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, 2006
o | 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: 000-50883
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: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o 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 o 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 o
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. x
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 o | Accelerated filer o | Non-accelerated filer x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
As of June 30, 2006, 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 $49 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.
As of March 15, 2007, there were 23,959,994 shares of the Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant’s Definitive Proxy Statement for its 2007 Annual Meeting of Shareholders to be filed with the Commission within 120 days after the close of the Registrant’s fiscal year are incorporated by reference into Part III of this Annual Report on Form 10-K.
EXPLANATORY NOTE
This Amendment No. 1 to the Annual Report on Form 10-K for the year ended December 31, 2006 (the “Amendment”) 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “Original Filing”) is being amended to: (1) record a compensation charge relating to the 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 changes in certain restricted cash which was used as collateral support for the Company’s bills payable from cash flows from investing activities to cash flows from financing activities (see below for more details); (3) separated research and development costs from cost of sales and reclassify it as operating expenses to confirm to the Company’s current year presentation; and (4) revise Item 6 “Selected Financial Data” and Item 7 “Managements Discussion and Analysis of Financial Condition and Results of Operations” to reflect the changes above.
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, 2006 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, stockholders of CIL and ECL transferred their right to receive the 1,650,000 shares in escrow for no consideration to Xiangdong Gao who ultimately received the escrowed shares. Upon consideration of the SEC’s comment, after consultation with its independent auditor, the Company’s management and audit committee have determined that it should have recognized a non-cash compensation expense for the shares released from the escrow on February 8, 2007. Accordingly, the aggregate fair value of the shares at the time when the performance target was met, $7,507,500, has been accounted for as stock-based compensation in 2006.
Re-classification of Restricted Cash
The Company originally accounted for the change of 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 year ended December 31, 2006 to re-classify such increases and decreases in restricted cash as cash flows from financing activities in its financial statements.
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For purposes of the Amendment, 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 Amendment to update other disclosures presented in the Original Filing. This Amendment 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 Amendment 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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Item 6. | Selected Financial Data |
The selected consolidated statement of income and comprehensive income data for the years ended December 31, 2004, 2005 and 2006 and the selected balance sheet data as of December 31, 2004, 2005 and 2006 are derived from our audited consolidated financial statements included elsewhere in this Report. The selected consolidated financial data for the year ended December 31, 2003 is derived from our audited consolidated financial statements not included in this Report. The selected consolidated financial data for the year ended December 31, 2002 is derived from our unaudited consolidated financial statements that are not included in this Report.
The following selected historical financial information should be read in conjunction with our consolidated financial statements and related notes and the information contained in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Year Ended December 31, | ||||||||||||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Statement of operations data: | ||||||||||||||||||||
Sales Revenues: | $ | 22,781 | $ | 39,791 | $ | 42,266 | $ | 48,063 | $ | 72,150 | ||||||||||
Cost of Sales | (17,288 | ) | (31,193 | ) | (32,794 | ) | (35,963 | ) | (57,342 | ) | ||||||||||
Gross profit | 5,493 | 8,598 | 9,470 | 12,100 | 14,808 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Administrative expenses | 715 | 755 | 890 | 1,155 | 1,918 | |||||||||||||||
Research and development expenses | - | - | 279 | 824 | 948 | |||||||||||||||
Selling expenses | 1,135 | 1,523 | 1,514 | 2,148 | 2,138 | |||||||||||||||
Unusual charge-make good provision | - | - | - | - | 7,508 | |||||||||||||||
1,850 | 2,278 | 2,684 | 4,128 | 12,511 | ||||||||||||||||
Income from operations | ||||||||||||||||||||
Interest income | - | - | 14 | 29 | 97 | |||||||||||||||
Other income | - | - | 148 | 137 | 357 | |||||||||||||||
Income before income taxes | 3,334 | 5,883 | 6,306 | 7,298 | 2,088 | |||||||||||||||
Income taxes | 33 | (665 | ) | (718 | ) | (897 | ) | (1,270 | ) | |||||||||||
Minority interests | - | - | - | - | (102 | ) | ||||||||||||||
Net income | 3,367 | 5,218 | 5,588 | 6,401 | 716 | |||||||||||||||
Earnings per share - basic and diluted | $ | 0.2 | $ | 0.3 | $ | 0.32 | $ | 0.37 | $ | 0.03 | ||||||||||
Weighted average number of shares outstanding - basic and diluted | 17,227 | 17,227 | 17,227 | 17,227 | 20,787 | |||||||||||||||
Cash dividend declared per common share | N/A | N/A | N/A | 0.33 | N/A | |||||||||||||||
Cash flows data: | ||||||||||||||||||||
Net cash flows provided by (used in) operating activities | $ | 908 | $ | (2,481 | ) | $ | 7,239 | $ | 11,439 | $ | 1,389 | |||||||||
Net cash flows used in investing activities | (631 | ) | (1,300 | ) | (2,849 | ) | (2,099 | ) | (6,219 | ) | ||||||||||
Net cash flows provided by (used in) financing activities | 304 | 4,947 | (4,784 | ) | (6,952 | ) | 8,308 |
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December 31, | ||||||||||||||||||||
2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||||||
Balance sheet data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 1,056 | $ | 2,223 | $ | 1,830 | $ | 4.369 | $ | 8,204 | ||||||||||
Working capital | ||||||||||||||||||||
4,367 | 6,297; | 5,344 | 10,185 | 18,933 | ||||||||||||||||
Total assets | 28,591 | 37,643 | 36,975 | 52,090 | 78,000 | |||||||||||||||
Total current liabilities | 14,154 | 20,824 | 19,262 | 28,282 | 37,194 | |||||||||||||||
Long term liability | - | - | 4,955 | - | ||||||||||||||||
Total liabilities | 14,154 | 20,824 | 19,262 | 33,236 | 37,194 | |||||||||||||||
Total stockholders' equity | 14,437 | 16,819 | 17,713 | 18,853 | 38,227 |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
Wonder Auto Technology, Inc. is a holding company whose primary business operations are conducted through our subsidiary, Wonder Auto Limited and its subsidiary Halla. Through Halla, Wonder Auto is a China-based manufacturer of automotive electrical parts, specifically, starters and alternators. Wonder Auto’s business is focused on designing, developing, manufacturing and selling these automotive electrical parts. Until our acquisition of Wonder Auto on June 22, 2006, our business strategy and ownership changed over the years as a result of several acquisitions of our stock that are discussed in the section below entitled “Our Background and History.”
Our Background and History
We were incorporated on June 8, 2000 in the State of Nevada under the name “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. In particular, its plan was to focus its business in the areas of corporate finance consulting services, business consulting services, broker-client relation services and public relations services. WATG had no business operations during this period.
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On March 16, 2004, MyTop purchased 1,025,000 shares of the common stock of WATG and became 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 through the acquisition of other companies. 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, and 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 effected a 20-for-1 reverse stock split in February 2006.
Until the reverse acquisition of Wonder Auto on June 22, 2006, WATG engaged in no active operations. In connection with the reverse acquisition transaction, Wonder Auto became the wholly owned subsidiary of WATG and is the holding company for all current commercial operations, which are conducted through a variety of subsidiary companies whose business operations originally commenced business in May 1996.
Background and History of Wonder Auto and its Operating Subsidiaries
Wonder Auto Limited 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 Limited nor Man Do Auto Technology Co. Ltd. has any active business operations other than their ownership of Halla, which is the operating company that primarily 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 Limited and 39% owned by Man Do Auto Technology Co. Ltd.
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Acquisition of Wonder Auto and Related Financing
On June 22, 2006, Wonder Auto Limited completed a private placement pursuant to which Wonder Auto Limited 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 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.
For accounting purposes, the share exchange transaction was treated as a reverse acquisition with Wonder Auto as the acquirer and WATG as the acquired party. When we refer in this Report to business and financial information for periods prior to the consummation of the reverse acquisition, we are referring to the business and financial information of Wonder Auto on a consolidated basis unless the context suggests otherwise.
Subsequent Transactions
On August 23, 2006, Wonder Auto entered into a share purchase agreement with Winning to purchase Winning’s 50% interest in Dong Woo, one of our primary suppliers for $4.85 million to be paid in two installments subject to adjustment based on Dong Woo’s financial performance. We paid $2.43 in 2006, $400,000 on February 13, 2007 and are in the process of arranging for the payment of the remaining balance. Under this agreement, Wonder Auto may designate three out of five members of the board of directors of Dong Woo.
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On September 21, 2006, Halla together with two independent parties established Wonder Friends in the PRC. Halla contributed $0.5 million to Wonder Friends registered capital representing a 20.41% equity interest. Wonder Friends is principally engaged in the manufacture of piston rods, vibration-dampers and rotary axes for motor vehicles.
Industry Wide Factors that are Relevant to Our Business
Management believes that the Chinese auto parts industry is expanding. According to the China Council for the Promotion of International Trade, individual vehicle ownership more than doubled to 13.65 million units in 2004 from 6.25 million units in 2000. According to the China Automotive Industry Yearbook (1955-2005), the Chinese automobile market maintained an average growth rate of 10% to 15% over the past 15 years. In 2006, according to China Auto Mobile Information Net, the total automobile production in China reached 7.28 million units, representing a 27.32% increase over 2005. China is now the second largest auto market in the world, with sales volume for 2006 reaching 7.22 million units. Of the 5.23 million passenger cars manufactured in 2006, 5.17 million were sold, representing 32.76% and 30.02% increase over 2005, respectively. It is expected that production of autos in China will exceed 8.50 million units in 2007. (Source: Beijing Daily). Among the 7.22 million vehicles sold, 60% of them were purchased by private owners of which 2.08 million were small cars with engine displacements between 1 to 1.6 liters. It is estimated by market specialists that the number of cars owned by private owners will have reached 22 million by the end of 2006, making China the second largest new car market in the world, especially for privately owned autos. It is estimated that there are about 30 automobiles per 1000 people in China, which lags behind the global average of approximately120 automobiles per 1000 people. Largely based on these statistics, the consensus is that the Chinese automobile market may have considerable potential for growth in the coming years. (Source: Xinhua Net, Yunnan Channel). We believe that the increasing number of automobile sales will also increase the size of the automotive aftermarket. As the automotive aftermarket increases and vehicle owners use older automobiles, the need for replacement parts and maintenance increases. We believe this trend will create an increasing demand for our products.
Another important trend that has an effect on our financial condition is the increasing demand for automobiles that utilize small engines and automobiles that can be sold at a lower cost. Management believes that a variety of factors contribute to this increasing demand. The first factor is fuel prices. If fuel costs remain at or above current levels, consumers may seek automobiles that utilize less fuel to save money and our products are designed for use in these fuel efficient vehicles. In addition, the Chinese government promulgated regulations in April 2006 that further encourage the consumption of small engine vehicles. These regulations provide for an upward adjustment of the tax rate applicable to larger vehicles in order to encourage consumers to purchase smaller engine vehicles. The top tax rate applicable to vehicles with engine displacements larger than 2 liters was raised to as high as 20% from 8%. Since we manufacture auto parts for vehicles that do not fall within the category of vehicles subject to the increased taxes, we anticipate that we will benefit from this regulation because as more smaller engine vehicles are sold and the aftermarket in these vehicles increases, we believe there will be an increased demand for parts and maintenance for these vehicles.
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We believe that other regulatory measures by the Chinese government will also contribute to the growth in demand for our 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 is a regulation that encourages automakers to use parts manufactured by local Chinese auto parts manufacturers. Pursuant to this regulation, which became effective on July 1, 2006, the Chinese government charges automakers a tariff of up to 25% if more than 40% of the components and parts of an automobile are imported. We believe that this regulation will have a positive impact on the sales of our products.
We also believe that sales to foreign markets may represent an opportunity for us and we plan to enhance our sales efforts to foreign markets, which accounted for approximately 5% of our total sales in 2006. In 2003, we began to sell a small quantity of products directly to overseas customers. For the year ended December 31, 2006, we sold our products to consumers in South Korea, US and Turkey which resulted in total sales of approximately $3.8 million.
Uncertainties that Affect our Financial Condition
Our primary challenge is our potential inability to produce enough of our products to satisfy the increased demand for our products. In order to increase our capacity, we will be required to make investments that improve the efficiency and capacity of our properties, plant and equipment. The utilization rates of our alternator and starter production lines as of December 31, 2005 and 2006, were approximately 81% and 140%, respectively, assuming two work shifts per day of eight hours and five days per week. In order to meet the projected demand for our products in 2006, we need to build additional manufacturing lines. We have raised a total of $12 million in the private placement that we closed in June 2006, approximately $6 million of which were used and will be used to build additional production lines. We expect that two more production lines will be operational by June 2007 and shall be able to satisfy the projected demands for our products for the foreseeable future.
Results of Operations
The following tables set forth key components of our results of operations for the periods indicated, in dollars and key components of our revenue for the period indicated in dollars.
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All amounts are in thousands of U.S. dollars.
Year ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Revenue | ||||||||||||
Sales | $ | 72,150 | $ | 48,063 | $ | 42,266 | ||||||
Cost of sales | (57,342 | ) | (35,963 | ) | (32,795 | ) | ||||||
Gross profit | 14,808 | 12,100 | 9,471 | |||||||||
Operating expenses | ||||||||||||
Administrative expenses | 1,918 | 1,155 | 890 | |||||||||
Research and development expenses | 948 | 824 | 279 | |||||||||
Selling expenses | 2,138 | 2,148 | 1,514 | |||||||||
Unusual charge - Make good provision | 7,508 | - | - | |||||||||
12,511 | 4,128 | 2,684 | ||||||||||
Income from operations | 2,297 | 7,972 | 6,787 | |||||||||
Interest income | 97 | 29 | �� | 14 | ||||||||
Other income | 357 | 137 | 148 | |||||||||
Finance costs | (1,034 | ) | (839 | ) | (643 | ) | ||||||
Equity in net income of unconsolidated | ||||||||||||
affiliates | 371 | - | - | |||||||||
Income before income taxes | 2,088 | 7,298 | 6,306 | |||||||||
Income taxes | (1,270 | ) | (897 | ) | (718 | ) | ||||||
Minority interests | (102 | ) | - | - | ||||||||
Net income | $ | 716 | $ | 6,401 | $ | 5,587 |
Year Ended December 31, | ||||||||||||
Components of Revenue In thousands | 2006 | 2005 | 2004 | |||||||||
Total Revenues | $ | 72,150 | $ | 48,063 | $ | 42,266 | ||||||
Revenues by Product or Product line | ||||||||||||
alternator | 45,216 | 30,118 | 28,119 | |||||||||
starter | $ | 26,934 | $ | 17,945 | $ | 14,147 |
Year Ended December 31, 2006 Compared with Year Ended December 31, 2005
Sales Revenue. Sales revenue increased $24.09 million, or 50.12% to $72.15 million for the year ended December 31, 2006 from $48.06 million for the same period in 2005. This increase was mainly attributable to the increased market demand for our products in the small and medium engine sedan market in China spurred in part by governmental incentives, our expanded production capacity and increased sales to our existing customers.
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Cost of Goods Sold. Our cost of goods sold increased $21.38 million to $57.34 million for the year ended December 31, 2006 from $35.96 million during the same period in 2005. As a percentage of sales revenue, the cost of goods sold increased to 79.48% during the year ended December 31, 2006 from 74.82% in the same period of 2005. This increase is attributable to the rise in the cost of raw materials we use in our products. The price of raw materials rose by 8.92% in 2006 which resulted in an increase of 8.24% in the overall cost of goods sold despite our relatively stable labor and manufacturing costs.
Gross Profit. Our gross profit increased $2.71 million to $14.81 million for the year ended December 31, 2006 from $12.10 million for the same period in 2005. Gross profit as a percentage of sales revenue was 20.52% for the year ended December 31, 2006, as compared to 25.18% during the same period in 2005. The rise in the cost of raw materials dampened gross profit by offsetting any benefits, which could have otherwise accrued from a decrease in our labor and manufacturing costs and an increase in product price.
Administrative Expenses. Our administrative expenses increased $0.76 million, or 65.99%, to $1.92 million for the year ended December 31, 2006 from $1.16 million for the same period in 2005. As a percentage of sales revenue, administrative expenses increased to 2.66% for the year ended December 31, 2006 from 2.40% for the same period in 2005. The increases in amount and percentage were attributable to the increase in expenses incurred in the financing activities in the U.S., as well as audit expenses.
Research and Development Expenses. Our research and development expenses increased $0.12 million, or 14.99%, to $0.95 million for the year ended December 31, 2006 from $0.82 million for the same period in 2005. As a percentage of net revenues, research and development expenses decreased to 1.31% for the year ended December 31, 2006 from 1.71% for the same period in 2005. This percentage decrease is primarily a function of our net revenues increasing faster than our research and development expenses.
Selling Expenses. Our selling expenses decreased $10,573 to $2.14 million for the year ended December 31, 2006 from $2.15 million for the same period in 2005. As a percentage of sales revenue, our selling expenses decreased to 2.96% for the year ended December 31, 2006 from 4.47% for the same period in 2005. This percentage decrease was primarily attributable to our utilization of more efficient controls that stabilized our selling expenses and improved the quality of our products resulting in less expenses related to repairs and replacements.
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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, stockholders’ of CIL and ECL transferred their right to receive the 1,650,000 shares in escrow for no consideration to Xiangdong Gao who ultimately received the escrowed shares. Compensation expense should be recognized equal to the amount of the market value of the shares as of the date when the performance goal was met. We achieved our net income threshold for 2006, accordingly, the Company recognized a non-cash expense of $7.5 million in 2006.
Total expenses. Our total expenses increased $8.38 million to $12.51 million for the year ended December 31, 2006 from $4.13 million for the same period in 2005. As a percentage of sales revenue, our total expenses increased to 17.34% for the year ended December 31, 2006 from 8.59% for the same period in 2005. The increases in amount and percentage were primarily attributable to the non-cash expenses of $7.51 million related to the make good arrangement recognized in 2006 as discussed above.
Income Before Income Taxes. Income before income taxes decreased $5.21 million, or 71.39%, to $2.09 million during the year ended December 31, 2006 from $7.30 million during the same period in 2005. Income before income taxes as a percentage of sales revenue decreased to 2.89% during the year ended December 31, 2006 from 15.18% during the same period in 2005. Such decrease in income before income tax was mainly attributable to the non-cash expenses related to the make good arrangement as discussed above.
Provision for income taxes. We are subject to U.S. tax at the rate of 34%. No provision for income taxes in the United States have been made as the taxable income for year ended December 31, 2006 was set-off by a net operating loss carry forward from previous years and we had no taxable income for the years ended December 31, 2005 and 2004.
Wonder Auto and Man Do Auto are incorporated in the BVI and, under current laws of the BVI, not subject to income taxes.
Our subsidiary Halla is subject to Chinese enterprises income tax (“EIT”) at a rate of 27% of the assessable profits, consisting of a 24% national tax and a 3% local tax. As approved by the local tax authority in the PRC, Halla was entitled to a two-year exemption from EIT followed by 50% tax exemption for the next three years, commencing from the first cumulative profit-making year in the fiscal financial year of 2001. Accordingly, Halla was subject to a tax rate of 13.5% for 2004, 2005 and 2006. Furthermore, Halla, as a Foreign Investment Enterprise (“FIE”), is engaged in advanced technology industry, Halla was approved to enjoy a further 50% tax exemption for 2007 and 2008.
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In addition, as a FIE, Halla was entitled to another two special tax concessions. First, equivalent to 40% of the purchase price of qualifying domestic capital expenditure as defined and approved under the relevant PRC income tax rule can be used to offset against EIT. Second, if there is a 10% increase of the domestic development expenses in the current year over the prior year, amount equivalent to 50% of the current year’s expenses can be used to offset against EIT.
Provision for income taxes increased approximately $0.37 million to $1.27 million during the year ended December 31, 2006 from $0.90 million during the same period in 2005. Our effective tax rate for the year ended December 31, 2006, was 13.5%.
Net Income. Net income decreased $5.68 million, or 88.81%, to $0.72 million during the year ended December 31, 2006 from $6.40 million during the same period in 2005. Such decrease was attributable to the non-cash expenses related to the make good arrangement as discussed above.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Sales Revenue. Sales revenue increased $5.79 million or 13.72% to $48.06 million in 2005 from $42.27 million in 2004. This increase was mainly attributable to the increased market demand for our products due to growth in the small and medium engine sedan market.
Cost of Goods Sold. Our cost of goods sold increased $3.17 million or 9.66% to $35.96 million in 2005 from $32.79 million in 2004. This increase was mainly attributable to the increase of sales volumes. As a percentage of net revenues, our cost of goods sold in 2005 decreased 2.77% from 74.82% in 2005 to 77.59% in 2004 mainly because the sale of products with higher profit margins constituted a higher percentage of our sales revenue in 2005 as compared with 2004.
Gross Profit. Our gross profit increased $2.63 million or 27.76% to $12.10 million in 2005 from $9.47 million in 2004. Gross profit as a percentage of sales revenue increased 2.77% in 2005 as compared with 2004 for the reason stated above.
Administrative Expenses. Our administrative expenses increased approximately $0.26 million, or 29.75%, to $1.16 million in 2005 from approximately $0.89 million in 2004. As a percentage of sales revenue, administrative expenses increased 0.29% to 2.40% in 2005 from 2.11% in 2004. This dollar increase was primarily attributable to salary increases resulting from the establishment of three new vice president positions and the increase cost for repairing our facilities.
14
Research and Development Expenses. Our research and development expenses increased $0.55 million, or 195.63%, to $0.82 million for the year ended December 31, 2005 from $0.28 million for the same period in 2004. As a percentage of sales revenue, research and development expenses increased to 1.71% for the year ended December 31, 2005 from 0.07% for the same period in 2004. This percentage increase is primarily the result of the increased investment in research and development.
Selling Expenses. Our selling expenses increased $0.63 million, or 42.25%, to $2.15 million in 2005 from $1.51 million in 2004. As a percentage of sales revenue, our selling expenses in 2005 increased 0.90% as compared with 2004. This dollar increase was primarily attributable to our increased marketing efforts and the increase of the sales volumes. We believe the increase of selling expenses is generally in line with the increase of sales revenue.
Total Expenses. Our total expenses increased $1.44 million, or 53.82%, to $4.13 million in 2005 from $2.68 million in 2004. As a percentage of sales revenue, our total expenses increased to 8.59% in 2005 from 6.35% in 2004. This dollar increase was primarily attributable to the factors described above.
Income Before Income Taxes. Income before income taxes increased $0.99 million, or 15.73%, to $7.29 million in 2005 from $6.31 million in 2004. Income before income taxes as a percentage of sales revenue increased 0.26% in 2005 as compared to 2004. This increase was primarily a result of increase of the sales revenue and gross margin.
Income Taxes. We incurred income taxes of $897,000 in 2005. This is an increase of 24.93% from the taxes we incurred in 2004, which amounted to $718,000. We paid more taxes in 2005 mostly as a result of higher income in 2005 compared to 2004.
Net Income. Net income increased $813,000, or 14.55%, to $6.40 million in 2005 from $5.59 million in 2004, because of the factors described above.
Allowance for doubtful debts
Our trade receivables totaled $24.70 million as of December 31, 2006, an increase of $6.23 million or 33.73% from $18.47 million in the year ended December 31, 2005. Our allowance of doubtful accounts totaled $32,150 for year ended December 31, 2006, a 17.03% decrease from the $38,745 for the year ended December 31, 2005.
15
The seemingly disproportionate increase of our trade receivable as compared to the decrease of our allowance of doubtful accounts was mainly due to the increase in our sales revenue and our policy 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 only 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 relationship with us and with good settlement history. In the absence of significant bad debt experience, we consider the existing provisioning policy as adequate.
Liquidity and Capital Resources
As of December 31, 2005 and December 31, 2006, we had cash and cash equivalents (including restricted cash) of $7.97 million and $13.08 million, respectively. The following table provides detailed information about our net cash flow for all financial statements periods presented in this Report.
Cash Flow
Years Ended December 31, | ||||||||||||
2004 | 2005 | 2006 | ||||||||||
Net cash provided by operating activities | $ | 7,239,337 | $ | 11,439,101 | $ | 1,388,932 | ||||||
Net cash used in investing activities | (2,848,514 | ) | (2,099,462 | ) | (6,219,108 | ) | ||||||
Net cash (used in) provided by financing activities | (4,784,483 | ) | (6,951,636 | ) | 8,307,986 | |||||||
Effect of foreign currency translation on cash and cash equivalents | 74 | 150,993 | 357,132 | |||||||||
Net cash Flow | $ | (393,586 | ) | $ | 2,538,996 | $ | 3,834,942 |
16
Operating Activities :
Net cash provided by operating activities was $1.39 million for the year ended December 31, 2006 which is a decrease of $10.05 million from the $11.44 million net cash provided by operating activities for the same period in 2005. The decrease is a function of our higher bills receivable and increased expenses related to servicing our higher sales volume in fiscal 2006.
Net cash provided by operating activities during 2005 totaled $11.44 million, which is an increase of $4.20 million from net cash provided for operating activities of $7.24 million during 2004. The increase was mainly due to the increased sales revenue and the more efficient control of the accounts receivables and accounts payables. Our negative cash flow from operating activities in 2004 was funded from cash provided by financing activities during the year.
Investing Activities :
Our main uses of cash for investing activities are payments to the acquisition of property and purchase of stock option rights, plant and equipment.
Net cash used for investing activities in the year ended December 31, 2006 was $6.22 million, which is an increase of $4.12 million from net cash used for investing activities of $2.10 million in the same period of 2005. The increase was due to investments in fixed assets and the acquisition of Dong Woo for $5.82 million and an investment of $0.5 million for a 20% in interest in Wonder Friends, a manufacturer of piston rods, vibration dampers and rotary axes for motor vehicles.
Net cash used for investing activities in the year 2005 was $2.10 million, which is a decrease of $0.75 million from net cash used for investing activities of $2.85 million in 2004. Such decrease was primarily the result of decrease in payments to acquire and for acquisition of property, plant and equipment.
Financing Activities :
Net cash provided by financing activities in the year ended December 31, 2006 totaled $8.31 million as compared to $6.95 million used in financing activities in the same period of 2005. The increase in net cash is attributable to the receipt of (i) $10.14 million (after payment of offering expenses) through the issuance of stock in a private placement completed in June 2006 and (ii) $880,000 from bank loans which more than offset the payment of $1.72 million by Halla as dividends to its stockholders.
17
Net cash used for financing activities was $6.95 million in 2005 as compared to $4.78 million used for financing activities in 2004. The $2.17 million decrease in the payment of dividend and the $2.34 million increase in restricted cash in 2005 more than offset the $3.26 million increase of the proceeds from new bank loans in 2005.
Our debt to equity ratio was 37.48% as of December 31, 2006. We plan to maintain our debt to equity ratio below 60%, increase our long-term loans, decrease our short-term loans and increase the ratio of the borrowing in foreign currency to take advantage of the expected increase of the value of RMB against the U.S. dollar. We believe we currently maintain a good business relationship with many banks.
As of December 31, 2006, the maturities for these bank loans are as follows.
All amounts, other than percentages, in millions of U.S. dollars
Banks | Amounts | Beginning | Ending | Duration | ||||
Bank of China | $3.84 (RMB 30) | Sept. 20, 2006 | Sept. 19, 2007 | 1 year | ||||
Bank of China | $2.56 (RMB 20) | Aug. 21, 2006 | Aug. 28, 2007 | 1 year | ||||
JinZhou Commercial Bank | $ 0.25 (RMB2) | Jan. 5, 2006 | Jan. 4, 2007 | 1 year | ||||
China Construction Bank | $5.12 (RMB 40) | July 7, 2006 | July 6, 2007 | 1 year | ||||
China Construction Bank | $2.56 (RMB 20) | Oct. 18, 2006 | Oct. 17, 2007 | 1 year | ||||
Total | $14.33 |
As shown in the above table, we have $14.33 million in loans maturing in or before November 2007. We plan to either repay this debt as it matures or refinance this debt with other debt.
In June 2006, prior to the consummation of the share exchange with us, Wonder Auto Limited completed a private placement of its common shares to certain accredited investors. As a result of this private placement, Wonder Auto raised $12 million in gross proceeds, which left Wonder Auto Limited with approximately $10 million in net proceeds after the deduction of offering expenses in the amount of approximately $2 million. We plan to use approximately $2 million of the net proceeds on purchasing research and development equipment, approximately $6 million on building new production lines, $0.65 on infrastructure and $1.35 million as our working capital. This financing resulted in an increase of our net cash flow and a decrease of our asset/liability ratio and financial risks.
18
In 2006, we repaid an aggregate of $7.47 million in bank loans with maturity dates of July 7, 2006 and October 17, 2006, respectively. We obtained two new loans in the aggregate amount of $7.47 million from China Construction Bank on July 7, 2006 and October 18, 2006 with a maturity dates of July 6, 2007 and October 18, 2007, respectively.
We also obtained credit lines from Bank of China in aggregate principal amount of $10.02 million of which $6.26 million has been used by the Company by December 31, 2006. We used $5.01 million to repay loans owed to JinZhou Commercial Bank.
Our current material capital expenditure requirements are approximately $2 million which will be used in updating and expanding our production lines, research and development equipments and other equipments and facilities in the next 6 months so as to satisfy our production demands in 2007. In addition we expect that we may need approximately $5 million in additional working capital which we plan to raise through a bank loan. We believe that we maintain good relationships with the various 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, 2006:
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 | 14,327 | 14,327 | - | - | - | |||||||||||||||
Capital commitment | 1,536 | 1,536 | - | - | - | |||||||||||||||
Operating lease obligations | 1 | 1 | - | - | - | |||||||||||||||
Purchase obligations | - | - | - | - | - | |||||||||||||||
Total | $ | 15,864 | $ | 15,864 | - | - | - |
19
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management 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:
· | 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. |
· | 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.
20
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.
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 | % | 0 to 10% | |||||
Leasehold improvements | 20 | % | 0 |
21
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.
· | 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. |
· | Warranty . It is the policy of the Company to provide after sales support by way of a warranty program. 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 :
22
Year ended December 31, | % | |||
2006 | 1.5 | |||
2005 | 2 | |||
2004 | 2 |
· | Recently issued accounting pronouncements. In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments: and amendment of FASB Statements No. 133 and 140”. SFAS No. 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring in fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided the Company has not yet issued financial statements, including for interim periods, for that fiscal year. |
In March 2006, the FASB released SFAS No. 156 “Accounting for Servicing of Financial Assets: an amendment of FASB Statement No. 140” to simplify accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 permits an entity to choose either the amortization method or the fair value measurement method for measuring each class of separately recognized servicing assets and servicing liabilities after they have been initially measured at fair value. SFAS No. 156 applies to all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006.
In July 2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes.” This interpretation requires that the entity recognize in its 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 is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings.
23
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurement.” 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.
In September 2006, the FASB released SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans: an amendment of FASB Statements No. 87, 88, 106, and 132(R)” which requires an employer to recognize the over funded or under funded status of defined benefit and other postretirement plans as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through an adjustment to comprehensive income. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions.
In September 2006, the SEC issued SAB No. 108, which provides guidance on the process of quantifying financial statement misstatements. In SAB No. 108, the SEC staff establishes an approach that requires quantification of financial statement errors, under both the iron-curtain and the roll-over methods, based on the effects of the error on each of the Company’s financial statements and the related financial statement disclosures. SAB No. 108 is generally effective for annual financial statements in the first fiscal year ending after November 15, 2006. The transition provisions of SAB No. 108 permits existing public companies to record the cumulative effect in the first year ending after November 15, 2006 by recording correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings.
The company has adopted all the above accounting procurements and considers that they have no material impact on these consolidated financial statements.
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.
24
Item 8. | Financial Statements and Supplementary Financial Data |
The full text of our audited consolidated financial statements as of December 31, 2006, 2005 and 2004 begins on page F-1 of this Report.
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 - 3 | |
· | Consolidated Statement of Operations | F - 4 | |
· | Consolidated Balance Sheets | F - 5 | |
· | Consolidated Statement of Cash Flows | F - 7 | |
· | Consolidated Statement of Stockholders’ Equity | F - 9 | |
· | Notes to Consolidated Statements | F - 10 |
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2) | Financial Statement Schedules: |
Wonder Auto Technology, Inc.
Financial Statements Schedules:
Valuation and Qualifying Accounts
Three years ended December 31, 2006
Balance at beginning $ | Charge (credit) to other comprehensive income for exchange differences on translation $ | Acquisition $ | Charge (credit) to expenses $ | Balance at end of year $ | ||||||||||||||||
Allowance for Doubtful Accounts of Trade and Other Receivables | ||||||||||||||||||||
Year ended December 31, 2006 | 38,745 | 1,106 | - | (7,701 | ) | 32,150 | ||||||||||||||
Year ended December 31, 2005 | 37,748 | 997 | - | - | 38,745 | |||||||||||||||
Year ended December 31, 2004 | 35,841 | - | - | 1,907 | 37,748 | |||||||||||||||
Provision for inventories | ||||||||||||||||||||
Year ended December 31, 2006 | 194,153 | 5,252 | - | (52,470 | ) | 146,935 | ||||||||||||||
Year ended December 31, 2005 | 373,932 | 6,867 | - | (186,646 | ) | 194,153 | ||||||||||||||
Year ended December 31, 2004 | 247,392 | 16 | - | 126,524 | 373,932 | |||||||||||||||
Provision for warranty | ||||||||||||||||||||
Year ended December 31, 2006 | 914,403 | 32,096 | - | 102,845 | 1,049,344 | |||||||||||||||
Year ended December 31, 2005 | 815,498 | 22,750 | - | 76,155 | 914,403 | |||||||||||||||
Year ended December 31, 2004 | 774,149 | 23 | - | 41,326 | 815,498 |
3) | Exhibits |
Exhibit Index is hereby incorporated by reference.
26
Wonder Auto Technology, Inc.
Consolidated Financial Statements
(Stated in US dollars)
F-1
Wonder Auto Technology, Inc.
Consolidated Financial Statements
Index to Consolidated Financial Statements
Pages | ||
Report of Independent Registered Public Accounting Firm | F-3 | |
Consolidated Statements of Operations | F-4 | |
Consolidated Balance Sheets | F-5 | |
Consolidated Statements of Cash Flows | F-7 | |
Consolidated Statements of Stockholders’ Equity | F-9 | |
Notes to Consolidated Financial Statements | F-10 |
F-2
Report of Independent Registered Public Accounting Firm
To the Sole Director 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, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2006. 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, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3(iii) the Company has restated the accompanying consolidated financial statements as of December 31, 2006, and for the year then ended.
PKF
Certified Public Accountants
Hong Kong, China
February 12, 2007 except for note 3(ii), (iii) and (iv) as to which the date is March 30, 2009
F-3
Wonder Auto Technology, Inc.
Consolidated Statements of Operations
(Stated in US Dollars)
Year ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Revenue | ||||||||||||
Sales | $ | 72,150,483 | $ | 48,062,805 | $ | 42,265,874 | ||||||
Cost of sales | (57,342,201 | ) | (35,962,931 | ) | (32,794,978 | ) | ||||||
Gross profit | 14,808,282 | 12,099,874 | 9,470,896 | |||||||||
Operating expenses | ||||||||||||
Administrative expenses | 1,917,817 | 1,155,378 | 890,460 | |||||||||
Research and development expenses | 947,702 | 824,184 | 278,788 | |||||||||
Selling expenses | 2,137,853 | 2,148,426 | 1,514,417 | |||||||||
Unusual charge - make good provision - Note 3(ii) | 7,507,500 | - | - | |||||||||
12,510,872 | 4,127,988 | 2,683,665 | ||||||||||
Income from operations | 2,297,410 | 7,971,886 | 6,787,231 | |||||||||
Interest income | 96,810 | 28,539 | 13,554 | |||||||||
Other income | 356,590 | 136,711 | 148,056 | |||||||||
Finance costs - Note 5 | (1,033,551 | ) | (838,954 | ) | (643,141 | ) | ||||||
Equity in net income of unconsolidated affiliates - Note 4 | 371,005 | - | - | |||||||||
Income before income taxes | 2,088,264 | 7,298,182 | 6,305,700 | |||||||||
Income taxes - Note 6 | (1,270,391 | ) | (897,256 | ) | (718,298 | ) | ||||||
Minority interests - Note 7 | (101,827 | ) | - | - | ||||||||
Net income | $ | 716,046 | $ | 6,400,926 | $ | 5,587,402 | ||||||
Earnings per share: basic and diluted - Note 8 | $ | 0.03 | $ | 0.37 | $ | 0.32 | ||||||
Weighted average number of shares outstanding: | ||||||||||||
basic and diluted | 20,787,279 | 17,227,198 | 17,227,198 |
See Notes to Consolidated Financial Statements
F-4
Wonder Auto Technology, Inc.
Consolidated Balance Sheets
(Stated in US Dollars)
As of December 31, | ||||||||
2006 | 2005 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 8,203,699 | $ | 4,368,757 | ||||
Restricted cash - Note 9 | 4,876,879 | 3,597,609 | ||||||
Marketable securities | - | 37,159 | ||||||
Trade receivables (net of allowance of doubtful accounts of $32,150 in 2006, $38,745 in 2005) | 24,696,982 | 18,472,619 | ||||||
Bills receivable | 3,098,314 | 3,528,649 | ||||||
Other receivables, prepayments and deposits - Note 10 | 1,254,209 | 392,906 | ||||||
Inventories - Note 11 | 13,689,374 | 7,807,610 | ||||||
Amount due from a related company - Note 18 | 69,561 | - | ||||||
Deferred taxes - Note 6 | 237,570 | 261,548 | ||||||
Total current assets | 56,126,588 | 38,466,857 | ||||||
Know-how - Note 12 | 1,468,089 | 1,421,556 | ||||||
Trademarks and patents - Note 13 | 11,418 | 1,907 | ||||||
Property, plant and equipment, net - Note 14 | 13,945,846 | 10,648,082 | ||||||
Land use right - Note 15 | 1,203,256 | 580,020 | ||||||
Deposit for acquisition of property, plant and equipment | 1,740,548 | 819,183 | ||||||
Investment in an unconsolidated affiliate - Note 4 | 527,627 | - | ||||||
Goodwill - Note 4 | 2,771,293 | - | ||||||
Deferred taxes - Note 6 | 205,475 | 152,316 | ||||||
TOTAL ASSETS | $ | 78,000,140 | $ | 52,089,921 |
See Notes to Consolidated Financial Statements
F-5
Wonder Auto Technology, Inc.
Consolidated Balance Sheets (Cont’d)
(Stated in US Dollars)
As of December 31, | ||||||||
2006 | 2005 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Current liabilities | ||||||||
Trade payables - Note 9 | $ | 9,631,537 | $ | 10,299,879 | ||||
Bills payable - Note 9 | 8,628,078 | 7,060,222 | ||||||
Other payables and accrued expenses - Note 16 | 3,121,533 | 709,822 | ||||||
Provision for warranty - Notes 4 and 17 | 1,049,344 | 914,403 | ||||||
Dividend payable | - | 1,699,282 | ||||||
Income tax payable | 398,768 | 161,277 | ||||||
Amount due to a stockholder - Note 18 | - | 5,149 | ||||||
Amount due to an unconsolidated affiliate - Note 18 | 37,492 | - | ||||||
Secured short-term bank loans - Note 19 | 14,326,831 | 7,431,813 | ||||||
Total current liabilities | 37,193,583 | 28,281,847 | ||||||
Secured long-term bank loans - Note 19 | - | 4,954,542 | ||||||
TOTAL LIABILITIES | 37,193,583 | 33,236,389 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
- Note 20 | ||||||||
MINORITY INTERESTS - Note 4 | 2,579,572 | - | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock: par value $0.0001 per share; authorized 10,000,000 shares in 2006 and 2005; none issued and outstanding | - | - | ||||||
Common stock: par value $0.0001 per share - Note 21 | ||||||||
Authorized 90,000,000 shares in 2006 and 2005; issued and outstanding 23,959,994 shares in 2006 and 17,227,198 shares in 2005 | 2,396 | 1,723 | ||||||
Additional paid-in capital - Note 21 | 29,647,643 | 11,998,377 | ||||||
Statutory and other reserves - Note 22 | 3,148,265 | 2,347,848 | ||||||
Accumulated other comprehensive income - Note 23 | 1,452,138 | 444,670 | ||||||
Retained earnings | 3,976,543 | 4,060,914 | ||||||
TOTAL STOCKHOLDERS’ EQUITY | 38,226,985 | 18,853,532 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 78,000,140 | $ | 52,089,921 |
See Notes to Consolidated Financial Statements
F-6
Wonder Auto Technology, Inc.
Consolidated Statements of Cash Flows
(Stated in US Dollars)
Year ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 716,046 | $ | 6,400,926 | $ | 5,587,402 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation | 1,401,541 | 1,158,561 | 986,517 | |||||||||
Amortization of trademarks and patents | 769 | 342 | 338 | |||||||||
Amortization of land use right | 28,883 | 26,245 | 25,980 | |||||||||
Deferred taxes | (16,369 | ) | 857 | (144,817 | ) | |||||||
Loss on disposal of property, plant and equipment | 79,527 | - | 19,489 | |||||||||
(Recovery of)/provision for doubtful debts | (7,701 | ) | - | 1,906 | ||||||||
(Recovery of)/provision for obsolete inventories | (52,470 | ) | (186,646 | ) | 126,524 | |||||||
Equity in net income of an unconsolidated affiliate | (371,005 | ) | - | - | ||||||||
Increase in minority interests | 101,827 | - | - | |||||||||
Unusual charge - make good provision | 7,507,500 | - | - | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Trade receivables | (5,493,345 | ) | (7,073,894 | ) | 840,070 | |||||||
Bills receivable | 1,536,869 | (73,117 | ) | (736,499 | ) | |||||||
Other receivables, prepayments and deposits | (664,255 | ) | 96,624 | (232,531 | ) | |||||||
Inventories | (4,481,151 | ) | (415,127 | ) | 2,860,283 | |||||||
Trade payables | 460,403 | 5,288,135 | (3,267,345 | ) | ||||||||
Bills payable | 601,360 | 5,729,402 | 1,206,680 | |||||||||
Amount due to an unconsolidated affiliate | 36,719 | - | - | |||||||||
Other payables and accrued expenses | (263,895 | ) | 340,742 | (115,934 | ) | |||||||
Provision for warranty | 102,845 | 76,155 | 41,326 | |||||||||
Income tax payable | 164,834 | 69,896 | 39,948 | |||||||||
Net cash flows provided by operating activities | 1,388,932 | 11,439,101 | 7,239,337 | |||||||||
Cash flows from investing activities | ||||||||||||
Payments to acquire trademarks and patents | (10,023 | ) | - | (206 | ) | |||||||
Payments to acquire and for deposit for acquisition of property, plant and equipment | (3,627,589 | ) | (2,062,891 | ) | (2,879,320 | ) | ||||||
Proceeds from sales of property, plant and equipment | 73,169 | - | 31,012 | |||||||||
Payment to acquire marketable securities | - | (36,571 | ) | - | ||||||||
Proceeds from sales of marketable securities | 37,585 | - | - | |||||||||
Cash acquired from the RTO | 419 | - | - | |||||||||
Payment to acquire Wonder Friends - Notes 1 and 4 | (500,000 | ) | - | - | ||||||||
Payment to acquire Dong Woo - Notes 1 and 4 | (2,430,000 | ) | - | - | ||||||||
Cash inflow from Dong Woo - Note 4 | 237,331 | - | - | |||||||||
Net cash flows used in investing activities | $ | (6,219,108 | ) | $ | (2,099,462 | ) | $ | (2,848,514 | ) |
F-7
Wonder Auto Technology, Inc.
Consolidated Statements of Cash Flows (Cont’d)
(Stated in US Dollars)
Year ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Cash flows from financing activities | ||||||||||||
(Repayment to)/advance from a stockholder | $ | (5,149 | ) | $ | - | $ | 5,149 | |||||
Amount due from a related company | (68,128 | ) | - | - | ||||||||
Dividend paid to stockholders | (1,719,985 | ) | (6,958,197 | ) | (4,666,033 | ) | ||||||
Increase in restricted cash | (917,757 | ) | (2,963,170 | ) | (623,072 | ) | ||||||
Proceeds from bank loans | 17,573,649 | 12,386,355 | 9,127,907 | |||||||||
Repayment of bank loans | (16,696,664 | ) | (9,416,624 | ) | (8,628,534 | ) | ||||||
Proceeds from issuance of shares in connection with the reorganization before RTO | - | - | 100 | |||||||||
Net proceed from issue of shares | 10,142,020 | - | - | |||||||||
Net cash flows provided by (used in) financing activities | 8,307,986 | (6,951,636 | ) | (4,784,483 | ) | |||||||
Effect of foreign currency translation on cash and cash equivalents | 357,132 | 150,993 | 74 | |||||||||
Net increase (decrease) in cash and cash equivalents | 3,834,942 | 2,538,996 | (393,586 | ) | ||||||||
Cash and cash equivalents - beginning of period | 4,368,757 | 1,829,761 | 2,223,347 | |||||||||
Cash and cash equivalents - end of period | $ | 8,203,699 | $ | 4,368,757 | $ | 1,829,761 | ||||||
Supplemental disclosures for cash flow information: | ||||||||||||
Non-cash financing activity: | ||||||||||||
Issuance of 8,613,599 shares of WAL’s common stock for the acquisition of entire equity interests in Man Do Auto and Jinzhou Halla in conjunction with the reorganization | $ | - | $ | - | $ | 100 | ||||||
Outstanding payable for acquisition of a subsidiary | $ | 2,420,000 | $ | - | $ | - | ||||||
Cash paid for: | ||||||||||||
Interest | $ | 807,693 | $ | 611,326 | $ | 537,958 | ||||||
Income taxes | $ | 1,121,927 | $ | 826,503 | $ | 823,165 |
See Notes to Consolidated Financial Statements
F-8
Wonder Auto Technology, Inc.
Consolidated Statements of Stockholders’ Equity
(Stated in US Dollars)
Accumulated | ||||||||||||||||||||||||||||
Additional | Statutory | other | ||||||||||||||||||||||||||
Common stock | paid-in | and other | comprehensive | Retained | ||||||||||||||||||||||||
No. of shares | Amount | capital | reserves | income | earnings | Total | ||||||||||||||||||||||
Balance, January 1, 2004 | 17,227,198 | $ | 1,723 | $ | 11,998,277 | $ | 1,061,191 | $ | 23,818 | $ | 3,734,432 | $ | 16,819,441 | |||||||||||||||
Issuance of shares in connection with the reorganization | - | - | 100 | - | - | - | 100 | |||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||
Net income | - | - | - | - | - | 5,587,402 | 5,587,402 | |||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | 766 | - | 766 | |||||||||||||||||||||
Total comprehensive income | 5,588,168 | |||||||||||||||||||||||||||
Appropriation to reserves | - | - | - | 645,488 | - | (645,488 | ) | - | ||||||||||||||||||||
Dividend | - | - | - | - | - | (4,694,894 | ) | (4,694,894 | ) | |||||||||||||||||||
Balance, December 31, 2004 | 17,227,198 | 1,723 | 11,998,377 | 1,706,679 | 24,584 | 3,981,452 | 17,712,815 | |||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||
Net income | - | - | - | - | - | 6,400,926 | 6,400,926 | |||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | 420,086 | - | 420,086 | |||||||||||||||||||||
Total comprehensive income | 6,821,012 | |||||||||||||||||||||||||||
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 (iii) | - | - | 7,507,500 | - | - | - | 7,507,500 | |||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||
Net income, as restated | - | - | - | - | - | 716,046 | 716,046 | |||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | 1,007,468 | - | 1,007,468 | |||||||||||||||||||||
Total comprehensive income | 1,723,514 | |||||||||||||||||||||||||||
Appropriation to reserves | - | - | - | 800,417 | - | (800,417 | ) | - | ||||||||||||||||||||
Balance, December 31, 2006 | 23,959,994 | $ | 2,396 | $ | 29,647,643 | $ | 3,148,265 | $ | 1,452,138 | $ | 3,976,543 | $ | 38,226,985 |
See Notes to Consolidated Financial Statements
F-9
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 State of Nevada on June 8, 2000. The Company’s shares are quoted for trading on the Over-The-Counter Bulletin Board in the United States of America.
Pursuant to the Plan of Reorganization dated on June 22, 2006, the Company acquired 100% ownership interest in Wonder Auto Limited (“WAL”), a limited company incorporated in the British Virgin Islands, in consideration for the issuance of the Company’s 17,227,198 common shares (as adjusted for a 2.449719-for-1 forward stock split on July 26, 2006 (“Forward Stock Split”)) to the former stockholders of WAL (“WAL Former Stockholders”) and 3,899,996 shares as adjusted for Forward Stock Split to new investors.
The aforesaid transaction was completed on June 22, 2006 and thereafter WAL became a wholly owned subsidiary of the Company and WAL Former Stockholders became the majority stockholders of the Company. This transaction constituted a reverse takeover transaction (“RTO”).
Following the RTO, through WAL, the Company indirectly owned Man Do Auto Technology Co., Ltd. (“Man Do Auto”) and Jinzhou Halla Electrical Equipment Co., Ltd. (“Jinzhou Halla”). The entire issued and outstanding common stock of Man Do Auto is directly held by the WAL. In respect of Jinzhou Halla, 61% of its common stock is directly held by the WAL whilst 39% is indirectly held by the WAL through Man Do Auto.
On August 23, 2006, WAL entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with Winning International Development Limited (“Winning”), a British Virgin Islands corporation, which held 50% equity interest in Jinzhou Dong Woo Precision Co. Ltd. (“Dong Woo”). The remaining 50% equity interest is held by two independent third parties in equal proportion (that is 25% each). Dong Woo was established in the People’s Republic of China (the “PRC”) and is a supplier of raw materials to WAL. More details and accounting treatment on investment in Dong Woo are set out in note 4.
On September 21, 2006, Jinzhou Halla together with two independent third parties established Jinzhou Wonder Friends Mechanical Parts Co., Ltd. (“Wonder Friends”) in the PRC. Jinzhou Halla contributed $0.5 million to its registered capital representing 20.41% equity interest thereon. Wonder Friends is principally engaged in manufacturing of piston rods, vibration-dampers and rotary axes for motor vehicles. More details and accounting treatment on investment in Wonder Friends are set out in note 4.
F-10
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
2. | Description of business |
Following the RTO as detailed in note 3(i), the Company commenced to be engaged in the manufacture and distribution of automotive electrical components, namely starters and alternators, in the PRC.
The products of the Company are suitable for use in various types of automobiles. However, the Company currently has more market presence in the sedan and passenger cars, pickup trucks and sport utility vehicles segments.
The customers include renowned automakers and automotive components suppliers in the PRC. As an integral part of developing customer relationship, the Company will offer to its customers product design and development services for their new car models or automotive components based on customers’ required specifications.
The raw materials used in production are mainly divided into four groups, namely metal parts, semiconductors, chemical and packaging materials.
It is the Company’s policy to only purchase raw materials from selected suppliers, both locally and overseas from South Korea because management believed that the South Korean suppliers provide the Company with goods that domestic manufacturers cannot produce consistently at a high quality.
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 WAL (17,227,198 shares as adjusted for Forward Stock Split to WAL 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 WAL.
The RTO has been accounted for as a recapitalization of the Company whereby the historical financial statements and operations of WAL 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, WAL completed a private placement pursuant to which WAL 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, WAL'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, WAL 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 ending 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 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 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, stockholders of CIL and ECL resolved to surrender the right of entitlement to the 1,650,000 shares in aggregate for the fiscal year ended December 31, 2006 placed with the escrow agent to Xiangdong Gao under the escrow agreement. On the same date, an 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, 2006 to Xiangdong Gao as a gift (that is for nil 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 $7,507,500, the Company has achieved the 2006 NIT.
Following the incorporation of the SEC comments as detailed in note 3(iii) below, the shares released back to CIL and ECL is recognized as an expense by reference to the market value of the shares as of the date when the performance goal was met, i.e. December 31, 2006. The total expense recognized for the fiscal year 2006 is $7,507,500. Such expense is 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) | Restatement |
The Company has restated the consolidated financial statements as of December 31, 2006 in response to the comments from the United States Securities and Exchange Commission’s (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 8, 2007, stockholders of CIL and ECL surrendered their rights of entitlement to the first tranche of 1,650,000 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 were 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 be 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.
The following table sets forth the financial impacts of the restatement on the Company.
F-13
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3. | Basis of presentation (Cont’d) |
(iii) | Restatement (Cont’d) |
Consolidated Statement of Operations for the 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 before the following items and taxes | 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 | |||||
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 Sheet 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 |
F-14
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
3. | Basis of presentation (Cont’d) |
(iii) | Restatement (Cont’d) |
Consolidated Statement of Cash Flows 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 provide 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 |
(iv) | Reclassification |
Certain current and prior year balances in the Consolidated Statements of Operations have been reclassified to conform to current year presentation. For the years ended December 31, 2006, 2005 and 2004, the Company reclassified $947,702, $824,184 and $278,788 from cost of sales to research and development expenses under operating expenses respectively. These reclassifications have no effect on net income as previously presented.
F-15
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.
The Company acquired 50% equity interest in Dong Woo, one of the Company’s primary raw material suppliers, on August 23, 2006. The board of directors of Dong Woo consists of 5 members, three out of which were nominated by WAL whilst the remaining two board members by the other two shareholders of Dong Woo. The board is the highest authority of Dong Woo and has power to make operating and financing decision. Before November 18, 2006, any valid resolution of the board should be made by over two-third 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 Dong Woo. Accordingly, the investment in Dong Woo was initially recognized at cost and subsequently accounted for under the equity method of accounting, under which the attributable share (that is 50%) of Dong Woo’s net income is recognized in the period in which it is earned by Dong Woo from the date of acquisition till November 17, 2006. On November 18, 2006, Dong Woo amended its Memorandum and Articles of Association such that any valid resolution of the board shall only be made by more than a half of the board members with immediate effect. Without any change in the composition of the board as before, the Company obtained control over Dong Woo and the results of operations and the financial position of Dong Woo is consolidated since then.
The financial position of Dong Woo as of November 18, 2006 is as follows:
Cash and cash equivalents | $ | 237,331 | ||
Restricted cash | 361,512 | |||
Receivable | 2,931 | |||
Bills receivable | 1,019,550 | |||
Other receivable, prepayment and deposits | 168,463 | |||
Inventories | 985,558 | |||
Property, plant and equipment | 1,720,399 | |||
Land use right | 631,390 | |||
Amount due from Jinzhou Halla | 3,496,918 | |||
Accounts payable | (2,033,220 | ) | ||
Bills payable | (720,057 | ) | ||
Other repayable and accrued expenses | (237,040 | ) | ||
Income tax payable | (63,675 | ) | ||
Secured short-term bank loans | (637,219 | ) | ||
Net assets | $ | 4,932,841 |
The net cash inflows from Dong Woo on November 18, 2006 (i.e. The date on which was obtained control) is $237,331.
F-16
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 Company acquired the 50% equity interest in Dong Woo at a cash purchase price of $4.85 million, which is contingent on whether Dong Woo can attain a net income of $1.63 million for the fiscal year ended December 31, 2006. If Dong Woo fails to attain $1.63 million, the Company is entitled to deduct the purchase price proportionately with the amount of the unfulfilled net income. For the year ended December 31, 2006, Dong Woo has achieved the above said income target.
According to the payment terms of the share purchase agreement, $2.43 million of the purchase price was paid within one month after signing of the share purchase agreement and the remaining $2.42 million will be paid within 5 days after the confirmation by WAL that Dong Woo attains the said income target. As Dong Woo has met the income target, the Company will write to confirm its achievement in the near future. Accordingly, purchase price of $2.42 million was still outstanding as of December 31, 2006.
As of December 31, 2006, the consolidated balance sheet reflects a goodwill identified on acquisition of Dong Woo amounted to $2.77 million which represents the excess of the purchase price of $4.85 million over the attributable share (that is 50%) of fair value of acquired identifiable net assets of Dong Woo amounted to $2.08 million.
Goodwill
Goodwill represents the excess of the purchase price of an acquired business over the fair value of the identifiable assets acquired and liabilities assumed. Pursuant to the provisions of SFAS No. 142 “Goodwill and Other Intangible Assets”, goodwill is not amortized and is subjected to an annual impairment test which occurs in the fourth quarter of each fiscal year.
Goodwill will be written down only when and if impairment is identified and measured, based on future events and conditions.
Minority interests
Minority interests resulted from the consolidation of 50% owned subsidiary, Dong Woo, where the Company has control over its operations.
Investment in an unconsolidated affiliate
The Company accounts for the 20.41% investment in Wonder Friends (an investment in which the Company exercises significant influence but does not control) using the equity method, under which the share of Wonder Friends’ net income is recognized in the period in which it is earned by Wonder Friends. As of December 31, 2006, the investment in unconsolidated affiliate of $0.53 million represents attributable share of the underlying net assets of Wonder Friends.
F-17
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
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.
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, 2006 and 2005, 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 :-
Year ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Beijing Hyundai Motor Company | $ | 13,686,791 | $ | 6,926,159 | $ | 70,757 | ||||||
Dongfeng Yueda Kia Motors Company Limited | 2,416,288 | 5,346,827 | 1,849,984 | |||||||||
Harbin Dongan Auto-Engine Company Limited | 2,777,216 | 4,511,073 | 6,681,493 | |||||||||
Harbin Dongan Automotive Engine Manufacturing Company Limited | 5,770,801 | 1,403,102 | 1,037,976 | |||||||||
Shanghai WuLong Auto Components Investment Company Limited | - | - | 5,621,017 | |||||||||
Shenyang Aerospace Mitsubishi Motors Engine Manufacturing Company Limited | 12,837,338 | 5,451,367 | 3,715,043 | |||||||||
$ | 37,488,434 | $ | 23,638,528 | $ | 18,976,270 |
F-18
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
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, 2006 and 2005, 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.
Restricted Cash
Deposits in banks pledged as securities for bills payable and letter of credit (Note 9) that are restricted in use are classified as restricted cash under current assets.
Marketable securities
Marketable securities represent the available-for-sale securities and are carried at current fair values by reference to their market prices. The change in fair values is taken to other comprehensive income.
During the reporting periods, there was no significant fluctuation on market prices of these securities and accordingly no change in fair value is taken to other comprehensive income.
There is no significant market price risk as there was no significant fluctuation on market prices and the marketable securities are not significant to the Company.
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.
F-19
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 (cont’d)
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.
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.
F-20
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
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. 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.
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.
F-21
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
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.
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.
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 $16,137, $15,992 and $12,061 for three years ended December 31, 2006, 2005 and 2004 respectively are included in selling expenses.
Transportation expenses amounted to $464,838, $342,805 and $347,134 for three years ended December 31, 2006, 2005 and 2004 respectively are included in selling expenses.
F-22
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 (cont’d)
Research and development expenditure for each of three years in the year ended December 31, 2006 are as follow :-
Year ended December 31, | ||||||||||||||
Nature | Included in | 2006 | 2005 | 2004 | ||||||||||
New products | Cost of sales | |||||||||||||
development | ||||||||||||||
expenses | $ | 500,347 | $ | 477,225 | $ | 278,784 | ||||||||
Investments in research | Property, plant | |||||||||||||
and development | and equipment | |||||||||||||
equipment | 611,615 | 645,925 | 695,610 | |||||||||||
Other research and | Cost of sales | |||||||||||||
development | ||||||||||||||
expenses | 447,355 | 346,959 | 375,532 | |||||||||||
$ | 1,559,317 | $ | 1,470,109 | $ | 1,349,926 |
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, | % | |||
2006 | 1.5 | |||
2005 | 2 | |||
2004 | 2 |
Stock-based compensation
During the reporting periods, the Company did not make any stock-based compensation payments.
F-23
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
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.
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, 2006, 2005 and 2004 were RMB1 for $0.1279, $0.1239 and $0.1207 respectively. There is no significant fluctuation in exchange rate for the conversion of RMB to US dollars after the balance sheet date.
F-24
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
4. | Summary of significant accounting policies (Cont’d) |
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.
Recently issued accounting pronouncements
In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments: and amendment of FASB Statements No. 133 and 140”. SFAS No. 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring in fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided the Company has not yet issued financial statements, including for interim periods, for that fiscal year.
In March 2006, the FASB released SFAS No. 156 “Accounting for Servicing of Financial Assets: an amendment of FASB Statement No. 140” to simplify accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 permits an entity to choose either the amortization method or the fair value measurement method for measuring each class of separately recognized servicing assets and servicing liabilities after they have been initially measured at fair value. SFAS No. 156 applies to all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006.
F-25
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 July 2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes”. This interpretation requires that the entity recognize in its 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 is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings.
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurement”. 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.
In September 2006, the FASB released SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans: an amendment of FASB Statements No. 87, 88, 106, and 132(R)” which requires an employer to recognize the over funded or under funded status of defined benefit and other postretirement plans as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through an adjustment to comprehensive income. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions.
In September 2006, the SEC issued SAB No. 108, which provides guidance on the process of quantifying financial statement misstatements. In SAB No. 108, the SEC staff establishes an approach that requires quantification of financial statement errors, under both the iron-curtain and the roll-over methods, based on the effects of the error on each of the Company’s financial statements and the related financial statement disclosures. SAB No. 108 is generally effective for annual financial statements in the first fiscal year ending after November 15, 2006. The transition provisions of SAB No. 108 permits existing public companies to record the cumulative effect in the first year ending after November 15, 2006 by recording correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings.
The company has adopted all the above accounting procurements and considers that they have no material impact on these consolidated financial statements.
F-26
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
5. | Finance costs |
Year ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Interest expenses | $ | 807,693 | $ | 611,326 | $ | 537,958 | ||||||
Bills discounting charges | 170,851 | 186,103 | 68,524 | |||||||||
Bank charges and net exchange loss | 55,007 | 41,525 | 36,659 | |||||||||
$ | 1,033,551 | $ | 838,954 | $ | 643,141 |
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 income taxes in the United States has been make as the taxable income for the year ended December 31, 2006 was set-off by net operating loss carry forward from previous years and Wonder Auto Technology, Inc. had no taxable income for the years ended December 31, 2005 and 2004.
BVI
WAL and Man Do Auto were incorporated in the BVI and, under the current laws of the BVI, are not subject to income taxes.
PRC
Enterprises income tax (“EIT”) to Jinzhou Halla and Dong Woo in the PRC is charged at 27%, in which 24% for national tax and 3% for local tax, of the assessable profits. As approved by the local tax authority in the PRC, Jinzhou Halla and Dong Woo was entitled to two years’ exemption, from the first profit making calendar year of operations after offset of accumulated taxable losses, followed by 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”), is engaged in advanced technology industry, Jinzhou Halla was approved to enjoy a further three years’ 50% tax reduction for 2006, 2007 and 2008. The tax holiday of Dong Woo commenced in the fiscal year 2004. Accordingly, Dong Woo was subject to tax rate of 13.5% for 2006, 2007 and 2008.
Jinzhou Halla and Dong Woo, being FIEs, were entitled to another special tax concession that equivalent to 40% of the purchase price of qualifying domestic capital expenditure as defined and approved under the relevant PRC income tax rule can be used to offset against EIT. Jinzhou Halla was additionally entitled to a further tax concession, if there is a 10% increase in the current year’s domestic development expenses over the prior year, amount equivalent to 50% of the current year’s expenses can be used to offset against EIT.
F-27
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, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Current taxes - PRC | $ | 1,286,760 | $ | 896,399 | $ | 863,115 | ||||||
Deferred taxes - PRC | (16,369 | ) | 857 | (144,817 | ) | |||||||
$ | 1,270,391 | $ | 897,256 | $ | 718,298 |
The effective income tax expenses differs from the PRC statutory income tax rate of 27% from continuing operations in the PRC as follows :-
Year ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Provision for income taxes at PRC | ||||||||||||
statutory income tax rate | $ | 522,066 | $ | 1,970,509 | $ | 1,702,539 | ||||||
Non-deductible items for tax | 2,094,875 | 31,817 | 11,845 | |||||||||
Income not subject to tax | (108,558 | ) | (7,361 | ) | (4,407 | ) | ||||||
Others | 16,200 | - | - | |||||||||
Tax concessions | (1,254,192 | ) | (1,097,709 | ) | (991,679 | ) | ||||||
$ | 1,270,391 | $ | 897,256 | $ | 718,298 |
F-28
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, 2006 and 2005 are composed of the following :-
As of December 31, | ||||||||
2006 | 2005 | |||||||
PRC | ||||||||
Current deferred tax assets: | ||||||||
Allowance for doubtful debts | $ | 4,340 | $ | 5,231 | ||||
Provision for obsolete inventories | 17,168 | 26,211 | ||||||
Provision for warranty | 141,661 | 123,444 | ||||||
Accrued liabilities | 23,053 | 37,188 | ||||||
Unrealized profit | 51,348 | - | ||||||
Others | - | 69,474 | ||||||
$ | 237,570 | $ | 261,548 | |||||
United States | ||||||||
Non current deferred tax assets: | ||||||||
Tax losses | $ | 48,000 | $ | 52,000 | ||||
Valuation allowances | (48,000 | ) | (52,000 | ) | ||||
$ | - | $ | - | |||||
PRC | ||||||||
Non current deferred tax assets | ||||||||
(liabilities): | ||||||||
Depreciation of property, plant | ||||||||
and equipment | 376,368 | 298,021 | ||||||
Amortization of land use right | 12,435 | 12,621 | ||||||
Amortization of know-how | (183,328 | ) | (158,326 | ) | ||||
205,475 | 152,316 | |||||||
$ | 205,475 | $ | 152,316 |
As of December 31, 2006, the Company had net operating loss carried forward amounted to $140,612 in the United States which, if unutilized, will expire through to 2020.
F-29
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
7. | Minority Interests |
Minority interests on the consolidated statement of operations of $101,827 for the year ended December 31, 2006 represents the minority shareholders’ proportionate share of the net income of Dong Woo.
8. | Earnings per share |
During the reporting periods, the Company had no dilutive instruments. Accordingly, the basic and diluted 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, | ||||||||
2006 | 2005 | |||||||
Bank deposits held as collateral for bills payable | $ | 4,876,879 | $ | 3,597,609 |
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.
F-30
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
10. | Other receivables, prepayments and deposits |
As of December 31, | ||||||||
2006 | 2005 | |||||||
Advances to staff | $ | 238,310 | $ | 110,178 | ||||
Value added tax and other tax recoverable | 193,318 | 145,669 | ||||||
Other prepayments | 227,883 | 126,573 | ||||||
Advance to a third party - Note 10a | 358,171 | - | ||||||
Prepaid front-end-fee - Note 10b | 162,146 | - | ||||||
Other receivables | 74,381 | 10,486 | ||||||
$ | 1,254,209 | $ | 392,906 |
Notes :-
(a) | The advance is interest-free, unsecured and repayable on demand. |
(b) | The front-end-fee was prepaid in conjunction with the loan facility to be obtained by the Company (Note 19). |
11. | Inventories |
As of December 31, | ||||||||
2006 | 2005 | |||||||
Raw materials | $ | 3,957,527 | $ | 2,733,814 | ||||
Work-in-progress | 450,545 | 301,958 | ||||||
Finished goods | 9,428,237 | 4,965,991 | ||||||
13,836,309 | 8,001,763 | |||||||
Provision for obsolete inventories | (146,935 | ) | (194,153 | ) | ||||
$ | 13,689,374 | $ | 7,807,610 |
(Recovery of)/provision for obsolete inventories of $(52,470), $(186,646) and $126,524 were (credited) charged to operations during the years ended December 31, 2006, 2005 and 2004 respectively.
12. | Know-how |
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.
F-31
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
13. | Trademarks and patents |
As of December 31, | ||||||||
2006 | 2005 | |||||||
Cost | $ | 13,818 | $ | 3,471 | ||||
Accumulated amortization | (2,400 | ) | (1,564 | ) | ||||
$ | 11,418 | $ | 1,907 |
During the three years ended December 31, 2006, 2005 and 2004 amortization charge was $769, $342 and $338 respectively.
The estimated aggregate amortization expenses for trademarks and patents for the five succeeding years is as follows :-
Year | ||||
2007 | $ | 769 | ||
2008 | 769 | |||
2009 | 769 | |||
2010 | 769 | |||
2011 | 769 | |||
$ | 3,845 |
14. | Property, plant and equipment, net |
As of December 31, | ||||||||
2006 | 2005 | |||||||
Costs: | ||||||||
Buildings | $ | 5,850,903 | $ | 4,869,688 | ||||
Plant and machinery | 13,457,393 | 10,440,533 | ||||||
Furniture, fixtures and equipment | 381,810 | 309,952 | ||||||
Tools and equipment | 1,196,095 | 877,572 | ||||||
Leasehold improvements | 151,848 | 24,773 | ||||||
Motor vehicles | 642,172 | 341,337 | ||||||
21,680,221 | 16,863,855 | |||||||
Accumulated depreciation | (7,851,156 | ) | (6,215,773 | ) | ||||
Construction in progress - Note 4 | 116,781 | - | ||||||
Net | $ | 13,945,846 | $ | 10,648,082 |
F-32
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
14. | Property, plant and equipment, net (Cont’d) |
An analysis of buildings, plant and machinery pledged to banks for banking loans (Note 19a) is as follows :-
As of December 31, | ||||||||
2006 | 2005 | |||||||
Costs: | ||||||||
Buildings | $ | 4,576,803 | $ | 3,810,749 | ||||
Plant and machinery | - | 2,663,964 | ||||||
4,576,803 | 6,474,713 | |||||||
Accumulated depreciation | (929,213 | ) | (1,593,770 | ) | ||||
Net | $ | 3,647,590 | $ | 4,880,943 |
Year ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Depreciation | $ | 139,117 | $ | 348,473 | $ | 191,840 |
(i) | During the reporting periods, depreciation is included in :- |
Year ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Cost of sales and overheads | ||||||||||||
of inventories | $ | 1,255,390 | $ | 1,057,150 | $ | 901,873 | ||||||
Other | 146,151 | 101,411 | 84,644 | |||||||||
$ | 1,401,541 | $ | 1,158,561 | $ | 986,517 |
During the years ended December 31, 2006 and 2004, property, plant and equipment with carrying amounts of $152,696 and $50,501 were disposed of at considerations of $73,169 and $31,012 resulting in losses of $79,527 and $19,489 respectively.
(ii) | Construction in Progress |
Construction in progress mainly comprises capital expenditure for construction of the Company’s new offices and factories.
F-33
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
15. | Land use right |
As of December 31, | ||||||||
2006 | 2005 | |||||||
Land use right | $ | 1,465,806 | $ | 800,027 | ||||
Accumulated amortization | (262,550 | ) | (220,007 | ) | ||||
$ | 1,203,256 | $ | 580,020 |
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. This right was pledged to a bank for the bank loans granted to the Company (Note 19b).
During the three years ended December 31, 2006, 2005 and 2004, amortization amounted to $28,883, $26,245 and $25,980 respectively.
The estimated aggregate amortization expenses for land use right for the five succeeding years is as follows :-
Year | ||||
2007 | $ | 28,883 | ||
2008 | 28,883 | |||
2009 | 28,883 | |||
2010 | 28,883 | |||
2011 | 28,883 | |||
$ | 144,415 |
16. | Other payables and accrued expenses |
As of December 31, | ||||||||
2006 | 2005 | |||||||
Accrued audit fee | $ | 90,678 | $ | 110,114 | ||||
Other accrued expenses | 137,839 | 256,102 | ||||||
Other tax payable | 37,690 | 12,479 | ||||||
Payable for acquisition of property, plant | ||||||||
and equipment | 133,275 | 166,789 | ||||||
Staff welfare payable - Note | 132,699 | 82,325 | ||||||
Payable for acquisition of Dong Woo | ||||||||
- Note 4 | 2,420,000 | - | ||||||
Other payables | 169,352 | 82,013 | ||||||
$ | 3,121,533 | $ | 709,822 |
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.
F-34
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
17. | Provision for warranty |
As of December 31, | ||||||||
2006 | 2005 | |||||||
Balance, January 1 | $ | 914,403 | $ | 815,498 | ||||
Claims paid for the year | (843,026 | ) | (991,008 | ) | ||||
Addition provision for the year | 945,871 | 1,067,163 | ||||||
Translation adjustments | 32,096 | 22,750 | ||||||
Balance, December 31 | $ | 1,049,344 | $ | 914,403 |
18. | Amounts due from a related company / to a stockholder / 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.
19. | Secured bank loans |
As of December 31, | ||||||||
2006 | 2005 | |||||||
Bank loans repayable as follows: | ||||||||
Within 1 year | $ | 14,326,831 | $ | 7,431,813 | ||||
After 1 year but within 2 years | - | 4,954,542 | ||||||
$ | 14,326,831 | $ | 12,386,355 |
As of December 31, 2006, the Company’s banking facilities are composed of the following:
Amount | ||||||||||||
Facilities granted | Granted | Utilized | Unused | |||||||||
Secured bank loans | $ | 18,548,129 | $ | 14,326,831 | $ | 4,221,298 |
The above banking loans were secured by the following:
(a) | Property, plant and equipment with carrying value of $3,647,590 respectively (Note 14); |
(b) | Land use right with carrying value of $1,203,256 (Note 15); |
(c) | Certain trade receivables of approximately $4,260,000 were factored to a bank with recourse as collateral under invoice discount agreement; |
(d) | Guarantees executed by the Company’s sole director, Chief Executive Officer, President and Secretary, Qingjie Zhao, who is also a stockholder of the Company holding 61.05% common stock of the Company; and 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 |
F-35
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
19. | Secured bank loans (Cont’d) |
(e) | All the bank loans are denominated in RMB and carry interest rates ranging from 6.12% to 6.732% per annum with maturity for one year. |
During the reporting periods, there was no covenant requirement under the banking facilities granted to the Company.
On November 24, 2006, the Company entered into a loan agreement (“Loan Agreement”) with DEG - Deutsche Investitions - und Entwicklungsgesellschaft mbH for a bank loan approximately up to $13 million (equivalent of Euro 10 million) for expansion of its production facilities. However, the availability of this loan facility is subject to the terms and conditions laid down in the Loan Agreement, including a first ranking pledge of the Company’s property, plant and equipment with a minimum value of approximately $10.5 million (equivalent of Euro 8 million). As of December 31, 2006, such loan facility is not yet available to the Company because the Company is still in the process of arranging the aforementioned pledge and other necessary documents. Accordingly, this loan facility is not reflected in the banking facilities as detailed above. Details of such loan facility are set out in the Company’s Form 8K dated November 30, 2006.
20. | Commitments and contingencies |
a. | Capital commitment |
As of December 31, 2006, the Company had capital commitments amounting to $1,535,858 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, 2006, the Company had one non-cancelable operating lease for its warehouses. The leases will expire in 2007 and the expected payment is $1,302.
The rental expense relating to the operating leases was $1,302 and $3,764 for the two years ended December 31, 2006 and 2005 respectively.
F-36
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
21. | Common stock and additional paid-in capital |
Common stock | ||||||||||||
Number of | ||||||||||||
shares as | ||||||||||||
adjusted for | Additional | |||||||||||
Forward | paid-in | |||||||||||
Stock Split | Amount | capital | ||||||||||
Balance, January 1, 2005 and | ||||||||||||
December 31, 2005 | 17,227,198 | $ | 1,723 | $ | 11,998,377 | |||||||
Recapitalization | 2,832,800 | 283 | 136 | |||||||||
Shares issued for proceeds of $12 million | 3,899,996 | 390 | 11,999,610 | |||||||||
Cost of raising capital | - | - | (1,857,980 | ) | ||||||||
Balance, December 31, 2006 | 23,959,994 | $ | 2,396 | $ | 22,140,143 |
(a) | On June 22, 2006, the Company issued 21,127,194 shares of common stock, par value $0.0001 per share, to the stockholders of WAL, of which 17,227,198 shares to WAL Former Stockholders and 3,899,996 shares to new investors in exchange for 100% of the outstanding capital stock of WAL. |
(b) | The Company’s issued and outstanding number of common stock immediately prior to the RTO is 2,832,800 shares are accounted for at $419 of net book value at the time of the RTO. |
(c) | On July 12, 2006, the board of the directors of the Company approved a 2.448719-for-1 Forward Stock Split in the form of a stock dividend. Immediately following the Forward Stock Split, the Company has 23,959,994 shares of common stock issued and outstanding. The effect of Forward Stock Split has been retroactively reflected in these financial statements. All references to weighted average shares outstanding and per share amounts included in the accompanying financial statements and notes reflect the Forward Stock Split and its retroactive effects. |
22. | Statutory and other reserves |
The Company’s statutory and other reserves comprise statutory reserve and enterprise expansion fund of Jinzhou Halla and Dong Woo in the PRC.
As of December 31, | ||||||||
2006 | 2005 | |||||||
Statutory reserve | $ | 3,093,031 | $ | 2,292,614 | ||||
Enterprise expansion fund | 55,234 | 55,234 | ||||||
$ | 3,148,265 | $ | 2,347,848 |
F-37
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
22. | Statutory and other reserves (Cont’d) |
Statutory reserve
In accordance with the relevant laws and regulations of the PRC and articles of association of Jinzhou Halla and Dong Woo, it is required to appropriate 10% of its net income, after offsetting any prior years’ losses, to the statutory reserve. When the balance of such reserve reaches 100% of the registered capital, any further appropriation is optional. Upon approval from the board of directors of the respective company, the statutory reserve can be used to offset accumulated losses or to increase registered capital.
Enterprise expansion fund
In accordance with the relevant laws and regulations of the PRC and articles of association of Jinzhou Halla and Dong Woo, 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.
23. | Accumulated other comprehensive income |
The accumulated other comprehensive income consists of foreign currency translation adjustments as follows:
Foreign | ||||
currency | ||||
translation | ||||
adjustments | ||||
Balance, January 1, 2004 | $ | 23,818 | ||
Foreign currency translation adjustments | 766 | |||
Balance, December 31, 2004 | 24,584 | |||
Foreign currency translation adjustments | 420,086 | |||
Balance, December 31, 2005 | 444,670 | |||
Foreign currency translation adjustments | 1,007,468 | |||
Balance, December 31, 2006 | $ | 1,452,138 |
24. | Defined contribution plan |
The Company has a defined contribution plan for all qualified employees in the PRC. The employer and its employees are each required to make contributions to the plan at the rates specified in the plan. 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 operations. The Company contributed $490,519, $417,824 and $388,461 for the years ended December 31, 2006, 2005 and 2004, respectively.
F-38
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
25. | Segment information |
The Company is engaged in the manufacture and distribution of automotive electrical components including alternators and starters in the PRC. The Company has two reportable segments, alternators and starters, based on the type of products. Information for the two segments is disclosed under FAS 131, “Disclosures about Segments of an Enterprise and Related Information” as below:
Alternators | Starters | Total | ||||||||||||||||||||||||||||||||||
Year ended December 31 | Year ended December 31 | Year ended December 31 | ||||||||||||||||||||||||||||||||||
2006 | 2005 | 2004 | 2006 | 2005 | 2004 | 2006 | 2005 | 2004 | ||||||||||||||||||||||||||||
Revenue from external customers | $ | 45,216,038 | $ | 30,118,341 | $ | 28,119,116 | $ | 26,934,445 | $ | 17,944,464 | $ | 14,146,758 | $ | 72,150,483 | $ | 48,062,805 | $ | 42,265,874 | ||||||||||||||||||
Interest income | 41,954 | 17,844 | 9,017 | 24,154 | 10,632 | 4,537 | 66,108 | 28,476 | 13,554 | |||||||||||||||||||||||||||
Interest expenses | 507,310 | 383,085 | 357,899 | 300,383 | 228,241 | 180,059 | 807,693 | 611,326 | 537,958 | |||||||||||||||||||||||||||
Amortization | 19,295 | 16,661 | 17,509 | 10,357 | 9,926 | 8,809 | 29,652 | 26,587 | 26,318 | |||||||||||||||||||||||||||
Depreciation | 883,250 | 963,870 | 805,037 | 518,291 | 194,691 | 181,480 | 1,401,541 | 1,158,561 | 986,517 | |||||||||||||||||||||||||||
Segment profit | 4,835,128 | 3,904,964 | 3,413,013 | 4,818,079 | 3,384,753 | 2,897,393 | 9,653,207 | 7,289,717 | 6,310,406 | |||||||||||||||||||||||||||
Segment assets | 54,860,505 | 35,053,650 | 27,265,236 | 22,308,718 | 16,990,104 | 9,708,836 | 77,169,223 | 52,043,754 | 36,974,072 | |||||||||||||||||||||||||||
Expenditure for segment assets | $ | 1,685,790 | $ | 1,292,607 | $ | 1,915,749 | $ | 1,951,822 | $ | 770,284 | $ | 963,777 | $ | 3,637,612 | $ | 2,062,891 | $ | 2,879,526 |
F-39
Wonder Auto Technology, Inc.
Notes to Consolidated Financial Statements
(Stated in US Dollars)
25. | Segment information (Cont’d) |
A reconciliation is provided for unallocated amounts relating to corporate operations which is not included in the segment information.
Year ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Total consolidated revenue | $ | 72,150,483 | $ | 48,062,805 | $ | 42,265,874 | ||||||
Total profit for reportable segments | $ | 9,653,207 | $ | 7,289,717 | $ | 6,310,406 | ||||||
Unallocated amounts relating to | ||||||||||||
relating to operations: | ||||||||||||
Interest income | 30,702 | 63 | - | |||||||||
Other income | 18,418 | 9,753 | - | |||||||||
Other general expenses | (106,563 | ) | (1,351 | ) | (4,706 | ) | ||||||
Unusual charge - make good provision | (7,507,500 | ) | - | - | ||||||||
Income before income taxes | $ | 2,088,264 | $ | 7,298,182 | $ | 6,305,700 |
As of December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
Assets | ||||||||||||
Total assets for reportable segments | $ | 77,169,223 | $ | 52,043,754 | $ | 36,974,072 | ||||||
Cash and cash equivalents | 830,917 | 9,008 | 543 | |||||||||
Marketable securities | - | 37,159 | - | |||||||||
$ | 78,000,140 | $ | 52,089,921 | $ | 36,974,615 |
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:
Year ended December 31, | ||||||||||||
2006 | 2005 | 2004 | ||||||||||
PRC | $ | 68,686,842 | $ | 47,416,125 | $ | 41,920,125 | ||||||
Others | 3,463,641 | 646,680 | 345,749 | |||||||||
Total | $ | 72,150,483 | $ | 48,062,805 | $ | 42,265,874 |
26. | Subsequent events |
Subsequent to December 31, 2006, CIL, ECL and Xiangdong Gao entered into an agreement on February 8, 2007, pursuant to which both CIL and ECL have agreed to give the right of the entitlement to the 1,650,000 escrowed shares related to the fiscal year ended December 31, 2006 to Xiangdong Gao for nil consideration. Further details are set out in note 3 (ii).
F-40
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.
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 |
27
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]. |
28
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].** |
29
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]. |
30
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]. | |
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. | |
24 | Power of Attorney . | |
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 herewith.
** Represents management contract or compensatory plan or arrangement.
31