CAAS 2009 ANNUA REPORT
Dear Shareholders,
The 2009 year marked a new era for the Chinese automotive industry and China Automotive Systems.
China became the largest vehicle market in the world in 2009 while our Company captured the largest market
share in the growing automotive steering market in China. Total vehicle output in China was 13.8 million
units and total vehicle unit sales reached 13.6 million units, increases of 48.3% and 46.2% compared to 2008
according to the China Association of Automobile Manufacturers. We continued our growth trend by again
outperforming the market as our steering gears for passenger vehicles grew by 60.4%, for commercial
vehicles gears grew by 46.8% and steering pumps rose by 57.7% in 2009.
For the 2009 year, annual net sales were $255.6 million, up 56.6% or $92.4 million from 2008. Sales growth
was generated by China's economic expansion leading to higher income levels and greater passenger vehicle
sales. The government’s stimulus and investment in the national infrastructure generated greater commercial
vehicle sales in China. Gross profit in 2009 increased by 53.8% to $72.7 million with income from operations
up 122.6% to $37.7 million and net income rose by 88.3% to $23.4 million, or diluted EPS of $0.78. As of
December 31, 2009, cash and equivalents were $43.5 million and stockholder's equity rose to $132.8 million.
For 2009, working capital rose to $61.0 million and net cash flow from operations was $35.0 million.
Competition is pressuring OEMs in all markets to seek the best value systems. We supply leading Chinese
brands that require high-quality components and systems. OEM competition outside of China helped lead to
our first exports to the award-winning Jeep Wrangler in mid-2009 for the large North American market. Our
first OEM contract with Chrysler Jeep has created other OEM opportunities abroad.
Our strong research and development programs set barriers to entry. Research and development expense
increased slightly in 2009 as we continue to invest in new products with an emphasis on upgrading traditional
hydraulic steering products, developing electric power steering, and improving quality and manufacturing
efficiencies. We designed and started production in 2009 of the first domestic electric power steering system
in China. In early 2010, we also broke ground for the new Henglong Research and Development Center.
In early 2010, we formed a joint venture with a subsidiary of Beijing Automobile Industrial Holdings
("Beijing Auto"). The new JV, Beijing Hailong Automotive System Co., Ltd., will develop and manufacture
hydraulic and electric power steering systems and parts. A new production facility is expected to be
operational within 18 months with a designed capacity for 300,000 units of hydraulic and 200,000 units of
electric power steering systems plus parts. Beijing Auto will be the main customer for this new production.
The automotive market continues to receive support from government policies. The 2009 stimulus package
continues in 2010 although some terms have changed. However, organic growth is highly visible as more
vehicle sales are coming from the interior sections of the country and the tier 2 and tier 3 cities. We expect
revenue growth to be 20% for the 2010 year following the 56.6% growth in 2009.
Our strategy is to capture further market share in China as we take advantage of our economies of scale, R&D,
and quality control to further penetrate the international markets. We are the best positioned in the Chinese
market with strong new product development and long-established relationships in an industry with
significant barriers to entry. We continue to focus on expanding our market share and enhance OEM
relationships to grow our recurring revenue pipeline and maximize our long-term shareholders’ value.
We are enthusiastic about future growth and we thank our shareholders for your support and our employees
for their dedication.
Sincerely,
Qizhou Wu
CEO & Director
China Automotive Systems, Inc.
May 28, 2010
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CAAS 2009 ANNUA REPORT
INDEX
Cautionary Statement......................................................................................................................................3
PART I ............................................................................................................................................................3
ITEM 1. DESCRIPTION OF BUSINESS..............................................................................................3
ITEM 2. DESCRIPTION OF PROPERTY .......................................................................................11
ITEM 3. LEGAL PROCEEDINGS ....................................................................................................12
ITEM 4. RESERVED .........................................................................................................................12
PART II .........................................................................................................................................................12
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES ...........................................................................12
ITEM 6. SELECTED FINANCIAL DATA .......................................................................................13
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION......................................................................................................13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE......................................................................................................30
PART III .......................................................................................................................................................30
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, CORPORATE GOVERNANCE AND
BOARD INDEPENDENCE .................................................................................................................30
ITEM 11. EXECUTIVE COMPENSATION .......................................................................................34
ITEM
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS...........................................36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................37
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES .....................................................37
PART IV.......................................................................................................................................................38
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES..........................................38
LIST OF FINANCIAL STATEMENT / SCHEDULES.......................................................................38
NOTES TO CONSOLIDATED FINANCIAL STATEMENT ............................................................47
12.
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CAAS 2009 ANNUA REPORT
Cautionary Statement
This Annual Report on Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These
statements relate to future events or the Company’s future financial performance. The Company has
attempted to identify forward-looking statements by terminology including “anticipates,” “believes,”
“expects,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,”
“predict,” “should” or “will” or the negative of these terms or other comparable terminology. Such
statements are subject to certain risks and uncertainties, including the matters set forth in this report or
other reports or documents the Company files with the Securities and Exchange Commission from time to
time, which could cause actual results or outcomes to differ materially from those projected. Although the
Company believes that the expectations reflected in the forward-looking statements are reasonable, the
Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance
should not be placed on these forward-looking statements which speak only as of the date hereof. The
Company’s expectations are as of the date this Form 10-K is filed, and the Company does not intend to
update any of the forward-looking statements after the date this Annual Report on Form 10-K is filed to
confirm these statements to actual results, unless required by law.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY HISTORY
China Automotive Systems, Inc., “China Automotive” or the “Company”, was incorporated in the
State of Delaware on June 29, 1999 under the name Visions-In-Glass, Inc.
On or around March 5, 2003, the Company acquired all of the issued and outstanding equity
interests of Great Genesis Holdings Limited, “Genesis”, a corporation organized under the laws of the
Hong Kong Special Administrative Region, China, by issuance of 20,914,250 shares of common stock to
certain sellers. After the acquisition, the Company continued the operations of Genesis. Presently, Genesis
owns interests in eight Sino-joint ventures, which manufacture power steering systems and/or related
products for different segments of the automobile industry in China.
On May 19, 2003, the Company changed its name from Visions-In-Glass, Inc. to China Automotive
Systems, Inc.
Since December 17, 2009, Hanlin Chen, Qizhou Wu, Robert Tung, Bruce C. Richardson, Guangxun
Xu, and William E. Thomson began serving their terms as members of the Company’s Board of Directors.
The directors appointed Hanlin Chen as the chairman of the Board, Qizhou Wu as the Chief Executive
Officer of the Company, and Jie Li as Chief Financial Officer.
BUSINESS OVERVIEW
Unless the context indicates otherwise, the Company uses the terms “the Company”, “we”, “our”
and “us” to refer to Genesis and China Automotive collectively on a consolidated basis. The Company is a
holding company and has no significant business operations or assets other than its interest in Genesis.
Through Genesis, the Company manufactures power steering systems and other component parts for
automobiles. All operations are conducted through eight Sino-foreign joint ventures in China and a
wholly-owned subsidiary in the U.S. set forth below is an organizational chart as at December 31, 2009.
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CAAS 2009 ANNUA REPORT
China Automotive Systems, Inc. [NASDAQ:CAAS]
↓100%
Henglong USA Corporation
↓83.34%
Universal
Sensor
Application,
Inc.
↓77.33%
Wuhu
Henglong
Automotive
Steering
System Co.,
Ltd.
“Wuhu”
↓85%
Wuhan
Jielong
Electric
Power
Steering Co.,
Ltd
↓100.00%
Jingzhou
Hengsheng
Automotive
System
Co., Ltd.
“Jielong” “Hengsheng”
↓100%
Great Genesis Holdings Limited
↓
↓70%
Shenyang Jinbei
Henglong
Automotive
Steering System
Co., Ltd.
↓51%
Zhejiang
Henglong &
Vie
Pump-Manu
Co., Ltd.
↓81%
Shashi
Jiulong
Power
Steering
Gears
Co., Ltd.
↓80%
Jingzhou
Henglong
Automotive
Parts Co.,
Ltd.
“Henglong” “Jiulong” “Shenyang” “Zhejiang”
↓100.00%
Jingzhou
Henglong
Automotive
Technology
(Testing) Center
“Testing Center”
“USAI”
Jiulong was established in 1993 and is mainly engaged in the production of integral power steering
gear for heavy-duty vehicles.
Henglong was established in 1997 and is mainly engaged in the production of rack and pinion power
steering gear for cars and light duty vehicles.
On March 31, 2008, the Company’s wholly-owned subsidiary, Genesis, and Wiselink Holdings
Limited, “Wiselink”, both controlled by Hanlin Chen and his family, entered into an equity transfer
agreement, the “Henglong Agreement”, pursuant to which Wiselink agreed to transfer and assign its 35.5%
equity interest in Henglong, one of the Company’s currently consolidated subsidiaries, to Genesis for a
total consideration of $32,090,000. The Company now holds an 80% equity interest in Jingzhou Henglong.
In December 2009, Henglong, a subsidiary of Genesis, formed Jingzhou Henglong Automotive
Technology (Testing) Center (“Testing Center”), which is mainly engaged in research and development of
new products. The registered capital of Testing Center is RMB 30,000,000 ($4,393,544 equivalent ).
Under the terms of the Henglong Agreement, Genesis is deemed to be the owner of Jingzhou
Henglong commencing from January 1, 2008. The Henglong acquisition is considered as a business
combination of companies under common control and is being accounted for in a manner of pooling of
interests.
Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.
Zhejiang was established in 2002 to focus on power steering pumps.
USAI was established in 2005 and is mainly engaged in the production and sales of sensor modules.
In 2008, Genesis and Shanghai Hongxi Investment Inc., “Hongxi”, the other shareholder of USAI,
agreed to increase USAI’s capital to $2,600,000 from $1,800,000. The increased capital was wholly
funded by Genesis. Therefore, the capital contributed by Genesis in USAI increased to $2,166,900 from
$1,366,900, accounting for 83.34% of the total capital; while the capital contributed by Hongxi remained
unchanged, accounting for 16.66% of the total capital.
Wuhu was established in 2006 and is mainly engaged in the production and sales of automobile
steering systems.
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CAAS 2009 ANNUA REPORT
Jielong was established in 2006 and is mainly engaged in the production and sales of electric power
steering gear, “EPS”.
On March 7, 2007, Genesis established a wholly-owned subsidiary, Jingzhou Hengsheng
Automotive System Co., Ltd, “Hengsheng”, to engage in production and sales of automotive steering
systems. The registered capital of Hengsheng is $10,000,000.
The Company has business relations with more than sixty vehicle manufacturers, including FAW
Group and Dongfeng Auto Group, two of the five largest automobile manufacturers in China; Shenyang
Brilliance Jinbei Co., Ltd., the largest light vehicle manufacturer in China; Chery Automobile Co., Ltd, the
largest state owned car manufacturer in China, Xi’an BYD Auto Co., Ltd and Zhejiang Geely Automobile
Co., Ltd., the largest private owned car manufacturers. From 2008, the Company has supplied power
steering pumps and power steering gear to the Sino-Foreign joint ventures established by General Motors
(GM), Citroen and Volkswagen. In 2009, the Company began to supply power steering gear to Chrysler
North America.
The Company currently owns two trademarks covering automobile parts and twelve Chinese patents
covering power steering technology. The Company is in the process of integrating new advanced
technologies such as electronic chips in power steering systems into its current production line and is
pursuing aggressive strategies in technology to maintain a competitive edge within the automobile industry.
In 2001, the Company signed a Ten-Year Licensing Agreement with Bishop Steering Technology Limited,
a leader in automotive steering gear technology innovation which offers advanced technology for steering
valves within the contract period. In 2003, the Company signed a Technology Transfer Agreement with
Nanyang Ind. Co. Ltd., a leading steering column maker, for the technology necessary for electronic power
steering (EPS) systems. In addition, the Company established with Tsinghua University a steering systems
research institute designed to develop Electronic Power Steering (EPS) and Electronic Hydraulic Steering
Systems (EHPS).
STRATEGIC PLAN
The Company’s short to medium term strategic plan is to focus on both domestic and international
market expansion. To achieve this goal and higher profitability, the Company focuses on brand recognition,
quality control, decreasing costs, research and development and strategic acquisitions. Set forth below are
the Company’s programs:
- Brand Recognition. Under the Henglong and Jiulong brands, the Company offers four separate
series of power steering sets and 310 models of power steering sets, steering columns, steering oil pumps
and steering hoses.
-Quality Control. The Henglong and Jiulong manufacturing facilities passed the ISO/TS 16949
System Certification in January 2004, a well-recognized quality control system in the auto industry
developed by TUVRheindland of Germany.
- Decrease Cost. By improving the Company’s production ability and enhancing equipment
management, optimizing the process and products structure, perfecting the supplier system and cutting
production cost, the Company’s goal is to achieve a more competitive profit margin.
- Research and Development. By partnering with Bishop Steering Technology Limited, Nanyang
Ind. Co. Ltd. and Tsinghua University for the development of advanced steering systems, the Company’s
objective is to gain increased market share in China.
- International Expansion. The Company has entered into agreements with several international
vehicle manufacturers and auto parts modules suppliers and carried on preliminary negotiations regarding
future development projects.
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CAAS 2009 ANNUA REPORT
- Acquisitions. The Company is exploring opportunities to create long-term growth through new
ventures or acquisitions of other auto component manufacturers. The Company will seek acquisition
targets that fulfill the following criteria: ·
- companies that can be easily integrated into product manufacturing and corporate management;
- companies that have strong joint venture partners that would become major customers; and
- companies involved with power steering systems or oil pump.
CUSTOMERS
The Company’s ten largest customers represent 80.2% of the Company’s total sales for the year
ended December 31, 2009. The following table sets forth information regarding the Company’s ten largest
customers.
Name of Major Customers
Percentage of Total
Revenue in 2009
BYD Auto Co., Ltd
Chery Automobile Co., Ltd
Beiqi Foton Motor Co., Ltd.
Zhejiang Geely Holding Co., Ltd
Brilliance China Automotive Holdings Limited
Dongfeng Auto Group Co., Ltd
China FAW Group Corporation
Great Wall Motor Company Limited
Chrysler Group LLC
Anhui Jianghuai Automobile Group
Total
14.8 %
12.0 %
10.4 %
10.0 %
9.2 %
7.8 %
5.5 %
4.5 %
3.8 %
2.2 %
80.2 %
The Company primarily sells its products to the above-mentioned customers; it also has excellent
relationships with them, including as their first-ranking supplier and developer for new product
development for new models. While the Company intends to continue to focus on retaining and winning
this business, it cannot ensure that it will succeed in doing so. It is difficult to keep these contracts as a
result of severe price competition and customers’ diversification of their supply base. The Company’s
business would be materially and adversely affected if it loses one or more of these major customers.
SALES AND MARKETING
The Company’s sales and marketing team has 105 sales persons, which are divided into an original
equipment manufacturing, “OEM”, team, a sales service team and a working group dedicated to
international business. These sales and marketing teams provide a constant interface with the Company’s
key customers. They are located in all major vehicle producing regions to more effectively represent the
Company’s customers’ interests within the Company’s organization, to promote their programs and to
coordinate their strategies with the goal of enhancing overall service and satisfaction. The Company’s
ability to support its customers is further enhanced by its broad presence in terms of sales offices,
manufacturing facilities, engineering technology centers and joint ventures.
The Company’s sales and marketing organization and activities are designed to create overall
awareness and consideration of, and therefore to increase sales of, the Company’s modular systems and
components. To achieve that objective, the Company organized delegations to visit the United States,
Korea, India and Japan and has supplied power steering gear to Chrysler North America. Through these
activities, the Company has generated potential business interest as a strong base for future development.
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CAAS 2009 ANNUA REPORT
DISTRIBUTION
The Company’s distribution system covers all of China. The Company has established sales and
service offices with certain significant customers to deal with matters related to such customers in a timely
fashion. The Company also established distribution warehouses close to major customers to ensure timely
deliveries. The Company maintains strict control over inventories. Each of these sales and service offices
sends back to the Company through e-mail or fax information related to the inventory and customers’
needs. The Company guarantees product delivery in 8 hours for those customers who are located within
200 km from the Company’s distribution warehouses, and 24 hours for customers who are located outside
of 200 km from the Company’s distribution warehouses. Delivery time is a very important competitive
factor in terms of customer decision making, together with quality, pricing and long-term relationships.
EMPLOYEES AND FACILITIES
As of December 31, 2009, the Company employed approximately 2,944 persons, including
approximately 1,940 by Henglong and Jiulong, approximately 294 by Shenyang, approximately 293 by
Zhejiang, approximately 38 by USAI, approximately 135 by Wuhu, approximately 202 by Hengsheng, and
5 by Henglong USA.
As of December 31, 2009, each of Henglong and Jiulong, Shenyang, Zhejiang, Wuhu, Jielong, and
Hengsheng has a manufacturing and administration area of 278,092 square meters, 35,354 square meters,
100,000 square meters, 83,700 square meters, 105,735 square meters, and 170,520 square meters,
respectively.
Hubei Province, which is home to Dongfeng, one of the largest automakers in China, provides an
ample supply of inexpensive but skilled labor to automotive-related industries. The annual production of
the Company’s main product, power steering gear, was approximately 2,200,000 units and 1,290,000 units
in 2009 and 2008 respectively. Although the production process continues to rely heavily on manual labor,
the Company has invested substantially in high-level production machinery to improve capacity and
production quality. Approximately $43.6 million was spent over the last three years on professional-grade
equipment and workshops — approximately 87% of which has been used in the production process as of
December 31, 2009.
RAW MATERIALS
The Company purchases various manufactured components and raw materials for use in its
manufacturing processes. The principal components and raw materials the Company purchases include
castings, electronic parts, molded plastic parts, finished sub-components, fabricated metal, aluminum and
steel. The most important raw material is steel. The Company enters into purchase agreements with local
suppliers. The annual purchase plans are determined at the beginning of the calendar year but are subject to
revision every three months as a result of customers’ orders. A purchase order is made according to
monthly production plans. This protects the Company from building up inventory when the orders from
customers change.
The Company’s purchases from its ten largest suppliers represent in the aggregate 26.4% of all
components and raw materials it purchased for the year ended December 31, 2009, and none of them
providing more than 10% of total purchases.
All components and raw materials are available from numerous sources. The Company has not, in
recent years, experienced any significant shortages of manufactured components or raw materials and
normally does not carry inventories of these items in excess of what is reasonably required to meet its
production and shipping schedules.
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CAAS 2009 ANNUA REPORT
RESEARCH AND DEVELOPMENT
The Company has a ten-year consulting and licensing agreement with Bishop Steering Technology
Ltd, one of the leading design firms in power steering systems. Bishop’s technology in power steering
systems is currently used by carmakers such as BMW and Mercedes Benz. Pursuant to the agreement, the
Company has implemented the Bishop steering valve technology into the Henglong brand R&P power
steering gear.
The Company owns a Hubei Provincial-Level Technical Center, which has been approved by the
Hubei Economic Commission. The center has a staff of 211, including 13 senior engineers, 2 foreign
experts and 102 engineers, primarily focused on steering system R&D, tests, production process
improvement and new material and production methodology application.
In addition, the Company has partnered with Tsinghua University to establish a steering system
research center, called Tsinghua Henglong Automobile Steering Research Institute, for the purposes of
R&D and experimentation for Electronic Power Steering, “EPS”.
The Company believes that its engineering and technical expertise, together with its emphasis on
continuing research and development, allow it to use the latest technologies, materials and processes to
solve problems for its customers and to bring new, innovative products to market. The Company believes
that continued research and development activities, including engineering, are critical to maintaining its
pipeline of technologically advanced products. The Company has aggressively managed costs in other
portions of its business in order to maintain its total expenditures for research and development activities,
including engineering, at approximately $2,560,000, $2,260,000, and $1,700,000 for the years ended
December 31, 2009, 2008, and 2007, respectively. In 2009, the sales of newly developed products
accounted for about 26.7% of total sales.
COMPETITION
The automotive components industry is extremely competitive. Criteria for the Company’s
customers include quality, price/cost competitiveness, system and product performance, reliability and
timeliness of delivery, new product and technology development capability, excellence and flexibility in
operations, degree of global and local presence, effectiveness of customer service and overall management
capability. The power steering system market is fragmented in China, and the Company has seven major
competitors. Of these competitors, two are Sino-foreign joint ventures while the other five are state-owned.
Like many competitive industries, there is downward pressure on selling prices.
The Company’s major competitors, including Shanghai ZF and FKS, are component suppliers to
specific automobile manufacturers. Shanghai ZF is the joint venture of SAIC and ZF Germany, which is an
exclusive supplier to SAIC-Volkswagen and SAIC-GM. First Auto FKS is a joint venture between First
Auto Group and Japan’s Koyo Company and its main customer is FAW-Volkswagen Company.
While the Chinese Government limits foreign ownership of auto assemblers to 50%, there is no
analogous limitation in the automotive components industry. Thus, opportunities exist for foreign
component suppliers to set up factories in China. These overseas competitors employ technology that may
be more advanced and may have existing relationships with global automobile assemblers, but they are
generally not as competitive as the Company in China in terms of production cost and flexibility in
meeting client requirements.
CHINESE AUTOMOBILE INDUSTRY
The Company is a supplier of automotive parts and most of its operations are located in China. An
increase or decrease in the output and sales of Chinese vehicles could result in an increase or decrease of
the Company’s results of operations. According to the latest statistics from the China Association of
Automobile Manufacturers, “CAAM”, in 2009, the output and sales volume of vehicles in China have
reached 13,791,000 and 13,645,000 units respectively, with an increase of 48.3% and 46.2% compared to
2008. The output and sales volume of passenger vehicles have reached 10,384,000 and 10,331,000 units
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CAAS 2009 ANNUA REPORT
respectively, with an increase of 54.1% and 52.9% compared to 2008. The output and sales volume of
commercial vehicles have reached 3,407,200 and 3,313,500 units respectively, with an increase of 33.0%
and 28.4% compared to 2008. Accordingly, the Company’s sales of steering gear for passenger vehicles
and commercial vehicles and steering pumps in 2009 increased by 60.4%, 46.8% and 57.7% compared
with the year 2008.
To bolster auto consumption in China, the government continued a series of stimulus measures
including a reduction in purchase taxes of 25% on smaller cars, scrapping some road fees and granting
subsidies for farmers who trade in their polluting vehicles for more fuel-efficient ones.
CHINESE ECONOMY
Management believes that the most important factor in understanding the Chinese automobile
industry is the country’s rapid economic growth. During 2008, Chinese economic growth slowed down, as
it suffered from the global financial crisis since the third quarter of 2008. In early 2009, a series of
economic stimulation policies were issued by the Chinese Government, which rapidly reversed the great
drop on economic growth. According to data from the State Statistical Bureau, Chinese economic growth
reached 8.7% in 2009. With incentives provided by Government action, management believes that the
investment by Chinese enterprises and consumption by Chinese residents will continue to increase
relatively rapidly in 2010.
Management believes that the continued investment and consumption growth will have a favorable
effect on the sales of commercial vehicles and passenger vehicles.
HIGHWAY DEVELOPMENT
Management believes that the continuing development of the highway system will have a significant
positive impact on the manufacture and sale of private automobiles. Statistics from the Ministry of
Communications show that 980,000 kilometers of highway and 4,719 kilometers of expressway were
developed in 2009. Total highways and expressways now amount to 3,771,000 kilometers and 65,020
kilometers, respectively.
CHINESE LEGAL SYSTEM
DOING BUSINESS IN CHINA
The practical effect of the Chinese legal system on the Company’s business operations in China can
be viewed from two separate but intertwined considerations. First, as a matter of substantive law, the
Foreign Invested Enterprise Laws provide significant protection from government interference. In addition,
these laws guarantee the full enjoyment of the benefits of corporate articles and contracts to Foreign
Invested Enterprise participants. These laws, however, do impose standards concerning corporate
formation and governance, which are not qualitatively different from the general corporation laws of other
countries. Similarly, the Chinese accounting laws mandate accounting practices, which are not consistent
with US Generally Accepted Accounting Principles. The Chinese accounting laws require that an annual
“statutory audit” be performed in accordance with Chinese accounting standards and that the books of
account of Foreign Invested Enterprises be maintained in accordance with Chinese accounting laws.
Article 14 of the People’s Republic of China Wholly Foreign-Owned Enterprise Law requires a Wholly
Foreign-Owned Enterprise to submit certain periodic fiscal reports and statements to designated financial
and tax authorities. Otherwise, there is risk that its business license will be revoked.
Second, while the enforcement of substantive rights may appear less clear than those in the United
States, the Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered
companies which enjoy the same status as other Chinese registered companies in business dispute
resolution. Because the terms of the Company’s various Articles of Association provide that all business
disputes pertaining to Foreign Invested Enterprises will be resolved by the Arbitration Institute of the
Stockholm Chamber of Commerce in Stockholm, Sweden applying Chinese substantive law, the Chinese
minority partner in the Company’s joint venture companies will not assume any advantageous position
regarding such disputes. Any award rendered by this arbitration tribunal is, by the express terms of the
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CAAS 2009 ANNUA REPORT
various Articles of Association, enforceable in accordance with the “United Nations Convention on the
Recognition and Enforcement of Foreign Arbitral Awards (1958).” Therefore, as a practical matter,
although no assurances can be given, the Chinese legal infrastructure, while different from its United
States counterpart, should not present any significant impediment to the operation of Foreign Invested
Enterprises.
ECONOMIC REFORM ISSUES
Although the Chinese Government owns the majority of productive assets in China, in the past
several years the Government has implemented economic reform measures that emphasize decentralization
and encourage private economic activity. Because these economic reform measures may be inconsistent or
ineffectual, there is no assurance that:
- The Company will be able to capitalize on economic reforms;
- The Chinese Government will continue its pursuit of economic reform policies;
- The economic policies, even if pursued, will be successful;
- Economic policies will not be significantly altered from time to time; and
- Business operations in China will not become subject to the risk of nationalization.
Negative impact resulting from economic reform policies or nationalization could result in a total
investment loss in the Company’s common stock.
Since 1979, the Chinese Government has reformed its economic system. Because many reforms are
unprecedented or experimental, they are expected to be refined and readjusted. Other political, economic
and social factors, such as political changes, changes in the rates of economic growth, unemployment or
inflation, or disparities in per capita wealth between regions within China, could lead to further
readjustment of the reform measures. This refining and readjustment process may negatively affect the
Company’s operations.
Over the last few years, China’s economy has registered a high growth rate. Recently, there have
been indications that the rate of inflation has increased. In response, the Chinese Government recently has
taken measures to curb the excessively expansive economy. These measures included implementation of a
unitary and well-managed floating exchange rate system based on market supply and demand for the
exchange rates of Renminbi, restrictions on the availability of domestic credit, reduction of the purchasing
capability of its citizens, and centralization of the approval process for purchases of certain limited foreign
products. These austerity measures alone may not succeed in slowing down the economy’s excessive
expansion or control inflation, and may result in severe dislocations in the Chinese economy. The Chinese
Government may adopt additional measures to further combat inflation, including the establishment of
freezes or restraints on certain projects or markets.
To date reforms to China’s economic system have not adversely affected the Company’s operations
and are not expected to adversely affect the Company’s operations in the foreseeable future; however,
there can be no assurance that reforms to China’s economic system will continue or that the Company will
not be adversely affected by changes in China’s political, economic, and social conditions and by changes
in policies of the Chinese Government, such as changes in laws and regulations, measures which may be
introduced to control inflation, changes in the rate or method of taxation, imposition of additional
restrictions on currency conversion and remittance abroad, reduction in tariff protection and other import
restrictions.
ENVIRONMENTAL COMPLIANCE
The Company is subject to the requirements of U.S. federal, state, local and non-U.S., including
China’s, environmental and occupational safety and health laws and regulations. These include laws
regulating air emissions, water discharge and waste management. The Company has an environmental
management structure designed to facilitate and support its compliance with these requirements globally.
Although it is the Company’s intent to comply with all such requirements and regulations, it cannot
provide assurance that it is at all times in compliance. The Company has made and will continue to make
10
CAAS 2009 ANNUA REPORT
capital and other expenditures to comply with environmental requirements, although such expenditures
were not material during the past two years. Environmental requirements are complex, change frequently
and have tended to become more stringent over time. Accordingly, the Company cannot assure that
environmental requirements will not change or become more stringent over time or that its eventual
environmental cleanup costs and liabilities will not be material.
During 2009, the Company did not make any material capital expenditures relating to environmental
compliance.
WEB SITE ACCESS TO SEC FILINGS
The Company files electronically with the SEC its annual reports on Form 10-K, quarterly reports
on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) of the Securities Exchange Act
of 1934. The SEC maintains an Internet site that contains reports, proxy information and information
statements, and other information regarding issuers that file electronically with the SEC. The address of
that website is http://www.sec.gov. The materials are also available at the SEC’s Public Reference Room,
located at 100 F Street, Washington, D.C. 20549. The public may obtain information through the public
reference room by calling the SEC at 1-800-SEC-0330.
ITEM 2. DESCRIPTION OF PROPERTY
The Company’s headquarters are located at No. 1 Henglong Road, Yu Qiao Development Zone
Shashi District, Jing Zhou City Hubei Province, the PRC. Set forth below are the manufacturing facilities
operated by each joint venture. The Company has forty to fifty years long-term rights to use the lands and
buildings.
Name of
Entity
Product
Total Area
(M 2 )
Building Area
(M 2 )
Original Cost of
Equipment
Site
Henglong Automotive Parts
225,221
20,226 $
32,085,220
Jiulong
Shenyang
Power Steering Gear
Automotive Steering
Gear
13,393
13,707
-
39,478
23,728
18,907,019
35,354
5,625
3,835,851
Zhejiang Steering Pumps
100,000
32,000
7,162,455
USAI
Wuhu
Jielong
Hengsheng
Total
Sensor Modular
Automotive Steering
Gear
Electric Power
Steering
Automotive Steering
Gear
-
-
717,454
83,700
12,600
1,888,650
105,735
-
1,063,098
170,520
773,401
26,000
133,886 $
5,799,143
71,458,890
Jingzhou City, Hubei
Province
Wuhan City, Hubei
Province
Jingzhou City, Hubei
Province
Shenyang City, Liaoning
Province
Zhuji City, Zhejiang
Province
Wuhan City, Hubei
Province
Wuhu City, Anhui
Province
Wuhan City, Hubei
Province
Jingzhou City, Hubei
Province
The Company is not involved in investments in (i) real estate or interests in real estate, (ii) real estate
mortgages, and (iii) securities of or interests in persons primarily engaged in real estate activities, as all of
its land rights are used for production purposes.
11
CAAS 2009 ANNUA REPORT
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending or to the best of the Company’s knowledge, any
threatened legal proceedings. No director, officer or affiliate of the Company, or owner of record of more
than five percent, 5%, of the securities of the Company, or any associate of any such director, officer or
security holder is a party adverse to the Company or has a material interest adverse to the Company in
reference to pending litigation.
ITEM 4. RESERVED
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
(a) MARKET PRICES OF COMMON STOCK
The Company’s common stock has been traded on the NASDAQ Capital Market under the symbol
“CAAS”. The high and low bid intra-day prices of the common stock in 2009 and 2008 were reported on
NASDAQ for the time periods indicated on the table below. Accordingly, the table below contains the
high and low bid closing prices of the common stock as reported on the NASDAQ for the time periods
indicated.
Price Range
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
(b) STOCKHOLDERS
2008
2009
Low
High
$
3.94 $
6.64
9.90
22.49 $
$
High Low
7.98 $
7.45
6.69
4.20 $
2.30 $
3.35
5.14
8.00 $
4.40
4.85
3.88
2.01
The Company’s common shares are issued in registered form. Securities Transfer Corporation in
Frisco, Texas is the registrar and transfer agent for the Company’s common stock. As of February 27, 2010,
there were 27,046,244 shares of the Company’s common stock outstanding and the Company had
approximately 76 stockholders of record.
(c) DIVIDENDS
The Company has never declared or paid any cash dividends on its common stock and it does not
anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain
future earnings, if any, to finance operations and the expansion of its business. Any future determination to
pay cash dividends will be at the discretion of the Board of Directors and will be based upon the
Company’s financial condition, operating results, capital requirements, plans for expansion, restrictions
imposed by any financing arrangements and any other factors that the Board of Directors deems relevant.
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The securities authorized for issuance under equity compensation plans at December 31, 2009 are as
follows:
12
CAAS 2009 ANNUA REPORT
Plan category
Equity compensation plans approved
by security holders
Number of securities to
be issued upon exercise
of outstanding options
Weighted average
exercise price of
outstanding options
Number of securities
remaining available
for future issuance
2,200,000 $
3.62
1,766,150
The stock option plan was approved in the 2004 Annual Meeting of Stockholders, and the maximum
common shares for issuance under this plan are 2,200,000 with a term of 10 years.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following is management’s discussion and analysis of certain significant factors which have
affected the Company’s financial position and operating results during the periods included in the
accompanying consolidated financial statements, as well as information relating to the plans of its current
management. This report includes forward-looking statements. These statements relate to future events or
the Company’s future financial performance. The Company has attempted to identify forward-looking
statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continue,” “could,”
“estimates,” “intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the negative of these
terms or other comparable terminology. Such statements are subject to certain risks and uncertainties,
including the matters set forth in this report or other reports or documents the Company files with the
Securities and Exchange Commission from time to time, which could cause actual results or outcomes to
differ materially from those projected. Although the Company believes that the expectations reflected in
the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of
activity, performance or achievements. Undue reliance should not be placed on these forward-looking
statements which speak only as of the date hereof. The Company undertakes no obligation to update these
forward-looking statements. The Company’s expectations are as of the date this Form 10-K is filed, and
the Company does not intend to update any of the forward-looking statements after the date this Annual
Report on Form 10-K is filed to confirm these statements to actual results, unless required by law.
The following discussion and analysis should be read in conjunction with the Company’s
consolidated financial statements and the related notes thereto and other financial information contained
elsewhere in this Form 10-K.
GENERAL OVERVIEW:
China Automotive Systems, Inc., including, when the context so requires, its subsidiaries and the
subsidiaries’ interests in the Sino-foreign joint ventures described below, is referred to herein as the
“Company”. The Company, through its Sino-foreign joint ventures, engages in the manufacture and sales
of automotive systems and components in the People’s Republic of China, the “PRC” or “China”, as
described below.
Genesis, a company incorporated on January 3, 2003 under The Companies Ordinance in Hong
Kong as a limited liability company, is a wholly-owned subsidiary of the Company.
Henglong USA Corporation, “HLUSA”, which was incorporated on January 8, 2007 in Troy,
Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive
parts in North America, and provides after sales service and research and development support
accordingly.
13
CAAS 2009 ANNUA REPORT
The Company owns the following aggregate net interests in eight Sino-foreign joint ventures
organized in the PRC as of December 31, 2009 and 2008.
Name of Entity
Percentage Interest
2009 2008
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong”
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong”
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang”
Zhejiang Henglong & Vie Pump-Manu Co., Ltd., “Zhejiang”
Universal Sensor Application Inc., “USAI”
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong”
Wuhu HengLong Auto Steering System Co., Ltd., “Wuhu”
Jingzhou Hengsheng Automotive System Co., Ltd, “Hengsheng”
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center”
80.00%
81.00%
70.00%
51.00%
83.34%
85.00%
77.33%
80.00%
81.00%
70.00%
51.00%
83.34%
85.00%
77.33%
100.00% 100.00%
80.00%
-
Jiulong was established in 1993 and is mainly engaged in the production of integral power steering
gear for heavy-duty vehicles.
Henglong was established in 1997 and is mainly engaged in the production of rack and pinion power
steering gear for cars and light duty vehicles.
On March 31, 2008, the Company’s wholly-owned subsidiary, Genesis, and Wiselink, both
controlled by Hanlin Chen and his family, entered into an equity transfer agreement, the “Henglong
Agreement”, pursuant to which Wiselink transferred and assigned its 35.5% equity interest in Henglong,
one of the Company’s currently consolidated subsidiaries, to Genesis for a total consideration of
$32,090,000. The Company now holds an 80% equity interest in Jingzhou Henglong.
In December 2009, Henglong, a subsidiary of Genesis, formed Jingzhou Henglong Automotive
Technology (Testing) Center, (“Testing Center”), which is mainly engaged in research and development of
new products. The registered capital of Testing Center is RMB 30,000,000 ($4,393,544 equivalent).
Under the terms of the Henglong Agreement, Genesis is deemed to be the owner of Henglong
commencing from January 1, 2008. The Henglong Acquisition is considered as a business combination of
companies under common control and is being accounted for in a manner of pooling of interests.
Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.
Zhejiang was established in 2002 to focus on power steering pumps.
USAI was established in 2005 and is mainly engaged in production and sales of sensor modules.
In 2008, Genesis and Shanghai Hongxi Investment Inc., “Hongxi”, the other shareholder of USAI,
agreed to increase USAI’s capital to $2,600,000 from $1,800,000. The increased capital was wholly
funded by Genesis. Therefore, the capital contributed by Genesis in USAI increased to $2,166,900 from
$1,366,900, accounting for 83.34% of the total capital; while the capital contributed by Hongxi remained
unchanged, accounting for 16.66% of the total capital.
Wuhu was established in 2006 and is mainly engaged in production and sales of automobile steering
systems.
Jielong was established in 2006 and is mainly engaged in production and sales of electric power
steering, “EPS”.
Hengsheng was established in 2007 and is mainly engaged in production and sales of automobile
steering systems.
14
CAAS 2009 ANNUA REPORT
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain items from the Company's
Consolidated Statements of Income expressed as a percentage of net sales and the percentage change in the
dollar amount of each such item from that in the indicated previous year.
Percentage on net sales
Change in percentage
Year Ended December 31 Year Ended December 31
2009
2008
2009 vs 2008
Net sales
Cost of sales
Gross profit
Gain on other sales
Less: operating expenses
Selling expenses
General and administrative
expenses
R & D expenses
Depreciation and
amortization
Total operating expenses
Operating income
Other income
Financial expenses
Gain (loss) on change in fair
value of derivative
Income before income tax
Income tax
Net income
Net income attributable to
noncontrolling interest
Net income attributable to
Parent company
100.00 %
71.6
28.4
0.3
7.1
4.8
1.0
1.2
14.0
14.7
0.1
(0. 8 )
0.2
14.2
2.0
12.2
3.1
9.1 %
100.00%
71.0
29.0
0.4
6.7
7.4
1.4
3.6
19.1
10.3
0.7
(0.8)
0.6
10.8
0.1
10.7
3.1
7.6%
RESULTS OF OPERATIONS: 2009 VERSUS 2008
NET SALES
The increase in net product sales of the Company is summarized as follows:
Years Ended December 31
56.6 %
57.8
53.8
14.2
66.4
1.2
13.5
(4 9.5 )
15.4
1 22 .6
(91.1 )
53.2
(37.4 )
105.7
2,649.4
78.7
55.2
88.3 %
2009
2008
Steering gear for commercial vehicles $ 59,404,649 $ 40,457,552 $
Steering gear for passenger vehicles 172,004,635 107,219,598
23,810,72 2 15,094,357
Steering pumps
Sensor module
407,779
$255,597,553 $ 163,179,286 $
Total
377,547
Increase (Decrease) Percentage
18,947,09 7
64,785,037
8,716,36 5
(30,232 )
92,418,26 7
46.8 %
60.4
57.7
(7.4 )
56.6 %
For the year ended December 31, 2009, net product sales were $255,597,553, compared to
$163,179,286 for the year ended December 31, 2008, an increase of $92,418,267, or 56.6%. The increase
in net sales in 2009 as compared to 2008 was a result of following factors:
(1) Increases in the income of Chinese residents and the growth of purchasing power led to an
increase in the sales of passenger vehicles, which led to the increase in the Company’s sales of steering
gear and pumps. During 2009, the output and sales volume of passenger vehicles in China reached
15
CAAS 2009 ANNUA REPORT
10,383,800 and 10,331,300 units respectively, with an increase of 54.1% and 52.9% compared with last
year. As a result, net sales of steering gear and pumps for domestic passenger vehicles for the year ended
December 31, 2009 increased 60.4% and 57.7% over the year 2008, respectively.
(2) Increased national economic investments in China led to an increase in sales of commercial
vehicles, which led to the increase in the Company’s sales of steering gear for commercial vehicles.
During 2009, the output and sales volume of commercial vehicles reached 3,407,200 and 3,313,500 units
respectively with an increase of 33.0% and 28.4% over last year. For the year ended December 31, 2009,
net sales of steering gear and accessories for commercial vehicles increased by 46.8% compared to the
year 2008.
(3) The Company has raised the technological contents in, and production efficiency of, its products
as a result of technological improvement to its production lines, allowing the Company to reduce its costs
and, correspondingly, its sales prices which led to increased sales volumes.
COST OF GOODS SOLD
For the year ended December 31, 2009, the cost of goods sold was $182,929,833, compared to
$115,920,585 for the year ended December 31, 2008, an increase of $67,009,248, or 57.8%, as a result of
following factors:
(1) The increased volume of sales led to an increased cost of goods sold. During 2009, the sales of
the Company’s main products, steering gear and accessories for passenger vehicles, steering gear and
accessories for commercial vehicles, and steering pumps for commercial vehicles, increased 60.4%, 46.8%
and 57.5% compared to 2008, respectively. Accordingly, the cost of goods sold in 2009 has increased
$80,303,098, including $73,494,796 for steering gear and accessories for passenger vehicles and
commercial vehicles, $6,762,545 for steering pumps, and $45,757 for sensor modular.
(2) The decreased unit cost for the Company’s main products led to a decrease in cost of goods sold.
During 2009, by optimizing product design and production techniques, the costs of goods sold was
decreased by $13,413,934 compared to 2008, including $13,341,889 for steering gear and accessories for
passenger and commercial vehicles, and $72,045 for steering pumps.
(3) As the output of sensor modular has not yet started mass production, and the production process
has not been stable, the cost of goods sold for sensor modular in 2009 increased $120,084 compared to the
year 2008.
GROSS PROFIT FROM PRODUCT SALES
For the year ended December 31, 2009, the gross profit was $72,667,720, compared to $47,258,701
for the year ended December 31, 2008, an increase of $25,409,019, or 53.8%, as a result of following
factors:
The increase in unit sales contributed to an increase of $31,458,666 in gross profit, while decreases
in selling prices resulted in a decrease of $19,343,499 in gross profit, and reductions in unit costs resulted
in an increase of $13,293,852 in gross profit.
Gross margin was 28.4% for the year ended December 31, 2009, a decrease of 0.6% from 29% for
the same period of 2008, because the decline in selling prices was higher than the unit cost reductions. The
Company took the following measures in 2009 to increase gross profit levels.
(1) Reduce manufacturing costs by optimizing product design and production techniques. During
2009, the Company’s technical personnel improved product design and production techniques to reduce
wastage in the production process and improve manufacturing efficiency, thus reducing costs.
(2) Reduce the purchase price of sub-components.
16
CAAS 2009 ANNUA REPORT
GAIN ON OTHER SALES
Gain on other sales consisted of net amount retained from sales of materials and other assets. For the
year ended December 31, 2009, gain on other sales were $838,505, compared to $734,063 for the year
ended December 31, 2008, an increase of $104,442, or 14.2%, due to increased sales of materials.
SELLING EXPENSES
For the years ended December 31, 2009 and 2008, selling expenses are summarized as follows:
Salaries and wages
Supplies expense
Travel expense
Transportation expense
After sales service expense
Rent expense
Office expense
Advertising expense
Business entertainment expense
Insurance expense
Other expense
Total
Years Ended December 31
2008
2009
62,967
402,708
$ 2,563,384 $ 1,413,708 $
138,489
489,872
3,867,133 2,158,793
10,029,522 5,861,783
384,167
152,179
10,009
219,787
16,917
23,957
$ 18,085,377 $10,869,661 $
699,206
192,947
14,755
246,093
5,931
731
Increase (Decrease) Percentage
1,149,676
(75,522 )
(87,16 4 )
1,708,34 0
4,167,739
315,039
40,768
4,746
26,30 6
(10,986 )
(23,226 )
7,215,716
81.3 %
(54.5 )
(17.8 )
79.1
71.1
82.0
26.8
47.4
12.0
(64.9 )
(96.9 )
66.4 %
Selling expenses were $18,085,377 for the year ended December 31, 2009, compared to
$10,869,661 for 2008, an increase of $7,215,71 6 , or 66.4%. Major items that increased by more than
$100,000 in 2009 compared to 2008 were salaries and wages, transportation expense, after sales service
expense, and rent expenses.
The salaries of salesmen were indexed with their selling performance. During 2009, sales had a
56.6% increase over 2008, correspondingly increasing the salaries of salesmen.
The increase in transportation expense was due to increased sales and a rise in the price of oil, which
led to increases in domestic transportation prices.
After sales service expense is the cost of product warranties that the Company estimated, that is, the
Company has committed to provide repair and maintenance services and other services, within a certain
period after the Company’s products were sold. Such estimates of product warranties were based on,
among other things, historical experience, sales volume, material expenses, service and transportation
expenses arising from the manufactured product. Estimates will be adjusted on the basis of actual expenses
provided to repair and maintenance services and other services. After sales service expense for the year
ended December 31, 2009 increased by $4,167,739, or 71.1%, compared with the last year, mainly due to
the increased product sales and the increased after sales service offices.
The increase in rent expense was due to increased marketing activities, which led to increases in
product warehouses and offices.
GENERAL AND ADMINISTRATIVE EXPENSES
For the years ended December 31, 2009 and 2008, general and administrative expenses are
summarized as follows:
17
CAAS 2009 ANNUA REPORT
Years Ended December 31
2008
Increase (Decrease) Percentage
2009
4, 43 9,
$
449,171
527,844
516,215
697,945
212,460
611 $ 3,929,989 $
487,690
551,760
611,169
656,886
363,791
2,123,071 1,667,287
108,704
66,920
690,918
989,584
194,954
1,589,236 1,624,161
153,687
$ 12,239,867 $12,097,500 $
106,433
77,587
1,120,948
120,483
99,12 0
159,743
509,622
(38,5 19 )
(23,916 )
(94,954 )
41,05 9
(151,33 1 )
455,784
(2,271 )
10,66 7
430,030
(869,101 )
(95,83 4 )
(34,925 )
6,056 )
142,367
13.0 %
(7.9)
(4.3
(15.5 )
6.3
(41.6 )
27.3
(2.1 )
15.9
62.2
(87.8 )
(49.2 )
(2.2 )
3.9
1.2 %
Salaries and wages
Travel expenses
Office expenses
Supplies expenses
Repairs expenses
Business entertainment expenses
Labor insurance expenses
Labor union dues expenses
Board of directors expense
Taxes
Provision for bad debts
Training expenses
Listing expenses*
Others expenses
Total
* Listing expenses consisted of the costs associated with legal, accounting and auditing fees for
operating a public company.
General and administrative expenses were $12,239,867 for the year ended December 31, 2009,
compared to $12,097,500 for the year ended December 31, 2008, an increase of $142,367, or 1.2%.
The expense items that increased more than $100,000 in 2009 compared to 2008 were salaries and
wages, labor insurance expenses, and tax expenses. The expense items that decreased more than $100,000
in 2009 compared to 2008 were business entertainment expenses, and provision for bad debts expenses.
The increased salaries and wages were due to increased staff and performance bonuses resulting
from enlarged business size and improved earnings.
The Company’s labor insurance expenses were pension, medicare, injury insurance, unemployment
insurance, and housing fund expenses. The increase in labor insurance expenses for 2009 was a result of an
increase in the number of employees.
The Company’s tax expense was property tax such as land use right, housing property tax, vehicle
and vessel usage license plate tax. The increase in tax expense was a result of an increase in the property
usage of the Company.
The decrease in business entertainment expenses has resulted from the control of such expenses by
the Company’s management in 2009.
The Company recorded provision for bad debts based on aging of accounts receivable. The decrease
in provision for bad debts in 2009 was mainly due to decreased receivables in excess of credit terms, as
most domestic automobile manufacturers were in good financial situation, and paid the Company under
their credit terms.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $2,561,170 for the year ended December 31, 2009,
compared to $2,255,892 for the year ended December 31, 2008, an increase of $305,278, or 13.5%.
The global automotive parts industry is highly competitive; winning and maintaining new business
requires suppliers to rapidly produce new and innovative products on a cost-competitive basis. In order to
maintain the Company’s competitiveness, the Company needs to invest in more R & D expenses. In 2009,
18
CAAS 2009 ANNUA REPORT
the Company not only developed new products for foreign OEMs, but also increased R & D expenses for
power steering gear for domestic OEMs.
DEPRECIATION AND AMORTIZATION EXPENSE
For the year ended December 31, 2009, depreciation and amortization expenses excluded from that
recorded under cost of sales were $2,955,159, compared to $5,846,290 for the year ended December 31,
2008, a decrease of $2,891,131, or 49.5%, as a result of the full depreciation of certain fixed assets of the
Company.
INCOME FROM OPERATIONS
Income from operations was $37,664,652 for the year ended December 31, 2009, compared to
$16,923,421 for the year ended December 31, 2008, an increase of $20,741,231, or 122.6%, mainly
consisting of an increase of $25,409,019, or 53.8%, in gross profit, an increase of $104,442, or 14.2%, in
net sales from materials and others, and a decrease of operating income of $4,772,230, or 15.4%, as a
result of increased operating expenses.
OTHER INCOME
Other income was $94,534 for the year ended December 31, 2009, compared to $1,067,309 for the
year ended December 31, 2008, a decrease of $972,775, or 91.1%, primarily as a result of decreased
government subsidies.
The Company’s government subsidies consisted of interest subsidy and investment subsidy. Interest
subsidy is the refund by the Chinese Government of interest charged by banks to companies which are
entitled to such subsidies. Investment subsidy is subsidy to encourage foreign investors to set up
technologically advanced enterprises in China.
During the year ended December 31, 2009, the Company received $94,534 for interest subsidy, and
no investment subsidy. During the year ended December 31, 2008, the Company’s received $264,978 for
interest subsidy, and $802,331 for investment subsidy.
Interest subsidies apply only to loan interest related to production facilities expansion. During 2006
and 2007, the Company had used this special loan to improve technologically its production line in order
to enlarge capability and enhance quality. The expansion project was completed and new facilities were
put into use at the end of 2007 and 2008, respectively.
During 2009 and 2008, the experts sent by the Chinese Government reviewed and assessed the
actual usage of technologically improved production facilities on site in order to confirm whether the
improvement has achieved its expected goal of production expansion and quality enhancement. Whether or
not a company can receive interest subsidies from the Chinese Government depends on the company’s
achieving the two goals set forth above after the technological improvement.
Chinese Government also provided incentives to foreign investors for setting up technologically
advanced enterprises in China. During 2008, Genesis, a foreign investor, has received $802,331 for
re-investment in Jiulong and Henglong with profit distribution because these two entities were
technologically advanced enterprises entitled to such subsidies.
Since such government subsidy is similar to an investment income, the Company has recorded it as
other income.
FINANCIAL EXPENSES
Financial expenses were $ 1,986,200 for the year ended December 31, 2009, compared to financial
expenses of $1,296,218 for the year of 2008, an increase of $689,982, or 53.2%, primarily as a result of a
decrease in interest expense of $152,383, an increase in convertible notes discount amortization of
19
CAAS 2009 ANNUA REPORT
$294,013 and an increase in bank service fee of $19,659, as well as a decrease of foreign currency
exchange gain of $295,282 and an increase in notes discount expenses of $233,411.
The decrease in interest expense was due to decreased bank loan and convertible notes. The increase
in convertible note discount amortization was due to the redemption of three Convertible Notes with a total
principal amount of $5,000,000 on March 17, 2009, with unamortized convertible note discount being
written-off on the redemption date. The increase in notes discount expenses was mainly due to Chinese
bank’s increase of its notes discount rate in 2009.
GAIN ON CHANGE IN FAIR VALUE OF DERIVATIVE
During the year ended December 31, 2009, the gain on change in fair value of the derivatives
embedded in the convertible notes was $624,565, as compared to $998,014 for the year ended December
31, 2008, a decrease of $373,449, or 37.4%
During the year ended December 31, 2009, the decrease of change in fair value of the derivatives
resulted from reduced gain on adjustment of fair value of liabilities in connection with convertible notes,
and increased gain on change in fair value of compound derivatives embedded in the convertible notes.
During 2008, the opening fair value of warrant liabilities on February 15, 2008 was $798,626,
closing fair value of warrant liabilities on December 31, 2008 was $1,977, and gain on change in fair value
of warrant liabilities was $796,649. The significant reduction in fair value of warrant liabilities was due to
the reduced remaining term and the significant difference between trading price of the Company’s
common stock ($3.39) and opening trading price ($6.09). During 2009, the opening fair value of warrant
liabilities was $1,977, closing fair value of warrant liabilities on December 31, 2009 was $0. Since the
trading price of the Company’s common stock ($3.30) on exercise date (February 15, 2009) was
significantly below the contractual exercise price ($8.55), no warrant was exercised. The warrant has
expired, and its fair value was zero, and the gain on change in fair value was $1,977. (See Note 15)
During the year ended December 31, 2009, the gain on change in fair value of compound derivatives
embedded in the convertible notes was $622,588, compared to $201,365 for the year ended December 31,
2008, an increase of $421,223, mainly as a result of the recent stock market recovery. The Company’s
stock price rose dramatically. On December 31, 2009, the Company’s stock price has risen to $18.71, from
$3.39 on December 31, 2008, which is 2.64 times the contractual exercise price ($7.08). The convertible
note holders will gain more potential income if they convert or continue to hold than redeem. Therefore,
the Company estimated the probability of redemption was low, which led to a decrease in the fair value of
derivative liabilities. (See Note 14)
INCOME BEFORE INCOME TAXES
Income before income taxes was $36,397,551 for the year ended December 31, 2009, compared to
$17,692,526 for the year ended December 31, 2008, an increase of $18,705,025, or 105.7%, consisting of
increased income from operations of $20,741,231, decreased other income of $972,775, decreased finance
expenses of $689,982, and decreased gain on change in fair value of derivative of $373,449.
INCOME TAXES
Income tax expense was $5,110,475 for the year ended December 31, 2009, compared to $185,877
for the year ended December 31, 2008, an increase of $4,924,598, mainly because of:
(1) Increased taxable income resulted in an increased tax of $2,650,717.
(2) The Company has received $1,053,092 of government income tax benefit during the year ended
December 31, 2009, as compared to $2,762,823 for the year of 2008, a decrease of $1,709,731. The
domestically
Chinese Government
manufactured equipment in 2009.
for purchase
cancelled
income
benefit
the
tax
of
20
CAAS 2009 ANNUA REPORT
(3) Decrease in average income tax rate resulted in decreased income tax expenses of $333,882.
(4) An increase in provision for impairment of deferred income taxes assets led to an increased
income tax expenses of $757,359.
(5) Other adjustments led to an increased income tax expenses of $140,673.
NET INCOME
Net income was $31,287,076 for the year ended December 31, 2009, compared to $17,506,649 for
the year ended December 31, 2008, an increase of $13,780,427, or 78.7%, consisting of increased income
before income taxes of $18,705,025, or 105.7%, and a decrease of $4,924,598 due to increased income tax
expenses.
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
The Company recorded net income attributable to noncontrolling interests of $7,872,813 for the year
ended December 31, 2009, compared to $5,071,408 for the year ended December 31, 2008, an increase of
$2,801,405, or 55.2%.
The Company owns different equity interests in eight Sino-foreign joint ventures, through which it
conducts its operations. All the operating results of these eight Foreign Investment Enterprises were
consolidated in the Company’s financial statements as of December 31, 2009 and 2008. The Company
records the net income attributable to noncontrolling interests of the respective Sino-foreign joint ventures
for each period.
In 2009, net income attributable to noncontrolling interests has increased compared to 2008,
primarily resulting from increased net income.
NET INCOME ATTRIBUTABLE TO PARENT COMPANY
Net income attributable to parent company was $23,414,263 for the year ended December 31, 2009,
compared to $12,435,241 for the year ended December 31, 2008, an increase of $10,979,022, or 88.3%,
consisting of increased net income of $13,780,427, or 78.7%, and an increased net income attributable to
noncontrolling interests of $2,801,405, or 55.2%.
LIQUIDITY AND CAPITAL RESOURCES:
Capital resources and use of cash
The Company has historically financed its liquidity requirements from a variety of sources,
including short-term borrowings under bank credit agreements, bankers’ acceptance, issuances of capital
stock and internally generated cash. As of December 31, 2009, the Company had cash and cash equivalents
of $43,480,176, compared to $37,113,375 as of December 31, 2008, an increase of $6,366,801, or 17.2%.
The Company had working capital of $62,342,953 as of December 31, 2009, compared to
$42,032,901 as of December 31, 2008, an increase of $20,310,052, or 48.3%.
Financing activities:
The Company’s main financing activities were bank loans and banker’s acceptance bill facilities. In
such financing activities, the Company’s banks require the Company to sign documents to repay such
facilities within one year. On the condition that the Company can provide adequate mortgage security and
has not violated the terms of the line of credit agreement, such one year facilities can be extended for
another year.
21
CAAS 2009 ANNUA REPORT
The Company had bank loans maturing in less than one year of $5,125,802 and bankers’
acceptances of $38,041,602 as of December 31, 2009.
The Company currently expects to be able to obtain similar bank loans and bankers’ acceptance bills
in the future if it can provide adequate mortgage security following the termination of the above mentioned
agreements (See the table in section (a) Bank loan). If the Company is not able to do so, it will have to
refinance such debt as it becomes due or repay that debt to the extent it has cash available from operations
or from the proceeds of additional issuances of capital stock. Owing to depreciation, the value of the
mortgages securing the above-mentioned bank loans and banker's acceptance bills will be devalued by
approximately $7,965,902. If the Company wishes to obtain the same amount of bank loans and banker's
acceptance bills, it will have to provide $7,965,902 additional mortgages as of the maturity date of such
agreements (See the table in section (a) Bank loan). The Company still can obtain a reduced line of credit
with a reduction of $3,712,000, which is 46.6% (the mortgage rates) of $7,965,902, if it cannot provide
additional mortgages. The Company expects that the reduction of bank loans will not have a material
adverse effect on its liquidity.
On February 15, 2008, the Company issued $35,000,000 of convertible notes to Lehman Brothers
Commercial Corporation Asia Limited, LBCCA, and YA Global Investments, L.P., YA Global, maturing
in 5 years. According to the terms of the Senior Convertible Notes (as described in Note 13 of the financial
statement), convertible notes may be required to be repaid in cash on or prior to their maturity. For
example, Convertible Note holders are entitled to require the Company redeem all or any portion of the
Convertible Notes in cash, if the Weighted Average Price (WAP) for twenty (20) consecutive trading days
is less than $3.187 at any time following February 15, 2009, the “WAP Default”, by delivering written
redemption notice to the Company within five (5) business days after the receipt of the Company’s notice
of the WAP Default.
As a result of the 2008 and 2009 worldwide financial turmoil, the Company’s stock’s WAP for
twenty (20) consecutive trading days ended on March 16, 2009 was below $3.187. On March 17, 2009, the
Company delivered two WAP Default notices to the Convertible Note holders. On March 27, 2009, the
Company received a letter dated March 26, 2009 via fax from YA Global, one of the Convertible Note
holders, electing to require the Company to redeem all the three Convertible Notes it held in the
total principal amount of $5,000,000, together with interest, late charges, if any, and the Other Make
Whole Amount as defined in Section 5(d) of the Convertible Notes. After negotiation, on April 15, 2009,
the Company paid YA Global $5,041,667 for the total principal amount ($5,000,000), together with
interest and late charges. YA Global has waived its entitlement to the Other Make Whole Amount.
Following the WAP Default notices, the Company received a letter from the provisional liquidator
acting on behalf of LBCCA, the “LBCCA Liquidator”, requesting that it be granted an extension until
April 24, 2009 to consider its rights under the Convertible Notes. The Company granted an extension to
April 15, 2009. The LBCCA Liquidator requested another extension to April 24, 2009. On April 24, 2009,
LBCCA’s lawyers sent three Holder Redemption Notices via fax electing to redeem the entire outstanding
principal of $30,000,000, together with interest, late charges, if any, and the Other Make Whole Amount,
to be paid on July 23, 2009. The Company discussed settlement with the LBCCA Liquidator, and on or
about July 22, 2009, the Company and the LBCCA Liquidator agreed to extend the applicable holder
mandatory redemption date for two months to September 23, 2009 to give more time to the Company and
the LBCCA Liquidator to pursue settlement discussion. The Company received a letter dated September
22, 2009 from the LBCCA Liquidator stating that upon the Company’s acceptance of the revocation, all
holder redemption notices dated April 24, 2009 shall be immediately revoked as if they were never issued,
and the letter and the revocation did not purport to amend, restate or supplement any other terms and
conditions under the three Notes and Securities Purchase Agreement dated 1 February 2008 between the
Company and the LBCCA Liquidator. The Company accepted such revocation on September 23, 2009.
The Company’s ability to redeem the Convertible Notes and meet its payment obligations depends
on its cash position and its ability to refinance or generate significant cash flow, which is subject to general
economic, financial and competition factors and other factors beyond the Company’s control. The
Company cannot assure you that it has sufficient funds available or will be able to obtain sufficient funds
to meet its payment obligations under the Convertible Notes, and the Company’s redemption of the
22
CAAS 2009 ANNUA REPORT
Convertible Notes would result in a material adverse effect on its liquidity and capital resources, business,
results of operations or financial condition.
(a) Bank loans
As of December 31, 2009, the principal outstanding under the Company’s credit facilities and lines
of credit was as follows:
Comprehensive credit
facilities
Comprehensive credit
facilities
Comprehensive credit
facilities
Comprehensive credit
facilities
Comprehensive credit
facilities
Comprehensive credit
facilities
Comprehensive credit
facilities
Comprehensive credit
facilities
Comprehensive credit
facilities
Total
Bank
Due Date
Amount
available
Amount
borrowed
Bank of China
Dec-10 $ 8,054,831 $ 6,639,393
China Construction Bank
Oct-10 8,787,089 4,384,757
CITIC Industrial Bank
Jul-10
12,079,757 12,079,757
Shanghai Pudong Development Bank
Oct-10 6,590,317
-
Jingzhou Commercial Bank
Oct-10 9,519,346 8,281,685
Industrial and Commercial Bank of China Sep-10 2,929,030
342,697
Bank of Communications Co., Ltd
Sep-10 3,392,502 3,392,502
Guangdong Development Bank
Oct-10 4,393,544 1,991,740
China Merchants Bank Co. Ltd
Sep-10 6,054,873 6,054,873
$ 61,801,289 $43,167,404
The Company may request the banks to issue notes payable or bank loans within its credit line using
a 364-day revolving line.
The Company refinanced its short-term debt during early 2009 at annual interest rates of 4.86% to
5.31%, and maturity terms of six to twelve months. Pursuant to the refinancing arrangement, the Company
pledged $40,137,786 of equipment, land use rights and buildings as security for its comprehensive credit
facility with the Bank of China; pledged $13,510,237 of land use rights and buildings as security for its
comprehensive credit facility with Shanghai Pudong Development Bank; pledged $16,644,445 of land use
rights and equipment as security for its revolving comprehensive credit facility with Jingzhou Commercial
Bank; pledged $2,642,704 of land use rights and buildings as security for its comprehensive credit facility
with Industrial and Commercial Bank of China; pledged $13,475,528 of accounts receivable, land use
rights and buildings as security for its comprehensive credit facility with China Construction Bank;
pledged $17,505,961 of land use rights, notes receivable and buildings as security for its comprehensive
credit facility with China CITIC Bank; pledged $5,390,941 of land use rights and buildings as security for
its comprehensive credit facility with China Merchants Bank; pledged $6,499,795 of land use rights and
buildings as security for its comprehensive credit facility with Bank of Communications Co., Ltd,; and
pledged $1,991,740 of accounts receivable as security for its comprehensive credit facility with
Guangdong Development Bank.
(b) Financing from investors:
On February 15, 2008, the Company sold $30,000,000 and $5,000,000 convertible notes to Lehman
Brothers Commercial Corporation Asia Limited, LBCCA, and YA Global Investments, L.P., YA Global,
respectively, with a scheduled maturity date of February 15, 2013 and an initial conversion price for
conversion into the Company’s common stock of $8.8527 per share.
23
CAAS 2009 ANNUA REPORT
On April 15, 2009, the Company paid YA Global $5,041,667 to redeem the total principal amount
($5,000,000), together with interest, and late charges. YA Global has waived its entitlement to the Other
Make Whole Amount.
Cash Requirements:
The following table summarizes the Company’s expected cash outflows resulting from financial
contracts and commitments. The Company has not included information on its recurring purchases of
materials for use in its manufacturing operations. These amounts are generally consistent from year to year,
closely reflecting the Company’s levels of production, and are not long-term in nature, which are less than
three months.
Payment Due Dates
Total
Less than 1
year
$ 5,125,802 $ 5,125,802 $
38,041,602 38,041,602
30,000,000 30,000,000
1-3 years 3-5 years
- $
- $
-
-
-
-
More than 5
years
Short-term bank loan
Notes payable
Convertible notes payable
Other contractual purchase commitments,
including information technology
Total
$ 83,956,029 $
3,173,777 $ 782,252 $
Short-term bank loans:
10,788,625 10,006,373 782,252
8
-
- $
-
-
-
-
-
The following table summarizes the contract information of short-term borrowings between the
banks and the Company as of December 31, 2009.
Bank
Bank of China
China Merchants Bank
Guangdong
Development Bank
Borrowing
Date
Purpose
Working
Capital 10-Nov-09
Working
Capital 5-May-09
Working
Capital 18-Sep-09
Total
Borrowing
Term
(Year)
Annual
Percentage
Rate
Date of
Interest
Payment
Date of
payment
Amount
Payable on
Due Date
1
1
0.5
5.31 %Pay monthly 10-Nov-10 $ 2,196,772
5.31 %Pay monthly 5-Apr-10 2,196,772
4.86 %Pay monthly 24-Mar-10 732,258
$ 5,125,802
The Company must use the loans for the purpose described in the table. If the Company fails, it will
be charged a penalty interest at 100% of the specified loan rate. The Company has to pay interest at the
interest rate described in the table on the 20th of each month. If the Company fails, it will be charged a
compounded interest at the specified rate. The Company has to repay the principal outstanding on the
specified date in the table. If it fails, it will be charged a penalty interest at 50% of the specified loan rate.
Management believes that the Company had complied with such financial covenants as of December 31,
2009, and will continue to comply with them.
The following table summarizes the contract information of issuing notes payable between the banks
and the Company as of December 31, 2009:
24
Purpose
Working Capital
Working Capital
Working Capital
Working Capital
Working Capital
Working Capital
Total
CAAS 2009 ANNUA REPORT
Term (Month) Due Date
Amount Payable on Due
Date
3-6
3-6
3-6
3-6
3-6
3-6
Jan-10 $
Feb-10
Mar-10
Apr-10
May-10
Jun-10
$
3,727,058
5,822,912
6,133,827
5,592,757
6,802,671
9,962,377
38,041,602
The Company must use the loan for the purpose described in the table. If it fails, the banks will no
longer issue the notes payable, and it may have an adverse effect on the Company’s liquidity and capital
resources. The Company has to deposit sufficient cash in the designated account of the bank on the due
date of notes payable for payment to the suppliers. If the bank has advanced payment for the Company, it
will be charged a penalty interest at 150% of the specified loan rate. Management believes that the
Company had complied with such financial covenants as of December 31, 2009, and will continue to
comply with them.
The Company had approximately $10,788,625 of capital commitment as of December 31, 2009,
arising from equipment purchases for expanding production capacity. The Company intends to pay
$10,006,373 in 2010 using its working capital. Management believes that it will not have a material
adverse effect on the Company’s liquidity.
Cash flows:
(a) Operating activities
Net cash generated from operations during the year ended December 31, 2009 was $34,956,534,
compared with $16,373,966 for the year of 2008, an increase of $18,582,568, primarily due to increased
net income.
During the year ended December 31, 2009, the most important factor of cash outflow of operation
activities is increased accounts receivables, notes receivables, and pledged cash deposits.
First, cash outflow caused by the increased accounts receivable was about $44,000,000, mainly due
to increased sales in 2009 than in 2008. The credit terms on sale of goods between customers and the
Company generally range from 3 - 4 months, which resulted in increased accounts receivable as sales
increased. This is a normal capital circulation and the Company believes that it will not have a material
adverse effect on future cash flows. Second, cash outflow caused by increased notes receivable was about
$15,000,000, mainly due to the Company having sufficient working capital, thus having less notes
receivable discounted during this period. Since the notes receivable were based on bank credit standing,
they may turn into cash any time the Company elects. Therefore, the increase of notes receivable will not
have a material adverse effect on the Company’s future operating activities. Third, increased pledged cash
deposits caused cash outflow of $6,000,000. In order to save interest expenses, the Company arranged
interest free banker’s acceptance bill facilities with various banks to facilitate purchasing activities to pay
purchase expenditure. Such banker’s acceptance bill facilities required 30%-40% pledged rate for cash
deposits, which led to an increased pledged cash deposits for increased purchase expenditure in 2009 than
2008.
(b) Investing activities:
The Company expended net cash of $17,335,687 in investment activities during the year ended
December 31, 2009, as compared to $22,356,060 during the year of 2008, a decrease of $5,020,373, as a
result of the following factors:
25
CAAS 2009 ANNUA REPORT
First, as in 2008, the Company invested cash for equipment purchases and building facilities to
expand production to meet market needs. Cash used for equipment purchases and building facilities in
2009 and 2008 were $17,498,957 and $12,245,383, respectively.
Second, the Company acquired a 35.5% equity interest in Henglong, one of the Company’s
Joint-Ventures in 2008, while there was no such investing activity in 2009.
On March 31, 2008, the Company’s wholly-owned subsidiary, Genesis and Wiselink, both
controlled by Hanlin Chen and his family, entered into an equity transfer agreement, pursuant to which
Wiselink transferred and assigned its 35.5% equity interest in Henglong, one of the Company’s currently
consolidated subsidiaries, to Genesis for a total consideration of $32,090,000. The Company now holds an
80% equity interest in Henglong.
Under the terms of the Agreement, the Consideration was paid as follows: $10,000,000 cash was
paid by Genesis to Wiselink on April 30, 2008, and the balance of the purchase price, $22,090,000, was
paid by issuance of 3,023,542 shares of common stock of the Company, in its capacity as the 100% parent
company of Genesis.
(c) Financing activities
During the year ended December 31, 2009, the Company expended net cash of $11,290,625 in
financing activities, compared to obtaining net cash of $21,981,953 through financing activities for the
same period of 2008, a decrease of $33,272,578 as a result of the following factors:
During the year ended December 31, 2008, the Company sold $30,000,000 and $5,000,000 of
convertible notes to Lehman Brothers Commercial Corporation Asia Limited, and YA Global Investments,
L.P., respectively. During the same period in 2009, there is no such financing activity.
The Company repaid YA Global $5,000,000 for its convertible notes upon its request during the
year ended December 31, 2009.
During the year 2009 and 2008, the Company had sufficient working capital from its operating
activities. To save interest expenses, the Company repaid bank loans of $2,196,367 and $7,567,697 during
the year 2009 and 2008, respectively.
OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2009 and 2008, the Company did not have any transactions, obligations or
relationships that could be considered off-balance sheet arrangements.
COMMITMENTS AND CONTINGENCIES
The following table summarizes the Company’s contractual payment obligations and commitments
as of December 31, 2009:
Payment Obligations by Period
Obligations for service agreements $
Obligations for purchasing
agreements
Total
2011
2010
110,000 $ 110,000 $
2012
2013
Thereafter Total
— $
220,000
— $
9,896,373 672,252
$10,006,373 $ 782,252 $
—
— $
— 10,568,625
— $10,788,625
— $
—
— $
SUBSEQUENT EVENTS
On January 24, 2010, Genesis entered into a sino-foreign equity joint venture contract with Beijing
Hainachuan Auto Parts Co., Ltd., to establish a sino-foreign joint venture company, Beijing Henglong
Automotive System Co., Ltd. “Beijing Henglong”, to design, develop and manufacture both hydraulic and
26
CAAS 2009 ANNUA REPORT
electric power steering systems and parts. Under PRC laws, the establishment of Beijing Henglong and
the effectiveness of the equity joint venture contract are subject to the approval by the local Ministry of
Commerce and the registration of the same with the local Administration of Industries and Commerce in
Beijing. The Company expects that the approval and registration will be obtained and completed within 2
months from the date of the equity joint venture contract.
Due to the continued increase of market demand for its products, the Company decided to expand its
production capacity. On February 24, 2010, the Board of Directors of the Company decided to increase the
registered capital of Hengsheng, one of the Company’s subsidiaries, to $16,000,000 from $10,000,000.
The additional investment will be used for expansion of plant and purchase of machinery and equipment
and will be funded by the Company’s working capital balances. As of the date of this report, the additional
investment has been injected into Hengsheng.
INFLATION AND CURRENCY MATTERS
In the most recent decade, the Chinese economy has experienced periods of rapid economic growth
as well as relatively high rates of inflation, which in turn has resulted in the periodic adoption by the
Chinese Government of various corrective measures designed to regulate growth and contain inflation.
Foreign operations are subject to certain risks inherent in conducting business abroad, including
price and currency exchange controls, and fluctuations in the relative value of currencies. During 2009, the
Company has supplied products to North America and settled in cash in US dollars. As a result,
appreciation or currency fluctuation of the RMB against the US$ would increase the cost of export
products, thus adversely affect the Company’s financial performance.
In July 2005, the Chinese Government adjusted its exchange rate policy from “Fixed Rate” to
“Floating Rate”. During July 2005 to July 2008, the exchange rate between RMB and US dollars
experienced a big fluctuation, for RMB 1.00 to US$0.1205 and RMB 1.00 to US$0.1462, respectively.
Since August 2008, the exchange rate has maintained stable, and was approximately at RMB 1.00 to
US$0.1464. There can be no assurance that the exchange rate will remain stable. The Renminbi could
appreciate against the US dollar. The Company’s financial condition and results of operations may also be
affected by changes in the value of certain currencies other than the Renminbi in which the Company’s
earnings and obligations are denominated. In particular, an appreciation of the Renminbi is likely to
increase the cost of export products, thus decrease the Company’s cash flow.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 3 to the accompanying Consolidated Financial Statements under Item 15 of this Annual
Report on Form 10-K for a discussion of recent accounting pronouncements.
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
The Company prepares its consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires the use of estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Management periodically
evaluates the estimates and judgments made. Management bases its estimates and judgments on historical
experience and on various factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates as a result of different assumptions or conditions. The following
critical accounting policies affect the more significant judgments and estimates used in the preparation of
the Company’s consolidated financial statements.
The Company considers an accounting estimate to be critical if:
• It requires the Company to make assumptions about matters that were uncertain at the time it was
making the estimate, and
27
CAAS 2009 ANNUA REPORT
• Changes in the estimate or different estimates that the Company could have selected would have
had a material impact on the Company’s financial condition or results of operations.
The table below presents information about the nature and rationale for the Company critical
accounting estimates:
Balance Sheet
Caption
Critical Estimate
Item
Nature of Estimates Required
Assumptions/Approaches
Used
Key Factors
Warranty
obligations
Accrued
liabilities and
other
long-term
liabilities
Estimating warranty requires
the Company to forecast the
resolution of existing claims
and expected future claims on
products sold. VMs are
increasingly seeking to hold
suppliers responsible for
product warranties, which may
impact the Company’s
exposure to these costs.
The Company bases its
estimate on historical
trends of units sold and
payment amounts,
combined with its current
understanding of the status
of existing claims and
discussions with its
customers.
• VM(Vehicle
Manufacturer)
sourcing
• VM policy decisions
regarding warranty
claims
Valuation of
long- lived assets
and investments
Property, plant
and
equipment,
intangible
assets and
other
long-term
assets
The Company is required from
time-to-time to review the
recoverability of certain of its
assets based on projections of
anticipated future cash flows,
including future profitability
assessments of various product
lines.
The Company estimates
cash flows using internal
budgets based on recent
sales data, independent
automotive production
volume estimates and
customer commitments.
Production
• Future
estimates
• Customer
preferences and
decisions
Accounts and
notes
receivables
Provision for
doubtful accounts
and notes
receivable
•Customers’ credit
standing and financial
condition
Estimating the provision for
doubtful accounts and notes
receivable require the
Company to analyze and
monitor each customer’s credit
standing and financial
condition regularly. The
Company grants credit to its
customers, generally on an
open account basis. It will have
material adverse effect on the
Company’s cost disclosure if
such assessment were
improper.
The Company grants
credit to its customers for
three to four months based
on each customer’s current
credit standing and
financial data. The
Company assesses
allowance on an individual
customer basis, under
normal circumstances ；
the Company does not
record any provision for
doubtful accounts for
those accounts receivable
amounts which were in
credit terms. For those
receivables out of credit
terms, certain proportional
provision, namely 25% to
100%, will be recorded
based on respective
overdue terms.
Deferred
income taxes
Recoverability of
deferred tax
assets
The Company is required to
estimate whether recoverability
of its deferred tax assets is
more likely than not based on
forecasts of taxable earnings in
the related tax jurisdiction.
The Company uses
historical and projected
future operating results,
based upon approved
business plans, including a
review of the eligible
• Tax law changes
• Variances in
future projected
profitability, including
by taxing entity
28
Warrant liabilities
and compound
derivative
liabilities
The Company is required to
estimate the fair value of
warrant liabilities and
compound derivative liabilities
at conception and completion
of each reporting period
Convertible
notes payable,
discount of
convertible
note payable,
warrant
liabilities,
compound
derivative
liabilities
CAAS 2009 ANNUA REPORT
carryforward period, tax
planning opportunities and
other relevant
considerations.
The Company uses
Black-Scholes option
pricing model to determine
fair value of warrant; uses
forward cash-flow
valuation techniques to
determine fair value of
compound derivative
liabilities
interest
or
rate
such
• Expected term
• Expected volatility
• Risk-free rate
market
similar with
instrument
•Dividend distribution
•Common stock
trading price and
exercise price
•Credit risk
•Probability of certain
default event occurred
•Derivative
liabilities redeemed
on a price of exercise
plus premium
In addition, there are other items within the Company’s financial statements that require estimation,
but are not as critical as those discussed above. These include the allowance for reserves for excess and
obsolete inventory. Although not significant in recent years, changes in estimates used in these and other
items could have a significant effect on the Company’s consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) FINANCIAL STATEMENTS
The following financial statements are set forth at the end hereof.
1. Report of Independent Auditors
2. Consolidated Balance Sheets as of December 31, 2009 and 2008
3. Consolidated Statements of Earnings for the years ended December 31, 2009 and 2008
4. Consolidated Statements of Comprehensive Income for the years ended December 31, 2009 and
2008
5. Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31,
2009 and 2008
6. Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008
7. Notes to Consolidated Financial Statements
(b) Selected quarterly financial data for the past two years are summarized in the following table:
29
CAAS 2009 ANNUA REPORT
First
Quarterly Results of Operations
Third
Second
Fourth
2009
2008
2009
2008
2009
2008
2009
2008
$ 44,697,446 $ 41,467,043 $ 62,484,279 $ 46,508,340 $ 64,654,369 $ 36,936,755 $ 83,761,459 $ 38,267,148
12,197,831 12,212,370 18,501,732 14,463,004 17,639,322 9,878,223 24,328,835 10,705,104
7,092,507 6,784,664 11,660,281 5,477,887 9,654,436 3,697,416 9,257,428
963,454
3,642,509 6,180,421 8,730,000 6,429,358 10,593,273 3,742,259 8,321,294 1,154,611
1,383,697 1,750,247 2,653,651 1,685,003 2,036,762
983,480 1,798,703
652,678
2,258,812 4,430,174 6,076,349 4,744,355 8,556,511 2,758,779 6,522,591
501,933
$
$
0.08 $
0.08 $
0.18 $
0.18 $
0.23 $
0.21 $
0.19 $
0.18 $
0.32 $
0.28 $
0.10 $
0.10 $
0.24 $
0.21 $
0.01
0.00
Net Sales
Gross Profit
Operating
Income
Net Income
Net income
attributable to
noncontrolling
interest
Net income
attributable to
Parent
company
Earnings Per
Share
attributable to
Parent
company
Basic
Diluted
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, CORPORATE GOVERNANCE AND
BOARD INDEPENDENCE
The following table and text set forth the names and ages of all directors and executive officers of
the Company as of December 31, 2009. The Board of Directors is comprised of only one class. All of the
directors will serve until the next annual meeting of stockholders and until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal. Also provided herein are brief
descriptions of the business experience of each director and executive officer during the past five years and
an indication of directorships held by each director in other companies subject to the reporting
requirements under the federal securities laws.
Name
Hanlin Chen
Qizhou Wu
Jie Li
Tse, Yiu Wong Andy
Shengbin Yu
Shaobo Wang
Position(s)
Chairman of the Board
Chief Executive Officer and Director
Chief Financial Officer
Sr. VP
Sr. VP
Sr. VP
Age
52
45
40
39
56
47
30
Yijun Xia
Daming Hu
Dr. Haimian Cai
Robert Tung
Guangxun Xu
Bruce C. Richardson
William E. Thomson
CAAS 2009 ANNUA REPORT
VP
Chief Accounting Officer
Former Director
Director
Director
Director
Director
47
51
46
53
5 9
52
68
(a) BIOGRAPHIES OF DIRECTORS AND EXECUTIVE OFFICERS:
Hanlin Chen has served as Chairman of the Board since March 2003. Mr. Chen is a standing board
member of Political Consulting Committee of Jingzhou City and vice president of Foreign Investors
Association of Hubei Province. He was the general manager of Shashi Jiulong Power Steering Gears Co.,
Ltd. from 1993 to 1997. Since 1997, he has been the Chairman of the Board of Henglong Automotive Parts,
Ltd. Mr. Hanlin Chen is the brother-in-law of the Company’s Senior Vice President, Mr. Andy Yiu Wong
Tse.
Qizhou Wu has served as an Officer since September 2003 and the Chief Executive Officer since
September 2007. Prior to that position he served as the Chief Operating Officer since March 2003. He was
the Executive General Manager of Jiulong from 1993 to 1999 and GM of Henglong Automotive Parts, Ltd.
from 1999 to 2002. Mr. Wu graduated from Tsinghua University in Beijing with a Masters degree in
Automobile Engineering.
Jie Li has served as the Chief Financial Officer since September 2007. Prior to that position he
served as the Corporate Secretary from December 2004. Prior to joining the Company in September 2003,
Mr. Li was the Assistant President of Jingzhou Jiulong Industrial Inc from 1999 to 2003 and the general
manger of Jingzhou Tianxin Investment Management Co. Ltd. from 2002 to 2003. Mr. Li has a Bachelor's
degree from the University of Science and Technology of China. He also completed his graduate studies in
economics and business management at the Hubei Administration Institute.
Tse, Yiu Wong Andy has served as Sr. VP of the Company since March 2003. He has also served
as chairman of the board of Shenyang. He was the vice GM of Jiulong from 1993 to 1997 and the vice GM
of Henglong. Mr. Tse has over 10 years of experience in automotive parts sales and strategic development.
Mr. Tse has an MBA from the China People University.
Shengbin Yu has served as Sr. VP of the Company and had overall charge of the production since
March 2003. Mr. Yu was the Vice-G.M. of Jiulong from 1993 to 1996 and Executive Vice-G.M. of
Henglong from 1997 to 2003.
Shaobo Wang has served as Sr. VP of the Company and had overall charge of the technology since
March 2003. He was the Vice-G.M. of Jiulong from 1993 to 2003. Mr. Wang graduated from Tsinghua
University in Beijing with a bachelor degree in Automobile Engineering.
Yijun Xia has served as VP of the Company since December 2009. He has also served as the
general manager of the Henglong since April 2005. Prior to that position he served as the Vice-G.M. of
Henglong from December 2002. Mr. Xia graduated from Wuhan University of Water Transportation
Engineering with a bachelor degree in Metal Material and Heat Treatment .
Daming Hu has served as the Chief Accounting Officer since September 2007 and had overall
charge of the financial report. During March 2003 to August 2007, he served as Chief Financial Officer of
the Company. Mr. Hu was the Finance Manager of Jiulong from 1996 to 1999 and Finance Manager of
31
CAAS 2009 ANNUA REPORT
Heng Long from 1999 to 2002. Mr. Hu graduated from Zhongnan University of Economics and Law as an
accountant bachelor.
Haimian Cai has been an Independent Director from September 2003 to December 2009, and also a
member of the Company’s Audit, Compensation and Nominating Committees. Dr. Cai is a technical
specialist in the automotive industry. Prior to that, Dr. Cai was a staff engineer in ITT Automotive Inc. Dr.
Cai has written more than fifteen technical papers and co-authored a technical book regarding the Powder
Metallurgy industry for automotive application. Dr. Cai has more than ten patents including pending
patents. Dr. Cai holds a B.S. Degree in Automotive Engineering from Tsinghua University and a M.S. and
Ph. D. in manufacturing engineering from Worcester Polytechnic Institute. Since December 2009, Mr. Cai
has not served as Independent Director and a member of the Company’s Audit, Compensation and
Nominating Committees, for work reasons.
Robert Tung has been an Independent Director of the Company since September 2003 and a
member of the Company’s Audit, Compensation and Nominating Committees. Mr. Tung is currently the
President of Multi-Media Communications, Inc., and Vice President of Herbal Blends International, LLC.
Mr. Tung holds a M.S. in Chemical Engineering from the University of Virginia. Since 2003, Mr. Tung
has been actively developing business in China. Currently, Mr. Tung is the China Operation Vice President
of Iraq Development Company of Canada, a leading North American corporation engaging in oil field and
infrastructure development in the Republic of Iraq. In addition, Mr. Tung holds the Grand China sales
representative position of TRI Products, Inc., a well known North American iron ores and scrap metals
supplier.
Guangxun Xu has served as an Independent Director of the Company since December 2009. Prior
to that, he has been the Chief Representative of NASDAQ in China in the past two years and was a
managing director with the NASDAQ Stock Market International, Asia for over 10 years. With a
professional career in the finance field spanning over 25 years, Mr. Xu’s practice focuses on providing
package services on US and UK listings, advising on and arranging for Private Placements, PIPEs and
IPOs, pre-IPO restructuring, M&A, Corporate and Project Finance, corporate governance, post-IPOIR and
compliance, Risk Control, etc. He holds an MBA from Middlesex University, London.
William E. Thomson, CA , has been an Independent Director of the Company since September
2003 and is a member of the Company's Audit, Compensation and Nominating Committees. Mr.
Thomson's current additional directorships include: Asia Bio Chem (ABC) (Agriculture); China Armco
Metals (Scrap Metal); Score Media Inc. (SCR.TO) (Media); Electrical Contacts Ltd. (industrial); Han
Wind Energy (Sustainable Energy); Pure Med Laser (Health Care); Summit Energy Management (Oil &
Gas Distribution); Integrated Planning & Solution; Wright Environmental Management Inc. (Waste
Management Solutions); YTW Growth Capital Management Corp. (CPC Facilitation); and Greater China
Capital Inc. Mr. Thomson’s past directorships include: Open EC Technologies (OCE.V); Asia Media
Group Corporation; Atlast Pain & Injury Solutions Inc. (TSX U) (Media); Confederation of Italian
Entrepreneurs Worldwide Canada (Health Care); Debt Freedom Canada Inc. (Financial); Elegant
Communications Ltd. (Environment); Esna Technologies Inc. (Unified Communications Solutions);
Industrial Minerals Inc. (IDSM) (Graphite); JITE Technologies Inc. (JTI) (Electronics); Maxus
Technology Corp. (eWaste Solutions); Med-Emerg International Inc. (Health Care); Symtech Canada Ltd.
(Communications); The Aurora Fund (Financial); TPI Plastics (Plastics); Wiresmith Ltd. (Industrial) and
World Educational Services.
Bruce C. Richardson joined the Company as an Independent Director in December, 2009. Mr.
Richardson joined Redwood Capital as a manager in July 2009. Prior to joining Redwood Capital, he
served as CFO and company secretary of Dalian RINO Environmental Engineering from October 2007
until September 2008, a Managing Director of Xinhua Finance in Shanghai, PRC, from April 2006 until
September 2007, and a Senior Analyst at Evolution Securities China Limited in Shanghai from 2004 until
March 2006. Mr. Richardson also served as a Director of New Access Capital in Shanghai from June 2003
until January 2004. From 2001 through May 2003, Mr. Richardson was engaged in a private consulting
practice centered on Chinese financial markets and institutions. He began his career with Arthur Andersen
in New York, where he worked from 1989 to 1994 before returning to China. Mr. Richardson earned a BA
in Classics from the University of Notre Dame in 1980, and graduated with an MA in International
32
CAAS 2009 ANNUA REPORT
Management from the University of Texas at Dallas in 1986. He was awarded a graduate study grant by
the US National Academy of Sciences in 1987 and completed a year of post-graduate research on PRC
accounting at People’s University in 1988.
BOARD COMPOSITION AND COMMITTEES
(b) AUDIT COMMITTEE AND INDEPENDENT DIRECTORS
The Company has a standing Audit Committee of the Board of Directors established in accordance
with Section 3(a)(58)(A) of the Exchange Act, as amended. The Audit Committee consists of the following
individuals, all of whom the Company considers to be independent, as defined under the SEC’s rules and
regulations and the Nasdaq’s definition of independence: Robert Tung, Guangxun Xu, Bruce C.
Richardson, and William Thomson. Mr. William Thomson is the Chairman of the Audit Committee. The
Board has determined that Mr. William Thomson is the Audit Committee financial expert, as defined in
Item 407(d)(5) of Regulation S-K, serving on the Company’s audit committee.
(c) COMPENSATION COMMITTEE
The Company has a standing Compensation Committee of the Board of Directors. The
Compensation Committee is responsible for determining compensation for the Company’s executive
officers. Four of the Company’s independent directors, as defined under the SEC’s rules and regulations
and the Nasdaq’s definition of independence, Robert Tung, Guangxun Xu, Bruce C. Richardson, and
William Thomson, serve on the Compensation Committee. Since December 17, 2009, Mr. Bruce C.
Richardson has been the Chairman of the Compensation Committee.
The Company’s Compensation Committee is empowered to review and approve the annual
compensation and compensation procedures for the executive officers of the Company. The primary goals
of the Compensation Committee of the Company’s Board of Directors with respect to executive
compensation are to attract and retain the most talented and dedicated executives possible and to align
executives’ incentives with stockholder value creation. The Compensation Committee evaluates individual
executive performance with a goal of setting compensation at levels the committee believes are
comparable with executives in other companies of similar size and stage of development operating in
similar industry while taking into account the Company’s relative performance and its strategic goals.
The Company has not retained a compensation consultant to review its policies and procedures with
respect to executive compensation. The Company conducts an annual review of the aggregate level of its
executive compensation, as well as the mix of elements used to compensate its executive officers. The
Company compares compensation levels with amounts currently being paid to executives in its industry
and most importantly with local practices in China. The Company is satisfied that its compensation levels
are competitive with local conditions.
(d) NOMINATING COMMITTEE
their business and financial experience, personal characteristics, and expertise
The Company has a standing Nominating Committee of the Board of Directors. Director candidates
are nominated by the Nominating Committee. The Nominating Committee will consider candidates based
upon
that are
complementary to the background and experience of other Board members, willingness to devote the
required amount of time to carry out the duties and responsibilities of Board membership, willingness to
objectively appraise management performance, and any such other qualifications the Nominating
Committee deems necessary to ascertain the candidates’ ability to serve on the Board. The Nominating
Committee will not consider nominee recommendations from security holders, other than the
recommendations received from a security holder or group of security holders that beneficially owned
more than five (5) percent of the Company’s outstanding common stock for at least one year as of the date
the recommendation is made. Four of the Company’s independent directors, as defined under the SEC’s
rules and regulations and the Nasdaq’s definition of independence, Robert Tung, Guangxun Xu, Bruce C.
Richardson, and William Thomson serve on the Nominating Committee. Since December 17, 2009, Mr.
Guangxun Xu has been the Chairman of the Nominating Committee.
33
CAAS 2009 ANNUA REPORT
(e) STOCKHOLDER COMMUNICATIONS
Stockholders interested in communicating directly with the Board of Directors, or individual
directors, may email the Company’s independent director William Thomson at Bill.Thomson@chl.com.cn.
Mr. Thomson will review all such correspondence and will regularly forward to the Board copies of all
such correspondence that deals with the functions of the Board or committees thereof or that he otherwise
determines requires their attention. Directors may at any time review all of the correspondence received
that is addressed to members of the Board of Directors and request copies of such correspondence.
Concerns relating to accounting, internal controls or auditing matters will immediately be brought to the
attention of the Audit Committee and handled in accordance with procedures established by the Audit
Committee with respect to such matters.
(f) FAMILY RELATIONSHIPS
Mr. Hanlin Chen and Mr. Tse, Yiu Wong Andy are brothers-in-law.
(g) CODE OF ETHICS AND CONDUCT
The Board of Directors has adopted a Code of Ethics and Conduct which is applicable to all officers,
directors and employees. The Code of Ethics and Conduct is filed as an exhibit to this Form 10-K, which
incorporates it by reference from the Form 10-KSB for year ended December 31, 2003.
(h) SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
executive officers and directors and persons who own more than 10% of a registered class of the
Company’s equity securities to file with the Securities and Exchange Commission initial statements of
beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of
common stock and other of the Company’s equity securities, on Forms 3, 4 and 5 respectively. Executive
officers, directors and greater than 10% stockholders are required by Commission regulations to furnish
the Company with copies of all Section 16(a) reports they file. To the best of the Company’s knowledge,
based solely upon a review of the Form 3, 4 and 5 filed, no officer, director or 10% beneficial shareholder
failed to file on a timely basis any reports required by Section 16(a) of the Securities Exchange Act of
1934, as amended.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Committee
The Company has a standing Compensation Committee of the Board of Directors as described under
Item 10(c) above. The Compensation Committee is responsible for determining compensation for the
Company’s executive officers. Four of the Company’s independent directors, as defined under the SEC’s
rules and regulations and the Nasdaq’s definition of independence, Robert Tung, Guangxun Xu, Bruce C.
Richardson, and William Thomson, serve on the Compensation Committee. Since December 17, 2009, Mr.
Bruce C. Richardson has been the Chairman of the Compensation Committee.
Executive compensation consists of salary, stock option awards, and performance bonus in cash.
Salary
The Company’s Board of Directors and Compensation Committee have approved the current
salaries for executives: $150,000 for the Chairman, $100,000 for the CEO, and $60,000 for other officers
in 2009.
Stock Option Awards
34
CAAS 2009 ANNUA REPORT
The stock options plan proposed by management, which aims to incentivize and retain core
employees, to meet employees’ benefits, the Company’s long term operating goals and shareholder
benefits, was approved at the 2004 Annual Meeting of Stockholders, and the maximum common shares for
issuance under this plan is 2,200,000 with a period of 10 years.
The Company has not granted any stock option to management in 2009. The stock option granted
for management in 2008 was as follows, which was approved by the Board of Directors and Compensation
Committee.
a. Total Number of Options Granted: 298,850
b. Exercise Price Per Option: $2.93, the closing price of the common shares of the Company
on December 9, 2008
c. Date of Grant: December 10, 2008
d. Expiration Date: on or before December 9, 2011
e. Vesting Schedule
(i) On December 10, 2008, 1/3 of the granted stock option shall be vested and become
exercisable
(ii) On December 10, 2009, another 1/3 of the granted stock option shall be vested and
become exercisable
(iii) On December 10, 2010, remaining 1/3 of the granted stock option shall be vested and
become exercisable
In accordance with ASC Topic 718 (formerly SFAS No. 123R), the cost of the above mentioned
stock options issued to directors was measured on the grant date based on their fair value. The fair value is
determined using the Black-Scholes option pricing model and certain assumptions. Please see Note 21.
The compensation that executive officers received for their services for fiscal year 2009 and 2008
were as follows:
Name and
principal
position Year Salary Bonus
Stock
awards Option awards
Non-equity
incentive plan
compensation
Change in
pension value
and
non-qualified
deferred
compensation
earnings
All other
compensation Total
Hanlin
2009 $ 150,000 $ 75,000 $
Chen
(Chairman) 2008 $ 150,000 $ — $
Qizhou Wu 2009 $ 100,000 $ 50,000 $
2008 $ 100,000 $ — $
(CEO)
2009 $ 60,000 $ 30,000 $
Jie Li
2008 $ 60,000 $ — $
(CFO)
$
$
$
$
$
$
Performance bonus
— $
— $
— $
— $
— $
38,654 $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $
— $ 225,000
— $ 100,000
— $ 150,000
— $ 100,000
— $ 90,000
— $ 98,654
a. Grantees: Hanlin Chen, Qizhou Wu, Shengbin Yu, Shaobo Wang, Andy Tse, Jie Li, and
Daming Hu;
b. Conditions: (i) based on the Company’s consolidated financial statements, the year over
year growth rates of net sales and net profits for 200 9 must exceed 1 5 %; and (ii) the
average growth rate of the foregoing indicators must exceed that of the whole industry in
200 9 ;
c. Bonus: 50% of each officer ’ s annual salary in 200 9 .
Awards for performance bonus of $275,000 were accrued in 2009 and have not been paid by the end
of 2009.
Outstanding Equity Awards at Fiscal Year-End:
Not Applicable.
35
CAAS 2009 ANNUA REPORT
Compensation for Directors
Based on the number of the board of directors’ service years, workload and performance, the
Company decides on their pay. The management believes that the pay for the members of the Board of
Directors was appropriate as of December 31, 2009.
The compensation that directors received for serving on the Board of Directors for fiscal year 2009
was as follows:
Fees
earned or
paid in
cash
$ 40,000 $
Stock
awards
Option
awards*
- $ 65,550 $
Non-equity
incentive
plan
compensation
$ 46,000 $
$ 40,000 $
- $
$
- $ 65,550 $
- $ 65,550 $
- $
- $
$
- $
- $
- $
Change in
pension value
and
nonqualified
deferred
compensation
earnings
All other
compensation** Total
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
96,000 $201,550
- $111,550
- $105,550
-
- $
- $
-
Name
Haimian Cai
William E.
Thomson
Robert Tung
Guangxun Xu
Bruce C.
Richardson
* Other than the cash payment based on the number of a director’s service years, workload and
performance, the Company grants 7,500 option awards to each director every year.
In accordance with ASC Topic 220 (formerly SFAS No. 123R), the cost of the above mentioned
stock options issued to directors was measured on the grant date based on their fair value. The fair value is
determined using the Black-Scholes option pricing model and certain assumptions. Please see Note 21.
**The cost of the above mentioned compensation paid to directors was measured based on
investment, operating, technology, and consulting services they provided.
During the year 2009, Mr. Haimian Cai provided additional investment and technology consulting
services.
All other directors did not receive compensation for their service on the Board of Directors, except
the first three independent directors mentioned above.
ITEM
12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS
As used in this section, the term beneficial ownership with respect to a security is defined by Rule
13d-3 under the Securities Exchange Act of 1934, as amended, as consisting of sole or shared voting
power, including the power to vote or direct the vote, and/or sole or shared investment power, including
the power to dispose of or direct the disposition of, with respect to the security through any contract,
arrangement, understanding, relationship or otherwise, subject to community property laws where
applicable. The percentage ownership is based on 27,046,244 shares of common stock outstanding at
February 27, 2010.
Name/Title
Total Number of Shares Percentage Ownership
Hanlin Chen, Chairman (1)
Qizhou Wu, CEO, President and Director
Jie Li, CFO
Li Ping Xie(2)
Tse, Yiu Wong Andy, Sr. VP, Director
15,144,526
1,641,396
-
15,144,526
472,704
55.99 %
6.06 %
-%
55.99 %
1.74 %
36
CAAS 2009 ANNUA REPORT
Shaobo Wang, Sr. VP
Shengbin Yu, Sr. VP
Yijun Xia, VP
Daming Hu, CAO
Robert Tung, Director
Dr. Haimian Cai, Director
William E. Thomson, Director
Wiselink Holdings Limited (3)
All Directors and Executive Officers (10 persons) (4)
165,104
216,429
-
9,000
-
3,750
-
3,023,542
20,374,097
0.61 %
0.80 %
-%
0.03 %
-%
0.01 %
- %
11.17 %
75.33 %
( 1 ) Includes 1,491,425 shares of common stock beneficially owned by Mr. Chen’s wife, Ms. Xie and
302,354 shares indirectly held in Wiselink Holdings Limited.
(2) Includes 13,653,101 shares of common stock beneficially owned by Ms. Xie’s husband, Mr. Chen.
( 3 ) Wiselink Holdings Limited is a company controlled by Mr. Chen and other executive officers.
( 4 ) Excludes 302,354 shares indirectly held by Mr. Chen in Wiselink Holdings Limited
Hanlin Chen, Chairman, owns 55.99% of the common stock of the Company and has the effective
power to control the vote on substantially all significant matters without the approval of other
stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the information required by Item 13 please refer to Consolidated Financial Statements notes 2
and 23 “ Certain Relationships And Related Transactions ” and “ Related Party Transactions ” in the
Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the aggregate fees for professional audit services rendered by
Schwartz Levitsky Feldman LLP for the audit of the Company’s annual financial statements, and fees
billed for other services for the fiscal years 2009 and 2008. The Audit Committee has approved all of the
following fees.
Audit Fees
Audit-Related Fees(1)
Tax Fees (2)
Total Fees Paid
Fiscal Year Ended
2008
2009
$ 265,000 $ 285,000
24,100
-
8,400
8,400
$ 273,400 $ 317,500
(1) Includes accounting and reporting consultations related to financing and internal control
procedures.
(2) Includes fees for service related to tax compliance services, preparation and filing of tax returns
and tax consulting services.
Audit Committee’s Pre-Approval Policy
During fiscal years ended December 31, 2009 and 2008, the Audit Committee of the Board of
Directors adopted policies and procedures for the pre-approval of all audit and non-audit services to be
provided by the Company’s independent auditor and for the prohibition of certain services from being
provided by the independent auditor. The Company may not engage the Company’s independent auditor to
37
CAAS 2009 ANNUA REPORT
render any audit or non-audit service unless the service is approved in advance by the Audit Committee or
the engagement to render the service is entered into pursuant to the Audit Committee’s pre-approval
policies and procedures. On an annual basis, the Audit Committee may pre-approve services that are
expected to be provided to the Company by the independent auditor during the fiscal year. At the time such
pre-approval is granted, the Audit Committee specifies the pre-approved services and establishes a
monetary limit with respect to each particular pre-approved service, which limit may not be exceeded
without obtaining further pre-approval under the policy. For any pre-approval, the Audit Committee
considers whether such services are consistent with the rules of the Securities and Exchange Commission
on auditor independence.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
LIST OF FINANCIAL STATEMENT / SCHEDULES
1. Report of Independent Registered Public Accounting Firm
2. Consolidated Balance Sheets as of December 31, 2009 and 2008
3. Consolidated Statements of Earnings for the years ended December 31, 2009 and 2008
4. Consolidated Statements of Comprehensive Income for the years ended December 31, 2009 and
2008
5. Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31,
2009 and 2008
6. Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008
7. Notes to Consolidated Financial Statements
38
CAAS 2009 ANNUA REPORT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of China Automotive Systems, Inc. and Subsidiaries :
We have audited the accompanying consolidated balance sheets of China Automotive Systems, Inc.
and Subsidiaries as at December 31, 2009 and 2008 and the related consolidated statements of earnings,
and comprehensive income, cash flows and changes in stockholders’ equity for the years ended December
31, 2009 and 2008. These consolidated financial statements are the responsibility of the management of
China Automotive Systems, Inc. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated 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.
The company is not required to have nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company’s internal controls over financing reporting.
Accordingly, we express no such opinion.
In our opinion, these consolidated financial statements referred to above present fairly, in all
material respects, the financial position of China Automotive Systems, Inc. and Subsidiaries as of
December 31, 2009 and 2008 and the results of its earnings and its cash flows for the years ended
December 31, 2009 and 2008 in conformity with generally accepted accounting principles in the United
States of America.
Toronto, Ontario, Canada
March 16, 2010
/s/ Schwartz Levitsky Feldman LLP
Schwartz Levitsky Feldman LLP
Chartered Accountants
Licensed Public Accountants
39
CAAS 2009 ANNUA REPORT
China Automotive Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2009 and 2008
ASSETS
Current assets:
Cash and cash equivalents
Pledged cash deposits (note 4)
Accounts and notes receivable, net, including $ 1,441,939 and $1,285,110
from related parties at December 31, 200 9 and 200 8 , net of an allowance
for doubtful accounts of $ 5,320,378 and $4,910,478 at December 31, 2009
and 2008 (note 5)
Advance payments and others, including $0 and $9,374 to related parties at
December 31, 2009 and 2008
Inventories (note 7)
Current deferred tax assets (note 10)
Total current assets
Long-term Assets:
Property, plant and equipment, net (note 8)
Intangible assets, net (note 9)
Other receivables, net, including $ 65,416 and $ 369,365 from related
parties at December 31, 2009 and 2008 , net of an allowance for doubtful
accounts of $ 1,295,755 and $659,837 at December 31, 2009 and 2008
(note 6)
Advance payment for property, plant and equipment, including $ 2,579,319
and $2,473,320 to related parties at December 31, 2009 and 2008
Long-term investments
Non-cur rent deferred tax assets (note 10)
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans (note 11)
Accounts and notes payable, including $ 1,537,827 and $1,097,641 to
related parties at December 31, 2009 and 2008 (note 12)
Convertible notes payable, net, including $ 1,359,245 and $2,077,923 for
discount of convertible note payable at December 31, 2009 and 2008
(note 13)
Compound derivative liabilities (note 14)
Customer deposits
Accrued payroll and related costs
Accrued expenses and other payables (note 15)
Accrued pens ion costs (note 16)
Taxes payable (note 17)
Amounts due to shareholders/directors (note 18)
Total current liabilities
Long-term liabilities:
Advances payable (note 19)
Total liabilities
Significant concentrations (note 28)
Related p arty transactions (note 29 )
Commitments and contingencies (note 30 )
Subsequent events (note 32)
Stockholders' equity:
Preferred stock, $0.0001 par value - Authorized - 20,000,000 shares
Issued and Outstanding – None
40
December 31,
2009
2008
$ 43,480,176 $ 37,113,375
6,739,980
12,742,187
154,863,292 96,424,856
2,413,556
1,442,614
27,415,697 26,571,755
-
$ 242,296,776 $ 168,292,580
1,381,868
$ 60,489,798 $ 51,978,905
504,339
561,389
1,064,224
1,349,527
6,369,043
79,084
2,172,643
6,459,510
79,010
2,383,065
$ 313,032,957 $231,046 ,936
$ 5,125,802 $
7,315,717
107,495,833 59,246,043
880,009
1,918,835
3,040,705
28,640,755 32,922,077
1,502,597
236,018
2,715,116
17,708,681 12,460,784
3,806,519
3,778,187
5,717,438
11,365,016
－
337,370
$ 179,953,823 $ 126,259,679
233,941
234,041
$ 180,187,764 $ 126,493,720
$
— $
—
CAAS 2009 ANNUA REPORT
Common stock, $0.0001 par value - Authorized - 80,000,000 shares
Issued and Outstanding – 27,046,244 shares and 26,983,244 shares at
December 31, 2009 and 2008 , respectively
(note 21)
Additional paid-in capital (note 21)
Retained earnings- (note 22)
Appropriated
Unappropriated
Accumulated other comprehensive income
Total parent company stockholders' equity
Non-controlling interests (note 20 )
Total stockholders' equity
Total liabilities and stockholders' equity
2,698
27, 515,064 26,648,154
2,704
8,324,533 7, 525,777
58,642,023 36,026,516
11,187,744 11,127,505
-------------- --------------
105,672,068 81,330,650
27,173,125 23,222,566
$ 132,845,193 $ 104,553,216
$ 313,032,957 $231,046 ,936
The accompanying notes are an integral part of these consolidated financial statements.
41
CAAS 2009 ANNUA REPORT
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Earnings
Years Ended December 31, 2009 and 2008
Net product sales, including $5,892,164 and $4,675,410 to related parties
for Years Ended December 31, 2009 and 2008
Cost of product sold, including $13,998,702 and $7,901,944 purchased
from related parties for Years Ended December 31, 2009 and 2008
Gross profit
Add: Gain on other sales
Less: Operating expenses
Selling expenses
General and administrative expenses
R&D expenses
Depreciation and amortization
Total Operating expenses
Income from operations
Add: Other income, net (note 23)
Financial income (expenses) (note 24)
Gain (loss) on change in fair value of derivative (note 25)
Income before income taxes
Less: Income taxes (note 26)
Net income
Net income attributable to noncontrolling interest
Net income attributable to parent company
Net income per common share attributable to parent company–
Basic
Diluted (note 27)
Weighted average number of common shares outstanding –
Basic
Diluted
Years Ended December 31
2009
2008
$ 255,597,553 $ 163,179,286
182,929,833 115,920,585
$ 72,667,720 $ 47,258,701
734,063
838,505
2,561,170
2,955,159
18,085,377 10,869,661
12,239,867 12,097,500
2,255,892
5,846,290
35,841,573 31,069,343
$ 3 7,664,652 $ 16,923,421
1,067,309
(1,296,218)
998,014
36,397,551 17,692,526
185,877
31,287,076 17,506,649
5,071,408
$ 23,414,263 $ 12,435,241
94,534
(1,986,200)
624,565
7, 872,813
5,110,475
$
$
0.87 $
0.78 $
0.48
0.46
26,990,649 25,706,364
31,618,412 29,668,726
The accompanying notes are an integral part of these consolidated financial statements.
42
CAAS 2009 ANNUA REPORT
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2009 and 2008
Net income
Other comprehensive income:
Foreign currency translation gain (loss)
Comprehensive income
Comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to parent company
Years Ended December 31
200 9
2008
$31,287,076 $17,506,649
82,604 6,571,019
$31,369,680 $24,077,668
7,895,178 6,504,385
$23,474,502 $17,573,283
The accompanying notes are an integral part of these consolidated financial statements.
43
CAAS 2009 ANNUA REPORT
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2009 and 2008
Common
Stock
Additional
Paid-in
Capital
Other
Comprehensive
Appropriated Unappropriated Income (Loss)
Retained Earnings
Accumulated
Total parent
company
stockholders '
equity
Non-controlling
interests
Total
stockholders'
equity
$ 2,396 $ 30,125,951 $ 7,525,777 $
23,591,275 $
5,989,463 $ 67,234,862 $ 23,166,270 $ 90,401,132
–
–
302 22,089,698
–
–
- (25,912,921 )
–
–
5,138,042
5,138,042
1,432,977 6,571,019
–
–
– 22,090,000
– 22,090,000
– (25,912,921 )
(6,177,079 ) (32,090,000 )
(1,016,733 ) (1,016,733 )
745,723
745,723
-
345,426
–
–
–
345,426
–
345,426
–
–
–
12,435,241
– 12,435,241
5,071,408 17,506,649
$ 2,698 $ 26,648,154 $ 7,525,777 $
36,026,516 $ 11,127,505 $ 81,330,650 $ 23,222,566 $ 104,553,216
–
–
6
420,234
–
–
–
–
60,239
60,239
22,365
82,604
–
420,240
–
420,240
-
446,676
–
–
–
446,676
–
446,676
-
798,756
(798,756)
–
–
(3,944,619 ) (3,944,619 )
–
–
–
23,414,263
– 23,414,263
7,8 72,813 31,287,076
$ 2,704 $ 27,515,064 $ 8,324,533 $
58,642,023 $ 11,187,744 $ 105,672,068 $ 27,173,125 $ 132,845,193
The accompanying notes are an integral part of these consolidated financial statements.
44
Balance at
January 1,
2008
Foreign
currency
translation
gain
Issuance of
common stock
Acquirement of
the 35.5%
equity interest
of Henglong
Appropriation
of retained
earnings
Capital
contribution
Issuance of
stock options to
independent
directors and
management
Net income for
the year ended
December 31,
2008
Balance at
December 31,
2008
Foreign
currency
translation gain
Exercise of
stock options
Issuance of
stock options to
independent
directors and
management
Appropriation
of retained
earnings
Net income for
the year ended
December 31,
2009
Balance at
December 31,
2009
CAAS 2009 ANNUA REPORT
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2009 and 2008
Cash flows from operating activities:
Net income
Adjustments to reconcile net income from continuing operations to net cash
provided by operating activities:
Stock-based compensation
Depreciation and amortization
Deferred income taxes
Allowance for impairment of asset
Amortization for discount of convertible note payable
(Gain) loss on change in fair value of derivative
Other operating adjustments
Changes in operating assets and liabilities:
(Increase) decrease in:
Pledged cash deposits
Accounts and notes receivable
Advance payments and other
Inventories
Increase (decrease) in:
Accounts and notes payable
Customer deposits
Accrued payroll and related costs
Accrued expenses and other payables
Accrued pension costs
Taxes payable
Advances payable
Net cash provided by operating activities
Cash flows from investing activities:
(Increase) decrease in other receivables
Cash received from equipment sales
Cash paid to acquire property, plant and equipment
Cash paid to acquire intangible assets
Cash paid for the acquisition of 35.5% of Henglong equity
Net cash used in investing activities
Cash flows from financing activities:
Repayment of bank loans
Dividends paid to the minority interest holders of Joint-venture companies
Increase (decrease) in amounts due to shareholders/directors
Proceeds on exercise of stock options
Capital Contribution from the minority interest holders of Joint-venture
companies
Proceeds (expenditure) from issuance (redemption) of convertible note
payable
Net cash provided by (used in) financing activities
Cash and cash equivalents affected by foreign currency
Net change in cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents, at beginning of year
Cash and cash equivalents, at end of year
Years Ended December 31
2009
2008
$ 31,287,076 $ 17,506,649
446,676
345,426
8,684,169 9,924,992
(974,383 )
(1,169,108)
901,680 1,030,738 )
424,665
718,678
(998,014 )
(624,565)
2,533
(212,106)
(5,994,298) (1,776,424 )
(58,735,311) (9,335,776 )
(417,973 )
(968,719)
(817,828) (4,955,085 )
1,682,384
322,877
48,178,260 8,319,472
89,046
(128,344 )
5,650,474 1,487,900
(69,998 )
5,638,359 (3,974,905 )
(126,553 )
$ 34,956,534 $ 16,373,966
(31,847)
(317)
207,014
280,270
(353,834 )
368,707
(17,498,957) (12,245,383 )
(125,550 )
- (10,000,000 )
$ (17,335,687) $(22,356,060 )
(324,014)
$ (2,196,367) $ (7,567,697 )
(4,176,583) (6,198,489 )
2,416
-
(337,915)
420,240
-
745,723
(5,000,000) 35,000,000
$ (11,290,625) $ 21,981,953
36,579 $ 1,626,357
$
$ 6,366,801 $ 17,626,216
37,113,375 19,487,159
$ 43,480,176 $ 37,113,375
The accompanying notes are an integral part of these consolidated financial statements
45
CAAS 2009 ANNUA REPORT
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended December 31, 2009 and 2008
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest
Cash paid for income taxes
Years Ended December 31
2009
2008
$ 1,475,307 $ 1,266,204
$ 4,048,120 $ 4,126,048
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of 35.5% of Henglong equity from the minority shareholder on a
cashless basis
Liability resulted from issuance of common stock to acquire 35.5% of
Henglong's equity
$
$
- $ (22,090,000)
— $ 22,090,000
The accompanying notes are an integral part of these consolidated financial statements.
Years Ended December 31
2009
2008
46
CAAS 2009 ANNUA REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
China Automotive Systems, Inc. and Subsidiaries
Years Ended December 31, 2009 and 2008
1. Organization and Business
China Automotive Systems, Inc., “China Automotive”, was incorporated in the State of Delaware on
June 29, 1999 under the name Visions-In-Glass, Inc. China Automotive, including, when the context so
requires, its subsidiaries and the subsidiaries’ interests in the Sino-foreign joint ventures described below,
is referred to herein as the “Company”. The Company is primarily engaged in the manufacture and sale of
automotive systems and components, as described below.
Great Genesis Holdings Limited, a company incorporated on January 3, 2003 under The Companies
Ordinance in Hong Kong as a limited liability company, “Genesis”, is a wholly-owned subsidiary of the
Company.
Henglong USA Corporation, “HLUSA”, which was incorporated on January 8, 2007 in Troy,
Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive
parts in North America, and provides after sales service and research and development support
accordingly.
The Company owns the following aggregate net interests in eight Sino-foreign joint ventures
organized in the PRC as of December 31, 2009 and 2008.
Name of Entity
Percentage Interest
2009 2008
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong”
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong”
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang”
Zhejiang Henglong & Vie Pump-Manu Co., Ltd., “Zhejiang”
Universal Sensor Application Inc., “USAI”
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong”
Wuhu HengLong Auto Steering System Co., Ltd., “Wuhu”
Jingzhou Hengsheng Automotive System Co., Ltd., “Hengsheng”
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center”
80.00 %
81.00 %
70.00 %
51.00 %
83.34 %
85.00 %
77.33 %
80.00 %
81.00 %
70.00 %
51.00 %
83.34 %
85.00 %
77.33 %
100.00 % 100.00 %
80.00 %
-
Jiulong was established in 1993 and is mainly engaged in the production of integral power steering
gear for heavy-duty vehicles.
Henglong was established in 1997 and is mainly engaged in the production of rack and pinion power
steering gear for cars and light duty vehicles.
On March 31, 2008, the Company’s wholly-owned subsidiary, Genesis, and Wiselink Holdings
Limited, “Wiselink”, both controlled by Hanlin Chen and his family, entered into an equity transfer
agreement, the “Henglong Agreement”, pursuant to which Wiselink agreed to transfer and assign its 35.5%
equity interest in Henglong, one of the Company’s currently consolidated subsidiaries, to Genesis for a
total consideration of $32,090,000. The Company now holds an 80% equity interest in Henglong.
In December 2009, Henglong, a subsidiary of Genesis, formed Jingzhou Henglong Automotive
Technology (Testing) Center (“Testing Center”), which is mainly engaged in research and development of
new products. The registered capital of Testing Center is RMB 30,000,000 ($4,393,544 equivalent).
Under the terms of the Henglong Agreement, Genesis is deemed to be the owner of Henglong
commencing from January 1, 2008. The Henglong acquisition is considered as a business combination of
47
CAAS 2009 ANNUA REPORT
companies under common control and is being accounted for in a manner similar to that of pooling of
interests.
Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.
Zhejiang was established in 2002 to focus on power steering pumps.
USAI was established in 2005 and is mainly engaged in the production and sales of sensor modulars.
In 2008, Genesis and Shanghai Hongxi Investment Inc., “Hongxi”, the other shareholder of
USAI, agreed to increase USAI’s capital to $2,600,000 from $1,800,000. The increased capital was wholly
funded by Genesis. Therefore, the capital contributed by Genesis in USAI increased to $2,166,900 from
$1,366,900, accounting for 83.34% of the total capital; while the capital contributed by Hongxi remained
unchanged, accounting for 16.66% of the total capital.
Wuhu was established in 2006 and is mainly engaged in the production and sales of automobile
steering systems.
Jielong was established in 2006 and is mainly engaged in the production and sales of electric power
steering gear (“EPS”).
On March 7, 2007, Genesis established a wholly-owned subsidiary, Jingzhou Hengsheng
Automotive System Co., Ltd, “Hengsheng”, to engage in production and sales of automotive steering
systems. The registered capital of Hengsheng is $10,000,000.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation - For the year ended December 31, 2009 and 2008, the accompanying
consolidated financial statements include the accounts of the Company and its two subsidiaries and eight
joint ventures, which are described in Note 1. Significant inter-company balances and transactions have
been eliminated upon consolidation. The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of America.
During early 2003, the Directors of the Company and the other joint venture partners in the
Company’s Sino-foreign joint ventures executed “Act in Concert” agreements, resulting in the Company
having voting control in such Sino-foreign joint ventures. Consequently, effective January 1, 2003, the
Company changed from equity accounting to consolidation accounting for its investments in Sino-foreign
joint ventures for the year ended December 31, 2003. Prior to January 1, 2003, the Company used the
equity method pursuant to the provision in ASC Topic 810 (formerly EITF 96-16), as described as follows.
Henglong was formed in 1997. The Company increased its shareholdings from 44.5% to 80% in
2008 and the remaining 20% is owned by Jingzhou Jiulong Machinery and Electronic Manufacturing Co.,
Ltd., “JLME”. The highest authority of the joint venture is the Board of Directors, which is comprised of
five directors, four of which, 80%, are appointed by the Company, and one of which, 20%, is appointed by
JLME. As for day-to-day operating matters, approval by more than two-thirds of the members of the Board
of Directors, 67%, is required. Both the Chairman of the Board of Directors and general manager are
appointed by the Company.
Jiulong was formed in 1993, with 81% owned by the Company, 10% owned by Jingzhou Jiulong
Machinery and Electronic Manufacturing Co., Ltd., “JLME”, and 9% owned by Jingzhou Tianxin
Investment Consulting Co., Ltd., “Tianxin”. The highest authority of the joint venture is the Board of
Directors, which is comprised of five directors, four of which, 80%, are appointed by the Company, and
one of whom, 20%, is appointed by JLME. As for day-to-day operating matters, approval by more than
two-thirds of the members of the Board of Directors, 67%, is required. The Chairman of the Board of
Directors is appointed by JLME. The general manager is appointed by the Company.
48
CAAS 2009 ANNUA REPORT
Shenyang was formed in 2002, with 70% owned by the Company, and 30% owned by Shenyang
Automotive Industry Investment Corporation, “JB Investment”. The highest authority of the joint venture
is the Board of Directors, which is comprised of seven directors, four of whom, 57%, are appointed by the
Company, and three of whom, 43%, are appointed by JB Investment. As for day-to-day operating matters,
approval by more than two-thirds of the members of the Board of Directors, 67%, is required. The
Chairman of the Board of Directors is appointed by the Company. The general manager is appointed by
the Company.
Zhejiang was formed in 2002, with 51% owned by Genesis and 49% owned by Zhejiang Vie Group,
“ZVG”. The highest authority of the joint venture is the Board of Directors, which is comprised of seven
directors, four of whom, 57%, are appointed by the Company and three of whom, 43%, are appointed by
ZVG. As for day-to-day operating matters, approval by more than two-thirds of the members of the Board
of Directors, 67%, is required. The Chairman of the Board of Directors is appointed by ZVG. The general
manager is appointed by the Company.
USAI was formed in 2005. As at December 31, 2008, 83.34% was owned by the Company. The
highest authority of the joint venture is the Board of Directors, which is comprised of three directors, two
of whom, 67%, are appointed by the Company, one of whom, 33%, is appointed by Hongxi. As for
day-to-day operating matters, approval by more than two-thirds of the members of the Board of Directors,
67%, is required. The Chairman of the Board of Directors is appointed by the Company. The general
manager is appointed by the Company.
Jielong was formed in April 2006, with 85% owned by the Company, and 15% owned by Hong
Kong Tongda, “Tongda”. The highest authority of the joint venture is the Board of Directors, which is
comprised of three directors, two of whom, 67%, are appointed by the Company, and one of whom, 33%,
is appointed by Tongda. As for day-to-day operating matters, approval by more than two-thirds of the
members of the Board of Directors, 67%, is required. The Chairman of the Board of Directors is appointed
by the Company. The general manager is appointed by the Company.
Wuhu was formed in May 2006, with 77.33% owned by the Company, and 22.67% owned by Wuhu
Chery Technology Co., Ltd., “Chery Technology”. The highest authority of the joint venture is the Board
of Directors, which is comprised of five directors, three of whom, 60%, are appointed by the Company,
and two of whom, 40%, are appointed by Chery Technology. As for day-to-day operating matters,
approval by more than two-thirds of the members of the Board of Directors, 67%, is required. The
directors of the Company and the other joint venture partner of Wuhu executed “Act in Concert”
agreement, resulting in the Company having voting control in the joint venture. The Chairman of the
Board of Directors is appointed by the Company. The general manager is appointed by the Company.
The minority partners of each of the joint ventures are all private companies not controlled, directly
or indirectly, by any PRC municipal government or other similar government entity.
Use of Estimates - The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and expenses during the reporting
periods. The Company is of an opinion that the significant items were warranty reserves, long term assets
and investment, the realizable value of accounts receivable and inventories, useful lives of property, plant
and equipment, accruals warranty liabilities and deferred tax assets. Actual results could differ from those
estimates.
Cash and Cash Equivalents - Cash and cash equivalents include all highly-liquid investments with
an original maturity of three months or less at the date of purchase.
Pledged Cash Deposits - The Company has pledged cash deposits to secure trade financing provided
by banks.
49
CAAS 2009 ANNUA REPORT
Accounts Receivable - In order to determine the value of the Company’s accounts receivable, the
Company records a provision for doubtful accounts to cover estimated credit losses. Management reviews
and adjusts this allowance periodically based on historical experience and its evaluation of the
collectability of outstanding accounts receivable. The Company evaluates the credit risk of its customers
utilizing historical data and estimates of future performance.
Inventories - Inventories are stated at the lower of cost and net realizable value. Cost is calculated on
the moving-average, first-in-first-out basis and includes all costs to acquire and other costs to bring the
inventories to their present location and condition. The Company evaluates the net realizable value of its
inventories on a regular basis and records a provision for loss to reduce the computed moving-average cost
if it exceeds the net realizable value.
Advance Payments - These amounts represent advances or prepayments to acquire various assets to
be utilized in the future in the Company’s normal business operations. Such amounts are paid according to
their respective contract terms and are classified as a current asset in the consolidated balance sheet.
Property, Plant and Equipment – Property, plant and equipment are stated at cost. Major renewals
and improvements are capitalized; minor replacements and maintenance and repairs are charged to
operations. Depreciation is provided on the straight-line method over the estimated useful lives of the
respective assets as follows:
Category
Land use rights and buildings:
Land use rights
Buildings
Machinery and equipment
Electronic equipment
Motor vehicles
Estimated Useful Life (Years)
45-50
25
6
4
6
Assets under construction- represent buildings under construction and plant and equipment pending
installation— are stated at cost. Cost includes construction and acquisitions, and interest charges arising
from borrowings used to finance assets during the period of construction or installation and testing. No
provision for depreciation is made on assets under construction until such time as the relevant assets are
completed and ready for their intended commercial use.
Gains or losses on disposal of property, plant and equipment are determined as the difference
between the net disposal proceeds and the carrying amount of the relevant asset, and are recognized in the
consolidated statements of operations on the date of disposal.
Interest Costs Capitalized - Interest costs incurred in connection with specific borrowings for the
acquisition, construction or installation of property, plant and equipment are capitalized (if significant) and
depreciated as part of the asset’s total cost when the respective asset is placed into service.
However, for the fiscal year ended December 31, 2009, interest costs which were incurred before
achieving the expected usage as result of using such specific borrowings for the acquisition, construction
or installation of property, plant and equipment were not significant. For example, the interest cost
incurred in connection with specific borrowings for acquisition of Henglong’s equity was $262,500 and
$343,750 in 2008 and 2009, respectively, and such amount can achieve the expected usage without
preparation time. Interest cost incurred in connection with specific borrowings for construction or
installation of property, plant and equipment was $264,978 and $94,534 in 2008, and 2009, respectively.
Interest cost in preparation time was $$90,000, and $30,000, in 2008 and 2009, respectively.
Intangible Assets - Intangible assets, representing patents and technical know-how acquired, are
stated at cost less accumulated amortization and impairment losses. Amortization is calculated on the
straight-line method over the estimated useful life of 5 to 15 years.
50
CAAS 2009 ANNUA REPORT
In January 2002, the Company has adopted the provisions of ASC Topic 350 (formerly SFAS No.
142), “Goodwill and Other Intangible Assets”. The Company did not have any goodwill at December 31,
2009 and 2008.
Long-Lived Assets - The Company has adopted the provisions of ASC Topic 360 (formerly SFAS
No.144), “Accounting for the Impairment or Disposal of Long-Lived Assets”. Property, plant and
equipment and intangible assets are reviewed periodically for impairment losses whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If
required, an impairment loss is recognized as the difference between the carrying value and the fair value
of the assets.
In assessing long-lived assets for impairment, management considered the Company’s product line
portfolio, customers and related commercial agreements, labor agreements and other factors in grouping
assets and liabilities at the lowest level for which identifiable cash flows are largely independent. The
Company considers projected future undiscounted cash flows, trends and other factors in its assessment of
whether impairment conditions exist. Whilst the Company believes that its estimates of future cash flows
are reasonable, different assumptions regarding such factors as future automotive production volumes,
customer pricing, economics and productivity and cost saving initiatives, could significantly affect its
estimates. In determining fair value of long-lived assets, management uses appraisals, management
estimates or discounted cash flow calculations.
The Company recorded asset impairment charges of $781,373 for the year ended December 31,
2009, to adjust certain long-lived assets to their estimated fair values and included such charges in other
sales income in the income statement.
During 2009, the Company recorded impairment charges of $383,434 to reduce the net book value
of long-lived assets associated with the Company’s sensor products to their estimated fair value. This
amount was recorded pursuant to impairment indicators including lower than anticipated current and near
term future customer volumes, the related impact on the Company’s current and projected operating results
and cash flows resulting from a change in product technology.
During 2009, the Company planned to sell the idle and unused machinery equipment of Henglong.
The Company determined to fully write off these machinery and equipment. This results in asset
impairment charges of approximately $397,939.
Long-Term Investments - Investments in which the Company owns less than 20% of the investee
company and does not have the ability to exert significant influence are stated at cost, and are reviewed
periodically for realizability.
Revenue from Product Sales Recognition - The Company recognizes revenue when the significant
risks and rewards of ownership have been transferred to the customer pursuant to PRC law, including
factors such as when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is
fixed or determinable, sales and value added tax laws have been complied with, and collectability is
probable. The Company recognizes product sales generally at the time the product is shipped. Concurrent
with the recognition of revenue, the Company reduces revenue for estimated product returns. Shipping and
handling costs are included in cost of goods sold. Revenue is presented net of any sales tax and value
added tax.
Revenue from Materials and Other Assets Sales Recognition – Normally, the Company purchases
materials only for its production. Occasionally, some materials will be sold to other suppliers in case of
temporary inventory overage of such materials and to make a profit on any price difference. The Company
is essentially the agent in these transactions because it does not have any risk of product return. When there
is any quality or quantity loss, the suppliers are obligated to restitution. Income generated from selling
materials is recorded as the net amount retained, that is, the amount billed to the customers less the amount
paid to suppliers, in the consolidated statement of operations in accordance with the provisions of ASC
Topic 350 (formerly EITF 99-19).
51
CAAS 2009 ANNUA REPORT
Revenue from other asset sales represents gains or losses from other assets, for example, used
equipment. Income generated from selling other assets is recorded as the sales amount less cost of the
assets. The Company has classified such revenue from materials and other asset sales into gain on other
sales in its consolidated statement of operations.
Sales Taxes - The Company is subject to value added tax, “VAT”. The applicable VAT tax rate is
17% for products sold in the PRC. The amount of VAT liability is determined by applying the applicable
tax rate to the invoiced amount of goods sold less VAT paid on purchases made with the relevant
supporting invoices. VAT is collected from customers by the Company on behalf of the PRC tax
authorities and is therefore not charged to the consolidated statements of operations.
Product Warranties - The Company provides for the estimated cost of product warranties when the
products are sold. Such estimates of product warranties were based on, among other things, historical
experience, product changes, material expenses, service and transportation expenses arising from the
manufactured product. Estimates will be adjusted on the basis of actual claims and circumstances.
Pension - All the employees are located in China. The Company records pension costs and various
employment benefits in accordance with the relevant Chinese social security laws, which is approximately
at a total of 31% of salary as required by local governments. Base salary levels are the average salary
determined by the local governments.
Concentration of Credit Risk - Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily of trade accounts receivable. The Company
performs ongoing credit evaluations with respect to the financial condition of its debtors, but does not
require collateral. In order to determine the value of the Company’s accounts receivable, the Company
records a provision for doubtful accounts to cover probable credit losses. Management reviews and adjusts
this allowance periodically based on historical experience and its evaluation of the collectability of
outstanding accounts receivable.
Interest Rate Risk- Bank loans are charged at fixed interest rates.
Income Taxes - The Company accounts for income taxes using the liability method whereby
deferred income taxes are recognized for the tax consequences of temporary differences by applying
statutory tax rates applicable to future years to differences between the financial statement carrying
amounts and the tax bases of certain assets and liabilities, changes in deferred tax assets and liabilities, if
any, include the impact of any tax rate changes enacted during the year. ASC Topic 350 (formerly SFAS
No.109), “Accounting for Income Taxes,” requires that deferred tax assets be reduced by a valuation
allowance if, based on all available evidence, it is considered more likely than not that some portion or all
of the recorded deferred tax assets will not be realized in future periods. If the amount of the Company’s
taxable income or income tax liability is a determinant of the amount of a grant, the grant is treated as a
reduction of the income tax provision in the year the grant is realized.
Research and Development Costs - Research and development costs are expensed as incurred.
Advertising, Shipping and Handling Costs - Advertising, shipping and handling costs are expensed
as incurred.
Income Per Share - Basic income per share is calculated by dividing net income attributable to the
parent by the weighted average number of common shares outstanding during the period. Diluted income
per share is calculated based on the treasury stock method, assuming the issuance of common shares, if
dilutive, resulting from the exercise of options and warrants. The dilutive effect of convertible securities is
reflected in diluted earnings per share by application of the “if converted” method.
Comprehensive Income - The Company has adopted ASC Topic 220 (formerly SFAS No. 130),
“Reporting Comprehensive Income”. ASC Topic 220 establishes standards for the reporting and display of
comprehensive income, its components and accumulated balances in a full set of general purpose financial
statements. ASC Topic 220 defines comprehensive income to include all changes in equity except those
52
CAAS 2009 ANNUA REPORT
resulting from investments by owners and distributions to owners, including adjustments to minimum
pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on marketable
securities.
Fair Value of Financial Instruments -The company follows, “Fair Value Measurements and
Disclosures” (ASC 820-10), which among other things, defines fair value, establishes a consistent
framework for measuring fair value and expands disclosure for each major asset and liability category
measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing
the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would in pricing an asset or liability. As a basis for
considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the
inputs used in measuring fair value as follows:
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at
the measurement date.
Fair valued assets and liabilities that are generally included in this category are assets comprised of
cash equivalents, restricted cash, accounts and notes receivable, and liabilities comprised of bank loans,
accounts and notes payable, convertible notes payable, accrued payroll and related costs, accrued expenses
and other payables, accrued pension costs and amounts due to shareholders/directors.
Level 2 – Inputs (other than quoted prices included in Level 1) are either directly or indirectly
observable for the asset or liability through correlation with market data at the measurement date and for
the duration of the instrument’s anticipated life.
At December 31, 2009 and 2008, the Company did not have any fair value assets or liabilities
classified as Level 2.
Level 3 – Inputs reflect management’s best estimate of what market participants would use in
pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the
valuation technique and the risk inherent in the inputs to the model.
Fair valued assets and liabilities that are generally included in this category are assets comprised of
other long-term receivables; and liabilities comprised of advances payable.
Assets and liabilities measured at fair value as of December 31, 2009 and 2008 are classified below
based on the three fair value hierarchy tiers described above:
Fair value measurements using
Carrying value
Level 1
Level 2 Level 3
December 31, 2009
Assets
Cash equivalents
Restricted cash
Accounts and notes receivable
Other long term receivable
Total assets
Liabilities
Bank loans
Accounts and notes payable
Convertible notes payable
Accrued payroll and related costs
Accrued expenses and other payables
Accrued pension costs
Advances payable
$ 43,480,176 $ 43,480,176 $
12,742,187 12,742,187
154,863,292 154,863,292
-
$ 212,149,879 $ 211,085,655 $
1,064,224
5,125,802
5,125,802 $
107,495,833 107,495,833
28,640,755 28,640,755
3,040,705
- 17,708,681
3,778,187
-
3,778,187
233,941
3,040,705
53
- $
-
-
-
-
-
- 1,010,000
- $ 1,010,000
-
- $
-
-
-
-
-
-
-
-
-
-
- 220,000
Total liabilities
December 31, 2008
Assets
Cash equivalents
Restricted cash
Accounts and notes receivable
Other long term receivable
Total assets
Liabilities
Bank loans
Accounts and notes payable
Convertible notes payable
Accrued payroll and related costs
Accrued expenses and other payables
Accrued pension costs
Amounts due to shareholders/directors
Advances payable
Total liabilities
CAAS 2009 ANNUA REPORT
$ 166,023,904 $ 165,789,963 $
- $ 220,000
6,739,980
$ 37,113,375 $ 37,113,375 $
6,739,980
96,424,856 96,424,856
-
$ 141,627,738 $ 140,278,211 $
1,349,527
$
2,715,116
7,315,717 $ 7,315,717 $
59,246,043 59,246,043
32,922,077 32,922,077
2,715,116
12,460,784 12,460,784
3,806,519
337,370
-
$ 119,037,667 $ 118,803,626 $
3,806,519
337,370
234,041
-
- $
-
-
-
-
- 1,270,000
- $ 1,270,000
-
- $
-
-
-
-
-
-
-
-
-
-
-
-
- 220,000
- $ 220,000
Stock-Based Compensation - The Company may issue stock options to employees and stock options
or warrants to non-employees in non-capital raising transactions for services and for financing costs.
In July 2004, the Company adopted a stock incentive plan. The maximum number of common
shares for issuance under this plan is 2,200,000 with a period of 10 years. The stock incentive plan
provides for the issuance, to the Company’s officers, directors, management and employees, of options to
purchase shares of the Company’s common stock. Since the adoption of the stock incentive plan, the
Company has issued 433,850 stock options and 1,766,150 stock options remain to be issuable in the future.
As of December 31, 2009, the Company had 343,850 stock options outstanding.
The Company has adopted ASC Topic 718 (formerly SFAS 123R), “Accounting for Stock-Based
Compensation”, which establishes a fair value method of accounting for stock-based compensation plans.
In accordance with guidance now incorporated in ASC Topic 718, the cost of stock options and warrants
issued to employees and non-employees is measured on the grant date based on the fair value. The fair
value is determined using the Black-Scholes option pricing model. The resulting amount is charged to
expense on the straight-line basis over the period in which the Company expects to receive the benefit,
which is generally the vesting period.
Financial instruments - Derivative financial instruments, as defined in ASC Topic 815 (formerly
FAS 133), Accounting for Derivative Financial Instruments and Hedging Activities (ASC Topic 815),
consist of financial instruments or other contracts that contain a notional amount and one or more
underlying, e.g. interest rate, security price or other variable, require no initial net investment and permit
net settlement. Derivative financial instruments may be free-standing or embedded in other financial
instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value
and recorded as liabilities or, in rare instances, assets.
The Company generally does not use derivative financial instruments to hedge exposures to
cash-flow, market or foreign-currency risks. However, the Company has entered into certain other
financial instruments and contracts, such as debt financing arrangements that embody features that are
either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host
contracts, or (iii) may be net-cash settled by the counterparty. As required by ASC Topic 815 (formerly
FAS 133), these instruments are required to be carried as derivative liabilities, at fair value, in the
Company’s financial statements.
Registration Payment Arrangements - The Company has entered into registration payment
arrangements with certain investors that provide for the payment of damages for failures to register
common shares underlying the investor’s financial instruments. ASC Topic 825 (formerly FASB Staff
Position 00-19-2), Accounting for Registration Payment Arrangements, provides for the exclusion of
54
CAAS 2009 ANNUA REPORT
registration payments, such as the liquidated damages, from the consideration of classification of financial
instruments. Rather, such registration payments would be accounted for pursuant to ASC Topic 450
(formerly FASB No. 5), “Accounting for Contingencies”, which is the Company’s current accounting
practice. That is, all registration payments will require recognition when they are both probable and
reasonably estimable. The Company does not currently believe that damages are probable.
Fair Value Measurements - The Company has adopted the provisions of ASC Topic 820 (formerly
SFAS 157), “Fair Value Measurements” , except as it applies to those nonfinancial assets and nonfinancial
liabilities. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements.
Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion
(Including Partial Cash Settlement) - The Company has adopted the provisions of ASC Topic 470
(formerly FSP APB 14-1), “Accounting for Convertible Debt Instruments That May be Settled in Cash
upon Conversion (Including Partial Cash Settlement)”.ASC Topic 470 specifies that issuers of such
instruments should separately account for the liability and equity components in a manner that will reflect
the entity’s non-convertible debt borrowing rate when interest cost is recognized in subsequent periods.
ASC Topic 470 (formerly FSP APB 14-1) is effective beginning from January 1, 2009 for the Company,
and this standard must be applied on a retrospective basis. Since the Company’s Convertible Notes
agreement do not have a term for cash (or other assets) settlement upon conversion (Including Partial Cash
Settlement), the adoption of ASC 480 did not have an impact on the Company’s consolidated financial
position and results of operations.
Foreign Currencies - The Company maintains its books and records in Renminbi, “RMB”, the
currency of the PRC, its functional currency. In accordance with guidance now incorporated in ASC Topic
830 (formerly FAS 52), foreign currency transactions in RMB are reflected using the temporal method.
Under this method, all monetary items are translated into the functional currency at the rate of exchange
prevailing at the balance sheet date. Non-monetary items are translated at historical rates. Income and
expenses are translated at the rate in effect on the transaction dates. Transaction gains and losses, if any,
are included in the determination of net income for the period.
In translating the financial statements of the Company from its functional currency into its reporting
currency of United States dollars, balance sheet accounts are translated using the closing exchange rate in
effect at the balance sheet date and income and expense accounts are translated using an average exchange
rate prevailing during the reporting period. Adjustments resulting from the translation, if any, are included
in cumulative other comprehensive income (loss) in stockholders’ equity.
Certain Relationships And Related Transactions-
The following related parties are related through common ownership with the major shareholders of
the Company:
Jingzhou Henglong Fulida Textile Co., Ltd. (“Jingzhou”)
Xiamen Joylon Co., Ltd. (“Xiamen Joylon”)
Shanghai Tianxiang Automotive Parts Co., Ltd. (“Shanghai Tianxiang”)
Shanghai Fenglong Materials Co., Ltd. (“Shanghai Fenglong”)
Changchun Hualong Automotive Technology Co., Ltd. (“Changchun Hualong”)
Jiangling Tongchuang Machining Co., Ltd. (“Jiangling Tongchuang”)
Beijing Hualong Century Digital S&T Development Co., Ltd. (“Beijing Hualong”)
Jingzhou Jiulong Material Co., Ltd. (“Jiulong Material”)
Shanghai Hongxi Investment Inc. (“Hongxi”)
Hubei Wiselink Equipment Manufacturing Co., Ltd. (“Hubei Wiselink”)
Jingzhou Tongyi Special Parts Co., Ltd. (“Jingzhou Tongyi”)
Jingzhou Derun Agricultural S&T Development Co., Ltd. (“Jingzhou Derun”)
Jingzhou Tongying Alloys Materials Co., Ltd. (“Jingzhou Tongying”)
WuHan Dida Information S&T Development Co., Ltd. (“WuHan Dida”)
Hubei Wanlong Investment Co., Ltd. (“Hubei Wanlong”).
55
CAAS 2009 ANNUA REPORT
Jiangling Yude Machining Co., Ltd. (“Jiangling Yude”)
Wiselink Holdings Limited. (“Wiselink”)
Principal policies of the Company in connection with transaction with related parties are as follows:
Products sold to related parties – The Company sold products to related parties at fair market prices,
and also granted them credit of three to four months on an open account basis. These transactions were
consummated under similar terms as the Company's other customers.
Materials purchases from related parities – The Company purchased materials from related parties at
fair market prices, and also received from them credit of three to four months on an open account basis.
These transactions were consummated under similar terms as the Company's other suppliers.
Equipment and production technology purchased from related parties - The Company purchased
equipment and production technology from related parties at fair market prices, and was required to pay in
advance based on the purchase agreement between the two parties, because such equipment manufacturing
and technology development was required for a long period. These transactions were consummated under
similar terms as the Company's other suppliers.
3. Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) launched its Accounting Standards Codification
(ASC or the Codification), the single source of nongovernmental authoritative generally accepted
accounting principles in the United States (U.S. GAAP), and was effective for interim and annual periods
ending after September 15, 2009. The Codification is a reorganization of U.S. GAAP into a topical format
that eliminates the previous U.S. GAAP hierarchy. References to accounting standards in this Form 10-K
refer to the relevant ASC topic. As the Codification was not intended to change or alter existing GAAP, it
did not impact the Company’s financial condition, results of operations, or cash flows.
Effective January 1, 2009, the Company adopted guidance (originally issued as SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51)
amending existing GAAP to establish accounting and reporting standards for the noncontrolling interest in
a subsidiary and for the deconsolidation of a subsidiary. The adopted guidance, now included in ASC
Topic 810, Consolidation (ASC 810), clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity and should be reported as equity on the financial statements. ASC 810
requires consolidated net income to be reported at amounts that include the amounts attributable to both
the parent and the noncontrolling interest. Furthermore, disclosure of the amounts of consolidated net
income attributable to the parent and to the noncontrolling interest is required on the face of the financial
statements. The adoption of the guidance did not have a material impact on the Company’s consolidated
finance position and result of operation.
In April 2009, the FASB issued three accounting standard updates which were intended to provide
additional application guidance and enhanced disclosures regarding fair value measurements and
impairments of securities. The first update, as codified in ASC 820-10-65, provides additional guidelines
for estimating fair value in accordance with fair value accounting. The second update, as codified in ASC
320-10-65 established a new model for measuring other-than-temporary impairments for debt securities,
including establishing criteria for when recognize a write-down through earnings. The third accounting
update, as codified in ASC 825-10-65, increases the frequency of fair value disclosures. These updates
were effective for fiscal year and interim periods ending after June 15, 2009. There was no impact to the
Company’s consolidated financial statements as a result of the adoption of these standards.
In the second quarter of 2009, the Company adopted a new accounting standard for subsequent
events, as codified in ASC 855-10. The updated modifies the names of the two types of subsequent events
either as recognized subsequent events (previously referred to in practice as Type I subsequent events) or
non-recognized subsequent events (previously referred to in practice as Type II subsequent events). In
addition, the standard modifies the definition of subsequent events to refer to events or transactions that
occur after the balance sheet date, but before the financial statements are issued (for public entities) or
56
CAAS 2009 ANNUA REPORT
available to be issued (for nonpublic entities). The update did not result in significant changes in the
practice of subsequent event disclosures, and therefore the adoption did not have an impact on the
Company’s financial condition, results of operations, or cash flows.
In February 2010, FASB issued ASU 2010-09 Subsequent Event (Topic 855) Amendments to
Certain Recognition and Disclosure Requirements. ASU 2010-09 removes the requirement for an SEC
filer to disclose a date through which subsequent events have been evaluated in both issued and revised
financial statements. Revised financial statements include financial statements revised as a result of either
correction of an error or retrospective application of GAAP. All of the amendments in ASU 2010-09 are
effective upon issuance of the final ASU, except for the use of the issued date for conduit debt obligors.
That amendment is effective for interim or annual periods ending after June 15, 2010. The Company
adopted ASU 2010-09 in February 2010 and did not disclose the date through which subsequent events
have been evaluated.
In October 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-13 Revenue
Recognition (ASC 605): Multiple-Deliverable Revenue Arrangement, which changes the requirements for
establishing separate units of accounting in a multiple element arrangement and requires the allocation of
arrangement consideration to each deliverable based on the relative selling price. The selling price for each
deliverable is based on vendor-specific objective evidence (VSOE) if available, third-party evidence if
VSOE is not available, or estimated selling price if neither VSOE or third-party evidence is available. ASU
2009-13 is effective for revenue arrangements entered into in fiscal years beginning on or after June 15,
2010. The Company is currently assessing the impact to its financial condition, results of operations or
cash flows.
In January 2010, the FASB issued new standards in ASC 820, Fair Value Measurements and
Disclosures. These standard required new disclosures on the amount and reason for transfers in and out of
Level 1 and 2 fair value measurements. The standards also require disclosure of activities, including
purchases, sales, issuances, and settlements within the Level 3 fair value measurements. The standards also
clarify existing disclosure requirements on levels of disaggregation and disclosures about inputs and
valuation techniques. The new disclosures regarding Level 1 and 2 fair value measurements and
clarification of existing disclosures are effective for the Company beginning with its first interim filing in
2010. The disclosures about the roll forward of information in Level 3 are required for the Company with
its first interim filing in 2011. The Company is currently evaluating the impact these standards will have
on its financial condition, results of operations, or cash flows.
In January 2010, the FASB issued ASU No. 2010-01, Equity (ASC 505): Accounting for
distributions to Shareholders with Components of Stock and Cash (A Consensus of the FASB Emerging
Issues Task Force). This amendment to ASC 505 clarifies the stock portion of a distribution to
shareholders that allow them to elect to receive cash or stock with a limit on the amount of cash that will
be distributed is not a stock dividend for purposes of applying ASC 505 and 260. Effective for interim and
annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. The
Company does not expect the provisions of ASU No. 2010-01 to have a material effect on the financial
position, results of operations or cash flows of the Company.
4. Pledged cash deposits
Pledged as guarantee for the Company's notes payable, the Company regularly pays some of its
suppliers by bank notes. The Company (the drawer) has to deposit a cash deposit, equivalent to 10%- 40%
of the face value of the relevant bank note, in a bank (the drawer) in order to obtain the bank note.
5. Accounts Receivable and Notes Receivable
The Company’s accounts receivable at December 31, 2009 and 2008 are summarized as follows:
57
Accounts receivable
Notes receivable
Less: allowance for doubtful accounts
Balance at end of year
CAAS 2009 ANNUA REPORT
December 31,
2009
2008
$104,120,926 $ 60,345,494
56,062,744 40,989,840
160,183,670 101,335,334
(5,320,378 ) (4,910,478 )
$154,863,292 $ 96,424,856
Notes receivable represent accounts receivable in the form of bills of exchange whose acceptances
and settlements are handled by banks.
The activity in the Company’s allowance for doubtful accounts of accounts receivable during the
years ended December 31, 2009 and 2008 are summarized as follows:
Balance at beginning of year
Amounts provided for during the year
Add: foreign currency translation
Balance at end of year
6. Other Receivables
December 31,
2008
2009
$ 4,910,478 $3,827,838
406,228 841,078
3,672 241,562
5,320,37
$
8 $4,910,478
The Company’s other receivables at December 31, 2009 and 2008 are summarized as follows:
Other receivables
Less: allowance for doubtful accounts
Balance at end of year
December 31,
2008
2009
$1,804,334 $2,009,364
(740,110 ) (659,837 )
$1,064,224 $1,349,527
Other receivables consist of amounts advanced to both related and unrelated parties, primarily as
unsecured demand loans, with no stated interest rate or due date.
The activity in the Company’s allowance for doubtful accounts of other receivable during the year
ended December 31, 2009 and 2008 are summarized as follows:
Balance at beginning of the year
Add: amounts provided for during the year
Add: foreign currency translation
Balance at end of year
7. Inventories
December 31,
2008
2009
$ 659,837 $ 652,484
(41,264 )
48,617
$ 740,110 $ 659,837
79,618
655
The Company’s inventories at December 31, 2009 and 2008 consisted of the following:
December 31,
58
Raw materials
Work in process
Finished goods
Less: provision for loss
Balance at end of year
8. Property, Plant and Equipment
CAAS 2009 ANNUA REPORT
2009
2008
$10,683,448 $ 8,354,397
6,824,137 4,466,720
12,017,195 14,826,961
29,524,780 27,648,078
(2,109,083 ) (1,076,323)
$27,415,697 $ 26,571,755
The Company’s property, plant and equipment at December 31, 2009 and 2008 are summarized as
follows:
Costs:
Land use rights and buildings
Machinery and equipment
Electronic equipment
Motor vehicles
Construction in progress
Less: Accumulated depreciation
Balance at end of year
December 31,
2009
2008
$ 33,100,702 $ 27,416,977
62,982,885 54,405,700
5,054,502 4,356,475
2,634,696 2,461,378
1,939,256 1,007,415
105,712,041 89,647,945
(45,222,243 ) (37,669,040)
$ 60,489,798 $ 51,978,905
Depreciation charge for the years ended December 31, 2009 and 2008 were $8,429,863 and
$9,672,948, respectively.
9. Intangible Assets
The activity in the Company’s intangible asset account during the years ended December 31, 2009
and 2008 are summarized as follows:
Costs:
Patent technology
Management software license
Less: Accumulated amortization
Balance at end of the year
December 31,
2009
2008
438,359
$ 1,384,037 $ 1,090,112
423,014
1,822,396 1,513,126
(1,261,007 ) (1,008,787 )
504,339
$ 561,389 $
The estimated aggregated amortization expense for each of the five succeeding years is $174,384,
$143,807, $136,383, $77,112, and $16,633 respectively.
10. Deferred Income Tax Assets
In accordance with the provisions of ASC Topic 740 “Income Taxes” (formerly SFAS 109), the
Company assesses, on a quarterly basis, its ability to realize its deferred tax assets. Based on the more
likely than not standard in the guidance and the weight of available evidence, the Company believes a
valuation allowance against its deferred tax assets is necessary. In determining the need for a valuation
allowance, the Company considered the following significant factors: an assessment of recent years’
profitability and losses; the Company’s expectation of profits based on margins and volumes expected to
be realized (which are based on current pricing and volume trends); the long period - ten years or more in
all significant operating jurisdictions — before the expiry of net operating losses, noting further that a
portion of the deferred tax asset is composed of deductible temporary differences that are subject to an
59
expiry period until realized under tax law. The Company will continue to evaluate the provision of
valuation allowance in future periods.
The components of deferred income tax assets at December 31, 2009 and 2008 were as follows:
CAAS 2009 ANNUA REPORT
December 31,
2009
2008
Losses carryforward (U.S.)
Losses carryforward (PRC)
Product warranties and other reserves
Property, plant and equipment
Bonus accrual
All other
Valuation allowance *
Total deferred tax assets
421,629
$ 3,855,426 $ 2,300,322
287,285
2,313,728 1,737,052
2,818,497 2,471,716
297,208
154,348
10,110,959 7,247,931
(6,556,448) (4,864,866 )
$ 3,554,511 $ 2,383,065
306,030
395,649
*As of December 31, 2009, valuation allowance was $6,556,448, including $3,855,426 allowance
for the Company’s deferred tax assets in the U.S. and $2,701,022 allowance for the Company’s non-U.S.
deferred tax assets. Based on the Company’s current operations in the U.S., the management believes that
the deferred tax assets in the US are not likely to be realized in the future. For the non-U.S. deferred tax
assets, pursuant to certain tax laws and regulations in China, the management believes such amount will
not be used to offset future taxable income.
** Approximately $2,172,643 and $2,383,065 of deferred income tax asset as of December 31, 2009
and 2008, respectively, is included in n on-current deferred tax assets in the accompanying consolidated
balance sheets. The remaining $1,381,868 and $ nil of deferred income tax asset as of December 31, 200 9
and 2008 respectively, is included in the current deferred tax assets.
The estimated losses available to reduce taxable income in future years will expire as follows:
Years ending December 31,
2029
2028
2027
2026
2025
2024
2023
2014
2013
2012
2011
Total
$ 3,260,652
2,179,305
779,388
1,044,363
471,623
933,308
2,259,753
632,272
65,267
709,099
653,016
$12,988,046
11. Bank Loans
At December 31, 2009, the Company, through its Sino-foreign joint ventures, had outstanding
fixed-rate short-term bank loans of $5,125,802, with weighted average interest rate at 5.68% per annum.
These loans are secured with some of the property and equipment of the Company and are repayable
within one year.
At December 31, 2008, the Company, through its Sino-foreign joint ventures, had outstanding
fixed-rate short-term bank loans of $7,315,717, with weighted average interest rate at 6.17% per annum.
These loans are secured with some of the property and equipment of the Company and are repayable
within one year.
12. Accounts and notes payable
60
The Company’s accounts and notes payable at December 31, 2009 and 2008 are summarized as
CAAS 2009 ANNUA REPORT
follows:
Accounts payable
Notes payable
Balance at end of year
December 31,
2009
2008
$ 69,454,231 $38,595,446
38,041,602 20,650,597
$107,495,833 $59,246,043
Notes payable represent accounts payable in the form of bills of exchange whose acceptances and
settlements are handled by banks.
The Company has pledged cash deposits, notes receivable and certain property plant and machinery
to secure trade financing granted by banks.
13. Convertible notes payable
The Company’s Convertible notes payable at December 31, 2009 and 2008 are summarized as
follows:
Convertible notes payable, face value
Less: discount of Convertible notes payable
Convertible notes payable, net of discount
December 31,
2009
2008
$30,000,000 $ 35,000,000
(1,359,245 ) (2,077,923)
$28,640,755 $ 32,922,077
The Company’s discount of Convertible notes payable at December 31, 2009 and 2008 are
summarized as follows:
Balance at beginning of year
Less: amortization
Balance at end year
December 31,
2008
2009
$ 2,077,923 $2,502,588
(718,678 ) (424,665 )
$ 1,359,245 $2,077,923
In February 2008, the Company sold to two accredited institutional investors $35 million of
convertible notes, the "Convertible Notes", with a scheduled maturity date of February 15, 2013. The
Convertible Notes, including any accrued but unpaid interest, are convertible into common shares of the
Company at a conversion price of $8.8527 per share, subject to adjustment upon the occurrence of certain
events.
The Convertible Notes bear annual interest rates of 3%, 3.5%, 4%, 4.5% and 5% for each year of
2008, 2009, 2010, 2011 and 2012. The interest on the Convertible Notes shall be computed commencing
from the issuance date and will be payable in cash in arrears semi-annually on January 15, and July 15 of
each year with the first interest payable date being July 15, 2008. From and after the occurrence and during
the continuance of an Event of Default defined in the relevant Convertible Note agreements, the interest
rate then in effect shall be increased by two percent (2%) until the event of default is remedied.
The holders of the Convertible Notes will be entitled to convert any portion of the conversion
amount into shares of common stock at the conversion price at any time or times on or after the thirtieth
(30th) day after the issuance date and prior to the thirtieth (30th) Business Day prior to the expiry date of
the Convertible Notes. A damage penalty will be paid if share certificates are not delivered timely after any
conversion.
The Company will have the right to require the Convertible Note holders to convert all or any
portion of the conversion amount then remaining under the Convertible Note obligation into shares of
61
CAAS 2009 ANNUA REPORT
common stock, “ Mandatory Conversion”, if at any time during a six-month period, the beginning day of
each such six-month period, a “Mandatory Conversion Period Start Date”, the arithmetic average of the
weighted average price of the common stock for a period of at least thirty (30) consecutive trading days
following the Mandatory Conversion Period Start Date equals or exceeds the percentage of $8.8527 set
forth in the chart below as applicable to the indicated six month period:
0-6 months: 125 %
6-12 months: 125 %
12-18 months: 135 %
18-24 months: 135 %
24-30 months: 145 %
30-36 months: 145 %
36-42 months: 155 %
42-48 months: 155 %
On each six month anniversary of the issuance date beginning August 15, 2008, the conversion price
will be adjusted downward to the Reset Reference Price, as defined below, if the weighted average price
for the twenty (20) consecutive trading days immediately prior to the applicable six month anniversary, the
“Reset Reference Price”, is less than 95% of the conversion price in effect as of such applicable six month
anniversary date. The foregoing notwithstanding, the conversion price will not be reduced via such reset
provision to less than $7.0822. The conversion price is also subject to weighted-average antidilution
adjustments, but in no event will the conversion price be reduced to less than $6.7417. If and whenever on
or after the issuance date, the Company issues or sells its shares of Common Stock or other convertible
securities, except for certain defined exempt issuances, for a consideration per share less than a price equal
to the conversion price in effect on the issuance date immediately prior to such issue or sale, the original
conversion price then in effect shall be adjusted by a weighted-average antidilution formula, but in no
event to a new conversion price less than $6.4717.
The Company will not effect any conversion of the Convertible Notes, and each holder of the
Convertible Notes will not have the right to convert any portion of the Convertible Notes to the extent that
after giving effect to such conversion, such holders would beneficially own in excess of 4.99% of the
number of shares of Common Stock outstanding immediately after giving effect to such conversion.
The Company will not effect a Mandatory Conversion of more than twelve percent (12%) of the
original principal amount of the Convertible Notes, with the applicable accrued but unpaid interest, in any
six month period or twenty-four percent (24%) of the original principal amount of the Convertible Notes,
with the applicable accrued but unpaid interest, in any twelve (12) month period.
Upon the occurrence of an event of default with respect to the Convertible Notes, the Convertible
Note holders may require the Company to redeem all or any portion of the Convertible Notes. Each portion
of the Convertible Notes subject to redemption by the Company will be redeemed by the Company at a
price equal to the sum of (i) the conversion amount to be redeemed and (ii) the Other Make Whole Amount.
The “Other Make Whole Amount” will mean a premium to the conversion amount such that the total
amount received by the Convertible Note holder upon redemption represents a gross yield to the
Convertible Note holders on the original principal amount as of the redemption date equal to thirteen
percent (13%), with interest computed on the basis of actual number of days elapsed over a 360-day year.
The events of default includes the Company’s failure to cure a conversion failure by delivery of the
required number of shares of Common Stock, the Company’s failure to pay to the Convertible Note holder
any amount of principal, interest, late charges or other amounts when and as due under the Convertible
Notes and other events as defined in the Convertible Note agreements.
Upon the consummation of a change of control as defined in the Convertible Note agreements, the
Convertible Note holder may require the Company to redeem all or any portion of the Convertible Notes.
The portion of the Convertible Notes subject to redemption shall be redeemed by the Company in cash at a
price equal to the sum of the conversion amount of being redeemed and the Other Make Whole Amount as
defined above.
62
CAAS 2009 ANNUA REPORT
On each of February 15, 2010 and February 15, 2011, the Convertible Note holders will have the
right, in their sole discretion, to require that the Company redeem the Convertible Notes in whole but not
in part, by delivering written notice thereof to the Company. The portion of this Convertible Note subject
to redemption pursuant to this annual redemption right will be redeemed by the Company in cash at a price
equal to the sum of the conversion amount being redeemed and the Annual Redemption Make Whole
Amount. The “Annual Redemption Make Whole Amount” will mean a premium to the conversion amount
such that the total amount received by the Convertible Note holder upon any annual redemption represents
a gross yield on the original principal amount of eleven percent (11%), with interest computed on the basis
of actual number of days elapsed over a 360-day year.
In the event that the Company has not completed the necessary filings to list the conversion shares
on its principal market by the date that is ninety (90) days after the issuance date or has not so listed the
conversion shares by the date that is ninety (90) days after the issuance date or the shares of the
Company’s common stock are terminated from registration under the Securities Act of 1933, the
Convertible Note holders will have the right, in its sole discretion, to require that the Company redeem all
or any portion of the Convertible Notes. The portion of the Convertible Notes subject to redemption in
connection with this listing default will be redeemed by the Company in cash at a price equal to the sum of
the conversion amount being redeemed and the Other Make Whole Amount as mentioned above.
At any time following February 15, 2009, if the Weighted Average Price (WAP) for twenty (20)
consecutive trading days is less than 45% of the Conversion Price in effect on the Issuance Date, as
adjusted, namely $3.187, the Convertible Note holder shall have the right, in its sole discretion, to require
that the Company redeem all or any portion of the Convertible Notes. The portion of this Convertible Note
subject to redemption in connection with the share price change of the underlying common stock will be
redeemed by the Company in cash at a price equal to the sum of the conversion amount being redeemed
and the Other Make Whole Amount as mentioned above.
Since the Company’s stock Weighted Average Price for twenty (20) consecutive trading days ended
on March 16, 2009 was below $3.187, which is less than 45% of the Conversion Price in effect as of the
Issuance Date, as adjusted, the “ WAP Default” , each Convertible Note holder had the right, at its sole
discretion, to require that the Company redeem all or any portion of the Convertible Notes by delivering
written redemption notice to the Company within five (5) business days after the receipt of the Company’s
notice of the WAP Default.
On March 17, 2009, the Company delivered two WAP Default notices to the Convertible Note
holders. On March 27, 2009, the Company received a letter from YA Global, one of the Convertible Note
holders, electing to require the Company to redeem all the three Convertible Notes it held in the total
principal amount of $5,000,000, together with interest, late charges, and the Other Make Whole Amount as
defined in Section 5(d) of the Convertible Notes. After negotiation, the Company and YA Global reached a
settlement agreement on April 8, 2009 and under the terms of the settlement agreement, the Company paid
on April 15, 2009 a redemption amount of $5,041,667 to YA Global and YA Global waived its entitlement
to the Other Make Whole Amount.
Following the WAP Default notices, the Company received a letter from the provisional liquidator
acting on behalf of Lehman Brothers Commercial Corporation Asia Limited, the “LBCCA Liquidator”, the
other Convertible Note holder, requesting an extension until April 24, 2009 to consider its rights under the
Convertible Notes. The Company granted an extension to April 15, 2009. The LBCCA Liquidator further
requested another extension to April 24, 2009. On April 24, 2009, LBCCA’s lawyers sent three Holder
Redemption Notices via fax electing to redeem the entire outstanding principal of $30,000,000, together
with interest, late charges, if any, and the Other Make Whole Amount, to be paid on July 23, 2009. The
Company discussed settlement with the LBCCA Liquidator, and on or about July 22, 2009, the Company
and the LBCCA Liquidator agreed to extend the applicable holder mandatory redemption date for two
months to September 23, 2009 to give more time to pursue settlement discussion. The Company received a
letter dated September 22, 2009 from the LBCCA Liquidator stating that upon the Company’s acceptance
of the revocation, all holder redemption notices dated April 24, 2009 shall be immediately revoked as if
they were never issued, and the letter and the revocation did not purport to amend, restate or supplement
any other terms and conditions under the three Notes and the Securities Purchase Agreement dated 1
63
CAAS 2009 ANNUA REPORT
February 2008 between the Company and LBCCA Liquidator. The Company accepted such revocation on
September 23, 2009.
In connection with the Convertible Notes, the Company issued 1,317,864 detachable warrants, the
“Warrants,” to purchase from the Company shares of common stock of the Company at the exercise price
of $8.8527 per share. The Warrants are exercisable immediately and expired on February 15, 2009. The
Warrants require net cash settlement in the event that there is a fundamental transaction, contractually
defined as a merger, sale of substantially all assets, tender offer or share exchange. Due to this contingent
redemption provision, in accordance with guidance now incorporated in ASC Topic 480 (formerly SFAS
150), the warrants require liability classification and must be recorded at fair value each reporting period.
As of the issuance date, i.e., February 15, 2008, the fair value of warrants was $798,626, which was
determined using the Black-Scholes option pricing model.
The Company has evaluated the convertible notes for terms and conditions that are not clearly and
closely associated with the risks of the debt-type host instrument. Generally, such features require
separation from the host contract and treatment as derivative financial instruments. Certain features, such
as the conversion option, were found to be exempt. Other features, such as puts and redemption features,
were found to require bifurcation and recognition as derivative liabilities. These derivative liabilities are
recognized initially at fair value, using forward cash-flow valuation techniques. As of February 15, 2008,
the compound derivative value amounted to $1,703,962. This derivative will be adjusted to its estimated
fair value at the completion of each reporting period until the debt arrangement is ultimately settled,
converted or paid.
When a financial instrument contains embedded derivatives that require bifurcation, such as the
redemption put, and freestanding instruments that are recorded at fair value each period, such as the
warrants, the accounting is to record the embedded derivative and the freestanding instruments at fair value
on inception and the residual proceeds are allocated to the debt instrument. Based on this premise, upon
inception of the debt instruments, the Company recorded the redemption put at fair value $1,703,962 and
the Company recorded the warrants at fair value $798,626. The remaining proceeds were then allocated
to the debt instrument.
The Company has adopted the provisions of ASC Topic 470 (originally issued as FSP APB
14-1), “Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion
(Including Partial Cash Settlement). ASC Topic 470 specifies that issuers of such instruments should
separately account for the liability and equity components in a manner that will reflect the entity’s
non-convertible debt borrowing rate when interest cost is recognized in subsequent periods. ASC Topic
470 (formerly FSP APB 14-1) is effective beginning from January 1, 2009 for the Company, and this
standard must be applied on a retrospective basis. Since the Company’s Convertible Notes agreement do
not have a term for cash (or other assets) settlement upon conversion (Including Partial Cash Settlement),
the adoption of ASC 480 did not have an impact on the Company’s consolidated financial position and
results of operations.
As indicated above, according to the terms of the Convertible Notes, the conversion price was reset
to $7.0822 as of August 15, 2008 based on the weighted average price of the stock on that date. In
accordance with ASC Topic 470 (formerly EITF 00-27), a contingency feature that cannot be measured at
inception of the instrument, should be recorded when the contingent event occurs. Therefore, on the date
of the reset, the difference in the number of indexed shares prior to the reset was compared to the indexed
shares subsequent to the reset and this incremental number of shares was multiplied by the
commitment date stock price to determine the incremental intrinsic value that resulted from the adjustment
to the conversion price. This difference was recorded in equity as a beneficial conversion feature (“BCF”)
and the related discount reduced the carrying value of the note and is being amortized over the remaining
life of the instrument.
As of August 15, 2008, the number of indexed shares was 3,953,596 and 4,941,967 at the inception
conversion price and reset conversion price, respectively. At the commitment date, the stock price was
$6.09, and the “effective” conversion price was $6.93. Accordingly, since the effective conversion price
64
CAAS 2009 ANNUA REPORT
was higher than the market value of the stock, the debt instruments are not considered "in the money" and
no beneficial conversion feature is present.
On the date of inception, allocation of basis in the financing arrangement to the warrants and
derivative liability has resulted in an original issue discount to the face value of the convertible notes in the
amount of $2,502,588, which amount is subject to amortization over the Convertible Note’s term using the
effective method. As of December 31, 2009, the amortization expense balance recorded by the Company
was $1,143,343 (including unamortized discount on the YA Global Convertible Note $276,448, which has
been written off after its redemption. As the YA Global convertible note has been elected by its holder to
be redeemed, the unamortized discount on the convertible note has been written off as expense on the
redemption date), remaining $1,359,245 will be amortized over the remaining life of the instrument.
14. Compound derivative liabilities
The Company has evaluated the convertible notes for terms and conditions that are not clearly and
closely associated with the risks of the debt-type host instrument (see Note 13). Generally, such features
require separation from the host contract and treatment as derivative financial instruments. Certain features,
such as the conversion option, were found to be exempt, as they satisfied the conditions for equity
classification in ASC Topic 815 (formerly the paragraph 11(a) of SFAS 133) for instruments (1) indexed
with the Company’s own stock, and (2) classified as equity in financial position statement. Other features,
such as puts and redemption features were found to require bifurcation and recognition as derivative
liabilities based on the provision of ASC Topic 815 (formerly the paragraph 12 of SFAS 133). These
derivative liabilities are recognized both at inception and the end of each reporting period at fair value,
using forward cash-flow valuation techniques, until such liabilities arrangement are eventually settled,
converted or paid. As of February 15, 2008, the compound derivative value amounted to $1,703,962. As of
December 31, 2009 and 2008, the compound derivative value amounted to $880,009 and $1,502,597. The
income from adjustment of fair value of compound derivative has been recorded in the income statement
as gain or loss on change in fair value of derivative. (See note 13 and 25)
The fair value of compound derivative liabilities at inception and the end of each reporting period
was calculated based on the following assumptions:
(1) Credit risk adjusted based on publicly available research/investigation: The Company develops
credit risk assumptions by reference to corporate bond spreads in the market that the Company's equity
security trades. Bond yields were selected as the principal market indicator because such yields are
presumed to provide information that assigns yields directly to any company's assumed credit rating.
Credit ratings are established through formal analysis of bond inception and trading activity by Standard &
Poor, Moody's and Fitch. The Company believes that it is likely that a market-participant would look to
this indicator for purposes of assessing the credit risk associated with the investment. The calculation of
the risk adjusted yield requires its measurement against a risk-free rate. The Company has chosen the
publicly quoted yields on zero-coupon US Government Securities.
(2) Probability of certain default event occurred: Compound derivatives are bifurcated pursuant to
SFAS 133.12. The fair value of compound derivatives is predicated on a probability assessment of the
likelihood of a triggering event and the incremental value embodied in the hybrid instrument (See Note 13
regarding the assessment of compound derivatives. For example: mandatory redemption requires the gross
yield arrived at 13% and annual redemption requires the gross yield arrived at 11%. ). The Company has
assessed the probability of the likelihood of a triggering event at inception and completion of each
reporting period:
Default put :
February 15, 2008
(Inception)
0.0%
December 31,
2008
0.0%
December 31,
2009
0.0%
Service default
Low
Low
Low
Comments
The Company has an
established history of debt
service and projections indicate
ability to service.
65
CAAS 2009 ANNUA REPORT
Bankruptcy/liquidation
Low
Low
Low
Material judgments
Low
Low
Low
Suspension of listing*
Low
Low
Low
Non-registration
events:
0.5%
0.5%
0.5%
Filing*
Low
Low
Low
Effectiveness*
Low
Low
Low
Continuous
Effectiveness*
Low
Low
Low
Share non-delivery
0.5%
0.5%
0.5%
Mandatory
redemption put:
4.0%
15.0%
1.5%
Maintenance of share
price at a certain
level**
4.0%
15.0%
1.5%
Suspension of listing
and non-registration
events*
Annual Redemption
Rights:
Low
Low
Low
25.0%
30.0%
11.7%
66
This event is within the
Company's control.
The Company is not aware of
any asserted or unasserted
claims that would trigger such
event.
The Company is not aware of
any indications that would
result in suspension.
The filing of a registration
statement is highly probable.
Management has a history of
making its filings and
maintaining listing of its
securities.
Management has a history of
making its filings and
maintaining listing of its
securities.
The risk is low because delivery
is within the Company's
control.
This is not within the
Company’s control. This put is
only available subsequent to
February 15, 2009 and only if
the stock price is <45% of the
conversion price for 20 trading
days. Therefore, the risk of
mandatory redemption was low
at February 15, 2008 (Inception
date). On December 31, 2008,
the stock price has maintained a
value barely above 45% of the
adjusted conversion price, so
the risk of mandatory
redemption was high. On
December 31, 2009, the stock
price was 164% above the
adjusted conversion price, so
the risk of mandatory
redemption was low.
The Company is not aware of
any indications that would
result in suspension, and
filing of a registration statement
is highly probable.
CAAS 2009 ANNUA REPORT
Allows for redemption
rights on specific
dates**
25.0%
30.0%
11.7%
This is not within the
Company’s control. On
February 15, 2008 (Inception)
and December 31, 2008, the
stock prices were below the
adjusted conversion price, so
the risk of annual redemption
was high. On December 31,
2009, the stock price was 164%
above the adjusted conversion
price, so the risk of annual
redemption was low.
Allows for redemption
if < 10% of note is
outstanding
Low
Low
Low
This is at the Company's option.
Henglong Make
Whole Amount and
Redemption Right
Low
Low
Low
Change in Control
Put:
0.5%
0.5%
0.5%
Change in control*
0.5%
0.5%
0.5%
This is not within the
Company's control, however,
the funds related to the
Henglong transaction were held
in an escrow account until
March 31, 2008 at which time
the Henglong transaction was
completed. The Henglong
Make Whole and Redemption
amounts were not applicable
unless the Company did not
consummate the Henglong
transaction by April 15th. Since
the transaction did consummate
prior to April 15, 2008 and the
funds were held in escrow prior
to that time, there was no value
assigned to the puts associated
with the Henglong transaction.
Not within Company's control-
however, there are no
impending or planned events.
*Represent the event is not within the Company's control, but the probability of a triggering event is
low.
**Represent the event is not within the Company's control, and the probability of a triggering event
is high. The assessment of such probability was based on the probability of the historical trading price of
the Company's common stock above or under Strike price for previous periods (same with the remaining
period of the instruments). For example, the triggering event of maintaining the stock price at a certain
level, is the Company's stock weighted average price for twenty (20) consecutive trading days below
$3.187, which is 45% of the reset Conversion Price of $7.0822. The triggering event allows for redemption
rights on specific dates, is maintaining the stock price at $8.6 or lower.
According to the analysis and data above, change of the fair value of compound derivative liabilities
for the reporting period was mainly based on the price change of the Company’s trading common stock. It
was estimated that, if the probability of the stock price above $8.6 was high, the probability of redemption
was low, because the Convertible notes holders would gain 11% or more income by converting into
common stock at this price level, which was higher than the income from bond market or redemption of
Convertible notes upon any occurrence of triggering events as defined in the debt agreement. As of
December 31, 2009, the fair value of compound derivative liabilities was $880,009, significantly lower
67
CAAS 2009 ANNUA REPORT
than $1,502,597 on December 31, 2008, mainly as a result of the recent market recovery, the Company’s
stock price rose dramatically, the probability of the Company’s stock price trading above $8.6 rose,
accordingly, the probability of redemption declined.
15. Accrued expenses and other payables
The Company’s accrued expenses and other payables at December 31, 2009 and 2008 are
summarized as follows:
Accrued expenses
Other payables
Warranty reserves*
Dividend payable to minority interest shareholders of Joint-ventures
Liabilities in connection with warrants**
Balance at end of year
December 31,
2009
2008
$ 4,160,433 $ 2,441,352
2,694,447 1,690,046
9,092,462 6,335,613
1,761,339 1,991,796
1,977
-
$ 17,708,681 $12,460,784
*The Company provides for the estimated cost of product warranties when the products are sold.
Such estimates of product warranties were based on, among other things, historical experience, product
changes, material expenses, service and transportation expenses arising from the manufactured product.
Estimates will be adjusted on the basis of actual claims and circumstances.
For the years ended December 31, 2009 and 2008, the warranties activities were as follows:
Balance at the beginning of year
Additions during the year
Settlement within the year
Foreign currency translation
Balance at end of year
December 31,
2009
2008
$ 6,335,613 $ 4,919,491
10,192,749 5,861,782
(7,442,984) (4,797,457 )
351,797
$ 9,092,462 $ 6,335,613
7,084
The Company has recorded $9,092,462 and $6,335,613 product warranty reserves as at December
31, 2009 and 2008, which were included in the accrued expenses and other payables in the accompanying
consolidated financial statements.
**In connection with the Convertible Debt, the Company issued 1,317,864 of detachable warrants,
“Warrants,” to purchase from the Company shares of common stock at the exercise price of $ 8.8527 per
share, subject to adjustments upon certain events occurring as defined in the debt agreement. The Warrants
were exercisable immediately and expired on February 15, 2009.
The exercise price or the number of shares to be converted by the Warrant will be adjusted in the
event of no effective Registration Statement or delayed effectiveness of the Registration Statement. In
addition a damage penalty will be paid if the delivery of share certificates occurs upon the Warrants
conversion.
The Company will not effect any conversion of a Warrant, and each holder of any Warrant will not
have the right to convert any portion of such Warrant to the extent that after giving effect to such
conversion, each of these two holders would beneficially own in excess of 4.99% of the number of shares
of Common Stock outstanding immediately after giving effect to such conversion.
If and whenever on or after the issuance date, the Company issues or sells its shares of common
stock or other convertible securities for a consideration per share less than a price equal to the exercise
price of a Warrant in effect on the issuance date immediately prior to such issue or sale, the exercise price
of such Warrant then in effect will be adjusted.
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CAAS 2009 ANNUA REPORT
The warrants issued in connection with the financial arrangement were derivative instruments. The
warrants require net cash settlement in the event that there is a fundamental transaction, contractually
defined as a merger, sale of substantially all assets, tender offer or share exchange.
In accordance with guidance now incorporated in ASC Topic 480 (formerly SFAS 150), it appears
that the warrants require liability classification due to the possible cash redemption upon the event of an all
cash acquisition. The FSP clarifies that warrants that contain any redemption features, including contingent
redemption features, must be recorded as liabilities and marked to fair value each reporting period. As of
the issuance date, i.e., February 15, 2008, the fair value of warrants was $798,626. Such warrant liabilities
will be adjusted to its estimated fair value at the completion of each reporting period until the maturity of
February 15, 2009.
The warrant agreements contain strike price adjustment provisions. In accordance with Section 8(iii),
if the rate at which any Convertible Instruments are convertible into changes at any time, the warrant
exercise price in effect at the time of the change will be adjusted based on the formula provided in Section
8(a) of the warrant agreement. Accordingly, the warrants will be valued at the exercise price of $8.55 as of
August 15, 2008 and thereafter.
As of August 15, 2008, the Company valued the warrant using conversion price at inception and
reset respectively. The fair value of the warrant is $489,719 at the inception conversion price of $8.8527,
and $551,131 at the reset conversion price of $8.55, respectively.
As of December 31, 2009 and 2008, the fair value of warrant was $0 and $1,977, respectively. On
February 15, 2009, the warrant matured and was unexercised, and the right of exercising the warrants was
forfeited. The income from adjustment of fair value of liabilities in connection with warrants has been
recorded in the income statement as gain or loss on change in fair value of derivative. (See note 25)
As of Issuance Date (February 15, 2008), Reset date (August 15, 2008) and the end of each
reporting period, the fair value of liabilities in connection with warrants was calculated using
Black-Scholes option pricing model and based on the following assumptions:
February
15, 2008
Issuance
Date
August 15,
2008
Prior to
reset
August 15,
2008
Subsequent
to reset
December
31,
2 008
February
15, 2009
Maturity
date
Warrants indexed to common stock 1,317,864 1,317,864 1,317,864 1,317,864 1,317,864
Strike price Trading market price* $
3.30
6.03 $
8.8527 $ 8.8527
$
Strike price
8.8527 $
(0.3027 ) $ (0.3027 ) $ (0.3027 )
Strike price adjustment
8.5500 $ 8.5500
8.5500 $
Effective strike for BSM
6.03 $
8.8527 $ 8.8527 $
- $
8.8527 $ 8.8527 $
3.39 $
6.09 $
-
$
Term:
Estimated Term (Year)**
Volatility Historical volatility for
effective term***
Risk-free rate****
Dividend yield rates*****
Fair value of warrants
1.00
0.50
0.50
0.13
0.00
54.60 %
2.02 %
0.00 %
64.00 %
1.99 %
0.00 %
$ 798,626 $ 489,718 $ 551,131 $
64.00 %
1.99 %
0.00 %
92.36 %
0.11 %
0.00 %
1,977 $
0.00 %
0.00 %
0.00 %
0
* Using the Company’s common stock trading price.
** Same with the remaining contractual term.
*** The volatility for the remaining contractual term was calculated and was consistent with
historical term.
**** The Risk-free rate elected was zero-coupon US Government Securities, and have the same
term as the remaining contractual term. Is was considered an appropriate index because it is a general
index that a market participant will used to trade in the Company’s common stock market.
***** It was estimated that the Company would not distribute any dividend.
69
CAAS 2009 ANNUA REPORT
As above, the significant change in fair value of warrant between reporting period and inception,
primarily due to a decrease of trading price of the Company’s common stock and a decrease of days for
contract execution deadline or un-exercised on maturity date (February 15, 2009), the right of warrant
forfeited.
16. Accrued pension costs
All the employees are located in China. The Company records pension costs and various
employment benefits in accordance with the relevant Chinese social security laws, which is approximately
a total of 31% of salary as required by local governments. Base salary levels are the average salary
determined by the local governments.
The activities in the Company’s pension account during the year ended December 31, 2009 and
2008 are summarized as follows:
Balance at beginning of year
Amounts provided during year
Settlement during the year
Foreign currency translation
Balance at end of year
17. Taxes payable
December 31,
2009
2008
$ 3,806,519 $ 3,622,729
3,738,373 2,311,049
(3,770,220 ) (2,381,047 )
253,788
$ 3,778,187 $ 3,806,519
3,515
The Company’s taxes payable at December 31, 2009 and 2008 are summarized as follows:
Value-added tax payable
Income tax payable (recoverable)*
Other tax payable
Balance at end of year
December 31,
2008
2009
$ 9,290,149 $6,279,089
1,733,942 (652,865 )
91,214
$ 11,365,016 $5,717,438
340,925
* At the end of the fiscal year of 2008, the Company paid income tax in advance, and the
government has settled with the Company during 2009.
18. Amounts Due to Shareholders/Directors
The activity in the amounts due to shareholders/directors during the years ended December 31,
2009 and 2008 is summarized as follows:
Balance at beginning of the year
Increase (decrease) during the year
Foreign currency translation
Balance at end of year
19. Advances payable
December 31,
2008
2009
$ 337,370 $ 304,601
2,415
(337,915 )
30,354
545
- $ 337,370
$
The amounts mainly represent advances made by the Chinese government to the Company as
subsidy on interest on loans related to production facilities expansion.
The balances are unsecured, interest-free and will be repayable to the Chinese government if the
usage of such advance does not continue to qualify for the subsidy (see notes 23 and 30).
70
CAAS 2009 ANNUA REPORT
20. Non-controlling interests
The Company’s activities in respect of the amounts of non-controlling interests at December 31,
2009 and 2008 are summarized as follows:
Balance at beginning of year
Add: Additions during the year-
Income attributable to non-controlling interests
Capital Contribution from the non-controlling interest holders of Joint-venture
companies
Less: decrease during the year
Dividends declared to the non-controlling interest holders of Joint-venture
companies
Transfer equity interest in Henglong by non-controlling interest holders of
Joint-venture company*
Foreign currency translation
Balance at end of year
December 31,
2009
2008
$23,222,566 $ 23,166,270
7,872,813 5,071,408
-
745,723
(3,944,619 ) (1,016,733)
- (6,177,079)
22,365 1,432,977
$27,173,125 $ 23,222,566
*On March 31, 2008, the Company’s wholly-owned subsidiary, Genesis, and Wiselink, both
controlled by Hanlin Chen and his family, entered into an equity transfer agreement, pursuant to which
Wiselink agreed to transfer and assign its 35.5% equity interest in Jingzhou Henglong, one of the
Company’s currently consolidated subsidiaries, to Genesis for a total consideration of $32,090,000.
Under the terms of the above agreement, Genesis is deemed to be the owner of the equity concerned
commencing from January 1, 2008. In accordance with ASC Topic 805 (formerly SFAS 141(R)), the
acquisition is considered as a business combination of companies under common control and is being
accounted for in a manner similar to that of pooling of interests. (See Note 21)
As of January 1, 2008, the net book value of 35.5% equity of Henglong, which was transferred from
minority shareholders, was $6,177,079.
21. Share Capital and Additional paid-in capital
The activities in the Company’s share capital and Additional paid-in capital account during the years
ended December 31, 2009 and 2008 are summarized as follows:
Balance at January 1, 2008
Issuance of common stock*
Decrease in additional paid-in capital in connection with
Henglong equity acquisition **
Issuance of stock options to independent directors and
management***
Balance at December 31, 2008
Exercise of stock option by independent directors and
management
Issuance of stock options to independent directors and
management***
Balance at December 31, 2009
Share Capital
Par Value
Additional paid-in
capital
2,396 $
302
30,125,951
22,089,698
Shares
23,959,702 $
3,023,542
-
-
(25,912,921)
-
26,983,244
-
2,698
345,426
26,648,154
63,000
-
6
-
27,046,244 $
2,704 $
420,234
446,676
27,515,064
*On March 31, 2008, Wiselink Holdings Limited, “Wiselink”, Great Genesis Holdings Limited,
“Genesis”, a wholly-owned subsidiary of China Automotive Systems, Inc., “the Company” and other
parties entered into an equity transfer transaction, the “Acquisition”, documented by an Equity Transfer
71
CAAS 2009 ANNUA REPORT
Agreement, the “Agreement”, pursuant to which Wiselink agreed to transfer and assign a 35.5% equity
interest in Jingzhou Henglong Automotive Parts Co. Ltd., “Henglong” to Genesis for a total consideration
of $32,090,000, the “Consideration”.
Under the terms of the Agreement, the Consideration is to be paid as follows: $10,000,000 cash was
paid by Genesis to Wiselink on April 30, 2008, and the balance of the purchase price ($22,090,000) was
paid by issuance of 3,023,542 shares of common stock of the Registrant, in its capacity as the 100% parent
company of Genesis.
On April 22 and June 30, 2008, the Company issued 1,170,000 and 1,853,542 shares of common
stock, respectively, at an issuance price of $7.3060, par value of $0.0001. The difference between issuance
price and par value was credited into additional paid-in capital.
Under the terms of the Agreement, 3,023,542 shares of common stock were paid as the portion of
35.5% equity of Henglong’s consideration and the value per share was $7.3060, which was calculated
based on the Volume Weighted Average Price (VWAP) for twenty (20) consecutive trading days prior to
the announcement date (January 22, 2008).
In accordance with ASC Topic 805 (formerly SFAS 141(R)), the above acquisition is considered as
a business combination of companies under common control and is being accounted for in a manner
similar to that of pooling of interests. The Company’s consolidated financial statement recognizes
Henglong’s 35.5% equity form January 1, 2008. The net book value of 35.5% equity of Henglong was
$6,177,079. The difference between the acquisition consideration of $32,090,000 and 35.5% equity of
Henglong, which was $25,912,921, has been debited to additional paid-in capital. Since Henglong has
been a consolidated subsidiary of the Company, the historical consolidated financial statement of the
Company has contained the assets, liabilities and other financial data of Henglong. A summary of the
comparative statement for the previous periods is set out below. For detailed information, please see the
disclosures in Form 8-K filed by the Company on May 8, 2008.
The following is a summary of the comparative statement of the consolidated income statement for
previous years:
For the year ended December 31,
2007
Historical
statement
comparative
statement
2008
2009
Net sales
Cost of product sold
Gross profit
Add: gain on other sales
Total operating expense
Income from operations
Other income, net
Financial (expenses)
Gain on change in fair value of derivative
Income before income taxes
Income taxes
Net income
Net income attributable to noncontrolling
interest
Net income attributable to parent company
Net income per common share attributable to
parent company–
Basic
Diluted
554,150
554,150
734,063
$133,597,003 $133,597,003 $163,179,286 $255,597,553
88,273,955 88,273,955 115,920,585 182,929,833
45,323,048 45,323,048 47, 258,701 72,667,720
838,505
24,611,397 24,611,397 31,069,343 35,841,573
21,265,801 21,265,801 16,923,421 37,664,652
1,067,309
94,534
38,462
(1,296,218 ) (1,986,200 )
(566,986 )
624,565
-
20,737,277 20,737,277 17,692,526 36,397,551
185,877 5,110,475
18,506,245 18,506,245 17,506,649 31,287,076
38,462
(566,986 )
-
2,231,032
2,231,032
998,014
9,646,339
4,945,372 5 , 071 , 408 7,8 72 , 813
$ 8,859,906 $ 13,560,873 $12,435 , 241 $ 23,414,263
$
$
0.37 $
0.37 $
0.50 $
0.50 $
0. 4 8 $
0. 4 6 $
0. 8 7
0. 7 8
72
The following is a summary of the comparative statement of the consolidated balance sheet for
previous years:
CAAS 2009 ANNUA REPORT
December 31,
2007
Total assets
Total liabilities
Non-controlling interests
Total parent company stockholders'
equity
Total stockholders' equity
Total liabilities and stockholders' equity $
Historical statement
$
Comparative
statement
2008
2009
182,984,687 $ 172,984,687 $ 231,046,936 $ 313,032,957
92,583,555 88,693,144 126,493,720 180,187,764
23,166,270 13,652,651 23,222,566 27,173,125
67,234,862 70,638,892 81,330,650 105,672,068
90,401,132 84,291,543 104,553,216 132,845,193
182,984,687 $ 172,984,687 $ 231,046,936 $ 313,032,957
***In July 2004, the Company adopted a stock incentive plan. The maximum number of common
shares for issuance under this plan is 2,200,000 with a period of 10 years. The stock incentive plan
provides for the issuance, to the Company’s officers, directors, management and employees who served
over three years or have given outstanding performance, of options to purchase shares of the Company’s
common stock. Since the adoption of the stock incentive plan, the Company has issued 433,850 stock
options under this plan, and there remain 1,766,150 stock options issuable in the future as of December 31,
2009.
Stock options granted under the aforementioned plans have an exercise price equal to the closing
price of the Company’s common stock traded on NASDAQ on the date of grant, and will expire two to
five years after the grant date. Except for the 298,850 options granted to management on December 2008,
which become exercisable on a ratable basis over the vesting period, the others were exercisable
immediately on the grant date. Stock options will be settled in shares of the Company’s common stock
upon exercise and are recorded in the Company’s consolidated balance sheets under the caption
“Additional paid-in capital.” As of December 31, 2009, the Company has sufficient unissued registered
common stock for settlement of the stock incentive plan mentioned above.
The fair value of stock option was determined at the date of grant using the Black-Scholes option
pricing model. The Black-Scholes option model requires management to make various estimates and
assumptions, including expected term, expected volatility, risk-free rate, and dividend yield. The expected
term represents the period of time that stock-based compensation awards granted are expected to be
outstanding and is estimated based on considerations including the vesting period, contractual term and
anticipated employee exercise patterns. Expected volatility is based on the historical volatility of the
Company’s stock. The risk-free rate is based on the U.S. Treasury yield curve in relation to the contractual
life of stock-based compensation instrument. The dividend yield assumption is based on historical patterns
and future expectations for the Company dividends.
Assumption used to estimate the fair value of stock options on the granted date are as follows:
Issuance Date
September 10, 2009
December 10, 2008
June 25, 2008
Expected volatility Risk-free rate Expected term (years) Dividend yield
153.6 %
134.39 %
98.29 %
2.38 %
1.21 %
3.34 %
5
3
5
0.00 %
0.00 %
0.00 %
The stock options granted during 2009 were exercisable immediately, the fair value on the grant date
using the Black-Scholes option pricing model was $196,650, and have been recorded as compensation
costs.
The stock options granted during 2008 were partially exercisable immediately, and partially
exercisable pro rata during the grant term. The stock options' fair value on the grant date using the
Black-Scholes option pricing model was $845,478, of which $345,426 have been recorded as
73
CAAS 2009 ANNUA REPORT
compensation costs. $250,026 of the remaining unrecognized cost of $500,052 has been recognized in
2009, and thereafter the remaining unrecognized cost of $250,026 will be recognized in 2010.
The activities of stock options are summarized as follows, including granted, exercised and
forfeited.
Outstanding - January 1, 2008
Granted
Exercised
Cancelled
Outstanding - December 31, 2008
Granted
Exercised
Cancelled
Outstanding - December 31, 2009
Shares
67,500 $
321,350
—
—
388,850 $
22,500
(63,000 )
(4,500 )
343,850 $
Weighted-Average
Exercise Price
7.26
3.12
—
—
3.84
8.45
6.67
2.93
3.67
Weighted-Average
Contractual
Term (years)
4.7
3.1
—
—
3.4
5
4.7
3
3.3
The following is a summary of the range of exercise prices for stock options that are outstanding and
exercisable at December 31, 2009:
Range of Exercise Prices
Outstanding Stock
Options
Weighted Average
Remaining Life
Weighted Average
Exercise Price
Number of Stock
Options Exercisable
$2.00 - $4.49
$4.50 - $10.00
291,350
52,500
343,850
1.94 $
3.05 $
2.93
7.54
194,733
52,500
247,233
As of December 31, 2009, as the fair value of the Company’s stock options that were outstanding
and exercisable were both probable and reasonably estimable, the Company did not assess their intrinsic
value. The average weighted fair value of stock options granted were $2.63 and $8.74 in 2009 and 2008,
respectively.
As of March 20, 2006 and February 15, 2008, the Company issued 156,250 shares and 1,317,864
shares of warrant to different investors, with term of three years and one year, respectively. Such warrants
have not been exercised on March 20, 2009 and February 15, 2009 (their maturity dates), and the right of
warrants was forfeited. As of December 31, 2009, the Company did not have any warrant outstanding. The
fair value of warrant was determined on the date of issuance using the Black-Scholes option pricing
model. (See Note 15)
22 .Retained earnings
Pursuant to the relevant PRC laws and regulations of Sino-foreign joint venture enterprises, the
profits distribution of the Company’s Sino-foreign subsidiaries, which are based on their PRC statutory
financial statements, are available for distribution in the form of cash dividends after these subsidiaries
have paid all relevant PRC tax liabilities, provided for losses in previous years, and made appropriations to
statutory surplus at 10%.
The Company recorded $798,756 statutory surplus reserve for the year 2009.
When the statutory surplus reserve reaches 50% of the registered capital of a company, additional
reserve is no longer required. However, the reserve cannot be distributed to joint venture partners. Based
on the business licenses of the Sino-foreign joint ventures, the registered capital of Henglong, Jiulong,
Jielong, Wuhu, and Hengsheng are $10,000,000, $4,283,170
Shenyang, Zhejiang, USAI,
74
CAAS 2009 ANNUA REPORT
(RMB35,000,000), $8,132,530 (RMB67,500,000), $7,000,000, $2,600,000, $6,000,000, $3,750,387
(RMB30,000,000), and $10,000,000 respectively.
Net income as reported in the US GAAP financial statements differs from that reported in the PRC
statutory financial statements. In accordance with relevant laws and regulations in the PRC, profits
available for distribution are based on the statutory financial statements. If the Company has foreign
currency available after meeting its operational needs, the Company may make its profit distributions in
foreign currency to the extent foreign currency is available. Otherwise, it is necessary to obtain approval
and convert such distributions at an authorized bank.
23. Other Income
Other income was $94,534 for the year ended December 31, 2009, compared to $1,067,309 for the
year ended December 31, 2008, a decrease of $972,775, or 91.1%, primarily as a result of decreased
government subsidies.
The Company’s government subsidies consisted of interest subsidy and investment subsidy. Interest
subsidy is the refund by the Chinese Government of interest charged by banks to companies which are
entitled to such subsidies. Investment subsidy is subsidy to encourage foreign investors to set up
technologically advanced enterprises in China.
During the year ended December 31, 2009, the Company received $94,534 for interest subsidy, and
had no investment subsidy. During the year ended December 31, 2008, the Company received $264,978
for interest subsidy, and $802,331 for reinvestment subsidy.
Interest subsidies apply only to loan interest related to production facilities expansion. During 2006
and 2007, the Company had used this special loan to improve technologically its production line in order
to enlarge capability and enhance quality. The expansion project was completed and new facilities were
put into use at the end of 2007 and 2008, respectively.
During 2009 and 2008, the experts sent by the Chinese Government reviewed and assessed the
actual usage of technologically improved production facilities on site in order to confirm whether the
improvement has achieved its expected goal of production expansion and quality enhancement. Whether or
not a company can receive interest subsidies from the Chinese Government depends on the company’s
achieving the two goals set forth above after the technological improvement.
Chinese government also provided incentives to foreign investors for setting up technologically
advanced enterprises in China. During 2008, Genesis, as a foreign investor, has received $802,331 for
those entities were
in Jiulong and Henglong with
re-investment
technologically advanced enterprises and entitled to such subsidies.
their profit distribution, and
Since such government subsidy is similar to an investment income, the Company has recorded it as
other income.
24. Financial income (expenses)
During the years ended December 31, 2009 and 2008, the Company recorded financial income
(expenses) which were summarized as follows:
Interest income(expenses), net
Foreign exchange gain (loss), net
Income (loss) of note discount, net
Amortization for discount of convertible note payable, net
Handling charge
Total
75
Years Ended December 31,
2009
2008
$ (1,086,381) $ (1,238,764)
305,578
150,654
(424,665)
(89,021)
$ (1,986,200) $ (1,296,218)
10,295
(82,757)
(718,678)
(108,679)
CAAS 2009 ANNUA REPORT
25. Gain on change in fair value of derivative
Income from adjustment of fair value of liabilities in connection with warrants $
Income from adjustment of fair value of compound derivative liabilities
Total
$
2009
1,977 $
622,588
624,565 $
2008
796,649
201,365
998,014
Years Ended December 31,
Gain on the change of the fair value of warrant liability and compound derivative liabilities
mentioned above, see note 14 and 15.
26. Income Taxes
The Company’s subsidiaries registered in the PRC are subject to state and local income taxes within
the PRC at the applicable tax rate of 25% on the taxable income as reported in their PRC statutory
financial statements in accordance with the relevant income tax laws applicable to foreign invested
enterprise. The Company’s PRC subsidiaries, which are in the stage of its enterprise income tax exemption
currently, are to remain subject to enterprise fixed income tax at a statutory rate of 33%, which comprises
30% national income tax and 3% local income tax.
On January 1, 2007, Jiulong has used up its enterprise income tax exemption. During 2008, Jiulong
was subject to enterprise income tax at a rate of 25%. During 2009, Jiulong was awarded the status of
Advanced Technology Enterprises, and subject to enterprise income tax at a rate of 15% for 2009.
On January 1, 1999, Henglong was granted an enterprise income tax holiday of a 100% enterprise
income tax exemption for two years commencing from 1999, and a 50% enterprise national income tax
deduction and a 100% local income tax deduction for the next nine years thereafter, from 2001 to 2009, for
income tax purposes. Henglong is subject to enterprise national income tax at a rate of 15% for 2009 and
2008.
On January 1, 2003, Shenyang was granted an enterprise income tax holiday of a 100% enterprise
income tax exemption for two years commencing from 2003, a 75% enterprise national income tax
deduction and a 100% local income tax deduction for the next three years thereafter, from 2005 to 2007,
and a 50% enterprise national income tax deduction, and enterprise income tax at a rate of 18% in
2008. During 2009, Shenyang was awarded the status of Advanced Technology Enterprises, and subject to
enterprise income tax at a rate of 15% for 2009.
On January 1, 2004, Zhejiang was granted an enterprise income tax holiday of a 100% enterprise
income tax exemption for two years commencing from 2004, and a 50% enterprise national income tax
deduction, and a 50% local income tax deduction for the next three years thereafter, from 2006 to 2008, for
income tax purposes. During 2008, Zhejiang was subject to enterprise income tax at a rate of 16.5%, which
comprises of 15% enterprise national income tax and 1.5% local income tax. During 2009, Zhejiang was
awarded the status of Advanced Technology Enterprises, and is subject to enterprise income tax at a rate of
15% commencing in 2009.
Wuhu and Hengsheng have an enterprise income tax exemption in 2008 and 2009, and are subject to
income tax at a rate of 15% for the next three years thereafter, from 2010 to 2012, and a 25% enterprise
national income tax commencing from January 1, 2013.
USAI and Jielong are at their start up stage in 2009 and 2008, accordingly, there is no assessable
profit for these periods. They have an enterprise income tax exemption in 2008 and 2009, and are subject
to income tax at a rate of 15% for the next three years thereafter, from 2010 to 2012, and a 25% enterprise
national income tax for the years commencing from January 1, 2013.
No provision for Hong Kong tax is made as Genesis is an investment holding company, and has no
assessable income in Hong Kong for the years 2009 and 2008. The enterprise income tax of Hong Kong is
17.5%.
76
CAAS 2009 ANNUA REPORT
No provision for US tax is made as the Company has no assessable income in the US for the
years of 2009 and 2008. The enterprise income tax of US is 35%.
The provision for income tax differs from the provision computed at statutory rates as follows:
Years Ended December 31,
2009
2008
Average tax rate *
Computed income tax provision
Permanent Difference s ：
Income tax refund**
Deferred tax provision
Other reconciling items
Total current and deferred tax expense
13.25 % $
$
4,824,194
14.17 %
2,507,295
(1,053,092 )
1,691,582
(352,209 )
5,110,475
(2,762,823 )
934,224
(492,819 )
185,877
*Average tax rate = sum of statutory tariff for each subsidiary × weight (weight= net income before
income tax for each subsidiary / sum of net income before income tax)
**For the years ended December 31, 2009 and 2008, the income tax refund mainly includes the
income tax benefit received by the Company's Sino-foreign joint ventures for purchase of domestically
manufactured equipments, and other tax reduction or exemption.
27. Income Per Share
Basic income per share attributable to Parent company is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted income per share is
calculated based on the treasury stock method, assuming the issuance of common shares, if dilutive,
resulting from the exercise of warrants.
The calculations of diluted income per share attributable to Parent company were:
Numerator:
Net income attributable to Parent company
Add: interest expenses of convertible notes payable, net of tax
Add: Amortization for discount of convertible notes payable, net of tax
Denominator:
Weighted average shares outstanding
Effect of dilutive securities
Net income per common share attributable to Parent company- diluted
Years Ended December 31,
2009
2008
$23,414,263 $12,435,241
918,750
424,665
$24,578,123 $13,778,656
696,719
467,141
26,990,649 25,706,364
4,627,763 3,962,362
31,618,412 29,668,726
0.46
$
0.78 $
During the year ended December 31, 2008, the options and warrants outstanding have not been
included in the computation of diluted income per share, except the options issued on December 10, 2008,
because such inclusion would have had an anti-dilutive effect. The shares issuable upon conversion of
Convertible Notes have been included in the computation.
During the year ended December 31, 2009, the options outstanding have been included in the
computation of diluted income per share, except the options issued on July 6, 2006, because such inclusion
would have had an anti-dilutive effect. The shares issuable upon conversion of Convertible Debt have been
included in the computation.
28. Significant Concentrations
77
CAAS 2009 ANNUA REPORT
The Company grants credit to its customers, generally on an open account basis. The Company’s
customers are mostly located in the PRC.
In 2009, the Company’s ten largest customers accounted for 80.2% of the Company’s consolidated
sales, with four customers accounting for more than 10% of consolidated sales, i.e. 14.8%, 12.0%, 10.4%
and 10.0% of consolidated sales, or an aggregate of 47.2% of consolidated sales.
In 2008, the Company’s ten largest customers accounted for 78.4% of the Company’s consolidated
sales, with four customers accounting for in excess of 10% of consolidated sales, i.e. 15.1%, 11.9%, 11.4%
and 10.6% of consolidated sales, or an aggregate of 49.1% of consolidated sales.
At December 31, 2009 and 2008, approximately 31.9% and 34.2% of accounts receivable were from
trade transactions with the aforementioned customers.
29. Related Party Transactions
The Company’s related party transactions include product sales, material purchases and purchases of
equipment and technology. These transactions were consummated under similar terms as those with the
Company's customers and suppliers. On some occasions, the Company’s related party transactions also
include purchase/sale of capital stock of the joint ventures and sale of property, plant and equipment.
Related sales and purchases: During the years ended December 31, 2009 and 2008, the
joint-ventures entered into related party transactions with companies with common directors as shown
below:
Merchandise Sold to Related Parties
Xiamen Joylon
Shanghai Fenglong
Jiangling Yude
Total
Materials Purchased from Related Parties
Xiamen Joylon
Shanghai Fenglong
Jiangling Tongchuang
Jingzhou Tongyi
Jingzhou Tongying
Hubei Wiselink
Total
Technology Purchased from Related Parties
Changchun Hualong
Equipment Purchased from Related Parties
Years Ended December 31,
2009
2008
$ 4,850,977 $ 2,143,418
400,001
166,885
641,186 2,365,107
$ 5,892,164 $ 4,675,410
Years Ended December 31,
2009
2008
$
- $
17,273
9,547
136,990
7,078,698 5,485,206
285,347
6,216,739 1,984,854
-
$13,998,702 $ 7,901,944
489,116
196,876
Years Ended December 31,
2009
248,916 $
2008
321,892
$
Years Ended December 31,
2009
2008
78
CAAS 2009 ANNUA REPORT
Hubei Wiselink
$ 3,962,690 $ 3,031,072
Purchase of 35.5% equity interest in Jinzhou Henglong during the year ended December 31, 2008
(refer to note 20).
Related receivables, advance payments and account payable: As at December 31, 2009 and 2008,
accounts receivables, advance payments and account payable between the Company and related parties are
as shown below:
Due from Related Parties
Xiamen Joylon
Shanghai Fenglong
Jiangling Yude
Total
Other Receivables from Related Parties
Jiangling Tongchuang
WuHan Dida
Jiulong Material
Changchun Hualong
Total
Less: provisions for bad debts
Balance at end of year
December 31,
2008
2009
$ 1,214,682 $1,077,659
193,595 207,451
-
$ 1,441,939 $1,285,110
33,662
December 31,
2008
2009
$
3,515 $
3,511
61,901 141,560
537,300 534,369
- 224,234
602,716 903,674
(537,300 ) (534,309 )
$ 65,416 $ 369,365
Other receivables from related parties are primarily unsecured demand loans, with no stated interest
rate or due date.
Due to Related Parties
Shanghai Tianxiang
Shanghai Fenglong
Jiangling Tongchuang
Hubei Wiselink
Jingzhou Tongyi
Jingzhou Tongying
Total
Advanced Equipment Payment to Related Parties
Hubei Wiselink
30. Commitments and Contingencies
December 31,
2008
2009
$ 610,246 $ 609,675
38,063
-
63,314 206,039
328,366 159,482
17,377
67,006
$ 1,537,827 $1,097,642
9,136
526,765
December 31,
2008
2009
$ 2,579,319 $2,473,320
Legal Proceedings - The Company is not currently a party to any threatened or pending legal
proceedings, other than incidental litigation arising in the ordinary course of business. In the opinion of
79
CAAS 2009 ANNUA REPORT
management, the ultimate disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
The following table summarizes the Company‘s major contractual payment obligations and
commitments as of December 31, 2009:
2010
2011
2012
2013
Thereafter
Total
Payment Obligations by Period
Obligations for service
agreements
Obligations for purchasing
agreements
Total
$
110,000 $ 110,000 $
— $
— $
— $
220,000
9,896,373 672,252
$10,006,373 $ 782,252 $
—
— $
—
— $
— 10,568,625
— $ 10,788,625
31. Off-Balance Sheet Arrangements
At December 31, 2009 and 2008, the Company did not have any transactions, obligations or
relationships that could be considered off-balance sheet arrangements.
32. Subsequent Events
On January 24, 2010, Genesis entered into a sino-foreign equity joint venture contract with Beijing
Hainachuan Auto Parts Co., Ltd., to establish a sino-foreign joint venture company, Beijing Henglong
Automotive System Co., Ltd. “Beijing Henglong”, to design, develop and manufacture both hydraulic and
electric power steering systems and parts. Under PRC laws, the establishment of Beijing Henglong and the
effectiveness of the equity joint venture contract are subject to the approval by the local Ministry of
Commerce and the registration of the same with the local Administration of Industries and Commerce in
Beijing. As of the date of releasing this report, the approval has not been obtained.
On February 24, 2010, the Board of Directors of the Company resolved to increase the registered
capital of Hengsheng, one of the Company’s subsidiaries, to $16,000,000 from $10,000,000. The
additional investment will be used for expansion of plant and purchase of machinery and equipment and
will be funded by the Company’s working capital balances. As of the date of this report, the additional
investment has been injected into Hengsheng.
33. Segment reporting
The accounting policies of the product sectors are the same as those described in the summary of
significant accounting policies except that the disaggregated financial results for the product sectors have
been prepared using a management approach, which is consistent with the basis and manner in which
management internally disaggregates financial information for the purposes of assisting them in making
internal operating decisions. Generally, the Company evaluates performance based on stand-alone product
sector operating income and accounts for inter segment sales and transfers as if the sales or transfers were
to third parties, at current market prices.
During the years ended December 31, 2009 and 2008, the Company had nine product sectors, five of
them were principal profit makers, which were reported as separate sectors which engaged in the
production and sales of power steering (Henglong), power steering (Jiulong), power steering (Shenyang),
power pumps (Zhejiang), and power steering (Wuhu). The other four sectors which were established in
2005, 2006 and 2007 respectively, engaged in the production and sales of sensor modular (USAI),
electronic power steering (Jielong), power steering (Hengsheng), and provider of after sales and R&D
services (HLUSA). Since the revenues, net income and net assets of these four sectors are less than 10% of
its segment in the consolidated financial statements, the Company incorporated these four sectors into
“other sectors”.
The Company’s product sectors information is as follows:
80
For the year ended December 31, 2009
Henglong
Jiulong Shenyang
Zhejiang
Wuhu
Other Sectors Other (a)
Total
CAAS 2009 ANNUA REPORT
-
73,677
(95,523 )
216,560
382,646
150,980
593,732 $
— $ 255,597,553
- 10,212,802 (53,464,331 )
35,932,821 2,208,479 4,727,583
$ 117,527,054 $ 59,404,637 $ 27,765,261 $ 23,810,721 $ 26,496,148 $
Revenue
Net product
sales –
external
Net product
sales –
internal
Gain on other
sales and
other income
838,505
– external
Total revenue $ 153,364,352 $ 61,764,096 $ 32,709,404 $ 24,267,044 $ 26,480,811 $ 11,318,324 $ (53,467,973 ) $ 256,436,058
Net income
(loss)
Net income
attributable to
noncontrolling
interest
Net income
attributable to
Parent
company
Depreciation
and
amortization 3,777,978 2,068,581
70,837 8,684,169
Total assets 155,983,242 58,798,859 32,070,205 25,917,543 18,074,164 27,405,436 (5,216,492 ) 313,032,957
Capital
expenditures $ 5,378,814 $ 1,671,139 $ 218,297 $ 2,486,501 $ 150,212 $ 7,918,008 $
$ 20,846230 $ 3,035,102 $ 1,991,460 $ 1,490,237 $
26,057,787 3,747,039 2,844,943 2,922,034
86,209 $ 1,324,229 $ (5,359,204 ) $ 23,414,263
1,158,152 (5,554,362 ) 31,287,076
( 195,15 8 ) 7,872,813
853,483 1,431,797
- $ 17,822,971
5, 211557
( 16 6,077 )
974,832
511,790
711,937
352,770
111,483
543,930
895,241
(15,337 )
(3,642 )
25,274
81
For the year ended December 31, 2008
Henglong
Jiulong
Shenyang
Zhejiang
Wuhu
Other Sectors Other (a)
Total
CAAS 2009 ANNUA REPORT
409,604 $
-
684,098
156,743
73,819
317,477
27,088,095 2,250,714 3,646,916
$ 65,903,560 $ 40,457,552 $ 21,360,581 $ 15,094,357 $ 19,953,632 $
Revenue
Net product
sales –
external
Net product
sales –
internal
Gain on other
sales and
other income
134,472
– external
Total revenue $ 93,309,132 $ 42,782,085 $ 25,164,240 $ 15,812,385 $ 20,088,104 $
Net income
(loss)
Net income
attributable to
noncontrolling
interest
Net income
attributable to
Parent
company
Depreciation
and
amortization 4,575,115 2,569,716
416,957
Total assets 107,998,822 46,541,107 23,460,621 23,907,010 10,068,515 18,714,486
Capital
expenditures $ 2,277,253 $ 3,407,505 $
353,549 2,092,311 2,733,36 4
627,694 1,339,34 9
$ 11,989,130 $
14,986,412
2,997,282
(841,725 )
1,147,517
( 24,804 )
( 108,203 )
(477,293 )
269,207 $
501,557 $
401,379
67,173
701,120
33,930
— $ 163,179,286
491,871 (34,161,694 )
-
734,063
21,217
922,692 $ (34,165,289 ) $ 163,913,349
(3,595 )
(1,339,969 )
17,506,649
172,917
5,071,40 8
113,188
9,924,992
856,427 231,546,988
716,239 $ 5,199,172 $ 10,000,000 $ 22,370,933
286,376 $ 1,464,617 $ 1,394,015 $ (369,090 ) $ (816,921 ) $ (1,512 ,886 ) $ 12,435,241
(a) Other includes activity at the corporate level, unrealized income between product companies
(sectors), and elimination of inter-sector transactions.
34. Reclassification
Certain prior period balances have been reclassified to conform with the current period presentation.
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CAAS 2009 ANNUA REPORT
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CAAS 2009 ANNUA REPORT
Investor Information
Annual Meeting
The Annual Meeting of China Automotive Systems
stockholders will be held on July 8, 2010
(Thursday) at 10 a.m. local time in Wuhan, China
Legal Counsel
Winston & Strawn LLP
11th Floor Gloucester Tower,
The Landmark
15 Queen’s Road Central, Hong Kong
Phone: 852-2292-2000
www.winston.com
Independent Public Accountant
Schwartz Levitsky Feldman LLP
Toronto, Canada
Transfer Agent and Registrar
Securities Transfer Corporation
2591 Dallas Parkway Corporation Ste 102
Frisco, Texas 75034, USA
Phone: 496-633-0101
www.stctansfer.com
Investor Relations
Grayling
825 Third Avenue, 18th floor
New York, NY 10022
Phone: 646-284-9400
www.grayling.com
Corporate Headquarters
China Automotives Systems, Inc
No.1 Guanshan First Road
East Lake Hi-tech Zone
Wuhan City, Hubei Province
People’s Republic of China
Phone (86) 27-5981-8527
Board of Directors
Hanlin Chen
Chairman
Qizhou Wu
Director, Chief Executive Officer
Guangxun Xu
Independent Non-executive Director
Bruce Carlton Richardson
Independent Non-executive Director
Robert Tung
Independent Non-executive Director
William E. Thomson
Independent Non-executive Director
Executive Officers
Hanlin Chen
Chairman
Qizhou Wu
Chief Executive Officer
Jie Li
Chief Financial Officer
Daming Hu
Chief Accountant
Andy Yiu Wong Tse
Senior Vice President
Shengbin Yu
Senior Vice President
Shaobo Wang
Senior Vice President
Yijun Xia
Vice President
84