Attached files
file | filename |
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EX-31.2 - Harbin Electric, Inc | v177348_ex31-2.htm |
EX-32.1 - Harbin Electric, Inc | v177348_ex32-1.htm |
EX-99.1 - Harbin Electric, Inc | v177348_ex99-1.htm |
EX-31.1 - Harbin Electric, Inc | v177348_ex31-1.htm |
EX-23.1 - Harbin Electric, Inc | v177348_ex23-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31, 2009
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from _____ to _____
COMMISSION
FILE NO. 000-51006
HARBIN
ELECTRIC, INC.
(Name
of Business Issuer in Its Charter)
NEVADA
|
98-0403396
|
|
(State or other
jurisdiction
of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
No.
9 Ha Ping Xi Lu, Ha Ping Lu Ji Zhong Qu
Harbin
Kai Fa Qu, Harbin, People’s Republic of China 150060
(Address
of principal executive offices)
86-451-8611-6757
(Issuer’s
telephone number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act:
Common
Stock, Par Value $0.00001 Per Share
|
The
NASDAQ Stock Market LLC
|
|
(Title
of Class)
|
(Name
of exchange on which
registered)
|
Securities
Registered Pursuant to Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Check
whether the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. Yes o No x
Check
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports); and (2)
has been subject to such filing requirements for the past 90
days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer or a smaller reporting company.
See definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Small
Reporting Company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value of the voting stock held on June 30, 2009 by
non-affiliates of the registrant was $172,525,168 based on the closing price of
$15.64 per share as reported on The NASDAQ Stock Market LLC on June 30, 2009,
the last business day of the registrant’s most recently completed second fiscal
quarter (calculated by excluding all shares held by executive officers,
directors and holders known to the registrant of five percent or more of the
voting power of the registrant’s common stock, without conceding that such
persons are “affiliates” of the registrant for purposes of the federal
securities laws).
At March
11, 2010, 31,067,471 shares of the registrant’s Common Stock, $0.00001 par value
were outstanding.
1
TABLE
OF CONTENTS
PART
I
|
3
|
|||
ITEM
1.
|
Business
|
3
|
||
ITEM
1A.
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Risk
Factors
|
10
|
||
ITEM
1B.
|
Unresolved
Staff Comments
|
15
|
||
ITEM
2.
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Properties
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15
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||
ITEM
3.
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Legal
Proceedings
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15
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||
ITEM
4.
|
Reserved
for Future Use by the Securities and Exchange Commission
|
15
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||
PART
II
|
16
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|||
ITEM
5.
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Market
for Common Equity and Related Stockholder Matters
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16
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||
ITEM
6.
|
Selected
Financial Data
|
18
|
||
ITEM
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
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||
ITEM
7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
33
|
||
ITEM
8.
|
Financial
Statements and Supplementary Data.
|
35
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||
ITEM
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
|
35
|
||
ITEM
9A.
|
Controls
and Procedures
|
36
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||
ITEM
9B.
|
Other
Information.
|
38
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||
PART
III
|
38
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|||
ITEM
10.
|
Directors
and Executive Officers of the Registrant
|
38
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||
ITEM
11.
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Executive
Compensation
|
41
|
||
ITEM
12.
|
Security
Ownership of Certain Beneficial Owners and Management
|
45
|
||
ITEM
13.
|
Certain
Relationships and Related Transaction
|
47
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||
ITEM
14.
|
Principal
Accounting Fees and Services
|
47
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||
PART
IV
|
48
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|||
ITEM
15.
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Exhibits
and Financial Statement Schedules
|
48
|
2
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report includes forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended. All statements, other than statements of historical fact, are
statements that could be deemed forward-looking statements, including, but not
limited to, statements regarding our future financial position, business
strategy and plans and objectives of management for future operations. When used
in this Annual Report on Form 10-K, the words “believe,” “may,” “will,”
“estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions
are intended to identify forward-looking statements.
We have
based these forward-looking statements largely on our current expectations and
projections about future events and financial trends that we believe may affect
our financial condition, results of operations, business strategy, short-term
and long-term business operations and objectives, and financial needs. These
forward-looking statements are subject to certain risks and uncertainties that
could cause our actual results to differ materially from those reflected in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to the risks discussed under the
heading “Risk Factors”. Except as required by law, we assume no obligation to
update these forward-looking statements publicly or to update the reasons actual
results could differ materially from those anticipated in these forward-looking
statements, even if new information becomes available in the
future.
In light
of these risks, uncertainties and assumptions, the forward-looking events and
circumstances discussed in this Annual Report may not occur and actual results
could differ materially and adversely from those anticipated or implied in the
forward-looking statements. Accordingly, readers are cautioned not to place
undue reliance on such forward-looking statements.
PART
I.
ITEM
1. BUSINESS
Overview
Harbin
Electric, Inc. (“Harbin Electric”), is a holding company incorporated in Nevada
with its principal place of business based in the People’s Republic of China
(“PRC”). Through our U.S. and China-based subsidiaries, we design, develop,
manufacture, supply, and service a wide range of electric motors including
linear motors, specialty micro-motors, and industrial rotary motors, with a
focus on innovation, creativity, and value-added products. We sell our products
principally in China, but also to certain international markets. The
terms “Harbin,” “Harbin Electric,” “we,” “Company,” “us” and
“our” and similar terms refer to Harbin Electric and its subsidiaries, unless
otherwise expressly stated or the context requires otherwise.
We
currently operate the following four manufacturing facilities in
China:
|
·
|
Harbin Tech Full Electric Co.,
Ltd. (“Harbin
Tech
Full”) is located in
the government-designated Development Zone in the city of Harbin with
approximately 50,000 square meters of land and manufactures linear motors
and linear motor integrated
systems.
|
|
·
|
Shanghai Tech Full Electric Co.,
Ltd. (“Shanghai Tech Full”) is located in the Shanghai
Zhuqiao Airport Industrial Zone with 40,800 square meters of land and
manufactures specialty
micro-motors.
|
|
·
|
Weihai Tech Full Simo Motor Co.,
Ltd. (“Weihai Tech
Full”) is located in
Weihai with approximately 150,000 square meters of land and primarily
manufactures small to medium sized industrial rotary
motors.
|
|
·
|
Xi’an Tech Full Simo Motor Co., Ltd.
(“Xi’an Tech Full Simo”)
was acquired in October 2009 and
manufactures primarily medium to large sized industrial rotary
motors.
Xi’an Tech Full Simo is located in
Xi’an city’s Economy and Technology
Development Zone and occupies approximately 200,000 square meters of
land.
|
We offer
three major product lines: linear motors (“LMs”) and integrated systems,
specialty micro-motors, and industrial rotary motors. LMs operate on the same
physical principles as a traditional motor, but the stator, or non-moving
component, is flat, rather than cylindrical, producing linear, rather than
rotational, force. LMs can be configured into different sizes and shapes. We
believe that, for a variety of applications, our LMs have advantages over
traditional electric motors, in terms of design, energy output, energy
efficiency, and precision movement. By obviating pneumatic stops, belts,
pulleys, and gears that rotary motors require to move and position their
loads, LMs can provide higher levels of performance in accuracy, resolution,
repeatability, and speed, with less maintenance and down-time. We sell our LMs
to a broad range of customers in China and in the United States, including those
involved in the energy industry, factory automation, food processing, packaging
industries, power generation systems, and mass transportation and freight
transportation systems.
3
Specialty
micro-motors are used for various automation functions for automotives,
precision instrument and machinery, office equipment, medical devices, consumer
electronics, etc. We currently focus on developing products used for automobile
interior automations. We have developed many innovative products that are used
for car seat automation, back seat folding, electric power steering (EPS),
automated window, and automated trunk opening. Our automobile specialty
micro-motors are purchased by customers who are first-tier suppliers to the
automobile industry. We supply these products to domestic customers and also
export them to OEM suppliers in North America.
We offer
a wide range of industrial rotary motors including small, medium, and
large-sized motors and some specialized motors such as high/low voltage motors
and speed control motors. Our industrial rotary motors are widely used
for trains, power plants, steel processing, agricultural machineries, heavy
machineries, material industry, construction industry, chemical industry, HVAC,
aviation, navigation, hi-tech fields, etc. Our branded “Simo Motor” manufactured
by Xi’an Tech Full Simo and “Wenbao Motor” manufactured by Weihai Tech Full are
among the best-known motors in China and have received national awards. These
products are primarily purchased by domestic customers throughout
China.
Significant
Developments
In
December 2006, the Company formed Shanghai Tech Full Electric Co., Ltd., a
wholly-owned subsidiary, to develop and manufacture automobile specialty
micro-motors and their components and accessories. The Company had invested
approximately $93.1 million in this facility as of December 31,
2009.
On April
9, 2007, the Company entered into an Agreement (the “Original Agreement”) with
Shelton Technology, LLC (“Shelton”), whereby the Company and Shelton agreed to
work together through the Company’s newly formed, wholly-owned subsidiary,
Advanced Automation Group, LLC (“AAG”) to design, develop and manufacture
customized industrial automation controllers. The initial term of the
arrangement ran from April 9, 2007 to August 31, 2008. During the initial term,
Shelton was entitled to receive 49% of the profits earned by AAG. Pursuant to
the terms of the Letter Agreement, Shelton had assigned to AAG all of its
existing customer accounts and granted to AAG an exclusive royalty free
worldwide license to its technology and intellectual property related to
precision servo motor controllers for industrial automation, while the Company
was required to invest a total of $3 million in installments in AAG by March 31,
2009. On December 11, 2008, the Company and Shelton entered into a first
amendment to the Original Agreement to extend the term of the Original Agreement
from August 31, 2008 to December 31, 2008. On April 21, 2009, the Company and
Shelton entered into a second amendment to the Original Agreement to extend the
term to June 30, 2009. On December 7, 2009, the Company and Shelton
entered into a third amendment to the Original Agreement to further extend the
Original Agreement to December 31, 2009. The Company had invested a
total of $2.0 million in AAG as of December 31, 2009 and has the remaining $1.0
million to be invested. The Company and Shelton are currently continuing the
work jointly and in the process of developing a new agreement. We have included
the financial results of AAG in our consolidated financial statements beginning
April 2007.
On July
10, 2008, Harbin Tech Full entered into an Equity and Assets Transfer Agreement
(the “2008 Agreement”) with Wendeng Second Electric Motor Factory, a PRC
corporation (”Wendeng”), the Committee of Labor Union of Wendeng Second Electric
Motor Factory (the “Labor Committee”) and the People’s Government of
Zhangjiachan Town and Wendeng County (“Zhangjiachan Town”) with respect to the
acquisition by Harbin Tech Full of Weihai Hengda Electric Motor
(Group) Co., Ltd. (“Hengda”) Pursuant to the terms of the 2008 Agreement, Harbin
Tech Full acquired (i) all of the outstanding shares of Hengda, (ii) all other
assets of Wendeng, and (iii) all remaining equity of Hengda’s subsidiaries not
then owned by Hengda, which consisted of 9.1% of Wendeng Wanda Chemical Products
Limited Liability Company, 4.4% of Wendeng Wenbao Electrical Motors Limited
Liability Company, 10% of Wendeng Chengxin Electrical Motors Limited
Liability Company and 9.1% of Wendeng Yongheng Electrical Instruments Limited
Liability Company (“Hengda Subsidiaries”), for an aggregate price of
RMB375,000,000 (approximately US$54.7 million) paid in cash. The transaction was
closed on July 15, 2008. The name of Hengda was changed to Weihai
Tech Full in June 2009. We have included the financial results of Weihai Tech
Full in our consolidated financial statements beginning July 2008.
In
October 2008, the Company, through AAG formed Advanced Automation Group Shanghai
Co., Ltd. (“AAG Shanghai”), to design, develop, manufacture, sell and service
custom industrial automation controllers for linear motors. AAG had invested
$500,000 in AAG Shanghai as of December 31, 2009.
On
October 2, 2009, Harbin Tech Full entered into an Equity Acquisition Agreement
(the “2009 Agreement”) with Xi’an Simo Electric Co. Ltd. (“Simo”) and Shaanxi
Electric Machinery Association (“Shaanxi Electric” and collectively with
Simo, the “Selling Shareholders”) whereby Harbin Tech Full agreed to acquire (i)
100% of the outstanding shares of Xi’an Simo Motor Incorporation (Group) (“Simo
Motor”), which is 99.94% owned by Simo and 0.06% owned by Shaanxi Electric, and
(ii) all corresponding assets of Simo Motor, including but not limited to, all
of the manufacturing equipment, real estate, land use rights, stocks, raw
materials, automobiles, intellectual property, receivables, other receivables,
payables, business contracts and external investments owned by Simo Motor for an
aggregate price of up to RMB 763,179,799 (approximately US$112 million) payable
in cash. On October 22, 2009, Harbin Tech Full paid RMB 572,700,000
(approximately US$84 million) to the selling shareholders of Simo Motor. On
January 25, 2010, after verification of the assets and capital of Simo
Motor, Harbin Tech Full paid an additional RMB 190.5
million (approximately US$27.9 million) to the selling shareholders of Simo
Motor. The acquisition also included 15 wholly-owned and 8 majority-owned
subsidiaries by Simo Motor. As a result, the Company’s ownership to Simo Motor
and all subsidiaries averages to 87.2%. The remaining 12.8% is owned by
noncontrolling shareholders. The transaction was closed on October 13, 2009 and
the name of Simo Motor was changed to Xi’an Tech Full Simo Motor Co., Ltd. We
have included the financial results of Xi’an Tech Full Simo in our consolidated
financial statements for the three months ended December 31, 2009.
4
INDUSTRY
OVERVIEW
The
linear motor (“LM”) industry is a fast-growing industry in China. Historically,
traditional rotary motors have been used in various industries throughout China,
but performance and efficiency issues associated with traditional rotary motors
have spurred an interest in the industry to consider alternative technologies
such as LMs. Compared with traditional rotary motors, we believe that LMs are
simpler to control, easier to operate, more reliable and capable of reducing
operating costs in the long term.
Unlike
rotary motors that rely on centrifugal rotation, or torque, a linear motor is an
electric motor that transmits force through a magnetic field without the need
for a mechanical linkage. An axis driven by a linear motor requires little or no
contact between moving parts. Reduced contact between moving surfaces translates
to reduced friction and reduced vibration. As a result, there is no backlash,
windup, wear or maintenance that is normally associated with traditional rotary
motors. Many applications that require some sort of linear motion can benefit
from the use of LMs. We believe that, for a variety of
applications, LMs have advantages over traditional rotary motors, in terms of
design, energy output, energy efficiency, and precision movement. By obviating
pneumatic stops, belts, pulleys, and gears that rotary motors require to move
and position their loads, LMs can provide higher levels of performance in
accuracy, resolution, repeatability, and speed, with less maintenance and
down-time.
Micro-motors
are widely used in applications such as automobile interior automation, medical
devices, communication equipment, information systems, home appliances, defense
industry, and many other industrial applications. While China has become a
leading micro-motor supplier in the world, we believe that China is still at the
early stage of its industrialization and the demand for micro-motors will
continue to grow in many areas. Currently the Company is focusing on
growing its automobile specialty micro-motors business, however, is also
interested in expanding into other application areas.
Automobile
specialty micro-motors are used for various automation functions in an
automobile. In order to stay competitive and attract customers, automakers have
been trying to keep their cost down while offering enhanced functionality and
automation features in an automobile, which drives up the degree of automation
in an automobile. The automobile’s interior automation is
increasingly becoming a standard package, which was once only seen in high-end,
luxury passenger cars. This trend has created a new market for new
types of automobile specialty micro-motors that automate different parts of an
automobile including car seats, front and back, windows, trunks, door locks,
mirrors, sliding doors, roofs, etc. We believe that the worldwide demand for
automobile specialty micro-motors with low cost and high quality is rapidly
growing. Global automakers are increasingly sourcing auto parts from low cost
countries including China.
Traditional
rotary motors have historically dominated China’s and the world’s electric motor
market. Industrial rotary motors are widely used to power machinery and
equipment in all industries such as petrochemical and chemical, metallurgical
and mining, textile, ventilation, machine tools, to name just a
few. Traditional rotary motor market is highly fragmented in China,
with a few large state-owned manufacturers and many smaller private
operators. The Company entered the industrial rotary motor business
through the acquisition of Weihai Tech Full in July 2008 and further expanded
this business and strengthened our competitive position in the industry through
the acquisition of Xian Tech Full Simo in October 2009. These
business expansions allowed the Company to become one of the largest and most
diversified developer and manufacturer of electric motors in China.
OUR
STRATEGY
Our
objective is to develop a global brand and to be a world class enterprise that
develops and manufactures a broad range of electric motors from linear motors,
to specialty micro-motors, to industrial rotary motors with a focus on highly
specialized, energy-efficient, customized, and value-added products for domestic
and international customers. We expect that our scale and size will grow and our
product offerings will be broadened. To achieve this objective, we plan to
execute the following key business strategies:
|
·
|
Strengthen
Our Design and Development Capabilities. To meet the changing needs
of our customers, we intend to continue to improve and strengthen our
in-depth product development and design capabilities. We will continue to
recruit talents world-wide to strengthen our research and development team
and expand collaborations with other research and engineering
institutions. We intend to capitalize on the strength of our research and
development capability and focus on developing energy efficient and
environmentally friendly electric motors in all of our product lines:
linear motors, automotive motors, and industrial rotary
motors;
|
|
·
|
Further
Grow Market Share in Linear Motor Market. We are expanding our
customer base by developing new products for existing and new customers.
We successfully developed a “Tower Type Oil Pump” driven by permanent
magnetic linear motors for the oil industry. We also designed the Cylinder
Permanent Magnetic Linear Servo Motor which can be applied in many
different applications including printers, air compressors and food
slicers. We have entered a joint project to build China’s first coal
transportation line using the linear motor propelled freight train. We
have successfully developed a LM propulsion system for the first “Made
in-China” LM driven metro train to support the build-up of urban mass
transportation system across China;
|
5
|
·
|
Expand
Customer Base and Product Offering in Micro Motor Market. We have
constructed a brand new facility in Shanghai that is close to the network
of auto parts OEM suppliers around Shanghai. This new facility is focused
on serving the market for automotive applications and has annual capacity
of 10 million unit automotive motors. We believe it is the largest
manufacturing facility of automotive motors integrated with product
development and design capabilities in China. It began production in
October 2009. This will allow us to serve many international and domestic
customers and produces variety of products at the same time and in the
same place. We intend to supply the fast growing
domestic automobile industry and capture the international auto markets
that increasingly source auto parts from China. We are also interested in
expanding into other industrial
applications;
|
|
·
|
Grow
Industrial Rotary Motors Business with Focus on High Efficient Specialized
Products. We entered the industrial rotary motors business through
an acquisition in July 2008. We further expanded the business and
strengthened our leading position in the electric motor industry through
another acquisition in October 2009. These expansions have
provided us a solid manufacturing platform and access to a broad base of
industrial customers. With continued economic growth and accelerated
industrialization and urbanization in China, as well as the global efforts
to reduce energy consumption and protect the environment, we expect the
demand for high efficiency and high quality industrial rotary motors to
continue to grow in China. We intend to capitalize on our research and
product development capability and become an industry leader in China in
developing and offering high efficient, high quality industrial
rotary motors;
|
|
·
|
Maintain
Our Competitive Strength – Offer High
Quality and Low Cost Products with High Content of Technology. We
compete with global competitors that offer high quality products and with
domestic competitors that offer low cost products. However, customers are
increasingly focusing on high engineering content and quality of products
with low cost. We intend to differentiate ourselves from other competitors
by providing high quality and low cost products with high content of
technology supported by our own development and design capabilities and
low cost production; and
|
|
·
|
Focus on
Organic Growth Effectively Mixed with Acquisitions When Opportunities
Arise. We
intend to grow our business through penetrating different markets at
different stages of our development and effectively mix organic growth
with acquisitions when opportunities
arise.
|
PRODUCTS
AND SERVICES
We
design, develop, manufacture, supply, and service a wide range of electric
motors, with a focus on innovation, creativity, and value-added products. We
develop products according to our customers’ specifications using our
proprietary process technology and expertise. With close customer relationships,
in depth understanding of local markets and customer needs, fast development
cycle, assurance of high quality products, and low development and production
costs, we hope to be able to outperform our international and domestic
peers.
Presently,
we offer three key product lines:
1.
|
Linear
motors and their integrated application
systems
|
A linear
motor is an electric motor that converts the electric energy through a magnetic
field into linear motion without the need for a mechanical linkage. An axis
driven by a linear motor requires little or no contact between moving parts.
Reduced contact between moving surfaces translates to reduced friction and
reduced vibration. As a result, there is no backlash, windup, wear or
maintenance that is normally associated with industrial rotary motors. Many
applications that require some sort of linear motion can benefit from the use of
linear motors.
Compared
to rotary motors, the advantages of linear motors include simplicity,
reliability, and low maintenance due to fewer moving parts; precision movement;
compact size; quiet motor operation; energy-efficient; easy customization due to
simplicity.
Linear
motors can be designed in different sizes and shapes such as flat, pancake,
cylindrical, round, etc. Our primary linear motor products include the
following:
A. Flat
linear asynchronous motor series (self-cooled)
The flat
linear asynchronous motor series is widely applied in transmission systems such
as the production transportation line, the crane, postal service sorting
machine, baggage sorting machine, printed matter sorting machine, automatic
linear door, and revolving door applications. The flat linear asynchronous motor
series is self-cooling using the ambient environment.
B. Flat
three-phase linear asynchronous motor (forced ventilation)
The
flat three-phase linear asynchronous motor is also used in transmission systems
such as the production transportation line, the crane, postal service sorting
machine, baggage sorting machine, printed matter sorting machine, automatic
linear door, and revolving door applications. Unlike the self-cooling design of
our flat linear asynchronous motor series, our flat three-phase linear
asynchronous motor uses forced ventilation, which is loaded with radiator,
bottom board, and air blower to reduce and dissipate heat.
6
C. Integrated
linear motor application systems
An
integrated linear motor application system consists of one or more linear
motors, controllers, and other auxiliary components. We have developed linear
motors and their integrated application systems used in the oil industry,
factory automation, packaging, logistic systems, and food industry. Applications
mainly include production transportation conveyor line, the postal service mail
sorting machine, the baggage sorting machine, the printed matter sorting
machine, food and meat slicer, oil pump machine of oilfield, and automated power
switch. We are developing a LM propulsion system to drive freight trains for
China’s first coal transportation line built on LM technology.
We have
successfully developed a high efficiency linear motor propulsion system powering
China’s first domestically developed and manufactured LM driving metro train.
Compared to the traditional rotary motor propelled metro transit system widely
in use in the world, the LM driving metro train provides higher performance
efficiency with lower energy consumption. It can negotiate steep
grades and cope with tight curves and corners, lower maintenance
cost, provide a safer ride under severe weather conditions such as rain and
snow, and it is quieter and more comfortable. It is environmentally friendly and
contributes to making cities “greener”. Additionally, due to the
simplicity of the LM propulsion system, the vehicle body is more compact,
reducing the cross section of underground tunnels by about 40%, thus
accelerating construction of the tracks and providing significant cost
savings.
2.
|
Automobile
specialty micro-motors
|
Automobile
specialty micro-motors are used for various automation functions in an
automobile. We have developed products that are used for car seat automation,
back seat folding, EPS (electric power steering), automated windows, and
automated trunk opening. Several other types of specialty micro-motors are under
development including micro-motors used for door locks, gas pedals, ABS, gas
pumps, and engine gas jets.
3.
|
Industrial
rotary motors
|
We
manufacture various industrial rotary motors such as high/low voltage motors,
AC/DC motors and speed control motors including small, medium and large sized.
Our industrial rotary motors are used mainly for the following applications:
|
·
|
Freight
train driving motors
|
|
·
|
Power
plants
|
|
·
|
Metallurgical
and mining industry
|
|
·
|
Chemical
and petrochemical industry
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Construction
machinery
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Agricultural
equipment and machinery
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Transportation
machinery
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Machine
tools
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Medical
devices
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Ventilation
equipment
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Air
compressors
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Electric
pumps
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MANUFACTURING
PROCESS
We employ
state-of-the-art manufacturing equipment, production lines, inspection and
testing equipment, and quality control systems at our manufacturing facilities.
Our Harbin and Shanghai manufacturing facilities are constructed following the
international standards that enable us to meet the demands of high
quality engineering to ensure product reliability and durability. We are
upgrading our acquired Weihai and Xi’an facilities by adding new and more
efficient production equipment. All of our facilities in the PRC have extra
spaces that can accommodate capacity expansion in the future when the need
arises.
7
Generally,
there are two stages of design and development before the main production
process. In the first process stage, the technical design of the motor is drawn
based on customer defined parameters such as the speed, force, heat output and
size of the motor. In the second process stage, the working prototype is
produced, and testing and validation of the prototype are conducted. The main
production process can be carried out only after the working prototype passes
the various testing and validation protocols. The actual manufacturing process
consists of winding the coils, laminating the primary and secondary elements,
and hermetic casing for protection and durability among other procedures. The
last stage is testing and validation.
SERVICES
We
provide after-sale services to our customers. For our linear motor and specialty
micro-motor businesses, our products are customized products which are customer
specific. We typically offer a warranty on our products, only in the event of
defects, for two years from the date of shipment, and expect to absorb the costs
of servicing if our products fail within the two-year warranty period. For our
industrial rotary motor business, our products are standardized products. We
provide product warranty for repair one year from the date of shipment.
Historically, the returns and defects have not been material. We generally
provide on-site services at a client location within 24 hours to fix problems
during the warranty period. After the warranty period expires, we offer
after-sale services for a fee.
MARKETING
In our
linear motor and specialty micro-motor businesses, we receive proposals and
contracts mostly through referrals. We have a marketing and sales team that
focuses on providing support and consultancy to customers. We target our
products to the global original equipment manufacturers (“OEMs”) as components
or in integrated systems. We also collaborate with major system integrators to
jointly develop and market new products. We have a close involvement with our
customers to jointly develop and customize products for customers’ specific
needs. We believe this active working relationship with customers has allowed us
to win repeat business, create visibility and enhance our growth.
In our
industrial rotary motor business, we have a well established sales network and
distribution channel across the country at each of our Weihai and Xi’an
facility. We provide sales incentives to the sales team and encourage them to
cross sell products produced by other facilities. Sometimes, we offer
promotions according to the market trend.
We also
participate in industry trade shows, technical conferences, professional
seminars and exhibitions, and use these events to promote our products, generate
sales, and build brand awareness.
We are
actively exploring the international markets for our products and developing
business outside of China. We have established a wholly-owned subsidiary in the
U.S. - Advance Automation Group, LLC. This subsidiary serves as the company’s
research and development center that is specialized in industrial automation
controller technology. Through this subsidiary, we believe that we can
capitalize on the U.S.-based world class development expertise and a China-based
electric motor manufacturing capability, expand our business into the industrial
automation controller market, and enhance Harbin Electric’s existing R&D
projects. We expect that this project will also provide us greater reach into
the U.S. and international markets. We also have an executive office in New York
that supports our sales and customer relationship management.
See Note 15 to our Consolidated Financial Statements for
information with respect to the geographic markets in which we operate and
generate revenue.
SOURCES
AND AVAILABILITY OF RAW MATERIALS (VENDORS)
The raw
materials used by us are mainly semi-finished products and component materials
including fans, radiators, silicon steel sheet, cast iron, aluminum, enameled
copper wire, metal plating, and control cabinets. We believe that alternative
sources are available for such materials other than our current
suppliers.
One major
vendor provided approximately 16% of the Company’s purchases of raw materials
for the year ended December 31, 2009. Two major vendors provided approximately
39% of the Company’s purchases of raw materials for the year ended December 31,
2008, with each vendor individually accounting for 23% and 16%, respectively.
Five major vendors provided approximately 80% of the Company’s purchases of raw
materials for the year ended December 31, 2007, with each vendor individually
accounting for 27%, 22%, 13%, 12% and 6%, respectively. The Company’s accounts
payable to these vendors was $0 and $1,055,730 at December 31, 2009 and,
2008, respectively.
CUSTOMERS
One major
customer accounted for approximately 12% of the net revenue for the fiscal year
ended December 31, 2009. At December 31, 2009, the total
receivable balance due from this customer was $11,494,287, representing 12% of
total accounts receivable. Three major customers accounted for 43% of the net
revenue for the fiscal year ended December 31, 2008, with each customer
individually accounting for 16%, 15% and 12%, respectively. At December 31,
2008, the total receivable balance due from these customers was $26,253,907,
representing 87% of total accounts receivable. Five major customers
accounted for 72% of the net revenue for the year ended December 31, 2007, with
each customer individually accounting for 20%, 20%, 13%, 10% and 9%,
respectively.
8
RESEARCH
AND DEVELOPMENT
We
recruit talent world-wide. Our in-house Research & Development team is made
of top researchers and engineers with diverse experience and
specializations in linear motors, micro motors, automotive motors, automations
and controllers, as well as in manufacturing technologies and processes. We have
developed many new products and own numerous patents in China including twenty
patents related to our LM and automobile specialty micro-motors products as of
December 31, 2009. Our product design and development work includes both the
development of new products and the modification of existing products.
Development work is also conducted to improve manufacturing processes. Our
strategy is to leverage the in-house product research and development capability
with outside research from China’s scientific research
institutions.
We
collaborate closely with various scientific research institutions to advance
development of new products and manufacturing processes. For example, one of our
joint research and development projects was the program with Zhejiang University
where we jointly developed a Permanent Magnetic Synchronization Servo Motor used
for a meat and food slicer in the food industry. We have also successfully
developed a high efficiency LM propulsion system for LM propelled metro train
working jointly with the Institute of Electrical Engineering of the Chinese
Academy of Sciences (“IEECAS”) and Changchun Railway Vehicles Co. Ltd. (“CRC”),
Changchun, China. We have on-going relationships with Zhejiang University,
Shanghai Micro-Motors Research Institute, and Institute of Electrical
Engineering of the Chinese Academy of Sciences (IEECAS).
We have
several new types of automotive specialty micro-motors under development
including micro-motors used for door lock, gas pedal, ABS, gas pump, and engine
gas jet.
Costs
associated with research, new product development, and product improvements are
treated as expenses when incurred and amounted to $2,093,366, $1,170,169, and
$1,064,074 for the years ended December 31, 2009, 2008 and 2007,
respectively.
EMPLOYEES
As of
December 31, 2009, the Company had a total of approximately 4,900 employees. We
believe that we have good working relationships with our employees, most of whom
are located in Harbin, the capital of Heilongjiang Province, Weihai, a coastal
city in Shandong Province, Xi’an, the capital of Shaanxi Province, and Shanghai.
We are not a party to any collective bargaining agreements, and none of our
employees are subject to collective bargaining agreements.
We have
employment contracts with most of our employees. Employment contracts are
designed to adhere to both State and Provincial employment and social security
regulations under applicable Chinese or the U.S. law. We have signed
confidentiality agreements with all of our employees.
COMPETITION
We
believe that the principal factors affecting the Company’s competitive position
include:
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understanding
our customers’ time-to-market, technology and cost
requirements;
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access
to industrial supply chain and raw material
providers;
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price
and cost;
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product
quality;
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design
capabilities and development
efficiency;
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customer
relationships; and
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technical
support.
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In our
customized linear motor and specialty micro-motor business, we believe that we
compete favorably with respect to each of these criteria. We do not believe that
there are any direct competitors of any meaningful size that operate using the
same business model as ours within the PRC.
The
market in the industrial rotary motor product line is large and very fragmented
and is very competitive in China. Our products are in competition with similar
products produced by other large state-owned manufacturers and many smaller
privately-owned operators.
Globally,
we also compete with many foreign companies. Some of our global competitors are
larger in size or are divisions of large diversified companies and have
substantially greater financial resources and technical
capabilities.
9
PRC
REGULATIONS
The
principal regulation governing foreign currency exchange in China is the Foreign
Currency Administration Rules (1996), or the Rules, as amended and adopted on
August 1, 2008. Under the Rules, once certain procedural requirements are met,
Renminbi (“RMB”) is convertible for current account transactions, including
trade and service-related foreign exchange transactions and dividend payments,
but not for capital account transactions, including direct investment, loans or
investments in securities outside China, without prior approval of the State
Administration of Foreign Exchange of the People’s Republic of China, or its
local counter-parts. Since a significant amount of our future revenues will
continue to be denominated in RMB, any existing and future restrictions on
currency exchange may limit our ability to utilize revenue generated in China to
fund our business activities outside of China, if any, or expenditures
denominated in foreign currencies, or our ability to meet our foreign currency
obligations, which could have a material adverse effect on our business,
financial condition and results of operations. We cannot be certain that the PRC
regulatory authorities will not impose more stringent restrictions on
the convertibility of RMB with respect to foreign exchange
transactions.
In
addition, regulations were promulgated by the State Development and Reform
Commission, or SDRC, the Ministry of Commerce of the People’s Republic of
China, or MOFCOM and the State Administration of Foreign Exchange, or SAFE, that
requires registration with, and approval from, PRC government authorities in
connection with direct or indirect offshore investment activities by individuals
who are PRC residents and PRC corporate entities. These regulations may
apply to future offshore or cross-border acquisitions, if any, as well as to the
equity interests in offshore companies held by our PRC stockholders who are
considered PRC residents. We intend to make all required application and
filings, and will require the stockholders of the offshore entities in
our corporate group who are considered PRC residents to make the
application and filings, as required under these regulations and under any
implementing rules or approval practices that may be established under these
regulations. However, because these regulations are relatively new and lacking
implementing rules or reconciliation with other approval requirements, it
remains uncertain how these regulations and any future legislation concerning
offshore or cross-border transactions, will be interpreted and implemented by
the relevant government authorities. The approval criteria by SDRC and
MOFCOM agencies for outbound investment by PRC residents are not provided under
the relevant SDRC and MOFCOM regulations. Also, the criteria for registration
with SAFE agencies, and whether such registration procedure is discretionary,
are still uncertain as the criteria, if any, are not provided for under relevant
SDRC regulations. Furthermore, there is a lack of relevant registration
precedents for us to determine the registration criteria in practice.
Accordingly, we cannot provide any assurances that we will be able to comply
with, qualify under or obtain any registration or approval as required by these
regulations or other related legislations. Further, we cannot assure you that
our stockholders would not be considered PRC residents, given uncertainties as
to what constitutes a PRC resident for the purposes of the regulation, or that
if they are deemed PRC residents, they would or would be able to comply with the
requirements. Our failure or the failure of our PRC resident stockholders to
obtain these approvals or registrations may restrict our ability to acquire a
company outside of China or use our entities outside of China to acquire or
establish companies inside of China, which could negatively affect our business
and future prospects.
With
respect to our subsidiaries in the PRC and to the extent that we form any
additional subsidiaries in the PRC, the ability of any PRC operating subsidiary
to make dividend and other payments to us may be restricted by factors such as
changes in applicable foreign exchange and other laws and regulations. For
example, under the SAFE regulations discussed above, the foreign exchange
activities of a PRC subsidiary are conditioned upon the compliance with the SAFE
registration requirements by the stockholders of any offshore entities who are
PRC residents. Failure to comply with these SAFE registration requirements may
substantially restrict or prohibit the foreign exchange inflow to and outflow
from a PRC subsidiary, including, remittance of dividends and
foreign-currency-denominated borrowings by a PRC subsidiary. In addition, a PRC
operating subsidiary is required, where applicable, to allocate a portion of
their net profit to certain funds before distributing dividends, including at
least 10% of their net profit to certain reserve funds until the balance of such
fund has reached 50% of their registered capital. These reserves can only be
used for specific purposes, including making-up cumulative losses of previous
years, conversion to equity capital, and application to business expansion, and
are not distributable as dividends. A PRC operating company is also required,
where applicable, to allocate an additional 5% to 10% of their net profits to a
statutory common welfare fund. The net profit available for distribution from a
PRC operating company is determined in accordance with generally accepted
accounting principles in China, which may materially differ from a determination
performed in accordance with U.S. GAAP. As a result, we may not receive
sufficient distributions or other payments from these entities to enable us to
make dividend distributions to our stockholders in the future, even if our U.S.
GAAP financial statements indicate that our operations have been
profitable.
The address of our corporate headquarters is No. 9, Ha Ping Xi Lu,
Ha Ping Lu Ji Zhong Qu, Harbin Kai Fa Qu, Harbin, China, 150060. Our telephone
number is: 86-451-8611-6757. Our internet address is www.harbinelectric.com. You
can find on our website, free of charge, our Annual and Quarterly Reports on
Forms 10-K and 10-Q, Current Reports on Form 8-K, and amendments to these
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act.
Item
1A. Risk Factors
An
investment in our common stock is very risky. You should carefully consider the
risk factors described below, together with all other information in this Form
10-K, before making an investment decision. If any of the following risks
actually occurs, our business, financial condition or operating results could be
materially and adversely affected. In such case, the trading price of our common
stock could decline, and you may lose all or part of your
investment. Additional risks and uncertainties not currently foreseeable to
us may also impair our business operations.
GENERAL
RISKS RELATING TO OUR BUSINESS
Our
rapid growth may strain our resources.
Our
revenues increased by 85% for the year ended December 31, 2009 versus the year
ended December 31, 2008, and 85% in 2008 over 2007; however, it is unlikely that
we will maintain such growth in the long term and cannot assure any growth of
our business for any period. Our rapid expansion will place significant strain
on our management and our operational, accounting, and information systems. We
expect that we will need to continue to improve our financial controls,
operating procedures, and management information systems. We will also need to
effectively hire, train, motivate, and manage our employees. Our failure to
manage our growth could disrupt our operations and ultimately prevent us from
generating the profits we expect.
10
Our
debt may constrict our operations, and cash flows and capital resources may be
insufficient to make required payments on our indebtedness and future
indebtedness.
As of
December 31, 2009, we had approximately $9.1 million debt outstanding under our
Guaranteed Senior Secured Floating Rate Notes (the “Notes”) issued in August
2006. Additionally, our PRC subsidiaries had a total of approximately $48.8
miilion loans outstanding as of December 31, 2009. These loans were obtained
from local PRC banks, our noncontrolling shareholders, and also unrelated
individual companies. They are used to support our working capital. These
obligations could have important consequences to you. For example, they
could:
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reduce
the availability of our cash flow to fund future working capital, capital
expenditures, acquisitions and other general corporate
purposes;
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limit
our ability to obtain additional financing for working capital, capital
expenditures, and other general corporate
requirements;
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expose
us to interest rate fluctuations because the interest rate for the Notes
is variable; and
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place
us at a competitive disadvantage compared to competitors that may have
proportionately less debt.
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In
addition, our ability to make scheduled payments or refinance our obligations
depends on our successful financial and operating performance, cash flows, and
capital resources, which in turn depend upon prevailing economic conditions and
certain financial, business, and other factors, many of which are beyond our
control. If our cash flows and capital resources are insufficient to fund our
debt obligations, we may be forced to reduce or delay capital expenditures, sell
material assets or operations, obtain additional capital, restructure our debt,
or declare bankruptcy. Furthermore, our obligations under the Notes are secured
by our shares of Advanced Electric Motors, Inc., our Delaware subsidiary through
which we own our PRC operating subsidiaries. These security interests could
result in our loss of the business, if we default on the Notes.
Covenants
in the Indenture governing our Notes and the Purchase Agreement pursuant to
which the Notes were initially sold, restrict our ability to engage in or enter
into a variety of transactions.
Our
“Notes” were issued pursuant to an Indenture, dated as of August 30, 2006,
between us and The Bank of New York, as Trustee. The Indenture contains various
covenants that may limit our discretion in operating our business. In
particular, we are limited in our ability to merge, consolidate or transfer
substantially all of our assets, issue preferred stock of subsidiaries, create
liens on our assets to secure debt, make capital expenditures, incur additional
indebtedness and pay dividends. The Indenture also requires us to maintain
certain financial ratios. These covenants and ratios could have an adverse
effect on our business by limiting our ability to take advantage of financing,
merger and acquisition or other corporate opportunities and to fund our
operations.
The
Purchase Agreement dated August 29, 2006, pursuant to which the Notes were
initially sold, provides that the initial purchasers of the Notes and their
assignees have a right of first offer for so long as such persons continue to
hold any Notes with respect to any issuances of new equity securities by us
other than shares of stock issued to employees, officers and directors pursuant
to bona fide employee benefit plans. This right of first offer contained in the
Purchase Agreement could adversely impact our ability to do future equity
offerings.
Our
success depends on our management team and other key personnel, the loss of any
of whom could disrupt our business operations.
Our
future success will depend in substantial part on the continued service of the
members of our senior management. The loss of the services of one or more of our
key personnel could impede implementation of our business plan and result in
reduced profitability. We do not carry key person life insurance on any of our
officers or employees. Our future success will also depend on the continued
ability to attract, retain and motivate highly qualified technical sales and
marketing customer support.
Because
of the rapid growth of the economy in China, competition for qualified personnel
is intense. We cannot assure you that we will be able to retain our key
personnel or that we will be able to attract, assimilate or retain qualified
personnel in the future.
We
depend on the supply of raw materials and key component parts, and any adverse
changes in such supply or the costs of raw materials may adversely affect our
operations.
One, two,
and five major vendors provided approximately 16%, 39%, and 80% of the
Company’s purchases of raw materials for the years ended December 31, 2009,
2008, and 2007, respectively. Any material change in the spot and forward rates
could have a material adverse effect on the cost of our raw materials and on our
operations. In addition, if we need alternative sources for key component parts
for any reason, these component parts may not be immediately available to us. If
alternative suppliers are not immediately available, we will have to identify
and qualify alternative suppliers, and production of these components may be
delayed. We may not be able to find an adequate alternative supplier in a
reasonable time period or on commercially acceptable terms, if at all. Shipments
of affected products have been limited or delayed as a result of such problems
in the past, and similar problems could occur in the future. An inability to
obtain our key source supplies for the manufacture of our products might require
us to delay shipments of products, harm customer relationships or force us to
curtail or cease operations.
11
We
may experience material disruptions to our manufacturing operation.
While we
seek to operate our facilities in compliance with applicable rules and
regulations and take measures to minimize the risks of disruption at our
facilities, a material disruption at one of our manufacturing facilities could
prevent us from meeting customer demand, reduce our sales and/or negatively
impact our financial results. Any of our manufacturing facilities, or any of our
machines within an otherwise operational facility, could cease operations
unexpectedly due to a number of events, including:
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unscheduled
maintenance outages;
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prolonged
power failures;
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an
equipment failure;
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disruptions
in the transportation infrastructure including roads, bridges, railroad
tracks;
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fires,
floods, earthquakes, or other catastrophes;
and
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other
operational problems.
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We
may not be able to adequately protect and maintain our intellectual property,
which could weaken our competitive position.
Our
success will depend on our ability to continue to develop and market electric
motor products. We have been granted 20 patents in China relating to linear
motor and automobile specialty micro-motor applications. No assurance can be
given that such patents will not be challenged, invalidated, infringed or
circumvented, or that such intellectual property rights will provide a
competitive advantage to us. The implementation and enforcement of PRC
intellectual property laws historically have not been vigorous or consistent,
primarily because of ambiguities in the PRC laws and a relative lack of
developed enforcement mechanisms. Accordingly, intellectual property rights and
confidentiality protections in the PRC are not as effective as in the United
States and other countries. Policing the unauthorized use of proprietary
technology is difficult and expensive, and we might need to resort to litigation
to enforce or defend patents issued to us or to determine the enforceability,
scope and validity of our proprietary rights or those of others. Such litigation
will require significant expenditures of cash and management efforts and could
harm our business, financial condition and results of operations. An adverse
determination in any such litigation will impair our intellectual property
rights and may harm our business, competitive position, business prospects and
reputation. In addition, since we have chosen to secure patents only in China,
we may not be in a position to protect our inventions and technology in other
countries in which we sell our product, which could result in increased
competition and lower pricing for our products.
RISKS
RELATING TO DOING BUSINESS IN THE PEOPLE’S REPUBLIC OF CHINA
China’s
economic policies could adversely affect our business.
Substantially
all of our assets are located in China and substantially all of our revenues are
derived from our operations in China. Accordingly, our results of operations and
prospects are subject, to a significant extent, to economic, political and legal
developments in China.
While
China’s economy has experienced significant growth in the past 30 years, it has
been uneven, both geographically and among various sectors of the economy. The
Chinese government has implemented various measures to encourage economic growth
and guide the allocation of resources. Some of these measures benefit the
overall economy of China, but may also have a negative effect on us. For
example, our operating results and financial condition may be adversely affected
by government control over capital investments or changes in tax
regulations.
The
economy of China has been changing from a planned economy to a more
market-oriented economy. In recent years the Chinese government has implemented
measures emphasizing market forces for economic reform, reduction of state
ownership of productive assets, and establishment of corporate governance in
business enterprises; however, a substantial portion of productive assets in
China are still owned by the Chinese government. In addition, the Chinese
government continues to play a significant role in regulating industry
development by imposing industrial policies. It also exercises significant
control over China’s economic growth through the allocation of resources,
controlling payment of foreign currency-denominated obligations, setting
monetary policy, and providing preferential treatment to particular industries
or companies.
12
PRC
laws and regulations governing our current business operations are sometimes
vague and uncertain and any changes in such laws and regulations may harm our
business.
There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations including, but not limited to, the laws and regulations
governing our business, and the enforcement and performance of our arrangements
with customers in the event of the imposition of statutory liens, death,
bankruptcy and criminal proceedings. We are considered foreign persons or
foreign funded enterprises under PRC laws and, as a result, we are required to
comply with PRC laws and regulations. These laws and regulations are sometimes
vague and may be subject to future changes, and their official interpretation
and enforcement may involve substantial uncertainty. The effectiveness of newly
enacted laws, regulations or amendments may be delayed, resulting in detrimental
reliance. New laws and regulations that affect existing and proposed future
businesses may also be applied retroactively. We cannot predict what effect the
interpretation of existing or new PRC laws or regulations may have on our
business.
Inflation
in the PRC could negatively affect our profitability and growth.
The PRC
economy has experienced rapid growth. Rapid economic growth could lead to growth
in the money supply and rising inflation. If prices for our products rise at a
rate that is insufficient to compensate for the rise in the cost of supplies, it
may harm our profitability. In order to control inflation in the past, the PRC
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 our costs
and also reduce demand for our products.
PRC
regulations relating to mergers, offshore companies, and Chinese stockholders,
if applied to us, may limit our ability to operate our business as we see
fit.
Regulations
govern the process by which we may participate in an acquisition of assets or
equity interests. Depending on the structure of the transaction, the new
regulation will require Chinese parties to make a series of applications and
supplemental applications to various government agencies. In some instances, the
application process may require the presentation of economic data
concerning a transaction, including appraisals of the target business and
evaluations of the acquirer, which are designed to allow the government to
assess the transaction. Government approvals will have expiration dates by which
a transaction must be completed and reported to the government agencies.
Compliance with the new regulations is likely to be more time consuming and
expensive than in the past and the government can now exert more control over
the combination of two businesses. Accordingly, due to the PRC regulations,
our ability to engage in business combination transactions in China through our
Chinese subsidiaries has become significantly more complicated, time consuming
and expensive, and we may not be able to negotiate transactions that are
acceptable to us or sufficiently protective of our interests in a
transaction.
If preferential
tax concessions granted by the PRC government change or expire, our financial
results and results of operations would be materially and adversely
affected.
Our
results of operation may be adversely affected by changes to or expiration of
preferential tax concessions that our Chinese subsidiaries currently enjoy. The
statutory tax rate generally applicable to domestic Chinese companies was 33%
before January 1, 2008. On January 1, 2008, the new Chinese Enterprise Income
Tax (“EIT”) law replaced the existing laws for Domestic Enterprises (“DES”),
such as Weihai Tech Full and Xi’an Tech Full Simo, and Foreign Invested
Enterprises (“FIEs”), such as Harbin Tech Full, Shanghai Tech Full, and Advanced
Automation Group Shanghai, Ltd. The new standard EIT rate of 25% is now
applicable to both DES and FIEs. The PRC government provides reduced tax rates
for productive foreign investment enterprises in the Economic and Technological
Development Zones and for enterprises engaged in production or business
operations in the Special Economic Zones. These preferential tax
rates are generally graduated, starting at 0% and increasing to the standard EIT
rate of 25% over time. Our operations under Harbin Tech Full were
subject to a 10% preferential tax rate until December 31, 2010. Our operations
under Shanghai Tech Full was subject to 0% preferential tax rate in 2008 and
2009 and will be subject to 11% in 2010, 12% in 2011, 12.5% in 2012, and 25%
thereafter. Our operations under Xi’an Tech Full Simo were subject to a 15%
preferential tax rate. As a result, the estimated tax savings for the year ended
December 31, 2009, 2008 and 2007 amounted to approximately $8.6 million, $6.0
million, and $10.3 million, respectively. Tax laws in China are subject to
interpretations by relevant tax authorities. Preferential tax rates may not
remain in effect or may change, in which case we may be required to pay the
higher income tax rate generally applicable to Chinese companies, or such other
rate as is required by the laws of China.
Fluctuation
in the value of the RMB may have a material adverse effect on your
investment.
The value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Our revenues and costs are mostly denominated in RMB. Any significant
fluctuation in value of RMB may materially and adversely affect our cash flows,
revenues, earnings and financial position, and the value of our stock in U.S.
dollars. For example, an appreciation of RMB against the U.S. dollar would make
any new RMB denominated investments or expenditures more costly to us, to
the extent that we need to convert U.S. dollars into RMB for such purposes. In
addition, the depreciation of significant U.S. dollar denominated assets could
result in a charge to our income statement and a reduction in the value of these
assets.
We
must comply with the Foreign Corrupt Practices Act.
We are
required to comply with the United States Foreign Corrupt Practices Act, which
prohibits U.S. companies from engaging in bribery or other prohibited payments
to foreign officials for the purpose of obtaining or retaining business. Foreign
companies, including some of our competitors, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in mainland China. If our
competitors engage in these practices, they may receive preferential treatment
from personnel of some companies, giving our competitors an advantage in
securing business or from government officials who might give them priority in
obtaining new licenses, which would put us at a disadvantage. Although we inform
our personnel that such practices are illegal, we cannot assure you that our
employees or other agents will not engage in such conduct for which we might be
held responsible. If our employees or other agents are found to have engaged in
such practices, we could suffer severe penalties.
13
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.
Our
ability to operate in China may be harmed by changes in its laws and
regulations, including those related to taxation, environmental regulations,
land use rights, property and other matters. We believe that our operations in
China are in material compliance with all applicable legal and regulatory
requirements. However, the central or local governments of these jurisdictions
may impose new, stricter regulations or interpretations of existing regulations
that would require additional expenditures and efforts on our part to ensure our
compliance with such regulations and interpretations. Government actions in
the future, including any decision not to continue to support recent economic
reforms and to return to a more centrally planned economy or regional or local
variations in the implementation of economic policies, could have a significant
effect on economic conditions in China or particular regions thereof, and could
require us to divest ourselves of any interest we then hold in Chinese
properties.
We
are subject to environmental laws and regulations in the PRC.
We are
subject to environmental laws and regulations in the PRC. Any failure by us to
comply fully with such laws and regulations will result in us being subject to
penalties and fines or being required to pay damages. Although we believe we are
currently in compliance with the environmental regulations in all material
respects, any change in the regulations may require us to acquire equipment or
incur additional capital expenditure or costs in order to comply with such
regulations. Our profits will be adversely affected if we are unable to pass on
such additional costs to our customers.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
The PRC
historically has been deficient in Western style management and financial
reporting concepts and practices, as well as in modern banking, computer and
other control systems. We may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a result of
these factors, we may experience difficulty in establishing management, legal
and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards.
It
will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in the PRC.
Because
most of our executive officers and several of our directors, including our
chairman of the Board of Directors, are Chinese citizens, it may be difficult,
if not impossible, to acquire jurisdiction over these persons in the event a
lawsuit is initiated against us and/or our officers and directors by a
stockholder or group of stockholders in the United States. Also, because the
majority of our assets are located in the PRC, it would also be extremely
difficult to access those assets to satisfy an award entered against us in the
U.S. court.
The
legal system in China has inherent uncertainties that may limit the legal
protections available in the event of any claims or disputes with third
parties.
The legal
system in China is based on written statutes. Prior court decisions may be cited
for reference but have limited precedential value. Since 1979, the central
government has promulgated laws and regulations dealing with economic matters
such as foreign investment, corporate organization and governance, commerce,
taxation and trade. As China’s foreign investment laws and regulations are
relatively new and the legal system is still evolving, the interpretation
of many laws, regulations and rules is not always uniform and enforcement of
these laws, regulations and rules involve uncertainties, which may limit the
remedies available in the event of any claims or disputes with third parties. In
addition, any litigation in China may be protracted and result in substantial
costs and diversion of resources and management attention.
RISKS
ASSOCIATED WITH OUR COMMON STOCK
Our
common stock may be affected by limited trading volume and may fluctuate
significantly.
Our
common stock is traded on the Nasdaq Global Select Market. Although an active
trading market has developed for our common stock, there can be no assurance
that an active trading market for our common stock will be sustained. Failure to
maintain an active trading market for our common stock may adversely affect our
stockholders’ ability to sell our common stock in short time periods, or at all.
In addition, sales of substantial amounts of our common stock in the public
market could harm the market price of our common stock. Our common stock has
experienced, and may experience in the future, significant price and volume
fluctuations, which could adversely affect the market price of our common
stock.
14
We do not
anticipate paying cash dividends in the foreseeable future. Presently, we intend
to retain all of our earnings, if any, to finance development and expansion of
our business. The Indenture pursuant to which the Notes were issued prohibits us
from paying any dividends on our capital stock while the Notes remain
outstanding. PRC capital and currency regulations may also limit our ability to
pay dividends. Consequently, the only opportunity for investors to achieve a
positive return on your investment in us will be if the market price of our
common stock appreciates.
Our
directors and officers control approximately one third of our common stock and,
as a result, they may exercise some voting control and be able to take actions
that may be adverse to your interests.
Our
directors and executive officers, directly or through entities that they
control, beneficially owned, as a group, approximately 35.08% of our issued
and outstanding common stock as of December 31, 2009. This concentration of
share ownership may adversely affect the trading price of our common stock
because investors often perceive a disadvantage in owning shares in a company
with one or several controlling stockholders. Furthermore, our directors
and officers, as a group, have the ability to significantly influence
the outcome of all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions,
such as mergers, consolidations or the sale of substantially all of our assets.
This concentration of ownership may have the effect of delaying or
preventing a change of control, including a merger, consolidation or other
business combination involving us, or discouraging a potential acquirer
from making a tender offer or otherwise attempting to obtain
control.
Your
percentage ownership in us may be diluted by future issuances of capital stock,
which could reduce your influence over matters on which stockholders
vote.
Subject
to any applicable stockholder approval requirements imposed by the Nasdaq Stock
Market, our board of directors has the authority to issue all or any part of our
authorized but unissued shares of common stock. Issuances of common stock would
reduce your influence over matters on which our stockholders vote.
Item
1B. Unresolved Staff Comments
ITEM
2. Description of Property
Our
corporate headquarters are located at No. 9, Ha Ping Xi Lu, Ha Ping Lu Ji
Zhong Qu, Harbin Kai Fa Qu, Harbin, 150060. We currently operate four
manufacturing facilities in China.
|
·
|
Our
Harbin facility is located in the government-designated Development Zone
in the city of Harbin and occupies approximately 50,000 square meters of
land with state-of-the-art production equipment primarily dedicated to our
linear motor products.
|
|
·
|
Weihai
Tech Full is located in the coastal city of Weihai, Shandong Province, and
occupies approximately 150,000 square meters of
land.
|
|
·
|
Shanghai
Tech Full is located in the Shanghai Zhuqiao Airport Industrial Zone and
occupies approximately 40,800 square meters of
land.
|
|
·
|
Xi’an
Tech Full Simo, acquired in October 2009, is located in Xi’an city’s
Economy and Technology Development Zone and occupies approximately 200,000
square meters of land.
|
ITEM
3. Legal Proceedings
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business.
We are
not currently a party to any material legal proceedings.
ITEM
4. Reserved for Future Use by the Securities and Exchange
Commission
15
PART
II
ITEM
5. Market For Common Equity and Related Stockholder Matters
Or common
stock commenced trading on the Nasdaq Global Market on January 31, 2007 under
the ticker symbol “HRBN” and was upgraded to Nasdaq Global Select Market
effective on January 4, 2010. The following table sets forth the high and low
sale prices for our common stock from January 1, 2008 to March 12, 2010, as
reported by the Nasdaq Global Market, and the Nasdaq Global Select Market,
respectively. The closing price for shares of our common stock on March 12, 2010
was $22.75.
2010
|
High
|
Low
|
||||||
First
Quarter*
|
26.00
|
16.79
|
2009
|
High
|
Low
|
||||||
First
Quarter
|
8.90
|
4.25
|
||||||
Second
Quarter
|
16.89
|
6.00
|
||||||
Third
Quarter
|
18.55
|
12.11
|
||||||
Fourth
Quarter
|
22.91
|
15.36
|
2008
|
High
|
Low
|
||||||
First
Quarter
|
28.00
|
12.90
|
||||||
Second
Quarter
|
19.25
|
12.91
|
||||||
Third
Quarter
|
16.91
|
11.03
|
||||||
Fourth
Quarter
|
12.44
|
4.70
|
* Through
March 12, 2010.
Holders
of Record
As of
March 11, 2010, there were 34 holders of record of our common stock. The
transfer agent for the common stock is StockTrans, Inc. The transfer agent’s
address is 44 West Lancaster Avenue, Ardmore, PA 19003, telephone
(610)-649-7300.
Dividends
We have
not paid any cash dividends on our common stock, and we do not currently intend
to pay cash dividends in the foreseeable future.
16
Stock
Price Performance Graph
The
following chart compares the cumulative total stockholder return on the
Company’s shares of Common Stock with the cumulative total stockholder return of
(i) the Nasdaq Stock Exchange Market Index and (ii) a peer group index
consisting of companies reporting under the Standard Industrial Classification
Code 3621 (Motors & Generators):
The
material in this chart is not soliciting material, is not deemed filed with the
SEC and is not incorporated by reference in any filing of the Company under the
Securities Act of 1933, as amended or the Exchange Act, whether made before or
after the date of this Annual Report on Form 10-K and irrespective of any
general incorporation language in such filing.
Equity
Compensation Plan Information
The
following table provides certain information with respect to all of the
Company’s equity compensation plans in effect as of December 31,
2009.
Equity
Compensation Plan Information
Plan
category
|
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights(a)
|
Weighted-
average
exercise price of
outstanding
options,
warrants and
rights(b)
|
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a)) (c)
|
||||
Equity
compensation plans approved by security holders
|
—
|
—
|
—
|
||||
Equity
compensation plans not approved by security holders
|
355,000
|
$
|
13.97
|
403,334(1)
|
|||
Total
|
355,000
|
$
|
13.97
|
403,334(1)
|
(1)
Include forfeited options
17
Equity
Repurchases
None.
Issuance
of Unregistered Shares
The
Company has sold the following securities within the past three years that were
not registered under the Securities Act of 1933:
On June
16, 2007, the Company entered into an Asset Purchase Agreement with Harbin Tech
Full, Harbin Taifu Auto Electric Co., Ltd., a limited liability company
organized and existing under the laws of the People’s Republic of China (“Taifu
Auto”) Harbin Tech Full Industry Co., Ltd., a shareholder of the Taifu Auto
(“HTFI”), Tianfu Yang, Suofei Xu and Zedong Xu, shareholders of HTFI, and Tianli
Yang, a shareholder of both Taifu Auto and HTFI. Pursuant to the terms of the
Asset Purchase Agreement, Taifu Auto agreed to sell substantially all of its
non-cash assets to Harbin Tech Full. In consideration for the sale of Taifu
Auto’s assets, Taifu Auto will receive an aggregate purchase price consisting of
(x) a cash payment in the amount of four million dollars ($4,000,000), and (y)
473,354 newly issued shares of the Company’s common stock. Such issuances were
made in an offshore transaction pursuant to Regulation S under the Securities
Act of 1933.
On June
24, 2008, the Company entered into a Purchase Agreement with certain investors
pursuant to which, on June 25, 2008, the Company sold to the investors 3.5
million shares of our common stock, par value $0.00001 per share at $14.13 per
share solely to purchasers that qualified as accredited investors without any
general solicitation, as defined in Regulation D, for a total aggregate purchase
price of $49,455,000. The proceeds were used to pay for the acquisition by
Harbin Tech Full Electric Co. Ltd., our wholly-owned subsidiary and a PRC
company, of Weihai Hengda Electric Motor (Group) Co. Ltd., a PRC
corporation.
ITEM
6. Selected Financial Data
The
consolidated statement of operations data for the years ended December 31, 2009,
2008, 2007, 2006, and 2005 and the consolidated balance sheet data presented
below as of December 31, 2009, 2008, 2007, 2006, and 2005 are derived from our
audited consolidated financial statements and related notes, included elsewhere
in this Annual Report on Form 10-K. These audited consolidated financial
statements and notes have been prepared in accordance with accounting principles
generally accepted in the United States, or U.S. GAAP, and for the years ended
December 31, 2009, 2008, 2007 and 2006 have been audited by Frazer Frost, LLP (a
successor entity of Moore Stephens Wurth Frazer and Torbet, LLP), an independent
registered public accounting firm, and for the year ended December 2005 have
been audited by Kabani & Company, Inc., an independent registered public
accounting firm.
This data
should be read in conjunction with our “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our consolidated financial
statements and the related notes included elsewhere in this Annual Report on
Form 10-K.
Consolidated
Statement of Operations Data:
Year ended December 31,
|
||||||||||||||||||||
2009(a)(b)(c)
|
2008(b)
|
2007(d)
|
2006(e)
|
2005
|
||||||||||||||||
Revenue
|
$ | 223,234,394 | $ | 120,820,302 | $ | 65,402,864 | $ | 40,415,777 | $ | 23,643,664 | ||||||||||
Cost
of revenue
|
(146,622,220 | ) | (73,343,521 | ) | (32,967,887 | ) | (20,754,282 | ) | (12,083,957 | ) | ||||||||||
Gross
profit
|
76,612,174 | 47,476,781 | 32,434,977 | 19,661,495 | 11,559,707 | |||||||||||||||
Selling,
R&D general and administrative expenses
|
(20,764,873 | ) | (13,083,604 | ) | (8,723,685 | ) | (5,667,260 | ) | (1,595,443 | ) | ||||||||||
Income
(loss) from operations
|
55,847,301 | 34,393,177 | 23,711,292 | 13,994,235 | 9,964,264 | |||||||||||||||
Net
Income attributable to controlling interest
|
$ | 19,646,781 | $ | 25,378,699 | $ | 16,902,684 | $ | 18,438,512 | $ | 10,000,158 | ||||||||||
Basic
earnings per share attributable to controlling interest
|
$ | 0.77 | $ | 1.25 | $ | 0.99 | $ | 1.11 | $ | 0.67 | ||||||||||
Diluted
earnings per share attributable to controlling interest
|
$ | 0.77 | $ | 1.19 | $ | 0.91 | $ | 1.01 | $ | 0.66 | ||||||||||
Dividends
declared per share
|
— | — | — | — | — | |||||||||||||||
Weighted
average number of shares outstanding
|
||||||||||||||||||||
Basic
|
25,568,936 | 20,235,877 | 17,082,300 | 16,600,451 | 14,934,667 | |||||||||||||||
Diluted
|
25,672,420 | 21,323,660 | 18,634,739 | 18,306,569 | 15,143,891 |
18
Consolidated
Balance Sheet Data:
As of December 31,
|
||||||||||||||||||||
2009(f)
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Cash
|
$ | 92,902,400 | $ | 48,412,263 | $ | 45,533,893 | $ | 67,313,919 | $ | 5,739,019 | ||||||||||
Accounts
receivable, net
|
93,322,885 | 30,284,080 | 23,216,543 | 8,827,799 | 5,842,840 | |||||||||||||||
Inventories
|
74,913,877 | 21,960,084 | 2,570,929 | 583,287 | 1,343,031 | |||||||||||||||
Property,
plant and equipment
|
156,364,548 | 94,931,999 | 23,858,035 | 9,219,534 | 7,783,001 | |||||||||||||||
Total
assets
|
530,954,232 | 235,488,303 | 132,649,253 | 92,958,821 | 24,795,156 | |||||||||||||||
Total
current liabilities
|
171,433,316 | 22,711,515 | 4,066,575 | 2,770,898 | 192,237 | |||||||||||||||
Total
liabilities
|
180,457,874 | 60,838,968 | 48,032,678 | 47,928,577 | 192,237 | |||||||||||||||
Total
stockholders’ equity
|
329,196,517 | 174,649,335 | 84,616,575 | 45,030,244 | 24,602,919 |
Footnotes
to Five-Year Financial Summary
(a) In
October 2009, the Company acquired Xi’an Tech Full Simo, a PRC
corporation. The acquisition contributed $44.1 million to total sales
and $4.6 million to net income attributable to controlling interest in 2009 and
only included the operations for the three months ended December 31,
2009.
(b) Net
income attributable to controlling interest in 2009 included special non-cash
and non-recurring items totaling a net loss of $24.2 million or $(0.94) per
diluted share. See Management Discussions and Analysis. Excluding these
non-recurring and non-cash charges, the adjusted net income attributable to
controlling interest was $43.4 million.
(c) In
July 2008, the Company acquired Weihai Hengda Electric Motor (Group) Co., Ltd.,
a PRC corporation. The acquisition contributed $27.6 million to total
sales and $1.7 million to net income in 2008. The 2009 results reflected a
full-year contribution from this acquisition compared to only six-month
contribution in 2008.
(d) In
June 2007, the Company acquired Harbin Taifu Auto Electric Co., Ltd., a PRC
corporation through an Asset Purchase Agreement. The acquisition
contributed to the results of operations starting in the quarter ended September
30, 2007.
(e) Net
income in 2006 included non-cash gains of $6.4 million “Change in Fair Value of
Warrants” due to an accounting adjustment.
(f) The
significant increase in accounts receivable and inventories was mainly due to
the acquisition of Xi’an Techu Full Simo in October 2009.
19
ITEM
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion of our financial condition and results of operations should
be read in conjunction with our audited consolidated financial statements and
the notes to those financial statements appearing elsewhere in this Annual
Report on Form 10-K. This discussion contains forward-looking statements that
involve significant risks and uncertainties. As a result of many factors, such
as those set forth under “Forward Looking Statements” and “Item 1A.
Business—Risk Factors” and elsewhere in this Annual Report on Form 10-K, our
actual results may differ materially from those anticipated in these
forward-looking statements.
As used
in this report, the terms “Company”, “we”, “our”, “us” and “Harbin” refer to
Harbin Electric, Inc., a Nevada corporation.
PRELIMINARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The
following discussion of our financial condition and results of operations should
be read in conjunction with our audited and unaudited consolidated financial
statements and the notes to those financial statements set forth commencing on
page F-1 of this report. In addition to historical information, this discussion
and analysis contains forward-looking statements that relate to future events
and expectations and, as such, constitute forward-looking statements.
Forward-looking statements include those containing such words as “anticipates,”
“believes,” “estimates,” “expects,” “hopes,” “targets,” “should,” “will,”
“will likely result,” “forecast,” “outlook,” “projects” or similar expressions.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause actual results, performance or achievements of
the Company to be materially different from those expressed or implied in the
forward-looking statements.
Company
Overview
We were
incorporated under the laws of the state of Nevada and, along with our
wholly-owned subsidiaries, are headquartered in Harbin, China. We design,
develop, manufacture, supply, and service a wide range of electric motors, with
a focus on innovation, creativity, and value-added products. Our major product
lines include linear motors, specialty micro-motors, and industrial rotary
motors. Our products are purchased by a broad range of customers including those
customers in the energy industry, factory automation, food processing, packaging
industries, power generation systems, and mass transportation and freight
transportation systems, petrochemical, metallurgical, mining, textile, and
agricultural industries. We supply domestic China and other international
markets. We operate four major manufacturing facilities in China, covering
approximately 450,000 meters of land, and have an employee base of approximately
4900 engineers, production technicians and other employees.
We are
subject to risks common to companies operating in China, including risks
inherent in our distribution and commercialization efforts, uncertainty of
foreign regulatory and marketing approvals and laws, reliance on key customers,
enforcement of patent and proprietary rights, the need for future capital and
retention of key employees. We cannot provide assurance that we will generate
revenues or achieve and sustain profitability in the future.
Executive
Summary
Harbin
Electric performed well in 2009 despite weak economic conditions early on.
This was also a year of significant strategic, operational and financial
accomplishments as we further strengthened our leadership position in the
electric motor industry in China. Faster economic growth in the second half of
the year fueled by the massive government stimulus program and continued
industrialization created a positive environment for our business. The Company
achieved total revenues of $223.2 million in 2009, an 85% increase compared with
$120.8 million in 2008. Net income attributable to controlling
interest totaled $19.6 million ($0.77 per diluted share) in 2009, which included
$24.2 million charges related to non-recurring and non-cash items. Excluding
these non-recurring and non-cash items, on a comparable basis, the adjusted net
income attributable to controlling interest totaled $43.8 million ($1.71 per
diluted share), compared with net income of $25.4 million ($1.19 per diluted
share) in 2008. The successful acquisition and integration of Xi’an Tech Full
Simo in October contributed $44.1 million to total revenues and $4.6 million to
net income attributable to controlling interest.
On the
financial front, we raised additional equity capital which allowed us to repay a
significant portion of our existing indebtedness, completed the acquisition of
Xi’an Simo, and maintained a strong balance sheet as we continue to implement
our growth strategy. The Company generated a total of $62.5 million cash flow
from operations in 2009.
As 2010
begins, we expect to move the Company forward to a sustained profitability by
leveraging our solid financial position and a promising portfolio of
products. Although the first quarter is traditionally slower with the long
Chinese new-year holiday, we do not expect this seasonality to impact our
business significantly compared to the fourth quarter. We also expect that the
Chinese government’s commitment to sustainable economic growth and the
accelerated industrialization and urbanization of China will continue to drive
our business and support our long term growth objectives. In 2010, we expect to
continue the integration of Xi’an Tech Full Simo, capture the synergies, advance
R&D, and further strengthen our competitive position in the
industry.
Critical
Accounting Policies and Estimates
We
believe that the application of the following accounting policies, which are
important to our financial position and results of operations, require
significant judgments and estimates on the part of management. Our critical
accounting policies and estimates present an analysis of the uncertainties
involved in applying a principle, while the accounting policies note to the
financial statements (Note 2) describe the method used to apply the accounting
principle.
20
Accounts
Receivable
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reverses. The estimated loss rate is based on our historical
loss experience and also contemplates current market conditions. Delinquent
account balances are written-off after management has determined that the
likelihood of collection is not probable, and known bad debts are written off
against allowance for doubtful accounts when identified.
Inventories
Inventory
is valued at the lower of cost or market value, as determined on a first-in,
first-out basis, using the weighted average method. Management compares the cost
of inventory with the market value and an allowance is made for writing down the
inventory to its market value, if lower than cost. On an ongoing basis,
inventories are reviewed for potential write-down for estimated obsolescence or
unmarketable inventories equal to the difference between the costs of
inventories and the estimated net realizable value based upon forecasts for
future demand and market conditions. When inventory is written-down to the lower
of cost or market, it is not marked up subsequently based on changes in
underlying facts and circumstances. Inventory is composed of raw
material for manufacturing electrical motors, work in process and finished goods
within the Company’s warehouse premise or consigned at a customer
site.
Inventory
levels are maintained based on projections of future demand and market
conditions. Any sudden decline in demand and/or rapid product improvements and
technological changes can result in excess and/or obsolete inventories. To the
extent we increase our reserves for future periods, operating income will be
reduced. Because most of our products are customized and unique to a
particular customer, there is a risk that we will forecast inventory needs
incorrectly and purchase or produce excess inventory. As a result, actual demand
may differ from forecasts, and such differences, if not managed, may have a
material adverse effect on future results of operations due to required
write-offs of excess or obsolete inventory. To mitigate such exposure, sometimes
we require a binding purchase order or a signed agreement by our customers
agreeing to pay for and take possession of finished goods inventory
parts for the duration of the agreement.
Revenue
Recognition
The
Company recognizes sales at the date of shipment to customers when a formal
arrangement exists, the price is fixed or determinable, the delivery is
completed, no other significant obligations of the Company exist and
collectability is reasonably assured. For products that are required to be
examined by customers, sales revenue is recognized after the customer
examination is passed. Payments received before all of the relevant criteria for
revenue recognition are recorded as customer deposits.
In
addition, revenue recognition could be negatively impacted by returns. For our
linear motor and specialty micro-motor businesses, our products are custom
products which are customer specific, and no returns are allowed. We warrant our
product for repair, only in the event of defects for two years from the date of
shipment. We charge such costs to cost of goods sold. For our
industrial rotary motor business, our products are standardized products
and returns are allowed within three days upon receipt of products by customers.
We provide product warranty for repair one year from the date of shipment.
Historically, the returns and defects have not been material. Should returns
increase in the future it would be necessary to adjust the estimates, in which
case recognition of revenues could be delayed.
Stock-Based
Compensation
We are
required to estimate the fair value of share-based awards on the date of grant.
The value of the award is principally recognized as expense ratably over the
requisite service periods. The fair value of our restricted stock units is based
on the closing market price of our common stock on the date of grant. We have
estimated the fair value of stock options and stock purchase rights as of the
date of grant or assumption using the Black-Scholes option pricing model, which
was developed for use in estimating the value of traded options that have no
vesting restrictions and that are freely transferable. The Black-Scholes model
considers, among other factors, the expected life of the award and the expected
volatility of our stock price. We evaluate the assumptions used to value stock
options and stock purchase rights on a quarterly basis. The fair values
generated by the Black-Scholes model may not be indicative of the actual fair
values of our equity awards, as it does not consider other factors important to
those awards to employees, such as continued employment, periodic vesting
requirements and limited transferability.
The
Company is required to measure the cost of the equity instruments issued in
exchange for the receipt of goods or services from other than employees at the
estimated fair market value of the consideration received or the estimated fair
value of the equity instruments issued, whichever is more reliably determinable.
The value of equity instruments issued for consideration other than employee
services is determined on the earlier of a performance commitment or completion
of performance by the provider of goods or services.
21
Stock
compensation expense is recognized based on awards expected to vest. GAAP
requires forfeitures to be estimated at the time of grant and revised in
subsequent periods, if necessary, if actual forfeitures differ from those
estimates. There were no estimated forfeitures as the Company has a
short history of issuing options.
Derivative
Financial Instruments
The
Company used a cross-currency interest rate swap to hedge its exposure under the
2012 Notes. The derivative is initially recognized in the balance sheet at cost
and subsequently re-measured at fair value each reporting period. Changes in the
fair values of derivatives accounted for as cash flow hedges, to the extent they
qualify for hedge accounting, are recorded in accumulated other comprehensive
income, net of deferred taxes; changes in fair values of derivative financial
instruments not qualifying as hedges are reported in income.
At the
inception of a hedge transaction, the Company documents the relationship between
hedging instruments and hedged items, as well as its risk management objective
and the strategy for undertaking the hedge. This process includes linking all
derivatives designated to specific firm commitments of forecast transactions.
The Company also documents its assessment, both at inception and on an ongoing
basis, of whether the derivative financial instruments that are used to hedge
are highly effective in offsetting changes in fair values or cash flows of
hedged items.
The
Company terminated the cross-currency interest rate swap agreement during the
third quarter of 2009. Therefore, this derivative financial instrument is no
longer recognized in the quarterly financial statements as a liability beginning
in the third quarter of 2009.
Fair
Value of Financial Instruments
On
January 1, 2008, the Company adopted FASB’s accounting standard related to fair
value measurements and began recording financial assets and liabilities subject
to recurring fair value measurement at the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants. On January 1, 2009 the Company began recording
non-recurring financial as well as all non-financial assets and liabilities
subject to fair value measurement under the same principles. These fair value
principles prioritize valuation inputs across three broad levels.
Adoption
of New Accounting Standards
Effective
January 1, 2009, a total of 2,030,158 warrants previously treated as equity
pursuant to the derivative treatment exemption are no longer afforded equity
treatment because the strike price of the warrants is denominated in US dollar,
a currency other than the Company’s functional currency, the Chinese
Renminbi. As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of the
warrants outstanding will be recognized currently in earnings until such time as
the warrants are exercised or expired.
As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in August 2006. On January 1,
2009, the Company reclassified from additional paid-in capital, as a cumulative
effect adjustment, $6.1 million to beginning retained earnings and $7.4
million to warrant liabilities to recognize the fair value of such warrants. As
of December 31, 2009, the Company has 366,697 warrants outstanding. The fair
value of the outstanding warrants was $4.6 million. The Company
recognized a total of $13.2 million loss from the change in fair value of
the warrants for the year ended December 31, 2009. The Company uses the
Black-Scholes Option Pricing Model to value its options and warrants, and
considering certain key input, including the trading price on reporting date,
volatility of its stock, conversion price, remaining term of the warrants ,
dividend rate , and the risk-free interest rate for the warrant
life.
Recently
Adopted Accounting Standards
In
January 2009, the FASB’s accounting standard regarding other investments
providing additional guidance which amended the impairment model to remove the
exclusive reliance on “market participant” estimates of future cash flows used
in determining fair value. Changing the cash flows used to analyze
other-than-temporary impairment from the “market participant” view to a holder’s
estimate of whether there has been a “probable” adverse change in estimated cash
flows allows companies to apply reasonable judgment in assessing whether an
other-than-temporary impairment has occurred. The adoption of this guidance did
not have a material impact on the Company’s consolidated financial
statements.
In April
2009, the FASB’s accounting standard regarding fair value measurements and
disclosures providing additional guidance for estimating fair value when the
volume and level of activity for the asset or liability have significantly
decreased and also includes guidance on identifying circumstances that indicate
a transaction is not orderly for fair value measurements. This guidance shall be
applied prospectively with retrospective application not permitted. The adoption
of this guidance did not have a material impact on the Company’s consolidated
financial statements.
22
In April
2009, the FASB’s
accounting standard regarding debt and equity securities requires to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This guidance will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This guidance provides
increased disclosure about the credit and noncredit components of impaired debt
securities that are not expected to be sold and also requires increased and more
frequent disclosures regarding expected cash flows, credit losses, and an aging
of securities with unrealized losses. Although this guidance does not result in
a change in the carrying amount of debt securities, it does require that the
portion of an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. The adoption of this guidance
did not have a material impact on the Company’s consolidated financial
statements.
In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this guidance, fair values for these assets and liabilities were only
disclosed annually. This guidance applies to all financial instruments and
requires all entities to disclose the method(s) and significant assumptions used
to estimate the fair value of financial instruments. The adoption of this
guidance did not have a material impact on the Company’s consolidated financial
statements.
In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This
guidance is effective for the Company beginning in 2010. Should the Company’s
accounts receivable securitization programs not qualify for sale treatment under
the revised rules, future securitization transactions entered into on or after
January 1, 2010 would be classified as debt and the related cash flows would be
reflected as a financing activity. The adoption of this guidance did not have a
material impact on the Company’s consolidated financial statements.
In June
2009, the FASB updated an accounting standard regarding consolidation guidance
which modifies how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. This guidance clarifies that the determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic performance.
This guidance requires an ongoing reassessment of whether a company is the
primary beneficiary of a variable interest entity. This guidance also requires
additional disclosures about a company’s involvement in variable interest
entities and any significant changes in risk exposure due to that involvement.
This guidance is effective for fiscal years beginning after November 15, 2009.
The adoption of this guidance did not have a material impact on the Company’s
consolidated financial statements.
In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. The adoption of this guidance
did not have a material impact on the Company’s consolidated financial
statements.
In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation. This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The adoption of this guidance did not have a material impact on
the Company’s consolidated financial statements.
In
November 2009, the FASB issued an ASU regarding accounting for stock dividends,
including distributions to shareholders with components of stock and cash. This
ASU clarifies that the stock portion of a distribution to shareholders that
contains components of cash and stock and allows shareholders to select their
preferred form of the distribution (with a limit on the amount of cash that will
be distributed in total) should be considered a stock dividend and included in
EPS calculations as a share issuance. The adoption of this guidance did not have
a material impact on the Company’s consolidated financial
statements
In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140.The amendments in
this Accounting Standards Update improve financial reporting by eliminating the
exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require enhanced
disclosures about the risks that a transferor continues to be exposed to because
of its continuing involvement in transferred financial assets. Comparability and
consistency in accounting for transferred financial assets will also be improved
through clarifications of the requirements for isolation and limitations on
portions of financial assets that are eligible for sale accounting. The Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.
23
In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company is currently evaluating the impact of this
ASU, however, the Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company does not expect the adoption of this ASU to
have a material impact on its consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are
effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date
the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15, 2009. The
amendments in this update should be applied retrospectively to the first period
that an entity adopted SFAS No. 160. The Company does not expect the adoption of
this ASU to have a material impact on the Company’s consolidated financial
statements.
In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and
2. A reporting entity should disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers. 2) Activity in
Level 3 fair value measurements. In the reconciliation for fair value
measurements using significant unobservable inputs (Level 3), a reporting entity
should present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number). This
update provides amendments to Subtopic 820-10 that clarify existing disclosures
as follows: 1) Level of disaggregation. A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities. A
class is often a subset of assets or liabilities within a line item in the
statement of financial position. A reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities.
2) Disclosures about inputs and valuation techniques. A reporting entity
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. These disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
Company is currently evaluating the impact of this ASU, however, the Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.
Results
of Operations
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenue
For the
year ended December 31, 2009, total revenues were $223.2 million, compared with
$120.8 million in 2008, reflecting an 85% growth year-over-year. Strong sales
growth resulted from the acquisition of Xi’an Tech Full Simo, which contributed
$44 million to total sales, as well as higher sales across all product lines. By
product line, linear motor sales were up 19% from 2008 primarily due to higher
oil pumps sales (519 units in 2009 compared to 214 units in 2008) and new
sales from our linear motor propulsion systems developed for coal transportation
trains ($7.3 million), as the Company started to deliver the products during the
4th quarter. This was somewhat offset by declines in other linear motors and in
export sales. Sales of specialty micro motors were up 17% from 2008. Sales of
industrial rotary motors increased from $28 million to $116 million including
the contribution from the new acquisition. International sales totaled $21.6
million in 2009, compared with $20.2 million in 2008.
24
The
following table sets forth the amounts and the percentage relationship to
revenues in our consolidated statements of income for the years ended December
31, 2009 and 2008:
Year Ended December 31,
|
Variance
|
|||||||||||||||
2009
|
2008
|
Amount
|
%
|
|||||||||||||
Revenues
|
$ | 223,234,394 | $ | 120,820,302 | $ | 102,414,092 | 85 | % | ||||||||
Gross
Profit
|
76,612,174 | 47,476,781 | 29,135,393 | 61 | % | |||||||||||
Gross
Profit Margin
|
34.3 | % | 39.3 | % | ||||||||||||
Operating
Income
|
55,847,301 | 34,393,177 | 21,454,124 | 62 | % | |||||||||||
Operating
Margin
|
25.0 | % | 28.5 | % | ||||||||||||
Net
Income attributable to controlling interest
|
19,646,781 | 25,378,699 | (5,731,918 | ) | (23 | )% | ||||||||||
Net
Profit Margin
|
8.8 | % | 21.0 | % | ||||||||||||
Income
Per Share attributable to controlling interest
|
||||||||||||||||
Basic
|
$ | 0.77 | $ | 1.25 | $ | (0.48 | ) | |||||||||
Diluted
|
$ | 0.77 | $ | 1.19 | $ | (0.42 | ) |
The
following table presents the revenue contribution by percentage by each of our
product line in 2009 versus 2008.
|
Percent of Total Revenues
|
|||||||
Product Line
|
2009
|
2008
|
||||||
Linear
Motors and Related Systems
|
27 | % | 41 | % | ||||
Specialty
Micro-Motors
|
18 | % | 28 | % | ||||
Rotary
Motors
|
52 | % | 23 | % | ||||
Weihai
|
32 | % | 23 | % | ||||
Xi'an
|
20 | % | 0 | % | ||||
Others
|
3 | % | 8 | % | ||||
Total
|
100.0 | % | 100.0 | % |
Net
Income
The
Company recorded a net income available to controlling interest of $19.6
million, or $0.77 per diluted share, which included special non-cash and
non-recurring items totaling a net loss of $24.2 million or $(0.94) per diluted
share. This compared with a net income of $25.4 million, or $1.19 per
diluted share in 2008. Total weighted average diluted share count at the end of
2009 was 25.7 million compared to 21.3 million at the end of 2008. The increase
was mainly due to the 7.2 million common shares issued in August 2009 in an
equity financing, which resulted in some earnings dilution.
The
management of Harbin Electric uses non-GAAP adjusted net earnings to measure the
performance of the Company’s business internally by excluding non-recurring
items as well as special non-cash charges. The Company’s management
believes that these non-GAAP adjusted financial measures allow the management to
focus on managing business operating performance because these measures reflect
the essential operating activities of Harbin Electric and provide a consistent
method of comparison to historical periods. The Company believes that providing
the non-GAAP measures that management uses internally to its investors is useful
to investors for a number of reasons. The non-GAAP measures provide a consistent
basis for investors to understand Harbin Electric's financial performance in
comparison to historical periods without variation of non-recurring items and
non-operating related charges. In addition, it allows investors to evaluate the
Company's performance using the same methodology and information as that used by
the management. Non-GAAP measures are subject to inherent limitations because
they do not include all of the expenses included under GAAP and because they
involve the exercise of judgment of which charges are excluded from the non-GAAP
financial measure. However, the management of Harbin Electric compensates for
these limitations by providing the relevant disclosure of the items
excluded.
25
The
following table provides the non-GAAP financial measure and a reconciliation of
the non-GAAP measure to the GAAP net income.
2009
|
2008
|
|||||||
Net
Income Attributable to Controlling Interest
|
$ | 19,646,781 | $ | 25,378,699 | ||||
Deduct:
|
||||||||
Other
Income - Government Grant
|
$ | (1,172,560 | ) | $ | 0 | |||
Gain
on debt repurchase
|
$ | (4,155,000 | ) | $ | 0 | |||
Add
back:
|
||||||||
Amortization
associated with debt repurchase
|
$ | 7,279,487 | $ | 0 | ||||
Loss
on cross currency swap settlement
|
$ | 9,000,000 | $ | 0 | ||||
Change
in fair value of warrant
|
$ | 13,214,525 | $ | 0 | ||||
Adjusted
Net Income Attributable to Controlling Interest
|
$ | 43,813,233 | $ | 25,378,699 | ||||
Diluted
EPS
|
$ | 0.77 | $ | 1.19 | ||||
Deduct:
|
||||||||
Other
Income - Government Grant
|
$ | (0.050 | ) | $ | 0.00 | |||
Gain
on debt repurchase
|
$ | (0.160 | ) | $ | 0.00 | |||
Add
back:
|
||||||||
Amortization
associated with debt repurchase
|
$ | 0.280 | $ | 0.00 | ||||
Loss
on cross currency swap settlement
|
$ | 0.350 | $ | 0.00 | ||||
Change
in fair value of warrant
|
$ | 0.520 | $ | 0.00 | ||||
Adjusted
Diluted EPS Attributable to Controlling Interest
|
$ | 1.71 | $ | 1.19 |
The
non-recurring and non-cash items in 2009 included:
(1) The
second quarter had $1.17 million (RMB 8 million) government grant, which was
awarded in June 2009 to the Company’s subsidiary HTFE by the Harbin municipal
government to support the Company’s subway train project that qualifies as
engaging in China’s advanced industrialization;
(2)
During the third quarter, the Company repurchased $26.5 million 2012 Notes at a
discount of 15% and the outstanding $6 million 2010 Notes at a discount of 3%,
which resulted in a total gain of $4.16 million. As a result of the debt
repurchase, the Company recorded a $7.3 million additional amortization of debt
discount and debt issuance costs associated with the repurchased portion of the
debt;
(3)
During the third quarter, the Company also terminated the cross currency
interest rate swap agreement that was intended as a cash flow hedge on the
scheduled payments of the $38 million 2012 Notes. As a result, $9 million was
transferred from the accumulated other comprehensive loss into earnings as a
loss from termination of the swap; and
(4) In
2009, the Company also recorded a loss of $13.2 million due to changes in fair
value of warrants.
Gross
Profit
The
following table presents the average gross profit margin by each of our product
line in 2009 versus 2008. Overall gross profit margin declined to 34.3% in
2009 from 39.3% in 2008 due to changes in the product mix as sales of
lower-margin industrial rotary motors expanded, in part as a result of the
acquisition of Xi’an Tech Full Simo.
26
|
Gross Profit Margin
|
|||||||
Product Line
|
2009
|
2008
|
||||||
Linear
Motors and Related Systems
|
59.3 | % | 54.0 | % | ||||
Specialty
Micro-Motors
|
39.2 | % | 40.0 | % | ||||
Rotary
Motors
|
18.9 | % | 11.2 | % | ||||
Weihai
|
11.2 | % | 11.2 | % | ||||
Xi'an
|
31.6 | % |
NA
|
|||||
Others
|
46.1 | % | 44.7 | % | ||||
Total/Average
|
34.3 | % | 39.3 | % |
Operating
Expenses
Selling,
general and administrative expense (SG&A) of $18.7 million in 2009 was
higher than the $11.9 million in 2008, reflecting higher costs associated with
increased sales activities such as shipping and handling costs and the addition
of administrative costs from the newly acquired company Xi’an Tech Full Simo and
our start up of Shanghai Tech Full. Higher depreciation expense and increased
auditing expense and consulting expense related to the acquisition and
Sabanes-Oxley 404 compliance contributed to the higher SG&A. However, as a
percentage of total sales, the Company’s total operating expense declined
year-over-year to 8.4% in 2009 from 9.9% in 2008.
Operating
profits in 2009 were $55.8 million compared to $34.4 million in 2008, with the
operating margin at 25.0% and 28.5%, respectively for 2009 and 2008. The decline
of the operating margin was primarily driven by changes in product mix as lower
margin industrial rotary motor business expanded more rapidly as a result of
acquisition. Before the contribution from the acquisition of Xi’an Tech
Full Simo ($9.9 million), operating profits were $45.9 in 2009 and operating
margin was 25.6%.
Interest
Expense (net)
Net
interest expense was $12.3 million in 2009, which included $10.9 million
amortization of debt discount and $1.3 million amortization of debt
issuance costs, of which $7.93 million was related to the debt repurchase in the
third quarter of 2009. Excluding these special charges, net interest expense was
$5.0 million. This compares to net interest expense of $6.1 million in
2008. The reduction of interest expense was mainly due to reduction
of our debt. Interest income earned on cash deposit included in the net interest
expense was $0.9 million in 2009 and $0.8 million in 2008.
Other
Income (net)
Other
income, net, totaled $5.5 million in 2009 compared to $1.6 million in
2008. This item mainly included income from recycling scrap materials
and selling production waste, government grant, and a government subsidy in an
amount that is equal to a 2.5% tax rate reduction granted to Harbin Tech Full
to encourage its high-technology related businesses. The dollar amount of
the assistance to Harbin Tech Full was approximately $1.1 million in 2009 and
$0.8 million in 2008.
Income
Tax
The
income tax provision was $7.8 million in 2009 versus $4.5 million in 2008. Some
of our subsidiaries receive preferential tax treatment either due to its being
located in an economic development zone or due to its approved status as
engaging in the development of high-technology. Harbin Tech Full is subject to
10% preferential tax rate until December 31, 2010 and 15% thereafter. Our
operations under Shanghai Tech Full was subject to 0% preferential tax rate in
2009 and will be subject to 11% in 2010, 12% in 2011, 12.5% in 2012, and 25%
thereafter. Our operations under Xi’an Tech Full Simo were subject to a 15%
preferential tax rate. Weihai Tech Full is subject to the 25% standard income
tax rate. The standard income tax rate for all corporations in China is
25%.
Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
Revenue
For the
year ended December 31, 2008, the Company reported sales of $120.8 million, up
85% compared with sales of 65.4 million in 2007. Total sales consisted of 41%
from linear motors and its integrated application systems, 28% from automobile
specialty micro-motors, 23% from industrial rotary motors, and 8% from
controllers and armatures. For comparison, total sales in 2007 consisted of 56%
from linear motors and the integrated application systems, 28% from automobile
specialty micro-motors, and 16% from controllers, armatures and other special
motors.
27
The
year-over-year sales growth was primarily attributable to the $27.6 million
sales from our industrial rotary motor business acquired in July
2008. Higher sales from the other two core product lines also
contributed significantly to the sales growth, with linear motor sales up 36%
and automobile specialty micro-motor sales up 87% year-over-year. Excluding the
acquisition of Weihai Tech Full in July 2008, revenues from existing products
increased to $93.2 million, representing a 43% increase from 2007.
International
sales totaled $20.2 million or 17% of total sales in 2008. This compares to
international sales of $8.1 million in 2007, representing a 149% growth from the
prior year.
The
following table sets forth the amounts and the percentage relationship to
revenues in our consolidated statements of income for the years ended December
31, 2008 and 2007:
Year
Ended December 31,
|
Variance
|
|||||||||||||||
2008
|
2007
|
Amount
|
%
|
|||||||||||||
Revenues
|
$ | 120,820,302 | $ | 65,402,864 | $ | 55,417,438 | 85 | % | ||||||||
Gross
Profit
|
47,476,781 | 32,434,977 | 15,041,804 | 46 | % | |||||||||||
Gross
Profit Margin
|
39.3 | % | 49.6 | % | ||||||||||||
Operating
Income
|
34,393,177 | 23,711,292 | 10,681,885 | 45 | % | |||||||||||
Operating
Margin
|
28.5 | % | 36.3 | % | ||||||||||||
Net
Income attributable to controlling interest
|
25,378,699 | 16,902,684 | 8,476,015 | 50 | % | |||||||||||
Net
Profit Margin
|
21.0 | % | 25.8 | % | ||||||||||||
Income
Per Share attributable to controlling interest
|
||||||||||||||||
Basic
|
$ | 1.25 | $ | 0.99 | $ | 0.26 | ||||||||||
Diluted
|
$ | 1.19 | $ | 0.91 | $ | 0.28 |
Net
Income
Full year
2008 net income totaled $25.4 million ($1.19 per diluted share), compared with
net income of $16.9 million ($0.91 per diluted share) in 2007. The acquisition
of Weihai Tech Full in July 2008 contributed $1.7 million to the total net
income. Compared with 2007, the benefits of sales growth from new products and
the acquisition as well as lower interest expense and higher other income were
partially offset by higher SG&A costs and the provision for income taxes
that began in 2008. Total weighted average diluted share count at the end of
2008 was 21.3 million compared to 18.6 million at the end of 2007. The increase
was mainly due to the 3.5 million common shares issued in June 2008, which
resulted in some earnings dilution in 2008.
Gross
Profit
Total
gross profits of $47.5 million consisted of 6% from the acquisition of
Weihai Tech Full and 94% from the existing businesses. This was $15.0 million
higher in 2008 than in 2007, due principally to higher sales from existing
products and newly added sales from acquisition. The overall gross
profit margin was 39.3% in 2008 compared to 49.6% in 2007. The decline in gross
profit margin is primarily driven by changes in product mix where sales
contribution from our lower margin products including industrial rotary motors
and auto specialty micro-motors increased more. The gross margin for
industrial rotary motor products was negatively impacted by higher raw material
prices in 2008 compared to 2007. Excluding the acquisition, the
average gross profit margin was 47.8% for 2008.
Operating
Expenses
Selling,
general and administrative expense (SG&A) of $11.9 million in 2008 was
higher than the $7.7 million in 2007, reflecting higher costs associated with
increased sales activities such as shipping and handling costs and the addition
of administrative costs from the newly acquired company Weihai Tech Full. Higher
depreciation expense and increased auditing, consulting, and legal expense
related to the acquisition and Sabanes-Oxley 404 compliance work as well as
higher stock based compensation expense contributed to the higher S&A.
However, as a percentage of total sales, the Company’s total operating expense
declined year-over-year to 9.9% in 2008 from 11.7% in 2007.
28
Operating
profits of $34.4 million were $10.7 million higher in 2008 than in 2007, with
the operating margin at 28.5% and 36.3%, respectively for 2008 and
2007. The decline of the operating margin was primarily driven by
changes in product mix due to the addition of lower margin industrial rotary
motor business through the acquisition. Excluding the contribution
from the acquisition ($1.7 million), operating profits were $32.7 with the
operating margin at 35.1% in 2008.
Interest
Expense (net)
Interest
expense, net, of $6.1 million in 2008 decreased from $6.6 million in 2007
reflecting lower average debt balances and lower interest rates on the variable
rate 2010 Notes. Non-cash amortization expense of debt discount and
debt issuance cost totaled $5.0 million for both years. This non-cash
item reduced the annual earnings by $0.24 per diluted share in 2008 and $0.27
per diluted share in 2007.
Other
Income (net)
Other
income, net, totaled $1.6 million in 2008 compared to other expenses, net, of
$0.2 million in 2007. The other income in 2008 mainly consisted of
income from recycling scrap materials and selling production waste and a
government subsidy in an amount that is equal to a 2.5% tax rate reduction
granted to Harbin Tech Full beginning in 2008 tax year to encourage its
high-technology related businesses. The dollar amount of the subsidy to Harbin
Tech Full was approximately $0.8 million in 2008.
Income
Tax
According
to the Provisional Regulations of the People's Republic of China on Income Tax
and the approval by the local tax bureau and the Management Regulation of Harbin
Economic and Technological Development Zone, from July 1, 2004 through December
31, 2007, Harbin Tech Full was exempted from income tax. A reduced income tax
rate of 10% has been approved for January 1, 2008 to December 31,
2010. Weihai Tech Full is subject to the 25% standard income tax
rate.
The
income tax provision was $4.5 million in 2008 versus none in 2007. The income
tax that Harbin Tech Full began to pay on earnings starting on January 1, 2008
has resulted in a reduction in our growth of net earnings compared to previous
periods.
Liquidity
and Capital Resources
Overview
A major
factor in the Company’s liquidity and capital resource planning is its
generation of operating cash flow, which is strongly dependent on the demand for
our products. This is supplemented by our financing activities in the
capital markets including potentially debt and equity, which supports major
acquisitions and capital investments for business growth.
Our
liquidity position remains adequate, with $92.9 million in cash and cash
equivalents as of December 31, 2009, compared to $48.4 million as of December
31, 2008. The increase in cash and cash equivalents was mainly driven by cash
generated from operations, cash proceeds from the conversion of outstanding
warrants and option exercise, and cash proceeds from the issuance
of 7,187,500 shares of common stock at $16 per share in a public offering
during the third quarter. Cash provided by operating activities
totaled $62.5 million in 2009 compared to $42.3 million in 2008. Net proceeds
from the conversion of warrants and option exercise totaled $11.9 million. Net
proceeds from stock issuance totaled $107.5 million. Capital spending from
operations for 2009 totaled approximately $16.5 million, compared to $32.8
million for 2008. The capital spending in both periods reflects
primarily the investments in the construction and upgrading of our facilities
and purchases of new equipment.
At
December 31, 2009, several items under our current assets and current
liabilities including accounts receivables, inventories, accounts payables,
short term loans and customer deposits increased significantly compared with the
levels at December 31, 2008. Accounts receivables, increased by $63.0 million.
Inventories increased by $52.0 million. Accounts payables increased
by $38.7 million. Short term loans increased by $40.2 million.
Customer deposits increased by $17.3 million. These significant
changes in our current assets and current liabilities were primarily due to
acquisition of Xi’an Tech Full Simo. The $28.7 million amounts due to original
shareholders at December 31, 2009 represented the unpaid portion of the purchase
price for the acquisition of Xi’an Tech Full Simo.
Cash
Provided by Operating Activities
Cash
provided by operating activities totaled $62.5 million. The major components of
cash provided by operating activities are consolidated net income (net income
attributable to both controlling and noncontrolling interest) adjusted for
non-cash income and expense items and changes in operating assets and
liabilities.
Financing
Activities
On August
29, 2006, the Company, Advanced Electric Motors, Inc. (“AEM”), Citadel Equity
Fund Ltd. (“Citadel”) and Merrill Lynch International (“Merrill Lynch” and,
together with Citadel, the “Investors”) entered into a purchase agreement (the
“Purchase Agreement”) relating to the purchase and sale of (a) $50.0 million
aggregate principal amount of the Company’s Guaranteed Senior Secured Floating
Rate Notes (collectively, the “Notes”) and (b) fully detachable warrants (the
“Warrants”) to purchase an aggregate of 3,487,368 shares of our common stock.
The transaction closed on August 30, 2006. Interest on the Notes is payable
semi-annually in arrears, commencing March 1, 2007.
29
The Notes
are governed by an indenture, dated August 30, 2006, entered among the Company,
AEM, as guarantor, and The Bank of New York, as trustee for the Notes (the
“Indenture”). Of the $50.0 million aggregate principal amount of the Notes,
Citadel subscribed to $38.0 million of the principal amount of the Notes,
which were scheduled to mature on September 1, 2012 (the “2012 Notes”), and
Merrill Lynch subscribed to $12.0 million of the principal amount of the
Notes, which were schedule to mature on September 1, 2010 (the “2010 Notes”).
Pursuant to the indenture, AEM has agreed, and all of our other existing and
future subsidiaries (other than subsidiaries domiciled in the People’s Republic
of China) are obligated, to guarantee, on a senior secured basis, to the
Investors and to the trustee the payment and performance of our
obligations.
As
security for the Notes, we and The Bank of New York, as collateral agent,
entered into a share pledge agreement, dated August 30, 2006, to secure the
Notes by pledging all the shares of AEM common stock held by us.
The 2010
Notes bore interest, payable semi-annually in arrears, commencing March 1, 2007,
at a rate equal to LIBOR plus 4.75%. The 2010 Notes were subject to mandatory
redemption semi-annually commencing March 1, 2008 in the principal amount
$2,000,000 at a price equal to 100% of such principal amount.
The 2012
Notes bear interest, payable semi-annually in arrears, commencing March 1, 2007,
at a rate equal to LIBOR plus 3.35%. The 2012 Notes are subject to mandatory
redemption semi-annually commencing September 1, 2009 in the principal amounts
of $2,400,000 on September 1, 2009, $3,800,000 on March 1, 2010, $9,900,000 on
September 1, 2010 and March 1, 2011, and $4,000,000 on September 1, 2011,
March 1, 2012 and September 1, 2012, in each instance at price equal to 100% of
such principal amount.
The
Warrants are governed by a warrant agreement, dated August 30, 2006, between us
and The Bank of New York, as warrant agent. The Warrants consist of (i) six-year
warrants to purchase an aggregate of 2,192,308 shares of our common stock, at an
exercise price of $7.80 per share (the “First Tranche 2012 Warrants”), (ii)
six-year warrants to purchase an aggregate of 525,830 shares of our common stock
at an exercise price of $10.84 per share (the “Second Tranche 2012 Warrants”)
and (iii) three-year warrants to purchase an aggregate of 769,230 shares of our
common stock at an exercise price of $7.80 per share (the “2009 Warrants”). The
First Tranche 2012 Warrants and the Second Tranche 2012 Warrants were issued to
Citadel, and the 2009 Warrants were issued to Merrill. Each Warrant is
exercisable at the option of the Warrant holder at any time through the maturity
date of such Warrant.
On July
14, 2009, the Company entered into a Letter Agreement with Merrill Lynch and ABN
AMRO Bank N.V., London Branch, pursuant to which Merrill Lynch and ABN/AMRO each
agreed to waive each and every applicable provision of the Indenture but only to
the fullest extent necessary solely to permit the Company to repurchase, all
(but not part), of the remaining $6 million 2010 Notes held by Merrill
Lynch ($3 million) and ABN AMRO Bank N.V., London Branch ($3 million) on or
prior to July 31, 2009 for a repurchase price equal to 97% of the aggregate
principal amount of the 2010 Notes plus accrued and unpaid interest to but
excluding the repurchase date. On July 31, 2009, the Company paid a
total of $5,983,844 to repurchase the 2010 Notes, which was comprised of
$5,820,000 representing 97% of the $6,000,000 aggregate principal amount of the
2010 Notes held by the Merrill Lynch and ABN AMRO Bank N.V., London Branch plus
$163,844 representing accrued and unpaid interest on the 2010 Notes to but
excluding the repurchase date of the 2010 Notes. On August 5, 2009,
the 2010 Notes were cancelled.
On June
1, 2009, the Company and Citadel Equity Fund Ltd. (“Citadel”) entered into a
Letter Agreement (the “Citadel Agreement”), pursuant to which Citadel agreed to
waive each and every applicable provision of the Indenture but only to the
fullest extent necessary solely to permit the Company to repurchase, at its
option, all (but not part), of the $26.5 million 2012 Notes held by Citadel
(“Citadel Notes”) on or prior to August 31, 2009 for repurchase price
equal to 85% of the aggregate principal amount of the Citadel Notes plus accrued
and unpaid interest to but excluding the repurchase date. On August
7, 2009, the Company paid a total of $23,131,997 to repurchase the Citadel
Notes, which amount was comprised of $22,525,000 representing 85% of the
$26,500,000 aggregate principal amount of the 2012 Notes held by Citadel plus
$606,997 representing accrued and unpaid interest on the Citadel Notes to but
excluding the repurchase date. On August 11, 2009, the Citadel Notes were
cancelled.
In 2009,
the Company used total of $32,745,000 cash to repurchase and repay a total of
$36,900,000 aggregate principal amount of the 2010 and 2012 Notes, including the
mandatory redemption of $2.0 million principal amount of the 2010 Notes on March
1, 2009 and $2.4 million principal amount of the 2012 Notes on September 1,
2009.
In 2009,
a total of 1,663,461 warrants were exercised including 1,428,846 of First
Tranche 2012 Warrants and 234,615 of 2009 Warrants. The 1,428,836
First Tranche 2012 Warrants were exercised in consideration for an exercise
price paid in cash. The Company received net cash proceeds of $11,144,999 as a
result of such exercise. As of December 31, 2009, a total of 366,697 Second
Tranche 2012 Warrants remained outstanding. None of First Tranche 2012 Warrants
and 2009 Warrants remains outstanding.
On August
4, 2009, the Company closed a public offering of 6,250,000 shares of its common
stock at a price of $16.00 per share. The Company received net proceeds of
approximately $93.4 million from the offering, after deducting underwriting
discounts and estimated offering expenses. The offering was underwritten by Roth
Capital Partners, LLC (“Roth”), pursuant to the Underwriting Agreement by and
between the Company and Roth dated as of July 30, 2009. On August 17, 2009, the Company issued
an additional 937,500 shares of common stock at the public offering price of
$16.00 per share, pursuant to the over-allotment option exercised in full by
Roth in connection with its public offering that closed on August 4, 2009. The
exercise of the over-allotment option brings the total number of shares sold by
the Company in this public offering to 7,187,500 and the total gross proceeds to
$115 million. The aggregate net proceeds received by the Company totaled
approximately $107.5 million, after deducting underwriting discounts and
commissions and offering expenses payable by the
Company.
30
Investment
Activities
On
October 2, 2009, Harbin Tech Full, a wholly-owned subsidiary of the Company,
entered into an Equity Acquisition Agreement (the “Agreement”) with
Xi’an Simo Electric Co. Ltd. (“Xi’an Simo”) and Shaanxi Electric Machinery
Association (“Shaanxi Electric” and collectively with Xi’an Simo, the “Selling
Shareholders”) whereby Harbin Tech Full agreed to acquire (i) 100% of the
outstanding shares of Xi’an Simo Motor Incorporation (Group) (“Simo Motor”),
which is 99.94% owned by Xi’an Simo and 0.06% owned by Shaanxi Electric, and
(ii) all corresponding assets of Simo Motor, including but not limited to, all
of the manufacturing equipment, real-estate, land use rights, stocks, raw
materials, automobiles, intellectual property, receivables, other receivables,
payables, business contracts and external investments owned by Simo Motor for a
purchase price of equal to no less than six (6) times and no more than eight (8)
times the 2008 audited net profits of Simo Motor. Pursuant to the Agreement,
Harbin Tech Full was required to make a payment to the Selling Shareholders
equivalent to six (6) times the 2008 audited net profit of Simo Motor within ten
(10) business days after the effectiveness of the Agreement. Upon verification
of the assets and capital of Simo Motor within seven months of the closing date
of the acquisition, Harbin Tech Full may be required to make an additional
payment to the Selling Shareholders in an amount not to exceed two (2) times the
2008 audited net profit of Simo Motor.
On October 13, 2009, the Company
completed the acquisition of Simo Motor. On October 22, 2009, the
Company paid approximately $84.0 million (RMB 572.7
million) to the Selling
Share holders. As of the closing date, Harbin Tech Full had completed the
registration of the share transfer with the requisite PRC authorities and had
obtained the required business registration and transfer of licenses of Simo
Motor, all as contemplated by the Agreement. On October 13, 2009, Simo Motor
changed its name to Xi’an Tech Full Simo Motor Co. Ltd.
In
January 2010, the Company made an additional cash payment in an amount of $27.9
million to the Selling Shareholders representing the unpaid portion for the
acquisition of Simo Motor. The acquisition of Simo Motor is fully paid for after
this payment pursuant to the Agreement.
The
Company used a portion of the proceeds from the public offering it completed in
August 2009 to finance the payment of the acquisition.
Liquidity
and Capital Resources Outlook
The
Company expects to be able to meet projected capital expenditures, service
existing debt and meet working capital requirements during 2010 through current
cash balances and cash from operations, supplemented as needed by financing
activities including obtaining short-term bank loans from banks in China for our
working capital needs. Capital spending for 2010 is targeted at
approximately $40-50 million primarily for investments in expanding our
production capacities as well as improving technology and manufacturing
efficiency at our Harbin, Weihai, and Xi’an facilities.
The
Company has $9.1 million of debt repayment obligations in 2010 toward our 2012
Notes.
The
Company was in compliance with its debt covenants at December 31, 2009. The
Company’s debt covenants require the maintenance of the "Consolidated Tangible
Net Worth Threshold" and a “Fixed Charge Coverage
Ratio”. Consolidated Tangible Net Worth Threshold, as defined in the
covenants, shall be equal to $25.0 million from the debt issue date until the
first annual anniversary thereof, and at each annual anniversary of the debt
issue date shall increase by an amount equal to $10.0 million. Fixed Charge
Coverage Ratio shall be maintained at above 1.25 to 1, which means, as defined,
(a) EBITDA for the most recent four consecutive fiscal quarters minus cash
capital expenditures for such period minus the positive amount of any decrease
in working capital during such fiscal year (or plus the amount of any increase
in working capital during such fiscal year, as the case may be) to (b) the Fixed
Charges. "Fixed Charges", as defined in the covenants, means the sum of (a) the
Consolidated Interest Expense for such period that is anticipated to accrue
during a period consisting of the Fiscal Quarter in which such determination
date occurs and the three Fiscal Quarters immediately subsequent thereto, (b)
the principal amount of consolidated Financial Covenant Debt having a scheduled
due date during such period and (c) all cash dividends payable on Capital Stock
in respect of such period. The calculation excludes certain items as defined in
the covenants.
For our
long-term strategic growth, the Company will continue to rely upon debt and
capital markets for any necessary long-term funding not provided by operating
cash flows. Funding decisions will be guided by our capital structure planning
objectives. The primary objectives of the Company’s capital structure planning
are to maximize financial flexibility and preserve liquidity while controlling
interest expense.
Cross-currency
interest rate hedge
The
Company's operations are exposed to a variety of global market risks, including
changes in foreign currency exchange rates and interest rates. These exposures
are managed, in part, with the use of a financial derivative. The Company uses
financial derivatives only to hedge exposures in the ordinary course
of business and does not invest in derivative instruments for speculative
purposes.
On April
17, 2007, the Company entered a cross-currency interest rate swap agreement (the
“Transaction”) with Merrill Lynch, effectively exchanging the LIBOR plus 3.35%
variable rate interest payable on the $38 million principal amount of 2012 Notes
for a 7.2% RMB fixed interest rate. The agreement requires semi-annual payments
on March 1 and September 1 through the maturity of the agreement on
September 1, 2012. Merrill Lynch required the Company to deposit $1,000,000 to
secure the agreement. The deposit may be increased to $2,500,000, if the
exchange rate for RMB to USD falls below 6.5, and to $4,000,000, if the exchange
rate falls below 5.5. This swap is designated and qualified as a cash
flow hedge.
31
On
September 16, 2009, the Company entered an agreement with Merrill Lynch to
terminate the SWAP (“Unwind Term”), pursuant to which the Company was
required to make a termination payment of $9 million
(“Termination Payment”) to Merrill Lynch on September 21, 2009. Upon
receipt of the Termination Payment by Merrill Lynch, Merrill Lynch and the
Company were deemed to have agreed, as of September 21, 2009, (i) the
Transaction and all of the respective rights and obligations of
Merrill Lynch and the Company were cancelled and terminated; (ii) Merrill
Lynch released and discharged the Company from and agreed not to bring
a claim against the Company with respect to any obligations
arising and to be performed in connection with the Transaction after
September 21, 2009; and (iii) the Company released and discharged Merrill
Lynch from and agreed not to bring a claim against Merrill Lynch with
respect to any obligations arising and to be performed in connection
with the Transaction and the Guaranty thereof after September 21,
2009. On September 21, 2009, the Company made the Termination Payment of $9
million to Merrill Lynch.
Contractual
Obligations
The
Company enters into non-cancelable purchase commitments with its vendors. As of
December 31, 2009, and December 31, 2008, the Company was obligated under the
non-cancelable commitments to purchase materials totaling to $456,174 and
$305,100, respectively. These commitments are short-term and expire within one
year. The Company has experienced no losses on these purchase commitments over
the years.
As
discussed in Note 14, the Company entered into a swap agreement that required a
$1,000,000 deposit to secure the Transaction. On September 21, 2009,
the Company terminated the Transaction and the $1,000,000 cash deposit was
returned to the Company.
As
discussed in Note 11, the 2010 Notes are subject to mandatory redemption
semi-annually commencing March 1, 2008 in the principal amount of $2,000,000 at
a price equal to 100% of such principal amount. As of August 5, 2009,
the 2010 Notes have been repurchased by the Company and are no longer
outstanding. The 2012 Notes are subject to mandatory redemption semi-annually
commencing September 1, 2009 in the principal amount $2,400,000 on September 1,
2009, $3,800,000 on March 1, 2010, $9,900,000 on September 1, 2010 and March 1,
2011, and $4,000,000 on September 1, 2011, March 1, 2012 and September 1,
2012, in each instance at a price equal to 100% of such principal amount.
Holders of the 2012 Notes may require the Company to repurchase such Notes at
100% of the principal amount thereof at any time after September 1, 2011. As of
August 11, 2009, an aggregate principal amount of $26,500,000 of the 2012 Notes
has been repurchased by the Company. On September 1, 2009, the Company redeemed
additional $2,400,000 million principal amount of the 2012 Notes pursuant to the
mandatory redemption schedule set forth in the Indenture governing the 2012
Notes. As of December 31, 2009, a total of $9,100,000 2012 Notes remained
outstanding. The Company expects to follow the mandatory redemption
schedule with respect to the 2012 Notes and pay off the remainder of the
2012 Notes on September 1, 2010.
On
September 8, 2006, HTFE entered into an agreement (“Land Use Agreement”) with
Shanghai Lingang Investment and Development Company Limited (“Shanghai Lingang”)
with respect to HTFE’s lease and use of 40,800 square meters of State-owned land
in the Shanghai Zhuqiao Airport Industrial Zone (the “Site”). The term of the
land use agreement is 50 years. In June 2009, the Land Use Agreement was revised
with the land size increased to a total of approximately 53,000 square
meters. The aggregate amount HTFE shall pay to Shanghai Lingang is now
approximately $6.28 million (RMB42.84 million) ("Fee"), approximately 93% or
$5.85 million (RMB 38.9 million) has been paid as of December 31, 2009 with the
balance payable in installments. Prepayment in the amount of $2.72 was
transferred to intangible assets after the land was put in use. The remaining
amount paid is recorded as advances on intangible assets for $3,133,512 and
$1,481,670 as of December 31, 2009 and December 31, 2008,
respectively.
In
October 2008, the Company, through its wholly-owned subsidiary Advanced
Automation Group, LLC (“AAG”), formed Advanced Automation Group Shanghai, Ltd.
(“AAG Shanghai”), a wholly-owned subsidiary in China, to design, develop,
manufacture, sell and service custom industrial automation controllers for
linear motors. The registered capital is $1 million. AAG has invested $500,000
in AAG Shanghai through December 31, 2009.
The
Company entered into an agreement (“Original Agreement”) with Shelton
Technology, LLC on April 9, 2007 whereby the Company and Shelton agreed to work
together through the Company’s wholly-owned subsidiary, Advanced Automation
Group, LLC (“AAG”), to design, develop and manufacture custom industrial
automation controllers. Pursuant to the Original Agreementthe Company
is required to invest a total of $3 million in AAG while Shelton
contributes an exclusive worldwide royalty-free license for motorized automation
technology. Shelton is entitled to receive 49% of any profits earned by AAG
through the initial term of the Agreement which ended August 31, 2008. The
Company and Shelton entered into a first amendment to the Original Agreement on
December 11, 2008 to extend the term of the Original Agreement from August 31,
2008 to December 31, 2008. On April 21, 2009, the Company and Shelton entered
into a second amendment to the Original Agreement to further extend the term to
June 30, 2009. On December 7, 2009, the Company and Shelton entered into the
third amendment to the Original Agreement to further extend the term to December
31, 2009. The Company has contributed a total of $2.0 million to AAG as of
December 31, 2009. The remaining $1.0 million contribution to AAG is to be made
at a mutually agreed later date. The Company and Shelton are
continuing their joint work and are currently in process of developing a new
agreement to extend the arrangement between them with respect to this
work.
The
following table discloses aggregate information about our contractual
obligations as of December 31, 2009 and the effect such obligations are expected
to have on our liquidity and cash flows in future periods (in
thousands).
32
Harbin
Electric Inc. and Subsidiaries
As
of December 31, 2009 (in thousands)
Contractual
obligations
|
Total
|
Less than
1yr
|
1-3 yrs
|
3-5 yrs
|
More than
5 yrs
|
|||||||||||||||
Long-Term
Debt Obligations - 2012 Notes
|
$
|
9,100
|
$
|
9,100
|
$
|
0
|
$
|
0
|
$
|
0
|
||||||||||
Long-Term
Bank Loan
|
$
|
4,401
|
$
|
0
|
$
|
4,401
|
$
|
0
|
$
|
0
|
||||||||||
Purchase
Obligations
|
$
|
456
|
$
|
456
|
$
|
0
|
$
|
0
|
$
|
0
|
||||||||||
Investment
commitment
|
$
|
1,000
|
$
|
1,000
|
$
|
0
|
$
|
0
|
$
|
0
|
||||||||||
Land
Use Agreement
|
$
|
430
|
$
|
430
|
$
|
0
|
$
|
0
|
$
|
0
|
||||||||||
Total
|
15,387
|
10,986
|
4,401
|
0
|
0
|
Off
Balance Sheet Arrangements
We do not
have any off balance sheet arrangements.
Item
7A. Quantitative and Qualitative Disclosures about Market Risk
The
Company's operations are exposed to a variety of global market risks, including
the effect of changes in foreign currency exchange rates and interest rates.
These exposures are managed, in part, with the use of a financial derivative.
The Company uses financial derivatives only to hedge exposures in the ordinary
course of business and does not invest in derivative instruments for speculative
purposes.
Foreign
Exchange Risk
We
currently conduct substantially all of our operations through our PRC
subsidiaries. The functional currency of our PRC subsidiaries is the Chinese
RMB. The financial statements of our Chinese subsidiary are translated to United
States dollars using year-end exchange rates as to assets and liabilities and
average exchange rates as to revenues, expenses, and cash flows. Capital
accounts are translated at their historical exchange rates when the capital
transaction occurred. Translation adjustments resulting from this process are
included in accumulated other comprehensive income in the statement of
shareholders’ equity. Transaction gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
As the
majority of our net revenue, 77% of consolidated costs and expenses, and
substantially all of our assets are denominated in RMB, any significant
revaluation of the RMB may materially and adversely affect our cash flows,
revenues and financial condition. For example, if the RMB depreciates against
the U.S. dollar, the value of our RMB revenues, earnings, and assets, as
expressed in our U.S. dollar financial statements could decline. In addition, if
we decide to convert our RMB into U.S. dollars for the purpose of making
payments for business purposes, the U.S. dollar equivalent of the RMB we convert
would be reduced. On the other hand, to the extent that we need to convert U.S.
dollars we receive from an offering of our securities into RMB for our
operations, appreciation of the RMB against the U.S. dollar could reduce the
amount of the U.S. dollars available. In addition, the appreciation of the RMB
could make our customers’ products more expensive to purchase, because some of
our customers are involved in the export of goods, which may have an adverse
impact on their sales. A decrease in sales by our customers could have an
adverse effect on our operating results.
The local
currencies in the countries in which we sell our products may fluctuate in value
in relation to other currencies. Such fluctuations may affect the costs of our
products sold and the value of our local currency profits. While we are not
conducting any meaningful operations in countries other than China at the
present time, we may expand to other countries and may then have an increased
risk of exposure of our business to currency fluctuation.
The PRC
government imposes control over the conversion of RMB, into foreign currencies.
Under the current unified floating exchange rate system, the People’s Bank of
China publishes an exchange rate, which we refer to as the PBOC exchange rate,
based on the previous day’s dealings in the inter-bank foreign exchange market.
Financial institutions authorized to deal in foreign currency may enter into
foreign exchange transactions at exchange rates within an authorized range above
or below the PBOC exchange rate according to market conditions.
Pursuant
to the Foreign Exchange Control Regulations of the PRC issued by the State
Council which came into effect on April 1, 1996, and the Regulations on the
Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which
came into effect on July 1, 1996, regarding foreign exchange control,
conversion of RMB into foreign exchange by Foreign Investment Enterprises, or
FIEs, for use on current account items, including the distribution of dividends
and profits to foreign investors, is permissible. FIEs are permitted to convert
their after-tax dividends and profits to foreign exchange and remit such foreign
exchange to their foreign exchange bank accounts in China. Conversion of RMB
into foreign currencies for capital account items, including direct investment,
loans, and security investment, is still under certain restrictions. On
January 14, 1997, the State Council amended the Foreign Exchange Control
Regulations and added, among other things, an important provision, which
provides that the PRC government shall not impose restrictions on recurring
international payments and transfers under current account items.
Enterprises
in China, including FIEs, which require foreign exchange for transactions
relating to current account items, if within a certain limited amount may,
without approval of the State Administration of Foreign Exchange, or SAFE,
effect payment from their foreign exchange account or convert and pay at the
designated foreign exchange banks by providing valid receipts and
proofs.
33
Convertibility
of foreign exchange in respect of capital account items, such as direct
investment and capital contribution, is still subject to certain restrictions,
and prior approval from the SAFE or its relevant branches must be
sought.
Between
1994 and 2004, the exchange rate for RMB against the U.S. dollar remained
relatively stable, most of the time in the region of approximately RMB8.28 to
US$1.00. However, in 2005, the Chinese government announced that it would begin
pegging the exchange rate of the RMB against a number of currencies, rather than
just the U.S. dollar.
Since a
significant amount of our future revenues are expected to be denominated in RMB,
any existing and future restrictions on currency exchange may limit our ability
to utilize revenue generated in China to fund our business activities outside of
China, if any, or expenditures denominated in foreign currencies, or our ability
to meet our foreign currency obligations, which could have a material adverse
effect on our business, financial condition and results of operations. We cannot
be certain that the PRC regulatory authorities will not impose more stringent
restrictions on the convertibility of RMB with respect to foreign exchange
transactions.
Translation
adjustments resulting from this process amounted to $(70,011), $9,513,907 and
$7,162,512 for the fiscal years ended December 31, 2009, 2008 and 2007,
respectively. The balance sheet amounts with the exception of equity
at December 31, 2009 and 2008 were translated 6.84 RMB to $1.00 and 6.85 RMB to
$1.00, respectively. The equity accounts were stated at their
historical exchange rate. The average translation rates applied to
the revenues, expenses and cash flows statement amounts for the fiscal years
ended December 31, 2009, 2008 and 2007 were 6.84 RMB, 6.96 RMB and 7.62 RMB to
$1.00, respectively. Simo Motor was acquired in October 2009, and the
average translation rate applied to Simo Motor’s statement of income and cash
flow was 6.84 RMB to $1.00.
Interest
Rate Risk
Our
exposure to market risk for changes in interest rates relates primarily to the
2010 Notes and 2012 Notes, as described under Liquidity and Capital Resources.
Our future interest expense will fluctuate in line with any change in our
borrowing rates and therefore affect our cash flows and results of
operations.
Derivative
Instrument
To
mitigate our exposure to volatility in interest rates and foreign currency
exchange rates fluctuation associated with the 2012 Notes, in 2007, the Company
entered a cross-currency interest rate swap agreement, which was terminated in
September 2009, as described under Liquidity and Capital Resources –
Cross-currency interest rate hedge.
Inflation
According
to the National Bureau of Statistics of China, the change in Consumer Price
Index in China was (0.7%), 5.9%, and 4.8% in 2009, 2008, and 2007,
respectively.
Our most
liquid assets are cash and cash equivalents. Because of their liquidity, these
assets are not directly affected by inflation. Because we intend to retain and
continue to use our equipment, furniture and fixtures and leasehold
improvements, we believe that the incremental inflation related to replacement
costs of such items will not materially affect our operations. However, the rate
of inflation affects our expenses, such as those for employee compensation and
contract services, which could increase our level of expenses and the rate at
which we use our resources.
We
believe that inflation has not had a material impact on the Company's operations
in recent years.
Concentration
of Credit Risks
The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents, for cash
flow statement purposes. Cash includes cash on hand and demand deposits in
accounts maintained with banks within the PRC and banks in the United
States. Certain financial instruments, which subject the Company to
concentration of credit risk, consist of cash. The Company maintains balances at
financial institutions which, from time to time, may exceed Federal Deposit
Insurance Corporation insured limits for the banks located in the Unites States.
Balances at financial institutions or state owned banks within the PRC are not
covered by insurance. As of December 31, 2009 and 2008, the Company had deposits
in excess of federally insured limits totaling $92,701,730 and $47,783,767,
respectively. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant risks on its cash in bank
accounts.
One major
customer accounted for approximately 12% of the net revenue for the fiscal year
ended December 31, 2009. At December 31, 2009, the total
receivable balance due from this customer was $11,494,287, representing 12% of
total accounts receivable. Three major customers accounted for
approximately 43% of the net revenue for the year ended December 31, 2008, with
each customer individually accounting for 16%, 15% and 12%,
respectively. At December 31, 2008, the total receivable balance due
from these customers was $26,253,907, representing 87% of total accounts
receivable. Five major customers accounted for 72% of the net revenue for the
year ended December 31, 2007, with each customer individually accounted for 20%,
20%, 13%, 10% and 9%, respectively. At December 31, 2007, the total receivable
balance due from these customers was $19,338,613, representing 83% of total
accounts receivable.
34
We depend
on a few key suppliers to provide the raw materials and key component parts for
the manufacture of our products. And adverse changes in such supply or the costs
of raw materials may adversely affect our operations. In addition, if we need
alternative sources for key component parts for any reason, these component
parts may not be immediately available to us. If alternative suppliers are not
immediately available, we will have to identify and qualify alternative
suppliers, and production of these components may be delayed. We may not be able
to find an adequate alternative supplier in a reasonable time period, or on
commercially acceptable terms, if at all. Shipments of affected products have
been limited or delayed as a result of such problems in the past, and similar
problems could occur in the future. Our inability to obtain our key source
supplies for the manufacture of our products may require us to delay shipments
of products, harm customer relationships or force us to curtail or cease
operations. One major vendor provided approximately 16% of the Company’s
purchases of raw materials for the year ended December 31, 2009. Two major
vendors provided approximately 39% of the Company’s purchases of raw materials
for the period ended December 31, 2008, with each vendor individually accounting
for 23% and 16%, respectively. Five vendors provided 80% of the Company’s
purchase of raw materials for the year ended December 31, 2007, with each vendor
individually accounting for 27%, 22%, 13%, 12% and 6%, respectively. The
Company’s accounts payable to these vendors was $0 and $1,055,730 at December
31, 2009 and 2008, respectively.
ITEM
8. Financial Statements and Supplementary Data
The
management of the Company is responsible for the preparation of the consolidated
financial statements in this Annual Report on Form 10-K and for establishing and
maintaining adequate internal controls over financial reporting. The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, or U.S. GAAP,
which are considered appropriate to present fairly the Company’s consolidated
financial position, results of operations and cash flows on a consistent basis.
Management has also prepared the other information in this report and is
responsible for its accuracy and consistency with the consolidated financial
statements.
As can be
expected in a complex and dynamic business environment, some financial statement
amounts are based on estimates and judgments. Even though estimates and
judgments are used, measures have been taken to provide reasonable assurance of
the integrity and reliability of the financial information contained in this
annual report on Form 10-K.
The
consolidated financial statements for the years ended December 31, 2009, 2008,
and 2007 prepared in response to this item are included in a separate section of
this Report. See “Index to Consolidated Financial Statements” on Page F-1. They
have been audited by Frazer Frost, LLP (a successor entity of Moore Stephens
Wurth Frazer and Torbet, LLP), an independent registered public accounting firm.
During its audits, Frazer Frost, LLP (a successor entity of Moore Stephens Wurth
Frazer and Torbet, LLP), was given unrestricted access to all
financial records and related data, including minutes of all meetings of
shareholders and the board of directors and all committees of the board.
Management believes that all representations made to the independent auditors
during their audits were valid and appropriate.
Sales
Distribution by Product Lines and Percentage of International
Business
The
following table sets forth the percentage of revenues by our major product lines
and the percentage of our international business for the years ended December
31, 2009, 2008 and 2007.
Product Line
|
Percent of Total Revenues (%)
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
Linear
Motors and Related Systems
|
27 | % | 41 | % | 56 | % | ||||||
Specialty
Micro-Motors
|
18 | % | 28 | % | 28 | % | ||||||
Rotary
Motors
|
52 | % | 23 | % | 0 | % | ||||||
Others
|
3 | % | 8 | % | 16 | % | ||||||
Total
|
100 | % | 100 | % | 100 | % | ||||||
International
Business
|
10 | % | 17 | % | 12 | % |
We were
notified that, effective January 1, 2010, certain partners of Moore Stephens
Wurth Frazer and Torbet, LLP (“MSWFT”) and Frost, PLLC (“Frost”) formed Frazer
Frost, LLP (“Frazer Frost”), a new partnership. Pursuant to the terms of a
combination agreement by and among MSWFT, Frazer Frost and Frost, each of MSWFT
and Frost contributed substantially all of their assets and certain of their
liabilities to Frazer Frost, resulting in Frazer Frost assuming MSWFT’s
engagement letter with us and becoming our new independent accounting
firm. Frazer Frost is currently registered with the Public Company
Accounting and Oversight Board (PCAOB).
The audit
reports of MSWFT on the financial statements of the Company as of and for the
years ended December 31, 2008 and December 31, 2007 did not contain an
adverse opinion or a disclaimer of opinion, and were not qualified or modified
as to uncertainty, audit scope or accounting principles.
The
decision to engage Frazer Frost, as successor to MSWFT, was approved by the
audit committee of the board of directors.
35
ITEM
9 A. Controls and Procedures
(a)
Evaluation of Controls and Procedures
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, the Company
conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2009, as such term is
defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on this evaluation,
our principal executive officer and principal financial officer have concluded
that during the period covered by this Annual Report on Form 10-K, the Company’s
disclosure controls and procedures are effective as of such date at a reasonable
assurance level to ensure that information required to be disclosed by us in our
Exchange Act reports is recorded, processed, summarized, and reported within the
time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
(b)
Management’s Annual Report on Internal Control over Financial
Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. These controls are designed under the
supervision of the Company's CEO and CFO to provide reasonable assurance to
management and the Board of Directors regarding the reliability
of financial reporting and the preparation of the Company's financial
statements for external reporting purposes in accordance with U.S. generally
accepted accounting principles. Our internal control over financial reporting
includes those policies and procedures that:
1. Pertain
to the maintenance of records that in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;
2.
Provide reasonable assurance that transactions are recorded properly to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorization of our management and
directors;
3.
Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisitions, use or disposition of our assets that could have a
material effect on the financial statements: and
4.
Provide reasonable assurance as to the detection of fraud.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions or
that the degree of compliance with the policies or procedures may
deteriorate.
As of
December 31, 2009, management has made a comprehensive review, evaluation and
assessment of the effectiveness of the Company's internal control over financial
reporting. In making its assessment of the effectiveness of the Company’s
internal control over financial reporting, management used the criteria issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
in Internal Control-Integrated Framework. Management excluded Xi’an Tech Full
Simo from its assessment of internal control over financial reporting as of
December 31, 2009 because it was acquired by the Company during
2009. Xi’an Tech Full Simo is a wholly owned subsidiary of the
Company and represents 40%, 20%, and 24% of the Company’s consolidated total
assets, total revenue, and net income as of and for the year ended December 31,
2009.
Based on
our evaluation, our principal executive officer and principal financial officer
have concluded as of the end of the period covered by our Annual
Report on Form 10-K for the year ended December 31, 2009, our internal controls
over financial reporting were effective.
Our
independent registered public accounting firm, Frazer Frost, LLP (a successor
entity of Moore Stephens Wurth Frazer and Torbet, LLP), with direct access to
our Board of Directors through our Audit Committee, has audited our
consolidated financial statements and independently assessed the effectiveness
of our internal control over financial reporting as of December 31, 2009, as
stated in their report which is included in this Annual Report on Form
10-K.
(c)
Management Process to Assess the Effectiveness of Internal Control over
Financial Reporting
To comply
with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, the
Company followed a comprehensive compliance process across our major operations
to evaluate our internal control over financial reporting, engaging
employees at all levels of the organization. Our internal control
environment includes a corporate-wide attitude of integrity
and control consciousness. This is exemplified by our ethics education
program that includes long-standing principles and policies on ethical
business conduct that require employees to maintain the highest ethical and
legal standards in the conduct of our business. We have distributed
the Board of Directors approved policy on ethics and code of business conduct to
all employees and required them to study and abide by the policy. We encourage
any employee may report suspected violations of law or our policy. The
internal control system further includes careful selection
and training of supervisory and management personnel, appropriate
delegation of authority and division of responsibility, dissemination of
accounting and business policies throughout the Company, and
an extensive program of internal audits with management follow-up. Our
Board of Directors, assisted by the Audit Committee, monitors
the integrity of our financial statements and financial reporting
procedures, the performance of our internal audit function and
independent auditors, and other matters set forth in its charter.
The Committee, which currently consists of three independent directors,
meets regularly with representatives of management, and with
the independent auditors and the Internal Auditor, with and without
management representatives in attendance, to review their
activities. We have engaged an external consultant firm who has
helped us to establish our internal control process over financial reporting and
has continued to help us to assess and improve the effectiveness of our internal
control over financial reporting.
36
(d)
Changes in Internal Control over Financial Reporting
There was
no change in our internal control over financial reporting that occurred during
the fiscal year covered by this Annual Report on Form 10-K that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Attestation
Report of the Registered Public Accounting Firm
To the
Board of Directors and Stockholders of Harbin Electric, Inc.
We have
audited Harbin Electric, Inc. and subsidiaries’ (the “Company”) internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal
Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Item 9A
“Management’s Report on Internal Control Over Financial Reporting”. Our
responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We
conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. 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 audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
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 (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
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 (3) 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 may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As
described in Management’s Report on Internal Control Over Financial Reporting,
management excluded Xi’an Tech Full Simo from its assessment of internal control
over financial reporting as of December 31, 2009 because it was acquired by the
Company during 2009. Xi’an Tech Full Simo is a majority owned
subsidiary of the Company and represents 40%, 20%, and 24% of the Company’s
consolidated total assets, total revenue, and net income as of and for the year
ended December 31, 2009.
In our
opinion, except for the effects of omission of Xi’an Tech Full Simo discussed in
the preceding paragraph, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control—Integrated
Framework issued by the COSO.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets and the related
consolidated statements of income and other comprehensive income, changes
in equity, and cash flows of the Company, and our report dated March 15,
2010 expressed an unqualified opinion.
Frazer
Frost, LLP (a successor entity of Moore Stephens Wurth Frazer and Torbet, LLP,
See Form 8-K filed on January 7, 2010)
Brea,
California
March 15,
2010
37
ITEM
9B. Other Information.
On August
20, 2009, the Company held its fourth annual meeting of stockholders. There were
two proposals presented to the stockholders at the meeting.
Proposal
1 was the election of the following five directors to serve for a one year term
or until their respective successors have been duly elected and
qualified.
DIRECTOR
NOMINEE
|
FOR
|
AGAINST
|
WITHHELD
|
|||||||||
Tianfu
Yang
|
18,131,484
|
0
|
45,034
|
|||||||||
Lanxiang
Gao
|
18,126,659
|
0
|
49,859
|
|||||||||
Ching
Chuen Chan
|
18,021,253
|
0
|
155,265
|
|||||||||
David
Gatton
|
18,132,312
|
0
|
44,206
|
|||||||||
Yunyue
Ye
|
18,134,708
|
0
|
41,810
|
Proposal
2 was the ratification of the appointment of Frazer Frost, LLP (a successor
entity of Moore Stephens Wurth Frazer and Torbet, LLP) as the Company’s
independent auditor for the 2009 fiscal year. There were 8,115,527 votes FOR,
20,141 votes AGAINST and 40,850 votes ABSTAINED.
PART
III
ITEM
10. Directors, Executive Officers and Corporate Governance
The
following table sets forth the names and ages of our current directors and
executive officers, their principal offices and positions and the date each such
person became a director or executive officer. Executive officers are elected
annually by our Board of Directors. Each executive officer holds his office
until he resigns, is removed by the Board or his successor is elected and
qualified. Directors are elected annually by our stockholders at the annual
meeting. Each director holds his office until his successor is elected and
qualified or his earlier resignation or removal.
The
following persons are the directors and executive officers of our
company:
Age
|
Title
|
Director Since
|
||||
Tianfu
Yang
|
48
|
Chief
Executive Officer and Chairman of the Board of Director
|
January
24, 2005
|
|||
Zedong
Xu
|
40
|
Chief
Financial Officer
|
January
24, 2005
|
|||
Ching
Chuen Chan (1)(2)(3)
|
74
|
Independent
Director
|
February
1, 2005
|
|||
Boyd
Plowman (1)(2)(3)
|
66
|
Independent
Director
|
December
1, 2009
|
|||
David
Gatton (1)(2)(3)
|
56
|
Independent
Director
|
February
1, 2005
|
|||
Yunyue
Ye
|
58
|
Independent
Director
|
October
12, 2006
|
|||
Tianli
Yang
|
46
|
Vice
President
|
January
24, 2005
|
|||
Lanxiang
Gao
|
57
|
Director
|
September
26, 2008
|
|||
Christy
Shue
|
46
|
Executive
Vice President & Corporate Secretary
|
December
15, 2007
|
(1)
Serves as a member of the Audit Committee.
(2)
Serves as a member of the Compensation Committee.
(3)
Serves as a member of the Nominating and Corporate Governance
Committee.
Tianfu Yang,
Chairman & Chief Executive Officer – Since May 2003, Mr. Yang
has been the Chairman and CEO of Harbin Tech Full Electric Co., Ltd. From 2000
until now, he has been the Chairman and CEO of Harbin Tech Full Industry Co.,
Ltd. From 1994 to 2000, he was the President of Harbin Tianheng Wood Industry
Manufacture Co., Ltd. From 1991 to 1994, Mr. Yang was the President of Hong Kong
Lianfa Real Estate Company. From 1988 to 1991, he was the President of Hong Kong
Property Management Development. From 1986-1988, he was the President of
Helongjiang Cultural Development Company and Guangzhou Subsidiary Company. Mr.
Yang graduated from Zhejiang University with a Masters degree in Electric Motor
Automation and Control. From 1978 to 1979, he was a professional member in the
Heilongjiang Province Aeromodelling Team, twice becoming free-style
aeromodelling champion in national competition. Mr. Yang is currently the
commissioner of the China Electro-Technical Society (CES) in the Linear Motor
and Electromagnetism Eradiation Specialist Committees. Mr. Yang is also a Deputy
representing Heilongjiang Province to the 11th National People’s Congress
(NPC).
Zedong Xu,
Chief Financial
Officer – Since
2003, Mr. Xu has been the Chief Financial Officer of Harbin Tech Full Electric
Co, Ltd. From 2000 until present, he has been the CFO of Harbin Tech Full
Industry Co., Ltd. From September 1998 to 2000, he was employed as the
Chief Financial Officer for Harbin WanDa Electrical home appliances. From 1996
to 1998, Mr. Xu worked as a financial manager for Harbin High Technology Torch
Daya Real Estate Co., Ltd. Mr. Xu Zedong is a qualified CPA under China’s
accountancy program. He graduated in 1992 from Harbin Electrical Engineering
College with a BA in Project Management.
Chan Ching Chuen,
Board Member, Chairman of Nominating Committee - Mr. Chan is an
Honorary Professor at Hong Kong University's Department of Electrical and
Electronics Engineering. From 1976 through present, Mr. Chan earned many
professorships in honorary, visiting and guest roles at world renowned
institutions such as University of Hong Kong, University of California Berkeley
and Davis, Zhejiang University, Grenoble Polytechnic, France, Massachusetts
Institute of Technology, USA and Tsing Hua University, Beijing among others. He
is a Fellow of the Royal Academy of Engineering, U.K., the Chinese Academy of
Engineering, the Ukraine Academy of Engineering Sciences and a Fellow and Past
Vice President of Hong Kong Academy of Engineering Sciences. He is also a Fellow
of IEEE, IEE and HKIE, Past President of the Hong Kong Institution of Engineers.
He was awarded the IEE International Lecture Medal in 2000 and lecturing on
electric vehicles worldwide. In 2001, he was selected as one of Asia's Best
Technology Pioneers by Asiaweek. During his career, Mr. Chan has advised on
various consultancy projects for large corporations such as Ford Motor Company,
Honda R & D Co Ltd., National Institute of Environmental Studies, Japan,
Sumitomo Corporation and Mitsubishi Electric Corporation as well as serving as
advisor to government agencies. Mr. Chan graduated from Tsing Hua University in
1959 with an MSc in Electrical Engineering later achieving his PhD in 1982 from
University of Hong Kong. From 1959 through 1966, Mr. Chan started his career
lecturing at China University of Mining & Technology. From 1967 to 1976, he
was Electrical Machines Designer in Shanghai. He was awarded the Doctor of
Technology honoris causa from Loughborough University, U.K. in
2008.
38
Boyd Plowman,
Board Member, Chairman of Audit Committee - Mr. Plowman joined Harbin
Electric’s board of directors on December 1, 2009 as an independent board
member. Mr. Plowman is the retired Executive Vice President and Chief Financial
Officer of Fleetwood Enterprises, Inc. (“Fleetwood”) where he was employed from
1969 until 1987 and from 1997 until 2008. Fleetwood was the world’s largest
producer of recreational vehicles and manufactured housing. During his career
with Fleetwood, Mr. Plowman held numerous leadership positions including
Controller, Treasurer, and Financial Vice President. During his second stint
with Fleetwood, he served as Executive Vice President and Chief Financial
Officer until his retirement in 2008. He also served as President and Chief
Executive Officer of Lee & Associates (Inland Empire Region). Lee &
Associates is one of the leading commercial real estate brokerage firms in the
United States. Prior to that, Mr. Plowman served as a Director and Chairman
of the Audit Committee for Corporate Insurance and Reinsurance Company Limited
(CIRCL), a Bermuda-based company reinsuring risks for captive insurance
companies. Earlier in his career, Mr. Plowman worked as a senior tax accountant
at Arthur Andersen & Co. and Ernst & Ernst. He earned his bachelor’s
degree from Utah State University and was a certified public accountant. Mr.
Plowman is the co-founder and President of Boyd Plowman
& Associates, Inc., a firm involved in venture capital,
merchant banking, and consulting services regarding real estate, capital
formation, and financial services.
David Gatton,
Board Member, Chairman of Compensation Committee - Since 1985 Mr. Gatton
has served as the Chairman and President of Development Initiatives, Inc, a
Washington, D.C.-based government relations firm specializing in urban affairs,
business development and marketing, serving a variety of public and private
clients. Mr. Gatton advises cities, organizations, and companies on business
development strategies, public/private partnerships and marketing initiatives.
He has advised various organizations on tax reform, economic development
initiatives and a variety of environmental laws, including the reauthorization
of the Clean Water Act, the Safe Drinking Water Act, the Resource Conservation
and Recovery Act, Superfund and the Clean Air Act. Some of Mr. Gatton’s major
accomplishments include: development of U.S.-Sino Memorandum of Cooperation
between U.S. and China Association of Mayors, development of a national
brownfield redevelopment initiative, development of several multifamily low- and
moderate-income housing developments, business development strategies 13 for
various private firms, and assistance in development of economic development
projects for numerous cities. Mr. Gatton holds a B.A. from Cornell College and a
Master’s degree from Harvard University.
Yunyue Ye, Board
Member - Mr. Ye is currently a professor in Electrical Engineering at
Zhejiang University. Mr. Ye also currently serves as Director of the Aerospace
Electric and Electrical Motor Institute of Zhejiang University and Director of
the Linear Motor Institute of the Chinese Electrotechnical Society. Mr. Ye was
also Council Member of the China Electrotechnical Society. Mr. Ye graduated from
Zhejiang University in 1978.
Tianli Yang, Vice
President - Since
January 2005, Tianli Yang has been Vice President of Harbin Electric. From 2003
until now, he was the vice
president of Harbin Tech Full Electric Co., Ltd. From 2000 until now, Mr. Yang
has been the Vice President of Harbin Tech Full
Industry Co., Ltd. From 1985-2000 he was employed in the China State
Construction Engineering Corporation (“CSCEC”), in various
positions, including post of Chief Administration Officer. Mr. Yang graduated
from Heilongjiang University in 1985 with a BA in
Chinese Language & Literature.
Lanxiang Gao,
Board Member – Ms. Gao joined the Company in September 2007 as Chief
Operating Officer of Shanghai Tech-Full Electric Co., Ltd., a wholly owned
subsidiary of the Company. Ms. Gao worked as an engineer for Shanghai No.21
Research Institute, a research and development institution under the state-owned
China Electronics Technology Group for over 30 years. She managed a development
and production project of office automation motors in collaboration with Sankyo
Seiki, Inc. of Japan for 10 years and served as the Senior Engineer managing
micro motor research and development, with a focus on the development of
specialty micro-motors of automobile seats for two years. Ms. Gao has won
numerous government sponsored Science & Technology Progress Awards including
a First Place Prize due to her outstanding contributions in the research and
development of electric motors. Ms. Gao graduated from Zhejiang University,
China with a major in Electrical Engineering.
Christy Y. Shue,
Executive Vice President of Finance and Investor Relations and Corporate
Secretary – Ms. Shue joined Harbin Electric on December 15, 2007.
Prior to joining the Company, she was a Vice President and a Senior Investor
Relations Consultant at Christensen, an Investor Relations advisory firm,
advising U.S. listed Chinese Companies on managing capital market related issues
including investor relations, corporate governance, disclosure, and investor
communications. Prior to joining Christensen, Ms. Shue was Manager, Investor
Relations for International Paper, serving as one of the company's spokespersons
since 2003 to craft and communicate the company's messages to the financial
community. Ms. Shue also has extensive experience in financial analysis and
planning, financial accounting, and marketing research, having worked in various
divisions and functions during her career with International
Paper. Ms. Shue holds a Ph.D. in chemistry from Purdue University and
an M.B.A. in finance/international business from the Stern School of Business,
New York University. She earned her Bachelor of Science degree from Sichuan
University, China.
Board Leadership Structure
The Board
of Directors believes that Mr. Yang’s service as both Chairman of the Board and
Chief Executive Officer is in the best interest of the Company and its
stockholders. Mr. Yang possesses detailed and in-depth knowledge of the issues,
opportunities and challenges facing the Company and its business and is thus
best positioned to develop agendas that ensure that the Board’s time and
attention are focused on the most critical matters. His combined role enables
decisive leadership, ensures clear accountability, and enhances the Company’s
ability to communicate its message and strategy clearly and consistently to the
Company’s shareholders, employees, customers and suppliers.
CORPORATE
GOVERNANCE
Board
of Directors
We have
six members serving on our Board of Directors. Each board member is nominated
for election at our annual meeting to serve until the next annual meeting of
stockholders and until their successors are duly elected and qualified. If there
is a vacancy left by unexpected event such as death or sickness, our Board of
Directors will appoint a new member as necessary to fill the
vacancy.
Director
Qualifications
We seek
directors with established strong professional reputations and experience in
areas relevant to the strategy and operations of our businesses. We
also seek directors who possess the qualities of integrity and candor, who have
strong analytical skills and who are willing to engage management and each other
in a constructive and collaborative fashion. We also seek directors
who have the ability and commitment to devote significant time and energy to
service on the Board and its committees. We believe that all of our
directors meet the foregoing qualifications.
Certain
of our directors have strong technological backgrounds that are relevant to our
industry. Certain of our directors have backgrounds in accounting,
public company reporting, compliance and management. We believe that
the backgrounds and skills of our directors bring a diverse range of
perspectives to the Board.
Meetings
of the Board of Directors and Committees
The Board
of Directors held five (5) meetings during 2009. The
Audit Committee held five (5) meetings in 2009. The
Compensation Committee held four (4) meetings in 2009. The
Nominating and Corporate Governance Committee held one (1) meeting in
2009. Each director is expected to attend meetings of our Board of
Directors and meetings of committees of our Board of Directors of which he is a
member, and to spend the time necessary to properly discharge his respective
duties and responsibilities. No director attended less than 75% of the meetings
of any committee of which the director was a member. We do not have a policy
with regard to Board members’ attendance at annual meetings of stockholders.
Tianfu Yang, Lanxiang Gao, David Gatton, Ching Chuen Chan and Yunyue Ye attended
the Company’s previous annual meeting in person.
39
Board
Committees
The Board
of Directors has an Audit Committee, Nominating and Corporate Governance
Committee and a Compensation Committee.
Nominating
and Corporate Governance Committee
The
purpose of the Nominating and Corporate Governance Committee is to assist and
advise the Board of Directors with respect to identifying individuals qualified
to become members of the Board of Directors, evaluating the overall functioning
and performance of the Board of Directors and its committees and developing
and overseeing a set of corporate governance guidelines for the Company.
Ching Chuen Chan, David Gatton, and Boyd Plowman are members of the Nominating
and Corporate Governance Committee. There have been no changes to the procedures
by which the stockholders of the Company may recommend nominees to the Board of
Directors since the filing of the Company’s Definitive Proxy Statement on July
9, 2009, as amended on July 14, 2009, for its Annual Meeting of Stockholders,
which was held on August 20, 2009. A copy of our Nominating and Corporate
Governance Committee Charter can be found on our website at
www.harbinelectric.com and can be made available in print free of charge to any
shareholder who requests it.
The
Nominating and Corporate Governance Committee evaluates all nominees, including
current directors who may be up for re-election, based on several different
professional criteria and in accordance with the minimum requirements as
established in its charter and in the Company’s Articles of Incorporation and
Bylaws. The Nominating and Corporate Governance Committee will consider
candidates recommended by stockholders. Stockholders can recommend qualified
candidates for the Board of Directors by submitting the candidate’s name and
qualifications to: Ching Chuen Chan, Chairman, Nominating and Corporate
Governance Committee, Harbin Electric, Inc., 20 Ramblewood Road, Shoreham, NY
11786. There are no differences in the manner in which the Nominating and
Corporate Governance Committee evaluates nominees for director based on whether
the nominee was recommended by a stockholder. Among other things, the Nominating
and Corporate Governance Committee takes into account, when acting upon
nominees, factors such as familiarity with the industry in which the Company
operates, experience in working with China-based companies, the relevant
expertise of its directors and director nominees, whether the director or
nominee would be considered independent, the time that the director or nominee
will be able to devote to Company matters, experience with US public companies,
language skills and other factors. The Nominating and Corporate Governance
Committee believes that it is appropriate to include representation of senior
management on the Board of Directors
Compensation
Committee
The
Compensation Committee evaluates and determines the salaries and incentive
compensation for our officers. The function of the Compensation Committee is to
evaluate and determine the compensation levels of the Company’s Named Executive
Officers, including the Chief Executive Officer; and the equity allocations
relating to the Company’s equity programs. David Gatton, Ching Chuen Chan,
and Boyd Plowman are members of our Compensation Committee. The Compensation
Committee Charter was amended on January 22, 2009. A copy of our Amended and
Restated Compensation Committee Charter can also be found on our website at
www.harbinelectric.com and can be made available in print free of charge to any
shareholder who requests it. No member
of our Compensation Committee has at any time been an officer or employee of
ours or our subsidiaries. No interlocking relationship exists between our Board
of Directors or Compensation Committee and the Board of Directors or
Compensation Committee of any other company, nor has any interlocking
relationship existed in the past.
Audit
Committee
The
Company has a separately designated standing audit committee in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The
audit committee members for the year ended December 31, 2009 consisted of Boyd
Plowman, David Gatton, and Ching Chuen Chan. Each of these members are
considered “independent” under the current independence standards of NASDAQ
Marketplace Rule 5605(a)(2) and meet the criteria for independence set forth in
Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended, as
determined by the Board of Directors. The audit committee assists the Board of
Directors in its oversight of the Company’s financial reporting process. The
Audit Committee is directly responsible for the appointment, retention and
termination of the independent accountants. The Audit Committee reviews with the
independent accountants the scope and results of audits, our internal accounting
controls and audit practices and professional services rendered to us by our
independent accountants. A copy of our Audit Committee Charter can be found
on our website at www.harbinelectric.com and can be made available in print free
of charge to any shareholder who requests it.
Our board
of directors has determined that we have at least one audit committee financial
expert, as defined in the Exchange Act, serving on our audit committee. Boyd
Plowman is the “audit committee financial expert” and is an independent member
of our board of directors.
REPORT
OF THE AUDIT COMMITTEE
The role
of the Audit Committee is to assist the Board of Directors in its oversight of
the Company’s financial reporting process. As set forth in the Charter,
management of the Company is responsible for the preparation, presentation and
integrity of the Company’s financial statements, accounting and financial
reporting principles and internal controls and procedures designed to assure
compliance with accounting standards and applicable laws and regulations. The
independent auditors are responsible for auditing the Company’s financial
statements and expressing an opinion as to their conformity with generally
accepted accounting principles.
In the
performance of this oversight function, the Audit Committee has reviewed and
discussed the audited financial statements for the fiscal year ended December
31, 2009 with management, and has discussed with the independent auditors the
matters required to be discussed by Statement of Auditing Standards No. 61,
Communication with Audit Committee, as currently in effect. The Audit Committee
has received the written disclosures and the letter from the independent
auditors required by Independence Standards Board Standard No. 1, Independence
Discussions with Audit Committees, as currently in effect, and has discussed
with the independent auditors the independent auditors’ independence; and based
on the review and discussions referred above, the Audit Committee recommended to
the Board of Directors that the audited financial statements be included in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009
for filing with the SEC.
The
members of the Audit Committee are not professionally engaged in the practice of
auditing or accounting, are not experts in the fields of accounting or auditing,
including in respect of auditor independence. Members of the Committee rely
without independent verification on the information provided to them and on the
representations made by management and the independent accountants. Accordingly,
the Audit Committee’s oversight does not provide an independent basis to
determine that management has maintained appropriate accounting and financial
reporting principles or appropriate internal control and procedures designed to
assure compliance with accounting standards and applicable laws and regulations.
Furthermore, the Audit Committee’s consideration and discussions referred to
above do not assure that the audit of the Company’s financial statements has
been carried out in accordance with generally accepted accounting principles or
that the Company’s auditors are in fact “independent”.
Based
upon the reports, review and discussions described in this report, and subject
to the limitations on the role and responsibilities of the Committee referred to
above and in the Charter, the Committee recommended to the Board that the
audited financial statements be included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2009, be filed with the Securities and
Exchange Commission.
THE
AUDIT COMMITTEE
Boyd
Plowmans (Chairman)
David
Gatton
Ching
Chuen Chan
40
COMPLIANCE
WITH SECTION 16(a) OF EXCHANGE ACT
Based on
the Company’s review of copies of Forms 3, 4 and 5 filed with the Securities and
Exchange Commission (the “SEC”) or written representations from certain
reporting persons, we believe that during fiscal year 2009, all of the executive
officers and board of directors complied with the filing requirements of Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”).
CODE
OF ETHICS
We
adopted a code of ethics that applies to our Chief Executive Officer and Chief
Financial Officer, and other persons who perform similar functions. A
copy of our Code of Ethics is filed as Exhibit 14.1 to our 2005 Annual Report on
Form 10-KSB and is available on our website www.harbinelectric.com. Our Code of
Ethics can be made available in print free of charge to any shareholders who
requests it. Our Code of Ethics is intended to be a codification of the
business and ethical principles which guide us, and to deter wrongdoing, to
promote honest and ethical conduct, to avoid conflicts of interest, and to
foster full, fair, accurate, timely and understandable disclosures, compliance
with applicable governmental laws, rules and regulations, the prompt internal
reporting of violations and accountability for adherence to this
Code.
ITEM
11. Executive Compensation
Compensation
Discussion and Analysis
This
compensation discussion describes the overall compensation practices at the
Company and specifically describes the compensation for the following named
executive officers (“Named Executive Officers”):
|
·
|
Tianfu
Yang, Chairman and Chief Executive
Officer
|
|
·
|
Zedong
Xu, Chief Financial Officer
|
|
·
|
Tianli
Yang, Vice President
|
|
·
|
Christy
Shue, Executive Vice President of Finance and Investor Relations and
Corporate Secretary
|
The Board
of Directors appointed the Compensation Committee of our Board of Directors to
evaluate and determine the compensation programs of the Company’s Named
Executive Officers, including the Chief Executive Officer and the Chief
Financial Officer.
Compensation
Philosophy and Objectives
Our
primary goal with respect to our compensation programs has been to attract and
retain the most talented and dedicated employees in key positions in order to
compete effectively in the market place, successfully execute our growth
strategies, and create lasting shareholder value. The Compensation Committee
evaluates both individual and Company performance when determining the
compensation of our executives. Our executives’ overall compensation is tied to
the Company financial and operational performance, as measured by revenues and
net income, as well as to accomplishing strategic goals such as merger and
acquisitions and fund raising. The Compensation Committee believes that a
significant portion of our executive’s total compensation should be at-risk
compensation that is linked to stock-based incentives to align their interests
with those of shareholders.
Additionally,
the Compensation Committee has determined that an executive officer who is a
Chinese national and is based in China will be entitled to a locally competitive
package and an executive officer who is an expatriate or who is based in the
U.S. will be paid a salary commensurate with those paid to the executives in the
U.S. The Compensation Committee evaluates the appropriateness of the
compensation programs annually and may make adjustments after taking account the
subjective evaluation described previously.
We apply
our compensation policies consistently for determining compensation of our Chief
Executive Officer as we do with the other executives. The Compensation Committee
assesses the performance of our Chief Executive Officer annually and determines
the base salary and incentive compensation of our chief executive
officer.
Our Chief
Executive Officer is primarily responsible for the assessment of our other
executive officers’ performance. Ultimately, it is the Compensation Committee’s
evaluation of the chief executive officer’s assessment along with competitive
market data that determines each executive’s total compensation.
Elements
of Our Executive Compensation Programs
Base Salary. All full time
executives are paid a base salary. Base salaries for our named executives are
set based on their professional qualifications and experiences, education
background, scope of their responsibilities, taking into account competitive
market compensation levels paid by other similar sized companies for similar
positions and reasonableness and fairness when compared to other similar
positions of responsibility within the Company. Base salaries are reviewed
annually by the Compensation Committee, and may be adjusted annually as
needed.
Annual Bonuses. The Company
does not pay guaranteed annual bonuses to our executives or to employees at any
level because we emphasize pay-for-performance. The Compensation Committee
determines cash bonuses towards the end of each fiscal year to award our
executive officers including our Chief Executive Officer and Chief Financial
Officer based upon a subjective assessment of the Company’s overall performance
and the contributions of the executive officers during the relevant
period.
Equity Incentive
Compensation. A key element of our pay-for-performance philosophy is our
reliance on performance-based equity awards through the Company’s stock option
plan. This program aligns executives’ and shareholders’ interests by providing
executives an ownership stake in the Company. Our Compensation Committee has the
authority to award equity incentive compensation, i.e. stock options, to our
executive officers in such amounts and on such terms as the Compensation
Committee determines in its sole discretion. The Compensation Committee reviews
each executive’s individual performance and his or her contribution to our
strategic goals and determines the amount of stock options to be awarded towards
the end of the fiscal year. The Compensation Committee grants equity incentive
compensation at times when there are not material non-public information to
avoid timing issues and the appearance that such awards are made based on any
such information. The exercise price is the closing market price on the date of
the grant.
Service-Based Stock Option Awards
and Severance Plan. In certain circumstances, the Compensation Committee
makes service-based stock option awards to retain key employees, recruit new
senior-level executives, or recognize a significant promotion. Service based
stock option awards are used infrequently and can be awarded any time during the
year. Occasionally a severance plan is provided to retain or recruit a top
executive talent at the sole discretion of the Compensation
Committee.
Other Compensation. We
provide our executives with certain other benefits, including reimbursement of
business and entertainment expenses, health insurance, vacation and sick leave
plan. The Compensation Committee in its discretion may revise, amend or add to
the officer’s executive benefits as it deems necessary. We believe that these
benefits are typically provided to senior executives of similar companies in
China and in the U.S.
Summary
Compensation Table
The
following table sets forth all cash compensation paid or to be paid by the
company, as well as certain other compensation paid or accrued, for each of the
last three fiscal years of our company to each Named Executive
Officer.
41
Year
|
Salary (Cash)
($)
|
Bonus (Cash)
($)
|
Option
Awards
($)
|
All other
compensation(1)
($)
|
Total
($)
|
|||||||||||||||||
Tianfu
Yang, CEO
|
2009
|
26,470 | - | 11,946 | (3) | - | 38,416 | |||||||||||||||
2008
|
26,470 | - | 47,784 | (2) | - | 74,254 | ||||||||||||||||
2007
|
23,715 | - | 47,784 | (1) | - | 71,499 | ||||||||||||||||
Zedong
Xu, CFO
|
2009
|
15,882 | - | 7,962 | (3) | - | 23,844 | |||||||||||||||
2008
|
15,882 | - | 31,856 | (2) | - | 47,738 | ||||||||||||||||
2007
|
14,229 | - | 31,856 | (1) | - | 46,085 | ||||||||||||||||
Tianli
Yang, Vice President
|
2009
|
15,882 | - | 7,962 | (3) | - | 23,844 | |||||||||||||||
2008
|
15,882 | - | 31,856 | (2) | - | 47,738 | ||||||||||||||||
2007
|
14,229 | - | 31,856 | (1) | - | 46,085 | ||||||||||||||||
Christy
Shue, Executive Vice President of Finance and Investor Relations and
Corporate Secretary
|
2009
|
76,290 | 27,500 | 573,484 | (3) | 40,810 | (4) | 718,084 | ||||||||||||||
2008
|
70,360 | - | 573,484 | (3) | 39,240 | (4) | 683,084 | |||||||||||||||
2007
|
4,171 | - | 430,115 | (1) | - | 434,286 |
(1)
Valuation based on the dollar amount of option grants recognized for financial
statement reporting purposes pursuant to FAS 123(R) with respect to 2007. See
Note 17 of consolidated financial statements for assumptions made in the
valuations.
(2)
Valuation based on the dollar amount of option grants recognized for financial
statement reporting purposes pursuant to FAS 123(R) with respect to 2008. See
Note 18 of consolidated financial statements for assumptions made in the
valuations.
(3)
Valuation based on the dollar amount of option grants recognized for financial
statement reporting purposes pursuant to FAS 123(R) with respect to 2009. See
Note 19 of consolidated financial statements for assumptions made in the
valuations.
(4) Such
amount represented reimbursement of health insurance, apartment and leased car
expenses.
Grant
of Plan Based Awards
No grant
of any award pursuant to the Company’s 2005 Stock Option Plan was made in 2009
to any Named Executive Officer.
Outstanding
Equity Awards At Fiscal Year-End
Option Awards
|
|||||||||||||
Name
|
Number of Securities
Underlying
Unexercised
Options Exercisable
|
Number of Securities
Underlying
Unexercised
Options Unexercisable
|
Option
Exercise
Price ($)
|
Option
Expiration
Date
|
|||||||||
Tianfu
Yang, CEO
|
30,000 | - | (1) | $ | 8.10 |
2/
6/11
|
|||||||
Christy
Shue, Executive Vice President of Finance and Investor Relations and
Corporate Secretary
|
160,667 | 69,333 | (2) | 15.60 |
12/15/12
|
(1) Mr.
Tianfu Yang received a stock option grant of 30,000 shares in February 2006 at
an exercise price of $8.10 per share, all of which were vested and were
exercisable as of December 31, 2009.
42
(2) Ms.
Christy Shue received a stock option grant of 260,000 shares in December 2007 at
an exercise price of $15.60 per share, 160,667 of which vested and were
exercisable as of December 31, 2009.
Aggregate Option Exercises In Last
Fiscal Year and
Value Realized on Exercise
The
following table shows the options exercised on vesting by the Named Executive
Officers in 2009 and the value realized at December 31, 2009.
|
Options Exercised
|
|||||||
Name
|
Number of Shares
Exercised
|
Value Realized on
Exercise ($)(1)
|
||||||
Zedong
Xu
|
20,000 | 244,200 | ||||||
Tianli
Yang
|
20,000 | 244,200 | ||||||
Christy
Shue
|
30,000 | 187,500 |
(1) The
dollar amounts shown above are determined by multiplying (i) the number of
shares acquired at exercise by (ii) the difference between the closing price of
our Common Stock at the date of exercise and the option exercise
price.
Pension
Benefits
We do not
sponsor any qualified or non-qualified defined benefit plans.
Nonqualified
Deferred Compensation
We do not
maintain any non-qualified defined contribution or deferred compensation
plans.
Employment
Contract
We have
employment contracts with our employees. Employment contracts are designed to
adhere to both State and Provincial employment and social security regulations
under applicable Chinese or the U.S. law. We have signed confidentiality
agreements with all of our employees.
On
November 26, 2007, in connection with the Employment Agreement dated November
27, 2007 between the Company and Christy Young Shue, the Company’s Executive
Vice President of Finance and Investor Relations, the Company granted options
(the “Options”) to purchase 260,000 shares of the Company’s Common Stock, at an
exercise price $15.60, the closing price on November 26, 2007. One-fifth (1/5)
of the options (52,000 shares) vested immediately. The remaining options vest
over a 3-year period, with 13.33% shares vesting on the 180th day of the
effective date of the Employment Agreement, and the balance vesting thereafter
on a semi-annual basis over the course of the following three (3)
years.
Potential
Payment Upon Termination of Change in Control
In the
event Ms. Shue's employment is terminated without cause, she will be eligible to
receive any base salary earned to the date of termination, a severance amount
equal three (3) times her current base salary in effect on the date of
termination and the immediate vesting of any unvested options.
Director
Compensation
The
following table summarizes compensation that our directors earned during 2009
for services as members of our Board.
Name
|
Fees Earned or
Paid in Cash
($)
|
Options
Awards
($)
|
All Other
Compensation
($)
|
Total
($)
|
||||||||||||
Ching
Chuen Chan (1)
|
24,000 | - | - | 24,000 | ||||||||||||
David
Gatton (2)
|
36,000 | 2,071 | (7) | - | 38,071 | |||||||||||
Patrick
McManus
|
27,000 | (3) | 2,071 | (7) | - | 29,071 | ||||||||||
Feng
Bai
|
15,333 | (4) | - | - | 15,333 | |||||||||||
Boyd
Plowman
|
3,000 | (5) | 140,891 | (8) | - | 143,891 | ||||||||||
Yunyue
Ye
|
- | - | - | - | ||||||||||||
Lanxiang
Gao(6)
|
- | - | - | - |
43
(1)
During the fiscal year ended December 31, 2005, Mr. Ching Chuen Chan received a
stock option award of 50,000 shares at an exercise price of $3.10 per share, all
of which have vested and are exercisable as of December 31, 2009. In 2009, Ching
Chuen Chan exercised 25,000 shares of options in a cash
transaction.
(2) Mr.
David Gatton received a stock option grant of 10,000 shares in February 2006 at
an exercise price of $8.10 per share, all of which have vested and are
exercisable as of December 31, 2009. During the fiscal year ended December
31, 2005, Mr. David Gatton received a stock option award of 50,000
shares at an exercise price of $3.10 per share, all of which have vested
and are exercisable as of December 31, 2009. In 2009, Mr. Gatton exercised
45,000 shares of options (including 25,000 shares owned by his wife) in a
cashless transaction.
(3) Mr.
Patrick McManus deceased in July 2009.
(4)
Representing the cash compensation received by Mr. Feng Bai from January –
August 20, 2009. Mr. Feng Bai ceased to be a member of the Board of Directors as
of August 20, 2009.
(5)
Representing the cash compensation received by Mr. Boyd Plowman for December
2009. Mr. Boyd Plowman joined the Board of Directors on December 1,
2009.
(6) Ms.
Lanxiang Gao received a stock option grant of 30,000 shares in February 2006 at
an exercise price of $8.10 per share, all of which vested and were
exercisable as of December 31, 2009 Ms. Gao received her stock options as
compensation for serving as the Chief Operating Officer of Shanghai Tech Full
Electric Co., Ltd, a wholly owned subsidiary of Harbin. In 2009, Ms. Gao
exercised 12,500 shares of options in a cashless transaction.
(7)
Valuation is based on the dollar amount of option grants recognized for
financial statement reporting purposes pursuant to FAS 123(R) with respect to
2009. See Note 19 of consolidated financial statements for assumptions made in
the valuations.
(8) Mr.
Boyd Plowman received a stock option grant of 30,000 shares in December 2009 at
an exercise price of $20.02 per share, 15,000 of which have vested and are
exercisable as of December 31, 2009. Valuation is based on the dollar
amount of option grants recognized for financial statement reporting purposes
pursuant to FAS 123(R) with respect to 2009. See Note 19 of consolidated
financial statements for assumptions made in the valuations.
STOCK
INCENTIVE PLAN
Our long
term incentives are in the form of stock options to directors, executives,
employees and consultants under the 2005 Stock Option Plan (the “Plan”). The
objective of these awards is to advance the longer term interests of our Company
and our stockholders and complement incentives tied to annual performance. These
awards provide rewards to directors, executives and other key employees and
consultants upon the creation of incremental stockholder value and attainment of
long-term earnings goals. Stock option awards under the Plan produce
value to participants only if the price of our stock appreciates, thereby
directly link the interests of the participants with those of the
stockholders.
On
January 31, 2005, the Company granted a total of 150,000 stock options to
purchase shares of its common stock to three directors of the Company under the
Company’s 2005 Stock Option Plan, pursuant to written agreements (the
“Agreements”). Each of these options terminates five (5) years from the date of
grant. Per each of the Agreements, options shall become exercisable during the
term that Optionee serves as a Director of the Company as follows: (i) 50% of
the shares of Stock subject to each of these Options became exercisable
immediately as of the date of the Agreements; and (ii) the balance of the shares
of stock subject to these Options shall become exercisable in eight (8) equal
quarterly installments of three thousand one hundred twenty five (3,125) shares
of stock subject to this Option. The first such installment became exercisable
as of the last day of the first quarter of calendar year 2005, with an
additional 3,125 of such shares becoming exercisable as of such date. An
additional 3,125 of such shares became exercisable on the last day of each of
the second, third and fourth quarters of 2005 and on the last day of each of the
first, second and third quarters of 2006. The Company granted to Optionee the
right to purchase the number of shares of Stock set forth in the Agreement, for
cash (or other consideration as is authorized under the Plan and acceptable to
the Board of Directors of the Company, in their sole and absolute discretion) at
$3.10 per share (the “Exercise Price”), such price being not less than
eighty-five percent (85%) of the fair market value per share of the Shares
covered by this Option as of the date of the Agreement.
On
September 26, 2005, in connection with an employment agreement, the Company
granted options (the “Options”) to purchase 250,000 shares of the Company’s
common stock (the “Common Stock”) at an exercise price $3.93, the closing price
on September 23, 2005. One-fifth (1/5) of the Options (50,000 shares) has vested
immediately upon granting. The remaining Options shall vest over a 3-year
period, with 13.33 % (33,333 shares) vesting on the 180th day from September 26,
2005, and the balance vesting thereafter on a semi-annual basis, proportionately
over the course of the following three (3) years. Due to the termination of this
employment agreement, 66,667 shares of these options have been
forfeited.
On
February 6, 2006, the Company granted options to purchase 500,000 shares of the
Company’s Common Stock at an exercise price of $8.10, the closing price on
February 6, 2006. These options will vest in twelve equal quarterly installments
over a three year period commencing on May 6, 2006. These options will
expire on February 6, 2011.
44
On
February 26, 2007, the Company granted options to purchase 25,000 shares of the
Company’s Common Stock to certain employees at an exercise price of $12.40, the
closing price on February 26, 2006. These options will vest per employee
agreement dated February 26, 2006.
On
November 26, 2007, in connection with the Employment Agreement dated November
27, 2007 between the Company and Christy Young Shue, the Company’s Executive
Vice President of Finance and Investor Relations, the Company granted options
(the “Options”) to purchase 260,000 shares of the Company’s Common Stock, at an
exercise price $15.60, the closing price on November 26, 2007. One-fifth (1/5)
of the options (52,000 shares) shall vest immediately. The remaining options
shall vest over a 3-year period, with 13.33% shares vesting on the 180th day of
the effective date of the Employment Agreement, December 15, 2007, and the
balance vesting thereafter on a semi-annual basis over the course of the
following three (3) years.
On
December 1, 2009, in connection with the Independent Director Agreement (the
“Agreement”) dated November 30, 2009 between the Company and Boyd Plowman, the
Company granted options (the “Options”) to Mr. Plowman to purchase an aggregate
of 30,000 shares of the Company's common stock, at an exercise price of $20.02
per share, the closing price of the Company’s common stock on November 30,
2009. Fifty percent of the options (15,000 shares) shall vest
immediately. The remaining options shall become exercisable in twelve
(12) equal quarterly installments of one thousand two hundred and fifty (1,250)
options, with the first installment to be exercisable as of the last day of the
first quarter of calendar year 2010, with an additional 1,250 of options
becoming exercisable as of the last day of the subsequent quarter.
Compensation
Committee Interlocks and Insider Participation
Members
of our Compensation Committee of the Board of Directors were David Gatton, Ching
Chuen Chan, and Boyd Plowman. No member of our Compensation Committee was, or
has been, an officer or employee of the Company or any of our
subsidiaries.
No member
of the Compensation Committee has a relationship that would constitute an
interlocking relationship with executive officers or directors of the Company or
another entity.
Compensation
Committee Report
The goal
of the Company’s executive compensation policy is to ensure that an appropriate
relationship exists between executive compensation and the creation of
stockholder value, while at the same time attracting, motivating and retaining
experienced executive officers.
The
Compensation Committee has reviewed and discussed the discussion and analysis of
the Company’s compensation which appears above with management, and, based on
such review and discussion, the Compensation Committee recommended to the
Company’s Board of Directors that the above disclosure be included in this
Annual Report on Form 10-K for the year ended December 31, 2009.
The
members of the Compensation Committee are:
David
Gatton, Chairman
Ching
Chuen Chan
Boyd
Plowman
ITEM
12. Security Ownership of Certain Beneficial Owners and Management
The
following table sets forth certain information with respect to the beneficial
ownership of our common stock by:
(i)
each
person known to beneficially own more than five percent of our common
stock;
(ii)
each of
our directors, nominees, and executive officers; and
(iii)
all of
our directors and executive officers as a group.
The
number of shares beneficially owned by each director, nominee or executive
officer is determined under rules of the SEC, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under the
SEC rules, beneficial ownership includes any shares as to which the individual
has the sole or shared voting power or investment power. In addition, beneficial
ownership includes any shares that the individual has the right to acquire
within 60 days. Unless otherwise indicated, each person listed below has sole
investment and voting power (or shares such powers with his or her spouse). In
certain instances, the number of shares listed includes (in addition to shares
owned directly) shares held by the spouse or children of the person, or by a
trust or estate of which the person is a trustee or an executor or in which the
person may have a beneficial interest.
45
Title of Class
|
Name and Address of Beneficial Owner**
|
Amount of
Beneficial
Ownership
|
Percentage
of Class (1)
|
|||||||
Common
Stock
|
Tianfu
Yang
|
9,663,354 | (2) | 31.10 | % | |||||
Common
Stock
|
Tianli
Yang
|
500,000 | (3) | 1.61 | % | |||||
Common
Stock
|
Zedong
Xu
|
350,000 | (4) | 1.13 | % | |||||
Common
Stock
|
Ching
Chuen Chan
|
18,000 | (5) | * | ||||||
Common
Stock
|
Boyd
Plowman
|
15,000 | (6) | * | ||||||
Common
Stock
|
David
Gatton
|
25,268 | (7) | * | ||||||
Common
Stock
|
Yunyue
Ye
|
45,000 | * | |||||||
Common
Stock
|
Lanxiang
Gao
|
120,010 | * | |||||||
Common
Stock
|
Christy
Shue
|
160,667 | (8) | * | ||||||
Common
Stock
|
Shares
of all directors and executive officers as a group (9
persons)
|
10,897,299 | (9) | 35.08 | % | |||||
Common
Stock
|
Citadel
Advisors LLC
c/o
Citadel Investment Group, L.L.C.,
131
S. Dearborn Street, 32nd Floor, Chicago, IL 60603
|
1,600,033 | (10) | 5.15 | % |
*
Indicates less than one percent.
** The
address of each director, nominee, and executive officer is c/o Harbin Electric,
Inc., No. 9 Ha Ping Xi Lu, Ha Ping Lu Ji Zhong Qu, Harbin Kai Fa Qu, Harbin,
People’s Republic of China 150060.
(1)
|
Based
on 31,067,471 shares of common stock outstanding as of December 31,
2009.
|
(2)
|
Includes
options to acquire 30,000 shares of common stock exercisable within 60
days of December 31, 2009. Also includes 2,950,000 shares of common stock
owned by Hero Wave Investments Limited, a British Virgin Islands company
(“Hero”). Mr. Yang is the sole owner of the equity of Hero and has voting
and dispositive control over the shares of common stock held by
Hero.
|
(3)
|
Owned
by Sea Giant Investments Limited, a British Virgin Islands company (“Sea
Giant”). Mr. Yang is the sole owner of the equity of Sea Giant and has
voting and dispositive control over the shares of common stock held by
Broad Globe.
|
(4)
|
Owned
by Victory Lake Investments Limited, a British Virgin Islands company
(“Victory Lake”). Mr. Xu is the sole owner of the equity of Victory Lake
and has voting and dispositive control over the shares of common stock
held by Victory Lake.
|
(5)
|
Includes
options to acquire 18,000 shares of common stock exercisable within 60
days of December 31, 2009.
|
(6)
|
Includes
options to acquire 15,000 shares of common stock exercisable within
60 days of December 31, 2009.
|
46
(7)
|
Includes
options to acquire 10,000 shares of common stock exercisable within
60 days of December 31, 2009, 5,000 of which are held by Mr. Gatton’s
wife, Jillian F. McNamara.
|
(8)
|
Includes
options to acquire 160,667 shares of common stock exercisable within 60
days of December 31, 2009.
|
(9)
|
Includes
aggregate options to acquire 215,667 shares of common stock in each case
exercisable within 60 days of December 31,
2009.
|
(10)
|
The
Schedule 13G filed on February 4, 2010, was jointly filed by each of the
following persons pursuant to Rule 13d-1 promulgated by the Securities and
Exchange Commission pursuant to Section 13 of the Securities Exchange Act
of 1934, as amended: (i) Citadel Advisors LLC (“Citadel Advisors”), (ii)
Citadel Holdings II LP (“CH-II”), (iii) Citadel Investment Group II,
L.L.C. (“CIG-II”) and (iv) Mr. Kenneth Griffin (collectively with Citadel
Advisors, CH-II and CIG-II, the “Reporting Persons”) with respect to
shares of Common Stock of the Company (and/or warrants to purchase such
stock) owned by Citadel Equity Fund Ltd., a Cayman Islands limited company
(“CEF”), Citadel Derivatives Trading Ltd., a Cayman Islands limited
company (“CDT”), Citadel Global Equities Master Fund Ltd., a Cayman
Islands limited company (“CG”), Citadel Securities LLC, a Delaware limited
liability company (“Citadel Securities”), and certain segregated accounts.
Citadel Advisors is the investment manager for CEF, CG and certain
segregated accounts, and the portfolio manager for CDT. CH-II is the
managing member of Citadel Advisors. CH-I is the non-member manager of
Citadel Securities. CIG-II is the general partner of CH-I and CH-II. Mr.
Griffin is the President and Chief Executive Officer of, and owns a
controlling interest in, CIG-II. The information was derived from a
Schedule 13G filed on February 4,
2010.
|
ITEM
13. Certain Relationships and Related Transactions, and Director
Independence
There
were no transactions, since the beginning of the Company’s last fiscal year in
which the Company was or is to be a participant and in which any related person
had or will have a direct or indirect material interest.
Our board
of directors has determined that Mr. Ching Chuen Chan, Mr. David Gatton, Mr.
Boyd Plowman, and Mr. Yunyue Ye are considered “independent” under the current
independence standards of NASDAQ Marketplace Rule 4200(a)(15) and meet the
criteria for independence set forth in Rule 10A-3(b)(1) of the Securities
Exchange Act of 1934, as amended, as determined by the Board of
Directors.
ITEM
14. Principal Accounting Fees and Services
Audit
Fees
The
aggregate fees for each of the last two years for professional services rendered
by the principal accountant for our audits of our annual financial statements
and interim reviews of our financial statements included in our fillings with
Securities and Exchange Commission on Form 10-KSBs, Form 10-K, and 10-Qs
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for those years were
approximately:
2009:
|
$
|
560,700
|
Frazer
Frost, LLP (a successor entity of Moore Stephens Wurth Frazer and Torbet,
LLP) LLP)
|
||
2008:
|
$
|
440,000
|
Frazer
Frost, LLP (a successor entity of Moore Stephens Wurth Frazer and Torbet,
LLP)
LLP)LLP)
|
Audit
Related Fees
This
category consists of services by our independent auditors that are reasonably
related to the performance of the audit or review of our financial statements
and are not reported above under Audit Fees. This category includes accounting
consultations on transaction and proposed transaction related
matters.
2009:
|
$
|
515,000
|
Frazer
Frost, LLP (a successor entity of Moore Stephens Wurth Frazer and Torbet,
LLP)
|
||
2008:
|
$
|
93,800
|
Frazer
Frost, LLP (a successor entity of Moore Stephens Wurth Frazer and Torbet,
LLP)
|
We
incurred these fees in connection with registration statements, financing, and
acquisition transaction.
Tax
Fees
The
aggregate fees in each of the last two years for the professional services
rendered by the principal accountant for tax compliance, tax advice and tax
planning were approximately:
47
2009:
|
$
|
25,000
|
Frazer
Frost, LLP, (a successor entity of Moore Stephens Wurth Frazer and Torbet,
LLP)
|
||
2008:
|
$
|
7,000
|
Frazer
Frost, LLP, (a successor entity of Moore Stephens Wurth Frazer and Torbet,
LLP)
|
All Other
Fees
There are
no other fees to disclose.
All of
the fees paid to Frazer Frost, LLP (a successor entity of Moore Stephens Wurth
Frazer and Torbet, LLP) for the fiscal years ended December 31, 2009 and 2008
described above were pre-approved by the audit committee.
Policy on
Audit Committee Pre-Approval of Services Performed by Independent Registered
Public Accounting Firm
The audit
committee’s policy is to pre-approve all audit and permissible non-audit
services provided by the independent auditors. These services may include audit
services, audit-related services, tax services and other services. The audit
committee may also pre-approve particular services on a case-by-case
basis.
PART
IV
ITEM
15. Exhibits and Financial Statement Schedules
The
following exhibits are filed as part of this Annual Report on Form
10-K:
Exhibit Number
|
Description
|
Method of Filing
|
||
1.1
|
Underwriting
Agreement, dated July 30, 2009, between the Company and Roth Capital
Partners, LLC.
|
Filed
as Exhibit 1.1 to the current report on Form 8-K filed with the
Commission on July 30, 2009 and incorporated herein by
reference.
|
||
3.1
|
Articles
of Incorporation of the Company
|
Filed
as Exhibit 3.1 to the registration statement on Form SB-2 filed with the
Commission on October 10, 2003 and incorporated herein by
reference.
|
||
3.2
|
Amended
and Restated Bylaws of the Company
|
Filed
as Exhibit 3.2 to the Registration Statement on Form S-1 filed with the
Commission on October 20, 2008 and incorporated by
reference.
|
||
3.3
|
Amendment
to the Bylaws of the Company
|
Filed
as Exhibit 4.1 to the current report on Form 8-K filed with the
Commission on December 20, 2006 and incorporated herein by
reference.
|
||
3.4
|
Articles
of Merger dated as of January 27, 2005 by
and
between the Company and Torch Executive Services Ltd., a Nevada
corporation.
|
Filed
as Exhibit 3.1 to the quarterly report on Form 10-Q filed with the
Commission on May 8, 2009 and incorporated herein by
reference.
|
||
10.1
|
Registration
Rights Agreement dated as of August 31, 2005
|
Filed
as Exhibit 10.1 to the registration statement on Form SB-2 filed with the
Commission on April 27, 2006 and incorporated herein by
reference.
|
||
10.2
|
Common
Stock Purchase Agreement dated as of August 31, 2005
|
Filed
as Exhibit 10.2 to the registration statement on Form SB-2 filed with the
Commission on April 27, 2006 and incorporated herein by
reference.
|
||
10.3
|
Option
Agreement dated as of August 31, 2005
|
Filed
as Exhibit 10.3 to the registration statement on Form SB-2 filed with the
Commission on April 27, 2006 and incorporated herein by
reference.
|
48
10.4
|
Term
Sheet dated August 2, 2006
|
Filed
as Exhibit 10.5 to the current report on Form 8-K filed with the
Commission on August 2, 2006 and incorporated herein by
reference.
|
||
10.5
|
Agreement
on Cooperation between Harbin Tech Full Electric Co., Ltd. and Institute
of Electrical Engineering of the Chinese Academy of
Sciences
|
Filed
as Exhibit 10.6 to the current report on Form 8-K filed with the
Commission on August 25, 2006 and incorporated herein by
reference.
|
||
10.6
|
Purchase
Agreement among the Company, Advanced Electric Motors, Inc., Citadel
Equity Fund Ltd. and Merrill Lynch International, dated August 29,
2006
|
Filed
as Exhibit 4.1 to the current report on Form 8-K filed with the Commission
on September 1, 2006 and incorporated herein by
reference.
|
||
10.7
|
Indenture
among the Company, Advanced Electric Motors, Inc. and The Bank of New
York, as trustee, dated August 30, 2006
|
Filed
as Exhibit 4.2 to the current report on Form 8-K filed with the Commission
on September 1, 2006 and incorporated herein by
reference.
|
||
10.8(a)
|
2010
Global Note
|
Filed
as Exhibit 4.3(a) to the current report on Form 8-K filed with the
Commission on September 1, 2006 and incorporated herein by
reference.
|
||
10.8(b)
|
2012
Global Note
|
Filed
as Exhibit 4.3(b) to the current report on Form 8-K filed with the
Commission on September 1, 2006 and incorporated herein by
reference.
|
||
10.9
|
Registration
Rights Agreement between the Company and the Investors, dated August 30,
2006
|
Filed
as Exhibit 4.4 to the current report on Form 8-K filed with the Commission
on September 1, 2006 and incorporated herein by
reference.
|
||
10.10
|
Share
Pledge Agreement between the Company and The Bank of New York, as
collateral agent, dated August 30, 2006
|
Filed
as Exhibit 4.5 to the current report on Form 8-K filed with the Commission
on September 1, 2006 and incorporated herein by
reference.
|
||
10.11
|
Warrant
Agreement between the Company and The Bank of New York, as warrant agent,
dated August 30, 2006
|
Filed
as Exhibit 4.6 to the current report on Form 8-K filed with the Commission
on September 1, 2006 and incorporated herein by
reference.
|
||
10.12(a)
|
Global
First Tranche 2012 Warrants
|
Filed
as Exhibit 4.7(a) to the current report on Form 8-K filed with the
Commission on September 1, 2006 and incorporated herein by
reference.
|
||
10.12(b)
|
Global
Second Tranche 2012 Warrants
|
Filed
as Exhibit 4.7(b) to the current report on Form 8-K filed with the
Commission on September 1, 2006 and incorporated herein by
reference.
|
||
10.12(c)
|
Global
2009 Warrants
|
Filed
as Exhibit 4.7(c) to the current report on Form 8-K filed with the
Commission on September 1, 2006 and incorporated herein by
reference.
|
||
10.13
|
Voting
Agreement among the Company, Tianfu Yang and Citadel Equity Fund Ltd.,
dated August 30, 2006
|
Filed
as Exhibit 4.8 to the current report on Form 8-K filed with the Commission
on September 1, 2001 and incorporated herein by
reference.
|
49
10.14
|
Noncompetition
Covenant and Agreement among Citadel Equity Fund Ltd., Merrill Lynch
International and Tianfu Yang, dated August 30, 2006
|
Filed
as Exhibit 10.15 to the Registration Statement on SB-2 filed with the
Commission on October 4, 2006 and incorporated herein by
reference.
|
||
10.15
|
Agreement
between Harbin Tech Full Electric Co., Ltd. and Shanghai Lingang
Investment and Development Company Limited, dated September 8,
2006
|
Filed
as Exhibit 10.15 to the Registration Statement on SB-2 filed with the
Commission on October 4, 2006 and incorporated herein by
reference.
|
||
10.16
|
Letter
Agreement dated April 9, 2007 by and among Harbin Electric, Inc, Shelton
Technology LLC, Shaotang Chen and Xioagang Luo
|
Filed
as Exhibit 10.1 to the current report on Form 8-K filed with the
Commission on April 13, 2007 and incorporated herein by
reference.
|
||
10.17
|
License
Agreement dated as of April 9, 2007 by and among Advanced Automation
Group. LLC, Shelton Technology, LLC, Shaotang Chen and Xiaogang
Luo
|
Filed
as Exhibit 10.2 to the current report on Form 8-K filed with the
Commission on April 13, 2007 and incorporated herein by
reference.
|
||
10.18
|
Employment
Agreement dated April 9, 2007 by and between Advanced Automation Group,
LLC and Shaotang Chen
|
Filed
as Exhibit 10.3 to the current report on Form 8-K filed with the
Commission on April 13, 2007 and incorporated herein by
reference.
|
||
10.19
|
Employment
Agreement dated April 9, 2007 by and between Advanced Automation Group,
LLC and Xiaogang Luo.
|
Filed
as Exhibit 10.4 to the current report on Form 8-K filed with the
Commission on April 13, 2007 and incorporated herein by
reference.
|
||
10.20
|
Asset
Purchase Agreement dated June 16, 2007, by and between the Company, Harbin
Tech Full Electric Co., Ltd., Harbin Taifu Auto Electric Co., Ltd., Tianfu
Yang, Tianli Yang, Suofei Xu, Zedong Xu and Harbin Tech Full Industry Co.,
Ltd.
|
Filed
as Exhibit 10.1 to the current report on Form 8-K filed with the
Commission on June 19, 2007 and incorporated herein by
reference.
|
||
10.21
|
Equity
Registration Rights Agreement, dated October 17, 2007, by and between the
Company, Hero Wave Investment Limited a British Virgin Islands company,
and Tianfu Yang, as guarantor.
|
Filed
as Exhibit 10.1 to the current report on Form 8-K filed with the
Commission on October 23, 2007 and incorporated herein by
reference.
|
||
10.22
|
Employment
Agreement dated November 27, 2007 by and between the Company and Ms.
Christy Young Shue
|
Filed
as Exhibit 10.1 to the current report on Form 8-K filed with the
Commission on November 30, 2007 and incorporated herein by
reference.
|
||
10.23
|
Letter
of Intent dated March 27, 2008, by and among Harbin Tech Full Electric
Co., Ltd., Wendeng Second Electric Motor Factory, The Committee of Labor
Union of Wendeng Second Electric Motor Factory and The People’s Government
of Zhangjiachan Town, Wendeng County.
|
Filed
as Exhibit 10.1 to the current report on Form 8-K filed with the
Commission on March 31, 2008 and incorporated herein by
reference.
|
||
10.24
|
Purchase
Agreement, dated June 24, 2008, by and among the Company and the investors
party thereto.
|
Filed
as Exhibit 10.1 to the current report on Form 8-K filed with the
Commission on June 26, 2008 and incorporated herein by
reference.
|
||
10.25
|
Registration
Rights Agreement, dated June 24, 2008, by and among the Company and the
investors party thereto.
|
Filed
as Exhibit 10.2 to the current report on Form 8-K filed with the
Commission on June 26, 2008 and incorporated herein by
reference.
|
50
10.26
|
Equity
and Assets Transfer Agreement, dated July 10, 2008, by and between Harbin
Tech Full Electric Co. Ltd., Weihai Hengda Electric Motor (Group) Co.
Ltd., Wendeng Second Electric Motor Factory, the Committee of Labor Union
of Wendeng Second Electric Motor Factory, the People’s Government of
Zhangjiachan Town and Wendeng County.
|
Filed
as Exhibit 10.1 to the current report on Form 8-K filed with the
Commission on July 11, 2008 and incorporated herein by
reference.
|
||
10.27
|
Amendment
to Letter Agreement, dated as of December 11, 2008 between the Company and
Shelton Technology, LLC.
|
Filed
as Exhibit 10.1 to the current report on Form 8-K filed with the
Commission on December 16, 2008 and incorporated herein by
reference.
|
||
10.28
|
Second
Amendment to Letter Agreement , dated as of April 21, 2009 between the
Company and Shelton Technology, LLC..
|
Filed
as Exhibit 10.1 to the current report on Form 8-K filed with the
Commission on April 24, 2009 and incorporated herein by
reference.
|
||
10.29
|
Amendment
to Employment Agreement, dated April 1, 2009 by and between the Company
and Ms. Christy Young Shue.
|
Filed
as Exhibit 10.1 to the quarterly report on Form 10-Q filed with the
Commission on May 8, 2009 and incorporated herein by
reference.
|
||
10.30
|
Letter
Agreement between the Company and Citadel Equity Fund Ltd. dated June 1,
2009.
|
Filed
as Exhibit 10.1 to the current report on Form 8-K filed with the
Commission on June 5, 2009 and incorporated herein by
reference.
|
||
10.31
|
Merrill
Lynch International (“Merrill”) and ABN AMRO Bank N.V., London Branch
(“ABN”) Letter Agreement among the Company, Merrill and ABN dated July 14,
2009.
|
Filed
as Exhibit 10.1 to the current report on Form 8-K filed with the
Commission on July 20, 2009 and incorporated herein by
reference.
|
||
10.32
|
Abax
Letter Agreement among the Company, Abax Jade and Abax Nai Xin
dated July 14, 2009.
|
Filed
as Exhibit 10.2 to the current report on Form 8-K filed with the
Commission on July 20, 2009 and incorporated herein by
reference.
|
||
10.33
|
Equity
Acquisition Agreement between Harbin Tech Full Electric Co. Ltd., Xi’an
Simo Electric Co. Ltd. and Shaanxi Electric Machinery Association dated
October 2, 2009.
|
Filed
as Exhibit 10.1 to the current report on Form 8-K filed with the
Commission on October 7, 2009 and incorporated herein by
reference.
|
||
10.34
|
SWAP
Termination Agreement between the Company and Merrill Lynch International,
dated as of September 16, 2009.
|
Filed
as Exhibit 10.5 to the quarterly report on Form 10-Q filed with the
Commission on November 9, 2009 and incorporated herein by
reference.
|
||
10.35
|
Independent
Director Agreement dated November 30, 2009, between the Company and Boyd
R. Plowman.
|
Filed
as Exhibit 10.1 to the current report on Form 8-K filed with the
Commission on December 2, 2009 and incorporated herein by
reference.
|
||
10.36
|
Third
Amendment to the Letter Agreement
between
the Company and Shelton Technology, LLC
dated
as of December 7, 2009.
|
Filed
as Exhibit 10.1 to the current report on Form 8-K filed with the
Commission on December 8, 2009 and incorporated herein by
reference.
|
||
14.1
|
Code
of Ethics and Business Conduct
|
Previously
filed.
|
||
21.1
|
List
of subsidiaries
|
Filed
as Exhibit 21.1 to the Registration Statement on Form S-1 filed with the
Commission on October 20, 2008 and incorporated by
reference.
|
51
23.1
|
Consent
of Frazer Frost, LLP, (a successor entity of Moore Stephens Wurth Frazer
and Torbet, LLP)
|
Filed
herewith.
|
||
31.1
|
Certification
by the Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a)
|
Filed
herewith.
|
||
31.2
|
Certification
by the Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a)
|
Filed
herewith
|
||
32.1
|
Certification
of the Chief Executive Officer and the Chief Financial Officer pursuant 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
Filed
herewith
|
||
Exhibit
99.1
|
Press
Release Announcing Fourth Quarter and 2009 Financial
Results
|
Filed
herewith
|
52
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange Act,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date:
March 16, 2010
|
By:
|
/s/
Tianfu Yang
|
By:
|
Tianfu
Yang
|
|
Title:
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this Report has
been signed below by the following person on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
NAME
|
TITLE
|
|||
/s/
Tianfu Yang
|
Chief
Executive Officer, Director and Chairman of the Board
|
March
16, 2010
|
||
Tianfu
Yang
|
||||
/s/
Zedong Xu
|
Chief
Financial Officer (Principal Accounting Officer)
|
March
16, 2010
|
||
Zedong
Xu
|
||||
/s/
Lanxiang Gao
|
Director
|
March
16, 2010
|
||
Lanxiang
Gao
|
||||
/s/
Ching Chuen Chan
|
Director
|
March
16, 2010
|
||
Ching
Chuen Chan
|
||||
/s/
Boyd Plowman
|
Director
|
March
16, 2010
|
||
Boyd
Plowman
|
||||
/s/
David Gatton
|
Director
|
March
16, 2010
|
||
David
Gatton
|
||||
/s/
Yunyue Ye
|
Director
|
March
16, 2010
|
||
Yunyue
Ye
|
53
Index to
Consolidated Financial Statements
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-3
|
Consolidated
Statements of Income and Other Comprehensive Income for the Years
Ended December 31, 2009, 2008 and 2007
|
F-4
|
Consolidated
Statements of Changes in Equity for the Years Ended
December 31, 2009, 2008 and 2007
|
F-5
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009, 2008
and 2007
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Harbin Electric, Inc
We have
audited the accompanying consolidated balance sheets of Harbin Electric, Inc.
and subsidiaries as of December 31, 2009 and 2008, and the related consolidated
statements of income and other comprehensive income, changes in equity, and cash
flows for each of the years in the three-year period ended December 31, 2009.
Harbin Electric, Inc.’s management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Harbin Electric, Inc. as of
December 31, 2009 and 2008, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2009 in
conformity with accounting principles generally accepted in the United States of
America.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Harbin Electric, Inc.’s internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 15, 2010 expressed a
unqualified opinion.
/S/
Frazer Frost, LLP (Successor Entity of Moore Stephens Wurth Frazer and
Torbet, LLP, see Form 8-K filed on January 7, 2010)
|
|
Brea,
CA
|
|
March
15, 2010
|
F-2
CONSOLIDATED
BALANCE SHEETS
AS OF
DECEMBER 31, 2009 AND 2008
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 92,902,400 | $ | 48,412,263 | ||||
Restricted
cash
|
3,522,009 | 513,450 | ||||||
Notes
receivable
|
1,086,929 | 1,451,977 | ||||||
Accounts
receivable, net
|
93,322,885 | 30,284,080 | ||||||
Inventories
|
74,913,877 | 21,960,084 | ||||||
Other
receivables & prepaid expenses
|
5,828,453 | 248,552 | ||||||
Advances
on inventory purchases
|
11,718,544 | 3,529,607 | ||||||
Total
current assets
|
283,295,097 | 106,400,013 | ||||||
PLANT
AND EQUIPMENT, net
|
156,364,548 | 94,931,999 | ||||||
OTHER
ASSETS:
|
||||||||
Debt
issuance costs, net
|
359,255 | 1,672,279 | ||||||
Advances
on non-current assets
|
13,666,414 | 12,308,617 | ||||||
Goodwill
|
54,073,754 | 12,273,778 | ||||||
Other
intangible assets, net of accumulated amortization
|
21,472,471 | 6,430,397 | ||||||
Other
assets
|
1,722,693 | 471,220 | ||||||
Deposit
in derivative hedge
|
- | 1,000,000 | ||||||
Total
other assets
|
91,294,587 | 34,156,291 | ||||||
Total
assets
|
$ | 530,954,232 | $ | 235,488,303 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Notes
payable - short term
|
$ | 4,533,268 | $ | 1,026,900 | ||||
Accounts
payable
|
47,099,135 | 8,415,919 | ||||||
Short
term loans
|
44,439,629 | 4,180,950 | ||||||
Other
payables
|
8,890,730 | 875,395 | ||||||
Accrued
liabilties
|
3,438,664 | 2,715,351 | ||||||
Customer
deposits
|
18,455,842 | 1,244,622 | ||||||
Taxes
payable
|
8,233,862 | 2,096,521 | ||||||
Cross
currency hedge payable
|
- | 175,986 | ||||||
Amounts
due to original shareholders
|
28,681,976 | - | ||||||
Current
portion of notes payable, net
|
7,660,210 | 1,979,871 | ||||||
Total
current liabilities
|
171,433,316 | 22,711,515 | ||||||
LONG
TERM LIABILITIES:
|
||||||||
Amounts
due to original shareholders
|
- | 733,500 | ||||||
Long
term loan - bank
|
4,401,000 | - | ||||||
Notes
payable, net
|
- | 31,630,995 | ||||||
Fair
value of derivative instrument
|
- | 5,762,958 | ||||||
Warrant
liability
|
4,623,558 | - | ||||||
Total
liabilities
|
180,457,874 | 60,838,968 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
SHAREHOLDERS'
EQUITY:
|
||||||||
Common
Stock, $0.00001 par value, 100,000,000 shares authorized, 31,067,471 and
22,102,078 shares issued and outstanding as of December 31, 2009 and
December 31, 2008, respectively
|
310 | 220 | ||||||
Paid-in-capital
|
218,094,374 | 95,029,290 | ||||||
Retained
earnings
|
69,594,111 | 52,100,479 | ||||||
Statutory
reserves
|
22,869,423 | 14,573,994 | ||||||
Accumulated
other comprehensive income
|
18,638,299 | 12,945,352 | ||||||
Total
shareholders' equity
|
329,196,517 | 174,649,335 | ||||||
NONCONTROLLING
INTERESTS
|
21,299,841 | - | ||||||
Total
liabilities and equity
|
$ | 530,954,232 | $ | 235,488,303 |
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
2009
|
2008
|
2007
|
||||||||||
REVENUES
|
$ | 223,234,394 | $ | 120,820,302 | $ | 65,402,864 | ||||||
COST
OF SALES
|
146,622,220 | 73,343,521 | 32,967,887 | |||||||||
GROSS
PROFIT
|
76,612,174 | 47,476,781 | 32,434,977 | |||||||||
RESEARCH
AND DEVELOPMENT EXPENSE
|
2,093,366 | 1,170,169 | 1,064,074 | |||||||||
SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES
|
18,671,507 | 11,913,435 | 7,659,611 | |||||||||
INCOME
FROM OPERATIONS
|
55,847,301 | 34,393,177 | 23,711,292 | |||||||||
OTHER
EXPENSE (INCOME), NET
|
||||||||||||
Other
(income) expenses, net
|
(5,462,148 | ) | (1,575,224 | ) | 188,654 | |||||||
Interest
expense, net
|
12,315,645 | 6,065,814 | 6,619,954 | |||||||||
Loss
on cross currency hedge settlement
|
9,000,000 | - | - | |||||||||
Gain
on debt repurchase
|
(4,155,000 | ) | - | - | ||||||||
Change
in fair value of warrant
|
13,214,525 | - | - | |||||||||
Total
other expense, net
|
24,913,022 | 4,490,590 | 6,808,608 | |||||||||
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
30,934,279 | 29,902,587 | 16,902,684 | |||||||||
PROVISION
FOR INCOME TAXES
|
7,796,084 | 4,523,888 | - | |||||||||
NET
INCOME BEFORE NONCONTROLLING INTEREST
|
23,138,195 | 25,378,699 | 16,902,684 | |||||||||
LESS:
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
|
3,491,414 | - | - | |||||||||
NET
INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
|
19,646,781 | 25,378,699 | 16,902,684 | |||||||||
OTHER
COMPREHENSIVE INCOME (LOSS)
|
||||||||||||
Foreign
currency translation adjustment
|
(70,011 | ) | 9,513,907 | 7,162,512 | ||||||||
Foreign
currency translation adjustment attributable to noncontrolling
interest
|
683 | - | - | |||||||||
Change
in fair value of derivative instrument
|
(3,237,042 | ) | 5,081,414 | (10,844,372 | ) | |||||||
COMPREHENSIVE
INCOME
|
$ | 16,340,411 | $ | 39,974,020 | $ | 13,220,824 | ||||||
EARNINGS
PER SHARE
|
||||||||||||
Basic
|
||||||||||||
Weighted
average number of shares
|
25,568,936 | 20,235,877 | 17,082,300 | |||||||||
Earnings
per share before noncontrolling interest
|
$ | 0.90 | $ | 1.25 | $ | 0.99 | ||||||
Earnings
per share attributable to controlling interest
|
$ | 0.77 | $ | - | $ | - | ||||||
Earnings
per share attributable to noncontrolling interest
|
$ | 0.13 | $ | - | $ | - | ||||||
Diluted
|
||||||||||||
Weighted
average number of shares
|
25,672,420 | 21,323,660 | 18,634,739 | |||||||||
Earnings
per share before noncontrolling interest
|
$ | 0.90 | $ | 1.19 | $ | 0.91 | ||||||
Earnings
per share attributable to controlling interest
|
$ | 0.77 | $ | - | $ | - | ||||||
Earnings
per share attributable to noncontrolling interest
|
$ | 0.13 | $ | - | $ | - |
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these consolidated
statements.
F-4
CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY
Common
stock
|
Additional
|
Retained
earnings
|
Accumulated
other
|
|||||||||||||||||||||||||||||
Par
|
paid-in
|
Unrestricted
|
Statutory
|
comprehensive
|
Noncontrolling
|
|||||||||||||||||||||||||||
Shares
|
value
|
capital
|
earnings
|
reserves
|
income
(loss)
|
interest
|
Total
|
|||||||||||||||||||||||||
BALANCE,
January 1, 2007
|
16,600,451 | $ | 166 | $ | 12,252,064 | $ | 26,222,408 | $ | 4,523,715 | $ | 2,031,891 | $ | - | $ | 45,030,244 | |||||||||||||||||
Reclassification
of warrant liabilities to equity
|
22,921,113 | (6,353,033 | ) | 16,568,080 | ||||||||||||||||||||||||||||
Stock
issued in acquisition
|
473,354 | 5 | 6,499,995 | 6,500,000 | ||||||||||||||||||||||||||||
Exercise
of stock warrants at $3.50
|
155,198 | 1 | 543,192 | 543,193 | ||||||||||||||||||||||||||||
Exercise
of stock warrants at $7.80
|
150,000 | 1 | 1,169,999 | 1,170,000 | ||||||||||||||||||||||||||||
Cashless
exercise of warrants and options
|
764,153 | 8 | (8 | ) | - | |||||||||||||||||||||||||||
Capital
contribution
|
199,111 | 199,111 | ||||||||||||||||||||||||||||||
Stock
based compensation
|
1,385,123 | 1,385,123 | ||||||||||||||||||||||||||||||
Net
income
|
16,902,684 | 16,902,684 | ||||||||||||||||||||||||||||||
Adjustment
to statutory reserve
|
(4,490,747 | ) | 4,490,747 | - | ||||||||||||||||||||||||||||
Foreign
currency translation gain
|
7,162,512 | 7,162,512 | ||||||||||||||||||||||||||||||
Net
change related to cash flow hedge
|
(10,844,372 | ) | (10,844,372 | ) | ||||||||||||||||||||||||||||
BALANCE,
December 31, 2007
|
18,143,156 | $ | 181 | $ | 44,970,589 | $ | 32,281,312 | $ | 9,014,462 | $ | (1,649,969 | ) | $ | - | $ | 84,616,575 | ||||||||||||||||
Exercise
of stock warrants at $3.50
|
322,298 | 3 | 1,128,040 | 1,128,043 | ||||||||||||||||||||||||||||
Exercise
of stock options at $3.10
|
25,000 | - | 77,500 | 77,500 | ||||||||||||||||||||||||||||
Non-cash
exercise of stock option at $3.10
|
11,624 | - | - | - | ||||||||||||||||||||||||||||
Exercise
of stock warrants at $7.80
|
100,000 | 1 | 779,999 | 780,000 | ||||||||||||||||||||||||||||
Stock
issuance for cash at $14.13
|
3,500,000 | 35 | 46,290,708 | 46,290,743 | ||||||||||||||||||||||||||||
Amortization
of stock compensation
|
1,782,454 | 1,782,454 | ||||||||||||||||||||||||||||||
Net
income
|
25,378,699 | 25,378,699 | ||||||||||||||||||||||||||||||
Adjustment
to statutory reserve
|
(5,559,532 | ) | 5,559,532 | - | ||||||||||||||||||||||||||||
Foreign
currency translation gain
|
9,513,907 | 9,513,907 | ||||||||||||||||||||||||||||||
Net
change related to cash flow hedge
|
5,081,414 | 5,081,414 | ||||||||||||||||||||||||||||||
BALANCE,
December 31, 2008
|
22,102,078 | $ | 220 | $ | 95,029,290 | $ | 52,100,479 | $ | 14,573,994 | $ | 12,945,352 | $ | - | $ | 174,649,335 | |||||||||||||||||
Cumulative
effect of reclassification of warrants
|
(13,613,718 | ) | 6,142,280 | (7,471,438 | ) | |||||||||||||||||||||||||||
BALANCE,
January 1, 2009 as adjusted
|
22,102,078 | $ | 220 | $ | 81,415,572 | $ | 58,242,759 | $ | 14,573,994 | $ | 12,945,352 | $ | - | $ | 167,177,897 | |||||||||||||||||
Exercise
of stock warrants at $7.80
|
1,428,846 | 14 | 26,122,124 | 26,122,138 | ||||||||||||||||||||||||||||
Amortization
of stock compensation
|
1,211,037 | 1,211,037 | ||||||||||||||||||||||||||||||
Non
cash exercise of warrant at $12.25
|
85,227 | 1 | 1,055,266 | 1,055,267 | ||||||||||||||||||||||||||||
Stock
issuance for cash at $16
|
7,187,500 | 72 | 107,521,878 | 107,521,950 | ||||||||||||||||||||||||||||
Noncontrolling
interest in acquiree
|
17,957,815 | 17,957,815 | ||||||||||||||||||||||||||||||
Exercise
of stock options at $3.10
|
65,000 | 1 | 201,499 | 201,500 | ||||||||||||||||||||||||||||
Exercise
of stock options at $8.10
|
70,000 | 1 | 566,999 | 567,000 | ||||||||||||||||||||||||||||
Cashless
exercise of options
|
128,820 | 1 | (1 | ) | - | |||||||||||||||||||||||||||
Net
income
|
19,646,781 | 3,491,414 | 23,138,195 | |||||||||||||||||||||||||||||
Adjustment
to statutory reserve
|
(8,295,429 | ) | 8,295,429 | - | ||||||||||||||||||||||||||||
Dividend
distribution
|
(150,071 | ) | (150,071 | ) | ||||||||||||||||||||||||||||
Foreign
currency translation
|
(70,011 | ) | 683 | (69,328 | ) | |||||||||||||||||||||||||||
Net
change related to cash flow hedge
|
(3,237,042 | ) | (3,237,042 | ) | ||||||||||||||||||||||||||||
Reclassification
of change in cash flow hedge to earnings
|
9,000,000 | 9,000,000 | ||||||||||||||||||||||||||||||
BALANCE,
December 31, 2009
|
31,067,471 | $ | 310 | $ | 218,094,374 | $ | 69,594,111 | $ | 22,869,423 | $ | 18,638,299 | $ | 21,299,841 | $ | 350,496,358 |
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these consolidated
statements.
F-5
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
2009
|
2008
|
2007
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
Net
income attributable to controlling interest
|
$ | 19,646,781 | $ | 25,378,699 | $ | 16,902,684 | ||||||
Net
income attributable to noncontrolling interest
|
3,491,414 | - | - | |||||||||
Consolidated
net income
|
23,138,195 | 25,378,699 | 16,902,684 | |||||||||
Adjustments
to reconcile net income to cash provided by (used in) operating
activities:
|
||||||||||||
Depreciation
|
3,563,602 | 1,608,724 | 567,069 | |||||||||
Amortization
of intangible assets
|
1,166,304 | 1,032,674 | 510,023 | |||||||||
Amortization
of debt issuance costs
|
1,313,024 | 542,438 | 542,438 | |||||||||
Amortization
of debt discount
|
10,949,344 | 4,489,135 | 4,532,132 | |||||||||
(Recovery
of) provision for accounts receivable
|
(437,191 | ) | (1,899 | ) | 65,876 | |||||||
Stock
based compensation
|
1,211,037 | 1,782,454 | 1,584,234 | |||||||||
Loss
(gain) on derivative instrument
|
- | 541,018 | (700,496 | ) | ||||||||
Realized
loss on extinguishment of derivative liability
|
9,000,000 | - | - | |||||||||
Realized
gain on repurchase of notes payable
|
(4,155,000 | ) | - | - | ||||||||
Loss
on disposal of equipment
|
1,305,831 | - | - | |||||||||
Gain on
disposal of intangible assets
|
(89,955 | ) | ||||||||||
Change
in fair value of warrants
|
13,214,525 | - | - | |||||||||
Change
in operating assets and liabilities
|
||||||||||||
Notes
receivable
|
352,233 | (1,076,669 | ) | - | ||||||||
Accounts
receivable
|
69,474 | (1,174,801 | ) | (12,197,768 | ) | |||||||
Inventories
|
12,174,305 | 9,605,737 | (1,615,757 | ) | ||||||||
Other
receivables
|
(1,321,224 | ) | 1,313,578 | (108,028 | ) | |||||||
Advances
on inventory purchases
|
(151,787 | ) | (730,043 | ) | (844,177 | ) | ||||||
Other
assets
|
98,624 | 8,920 | (24,781 | ) | ||||||||
Accounts
payable
|
(1,660,309 | ) | 591,620 | (1,302,212 | ) | |||||||
Other
payables and accrued liabilities
|
(2,483,281 | ) | (1,627,632 | ) | 965,773 | |||||||
Customer
deposits
|
(4,052,825 | ) | (1,277,737 | ) | (7,848 | ) | ||||||
Taxes
payable
|
(688,173 | ) | 1,298,829 | 234,702 | ||||||||
Net
cash provided by operating activities
|
62,516,753 | 42,305,045 | 9,103,864 | |||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
Cash
acquired through acquisition
|
11,092,963 | 5,061,757 | - | |||||||||
Payment
for advances on non-current assets
|
(4,317,899 | ) | (403,620 | ) | (23,315,185 | ) | ||||||
Purchase
of intangible assets
|
(9,969 | ) | - | (1,117,024 | ) | |||||||
Additions
to plant and equipment
|
(8,478,159 | ) | (16,035,159 | ) | (12,138,676 | ) | ||||||
Additions
to construction-in-progress
|
(3,733,692 | ) | (16,386,519 | ) | - | |||||||
Payment
to original shareholders for acquisition
|
(83,958,460 | ) | (53,335,500 | ) | - | |||||||
Proceeds
from disposal of equipments
|
282,877 | - | - | |||||||||
Net
cash used in investing activities
|
(89,122,339 | ) | (81,099,041 | ) | (36,570,885 | ) | ||||||
CASH
FLOWS FINANCING ACTIVITIES:
|
||||||||||||
Increase
in restricted cash
|
(2,992,096 | ) | (504,525 | ) | - | |||||||
Net
proceeds from stock issuance
|
107,491,950 | 46,290,743 | - | |||||||||
Proceeds
received from conversion of warrants and options
|
11,913,499 | 1,985,543 | 1,713,193 | |||||||||
Deposit
to secure investment in cross currency hedge
|
1,000,000 | - | (1,000,000 | ) | ||||||||
Proceeds
from cross currency hedge
|
- | 145,945 | 554,551 | |||||||||
Payment
on cross currency hedge
|
(9,000,000 | ) | (365,032 | ) | - | |||||||
Payment
on notes payable
|
(32,745,000 | ) | (4,000,000 | ) | - | |||||||
Payment
on notes payable -short term
|
(5,125,486 | ) | (3,315,450 | ) | - | |||||||
Proceeds
from notes payable - short term
|
6,151,756 | - | - | |||||||||
Proceeds
from short term loan-bank
|
15,020,201 | - | - | |||||||||
Repayment
of short term loan-bank
|
(18,872,916 | ) | (1,034,997 | ) | - | |||||||
Repayment
of long term loan - bank
|
(1,466,700 | ) | - | - | ||||||||
Dividend
payment to shareholders
|
(150,071 | ) | - | - | ||||||||
Net
cash provided by financing activities
|
71,225,137 | 39,202,227 | 1,267,744 | |||||||||
EFFECTS
OF EXCHANGE RATE CHANGE IN CASH
|
(129,414 | ) | 2,470,139 | 4,419,251 | ||||||||
INCREASE
(DECREASE) IN CASH
|
44,490,137 | 2,878,370 | (21,780,026 | ) | ||||||||
CASH,
beginning
|
48,412,263 | 45,533,893 | 67,313,919 | |||||||||
CASH,
ending
|
$ | 92,902,400 | $ | 48,412,263 | $ | 45,533,893 |
See
report of independent registered public accounting firm.
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Note
1 - Nature of Business
Harbin
Electric, Inc. (“the Company” or “Harbin Electric”) is a Nevada Corporation,
incorporated on July 9, 2003. Through its subsidiaries, the Company designs,
develops, engineers, manufactures, sells and services a wide array of electric
motors including linear motors, specialty micro-motors, and industrial rotary
motors, with focus on innovation, creativity, and value-added
products. Products are sold in China and to certain international
markets.
Current
development
On
October 2, 2009, Harbin Electric acquired Xi’an Tech Full Simo Motor Co., Ltd.
(“Simo Motor”). Simo Motor formerly known as Xi’an Simo Motor
Incorporation (Group), was initially established in 1955 as a State-Owned
Enterprise and one of the major backbone companies of China’s electric motor
industry. In January 2004, Simo Motor was privatized as a shareholding company
from the former Xi’an Electric Motor Works under the corporate laws of the PRC.
Simo Motor develops and manufactures various industrial motors. Simo
Motor sells its products primarily in China and also in the advanced industrial
markets of North America, Europe and Asia as well as in Africa, Southeast Asia
and the Middle East. Simo Motor has developed to a large enterprise group which
consists of 15 wholly-owned and 8 majority owned subsidiaries mainly engaged in
manufacturing and selling of electric motors. As a result, the Company’s
ownership to Simo Motor and all subsidiaries averages to 87.2%. The remaining
12.8% is owned by noncontrolling shareholders. See Note 16 for
further discussion.
Note
2 - Summary of Significant Accounting Policies
Basis of
presentation
The
consolidated financial statements of Harbin Electric Inc. reflect the activities
of the following subsidiaries. All material intercompany transactions
have been eliminated.
Place incorporated
|
Ownership
percentage
|
|||||
Advanced
Electric Motors, Inc. (“AEM”)
|
Delaware,
USA
|
100 | % | |||
Harbin
Tech Full Electric Co., Ltd. (“HTFE”)
|
Harbin,
China
|
100 | % | |||
Advanced
Automation Group, LLC (“AAG”)
|
Delaware,
USA
|
100 | % | |||
Advanced
Automation Group Shanghai Co., Ltd. (“SAAG”)
|
Shanghai,
China
|
100 | % | |||
Shanghai
Tech Full Electric Co., Ltd. (“STFE”)
|
Shanghai,
China
|
100 | % | |||
Weihai
Tech Full Simo Motors Co., Ltd. (“Weihai”)
|
Weihai,
China
|
100 | % | |||
Xi’an
Tech Full Simo Motor Co., Ltd. (“Simo Motor”)
|
Xi’an,
China
|
87.2 | % |
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and include the accounts of all directly and indirectly owned subsidiaries
listed above.
Since
Simo Motor was acquired in October 2009, its operating results for the three
months ended December 31, 2009 were included in the consolidated
statements.
Use of
estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions about future events. These estimates and the
underlying assumptions affect the reported amounts of assets, liabilities,
revenue and expenses, and disclosures about contingent assets and liabilities.
Such estimates and assumptions by management affect accrued expenses,
the valuation of accounts receivable, inventories, and long-lived assets, legal
contingencies, lives of plant and equipment, lives of intangible assets,
business combinations, goodwill, calculation of warranty accruals, taxes,
share-based compensation and others.
Although
the Company regularly assesses these estimates, actual results could materially
differ. The Company bases its estimates on historical experience and various
other assumptions that it believes to be reasonable under the
circumstances.
See
report of independent registered public accounting firm.
F-7
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Foreign currency
transactions
Our
reporting currency is the US dollar. The functional currency of PRC
subsidiaries is the Chinese Renminbi (“RMB”). Our results of operations and
financial position of the PRC subsidiaries are translated to United States
dollars using the year end exchange rates as to assets and liabilities and
weighted average exchange rates as to revenues, expenses and cash flows. Capital
accounts are translated at their historical exchange rates when the capital
transaction occurred. The resulting currency translation adjustments are
recorded as a component of accumulated other comprehensive income (loss) within
stockholders’ equity. As a result, translation adjustments amount
related to assets and liabilities reported on the consolidated statement of cash
flows will not necessarily agree with changes in the corresponding consolidated
balances on the balance sheet. Transaction gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other than
the functional currency are included in the results of operations as
incurred.
Translation
adjustments resulting from this process amounted to $(70,011), $9,513,907 and
$7,162,512 for the fiscal years ended December 31, 2009, 2008 and 2007,
respectively. The balance sheet amounts with the exception of equity
at December 31, 2009 and 2008 were translated 6.84 RMB to $1.00 and 6.85 RMB to
$1.00, respectively. The equity accounts were stated at their
historical exchange rate. The average translation rates applied to
the revenues, expenses and cash flows statement amounts for the fiscal years
ended December 31, 2009, 2008 and 2007 were 6.84 RMB, 6.96 RMB and 7.62 RMB to
$1.00, respectively. Simo Motor was acquired in October, 2009, and
the average translation rate applied to Simo Motor’s statement of income and
cash flow was 6.84 RMB to $1.00.
Transaction
loss of $88,993, $358,460 and $118,247 were recognized during fiscal years ended
December 31, 2009, 2008 and 2007.
Concentration of
risks
The
Company considers all highly liquid investments with original maturities of
three months or less at the time of purchase to be cash equivalents, for cash
flow statement purposes. Cash includes cash on hand and demand
deposits in accounts maintained with state owned banks within the PRC and with
banks in the United States. The Company maintains balances at financial
institutions which, from time to time, may exceed Federal Deposit Insurance
Corporation insured limits for the banks located in the Unites States. Balances
at financial institutions or state owned banks within the PRC are not insured.
As of December 31, 2009 and 2008, the Company had deposits in excess of
federally insured limits totaling $92,701,730 and $47,783,767, respectively. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant risks on its cash in bank accounts.
One major
customer accounted for approximately 12% of the net revenue for the fiscal year
ended December 31, 2009. At December 31, 2009, the total
receivable balance due from this customer was $11,494,287, representing 12% of
total accounts receivable. Three major customers accounted for 43% of the net
revenue for the fiscal year ended December 31, 2008, with each customer
individually accounting for 16%, 15% and 12%, respectively. At December 31,
2008, the total receivable balance due from these customers was $26,253,907,
representing 87% of total accounts receivable. Five major customers
accounted for 72% of the net revenue for the year ended December 31, 2007, with
each customer individually accounting for 20%, 20%, 13%, 10% and 9%,
respectively.
One major
vendor provided approximately 16% of the Company’s purchases of raw materials
for the year ended December 31, 2009. Two major vendors provided 39%
of the Company’s purchase of raw materials for the year ended December 31, 2008,
with each vendor individually accounting for 23% and 16%, respectively. Five
major vendors provided 80% of the Company’s purchase of raw materials for
the year ended December 31, 2007, with each vendor individually accounting for
27%, 22%, 13%, 12% and 6%, respectively. The Company’s accounts payable to these
vendors was $0 and $1,055,730 at December 31, 2009 and 2008,
respectively.
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in the North America and Western Europe. These include risks
associated with, among others, the political, economic and legal environments
and foreign currency exchange. The Company's results may be adversely affected
by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
See
report of independent registered public accounting firm.
F-8
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Restricted
cash
Restricted
cash represent amounts set aside by the Company in accordance with the Company’s
debt agreements with certain financial institutions. These cash
amounts are designated for the purpose of paying down the principal amounts owed
to the financial institutions, and these amounts are held at the same financial
institutions with which the Company has debt agreements in the
PRC. Due to the short-term nature of the Company’s debt obligations
to these banks, the corresponding restricted cash balances have been classified
as current in the consolidated balance sheets.
Notes
receivable
Notes
receivable arose from sale of goods and represented commercial drafts issued by
customers to the Company that were guaranteed by banks of the
customers. Notes receivables were interest-free with maturity dates
of three or six months from date of issuance.
Accounts
receivable
Accounts
receivable are presented net of an allowance for bad debts account. The Company
maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reverses. The estimated loss rate is based on our historical
loss experience and also contemplates current market conditions. Delinquent
account balances are written-off after management has determined that the
likelihood of collection is not probable, and known bad debts are written off
against allowance for doubtful accounts when identified.
Inventories
Inventory
is valued at the lower of cost or market value, as determined on a first-in,
first-out basis, using the weighted average method. Management compares the cost
of inventory with the market value and an allowance is made for writing down the
inventory to its market value, if lower than cost. On an ongoing basis,
inventories are reviewed for potential write-down for estimated obsolescence or
unmarketable inventories equal to the difference between the costs of
inventories and the estimated net realizable value based upon forecasts for
future demand and market conditions. When inventory is written-down to the lower
of cost or market, it is not marked up subsequently based on changes in
underlying facts and circumstances. Inventory is composed of raw
material for manufacturing electrical motors, work in process and finished goods
within the Company’s warehouse premise or consigned at a customer
site.
Plant and
equipment
Plant and
equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When assets are retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the respective accounts, and any
gain or loss is included in operations. Depreciation of plant and equipment is
provided using the straight-line method for substantially all assets with
estimated lives as follows:
Estimated Useful Life
|
|
Buildings
|
20
years
|
Vehicle
|
5
years
|
Office
equipment
|
5
years
|
Production
equipment
|
10
years
|
Construction
in progress represents the costs incurred in connection with the construction of
buildings or new additions to the Company’s plant facilities. No
depreciation is provided for construction in progress until such time as the
assets are completed and placed into service. Maintenance, repairs and minor
renewals are charged directly to expense as incurred. Major additions and
betterment to buildings and equipment are capitalized. Interest incurred during
construction is capitalized into construction in progress. All other interest is
expensed as incurred.
See
report of independent registered public accounting firm.
F-9
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
The
Company recognizes an impairment loss when estimated cash flows generated by
those assets are less than the carrying amounts of the asset. Based on
management review, the Company believes that there were no impairments as of
December 31, 2009.
Goodwill and other
intangible assets
Goodwill
– the excess of the cost of an acquired entity over the net of the amounts
assigned to assets acquired and liabilities assumed shall be recognized as
goodwill. Goodwill is tested for impairment at the reporting unit
level (operating segment or one level below an operating segment) on an annual
basis in the fourth quarter or more frequently if there are indicators of
impairment exist. For purposes of our goodwill impairment test, a two-step test
is used to identify the potential impairment and to measure the amount of
goodwill impairment, if any. The first step is to compare the fair value of the
reporting unit with its carrying amount, including goodwill. If the fair value
of the reporting unit exceeds its carrying amount, goodwill is considered not
impaired. If the carrying amount of a reporting unit exceeds its fair value, the
second step of the goodwill impairment test is performed to measure the amount
of impairment loss, if any. Under step two, the impairment loss is measured by
comparing the implied fair value of the reporting unit goodwill with the
carrying amount of that goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess.
Land use
rights - all land in the People’s Republic of China is government
owned. However, the government grants “land use rights” (the
“Right”). The Company has the right to use the land for 50 years and
amortizes the Right on a straight line basis over 50 years.
Patents –
capitalized patent costs represent legal costs incurred to establish patents and
the portion of the acquisition price paid attributed to patents upon the assets
acquisition on July 16, 2007. Capitalized patent costs are amortized on a
straight line method over the related patent terms generally from 6 to 10
years.
The
Company evaluates intangible assets for impairment, at least annually and
whenever events or changes in circumstances indicate that the assets might be
impaired. We perform our annual impairment test in the fourth
quarter.
Our
impairment test consists of a comparison of the fair value of the intangible
asset with its carrying amount. If the carrying amount of an intangible asset
exceeds its fair value, an impairment loss is recognized in an amount equal to
the excess. As of December 31, 2009, management believes there was no
impairment.
Accounting for long-lived
assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. We assess
the recoverability of the assets based on the undiscounted future cash flow the
assets are expected to generate and recognize an impairment loss when estimated
undiscounted future cash flow expected to result from the use of the asset plus
net proceeds expected from disposition of the asset, if any, are less than the
carrying value of the asset. When we identify an impairment, we reduce the
carrying amount of the asset to its estimated fair value based on a discounted
cash flow approach or, when available and appropriate, to comparable market
values. As of December 31, 2009, management believes there was no
impairment.
Stock-based
compensation
We record
share-based compensation expense based upon the grant date fair value of
share-based awards. The value of the award is principally recognized as expense
ratably over the requisite service periods. We use the Black-Scholes Merton
(“BSM”) option-pricing model, which incorporates various assumptions including
volatility, expected life and interest rates to determine fair value. The
Company’s expected volatility assumption is based on the historical volatility
of Company’s stock. The expected life assumption is primarily based on the
simplified method of the terms of the options. The risk-free interest rate for
the expected term of the option is based on the U.S. Treasury yield curve
in effect at the time of grant.
The
Company is required to measure the cost of the equity instruments issued in
exchange for the receipt of goods or services from other than employees at the
estimated fair market value of the consideration received or the estimated fair
value of the equity instruments issued, whichever is more reliably determinable.
The value of equity instruments issued for consideration other than employee
services is determined on the earlier of a performance commitment or completion
of performance by the provider of goods or services.
See
report of independent registered public accounting firm.
F-10
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Stock
compensation expense is recognized based on awards expected to
vest. GAAP requires forfeitures to be estimated at the time of grant
and revised in subsequent periods, if necessary, if actual forfeitures differ
from those estimates. There were no estimated forfeitures as the
Company has a short history of issuing options.
Revenue
recognition
The
Company recognizes sales at the date of shipment to customers when a formal
arrangement exists, the price is fixed or determinable, the delivery is
completed, no other significant obligations of the Company exist and
collectability is reasonably assured. For products that are required to be
examined by customers, sales revenue is recognized after the customer
examination is passed. Payments received before all of the relevant
criteria for revenue recognition are recorded as customer deposits.
In
addition, revenue recognition could be negatively impacted by returns. For our
linear motor and specialty micro-motor businesses, our products are custom
products which are customer specific, and no returns are allowed. We warrant our
product for repair, only in the event of defects for two years from the date of
shipment. We charge such costs to cost of goods sold. For our
industrial rotary motor business, our products are standardized products and
returns are allowed within three days upon receipt of products by customers. We
provide product warranty for repair one year from the date of shipment.
Historically, the returns and defects have not been material. Should returns
increase in the future it would be necessary to adjust the estimates, in which
case recognition of revenues could be delayed.
Shipping
and handling costs are included in selling, general and administrative costs and
totaled $2,896,231, $1,665,628 and $647,585 for the years ended December 31,
2009, 2008 and 2007, respectively.
Income
taxes
The
Company utilizes the asset and liability method of accounting for income taxes,
under which deferred taxes are determined based on the temporary differences
between the financial statement and tax basis of assets and liabilities using
tax rates expected to be in effect during the years in which the basis
differences reverse. A valuation allowance is recorded when it is more likely
than not that some of the deferred tax assets will not be
realized. GAAP also requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. As of January 1, 2007,
income tax positions must meet a more-likely-than-not recognition threshold to
be recognized. A tax position is recognized as a benefit only if it
is “more likely than not” that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that is greater than 50% likely
of being realized on examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded.
Under
this method, deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each period end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized. No material deferred tax amounts were recorded at December
31, 2009, 2008, and 2007, respectively.
The
charge for taxation is based on the results for the reporting period as adjusted
for items, which are non-assessable or disallowed. It is calculated
using tax rates that have been enacted or substantively enacted by the balance
sheet date.
The
Company’s operating subsidiaries located in PRC are subject to PRC income tax.
The new Chinese Enterprise Income Tax (“EIT”) law was effective on January 1,
2008. Under the new Income Tax Laws of PRC, a company is generally subject to
income tax at an effective rate of 25% on income reported in the statutory
financial statements after appropriated tax adjustments. HTFE is located in a
specially designated region where HTFE is subject to a 10% EIT rate from January
1, 2008 to December 31, 2010. Weihai is currently at the standard 25%
income tax rate. Our operations under STFE was income tax
exempt in 2008 and 2009, and will be subject to preferential income tax rate of
11% in 2010, 12% in 2011 and 12.5% in 2012 since its located in an economic
development zone. Simo Motor is located in the Province of Shaanxi
which is in the mid-west region of China, a specially designated region where
the government grants special income tax rates to qualified
entities. Simo Motor qualifies for the “Go-west” special income tax
rate of 15% promulgated by the government and therefore is subject to a 15% EIT
rate from year 2007 to 2010.
See
report of independent registered public accounting firm.
F-11
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
The
Company’s subsidiaries were paying the following tax rate for the years ended
December 31:
2009
|
2008
|
2007
|
||||||||||||||||||||||
Subsidiaries
|
Income
Tax
Exemption
|
Effective
Income
Tax Rate
|
Income
Tax
Exemption
|
Effective
Income
Tax Rate
|
Income
Tax
Exemption
|
Effective
Income Tax
Rate
|
||||||||||||||||||
HTFE
|
15 | % | 10 | % | 15 | % | 10 | % | 15 | % | 10 | % | ||||||||||||
Weihai
(a)
|
0 | % | 25 | % | 0 | % | 25 | % | n/a | n/a | ||||||||||||||
STFE
(b)
|
25 | % | 0 | % | 25 | % | 0 | % | n/a | n/a | ||||||||||||||
Simo
Motor (c)
|
10 | % | 15 | % | n/a | n/a | n/a | n/a |
(a)
Weihai was acquired in July 2008 and the tax rate only applied to its results of
operations included in the consolidated financial statements, which is the
six-months-period ended December 31, 2008 and the fiscal year ended
December 31, 2009.
(b) STFE
was income tax exempt for the years ended December 31, 2009 and 2008, and no
operational income was generated for the year ended December 31, 2008 and
2007.
(c) Simo
Motors was acquired in October 2009 and the tax rate only applied to its results
of operations included in the consolidated financial statements, which is the
three-month-period ended December 31, 2009.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the years ended December 31:
2009
|
2008
|
2007
|
||||||||||
U.S.
Statutory rates
|
34
|
%
|
34
|
%
|
34
|
%
|
||||||
Foreign
income not recognized in USA
|
-34
|
-34
|
-34
|
|||||||||
China
income taxes
|
25
|
25
|
33
|
|||||||||
Tax
exemption
|
-14
|
-10
|
-33
|
|||||||||
Other
items (d)
|
14
|
-
|
-
|
|||||||||
Effective
income taxes
|
25
|
%
|
15
|
%
|
-
|
%
|
(d) The
14 % represents the $34,762,948 of expenses incurred by the Company, and its US
subsidiaries AEM and AAG that are not subject to PRC income tax for the year
ended December 31, 2009.
The
estimated tax savings for the years ended December 31, 2009, 2008 and 2007
amounted to $8,638,041, $6,007,426, and $10,260,615, respectively. The net
effect on earnings per share attributable to controlling interest had the income
tax been applied would decrease earnings per share from $0.77 to $0.43 in 2009,
$1.25 to $0.95 in 2008, and $0.99 to $0.38 in 2007.
Harbin
Electric, AEM and AAG were organized in the United States and have incurred net
operating losses for income tax purposes for the year ended December 31,
2009. The net operating loss carry forwards for United States income
taxes amounted to $29,276,137 which may be available to reduce future years’
taxable income. These carry forwards will expire, if not utilized,
starting from 2026 through 2029. Management believes that the
realization of the benefits from these losses appears uncertain due to the
Company’s limited operating history and continuing losses for United States
income tax purposes. Accordingly, the Company has provided a 100%
valuation allowance on the deferred tax asset benefit to reduce the asset to
zero. The net change in the valuation allowance for the year ended
December 31, 2009 was an increase of approximately $3,157,259. Management will
review this valuation allowance periodically and make adjustments
accordingly.
See
report of independent registered public accounting firm.
F-12
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
The
Company has cumulative undistributed earnings of foreign subsidiaries of
approximately $128,862,919 as of December 31, 2009, which is included in
consolidated retained earnings and will continue to be indefinitely reinvested
in international operations. Accordingly, no provision has been made for
U.S. deferred taxes related to future repatriation of these earnings, nor is it
practicable to estimate the amount of income taxes that would have to be
provided if we concluded that such earnings will be remitted in the
future.
Value added
tax
Sales
revenue represents the invoiced value of goods, net of a value-added tax
(“VAT”). All of the Company’s products that are sold in the PRC are subject to a
Chinese value-added tax at a rate of 17% of the gross sales price. This VAT may
be offset by VAT paid by the Company on raw materials and other materials
included in the cost of producing their finished product. The Company recorded
VAT Payable and VAT receivable net of payments in the financial statements. The
VAT tax return is filed offsetting the payables against the
receivables.
VAT on
sales and VAT on purchases amounted to $40,292,224 and $25,943,303 for the year
ended December 31, 2009. VAT on sales and VAT on purchases amounted
to $12,278,874 and $7,217,430 for the year ended December 31, 2008, and
$9,747,272 and $5,138,433 for the same period of 2007, respectively. Sales
and purchases are recorded net of VAT collected and paid as the Company acts as
an agent for the government.
Advertising
costs
The
Company expenses the cost of advertising as incurred in selling, general and
administrative costs. The Company incurred $139,252, $230,307 and $1,183 for the
years ended December 31, 2009, 2008 and 2007, respectively.
Research and development
costs
Research
and development costs are expensed as incurred. The costs of material
and equipment that are acquired or constructed for research and development
activities and have alternative future uses are classified as plant and
equipment and depreciated over their estimated useful lives.
Business
combinations
Effective
January 1, 2009, we account for business combinations using the acquisition
method of accounting. The acquisition method requires an acquirer to recognize
the assets acquired, the liabilities assumed, and any noncontrolling interest in
the acquiree at the acquisition date, measured at their fair values as of that
date. The provisions of the acquisition method related to income tax adjustments
apply to all business combinations regardless of consummation date. As a result
of implementing the acquisition method, acquisition costs of approximately
$926,000, which included legal, accounting and investment banking fees were
expensed during the year ended December 31 2009 in connection with the Simo
Motor acquisition. This acquisition is further described in Note 16, “Business
Combination”.
Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. This is an exit price concept for the valuation of the
asset or liability. In addition, market participants are assumed to be buyers
and sellers in the principal market for the asset or liability. Fair value
measurements for an asset assume the highest and best use by these market
participants. As a result of these standards, we may be required to record
assets which we do not intend to use or sell (defensive assets) and/or to value
assets at fair value measures that do not reflect our intended use of those
assets. Many of these fair value measurements can be highly subjective and it is
also possible that other professionals, applying reasonable judgment to the same
facts and circumstances, could develop and support a range of alternative
estimated amounts.
Derivative
instrument
The
Company uses a cross currency interest rate swap, a derivative financial
instrument, to hedge the risk of rising interest rates on their variable
interest rate debt. This type of derivative financial instrument is
known as a cash flow hedge. Cash flow hedges are defined by GAAP as
derivative instruments designated as and used to hedge the exposure to
variability in expected future cash flows that is attributable to a particular
risk. For derivative instruments that are designated and qualify as a cash flow
hedge, the effective portion of the gain or loss on the derivative is reported
as a component of other comprehensive income, net of income taxes and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. Gains and losses on the derivatives representing
either hedge ineffectiveness or hedge components excluded from the assessment of
effectiveness are recognized in current earnings.
See
report of independent registered public accounting firm.
F-13
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
At the
inception of the transaction, the Company documents the relationship between
hedging instruments and hedged items, as well as its risk management objective
and the strategy for undertaking various hedge transactions. This process
includes linking all derivatives designated to specific firm commitments of
forecast transactions. The Company also documents its assessment, both at
inception and on an ongoing basis, of whether the derivative financial
instruments that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash flows of hedged items. Any portion
deemed ineffective is recorded in earnings with the effective portion reflected
in accumulated other comprehensive.
Fair value of financial
instruments
On
January 1, 2008, the Company began recording financial assets and liabilities
subject to recurring fair value measurement at the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. On January 1, 2009 the Company began recording
non-recurring financial as well as all non-financial assets and liabilities
subject to fair value measurement under the same principles. These fair value
principles prioritize valuation inputs across three broad levels. The three
levels are defined as follows:
·
|
Level
1 inputs
to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active
markets.
|
·
|
Level
2 inputs
to the valuation methodology 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.
|
·
|
Level
3 inputs
to the valuation methodology are unobservable and significant to the fair
value.
|
As of
December 31, 2009, the outstanding principal on the Company’s 2012 Notes
payable , evaluated under these accounting standards, amounted to
$7,660,210. Management concluded the carrying values are a reasonable
estimate of fair value because of the short period of time between the
origination of such instruments and their expected realization and if
applicable, their stated interest rate approximates current
rates available.
Effective
January 1, 2009, a total of 2,030,158 warrants previously treated as equity
pursuant to the derivative treatment exemption is no longer afforded equity
treatment because the strike price of the warrants is denominated in US dollar,
a currency other than the Company’s functional currency, the Chinese
RMB. As a result, the warrants are not considered indexed to the
Company’s own stock, and as such, all future changes in the fair value of these
warrants will be recognized currently in earnings until such time as the
warrants are exercised or expired. The Company reclassified the fair value of
these warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in August 2006. On January 1,
2009, the Company reclassified from additional paid-in capital, as a cumulative
effect adjustment, $6.1 million to beginning retained earnings and $7.4
million to warrant liabilities to recognize the fair value of such warrants. As
of December 31, 2009, the Company has 366,697 warrants outstanding. The fair
value of the outstanding warrants was $4.6 million. The Company
recognized a total of $13.2 million loss from the change in fair value of
the warrants for the year ended December 31, 2009.
These
common stock purchase warrants do not trade in an active securities market, and
as such, we estimate the fair value of these warrants using the Black-Scholes
Option Pricing Model using the following assumptions:
December 31,
2009
|
January 1, 2009
|
|||||||
Annual
dividend yield
|
- | - | ||||||
Expected
life (years)
|
2.67 | 3.67 | ||||||
Risk-free
interest rate
|
1.51 | % | 1.20 | % | ||||
Expected
volatility
|
68 | % | 66 | % |
See
report of independent registered public accounting firm.
F-14
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Expected
volatility is based primarily on historical volatility. Historical volatility
was computed using daily pricing observations for recent periods that correspond
to the term of the warrants. We believe this method produces an estimate that is
representative of our expectations of future volatility over the expected term
of these warrants. We have no reason to believe future volatility over the
expected remaining life of these warrants likely to differ materially from
historical volatility. The expected life is based on the remaining term of the
warrants. The risk-free interest rate is based on U.S. Treasury securities
according to the remaining term of the warrants.
Carrying Value
as of
December 31,
2009
|
Fair Value Measurements at December 31, 2009 Using
Fair Value Hierarchy
|
|||||||||
Level
1
|
Level
2
|
Level
3
|
||||||||
Fair
value of warrant liabilities
|
$ | 4,623,558 | $ | 4,623,558 |
Other
than the derivative instruments, the Company did not identify any assets and
liabilities that are required to be presented on the balance sheet at fair
value.
Recently Adopted Accounting
Standards
In
January 2009, the FASB’s accounting standard regarding other investments
providing additional guidance which amended the impairment model to remove the
exclusive reliance on “market participant” estimates of future cash flows used
in determining fair value. Changing the cash flows used to analyze
other-than-temporary impairment from the “market participant” view to a holder’s
estimate of whether there has been a “probable” adverse change in estimated cash
flows allows companies to apply reasonable judgment in assessing whether an
other-than-temporary impairment has occurred. The adoption of this guidance did
not have a material impact on the Company’s consolidated financial
statements.
In April
2009, the FASB’s accounting standard regarding fair value measurements and
disclosures providing additional guidance for estimating fair value when the
volume and level of activity for the asset or liability have significantly
decreased and also includes guidance on identifying circumstances that indicate
a transaction is not orderly for fair value measurements. This guidance shall be
applied prospectively with retrospective application not permitted. The adoption
of this guidance did not have a material impact on the Company’s consolidated
financial statements.
In April
2009, the FASB’s
accounting standard regarding debt and equity securities requires to make the
other-than-temporary impairments guidance more operational and to improve the
presentation of other-than-temporary impairments in the financial statements.
This guidance will replace the existing requirement that the entity’s management
assert it has both the intent and ability to hold an impaired debt security
until recovery with a requirement that management assert it does not have the
intent to sell the security, and it is more likely than not it will not have to
sell the security before recovery of its cost basis. This guidance provides
increased disclosure about the credit and noncredit components of impaired debt
securities that are not expected to be sold and also requires increased and more
frequent disclosures regarding expected cash flows, credit losses, and an aging
of securities with unrealized losses. Although this guidance does not result in
a change in the carrying amount of debt securities, it does require that the
portion of an other-than-temporary impairment not related to a credit loss for a
held-to-maturity security be recognized in a new category of other comprehensive
income and be amortized over the remaining life of the debt security as an
increase in the carrying value of the security. The adoption of this guidance
did not have a material impact on the Company’s consolidated financial
statements.
In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this guidance, fair values for these assets and liabilities were only
disclosed annually. This guidance applies to all financial instruments and
requires all entities to disclose the method(s) and significant assumptions used
to estimate the fair value of financial instruments. The adoption of this
guidance did not have a material impact on the Company’s consolidated financial
statements.
In June
2009, the FASB issued an accounting standard amending the accounting and
disclosure requirements for transfers of financial assets. This
guidance is effective for the Company beginning in 2010. Should the Company’s
accounts receivable securitization programs not qualify for sale treatment under
the revised rules, future securitization transactions entered into on or after
January 1, 2010 would be classified as debt and the related cash flows would be
reflected as a financing activity. The adoption of this guidance did not have a
material impact on the Company’s consolidated financial statements.
See
report of independent registered public accounting firm.
F-15
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
In June
2009, the FASB updated an accounting standard regarding consolidation guidance
which modifies how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. This guidance clarifies that the determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic performance.
This guidance requires an ongoing reassessment of whether a company is the
primary beneficiary of a variable interest entity. This guidance also requires
additional disclosures about a company’s involvement in variable interest
entities and any significant changes in risk exposure due to that involvement.
This guidance is effective for fiscal years beginning after November 15, 2009.
The adoption of this guidance did not have a material impact on the Company’s
consolidated financial statements.
In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. The adoption of this guidance
did not have a material impact on the Company’s consolidated financial
statements.
In
October 2009, the FASB issued an ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation. This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning of those
fiscal years. The adoption of this guidance did not have a material impact on
the Company’s consolidated financial statements.
In
November 2009, the FASB issued an ASU regarding accounting for stock dividends,
including distributions to shareholders with components of stock and cash. This
ASU clarifies that the stock portion of a distribution to shareholders that
contains components of cash and stock and allows shareholders to select their
preferred form of the distribution (with a limit on the amount of cash that will
be distributed in total) should be considered a stock dividend and included in
EPS calculations as a share issuance. The adoption of this guidance did not have
a material impact on the Company’s consolidated financial
statements
In
December 2009, FASB issued ASU No. 2009-16, Accounting for Transfers of
Financial Assets. This Accounting Standards Update amends the FASB Accounting
Standards Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140.The amendments in
this Accounting Standards Update improve financial reporting by eliminating the
exceptions for qualifying special-purpose entities from the consolidation
guidance and the exception that permitted sale accounting for certain mortgage
securitizations when a transferor has not surrendered control over the
transferred financial assets. In addition, the amendments require enhanced
disclosures about the risks that a transferor continues to be exposed to because
of its continuing involvement in transferred financial assets. Comparability and
consistency in accounting for transferred financial assets will also be improved
through clarifications of the requirements for isolation and limitations on
portions of financial assets that are eligible for sale accounting. The Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.
In
December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities. This Accounting
Standards Update amends the FASB Accounting Standards Codification for the
issuance of FASB Statement No. 167, Amendments to FASB Interpretation
No. 46(R). The amendments in this Accounting Standards Update replace the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. An approach that is expected to be primarily qualitative will be more
effective for identifying which reporting entity has a controlling financial
interest in a variable interest entity. The amendments in this Update also
require additional disclosures about a reporting entity’s involvement in
variable interest entities, which will enhance the information provided to users
of financial statements. The Company is currently evaluating the impact of this
ASU, however, the Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements.
See
report of independent registered public accounting firm.
F-16
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
In
January 2010, FASB issued ASU No. 2010-01- Accounting for Distributions to
Shareholders with Components of Stock and Cash. The amendments in this Update
clarify that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected in EPS prospectively and is not a
stock dividend for purposes of applying Topics 505 and 260 (Equity and Earnings
Per Share). The amendments in this update are effective for interim and
annual periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. The Company does not expect the adoption of this ASU to
have a material impact on its consolidated financial statements.
In
January 2010, FASB issued ASU No. 2010-02 – Accounting and Reporting for
Decreases in Ownership of a Subsidiary – a Scope Clarification. The amendments
in this Update affect accounting and reporting by an entity that experiences a
decrease in ownership in a subsidiary that is a business or nonprofit activity.
The amendments also affect accounting and reporting by an entity that exchanges
a group of assets that constitutes a business or nonprofit activity for an
equity interest in another entity. The amendments in this update are
effective beginning in the period that an entity adopts SFAS No. 160,
“Non-controlling Interests in Consolidated Financial Statements – An Amendment
of ARB No. 51.” If an entity has previously adopted SFAS No. 160 as of the date
the amendments in this update are included in the Accounting Standards
Codification, the amendments in this update are effective beginning in the first
interim or annual reporting period ending on or after December 15, 2009. The
amendments in this update should be applied retrospectively to the first period
that an entity adopted SFAS No. 160. The Company does not expect the adoption of
this ASU to have a material impact on the Company’s consolidated financial
statements.
In
January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10 that
requires new disclosure as follows: 1) Transfers in and out of Levels 1 and
2. A reporting entity should disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers. 2) Activity in
Level 3 fair value measurements. In the reconciliation for fair value
measurements using significant unobservable inputs (Level 3), a reporting entity
should present separately information about purchases, sales, issuances, and
settlements (that is, on a gross basis rather than as one net number). This
update provides amendments to Subtopic 820-10 that clarify existing disclosures
as follows: 1) Level of disaggregation. A reporting entity should provide
fair value measurement disclosures for each class of assets and liabilities. A
class is often a subset of assets or liabilities within a line item in the
statement of financial position. A reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities.
2) Disclosures about inputs and valuation techniques. A reporting entity
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements.
Those disclosures are required for fair value measurements that fall in either
Level 2 or Level 3. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. These disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. The
Company is currently evaluating the impact of this ASU, however, the Company
does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation. These reclassifications have no effect on net income or cash
flows.
Note
3 – Supplemental disclosure of cash flows
The
Company prepares its statements of cash flows using the indirect method as
defined under the FAS 95. The following information relates to non-cash
investing and financing activities for the years ended December 31, 2009, 2008
and 2007.
See
report of independent registered public accounting firm.
F-17
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Total
interest paid amounted to $4,581,551, $4,441,698 and $2,326,267 for the years
ended December 31, 2009, 2008 and 2007, respectively. Interest expense in the
amount of $3,540,156, $2,114,498 and $980,154 was capitalized into construction
in progress for the years ended December 31, 2009, 2008 and 2007,
respectively.
Total
income tax paid amounted to $7,612,524, $4,509,648 and $0 for the years ended
December 31, 2009, 2008 and 2007, respectively.
For the
year ended December 31, 2009, notes receivable in the amount of $91,754 was
transferred as payment for purchase of equipments. Notes payable of
$2,478,961 was transferred from accounts receivable in the amount of $721,198
and accounts payable of $1,757,763. Fixed asset of $55,001 was transferred as
payment to accounts payable.
Note
4 – Accounts receivable
Accounts
receivable consisted of the following:
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Accounts
receivable
|
$
|
97,302,153
|
$
|
30,437,235
|
||||
Less:
allowance for bad debts
|
(3,979,268)
|
(153,155)
|
||||||
Accounts
receivable, net
|
$
|
93,322,885
|
$
|
30,284,080
|
The
following table consists of allowance for bad debts:
Allowance
for bad debts at January 1, 2008
|
$ | 116,238 | ||
Recovery
of bad debts
|
(1,899 | ) | ||
Accounts
receivable write off
|
- | |||
Increase
in allowance from acquisition of Weihai
|
30,735 | |||
Effect
of foreign currency translation
|
8,081 | |||
Allowance
for bad debts at December 31, 2008
|
153,155 | |||
Recovery
of bad debts
|
(437,191 | ) | ||
Accounts
receivable write off
|
- | |||
Increase
in allowance from acquisition of Simo Motor
|
4,263,411 | |||
Effect
of foreign currency translation
|
(107 | ) | ||
Allowance
for bad debts at December 31, 2009
|
$ | 3,979,268 |
Note
5 – Inventories
The
following is a summary of inventories by major category:
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Raw
and packing materials
|
$
|
11,826,804
|
$
|
2,702,417
|
||||
Work
in process
|
28,434,522
|
7,978,350
|
||||||
Finished
goods
|
25,471,544
|
11,279,317
|
||||||
Finished
goods - consignment
|
18,077,870
|
-
|
||||||
Inventory
valuation allowance
|
(8,896,863)
|
-
|
||||||
Total
inventory, net
|
$
|
74,913,877
|
$
|
21,960,084
|
As of
December 31, 2009 and 2008, total inventory valuation allowance amounted to
$8,896,863 and $0. All inventory valuation allowance is from the
subsidiary Simo Motor acquired on October 2, 2009.
See
report of independent registered public accounting firm.
F-18
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Note
6 – Advances on inventory purchases
The
Company makes advances to certain vendors for inventory
purchases. The advances on inventory purchases were $11,718,544 and
$3,529,607 as of December 31, 2009 and 2008, respectively.
Note
7 – Plant and equipment
The
following table presents details of our property and equipment:
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Buildings
|
$
|
88,081,895
|
$
|
26,440,241
|
||||
Office
equipment
|
1,437,761
|
925,372
|
||||||
Production
equipment
|
28,801,414
|
7,908,020
|
||||||
Vehicles
|
3,633,367
|
1,472,593
|
||||||
Construction
in progress
|
40,504,272
|
61,095,712
|
||||||
Total
|
162,458,709
|
97,841,938
|
||||||
Less:
accumulated depreciation
|
(6,094,161
|
)
|
(2,909,939
|
)
|
||||
Property
and equipment, net
|
$
|
156,364,548
|
$
|
94,931,999
|
Construction
in progress represents labor costs, material, capitalized interest incurred in
connection with the construction of the new plant facility in Shanghai and the
construction and installation of manufacturing equipment in HTFE, Weihai and
Simo Motor. The Company expects to complete the construction of
Shanghai plant on or before the end of year 2010.
Depreciation
expense for the years ended December 31, 2009, 2008 and 2007 amounted to
$3,563,602, $1,608,724 and $567,069, respectively.
For the
year ended December 31, 2009, 2008 and 2007, a total of $3,540,156,
$2,114,498 and $980,154 of interest was capitalized into construction in
progress, respectively.
Note
8 – Advances on non-current assets
Advance for intangible
assets
The
advances for intangible assets consisted of land use right prepayment. As of
December 31, 2009 and 2008, advances for intangible assets amounted to
$3,133,512 and $1,892,430, respectively.
On
September 8, 2006, HTFE entered into an agreement ("Land Use Agreement") with
Shanghai Lingang Investment and Development Company Limited ("Shanghai Lingang")
with respect to HTFE’s use of 40,800 square meters of State-owned land in the
Shanghai Zhuqiao Airport Industrial Zone (the "Site"). The size of
the land used by HTFE was later revised to a total of approximately 53,000
square meters. The term of the land use agreement is 50 years and the aggregate
amount HTFE shall pay to Shanghai Lingang is approximately $6.28 million
(RMB42,840,000) ("Fee"), approximately 93% or $5.85 million (RMB 39,880,000) has
been paid, as of December 31, 2009, $2.72 million has been transferred from
prepayment to land use rights, with the remaining balance payable in
installment. HTFE shall register a Sino-foreign joint venture company at the
location of Shanghai Lingang, with taxes payable at the same location. HTFE has
agreed to compensate Shanghai Lingang for certain local taxes due to the local
tax authority in connection with applicable tax generation
requirements.
Advance to
suppliers
The
Company makes advances to certain vendors for construction
projects. The advances on equipment and construction were $10,532,902
and $10,416,187 as of December 31, 2009 and 2008, respectively.
See
report of independent registered public accounting firm.
F-19
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Note
9 – Goodwill and other intangible assets
Net
intangible assets consist of the following at December 31:
2009
|
2008
|
|||||||
Goodwill
on 2008 Acquisition of Weihai
|
$ | 12,273,778 | $ | 12,273,778 | ||||
Goodwill
on 2009 Acquisition of Simo Motor
|
41,799,976 | - | ||||||
Total
goodwill
|
54,073,754 | 12,273,778 | ||||||
Land
use rights
|
17,481,972 | 1,531,202 | ||||||
Patents
|
6,702,983 | 6,629,028 | ||||||
Software
|
95,110 | - | ||||||
Total
goodwill and other intangible assets
|
78,353,819 | 20,434,008 | ||||||
Less:
accumulated amortization
|
(2,807,594 | ) | (1,729,833 | ) | ||||
Intangible
assets, net
|
$ | 75,546,225 | $ | 18,704,175 |
Amortization
expense for the years ended December 31, 2009, 2008 and 2007 amounted to
$1,166,304, $1,032,674 and $510,023, respectively.
The
Company uses the purchase method of accounting for business combinations. Annual
testing for impairment of goodwill is performed during the fourth quarter of
each year unless events or circumstances indicate earlier impairment testing is
required. No impairment loss was recognized for 2009, 2008 and
2007.
Note
10 – Taxes payable
Taxes
payable consisted of the following:
December 31,
2009 |
December 31,
2008 |
|||||||
VAT
tax payable
|
$ | 3,473,092 | $ | 1,019,771 | ||||
Individual
income tax payable
|
71,563 | 4,281 | ||||||
Corporation
income tax payable
|
2,825,545 | 956,583 | ||||||
Others
misc. tax payable
|
1,863,662 | 115,886 | ||||||
Total
|
$ | 8,233,862 | $ | 2,096,521 |
Note
11 – Financing
On August
29, 2006, the Company, Citadel Equity Fund Ltd. (“Citadel”) and Merrill Lynch
International (“Merrill Lynch” and, together with Citadel, the “Investors”)
entered a purchase agreement (the “Purchase Agreement”) relating to the purchase
and sale of (a) $50 million aggregate principal amount of the Company's
Guaranteed Senior Secured Floating Rate Notes (collectively, the “Notes”) and
(b) fully detachable warrants (the “Warrants”) to purchase an aggregate of
3,487,368 shares of our common stock. The transaction closed on August 30,
2006.
The Notes
are governed by an indenture, dated August 30, 2006, entered into among the
Company, AEM as guarantor, and The Bank of New York, as trustee for the Notes
(the “Indenture”). Of the $50 million aggregate principal amount of the Notes,
Citadel subscribed to $38 million of the principal amount of the Notes, which
were scheduled to mature on September 1, 2012 (the “2012 Notes”), and
Merrill Lynch subscribed to $12 million of the principal amount of the Notes,
which were scheduled to mature on September 1, 2010 (the “2010 Notes”).
Pursuant to the indenture, AEM has agreed, and all of the Company’s other
existing and future subsidiaries (other than subsidiaries domiciled in the
People's Republic of China) are obligated, to guarantee, on a senior secured
basis, to the Investors and to the trustee the payment and performance of our
obligations under the Notes.
See
report of independent registered public accounting firm.
F-20
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
The 2010
Notes bore interest, payable semi-annually in arrears commencing March 1, 2007,
at a rate equal to LIBOR plus 4.75%. The 2010 Notes bore an additional 4%
interest on any overdue principal and premium, if any, including interest on
overdue interest, to the extent permitted by law.
The 2012
Notes bear interest, payable semi-annually in arrears commencing March 1, 2007,
at a rate equal to LIBOR plus 3.35%. The 2012 Notes bear an additional 4%
interest on any overdue principal and premium, if any, including interest on
overdue interest, to the extent permitted by law.
On June
1, 2009, the Company and Citadel entered into a Letter Agreement (the “Citadel
Agreement”). Pursuant to the Citadel Agreement, the Company was granted the
option to repurchase, all (but not part), of the $26.5 million 2012 Notes held
by Citadel before August 31, 2009 (“the Proposed 2012 Notes
Repurchase”). On August 4, 2009, the Company notified Citadel that
pursuant to the Citadel Agreement (i) the Company was exercising its option to
consummate the Proposed 2012 Notes Repurchase and (ii) the Proposed 2012 Notes
Repurchase shall be consummated on August 11, 2009 (the “Citadel Repurchase
Date”) at an aggregate Citadel Repurchase Price of $23,131,997 to be paid in
cash, which Repurchase Price shall be comprised of $22,525,000 representing 85%
of the $26,500,000 aggregate principal amount of the 2012 Notes held by Citadel
(the “Citadel Notes”) plus $606,997 representing accrued and unpaid
interest on the Citadel Notes to but excluding the Repurchase Date. On August
11, 2009, the Company made cash payment in accordance with terms of the Citadel
Agreement and recorded a gain of $3,975,000 from the repurchase transaction.
After principal payment of $2,400,000 made on September 1, 2009, the 2012
Notes balance as of December 31, 2009 amounted to $7,660,210 (net of debt
discount of $1,439,790), which will be fully paid off in 2010.
On July
14, 2009, the Company entered into a Letter Agreement with Merrill Lynch
International and ABN AMRO Bank N.V., London Branch (the “Merrill Agreement”).
Pursuant to the Merrill Agreement, the Company was granted the option to
repurchase, all (but not part), of the remaining $6 million 2010
Notes held by Merrill Lynch International ($3 million) and ABN AMRO Bank N.V.,
London Branch ($3 million) before July 31, 2009. On July
31, 2009, the Company paid a total of $5,983,844 to repurchase the 2010
Notes, which amount was comprised of $5,820,000 representing 97% of the
$6,000,000 aggregate principal amount of the 2010 Notes held by the Holders plus
$163,844 representing accrued and unpaid interest on the 2010 Notes to but
excluding the Repurchase Date. As of August 5, 2009, the repurchase have been
completed and the 2010 Notes were cancelled and the Company recorded a gain of
$180,000 from the repurchase transaction.
The
following table disclosed the combined aggregate amounts of maturities for all
the notes payable discussed above for each of the five years following
December 31, 2009:
Contractual Obligations
|
2012 Notes
|
Total
|
||||||
2010
|
$ | 9,100,000 | $ | 9,100,000 | ||||
Thereafter
|
- | - | ||||||
Total
|
$ | 9,100,000 | $ | 9,100,000 |
The
Warrants are governed by a warrant agreement, dated August 30, 2006, between AEM
and The Bank of New York, as warrant agent. The Warrants consist of (i) six-year
warrants to purchase an aggregate of 2,192,308 shares of our common stock, at an
exercise price of $7.80 per share (the “First Tranche 2012 Warrants”), (ii)
six-year warrants to purchase an aggregate of 525,830 shares of our common stock
at an exercise price of $10.84 per share (the “Second Tranche 2012 Warrants”)
and (iii) three-year warrants to purchase an aggregate of 769,230 shares of our
common stock at an exercise price of $7.80 per share (the “2009
Warrants”).
The First
Tranche 2012 Warrants and the Second Tranche 2012 Warrants were issued to
Citadel, and the 2009 Warrants were issued to Merrill. Each Warrant is
exercisable at the option of the Warrant holder at any time through the maturity
date of such Warrant.
The
warrant agreements contain a cashless exercise provision. During the
year ended December 31, 2009, 234,615 of 2009 Warrants outstanding were
exercised by cashless transaction and 85,227 shares of common stock were issued
upon this exercise. In addition, the remaining 1,428,846 of the
First Tranche 2012 Warrants were exercised at price of $7.80.
The fair
value of the warrants upon issuance totaled $22,921,113, was treated as a
discount on the carrying value of the debt, and is being amortized over the life
of the loan using the effective interest method. $10,949,344, $4,489,135 and
$4,532,132 were amortized to interest expense for the years ended December 31,
2009, 2008 and 2007, respectively.
See report of independent registered public accounting firm.
F-21
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Debt
issuance costs, initially $2,954,625, are carried in other assets and are
amortized over the life of the loan using the effective interest
method. $1,313,024, $542,438 and $542,438 were amortized to interest
expense for the years ended December 31, 2009, 2008 and 2007, respectively. As
of December 31, 2009 and 2008, unamortized debt issuance costs totaled $359,255
and $1,672,279, respectively.
Note
12 -Short term loans
The
Company’s short term loans comprise of the following:
December 31, 2009
|
December 31, 2008
|
|||||||
Short
term loan – bank
|
$ | 38,291,634 | $ | 4,180,950 | ||||
Short
term loan – non controlling shareholders
|
918,342 | - | ||||||
Short
term loan – others
|
5,229,653 | - | ||||||
Total
short term loans
|
$ | 44,439,629 | $ | 4,180,950 |
Short term loans
– bank
|
December 31,
2009 |
December 31,
2008 |
||||||
Loan
from Agriculture Bank in city of Wendeng, due October 2009. Monthly
interest-only payments at 8.36% per annum, secured by assets
|
$ | - | $ | 3,007,350 | ||||
Loan
from Citic Bank in city of Wendeng, due June 2010. Monthly interest-only
payments at 5.310% per annum, secured by assets
|
3,080,700 | - | ||||||
Loan
from Commercial Bank in city of Wendeng, due August 2009. Monthly
interest-only payments at 7.47% per annum, guaranteed loan
|
- | 1,173,600 | ||||||
Loan
from Xi'an City Commercial Bank, due September 2010. Monthly interest-only
payment at 5.31% per annum, guaranteed loan
|
1,173,600 | - | ||||||
Loan
From Huaxia Bank, due various dates from April to October 2010. Monthly
interest-only payment at 6.480% per annum, secured by
assets
|
8,802,000 | - | ||||||
Loan
From Industrial Commercial Bank of China, due various dates from July to
December 2010. Monthly interest-only payment at 6.372% per annum,
guaranteed loan
|
2,995,614 | - | ||||||
Loan
From Weihai City Commercial Bank, due various dates from August to
September 2010. Monthly interest-only payment at 5.841% per annum, secured
by assets
|
1,173,600 | - | ||||||
Loan
from Citic Bank, due in January 2010. Monthly interest-only payment at
5.832% per annum, secured by assets
|
2,200,500 | - | ||||||
Loan
from China Merchant Bank, due various dates from August to December 2010.
Monthly interest-only payments at 5.841% per annum, secured by
assets
|
3,814,200 | - | ||||||
Loan
from China Construction Bank, due in October 2010. Monthly interest-only
payment at 10% per annum, guaranteed loan
|
1,467,000 | - | ||||||
Loan
from Citic Bank, due in December 2010. Monthly interest-only payment at
5.310% per annum, secured by assets
|
3,960,900 | - | ||||||
Loan
from China Merchants Bank, due various dates from May to September 2010.
Monthly interest-only payment at 5.841% per annum, guaranteed
loan
|
4,401,000 | - | ||||||
Loan
from China Zheshang Bank, due in various dates from June to July 2010.
Monthly interest-only payment at 5.841% per annum, guaranteed
loan.
|
4,401,000 | - | ||||||
Loan
from Bank of China. Monthly interest-only payment at 4% per
annum
|
821,520 | - | ||||||
Short
term loan - bank
|
$ | 38,291,634 | $ | 4,180,950 |
See
report of independent registered public accounting firm.
F-22
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Short
term loan – non controlling shareholders represent borrowing from its minority
shareholders and amounted to $918,342 and $0 as of December 31, 2009 and 2008,
respectively. All amounts are due within one year, uncollaterized and the amount
will be paid in the form of cash.
The
Company has short term loans from sources other than banks amounted to
$5,229,653 and $0 as of December 31, 2009.
Long term loans -
bank
The
Company’s long term bank loan as of December 31, 2009 and 2008 are as
follows:
December 31,
2009 |
December 31,
2008 |
|||||||
Loan
from Huaxia Bank in city of Xi’an, due various dates from February 2011 to
March 2011. Interest-only payments at 6.48% per annum, secured
by assets.
|
$ | 4,401,000 | $ | - | ||||
$ | 4,401,000 | $ | - |
The above
loans are secured by the Company's plants, buildings, land use rights and
inventories located within PRC, with carrying net value as follows:
December 31,
2009
|
December 31,
2008
|
|||||||
Plant
in Xi’an, Shaanxi, China
|
$
|
18,424,465
|
$
|
-
|
||||
Buildings
in Xi’an, Shaanxi, China
|
3,785,795
|
-
|
||||||
Buildings
in Weihai, Shandong, China
|
2,251,581
|
2,411,985
|
||||||
Land
use rights in Xi’an, Shaanxi, China
|
3,630,792
|
-
|
||||||
Land
use rights in Weihai, Shandong, China
|
1,111,369
|
1,135,280
|
||||||
Inventories
in Xi’an, Shaanxi, China
|
8,802,000
|
-
|
||||||
Total
assets pledged as collateral for bank loans
|
$
|
38,006,002
|
$
|
3,547,265
|
Net
interest expense for the years ended December 31, 2009, 2008 and 2007 was
comprised of the following:
2009
|
2008
|
2007
|
||||||||||
Amortization
of debt discount
|
$ | 10,949,344 | $ | 4,489,134 | $ | 4,532,132 | ||||||
Amortization
of debt issuance costs
|
1,313,024 | 542,438 | 542,438 | |||||||||
Interest
expense
|
882,014 | 1,483,152 | 3,359,259 | |||||||||
Interest
earned on cash deposits
|
(917,730 | ) | (807,370 | ) | (1,932,122 | ) | ||||||
Foreign
currency transaction loss (gain)
|
88,993 | 358,460 | 118,247 | |||||||||
Interest
expense, net
|
$ | 12,315,645 | $ | 6,065,814 | $ | 6,619,954 |
Note
13 – Due to original shareholders
Due to
original shareholders represent the amount that was unpaid for the acquisition
of Simo Motors and Wehai, which consisted of the following:
December 31,
2009
|
December 31,
2008 |
|||||||
Amount
due to Simo Motor original shareholders
|
$ | 27,948,476 | $ | - | ||||
Amount
due to Weihai original shareholders
|
733,500 | 733,500 | ||||||
$ | 28,681,976 | $ | 733,500 |
The
amount due to Simo Motor original shareholders was paid in January 2010 in full.
Amount due to Weihai original shareholders is due in July 2010, which is two
years from the acquisition date of July 2008.
See report of independent registered public accounting firm.
F-23
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Note
14 – Derivative instrument
The
Company's operations are exposed to a variety of global market risks, including
the effect of changing currency exchange rates and interest rates.
These exposures are managed, in part, with the use of a financial
derivative. The Company uses financial derivatives only to hedge exposures in
the ordinary course of business and does not invest in derivative instruments
for speculative purposes.
Effective
April 17, 2007, the Company entered into a cross currency interest rate swap
agreement with Merrill Lynch exchanging the LIBOR plus 3.35% variable rate
interest payable on the $38 million principle amount or 2012 Notes for a 7.2%
(3.6% semi-annually) RMB fixed rate interest. The agreement required
semi-annual payments on March 1 and September 1 through the maturity of the
agreement on September 1, 2012. Merrill Lynch required the Company to
deposit $1,000,000 with them to secure the agreement. The deposit may
be increased to $2,500,000 if the exchange rate for RMB to USD falls below 6.5,
and to $4,000,000 if the exchange rate falls below 5.5. This swap was designated
and qualified as a cash flow hedge. The fair value of this swap agreement
at April 02, 2007 (inception date) was a payable of $5,387,487, and on September
16, 2009 (the termination date), was a payable of $9,003,322, respectively.
Changes in the fair values of derivative instruments accounted for as cash flow
hedges, to the extent they qualify for hedge accounting, are recorded in
accumulated other comprehensive income. For the years ended December
31, 2009, 2008 and 2007, the Company recorded $3,237,042 as loss and $5,081,414
as gain and $10,844,372 as loss on the derivative instrument, respectively, in
other comprehensive income (loss).
Effective
September 1, 2009, the whole original swap, with outstanding USD notional of
35,600,000 and outstanding CNY notional of 281,240,000 was unwind with
$9,000,000 premium payment made to Merrill Lynch. As a result,
$9,000,000 was transferred from the accumulated other comprehensive loss into
earnings as a loss from termination of the swap. There were no
amounts recorded in the consolidated statements of income in relation to
ineffectiveness of this interest swap prior to unwind.
During
the year ended December 31, 2009, the Company paid $1,299,764 as hedging
payment and the Company recognized $1,123,778 of loss from derivative
transactions.
Changes
of cross currency hedge are as follows:
Cross
currency hedge payable balance at December 31,
2008
|
$ | 175,986 | ||
Proceeds
from cross currency hedge
|
- | |||
Payments
for cross currency hedge
|
(1,299,764 | ) | ||
Loss
from derivative transactions
|
1,123,778 | |||
Cross
currency hedge payable balance at December 31,
2009
|
$ | - |
Note
15 – Additional product sales information
The
Company has a single operating segment. The majority of the Company’s revenue
was generated from local sales. Summarized financial information concerning the
Company’s revenues based on geographic areas for the years ended December 31,
2009, 2008 and 2007 are as follows:
2009
|
2008
|
2007
|
||||||||||
China
|
$ | 201,611,075 | $ | 100,574,378 | $ | 57,272,257 | ||||||
International
|
21,623,319 | 20,245,924 | 8,130,607 | |||||||||
Total
sales
|
223,234,394 | 120,820,302 | 65,402,864 | |||||||||
Cost
of sales - China
|
133,360,464 | 62,247,605 | 30,195,324 | |||||||||
Cost
of sales - International
|
13,261,756 | 11,095,916 | 2,772,563 | |||||||||
Total
cost of sales
|
146,622,220 | 73,343,521 | 32,967,887 | |||||||||
Gross
profit
|
$ | 76,612,174 | $ | 47,476,781 | $ | 32,434,977 |
Note
16 – Business combinations
Acquisition
of Xi’an Tech Full Simo Motor Co. Ltd.
See report of independent registered public accounting firm.
F-24
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
On
October 2, 2009, HTFE entered into an Equity Acquisition Agreement (the
“Agreement”) with Xi’an Simo Electric Co. Ltd. (“Xi’an Simo”) and Shaanxi
Electric Machinery Association (“Shaanxi Electric” and collectively with Xi’an
Simo, the “Selling Shareholders”) whereby HTFE agreed to acquire (i) 100% of the
outstanding shares of Simo Motor, which is 99.94% owned by Xi’an Simo and 0.06%
owned by Shaanxi Electric, and (ii) all corresponding assets of Simo Motor,
including but not limited to, all of the manufacturing equipment, real-estate,
land use rights, stocks, raw materials, automobiles, intellectual property,
receivables, other receivables, payables, business contracts and external
investments owned by Simo Motor for an aggregate price of approximately $111.6
million (RMB 763.2 million), payable in cash. The acquisition
also included 15 wholly-owned and 8 majority-owned subsidiaries by Simo Motor.
As a result, the Company’s ownership to Simo Motor and all subsidiaries averages
to 87.2%. The remaining 12.8% is owned by noncontrolling shareholders. On
October 13, 2009, the Company completed the acquisition of Simo Motor. As of the
closing date, HTFE had completed the registration of the share transfer with the
requisite PRC authorities and had obtained the required business registration
and transfer of licenses of Simo Motor, all as contemplated by the Agreement. On
October 13, 2009, Simo Motor changed its name to Xi’an Tech Full Simo Motor
Co. Ltd.
The
following table summarizes the net book value and the fair value of the assets
acquired and liabilities assumed at the date of acquisition:
Net Book Value
|
Fair Value
|
|||||||
Current
assets
|
$
|
150,918,962
|
$
|
150,918,962
|
||||
Property,
plant and equipment, net
|
53,417,013
|
54,331,338
|
||||||
Other
noncurrent assets
|
6,890,327
|
14,116,814
|
||||||
Goodwill
|
-
|
41,799,976
|
||||||
Total
assets
|
211,226,302
|
261,167,090
|
||||||
Total
liabilities
|
131,250,800
|
131,250,800
|
||||||
Noncontrolling
interest
|
17,957,814
|
17,957,814
|
||||||
Net
assets
|
$
|
62,017,688
|
$
|
111,958,476
|
Based on
an evaluation by an independent appraisal and final asset evaluation by the
management, the purchase price exceeded the fair value of Simo Motor’s net
assets by $41.8 million, which was recognized as goodwill, see Note 9 for
detail.
Acquisition of Weihai Tech Full Simo Motors
Co., Ltd.
On July
10, 2008, the Company’s subsidiary HTFE entered into an Equity and Assets
Transfer Agreement (the “Agreement”) with respect to the acquisition by HTFE of
Weihai Tech Full Simo Motors Co., Ltd., a PRC corporation (“Weihai”) for an
aggregate price of approximately $54.7 million (RMB 375 million), payable
in cash. In connection with the acquisition of Weihai by Harbin Tech Full, an
independent third party appraiser was engaged by Harbin Tech Full to perform an
appraisal of certain of the assets of Weihai to be acquired by the Company.
The assets evaluated included fixed assets (equipment and buildings),
construction in progress, and intangible assets (land-use rights). The appraiser
conducted an on-site visit, inspected each item, conducted market research and
investigation, followed some asset evaluation policies and regulations issued by
the Chinese government, and provided an evaluation report. The Company’s
management also performed an internal evaluation, taking into account of the
appraiser’s evaluation report, to determine the fair value of these assets
reported in the financial statements. For current assets, the management
used the adjusted book value. Based on this evaluation, the management
determined that the purchase price exceeded the fair value of Weihai’s net
assets by $12.3 million, which was recognized as goodwill.
The
following table summarizes the net book value and the fair value of the assets
acquired and liabilities assumed at the date of acquisition:
Net Book Value
|
Fair Value
|
|||||||
Current
assets
|
$
|
43,572,481
|
$
|
43,572,481
|
||||
Property,
plant and equipment, net
|
22,350,703
|
22,350,703
|
||||||
Other
noncurrent assets
|
1,201,828
|
1,201,828
|
||||||
Goodwill
|
-
|
12,273,778
|
||||||
Total
assets
|
67,125,012
|
79,398,790
|
||||||
Total
liabilities
|
24,590,248
|
24,590,248
|
||||||
Net
assets
|
$
|
42,534,764
|
$
|
54,808,542
|
See report of independent
registered public accounting firm.
F-25
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Based on
an evaluation by an independent appraisal and final asset evaluation by the
management, the purchase price exceeded the fair value of Weihai’s net assets by
$12.3 million, which was recognized as goodwill, see Note 9 for
detail.
For the
above two acquisitions, the acquirer, HTFE and the acquired subsidiaries of the
Company, engaged a third party independent appraiser to evaluate and determine
the fair value of major assets acquired. The third party independent appraiser
is a certified public accountant under the laws of PRC (the “PRC CPA”). The
assets evaluated by the independent appraiser included fixed assets (equipment
and buildings), construction in progress, and intangible assets (land use
rights). The PRC CPA conducted an on-site visit, inspected each item,
conducted market research and investigation and provided an evaluation report
based on certain asset evaluation policies and regulations issued by the Chinese
government. The Company’s management used the PRC CPA’s appraisal reports as a
reference to assess the fair value of these assets and reported in the financial
statements. For current assets, however, the management used the carrying value
on the acquisition date.
Pro
Forma
The
following unaudited pro forma condensed income statement for the years ended
December 31, 2009, 2008 and 2007 were prepared under generally accepted
accounting principles, as if the acquisition of Weihai and Simo Motor had
occurred the first day of the respective periods. The pro forma information may
not be indicative of the results that actually would have occurred if the
acquisition had been in effect from and on the date indicated.
For the years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
Sales
|
$ | 349,056,029 | $ | 307,128,770 | $ | 245,502,969 | ||||||
Cost
of Goods Sold
|
239,165,818 | 216,340,795 | 177,389,826 | |||||||||
Gross
Profit
|
109,890,211 | 90,787,975 | 68,113,143 | |||||||||
Operating
Expenses
|
33,426,912 | 32,046,804 | 31,707,951 | |||||||||
Income
from Operations
|
$ | 76,463,299 | $ | 58,741,171 | $ | 36,405,192 | ||||||
Other
expense (Income), net
|
28,647,572 | 1,622,183 | 1,685,261 | |||||||||
Income
Tax
|
10,670,392 | 8,202,957 | 3,966,719 | |||||||||
Net
Income before noncontrolling interest
|
$ | 37,145,335 | $ | 48,916,031 | $ | 30,753,212 | ||||||
Net
Income attributable to controlling interest
|
$ | 27,886,504 | $ | 44,050,034 | $ | 28,388,642 |
Note
17 – Commitments and contingencies
The
Company enters into non-cancelable purchase commitments with its vendors. As of
December 31, 2009 and 2008, the Company was obligated under the non cancelable
commitments to purchase materials totaling to $456,174 and $305,100,
respectively. These commitments are short-term and expire within one
year. The Company has experienced no losses on these purchase
commitments over the years.
On April
9, 2007, the Company entered into an agreement with Shelton Technology,
LLC. Under the terms of the agreement, the Company is required to
contribute a total of $3 million in installments to AAG by March 31,
2009. The Company has invested a total of $2 million to AAG as of
December 31, 2009 and has the remaining $1,000,000 to be
invested. Based upon a mutual agreement, the Company will contribute
the remaining $1,000,000 to AAG at a later date according to actual
needs.
On
September 8, 2006, HTFE entered into an agreement (“Land Use Agreement”) with
Shanghai Lingang Investment and Development Company Limited (“Shanghai Lingang”)
with respect to HTFE’s lease and use of 40,800 square meters of State-owned land
in the Shanghai Zhuqiao Airport Industrial Zone (the “Site”). The size of the
land used by HTFE was later revised to a total of approximately 53,000 square
meters. The term of the Land Use Agreement is 50 years and totaled $6.28 million
(RMB 42.84 million) (“Fee”), approximately 93% or $5.85 million (RMB 39,880,000)
of which has been paid with the balance to be paid in installments.
On August
10, 2009, AEM increased its investment capital in its 100% owned subsidiary HTFE
from $57 million to $82 million. Of the $25 million increase in
capital, $17 Million was paid prior to December 31, 2009 with the
remaining $8 million of contribution payable by AEM to be paid prior
to September 2011.
Note
18 – Earnings per share
FASB
requires presentation of basic and diluted earnings per share in conjunction
with the disclosure of the methodology used in computing such earnings per
share. Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted average common
shares outstanding during the period. Diluted earnings per share takes into
account the potential dilution that could occur if securities or other contracts
to issue common stock were exercised and converted into common stock. The
following is a reconciliation of the basic and diluted earnings per share
computations:
See report of independent registered public accounting firm.
F-26
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
For the years ended December 31:
|
2009
|
2008
|
2007
|
|||||||||
Net
income for basic and diluted earnings per share
|
$
|
19,646,781
|
$
|
25,378,699
|
$
|
16,902,684
|
||||||
Weighted
average shares used in basic computation
|
25,568,936
|
20,235,877
|
17,082,300
|
|||||||||
Diluted
effect of stock options and warrants
|
103,484
|
1,087,783
|
1,552,439
|
|||||||||
Weighted
average shares used in diluted computation
|
25,672,420
|
21,323,660
|
18,634,739
|
|||||||||
Earnings
per share:
|
||||||||||||
Basic
|
$
|
0.77
|
$
|
1.25
|
$
|
0.99
|
||||||
Diluted
|
$
|
0.77
|
$
|
1.19
|
$
|
0.91
|
For the
years ended December 31, 2009, 2008 and 2007, a total of 260,000 options were
excluded from diluted earnings per share due to the anti-dilutive effect. All
other stock options and warrants have been included in the diluted earnings per
share calculation for the years ended December 31, 2009, 2008 and
2007.
Note
19 – Shareholders’ equity
Common
stock
On August
5, 2009, the Company closed an offering of 6,250,000 shares of its common stock
at a public offering price of $16.00 per share. The Company received net
proceeds of approximately $93.4 million from the offering, after deducting
underwriting discounts and estimated offering expenses.
On August
17, 2009, the Company issued an additional 937,500 shares of common stock at the
public offering price of $16.00 per share, pursuant to the over-allotment option
exercised in full by Roth Capital Partners, LLC (“Roth”) in connection with its
public offering that closed on August 4, 2009. The exercise of the
over-allotment option brings the total number of shares sold by the Company in
this public offering to 7,187,500 and the total gross proceeds to $115 million.
The aggregate net proceeds received by the Company totaled approximately $107.5
million, after deducting underwriting discounts and commissions and offering
expenses payable by the Company.
Statutory
reserves
The laws
and regulations of the People’s Republic of China require that before a
Sino-foreign cooperative joint venture enterprise distributes profits to its
partners, it must first satisfy all tax liabilities, provide for losses in
previous years, and make allocations in proportions determined at the discretion
of the board of directors, after the statutory reserve.
Surplus reserve
fund
The
Company is required to transfer 10% of its net income, as determined in
accordance with the PRC accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the Company’s registered
capital. The transfer to this reserve must be made before distribution of
any dividend to shareholders. The Company will transfer at year end 10% of the
year’s net income determined in accordance with PRC accounting rules and
regulations.
For the
year ended December 31, 2009, the Company transferred $8,295,429 representing
10% of the current year’s net income generated by the Company’s subsidiaries
located within PRC determined in accordance with PRC accounting rules and
regulations, to this reserve. The remaining reserve to fulfill the 50%
registered capital requirement amounted to approximately $49.7 million and $25.4
million as of December 31, 2009 and December 31, 2008,
respectively.
The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years’ losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25% of the registered
capital.
See
report of independent registered public accounting firm.
F-27
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Warrants
Following
is a summary of warrant activity:
Outstanding
as of January 1, 2008
|
2,454,960
|
|||
Granted
|
-
|
|||
Forfeited
|
(2,504
|
) | ||
Exercised
|
(422,298
|
)
|
||
Outstanding
as of December 31, 2008
|
2,030,158
|
|||
Granted
|
-
|
|||
Forfeited
|
-
|
|||
Cancelled
|
-
|
|||
Exercised
|
(1,663,461
|
) | ||
Outstanding
as of December 31, 2009
|
366,697
|
Following
is a summary of the status of warrants outstanding at December 31,
2009:
Outstanding Warrants
|
Exercisable Warrants
|
|||||||||||||||||||
Exercise Price
|
Number of
Shares
|
Average Remaining
Contractual Life
|
Average
Exercise Price
|
Number of
Shares
|
Average Remaining
Contractual Life
|
|||||||||||||||
$10.84
|
366,697
|
2.67
|
$
|
10.84
|
366,697
|
2.67
|
||||||||||||||
Total
|
366,697
|
366,697
|
Options
On
November 30, 2009, the Company granted options to an independent director to
purchase an aggregate of 30,000 shares of the Company's common stock, at an
exercise price of $20.02 per share, the closing price of the Company’ s common
stock on November 30, 2009. The fair
values of stock options granted to employees and the independent directors were
estimated at the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
Expected
|
Expected
|
Dividend
|
Risk
Free
|
Grant
Date
|
|||||
Life
|
Volatility
|
Yield
|
Interest
Rate
|
Fair
Value
|
|||||
Employees
- 2006
|
5.0
yrs
|
66%
|
0%
|
4.13%
|
$8.10
|
||||
Directors
- 2006
|
5.0
yrs
|
66%
|
0%
|
4.13%
|
$8.10
|
||||
Executives
- 2007
|
3.0
yrs
|
77%
|
0%
|
4.50%
|
$15.60
|
||||
Directors
- 2009
|
3.0
yrs
|
70%
|
0%
|
1.15%
|
$9.39
|
Following
is a summary of stock option activity:
Options Outstanding
|
Weighted
Average
Exercise Price
|
Aggregate Intrinsic
Value
|
||||||||||
Outstanding
as of January 1, 2008
|
761,250
|
$
|
9.82
|
$
|
12,370,313
|
|||||||
Granted
|
-
|
-
|
-
|
|||||||||
Forfeited
|
(26,667
|
)
|
8.10
|
-
|
||||||||
Exercised
|
(40,000
|
)
|
3.10
|
-
|
||||||||
Outstanding
as of December 31, 2008
|
694,583
|
$
|
10.27
|
$
|
-
|
|||||||
Granted
|
30,000
|
20.02
|
-
|
|||||||||
Forfeited
|
(25,000
|
)
|
12.40
|
-
|
||||||||
Exercised
|
(344,583
|
)
|
7.15
|
-
|
||||||||
Outstanding
as of December 31, 2009
|
355,000
|
$
|
13.97
|
$
|
2,333,600
|
Following
is a summary of the status of options outstanding at December 31,
2009:
Outstanding Options
|
Exercisable Options
|
|||||||||||||||||||
Exercise
Price
|
Number
|
Average Remaining
Contractual Life
|
Average
Exercise Price
|
Number
|
Average Remaining
Contractual Life
|
|||||||||||||||
$8.10
|
95,000
|
1.10
|
$
|
8.10
|
95,000
|
1.10
|
||||||||||||||
$15.60
|
230,000
|
0.95
|
$
|
15.60
|
160,667
|
0.95
|
||||||||||||||
$20.02
|
30,000
|
4.92
|
$
|
20.02
|
15,000
|
4.92
|
||||||||||||||
Total
|
355,000
|
270,667
|
See report of independent registered public accounting firm.
F-28
HARBIN
ELECTRIC, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
On July
12, 2007, the Company’s CEO transferred 280,000 of his own shares to the Company
employees and consultants. The shares vest over 5 to 10 years starting July 12,
2007. The Company valued the shares at $13.73 per share, based on the average
price for the immediately proceeding fifteen consecutive trading days before
June 16, 2007, the date when the Company and HTFE entered into the asset
purchase agreement with Harbin Taifu Auto Electric Co., Ltd, the trading price
of the stock on the date of transfer, as a capital contribution totaling
$3,844,904 by the CEO, the value was amortized over the vesting
period.
For the
years ended December 31, 2009, 2008 and 2007, stock compensation expense related
to options issued amounted to $1,211,037, $1,782,454 and $1,584,234,
respectively. As of December 31, 2009 and 2008, total unamortized stock
compensation amounted to $2,849,347 and $3,247,571, respectively.
Note 20 –
Employee pension
Regulations
in the People’s Republic of China require the Company to contribute to a defined
contribution retirement plan for all employees. All Joint Venture employees are
entitled to a retirement pension amount calculated based upon their salary at
their date of retirement and their length of service in accordance with a
government managed pension plan. The PRC government is responsible for the
pension liability to the retired staff. The employee pension in Harbin generally
includes two parts: the first part to be paid by the Company is 20% of the
employees’ actual salary in the prior year. If the average salary falls
below $1,165 for each individual, $1,165 will be used as the basis. The other
part, paid by the employees, is 8% of actual salary with the same minimum
requirement. The Company made contributions to employment benefits, including
pension, of $334,394, $261,847 and $53,027 for the years ended December 31,
2009, 2008 and 2007, respectively.
Note 21 –
Subsequent Events
In
January 2010, HTFE made a cash payment in an amount of $27.9 million (RMB
190.5million) representing the unpaid portion for the acquisition of Simo
Motor. The acquisition of Simo Motor is fully paid for after this payment
pursuant to the Equity Acquisition Agreement.
The
Company has performed an evaluation of subsequent events through the date these
consolidated financial statements were issued to determine whether the
circumstances warranted recognition and disclosure of those events or
transactions in the consolidated financial statements as of December 31,
2009.
Note
22 – Quarterly Data (Unaudited)
Year ended December 31, 2009
|
First Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Full Year
(audited)
|
|||||||||||||||
(in
thousands except earnings per share)
|
||||||||||||||||||||
Revenue
|
$
|
30,725
|
$
|
38,363
|
$
|
46,932
|
$
|
107,214
|
$
|
223,234
|
||||||||||
Gross
profit
|
$
|
10,924
|
$
|
12,863
|
$
|
16,761
|
$
|
36,064
|
$
|
76,612
|
||||||||||
Net
income (loss) attributable to controlling interest
|
$
|
8,654
|
$
|
(5,419
|
) |
$
|
(1,908
|
) |
$
|
18,320
|
$
|
19,647
|
||||||||
Basic
net income (loss) per share
|
$
|
0.39
|
$
|
(0.24
|
) |
$
|
(0.07
|
) |
$
|
0.59
|
$
|
0.77
|
||||||||
Diluted
net income (loss) per share
|
$
|
0.39
|
$
|
(0.24
|
) |
$
|
(0.07
|
) |
$
|
0.59
|
$
|
0.77
|
Year ended December 31, 2008
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Full
Year
(audited)
|
|||||||||||||||
(in thousands except earnings per
share)
|
||||||||||||||||||||
Revenue
|
$ | 22,458 | $ | 23,959 | $ | 39,657 | $ | 34,746 | $ | 120,820 | ||||||||||
Gross
profit
|
$ | 10,759 | $ | 11,456 | $ | 13,772 | $ | 11,490 | $ | 47,477 | ||||||||||
Net
income (loss) attributable to controlling interest
|
$ | 5.353 | $ | 6,231 | $ | 7,754 | $ | 6,041 | $ | 25,379 | ||||||||||
Basic
net income (loss) per share
|
$ | 0.29 | $ | 0.33 | $ | 0.35 | $ | 0.28 | $ | 1.25 | ||||||||||
Diluted
net income (loss) per share
|
$ | 0.27 | $ | 0.31 | $ | 0.34 | $ | 0.28 | $ | 1.19 |
See report of
independent registered public accounting firm.
F-29