Based in Hubei Province, People’s Republic of China, China Automotive Systems, Inc. is a leading supplier of power
steering components and systems to the Chinese automotive industry and is exporting into the North American market. The
company operates through nine Sino-foreign joint ventures in China and three wholly-owned subsidiaries in China and
America.
o Henglong USA Corporation
o Great Genesis Holdings Limited
•
•
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd.
Jingzhou Hengsheng Automotive System Co., Ltd.
o Shashi Jiulong Power Steering Co.
Jingzhou Henglong Automotive Parts Co.
o
o Wuhu Henglong Electric Power Steering Co., Ltd.
o Wuhan Jielong Steering System Co., Ltd.
Universal Sensor Application, Inc.
o
o Beijing Henglong Automotive System Co., Ltd.
•
Jingzhou Henglong Automotive Technology (Testing) Centre
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Sincere
Qizhou
China A
May 23
ely,
u Wu - CEO &
Automotive Sy
3, 2012
& Director
ystems, Inc.
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CHINA AUTOMOTIVE SYSTEMS, INC.
INDEX
Page(s)
0PART I .................................................................................................................................................................................. 1
11
1ITEM 1 BUSINESS ............................................................................................................................................... 1
2ITEM 2 PROPERTIES ........................................................................................................................................ 2
3ITEM 3 LEGAL PROCEEDINGS ...................................................................................................................... 2
21
212
213
4PART II .............................................................................................................................................................................. 2
214
5ITEM 4 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES ....................................................................................... 2
6ITEM 5 SELECTED FINANCIAL DATA ......................................................................................................... 2
7ITEM 6 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. .................................................................................................................................. 2
8ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...................................................... 2
9ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ..................................................................................................................................... 2
214
215
217
239
240
1PART III ............................................................................................................................................................................. 2
242
1ITEM 9 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ............................... 2
1ITEM 10 EXECUTIVE COMPENSATION ......................................................................................................... 3
1ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS ................................................................................................................ 3
1ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE ...................................................................................................................................................... 3
1ITEM 13 PRINCIPAL ACCOUNTING FEES AND SERVICES ........................................................................ 3
342
346
349
349
350
1PART IV ............................................................................................................................................................................. 3
350
1ITEM 14 FINANCIAL STATEMENTS ............................................................................................................... 3
350
0
1
2
3
4
5
6
7
8
9
1
1
1
1
1
1
1
1
(This page intentionally left blank)
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,” “continues,” “could,” “estimates,”
“expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “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 Annual 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 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. On May 19,
2003, the Company changed its name from Visions-In-Glass, Inc. to China Automotive Systems, Inc. Presently,
Genesis directly and indirectly owns interests in eight Sino-joint ventures and a wholly owned subsidiary in the
People’s Republic of China, “China” or the “PRC,” which manufacture power steering systems and/or related products
for different segments of the automobile industry. 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.
BUSINESS OVERVIEW
The Company is a holding company and has no significant business operations or assets other than its interest in
Genesis. All operations are conducted through Genesis and Henglong USA, its wholly owned subsidiaries (the
abbreviated names of subsidiaries and joint ventures are defined in the organization chart below), as well as through
eight Sino-foreign joint ventures in China, Henglong, Jiulong, Shenyang, Zhejiang, USAI, Wuhu, Jielong and Testing
Center and a wholly owned subsidiary in China, Hengsheng. Seven non-wholly owned joint ventures (Henglong,
Jiulong, Shenyang, Zhejiang, USAI, Wuhu and Jielong) are under the Company’s control, whereas the Testing Center
is a wholly owned subsidiary of Henglong. Beijing Henglong is a joint venture formed by Hengsheng, which is jointly
controlled by the Company and another investor. Set forth below is an organizational chart as at December 31, 2011.
1
China Automotive Systems, Inc. [NASDAQ:CAAS]
↓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.
↓83.34%
Universal
Sensor
Application,
Inc.
“Jiulong” 2
“Shenyang” 3
“Zhejiang” 4
“USAI” 5
↓100%
Henglong USA Corporation
↓77.33%
Wuhu Henglon
g
Automotive
Steering
System Co.,
Ltd.
“Wuhu” 6
↓85%
Wuhan
Jielong
Electric Power
Steering Co.,
Ltd.
“Jielong” 7
↓100.00%
Jingzhou
Hengsheng
Automotive
System
Co., Ltd.
“Hengsheng” 8
↓ 50.00%
Beijing Henglong
Automotive
System Co.,
Ltd.
“Beijing
Henglong” 10
↓80%
Jingzhou
Henglong
Automotive
Parts Co.,
Ltd.
“Henglong” 1
↓80.00%
Jingzhou
Henglong
Automotive
Technology
(Testing)
Center
“Testing
Center” 9
1. Henglong was established in 1997 and is mainly engaged in the production of rack and pinion power steering gear
2.
for cars and light duty vehicles.
Jiulong was established in 1993 and is mainly engaged in the production of integral power steering gear for
heavy-duty vehicles.
3. Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.
4. Zhejiang was established in 2002 to focus on power steering pumps.
5. USAI was established in 2005 and is mainly engaged in the production and sales of sensor modules.
6. Wuhu was established in 2006 and is mainly engaged in the production and sales of automobile steering systems.
7.
Jielong was established in 2006 and is mainly engaged in the production and sales of electric power steering gear,
“EPS.”
8. On March 7, 2007, Genesis established Hengsheng, its wholly owned subsidiary, to engage in the production and
sales of automotive steering systems. The registered capital of Hengsheng at the time of establishment was
$10,000,000. On February 10, 2010, the registered capital of Hengsheng was increased to $16,000,000. On
October 12, 2011, the board of directors of the Company approved a reorganization of the Company’s subsidiaries
operating in China. As a result of the reorganization, all of Genesis’s equity interests of its subsidiaries operating
in China, except for Shenyang and Zhejiang, were transferred to Hengsheng, the Company’s new China-based
holding company. The reorganization was completed on January 19, 2012, and after that, the registered capital of
Hengsheng increased to $39,000,000.
In December 2009, Henglong, a subsidiary of Genesis, formed the Testing Center, which is mainly engaged in the
research and development of new products. The registered capital of the Testing Center was RMB 30,000,000,
equivalent to approximately $4,393,544.
9.
10. On January 24, 2010, Genesis entered into a joint venture contract with Beijing Hainachuan Auto Parts Co., Ltd.,
to establish Beijing Henglong as a joint venture company to design, develop and manufacture both hydraulic and
electric power steering systems and parts. On September 16, 2010, with Beijing Hainachuan’s agreement, Genesis
transferred its interest in the joint venture to Hengsheng, and left the other terms of the joint venture contract
unchanged. According to the joint venture agreement, the Company does not have voting control of Beijing
Henglong. Therefore, the Company’s consolidated financial statements do not include Beijing Henglong, and such
investment is accounted for by the equity method.
On October 12, 2011, the board of directors of the Company approved a reorganization of the Company’s
subsidiaries operating in China. This reorganization is intended to improve the Company’s marketing of its products in
China by presenting a more unified structure under one PRC-based holding company and to improve the administration
and control of the various China-based subsidiaries. As a result of the reorganization, all of Genesis’s equity interests in
its subsidiaries operating in China, except for Shenyang and Zhejiang, were transferred to Hengsheng (the Company’s
2
new China-based holding company). As the reorganized entities were under common control of the Company, the
reorganization will not have a material impact on the Company’s consolidated financial position or results of operations
and should not impact the tax treatment of the Company or its subsidiaries in any material respect. The reorganization
was completed on January 19, 2012. Set forth below is the organizational chart after the reorganization.
China Automotive Systems, Inc. [NASDAQ:CAAS]
↓100%
Henglong USA Corporation
↓100%
Great Genesis Holdings Limited
↓
↓100.00%
Jingzhou
Hengsheng
Automotive
System
Co., Ltd.
“Hengsheng”
↓
↓70%
Shenyang Jinbei
Henglong
Automotive
Steering System
Co., Ltd.
“Shenyang”
↓81%
Shashi Jiulong
Power
Steering
Gears
Co., Ltd.
↓83.34%
Universal
Sensor
Application,
Inc.
↓77.33%
Wuhu Henglong
Automotive
Steering
System Co.,
Ltd.
↓85%
Wuhan
Jielong
Electric Power
Steering Co.,
Ltd.
“Jiulong”
“USAI”
“Wuhu” 6
“Jielong”
↓80%
Jingzhou
Henglong
Automotive
Parts Co.,
Ltd.
“Henglong”
↓80.00%
Jingzhou
Henglong
Automotive
Technology
(Testing)
Center
“Testing
Center”
↓51%
Zhejiang
Henglong &
Vie
Pump-Manu
Co., Ltd.
“Zhejiang”
↓50.00%
Beijing
Henglong
Automotive
System Co.,
Ltd.,
“Beijing
Henglong”
The Company has business relationships 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, and BYD Auto Co., Ltd and Zhejiang Geely Automobile Co., Ltd., the largest privately owned car
manufacturers in China. 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. Since 2009, the Company
has also supplied power steering gears to Chrysler North America.
INTELLECTUAL PROPERTY RIGHTS
Intellectual Property rights, “IP,” are important in helping the Company maintain its competitive position.
Currently, the Company owns IP rights, including two trademarks covering automobile parts, “HL” and “JL,” and more
than eighty five patents registered in China 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 2006, the Company signed a five-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. On December 20, 2011, the Company extended that agreement for one year. Before expiration, the
Company plans to negotiate with Bishop Steering Technology Limited to renew the agreement. The Company does not
anticipate that there will be a significant adverse impact if the Company fails to renew as the Company has already
developed independent R&D capabilities in steering valves. 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
3
research institute designed to develop EPS and Electronic Hydraulic Power Steering Systems (EHPS). In December
2009, the Company, through Henglong, a subsidiary of Genesis, formed Henglong Testing Center to engage in the
research and development of new products, such as EPS, integral rack and pinion power steering and high pressure
power steering, to optimize current products design and to develop new, cost-saving manufacturing processes.
CUSTOMERS
The Company’s ten largest customers represented 72.0% of the Company’s total sales for the year ended
December 31, 2011. The following table sets forth information regarding the Company’s ten largest customers.
Name of Major Customers
Chery Automobile Co., Ltd
Dongfeng Auto Group Co., Ltd
Zhejiang Geely Holding Co., Ltd
China FAW Group Corporation
Beiqi Foton Motor Co., Ltd.
Brilliance China Automotive Holdings Limited
Great Wall Motor Company Limited
BYD Auto Co., Ltd
Chrysler Group LLC
Xiamen Joylon Co., Ltd.,
Total
Percentage of Total
Revenue in 2011
11.7%
9.7%
7.8%
6.9%
6.6%
6.4%
6.1%
6.0%
5.9%
4.9%
72.0%
The Company primarily sells its products to the above-mentioned original equipment manufacturing, “OEM,”
customers; it also has excellent relationships with them, including serving as their first-rank supplier and developer for
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 103 sales persons, which are divided into an 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
represent more effectively 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.
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
4
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, 2011, the Company employed approximately 3,746 persons, including approximately 2,131
by Henglong and Jiulong, approximately 290 by Shenyang, approximately 347 by Zhejiang, approximately 38 by USAI,
approximately 207 by Wuhu, approximately 370 by Jielong, approximately 353 by Hengsheng, and 10 by Henglong
USA.
As of December 31, 2011, 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, 32,000 square meters,
83,700 square meters, 99,580 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 3,400,000 units and 3,100,000 units in 2011 and 2010, 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 $61 million was spent
over the last three years to purchase professional-grade equipment and extend workshops—approximately 80% of
which has been used in the production process as of December 31, 2011.
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, finished
sub-components, aluminum, steel, fabricated metal electronic parts and molded plastic parts. 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 represented in the aggregate 28.6% of all components
and raw materials it purchased for the year ended December 31, 2011, and none of them provided 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.
RESEARCH AND DEVELOPMENT
In 2006, the Company signed a five 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. On December
20, 2011, the Company signed a one-year extension of a licensing agreement with Bishop Steering Technology Limited
for steering valves technology. Before expiration, the Company plans to negotiate with Bishop Steering Technology
Limited to renew the agreement. The Company does not anticipate that there will be a significant adverse impact if the
Company fails to renew as the Company has already developed independent R&D capabilities in steering valves.
5
The Company owns the Testing Center, a Hubei Provincial-Level technical center, which has been approved by
the Hubei Economic Commission. The center has a staff of about 295, including 26 senior engineers, 3 foreign experts
and 205 engineers, primarily focusing 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
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 increase its total
expenditures for research and development activities, including engineering, at approximately $10,010,000, $7,990,000,
and $2,560,000 for the years ended December 31, 2011, 2010, and 2009, respectively. The significant increase in 2011
is mainly due to the large expenditure in EPS R&D, because the Company believes demands for new EPS products will
increase significantly in the future. In 2011, the sales of newly developed products accounted for about 20.5% of total
sales. As the Company sold newly developed products in 2011, the Company’s sales of steering gear for passenger
vehicles increased by 7.3%, compared with the year 2010. By way of comparison, the sales of passenger vehicles in the
China market only increased by 4.23%, compared with the year 2010.
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
2011, the output and sales volume of vehicles in China have reached 18.24 million and 18.51 million units, respectively,
an increase of 0.84% and 2.5% compared to 2010. The output and sales volume of passenger vehicles have reached
14.49 million and 14.47 million units respectively, with an increase of 4.23% and 5.19% compared to 2010. The output
and sales volume of commercial vehicles have reached 3.93 million and 4.03 million units, respectively, a decrease of
9.94% and 6.31% compared to 2010. Accordingly, in 2011, the Company’s sales of steering gear for passenger vehicles
increased by 7.3% compared with the year 2010, steering gear and steering pumps for commercial vehicles decreased
by 13.0% and 24.2%, respectively, compared with the year 2010.
Industry analysts expect market growth to slow in 2012 as the incentive policies, such as subsidies to rural area
consumers, fuel-efficient car buyers and reduced purchase taxes, have expired. In addition, some PRC cities, like
Beijing, have policies to limit the number of cars purchased each month to deal with gridlocked streets, which the
Company expects to have a longer-term impact on the development of the automobile industry in China.
Despite these challenges, management believes that the continuing development of the highway system will have
a significant positive long-term impact on the manufacture and sale of private automobiles in the PRC. Statistics from
the Ministry of Transport show that 71,000 kilometers of highway and 11,000 kilometers of expressway were built in
2011. Total highways and expressways in the PRC now amount to 4,055,000 kilometers and 85,000 kilometers,
respectively.
FINANCIAL INFORMATION AND GEOGRAPHIC AREAS
Financial information about sales and long-term assets by major geographic region can be found in Note 32,
“Segment Information” to the consolidated financial statements. The following table summarizes the percentage of
sales and total assets by major geographic regions:
6
Net Sales
Year Ended December 31
2010
2011
2009
Long-term Assets
As of December 31
2010
2011
Geographic region:
United States
China
Total
ITEM 1A RISK FACTORS
6.4%
93.6
100%
5.0%
95.0
100%
2.4%
97.6
100%
0.03%
99.97
100%
0.02%
99.98
100%
Any investment in the Company’s securities involves a high degree of risk. You should carefully consider the
risks described below, together with the information contained elsewhere in this Annual Report, before you make a
decision to invest in the Company. The Company’s business, financial conditions and results of operations could be
materially and adversely affected by many risk factors. Because of these risk factors, actual results might differ
significantly from those projected in any forward-looking statements. Factors that might cause such differences include,
among others, the following:
RISKS RELATED TO THE COMPANY’S BUSINESS AND INDUSTRY
The cyclical nature of automotive production and sales could result in a reduction in automotive sales, which
could adversely affect the Company’s business and results of operations.
The Company’s business relies on automotive vehicle production and sales by its customers, which are highly
cyclical and depend on general economic conditions and other factors, including consumer spending and preferences
and the price and availability of gasoline. They also can be affected by labor relations issues, regulatory requirements
and other factors. In the last two years, the price of automobiles in China has generally declined. Additionally, the
volume of automotive production in China has fluctuated from year to year, which gives rise to fluctuations in the
demand for the Company’s products. Therefore, any significant economic decline could result in a reduction in
automotive production and sales by the Company’s customers and could have a material adverse effect on the
Company’s results of operations. Moreover, if the prices of automobiles do not remain low, then demand for
automobile parts could fall and result in lower revenues and profitability.
Increasing costs for manufactured components and raw materials may adversely affect the Company’s
profitability.
The Company uses a broad range of manufactured components and raw materials in its products, including
castings, electronic components, finished sub-components, molded plastic parts, fabricated metal, aluminum and steel
and resins. Because it may be difficult to pass increased prices for these items on to the Company’s customers, a
significant increase in the prices of the Company’s components and materials could materially increase the Company’s
operating costs and adversely affect its profit margins and profitability.
Because the Company is a holding company with substantially all of its operations conducted through its
subsidiaries, its performance will be affected by the performance of its subsidiaries.
The Company almost has no operations independent of those of Genesis and its subsidiaries, and the Company’s
principal assets are its investments in Genesis and its subsidiaries and affiliates. As a result, the Company is dependent
upon the performance of Genesis and its subsidiaries and will be subject to the financial, business and other factors
affecting Genesis as well as general economic and financial conditions. As substantially all of the Company’s
operations are and will be conducted through its subsidiaries, the Company will be dependent on the cash flow of its
subsidiaries to meet its obligations.
Because virtually all of the Company’s assets are and will be held by operating subsidiaries, the claims of the
Company’s stockholders will be structurally subordinate to all existing and future liabilities and obligations, and trade
payables of such subsidiaries. In the event of the Company’s bankruptcy, liquidation or reorganization, its assets and
7
those of its subsidiaries will be available to satisfy the claims of the Company’s stockholders only after all of its and its
subsidiaries’ liabilities and obligations have been paid in full.
The convertible notes are the Company’s unsecured obligations, but are not obligations of its subsidiaries. In
addition, the subsidiaries’ secured bank loans and notes payable are senior to the convertible notes.
With the automobile parts markets being highly competitive and many of the Company’s competitors having
greater resources than it does, the Company may not be able to compete successfully.
The automobile parts industry is a highly competitive business. Criteria for the Company’s customers include:
system and product performance;
reliability and timeliness of delivery;
- quality;
- price/cost competitiveness;
-
-
- new product and technology development capability;
-
- degree of global and local presence;
-
- overall management capability.
excellence and flexibility in operations;
effectiveness of customer service; and
The Company’s competitors include independent suppliers of parts, as well as suppliers formed by spin-offs from
the Company’s customers, who are becoming more aggressive in selling parts to other vehicle manufacturers.
Depending on the particular product, the number of the Company’s competitors varies significantly. Many of the
Company’s competitors have substantially greater revenues and financial resources than it does, as well as stronger
brand names, consumer recognition, business relationships with vehicle manufacturers, and geographic presence than it
has. The Company may not be able to compete favorably and increased competition may substantially harm its
business, business prospects and results of operations.
Internationally, the Company faces different market dynamics and competition. The Company may not be as
successful as its competitors in generating revenues in international markets due to the lack of recognition of its
products or other factors. Developing product recognition overseas is expensive and time-consuming and the
Company’s international expansion efforts may be more costly and less profitable than it expects. If the Company is
not successful in its target markets, its sales could decline, its margins could be negatively impacted and it could lose
market share, any of which could materially harm the Company’s business, results of operations and profitability.
Pricing pressure by automobile manufacturers on their suppliers may adversely affect the Company’s business
and results of operations.
Recently, pricing pressure from automobile manufacturers has been prevalent in the automotive parts industry in
China. Virtually all vehicle manufacturers seek price reductions each year. Although the Company has tried to reduce
costs and resist price reductions, these reductions have impacted the Company’s sales and profit margins. If the
Company cannot offset continued price reductions through improved operating efficiencies and reduced expenditures,
price reductions will have a material adverse effect on the Company's results of operations.
The Company’s business, revenues and profitability would be materially and adversely affected if it loses any of
its large customers.
For the year ended December 31, 2011, approximately 11.7% of the Company’s sales were to Chery Automobile
Co., Ltd, approximately 9.7% were to Dongfeng Auto Group Co., Ltd, approximately 7.8% were to Zhejiang Geely
Holding Co., Ltd, and approximately 6.9% were to China FAW Group Corporation, the Company’s four largest
customers. In total, these four largest customers accounted for 36.1% of the total sales in 2011. For the year ended
December 31, 2010, approximately 12.3% of the Company’s sales were to Chery Automobile Co., Ltd, approximately
11.0% were to BYD Automobile Co., Ltd, approximately 8.8% were to Dongfeng Auto Group Co., Ltd and
approximately 8.5% were to Zhejiang Geely Holding Co., Ltd, the Company’s four largest customers. In total, these
8
four largest customers accounted for 40.6% of the total sales in 2010. The loss of, or significant reduction in purchases
by, one or more of these major customers could adversely affect the Company’s business.
The Company may not be able to collect receivables incurred by customers.
Although the Company currently sells its products on credit, the Company’s ability to receive payment for its
products depends on the continued creditworthiness of its customers. The Company’s customer base may change if its
sales increase because of the Company’s expanded capacity. If the Company is not able to collect its receivables, its
profitability will be adversely affected.
The Company may be subject to product liability and warranty and recall claims, which may increase the costs
of doing business and adversely affect the Company’s financial condition and liquidity.
The Company may be exposed to product liability and warranty claims if its products actually or allegedly fail to
perform as expected or the use of its products results, or is alleged to result, in bodily injury and/or property damage.
The Company started to pay some of its customers’ increased after-sales service expenses due to consumer rights
protection policies of “recall” issued by the Chinese government in 2004, such as the recalling flawed vehicles policy.
Beginning in 2004, automobile manufacturers unilaterally required their suppliers to pay a “3-R Guarantees” service
charge for repair, replacement and refund in an amount of about 2%–6% of the total amount of parts supplied.
Accordingly, the Company has experienced and will continue to experience higher after sales service expenses. Product
liability, warranty and recall costs may have a material adverse effect on the Company’s financial condition.
The Company is subject to environmental and safety regulations, which may increase the Company’s compliance
costs and may adversely affect its results of operations.
The Company is subject to the requirements of environmental and occupational safety and health laws and
regulations in China. The Company cannot provide assurance that it has been or will be at all times in full compliance
with all of these requirements, or that it will not incur material costs or liabilities in connection with these requirements.
Additionally, these regulations may change in a manner that could have a material adverse effect on the Company’s
business, results of operations and financial condition. The capital requirements and other expenditures that may be
necessary to comply with environmental requirements could increase and become a material expense of doing business.
Non-performance by the Company’s suppliers may adversely affect its operations by delaying delivery or
causing delivery failures, which may negatively affect demand, sales and profitability.
The Company purchases various types of equipment, raw materials and manufactured component parts from its
suppliers. The Company would be materially and adversely affected by the failure of its suppliers to perform as
expected. The Company could experience delivery delays or failures caused by production issues or delivery of
non-conforming products if its suppliers fail to perform, and it also faces these risks in the event any of its suppliers
becomes insolvent or bankrupt.
The Company’s business and growth may suffer if it fails to attract and retain key personnel.
The Company’s ability to operate its business and implement its strategies effectively depends on the efforts of
its executive officers and other key employees. The Company depends on the continued contributions of its senior
management and other key personnel. The Company’s future success also depends on its ability to identify, attract and
retain highly skilled technical staff, particularly engineers and other employees with mechanics and electronics
expertise, and managerial, finance and marketing personnel. The Company does not maintain a key person life
insurance policy on Mr. Hanlin Chen or Mr. Qizhou Wu. The loss of the services of any of the Company’s key
employees or the failure to attract or retain other qualified personnel could substantially harm the Company’s business.
The Company’s management controls approximately 71.31% of its outstanding common stock and may have
conflicts of interest with the Company’s minority stockholders.
9
As of December 31, 2011, members of the Company’s management beneficially own approximately 71.31% of
the outstanding shares of the Company’s common stock. As a result, except for the related party transactions that
require approval of the audit committee of the board of directors of the Company, these majority stockholders have
control over decisions to enter into any corporate transaction, which could result in the approval of transactions that
might not maximize overall stockholders’ value. Additionally, these stockholders control the election of members of
the Company’s board, have the ability to appoint new members to the Company’s management team and control the
outcome of matters submitted to a vote of the holders of the Company’s common stock. The interests of these majority
stockholders may at times conflict with the interests of the Company’s other stockholders. The Company regularly
engages in transactions with entities controlled by one or more of its officers and directors, including those controlled
by Mr. Hanlin Chen, the chairman of the board of directors of the Company and its controlling stockholder.
Covenants contained in the Securities Purchase Agreement and the convertible notes restrict the Company’s
operating flexibility.
In connection with the convertible notes, the Company entered into a series of binding covenants and contractual
provisions that limits the Company’s operating flexibility. For example, the Securities Purchase Agreement prohibits
the Company from paying cash dividends on common stock without the approval of the holders of the convertible notes.
Also, if the Weighted Average Price (WAP) for twenty (20) consecutive trading days is less than $3.187, the
convertible notes holders shall have the right, in their sole discretion, to require that the Company redeem all or any
portion of the convertible notes. The portion of this convertible notes 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 in Note 12 to the
consolidated financial statements. Also, upon the consummation of a change of control as defined in the convertible
notes agreements, the convertible notes holders may require the Company to redeem all or any portion of the
convertible notes. These binding covenants and contractual provisions limit the Company’s ability to declare or pay
dividends, issue other notes or debt, issue certain types of securities engage in certain types of intercompany loans or
enter into other types of fundamental transactions. These restrictions could limit the Company’s ability to operate and
may harm the equity interest of stockholders.
There is a limited public float of the Company’s common stock, which can result in the Company’s stock price
being volatile and prevent the realization of a profit on resale of the Company’s common stock or derivative securities.
There is a limited public float of the Company’s common stock. As of December 31, 2011, approximately 28.69%
of the Company’s outstanding common stock is considered part of the public float. The term “public float” refers to
shares freely and actively tradable on the NASDAQ Capital Market and not owned by officers, directors or affiliates, as
such term is defined under the Securities Act. As a result of the limited public float and the limited trading volume on
some days, the market price of the Company’s common stock can be volatile, and relatively small changes in the
demand for or supply of the Company’s common stock can have a disproportionate effect on the market price for its
common stock. This stock price volatility could prevent a security holder seeking to sell the Company’s common stock
or derivative securities from being able to sell them at or above the price at which the stock or derivative securities
were bought, or at a price which a fully liquid market would report.
Provisions in the Company’s certificate of incorporation and bylaws and the General Corporation Law of
Delaware may discourage a takeover attempt.
Provisions in the Company’s certificate of incorporation and bylaws and the General Corporation Law of
Delaware, the state in which it is organized, could make it difficult for a third party to acquire the Company, even if
doing so might be beneficial to the Company’s stockholders. Provisions of the Company’s certificate of incorporation
and bylaws impose various procedural and other requirements, which could make it difficult for stockholders to effect
certain corporate actions and possibly prevent transactions that would maximize stockholders’ value.
Litigation arising from the need to restate certain previously issued historical financial statements of the
Company could have a material adverse effect on the Company’s business, financial condition, results of operations or
liquidity.
10
On March 17, 2011, the Company announced that it had identified historical accounting errors relating to the
accounting treatment of the Company’s convertible notes issued on February 15, 2008. The accounting errors resulted
in the misstatement of certain charges since the first quarter of 2009. The Company undertook a review to determine
the total amount of the errors and the accounting periods in which the errors occurred. The Company’s review was
overseen by the audit committee of the board of directors of the Company, the “Audit Committee”, with the assistance
of management and accounting consultants engaged by management. The Audit Committee concluded on March 12,
2011 that the Company’s previously issued audited consolidated financial statements as of and for the year ended
December 31, 2009, and related auditors’ report, and unaudited interim consolidated financial statements as of and for
the quarterly periods ended March 31, June 30 and September 30, 2010 should no longer be relied upon because of
these errors in the financial statements. The Company’s board of directors agreed with the Audit Committee’s
conclusions. After analyzing the size and timing of the errors, the Company determined that, in the aggregate, the errors
were material and would require the Company to restate certain of its previously issued financial statements.
On October 25, 2011, a purported securities class action was filed in the United States District Court for the
Southern District of New York on behalf of all purchasers of the Company’s securities between March 25, 2010 and
March 17, 2011. On February 24, 2012, the plaintiffs filed an amended complaint, changing the purported class period
from May 12, 2010 through March 17, 2011. The amended complaint alleges that the Company, certain of its present
officers and directors and the Company’s former auditor violated Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, and the rules promulgated thereunder, and seeks unspecified damages.
On December 23, 2011, a purported shareholder derivative action was filed in the Court of Chancery of the State
of Delaware (the “Court of Chancery”) on behalf of the Company. The complaint alleges that certain of the Company’s
current officers and directors breached their fiduciary duties to the Company in relation to the Company’s accounting
of convertible notes issued in February 2008. On January 25, 2012, a second purported shareholder derivative action
was filed in the Court of Chancery on behalf of the Company. On February 3, 2012 the Court of Chancery consolidated
the two cases. The shareholder suits have been stayed pending the outcome of any motion to dismiss in the securities
class action.
The Company has not yet been required to respond formally to these lawsuits. In addition, the complaints do not
specify an amount of damages that plaintiffs seek. Because these matters are in very early stages, the Company cannot
determine whether or not an adverse outcome is probable, nor can it provide a reasonable estimate of potential losses
related to these matters. An adverse outcome in one or more of these matters could have a material adverse effect on
the Company’s business, financial condition, results of operations or liquidity.
The Company may also be subject to additional lawsuits as a result of the restatement, which could have a
material adverse effect on the Company’s business, financial condition, results of operations or liquidity.
Failure to achieve and maintain effective internal control over financial reporting could have a material adverse
effect on the Company’s business, results of operations and the trading price of its shares.
The Company is subject to reporting obligations under the U.S. securities laws. The Securities and Exchange
Commission, the “SEC,” as required by Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring
public companies to include a report of management in its annual report that contains an assessment by management of
the effectiveness of such company’s internal control over financial reporting. In addition, beginning with the year
ended December 31, 2007, an independent registered public accounting firm for an accelerated filer must attest to and
report on the effectiveness of the company’s internal control over financial reporting.
The Company’s management has conducted an evaluation of the effectiveness of its internal control over
financial reporting and concluded that the Company’s internal control over financial reporting was not effective as of
December 31, 2011, and a material weakness was noted because the Company did not have sufficient personnel with
appropriate levels of accounting knowledge and experience to address complex U.S. GAAP accounting issues, and to
prepare and review financial statements and related disclosures under U.S. GAAP. If the Company fails to maintain the
effectiveness or fails to remediate the deficiencies of its internal control over financial reporting, the Company may not
be able to conclude on an ongoing basis that it has effective internal control over financial reporting in accordance with
the Sarbanes-Oxley Act.
11
Effective internal controls are necessary for the Company to produce reliable financial reports. For the
deficiencies identified in this fiscal year, the Company’s management team is evaluating remediation measures that can
be undertaken to address this material weakness and will continue such evaluation so that it may institute a
comprehensive remediation plan in order to maintain effective internal control over financial reporting. Any failure to
achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in
the reliability of the Company’s financial statements, which in turn could negatively impact the trading price of the
Company’s shares. Furthermore, the Company may need to incur additional costs and use additional management and
other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and other requirements going
forward.
The Company does not pay cash dividends on its common stock.
The Company has never paid common stock cash dividends and does not anticipate doing so in the foreseeable
future. In addition, the Securities Purchase Agreement prohibits the Company from paying cash dividends on common
stock without the approval of the holders of the convertible notes.
Techniques employed by short sellers may drive down the market price of the Company’s common stock.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third
party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes
to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the
replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the
short seller’s best interests for the price of the stock to decline, many short sellers publish, or arrange for the publication
of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market
momentum and generate profits for themselves after selling a stock short. These short attacks have, in the past, led to
selling of shares in the market.
Recently, public companies that have substantially all of their operations in China have been the subject of short
selling. Much of the scrutiny and negative publicity has centered around allegations of a lack of effective internal
control over financial reporting resulting in financial and accounting irregularities and mistakes, inadequate corporate
governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, many of these
companies are now conducting internal and external investigations into the allegations and, in the interim, are subject to
shareholder lawsuits and/or SEC enforcement actions.
It is not clear what effect such negative publicity would have on the Company, if any. If the Company were to
become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, the
Company could have to expend a significant amount of resources to investigate such allegations and/or defend itself.
While the Company would strongly defend against any such short seller attacks, the Company may be constrained in
the manner in which it can proceed against the relevant short seller by principles of freedom of speech, applicable state
law or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could distract
the Company’s management from growing the Company. Even if such allegations are ultimately proven to be
groundless, allegations against the Company could severely impact its business operations and stockholders equity, and
any investment in the Company’s stock could be greatly reduced or rendered worthless.
ITEM 2 PROPERTIES
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-five to fifty years long-term rights to use the lands and buildings.
12
Name of Entity
Product
Total Area
(M2)
Building Area
(M2)
Original Cost of
Equipment
Site
Henglong
Automotive Parts
225,221
20,226 $
35,710,000
Jingzhou City, Hubei
Province
Jiulong
Shenyang
Power Steering
Gear
Automotive
Steering Gear
13,393
39,478
23,728 $
31,880,000
13,707 $
- Wuhan City, Hubei Province
35,354
5,625 $
5,480,000
Jingzhou City, Hubei
Province
Shenyang City, Liaoning
Province
Zhuji City, Zhejiang
Province
Zhejiang
Steering Pumps
32,000
20,000 $
10,610,000
Jielong
USAI
Hengsheng
Wuhu
Total
Electric Power
Steering
Sensor Modular
Automotive
Steering Gear
Automotive
Steering Gear
99,580
-
- $
- $
170,520
26,000 $
6,090,000 Wuhan City, Hubei Province
900,000 Wuhan City, Hubei Province
Jingzhou City, Hubei
Province
12,490,000
83,700
12,600 $
4,160,000 Wuhu City, Anhui Province
699,246
121,886 $
107,320,000
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.
ITEM 3 LEGAL PROCEEDINGS
On October 25, 2011, a purported securities class action was filed in the United States District Court for the
Southern District of New York on behalf of all purchasers of the Company’s securities between March 25, 2010 and
March 17, 2011. On February 24, 2012, the plaintiffs filed an amended complaint, changing the purported class period
from May 12, 2010 through March 17, 2011. The amended complaint alleges that the Company, certain of its present
officers and directors and the Company’s former auditor violated Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, and the rules promulgated thereunder, and seeks unspecified damages. The Company has not yet
responded to the amended complaint, but believes the allegations in the complaint are without merit. The Company
intends to defend itself vigorously against the claims.
On December 23, 2011, a purported shareholder derivative action was filed in the Court of Chancery of the State
of Delaware (the “Court of Chancery”) on behalf of the Company. The complaint alleges that certain of the Company’s
current officers and directors breached their fiduciary duties to the Company in relation to the Company’s accounting
of convertible notes issued in February, 2008. On January 25, 2012, a second purported shareholder derivative action
was filed in the Court of Chancery on behalf of the Company. On February 3, 2012 the Court of Chancery consolidated
the two cases. The shareholder suits have been stayed pending the outcome of any motion to dismiss in the securities
class action. The Company believes the allegations in the shareholder suits are without merit, and intends to defend
itself vigorously against the claims.
The Company has not yet been required to respond formally to these lawsuits. In addition, the complaints do not
specify an amount of damages that plaintiffs seek. Because these matters are in very early stages, the Company cannot
determine whether or not an adverse outcome is probable, nor can it provide a reasonable estimate of potential losses
related to these matters. While the Company believes that it has meritorious defenses to each of these actions and
intends to defend them vigorously, an adverse outcome in one or more of these matters could have a material adverse
effect on the Company’s business, financial condition, results of operations or liquidity.
13
Other than the above, the Company is not a party to any pending or, to the best of the Company’s knowledge,
any threatened legal proceedings. In addition, no director, officer or affiliate of the Company, or owner of record of
more than five percent 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.
PART II
ITEM 4 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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 2011 and 2010 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
2011
2010
High
Low
High
Low
$
$
$
$
15.02 $
11.59 $
9.29 $
5.65 $
7.40 $
6.30 $
4.03 $
3.23 $
27.17 $
25.15 $
20.70 $
17.98 $
14.18
14.60
13.60
13.10
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
STOCKHOLDERS
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 December 31, 2011, there were 28,260,302
shares of the Company’s common stock outstanding and the Company had approximately 59 stockholders of record.
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.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The securities authorized for issuance under equity compensation plans at December 31, 2011 are as follows:
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
$
9.72
1,721,150
14
The stock option plan was approved at 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.
PERFORMANCE GRAPH
Company Stock Performance
The information contained below shall not be deemed incorporated by reference in any filing under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, the “Exchange Act,” whether
made before or after the date hereof and irrespective of any general incorporation language in any such filing (except
to the extent that the Company specifically incorporates this information by reference) and shall not otherwise be
deemed “soliciting material” or “filed” with the Securities and Exchange Commission or subject to Regulation 14A or
14C, or to the liabilities of Section 18 of the Exchange Act (except to the extent that the Company specifically requests
that this information be treated as soliciting material or specifically incorporate this information by reference).
The following graph shows a five-year comparison of the cumulative total stockholder return on the Company’s
common stock as compared to the cumulative total return of two other indexes: a custom composite index (“Peer
Group”), and the Standard & Poor’s 500 Composite Stock Price Index. The companies included in the Peer Group are:
SORL Auto Parts, Inc., China Yuchai International Limited, Standard Motor Products Inc. and Dorman Products, Inc.
These comparisons assume an initial investment of $100 and the reinvestment of dividends.
CAAS
S&P 500 1
Peer Group
Peer + CAAS
$
$
$
$
2006
100 $
100 $
100 $
100 $
Data Source: Standard & Poor's
Fiscal Years End December 31,
2009
2008
2007
65 $
105 $
101 $
92 $
28 $
66 $
54 $
47 $
156 $
84 $
129 $
136 $
2010
114 $
97 $
255 $
219 $
2011
28
99
187
147
The graph and other information furnished in the section titled “Share Performance” under this Part II, Item 5 of
this Form 10-K shall not be deemed to be “soliciting” material or to be “filed” with the Securities and Exchange
Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of
1934, as amended.
ITEM 5 SELECTED FINANCIAL DATA
The selected consolidated statement of income (loss) and cash flows data for the years ended December 31,
2011, 2010 and 2009 and the selected balance sheet data as of December 31, 2011 and 2010 are derived from the
Company’s audited consolidated financial statements included elsewhere in this Annual Report. The selected
consolidated financial data for the years ended December 31, 2008 and 2007, and the selected balance sheet data as of
15
December 31, 2009, 2008 and 2007, are derived from the Company’s audited consolidated financial statements not
included in this Annual Report.
The following selected historical financial information should be read in conjunction with the Company’s
consolidated financial statements and related notes and the information contained in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”.
2007
Year Ended December 31,
2009
2010
2008
2011
Statement of income (loss) data:
Net sales
Gross profit
Operating expenses
Income from operations
Net income (loss) attributable to parent
company
Earnings (loss) per share attributable to
parent company
— basic
— diluted
Statement of cash flows data:
Net cash flows provided by operating
activities
Net cash flows used in investing
activities (1)
Net cash flows provided by/(used in)
financing activities (2)
$133,597,003 $163,179,286 $255,597,553 $ 345,925,182 $347,974,754
45,323,048 41,470,073 61,742,626 80,302,710 68,098,997
24,611,397 25,207,560 25,648,736 27,384,338 36,201,809
20,737,277 16,996,576 36,932,395 54,047,404 33,378,496
$
8,859,906 $ 10,244,130 $ (26,440,871) $ 51,738,113 $ 40,791,987
$
$
0.37 $
0.37 $
0.35 $
0.35 $
(0.98) $
(0.98) $
1.65 $
1.10 $
1.30
0.69
$ 11,324,473 $ 16,373,966 $ 34,956,534 $ 38,552,161 $ 34,063,290
$ (13,159,277) $ (22,356,060) $ (17,335,687) $ (32,596,741) $ (14,402,403)
$ (7,429,025) $ 21,981,953 $ (11,290,625) $ (1,394,578) $
871,936
$
Balance sheet data:
Cash and cash equivalents
Total assets
Long-term debt obligation
and accrued make-whole (2)
Total liabilities (2)
Total stockholders’equity
$
2007
2008
2009
2010
2011
Year Ended December 31,
19,487,159 $
182,984,687
37,113,375 $
231,888,141
43,480,176 $
314,382,572
49,424,979 $
405,527,665
72,960,500
466,447,120
-
92,583,555
90,401,132 $
-
129,252,311
102,635,830 $
-
232,529,179
81,853,393 $
-
257,287,874
148,239,791 $
31,187,138
250,289,944
216,157,176
(1) In January 2010, the Company invested $3.1 million to establish a joint venture company with another stockholder,
Beijing Henglong. Please see Note 6 to the Consolidated Financial Statements under Item 15 of this Annual
Report for more details.
(2) In February 2008, the Company issued convertible notes in the amount of $35 million, of which $5.0 million and
$6.4 million were redeemed and converted into common shares in April 2009 and March 2011, respectively. As of
December 31, 2011, 2010, and 2009, the accrued make-whole interests were $ 7.6 million, $6.6 million and $4.8
million, respectively. Upon expiration of the mandatory redemption period of the convertible notes in February
2011, the outstanding balance of the convertible notes and accrued make-whole interests were reclassified as
long-term obligations. Please see Notes 12 and 15 to the Consolidated Financial Statements under Item 15 of this
Annual Report for more details.
16
ITEM 6 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.” 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. Furthermore, the Company owns the
following aggregate net interests in the following wholly owned subsidiaries and joint ventures organized in the PRC as
of December 31, 2011, 2010, and 2009.
Name of Entity
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”
Wuhu HengLong Auto Steering System Co., Ltd., “Wuhu”
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong”
Jingzhou Hengsheng Automotive System Co., Ltd, “Hengsheng”
Jingzhou Henglong Automotive Technology (Testing) Center,
“Testing Center”
Beijing Hainachuan HengLong Automotive Steering System Co.,
Ltd, “Beijing HengLong”
Aggregate Net Interest
2010
2011
2009
80.00%
81.00%
70.00%
51.00%
83.34%
77.33%
85.00%
100.00%
80.00%
81.00%
70.00%
51.00%
83.34%
77.33%
85.00%
100.00%
80.00%
81.00%
70.00%
51.00%
83.34%
77.33%
85.00%
100.00%
80.00%
80.00%
80.00%
50.00%
50.00%
—
RESULTS OF OPERATIONS
Net Sales and Cost of Sales
2011 Versus 2010 Comparative
For the years ended December 31, 2011 and 2010, net sales and cost of sales are summarized as follows:
Net Sales
2011
2010
$ 196,296,846 $ 197,226,807 $
92,095,265
39,691,553
26,193,095
33,057,878
13,092,659
69,517,738
30,290,139
20,269,837
35,271,488
22,313,422
43,357,605
(69,342,321)
32,707,067
(88,139,142)
$ 347,974,754 $ 345,925,182 $
Henglong
Jiulong
Shenyang
Zhejiang
Wuhu
Hengsheng 1
Other
Sectors 1
Eliminations
Total
2011
Cost of sales
2010
Change
(929,961)
(22,577,527) -24.5
(9,401,414) -23.7
(5,923,258) -22.6
2,213,610
6.7
9,220,763 70.4
-0.5% $ 154,856,218 $ 150,622,578 $
80,664,101
33,644,820
18,630,742
31,330,114
10,650,920
60,387,004
26,239,369
15,555,120
33,531,226
17,655,987
Change
4,233,640
2.8%
(20,277,097) -25.1
(7,405,451) -22.0
(3,075,622) -16.5
2,201,112
7.0
7,005,067 65.8
10,650,538 32.6
18,796,821 -21.3
2,049,572
41,729,969
(70,079,136)
29,204,686
(89,125,489)
12,525,283 42.9
19,046,353 -21.4
0.6% $ 279,875,757 $ 265,622,472 $ 14,253,285
5.4%
17
1. Hengsheng was previously included in “Other Sectors.” The Company is now reporting Hengsheng as a separate
sector, as it has recently become a principal profit maker. As such, a reclassification has been made to all periods
presented to conform to the current period presentation. Such reclassifications had no effect on previously reported
results of operations.
Net Sales
Net sales were $347,974,754 for the year ended December 31, 2011, compared with $345,925,182 for the year
ended December 31, 2010, an increase of $2,049,572, or 0.6%. Historically, more than 90% of the Company’s business
was derived from China and denominated in RMB, and the increase in net sales results from the appreciation of the
RMB against the U.S. dollar. The growth rate of the Company’s net sales in 2011 was lower than the prior year’s as
China’s auto market demand slowed, as a result of the expiration of government incentive policies (such as subsidies to
rural-area consumers, fuel-efficient car buyers and reduced purchase taxes) and tightened auto industry financing. The
decrease in sales volume led to a sales decrease of $18,817,548, a decrease in the average selling price led to a sales
decrease of $406,716 and the appreciation of the RMB against the U.S. dollar led to a sales increase of $21,273,836
compared with the same period of 2010. Further analysis is as follows:
- Net sales for Henglong was $196,296,846 for the year ended December 31, 2011, compared with $197,226,807
for the year ended December 31, 2010, representing a decrease of $929,961, or 0.5%. Decrease in sales was
mainly due to decrease in sale volumes with a sales decrease of $4,788,983, decrease in selling price with a sales
decrease of $5,715,008 and the effect of foreign currency translation of the RMB against the U.S. dollar with a
sales increase of $9,574,030.
- Net sales for Jiulong was $69,517,738 for the year ended December 31, 2011, compared with $92,095,265 for the
year ended December 31, 2010, representing a decrease of $22,577,527, or 24.5%. Excluding the net sales of
$9,497,104 to Chrysler during the nine months ended September 30, 2010, net sales decrease was $13,080,423, or
15.8% in 2011. Prior to October 1, 2010, sales of Hengsheng’s product to Chrysler were made through Jiulong.
Subsequent to that date, Hengsheng directly sells its products to Chrysler. The net sales decrease was mainly due
to decrease in sales volumes with a sales decrease of $16,441,619, increase in selling prices resulting from newly
developed steering gear models which have higher selling prices than those of old models with a sales increase of
$734,771 and the effect of foreign currency translation of the RMB against the U.S. dollar with a sales increase of
$2,626,425.
- Net sales for Shenyang was $30,290,139 for the year ended December 31, 2011, compared with $39,691,553 for
the year ended December 31, 2010, representing a decrease of $9,401,414, or 23.7%. Net sales decrease was
mainly due to a decrease in sale volumes with a sales decrease of $11,662,345, an increase in selling prices
resulting from newly developed steering gear models that have higher selling prices than those of older models
with a sales increase of $ 318,036 and the effect of foreign currency translation of the RMB against the U.S. dollar
with a sales increase of $1,942,895.
- Net sales for Zhejiang was $20,269,837 for the year ended December 31, 2011, compared with $26,193,095 for
the year ended December 31, 2010, representing a decrease of $5,923,258, or 22.6%. Net sales decrease was
mainly due to a decreased sale volume with a sales decrease of $5,682,237, a decrease in selling price with a sales
decrease of $1,521,246 and the effect of foreign currency translation of the RMB against the U.S. dollar with a
sales increase of $1,280,225.
- Net sales for Wuhu was $35,271,488 for the year ended December 31, 2011, compared with $33,057,878 for the
year ended December 31, 2010, representing an increase of $2,213,610, or 6.7%. Net sales increase was mainly
due to a decrease in sale volumes with a sales decrease of $1,752,322, an increase in selling prices resulting from
newly developed steering gear models which have higher selling prices than that of older models with a sales
increase of $ 2,331,516 and the effect of foreign currency translation of the RMB against the U.S. dollar with a
sales increase of $1,634,416.
18
- Net sales for Hengsheng was $22,313,422 for the year ended December 31, 2011, compared with $13,092,659 for
the year ended December 31, 2010, representing an increase of $9,220,763, or 70.4%. Net sales increase was
mainly due to an increase in automobile consumption in the United States as a result of its economic recovery.
Hengsheng’s products were all sold to United States. Increase in sale volumes lead to a sales increase of
$10,083,605, a decrease in selling price led to a sales decrease of $1,497,148 and the appreciation of the RMB
against the U.S. dollar led to a sales increase of $634,306.
- Net sales for Other Sectors was $43,357,605 for the year ended December 31, 2011, compared with $32,707,067
for the year ended December 31, 2010, representing an increase of $10,650,538 or 32.6%. Net sales increase was
mainly due to an increase in the market demand for newly developed EPS products. Increase in sale volumes led
to a sales increase of $4,567,049, increase in selling prices resulting from newly developed steering gear models
that have higher selling prices than those of older models led to a sales increase of $ 4,408,880 and the
appreciation of the RMB against the U.S. dollar led to a sales increase of $1,674,609.
Cost of Sales
For the year ended December 31, 2011, the cost of sales was $279,875,757, compared with $265,622,472 for the
same period of 2010, an increase of $14,253,285, or 5.4%. Increase in cost of sales was mainly due to the net effect of
decrease in sale volumes with a cost of sales decrease of $15,326,980, increase in unit cost with a cost of sales increase
of $12,175,705, and the appreciation of the RMB against the U.S. dollar with a cost of sales increase of $17,404,560.
The increase in the unit cost of sales was primarily due to an increase in the cost of raw materials, such as steel. Further
analysis is as follows:
- Cost of sales for Henglong was $154,856,218 for the year ended December 31, 2011, compared with
$150,622,578 for the year ended December 31, 2010, representing an increase of $4,233,640, or 2.8%. Increase in
cost of sales was mainly due to a decrease in sales volumes with a cost of sales decrease of $6,878,103, an
increase in unit cost with a cost of sales increase of $3,775,578 and the effect of foreign currency translation of the
RMB against the U.S. dollar with a cost of sales increase of $7,336,165.
- Cost of sales for Jiulong was $60,387,004 for the year ended December 31, 2011, compared with $80,664,101 for
the year ended December 31, 2010, representing a decrease of $20,277,097, or 25.1%. Excluding the cost of sales
of $7,430,534 to Chrysler during the nine months ended September 30, 2010, cost of sales decrease
was $12,846,563, or 17.5%. Prior to October 1, 2010, the sales of Hengsheng’s products to Chrysler were made
through Jiulong. Subsequent to that date, Hengsheng directly sells its products to Chrysler. Decrease in cost of
sales was mainly due to a decrease in sales volumes with a cost of sales decrease of $ 16,301,757, an increase in
unit cost with a cost of sales increase of $ 932,206 and the effect of foreign currency translation of the RMB
against the U.S. dollar with a cost of sales increase of $ 2,522,988.
- Cost of sales for Shenyang was $26,239,369 for the year ended December 31, 2011, compared with $33,644,820
for the year ended December 31, 2010, representing a decrease of $7,405,451, or 22.0%. Decrease in cost of sales
was mainly due to a decrease in sales volumes with a cost of sales decrease of $10,121,205, an increase in unit
cost with a cost of sales increase of $1,071,712 and the effect of foreign currency translation of the RMB against
the U.S. dollar with a cost increase of $1,644,042.
- Cost of sales for Zhejiang was $15,555,120 for the year ended December 31, 2011, compared with $18,630,742
for the year ended December 31, 2010, representing a decrease of $3,075,622, or 16.5%. Decrease in cost of sales
was mainly due to a decrease in sales volumes with a cost of sales decrease of $4,101,041, an increase in unit cost
with a cost of sales increase of $113,424 and the effect of foreign currency translation of the RMB against the U.S.
dollar with a cost increase of $911,995.
- Cost of sales for Wuhu was $33,531,226 for the year ended December 31, 2011, compared with $31,330,114 for
the year ended December 31, 2010, representing an increase of $2,201,112, or 7.0%. Increase in cost of sales was
mainly due to a decrease in sales volumes with a cost of sales decrease of $1,647,723, an increase in unit cost with
19
a cost of sales increase of $2,336,653 and the effect of foreign currency translation of the RMB against the U.S.
dollar with a cost increase of $1,512,182.
- Cost of sales for Hengsheng was $17,655,987 for the year ended December 31, 2011, compared with $10,650,920
for the year ended December 31, 2010, representing an increase of $7,005,067, or 65.8%. Increase in cost of sales
increase was mainly due to an increase in automobile consumption in the United States as a result of its economic
recovery. The increase in sales volumes led to a cost of sales increase of $8,561,925, a decrease in unit cost as a
result of increase in purchases led to a cost of sales decrease of $2,074,006 and the appreciation of the RMB
against U.S. dollar led to a cost of sales increase of $517,148.
- Cost of sales for Other Sectors was $41,729,969 for the year ended December 31, 2011, compared with
$29,204,686 for the year ended December 31, 2010, representing an increase of $12,525,283, or 42.9%. Increase
in net cost of sales was mainly due to an increase in market demand of newly developed EPS, which resulted in an
increase in sales volumes. The increase in sales volumes led to a cost of sales increase of $5,543,612. Given that
the Company’s market share of EPS in the China market is relatively low, and yet to reach a production level with
economies of scale, the Company could not purchase relevant materials from suppliers for a lower price.
Furthermore certain suppliers increased their selling prices as a result of inflation, which resulted in an increase in
costs of sales of $5,480,944. The appreciation of the RMB against the U.S. dollar led to a cost of sales increase of
$1,500,727.
Gross margin was 19.6% for the year ended December 31, 2011, representing a 3.6 percentage point decrease
from 23.2% for the same period of 2010, which was primarily due to a decrease of selling price and an increase of unit
cost.
Gain on Other Sales
Gain on other sales mainly consisted of net amount retained from sales of materials and other assets. For the year
ended December 31, 2011, gain on other sales amounted to $1,481,308, while it amounted to $1,129,032 for the year
ended December 31, 2010. The increase of $352,276, or 31.2%, was mainly due to an increase in sales of materials.
Selling Expenses
For the years ended December 31, 2011 and 2010, selling expenses are summarized as follows:
Salaries and wages
Office expense
Transportation expense
Rent expense
Other expense
Total
2011
2,337,901 $
1,509,413
4,634,306
1,277,140
213,075
9,971,835 $
$
$
Year Ended December 31
2010
2,247,519 $
1,129,348
4,690,313
1,085,128
211,567
9,363,875 $
Increase/(Decrease) Percentage
90,382
380,065
(56,007 )
192,012
1,508
607,960
4.0%
33.7
-1.2
17.7
0.1
6.5%
Selling expenses were $9,971,835 for the year ended December 31, 2011. As compared to $9,363,875 for the
year ended December 31, 2010, there was an increase of $607,960, or 6.5%, which was mainly due to an:
•
•
increase in office expenses (including office supplies, travel expenses and meeting expenses), as a result of an
increase in marketing activities; and
increase in rent expense due to expansion of commercial networks, which led to increases in product warehouses
rental.
20
General and Administrative Expenses
For the years ended December 31, 2011 and 2010, general and administrative expenses are summarized as
follows:
Year Ended December 31,
Increase/
(Decrease)
Salaries and wages
Labor insurance expenses
Maintenance and repair expenses
Property and other taxes
Provision/(recovery) for bad debts
Office expense
Depreciation and amortization expense
Listing expenses 1
Others expenses
Total
2011
5,401,098 $
2,988,187
1,112,250
1,479,122
(75,486)
1,642,180
919,682
2,370,880
386,456
16,224,369 $
$
$
2010
4,681,335 $
2,086,319
679,858
1,179,092
(2,558,818)
958,542
691,721
1,939,774
371,388
10,029,211 $
Percentage
719,763
901,868
432,392
300,030
2,483,332
683,638
227,961
431,106
15,068
6,195,158
15.4%
43.2
63.6
25.4
-97.0
71.3
33.0
22.2
4.1
61.8%
1. Listing expenses consisted of the costs associated with legal, accounting and auditing fees for operating a public
company. The expenses also included share-based compensation expense for options granted to members of the
audit committee.
General and administrative expenses were $16,224,369 for the year ended December 31, 2011. As compared to
$10,029,211 for the year ended December 31, 2010, there was an increase of $6,195,158, or 61.8%.
The analysis of expense items with significant fluctuation is as follows:
-
-
-
Increases in salaries and wages and labor insurance expenses were mainly due to an overall increase in labor cost
and additional endowment insurance for employees.
Increase of maintenance and repair expenses was mainly due to repair and maintenance projects on certain office
facilities in 2011, thus the costs of maintenance of office facilities and repair increased in 2011.
Increase in property and other taxes paid to government were mainly due to acquisition of new land use rights and
development of new properties in 2011.
- The Company recorded provision for bad debts based on specific identification methods. Decrease in provision for
bad debts in 2011 was mainly due to further improvement of OEMs’ financial positions as a result of the
continuing growth of China's economy. Compared with bad debt recovery of $2.6 million in 2010, in 2011, the
Company collected less aged accounts receivable that was previously considered uncollectible and for which the
Company made provisions. Accordingly, there was less of a reversal of the provision for bad debts.
- The increase in office expense was mainly due to expansion of operations.
- The increase of depreciation and amortization expense was mainly due to the increase in the number of land and
buildings, office equipment and software as a result of operation expansion.
- The increase in listing expenses was mainly due to the increase of auditing expenses, accounting consulting
expenses and attorney service expenses. The increase in professional fees was mainly due to increased cost in the
requirement of compliance as a publicly listed entity, the restatement of certain of the Company’s previously
reported financial statements and the need to evaluate the Company’s internal control over financial reporting.
21
Research and Development Expenses
Research and development expenses, “R & D” expenses, were $10,005,605 for the year ended December 31,
2011. As compared to $7,991,252 for the year ended December 31, 2010, there was an increase of $2,014,353, or
25.2%.
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 2011, foreign OEMs
significantly increased their demand for EPS, but the related technology in China is still in the research and
development and testing stage. In order to expand into the market for EPS, the Company increased its investment in the
research and development of EPS in 2011, including assigning the Company’s senior technicians and advanced
manufacturing equipment to EPS, establishing the EPS trail-production department, introducing technology
expectations and purchasing advanced technology and test equipment. At present, the Company has developed several
types of EPSs suitable for small-engine cars, and has sold certain quantities of EPS.
Income from Operations
Income from operations was $33,378,496 for the year ended December 31, 2011. As compared to $54,047,404
for the year ended December 31, 2010, there was a decrease of $20,668,908, or 38.2%, which mainly consisted of a
decrease of $12,203,713, or 15.2%, in gross profit, an increase of $352,276, or 31.2%, in gain on other sales (such as
raw materials) and an increase in operating expenses of $8,817,471, or 32.2%.
Other Income, Net
Other income was $168,749 for the year ended December 31, 2011. As compared to $558,058 for the year ended
December 31, 2010, there was a decrease of $389,309, or 69.8%, primarily as a result of fewer government subsidies
being recognized in 2011.
The Company’s government subsidies consisted of an interest subsidy and an investment subsidy. Interest
subsidies are refunds of bank interest charges offered by the Chinese government. Investment subsidies are subsidies
for encouraging foreign investors to set up technologically advanced enterprises in China.
For the year ended December 31, 2011, the Company received interest subsidy of $168,749.
For the year ended December 31, 2010, the Company received interest subsidy of $311,291, and investment
subsidy of $231,951, as Henglong was qualified as an advanced enterprise.
Financial Expenses
Financial expenses were $3,983,817 for the year ended December 31, 2011. As compared to financial expenses
of $3,360,837 for 2010, there was an increase of $622,980, or 18.5%, primarily as a result of an: (a) increase in the
average balance of borrowings increased to $8.6 million in 2011 from $6.0 million in 2010; (b) increase in the average
borrowing interest rate to 6.29% in 2011 from 5.25% in 2010; and (c) increase in foreign currency losses, as the
Company’s PRC based subsidiaries and Genesis maintain their books and records in the RMB (their functional
currency) and Hengsheng, which is also based in the PRC, settles its external sales in U.S. dollars. During 2011, the
RMB appreciated approximately by 5% against the U.S. dollar.
Gain (Loss) on Change in Fair Value of Derivatives
During the year ended December 31, 2011, the gain on change in fair value of the derivatives embedded in the
convertible notes was $20,971,087. As compared to $20,171,698 for the year ended December 31, 2010, there was an
increase of $799,389. The derivative liability was marked to market each period.
Compared with the fair value of compound derivative liabilities as of December 31, 2010, the fair value of
compound derivative liabilities decreased $24,712,660, including: (a) on March 1, 2011, an investor converted
22
$6,428,571 of the principal amount of the convertible notes and, correspondingly, the derivative liabilities decreased
$3,741,573; and (b) during the year ended December 31, 2011, the Company’s common stock market price dropped to
$3.30 from $13.62 at the beginning of year, which significantly decreased fair value of $20,971,087 for the embedded
conversion option of the convertible notes. See Note 13 to the Consolidated Financial Statements under Item 15 of this
Annual Report for more details.
During the year ended December 31, 2010, the Company’s common stock market price dropped to $13.62 from
$18.71 at the beginning of the year, which significantly decreased the intrinsic value of the embedded conversion
option of the convertible notes. As a result, the fair value of compound derivative liabilities decreased significantly and,
correspondingly, the gain on change in fair value of derivatives increased.
The increase of gain on change in fair value of derivatives as compared with 2010 was primarily due to greater
stock price decreases with lower compound derivative liabilities in 2011.
Gain on Convertible Notes Conversion
During the year ended December 31, 2011, the Company recognized a gain of $1,564,418 for convertible notes
conversion which occurred in March 2011 whereas there was no convertible note converted in 2010.
On March 1, 2011, an investor converted $6,428,571 principal amount of the convertible notes at a conversion
price of $7.0822 per share and the Company issued 907,708 shares of its common stock to the investor. On the
conversion date, the market price of the common shares issued was $10,111,869 ($11.14 per share) and the value of the
conversion consideration was $11,676,287, including $6,428,571 of principal, $1,506,143 of coupon interest and
make-whole amount payable and $3,741,573 of derivative liabilities under such principal. The Company recorded a
gain on convertible notes conversion of $1,564,418, which is the difference between the market price of the common
stock and the conversion consideration.
Income before Income Tax Expenses and Equity in Earnings of Affiliated Companies
Income before income tax expenses and equity in earnings of affiliated companies was $52,098,933 for the year
ended December 31 , 2011, compared with $71,416,323 for the year ended December 31, 2010, a decrease of
$19,317,390, or 27.0%, including a decrease in income from operations of $20,668,908, a decrease in gain on other
income of $389,309, an increase in financial expense of $622,980, an increase in gain on change in fair value of
derivative of $799,389 and an increase in gain on convertible notes conversion of $1,564,418.
Income Taxes
Income tax expense was $4,353,702 for the year ended December 31, 2011, compared to $8,484,205 for the year
ended December 31, 2010, a decrease of $4,130,503, mainly because of: (1) a decrease in income before income tax;
and (2) certain joint ventures of the Company based in the PRC that were qualified as an “Advanced Technology
Enterprises” in 2011 need to have their qualification re-assessed in 2012. Thus, for these entities, their current tax rates
of 12.5% and 15% need further government assessment. If such approval is not given, these entities will be subject to a
tax rate of 25% in 2012. Therefore, the Company has calculated deferred income tax for these joint ventures based on a
rate of 25% in 2011, while preferential rates were applied previously. As a result, additional deferred tax assets of
$929,795 were recognized, which offset the current income tax expense. See Note 25 to the Consolidated Financial
Statements under Item 15 of this Annual Report. For a full reconciliation of the Company’s effective tax rate to the U.S.
federal statutory rate of 35%, and further explanation of the Company’s provision for taxes, see Note 27 to the
consolidated financial statements in Item 15.
Net Income
Net income was $47,903,481 for the year ended December 31, 2011. As compared with $62,917,302 for the year
ended December 31, 2010, there was a decrease of $15,013,821 or 23.9%, representing a decrease in income before
income tax expenses and equity in earnings of affiliated companies of $19,317,390, or 27.0%, a decrease in income tax
expenses of $4,130,503, or 48.7%, and an increase in equity in earnings of affiliated companies of $173,066.
23
Net Income Attributable to Noncontrolling Interests
The Company recorded net income attributable to noncontrolling interests of $7,111,494 for the year ended
December 31, 2011, compared to $11,179,189 for the year ended December 31, 2010, a decrease of $4,067,695, or
36.4%.
The Company owns different equity interests in nine joint ventures, through which it conducts its operations. The
operating results of eight entities were consolidated in the Company’s financial statements for the years ended
December 31, 2011, 2010 and 2009. The Company records the net income attributable to noncontrolling interests of the
respective entities for each period.
In 2011, net income attributable to noncontrolling interests decreased as compared to that of 2010, primarily
resulting from a decrease in net income of joint ventures.
Net Income Attributable to Parent Company
Net income attributable to parent company was $40,791,987 for the year ended December 31, 2011. As
compared to $51,738,113 for the year ended December 31, 2010, there was a decrease of $10,946,126, consisting of a
decrease in net income of $15,013,821, and a decrease in net income attributable to noncontrolling interests of
$4,067,695.
2010 Versus 2009 Comparative
Net Sales and Cost of Sales
For the years ended December 31, 2010 and 2009, net sales and cost of sales are summarized as follows:
Net Sales
2010
2009
Change
2010
Cost of sales
2009
Change
$197,226,807 $ 153,459,876 $ 43,766,931 28.5% $150,622,578 $112,141,910 $ 38,480,668 34.3%
Henglong
92,095,265 61,613,116 30,482,149 49.5
Jiulong
39,691,553 32,492,844 7,198,709 22.2
Shenyang
26,193,095 24,193,366 1,999,729
8.3
Zhejiang
33,057,878 26,496,148 6,561,730 24.8
Wuhu
Hengsheng 1 13,092,659 10,209,668 2,882,991 28.2
Other
Sectors 1
596,865 32,110,202 5379.8
Eliminations (88,139,142 ) (53,464,330) (34,674,812) 64.9
Total
80,664,101 53,368,639 27,295,462 51.1
33,644,820 27,051,979 6,592,841 24.4
18,630,742 18,926,080
-1.6
31,330,114 25,769,456 5,560,658 21.6
47
10,650,920
29,204,686
710,971 28,493,715 4007.7
(89,125,489) (51,358,895) (37,766,594) 73.5
$345,925,182 $ 255,597,553 $ 90,327,629 35.3% $265,622,472 $193,854,927 $ 71,767,545 37.0%
7,244,787 3,406,133
32,707,067
(295,338)
1. Hengsheng was previously included in “Other Sectors.” The Company is now reporting Hengsheng as a
separate sector in 2011, as it has recently become a principal profit maker. As such, a reclassification has been made to
all periods presented to conform to the current period presentation. Such reclassifications had no effect on previously
reported results of operations.
Net Sales
Net sales were $345,925,182 for the year ended December 31, 2010, compared with $255,597,553 for the year
ended December 31, 2009, an increase of $90,327,629, or 35.3%, mainly due to the increases in the income of Chinese
residents and significant government investment, including incentives to buyers, leading to an increase in demand of
passenger vehicles and commercial vehicles, and the resultant increase in the Company’s sales of steering gear and
pumps. Further analysis is as follows:
24
- Net sales for Henglong was $197,226,807 for the year ended December 31, 2010, compared with $153,469,876
for the year ended December 31, 2009, representing an increase of $43,766,931, or 28.5%. Net sales increase was
mainly due to increased sale volumes with a sales increase of $56,708,725, the impact from the decrease in sales
price of $15,532,900 and the effect of foreign currency translation with a sales increase of $2,591,106.
- Net sales for Jiulong was $92,095,265 for the year ended December 31, 2010, compared with $61,613,116 for the
year ended December 31, 2009, representing an increase of $30,482,149, or 49.5%. The net sales increase was
mainly due to increased sale volumes with a sales increase of $25,273,955, the impact from the increase in sales
price of $4,159,962 and the effect of foreign currency translation with a sales increase of $1,048,232.
- Net sales for Shenyang was $39,691,553 for the year ended December 31, 2010, compared with $32,492,844 for
the year ended December 31, 2009, representing an increase of $7,198,709, or 22.2%. The net sales increase was
mainly due to increased sale volumes with a sales increase of $8,770,764, the impact from the decrease in sales
price of $2,077,612, and the effect of foreign currency translation with a sales increase of $505,557.
- Net sales for Zhejiang was $26,193,095 for the year ended December 31, 2010, compared with $24,193,366 for
the year ended December 31, 2009, representing an increase of $1,999,729, or 8.3%. The net sales increase was
mainly due to decreased sale volumes with a sales decrease of $233,616, the impact from the increase in sales
price of $1,875,753 and the effect of foreign currency translation with a sales increase of $357,592.
- Net sales for Wuhu was $33,057,878 for the year ended December 31, 2010, compared with $26,496,148 for the
year ended December 31, 2009, representing an increase of $6,561,730, or 24.8%. The net sales increase was
mainly due to increased sale volumes with a sales increase of $7,006,394, the impact from the decrease in sales
price of $878,314 and the effect of foreign currency translation with a sales increase of $433,650.
- Net sales for Other Sectors was $45,799,726 for the year ended December 31, 2010, compared with $10,806,533
for the year ended December 31, 2009, representing an increase of $34,993,193 or 323.8%. The net sales
increased mainly due to the development of new market, such as the U.S. market and EPS market. For the U.S.
market, net sales were $16,950,000 in 2010, compared with $6,430,000 in 2009, representing an increase of
$10,520,000. For the new products in the China market, net sales were $28,850,000 in 2010, compared with
$4,380,000 in 2009, representing an increase of $24,470,000.
Cost of Sales
For the year ended December 31, 2010, the cost of sales was $265,622,472, compared with $193,854,927 for the
same period of 2009, an increase of $71,767,545, or 37.0%, mainly due to the increase of sales. Further analysis is as
follows:
- Cost of sales for Henglong was $150,622,578 for the year ended December 31, 2010, compared with
$112,141,910 for the year ended December 31, 2009, representing an increase of $38,480,668, or 34.3%. The cost
of sales increase was mainly due to increased sale volumes with a cost of sales increase of $40,349,480, decreased
unit price with a cost of sales decrease of $3,808,979, and the effect of foreign currency translation with a cost
increase of $1,940,167.
- Cost of sales for Jiulong was $80,664,101 for the year ended December 31, 2010, compared with $53,368,639 for
the year ended December 31, 2009, representing an increase of $27,295,462, or 51.1%. The cost of sales increase
was mainly due to increased sales volumes with a cost of sales increase of $21,512,660, increased unit price with a
cost of sales increase of $4,859,034, and the effect of foreign currency translation with a cost increase of
$923,768.
- Cost of sales for Shenyang was $33,644,820 for the year ended December 31, 2010, compared with $27,051,979
for the year ended December 31, 2009, representing an increase of $6,592,841, or 24.4%. The cost of sales
increase was mainly due to increased sales volumes with a cost of sales increase of $7,257,738, decreased unit
25
price with a cost of sales decrease of $1,086,994, and the effect of foreign currency translation with a cost increase
of $422,097.
- Cost of sales for Zhejiang was $18,630,742 for the year ended December 31, 2010, compared with $18,926,080
for the year ended December 31, 2009, representing a decrease of $295,338, or 1.6%. The cost of sales decrease
was mainly due to decreased sales volumes with a cost of sales decrease of $188,586, decreased unit price with a
cost of sales decrease of $394,748, and the effect of foreign currency translation with a cost increase of $287,996.
- Cost of sales for Wuhu was $31,330,114 for the year ended December 31, 2010, compared with $25,769,456 for
the year ended December 31, 2009, representing an increase of $5,560,658, or 21.6%. The cost of sales increase
was mainly due to increased sales volumes with a cost of sales increase of $6,846,269, decreased unit price with a
cost of sales decrease of $1,718,865, and the effect of foreign currency translation with a cost increase of
$433,254.
- Cost of sales for Other Sectors was $39,855,606 for the year ended December 31, 2010, compared with
$7,955,758 for the year ended December 31, 2009, representing an increase of $31,899,848, or 401.0%, mainly
due to the sales volume increase.
Gross margin was 23.2% for the year ended December 31, 2010, a 1 percentage point decrease from 24.2% for
the same period of 2009, primarily due to declines in sales price in excess of unit cost reductions.
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, 2010, gain on other sales were $1,129,032, compared to $838,505 for the year ended December 31, 2009,
an increase of $290,527, or 34.6%, due to increased sales of materials.
Selling Expenses
For the years ended December 31, 2010 and 2009, selling expenses are summarized as follows:
Salaries and wages
Office expense
Transportation expense
Rent expense
Other expense
Total
2010
2,247,519 $
1,129,348
4,690,313
1,085,128
211,567
9,363,875 $
$
$
Year Ended December 31
2009
2,563,384 $
841,748
3,703,818
699,206
84,384
7,892,540 $
Increase(Decrease) Percentage
(315,865)
287,600
986,495
385,922
127,183
1,471,335
-12.3%
34.2
26.6
55.2
150.7
18.6%
Selling expenses were $9,363,875 for the year ended December 31, 2010, compared to $7,892,540 for 2009, an
increase of $1,471,335, or 18.6%. Items that increased in 2010 compared to 2009 were office expenses, transportation
expense, rent expenses, and other expense. The major item that decreased was salaries and wages.
The increase in office expenses was due to increased sales, which led to increases in office supplies, travel
expenses and meeting expenses.
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.
The increase in rent expense was due to increased sale volumes, which led to increases in the area of product
warehouses in different places.
26
The salaries of salesmen, including bonuses for meeting sales target, were indexed with their sales performance.
During 2010, revenue increased by 35.3% over the last year, compared with the increase of 56.6% in 2009, a decrease
of 21.3 percentage points. As the salesmen did not meet their target, correspondingly their salaries decreased.
General and Administrative Expenses
For the years ended December 31, 2010 and 2009, general and administrative expenses are summarized as
follows:
Year Ended December 31
Increase
(Decrease)
Salaries and wages
Labor insurance expenses
Maintenance and repair expenses
Taxes
Provision/(income) for bad debts
Office expense
Depreciation and amortization expense
Listing expenses 1
Others expenses
Total
2010
4,681,335 $
2,086,319
679,858
1,179,092
(2,558,818)
958,542
691,721
1,939,774
371,388
10,029,211 $
$
$
2009
4,623,631 $
2,123,071
1,214,160
1,120,948
120,483
1,189,475
2,955,159
1,589,236
258,863
15,195,026 $
Percentage
57,704
(36,752)
(534,302)
58,144
(2,679,301)
(230,933)
(2,263,438)
350,538
112,525
(5,165,815)
1.2%
-1.7
-44.0
5.2
-2223.8
-19.4
-76.6
22.1
43.5
-34.0%
1. Listing expenses consisted of the costs associated with legal, accounting and auditing fees for operating a public
company. The expenses also included share-based compensation expense for options granted to members of the
audit committee.
General and administrative expenses were $10,029,211 for the year ended December 31, 2010, compared to
$15,195,026 for the year ended December 31, 2009, a decrease of $5,165,815, or 34.0%.
The expense items that significantly increased in 2010 compared to 2009 were listing expenses and other
expenses. The expense items that significantly decreased in 2010 compared to 2009 were provision for bad debt
expenses, maintenance and repair expenses, office expenses and depreciation and amortization expense.
The increase of listing expenses was mainly due to the increase of auditing expenses. The increase in
professional fees was mainly due to increased cost in the requirement of compliance with being a publicly listed entity
and the need to evaluate the Company’s internal control over financial reporting.
The increase of other expenses was primarily due to expansion of the scale of operation, and increases of the
costs associated with legal, insurance, and accounting service.
The Company recorded provision for bad debts based on specific identification methods. The decrease in
provision for bad debts in 2010 was mainly due to further improvement of OEMs’ financial positions resulting from the
Chinese government’s continuous stimulation measures on the automobile industry, such as subsidies to rural area
consumers and fuel efficient car buyers and reduction in purchase taxes. As a result, the Company collected about
$2,600,000 of accounts receivable in 2010, which was not expected to be collectible in prior years and bad debts
provision has been provided for. As a result, the provision for bad debts was negative.
The decrease of maintenance and repair expenses was mainly due to certain office facilities having maintenance
and repair last year and none this year, thus the maintenance of office facilities and repair were reduced in 2010.
The decrease of depreciation and amortization expense was mainly due to certain fixed assets of the Company
not needing to be depreciated in 2010 as they have been fully depreciated.
27
Research and Development Expenses
Research and development expenses, “R&D” expenses, were $7,991,252 for the year ended December 31, 2010,
compared to $2,561,170 for the year ended December 31, 2009, an increase of $5,430,084, or 212.0%.
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 2010, foreign OEMs
significantly increased their demand for EPS, but the related technology in China is still in the research and
development and testing stage. In order to market “EPS” quickly, the Company invested more in the R&D of “EPS” in
2010, including focusing the Company’s senior technicians and advanced manufacture equipment on “EPS”
establishing the “EPS” trail-production department, introducing technology expectations and purchasing advanced
technology and test equipment.
Income from Operations
Income from operations was $54,047,404 for the year ended December 31, 2010, compared to $36,932,395 for
the year ended December 31, 2009, an increase of $17,115,009, or 46.3%, mainly consisting of an increase of
$18,560,084, or 30.1%, in gross profit, an increase of $290,527, or 34.6%, in gain on other sales, such as raw materials,
and an increase of operating expenses of $1,735,602, or 6.8%.
Other Income, Net
Other income was $558,058 for the year ended December 31, 2010, compared to $94,534 for the year ended
December 31, 2009, an increase of $463,524, or 490.3%, primarily as a result of increased 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, 2010, the Company’s received $311,291 for interest subsidy,
and $231,951 for investment subsidy.
Interest subsidies apply only to loan interest related to production facilities expansion. During 2008 and 2009, the
Company had used the special loans to improve different products’ production lines technologically in order to enlarge
production capability and enhance quality. The expansion projects were completed and new facilities were put into use
at the end of 2009 and 2010, respectively.
The Chinese government also provided incentives to foreign investors for setting up technologically advanced
enterprises in China. Henglong, a subsidiary of the Company, has received $231,951 of government subsidies because
it is a technologically advanced enterprise.
Financial Expenses
Financial expenses were $3,360,837 for the year ended December 31, 2010, compared to financial expenses of
$7,883,714 for 2009, a decrease of $4,522,877, or 57.4%, primarily as a result of a decrease in interest expense related
to the convertible notes. Convertible notes holders are entitled to require the Company to redeem all or any portion of
the convertible notes in cash, if the weighted average price, “WAP,” is less than $3.187 for twenty (20) consecutive
trading days at any time following February 15, 2009. In March 2009, due to a default on the WAP under the aforesaid
contractual provision, the “WAP Default,” the Company accreted $3,900,000 of the remaining discount on the
convertible notes immediately and accrued an additional $520,000 of interest expenses for WAP Default. Please see
Note 13 to the Consolidated Financial Statements under Item 15 of this Annual Report for more details.
28
Gain (Loss) on Change in Fair Value of Derivatives
During the year ended December 31, 2010, the gain on change in fair value of the derivatives embedded in the
convertible notes was $20,171,698, as compared to a loss of $43,074,327 for the year ended December 31, 2009, an
increase of $63,246,025. The derivative liability was marked to market each period.
During the year ended December 31, 2009, the increase of loss on change in fair value of derivatives was
primarily due to the increase in the intrinsic value of the embedded conversion feature in the convertible notes as a
result of the increase in the market price of the Company’s common stock which rose from $3.39 at the beginning of
2009 to $18.71 at December 31, 2009. Upon the adoption of ASC 815-10 on January 1, 2009, the Company is required
to bifurcate the embedded conversion feature of the convertible note payable as a derivative liability.
During the year ended December 31, 2010, the Company’s common stock market price dropped to $13.62 from
$18.71 at the beginning of the year, which significantly decreased the intrinsic value of the embedded conversion
option of the convertible notes. As a result, the fair value of compound derivative liabilities decreased significantly and
correspondingly, the gain on change in fair value of derivatives increased. Please see Note 14 to the Consolidated
Financial Statements under Item 15 of this Annual Report for more details.
Income (Loss) before Income Taxes
Income before income taxes was $71,416,323 for the year ended December 31, 2010, compared to a loss of
$13,931,112 for the year ended December 31, 2009, an increase of $85,347,435, consisting of increased income from
operations of $17,115,009, increased other income of $463,524, decreased finance expenses of $4,522,877, and
increased gain on change in fair value of derivative of $63,246,025.
Income taxes
Income tax expense was $8,484,205 for the year ended December 31, 2010, compared to $4,720,013 for the year
ended December 31, 2009, an increase of $3,764,192, mainly because of: (1) an increase in income before income tax
in the PRC market that was not offset by losses before income tax in the U.S. market and the Company made a
provision for deferred income tax assets in the United States (see Note 9); (2) while there was a gain before income tax
in the United States for the year ended December 31, 2010 (and loss for the year ended December 31, 2009) mainly due
to a change in the fair value of convertible notes, the Company cannot recognize such gain as a deferred income tax as
if it was a permanent change; and (3) a decrease of foreign government tax return. For a full reconciliation of the
Company’s effective tax rate to the U.S. federal statutory rate of 35% and further explanation of the Company’s
provision for taxes, see Note 27 to the consolidated financial statements in Item 15.
Net income
Net income was $62,917,302 for the year ended December 31, 2010, compared to a loss of $18,651,125 for the
year ended December 31, 2009, an increase of $81,568,427, consisting of increased income before income taxes of
$85,332,619, and an increase of income tax expenses of $3,764,192.
Net Income Attributable to Noncontrolling Interests
The Company recorded net income attributable to noncontrolling interests of $11,179,189 for the year ended
December 31, 2010, compared to $7,789,746 for the year ended December 31, 2009, an increase of $3,389,443, or
43.5%.
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, 2010 and 2009. The Company records the net income attributable to
noncontrolling interests of the respective Sino-foreign joint ventures for each period.
In 2010, net income attributable to noncontrolling interests increased compared to 2009, primarily resulting from
increased net income of joint ventures.
29
Net Income Attributable to Parent Company
Net income attributable to parent company was $51,738,113 for the year ended December 31, 2010, compared to
a loss attributable to parent company of $26,440,871 for the year ended December 31, 2009, an increase of $78,178,984,
consisting of increased net income of $81,568,427, and an increased net income attributable to noncontrolling interests
of $3,389,443.
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, 2011, the Company had cash and cash equivalents of $72,960,500. As compared to $49,424,979
and $43,480,176 as of December 31, 2010 and 2009, there was an increase of $23,535,521 and $29,480,324,
respectively.
The Company had working capital of $147,819,863 as of December 31, 2011. As compared with $54,191,797 as
of December 31, 2010, there was an increase of $93,628,066, or 172.8%, which mainly includes: (a) according to the
terms of the convertible notes, convertible notes payable, compound derivative liabilities and accrued make-whole
redemption interest expense for convertible notes were recorded as current liabilities before February 15, 2011 (which
was the last annual redemption date), and thereafter reclassified to and recorded as non-current liabilities as the
convertible notes will mature on February 15, 2013 (refer to Note 15 to the Consolidated Financial Statements); (b) on
March 1, 2011, an investor converted $6,428,571 of the principal amount of the convertible notes and, correspondingly,
decreased the principal amount and compound derivative liabilities (refer to Note 13); and (c) the net income realized
in the current year.
The Company intends to indefinitely reinvest the funds in subsidiaries incorporated in China.
Capital Source
The Company’s capital source is multifaceted, such as bank loans and banker’s acceptance bill facilities. In
financing activities and operating activities, the Company’s banks require the Company to sign lines of credit
agreement and 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.
The Company had bank loans maturing in less than one year of $10,315,987 (Note 10) and bankers’ acceptances
of $57,307,445 (Note 11) as of December 31, 2011.
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 of Bank Arrangements below). 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 bankers’ acceptance bills will be devalued by approximately $14,799,392. If the Company wishes to obtain the
same amount of bank loans and bankers’ acceptance bills, it will have to provide $14,799,392 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 $8,137,184, which is 54.98% (the mortgage rates) of $14,799,392, 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 convertible notes (as described in Note 12), convertible notes may be required to be repaid in cash
30
on or prior to their maturity. For example, convertible note holders are entitled to require the Company to 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 worldwide financial crisis in 2009, 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 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, if any. 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
further requested another extension to April 24, 2009. On April 24, 2009, LBCCA’s lawyers sent three Holder
Redemption Notices 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 Agreements dated 1 February 2008 between the Company and the LBCCA Liquidator. The
Company accepted such revocation on September 23, 2009. On March 1, 2011, LBCCA Liquidator converted
$6,428,571 of the principal amount of the convertible notes at a conversion price of $7.0822 per share and the
Company issued 907,708 shares of its common stock to the investor. No additional consideration was paid for the
conversion of the convertible notes into common stock.
For the years ended December 31, 2011 and 2010, the Company’s stock’s WAP for any twenty consecutive
trading days was above $3.187.
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 convertible notes would result in a material adverse effect on its liquidity
and capital resources, business, results of operations or financial condition.
Bank Arrangements
As of December 31, 2011, the principal outstanding under the Company’s credit facilities and lines of credit was
as follows:
1.Comprehensive credit facilities (1)
2.Comprehensive credit facilities
3.Comprehensive credit facilities
Bank
Bank of China
Jingzhou
Commercial
Bank
China
Construction
Due
Date
Amount
Available Amount Used Mortgage Value
Jan-12 (2) $ 22,377,756 $ 4,761,225
$ 6,879,208
Apr-12
31,741,497
14,519,624
71,066,736
Oct-12
12,696,599
3,174,150
32,125,934
31
4.Comprehensive credit facilities (1)
5.Comprehensive credit facilities
6.Comprehensive credit facilities
7.Comprehensive credit facilities (1)
8.Comprehensive credit facilities
Total
Bank
Shanghai
Pudong
Development
Bank
China CITIC
Bank
Industrial and
Commercial
Bank of China
China Hua Xia
Bank
China
EverbrightBank
Dec-13
15,870,749
9,890,314
12,866,860
Sep-12
16,505,579
14,848,990
14,767,732
May-12
16,188,164
8,710,660
4,119,761
Jan-12 (2)
25,393,198
3,676,459
33,033,938
Aug-14
4,761,225
6,900,903 (3)
8,126,522
$145,534,767 $ 66,482,325 (4) $ 182,986,691
(1) Henglong’s comprehensive credit facility with China CITIC Bank, Henglong and Jielong's comprehensive credit
facility with Shanghai Pudong Development Bank, and Henglong's comprehensive credit facility with Hua Xia
Bank, also need to be guaranteed by Jiulong, another subsidiary of the Company, in addition to the above pledges.
(2) As at the date of this Annual Report, the comprehensive credit line arrangements with the Bank of China and
China Hua Xia Bank have expired. The Company plans to negotiate with these lenders to renew the agreements.
The Company does not anticipate that there will be any material adverse impact if the Company fails to renew as
the Company has obtained sufficient comprehensive credit lines from other banks.
(3) The amount available for use was increased to the amount of assets pledged with the bank.
(4) Total amount used includes bank loans of $10,315,987 and notes payable of $56,166,338 as of December 31, 2011.
Please see Notes 10 and 11 to the Consolidated Financial Statements under Item 15 of this Annual Report for
more details.
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 2011 at annual interest rates of 5.31% to 7.87 %, and
maturity terms of twelve months. Pursuant to the comprehensive credit line arrangement the Company pledged: (1)
land use rights with an assessed value of $6.9 million as security for its comprehensive credit facility with the Bank of
China; (2) land use rights and equipment with an assessed value of approximately $71.1 million as security for its
revolving comprehensive credit facility with Jingzhou Commercial Bank; (3) equipment, land use rights and buildings
with an assessed value of approximately $32.1 million as security for its comprehensive credit facility with China
Construction Bank; (4) land use rights and buildings with an assessed value of approximately $12.9 million as security
for its comprehensive credit facility with Shanghai Pudong Development Bank; (5) land use rights and buildings with
an assessed value of approximately $14.8 million as security for its comprehensive credit facility with China CITIC
Bank; (6) land use rights and buildings with an assessed value of approximately $4.1 million as security for its
comprehensive credit facility with Industrial and Commercial Bank of China; (7) accounts receivable with an assessed
value of approximately $33.0 million as security for its comprehensive credit facility with China Hua Xia Bank; and (8)
land use rights and buildings with an assessed value of approximately $8.1 million as security for its comprehensive
credit facility with China Everbright Bank.
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.
32
Short-term bank loan
including interest payable
Notes payable 2
Convertible notes payable
Convertible notes interest
Other contractual purchase
commitments, including
service agreements
Total
Total
Less than 1
year
1-3 years
3-5 years
More than
5 Years
Payment Due Dates
$10,315,987
$10,315,987
$ —
$ —
$ —
57,307,445
23,571,429
12,982,849
57,307,445
—
1,572,968
23,571,429
11,409,881
12,037,323
7,159,582
4,877,741
$116,215,033
$76,355,982
$39,859,051
—
—
—
—
—
—
—
—
—
—
1.
Including accrued make-whole redemption interest expense of $7,615,709, accrued coupon interest of $625,447
and interest and make-whole obligation of $4,870,615 to be accrued.
2. Notes payable do not bear interest.
Short-term Bank Loans
The following table summarizes the contract information of short-term borrowings between the banks and the
Company as of December 31, 2011.
Bank
China Construction Bank
Bank of China
China CITIC Bank
Total
Purpose
Working
Capital
Working
Capital
Working
Capital
Borrowing
Date
29-Jun-11
30-Sep-11
6-Jul-11
Borrowing
Term
(Year)
Annual
Percentage
Rate
Date of
Interest
Payment Due Date
Amount
Payable on
Due Date
1
1
1
6.56%
Pay monthly
28-Jun-12 $ 3,174,150
6.56%
Pay monthly
29-Sep-12
4,761,225
7.87%
Pay monthly
5-Jul-12
2,380,612
$10,315,987
The Company must use the loans for the purpose described in the table. If the Company fails to do so, it will be
charged a penalty interest at 100% of the specified loan rate listed in the table above. 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 in the above table. 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, 2011, and will continue to
comply with them.
Notes Payable
The following table summarizes the contract information of issuing notes payable between the banks and the
Company as of December 31, 2011:
Purpose
Working Capital 1
Working Capital 1
Working Capital
Working Capital
Working Capital
Working Capital
33
Term (Month) Due Date
Jan-12 $
Feb-12
Mar-12
Apr-12
May-12
Jun-12
3-6
3-6
3-6
3-6
3-6
3-6
Amount Payable on
Due Date
7,321,970
7,858,782
12,768,906
11,748,839
8,355,092
9,254,056
Total
$
57,307,445
1. The notes payable were settled in January and February 2012, respectively.
The Company must use notes payable 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 loan rate that is published by the People’s Bank of China in the same period. Management believes that the
Company had complied with such financial covenants as of December 31, 2011, and will continue to comply with
them.
Cash flows
(a) Operating activities
Compared with the net cash generated from operations during the year ended December 31, 2010 and 2009 of
$38,552,161 and $34,956,534, respectively, net cash generated from operations during the year ended December 31,
2011 was $34,063,290. Net cash generated from operations in 2011 decreased by $4,488,872 from 2010, whereas net
cash generated from operations in 2010 increased by $3,595,628 from 2009.
The decrease in net cash generated from operations in 2011 was mainly due to decreases in gross profit and in
accounts and notes payable, and increases in accounts and notes receivable and inventory compared with those of 2010.
As compared with 2009, in 2010, the primary factors for the increase in net cash generated from operations were
the increase in gross profit and accounts and notes payable.
For the years ended December 31, 2011, 2010 and 2009, changes in the balances of accounts and notes payable
used cash flow of $15,013,604, $36,821,221, and $48,178,260, respectively, and cash flow decreased in the amount of
$21,807,617, $11,357,039, and increased in $39,858,788 year on year.
For the years ended December 31, 2011, 2010 and 2009, changes in the balances of accounts receivable
generated cash flow of $6,294,797, and used cash flow of $14,450,692 and $43,700,826, respectively.
For the years ended December 31, 2011, 2010 and 2009, changes in the balances of notes receivable used cash
flow of $12,495,349, $18,605,172, and $15,034,485, respectively. The settlements of notes receivable are guaranteed
by issuing banks, and may be converted into cash whenever the Company factors them. Therefore, the increase in notes
receivable does not have any material adverse effect on the Company’s operations.
During the year ended December 31, 2011, the inventory turnover rate of the Company decreased as a result of a
slowdown in the growth of China’s automobile industry. Accordingly, an increase in year-end inventory balances used
cash flow of $12,458,644. The increasing in cash used in inventory in 2011 was primarily due to inventories stocked up
for seasonal sales during Chinese New Year in January 2012 and new models of inventories built for a customer based
in North America. For the years ended December 31, 2010 and 2009, an increase in inventory balances used cash flow
of $8,679,749 and $1,849,579, respectively. As the Company stocks up based on customers’ orders and market demand,
increase in inventory does not have any material adverse effect on the Company’s operations. The Company may adjust
its inventory level based on market demand.
(b) Investing activities
The Company expended $14,042,403 in investment activities during the year ended December 31, 2011, as
compared to $32,596,741 and $17,335,687 during the years ended December 31, 2010 and 2009.
34
During the years ended December 31, 2011, 2010, and 2009, the Company invested in manufacturing facilities to
expand production to meet market needs. Cash used for equipment purchases and building facilities in 2011, 2010 and
2009 were $14,857,364, $28,024,638 and $17,498,957, respectively.
For the year ended December 31, 2010, the Company invested $3,095,414 in Beijing to set up a jointly operated
company, Beijing Henglong, with Beijing Hainachuan to expand the market share of the Company. Beijing Henglong
was established to design, develop and manufacture both hydraulic and electric power steering systems and parts.
(c) Financing activities
During the year ended December 31, 2011, the Company received $871,936 provided by financing activities,
during the years ended December 2010 and 2009; the Company used $1,394,578 and $11,290,625 in financing
activities, respectively.
During the years ended December 31, 2011 and 2010, the Company borrowed net cash of $3,204,631 and
$1,420,279 from the banks. For the year ended December 31, 2009, the Company repaid bank loans of $2,196,367.
During the years ended December 31, 2011, 2010, and 2009, the Company’s subsidiaries in China paid dividends
of $2,822,432, $3,614,252 and $4,176,583 to their noncontrolling interest holders.
During the year ended December 31, 2009, the Company repaid YA Global $5,000,000 for its redemption of
convertible notes.
OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2011, 2010, and 2009, 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, 2011:
Obligations for service
agreements
Obligations for
purchasing agreements
Interest and make-whole
on convertible notes
Total
2012
2013
2014
2015
Thereafter
Total
Payment Obligations by Period
$ —
$ 206,320
$ —
$ —
$ —
$ 206,320
7,159,582
4,671,421
1,075,022
3,794,172
—
—
—
—
—
—
11,831,003
4,869,194
$ 8,234,604 $ 8,671,913 $
— $
— $
— $ 16,906,517
SUBSEQUENT EVENTS
On December 1, 2011, Hengsheng entered into a Sino-foreign equity joint venture contract with SAIC-IVECO
Hongyan Company to establish a Sino-foreign joint venture company, Chongqing Henglong Hongyan Power Steering
Systems Co. Ltd. ("Chongqing Henglong") to design, develop and manufacture both hydraulic and electric power
steering systems and parts. The new joint venture will be located in Chongqing City and have a registered capital
of RMB60 million (of which RMB 42 million, or 70%, will be invested by Hengsheng). Under PRC law, the
establishment of Chongqing Henglong and the effectiveness of the equity joint venture contract are subject to approval
by the local Ministry of Commerce and the registration of the same with the local Administration of Industries and
Commerce in Chongqing. As of the date of this Annual Report, such approval has not been obtained.
On January 19, 2012, the Company completed its reorganization as discussed in Item 1–BUSINESS.
35
INFLATION AND CURRENCY MATTERS
China’s economy has experienced rapid growth recently, mostly through the issuance of debt. Debt-induced
economic growth can lead to growth in the money supply and rising inflation. If prices for the Company’s products rise
at a rate that is insufficient to compensate for the rise in the cost of supplies, it may harm the Company’s profitability.
In order to control inflation in the past, the Chinese government has imposed controls on bank credit, limits on loans for
fixed assets and restrictions on state bank lending. Such policies can lead to a slowing of economic growth. Rises in
interest rates by the central bank would likely slow economic activity in China which could, in turn, materially increase
the Company’s costs and also reduce demand for the Company’s products.
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 2011, the Company supplied
products to North America and settled in cash in U.S. dollars. As a result, appreciation or currency fluctuation of the
RMB against the U.S. dollar would increase the cost of export products, and 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 December 2011, the exchange rate between RMB and U.S. dollar appreciated from RMB 1.00 to
US$0.1205 to RMB 1.00 to US$0.1587. This significant appreciation of the RMB may continue for in the near term, as
the Chinese government attempts to slow the rate of inflation in the PRC. Significant appreciation of the RMB is likely
to decrease the income of export products, thus decreasing the Company’s cash flow.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-04, “Fair Value
Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements
in U.S. GAAP and IFRSs” (ASU 2011-04). This newly issued accounting standard clarifies the application of certain
existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated
using significant unobservable (Level 3) inputs. This ASU is effective on a prospective basis for annual and interim
reporting periods beginning on or after December 15, 2011, which for the Company means January 1, 2012. The
adoption of this standard is not expected to have a material impact on the Company’s financial position or results of
operations.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of
Comprehensive Income” (ASU 2011-05). This newly issued accounting standard: (1) eliminates the option to present
the components of other comprehensive income as part of the statement of changes in stockholders’ equity; (2) requires
the consecutive presentation of the statement of net income and other comprehensive income; and (3) requires an entity
to present reclassification adjustments on the face of the financial statements from other comprehensive income to net
income. The amendments in this ASU do not change the items that must be reported in other comprehensive income or
when an item of other comprehensive income must be reclassified to net income nor do the amendments affect how
earnings per share is calculated or presented. In December 2011, the FASB issued ASU No. 2011-12, Deferral of the
Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other
Comprehensive Income in Accounting Standards Update No. 2011-05 , which defers the requirement within ASU
2011-05 to present on the face of the financial statements the effects of reclassifications out of accumulated other
comprehensive income on the components of net income and other comprehensive income for all periods presented.
During the deferral, entities should continue to report reclassifications out of accumulated other comprehensive income
consistent with the presentation requirements in effect prior to the issuance of ASU 2011-05. These ASUs are required
to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after
December 15, 2011, which for the Company means January 1, 2012. As these accounting standards do not change the
items that must be reported in other comprehensive income or when an item of other comprehensive income must be
reclassified to net income, the adoption of these standards is not expected to have an impact on our financial position or
results of operations.
In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting
Assets and Liabilities (ASU 2011-11). This newly issued accounting standard requires an entity to disclose both gross
36
and net information about instruments and transactions eligible for offset in the statement of financial position as well
as instruments and transactions executed under a master netting or similar arrangement and was issued to enable users
of financial statements to understand the effects or potential effects of those arrangements on its financial position. This
ASU is required to be applied retrospectively and is effective for fiscal years, and interim periods within those years,
beginning on or after January 1, 2013. As this accounting standard only requires enhanced disclosure, the adoption of
this standard is not expected to have an impact on our financial position or results of operations.
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 dates of the financial statements and the reported amount of revenues and expenses during the reporting
periods. 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
• 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’s critical accounting
estimates:
Balance Sheet
Caption
Accrued
liabilities and
other long-term
liabilities
Critical
Estimate
Item
Warranty
obligations
Property, plant
and equipment,
intangible assets
and other
long-term assets
Valuation of
long- lived
assets and
investments
Accounts and
notes receivables
Provision for
doubtful
accounts and
notes
receivable
Nature of Estimates Required
Estimating warranty requires the Company
to forecast the resolution of existing
claims and expected future claims on
products sold. VMs (Vehicle
Manufacturer) are increasingly seeking to
hold suppliers responsible for product
warranties, which may impact the
Company’s exposure to these costs.
Assumptions/Approaches
Used
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.
Key Factors
• VM sourcing
• VM policy
decisions
regarding
warranty claims
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.
• Future
production
estimates
• Customer
preferences and
decisions
Estimating the provision for doubtful
accounts and notes receivable requires 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 impact the
Company’s expense disclosure and results
of operations if such estimate is 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 records
provision for bad debts based on specific
identification methods.
•Customers’ credit
standing and
financial
condition
Deferred income Recoverability The Company is required to estimate
The Company uses historical and
• Tax law
37
taxes
of deferred tax
assets
whether recoverability of its deferred tax
assets is more likely than not based on
forecasts of taxable earnings in the related
tax jurisdiction.
projected future operating results, based
upon approved business plans, including
a review of the eligible carry forward
period, tax planning opportunities and
other relevant considerations.
changes
• Variances in
future projected
profitability,
including by
taxing entity
Convertible
notes payable,
warrant
liabilities,
compound
derivative
liabilities
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.
The Company uses Black-Scholes option
pricing model to determine fair value of
warrant; uses Monte Carlo simulation
(“MCS”) valuation techniques to
determine fair value of compound
derivative liabilities.
• Expected
volatility
• Risk-free rate
•interest market
risk
•Credit risk
• Redemption
activities before
maturity
Uncertain Tax
Uncertain Tax
Positions
The Company is required to determine and
assess all material positions, including all
significant uncertain positions in all tax
years that are still subject to assessment or
challenge under relevant tax statutes.
The Company applies a more likely than
not threshold and a two-step approach for
tax position measurement and financial
statement recognition. For the two-step
approach, the first step is to evaluate the
tax position for recognition by
determining if the weight of available
evidence indicates that it is more likely
than not that the position will be
sustained, including resolution of related
appeals or litigation processes, if any.
The second step is to measure the tax
benefit as the largest amount that is more
than 50% likely to be realized upon
settlement.
• An allocation or
a shift of income
between
jurisdictions
• The
characterization of
income or a
decision to
exclude reporting
taxable income in
a tax return
•A decision to
classify a
transaction, entity,
or other position
in a tax return as
tax exempt
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 6A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates and foreign currency exchange rates. For
purposes of specific risk analysis, the Company uses sensitivity analysis to determine the effects that market risk
exposures may have.
FOREIGN CURRENCY RISK
The Company’s reporting currency is the U.S. dollar and the majority of its revenues will be settled in RMB and
U.S. dollars. The Company’s currency exchange rate risks come primarily from the sales of products to international
customers. Most of the Company’s assets are denominated in RMB except for part of cash and accounts receivable. As
a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by
fluctuations in the exchange rate between the U.S. dollar and the RMB.
The value of the RMB fluctuates and is affected by, among other things, changes in China's political and
economic conditions. In addition, the RMB is not readily convertible into U.S. dollars or other foreign currencies. All
foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate quoted by the People’s Bank of China. The conversion of RMB into
foreign currencies such as the U.S. dollar has been generally based on rates set by the People's Bank of China, which
38
are set daily based on the previous day's interbank foreign exchange market rates and current exchange rates on the
world financial markets. On December 31, 2011 and 2010, the exchange rates of RMB against U.S. dollar were
RMB1.00 to US$0.1587 and RMB1.00 to US$0.1510, respectively. This floating exchange rate, and any appreciation
of the RMB that may result from such rate, could have various adverse effects on the Company’s business. If the RMB
appreciates against foreign currencies, it will make the Company’s sales income increase.
In order to mitigate the currency exchange rate risk, the Company has inserted a currency exchange rate
fluctuation compensation provision in its sales contracts with its international customers to the effect that both parties
will bear 50% of such loss when the fluctuation is over 8% within that contract year.
CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of
trade accounts receivable. The Company does not require collateral or other security to support client receivables since
most of its customers are large, well-established companies. The Company's credit risk is also mitigated because its
customers are all selected enterprises supported by the local government. One customer, Chery Automobile Co. Ltd,
accounted for more than 10% (11.7%) of the Company’s consolidated revenues in 2011. The Company maintains an
allowance for doubtful accounts for any potential credit losses related to its trade receivables. The Company does not
use foreign exchange contracts to hedge the risk in receivables denominated in foreign currencies and the Company
does not hold or issue derivative financial instruments for trading or speculative purposes.
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The following financial statements are set forth at the end of this Annual Report.
1. Report of Registered Public Accounting Firm, PricewatershouseCoopers Zhong Tian CPAs Limited Company
2. Report of Registered Public Accounting Firm, Schwartz Levitsky Feldman LLP
3. Consolidated Balance Sheets as of December 31, 2011 and 2010
4. Consolidated Statements of Income/(Loss) for the years ended December 31, 2011, 2010 and 2009
5. Consolidated Statements of Comprehensive Income/(Loss) for the years ended December 31, 2011, 2010 and
2009
6. Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2011, 2010 and
2009
7. Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
8. Notes to Consolidated Financial Statements
9. Financial Statement Schedule I – Condensed Financial Information of Registrant
SELECTED QUARTERLY FINANCIAL DATA
Selected quarterly financial data for the past two years are summarized in the following table.
First
Quarterly Results of Operations
Second
Third
Fourth
2011
2010
2011
2010
2011
2010
2011
2010
$ 91,014,170 $ 84,232,689 $ 82,505,886 $ 85,081,138 $ 75,002,717 $ 76,102,844 $ 99,451,981 $ 100,508,511
19,984,908 22,535,017 14,800,670 19,810,260 13,786,743 18,173,560 19,526,676 19,783,873
5,959,211 12,171,373 8,047,270 12,272,586
11,731,250 15,890,489
7,640,765 13,712,956
5,764,192 30,418,967 11,491,500 18,285,666 8,567,551 15,252,777
22,080,238 (1,040,108)
2,438,256 3,066,343
19,641,982 (4,106,451)
1,420,234
2,811,362
1,382,653
2,350,280 1,870,351
2,951,204
4,343,958 27,607,605 10,108,847 15,935,386 6,697,200 12,301,573
Net sales
Gross profit
Operating income
Net income/(loss)
Net income attributable to
noncontrolling interest
Net income /(loss) attributable to
parent company
Earnings/(loss) per share
attributable to parent company
Basic
Diluted
$
$
0.63 $
0.23 $
(0.15) $
(0.15) $
0.14 $
0.14 $
0.88 $
0.28 $
0.32 $
0.10 $
0.51 $
0.26 $
0.21 $
0.19 $
0.39
0.22
39
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A CONTROLS AND PROCEDURES
(A) DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management, under the supervision and with the participation of its chief executive officer and
chief financial officer, Messrs. Wu Qizhou and Li Jie, respectively, evaluated the effectiveness of the Company’s
disclosure controls and procedures as of December 31, 2011, the end of the period covered by this Report. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company in the reports, such as this Form 10-K, that it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the reports that it files or submits under
the Exchange Act is accumulated and communicated to the company’s management, including its chief executive
officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on that
evaluation, Messrs. Wu and Li concluded that the Company’s disclosure controls and procedures were not effective as
of December 31, 2011.
The Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance
that the objectives of its disclosure control system are met. Because of inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been
detected.
(B) MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting.
Internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the
Exchange Act, is a process designed by, or under the supervision of, the chief executive officer and chief financial
officer and effected by the board of directors, management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external
reporting purposes in accordance with generally accepted accounting principles. Internal control over financial
reporting includes those policies and procedures that:
a.
pertain to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and
dispositions of the Company’s assets;
b. provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated
financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts
and expenditures are being made only in accordance with appropriate authorization of the Company’s
management and board of directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the consolidated financial statements.
c.
In making its assessment of internal control over financial reporting, management, under the supervision and
with the participation of the chief executive officer and chief financial officer, used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control—Integrated
Framework.”
40
Management has assessed the effectiveness of internal control over financial reporting as of December 31, 2011
and determined that the following material weakness in internal control over financial reporting existed as of December
31, 2011.
The Company did not have sufficient personnel with appropriate levels of accounting knowledge and experience
to address complex U.S. GAAP accounting issues and to prepare and review financial statements and related
disclosures under U.S. GAAP. Specifically, the Company's controls did not operate effectively to ensure the
appropriate and timely analysis of and accounting for unusual and non-routine transactions and certain financial
statement accounts, including, but not limited to, accounting and disclosure for the convertible notes and accounting for
deferred taxes.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial
statements will not be prevented or detected on a timely basis. The above material weakness could result in
misstatements of accounting for unusual and non-routine transactions and certain financial statement accounts,
including, but not limited to the aforementioned accounts and disclosures that would result in a material misstatement
in the Company’s annual or interim consolidated financial statements that would not be prevented or detected in a
timely manner.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2011 has been
audited by PricewaterhouseCoopers Zhong Tian CPAs Limited Company, an independent registered public accounting
firm, as stated in their report which is included in Item 15 of this Annual Report.
Remediation of Previously Identified Material Weakness
As of December 31, 2011, the Company believes it has effectively remediated a material weakness in internal
control over financial reporting that was included in “Management’s Annual Report on Internal Control over Financial
Reporting” in “Item 9A — Controls and Procedures” contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2010.
During 2011, the Company was actively engaged in the implementation of remediation efforts to address the
material weaknesses in controls over financial reporting that were in existence at December 31, 2010. As it relates to
the material weakness identified by which the Company did not have formalized closing procedures and adequate
period-end review procedures to ensure a) proper preparation of the period-end financial statement closing entries and b)
consistency of application of accounting policies and completeness and accuracy of the financial statement disclosures,
the Company:
1.
2.
3.
4.
engaged an external consulting firm in the area of accounting advisory to assist it in reviewing the accounting
treatment of the convertible notes and other complex transactions and to enhance the Company’s knowledge of
U.S. GAAP and disclosure requirements for SEC registrants in preparing year-end financial statements and Form
10-K;
appointed a new financial manager at its headquarters, and redefined the responsibilities, roles and review matrix
clearly among the financial manager, chief accounting officer and chief financial officer in the process of
preparation and review of consolidated financial statements for its periodic reports;
established and developed comprehensive financial period-end closing procedures to ensure the proper preparation
of quarterly and annual consolidated financial statements, disclosure notes and related information in compliance
with accounting standards and guidance;
established a procedure for additional review of period-end closing procedures by conducting a detailed and
extensive review of non-routine and complex transactions and agreements, and carried out more comprehensive
accounting reconciliation processes;
5. provided more training on U.S. GAAP to accounting and other relevant personnel;
6.
required members of the finance team to perform extensive research to enhance knowledge of the relevant U.S.
GAAP interpretations and their application, including, but not limited to, accounting and disclosure for the
convertible notes and accounting for deferred taxes; and
41
7.
engaged the external consulting firm to review the draft Annual Report on Form 10-K before filing.
The Company’s remediation efforts were under the direction of its chief executive officer, chief financial officer
and chief accountant. The status of the remediation was reviewed by the audit committee of the board of directors of
the Company, who were advised of issues encountered and key decisions reached by the management.
Remediation of Existing Material Weakness
In order to address the material weakness identified as of December 31, 2011, the Company plans to:
1. hire additional key individuals in the corporate accounting function with in-depth knowledge and experience in
U.S. GAAP;
2. provide further comprehensive training on U.S. GAAP to accounting and other relevant personnel; and
3.
require the finance team to perform extensive research to enhance their knowledge of the relevant U.S. GAAP
interpretations and their application.
Management believes that the measures described above will satisfactorily address the referenced material
weakness. Under the direction of the Audit Committee, management will continue to review and make necessary
changes to the system of internal controls and the control environment, as well as policies and procedures to improve
the overall effectiveness of internal control over financial reporting.
(C) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Other than as described above, there have been no changes in the Company’s internal control over financial
reporting during the fourth quarter of the year ended December 31, 2011 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table and text set forth the names and ages of all directors and executive officers of the Company
as of December 31, 2011. 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
Robert Tung
Guangxun Xu
Bruce C. Richardson
Qizhou Wu
Jie Li
Andy Tse
Shengbin Yu
Shaobo Wang
Yijun Xia
Daming Hu
Haimian Cai
Position(s)
Chairman of the Board
Director
Director
Director
Chief Executive Officer and Director
Chief Financial Officer
Senior Vice President
Senior Vice President
Senior Vice President
Vice President
Chief Accounting Officer
Vice President
Age
54
55
61
54
47
42
41
58
49
49
53
48
42
BIOGRAPHIES OF DIRECTORS AND EXECUTIVE OFFICERS
Directors
Hanlin Chen has served as the chairman of the board of directors and an executive officer 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 Tse.
Qizhou Wu has served as a director and an executive 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 general manager of Henglong Automotive Parts, Ltd.
from 1999 to 2002. Mr. Wu graduated from Tsinghua University in Beijing with a Master’s degree in Automobile
Engineering.
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. Mr. Tung is also actively involved in minerals, iron ore and petroleum derivatives
purchase and trading.
Guangxun Xu has served as an independent director of the Company since December 2009. Mr. Xu has also
been an independent director of iNet School, a Korean company. 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 U.S. and U.K. listings, advising on and arranging for Private Placements,
PIPEs and IPOs, pre-IPO restructuring, M&A, Corporate and Project Finance, corporate governance, post-IPOIR
compliance, Risk Control, etc. He holds an MBA from Middlesex University, London. He is also on the Audit
Committee.
Bruce C. Richardson joined the Company as an independent director in December 2009. In November, 2010
Mr. Richardson joined Corin Group, a UK orthopedics firm, as China Managing Director. Prior to joining Corin Group,
Mr. Richardson served as a manager with Redwood Capital from July 2009. Prior to joining Redwood Capital, he
served as chief financial officer and company secretary of Dalian RINO Environmental Engineering from October
2007 until September 2008, and as a Managing Director of Xinhua Finance in Shanghai from April 2006 until
September 2007. 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 Management from the University of Texas at Dallas in 1986. He was awarded a graduate
study grant by the U.S. National Academy of Sciences in 1987 and completed a year of post-graduate research on PRC
accounting at People’s University in 1988. He is also the Chairman of the Audit Committee.
Executive Officers
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.
43
Andy Tse has served as a senior vice president 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. He is brother in-law to Hanlin Chen
Shengbin Yu has served as a senior vice president 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 a senior vice president 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 a vice president of the Company since December 2009. He has also served as the
general manager of 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.
Haimian Cai was an independent director of the Company 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 Committee, Compensation and Nominating Committees, because he was nominated as vice president
of the Company.
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 Henglong from 1999 to 2002. Mr. Hu
graduated from Zhongnan University of Economics and Law with bachelor’s degree in accounting.
BOARD COMPOSITION AND COMMITTEES
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 is operated under a written charter. 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 and
Bruce C. Richardson. Bruce C. Richardson is the Chairman of the Audit Committee. The Board has determined that Mr.
Bruce C. Richardson is the audit committee financial expert, as defined in Item 407(d) (5) of Regulation S-K, serving
on the Company’s audit committee.
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. Three 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 and Bruce C. Richardson serve on the Compensation Committee. Since July 8, 2010, Mr.
Robert Tung has been the Chairman of the Compensation Committee. The Board has determined that all members of
the Compensation Committee are independent directors under the rules of the Nasdaq Stock Market, as applicable. The
Compensation Committee administers the Company’s benefit plans, reviews and administers all compensation
arrangements for executive officers, and establishes and reviews general policies relating to the compensation and
44
benefits of the Company’s officers and employees. The Compensation Committee operates under a written charter that
is made available on the Company’s website, www.caasauto.com.
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.
Nominating Committee
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 their
business and financial experience, personal characteristics, and expertise 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. Three 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 and Bruce C. Richardson, serve on the
Nominating Committee. Since December 17, 2009, Mr. Guangxun Xu has been the Chairman of the Nominating
Committee.
Stockholder Communications
Stockholders interested in communicating directly with the Board of Directors, or individual directors, may email
the Company’s independent director Mr. Bruce C. Richardson at bcrichardson@hotmail.com. Mr. Richardson will
review all such correspondence and will regularly forward to the board of directors of the Company 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 of the Company 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.
Family Relationships
Mr. Hanlin Chen and Mr. Yiu Wong Andy Tse are brothers-in-law.
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 was filed as an exhibit to the Form 10-K for the year ended December
31, 2009, which was filed with the Securities and Exchange Commission on March 25, 2010.
Section 16(a) Beneficial Ownership Compliance
45
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 10 EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
In 2003, the Board of Directors established a Compensation Committee consisting only of independent Board
members, which is responsible for setting the Company’s policies regarding compensation and benefits and
administering the Company’s benefit plans. At the end of fiscal year 2011, the Compensation Committee consisted of
Robert Tung, Guangxun Xu and Bruce C. Richardson. The members of the Compensation Committee approved the
amount and form of compensation paid to executive officers of the Company and set the Company’s compensation
policies and procedures during these periods.
The primary goals of the Company’s compensation committee with respect to executive compensation are to
attract and retain highly talented and dedicated executives and to align executives’ incentives with stockholder value
creation.
The Compensation Committee will conduct an annual review of the aggregate level of the Company’s executive
compensation, as well as the mix of elements used to compensate the Company’s executive officers. The Company
compares compensation levels with amounts currently being paid to executives at similar companies in the same area
and the same industry. Most importantly, the Company compares compensation levels with local practices in China.
The Company believes that its compensation levels are competitive with local conditions.
Elements of compensation
The Company’s executive compensation consists of the following elements:
Base Salary
Base salaries for the Company’s executives are established to be amounts of compensation that are similar to
those paid by other companies to executives in similar positions and with similar responsibilities. Base salaries are
adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities,
performance and experience. The Compensation Committee established a salary structure to determine base salaries
and is responsible for initially setting executive officer compensation in employment arrangements with each individual.
The base salary amounts are intended to reflect the Company’s philosophy that the base salary should attract
experienced individuals who will contribute to the success of the Company’s business goals and represent cash
compensation that is commensurate with the compensation of individuals at similarly situated companies.
The Company’s Board of Directors and Compensation Committee have approved the current salaries for
executives: $165,000 for the Chairman, $110,000 for the CEO, and $66,000 for other officers in 2011.
Performance Bonus
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, net profits and earnings per share for 2011 must exceed 20%; and (ii) the average growth rate of the
46
foregoing indicators must exceed that of China auto industry in 2010 published by China Association Of Auto
Manufacturers, “CAAM”;
c. Bonus: 50% of each officer’s annual salary in 2011.
There are no accrued performance bonuses in 2011 as the Company did not reach either of the above conditions
for awarding performance bonuses.
Stock Option Awards
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 stockholder 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 stock options granted to management in 2008 were as follows, which were approved by the Board of
Directors and the 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, management has exercised all options before their expiration
date
e. Vesting Schedule
• On December 10, 2008, 1/3 of the granted stock option vested and became exercisable
• On December 10, 2009, 1/3 of the granted stock option vested and became exercisable
• On December 10, 2010, 1/3 of the granted stock option vested and became exercisable
Other Compensation
Other than the base salary for the Company’s executive officers, the performance bonus and the stock option
awards referred to above, the Company does not have any other benefits and perquisites for its executive officers.
However, the Compensation Committee in its discretion may provide benefits and perquisites to these executive
officers if it deems advisable to do so.
Compensation Committee Report
The Compensation Committee of the Board of Directors of the Company has reviewed and discussed the
Compensation Discussion and Analysis contained in this Annual Report on Form 10-K with management. Based on the
Company’s Compensation Committee’s review of and the discussions with management with respect to the
Compensation Discussion and Analysis, the Company’s Compensation Committee recommended to the Board of
Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K for filing
with the SEC.
The foregoing report is provided by the following directors, who constitute the Compensation Committee: Robert
Tung, Guangxun Xu and Bruce C. Richardson.
Compensation Committee Interlocks and Insider Participation
None of the Company’s executive officers has served as a member of a compensation committee, or other
committee serving an equivalent function, of any other entity whose executive officers serve as a director of the
Company or member of the Company’s compensation committee.
47
Compensation Tables
Executive Officers
The compensation that executive officers received for their services for fiscal years ended 2011, 2010 and 2009
were as follows:
Name and principal position
Hanlin Chen (Chairman)
Qizhou Wu (CEO)
Jie Li (CFO)
Haimian Cai (Vice President)
Shengbin Yu (Senior Vice President)
Option Awards 3 Total
Year
2011
2010
2009
Salary 1 Bonus 2
$ 165,000 $
$ 150,000 $
$ 150,000 $
— $
75,000 $
75,000 $
2011
2010
2009
$ 110,000 $
$ 100,000 $
$ 100,000 $
— $
50,000 $
50,000 $
66,000 $
60,000 $
60,000 $
— $
30,000 $
30,000 $
— $ 165,000
— $ 225,000
— $ 225,000
— $ 110,000
— $ 150,000
— $ 150,000
— $
— $
— $
66,000
90,000
90,000
96,000 $
96,000 $
40,000 $
— $
— $
96,000 $
— $
— $
96,000
96,000
65,550 $ 201,550
33,000 $
60,000 $
60,000 $
— $
30,000 $
30,000 $
— $
— $
— $
33,000
90,000
90,000
2011
2010
2009
2011
2010
2009
2011
2010
2009
$
$
$
$
$
$
$
$
$
1. Salary – Please refer to Base Salary disclosed under “Elements of compensation” section above for further details
2. Bonus – Please refer to Performance Bonus disclosed under “Elements of compensation” section above for further
details.
3. Option Awards – Please refer to Stock Option Awards disclosed under “Elements of compensation” section above
for further details.
For detailed information on option exercises and stock vested, please see Note 20 to the Consolidated Financial
Statements under Item 15 of this Annual 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, 2011. The compensation that directors received for serving on the Board of Directors for fiscal year 2011
was as follows:
Name
Robert Tung
Guangxun Xu
Bruce C. Richardson
Fees earned or paid in cash Option awards 1
33,525 $
$
33,525 $
$
33,525 $
$
44,000 $
32,000 $
38,000 $
Total
77,525
65,525
71,525
1. 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 718, 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 24 to the Consolidated Financial Statements under Item 15 of this Annual Report for more details.
48
The cost of the above-mentioned compensation paid to directors was measured based on investment, operating,
technology, and consulting services they provided. All other directors did not receive compensation for their service on
the Board of Directors.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 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 28,260,302 shares of
common stock outstanding at December 31, 2011.
Name/Title
Total Number of Shares Percentage Ownership
Hanlin Chen, Chairman 1
Qizhou Wu, CEO and Director
Jie Li, CFO
Li Ping Xie 2
Tse, Yiu Wong Andy, Sr. VP, Director
Shaobo Wang, Sr. VP
Shengbin Yu, Sr. VP
Yijun Xia, VP
Daming Hu, CAO
Robert Tung, Director
Haimian Cai, Director
Wiselink Holdings Limited 3
All Directors and Executive Officers (12 persons)
17,849,014
1,445,136
33,403
17,849,014
377,204
165,104
226,429
17,200
26,400
7,500
3,750
17,849,014
20,151,140
63.16%
5.11%
0.12%
63.16%
1.33%
0.58%
0.80%
0.06%
0.09%
0.03%
0.01%
63.16%
71.31%
1.
2.
Includes 1,502,925 shares of common stock beneficially owned by Mr. Chen’s wife, Ms. Xie, and 3,023,542
shares beneficially held through Wiselink Holdings Limited.
Includes 13,322,547 shares of common stock beneficially owned by Ms. Xie’s husband, Mr. Chen and 3,023,542
beneficially held in Wiselink Holdings Limited.
3. Wiselink Holdings Limited is a company controlled by Mr. Chen. Includes 13,322,457 shares of common stock
beneficially owned by Mr. Chen and 1,502,925 shares of common stock beneficially owned by Mr. Chen’s wife,
Ms. Xie.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
For the information required by Item 13 please refer to Consolidated Financial Statements Note 2 (Basis of
Presentation and Significant Accounting Policies–Certain Relationships and Related Transactions) and Note 28
(Related Party Transactions).
The Company’s Audit Committee’s charter provides that one of its responsibilities is to review and approve
related party transactions defined as those transactions required to be disclosed under Item 404 of Regulation S-K of
the rules and regulations under the Exchange Act. Although the Company does not currently have a formal written set
of policies and procedures for the review, approval or ratification of related person transactions, the Company does
have written procedures in place to identify related party transactions that may require Audit Committee approval.
These procedures include submission of a forecast summary of transactions with related parties annually. Where a
related party transaction is identified, the Audit Committee reviews and, where appropriate, approves the transaction
49
based on whether it believes that the transaction is at arm’s length and contains terms that are no less favorable than
what the Company could have obtained from an unaffiliated third party.
ITEM 13 PRINCIPAL ACCOUNTING FEES AND SERVICES
The
following
table sets
rendered by
PricewaterhouseCoopers Zhong Tian CPAs Limited Company for the audit of the Company’s annual financial
statements, and fees billed for other services for the fiscal years 2011 and 2010. The Audit Committee has approved all
of the following fees.
for professional audit services
the aggregate
forth
fees
Audit Fees
Audit-Related Fees
Tax Fees
Total Fees Paid
Fiscal Year Ended
2010
2011
823,000
870,000 $
—
—
—
—
823,000
870,000 $
$
$
AUDIT COMMITTEE’S PRE-APPROVAL POLICY
During the fiscal years ended December 31, 2011, 2010 and 2009, 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 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.
ITEM 14 FINANCIAL STATEMENTS
PART IV
1. Report of Independent Registered Public Accounting Firm, PricewatershouseCoopers Zhong Tian CPAs Limited
Company
2. Report of Registered Public Accounting Firm, Schwartz Levitsky Feldman LLP
3. Consolidated Balance Sheets as of December 31, 2011 and 2010
4. Consolidated Statements of Income (Loss) for the years ended December 31, 2011, 2010 and 2009
5. Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2011, 2010 and
2009
6. Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2011, 2010 and
2009
7. Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009
8. Notes to Consolidated Financial Statements
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CHINA AUTOMOTIVE SYSTEMS, INC.:
In our opinion, the consolidated balance sheets as of December 31, 2011 and 2010 and the related consolidated
statements of income (loss), comprehensive income (loss), changes in stockholders' equity and cash flows for the years
then ended present fairly, in all material respects, the financial position of China Automotive Systems, Inc. and its
subsidiaries (“the Company”) at December 31, 2011 and 2010, and the results of their operations and their cash flows
for the years then ended in conformity with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule as of December 31, 2011 and 2010 and for the years ended
December 31, 2011 and 2010 listed in the index appearing under Item 8 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related consolidated financial statements. Also in our
opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of
December 31, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO") because a material weakness in internal control
over financial reporting related to insufficient personnel with appropriate levels of accounting knowledge and
experience to address complex U.S. GAAP accounting issues and to prepare and review financial statements and
related disclosures under U.S. GAAP existed as of that date. A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The
material weakness referred to above is described in Management's Report on Internal Control over Financial Reporting
appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit
tests applied in our audit of the 2011 consolidated financial statements, and our opinion regarding the effectiveness of
the Company's internal control over financial reporting does not affect our opinion on those consolidated financial
statements. The Company's management is responsible for these financial statements and financial statement schedule,
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in management's report referred to above. Our responsibility is to express
opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over
financial reporting based on our integrated 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
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
51
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
We do not express an opinion or any other form of assurance on management's statements referring to the
management’s actions and plans of remediation of previously identified material weakness and the actions and plans to
remediate the existing material weakness included in the Management’s Report on Internal Control Over Financial
Reporting.
/s/ PricewaterhouseCoopers Zhong Tian CPAs Limited Company
PricewaterhouseCoopers Zhong Tian CPAs Limited Company
Shanghai, People’s Republic of China
March 9, 2012
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 sheet of China Automotive Systems, Inc. and
subsidiaries (the “Company”) as at December 31, 2009 and the related consolidated statements of operations,
comprehensive loss, cash flows and changes in stockholders’ equity for the year ended December 31, 2009. These
consolidated financial statements are the responsibility of the management of the Company. 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 the Company as of December 31, 2009 and the results of its operations and its cash flows for
the year ended December 31, 2009 in conformity with generally accepted accounting principles in the United States of
America.
Toronto, Ontario, Canada
March 16, 2010 except for note 2 to the
consolidated financial statements appearing
on the Company’s 2010 Form 10-K, which
was as of June 23, 2011
“SCHWARTZ LEVITSKY FELDMAN LLP”
Chartered Accountants
Licensed Public Accountants
52
China Automotive Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
ASSETS
Current assets:
Cash and cash equivalents
Pledged cash deposits
Accounts and notes receivable, net - unrelated parties
Accounts and notes receivable, net - related parties
Advance payments and others - unrelated parties
Advance payments and others - related parties
Inventories
Current deferred tax assets
Total current assets
Non-current assets:
Property, plant and equipment, net
Intangible assets, net
Other receivables, net - unrelated parties
Other receivables, net - related parties
Advance payment for property, plant and equipment - unrelated parties
Advance payment for property, plant and equipment - related parties
Long-term investments
Non-current deferred tax assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans
Accounts and notes payable - unrelated parties
Accounts and notes payable - related parties
Convertible notes payable
Compound derivative liabilities
Customer deposits
Accrued payroll and related costs
Accrued expenses and other payables
Accrued pension costs
Taxes payable
Amounts due to shareholders/directors
Deferred tax liabilities
Total current liabilities
Long-term liabilities:
Convertible notes payable
Compound derivative liabilities
Accrued make-whole redemption interest expense of convertible notes
Advances payable
Total liabilities
Commitments and Contingencies
Stockholders’ Equity
Common stock, $0.0001 par value - Authorized - 80,000,000 shares
Issued and Outstanding – 28,260,302 and 27,175,826 shares at December 31, 2011 and
2010, respectively
Additional paid-in capital
Retained earnings-
53
December 31,
2011
2010
$ 72,960,500 $ 49,424,979
21,820,890 20,983,891
206,333,110 190,392,146
5,466,842
6,126,148
2,892,068
2,215,240
1,334,069
629,741
51,607,193 36,870,272
3,686,713
3,511,421
365,379,535 310,875,688
84,843,250 75,380,747
662,089
837,075
2,450,970
1,876,953
350,464
499,652
1,839,537
1,472,442
7,534,440
3,712,121
3,162,136
3,485,118
4,340,974
3,271,594
$466,447,120 $405,527,665
$ 10,315,987 $
6,794,812
169,456,482 146,649,497
1,867,926
2,052,897
- 30,000,000
- 25,271,808
720,883
1,181,401
5,177,140
4,927,200
22,617,667 29,072,710
3,851,988
4,067,399
6,860,946
2,029,215
353,817
351,817
312,304
309,667
217,559,672 256,683,891
23,571,429
559,148
7,615,709
983,986
-
-
-
603,983
250,289,944 257,287,874
2,717
39,295,419 28,565,153
2,826
Appropriated
Unappropriated
Accumulated other comprehensive income
Total parent company stockholders' equity
Non-controlling interests
Total stockholders' equity
Total liabilities and stockholders' equity
9,026,240
8,767,797
99,513,395 58,979,851
25,291,231 15,957,500
173,129,111 112,273,018
43,028,065 35,966,773
216,157,176 148,239,791
$466,447,120 $405,527,665
The accompanying notes are an integral part of these consolidated financial statements.
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Income/(Loss)
Net product sales
Unrelated parties
Related parties (Note 28)
Cost of product sold
Unrelated parties
Related parties(Note 28)
Year Ended December 31
2010
2009
2011
$328,043,323 $334,264,680 $249,705,389
19,931,431 11,660,502
5,892,164
347,974,754 345,925,182 255,597,553
259,096,894 246,369,792 179,856,225
20,778,863 19,252,680 13,998,702
279,875,757 265,622,472 193,854,927
68,098,997 80,302,710 61,742,626
838,505
1,129,032
9,363,875
9,971,835
1,481,308
Gross profit
Net gain on other sales
Operating expenses:
Selling expenses
General and administrative expenses
R&D expenses
Total operating expenses
Operating income
Other income, net
Financial expenses, net
Gain (loss) on change in fair value of derivative
Gain on convertible notes conversion
Income (loss) before income tax expenses and equity in earnings of
affiliated companies
4,720,013
Less: Income taxes
-
Add: Equity in earnings of affiliated companies
47,903,481 62,917,302 (18,651,125)
Net income (loss)
7,789,746
Net income attributable to noncontrolling interest
$ 40,791,987 $ 51,738,113 $ (26,440,871)
Net income (loss) attributable to parent company
Allocation to convertible notes holders
-
Net income (loss) attributable to parent company’s common shareholders 36,273,149 44,743,807 (26,440,871)
7,892,540
16,224,369 10,029,211 15,195,026
10,005,605
2,561,170
36,201,809 27,384,338 25,648,736
33,378,496 54,047,404 36,932,395
94,534
(7,883,714)
20,971,087 20,171,698 (43,074,327)
-
52,098,933
4,353,702
158,250
168,749
(3,983,817)
558,058
(3,360,837)
7,111,494 11,179,189
8,484,205
(14,816)
(4,518,838)
(6,994,306)
(13,931,112)
1,564,418
7,991,252
71,416,323
-
Net income (loss) attributable to parent company’s common shareholders
per share –
Basic
Diluted
Weighted average number of common shares outstanding –
$
$
1.30 $
0.69 $
1.65 $
1.10 $
(0.98)
(0.98)
54
Basic
Diluted
27,930,668 27,098,258 26,990,649
31,511,685 31,565,422 26,990,649
The accompanying notes are an integral part of these consolidated financial statements.
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income/(Loss)
Net income (loss)
Other comprehensive income:
Foreign currency translation gain, net of tax
Comprehensive income (loss)
Comprehensive income attributable to noncontrolling interest
Comprehensive income (loss) attributable to parent company
Year Ended December 31
2010
$ 47,903,481 $ 62,917,302 $(18,651,125)
2011
2009
82,638
11,284,880 5,707,902
59,188,361 68,625,204 (18,568,487)
7,812,156
$ 50,125,718 $ 56,507,880 $(26,380,643)
9,062,643 12,117,324
The accompanying notes are an integral part of these consolidated financial statements.
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Common Stock
Balance at January 1
Issuance of common shares for the conversion of convertible notes
Exercise of stock option
Balance at December 31
Additional paid-in capital
Balance at January 1
Issuance of common shares for the conversion of convertible notes
Issuance of stock options
Exercise of stock option
Balance at December 31
Retained earnings— Appropriated
Balance at January 1
Appropriation of retained earnings
Balance at December 31
Unappropriated
Balance at January 1 – as previously reported
Accumulated effect of adopted ASC815-15
Balance at January 1
Net income (loss) attributable to parent company
Appropriation of retained earnings
Balance at December 31
55
2011
2010
2009
$
$
2,717 $
91
18
2,826 $
2,704 $
—
13
2,717 $
2,698
—
6
2,704
$ 28,565,153 $ 27,515,064 $ 26,648,154
—
446,676
420,234
$ 39,295,419 $ 28,565,153 $ 27,515,064
10,111,778
100,575
517,913
—
595,402
454,687
$ 8,767,797 $ 8,324,533 $ 7,525,777
798,756
$ 9,026,240 $ 8,767,797 $ 8,324,533
258,443
443,264
—
58,979,851
40,791,987
(258,443)
$ 58,979,851 $ 7,685,002 $ 34,060,876
863,753
34,924,629
(26,440,871)
(798,756)
$ 99,513,395 $ 58,979,851 $ 7,685,002
—
7,685,002
51,738,113
(443,264)
Accumulated Other Comprehensive Income
Balance at January 1
Net foreign currency translation adjustment attributable to parent
company
Balance at December 31
Total parent company stockholders' equity
$ 15,957,500
11,187,733 $ 11,127,505
9,333,731
4,769,767
60,228
$ 25,291,231 $ 15,957,500 $ 11,187,733
$173,129,111 $112,273,018 $ 54,715,036
Non-controlling interest
Balance at January 1
Net foreign currency translation adjustment attributable to
non-controlling interest
Net income attributable to non-controlling interest
Distribution of retained earnings
Balance at December 31
Total stockholders' equity
$ 35,966,773 $ 27,138,357 $ 23,270,820
1,951,149
938,135
22,410
7,111,494
(2,001,351)
11,179,189
(3,288,908)
7,789,746
(3,944,619)
$ 43,028,065 $ 35,966,773 $ 27,138,357
$216,157,176 $148,239,791 $ 81,853,393
The accompanying notes are an integral part of these consolidated financial statements.
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31
2010
2011
2009
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Stock-based compensation
Depreciation and amortization
Deferred income tax assets and liabilities
Inventory write downs
Provision (reversal) for doubtful accounts
Amortization for discount of convertible notes payable
Equity in earnings of affiliated companies
Gain on convertible notes conversion
(Gain) loss on change in fair value of derivative
Loss on disposal of fixed assets
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
56
$ 47,903,481 $ 62,917,302 $(18,651,125)
100,575
595,402
13,501,091 9,497,618
620,880
(914,886 )
(23,054 )
431,652
(75,486 ) (2,373,520 )
—
14,816
-
446,676
8,684,169
(1,676,731)
1,031,751
901,680
3,891,148
-
-
(20,971,087 ) (20,171,698 ) 43,074,327
22,970
(235,076)
—
(158,250 )
(1,564,418 )
104,849
-
690,256
(6 )
181,608 (7,656,455 )
(5,994,298)
(6,200,552 ) (33,055,864 ) (58,735,311)
(968,719)
1,576,777 (1,721,067 )
(1,849,579)
(12,458,644 ) (8,679,749 )
19,903
15,013,604 36,821,221 48,178,260
1,682,384
1,055,134
8,375,518
(31,847)
5,755,520
409,036 (1,232,590 )
206,373
2,355,538 6,295,860
(45,692 )
(5,107,984 ) (4,963,593 )
25,566
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
Equity investment
Net cash used in investing activities
Cash flows from financing activities:
Bank loans borrowed
Repayment of bank loans
Dividends paid to the non-controlling interest holders of joint-venture
companies
Increase (decrease) in amounts due to shareholders/directors
Exercise of stock option
Redemption of convertible notes
Net cash provided by (used in) financing activities
Cash and cash equivalents affected by foreign currency
Net increase in cash and cash equivalents
Cash and equivalents at beginning of year
Cash and equivalents at end of year
345,623
(317)
34,063,290 38,552,161 34,956,534
361,015
563,649 (1,695,321 )
383,924
574,775
207,014
280,270
(14,857,364 ) (28,024,638 ) (17,498,957)
(324,014)
(165,292 )
—
- (3,095,414 )
(14,042,403 ) (32,596,741 ) (17,335,687)
(323,463 )
10,199,951 8,215,091
(6,995,320 ) (6,794,812 )
6,590,317
(8,786,684)
(28,194 )
517,931
—
(2,822,432 ) (3,614,252 )
344,695
454,700
—
(4,176,583)
(337,915)
420,240
(5,000,000)
871,936 (1,394,578 ) (11,290,625)
36,579
2,642,698 1,383,961
23,535,521 5,944,803
6,366,801
49,424,979 43,480,176 37,113,375
$ 72,960,500 $ 49,424,979 $ 43,480,176
The accompanying notes are an integral part of these consolidated financial statements.
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest
Cash paid for income taxes
$1,972,601 $2,044,713
$8,271,564 $6,685,443
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Year Ended December 31
2010
2011
2009
$1,475,307
$4,048,120
Year Ended December 31
2010
2011
2009
Issuance of common shares for the conversion of convertible notes
Advance payments for acquiring property, plant and equipment
Dividend Payable to non-controlling interest shareholders of
joint-ventures
$10,111,869 $-
$5,184,563 $9,373,977
$-
$6,369,043
$807,970
1,530,445
1,761,339
The accompanying notes are an integral part of these consolidated financial statements.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
China Automotive Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization and Business
China Automotive Systems, Inc., “ China Automotive,” was incorporated in the State of Delaware on June 29,
1999 under the name of 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 the following Sino-foreign joint ventures,
wholly-owned subsidiary and joint ventures organized in the PRC as of December 31, 2011, 2010, and 2009.
Name of Entity
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong” 1
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong” 2
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang” 3
Zhejiang Henglong & Vie Pump-Manu Co., Ltd., “Zhejiang” 4
Universal Sensor Application Inc., “USAI” 5
Wuhu HengLong Auto Steering System Co., Ltd., “Wuhu” 6
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong” 7
Jingzhou Hengsheng Automotive System Co., Ltd, “Hengsheng” 8
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center” 9
Beijing Hainachuan HengLong Automotive Steering System Co., Ltd, “Beijing
HengLong” 10
2009
Aggregate Net Interest
2011 2010
80.00% 80.00% 80.00%
81.00% 81.00% 81.00%
70.00% 70.00% 70.00%
51.00% 51.00% 51.00%
83.34% 83.34% 83.34%
77.33% 77.33% 77.33%
85.00% 85.00% 85.00%
100.00% 100.00% 100.00%
80.00% 80.00% 80.00%
50.00% 50.00%
-
1. Henglong was established in 1997 and is mainly engaged in the production of rack and pinion power steering gear
2.
for cars and light duty vehicles.
Jiulong was established in 1993 and is mainly engaged in the production of integral power steering gear for
heavy-duty vehicles.
3. Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.
4. Zhejiang was established in 2002 to focus on power steering pumps.
5. USAI was established in 2005 and is mainly engaged in the production and sales of sensor modules.
6. Wuhu was established in 2006 and is mainly engaged in the production and sales of automobile steering systems.
7.
Jielong was established in 2006 and is mainly engaged in the production and sales of electric power steering gear,
“EPS.”
8. On March 7, 2007, Genesis established Hengsheng, its wholly-owned subsidiary, to engage in the production and
sales of automotive steering systems. The registered capital of Hengsheng at the time of establishment was
$10,000,000. On February 10, 2010, the registered capital of Hengsheng was increased to $16,000,000. On
October 12, 2011, the board of directors of the Company approved a reorganization of the Company’s subsidiaries
operating in China. As a result of the reorganization, all of Genesis’s equity interests of its subsidiaries operating
in China, except for Shenyang and Zhejiang, were transferred to Hengsheng, the Company’s new China-based
58
9.
holding company. The reorganization was completed on January 19, 2012 and, after that, the registered capital of
Hengsheng was increased to $39,000,000.
In December 2009, Henglong, a subsidiary of Genesis, formed the Testing Center, which is mainly engaged in the
research and development of new products. The registered capital of the Testing Center was RMB 30,000,000,
equivalent to approximately $4,393,544.
10. On January 24, 2010, Genesis entered into a joint venture contract with Beijing Hainachuan Auto Parts Co., Ltd.,
to establish Beijing Henglong as a joint venture company to design, develop and manufacture both hydraulic and
electric power steering systems and parts. On September 16, 2010, with Beijing Hainachuan’s agreement, Genesis
transferred its interest in the joint venture to Hengsheng, and left the other terms of the joint venture contract
unchanged. According to the joint venture agreement, the Company does not have voting control of Beijing
Henglong. Therefore, the Company’s consolidated financial statements do not include Beijing Henglong, and such
investment is accounted for by the equity method.
On October 12, 2011, the board of directors of the Company approved a reorganization of the group companies
operating as subsidiaries in China. The reorganization is intended to improve the Company’s marketing of its products
in China by presenting a more unified structure under one PRC-based holding company and to improve the
administration and control of the various China-based subsidiaries. As a result of the reorganization, all of Genesis’
equity interests in its subsidiaries operating in China, except for Shenyang and Zhejiang, were transferred to Hengsheng
(the Company’s new China-based holding company). As the reorganization was under common control of the
Company, it will not have a material impact on the Company’s consolidated financial position or results of operations
and should not impact the tax treatment of the Company or its subsidiaries in any material respect. The reorganization
was completed on January 19, 2012. Set forth below is an organizational chart after reorganization.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation - For the years ended December 31, 2011, 2010, and 2009, the accompanying consolidated
financial statements include the accounts of the Company and its three wholly-owned 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. The Company has no voting control in Beijing Henglong, thus
such investment was accounted for using the equity method.
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’s ownership of 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 of Henglong are appointed by the Company.
Jiulong was formed in 1993, with 81% owned and controlled by the Company, 10% owned by 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 of Jiulong is appointed by the Company.
Shenyang was formed in 2002, with 70% owned and controlled by the Company, and 30% owned by Shenyang
Automotive Industry Investment Corporation, “JB Investment.” The highest authority of the joint venture is the Board
59
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. In March 2003, the Company and Jinbei entered into an act-in-concert agreement, under which the directors
appointed by Jinbei agree to act in concert with the directors appointed by the Company. As a result, the Company
obtained control of Shenyang in March 2003. The general manager of Shenyang is appointed by the Company.
Zhejiang was formed in 2002, with 51% owned by Genesis, which is wholly-owned and controlled by the
Company, 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. In March 2003, the Company and ZVG entered into an
act-in-concert agreement, under which the directors appointed by ZVG agree to act in concert with the directors
appointed by the Company. As a result, the Company obtained control of Zhejiang in March 2003. The Chairman of
the Board of Directors is appointed by ZVG. The general manager of Zhejiang is appointed by the Company.
USAI was formed in 2005. As at December 31, 2008, 83.34% was owned by the Company and 16.66% owned
by Shanghai Hongxi Investment Inc., “Hongxi”. 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 of USAI 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 of Jielong 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 Chery Technology executed an
“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 of Wuhu is appointed by the Company.
Testing Center was formed in December 2009, as a wholly-owned subsidiary of Henglong. The highest authority
of the entity is the Board of Directors, which is comprised of three directors, all of them are appointed by the Company.
Beijing Henglong was formed in 2010, with 50% owned by the Company and 50% owned by Beijing
Hainachuan Auto Parts Co. Ltd., "Hainachuan.” 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 Hainachuan. 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 Hainachuan. The
general manager of Beijing Henglong 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 consolidated 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 dates of the financial
statements, and the reported amounts of revenues and expenses during the reporting periods. The Company is of an
60
opinion that the significant estimates related to impairment of long term assets and investment, the realizable value of
accounts receivable and inventories, useful lives of property, plant and equipment, and the amounts of 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 - Pledged as guarantee for the Company's notes payable and restricted to use. The
Company regularly pays some of its suppliers by bank notes. The Company (the drawer) has to deposit a cash deposit,
equivalent to 30%- 40% of the face value of the relevant bank note, in a bank (the drawer) in order to obtain the bank
note.
Allowance for Doubtful Accounts-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 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 to acquire various assets to be utilized in the future in the
Company’s normal business operations, such as machine equipment, raw materials and technology. Such amounts are
paid according to their respective contract terms. Advance payment for machinery and equipment is classified as
advance payment for property, plant and equipment in the consolidated balance sheet and advance payment of raw
materials and technology are classified as advance payments and others 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 calculated 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
8
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
income/(loss) on the date of disposal. Gains or losses on disposal of property, plant and equipment has not been
material for the years ended December 31, 2011, 2010 and 2009.
61
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, 2011, 2010 and 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, so the Company did not capitalize interest costs.
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.
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 definite life
intangible assets are reviewed periodically for impairment 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.
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 realization.
Investments in which the Company owns 20% - 50% of the investee company and does have the ability to exert
significant influence are accounted for using the equity method.
In 2010, the Company set up a joint venture with Beijing Hainachuan, Beijing Henglong. Beijing Henglong is an
entity over which the Company has significant influence, but which it does not control. Investment in Beijing Henglong
is accounted for by the equity method of accounting. Under this method, the Company’s income (loss) from investment
in Beijing Henglong is recognized in the consolidated statements of income/ (loss). Unrealized gains on transactions
between the Company and Beijing Henglong are eliminated to the extent of the Company’s interest in Beijing
Henglong, if any; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the
asset transferred. When the Company’s share of losses in Beijing Henglong equals or exceeds its interest in Beijing
Henglong, the Company does not recognize further losses, unless the Company has incurred obligations or made
payments on behalf of Beijing Henglong.
The Company continually reviews its investment in Beijing Henglong to determine whether a decline in fair
value below the carrying value is other than temporary. The primary factors the Company considers in its determination
are the length of time that the fair value of the investment is below the Company’s carrying value and the financial
condition, operating performance and near term prospects of the investee. In addition, the Company considers the
reason for the decline in fair value, including general market conditions, industry-specific or investee-specific reasons,
and changes in valuation subsequent to the balance sheet date and the Company’s intent and ability to hold the
investment for a period of time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed to
be other than temporary, the carrying value of the security is written down to fair value. There was no impairment
losses for its long-term investment in the three years ended December 31, 2011.
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
62
value added tax laws have been complied with, and collectability is probable. The Company recognizes product sales
generally at the time the product is installed on OEMs’ production line, and a small number of product sales is
recognized at the time the product is shipped. Concurrent with the recognition of revenue, the Company reduces
revenue for estimated product returns. 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 income (loss) in
accordance with the provisions of ASC Topic 350.
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 net sales amount less the carrying value of the assets. The
Company has classified such revenue from materials and other asset sales into gain on other sales in its consolidated
statements of income/ (loss).
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 income/ (loss).
Uncertain Tax Positions - In order to assess uncertain tax positions, the Company applies a more likely than not
threshold and a two-step approach for tax position measurement and financial statement recognition. For the two-step
approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50%
likely to be realized upon settlement.
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.
For the years ended December 31, 2011, 2010 and 2009, 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
2011
2009
Year Ended December 31
2010
$ 13,944,392 $ 9,092,464 $ 6,335,613
11,484,592 13,285,612 10,192,749
(7,442,982)
7,084
$ 16,808,787 $ 13,944,392 $ 9,092,464
(9,332,366) (8,715,820 )
282,136
712,169
Pension - Most of the operations and employees of the Company 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
63
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 and convertible notes payable 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, “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. Additionally, the Company accounts for
uncertainty in income taxes using a two-step approach to recognize and measure uncertain tax positions. The first step
is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more
likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes,
if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized
upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the
Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax
positions are recognized in the provision for income taxes.
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
and recorded in selling expenses. Shipping and handling costs relating to sales of $4,632,840, $4,690,313 and
$3,867,125 were included in selling expenses for the years ended December 31, 2011, 2010 and 2009, respectively.
Income Per Share - Basic income per share is computed by dividing net income attributable to ordinary
shareholders by the weighted average number of ordinary shares outstanding during the period using the two-class
method. Under the two-class method, net income is allocated between ordinary shares and other participating securities
(convertible note holders) based on their participating rights. Diluted income per share is calculated by dividing net
income attributable to ordinary shareholders, as adjusted for the effects on income of participating securities as if they
were dilutive ordinary shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent
shares outstanding during the period. Ordinary equivalent shares consist of ordinary shares issuable upon the
conversion of the convertible notes using the if-converted method, and shares issuable upon the exercise of stock
options and warrants for the purchase of ordinary shares using the treasury stock method. Ordinary equivalent shares
are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would
be antidilutive.
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 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.
Financial Instruments – Financial instruments consist of cash, evidence of ownership in an entity, and contracts
that both (i) impose on one entity a contractual obligation to deliver cash or another financial instrument to a second
entity, or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (ii)
conveys to that second entity a contractual right (a) to receive cash or another financial instrument from the first entity,
or (b) to exchange other financial instruments on potentially favorable terms with the first entity. Inputs to the valuation
methodology for Level 1 are quoted prices (unadjusted) for identical assets or liabilities in active markets. Inputs to the
64
valuation methodology for Level 2 include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial
instruments. Inputs to the valuation methodology for Level 3 are unobservable and significant to the fair value.
Consideration is also given to the risk inherent in the valuation technique and the risk inherent in the inputs to the
model.
Effective on January 1, 2009, the Company adopted the provisions of ASC 815 Derivatives and Hedging
Activities that address the determination of whether an instrument meets the definition of a derivative being indexed to
a company’s own stock for purposes of applying the scope exception as provided for in accordance with ASC 815-15.
Upon adoption of the standard on the effective date, the embedded conversion option that is embedded in the
Company’s convertible notes payable no longer met the definition of being indexed to its own stock because it
embodied certain anti-dilution protections that are not based on input to the fair value of a fixed-for-fixed option. As a
result, the embedded conversion feature required bifurcation, classification in liabilities and measurement at fair value
at each reporting period, with changes reflected in earnings, until the convertible notes are settled.
The Company has accounted for this change in accounting principle by reflecting the cumulative effect as an
adjustment to its beginning retained earnings during the year ended December 31, 2009. The cumulative effect
adjustment that the Company made is the difference between the amounts that it has recognized on the convertible
notes Payable prior to the adoption of ASC 815-40 and the amounts that would have been recognized if the amended
guidance had been effective on the issuance date of the convertible notes payable, which was February 15, 2008. The
following table illustrates the differences that comprise the cumulative effect:
Financial Instrument:
Convertible notes payable
Derivative liabilities
Total
(Effective Date January 1, 2009)
As
As
Recorded
Adjusted
$ 34,339,807 $ 31,108,852 $ 3,230,955
(2,367,202)
863,753
$ 34,339,807 $ 33,476,054 $
Cumulative
2,367,202
Effect
—
The following table illustrates the reallocation as if the amended provisions of ASC 815 had been in effect on the
financing date:
Financial Instrument:
Convertible notes payable
Derivative liabilities
Warrants
Total
(Financing Date February 15, 2008)
Amended
Original
Allocation Allocation Difference
$ 34,201,374 $ 28,379,704 $ 5,821,670
(5,821,670)
—
—
$ 35,000,000 $ 35,000,000 $
5,821,670
798,626
798,626
—
The cumulative effect of the change in accounting principle on the effective date reflects (i) the difference in the
financing date allocation of proceeds, (ii) the resulting change in the amortization of the debt discount that results from
the revised allocation, and (iii) the changes in the fair values of the derivative liabilities that would have been recorded
had the amended standard been in effect since the financing date.
Fair Value Measurements – For purposes of fair value measurements, the Company applies the applicable
provisions of ASC 820 “Fair Value Measurements and Disclosures”. Accordingly, fair value for the Company’s
financial accounting and reporting purposes represents the estimated price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the designated measurement date.
With an objective to increase consistency and comparability in fair value measurements and related disclosures, the
Financial Accounting Standard Board established the fair value hierarchy which prioritizes the inputs to valuation
techniques used to measure fair value into three broad levels.
65
Level 1 Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting
entity has the ability to access at the measurement date. An active market for the asset or liability is a market in which
transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an
ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to
measure fair value whenever available. As at December 31, 2011 and 2010, the Company did not have any fair value
assets and liabilities classified as Level 1.
Level 2 Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be
observable for substantially the full term of the asset or liability. As at December 31, 2011 and 2010, the Company did
not have any fair value assets and liabilities classified as Level 2.
Level 3 Inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair
value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any,
market activity for the asset or liability at the measurement date. However, the fair value measurement objective
remains the same, that is, an exit price from the perspective of a market participant that holds the asset or owes the
liability. Therefore, unobservable inputs shall reflect the reporting entity’s own assumptions about the assumptions that
market participants would use in pricing the asset or liability (including assumptions about risk). Accordingly, the
compound derivative liabilities are classified as Level 3 as the inputs reflected management’s best estimate of what
market participants would use in pricing the asset or liability at the measurement date.
The following table presents information about the Company’s financial liabilities classified as Level 3 as of
December 31, 2011 and December 31, 2010.
Derivative liability, non-current
$
559,148 $
Level 1
Level 2
- $
Level 3
- $ 559 ,148
Balance as of December 31, 2011
Carrying Value
Fair Value Measurements
Using Fair Value Hierarchy
Balance as of December 31, 2010
Carrying Value
Fair Value Measurements
Using Fair Value Hierarchy
Derivative liability, current
$
25,271,808 $
Level 1
Level 2
- $
Level 3
- $25,271,808
For a summary of changes in Level 3 derivative liabilities for the years ended December 31, 2011, 2010 and 2009,
please see Note 13
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 478,850 stock options and 1,721,150
stock options remain to be issuable in the future. As of December 31, 2011, the Company had 67,500 stock options
outstanding.
The Company has adopted ASC Topic 718, “Accounting for Stock-Based Compensation,” which establishes a
fair value based method of accounting for stock-based compensation plans. In accordance with 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
66
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.
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, Accounting for Registration Payment Arrangements, provides for the
exclusion of 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, “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.
As the investors may sell the convertible notes and underlying shares freely pursuant to Rule 144, there are no
liquidated damages.
Foreign Currencies - The Company’s subsidiaries based in PRC and Genesis maintain their books and records in
Renminbi, their functional currency. In accordance with ASC Topic 830, 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, including shareholders’ equity, 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. The parent
company (CAAS) and Henglong USA Corporation (HLUSA) maintain their books and records in U.S. dollars, “USD,”
the currency of U.S.A., their functional currency.
In translating the financial statements of the Company’s China subsidiaries and Genesis from their functional
currency into the Company's 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”
Jiangling Yude Machining Co., Ltd., “Jiangling Yude”
Wiselink Holdings Limited, “Wiselink”
Principal policies of the Company in connection with transactions with related parties are as follows:
67
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 purchased from related parties – 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, or reasonable cost plus pricing if fair market prices are
not available 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.
Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-04, “Fair Value
Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements
in U.S. GAAP and IFRSs” (ASU 2011-04). This newly issued accounting standard clarifies the application of certain
existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated
using significant unobservable (Level 3) inputs. This ASU is effective on a prospective basis for annual and interim
reporting periods beginning on or after December 15, 2011, which for the Company means January 1, 2012. The
adoption of this standard is not expected to have a material impact on the Company’s financial position or results of
operations.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of
Comprehensive Income” (ASU 2011-05). This newly issued accounting standard (1) eliminates the option to present
the components of other comprehensive income as part of the statement of changes in stockholders’ equity;
(2) requires the consecutive presentation of the statement of net income and other comprehensive income; and
(3) requires an entity to present reclassification adjustments on the face of the financial statements from other
comprehensive income to net income. The amendments in this ASU do not change the items that must be reported in
other comprehensive income or when an item of other comprehensive income must be reclassified to net income nor
do the amendments affect how earnings per share is calculated or presented. In December 2011, the FASB issued
ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items
Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers the
requirement within ASU 2011-05 to present on the face of the financial statements the effects of reclassifications out
of accumulated other comprehensive income on the components of net income and other comprehensive income for
all periods presented. During the deferral, entities should continue to report reclassifications out of accumulated other
comprehensive income consistent with the presentation requirements in effect prior to the issuance of ASU 2011-05.
These ASUs are required to be applied retrospectively and are effective for fiscal years, and interim periods within
those years, beginning after December 15, 2011, which for the Company means January 1, 2012. As these accounting
standards do not change the items that must be reported in other comprehensive income or when an item of other
comprehensive income must be reclassified to net income, the adoption of these standards is not expected to have an
impact on the Company’s financial position or results of operations.
In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting
Assets and Liabilities (ASU 2011-11). This newly issued accounting standard requires an entity to disclose both gross
and net information about instruments and transactions eligible for offset in the statements of financial position as
well as instruments and transactions executed under a master netting or similar arrangement and was issued to enable
users of financial statements to understand the effects or potential effects of those arrangements on their financial
position. This ASU is required to be applied retrospectively and is effective for fiscal years, and interim periods within
those years, beginning on or after January 1, 2013. As this accounting standard only requires enhanced disclosure, the
adoption of this standard is not expected to have an impact on the Company’s financial position or results of
operations.
68
3. Accounts and Notes Receivable
The Company’s accounts receivable at December 31, 2011 and 2010 are summarized as follows:
Accounts receivable
Notes receivable
Less: allowance for doubtful accounts
Balance at end of year
December 31,
2011
2010
$120,845,295 $122,379,968
92,805,163 76,407,523
213,650,458 198,787,491
(2,928,503)
(1,191,200)
$212,459,258 $195,858,988
Notes receivable represents accounts receivable in the form of bills of exchange whose acceptances and
settlements are handled by banks.
As of December 31, 2011, the Company has pledged $33,033,938 of accounts receivable as security for its
comprehensive credit facility with the banks in China.
The activity in the Company’s allowance for doubtful accounts of accounts receivable during the years ended
December 31, 2011, 2010 and 2009 are summarized as follows:
Balance at beginning of year
Amounts provided for during the year
Amounts reversed of collection during the year
Written off during the year
Foreign currency translation
Balance at end of year
4. Other Receivables
2009
2011
10,258
Year Ended December 31
2010
$ 2,928,503 $ 5,320,378 $ 4,910,478
1,171,429
(765,201)
-
3,672
$ 1,191,200 $ 2,928,503 $ 5,320,378
25,729
(168,008) (2,582,693)
-
165,089
(1,729,116)
149,563
The Company’s other receivables at December 31, 2011 and 2010 are summarized as follows:
Other receivables
Less: allowance for doubtful accounts
Balance at end of year
December 31,
2011
2010
$ 3,073,860 $ 3,501,967
(700,533)
$ 2,376,605 $ 2,801,434
(697,255)
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 years ended
December 31, 2011, 2010 and 2009 are summarized as follows:
Balance at beginning of year
Amounts provided for during the year
Amounts reversed of collection during the year
Foreign currency translation
Balance at end of year
$
$
69
Year Ended December 31,
2010
740,110 $
102,522
(165,066)
22,967
700,533 $
2011
700,533 $
57,849
(96,903)
35,776
697,255 $
2009
659,837
113,905
(34,287)
655
740,110
5. Inventories
The Company’s inventories at December 31, 2011 and 2010 consisted of the following:
Raw materials
Work in process
Finished goods
Balance at end of year
December 31,
2011
2010
$ 15,603,801 $ 11,394,670
7,344,342
7,537,766
28,659,050 17,937,836
$ 51,607,193 $ 36,870,272
Provision for inventories valuation amounted to $0.02million, $0.4 million and $1 million for the years ended
December 31, 2011, 2010 and 2009, respectively.
6. Long-term Investments
On December 31, 2011 and 2010, the Company’s balance of long-term investment was $3,485,118 and
$3,162,136, respectively. As discussed in note 2, for the long-term investments that the Company has no voting control,
such investments were accounted for using the equity method or the cost method.
On January 24, 2010, the Company invested $ 3,095,414 to establish a joint venture company with the other
shareholder, Beijing Hainachuan Henglong Steering System Co., Ltd., “Beijing Henglong,” in which the Company
owns 50% equity, as discussed in Note 2. The Company accounted for its operation results with the equity method. On
December 31, 2011 and 2010, the Company had $3,399,416 and $3,080,598, respectively, of net equity in Beijing
Henglong, respectively. Summarized statement of balance sheet data of Beijing Henglong as of December 31 is as
follows:
Current assets
Other assets
Total assets
Current liabilities
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2011
2010
$ 10,114,458 $ 4,462,788
4,860,562
4,530,395
$ 14,975,020 $ 8,993,183
586,678
$ 5,690,939 $
2,245,308
2,485,248
6,161,197
6,798,833
$ 14,975,020 $ 8,993,183
Summarized statement of operations data for the years ended December 31 is as follows:
Net Sales
Gross Margin
Net Income(Loss)
Beijing Henglong
2011
2010 2009
$ 25,051,883 $ — $ — $733,591 $ — $ — $316,500 $ (29,631) $ —
2010 2009 2011
2010 2009 2011
The Company’s share of net assets and net income is reported in the consolidated financial statements as
“long-term investments” on the consolidated balance sheets and “equity in earnings of affiliated companies” on the
consolidated statements of income/(loss) . The Company’s consolidated financial statement contains the net income
and net loss of non-consolidated affiliates of $158,250 and $14,816 at December 31, 2011 and 2010, respectively.
7. Property, Plant and Equipment
The Company’s property, plant and equipment at December 31, 2011 and 2010 are summarized as follows:
70
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,
2011
2010
6,353,939
2,956,235
6,546,981
$ 39,527,681 $ 36,983,940
100,327,278 81,905,845
5,840,308
2,902,738
4,686,699
155,712,114 132,319,530
(70,868,864) (56,938,783)
$ 84,843,250 $ 75,380,747
Depreciation charges for the years ended December 31, 2011, 2010 and 2009 were $13,320,752, $9,416,451 and
$8,429,863, respectively.
As of December 31, 2011, the Company has pledged approximately $83,000,000 of property, plant and
equipment as security for its comprehensive credit facilities with the banks in China.
8. Intangible Assets
The Company’s intangible asset at December 31, 2011 and 2010 are summarized as follows:
Costs:
Patent technology
Management software license
Less: Accumulated amortization
Balance at end of the year
December 31,
2011
2010
$ 1,896,013 $ 1,536,268
509,221
2,045,489
(1,383,400)
662,089
578,754
2,474,767
(1,637,692)
837,075 $
$
For the years ended 2011, 2010 and 2009, amortization expenses were $180,339, $81,167 and $254,306,
respectively.
The estimated aggregated amortization expense for the five succeeding years is $820,000 with $164,000 for each
year.
9. Deferred Income Tax Assets
In accordance with the provisions of ASC Topic 740 “Income Taxes”, 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 by taxing authorities; 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
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 expiry period until realized
under tax law. The Company will continue to evaluate the provision of valuation allowance in future periods.
71
The components of deferred income tax assets at December 31, 2011 and 2010 were as follows:
Losses carryforward (U.S.) ( 1)
Losses carryforward (PRC)
Product warranties and other reserves
Property, plant and equipment
Accrued make-whole interest expense for convertible notes
Share-based compensation
Bonus accrual
Other accruals
Others
Total deferred tax assets
Less: taxable temporary difference related to revenue recognition
Total deferred tax assets, net
Less: Valuation allowance
Total deferred tax assets, net of valuation allowance (2)
December 31,
2011
2010
$ 4,012,253 $ 2,422,312
804,147
1,351,498
2,871,844
3,512,683
3,271,594
4,094,824
2,320,938
2,665,498
366,464
213,098
182,970
206,035
943,373
790,664
314,795
136,660
16,983,213 13,498,437
(801,562)
16,166,072 12,696,875
(8,138,385)
(5,913,860)
$ 8,027,687 $ 6,783,015
(817,141)
(1) The net operating loss carry forwards for the U.S. entity for income tax purposes are available to reduce future
years' taxable income. These carry forwards will expire, if not utilized, in 20 years. Net operating loss
carryforwards for non-U.S. entities can be carried forward for 5 years to offset taxable income. However, as of
December 31, 2011, valuation allowance was $8,138,385, including $7,033,036 allowance for the Company’s
deferred tax assets in the United States and $1,105,349 allowance for the Company’s non-U.S. deferred tax assets.
Based on the Company’s current operations in the United States, management believes that the deferred tax assets
in the United States 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.
(2) Approximately $4,340,974 and $3,271,594 of deferred income tax asset as of December 31, 2011 and 2010,
respectively, is included in non-current deferred tax assets in the accompanying consolidated balance sheets. The
remaining $3,686,713 and $3,511,421 of deferred income tax asset as of December 31, 2011 and 2010,
respectively, is included in the current deferred tax assets.
The activity in the Company’s valuation allowance for deferred tax assets during the year ended December 31,
2011, 2010 and 2009 are summarized as follows:
Balance at beginning of year
Amounts provided for during the year
Amounts recovered during the year
Foreign currency translation
Balance at end of year
10. Bank Loans
2011
2009
Year Ended December 31
2010
$ 5,913,860 $ 4,821,210 $ 3,459,664
1,452,022
(91,037)
561
$ 8,138,385 $ 5,913,860 $ 4,821,210
2,336,821 1,269,127
(200,500)
(153,367)
24,023
41,071
At December 31, 2011, the Company, through its Sino-foreign joint ventures, had outstanding fixed-rate
short-term bank loans with a principal of $10,315,987 and a weighted average interest rate at 6.72 % per annum.
Interest is to be paid on the twentieth day of each month and the principal repayment is at maturity. These loans are
secured by some of the property and equipment of the Company and are repayable within one year.
72
1) On July 6, 2011, China CITIC Bank loaned $2,380,612 to the Company at an annual interest rate of 7.79%,
and maturity term of twelve months.
2) On September 30, 2011, Bank of China loaned $4,761,225 to the Company at an annual interest rate of
6.56%, and maturity terms of twelve months.
3) On June 29, 2011, China Construction Bank loaned $3,174,150 to the Company at an annual interest rate of
6.56%, and maturity term of twelve months.
At December 31, 2010, the Company, through its Sino-foreign joint ventures, had outstanding fixed-rate
short-term bank loans with a principal of $6,794,812 and a weighted average interest rate at 5.25 % per annum. Interest
is to be paid on the twentieth day of each month and the principal repayment is at maturity. These loans are secured by
some of the property and equipment of the Company and are repayable within one year. The Company has repaid such
loans at maturity dates in 2011.
11. Accounts and Notes Payable
The Company’s accounts and notes payable at December 31, 2011 and 2010 are summarized as follows:
Accounts payable
Notes payable
Balance at end of year
December 31,
2011
2010
$114,201,934 $ 95,726,549
57,307,445 52,790,874
$171,509,379 $148,517,423
Included in notes payable, $56,166,338 were notes issued by the banks out of the Company’s banking facility
lines, and $1,141,107 were notes issued by the banks in exchange of the notes received by the Company from
customers for which no banking facility line was utilized.
The Company has pledged cash deposits, accounts receivable and certain property plant and machinery as
security for its comprehensive credit facility with the banks in China.
12. Convertible Notes Payable
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%, 5% and 5% for each year of 2008, 2009,
2010, 2011, 2012 and 2013, respectively. 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 on July 15, 2008. From and after the occurrence and during the continuance of an Event of Default
defined in the relevant convertible notes 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 notes 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 penalty will be paid if share
certificates are not delivered timely after any conversion.
The Company will have the right to require the convertible notes holders to convert a portion of the conversion
amount then remaining under the convertible notes obligation into shares of 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
73
thirty (30) consecutive trading days following the Mandatory Conversion Period Start Date equals or exceeds the
percentage set forth in the chart below multiplied by $8.8527 as applicable to the indicated six month period:
0-6 months:
6-12 months:
12-18 months:
18-24 months:
24-30 months:
30-36 months:
36-42 months:
42-48 months:
125%
125%
135%
135%
145%
145%
155%
155%
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.
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.
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.
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, 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. At the
commitment date, as the effective conversion price was higher than the market value of the stock, no beneficial
conversion feature was present.
As of August 15, 2008, based on the inception conversion price and reset conversion price, the convertible notes
could be converted into 3,953,596 and 4,941,967 of common shares, 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 was
higher than the market value of the stock, the debt instruments are not considered "in the money" and no beneficial
conversion feature was present.
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 notes holder upon
redemption represents a gross yield to the convertible notes 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
74
over a 360-day year. The events of default include 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 notes 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 notes agreements. Any amount of principal, interest or other amount due under the
convertible notes which is not paid when due shall result in a late charge of 18% being incurred and payable by the
Company until such amount has been paid.
Upon the consummation of a change of control as defined in the convertible notes agreements, the convertible
notes 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 being redeemed and the Other Make Whole Amount as defined above.
On each of February 15, 2010 and February 15, 2011, the convertible notes holders had 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 the convertible notes 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 notes 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. The convertible notes holders did not
exercise their right on either of these dates.
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 notes 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 notes 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 notes 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 notes holders. On
March 27, 2009, the Company received a letter from YA Global, one of the convertible notes 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. The amount waived was accounted
for as a gain on convertible notes conversion and recorded in interest expense.
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
notes holder, requesting an extension until April 15, 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 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 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 discussions. 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
75
Notes and the Securities Purchase Agreement dated 1 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. On
February 15, 2009, the warrants expired unexercised and the warrants were forfeited.
On the issuance date, February 15, 2008, the Company has evaluated the convertible notes for terms and
conditions that would be considered to be features of embedded derivatives. Generally, such features would be required
to be separated from the host contract and accounted for as derivative financial instruments when certain conditions are
met. Certain features, such as the conversion option, were found to be exempt; as they satisfied the conditions as set
forth in ASC Topic 815 for instruments that are being (1) indexed to the Company’s own stock, and (2) classified as
equity in the financial position statement. Other features, such as puts, were not required to be bifurcated from the debt
host as they are clearly and closely associated with the risk of the debt-type host instrument.
Upon the adoption of ASC 815-15 on January 1, 2009, the Company bifurcated the embedded conversion feature
from the convertible notes and classified that financial instrument in liabilities at fair value. The Company has
accounted for this change in accounting principle by reflecting the cumulative effect as an adjustment to its beginning
retained earnings for the year ended December 31, 2009. The cumulative effect adjustment that the Company made is
the difference between the amounts that it has recognized on the convertible notes payable (prior to the adoption of
ASC 815-15 ) and the amounts that would have been recognized if the amended guidance had been effective on the
issuance date of the convertible notes payable, which was February 15, 2008. The following table reflects the
cumulative effect of the differences:
Convertible notes payable
Value allocated to debt
Warrants (1)
Compound embedded derivative (2)
Face value of convertible notes payable
Unamortized discount
Unamortized value as of December 31, 2008
Unamortized value as of January 1, 2009
Allocation
Original Allocation
$34,201,374
798,626
-
$35,000,000
660,193
$34,339,807
$-
$ 28,379,704
798,626
5,821,670
35,000,000
3,891,148
-
$ 31,108,852
1. The discount on original issuance reflects the fair value of the warrants of $798,626 at issuance date
2. Reflects the fair value of the embedded conversion feature of $5,821,670
As indicated above, on the date of the convertible note issuance, allocation of basis in the financing arrangement
to the warrants has resulted in an original issue discount to the face value of the convertible notes in the amount of
$798,626, of which the amount was accreted to its face value over the term of the convertible note using the effective
method. As of December 31, 2008, the interest expense recorded by the Company was $138,433, and the unamortized
discount was $660,193. On January 1, 2009, the Company adopted and applied the provision of ASC 815 Derivatives
and Hedging Activities (effective on January 1, 2009). The accounting for the cumulative effect change in this
accounting principle resulted in a discount of $6,620,296, including $798,626 discount resulting from Warrants and
$5,821,670 from the embedded conversion feature of the original unamortized discount and the subsequent
amortization using the effective interest method. On January 1, 2009, unamortized discount was $3,891,148.
As indicated above, due to the Company’s WAP Default on March 17, 2009, the convertible notes holders had
the option to elect to exercise their rights to require the Company to redeem the convertible notes. The remaining
amount of $3,891,148 unamortized discount on the convertible notes was recorded to its full face value and the
redemption make-whole amount of $520,000 was accrued. On April 8, 2009, the Company and YA Global reached a
settlement agreement, whereby under the terms of the settlement agreement, the Company paid a redemption amount of
$5,000,000 of principal and $41,667 of interest to YA Global, and accrual of $571,181 for make-whole redemption
interest to YA Global was waived and accounted for as a gain on convertible notes conversion. On September 22, 2009,
LBCCA Liquidator revoked the redemption notices that were sent on April 24, 2009, and continued to hold the
76
Company’s convertible notes, of which the face value was $30,000,000. The Company accepted such revocation on
September 23, 2009.
On March 1, 2011, LBCCA Liquidator converted $6,428,571 principal amount of the convertible notes at a
conversion price of $7.0822 per share, and the Company issued 907,708 shares of its common stock to such investor.
On the conversion date, the market price of the common shares issued was $10,111,869 ($11.14 per share) and the
value of the conversion consideration was $11,676,287, including $6,428,571 of principal, $1,506,143 of coupon
interest and make-whole amount payable and $3,741,573 of derivative liabilities under such principal. The amount of
coupon interest, make-whole and derivative liabilities included in the value of the conversion consideration were
determined by pro-rating the accrued coupon interest, accrued make-whole amount and the fair value of the derivative
liabilities based on the principal amount of the convertible notes converted as a percentage of the outstanding balance
prior to their conversion. The Company recorded a gain on convertible notes conversion of $1,564,418, which is the
difference between the market price of the common stock and the conversion consideration.
On December 31, 2011 and 2010, the carrying value of the Company’s convertible notes payable was
$23,571,429 and $30,000,000, respectively. Upon expiration of the mandatory redemption date of the convertible notes
on February 15, 2011, the outstanding convertible notes payable of $23, 571,429 were reclassified as long-term
liabilities.
13. Compound Derivative Liabilities
Effective January 1, 2009, the Company adopted the provisions of ASC 815 Derivatives and Hedging Activities
that address the determination of whether an instrument meets the definition of a derivative being indexed to a
company’s own stock for purposes of applying the scope exception as provided for in accordance with ASC 815-15.
Upon adoption of the standard on the effective date, the embedded conversion option that is embedded in the
Company’s convertible notes Payable (see Note 12) no longer met the definition because it embodied certain
anti-dilution protections that are not based on input to the fair value of a fixed-for-fixed option. As a result, the
embedded conversion feature required bifurcation, classification in liabilities and measurement at fair value at each
reporting period, with changes reflected in earnings, until the convertible notes are settled.
The Company’s derivative financial instruments (liabilities) consisted of a compound embedded derivative that
originated in connection with the Company’s convertible note Payable and Warrant Financing Arrangement. Derivative
liabilities are carried at fair value. The following table summarizes the compound derivative liabilities as of December
31, 2011 and 2010:
Financial Instrument
Derivative liability
Common shares to which the derivative liability is linked
December 31,
2011
2010
$
3,328,264
559,148 $ 25,271,808
4,235,972
Changes in the fair value of derivative liabilities are recorded in gain (loss) on change in fair value of derivative
in the income statement. The following tables summarize the components of gain (loss) on change in fair value of
derivative arising from fair value adjustments during the years ended December 31, 2011, 2010 and 2009:
Balances at January 1
Cumulative effect change in accounting principle
Subtotal
Decrease due to convertible notes conversion on March 1,
2011(see Note 12)
(Decrease) increase in fair value adjustments 1
Balances at December 31
2011
25,271,808 $
$
2010
45,443,506 $
—
25,271,808
—
45,443,506
2009
—
2,367,202
2,367,202
(3,741,573 )
(20,971,087)
$
559,148 $
-
-
(20,171,698)
43,076,304
25,271,808 $45,443,506
1. Recorded as gain on change in fair value of derivative in the statements of income.
77
Estimating fair values of derivative financial instruments requires the development of significant and subjective
estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and
external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading
market price of the Company’s common stock, which has a high estimated volatility. Since derivative financial
instruments are initially and subsequently carried at fair values, the Company’s income will reflect the volatility in
these estimate and assumption changes.
The Company’s embedded conversion option derivative represents the conversion option, term-extending option,
certain redemption and put features in the Company’s convertible notes payable. See Note 12 for additional
information about the Company’s convertible notes payable. The features embedded in the convertible notes were
combined into one compound embedded derivative that the Company measured at fair value using the Monte Carlo
valuation technique. Monte Carlo was believed by the Company’s management to be the best available technique for
this compound derivative because, in addition to providing for inputs such as trading market values, volatilities and risk
free rates, Monte Carlo also embodies assumptions that provide for credit risk, interest risk and redemption
behaviors(i.e., assumptions market participants exchanging debt-type instruments would also consider). Monte Carlo
simulates multiple outcomes over the period to maturity using multiple assumption inputs also over the period to
maturity. The following table sets forth (i) the range of inputs for each significant assumption and (ii) the equivalent, or
averages, of each significant assumption as of December 31, 2011, 2010, and 2009, and January 1, 2009 (effective date
of accounting principle change):
December 31, 2011 Assumptions:
Volatility
Market adjusted interest rates
Credit risk adjusted rates
Implied expected life (years)
December 31, 2010 Assumptions:
Volatility
Market adjusted interest rates
Credit risk adjusted rates
Implied expected life (years)
December 31, 2009 Assumptions:
Volatility
Market adjusted interest rates
Credit risk adjusted rates
Implied expected life (years)
January 1, 2009 Assumptions:
Volatility
Market adjusted interest rates
Credit risk adjusted rates
Implied expected life (years)
Range
Low
High
Equivalent
69.66%
21.87%
17.17%
-
60.40%
18.52%
17.17%
1.13
51.63%
15.38%
17.17%
-
Range
Low
High
Equivalent
76.00%
20.15%
15.82%
—
63.00%
9.64%
15.11%
1.73
43.14%
5.14%
14.75%
—
Range
Low
High
Equivalent
68.86%
6.40%
13.39%
—
Range
81.94%
7.87%
14.20%
—
76.71%
7.05%
13.63%
1.96
Low
High
Equivalent
63.09%
4.14%
21.58%
—
91.15%
17.01%
24.97%
—
74.02%
7.15%
23.20%
4.27
The Monte Carlo technique requires the use of inputs that range across all levels in the fair value hierarchy. As a
result, the technique is a Level 3 valuation technique in its entirety. The calculations of fair value utilized the
Company’s trading market values on the calculation dates. The contractual conversion prices were adjusted to give
effect to the value associated with the down-round, anti-dilution protection. Expected volatility for each interval in the
Monte Carlo process was established based upon the Company’s historical volatility for historical periods consistent
78
with the term of each interval in the calculation. Market adjusted interest rates give effect to expected trends or changes
in market interest rates by reference to historical trends in LIBOR. Credit risk adjusted rates, or yields were developed
using bond curves, risk free rates, market and industry adjustment factors for companies with similar credit standings as
the Company’s.
Upon expiration of the mandatory redemption date of the convertible notes on February 15, 2011, the compound
derivative liabilities of $559,148 were reclassified as long-term liabilities.
14. Accrued Expenses and Other Payables
The Company’s accrued expenses and other payables at December 31, 2011 and 2010 are summarized as
follows:
Accrued expenses
Accrued interest (1)
Other payables
Warranty reserves
Dividend payable to non-controlling interest shareholders of joint-ventures
Balance at end of year
December 31,
2011
2010
$ 2,802,145 $ 3,627,768
7,143,751
625,447
1,573,318
2,826,354
16,808,787 13,944,392
1,530,445
$ 22,617,667 $ 29,072,710
807,970
(1) As of December 31, 2011, accrued interest of $625,447 represented coupon interest on convertible notes to be paid
every six months, whereas, as of December 31, 2010, accrued interest of $ 7,143,751 included coupon interest and
make-whole redemption interest of $512, 500 and $ 6,631,251, respectively. Upon expiration of the mandatory
redemption period of the convertible notes on February 15, 2011, the entire make-whole redemption interest was
reclassified as long-term liabilities (see Note 12 and 15).
15. Accrued Maturity and Make-whole Redemption Interest Expense for Convertible Notes
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. Pursuant to the terms of the convertible
notes, on each of February 15, 2010 and February 15, 2011, the convertible note holders had 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 the convertible note subject to redemption pursuant to this annual
redemption right would have been 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” means a premium to the conversion amount such that the total amount received by the convertible notes
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 the actual number of days elapsed over a 360-day year. On February 15, 2011,
the remaining convertible notes holder did not exercise its annual redemption right. Therefore, the next scheduled
redemption date is the maturity date of February 15, 2013 and the make-whole provision accrued after February 15,
2011 was based on the “Maturity Make Whole Amount.” “Maturity Make Whole Amount” means a premium to the
Conversion Amount such that the total amount received by the Holder at Maturity represents a gross yield to the Holder
on the Original Principal Amount as of the Maturity Date equal to thirteen percent (13%), with interest computed on
the basis of the actual number of days elapsed over a 360-day year. The make-whole redemption interest was recorded
under accrued interest before February 15, 2011 due to its current liabilities feature and thereafter reclassified to and
recorded as non-current liability.
For the years ended December 31, 2011, 2010, and 2009, the accrued provision on maturity and make-whole
redemption interest pursuant to the term of convertible notes were as follows:
79
Balance at beginning of year
Amounts provided for during the year
Amount waived during the year
Decrease due to convertible notes conversion
Balance at end of year
16. Warrants
2011
Year Ended December 31
2010
$ 6,631,251 $ 4,763,771 $ 2,038,729
3,296,223
(571,181)
—
$ 7,615,709 $ 6,631,251 $ 4,763,771
2,486,583 1,867,480
—
—
—
(1,502,125)
2009
In connection with the convertible notes, the Company issued 1,317,864 detachable 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.
In accordance with ASC Topic 480, it appears that the warrants require liability classification due to the possible
cash redemption upon the event of an all cash acquisition. This guidance 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 were adjusted to their estimated fair values at the completion of each reporting period until the
maturity of February 15, 2009.
As of August 15, 2008, the Company valued the warrant using the conversion price at inception and reset the
price respectively. The fair value of the warrant was $489,718 at the inception conversion price of $8.8527, and
$551,131 at the reset conversion price of $8.55, respectively.
On February 15, 2009, the warrants expired unexercised and the warrants were forfeited. Accordingly, the value
of the warrants has been recorded in the income statement as gain or loss on change in fair value of derivative (see Note
24).
As of the Issuance Date (February 15, 2008), the Reset date (August 15, 2008) and the end of each reporting
period, the fair value of liabilities in connection with warrants was calculated using the Black-Scholes option pricing
model and based on the following assumptions:
Warrants indexed to common stock
Trading market price
Exercise price
Exercise price adjustment
Effective strike price for Black-Scholes
model
Term:
Estimated Term (Year)
Volatility Historical volatility for
effective term
Risk-free rate
Dividend yield rates
Fair value of warrants
February
15, 2008
Issuance
date
1,317,864
6.09
$
8.8527
$
-
August 15,
2008
Prior to
reset
1,317,864
6.03
$
8.8527
$
-
August 15,
February
December
15, 2009
31, 2008
2008
Maturity
Year end
Subsequent to
date
date
reset
1,317,864
1,317,864
1,317,864
3.30
$
3.39
$
6.03
8.8527
8.8527
8.8527
$
$
(0.3027)
(0.3027) $
(0.3027) $
$
$
$
$
8.8527
$
8.8527
$
8.5500
$
8.5500
$
8.5500
1.00
0.50
0.50
0.13
54.60%
2.02%
0.00%
$
798,626
64.00%
1.99%
0.00%
$
489,718
$
64.00%
1.99%
0.00%
$
551,131
92.36%
0.11%
0.00%
$
1,977
—
—
—
—
—
80
17. Taxes Payable
The Company’s taxes payable at December 31, 2011 and 2010 are summarized as follows:
Value-added tax payable
Income tax payable
Other tax payable
Balance at end of year
18. Amounts Due to Shareholders/Directors
December 31,
2011
2010
$ 1,513,808 $ 3,203,808
3,273,776
383,362
$ 2,029,215 $ 6,860,946
423,586
91,821
The activity in the amounts due to shareholders/directors during the years ended December 31, 2011 and 2010 is
summarized as follows:
Balance at beginning of the year
Increase (decrease) during the year
Foreign currency translation
Balance at end of year
$
$
December 31,
2010
2011
353,817 $
(28,194)
26,194
351,817 $
— $
344,695
9,122
353,817 $
2009
337,370
(337,915)
545
—
The amounts due to shareholders/directors were unsecured, interest-free and repayable on demand mainly
resulting from expenses paid on behalf of the Company by shareholders/directors.
19. Advances Payable
On December 31, 2011 and 2010, advances payable of the Company was $983,986 and $603,983, respectively.
The amounts mainly represent advances made by the Chinese government to the Company as subsidy on interest
on loans related to improvement of the production techniques and the quality of products.
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 Note 22).
20. Stock Options
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 term 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 478,850 stock options under this plan, and there remain 1,721,150 stock options issuable
in the future as of December 31, 2011.
Under the aforementioned plans, the stock options granted will 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 became exercisable on a
ratable basis over the vesting period (3 years), 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, 2011, the Company has
sufficient unissued registered common stock for settlement of the stock incentive plan mentioned above.
81
The fair value of stock options 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 instruments. The dividend yield assumption is based on
historical patterns and future expectations for the Company dividends.
Assumptions used to estimate the fair value of stock options on the grant dates are as follows:
Issuance Date
Expected volatility
Risk-free rate
Expected term (years) Dividend yield
October 12, 2011
July 8, 2010
September 10, 2009
157.0%
151.6%
153.6%
0.96%
1.79%
2.38%
5
5
5
0.00%
0.00%
0.00%
The stock options granted during 2011, 2010 and 2009 were exercisable immediately and their fair value on the
grant date using the Black-Scholes option pricing model was $100,575, $345,375 and $196,650, respectively. For the
years ended December 31, 2011, 2010 and 2009, the Company recognized stock-based compensation of $100,575,
$595,402 and $446,676, respectively.
The activities of stock options are summarized as follows, including granted, exercised and forfeited.
Outstanding - January 1, 2009
Granted
Exercised
Cancelled
Outstanding - December 31, 2009
Granted
Exercised
Outstanding - December 31, 2010
Granted
Exercised
Cancelled
Outstanding - December 31, 2011
Weighted-Average Contractual
Term (years)
Shares Exercise Price
Weighted-Average
388,850 $
22,500
(63,000)
(4,500)
343,850 $
22,500
(129,582)
236,768 $
22,500
(176,768)
(15,000)
67,500 $
3.84
8.45
6.67
2.93
3.63
16.80
3.48
4.97
4.84
2.93
7.48
9.72
3.4
5
4.7
3
3.3
5
3.2
3.5
5
3
4.5
5
The following is a summary of the range of exercise prices for stock options that are outstanding and exercisable
at December 31, 2011:
Range of Exercise Prices
$4.50 - $10.00
$10.01 - $18.00
Options
Outstanding Stock Weighted Average Weighted Average Number of Stock
Remaining Life Exercise Price
3.54 $
3.52 $
6.18
16.80
Options Exercisable
45,000
22,500
67,500
45,000
22,500
67,500
As of December 31, 2011, 2010, and 2009, the total intrinsic value of the Company’s stock options that were
outstanding was $0, $2,119,510, and $5,171,504, respectively.
82
As of December 31, 2011, 2010, and 2009, the total intrinsic value of Company’s stock options that were
exercisable was $0, $2,119,510, and $3,611,947, respectively.
As of December 31, 2011, 2010, and 2009, the total intrinsic value of Company’s stock options that were
exercised was $193,858, $749,400, and $637,725, respectively.
As of December 31, 2011, 2010, and 2009, the weighted average fair value of the Company’s stock options that
were granted was $4.47, $15.35, and $8.74, respectively.
21. Retained Earnings
Appropriated
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,
other than the financial statement that was prepared in accordance with generally accepted accounting principles in the
United States of America, 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%.
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, Shenyang, Zhejiang, USAI, Jielong, Wuhu,
and Hengsheng are $10,000,000, $4,283,170 (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 $16,000,000, respectively.
The Company recorded $258,443, $443,264 and $798,756 statutory surplus reserve for the years ended 2011,
2010 and 2009, respectively.
22. Other Income, Net
The Company recorded government subsidies as other income. As of December 31, 2011, 2010, and 2009, the
Company has received such subsidies in the amounts of $168,749, $558,058, and $94,534, respectively.
The Company’s government subsidies consisted of interest subsidy and investment subsidy. Interest subsidy is
the refund by the Chinese government of special loan interest charged by banks to companies which are entitled to such
subsidies, such as the company improving its production capacity and product quality under the support of such loan.
Investment subsidy is a subsidy to encourage foreign investors to set up technologically advanced enterprises in China.
For the year ended December 31, 2011, 2010, and 2009, the Company received interest subsidies in the amounts
of $168,749, $311,291, and $94,534, respectively, and investment subsidies of $0, $231,951, and $0, respectively.
Interest subsidies apply to loan interest related to optimized production technology. During 2008, 2009, 2010 and
2011, the Company had used this special loan to improve its different products’ production line technologically in order
to enlarge the production capability and enhance quality, and the Company has received government subsidies in these
years. Some of these improvement projects were completed in 2009, 2010 and 2011, the remaining are still in progress.
Improved production technologies were already produced benefits. Therefore, the Company recorded received
government subsidies related to completed improvement program as other income, and received government subsidies
related to uncompleted improvement program as advances payable.
Chinese government also provided incentives to foreign investors for setting up technologically advanced
enterprises in China. During 2010, the Company recognized $231,951 of investment subsidiary. Genesis, as a foreign
investor, has received such subsidies for re-investment in Jiulong and Henglong with their profit distribution, and both
entities were technologically advanced enterprises and entitled to such subsidies.
83
23. Financial (Income) Expenses
During the years ended December 31, 2011, 2010, and 2009, the Company recorded financial (income) expenses
which were summarized as follows:
Year Ended December 31
2010
2011
2009
Accrual on maturity and make-whole redemption interest and coupon
interest
Interest expense
Interest income
Foreign exchange (gain) loss, net
(Income) loss of note discount, net
Amortization for discount of convertible notes payable (1)
Bank fees
Total
$ 3,610,244
$ 3,048,730
$ 3,796,359
349,243
(726,926)
567,238
9,482
—
174,556
470,102
(455,035)
(10,296)
82,757
3,891,148
108,679
$ 3,983,817 $ 3,360,837 $ 7,883,714
459,474
(587,640)
348,823
(70,308)
—
161,758
(1) On March 17, 2009, due to the Company’s WAP Default, the remaining balance of $3,891,148 on the
unamortized discount on the convertible notes was accreted to its full face value (see Note 12).
24. Gain (Loss) on Change in Fair Value of Derivative
As of December 31, 2011, 2010, and 2009, following is the summary of Company’s recorded gain (loss) on
change in fair value of derivatives:
Year Ended December 31
2010
2009
2011
Income from changes in the fair value of warrant liabilities
Income (loss) from changes in the fair value of compound derivative
liabilities
Total
$
— $
— $
1,977
20,971,087 20,171,698 (43,076,304)
$ 20,971,087 $ 20,171,698 $(43,074,327)
Gain on the change of the fair value of warrant liability and compound derivative liabilities mentioned above, see
Notes 14 and 16.
25. 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. If the enterprise meets certain
preferential terms according to the China income tax law, such as assessment as an “Advanced Technology Enterprise”
by the government, then, the enterprise will be subject to enterprise income tax at a rate of 15% or 12.5%.
PRC withholding tax on undistributed dividends
Pursuant to the New China Income Tax Law and the Implementing Rules (New CIT) which are effective as of
January 1, 2008, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise to its foreign
investors will be subject to a 10% withholding tax if the foreign investors are considered as non-resident enterprises
without any establishment or place within China or if the dividends payable have no connection with the establishment
or place of the foreign investors within China, unless any such foreign investor’s jurisdiction of incorporation has a tax
treaty with China that provides for a different withholding arrangement.
84
Genesis, the Company’s wholly owned subsidiary and the direct holder of the equity interests in the Company’s
Joint Venture subsidiaries in China, is incorporated in Hong Kong. According to the Mainland and Hong Kong
Taxation Arrangement, dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong
Kong will be subject to withholding tax at a rate of no more than 5% (if the foreign investor owns directly at least 25%
of the shares of the foreign-invested enterprise). Under the New CIT Law and the Implementing Rules, if Genesis is
regarded as a non-resident enterprise and therefore is required to pay a 5% withholding tax for any dividends payable to
it from Joint Venture subsidiaries.
The Company provides for deferred income taxes on the unremitted earnings of foreign subsidiaries unless such
earnings are deemed to be permanently reinvested outside the United States. During the years ended December 31,
2011, 2010, and 2009, the Company has a gross U.S. deferred income taxes of $0.1 million, $0.2 million, and $0.2
million, respectively, on foreign earnings of $2.0 million, $4.0 million, and $3.7 million, respectively, that it consider
not permanently reinvested outside the United States, respectively.
As of December 31, 2011, the Company still has undistributed earnings of approximately $99 million from
investment in foreign subsidiaries that are considered permanently reinvested. The determination of the amount of
deferred taxes on these earnings is not practicable since the computation would depend on a number of factors that
cannot be known until a decision to repatriate the earnings is made.
During 2008, Jiulong was awarded the title of “Advanced Technology Enterprise”, based on the PRC income tax
law; it was subject to enterprise income tax at a rate of 15% for 2008, 2009 and 2010. In 2011, the Company has passed
re-assessment by the government, based on PRC income tax laws. Accordingly, it continues to be taxed at the 15% tax
rate in 2011, 2012, and 2013.
During 2008, Henglong was awarded the title of “Advanced Technology Enterprise”, based on the PRC income
tax law, it was subject to enterprise income tax at a rate of 15% for 2008, 2009 and 2010. In 2011, the Company has
passed re-assessment by the government, based on PRC income tax laws. Accordingly, it continues to be taxed at the
15% tax rate in 2011, 2012, and 2013.
During 2009, Shenyang was awarded the title of “Advanced Technology Enterprise”, based on the PRC income
tax law, and it was subject to enterprise income tax at a rate of 15% for 2009, 2010 and 2011. The government needs to
re-assess whether Shenyang is entitled to “Advanced Technology Enterprise” status in 2012, and if approved, its term
will be extended for another three years. If Shenyang fails to pass the re-assessment by the government, it would be
subject to a tax rate of 25%.
During 2009, Zhejiang was awarded the title of “Advanced Technology Enterprise”, based on the PRC income
tax law, and it was subject to enterprise income tax at a rate of 15% for 2009, 2010 and 2011. The government needs to
re-assess whether Zhejiang is entitled to “Advanced Technology Enterprise” status in 2012, and if approved, its term
will be extended for another three years. If Shenyang fails to pass the re-assessment by the government, it would be
subject to a tax rate of 25%.
Wuhu, Jielong and Hengsheng had an enterprise income tax exemption in 2008 and 2009, and Wuhu is subject to
income tax at a rate of 11%, 12%, and 12.5%, respectively, for 2010, 2011 and 2012; Jielong is subject to tax at a rate
of 12.5% in 2010 and 2011, and 25% in 2012; and Hengsheng is subject to tax at a rate of 12.5% for the next three year
thereafter, from 2010 to 2012.
There is no assessable profit for USAI and the Testing Center in 2011, 2010, and 2009. Based on PRC income
tax laws, they are exempted from income tax in 2009, subject to income tax at a rate of 12.5% in 2010 and 2011, and
25% in 2012 (if there is a taxable profit).
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 2011, 2010, and 2009. The enterprise income tax of Hong Kong is 16.5%.
No provision for U.S. tax is made as the Company has no assessable income in the United States for the years
ended December 31, 2011, 2010, and 2009. The enterprise income tax rate in the United States is 35%.
85
The provision for income taxes was calculated as follows:
Tax rate
Income (loss) before income taxes
Federal tax (benefit) at statutory rate
Fair value change in convertible bond
Change of income tax rate
Gain on convertible notes conversion
Accumulated discount amortization
Effect of differences in foreign tax rate
Tax benefit from income tax return
Provision on valuation allowance for deferred income tax – U.S.
Provision on valuation allowance for deferred income tax – PRC
Other differences
Total income tax expense
Year Ended December 31
2010
2009
2011
35%
35%
35%
$ 71,416,323 $(13,931,112)
$ 24,990,527 $ (4,875,889)
(7,060,094) 13,866,951
$52,098,933
$18,234,627
(7,339,881)
(929,795)
(547,546)
-
-
-
(6,449,798) (10,901,349)
(180,731)
1,062,704
29,946
543,202
-
2,268,652
(6,711,498)
(1,053,092)
1,185,693
175,853
(136,657)
$ 8,484,205 $ 4,720,013
-
1,923,322
260,132
(797,359)
$ 4,353,702
The combined effects of the income tax exemption and reduction available to the Company are as follows:
Tax holiday effect
Basic net income per share effect
Diluted net income per share effect
2011
Year Ended December 31,
2010
$ 6,449,798 $ 10,901,349 $ 6,711,498
0.25
0.25
0.23
0.20
0.40
0.35
2009
The Company is subject to examination in the United States and China. The Company's tax years for 2001
through 2011 are still open for examination in China. The Company's tax years for 2004 through 2011 are still open for
examination in the United States.
Uncertain Tax Positions
The Company did not have any uncertain tax positions for the years ended December 31, 2011, 2010 and 2009.
26. Income (Loss) Per Share
In periods when the Company generates income, the Company calculates basic earnings per share (“EPS”) using
the two-class method, pursuant to ASC 260, “Earnings Per Share”. The two-class method is required as the Company’s
convertible notes qualify as participating securities, having the right to receive dividends should dividends be declared
on common stock. Under this method, earnings for the period are allocated on a pro-rata basis to the common
stockholders and to the holders of convertible notes based on the weighted average number of common shares
outstanding and the number of shares that could be converted. The Company does not use the two-class method in
periods when it generates a loss as the holders of the convertible notes do not participate in losses.
For diluted earnings per share, the Company uses the more dilutive of the if-converted method or the two-class
method for convertible notes and the treasury stock method for options, assuming the issuance of common shares, if
dilutive, resulting from the exercise of options and warrants.
The calculations of diluted income per share attributable to parent company were:
86
Year Ended December 31
2010
2009
2011
Numerator:
Net income (loss) attributable to parent company
Allocation to convertible notes holders
Net income (loss) attributable to parent company’s common
shareholders – Basic
Dilutive effect of:
Add back allocation to convertible notes holders
Interest expenses of convertible notes payable
Gain on change in fair value of derivative
Gain on convertible notes conversion
Net income (loss) attributable to parent company’s common
shareholders – Diluted
Denominator:
Weighted average ordinary shares outstanding – Basic
Dilutive effects of stock options
Dilutive effect of convertible notes
Denominator for dilutive income/(loss) per share – Diluted
Net income (loss) per share attributable to parent company’s common
shareholders
Basic
Diluted
$ 40,791,987 $ 51,738,113 $(26,440,871)
-
(4,518,838) (6,994,306)
36,273,149 44,743,807 (26,440,871)
4,518,838 6,994,306
3,610,244 3,048,730
(20,971,087) (20,171,698)
-
(1,564,418)
—
—
—
-
$ 21,866,726 $ 34,615,145 $(26,440,871)
101,469
27,930,668 27,098,258 26,990,649
—
—
31,511,685 31,565,422 26,990,649
231,192
3,479,548 4,235,972
1.30
0.69
1.65
1.10
(0.98)
(0.98)
The following table summarizes potential common shares outstanding excluded from the calculation of diluted
income per share for the years ended December 31, 2011, 2010, and 2009 because such inclusion would have an
anti-dilutive effect.
Shares issuable under stock options
Shares issuable upon conversion of convertible notes
Total
67,500
-
67,500
-
-
-
Year Ended December 31
2010
2011
2009
343,850
4,235,972
4,579,822
27. Significant Concentrations
A significant portion of the Company’s business is conducted in China where the currency is the RMB.
Regulations in China permit foreign owned entities to freely convert the RMB into foreign currency for transactions
that fall under the "current account," which includes trade related receipts and payments, interest and dividends.
Accordingly, the Company’s Chinese subsidiaries may use RMB to purchase foreign exchange for settlement of such
"current account" transactions without pre-approval. However, pursuant to applicable regulations, foreign-invested
enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with
Chinese accounting standards and regulations. In calculating accumulated profits, foreign investment enterprises in
China are required to allocate at least 10% of their accumulated profits each year, if any, to fund certain reserve funds,
including mandated employee benefits funds, unless these reserves have reached 50% of the registered capital of the
enterprises.
China Automotive, the parent company, may depend on Genesis and HLUSA dividend payments, which are
generated from their subsidiaries and their subsidiaries’ interests in the Sino-foreign joint ventures in China
(“China-based Subsidiaries”) after they receive payments from the China-based Subsidiaries. Under PRC law
China-based Subsidiaries are required to set aside at least 10% of their respective accumulated profits, up to 50% of
their paid-in capital, to fund certain mandated reserve funds that are not payable or distributable as cash dividends.
87
The PRC government also imposes controls on the convertibility of RMB into foreign currencies and, in certain
cases, the remittance of currencies out of China, the China-based Subsidiaries may experience difficulties in
completing the administrative procedures necessary to obtain and remit foreign currencies. If China Automotive is
unable to receive dividend payments from its subsidiaries and China-based subsidiaries, China Automotive may be
unable to effectively finance its operations or pay dividends on its shares.
Transactions other than those that fall under the "current account" and that involve conversion of RMB into
foreign currency are classified as "capital account" transactions; examples of "capital account" transactions include
repatriations of investment by or loans to foreign owners, or direct equity investments in a foreign entity by a China
domiciled entity. "Capital account" transactions require prior approval from China's State Administration of Foreign
Exchange, or SAFE, or its provincial branch to convert a remittance into a foreign currency, such as U.S. Dollars, and
transmit the foreign currency outside of China.
This system could be changed at any time and any such change may affect the ability of the Company or its
subsidiaries in China to repatriate capital or profits, if any, outside China. Furthermore, SAFE has a significant degree
of administrative discretion in implementing the laws and has used this discretion to limit convertibility of current
account payments out of China. Whether as a result of a deterioration in the Chinese balance of payments, a shift in the
Chinese macroeconomic prospects or any number of other reasons, China could impose additional restrictions on
capital remittances abroad. As a result of these and other restrictions under the laws and regulations of the People's
Republic of China, or the PRC, the Company’s China subsidiaries are restricted in their ability to transfer a portion of
their net assets to the parent. The Company has no assurance that the relevant Chinese governmental authorities in the
future will not limit further or eliminate the ability of the Company’s Chinese subsidiaries to purchase foreign
currencies and transfer such funds to the Company to meet its liquidity or other business needs. Any inability to access
funds in China, if and when needed for use by the Company outside of China, could have a material and adverse effect
on the Company’s liquidity and its business.
The Company grants credit to its customers including to Xiamen Joylon, Shanghai Fenglong and Jiangling Yude
that are related parties of the Company. The Company’s customers are mostly located in the PRC.
In 2011, the Company’s ten largest customers accounted for 72.0% of the Company’s consolidated sales, with 1
customer accounting for more than 10% of consolidated sales (as 11.7% of consolidated sales).
In 2010, the Company’s ten largest customers accounted for 81.2% of the Company’s consolidated sales, with 2
customers each accounting for more than 10% of consolidated sales, i.e., 13.1% and 12.6% of consolidated sales, or an
aggregate of 25.7% of consolidated sales.
In 2009, the Company’s ten largest customers accounted for 80.2% of the Company’s consolidated sales, with
four customers each 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.
At December 31, 2011, 2010 and 2009, approximately 7.1%, 15.1% and 31.9% of accounts receivable were from
trade transactions with the aforementioned customers.
28. 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, 2011, 2010, and 2009, the joint-ventures
entered into related party transactions with companies with common directors as shown below:
88
Merchandise Sold to Related Parties
Xiamen Joylon
Shanghai Fenglong
Hubei Wiselink
Jiangling Yude
Total
Materials Purchased from Related Parties
Honghu Changrun
Shanghai Fenglong
Jiangling Tongchuang
Jingzhou Tongyi
Jingzhou Tongying
Hubei Wiselink
Wuhan Tongkai
Total
2009
2011
Year Ended December 31
2010
$ 16,981,268 $ 9,871,977 $ 4,850,977
400,001
-
641,186
$ 19,931,431 $ 11,660,502 $ 5,892,164
526,182
518,834
-
1,413,119
1,018,210 1,262,343
Year Ended December 31
2010
2009
2011
$ 1,104,102 $
—
81,266 $
—
8,912,337 9,187,392
785,649
9,152,847 9,198,373
—
—
—
17,273
7,078,698
489,116
6,216,739
196,876
—
$ 20,778,863 $ 19,252,680 $ 13,998,702
958,513
650,947
117
Technology Purchased from Related Parties
Changchun Hualong
$
Year Ended December 31
2010
178,972 $
2011
218,108 $
2009
248,916
Equipment Purchased from Related Parties
Hubei Wiselink
Year Ended December 31
2010
$ 4,724,043 $ 1,873,898 $ 3,962,690
2011
2009
Related receivables, advance payments and account payable: As at December 31, 2011 and 2010, accounts
receivables, advance payments and account payable between the Company and related parties are as shown below:
Accounts receivables from Related Parties
Xiamen Joylon
Shanghai Fenglong
Jiangling Yude
Total
Other Receivables from Related Parties
WuHan Dida
Jiulong Material
Jiangling Yude
Jingzhou Tongying
Total
89
December 31,
2011
2010
$ 5,999,246 $ 5,046,397
212,658
207,787
$ 6,126,148 $ 5,466,842
104,442
22,460
December 31,
2011
2010
$
63,608 $
638,272
436,044
-
1,137,924
59,846
564,074
136,393
154,225
914,538
Less: provisions for bad debts
Balance at end of year
(638,272)
499,652 $
(564,074)
350,464
$
Other receivables from related parties are primarily unsecured demand loans, with no stated interest rate or due
date.
Accounts payable to Related Parties
Shanghai Tianxiang
Jiangling Tongchuang
Hubei Wiselink
Jingzhou Tongyi
Jingzhou Tongying
Honghu Changrun
Total
Advanced equipment payments to Related Parties
Hubei Wiselink
Advance payments to related parties and others
Jiangling Tongchuang
Jingzhou Tongyi
Jingzhou Tongying
Honghu Changrun
Total
$
December 31,
2011
661,316 $
258,979
694,791
7,021
361,812
68,978
2010
629,183
263,246
509,898
51,561
414,038
$ 2,052,897 $ 1,867,926
December 31,
2011
2010
$ 3,712,121 $ 7,534,440
$
December 31,
2011
508,548 $
1,817
71,907
47,469
2010
405,266
875,619
-
53,184
$
629,741 $ 1,334,069
The Company’s related parties, such as Jingzhou Derun, and Wuhan Dida, pledged certain land use rights and
buildings as security for the Company’s comprehensive credit facility.
As of March 9, 2012, the date the Company issued the financial statements, Hanlin Chen, Chairman, owns 63.16%
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.
29. Commitments and Contingencies
Legal Proceedings – On October 25, 2011, a purported security class action was filed in the United States
District Court for the Southern District of New York on behalf of all purchasers of the Company’s securities between
March 25, 2010 and March 17, 2011. On February 24, 2012, the plaintiffs filed an amended complaint, changing the
purported class period from May 12, 2010 through March 17, 2011. The amended complaint alleges that the Company,
certain of its present officers and directors and the Company’s former auditor violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, and the rules promulgated thereunder, and seeks unspecified damages. The Company
has not yet responded to the amended complaint, but believes the allegations in the complaint are without merit. The
Company intends to defend itself vigorously against the claims.
On December 23, 2011, a purported shareholder derivative action was filed in the Court of Chancery of the State
of Delaware (the “Court of Chancery”) on behalf of the Company. The complaint alleges that certain of the Company’s
current officers and directors breached their fiduciary duties to the Company in relation to the Company’s accounting
90
of convertible notes issued in February, 2008. On January 25, 2012, a second purported shareholder derivative action
was filed in the Court of Chancery on behalf of the Company. On February 3, 2012 the Court of Chancery consolidated
the two cases. The shareholder suits have been stayed pending the outcome of any motion to dismiss in the securities
class action. The Company believes the allegations in the shareholder suits are without merit, and intends to defend
itself vigorously against the claims.
The Company has not yet been required to respond formally to these lawsuits. In addition, the complaints do not
specify an amount of damages that plaintiffs seek. Because these matters are in very early stages, the Company cannot
determine whether or not an adverse outcome is probable, nor can it provide a reasonable estimate of potential losses
related to these matters. While the Company believes that it has meritorious defenses to each of these actions and
intends to defend them vigorously, an adverse outcome in one or more of these matters could have a material adverse
effect on the Company’s business, financial condition, results of operations or liquidity.
Other than the above, the Company is not a party to any pending or to the best of the Company’s knowledge, any
threatened legal proceedings. In addition, no director, officer or affiliate of the Company, or owner of record of more
than five percent 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.
In addition to the convertible notes, bank loans, notes payables and the related interest, the following table
summarizes the Company’s major commitments and contingencies as of December 31, 2011:
Obligations for service
agreements
Obligations for
purchasing agreements
Interest and make-whole
on convertible notes
Total
2012
2013
2014
2015
Thereafter
Total
Payment Obligations by Period
$ —
$ 206,320
$ —
$ —
$ —
$ 206,320
7,159,582
4,671,421
1,075,022
3,794,172
—
—
—
—
—
—
11,831,003
4,869,194
$ 8,234,604 $ 8,671,913 $
— $
— $
— $ 16,906,517
30. Off-Balance Sheet Arrangements
At December 31, 2011 and 2010, the Company did not have any transactions, obligations or relationships that
could be considered off-balance sheet arrangements.
31. Subsequent Events
On December 1, 2011, Hengsheng entered into a Sino-foreign equity joint venture contract with SAIC-IVECO
Hongyan Company to establish a Sino-foreign joint venture company, Chongqing Henglong Hongyan Power Steering
Systems Co. Ltd. ("Chongqing Henglong") to design, develop and manufacture both hydraulic and electric power
steering systems and parts. The new joint venture will be located in Chongqing City and have a registered capital
of RMB60 million (of which RMB 42 million, or 70%, will be invested by Hengsheng). Under PRC law, the
establishment of Chongqing Henglong and the effectiveness of the equity joint venture contract are subject to approval
by the local Ministry of Commerce and the registration of the same with the local Administration of Industries and
Commerce in Chongqing. As of the date of this report, such approval has not been obtained.
On January 19, 2012, the Company completed its reorganization as discussed in Note 1.
32. 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
91
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, 2011, 2010, and 2009 the Company had ten product sectors, six 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), power
steering (Wuhu), and power steering (Hengsheng). The other four sectors which were established in 2005, 2006 and
2007, respectively, engaged in the production and sales of sensor modular (USAI), EPS (Jielong), provider of after
sales and R&D services (HLUSA), and the holding company (Genesis). 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.”
Hengsheng was previously included in “Other Sectors.” The Company is now reporting Hengsheng as a separate
sector, as it has recently become a principal profit maker. It is mainly engaged in manufacturing automobile power
steering products for export to the U.S. market As such, a reclassification has been made to all periods presented in the
summary above to conform to the current period presentation. Such reclassifications have no effect on previously
reported results of operations.
The Company’s product sectors information is as follows:
Net Sales
Year Ended December 31
2010
2009
2011
Net Income (Loss)
Year Ended December 31
2010
2009
2011
Henglong
Jiulong
Shenyang
Zhejiang
Wuhu
Hengsheng
Other Sectors
Eliminations
Total Segments
Corporate
Total consolidated
Henglong
Jiulong
Shenyang
Zhejiang
Wuhu
Hengsheng
Other Sectors
Corporate
Eliminations
Total consolidated
$196,296,846 $197,226,807 $153,459,876 $ 25,570,825 $ 30,563,088 $ 25,922,760
3,463,037
69,517,738 92,095,265 61,613,116 2,043,199 4,951,566
2,874,063
30,290,139 39,691,553 32,492,844 1,546,618 4,212,843
2,998,220
20,269,837 26,193,095 24,193,366 2,042,529 5,186,404
47,270
812,360
35,271,488 33,057,878 26,496,148
498,519
2,790,924
22,313,422 13,092,659 10,209,668 1,647,201
810,462
(1,487,820)
596,865 (2,101,341) 1,190,795
43,357,605 32,707,067
(69,342,321) (88,139,142) (53,464,330) (5,622,638) 1,000,819
(2,105,565)
347,974,754 345,925,182 255,597,553 25,624,912 48,728,337 34,502,889
— 22,278,569 14,188,965 (53,154,014)
$347,974,754 345,925,182 255,597,553 $ 47,903,481 $ 62,917,302 $(18,651,125)
—
—
Inventories
As of December 31
2010
2011
2009
2011
Total Assets
As of December 31
2010
2009
$ 14,277,098 $ 11,430,420 $ 13,686,928 $ 215,885,003 $ 188,019,911 $ 156,393,126
59,675,929
12,472,364 7,200,613 8,628,835
72,344,671
32,163,383
3,386,388 4,016,731 2,871,316
35,862,778
25,955,363
6,397,899 5,415,478 3,260,930
31,072,820
18,182,769
3,952,149 3,093,618 2,146,381
26,806,437
18,290,063
9,679,179 4,737,048 1,039,125
40,660,687
5,471,567 4,805,865
9,302,994
831,232
40,937,542
130,232,180 120,621,288
—
— 189,518,582
(137,285,705) (126,202,343)
(4,029,451) (3,829,501) (5,049,050) (186,641,400)
$ 51,607,193 36,870,272 27,415,697 $ 466,447,120 $ 405,527,665 $ 314,382,572
71,193,527
36,496,737
30,208,969
26,702,478
29,190,456
30,769,112
—
92
Depreciation and Amortization
Year Ended December 31
2010
2011
2009
Capital Expenditures
Year Ended December 31
2010
2009
2011
Henglong
Jiulong
Shenyang
Zhejiang
Wuhu
Hengsheng
Other Sectors
Eliminations
Total Segments
Corporate
Total consolidated
573,991
523,160
2,069,851
$ 6,242,593 $ 3,302,493 $ 3,777,978 $ 8,458,999 $ 3,012,270 $ 5,378,814
1,671,141
4,874,238 2,219,799
218,297
521,475
2,486,501
1,461,982 1,031,155
150,212
359,472
3,527,192
944,802
4,390,814
875,315 1,099,082
-
-
(3,140,469)
8,613,332 15,180,827 31,285,344 17,822,971
13,480,661 9,478,278
—
19,340
$ 13,501,091 $ 9,497,618 $ 8,684,169 $ 15,180,827 $ 31,285,344 $ 17,822,971
6,970,742 9,736,642
1,868,528 1,223,395
948,602 1,287,999
1,118,148 1,586,144
599,309 6,763,8671(1)
1,012,542 7,675,027
-
(5,796,043)
2,068,581
543,930
895,241
352,770
718,113
256,719
-
20,430
70,837
—
—
(1) Included in the balance, $3,095,414 was invested in Beijing Henglong by Hengsheng in 2010.
Financial information segregated by geographic region is as follows:
Net Sales
Year Ended December 31
2010
2009
2011
Long-term assets
As of December 31
2010
2011
Geographic region:
United States
China
Total consolidated
$ 22,313,426 $ 13,113,735 $
18,787
325,661,328 332,811,447 249,391,737 96,701,841 91,361,596
$ 347,974,754 $345,925,182 $255,597,553 $ 96,726,611(1) $ 91,380,383(1)
6,205,816 $
24,770 $
(1) Pursuant to ASC 280-10-50-41, the non-current deferred tax assets of $4,340,974 and $3,271,594 were excluding
from the long-term assets as of December 31, 2011 and 2010, respectively.
China Automotive Systems, Inc. (Unconsolidated – based on the parent company)
Balance Sheets of Registrant
December 31, 2011 and 2010
SCHEDULE I
ASSETS
Current assets:
Cash and cash equivalents
Total current assets
Non-current assets:
Other receivables — 3rd parties
Other receivables — intercompany
Long-term investments
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Convertible notes payable (Note 2)
Compound derivative liabilities (Note 2)
93
December 31,
2011
2010
$
129,810 $
129,810
451,391
451,391
126,551
89,361
51,714,827 54,566,152
153,834,192 120,262,911
$205,805,380 $175,369,815
$
- $ 30,000,000
- 25,271,808
Accrued expenses and other payables (Note 3)
Total current liabilities
Long-term liabilities:
Convertible notes payable (Note 2)
Compound derivative liabilities (Note 2)
Accrued make-whole redemption interest expense of convertible notes (Note 2)
Total liabilities
Commitments and Contingencies
Stockholders' equity :
Common stock-$0.0001 par value - Authorized-80,000,000 shares Issued and
Outstanding – 28,260,302 shares and 27,175,826 at December 31, 2011 and 2010,
respectively
Additional paid-in capital
Retained earnings-
Appropriated
Unappropriated
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these financial statements
929,983
7,824,989
929,983 63,096,797
-
23,571,429
-
559,148
-
7,615,709
32,676,269 63,096,797
2,717
39,295,419 28,565,153
2,826
9,026,240
8,767,797
99,513,395 58,979,851
25,291,231 15,957,500
173,129,111 112,273,018
$205,805,380 $175,369,815
China Automotive Systems, Inc.
(Unconsolidated – based on the parent company)
Statements of Income (Loss) of Registrant
Year Ended December 31, 2011, 2010 and 2009
Year Ended December 31
2010
2009
2011
Operating expenses:
General and administrative expenses (Note 4)
Total Operating expenses
Operating loss
Financial expenses (Note 5)
Gain (loss) on change in fair value of derivative (Note 5)
Gain on convertible notes conversion
Income (loss) before income taxes and equity in earnings of affiliated
companies
Equity in earnings of affiliated companies
Income (loss) before income taxes
Income tax
Net income (loss)
Allocation to convertible notes holders
Net income (loss) attributable to common shareholders
$ 2,370,880 $ 1,939,772 $ 1,452,118
1,452,118
(1,452,118)
(7,687,507)
20,971,087 20,171,698 (43,074,327)
2,370,880 1,939,772
(2,370,880) (1,939,772)
(3,610,189) (3,048,515)
1,564,418
16,554,436 15,183,411 (52,213,952)
24,237,551 36,554,702 25,773,081
40,791,987 51,738,113 (26,440,871)
-
40,791,987 51,738,113 (26,440,871)
-
$ 36,273,149 $ 44,743,807 $(26,440,871)
(4,518,838) (6,994,306)
-
-
The accompanying notes are an integral part of these financial statements
94
China Automotive Systems, Inc.
(Unconsolidated – based on the parent Company)
Statements of Cash Flows of Registrant
Year Ended December 31, 2011, 2010 and 2009
Year Ended December 31
2010
2011
2009
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Stock-based compensation
Amortization for discount of convertible notes payable
(Gain) loss on change in fair value of derivative
(Gain) on convertible notes conversion
Equity in earnings of affiliated companies
Changes in operating assets and liabilities:
Increases in accrued expenses and other payables
Write-down of accrued interest upon conversion of convertible notes
Net cash used in operating activities
Cash flows from investing activities:
Decrease in other receivables
Net cash provided by investing activities
Cash flows from financing activities:
Exercise of stock option
Redemption of convertible notes
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and equivalents at beginning of year
Cash and equivalents at end of year
$ 40,791,987 $ 51,738,113 $(26,440,871)
595,402
—
100,575
—
446,676
3,891,148
(20,971,087) (20,171,698) 43,074,327
-
(24,237,551) (36,554,702) (25,773,081)
(1,564,418)
-
720,704 1,730,780
—
1,506,143
(3,653,647) (2,662,105)
3,462,462
—
(1,339,339)
2,814,135 2,402,213
2,814,135 2,402,213
6,050,445
6,050,445
517,931
—
517,931
454,700
—
454,700
420,240
(5,000,000)
(4,579,760)
(321,581)
451,391
129,810 $
194,808
256,583
451,391 $
131,346
125,237
256,583
$
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest
Year Ended December 31
2010
$ 1,006,696 $ 1,656,034 $ 1,137,500
2009
2011
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Year Ended December 31
2010
2011
2009
Issuance of common shares for the conversion of convertible notes
$ 10,111,869 $
- $
-
The accompanying notes are an integral part of these financial statements.
95
China Automotive Systems, Inc.
Notes to Condensed Financial Statements
NOTE 1 — Basis of Presentation
China Automotive Systems, Inc., a Delaware corporation, is the direct or indirect parent company of all of China
Automotive Systems, Inc.’s subsidiaries and joint ventures. The accompanying condensed financial statements reflect
the financial position, results of operations and cash flows of China Automotive Systems, Inc. on a separate, parent
company basis. All subsidiaries and joint ventures of China Automotive Systems, Inc. and its subsidiaries are reflected
as investments accounted for using the equity method. For accounting policies and other information, see the Notes to
Consolidated Financial Statements included elsewhere herein.
NOTE 2 — Convertible Notes Payable and Compound Derivative Liabilities
Convertible notes payable and compound derivative liabilities arose from the issuance of convertible notes in
February 15, 2008. For detail information, see Notes 13 and 14 to the Consolidated Financial Statements included
elsewhere herein.
NOTE 3 — Accrued Expenses and Other Payables
Accrued expenses and other payables at December 31, 2011 and 2010 are summarized as follows:
Accrued interest (1)
Other payables
Balance at end of year
December 31,
2010
2011
625,447 $ 7,143,751
304,536
681,238
929,983 $ 7,824,989
$
$
(1) As of December 31, 2011, accrued interest of $625,447 represented coupon interests on convertible notes to be
paid every six months whereas, as of December 31, 2010, accrued interest of $ 7,143,751 included coupon interest
and make-whole redemption interest of $512,500 and $ 6,631,251, respectively. Upon expiration of the mandatory
redemption period of the convertible notes on February 15, 2011, the entire make-whole redemption interest was
reclassified as long-term liabilities; see Notes 12 and 15 to the Consolidated Financial Statements included
elsewhere herein.
NOTE 4 — General and Administrative Expenses
General and administrative expenses mainly consisted of the costs associated with legal, accounting and auditing
fees for operating a public company. The expenses also included share-based compensation expense for options granted
to the audit committee.
NOTE 5 — Financial Income (Expenses) and Gain (Loss) on Change in Fair Value of Derivative
Financial expenses and gain (loss) on change in fair value of derivative resulted from the issuance of the
convertible notes in February 15, 2008. For detail information, see Notes 24 and 25 to the Consolidated Financial
Statements included elsewhere herein.
96
Investor Information
Annual Meeting
The Annual Meeting of China Automotive Systems
stockholders will be held on August 15, 2012
(Wednesday) at 10:00 am local time at the Grand
Metropark Resort Sanya, Sanya, Hainan Province,
China
Independent Public Accountant
PricewaterhouseCoopers Zhong Tian CPAs Ltd., Co.
11/F PricewaterhouseCoopers Center
2 Corporate Ave., 202 Hu Bin Road
Luwan District, Shanghai
www.pwccn.com
Transfer Agent and Registrar
Securities Transfer Corporation
2591 Dallas Parkway Ste102
Frisco, Texas 75034, USA
Phone: 469-633-0101
www.stctransfer.com
Investor Relations
Grayling
405 Lexington Avenue, 7th Floor
New York, New York 10174
T: +1-646-284-9400
www.grayling.com
Corporate Headquarters
China Automotive Systems, Inc.
Henglong Building
Optics Valley Software Park
No. 1 Guanshan Avenue
Wuhan City, Hubei Province
People’s Republic of China
Phone: (86) 27-8757-0027
www.caasauto.com
Board of Directors
Hanlin Chen
Chairman
Qizhou Wu
Director, Chief Executive Officer
Robert Tung
Independent Non-executive Director
Guangxun Xu
Independent Non-executive Director
Arthur Wong
Independent Non-executive Director
Executive Officers
Qizhou Wu
Chief Executive Officer
Jie Li
Chief Financial Officer
Daming Hu
Chief Accountant
Tse Yiu Wong Andy
Senior Vice President
Shengbin Yu
Senior Vice President
Shaobo Wang
Senior Vice President
Yijun Xia
Vice President
Haimian Cai
Vice President
CHINA AUTO
Henglong Bui
No.1 Guansha
Wuhan City, H
T
Tel:(86)27-875
http://www.c
STEMS, INC.
OMOTIVE SYS
tics Valley Soft
lding, D8 Opt
ast Lake Hi-te
an Avenue, E
ce, 430073, PR
Hubei Provinc
57-0027 Fax: (8
86)27-8757-008
m
caasauto.com
tware Park
ech Zone
of China
88