation Co., Ltd. [Incorporated by reference as Exhibit 10.8 to the Company’s current report on Form 8-K filed on June 22, 2006]. | |
10.9 | Equipment Purchase Agreement, dated May 19, 2005, between JinZhou Halla Electrical Equipment Co., Ltd. And DMG meccanica. [Incorporated by reference as Exhibit 10.9 to the Company’s current report on Form 8-K filed on June 22, 2006]. |
10.10 | Equipment Purchase Agreement, dated December 17, 2004, between JinZhou Halla Electrical Equipment Co., Ltd. And OMT Co., Ltd. [Incorporated by reference as Exhibit 10.10 to the Company’s current report on Form 8-K filed on June 22, 2006]. | |
10.11 | Loan Agreement, dated October 18, 2005, between JinZhou Halla Electrical Equipment Co., Ltd. And China Construction Bank (JinZhou Linghe Branch). [Incorporated by reference as Exhibit 10.11 to the Company’s current report on Form 8-K filed on June 22, 2006]. | |
10.12 | Loan Agreement, dated September 30, 2005, between JinZhou Halla Electrical Equipment Co., Ltd. And JinZhou Commercial Bank (Chengjian Branch). [Incorporated by reference as Exhibit 10.12 to the Company’s current report on Form 8-K filed on June 22, 2006]. | |
10.13 | Loan Agreement, dated July 8, 2005, between JinZhou Halla Electrical Equipment Co., Ltd and China Construction Bank (JinZhou Linghe Branch). [Incorporated by reference as Exhibit 10.13 to the Company’s current report on Form 8-K filed on June 22, 2006]. | |
10.14 | Mortgage Agreement, dated September 30, 2005, between JinZhou Halla Electronic Equipment Co., Ltd. And JinZhou Commercial Bank (Linghe Branch). [Incorporated by reference as Exhibit 10.14 to the Company’s current report on Form 8-K filed on June 22, 2006]. | |
10.15 | Lease Agreement, dated November 8, 2005, by and among Beijing International Technological Cooperation Center Wang Jing Tower Company, JinZhou Halla Electrical Equipment Co., Ltd. And Beijing Zhucheng Real Property Management Company. [Incorporated by reference as Exhibit 10.15 to the Company’s current report on Form 8-K filed on June 22, 2006] . | |
10.16 | Employment Contract, dated June 21 , 2006, between Wonder Auto Limited and Qingjie Zhao. [Incorporated by reference as Exhibit 10.16 to the Company’s current report on Form 8-K filed on June 22, 2006].*** | |
10.17 | Employment Contract, dated June 21 , 2006, between Wonder Auto Limited and Yuncong Ma. [Incorporated by reference as Exhibit 10.17 to the Company’s current report on Form 8-K filed on June 22, 2006].*** | |
10.18 | Employment Contract, dated June 21 , 2006, between Wonder Auto Limited and Meirong Yuan. [Incorporated by reference as Exhibit 10.18 to the Company’s current report on Form 8-K filed on June 22, 2006].*** | |
10.19 | Employment Contract between JinZhou Halla Electrical Equipment Co., Ltd. And Seuk Jun Kim. [Incorporated by reference as Exhibit 10.19 to the Company’s current report on Form 8-K filed on June 22, 2006].*** | |
10.20 | Employment Contract between JinZhou Halla Electrical Equipment Co., Ltd. And Yuguo Zhao. [Incorporated by reference as Exhibit 10.20 to the Company’s current report on Form 8-K filed on June 22, 2006].*** | |
10.21 | Employment Contract between JinZhou Halla Electrical Equipment Co., Ltd. And Yongdong Liu. [Incorporated by reference as Exhibit 10.21 to the Company’s current report on Form 8-K filed on June 22, 2006].*** |
10.22 | Consulting Agreement, dated April 22, 2006, between Heritage Management Consultants, Inc. and Wonder Auto Limited. [Incorporated by reference as Exhibit 10.22 to the Company’s current report on Form 8-K filed on June 22, 2006].*** | |
10.23 | Amendment No. 1 to the Consulting Agreement, dated June 23, 2006, between Heritage Management Consultants, Inc. and Wonder Auto Limited.*** | |
10.24 | Financial Advisory Agreement, dated March 15, 2006, between Wonder Auto Group and HFG International, Limited. [Incorporated by reference as Exhibit 10.23 to the Company’s current report on Form 8-K filed on June 22, 2006].*** | |
10.25 | Assignment and Assumption Agreement, dated May 31, 2006, between Wonder Auto Group, HFG International Limited and Wonder Auto Limited. [Incorporated by reference as Exhibit 10.24 to the Company’s current report on Form 8-K filed on June 22, 2006]. | |
10.26 | Put Option Agreement, dated December 19, 2005, by and among the Registrant, Halter Financial Investments, L.P. and Rachel (Pin) Kang [Incorporated by reference as Exhibit 10.2 to Schedule 13D filed on December 21, 2005]. | |
10.27 | Credit Facility Agreement, dated August 21, 2006, by and between JinZhou Halla Electrical Equipment Co., Ltd. And the Bank of China JinZhou Tiebei branch. [Incorporated by reference as Exhibit 10.1 to the Company’s current report on Form 8-K filed on August 25, 2006] | |
10.28 | Share Purchase Agreement, dated August 23, 2006, by and between Wonder Auto Limited and Winning International Development Limited. [Incorporated by reference as Exhibit 10.2 to the Company’s current report on Form 8-K filed on August 25, 2006]. | |
10.29 | Domestic Business Invoice Discount Agreement, dated August 21, 2006, by and between JinZhou Halla Electrical Equipment Co., Ltd. And the Bank of China JinZhou branch. [Incorporated by reference as Exhibit 10.1 to the Company’s current report on Form 8-K filed on October 3, 2006]. | |
10.30 | RMB Short-term Loan Agreement, dated September 13, 2006, by and between JinZhou Halla Electrical Equipment Co., Ltd. And the Bank of China JinZhou Tiebei branch. [Incorporated by reference as Exhibit 10.2 to the Company’s current report on Form 8-K filed on October 3, 2006]. | |
10.31 | Mortgage Agreement, dated September 13, 2006, by and between JinZhou Halla Electrical Equipment Co., Ltd. And the Bank of China JinZhou Tiebei branch. [Incorporated by reference as Exhibit 10.3 to the Company’s current report on Form 8-K filed on October 3, 2006]. | |
10.32 | Loan Agreement, dated November 24, 2006, by and between JinZhou Halla Electrical Equipment Co., Ltd. And DEG - Deutsche Investitions - und Entwicklungsgesellschaft mbH [Incorporated by reference as Exhibit 10.1 of the Company’s current report on Form 8-K filed on November 30, 2006]. | |
10.33 | English summary of Credit Facility Agreement, Dated September 27, 2007, by and between Jinzhou Halla Electrical Equipment Co., Ltd and Bank of China, Jinzhou Tiebei Branch. [Incorporated by reference as Exhibit 10.1 of the Company’s quarterly report on Form 10-Q filed on November 1, 2007]. | |
10.34 | English summary of Short-Term Loan Agreement, Dated September 27, 2007, by and between Jinzhou Halla Electrical Equipment Co., Ltd and Bank of China, Jinzhou Tiebei Branch. [Incorporated by reference as Exhibit 10.2 of the Company’s quarterly report on Form 10-Q filed on November 1, 2007]. |
10.35 | English summary of Maximum Amount Mortgage Agreement, Dated September 27, 2007, by and between Jinzhou Halla Electrical Equipment Co., Ltd and Bank of China, Jinzhou Tiebei Branch. [Incorporated by reference as Exhibit 10.3 of the Company’s quarterly report on Form 10-Q filed on November 1, 2007]. | |
10.36 | Form of the Stock Purchase Agreement, dated December 10, 2007. [Incorporated by reference as Exhibit 10.1 to the Company’s current report on Form 8-K filed on December 12, 2007]. | |
10.37 | Form of the Registration Rights Agreement, dated December 10, 2007. [Incorporated by reference as Exhibit 10.1 to the Company’s current report on Form 8-K filed on December 12, 2007]. | |
14 | Code of Ethics. [Incorporated by reference as Exhibit 14 to the Company’s annual report on Form 10-KSB filed on March 30, 2005]. | |
21 | Revised list of subsidiaries of the Company.** | |
23 | Consent of PKF* | |
24 | Power of Attorney (included on the signature page of this annual report). | |
31.1 | Certification of Chief Executive Officer, pursuant to Rule 13a - 14(a). * | |
31.2 | Certification of Chief Financial Officer, pursuant to Rule 13a - 14(a). * | |
32.1 | Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * | |
32.2 | Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * | |
99.1 | Promissory Note, dated June 27, 2005 [Incorporated by reference as Exhibit 99.1 to the Company’s quarterly report on Form 10-QSB filed on August 15, 2005]. |
* Filed herein.
** Filed with the Original Filing
*** Represents management contract or compensation plan or arrangement.